Category: Antitrust & Trade Regulation

U.S. International Trade Commission Grants Injunctive Relief on Standard Essential Patent

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The U.S. International Trade Commission has issued an exclusion order barring importation of certain older model Apple products for infringing a Samsung patent.  The case is significant because the infringed patent was standard essential and encumbered by a commitment to license on fair, reasonable and non-discriminatory terms.  Patent holders and potential defendants should carefully monitor further developments regarding the availability of injunctive relief for infringement of standard essential patents.

On June 4, 2013, the U.S. International Trade Commission (ITC) issued an exclusion order barring the importation and sale of several older model Apple iPhones and iPads for infringing a Samsung patent.  This in itself is unremarkable, as the patent laws permit patent holders to seek monetary and injunctive relief against anyone who infringes their patents, and injunctive relief is commonly granted to prevailing patent holders.  The ITC ruling is noteworthy, however, because the infringed patent was essential to the 3G standard and was subject to a fair, reasonable and non-discriminatory (FRAND) licensing commitment.  The ruling therefore runs counter to views expressed by the U.S. antitrust enforcement agencies to the effect that injunctive relief should be disfavored when dealing with FRAND-encumbered standard essential patents (SEPs), underscoring the growing debate as to the appropriate balance between the rights of SEP holders under the patent laws and antitrust policy.

In September 2012, the presiding administrative law judge (ALJ) ruled that Apple had not infringed any of the patents-in-suit, and that one of those patents was invalid.  Samsung and the staff attorney from the ITC’s Office of Unfair Import Investigations petitioned for review of the ALJ’s decision.  The ITC then requested public comment on its authority to issue an import ban (which is in essence injunctive-type relief) on products that infringe SEPs.  (Monetary damages are not awarded in ITC cases.)  After receiving a number of comments, the ITC issued its decision modifying the ALJ’s construction of certain terms in one of the patents and holding that, as modified, Apple had infringed the patent.  The ITC determined that two of the three remaining patents were not invalid, but also not infringed, and the final of those patents was both invalid and not infringed.  Based on the infringement of one of Samsung’s patents, the ITC issued an import ban with one commissioner dissenting on public interest grounds.

The case arose as part of the broader ongoing intellectual property disputes between Apple and Samsung over popular consumer electronics devices.  The matter has been submitted to the White House and U.S. Trade Representative for a 60-day presidential review period, but it has been decades since an administration overruled an ITC exclusion order.  If the administration does not reverse the decision, Apple can appeal the decision to the U.S. Court of Appeals for the Federal Circuit.

In a recent policy paper entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments,” the U.S. Department of Justice Antitrust Division and the U.S. Patent and Trademark Office argued that the ITC and the courts generally should not grant injunctive relief for infringement of SEPs.  The Federal Trade Commission argued the point even more forcefully in a statement submitted last year in ITC investigation 337-TA-752, In re Certain Gaming and Entertainment Consoles, Related Software, and Components Thereof, asserting that on the basis of its mandate to consider the public interest, the ITC should not issue exclusion orders related to FRAND-encumbered SEPs.  In support of their position, these agencies have advanced two principal arguments.  First, they assert that the fact that the patentee voluntarily agreed to license the patent on FRAND terms implies that money damages are a sufficient form of relief.  They therefore argue that if the patentee’s first priority was excluding others from using the patent, it would not have bound itself to FRAND terms or tried to secure the patent’s incorporation into a standard.

Second, the agencies argue that injunctive relief may enable patent “hold-ups” by SEP holders.  At the time a standard setting organization is deciding what technology to adopt, patentees often compete with one another as to whose technology will be adopted.  But once a standard is adopted and large investments are made based on that standard, sunk costs often make switching to a different technology or innovating around the patent prohibitively expensive.  Thus, a company wishing to have its patent incorporated into the standard typically must agree to license that patent on FRAND terms.  The antitrust agencies fear that SEP owners can use the threat of injunctive relief to extract above-FRAND royalties from rivals, and that these additional costs are likely to be passed on to consumers.  The agencies therefore argue that the public interest, which the ITC is charged with taking into account, counsels against exclusion orders in these circumstances.

On the other side of the ledger, SEP holders point out that when a patent holder agrees to license its patent on FRAND terms, it is only making a commitment about the terms on which it will grant a license, not surrendering any remedy afforded by the patent laws.  They go on to argue that the position staked out by the agencies places them in an untenable position because prospective licensees may not accept a proposed license on FRAND terms or may disagree with the SEP holder about whether the terms are, in fact, FRAND.  When a dispute arises over the terms on which a SEP will be licensed, patent holders have a legitimate interest in wanting to ensure their ability to pursue all remedies authorized under the patent laws.  These remedies afford patent holders the ability to protect their intellectual property rights and thereby promote innovation.  Making it more difficult to obtain injunctive relief on SEPs would diminish their incentive to invest in innovation, which is one of the fundamental objectives of the patent laws.

The recent ITC decision represents a clear win for SEP holders, but as noted above, it is subject to further review and possible appeal.  And in all events, the underlying policy debate will most assuredly continue.  As a consequence, it is incumbent both upon patent holders and potential defendants to continue to carefully monitor developments in evaluating the availability of injunctive relief in the context of SEPs.

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Financial Services Legislative and Regulatory Update – Week of June 10, 2013

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Leading the Past Week

And the beat goes on… Another week with the White House dealing with another issue, this time news that the national security apparatus is collecting and combing through telephone record metadata.  The widespread revelation about a data mining program that would make any hedge fund quant jealous drowned out more positive news of the week, including that the U.S. recovery continues its sluggish, yet positive pace with 175,000 jobs added in May.

And in an interesting comparison, as noted by the extraordinary team at Davis Polk, while the agencies were silent during the Month of May, and did not announce any new implementations of the Dodd-Frank Act, last week, three major implications of the implementation were announced.  First, the SEC publicly released its much anticipated and long awaited money market mutual fund rules.  Second, the Fed announced an almost equally anticipate interim final “push out” rule that provided significant relief to foreign-based banks with operations in the United States.  Finally, the FSOC made its first round of non-bank systemically important financial institutions (“SIFIs”) designations.

