Category: Environmental Law

How Monsanto Applies to Nonagricultural Biotechnology

Womble Carlyle

The facts behind the Supreme Court’s recent ruling in Monsanto v. Bowman are simple enough. Farmers are able to buy soybeans containing Monsanto’s patented glyphosate resistance technology under a license that permits them to plant and grow one generation of crops. Vernon Bowman skirted this program, however, by purchasing commodity soybeans from a grain elevator knowing that the seeds would nonetheless likely contain the very same Monsanto technology. He then planted the seeds, raised crops, and saved seeds from these crops to plant new crops. The Supreme Court held that Bowman’s actions infringed Monsanto’s patents because unlicensed growth of the seeds was a new making of the patented invention. Consequently, the doctrine of patent exhaustion did not provide any defense as to these new seeds.

This was not a surprising result for the biotechnology industry. The idea that patent rights in seed progeny are not exhausted by the original sale of their “parents” was well established in the United States, and is even codified in the European Biotechnology Directive.

The Court left us with a relatively clear answer regarding the scope of patent exhaustion related to seeds. The use of the purchased, licensed seeds for consumption and/or processing cannot be interfered with by the original seller, as the patent rights on those individual (sold) seeds have been exhausted. The planting and cultivation (i.e., replication) of those seeds, however, can only be done under a license from the patentee. In other words, even though someone sells you a bag of seed, you have no right to plant and grow that seed without a license (although there may be a good argument that the license should be implied in appropriate cases).

So, where does Bowman leave us when it comes to determining the infringement or enforceability of self-replication biotechnology patents outside of the agricultural context? For other patented self-replicating (or easily replicable) technologies, the circumstances may present more complicated questions.

Biotechnology inventions such as cell lines, bacteria, and other living material often must exist in a condition of continuous self-replication simply to be maintained for any use. Vectors, plasmids, etc., replicate within cells, and from generation to generation within host cells, allowing for production of vastly more nucleic acid copies than initially used for transfection. Even small linear nucleic acids such as those used for primers and probes may be “replicated” to generate large quantities relatively easily using PCR or other methods in molecular biology. In each case, (cells, viruses, vectors, probes), something analogous to planting, watering, cultivating, is required. In view of the Bowman decision, the question persists as to whether such replication will be permitted or considered an unlicensed “remanufacture” or new making of the original, patented item.

In this regard, we note that Justice Kagan left open the possibility that the replication might be “a necessary but incidental step in using the item for another purpose.”[1] Certainly, the replication contemplated in this part of the opinion is that which must necessarily occur in connection with some authorized practice of the invention. Maintenance of culture cells, for example, where the cells are necessarily replicating only for the purpose of maintaining the culture during its authorized use or in preparation for such use is one example that seems to fit comfortably within this aspect of the Court’s opinion.  In other words, a license for multigenerational use of a cell line may be implied in these circumstances, even if it is not given expressly.

Other technologies may not present quite so simple an analysis. DNA vectors can be used for a variety of purposes, not all of which require replication. For example, vectors can be used as probes or markers, they can be used to transport sequences of interest for further manipulation, or they can be used as immunizing agents. None of these uses require or specifically contemplate replication. Of course, some vectors are used in contexts where replication is likely or assumed (e.g., transfection of cells or bacteria, generation of transgenic tissues or organisms). The consideration of vectors under Bowman will, therefore, likely depend more heavily on context, including the sales and licensing practices of the patentee.

Some commentators have characterized the Bowman holding as “limited to the facts,” pointing to the Court’s comment that “[o]ur holding today is limited – addressing the situation before us, rather than every one involving a self-replicating technology.”[2] Attempts to limit Bowman to its specific facts should be taken carefully. Indeed, the Court cut through much of the surrounding facts to reach its core holding – that replication is a new making of the patented invention and an infringement in the absences of a license. Accordingly, it does appear that the holding may address the most important “situation” for all self-replicating technologies, even if it does not address all of the context-dependent permutations of the facts involving self-replication technologies.

Consequently, assertions of “self-replicating” material turning otherwise innocent parties into patent infringers are simply not credible. To paraphrase the Court in Bowman, the soybeans Bowman took home from the grain elevator didn’t plant themselves, didn’t spray themselves with glyphosate, and didn’t otherwise cultivate themselves to produce the unauthorized crop. Similarly, in biotechnology, it is likely that unauthorized and infringing activity will quite clearly fit the Monsanto “situation” and be easily recognizable as infringement. For example, maintaining an initial cell culture in the hands of the licensee-purchaser, although it also involves replication, should be easily distinguished from distribution of the culture (or vectors, or phage, etc.) to unauthorized third parties.

