Author: National Law Forum

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Justice Department Investigation of S&P

Recently posted in the National Law Review an article by Jared Wade of Risk and Insurance Management Society, Inc. (RIMS) regarding the Justice Department investigating S&P:

The Justice Department is investigating Standard & Poor’s for improperly rating the garbage mortgage-backed securities that tanked the economy once the world caught on that they were toxic assets.

The anonymous folks who leaked this info to the press claim that the inquiry began prior to S&P’s downgrade of U.S. debt, but many have speculated that the fervor and depth of the probe has ratcheted up since the nation lost its AAA-status.

Either way, the law dogs are — finally — poking around in the ratings world.

The Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.

Any inquiry should of course involve looking at all three. Each overrated the used diaper mortgage-backed securities to a baffling degree. Whether or not it was incompetence or something more insidious is really the only question, I have. I presume they are capable of both.

But if this investigation focuses solely on S&P then it falls even more into how one talking head on MSNBC’s The Daily Rundown described it: more of a Washington story than a Wall Street one.

Honestly, the only weird thing about hearing today about an investigation going on right now is that it was something I expected to hear in 2008.

In related news, and not just to toot our own horn, but I would feel remiss not to mention that our Risk Management magazine cover story this month was titled “The Future of Ratings” and examines “how rating agencies gained so much power, helped tank the economy and figure into the future of risk assessment.”

I’m not going to pretend that I knew just how much play rating agencies would be getting in August when I commissioned the piece a few months ago. I’m many things, but clairvoyant is not one of them. But the piece speaks to many of the questionable issues surrounding the ratings world that have been curiously dormant in the mainstream media for years until recently.

A wonderful writer, Lori Widmer, did a fine job so please do give it a read.

Risk Management Magazine and Risk Management Monitor. Copyright 2011 Risk and Insurance Management Society, Inc. All rights reserved.

What To Expect From a President Perry on the Environment? Some Texas-Sized Clues

Posted on August 19, 2011 in the National Law Review an article by Jim Morris and Evan Bush of Center for Public Integrity regarding  Texas Gov. and Republican presidential candidate Rick Perry’s environmental stance: 

From climate change denial to stances against EPA and Supreme Court, candidate resists feds, aids businesses and helped a billionaire donor

What would President Rick Perry’s environmental agenda look like?

As Texas governor, Republican presidential candidate Rick Perry often relied on Bryan Shaw, chairman of the state’s environmental regulatory agency, second from right. Harry Cabluck / Associated Press

For clues, one need only examine Perry’s record as governor of Texas, where the chairman of the state environmental agency writes vitriolic letters to the U.S. Environmental Protection Agency and questions the science behind climate change.

Bryan Shaw , a 2007 Perry appointee to the Texas Commission on Environmental Quality who became the agency’s chairman in 2009, opined in a guest column in the El Paso Times last month that a new EPA rule designed to reduce cross-state air pollution from coal-fired power plants was in fact “aimed at cutting Texas jobs, cutting Texas economic growth, increasing Texas energy costs, and harming Texas energy security.”

The column closely followed a statement by Perry himself, who called the rule “another example of heavy-handed and misguided action from Washington, D.C.”

Perry’s gubernatorial campaign received more than $5 million in contributions from energy companies and their employees during the 2009-2010 election cycle, according to data compiled by the nonpartisan National Institute on Money in State Politics . Among Perry’s largest contributors during the cycle: Houston oilmen Jeffrey Hildebrand and Gary Petersen , and Valero Energy Corp . Oil and gas companies consistently are among the state’s biggest polluters.

Perry recently told the Christian Broadcast Network that he prays for President Obama every day, asking in particular that “his EPA back down these regulations that are causing businesses to hesitate to spend money.”

Shaw, in June 30 testimony before the a Senate clean air and nuclear safety subcommittee, attacked another EPA rule meant to limit emissions of mercury and other toxic compounds from coal- and oil-fired power plants. Shaw maintained, among other things, that “any health benefits [from the rule] would be insubstantial compared to the cost of regulation” and expressed concern that “the reliability of the Texas electrical power system will be severely compromised.”

And in a testy letter to EPA Administrator Lisa Jackson and Regional Administrator Al Armendariz a year ago, Shaw and Texas Attorney General Greg Abbott said they would defy EPA regulations – stemming from a 2006  U.S. Supreme Court decision , Massachusetts v. EPA – requiring Texas to begin issuing permits for greenhouse gas emissions from industrial sources.

Shaw declined Wednesday, through a spokeswoman at the agency he chairs, to be interviewed byiWatch News . Catherine Frazier, a spokeswoman in the governor’s office, said “the governor is proud of [Shaw’s] leadership and expects he will put Texas’s interests at the top of his decision-making.”

Frazier said that Perry, like Shaw, finds the science linking human activities to climate change to be “very questionable.” The EPA, she said, “continues to impose burdensome, job-killing mandates on Texas and the governor believes there needs to be a balanced approach to protecting jobs and protecting the environment. Texas has created a model for how to accomplish that goal.”

Environmental activists in Texas say they grew worried about Shaw when he disclosed during his 2009 confirmation hearing that he didn’t believe the science on climate change was “fully settled.”

“He denies the science no matter what it is – climate change, ozone, mercury,” Jim Marston, director of the Environmental Defense Fund’s Texas office, said of Shaw. “All the other scientists around the world are wrong. Somehow, the laws of physics and chemistry don’t apply in Texas, apparently.”

“Adhering to the party line is [Shaw’s] guiding compass,” said Matthew Tejada, executive director of Air Alliance Houston , an environmental group that closely follows the commission Shaw chairs. “Every decision, policy, program or position that the TCEQ takes at the commission level is being guided by that compass – what can it do to strike back at an imaginary federal foe and what can it do to coddle industry here in the state.”

