Author: National Law Forum

A group of in-house attorneys developed the National Law Review on-line edition to create an easy to use resource to capture legal trends and news as they first start to emerge. We were looking for a better way to organize, vet and easily retrieve all the updates that were being sent to us on a daily basis.In the process, we’ve become one of the highest volume business law websites in the U.S. Today, the National Law Review’s seasoned editors screen and classify breaking news and analysis authored by recognized legal professionals and our own journalists. There is no log in to access the database and new articles are added hourly. The National Law Review revolutionized legal publication in 1888 and this cutting-edge tradition continues today.

An Ounce of Prevention – The Importance of Periodic Corporate Audits

Posted this week at the National Law Review by James M. O’Brien, III and David R. Krosner of  Poyner Spruill LLP – a good overview of the many reasons managed care organization should perform periodic corporate audits:  

Most, if not all, long term care providers operate their business in an entity form, such as a corporation or limited liability company.  Many use multiple entities – for example, one entity to own the real estate (or a separate entity to own each parcel of real estate) and another to operate the business.

Although the type of entity (or entities) used in your business was likely selected based on an evaluation of the benefits and drawbacks of each type of entity (including tax considerations and management structure), one of the principal benefits of both a corporation and a limited liability company (LLC) is limited liability, which is often referred to as the “corporate veil” or “corporate shield.” The corporate veil refers to the concept that the owners of the corporation or LLC are generally not liable for the debts and obligations of the entity. Rather, the “corporate veil” protects the owners from that personal liability and places responsibility for the entity’s debts and obligations on the entity.

As we all know, for every rule, there are exceptions, and that holds true with respect to the corporate shield. Some of these exceptions are created by statutes and others by case law. For example, under federal statutes, employees who are responsible for the entity’s payroll or financial affairs may be personally liable (and also subject to penalties) for willfully failing to collect and remit required federal withholding or employment taxes. Similarly, under certain federal environmental laws, corporate officers who have authority and control over the disposal of hazardous wastes can be held personally liable for the corporation’s failure to comply with certain environmental laws.

In the category of case law type exceptions, generally an individual will always be liable for his own wrongdoing. For example, if I get frustrated at work and punch my partner in the nose, the corporate shield will not protect me from liability to my partner! We all understand (and can’t legitimately complain about) those types of exceptions to the corporate shield. But there is also a broader set of case law that creates additional exceptions that allow plaintiffs to “pierce the corporate veil.” Under this concept, a judge may decide that the facts of a particular case warrant piercing the corporate veil and, thereby, holding the owners of the entity personally liable for the matter being litigated. Generally, the courts examine a laundry list of factors, including, most importantly whether the facts suggest that a refusal to pierce the corporate veil would result in fraud or similar injustice.

Generally, to succeed in a veil piercing case, the plaintiffs would have to prove, among other items, that the owners of the entity so dominated its finances, policy and business that the entity had no separate mind, will or existence of its own. In determining whether that level of control exists, a court looks to several factors (none of which are typically decisive in and of themselves). These factors include (i) inadequate capitalization of the entity, (ii) noncompliance with corporate formalities, (iii) excessive fragmentation of a single enterprise into multiple entities, (iv) absence of company records, and (v) siphoning of funds from the company by the dominant owner.

Although the case law rules for veil piercing vary somewhat from state to state, the good news is that courts are typically very reluctant to pierce the corporate veil. The perhaps better news is that there are steps you can take to make it less likely that the veil of your entity will be pierced. So what can you do to lessen the risk of a successful veil piercing claim? For one, be sure your entity complies with appropriate corporate formalities and maintains appropriate corporate records. For example, if your entity is a corporation, each year the corporation should hold a shareholders’ meeting to elect its Board of Directors and the directors should appoint the officers. All major corporate actions should be approved by the Board of Directors and records of those approvals should be maintained. If money is distributed to the owners or there are multiple entities and money flows between the entities, all of this should be approved in writing by the directors and properly documented. Generally, these types of records are kept in the entity’s minute book. If the last entry in your minute book dates from 1982, your entity is not keeping proper records!

As a service to our clients, we often conduct legal reviews of a client’s corporate/LLC records, including, as applicable, minute books, shareholders’ or operating agreements, articles of incorporation/articles of organization, bylaws, annual reports, stock transfer ledgers, foreign qualifications, good standing certificates, tax clearance certificates, etc., to ensure the records are up to date, reflect the current operations of the company, comply with current law, and generally reflect compliance with the governing documents and formalities applicable to the company. To the extent we find deficiencies, we propose a course of action and help our clients implement corrections. This is an easy and inexpensive way for you to eliminate one of the factors associated with piercing the corporate veil and help protect owners from personal liability.

© 2011 Poyner Spruill LLP. All rights reserved.

 

Don't Gamble with My Money: When a Lawsuit Seeks Damages in Excess of Policy Limits, What Are the Insured's Rights in Illinois?

Posted this week at the National Law Review by Daniel J. Struck and Neil B. Posner of Much Shelist Denenberg Ament & Rubenstein P.C.  a good overview of R.C. Wegman Construction Company v. Admiral Insurance Company which help address the issues involved with insurance claims in excess of policy limits in Illinois: 

In general, if a lawsuit is covered or potentially covered by a commercial general liability (CGL) insurance policy, the insurer has a duty to defend that claim. If the insurer provides that defense without reserving its rights to deny coverage, the insurer is entitled to select defense counsel and control the defense. But when the insurer defends under a reservation of rights, that reservation may create a conflict of interest between the insurer and the insured.

The leading Illinois Supreme Court case on this subject is Maryland Casualty v. Peppers, decided in 1976. According to Peppers, when an insurer defends an insured, but reserves the right to deny coverage based on an exclusion in the insurance policy (the applicability of which could be established during the course of defending the insured), there is a conflict of interest that gives the insured the right to select independent counsel to defend it at the insurer’s expense. But the Illinois Supreme Court did not say that this is the only conflict of interest that could give rise to the insured’s right to select independent defense counsel.