Legislative Branch

Senate

As Administration Announces New Iran Sanctions, Senate Banking Members Skeptical of their Effectiveness

On June 4th, the Senate Banking Committee held a hearing to review sanctions against Iran. Witnesses and lawmakers were split regarding the efficacy of the sanctions, some arguing that their effectiveness has been proved by Iran’s continued inability to fund nuclear enrichment and other arguing that the sanctions have not had the desired result of fundamentally changing the governance of the country. Specifically, Ranking Member Mike Crapo (R-ID) and Senators Bob Corker (R-TN), Bob Menendez (D-NJ), and Chuck Schumer (D-NY) all expressed concerns that the sanctions have not measurably changed Iran’s behavior. Witnesses included: David Cohen, Under Secretary for Terrorism and Financial Intelligence for the Treasury; Wendy Sherman, Under Secretary for Political Affairs with the Department of State; and Eric Hirschhorn, Under Secretary for Industry and Security with the Department of Commerce. The hearing comes as the Administration announced a new set of sanctions against the country. An Executive Order released June 3rd takes aim at Iran’s currency and auto sector in addition to expanding sanctions against private business supporting the government of Iran.

Senate Finance Committee Releases Income and Business Entities Tax Reform Working Paper

On June 6th, the Senate Finance Committee released the latest in a series of options papers outlining tax reform options for individual and business income taxes and payroll taxes. The proposal outlines three options for tackling the integration of individual and corporate taxes, such as making the corporate tax a withholding tax on dividends and adjusting capital gains taxes for businesses to match the individual Code. In addition, the paper discusses ways in which to reach a long-term solution for taxing derivatives.

Senate Banking Approves Nomination to Ex-Im Bank

On June 6th, the Senate Banking Committee voted 20 to 2 in favor of Fred Hochberg to continue to head the Export-Import Bank. Senator Tom Coburn (R-OK) and Senator Patrick Toomey (R-PA) both voted against the nomination. Hochberg’s nomination now moves to the full Senate where, though he is expected to be confirmed, he must be approved before July 20th or else the bank would lose its quorum for voting on items.  During the same executive session, the Committee approved by voice vote the National Association of Registered Agents and Brokers Reform Act of 2013 (S. 534) which would make it easier for insurance agents to sell state-regulated insurance in multiple states.

Senator Brown Calls on CFPB to Target Debt Collectors

On June 4th, Senator Sherrod Brown (D-OH) wrote to the CFPB, urging the Bureau to enact rules to curb customer abuses by debt collectors. In a statement accompanying the letter, Brown, Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, said he intends to hold a hearing in the next month which will shine a light on bad practices and consumer abuses in the industry. The Dodd-Frank Act gives the CFPB authority to enforce and enact rules under the Fair Debt Collection Practices Act (FDCPA). Brown’s letter urged Director Cordray to pursue debt collectors as soon as possible, as the Bureau would lose its oversight authority in this space should Cordray’s nomination expire and a director not be in place.

Senate Banking Committee To Consider Flood Insurance As Soon As July

In remarks made on June 6th, Chairman of the Banking Committee Tim Johnson (D-SD) said the panel will hold hearings as soon as July to consider national flood insurance affordability. The announcement comes as a number of lawmakers express concerns that rate increases in the 2012 reauthorization are not affordable.

Senate Banking Subcommittee Looks into the State of the Middle Class

On June 6th, the Senate Banking Subcommittee on Economic Policy held a hearing titled “The State of the American Dream: Economic Policy and the Future of the Middle Class.” It was Senator Jeff Merkley’s first hearing as Chair of the Subcommittee, he said he wanted to feature witnesses whose voices were not normally heard in committee hearings and public policy debates. The witnesses included: Ms. Diedre Melson; Mr. John Cox; and Ms. Pamela Thatcher, who were subjects of the documentary movie American Winter; Dr. Atif Mian, Professor of Economics and Public Policy at Princeton University; Ms. Amy Traub, Senior Policy Analyst for Demos; Mr. Nick Hanauer with Second Avenue Partners; and Mr. Steve Hill, Executive Director of Nevada Governor’s Office of Economic Development.

House of Representatives

House to Consider Multiple Financial Services Bills Next Week

Next week the House is set to consider and vote on four separate bills dealing with the Financial Industry.  Three of the these bills, The Business Risk Mitigation and Price Stabilization Act (H.R. 634), The Reverse Mortgage Stabilization Act (H.R. 2167), the Swap Data Repository and Clearing House Indemnification Correction Act (H.R. 742) will be brought up on the suspension calendar, which is generally used for non-controversial measures.  The other bill, the Swap Jurisdiction Certainty Act (H.R. 1256) will be brought forward under a rule, which may allow for amendments to the bill that directs the SEC and CFTC to issue joint rules on swaps and security-based international swaps.  All are expected to pass the House.

Financial Services Subcommittee Examines Role of Proxy Advisory Firms

On June 5th, the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises met to examine the growing reliance on proxy advisory firms in proxy solicitations and corporate governance. Specifically, the Subcommittee sought to investigate the effect proxy advisory firms have on corporate governance standards, the market power of these firms, potential conflicts of interest, and SEC proposals seeking to modernize corporate governance standards. During the hearing Subcommittee Chairman Scott Garrett (R-NJ) voiced concern that institutions are overly reliant on proxy advisory firms in determining how to cast shareholder votes and questioned whether conflicts of interest and voting recommendations based on one-size-fits all policies affect shareholder value.

Witnesses at the hearing included: former SEC Chairman Harvey Pitt,  Timothy Bartl, President of the Center on Executive Compensation, Niels Holch, Executive Director of Shareholder Communications Coalition, Michael McCauley, Senior Offices for Investment Programs and Governance of the Florida State Board of Administration, Jeffrey Morgan, President and CEO of the National Investor Relations Institute, Darla Stuckey, Senior Vice President of the Society of Corporate Secretaries & Governance Professionals, and Lynn Turner, Managing Director of LitiNomics. The hearing comes as SEC Commission Daniel Gallagher recognized that lawmakers and regulators need to re-examine the role of advisory firms in the corporate governance matters as “no one should be able to outsource their fiduciary duties.”

