Category: Administrative & Regulatory

Watt’s New? Michigan Energy News

Varnum LLP

Community Solar Success

Cherryland Electric Cooperative has installed 48 solar panels on a site adjacent to its offices in Grawn.  Individual customers have signed up to lease each panel for 25 years for a one-time fee of $470 per solar panel. A rebate of up to $150 will be given the customer to account for energy optimization credits. The customer will also receive a monthly billing credit for the electricity produced by the solar panel, which is expected to be at least 25 kWh per month. As many as 360 panels will be installed on the racking at the site, depending on customer support.

Energy Innovation with Nanoparticles

Grid Logic Incorporated of Lapeer is developing a low-cost superconducting wire for electric utility application. Using a new manufacturing technique, it will embed very fine particles into metals to induce superconductivity. This will reduce the cost of transmission lines, motors, wind turbines, and other electric devices. At Michigan Technological University in Houghton research on growing manganese dioxide nanorods may lead to new high performance electric capacitors. By minimizing internal resistance, such material will store more energy, allow extraction of energy more quickly, and operate longer between recharging. University of Michigan labs in Ann Arbor have added silver nanoparticles to increase solar cell efficiency by 8 percent. The nanoparticles also allow for thinner silicon layers, which means lower costs (ten times less silicon used) and flexible substrates for solar panels.

Annual Meeting of Energy Group

The Michigan Energy Innovation Business Council held its Annual Meeting on April 17 in Lansing and elected new Board members. The meeting featured a solar industry panel discussion and a keynote address on the Department of Energy’s New Clean Energy Manufacturing Initiative. The new Board is composed of top officials from Astraeus Wind Energy, Growth Capital Network, Novi Energy, Ecotelligent Homes, Dowding Industries, Advanced Energy Group, Dow Chemical Company, TOGGLED, Sakti 3, First Energy Finance, Wind Resource LLC, and Ventower Industries. These are companies already engaged in wind, solar, bioenergy, geothermal, energy storage, and energy efficiency businesses. Committees on policy and advocacy, membership and marketing, and market and business development were also formed. The group participated in all seven energy forums held around Michigan in February, March, and April.

Wind Buoy Goes Back into Lake Michigan

The Grand Valley State University Wind Sentinel research buoy, one of only three in the world, will be returned to Lake Michigan this month. It will be placed about seven miles offshore, northwest of the Muskegon Channel, for its third research season. The project is running short of funding, and its future activities beyond this year are uncertain. Project partners include researchers from: Michigan Technological University, who are studying wind turbulence; Michigan Natural Features Inventory, a component of the Michigan State University Extension program, who are studying bird and bat activity (and who confirmed for the first time ever last summer that bats do fly over the Great Lakes); and the University of Michigan, who are conducting research on large data sets.

DOE Renews MSU Biofuels Funding

The U.S. Department of Energy has awarded $25 million per year for another five years to fund the Great Lakes Bioenergy Research Center. Michigan State University is a partner in the Center which is physically based at the University of Wisconsin-Madison. The Center supports nearly 400 researchers, students and staff working in disciplines ranging from microbiology to economics to plant biology to engineering aimed at advanced cellulosic biofuels technologies.

Courts to Rule on Wind Issues

Seventeen neighbors of the Consumers Energy Lake Wind Energy Park have filed a complaint in Mason County claiming the wind farm has negatively impacted property values and caused sleep disruption, headaches, ringing ears, dizziness, stress, extreme fatigue, nausea, and other physical and mental problems. A cease and desist order is being sought, together with damage awards, in a jury trial. In Clinton County, Forest Hill Energy-Fowler Farms LLC is suing Essex, Dallas, and Bengal townships for adopting ordinances that effectively block its wind farm development. The county had previously granted a special land use permit to Forest Hill Energy for its $120 million wind project, and the townships have moved to override that permit.

Energy Forums Concluded

With the conclusion of the last of the seven energy forums ordered by Governor Snyder in November, the next stage of fact-finding is underway. The schedule describes the May-June period as the time when the two forum chairs will be “outlining reports in each program and laying out plan for development of information that is not yet available.” The following three months is reserved for “compilation/development of information.” October-November will see the release of draft reports for public feedback. Final reports will be released in the November-December timeframe. Governor Snyder will be “making his comprehensive recommendations regarding Michigan’s energy future in December of 2013.”

Orisol Energy US, Inc. of Ann Arbor is one of the companies selected to bid on leases for submerged land in the Atlantic Ocean for offshore wind developments in the coastal waters of Virginia Midwest Independent System Operator (MISO) reported that on November 23 more than a quarter of its total generation came from wind turbines at 10,012 MW  The Michigan Public Service Commission has approved a special rate contract between Cloverland Electric Cooperative and the Manistique paper mill of MPI Acquisition LLC  State Senator Hoon-Yung Hopgood has introduced a bill to increase Michigan’s renewable energy standard to 22 percent by 2022  Mascoma, cellulosic ethanol maker with plans for commercial operations in the U.P., has withdrawn its $100 million initial public offering citing market conditions

Exporting Pure Michigan

Two years ago President Obama challenged the nation to increase its exports. American exports are up 34 percent since that time, with 70 percent of total exports being manufactured goods. “Made in America” still has a huge cache around the world. “Made in Michigan” can and should have significance overseas as well. Now is the time for Michigan’s alternative energy supply chain and manufacturers to look abroad for new markets, niche and otherwise. The demand for electricity is exploding in emerging markets of developing and less developed countries. The Kyoto Treaty and other international efforts are aimed at satisfying this demand with renewable resources rather than fossil fuels. With its technology, engineering, and lean manufacturing prowess, Michigan could be on the leading edge of this effort. The export market is wide open. Let’s go to work on exporting “Pure Michigan.