Shaw is a former associate professor in Texas A&M University’s Biological and Agricultural Engineering Department. His views on global warming contrast sharply with some of his former A&M colleagues – notably, the entire Department of Atmospheric Sciences, which declared in a statement several years ago that it is “very likely that humans are responsible for the recent warming.”

Loathsome though it may be to environmentalists, Shaw’s and Perry’s anti-EPA posture sits well with at least some members of the Texas business community.

“I think our political leaders in the state have done an excellent job protecting the environment while allowing the state’s economy to flourish in the past 10 years,” said Alex Mills, president of theTexas Alliance of Energy Producers. The EPA, under Obama, has “gone wacko,” Mills said, adding that a Perry administration would feature a “much more hands-off approach” to environmental regulation.

What some critics find most worrisome is Perry’s apparent willingness to reward major donors.

In 2009, the TCEQ approved a low-level radioactive waste dump for Andrews County in West Texas. The dump, expected to open next year, will accept waste from Texas and other states and be operated by Waste Control Specialists, owned by Dallas billionaire Harold Simmons.

Records show that Simmons and his wife have donated roughly $1.2 million to Perry’s campaigns since 1998, according to the National Institute on Money in State Politics. In 2004, Simmons helped finance the “Swift Boat” ads attacking the military record of Democratic presidential candidate John Kerry.

Karen Hadden, executive director of the Austin-based Sustainable Energy and Economic Development (SEED) Coalition , fought licensing of the dump, saying radioactive leakage threatens groundwater and could lead to serious transportation accidents. The term “low-level” is a misnomer, Hadden said; in fact, the dump will take everything but uranium fuel rods from nuclear power plants and plutonium components of nuclear bombs.

An eight-member TCEQ team unanimously advised against licensing the facility in 2007 but was overruled by top-level managers (not including Shaw). Three members of the team, including Glenn Lewis, left the agency in protest.

“We came to the conclusion that it was an unsuitable site geologically because of the immediate vicinity of groundwater,” Lewis told iWatch News . Nonetheless, he said, “We were immediately instructed to begin drafting a license” for Waste Control Specialists.

Asked if he believed Simmons’s relationship with Perry was behind the order, Lewis said, “I’m 99 to 100 percent sure. From the first day I reported for duty on this team, the other members were quite resigned to the fact that if Simmons is behind this, he’s going to get his license.”

The company and the candidate deny any favorable treatment.

“I think the record’s pretty clear there is absolutely no evidence of special treatment of any kind,” said Chuck McDonald, a Waste Control Specialists spokesman. “The licensing process was a long and arduous one. It took five years.”

Frazier, Perry’s spokeswoman, said the Andrews County dump “is supported by that community. It’s a project that will create jobs and bring them economic development opportunities.”

Questions also were raised about a 2005 Perry executive order expediting the state permitting process for coal-fired power plants. At the time, a Dallas-based utility and major Perry contributor, TXU, wanted to build 11 such plants; plans for eight of the 11 were scrapped in 2007 after TXU was acquired by two private equity groups.

In 2008, The Center for Public Integrity and Fort Worth Weekly reported that TXU’s coal plants exceeded federal emission limits nearly 650 times between 1997 and 2006, putting more than 1.3 million pounds of lung-damaging sulfur dioxide into the air.

A growing body of science suggests greenhouse gases produced by human activities – chiefly deforestation and the burning of fossil fuels – are responsible for shifting temperatures and other changes in climate across the globe that could threaten people and wildlife and exacerbate international frictions over scarce resources.

Reprinted by Permission © 2011, The Center for Public Integrity®. All Rights Reserved.

Power NY Act of 2011 Swings the Door Open for Renewable Development

Posted in the National Law Review on August 17, 2011 an article written by attorneys: David A. Domansky, Joseph G. Tirone and Brian J. Kelly of Bracewell & Giuliani LLP regarding Power NY Act of 20ll which Gov. Cuomo recently signed into law:

 

On August 4, 2011, Governor Cuomo signed into law the Power NY ACT of 2011 (A. 8510/S. 5844), a comprehensive energy bill that, among other things, reimplements and significantly revises Article X of the New York State Public Service Law. As revised, new Article X provides power project developers a more efficient, streamlined “one-stop” siting process. The new law was sought and supported by both business and environmental groups to remedy a patchwork of inconsistent local siting rules throughout New York, which have hampered project development efforts. Old Article X, which expired on January 1, 2003, was limited to power plants with 80-megawatts or more of nameplate generating capacity. New Article X reduces the capacity threshold to 25-megawatts, thereby allowing smaller generation projects, such as wind, solar and other renewable project developers, an opportunity to take advantage of the streamlined siting process.

Creation and Composition of the Review Board

Following the expiration of former Article X, developers were required to seek the requisite regulatory and environmental permits mandated by state and local laws from the various state and municipal regulatory authorities who had jurisdiction over the site where the proposed power project was to be developed. Under new Article X, the siting and licensing of electric generation facilities of at least 25-megawatts, or the increase in nameplate capacity by 25-megawatts or more of a current power facility, will fall within the purview of the New York State Board on Electric Generation Siting and the Environment (“Board”).The seven member Board will consist of five state agency officials (Department of Environmental Conservation, Department of Economic Development, Department of Health, Department of Agriculture and Markets and the New York State Energy Research and Development Authority), as well as two ad hoc members who are required to reside in the community in which the proposed facility is to be located. The Board will be tasked with determining if the contemplated project should receive a Certificate of Environmental Compatibility and Public Need (“Certificate”), which must be obtained before commencement of any site development or facility construction.