In R.C. Wegman Construction Company v. Admiral Insurance Company, decided in 2011, the United States Court of Appeals for the Seventh Circuit answered a question that has vexed Illinois insureds for a long time. Although the case involves a relatively uncommon set of facts, the court’s ruling in Wegman recognizes the conflicting interests that can arise between insureds and insurers when an insured faces a claim in which there is a “non-trivial probability” that there could be a judgment in excess of policy limits.

The Nuts and Bolts of Wegman

R.C. Wegman Construction Company was the manager of a construction site at which another contractor’s employee was seriously injured. Wegman was an additional insured under a policy issued by Admiral Insurance to the other contractor. When the worker sued Wegman, Admiral acknowledged its duty to defend, apparently without reserving any rights, and undertook the control of Wegman’s defense. The Admiral policy provided $1 million in per-occurrence limits of liability. Although it soon became clear that there was a “realistic possibility” that the underlying lawsuit would result in a settlement or judgment in excess of the policy limits, Admiral never provided this information to Wegman.

Shortly before trial, a Wegman executive was chatting about the case with a relative who happened to be an attorney. That relative pointed out the risk of liability in excess of policy limits, and mentioned that it was important for Wegman to notify its excess insurers. But by then it was too late, and the excess insurer denied coverage because notice was untimely. A judgment was entered against Wegman for more than $2 million. Wegman sued Admiral for failing to give sufficient warning of the possibility of an excess judgment so that Wegman could give timely notice to its excess insurer. According to the Seventh Circuit, the key issue was whether this situation—in which there was a risk of judgment in excess of the limit of liability, and where the insurer was paying for and controlling the defense—gave rise to a conflict of interest.

Admiral’s explanation for failing to inform Wegman was ultimately part of its downfall. Because there were other defendants in the underlying lawsuit, there was a good chance that Wegman would not be held jointly liable and that if a jury determined that Wegman was no more than 25% responsible for the worker’s injury, Wegman’s liability would have been capped at 25% of the judgment. Admiral’s trial strategy was not to deny liability, but to downplay Wegman’s responsibility. Admiral, however, never mentioned this litigation gambit to Wegman!

In the Seventh Circuit’s view, this was a textbook example of “gambling with an insured’s money.” And that is a breach of an insurer’s fiduciary duty to its insured.

When a potential conflict of interest arises, the insurer has a duty to notify the insured, regardless of whether the potential conflict relates to a basis for denying coverage, a reservation of rights, or a disconnect between the available limits of coverage and the insured’s potential liability. Once the insured has been informed of the conflict of interest, the insured has the option of hiring a new lawyer whose loyalty will be exclusively to the insured. In reaching its Wegman conclusion, the Seventh Circuit cited the conflict-of-interest rule established by the Illinois Supreme Court’s Peppersdecision. Thus, a potential conflict of interest between an insured and an insurer concerning the conduct of defense is not limited to situations in which the insurer has reserved its rights.

In rejecting Admiral’s arguments, the Seventh Circuit explained that a conflict of interest (1) can arise in any number of situations and (2) does not necessarily mean that the conflicted party—the insurer—has engaged in actual harmful conduct. A conflict of interest that permits an insured to select independent counsel occurs whenever the interests of the insured and the insurer are divergent, which creates a potential for harmful conduct.

The conflict between Admiral and Wegman arose when Admiral learned that a judgment in excess of policy limits was a “non-trivial probability.” When confronted with a conflict of this type, the insurer must inform the insured as soon as possible in order to allow the insured to give timely notice to excess insurers, and to allow the insured to make an informed decision as to whether to select its own counsel or to continue with the defense provided by the insurer.

Looking Beyond Wegman

The fact pattern discussed in Wegman, however, is not the only situation in which there may be a conflict of interest between an insurer and an insured concerning the control of the defense. Under the supplemental duty to defend in a CGL policy, an insured is entitled to be defended until settlements or judgments have been paid out in an amount that equals or exceeds the limits of liability. The cost of defense does not erode the limits of liability, which means that the supplemental duty to defend is of significant economic value to an insured.

The following hypothetical situations (involving an insured covered by a CGL policy with $1 million in per-occurrence and aggregate limits of liability and a supplemental duty to defend) illustrate the economic value of the duty to defend:

  • The insured is sued 25 times in one policy year. In each instance, the insurer acknowledges coverage and undertakes to defend the lawsuits. Each lawsuit is dismissed without the insured becoming liable for any settlements or judgments. The total cost of defending these 25 lawsuits is $1.5 million. The limits of liability are completely unimpaired with $1 million in limits of coverage remaining available.
  • The insured is a defendant in dozens of lawsuits alleging that one of the products it sells has a defect that has caused bodily injury. The insurer agrees to defend. The lawsuits are consolidated, and the costs of defense accumulate to more than $2.5 million. Eventually, there is a global settlement of the lawsuits for $1 million. Thus, a total of $3.5 million has been paid out on an insurance policy with a $1 million limit of liability.
  • The insured is involved in a catastrophic accident for which he was solely responsible and in which four other people were permanently disabled. Each of the victims files a lawsuit and the realistic projected liability exposure to each victim is $1.5 million—or $6 million collectively. Shortly after the complaints are filed (and before there has been any significant discovery or investigation), three of the plaintiffs make a joint offer to settle their claims for a collective $1 million. The insurer and the insured both believe that this is an outstanding settlement opportunity, but the fourth plaintiff wants her day in court. If the insured agrees to this promising settlement opportunity, the limits of liability will be exhausted, the duty to defend will be extinguished, and the insured will be forced to pay for his own defense or rely on his excess insurance to reimburse him for defense costs.

Any insured who has been in the position of defending against either a serious claim or a multitude of smaller claims will understand that the supplemental duty to defend under a CGL policy may have much greater economic value than the limit of liability alone.