Lawmakers Introduce Legislation Targeting Foreign Cyber Criminals

On June 6th, House Intelligence Committee Chairman Mike Rogers (R-MI) along with Representative Tim Ryan (D-OH) and Senator Ron Johnson (D-WI) introduced legislation that would impose visa and financial penalties on foreign cyber criminals who target American businesses. Specifically, the measure would deny foreign agents engaged in cybercrime from apply for visas or, if they reside in the U.S., would revoke visas and freeze financial assets. The bill also calls for the Department of Justice to bring more economic espionage criminal cases against offending foreign actors.

Online Gambling Legislation Introduced

On June 6th, Representative Peter King (R-NY) introduced legislation to create broad federal Internet gambling regulations and allow all online gambling with the exception of betting on sports and where Indian tribes opt not to participate. The legislation would also establish an office of Internet gaming housed within the Treasury. Following a 2011 ruling by the Justice Department that the 1961 Wire Act does not ban online gambling, several states, including Delaware, New Jersey, and Nevada, have moved forward with creating intra-state online gaming operations.  The movement at the state level has taken some of the momentum out of federal legalization efforts.

Executive Branch

Treasury

FSOC Selects First Group of Non-Banks to be SIFIs

On June 3rd, the Financial Stability Oversight Council (FSOC) voted on the preliminary list of systemically important financial institutions (SIFIs) which will be subject to additional regulation by the Fed. This additional regulation will include new stress tests to monitor stability, additional capital requirements, and the need to create living wills in the event of resolution. While the Council did not release the names or the number of non-banks that have been selected, several firms have announced that they have received notice from the FSOC regarding their designation, including GE Capital, Prudential Financial, and AIG. Now that designations have been made, companies selected will have 30 days to request a hearing to contest the designation. While Secretary Jack Lew called the designations an “important step forward,” Chairman of the House Financial Services Committee Jeb Hensarling criticized the move, saying perpetuating non-banks as “too big to fail” will only put taxpayers on the hook for another bailout.

Federal Reserve

Fed Approves Final Rule Clarifying Treatment of Foreign Banks Under Push-Out Rule

On June 5th, the Fed approved an interim final rule clarifying the treatment of uninsured U.S. branches of foreign banks under the Dodd-Frank Act swaps push-out measure. Dodd-Frank calls for banks to separate certain swap trading activities from divisions that are backed by federal deposit insurance or which have access to the Fed discount window. Under the clarification, the Fed states uninsured U.S. branches of foreign banks will be treated as insured depository institutions and that entities covered by the rule, including U.S. branches of foreign banks, can apply for a transition period of up to 24 months to comply with the push out provisions. The interim final rule also states that state member banks and uninsured state branches of foreign banks may apply for the transition period. The Institute of International Bankers, which represents international banks operating in the U.S., praised the Fed for offering clarity on a “widely acknowledged drafting error in the original legislation.”

Fed Vice Chairman Appears to Support Stronger Capital Rules for Large Banks

Speaking in Shanghai last week, Fed Vice Chairman Janet Yellen said that it may be necessary for regulators to impose capital requirements even higher than those set forth in the Basel III agreement. Agreeing with Fed Governors Daniel Tarullo and Jeremy Stein, Yellen said “fully offsetting any remaining “too big to fail” subsidies and forcing full internalization of the social costs of a SIFI failure may require either a steeper capital surcharge curve or some other mechanism for requiring that additional capital be held by firms that potentially pose the greatest risks to financial stability.” To that end, Yellen noted that the Fed and FDIC are “considering the merits” of requiring systemically significant firms to hold minimum levels of long-term unsecured debt to absorb losses and support orderly liquidation. Yellen who, is seen by many as the frontrunner for Fed Chairman following Bernanke’s term, is starting to generate a lot more attention as we come closer to the end of Bernanke’s reign.  However, she is not the only member of the Fed espousing this policy.  In a speech later in the week, Philadelphia Fed President Charles Plosser echoed Yellen’s sentiments, saying Dodd-Frank and other efforts to end “too big to fail” may not be “sufficient.” Plosser argued that current capital requirements should be made more stringent but also simpler by relying on a leverage ratio rather than the current practice of risk weighting.

SEC

SEC Proposes Long-Anticipated Money Market Mutual Fund Overhaul

On June 5th, the SEC released a proposal which would change the way the $2.6 trillion money market mutual fund industry is regulated. After months of internal disagreement within the SEC, the Commission voted unanimously to propose the plan. The goal of the proposal is to avoid future runs on the market, like that which occurred during the financial crisis, in tandem with ensuring that the industry still function as a viable investment vehicle. The Commission’s proposal sets out two alternative options for reform which could be enacted alone or in combination. The first would require institutional prime money market funds to operate with a floating net asset value (NAV). Notably, retail and government funds would still be allowed to operate with a fixed-NAV. The second alternative would require nongovernment funds whose liquid assets fell below 15 percent of total assets to impose a 2 percent liquidity fee on all redemptions. If this were to occur, a money market fund’s board would be permitted to suspend redemptions for up to 30 days. The proposal also calls for prompt public disclosure if a fund dips below the 15 percent weekly liquid asset threshold.

Coalition of Investment and Consumer Interests Call for Strong Uniform Fiduciary Standard

In a letter sent to the SEC on June 4th, a coalition of investment and consumer groups called on the Commission to enact a uniform fiduciary standard that would require broker-dealers and investment advisers to act in consumers’ best interest. The letter, signed by organizations such as AARP, the Consumer Federation of America, and the Investment Adviser Association, is in response to an SEC request for information (RFI) requesting input on regarding the possible extension of a fiduciary duty to broker-dealers. The groups assert that, the fiduciary standard set forth in the RFI is weak compared to current law and “seems to contemplate little more than the existing suitability standard supplemented by some conflict of interest disclosures.”