Filing Process

New Article X separates the Certificate process into two distinct phases, a pre-application preliminary scoping statement (the “Pre-Application”) and the actual Certificate application. In  the Pre-Application, an applicant is required to provide the Board with, among other things: (a) a description of the proposed facility and its environmental setting; (b) potential environmental and health impacts resulting from the construction and operation of the proposed facility; (c) proposed studies or programs of studies designed to evaluate the potential environmental and health impacts; (d) measures proposed to minimize environmental impacts; and (e) identification of all other state and federal permits required for the construction, operation or maintenance of the proposed facility.

Prior to submission of the Pre-Application, the applicant must meet with interested parties, including community groups and interested state agencies to address these groups’ concerns  with regard to the proposed facility. Following the applicant’s submission of the Pre-Application, the applicant has the ability to enter into side agreements or stipulations to address any concerns regarding the siting and location of the proposed facility. Once completed, the applicant is then required to file a Certificate application with the Board, which includes: (a) a description of the site and facility to be built; (b) an evaluation of the anticipated environmental and health impacts and safety and security ramifications that the facility will have on the surrounding community; (c) a comprehensive environmental impact analysis; and (d) a comprehensive demographic, economic and physical description of the community within which the facility is to be located, compared and contrasted with the county and with the adjacent communities in which the facility is proposed.

Board Decision Process and Timeline

New Article X requires that the Board issue a final decision on a Certificate application no later than: (a) 12 months after submission of a Certificate application deemed complete by the Board for a new-build facility, and (b) six months after the submission of a complete Certificate application deemed complete by the Board for modifications to (1) an existing facility, or (2) the site of a new facility adjacent or contiguous to an existing facility, provided the new facility would result in greater operating efficiencies and lower environmental impact than the original facility.

New Article X also requires that the Board schedule a hearing on the Certificate application no later than 60 days after the date the Board determines the Certificate application is complete. After conducting and taking testimony at the hearing, the Board may grant the Certificate if it finds that: (a) the facility is a beneficial addition to or substitution for the electric generation capacity of New York; (b) the construction and operation of the facility will serve the public interest; (c) the facility’s environmental impact has been minimized or eliminated to the maximum extent practicable; and (d) the facility complies with all state and local laws and regulations.

Any appeal of the Board’s decision denying or granting a Certificate is first heard by the Board itself. The application for rehearing must be filed no later than 30 days after issuance of the Board’s decision. The Board is required to render a decision on the application no later than 90 days after the expiration of the period for filing rehearing petitions. Thereafter, an aggrieved party may seek judicial relief in the Appellate Division of the New York Supreme Court. Such proceeding must be initiated within 30 days after the issuance of a final decision by the Board on the application for rehearing.

© 2011 Bracewell & Giuliani LLP

Hitting Non-Practicin Entities Where It Hurts

Recently posted in the National Law Review an article by Robert A. Gutkin and Jeff C. Dodd of Andrews Kurth LLP about the Federal Circuit affirmed a district court award of substantial sanctions against a Non-Practicing Entity (NPE) that had a business model of suing numerous companies for nuisance value settlements. 

 

 

The Federal Circuit Affirms an Award of Substantial Sanctions Against a NPE with a Business Model of Bringing Litigation To Extract Quick Settlements

 

Eon-Net LP v. Flagstar Bancorp, No. 2009 – 1308 (Fed. Cir., July 29, 2011) (Judges Lourie, Mayer and O’Malley)

 

In a July 29 decision, the Federal Circuit affirmed a district court award of substantial sanctions against a Non-Practicing Entity (NPE) that had a business model of suing numerous companies for nuisance value settlements. As the Court succinctly stated:

 

The record supports the district court’s finding that Eon-Net acted in bad faith by exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar. At the time that the district court made its exceptional case finding, Eon-Net and its related entities, Millennium and Glory, had filed over 100 lawsuits against a number of diverse defendants alleging infringement of one or more patents from the Patent Portfolio. Each complaint was followed by a “demand for a quick settlement at a price far lower than the cost of litigation, a demand to which most defendants apparently have agreed.” Slip Op at 22.

 

We think that this is a potentially important holding because the Federal Circuit approved an exceptional case for enhanced sanctions based on the business model adopted by some NPE’s—suit followed by quick settlement at lower-than-litigation cost. As we discuss below, the Eon-Net LP case represents the latest in a string of judicial opinions providing defendants with additional ammunition against NPE’s pursuing “objectively baseless” litigation. However, the threat of sanctions may also lead NPE’s to be more difficult in their settlement demands and willingness to offer quick and early settlements.

 

Background

 

The case at issue involved three document processing systems patents, U.S. Patent Nos. 6,683,697 (“the ‘697 Patent”), 7,075,673 (“the ‘673 Patent”), and 7,184,162 (“the ‘162 Patent”) (collectively “the Patents”) owned by Eon-Net LP, a patent holding company formed to enforce various patents. The Patents are part of a larger patent family (“the Patent Portfolio”) originating with a parent patent application filed in 1991. Between 1996 and 2001, Millennium L.P., an Eon-Net related company, filed four lawsuits asserting various claims of the Patent Portfolio. After 2001, Eon-Net hired new outside litigation counsel, and the number of patent cases filed on behalf of Eon-Net and its related entities skyrocketed. By the time the district court in the present matter had issued sanctions against Eon-Net, more than 100 lawsuits had been filed, almost all of which resulted in early settlements or dismissals.