In these kinds of situations—when either the potential liability exceeds policy limits or there are multiple claims against the insured such that the economic value of the defense is worth more than the limit of liability—who should be allowed to control the defense of claims against the insured? In prior cases (Conway v. County Casualty Insurance Company [1992] and American Service Insurance Company v. China Ocean Shipping Co. [2010]), Illinois courts concluded that an insurer cannot be excused of any further duty to defend by paying out its remaining limits to the plaintiffs or by depositing its policy limits into court. But this rule does not address the conflict of interest when (1) it is in the insurer’s financial interest to avoid the potentially unlimited expense of defending its insured but (2) it is in the insured’s interest to continue receiving a defense that may have greater financial value than the limits of liability of a primary CGL policy.

Thanks to the Wegman decision, there is now some authority acknowledging that the insured’s right to select independent counsel may exist even if the insurer defends without a reservation of rights. The court recognized that the insurer-insured relationship and the right to control the defense is fraught with potential conflicts. Therefore, it is more important than ever for insureds to protect their interests.

Editor’s note: For more on the insured’s right to a defense, see “Policyholders and the Right to a Defense: Don’t Be Left Holding the Bag.”

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

 

Supreme Court Grants Cert. In Caraco

Posted yesterday at the National Law Review by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. deatils about the U.S. Supreme Court’s grant of certiorari in Caraco Pharm. Labs., Ltd., v. Novo Nordisk:   

Today (June 27, 2010), the Supreme Court granted cert. in yet another patent appeal, Caraco Pharm. Labs., Ltd., v. Novo Nordisk, (Supreme Ct. 10-844). Earlier this month, I did an extensive post on the decision below, in which the Fed. Cir. denied Caraco’s counterclaim seeking to strike the broad “use code” that Novo had put on its drug, Prandin (U-968). Even though Caraco would market the generic for a narrower use, the broad use code effectively prevented Caraco from “carving out” the still-patented use(s) from its labeling, thus effectively keeping it off the market.

I took a chance by posting on this one because the Solicitor General’s office recommended review and there was a strong dissent below. However, when the appeal started getting some attention in the press – though the issues were often mischaracterized – it began to look more likely that cert. would be granted. I am not so sure that the Fed. Cir.’s recent streak of affirmances will be left intact.

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

Collision Occurs Between Copyrights and Misappropriation in Electronic News Media Space

Posted this week at the National Law Review by Bracewell & Giuliani LLP  and interesting article about copyrightable aspects of Wall Street research—the published models, insights, and facts:   

Despite winning in court to protect valuable copyrights, Wall Street firms are unable to protect their valuable trading recommendations as federal and state laws collide in Barclays Capital Inc. v. Theflyonthewall.com, Inc.1 (pending any potential review on appeal). The electronic news media continues to lead the charge, and now the walls of exclusivity are beginning to crumble for these respected recommendations.

Wall Street firms have for long provided detailed research reports and trading recommendations—exclusively to firm customers—to drive order flow with the recommending firm, thereby generating commission revenue. Storming the walls, however, are those in the electronic news media blasting the once-exclusive information to all corners of the Internet, immediately upon its release by Wall Street. But for Wall Street, this widespread, uncontrolled dissemination has cut into profitability and has wreaked havoc on traditional business models for market research.

Although the electronic news media scored a fresh victory, Wall Street has not suffered a devastating loss. The copyrightable aspects of Wall Street research—the published models, insights, and facts, for example, are often more valuable to institutional customers than the basic recommendation itself (e.g., Buy, Sell, or Hold). These copyrightable aspects, of course, remain protected by federal copyright law.2 Outside the realm of finance, however, this case may signal much broader implications for any business with both feet in the Information Age.

The appeals court received this case after the District Court for the Southern District of New York granted injunctive relief to plaintiffs Barclays Capital Inc.; Merrill Lynch; Pierce, Fenner & Smith Inc.; and Morgan Stanley & Co. Inc. (“the Firms”), which prohibited Theflyonthewall.com, Inc. (“Fly”) from publishing information about the Firms’ recommendations, within certain parameters.3 The issue presented on appeal was whether Fly could be enjoined from publishing “news,” i.e., bare facts, that the Firms [had] made certain recommendations.4 The appeals court vacated the injunction, paving the way for the electronic news media to publish Wall Street recommendations far and wide, and of course, to direct profits to publishers and sponsors, away from the recommending firm. In the wake of this decision, Wall Street firms must now reconsider business models built upon the value of their proprietary information.

Without further recourse from federal copyright law, which does not protect bare “facts” alone, the Firms sought relief under New York tort law through the doctrine of “hot news” misappropriation of information. The appeals court was bound to consider, however, whether federal copyright law preempted the applicability of state law in these circumstances. To survive preemption, Firms were required to prove that Fly’s use of the information constitutes “free riding” on the Firms’ efforts.5 By concluding that there was no “free riding,” the appeals court significantly narrowed the circumstances in which similar state law misappropriation claims can survive preemption by federal copyright law. Accordingly, this case signals a broader victory for electronic publishers hoping to widely distribute, and to profit from, factual information created by others.

In determining whether Fly engaged in “free riding,” the court looked to precedent in National Basketball Association v. Motorola, Inc.6 (“the NBA Case”). In the NBA Case, the NBA collected and broadcast information, based on live sports games, over a communication network; and likewise, a competitor collected and broadcast its own information, based on live sports games, over a competing communication network. The appeals court noted that, in the NBA Case, there was no free riding, in part, because Motorola was bearing its own costs of collecting factual information.