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SEC Announces First Non-Prosecution Agreement Involving Foreign Corrupt Practices Act (FCPA) Violations

DrinkerBiddle

On April 22, 2013, the Securities and Exchange Commission (SEC) announced it had entered into a Non-Prosecution Agreement (NPA) with Ralph Lauren Corporation under which the company agreed to disgorge approximately $700,000 in connection with certain unlawful payments made by a foreign subsidiary to government officials in Argentina from 2005 to 2009.  This is the first time the SEC has used a NPA for violations of the Foreign Corrupt Practices Act (FCPA).

According to the NPA, Ralph Lauren Corporation’s Argentine subsidiary paid “bribes,” i.e., payments in violation of the FCPA, to government and customs officials to improperly secure the importation of Ralph Lauren Corporation’s products in Argentina.  The purpose of the unlawful payments, made through a “customs broker,” was to obtain entry of Ralph Lauren Corporation’s products into the country without certain paperwork and to avoid certain inspections by customs officials.  The unlawful payments to Argentine officials totaled $593,000 during a four-year period.

The NPA further notes that the unlawful payments occurred during a period when Ralph Lauren Corporation lacked meaningful anti-corruption compliance and control mechanisms over its Argentine subsidiary.  The company discovered the misconduct in 2010 as a result of measures it adopted to improve its worldwide internal controls and compliance efforts, including implementation of a FCPA compliance training program in Argentina.  The NPA notes that the SEC determined not to charge Ralph Lauren Corporation with violations of the (FCPA) in light of several factors including:  (1) the company’s prompt reporting of the violations on its own initiative, (2) the completeness of the information it provided, and (3) the company’s extensive, thorough, and real-time cooperation with the SEC’s investigation.  According to the SEC, Ralph Lauren Corporation’s cooperation saved the Commission “substantial time and resources.”

In parallel criminal proceedings, the Justice Department also entered into a Non-Prosecution Agreement with Ralph Lauren Corporation under which the company will pay an $882,000 penalty.[1]

NPAs are part of the Enforcement Division’s Cooperation Initiative announced in 2010.  Prior to 2010, the SEC did not have the ability to enter into NPAs or Deferred Prosecution Agreements (DPAs).  The purpose of the Cooperation Initiative was to give the Commission the flexibility to incentivize and reward cooperation while at the same time ensuring that cooperators are held accountable for their misconduct.  Since 2010 and prior to this instance, the Commission has entered into three NPAs[2] and two DPAs[3]  It is likely that the SEC will continue to use DPAs and NPAs particularly in connection with FCPA matters given the factual complexity of the cases and the difficulty in discovering violations, which almost always occur outside the U.S.

The Ralph Lauren NPA provides useful guidance as to what the SEC will consider in assessing corporate cooperation by detailing the significant actions that Ralph Lauren Cooperation took in connection with the parallel investigations.  According to the NPA, Ralph Lauren Corporation:

  • reported preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts:
  • voluntarily and expeditiously produced documents;
  • provided English language translations of documents to the staff;
  • summarized witness interviews that the company’s investigators conducted overseas; and
  • made overseas witnesses available for staff interviews in the U.S.

The NPA also notes that Ralph Lauren Corporation entered into tolling agreements during the staff’s investigation.  The statute of limitations with respect to the 2005 conduct, the earliest conduct charged, would have likely run in 2010, just as the company reported the violations to the SEC.

The Ralph Lauren NPA provides several other takeaways.  First, the Ralph Lauren Corporation agreed to enter into the NPA “without admitting or denying liability.”  While the NPA also contains the standard provision prohibiting the Ralph Lauren Corporation from “denying, directly or indirectly, the factual basis of any aspect of the” NPA, the inclusion of the “without admitting or denying language” seems to run counter to the policy announced by the Enforcement Division in January 2012 to eliminate the use of “neither admit nor deny” language from settlement documents involving parallel (i) criminal convictions or (ii) NPAs or DPAs[4]  This may suggest that the “without admitting or denying liability” language remains negotiable.

Second, under the agreement, the Company must seek the staff’s prior approval of the contents of any press release concerning the NPA.  Third, while the SEC emphasizes the Ralph Lauren Corporation’s enhanced compliance program and successful implementation of the enhancements, it also highlights that the Ralph Lauren Corporation has ceased retail operations in Argentina and is in the process of winding down all operations there.  It is possible Ralph Lauren Corporation’s decision to close operations in Argentina was a significant factor in the SEC’s decision to use a NPA in this circumstance.  Fourth, notably, the NPA does not require the Ralph Lauren Corporation to retain an independent consultant to review its policies and procedures and to prepare a report to the staff regarding any findings.  The financial burden of independent consultant “reviews” is often significant.  The staff’s willingness to forego such an undertaking demonstrates the value of taking quick and full remedial action during an investigation.