 

Eon-Net sued Flagstar Bancorp in 2005, alleging infringement of the ‘697 patent. The district court entered summary judgment of noninfringement in favor of Flagstar, finding that Eon-Net failed to adequately investigate its claims prior to filing suit, and finding that the claims were baseless. The district court also assessed Rule 11 sanctions in the amount of $141,984.70 against Eon-Net and its attorney.

 

After the Federal Circuit vacated and remanded both the summary judgment and Rule 11 decisions in 2007, Eon-Net LP v. Flagstar Bancorp, 249 F. App’x 189 (Fed. Cir. 2007), Eon-Net pursued the case (even adding new claims for infringement). But after receiving an unfavorable Markman decision on claim construction, Eon-Net stipulated to noninfringement. The district court subsequently granted Flagstar’s motion for attorney fees under 35 U.S.C. §285, finding that Eon-Net pursued baseless claims; the lawsuit was brought for the improper purpose of seeking a nuisance value settlement; Eon-Net destroyed evidence; and, Eon-Net’s litigation tactics were improper. Upon invitation from the district court, Flagstar renewed its prior Rule 11 motion. The district court reinstated in full the $141,984.70 in attorneys fees and costs against Eon-Net and its attorney for violation of Rule 11. The district court also found the case to be exceptional under 35 U.S.C. §285, and awarded Flagstar $489,150.48 in attorneys fees and costs after Eon-Net continued to litigate the case after remand.

 

The Federal Circuit Decision

 

The Federal Circuit upheld the district court’s claim construction, and affirmed the judgment of noninfringement to which Eon-Net had stipulated.

 

In reviewing the district court’s finding of an exceptional case under 35 U.S.C. §285, the Federal Circuit stated:

 

Indeed, “[l]itigation misconduct and unprofessional behavior may suffice, by themselves, to make a case exceptional under § 285.” Absent litigation misconduct or misconduct in securing the patent, sanctions under § 285 may be imposed against the patentee only if both (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless (citations omitted). Slip Op at 17.

 

Eon-Net failed to show that the district court’s findings regarding the accused litigation misconduct were clearly erroneous. Eon-Net also failed to overcome the finding that its infringement allegations could only be supported by baseless claim construction positions.

 

Certainly Eon-Net’s behavior during the course of the litigation was egregious, as the court described in detail.1 But that alone would not have warranted our Client Alert, for the behavior giving rise to sanctions in any given case is based on the particular facts of the case. What caught our eye was the Federal Circuit’s condemnation of the business model of filing litigation to obtain a quick return through settlement:

 

Eon-Net’s case against Flagstar had “indicia of extortion” because it was part of Eon-Net’s history of filing nearly identical patent infringement complaints against a plethora of diverse defendants, where Eon-Net followed each filing with a demand for a quick settlement at a price far lower than the cost to defend the litigation. Slip Op at 22.

Meritless cases like this one unnecessarily require the district court to engage in excessive claim construction analysis before it is able to see the lack of merit of the patentee’s infringement allegations…. Thus, those low settlement offers—less than ten percent of the cost that Flagstar expended to defend suit—effectively ensured that Eon-Net’s baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements. Slip Op at 23.

 

The Federal Circuit affirmed the finding that the case was exceptional under 35 U.S.C. §285, and was disturbed by the ability of an NPE, such as Eon-Net, to impose high costs on a company to defend against meritless claims, while at the same time the NPE faces little downside risk other than the loss of future licensing revenue.2

 

Potential Implications of Eon-Net LP

 

We stress that the Federal Circuit did not uphold sanctions merely because a NPE sought to enforce its patent rights. Rather, the Federal Circuit was clearly bothered by the ability of an NPE to exploit the “system” to extort nuisance value settlements while facing little downside risk.

 

Indeed, some NPE’s count on defendants to settle based on the inescapable fact that defense of even a suit on a bad patent is expensive. That cost is built into the architecture of patent litigation. As our colleague David Griffith chronicled in“Patents by the Numbers” in Andrews Kurth’s IP and Technology Developmentsthe median cost of defense in 2009 (as reported by AILPA) was $650,000 if less than one million was at risk, $2.5 million if $1 million to 25 million at risk – $2,500,000. In addition, the median time for an infringement case to get to trial was 2.5 years (2009 data from a report by PwC). While the rate of success was 38% in the 15 most active patent dockets (1995-2009) as reported by PwC (31% for NPE’s) if the patentee survives summary judgment motions and gets to a jury, its odds improve to a 75% win rate (according to the University of Houston Law Center’s patstats). Given these statistics, the temptation for any operating company faced with a lawsuit is to settle and move on with its business if the NPE’s offer of settlement is far less than the cost of defense. NPE’s count on that temptation.

 

The Federal Circuit stopped short of stating that business models like that of Eon-Net provide the sole basis for finding an exceptional case under 35 U.S.C. §285. However, the language of the decision does suggest that the business model may per se satisfy the “bad faith” element of the two part requirement for finding an exceptional case. This decision seems to be an attempt by the Court to try to level the playing field for patent litigation by increasing the downside risk for a NPE. Moreover, this case follows a string of other cases, including eBay (which held that irreparable harm would not be presumed in a preliminary injunction action even if infringement had been found) and MedImmune (which allows declaratory judgment actions to be brought under less stringent standards than the Federal Circuit had historically applied).

 

Just as importantly, we are seeing many other trends and techniques that defendants are starting to use to combat vexatious NPE litigation. Some defendants are finding success in obtaining venue transfers from courts thought to be more favorable to NPE litigation; others are using declaratory judgment actions; yet others are pursuing early summary judgments (by some accounts approximately 60% of patent cases are decided on summary judgment and patentee success at the summary judgment stage is only 12%).