District Court Hears Challenge to SEC Critical Minerals Rule

On June 7th, the Court of Appeals for the D.C. Circuit heard a challenge brought on behalf of the American Petroleum Institute, the Chamber of Commerce, and others to the SEC’s critical minerals rule which requires companies to disclose payments made to foreign governments. Industry argues that the rule is overly burdensome and could result in proprietary information being shared with competitors. However, supporters of the rule, including Oxfam America, assert that the measure will increase transparency and help combat human rights abuses.

FDIC

FDIC Approves Non-Bank Resolution Final Rule

On June 4th, the FDIC approved a final rule establishing the criteria which will be used to determine which non-bank financial firms will be required to comply with the FDIC’s authority to liquidate large failing companies. The rule, which lays out factors used to determine if a company is “predominately engaged in financial activity,” requires companies where at least 85 percent of revenues are classified as financial in nature by the Bank Holding Company Act to comply. The FDIC’s rule closely resembles a final proposal by the Fed which established criteria for non-banks to be flagged for additional supervision under Dodd-Frank.

CFPB

CFPB Finalizes Ability-to-Repay Rule Amendments

On May 29th, the CFPB finalized rules designed to increase access to credit through exemptions and modifications to the Bureau’s ability-to-repay rule. The ability-to-repay rule, which was finalized in January 2013, requires that new mortgages comply with basic consumer protection requirements that are meant to ensure consumers do not take out loans they cannot pay back through Qualified Mortgages (QMs). In response to public and Congressional concerns about the scope of the rule, the Bureau’s finalized rules exempt certain nonprofit creditors and community-based lenders who service low- and moderate-income borrowers, facilitate lending by small creditors, banks and credit unions with less than $2 billion in assets and which make 500 or fewer mortgages loans per year, and establish how to calculate loan origination compensation. In announcing the amendments, the CFPB also delayed the effective date of provisions prohibiting creditors from financing certain credit insurance premiums in connection with certain mortgage loans. Currently, the effective date is January 10, 2014; however, the Bureau plans to solicit comment on an appropriate effective date for proposed credit insurance clarifications.

Bureau Issues Mortgage Rule Exam Guidelines

On June 4th, the CFPB issued an update to its exam procedures based on the new Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA) mortgage regulations finalized in January. The guidance addresses questions about how mortgage companies will be examined such as for: setting qualification and screening standards for loan originators; prohibiting steering incentives; prohibiting “dual compensation,” protecting borrowers of higher-priced loans; prohibiting the waiver of consumer rights; prohibiting mandatory arbitration; requiring lenders to provide appraisal reports and valuations; and prohibiting single premium credit insurance.

CFPB Announced Further Study on Pre-Dispute Arbitration in Financial Products

In a notice and request for comment published on June 7th, the CFPB announced it will conduct phone surveys of credit card holders as part of its study of mandatory pre-dispute arbitration agreements. While Dodd-Frank gave the CFPB authority to ban the use of arbitration in mortgages, Section 1028(a) of the Dodd-Frank Act requires the Bureau to conduct a study before taking additional action to limit arbitration in other financial products. According to the notice, the survey will investigate “the extent of consumer awareness of dispute resolution provisions in their agreements with credit card providers” and consumers’ assessments of these tools.

International

IMF Working Paper Calls for Taxes on Large Banks to Level Playing Field, End “Too Big to Fail”

In a working paper published at the end of May, the International Monetary Fund (IMF), suggesting that large banks in advanced economies have more incentive to take risks due to cheaper funding sources, proposed taxing large banks to “extract their unfair competitive advantage.” The authors of the paper argue that such as tax would level the playing field from the perspective of competitive policy and reduce excess incentives of banks to grow, reducing the problem of “too big to fail” and increasing financial stability. Specifically, the paper found that the implicit guarantee that “too big to fail” banks will be bailed out in the event of failure or crisis can lead to a funding advantage of up to 0.8 percent a year. In related news, On June 5th, Representative Michael Capuano (D-MA) introduced legislation (H.R. 2266) which would require certain systemically important institutions to account for the financial benefit they receive as a result of the expectations on the part of shareholders, creditors, and counterparties that the government will bail them out in the event of failure.

Upcoming Hearings

On Wednesday, June 12th at 10am, in 1100 Longworth, the Trade Subcommittee of House Ways and Means Committee will hold a hearing titled “U.S.-Brazil Trade and Investment Relationship: Opportunities and Challenges.”

On Wednesday, June 12th at 10am, in 2128 Rayburn, the House Financial Services Committee will hold a hearing titled “Beyond GSEs: Examples of Successful Housing Finance Models without Explicit Government Guarantees.”

On Wednesday, June 12th at 2pm, in 2128 Rayburn, the Capital Markets and Government Sponsored Enterprises Subcommittee of House Financial Services Committee will hold a hearing on proposals intended to support capital formation.

On Thursday, June 13th at 10am, in 538 Dirksen, the Senate Banking, Housing, and Urban Affairs Committee will hold a hearing titled “Lessons Learned From the Financial Crisis Regarding Community Banks.”

On Thursday, June 13th at 10am, in 2128 Rayburn, the Monetary Policy and Trade Subcommittee of House Financial Services Committee will hold a hearing on changes to the Export-Import Bank.

On Thursday, June 13th at 1pm, in 2128 Rayburn, the Housing and Insurance Subcommittee of House Financial Services Committee will hold a hearing on international insurance issues.

Non-Compete Agreements Aren’t for Everyone: The Necessity of Proving a “Legitimate Business Interest”

Womble Carlyle

It is a longstanding tenet of North Carolina law:  A company must have a legitimate business interest to justify using non-competes in its employment agreements.

Employers often focus on specific language describing the scope of their non-competes – should it be six months, one year or two years?  Should it be citywide, statewide, or is a larger territory reasonable?  And although the scope of a non-compete is critical, two recent North Carolina court decisions emphasize that you can’t use a non-compete in just any situation.  There must be a legitimate business interest which merits its use.

What qualifies as a legitimate business interest?

In Pinehurst Surgical Clinic, P.A. v. DiMichele, the NC Court of Appeals enforced an employment agreement prohibiting the defendant physician from practicing medicine in competition with the plaintiff surgical clinic for two years within a 35-mile radius of its Pinehurst facility.