Fifth, the NPA also refers to “gifts” such as perfume, dresses and handbags valued at between $400 and $14,000, which were provided to three different government officials during the relevant time.  This underscores the importance of having policies and procedures that extend beyond prohibiting monetary payments to government officials.  Finally, the NPA requires that the Ralph Lauren Corporation “to pay disgorgement obtained or retained as a result of the violations discovered during the investigation.”  In its press release, the SEC notes that Ralph Lauren Corporation will “disgorge” $700,000 in illicit profits and interest.  The disgorgement, however, appears to be the total amount of unlawful payments plus interest made rather than any profit earned as a result of the unlawful payments.  Disgorgement is frequently difficult to calculate, especially in FCPA cases.  It appears that rather than tracing the unlawful payments to profits, the SEC was satisfied to use the amount of unlawful payments as a proxy for disgorgement.  Moreover, the low monetary value of the unlawful payments may have also contributed to the SEC’s decision to enter into a NPA in this instance.

[1]  The agreement with the Justice Department stands as yet another example of DOJ’s position that senior management be intricately involved in anti-corruption compliance efforts.  More specifically, the agreement requires that Ralph Lauren’s “directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.”  Further, the agreement requires that the company “assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of the Company’s anti-corruption compliance code, policies and procedures.” 

[2]  In December 2010, the SEC entered into a NPA with Carters Inc. in connection with a financial fraud perpetrated by a former Executive Vice President of Carters.  The NPA focused on the isolated nature of the misconduct, Carters’ prompt self-reporting, extensive cooperation and remedial actions.  In December 2011, the SEC entered into DPAs with Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) in connection with certain misleading statements claiming that the companies had minimal holdings of higher-risk mortgage loans including subprime loans.  The NPA focused on Freddie Mac’s and Fannie’s Mae’s cooperation in connection with the SEC’s litigation against former senior executives.

[3]  In May 2011, the SEC entered into a DPA with Tenaris S.A. in connection with FCPA violations.  The DPA required Tenaris to disgorge approximately $5.4 million.  The DPA focused on Tenaris’ early self-reporting, extensive cooperation and remedial actions.  InJuly 2012, the SEC entered into a DPA with Amish Helping Fund in connection with certain misrepresentations and omissions in offering documents.  Again, the DPA focused on Amish Helping Fund’s immediate and complete cooperation, its willingness to offer investors a right of rescission and its remedial efforts. 

[4]  The Amish Helping Fund DPA entered into on July 18, 2012, does not contain the “without admitting or denying” or “neither admitting nor denying” language.

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Progressive Casualty Litigation Stayed Pending Outcome of Liberty Mutual Covered Business Method Patents

Schwegman Lundberg Woessner

Progressive Casualty Insurance Co. sued different insurance companies for patent infringement of 5 of its patents in 2010-2012 in the Northern District of Ohio.  (Cases 1:10CV01370 and 1:11CV00082 against Safeco; Case 1:12CV01068 against State Farm; and Case 1:12CV01070 against Hartford.)  One of the defendants is Safeco Insurance Company, which has Liberty Mutual as its parent.  In 2012 and 2013 Liberty Mutual filed ten covered business method patent review (CBM) petitions (two CBM petitions were filed per patent).  Eight of these ten petitions were instituted for trial and two petitions were denied, but each of the five patents has at least one CBM where trial was instituted by the PTAB.

Liberty Mutual and the remaining defendants moved to stay the litigation based on the CBMs instituted.  Progressive opposed the motion to stay.  The District Court heard oral arguments on April 11, 2013, and granted the motion stay on April 17, 2013.

The court used a four-factor test set forth in the AIA section pertaining to CBMs (AIA § 18(b)(1), P.L. 112-29, 125 Stat. 284, 331):

  • (1) whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial;
  • (2) whether discovery is complete and whether a trial date has been set;
  • (3) whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party; and
  • (4) whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.

It is interesting that the Liberty Mutual litigation was previously stayed pending the outcome of ex parte reexaminations, yet the Court found the benefits of inter partes covered business method review compelling enough to order another stay pending the outcome of the PTAB trials.  Some of these benefits observed by the Court include:

  • CBM proceedings are inter partes rather than ex parte, which allows Liberty mutual “a better platform to advocate its interests.”
  • CBM proceedings are “presided over by a panel of three administrative judges whom are required to have ‘competent legal knowledge and scientific ability,’ 35 U.S.C. § 6(a), as opposed to a single patent examiner.”
  • To institute CBM review, the petitioner must show the claims are likely invalid, 35 U.S.C. § 324(a), which is more onerous than meeting the “substantial new question of patentability” standard required to initiate ex parte reexaminations.
  • The Court also found the short timeline of the CBM proceedings (to be completed within 18 months of institution of trial), to be attractive and likely to decide issues before the Court.

For further information the order for stay provides the details of the Court’s findings and has a detailed table attached at the last page showing the different CBMs and their status.

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Supreme Court Hears Oral Arguments Regarding Limits on Class Arbitration Waivers in Federal Cases

Womble Carlyle

Recently, the United States Supreme Court heard oral argument in American Express Co. v. Italian Colors Restaurant, a case that will have a substantial impact on the enforceability of arbitration agreements that contain class action waivers.  Italian Colors picks up where the Supreme Court left off in AT&T Mobility, LLC v. Concepción when a sharply divided Supreme Court held that a state law purporting to invalidate class action waivers in arbitration agreements was preempted by the Federal Arbitration Act.