In the present case, the appeals court’s ultimate inquiry was whether any of the Firms’ products enabled Fly “to produce a directly competitive product for less money because it has lower costs.”7 Extending the reasoning from the NBA Case to cover Fly’s actions, the appeals court concluded that that there was no “free riding” because approximately half of Fly’s twenty-eight employees were involved in the collection and distribution of Firms’ recommendations.8 According to the appeals court, Fly “is reporting financial news—factual information on Firm Recommendations—through a substantial organizational effort.”9

The appeals court, however, did not consider it important that the Firms had incurred substantial costs in research and analysis (i.e., acquiring and creating information) as the basis for their recommendations, whereas Fly’s only costs were in collecting and reporting the recommendations. The appeals court discarded the relevance of these basis costs—even though they provide an arguable distinction over the NBA Case—stating that although the Firms “may be ‘acquiring material’ in the course of preparing their reports . . . that is not the focus of this lawsuit. In pressing a ‘hot news’ claim against [Fly], [Firms] seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.”10 The appeals court concluded that there was no meaningful difference between “taking material that a Firm has created . . . as the result of organization and the expenditure of labor, skill, and money . . . and selling it by ascribing the material to its creator” and the “unexceptional and easily recognized behavior by members of the traditional news media [reporting on] winners of Tony Awards . . . with proper attribution of the material to its creator.”11 We expect that the contours of these differences to be a key issue if this case [is] heard on appeal, either at the Second Circuit en banc or at the United States Supreme Court.

Absent any legal recourse to ensure the exclusivity of their recommendations, Wall Street firms must now scramble to implement even greater security and counter-intelligence measures. After all, publishers such as Fly rely on information leaks and intelligence to timely obtain the recommendations in the first place. More likely, however, is that Wall Street firms will soon refine their business models to otherwise adequately monetize, or else reduce expenditures in, their intensive research and analysis efforts.

The broader implications of this case—that the “ability to make news . . . does not give rise to a right for it to control who breaks that news and how”12—will bear critically on the development, funding, and overall power of rapidly-advancing electronic information sources. In particular, businesses providing information aggregation services of all stripes—including, for example, those provided by Google, Inc. and Twitter, Inc.—will rejoice in the ability to gather and publish information from multiple sources across the entire nation with a lower risk of encountering divergent legal standards for misappropriation, on a state-by-state basis.

____________________

1 Barclays Capital Inc. v. Theflyonthewall.com, Inc., No. 10-1372-cv (2d Cir. June 20, 2011).
2 The District Court for the Southern District of New York awarded monetary relief for copyright infringement by Fly’s unauthorized distribution of the Firm’s actual reports. Issues concerning copyright infringement were not addressed on appeal.
3 The injunction allowed the Firms’ customers to trade on the Firms’ recommendations prior to the broader market. The injunction prohibited Fly from reporting a recommendation until (a) the later of one half-hour after the opening of the New York Stock Exchange or 10:00 am for those recommendations first distributed prior to 9:30 am, or (b) two hours after the recommendation is first distributed by one of the Firms to its clients, for those recommendations first distributed at or after 9:30 am on a given day. See Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 29, n.20.
4 For example, a headline covering one of the Firms’ recommendations may state: “EQIX initiated with a Buy at BofA/Merrill. Target $110.”
5 “Free riding” was but one factor in a five-pronged test, the remainder of which were not the basis of the decision. The appeals court speculated, however, that proving certain other factors may be troublesome, such as “direct competition” between Fly and the Firms.
6 105 17 F.3d 841 (2d Cir. 1997).
7 Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 67.
8Fly previously relied on employees at investment firms (without the firms’ authorization) to e-mail the research reports to Fly as they were released. Fly’s staff would summarize a recommendation as a headline, and sometimes, Fly would include in a published item an extended passage taken verbatim from the underlying report.  Fly maintains that it no longer obtains recommendations directly from such investment firms and, instead, that it gathers them using a combination of other news outlets, chat rooms, “blast IMs” sent by people in the investment community to hundreds of recipients, and conversations with traders, money managers, and its other contacts involved in the securities markets. Id. at 16-17.
9 Id. at 67.
10 Id. at 62.
11 Id. at 63-64.
12 Id. at 71.

© 2011 Bracewell & Giuliani LLP

Clarification of DNR Orders Signed by Nurse Practitioners or Physician's Assistants

Posted this week at the National Law Review by Kenneth L. Burgess of Poyner Spruill LLP – some needed clarification about portable Do Not Resuscitate (DNR) forms and who can execute them:  

We have recently received several calls about the portable Do Not Resuscitate (DNR) order form, also known as the Goldenrod form. Several readers have told us that some physicians are under the impression that only a physician can sign a portable DNR order. This is incorrect. In 2004, the Office of Emergency Medical Services (OEMS) issued a memo in response to this same question and clarified that a physician’s assistant or nurse practitioner can also execute a portable DNR order, and the order is effective and “should be followed by all health care providers as if the orders were signed and issued by a physician.” The memo also stated that the official portable DNR form had been revised to reflect this interpretation.

Apparently, for reasons that are not clear, some providers have been told recently that this interpretation has changed. It has not. In response to an inquiry about this from several of us who work with end-of-life issues, OEMS on May 19, 2011, issued an updated memo clarifying and restating the substance of the 2004 memo—i.e., that portable DNR orders signed by a physician’s assistant or nurse practitioner are legal and should be honored just as if the physician with whom the PA or NP works had signed and issued the order, and that portable DNR orders signed by a PA or NP should be honored by all health care providers. The memo further states that this interpretation is based on an interpretation by the N.C. Medical Board, which regulates the practice of medicine in North Carolina.

Also, recall that the Medical Order for Scope of Treatment (MOST) form can also be signed by either a physician, nurse practitioner or physician’s assistant, and the MOST form specifically indicates this by designating the options of MD, PA or NP in the block where the medical provider must sign the form.

Please share this information with individuals in your facility who work with the DNR and/or MOST forms and with your medical director and other physicians who provide services in your facility. Please continue to share with us your questions about the portable DNR form, the MOST form or other end-of-life advance care planning issues, and we will continue to update our readers on these very important issues.

© 2011 Poyner Spruill LLP. All rights reserved.