In reversing the trial court’s finding of no irreparable harm, and remanding the case with instructions to grant the PI, the Court focused on several key findings which demonstrated the employer had strong, legitimate and protectable business interests to justify the use of non-competes:

  • In its more than 60 years of existence, the clinic had invested many resources “cultivating relationships with patients, employees, and various entities in the region in which it does business.”
  • The clinic annually spent significant sums “to develop and maintain a loyal patient base and goodwill in the community.”
  • The clinic provided the physician with “extensive confidential information regarding all aspects of plaintiff’s medical practice and business affairs.”
  • The clinic also provided the physician with an extensive patient base and the support necessary to maintain a successful medical practice, reputation and goodwill in the community.

In contrast – and reaching a different result – in Phelps Staffing, LLC v. C.T. Phelps, Inc., the Court of Appeals found that a staffing company failed to establish a legitimate business interest supporting its use of non-competes.   A number of factors undermined the staffing company’s case:

  • The employees at issue were “general laborers”;
  • The employees did not have access to trade secrets or proprietary information; and
  • The staffing company admitted that the primary purpose of the non-compete was to prevent competition from other temporary staffing companies.

The Court had little trouble affirming the trial court’s finding that the non-compete was “merely an attempt to stifle lawful competition between businesses and that it unfairly hinders the ability of plaintiff’s former employees to earn a living.”

These North Carolina cases are in sync with the national trend.  For example, in Gastroenterology Consultants of the North Shore v. Mick S. Meiselman, an Illinois appellate court invalidated a physician’s non-compete because the former employer failed to show a legitimate protectable interest.  The evidence showed that the doctor had been practicing in the relevant territory for about 10 years before his employment with the practice, the practice did not introduce the doctor to his patients or his physician-referral sources, the practice did not advertise, promote or market the doctor’s practice, and the doctor maintained his own office and telephone number.  The practice merely provided some administrative support for the doctor.  As a result, the practice lacked a legitimate interest to justify the non-compete.

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Six Ways to do Business Overseas While Reducing the Perils of Future Litigation

Sheppard Mullin 2012

As an executive or in-house counsel, your work likely reaches across the globe.

90% of companies in the United States are involved in litigation—much of it international. American companies have increased overseas business from 49% in 2008 to 72% as late as 2010.

If you work for a medium to large corporation, you are liking working overseas or interacting with colleagues that are. This means that you are likely working around the clock putting out fires, making deals, and juggling regulatory hurdles. Are you worried of running so fast in such unknown territory that you may miss something? Do you wish you had more time to learn everything to minimize your company’s business and litigation risks?

I have good and bad news. The bad—it is nearly impossible to know all of the intricacies of international law, customs, or the unique business challenges facing your company. The good news—you don’t have to. The reality is that ignorance of international law is not what gets you in trouble . . . facts do. Case in point, see Wal-Mart’s bribery scandal in Mexico.

Here are six habits you already know and should put into practice to reduce the risks of bad facts leading to future international litigation:

1. Watch What You Put in Email

You are in charge of an international project and the pressure is mounting. Your foreign counterparts seek written assurances. So, you go on the record via email stating definitively and unequivocally the company’s position. Years later and, with hindsight, you learn you were wrong and it comes back to bite you in litigation. Or maybe you feel especially close to your Brazilian counter-part after a night of food and drinks, so you share information via email about your company’s “issues.” That email is later produced in litigation and becomes evidence against your company.

Remember, emails live on forever and travel . . . fast! Like water leaks, emails go unnoticed until the full impact of their damage emerges years later.

This is basic, but often key in litigation. If you are doing business overseas: watch your tone, grammar, use of local colloquialisms, or use of vague undefined terms (e.g. “material” breach). Avoid definitive words like: “always,” “never,” or “definitely.” Give yourself margin for error. If you are assuming, say so in your email. If you still need approval for your written position, note as much in the email. Ask yourself, “is what I am writing something I would be okay having blown up on an overhead projector in court?” If so, send away.

2. Write Facts Down and Do So Clearly

The fear of bad facts or cross-examination should not deter you from writing. Given the language barriers of international work, communication is vital to your success. So, you should write emails and correspondence. But how? The key is clarity of facts.

This means, writing facts, not conclusions or opinions. When you portray facts, be objective and detail-oriented. For example, retell the other side’s position and your company’s response. Don’t assume that the other side will stick to the same story they told you orally, so document it.

However, you are often called to make conclusions or state an opinion. When you do, make sure you identify why, the process leading to the conclusion/opinion, and what factors could change your initial viewpoint.

Litigation is drama and international litigation is drama on a global scale where each side gives their “story.” Take the lead and document the “real story” by writing it down. When you do, and litigation erupts, a litigator like me can clearly and persuasively tell your story.

3. Respect Cultural Sensitivities, But Don’t Be Afraid to Follow Up

You are in meetings with your counter-parts in Asia and essential business issues come up. Yet, you are concerned about being culturally sensitive and not losing “face.” So, you let the issue pass and put it on your to-do list. As the days pass, hundreds of other “to-do” issues join it on your list and you forget.

Respect cultural sensitivities, but always follow-up. Better yet, document it, follow-up over the phone or in person, and document what you did. I have seen clients’ major multi-million dollar litigation matters get sidetracked because an executive failed to follow-up on a legitimate concern and subsequently “waived” the issue.

4. Be a Gatekeeper and Assert Your Contractual Rights

Companies and their executives fly to the moon to strike an international deal that benefits the company. They hire great lawyers to put in all the bells and whistles to protect their business interests. Yet, when the deal meets the reality of daily business life, gravity takes over and the precious rights protected in the contract fall flat to earth.

If you are the executive sent overseas to manage the project or handle the international distribution business, become the gatekeeper. That means: read the previously negotiated contract, understand it, ask questions about it, know it intimately, and then follow the terms of the contract.

If the contract gives you the right to documents from the foreign company, politely, but firmly get your documents. If the contract calls for a delivery schedule, follow it and insist the other side do the same. If the contract requires your foreign counterpart to act a certain way, do a number of things, or behave within the confines of a certain standard, make sure they do.