Here, the Supreme Court is confronting the question of whether, as the Second Circuit Court of Appeals put it, the “federal substantive law of arbitrability” can invalidate class action waivers in arbitration agreements when the underlying claims are based on federal law.  The Second Circuit Court of Appeals determined that federal law requiredthe invalidation of the class action waiver because the cost of litigation compared to the relatively minimal amount of potential damages would effectively prohibit plaintiffs from pursuing their federal claims.  Concepción did not compel a different result, according to the Second Circuit, because in that case there was no showing that ”the practical effect of the enforcement would be to preclude [the plaintiff class’s] ability to vindicate their statutory rights.”

The Supreme Court’s decision in this case will have a substantial impact on the viability of class action waivers contained in arbitration clauses.  If the Second Circuit’s ruling is upheld, it will provide plaintiffs with a way around the limitations of Concepción if they are able to show that litigating a matter on an individual basis would be prohibitively expensive.  A decision reversing the Second Circuit would give business owners a greater ability to avoid complex and expensive class action litigation through carefully worded arbitration agreements.

The Supreme Court is expected to decide the case before the end of June 2013.

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A Reminder About Pollution Legal Liability Coverage

GT Law

A recent decision from the federal district court in Pittsburgh highlights the importance of carrying environmental insurance, especially in connection with properties or facilities with an increased potential for environmental legacy liabilities. Many property owners believe that comprehensive general liability (CGL) policies adequately protect against environmental liabilities. However, standard CGL policies will typically only cover certain, very limited environmental liabilities and are by no means an effective tool for comprehensive environmental protection. Pollution legal liability (PLL) policies, designed to respond to contamination found on properties, are a far more useful and comprehensive mechanism to mitigate potential liability stemming from current or past ownership of environmentally sensitive properties.

Wiseman Oil v. TIG Insurance, 2013 U.S. Dist. LEXIS 14747 (W.D. Pa. Jan. 22, 2013), report and recommendation adopted, 2013 U.S. Dist. LEXIS 37501 (W.D. Pa. Mar. 19, 2013), involved a claim by Wiseman for coverage and for defense under Wiseman’s CGL policy for underlying claims against Wiseman under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

The CERCLA claims against Wiseman arose out of environmental contamination at property formerly owned by Wiseman. TIG asserted that it owed no such defense or coverage-related duties to Wiseman. Among other arguments, TIG asserted that the CGL policy contained an exclusion for bodily injury orproperty damage claims arising out of the release of hazardous materials “into or upon land.” However, the exclusion contained an exception to releases that were considered “sudden and accidental.” “Sudden and accidental” was not defined under the policy. TIG asserted that the CERCLA claims brought against Wiseman did not allege any sudden or accidental event and thus it had no duty to defend or otherwise provide coverage.

The case was assigned to Chief Magistrate Judge Lisa Pupo Lenihan for a report and recommendation. She clarified that TIG’s duty to defend did not hinge on whether the underlying complaint “expressly alleges specific factual predicates clearly within the applicable policy terms.” Rather, the duty to defend arose when a fair reading of the underlying complaint did not “expressly rule out the possibility of insurance coverage under the applicable policy terms.” Pupo Lenihan stated further that TIG could not reasonably conclude from the face of the underlying complaint that the allegations “precluded or negated any potential applicability” of the “sudden and accidental” qualifiers.

Based on the foregoing, Pupo Lenihan held that the language of the underlying complaint was a sufficient basis to deny TIG’s asserted grounds for summary judgment and to grant Wiseman’s motion for partial summary judgment on the question of TIG’s duty to defend.

Last month, U.S. District Judge Joy Flowers Conti of the Western District of Pennsylvania adopted Pupo Lenihan’s report and recommendation. (See 2013 U.S. Dist. LEXIS 37501 (W.D. Pa. Mar. 19, 2013).)

Although in this case Wiseman succeeded in thwarting its insurer’s summary judgment motion on the dutyto defend, in order for Wiseman ultimately to obtain coverage for its claim it will face a significant burden in demonstrating that the “sudden and accidental” exception to the policy exclusion applies. Given that the property was likely contaminated over a long period of time rather than in a single abrupt, catastrophic event, actually obtaining coverage under the policy will require a factually intensive showing that the gradual contamination was sufficiently like the abrupt event to qualify as “sudden and accidental.” In short, the case highlights the difficulty of obtaining coverage for environmental liabilities under a CGL policy.

That controversy could have been avoided if the plaintiffs had considered other insurance products that are better suited to cover this type of pollution-related risk. This is especially true of properties on which manufacturing or other environmentally sensitive operations may have occurred.

Generally speaking, PLL insurance policies can help landowners mitigate known and unknown risks associated with the acquisition and divesture of real property, and offer more robust protections for environmental risks than the CGL policy that the plaintiffs sought to rely on in the Wiseman case. In situations comparable to the facts at issue in Wiseman, a PLL policy would have been a more appropriate coverage and likely would have negated the need to bring a lawsuit to enforce the policy.

PLL coverage is the most common type of insurance to address potential environmental liabilities associated with real property.

It is generally used to address cleanup costs for environmental contamination, third-party claims for bodily injury or property damage arising from environmental contamination (both pre-existing or first occurring during the policy term), and business interruption losses resulting from a covered environmental condition or claim.

Among other things, PLL policies can also provide for protection against natural resource damages, risk stemming from non-owned disposal sites, and legal defense costs associated with all of the foregoing. PLL policies cover unknown pre-existing contamination discovered after the policy inception, as well as new conditions that occur after the inception date.