Patent Reform Bill Passed by the United States House of Representatives

Posted yesterday at the National Law Review by Richard L. Kaiser and Brian J.N. Marstall of Michael Best & Friedrich LLP a good recap of the most recent action in Congress on patent reform legislation:  

The House of Representatives passed its version of the America Invents Act (H.R. 1249) by a 304-117 vote on June 23, 2011. This follows the Senate passing its version back in March. The House and the Senate must now rectify the differences between the bills, and then each chamber must pass the reconciled version before being sent to the White House for signature. There may still be disagreements during the reconciliation process.  Even if reconciled and enacted, there could also be additional challenges to the legislation forthcoming, as some opponents have questioned the constitutionality of a key provision changing the U.S. patent system to a first-inventor-to-file system. Nonetheless, patent reform is now closer to becoming a reality than it has ever been in the last six years. A few of the key provisions are highlighted below.

First-to-File

Perhaps the biggest change that will take place is the switch to a first-inventor-to-file patent system. As the language of the Senate and House versions stands now, the change to a first-to-file system will go into effect 18 months after the effective date of the final legislation. Under the new first-to-file system, there will be an increased urgency to get patent applications filed as early as possible because any third-party prior art available before the patent application filing date can be used to reject the application.

Post Grant Review

Another major change will be the creation of a new post-grant review system that will expand the ability to challenge the validity of granted patents. The legislation provides several options to challenge patents, each option having various timeframes and limitations as to the grounds for challenge. The details of the new system will be developed by the Patent Office.

Patent Office Funding

While a change in how the Patent Office is funded may sound like an accounting matter, its impact could be very significant.  Increased fee setting authority and an end to Congress’ ability to divert Patent Office fees for other uses should increase the speed with which the Patent Office can examine patent applications. The Senate version of the legislation gives the Patent Office fee setting authority that need not be approved by Congress and ends fee diversion. The House bill does not go quite as far in granting the Patent Office autonomy, but it establishes a separate Patent Office account into which Patent Office fees will be placed. Congressional appropriators would have the authority to release those funds only to the Patent Office. This is one of the differences that will need to be reconciled for the final legislation.

False Marking

Both the Senate and House versions limit false marking claims. Only the United States or a competitor who can prove a competitive injury will be able to bring a false marking lawsuit under 35 U.S.C. Section 292. This change will apply to any case pending on or after the date of enactment of the legislation.

© MICHAEL BEST & FRIEDRICH LLP

 

Supreme Court Limits Bankruptcy Court Jurisdiction – Stern v. Marshall

Posted recently at the National Law Review by Prof. G. Ray Warner of Greenberg Traurig, LLP – the latest installment of the Anna Nicole Smith / J. Howard Marshall estate issue and how it impacts the jurisdiction of bankruptcy courts:   

 

In a decision that may create serious problems for bankruptcy case administration, the Supreme Court this morning invalidated part of the Bankruptcy Court jurisdictional scheme. Stern v. Marshall, No. 10-179, 564 U.S. ___ (June 23, 2011). Specifically, the Court held that the Bankruptcy Courts cannot issue final judgments on garden variety state law claims that are asserted as counterclaims by the debtor or trustee against creditors who have filed proofs of claim in the bankruptcy case.

Thus, while the Bankruptcy Court could issue a final order resolving the creditor’s claim against the estate, it could issue only a proposed ruling with respect to the counterclaim. Final judgment on the counterclaim could only be issued by the District Judge after de novo review of any matters to which a party objects. See 28 U.S.C. § 157(c).

In a five-to-four opinion by Chief Justice Roberts, the Court affirmed the Ninth Circuit Court of Appeals decision that had reversed an $88 million judgment in favor of Vickie Lynn Marshall (a/k/a Anna Nicole Smith) against E. Pierce Marshall for tortious interference with Vickie’s expectancy of a gift from her late husband J. Howard Marshall, Pierce’s father and one of the richest people in Texas.

The Court’s decision was based on constitutional principles defining the limits of Article III of the U.S. Constitution. Thus, it is likely to have implications that reach far beyond the narrow issue resolved in the instant case. The majority relies on the “public rights” doctrine to define the class of judicial matters that can be resolved by non-Article III tribunals like the Bankruptcy Courts. However, it adopts a narrower view of what constitutes “public rights” than was generally understood prior to this decision.

In addition, although earlier cases could be read to adopt a flexible pragmatic approach to Article III that focused only on significant threats to the Judiciary, Chief Justice Roberts takes a very firm approach, stating, “We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.” Of particular interest, this case focuses on the nature of the Bankruptcy Judge as a non-Article III judge (i.e., no life tenure and no salary protection) and rejects the view that the Bankruptcy Courts are merely “adjuncts” of the Article III District Courts. Note that the “adjunct” construct was one of the foundations of the 1984 Act’s post-Northern Pipeline jurisdictional fix that created the core/non-core distinction. See Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).

The narrow holding is that Bankruptcy Judges, as non-Article III judges, lack constitutional authority to hear and “determine” counterclaims to proofs of claim if the counterclaim involves issues that are not essential to the allowance or disallowance of the claim. Here, although the counterclaim was a compulsory counterclaim, it was a garden variety state law tort claim and did not constitute a defense to the proof of claim. Contrast this with the preference claim involved in Langenkamp v. Culp, 498 U.S. 42 (1990). The receipt of such an unreturned preference is a bar to the allowance of the claim. See 11 U.S.C. 502(d). The opinion also distinguishes Langenkamp (and the earlier pre-Code case of Katchen v. Landy, 382 U.S. 323 (1966)) on the ground that the preference counterclaims in those cases were created by federal bankruptcy law. It is unclear whether that reference establishes a second condition to Bankruptcy Court resolution of counterclaims — i.e., that the counterclaim be based on bankruptcy law in addition to its resolution being essential to claim allowance.