Your failure to know your contract and follow it, could waive important rights, change the terms of the contract, and create multiple avenues of arguments for the other side. This could come to haunt you later when you are back in the United States and the project you were in charge of heads to litigation.

5. Ask Questions, Look Around, and Gather Information

Maybe the most important and underused tool in your arsenal to reduce the risk of overseas business leading to litigation is to ask questions.

As you undertake your overseas assignment, you will notice that some things don’t make sense. When this happens, ask questions. Who is the foreign executive you are dealing with? What is his role in the company? Why is he asking you to meet with him and a foreign government official at a swanky resort? Could this be a problem? Maybe, but you will never know where you and your company stand unless you ask questions.

While you are asking questions, look around. If you are managing a construction project in Qatar, get on the ground and look at the project site. Don’t rely on others to tell you what is happening, see it for yourself. Open your eyes . . . is anything off? What’s there that shouldn’t be there? What isn’t there that should be there? If you know your contract (as in Tip 4 above), you will know what doesn’t look right.

Gather readily available information. The reality is that international litigation becomes very difficult and expensive from the United States when all of the evidence remains overseas. So, if you hear your foreign counter-part discuss a “regulation,” “policy,” or “contract” that they are relying on, ask to have a copy . . . and actually get it. Doing so will give your company an advantage in discovery if litigation ensues.

In the end, use your senses. What do you see and hear? Does it smell or feel right? If not, take note, ask questions, and gather information as it occurs.

6. Seek Advice

Note, it is wise to seek advice on international law when doing business overseas. Whether you are working on an international investment deal,cross border real estate transaction, want to protect your intellectual property, or are worried about immigration exposure, it is good business to get counsel.

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Department of Energy Approves Liquefied Natural Gas (LNG) Export Authorization for Freeport LNG – A Win for LNG Exports?

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The Department of Energy recently authorized Freeport LNG Expansion, L.P. (“FLEX”) to export LNG to non-Free Trade Agreement countries. Importantly, this is the first order on LNG exports issued by the DOE since it collected comments on its two-part LNG Export Study and likely represents the analysis DOE will use in reviewing the queue of pending LNG export applications.

FLEX proposes to export 1.4 Bcf/day from the Freeport LNG terminal, which is situated on the Gulf Coast in Texas. After filing its export application, FLEX secured long-term contracts with three entities for 88 percent of the requested export capacity; most of the gas for export would be sourced from Texas, and in particular, the Eagle Ford Shale.

By way of background, as the domestic natural gas markets shifted to favoring LNG exports in recent years, numerous applications were filed with the DOE for authorization to export LNG. In response to this onslaught, DOE commissioned a two-part study, consisting of (1) an Energy Information Administration study on the effects on increased natural gas exports on domestic energy markets; and (2) a NERA Economic Consulting study on the macroeconomic imports of LNG exports (together, the “LNG Export Study”). The NERA study has recently been the subject of substantial debate as DOE noted that it received over 188,000 comments and 2,700 reply comments, though DOE admits the majority of such comments were nearly identical form letters. Substantive and unique comments numbered nearly 800, with 11 different economic studies prepared by commenters.

In general, the FLEX order is a positive development for LNG exporters for two main reasons:  (1) DOE found the LNG Export Study to be sufficiently reliable and supportive of LNG exports; and (2) DOE strongly suggested that it would let market forces govern LNG exports (while being closely monitored by DOE). The FLEX order tracks with and builds upon DOE’s last order granting authorization for LNG exports to non-FTA countries, Sabine Pass, issued nearly two years ago. In approving the application as “not inconsistent with the public interest,” DOE considered the same public interest factors relied upon in its earlier Sabine Pass order, namely, the economic impacts, international impacts, and security of natural gas supply. DOE continued to consider the factors identified in its now-expired 1984 policy guidelines, including whether the arrangement is consistent with DOE’s policy of promoting market competition.

While at first glance the FLEX order appears to represent a big win for the LNG export industry, there are several conclusions worth attention. Arguably, the order is a broad endorsement of free-market principles as DOE determined the competitive market to be the proper mechanism for allocating a scare resource like natural gas. However, although DOE did not state it would impose limits or caps on LNG exports, DOE did indicate that it will take a “measured approach” in reviewing other pending LNG export applications. “Specifically, DOE/FE will assess the cumulative impacts of each succeeding request for export authorization on the public interest with due regard to the effect on domestic natural gas supply and demand fundamentals.” This approach suggests lower-queued applications may face a higher hurdle due to the cumulative impacts of the preceding applications and possibly suggests that DOE has a “cap” in mind. Third, DOE confirmed that the Federal Energy Regulatory Commission will conduct the environmental review, subject to independent review by DOE. Fourth, DOE found that the net economic benefits to the U.S. from LNG exports outweigh potential harms. Fifth, DOE continued to caution LNG export applicants that it will monitor the market and the impact of LNG exports and “may issue, make, amend, and rescind such orders . . . as it may find necessary . . . .” Such statements continue to inject some uncertainty into the contracting process. Finally, DOE suggested that local and regional benefits in terms of employment and income may be important in deciding whether to grant specific applications. Moreover, with respect to FLEX project, DOE noted that no one challenged the data provided by applicant in this regard.

A significant issue raised by commenters on the LNG Export Study was to what extent LNG exports would raise natural gas prices, how natural gas production would react to increased demand, and whether the net economic benefits accruing from LNG exports would outweigh negative impacts for higher domestic natural gas prices. As discussed in the FLEX order, DOE is clearly concerned about these issues, but it found arguments persuasive that the U.S. had a substantial oversupply of natural gas that would mitigate the preceding concerns. DOE cautioned that it would closely monitor the domestic natural gas markets and reiterated its authority to revise or rescind LNG export authorizations should the public interest require it. DOE did not indicate what market conditions would trigger such action, but changes in the domestic natural gas oversupply condition could be pivotal in subsequent approvals of LNG export applications or in rescinding/amending already issued export authorizations.