Known conditions are included under most PLL policies unless they are specifically scheduled and excluded from coverage under the policy. Capital improvement exclusions are quite common and would exclude costs of remediating known conditions, such as urban fill material, in connection with redevelopment of a property.

However, costs arising in connection with government claims stemming from known conditions can still be covered under a typical PLL policy. CGL policies will typically exclude coverage for underground storage tanks, fuel or chemical storage, waste storage and business interruption, which can be included under a PLL policy. It is also important to note that off-site disposal sites or landfills (often called “non-owned disposal sites” in PLL policies) can be scheduled onto policies. If liability arises at the disposal facility and liability attaches to your client as a generator, the PLL policy would kick in.

PLL policies also can cover re-opener type situations. In many states, parties that have received no-furtheraction determinations after cleaning up a contaminated property may be audited, and the cleanup decision re-opened to require further investigation or remediation. This is likely to occur in situations where the remediation standards governing a particular contaminant are revised, or where new data become available at a later date suggesting that remediation was not properly completed. With a PLL policy in place, costs associated with a re-opener become less of an uncertainty. PLL policies also entitle the policyholder to legal defense of any of the above situations.

PLL policies are claims-made-and-reported policies, meaning that claims must be made during the term of the policy. So, for example, Wiseman would have had to have an existing PLL policy covering the property to avail itself of that policy’s protections when the underlying CERCLA claim arose. It would not have been enough to have had the policy during ownership of the property.

Underwriting on PLL policies is typically conducted using readily available environmental documents, including Phase I and Phase II environmental site assessments, as well as other environmental reports, and agreement documents.

Wiseman offers an important lesson, especially to those that own or operate properties that have current or former facilities with environmentally sensitive operations: CGL policies are not an effective tool to manage environmental liability risks. Although not perfect, PLL policies are a more appropriate type of coverage to mitigate unknown risks associated with present and legacy property ownership. PLL policies can offer particular value to address the residual risk after a cleanup.

Kyle R. Johnson also contributed to this article.

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“Innovation Meets Insight:” An Intellectual Property Expert’s Take on the Revised America Invents Act (AIA)

The National Law Review a top volume legal news website

Speaking of the latest developments in the legal field, legislation for the Leahy-Smith American America Invents Act (“AIA” or “Act”) was signed by President Obama and passed in September of 2011 and has gone into full implementation this past March. The Act massively overhauls U.S. patent laws and sets forth the most comprehensive, sweeping changes to the U.S. patent system since 1836.

In an exciting era for intellectual property, David Kappos, one of the world’s leading experts on intellectual property law and a partner at Cravath, Swaine & Moore LLP, recently sat down with me to discuss the revisions to the AIA and their implications. Mr. Kappos ended his term as director of the U.S. Patent and Trademark Office (“USPTO”) this past January, where he acted as advisor to the president on intellectual property policy matters. He will serve as keynote speaker for the upcoming 13th Annual SuperConference, where he will present the new-and-improved AIA to an audience of senior-level legal professionals. In doing so, Mr. Kappos will introduce a revolutionary patent system in which “innovation meets insight.”

However, the AIA almost did not materialize due to its largely stagnated history. Initial calls for changes to the patent system began in the 1980s, but negotiations for the actual legislation did not start until 2001. Mr. Kappos was in private practice at that time and helped with the negotiations. It took nearly five session of Congress for the legislation to finally gain approval.

The ensuing legislation affects many tenants of the patent system. Among the most prominent amendments to the Act is the U.S.’s conversion from a first-to-invent system to a first-to-file system, resulting in the first inventor to file an application with the USPTO for the claimed invention to be granted the patent. In addition, improvements have been made to the post-grant challenge system, resulting in the ability of an inventor to appeal to the USPTO to reconsider any issues related to granting approval of a patent.

According to Mr. Kappos, the AIA espouses a modern, pro-innovation outlook that has “leapfrogged” legislation. The patent system tends to treat innovation as highly valuable and offers incentives. For example, the U.S. now retains an interest-based system for enabling third parties to participate in the patent process.

The Act’s pervasiveness has led to progress and evolution in numerous industries. Mr. Kappos identified the life sciences and pharmaceutical sectors of the business community, which among other fields, have been granted supplemental examination, thus enabling patent owners to request timely additional examination of their inventions by the USPTO for further consideration. The finance and banking industry is expected to progress, due to the covered business method which permits parties to request a post-grant review hearing, providing patent owners an alternative to litigation for challenging a decision related to a patent. For small inventors, a new category has been carved into the Act for 75% off of fees owed to the USPTO associated with obtaining a patent.

Mr. Kappos believes that the legislation will overall bring more clarity to the U.S. innovation system. He characterized the AIA as a “more streamlined and effective way to perfect your innovations.” Any person or business seeking a patent will find a more clear, efficient and cost-effective arrangement in the AIA.

As far as the legal community catching up to the legislation, Mr. Kappos points out that there are numerous changes in the law and recommends attorneys read about the Act and focus on the modifications. The revisions are also great fodder for exchanging ideas and asking questions to other members of the IP field because there are multiple angles to look at.