The Court begins its opinion by interpreting the “core” jurisdictional grant of 28 U.S.C. 157(b)(1). The Court finds the provision ambiguous, but rejects the view of the Ninth Circuit that the Bankruptcy Court’s jurisdiction to determine matters involves a two-step process of deciding both whether the matter is “core” and whether it “arises under” the Bankruptcy Code or “arises in” the bankruptcy case. The Court states that such a view incorrectly assumes there are “core” matters that are merely “related to” the bankruptcy case (and which cannot be “determined” by the Bankruptcy Court). The Court states that core proceedings are those that arise in a bankruptcy case or arise under bankruptcy law and that noncore is synonymous with “related.” Thus, since counterclaims to proofs of claim are listed as core in the statute, the Bankruptcy Court has statutory authority to enter final judgment. (Note that the opinion does not explain how a tort claim that arose before the bankruptcy and that was based on non-bankruptcy state law could be a claim “arising in” the bankruptcy case or “arising under” bankruptcy law. Possibly the fact that procedurally it arises as a counterclaim is sufficient to convert a “related” claim into an “arising in” or “arising under” claim. Cf. Langenkamp.)

The Court also rejects the argument that the personal injury tort provision of 28 U.S.C. 157(b)(5) deprives the Bankruptcy Court of jurisdiction to resolve the counterclaim. The Court holds that section 157(b)(5) is not jurisdictional and thus the objection was waived.

Although the statute authorized the Bankruptcy Court to determine the counterclaim, the Court holds that grant violates Article III. The Court rejects the view that the Article III problem was resolved by placing the Bankruptcy Judges in the judicial branch as an “adjunct” to the District Court. The Court focuses on the liberty aspect of Article III and its requirement of judges who are protected by life tenure and salary guarantees. After outlining the extensive jurisdiction of Bankruptcy Judges over matters at law and in equity and their power to issue enforceable orders, the Court states “a court exercising such broad powers is no mere adjunct of anyone.”

The Court then uses the “public rights” doctrine as the test for which matters can be delegated to a non-Article III tribunal. Although Granfinanciera v. Nordberg, 492 U.S. 33 (1989), suggested a balancing test that considered both how closely a matter was related to a federal scheme and the degree of District Court supervision (a test that arguably supports the Bankruptcy Court’s entry of a judgment on a compulsory counterclaim), the Court settles on a new test for public rights limited to “cases in which resolution of the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency’s authority.” The state common law tort counterclaim asserted here does not meet that test. Instead, adjudication of this claim “involves the most prototypical exercise of judicial power.”

Interpreted in the most restrictive fashion, this ruling might create serious problems for case administration. In proof of claim matters, the Bankruptcy Court would be limited to proposed findings on most counterclaims, with the District Court entering the final order after de novo review. Query whether the majority’s limited view of “public rights” would prevent the Bankruptcy Judge from entering final judgment in other disputes that involve the non-bankruptcy rights of non-debtor parties. Bankruptcy Courts regularly resolve inter-creditor disputes and resolve disputes regarding the non-bankruptcy rights of parties to the bankruptcy case in contexts other than claim allowance. Whether the Bankruptcy Court’s exercise of this power is constitutional may turn on how broadly the courts interpret the “cases in which resolution of the claim at issue derives from a federal regulatory scheme” prong of the “public rights” test.

©2011 Greenberg Traurig, LLP. All rights reserved.

 

Supreme Court Grants Cert. In Mayo v. Prometheus

Posted this week at the National Law Review by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. – an overview of the implications for biotech IP law involving the Mayo Collaborative Services v. Prometheus Labs case:  

June 20th, in what may be an ominous turn for biotech IP law, the Supreme Court granted cert. for the second time in Mayo Collaborative Services v. Prometheus Labs., Inc, Supreme Court No. 10-1150. Post-Bilski, the Supreme Court granted cert., vacated and remanded the Fed.  Cir.’s decision, rendered December 17, 2010, (related posts are archived under “patentable subject matter”) that reaffirmed that claims involving methods of medical treatment coupled with determining the levels of metabolites of the administered drugs were directed to patentable subject matter, and were not directed to abstract ideas or phenomena of nature. 628 F.3d 1347 (Fed. Cir. 2010).

Is it pay-back time? In the decision below, the Fed. Cir. pointedly in fn. 2, declined to give weight to the “Metabolite Labs. dissent,” 548 U.S. 124) in which Justices Breyer, Souter and Stevens would have found claims to an assay for cobalamin deficiency patent-ineligible as involving “natural correlations and data-gathering steps.” The Prometheus claims are not without vulnerable points. The Fed. Cir. agreed that the steps recited comparing the determined level of the metabolite to a benchmark level and concluding that a need exists to increase or decrease the amount of the drug administered were mental steps and not per se patentable. The Fed. Cir. also held that the first steps of the claims – the administering and determining steps – were not merely data gathering steps, but were central to the claimed method of optimizing therapeutic efficacy of the treatment.

While two of the three Justices who wrote the Metabolite dissent have retired, the Court clearly feels that there are issues here that need resolution. However, it is difficult to see how “methods of medical treatment” could remain patentable subject matter if these claims are held not to be. While processes are s. 101 patentable subject matter, John L. White’s Chemical Patent Practice (1993) felt it necessary to include a section “Process of Treating Humans.” Paragraph three begins:

“Claims to the treatment of humans medicinally are now allowed. Ex parte Timmis (POBA 1959) 123 USPQ 581 (treatment of chronic myeloid leukemia). The fact the claimed process for modifying a function of the human body (combating the clotting of blood) involves a mental determination of the amount administered is not a bar to patentability where that portion is an incidental feature of the process. Ex parte Campbell et al., (POBA 1952) 99 USPA 51.”

These decisions are from the nineteen fifties not the eighteen fifties! In Prometheus, the Fed. Cir. explicitly noted that claims to methods of medical treatment are patentable subject matter. Are modern medicine and IP law about to part ways?

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

U.S. Supreme Court Rejects Gender Discrimination Class Action Against Wal-Mart

Posted earlier this week at the National Law Review by the Labor and Employment Group of Sheppard, Mullin, Richter & Hampton LLP a good overview of the implications of the Wal-Mart Stores, Inc. v. Dukes case. 