 

Our firm also has had success strategically employing the re-examination to narrow or even eliminate patent claims from weak (or worse patents). Our success is consistent with some compelling statistics. Again our colleague David Griffith reported that the chances that PTO will grant an ex parte/inter partes reexamination application are greater than 90% (based on USPTO statistics as of March 2011). According to an AILPA 2009 report, the median cost of an ex parte reexamination was $10,000; for an inter-partes proceeding the median was $188,000. Moreover, according to USPTO statistics as of March 2011, in most cases claims were cancelled or modified:

 

ex parte reexamination (third party requested re-exam)

inter partes reexamination

All claims confirmed: 24%

All claims confirmed: 12%

All claims cancelled: 13%

All claims cancelled: 45%

Claims modified: 63%

Claims modified: 43%

 

The bottom line: defendants in NPE litigation should consider in the calculus of settlement not only litigation cost but also the trends and techniques favoring defendants over NPE’s, especially now that Eon-Net LP may encourage courts to shift the expenses of defense that NPE’s count on encouraging quick settlement—at least in the most abusive cases.

 

 

1. The court provided an extensive litany of Eon-Net’s sanctionable behavior throughout the course of the litigation, including: destroying relevant documents prior to the initiation of the lawsuit; flaunting the fact that as a patent enforcement company they did not believe they needed to have a document retention policy; refusing to participate in the claim construction process; lodging incomplete and misleading evidence with the court; submitting declarations contradicting deposition testimony; and, evidencing a general disdain and disrespect for the court process including statements made at a deposition by a party witnesses complaining that his deposition was “an inconvenience and a bother” and that he was “so sick of this stuff by now. I am so sick of this stuff, especially this haggling over stupidities and trivialities which is the name of the game in litigation.” Slip Op at 20.

 

2. The Federal Circuit also affirmed the Rule 11 sanctions, even though it was undisputed that Eon-Net’s counsel did examine portions of Flagstar’s website and reach a conclusion that it worked in a manner that infringed the ‘697 patent. “A reasonable pre-suit investigation, however, also requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device.” Slip Op at 26. It was not clearly erroneous for the district court to conclude that Eon-Net’s claim construction position “borders on the illogical” and that “[t]he specification exposes the frivolity of Eon-Net’s claim construction position.” Id.

© 2011 Andrews Kurth LLP Traurig, LLP. All rights reserved.

Doing Business at ART HK: Better, Bigger, Faster, Stronger

Recently posted in the National Law Review an article by Sheppard, Mullin, Richter & Hampton’s Art Law Practice regarding the Hong Kong International Art Fair:

 

On the verge of becoming an international institution, the recent Hong Kong International Art Fair, known as “ART HK,” represents an exciting development in the state of the art world in China. This growth has critical, yet profoundly inspiring, implications upon the international art community.  Since its humble beginnings in 2008, ART HK has shown rapid growth with over 260 galleries from over 38 countries participating in the recent fair.  Momentum of ART HK’s success and prominence was recently propelled by an announcement that MCH Swiss Exhibition, owners of Art Basel, the world’s biggest contemporary art fair, have just signed an agreement with Asian Art Fairs, the owners of ART HK, to purchase a majority stake in ART HK, which went into effect on July 1, 2011.  This tactical move, combined with rising auction revenue, favorable tax considerations, a newfound interest in art as an asset class, and interest based on national identity, cements China’s role in the global art market.

It was recently reported in Artprice.com, a French-based data service, that China ranks number one in fine art auction revenue, surpassing the U.S.  Moreover, the contemporary Chinese auction market has grown from just below $1 million in 2002 to $167.4 million in 2010. Prominent auction houses, Sotheby’s and Christie’s Hong Kong have seen sales turnover increase by 300% between 2009 and 2010.  The total auction sales value (all categories) for both auction houses in Hong Kong rose by 122 percent, from US$658 million in 2009, to US$1.46 billion in 2010.  Even mainland Chinese state-owned auction houses, such as Poly and Guardian, have seen their Chinese sales seasons grow from $397 million in 2009 to $2.2 billion in 2010.  This year is also set to become a record year in light of the sale of the Ullen Collection at Sotheby’s Hong Kong in April 2011.

The art world focus in Hong Kong, as opposed to mainland China, may have something to do with the tax advantages it provides.  While imported art is taxed by mainland China at a steep 34 percent, Hong Kong offers collectors the advantage of more relaxed sales tax and export policies. Organizers of ART HK are aggressively promoting the incredible tax advantages, since there are no tariffs on the import or export of art as it relates to the initial sale at ART HK.

A newfound interest in art as an asset class has also prompted growth in the Chinese art market.  The affluent in China have begun to invest in art as an asset, traditionally viewed as a Western luxury.  Observers note that the proliferation of art in China is the steady result of a rise in investment-oriented purchases of art, bolstered by China’s growing wealth, and not merely spontaneous overnight purchases.  In response to this, at least three Chinese financial institutions have set up hedge funds investing in Chinese art.  Notably there have been a succession of Chinese clients who have been spending millions of yuan recently at New York auctions.

National identity and pride is showing itself to be another significant factor behind the surge of Chinese interest in the art world.  Such national pride is evident by a report released by Artprice.com on March 19, 2011 showing that 2010 is the first year that four Chinese artists (Fu Baishi, Qi Baishi, Xu Beihong, and Zhang Daqian) have ranked in the top ten of global art auction earners.

In China, the impact of art fair culture through ART HK is no different than in other emerging markets.  Art Basel is itself is a pioneer for developing new markets.  In fact, in 2002, the decision to open Art Basel Miami Beach in the U.S. was partly to explore the emerging Latin American market.  A roaring success – Art Basel Miami provides a new platform for emerging dealers, contemporary artists, new collectors and the art world cognoscenti.