Overall, Mr. Kappos has said that progress in terms of innovation is amazing and things that were unimaginable five to ten years ago are now possible due to invention and technology. He is optimistic about the future and the ability of technology to change the equation. In his own words,  “Through innovation we — humanity — has the ability to meet and overcome our most critical challenges. And when you talk about innovation, you are talking about invention and insight.  And following that thread, there is only one system of laws that protects invention, incenting it and encouraging creative people to spend their resources on it.  That one system of laws: the patent system.”

 

The “Reasonable” Perils of Data Security Law

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The following is drawn from the materials to be presented at the 17th Annual America’s Claims Event 2013 conference in the “Cyber-Liability and Data Loss Claims: A Case Study from Notice of Occurrence Through Conclusion” session on June 20, 2013 in Austin, Texas.

NEGLIGENCE. “The omission to do something which a reasonable man, guided by those ordinary considerations which ordinarily regulate human affairs, would do, or the doing of something which a reasonable and prudent man would not do.”1

“When we think about data breaches, we often worry about malicious minded computer hackers exploiting software flaws, or perhaps Internet criminals seeking to enrich themselves at our expense. But the truth is that errors and negligence within the workplace are a significant cause of data breaches that compromise sensitive personal information.”2

According to a recent privacy institute study by the Ponemon Institute, only 8% of the surveyed data breach incidents were due to external cyber attack, while 22% could be attributed in part to malicious employees or other insiders. Loss of laptops or other mobile devices containing sensitive data topped the survey, while mishandling of data “at rest” or “in motion” were also major contributors.3 A later study showed that 39% of surveyed organizations identified negligence as the root cause of their data breaches, while 37% were attributed to malicious or criminal attack.4

Negligent document disposal is a clear source of preventable negligence. On December 7, 2012, at least eight garbage bags were left unattended on a dirt road in Hudson, Florida, containing credit applications to Rock Bottom Auto Sales with names, driver’s license information, and Social Security numbers. Three days later, in Pittsburgh, Pennsylvania, job placement documents were found in a dumpster from the West Pittsburgh Partnership, all containing names and SSN’s.5 For that matter, the Internal Revenue Service in 2008 was found to have disposed of taxpayer documents in regular waste containers and dumpsters, and that a follow-up investigation revealed that IRS officials failed to consistently verify whether contract employees who have access to taxpayer documents had passed background checks.6

Convincing users to back up their laptops has been difficult enough in practice; getting them to encrypt them voluntarily is much more daunting a task. A 2010 Ponemon Institute study, admittedly biased towards large corporations, concluded that of those surveyed typically 46% of the laptops held confidential data, while only 30% had their contents encrypted. A startlingly low 29% of the laptops had backup/imaging software installed, which implies that more than two thirds of all laptops if lost or stolen would leave no backup of work in progress.7

Even though more devices are coming to market with built-in encryption capabilities, these features may simply be left switched off by their users despite the fact that lost laptops, tablets, smartphones, USB “thumb” drives and other portable devices with unencrypted contents continue to provide a wealth of information to identity thieves.

On March 22, 2013, a laptop used by clinicians at the University of Mississippi Medical Center was discovered to be missing. It contained patient names, social security numbers, addresses, diagnoses, birthdates and other personal information, protected only by a password.8

On January 8, 2013, an unencrypted flash drive was stolen from a Hephzibah Georgia middle school teacher’s car, containing student SSN’s and other information.9 TD Bank had two unencrypted backup tapes with customer and their dependent names, SSN’s, addresses, account, credit and debit card numbers go missing while being transported between two TD Bank offices in March 2012, but public notice was not made until March 4, 2013.10

An examination of reported data security incidents with potential or actual data privacy breaches reveals that the scope of what is deemed “reasonable” ranges from ordinary care in the disposal of documents containing personally identifiable information (“PII”) and personal health information (“PHI”), to sophisticated data encryption, access authentication and other highly technical data security practices that the “reasonably prudent” persons, companies and governmental agencies are now expected to employ to protect the personal data that they have collected.

On October 10, 2012, the South Carolina Department of Revenue was informed of a potential cyber attack involving the personal information of taxpayers.11 The origin of the attack was traced to a state Department of Revenue employee who clicked on an embedded link in a “salacious” email and compromised his computer.12 The subsequent investigation revealed that “outdated computers and security flaws at the state’s Department of Revenue allowed international hackers to steal 3.8 million tax records”, according to Governor Nikki R. Haley. Apparently South Carolina did not encrypt Social Security Numbers, and once the outer perimeter security was compromised the hackers were able to log in as tax officials and read the data.13

Users of online services will routinely provide personal information as a matter of course to shop or obtain other services, all of which gets recorded and tracked. Data privacy laws are intended to promote and enforce a number of fair information practices to give individuals the ability to find out what personal information is being kept and by whom, opportunities to correct or remove such information, assurances that reasonable measures will be undertaken to protect such information from disclosure and to properly dispose of such information when appropriate, and may include remedial measures to be undertaken in the event of a data breach.

In the United States, there is no single comprehensive statute for data privacy laws.14 Instead, a number of sector-specific federal laws have been enacted to address the particular sensitivity of information generally recorded by companies in that market sector, and forty six states have enacted data breach notification statutes. If there is a data breach, you may be liable under state law to provide notice to those affected.15 In some jurisdictions, you may be required to provide notice to all consumer credit reporting agencies as well.16

The financial exposure to a data breach by a company may be insurable to some degree using various forms of “cyber liability” insurance, which expand and supplement many forms of more standard insurance coverages underwritten today. Policy premiums for such policies, however, are dependent upon the extent of data security practices implemented.