On June 20, 2011, the United States Supreme Court released its widely-anticipated decision in Wal-Mart Stores, Inc. v. Dukes, et al., 564 U.S. ___ (2011) (“Wal-Mart“). In Wal-Mart, the Supreme Court reversed the Ninth Circuit Court of Appeals and held that the proposed nationwide gender discrimination class action against the retail giant could not proceed. In a decision that will come as welcome news to large employers and other frequent targets of class action lawsuits, the Supreme Court (1) arguably increased the burden that plaintiffs must satisfy to demonstrate “common questions of law or fact” in support of class certification, making class certification more difficult, especially in “disparate impact” discrimination cases; (2) held that individual claims for monetary relief cannot be certified as a class action pursuant to Federal Rule of Civil Procedure 23(b)(2), which generally permits class certification in cases involving claims for injunctive and/or declaratory relief; and (3) held that Wal-Mart was entitled to individualized determinations of each proposed class member’s eligibility for backpay, rejecting the Ninth Circuit’s attempt to replace that process with a statistical formula.

The named plaintiffs in Wal-Mart were three current and former female Wal-Mart employees. They sued Wal-Mart under Title VII of the federal Civil Rights Act of 1964, alleging that Wal-Mart’s policy of giving local managers discretion over pay and promotion decisions negatively impacted women as a group, and that Wal-Mart’s refusal to cabin its managers’ authority amounted to disparate treatment on the basis of gender. The plaintiffs sought to certify a nationwide class of 1.5 million female employees. The plaintiffs sought injunctive and declaratory relief, punitive damages, and backpay.

The trial court and Ninth Circuit had agreed that the proposed class could be certified, reasoning that there were common questions of law or fact underFederal Rule of Civil Procedure 23(a), and that class certification pursuant to Rule 23(b)(2) – which permits certification in cases where “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole” – was appropriate because the plaintiffs’ claims for backpay did not “predominate.” The Ninth Circuit had further held that the case could be manageably tried without depriving Wal-Mart of its due process rights by having the trial court select a random sample of claims, determine the validity of those claims and the average award of backpay in the valid claims, and then apply the percentage of valid claims and average backpay award across the entire class in order to determine the overall class recovery.

The Supreme Court reversed. A five-justice majority concluded that there were not common questions of law or fact across the proposed class, and hence Federal Rule of Civil Procedure 23(a)(2) was not satisfied. Clarifying earlier decisions, the majority made clear that in conducting this analysis, it was permitted to consider issues that were enmeshed with the merits of the plaintiffs’ claims. The majority then explained that merely reciting common questions is not enough to satisfy Rule 23(a). Rather, the class proceeding needs to be capable of generating “common answers” which are “apt to drive the resolution of the litigation.” The four-justice dissent criticized this holding as superimposing onto Rule 23(a) the requirement in Rule 23(b)(3) that “common issues predominate” over individualized issues. The dissent believed that the “commonality” requirement in Rule 23(a) could be established merely by identifying a single issue in dispute that applied commonly to the proposed class. Because the trial court had only considered certification under Rule 23(b)(2), the dissent would have remanded the case for the trial court to determine if a class could be certified under Rule 23(b)(3).

The majority held that the plaintiffs had not identified any common question that satisfied Rule 23(a), because they sought “to sue about literally millions of employment decisions at once.” The majority further explained that “[w]ithout some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored.”

Addressing the plaintiffs’ attempt to provide the required “glue”, the majority held that anecdotal affidavits from 120 class members were insufficient, because they represented only 1 out of every 12,500 class members, and only involved 235 out of Wal-Mart’s 3,400 stores nationwide. The majority also held that the plaintiffs’ statistical analysis of Wal-Mart’s workforce (which interpreted data on a regional and national level) was insufficient because it did not lead to a rational inference of discrimination at the store or district level (for example, a regional pay disparity could be explained by a very small subset of stores). Finally, the majority held that the “social framework” analysis presented by the plaintiffs’ expert was insufficient, because although the expert testified Wal-Mart had a “strong corporate culture” that made it “vulnerable” to gender discrimination, he could not determine how regularly gender stereotypes played a meaningful role in Wal-Mart’s employment decisions, e.g., he could not calculate whether 0.5 percent or 95 percent of the decisions resulted from discriminatory thinking. Importantly, the majority strongly suggested that the rigorous test for admission of expert testimony (the Daubert test) should be applied to use of expert testimony on motions for class certification.

The Court’s other holdings were unanimous. For one, the Court agreed that class certification of the backpay claim under Rule 23(b)(2) was improper because the request for backpay was “individualized” and not “incidental” to the requests for injunctive and declaratory relief. The Court declined to reach the broader question of whether a Rule 23(b)(2) class could ever recover monetary relief, nor did it specify what types of claims for monetary relief were and were not considered “individualized.” The Court made clear, however, that when plaintiffs seek to pursue class certification of individualized monetary claims (such as backpay), they cannot use Rule 23(b)(2), but must instead use Rule 23(b)(3), which requires showing that common questions predominate over individual questions, and includes procedural safeguards for class members, such as notice and an opportunity to opt-out.

Lastly, the unanimous Court agreed that Wal-Mart should be entitled to individualized determinations of each employee’s eligibility for backpay. In particular, Wal-Mart has the right to show that it took the adverse employment actions in question for reasons other than unlawful discrimination. The Court rejected the Ninth Circuit’s attempt to truncate this process by using what the Court called “Trial by Formula,” wherein a sample group would be used to determine how many claims were valid, and their average worth, for purposing of extrapolating those results onto the broader class. The Court disapproved of this “novel project” because it deprived Wal-Mart of its due process right to assert individualized defenses to each class member’s claim.

Looking forward, the Wal-Mart decision will strengthen the arguments of employers and other companies facing large class action lawsuits. In particular, the decision reaffirms that trial courts must closely scrutinize the evidence when deciding whether to certify a class action, especially in “disparate impact” discrimination cases. Statistical evidence that is based on too small a sample size, or is not well-tailored to the proposed class action, should be insufficient to support class certification. Likewise, expert testimony that is over-generalized and incapable of providing answers to the key inquiries in the case (here, whether a particular employment decision was motivated by gender discrimination) should also be insufficient to support class certification. Finally, the Court’s holding that defendants have the right to present individualized defenses as to each class member, and that this right cannot be short-circuited through statistical sampling, will provide defendants with a greater ability to defeat class certification where such individualized determinations would otherwise prove unmanageable.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

U.S. Supreme Court: Federal Court Could Not Enjoin State Court from Addressing Class Certification Issue

Posted yesterday at the National Law Review by Scott T. Schutte of Morgan, Lewis & Bockius LLP a great overview of  the U.S. Supreme Court’s recent ruling  in Smith v. Bayer Corp.   