Popularity of the Chinese market for the international art community during ART HK has clearly prompted auction houses to be active.  For example, Christie’s has a partnership with ART HK to hold its spring auctions in the same venue and at the same time as ART HK with sales of art, antiques, wines, watches and jewels.  Other auction houses, particularly smaller Asian ones, are similarly following suit with auction sales planned at hotels around town during ART HK.

On May 23, 2011, ART HK and ArtTactic even announced in two art market reports (China Contemporary Art Market Report 2011 and US & Europe Contemporary Art Market Report 2011) that confidence in the Chinese contemporary art market greatly exceeds confidence in its US and European counterparts.  In fact, the reports claim that 75% of art industry experts indicate that the Chinese market will continue to grow over the next six months, compared to only 36% of art experts indicating growth in the US and European contemporary art markets.

Hong Kong offers a range of comforts for those doing business in the Hong Kong art market. In addition to the tremendous tax advantages in the  importation or exportation of art in Hong Kong, doing business in Hong Kong is made easier by the fact that English is commonly spoken and that Hong Kong adheres to international standards of business law, with a great degree of transparency in transactions. Moreover, in contrast to Shanghai or Beijing, the logistics of obtaining shipments in and out of Hong Kong do not typically involve lengthy turnaround times.

When exporting artwork from Hong Kong, buyers must ensure to complete and submit an export declaration in Hong Kong, as well as an import declaration in the destination country, where import duties and taxes are typically chargeable in the destination country. Where the buyer is shipping the artwork to the same country that the seller originally exported it to Hong Kong from, it may be possible for the buyer to avoid payment of import customs duty in the destination country under a “returned goods relief” procedure, as long as the seller can provide the buyer with the relevant proof of original export.

There are many factors contributing to the strength of China’s position in the international art market, including its beneficial tax considerations, remarkable auction revenue, a newfound interest in art within China as either an investment or because of national identity and a global interest in contemporary Chinese artists.  With offices in Shanghai and Beijing, these are issues encountered frequently here at Sheppard Mullin. Overall the future of the Chinese art world looks optimistic, and it is clear that the impact of the art fair culture, especially vis-à-vis ART HK, has a crucial role to play in this continued growth.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

http://www.natlawreview.com/article/fda-issues-draft-guidance-510k-device-modifications-new-emphasis-potential-impact-modificati

Recently posted in the National Law Review an article by  Sylvie A. Durham, Genna Garver and Dmitry G. Ivanov of Greenberg Traurig, LLP about a dismissed a lawsuit brought by noteholders under a New York law  indenture 

The U.S. District Court of the Southern District of New York dismissed a lawsuit brought by noteholders under a New York law indenture against the co-issuer of the notes and collateral manager for breach of contract because the noteholders failed to comply with the “limitation of suits” provision in the indenture.

The court stated that the allegation of the noteholders that they did not receive proper distribution amounts on the notes constituted an “event of default” under the indenture, and as such “falls squarely within the limitation on suits clause.” However, since the noteholders did not comply with all the contractual prerequisites for bringing a lawsuit set forth in the “limitation of suits” provision of the indenture, the court did not allow them to proceed with breach of contract claims against the co-issuer and collateral manager. However, the court did not dismiss the breach of contract claims against the indenture trustee based on the same “no-action” clause, since compliance with such clause “would require [noteholders] to demand that the [indenture trustee] initiate proceedings against itself to rectify the alleged error.”

A copy of the case can be accessed here.

 ©2011 Greenberg Traurig, LLP. All rights reserved.

US Labor Department considers development of data tool to combat pay discrimination

Posted in the National Law Review on August 14, 2011 an article by U.S. Department of Labor regarding is considering the development of a new data tool to collect information on salaries, wages and other benefits paid to employees of federal contractors and subcontractors.

Public invited to comment during early stage of development

WASHINGTON — The U.S. Department of Labor’s Office of Federal Contract Compliance Programs is considering the development of a new data tool to collect information on salaries, wages and other benefits paid to employees of federal contractors and subcontractors. The tool would improve OFCCP’s ability to gather data that could be analyzed for indicators of discrimination, such as disparities faced by female and minority workers. To provide an opportunity for the public to submit feedback, the department published an advance notice of proposed rulemaking in the Aug. 10 edition of the Federal Register.

OFCCP enforces Executive Order 11246, which prohibits companies that do business with the federal government from discriminating in employment practices — including compensation — on the basis of sex, race, color, national origin or religion. Last year, the agency announced plans to create a compensation data tool in the department’s fall 2010 regulatory agenda. In addition to providing OFCCP investigators with insight into potential pay discrimination warranting further review, the proposed tool would provide a self-assessment element to help employers evaluate the effects of their compensation practices.

“Today, almost 50 years after the Equal Pay Act became law, the wage gap has narrowed, but not nearly enough,” said Secretary of Labor Hilda L. Solis. “The president and I are committed to ending pay discrimination once and for all.”

The Labor Department’s Bureau of Labor Statistics reports that in 2010 women were paid an average of 77 cents for every dollar paid to men. In addition to the gender gap, research has shown that race- and ethnicity-based pay gaps put workers of color, including men, at a disadvantage. Eliminating compensation-based discrimination is a top priority for OFCCP.

“Pay discrimination continues to plague women and people of color in the workforce,” said OFCCP Director Patricia A. Shiu, a member of the president’s National Equal Pay Enforcement Task Force. “This proposal is about gathering better data, which will allow us to focus our enforcement resources where they are most needed. We can’t truly solve this problem until we can see it, measure it and put dollar figures on it.”