Conducting a data security risk assessment before encountering a data breach should identify measures that can be taken at the corporate level to provide additional protection not only to sensitive data, but also mitigate the consequences of a security incident where company data is disclosed, lost or stolen. Encrypted data in many cases may not be considered “exposed” for purposes of mandated notice to affected individuals.

In the event of a data security incident, please consider obtaining a data forensic team to not only identify the source and extent of the breach, but to preserve evidence in the event that a potential prosecution may be possible.

We will discuss a data breach case study from inception through enforcement, resolution and potential mitigation through cyber liability insurance at our presentation at ACE 2013. We hope to see you then.

1 BLACK’S LAW DICTIONARY 1184 (4th ed. 1968).

2 Privacy Rights Clearinghouse, Are the Businesses You Frequent or Work For Exposing You to an Identity Thief?, (Mar. 6, 2012), https://www.privacyrights.org/workplace-identity-theft-quiz-alert-2012

3 The Human Factor in Data Protection, 3 PONEMON INSTITUTE LLC (January 2012), available athttp://www.ponemon.org/local/upload/file/The_Human_Factor_in_data_Protection_WP_FINAL.pdf.

4 2011 Cost of Data Breach Study: United States, 7 PONEMON INSTITUTE LLC (March 2012),available at http://   www.ponemon.org/local/upload/file/2011_US_CODB_FINAL_5.pdf.

5 http://www.privacyrights.org/data-breach/new (check Breach Type “PHYS”, Organization Type “BSR” and Year “2012”).

6 Increased Management Oversight of the Sensitive but Unclassified Waste Disposal Process Is Needed to Prevent Inadvertent Disclosure of Personally Identifiable Information, TREASUR INSPECTOR GENERAL FOR TAX ADMINISTRATION (May 8, 2009), http://www.treas.gov/tigta/auditreports/2009reports/200930059fr.pdf.

7 The Billion Dollar Lost Laptop Problem 6 PONEMON INSTITUTE LLC (Sept. 30, 2010), availableat http://newsroom.intel.com/servlet/JiveServlet/download/1544-8-3132/The_Billion_Dollar_Lost_Laptop_Study.pdf.

8 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “EDU” and Year “2013”).

9 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “EDU” and Year “2013”).

10 http://www.privacyrights.org/data-breach/new (check Breach Type “PORT”, Organization Type “BSF” and Year “2013”).

11 Kara Durrette, SC Department of Revenue hacked; millions of SC residents affected, http://www.midlandsconnect.com/sports/story.aspx?id=817902#.UVyOdheYu7w (posted Oct. 26, 2012, updated Oct. 27, 2012).

12 Matthew J. Schwartz, How South Carolina Failed To Spot Hack Attack, INFORMATION WEEK, Nov. 26, 2012, http://www.informationweek.com/security/attacks/how-south-carolina-failed-to-spot-hack-a/240142543.

13 Robbie Brown, South Carolina Offers Details of Data Theft and Warns It Could Happen Elsewhere, N.Y. TIMES, Nov. 20, 2012, available at http://www.nytimes.com/2012/11/21/us/more-details-of-southcarolina-hacking-episode.html?_r=0.

14 PETER P. SWIRE & KENESA AHMAD, FOUNDATIONS OF INFORMATION PRIVACY AND DATA PROTECTION 41 (International Association of Privacy Professionals) (2012).

15 NYC Administrative Code § 20-117(c) (2013); NY CLS State Technology Law § 208(2) (NY state residents only); 73 Pa. Stat. § 2303 (PA residents).

16 73 Pa. Stat. § 2305; NY CLS State Technology Law §208(7)(b).

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New I-9 Form Required by May 8, 2013

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Effective May 8, 2013, employers are required to use an updated version of the I-9 form when verifying employee work authorization. The new I-9s will not be required for previously verified employees, only new hires and employees requiring reverification. Failure to use the updated I-9 form following the implementation date may result in fines ranging from $110 to $1,100 for each incorrect form.

As many employers are aware, I-9 forms must be completed to document the identity and employment authorization of all new hires. Section 1 of the I-9 must be completed by the employee on the first day of employment, and Section 2 completed by the employer within three business days thereof. Section 3 (Reverification and Rehires) need only be completed by the employer when reverifying that an employee is authorized to work or when an employee is rehired within 3 years of the date the I-9 was originally completed.

Revisions to the new I-9 form are threefold: (1) new format, (2) clearer instructions, and (3) additional data fields.

  1. Format: The updated I-9 has a new two-page format, which should be easier for employers to use. The first page of the form relates to employee information and certification, while the second page consists of the employer verification and reverification.
  2. Instructions: Additionally, the updated I-9’s instructions provide a more detailed explanation of the information required of employees and employers to properly complete the form.
  3. Data Fields: Finally, the new I-9 asks for several new pieces of information from employees, including email address, telephone number, and foreign passport information. U.S. Citizenship and Immigration Services’ request for additional employee contact information suggests that the agency may be more inclined to directly contact employees for information moving forward. Employees are not required to provide such information, however. The employee email address and telephone number fields are optional.

The updated I-9 form is available for download here.

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Considerations For International Clients Who Intend to Buy A Home In the U.S.