In a decision with implications for companies facing class action litigation, the U.S. Supreme Court ruled unanimously that a federal district court, having rejected certification of a proposed class action, could not take the additional step of enjoining a state court from addressing a motion to certify the same class under state law. In an opinion authored by Justice Kagan, the Court inSmith v. Bayer Corp., No. 09-1205, 564 U.S. ____ (June 16, 2011), held that principles of stare decisis and comity should have governed whether the federal court’s ruling had a controlling or persuasive effect in the later case, and the state court should have had an opportunity to determine the precedential effect (if any) of the federal court ruling.

Facts of Bayer

In Bayer, a plaintiff sued in West Virginia state court alleging that Bayer’s pharmaceutical drug Baycol was defective. After removal to federal court, the plaintiff moved to certify the action as a class action on behalf of all West Virginia purchasers of Baycol. The federal court rejected class certification because proof of injury from Baycol would have required plaintiff-specific inquiries and therefore individual issues of fact predominated over common issues. It then dismissed the plaintiff’s claims on independent grounds.

A different plaintiff, who had been a putative class member in the first action and was represented by the same class counsel in the federal action, moved to certify the same class in West Virginia state court. Bayer sought an injunction from the federal court in the first case, arguing that the court’s rejection of the class bid should bar the plaintiff’s relitigation of the same class certification question in state court. The district court granted the injunction, and the Circuit Court affirmed.

The Supreme Court’s Decision

The issues before the Court were (i) the district court’s power to enjoin the later state-court class action to avoid relitigation of the previously decided classcertification determination; and (ii) whether the federal court’s injunction complied with the Anti-Injunction Act, 28 U.S.C. § 2283, which permits a federal court to enjoin a state court action when necessary to “protect or effectuate its judgment.” The Court granted certiorari to resolve a circuit split concerning the application of the Anti-Injunction Act’s relitigation exception.

The Supreme Court overturned the injunction. It determined that enjoining the state court proceedings under the circumstances of the case was improperly “resorting to heavy artillery.” The Court noted that “[d]eciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court.” It observed that a federal court may under the relitigation exception to the Anti-Injunction Act enjoin a state court from relitigating an already decided issue-including whether to certify a case as a class action-when two conditions are met: “First, the issue the federal court decided must be the same as the one presented in the state tribunal. And second, [the party in the later case] must have been a party to the federal suit, or else must fall within one of a few discrete exceptions to the general rule against binding nonparties.” Notably, the Court commented that, in conducting this analysis, “every benefit of the doubt goes to the state court” being allowed to determined what effect the federal court’s prior ruling should be given.

The Court held that neither condition was met in Bayer. The issue of class certification under West Virginia’s Rule 23 (the language of which mirrored Federal Rule of Civil Procedure 23) was not “the same as” the issue decided by the federal court because the West Virginia Supreme Court had expressly disapproved of the approach to the “predominance” analysis adopted by federal courts interpreting the federal class action rule. In addition, the Court also held that unnamed persons in a proposed class action do not become parties to the case if the court declines to certify a class. By contrast, the Court affirmed the established rule that “a judgment in a properly entertained class action is binding on class members in any subsequent litigation.”

According to the Court, Bayer’s “strongest argument” centered on a policy concern that, after a class action is disapproved, plaintiff after plaintiff may relitigate the class certification issue in state courts if not enjoined by the original court. The Court suggested that these concerns were ameliorated by the Class Action Fairness Act of 2005, through which Congress gave defendants a right to remove to federal court any sizable class action involving minimal diversity of citizenship. The Court noted the availability of consolidating certain federal class actions to avoid inconsistent results and offered that the Class Action Fairness Act’s expanded federal jurisdiction should result in greater uniformity among class action decisions and in turn reduce serial relitigation of class action issues.

Implications of Bayer

Bayer exposes defendants to the potential for repetitive class action litigation by plaintiffs in state courts. Bayer does not alter existing standards for class certification, however, and its holding is a limited one: a defendant who has defeated class certification may not invoke the “heavy artillery” of an injunction against future state-court bids for class certification in a case raising the same legal theories unless that future bid is advanced by the same named plaintiff(s) (or a person who falls within one of the few discrete exceptions to the general rule against binding nonparties) and the defendant can establish that state standards for class certification are similar to Federal Rule 23. In this regard, the Court held that “[m]inor variations in the application of what is in essence the same legal standard do not defeat preclusion,” but if the state courts would apply a “significantly different analysis” than the federal court, an injunction will not be upheld. The Anti-Injunction Act analysis from Bayer applies directly only where the enjoining court is a federal court and the second court is a state court.

The Bayer opinion also highlights avenues for companies facing serial class actions to mitigate risk. The Court all but acknowledged that “class actions raise special problems of relitigation.” These relitigation problems in the class action context and beyond will remain after Bayer. But a number of strategic steps can be taken to reduce the burdens, expenses, and risks associated with multiple lawsuits. For example, the enactment of the Class Action Fairness Act provides expanded federal jurisdiction over many class actions and therefore permits enhanced removal opportunities for state court class actions. If subsequent class actions are filed and removed, the Court noted that multidistrict litigation proceedings may be available for coordination of pretrial proceedings to avoid repetitive litigation. Even if transfer and consolidation cannot be effectuated, the Court observed that “we would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.”

Finally, the Court’s treatment of absent class members as nonparties to the class certification question in the first action may have significance to other issues in class actions, including often hotly disputed issues relating to communications with putative class members by the defendant before class certification.

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