The notice poses 15 questions for public response on the types of data that should be requested, the scope of information OFCCP should seek, how the data should be collected, how the data should be used, what the tool should look like, which contractors should be required to submit compensation data and how the tool might create potential burdens for small businesses. The proposal will be open to public response for 60 days, and the deadline for receiving comments is Oct. 11. To read the proposal or submit a comment, visit the federal e-rulemaking portal at http://www.regulations.gov.

In addition to Executive Order 11246, OFCCP’s legal authority exists under Section 503 of the Rehabilitation Act of 1973 and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974. As amended, these three laws hold those who do business with the federal government, both contractors and subcontractors, to the fair and reasonable standard that they not discriminate in employment on the basis of sex, race, color, religion, national origin, disability or status as a protected veteran. For general information, call OFCCP’s toll-free helpline at 800-397-6251. Additional information is also available at http://www.dol.gov/ofccp/.

© Copyright 2011 U.S. Department of Labor

Washington Court of Appeals Rules that Liability Insurer Defending under Reservation of Rights is not Entitled to Reimbursement in the Absence of Express Policy Language Expressly Reserving Such a Right

Recently posted in the National Law Review an article by Dana Ferestien of Williams Kastner regarding when a liability insurer provides a reservation of rights defense, is it ever entitled to reimbursement of defense costs paid if a court later determines that there is no duty to defend?

 

On July 25, 2011, the Court of Appeals addressed what had been an open question in Washington:

The coverage dispute arose from claims that Immunex had artificially inflated the price of prescription drugs. After litigation had been pending for several years and Immunex had already incurred substantial defense fees and costs, Immunex tendered the claims to National Surety, its excess liability insurer, for defense and indemnity. National Surety denied coverage for the claims, but agreed under a reservation of rights to provide a defense with the right to reimbursement if a court later determined that there was no duty to defend.

The King County Superior Court determined that there was no coverage and, therefore, National Surety owed no duty to defend Immunex. But the trial court also ruled that National Surety was obligated to pay Immunex’s defense costs until the date that the court confirmed the claims were not covered, unless National Surety could establish actual prejudice resulting from Immunex’s late tender. Immunex appealed the finding of no coverage, and National Surety cross-appealed the trial court’s determination that its ruling applied prospectively only.

After agreeing that there was no coverage for the underlying claims, the Court of Appeals affirmed that National Surety remained obligated for defense costs incurred up until the trial court’s summary judgment rulings unless National Surety could prove actual prejudice resulting from Immunex’s late tender. Relying upon Washington cases noting the broader scope of a liability insurer’s duty to defend, the court reasoned that “payment of defense costs for claims that are potentially covered is part of the bargained-for exchange between the insurer and the insured” and the reservation of rights defense provides an insurer with “the benefit of insulating itself from a bad faith claim and possibly coverage by estoppel.”

Notably, the court indicated that its decision may have been different had National Surety’s policy included express language reserving to the insurer the right to reimbursement in the event that it defends a claim under a reservation of rights and then obtains a court determination of no coverage. Whether the Court of Appeals would actually enforce such a provision remains to be seen. But liability insurers now should give careful consideration as to whether to include a reimbursement provision in policies issued to Washington insureds.

In reaching this outcome, the Court of Appeals rejected several arguments advanced by National Surety. The court declined to draw any distinction between instances where an insurer defends under a reservation of rights because Washington law is unresolved as to the meaning of policy language as opposed to instances where a claim involves unresolved questions of fact for which there may or may not ultimately be coverage. The Court of Appeals also rejected reimbursement based upon theories of unilateral implied contract or unjust enrichment. And the court declined to reach a different outcome because National Surety had yet to reimburse Immunex for any of its defense costs, explaining that such a result would improperly reward insurers who withhold defense costs payments.

© 2002-2011 by Williams Kastner ALL RIGHTS RESERVED

Avoid Unnecessary Real Property Taxes

Recently posted in the National Law Review an article by Richard B. Tranter and Sarah Sparks Herron of Dinsmore & Shohl LLP regarding valuation pitfalls involved with the purchase of an on-going business that owns real estate.

When Buying an On-Going Business that Includes Real Estate in Ohio

Beware the valuation pitfalls involved with the purchase of an on-going business that owns real estate. A buyer can accidentally cause its real property taxes on the newly purchased property to increase dramatically if it fails to allocate values properly between personal property and real property. Fortunately, a few preventative measures can be taken at the closing to prevent an unnecessary real property tax increase and litigation.

Imagine the following scenario: Company ABC decides to buy a hotel. The purchase includes the real estate on which the hotel is located, the personal property, including the furniture, fixtures and equipment (“FF&E”) within the hotel, and the goodwill associated with the hotel franchise. The purchase price for everything is $3,600,000. Neither the purchase agreement nor the settlement statement allocates this purchase price between the real estate, FF&E and goodwill. After the closing, a title agent goes to record the deed for the real estate at the local recorder’s office. The agent is asked to fill out a “Real Property Conveyance Fee Statement of Value and Receipt” (a/k/a “Conveyance Fee Statement”). The agent fills-in the purchase price as the consideration for the real property. Shortly thereafter, Company ABC receives a notice that the County Auditor will be increasing the value of the real property to reflect the $3.6 million purchase price, and the real property taxes will be going up to reflect this new, higher value. Company ABC objects because the $3.6 million price reflects the combined value of the real property, FF&E and goodwill. Now, to challenge the property valuation, Company ABC must file a complaint with the county board of revision and prove that the purchase price, as stated on the Conveyance Fee Statement, does not reflect the fair market value of the real property.