Sheppard Mullin 2012

International buyers invested $82.5 billion in U.S. residential real estate (4.8% of total U.S. sales) according to the most recent survey conducted by the National Association of Realtors for the 12 month period ending with March 2012. According to that survey, the top states in the U.S. for international buyers were Florida, California, Arizona and Texas. That survey also finds that the top-five international buyers were from Canada, China, Mexico, India, and the United Kingdom and that Brazil also remains a major source of purchasers. Homes are bought in the U.S. for investment, vacation-use, temporary use for professional, educational (which could include providing a home to a child who is pursuing his or her education in the U.S.), and a myriad of other reasons.

U.S. home buying and ownership, without proper planning, can have unexpected and unintended consequences. Many international clients are not aware that ownership of a U.S. home triggers U.S. estate tax on death and a gift of the property during lifetime triggers U.S. gift tax. U.S. estate and gift tax is imposed at a rate of 40%. An individual who is neither a U.S. citizen nor domiciled in the U.S. can shelter only $60,000 of U.S. situs assets on death (i.e. assets located or deemed to be located within the U.S.). In terms of gifting, an individual who is neither a U.S. citizen nor domiciled in the U.S. can make annual exclusion gifts of $14,000 per year to anyone and can currently pass $143,000 per year to a spouse who is not a U.S. citizen free of gift tax. That is in contrast to the $5,250,000 that a U.S. citizen or domiciliary can pass free of estate tax on death or by gift during lifetime as well as unlimited transfers to a U.S. citizen spouse.

To avoid triggering U.S. estate tax on death, many international clients are counseled to take title to the home in a foreign “blocker” corporation which, if respected, is not subject to U.S. estate tax on death. This form of title has the added advantage of providing anonymity and liability protector to the shareholder . Owning a home in a foreign corporation triggers other more immediate tax concerns such as application of the corporate tax rate (up to 35%) in lieu of the preferential long-term capital gains rates on sale (up to 20%), possible imputed rental income for use of corporate property by the shareholder, loss of step-up in the income basis of the home on the death of the owner (the basis of the stock in the corporation would be adjusted but the inside basis—the home itself would not be entitled to a basis adjustment), and loss of the ability to avoid the home being reassessed for California real property tax purposes on transfer from parent to a child. In addition, a U.S. person who will inherit shares in a corporation that will either become a Controlled Foreign Corporation (CFC) or a passive foreign investment company (PFIC) faces numerous special compliance obligations and substantive tax issues as a result of the ownership of those shares. There are many other ways to take title, such as through a LLC or a trust and each option should be explored in depth to achieve the client’s objectives to the maximum extent possible. Consideration should also be given to planning aimed at avoiding a public court proceeding that would be necessary to convey title to the beneficiaries of an international client who dies holding title directly to a U.S. home.

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Federal Communications Commission (FCC) Considers Proposal To Lift 25% Cap On Indirect Foreign Investment In Broadcast Licensees

Sheppard Mullin 2012

In August 2012, the Coalition for Broadcast Investment (“CBI”), a group comprising national broadcast networks, radio and television station licensees, and community and consumer organizations, filed a letter with the FCC requesting clarification of the foreign ownership rules contained in Section 310(b)(4) of the Communications Act. Specifically, CBI requested clarification that “the FCC will conduct a substantive, facts, and circumstances evaluation of proposals for foreign investment in excess of 25 percent in the parent company of a broadcast licensee.…” If adopted, this approach would represent a marked change of course for the FCC, which has in the past “categorically refused” to consider transactions involving investment in broadcasters above the 25% benchmark, according to CBI.

Citing the numerous other contexts where foreign investment above 25% is permitted (including, among others, sectors such as cable, direct-to-home satellite, and wireless), CBI highlighted the “structural disadvantage” broadcasters face because of the FCC’s “effective presumption” against foreign investment above 25% in the broadcast sector. In addition, CBI pointed out that ending the presumption would place broadcasters “on the same footing” as other industry participants, facilitating crucial access to capital in a market where they face increasing competition for consumers.

In February 2013, the FCC responded with a Public Notice (MB Docket No. 13-50) soliciting comments on CBI’s request. The first round of comments were due April 15, and a review of those submissions reveals a uniform desire for the FCC to relax the de facto 25% indirect cap applied to foreign ownership in broadcasters. Although all commenters supported CBI’s request, different groups highlighted particular points of emphasis.

Adelante Media Group, the National Association of Broadcasters, and Nexstar Broadcasting all noted that the Over-the-Top providers competing with traditional broadcasters face no restriction on foreign ownership. The Minority Media and Telecommunications Council emphasized that encouraging foreign investment in broadcasters would help “reverse the decline in minority broadcast ownership.” The National Association of Media Brokers referenced the fact that many entities that provided working capital to prospective new broadcasters were no longer in the market.

The question remains whether the FCC will hear the pleas of the broadcasters for regulatory parity. On the one hand, broadcasters may have reason for optimism if the FCC’s recent Public Notice (IB Docket No. 11-133) stating that it has streamlined its policies and procedures for reviewing foreign ownership of common carrier wireless licenses and certain aeronautical radio licenses is any indication. On the other hand, the broadcast industry has a long history of special concern in Congress due to its potential to influence the outcome of elections, and the FCC has not yet heard from Congress on these issues.

Reply comments on the proposal to lift the 25% cap on indirect foreign ownership of broadcast licensees are due at the FCC on April 30.

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