DOE imposed numerous conditions on the export authorization, including a requirement that FLEX must file publicly with DOE (a) all executed long-term contracts associated with the long-term export of LNG; and (b) all executed long-term contracts associated with the long-term supply of natural gas to the terminal. DOE noted that commercially sensitive provisions may be redacted. DOE also reduced the duration of FLEX’s requested 25-year export authorization and approved only a 20-year authorization.

Overall, our sense is that the FLEX order is a step in the right direction for the LNG exports industry and is a sign that, after a two-year study period, DOE once again will begin its process of issuing non-FTA export authorizations. As previously rumored, we expect that those projects that are further along in the development process (e.g., those that have completed FERC’s pre-filing process and have commercial arrangements in place for a sizable portion of the terminal capacity) will receive priority processing regardless of the project’s place in DOE’s queue. As a result, less developed projects will face greater uncertainty, especially if DOE has a “cap” in mind. Further, project sponsors should continue to include provisions in their contracts that address the possibility that DOE would modify or revoke a non-FTA authorization in the event of changes to the current domestic natural gas oversupply condition.

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U.S. Customs and Border Patrol Expands Reconciliation Opportunities

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In the May 13, 2013 Federal Register, United States Customs and Border Protection (CBP) announced the expansion of its Reconciliation Prototype program to include post-importation duty preference claims under the U.S.-Oman Free Trade Agreement, the U.S.-Peru Trade Promotion Agreement, the U.S.-Korea Free Trade Agreement, the U.S.-Colombia Trade Promotion Agreement, and the U.S.-Panama Trade Promotion Agreement.  CBP announced this expansion will take effect for post-importation duty preference claims filed on or after August 12, 2013.

The expansion will enable importers to file post-entry duty preference claims under the above-referenced free trade agreements (FTAs) where they are unable to confirm qualification at the time of entry.  Using the Reconciliation program, importers will electronically flag as-yet-unqualified imports at the time of entry.  Presuming the requisite supporting information becomes available within 12 months of the date of entry, importers can then file a Reconciliation entry to make their duty preference claim and receive corresponding duty refunds.  Importers who are not yet part of the Reconciliation program, but would like to take advantage of these expanded opportunities, must apply to participate by submitting the requisite application to CBP Headquarters.

CBP has been utilizing the Reconciliation Prototype program since 1998 as part of its National Customs Automation Program Reconciliation provides importers an automated mechanism to identify at the time of entry certain undeterminable information (that does not affect admissibility), and provide that information at a later date through an entry-by-entry or aggregate filing. Importers identify this provisional information by placing an electronic “flag” at the time the entry summary is filed.  Prior to expansion to allow for various post-entry FTA claims, importers could only flag information relating to: 1) value issues other than claims based on manufacturing defects; 2) classification issues, on a limited basis; 3) issues concerning value aspects of entries filed under heading 9802, Harmonized Tariff Schedule of the United States (HTSUS); and 4) issues concerning merchandise entered under the North American Free Trade Agreement (NAFTA).

The expansion of the Reconciliation program to these additional FTAs is consistent with the original opportunities to file post-entry NAFTA claims, as well as previous expansion of the Reconciliation program to include the U.S.-Chile Free Trade Agreement and the Dominican Republic-Central America-U.S. Free Trade Agreement. As importers have experienced with Reconciliation for NAFTA, allowing for post-importation duty claims under these new trade agreements allows for a streamlined mechanism for filing post-entry refund claims, and allows importers to file potentially thousands of post-entry claims under a single Reconciliation entry and receive a single duty refund check from CBP in response.

Importers may elect not to file their post-entry duty preference claims via the Reconciliation prototype, and expansion of the program does not prohibit importers from continuing to file post-entry claims using traditional processes in accordance with 19 U.S.C § 1520(d).However, once an importer flags an entry summary indicating that it may pursue post-importation duty preference claims via the Reconciliation process, the importer locks itself into the process and waives its rights to file a traditional paper filing pursuant to 19 U.S.C.§ 1520(d). If, after having flagged the entry, an importer fails to file a post-entry Reconciliation claim under one of the approved FTAs, the importer will not be assessed liquidated damages for a late file or no file Reconciliation (which can happen for post-entry valuation adjustments that are flagged but not reconciled). Rather, the flagged FTA entry will simply liquidate at the end of the 12-month period as entered, i.e., with the payment of duties and fees.

Reconciliation can be an effective trade compliance and risk management tool. Among other things, it allows importers to streamline multiple post-entry FTA claims, and can also serve as a compliance vehicle to flag undetermined or provisional values at the time of entry – providing an automated method to make entry corrections or adjustments once the relevant information has been finally determined. The extension of the Reconciliation Prototype to these additional FTAs provides importers with additional tools to manage their duty preference programs.

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International Trade Commission Rules Lack of Domestic Industry Results in a Termination of Investigation

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The International Trade Commission (ITC) is an independent, quasi-judicial agency that adjudicates the importation of products that allegedly infringe U.S. intellectual property rights. The ITC can halt the importation of goods that infringe U.S. patents and/or trademarks, and thus is an effective tool for obtaining a relatively rapid determination of infringement (one year) and an exclusion order. One of the requirements for such an order is to prove harm to a domestic industry. The following case (ITC investigation 337-TA-874) is an example of one way that such an investigation can be defeated.

In a recent decision, the ITC ordered an investigation into whether certain laminated products infringed the claims of a nonpracticing entity’s (NPE) patent. In initiating the investigation, the ITC ordered the administrative law judge (ALJ) overseeing the investigation to hold a preliminary hearing and to issue a decision as to whether the NPE has the required domestic industry in the United States to bring an investigation before the ITC. A finding of a lack of domestic industry would result in a termination of the investigation, as the NPE would not have standing with the ITC. This is a departure from current ITC practice, and it may provide an effective tool for preventing NPEs from bringing frivolous suits before the ITC.