This is exactly what happened in a recent Ohio Supreme Court case, Hilliard City Schools Bd. of Educ. v. Franklin Cty. Bd. of Rev., 128 Ohio St.3d 565, 2011-Ohio-2258, 949 N.E.2d 1. The buyer in that case, K.D.M. and Associates, L.L.C. (“KDM”), purchased an 80-room, fully operating hotel for $3,600,000. Shortly thereafter, the Franklin County Auditor increased the value of the real property from $2,240,000 to $3,550,000. KDM filed a complaint, and the Franklin County Board of Revision reduced the real property value by $800,000 for FF&E, $60,000 for inventory, and $500,000 for goodwill for a final real property valuation of $2,240,000. The local school board appealed to the Board of Tax Appeals (“BTA”), which disallowed the $500,000 allocation to goodwill and the $60,000 allocated to inventory. Thus, the BTA concluded that the value of the real estate was $2,750,000. On appeals by both KDM and the school board, the Supreme Court valued the real estate even higher. The Court decreased the deduction for FF&E from $800,000 to $280,000. In addition, the Court refused to permit the deduction of $500,000 for goodwill. Thus, approximately six years after the plaintiff purchased an operating hotel for $3,600,000, the Ohio Supreme Court determined that the value of the real estate involved was $3,320,000.

What could KDM have done to avoid years of litigation and an additional $1.1 million in real property tax value? First, KDM could have completely filled out the Conveyance Fee Statement. Section 8(E) of this form asks what portion, if any, of the total consideration paid was for items other than real property. After every sale, the auditor will evaluate whether to increase or decrease the property’s valuation. This determination is made, in part, based on the Conveyance Fee Statement. If the new property owner allocates the purchase price on the Conveyance Fee Statement and the auditor accepts the allocation at this stage, then the new property owner does not have to challenge the auditor’s valuation. Further, if the local school board challenges the property valuation, the school board has the burden of proving a higher valuation. Thus, a fully completed Conveyance Fee Statement can head-off potential valuation disputes.

Second, KDM could have documented the allocation between real property, FF&E and goodwill in the closing documents. Notably, the settlement statement for the hotel purchase did not provide an allocation to personal property. In addition, the bill of sale for personal property was incomplete. The bill included “inventory, equipment, fixtures, assets used by seller in the business in the attached ‘Exhibit A’”, but there was no Exhibit A, nor any value assigned to that property. Thus, KDM had little evidence from the closing to support its conclusion that $800,000 of the purchase price was for FF&E, $60,000 was for inventory, and $500,000 was for goodwill.

The Supreme Court ultimately concluded that the FF&E was worth $280,000 based on a financing appraisal conducted in anticipation of the purchase. The Court pragmatically concluded that an operating hotel clearly included personal property, and this personal property clearly had value to be allocated as part of the purchase price. Thus, the Court rejected the school board’s argument that the sale price, as set forth in the Conveyance Fee Statement, reflected the fair market value of the real property. The Court, however, rejected KDM’s representatives’ testimony about the value of the FF&E and rejected an unauthenticated, 2005 year-end financial statement showing FF&E of $800,000. With no allocation on the Conveyance Fee Statement or in the closing documents, the best evidence available to the Court was the financing appraisal which presented an estimation of value relied upon by KDM’s lender at the time of the sale. The Court utilized such appraisal evidence.

In conclusion, the purchase of an on-going business can have multiple moving parts. If you are contemplating a purchase that includes real estate, remember to document the purchase price allocation between real and personal property in both the Conveyance Fee Statement and closing documents. These simple steps can avoid unnecessary real property taxes and litigation.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

Department of State Releases September 2011 Visa Bulletin

Recently posted in the National Law Review an article by Eleanor Pelta, Eric S. Bord, A. James Vázquez-Azpiri, and Lance Director Nagel of Morgan, Lewis & Bockius LLP regarding DOS recent Visa Bulletin which sets out per country priority date cutoffs that regulate the flow of adjustment of status (AOS) and consular immigrant visa applications.

The U.S. Department of State (DOS) has released its September 2011 Visa Bulletin. The Visa Bulletin sets out per country priority date cutoffs that regulate the flow of adjustment of status (AOS) and consular immigrant visa applications. Foreign nationals may file applications to adjust their status to that of permanent resident, or to obtain approval of an immigrant visa application at an American embassy or consulate abroad, provided that their priority dates are prior to the cutoff dates specified by the DOS.

What Does the September 2011 Bulletin Say?

EB-1: All EB-1 categories remain current.

EB-2: Priority dates remain current for foreign nationals in the EB-2 category from all countries except China and India.

The relevant priority date cutoffs for Indian and Chinese nationals are as follows:

China: April 15, 2007 (no movement)
India: April 15, 2007 (no movement)

EB-3: There is continued backlog in the EB-3 category.

The relevant priority date cutoffs for foreign nationals in the EB-3 category are as follows:

China: July 15, 2004 (forward movement of one week)
India: July 8, 2002 (forward movement of five weeks)
Mexico: November 22, 2005 (forward movement of three weeks)
Philippines: November 22, 2005 (forward movement of three weeks)
Rest of the World: November 22, 2005 (forward movement of three weeks)

How This Affects You

Priority date cutoffs are assessed on a monthly basis by the DOS, based on anticipated demand. Cutoff dates can move forward or backward, or remain static and unchanged. Employers and employees should take the immigrant visa backlogs into account in their long-term planning, and take measures to mitigate their effects. To see the September 2011 Visa Bulletin in its entirety, please visit the DOS website at http://www.travel.state.gov/visa/bulletin/bulletin_5542.html.

Copyright © 2011 by Morgan, Lewis & Bockius LLP. All Rights Reserved.