Under 19 U.S.C. § 1337(a), the ITC has jurisdiction to hear matters in which a party alleging infringement (the complainant) has, or is in the process of establishing, a domestic industry in the United States. The determination of domestic industry is a two-prong test. The first prong, referred to as the “technical prong,” requires the complainant to show that it is practicing a valid claim of each asserted patent in a product sold in the United States. The analysis of the technical prong is similar to an infringement analysis, in which each claim is compared to the domestic product.1 The second prong of the test, referred to as the “economic prong,” requires the complainant to demonstrate “(a) a significant investment in plant and equipment, (b) significant employment of labor and capital, or (c) a substantial investment in its exploitation, including engineering, research and development, or licensing.”2

The complaint in the present investigation (337-TA-874) was brought by Lamina Packaging Innovations, an NPE, against a group of companies including Hasbro, John Jameson Import Company, Cognac Ferrand USA, Inc. and Camus Wines & Spirits Group. In the investigation, Lamina Packaging alleged that the respondents were infringing two of Lamina’s patents directed to a packaging material. In initiating the investigation, the ITC ordered the ALJ to issue an initial determination as to whether Lamina has satisfied the economic prong of the domestic industry requirement. Further, the ITC stated that the initial determination would become the ITC’s final determination 30 days after the date of service of the initial determination. Accordingly, a finding of no domestic industry by the ALJ would result in a termination of the investigation. The ITC ordered the ALJ to issue a decision on domestic industry within 100 days from the institution of the investigation.

Typically, lack of domestic industry is an affirmative defense presented by a respondent. The new ruling by the ITC may allow respondents to terminate ITC investigations early, opposed to the current practice that requires respondents to endure a summary judgment motion or a trial before a domestic industry decision is rendered. As more NPEs file complaints with the ITC in an attempt to “test run” future district court cases, this recent decision may greatly reduce the number of NPE cases filed with the ITC.

1 Alloc, Inc. v. Int’l Trade Comm’n, 342 F.3d 1361, 1375 (Fed. Cir. 2003).

2 19 U.S.C. § 1337(b).

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Federal Trade Commission’s (FTC) New Chairwoman Ramirez Says Health Care Continues To Be Top Priority

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In remarks made this week at the International Competition Network annual conference, Federal Trade Commission (FTC) Chairwoman Edith Ramirez stated that health care will continue to be a top priority for the FTC.   Referring to health care and hospital mergers in particular, she said that the Commission will “guard[] against what we consider to be consolidation that may end up having adverse consequences for consumers.”  The Chairwoman’s comments indicate that the recent leadership change at the FTC from former Chairman Jon Leibowitz to Chairwoman Ramirez has not altered the Commission’s priorities.

Recent months have seen a flurry of FTC activity in the courts related to health care.  For example, two FTC cases came before the U.S. Supreme Court this term — the FTC’s challenge to Phoebe Putney’s acquisition of Palmyra Park Hospital in Georgia and the FTC’s challenge to “pay-for-delay” patent infringement litigation settlements between branded and generic pharmaceutical manufacturers.

In February, the Supreme Court ruled that the state action doctrine did not immunize Phoebe Putney’s hospital transaction from federal antitrust scrutiny, and the FTC has subsequently filed renewed motions in federal district court to stop further integration of the two hospitals even as it prepares for a full administrative hearing on the merits that will begin in August.

A decision on the “pay-for-delay” case is expected in June.  The Supreme Court’s ruling may have a large impact on further FTC efforts against what it perceives as anticompetitive efforts to delay generic drug entry.

Health care clients considering acquisitions are advised to consult antitrust counsel early in the transaction process.  Given the FTC and DOJ’s close scrutiny of health care transactions, early advocacy before the antitrust agencies is often critical to a deal closing on schedule.

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Natural Gas Companies Settle Antitrust Suit Stemming from Joint Bidding

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On Monday, April 22, 2013, after rejecting the initial settlement agreement, Judge Richard Matsch (D. Colo.) approved a revised settlement of a suit brought by the U.S. Department of Justice (DOJ) against two energy companies for conspiring not to compete for mineral rights leases.  Gunnison Energy Corp. (GEC) and SG Interests I Ltd. and SG Interests VII Ltd. (collectively “SGI”) will each pay a fine of $275,000 to the DOJ to settle allegations of agreeing not to bid against each other in violation of antitrust law for natural gas leases on government land in western Colorado.  These fines are in addition to those related to alleged False Claims Act violations, for which SGI and GEC paid government fines of $206,250 and $245,000 respectively.  The new settlement is twice the amount of the fines in the original settlement.

McDermott Will & Emery wrote an article in February 2012 analyzing the DOJ’s initial complaint against the parties, and the competitive implications of joint bidding.  At the time, the parties had agreed to pay a total of $550,000 in fines.  The court rejected the settlement in December 2012 finding that it was not in the public interest.  “There is no basis for saying that the approval of these settlements would act as a deterrence to these defendants and others in the industry, particularly as GEC considers ‘joint bidding’ to be common in the industry.”  Further, the settlement amount was “nothing more than the nuisance value of [the] litigation.”  Additionally, as reflected in the newly approved deal, the court wanted the alleged Sherman Act violations and False Claims Act violations settled separately, with a payment for the Sherman Act claims separate from, and in addition to, any amount due under the False Claims Act.  At heart, it appears Judge Matsch wanted any settlement he approved to be meaningful enough to have a deterrent effect on future agreements.

This was the DOJ’s first challenge to an anti-competitive bidding agreement for mineral rights leases, but it is just one of the recent cases in which joint bidding activities have become the focus of antitrust scrutiny.  In Summer 2012, the DOJ opened an investigation into Chesapeake Energy’s acquisition of oil and gas properties in Michigan and the possibility that Chesapeake conspired with Encana Corp. to allocate bids on those properties.  In 2006, the DOJ began investigating the joint bidding practices of private equity firms in connection with leveraged buyouts.  That investigation led to class action suits against private equity firms.  One of those suits survived a motion for summary judgment last month.

It is important to note that the DOJ is paying attention to joint bidding practices and taking action.  As noted in the SGI/GEC matter, while joint bidding may in fact be common practice in the energy field, it is not necessarily lawful.  Each arrangement should be evaluated for potential anticompetitive effects.

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