Nonetheless, given the potential for unnecessarily complex analysis and possible confusion of courts, patent holders should carefully consider how their license provisions may be used to clarify not only express grant and restriction provisions, but also how the license may shape an understanding of how the invention works and its intended use. The dividing line between authorized and infringing activity will be influenced by context, and parties are well advised to define that context by the licensing contract and not rely on the bare contours of the doctrine of patent exhaustion. The license is the place where the parties involved, the patent holder and the licensee, have a chance to agree on what is authorized and what is not. It is also the place where the patent holder has an opportunity to shape future interpretations of what the practice of the invention encompasses and what it does not. An effort to be as comprehensive as possible in the positive, express grant of the license may be as important as the restrictions that are expressly stated. If, as is quite possible, the restrictions fail to contemplate the full scope of intended unauthorized activities, a grant of authorization that is more specific may allow a court to more accurately determine what is “necessary but incidental” to the authorized practice of the invention and what is not.

The Bowman decision provides the biotech community some much needed clarity regarding self-replicating inventions. Perhaps equally important, the Court displayed a keen sensitivity to the negative implications of an overly broad exhaustion doctrine. While there will undoubtedly be further development of the law as it is applied to different technologies, the fundamental ability to control self-replicating inventions at each generation through the grant or withholding of a license places authority where it belongs – with the patentee. And, by reducing the need for complex work-arounds, the clarified authority and more calibrated level of control provided by theBowman decision should facilitate licensing negotiations to the benefit of both parties.

This article was written by guest bloggers Christopher Jeffers, Ph.D., Carl Massey, Jr., Thomas F. Poché, Ph.D.

[1]Although the Court referenced the copyright statute, 17 U.S.C. § 117(a)(1), in conjunction with this “necessary but incidental” fact pattern, the statute actually considers only computer programs and states there is no infringement if “a new copy or adaptation is created as an essential step in the utilization of the computer programin conjunction with a machine and that it is used in no other manner.” From this, better language in the Bowmanopinion might have been “necessary and essential” or even “necessary and incidental.” 

[2] Bowman Op. at 10.

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Bipartisan Toxic Substances Control Act (TSCA) Modernization Bill, Chemical Safety Improvement Act, Introduced in Senate

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In a major breakthrough, bipartisan and broadly supported legislation to modernize the Toxic Substances Control Act (TSCA) has been introduced in the Senate. The Chemical Safety Improvement Act (CSIA), S. 1009,[1] was announced on May 22, 2013[2] by its chief Democratic and Republican sponsors, Senator Frank Lautenberg (D-NJ) and Senator David Vitter (R-LA). This client alert provides the political context for this remarkable development, and then explains the key provisions of the bill. It concludes with comments on the prospects for passage.

Political Context

Just weeks ago, Senator Lautenberg, a longtime champion of TSCA reform, had reintroduced his own comprehensive chemical safety bill, the Safe Chemicals Act (SCA), as described in our previous report.[3] The SCA targets many of the same aspects of TSCA as the CSIA does, but applies different, often more complex approaches. The SCA has obtained support only from the Democratic caucus, with 26 Democratic and 2 Independent co-sponsors. This one-sided support left the SCA with few prospects for passage by the Republican-majority House of Representatives, even assuming that the Democratic majority in the Senate could pass it.

Now, with Senator Lautenberg’s retirement next year lending more urgency to his quest for a viable TSCA modernization bill, the long-sought goal of bipartisan support has been achieved. As of this writing, the CSIA has been co-sponsored not only by a number of Democratic senators who had co-sponsored the SCA,[4] but also by eight Republicans,[5] as well as three more conservative Democratic senators who had not signed on to the SCA.[6] Since the original introduction, three Democrats and one Republican have co-sponsored the bill,[7] for a total of 19 co-sponsors (10 Democrats and 9 Republicans).

Initial reactions to the CSIA have been generally been very favorable, by both industry groups[8] and some NGOs.[9] Other NGOs have already announced their opposition, however.[10]

EPA has not commented publicly on the bill, although two former EPA officials in the TSCA office, Steve Owens and Charlie Auer, issued statements of support.[11]

There is no guarantee of passage, but never before have the prospects for TSCA modernization been more favorable.

Key Provisions

1. Overview

The CSIA would mandate that EPA determine, on a prioritized basis, whether chemical substances meet a safety standard under the intended conditions of use. If they are found not to meet the safety standard, EPA would have to regulate them. The CSIA would establish a prioritization mechanism; set a safety standard; require EPA to determine whether chemical substances meet that safety standard under the intended conditions of use, by deadlines set by EPA; authorize EPA to require testing when additional information is needed in order to complete that determination; and direct EPA to select risk management measures by taking costs and benefits into account, but not by requiring use of the least burdensome alternative.

In addition to these core provisions, the bill would make limited changes to the new chemical provisions; require reporting by processors; lead to identification of chemical substances that are actively manufactured or processed; revise confidentiality protections, including protection for chemical identities; expand preemption of state and local restrictions of chemicals; and update export and import reporting requirements.

2. Prioritization

The prioritization mechanism would classify a chemical substance as being a high priority or a low priority for a safety assessment and safety determination. With few exceptions, only chemicals classified as active (see below) would be considered for prioritization. Only high-priority chemical substances would continue on to safety assessments and determinations.

For the most part, there would be no statutory deadlines for completing the prioritization process, but EPA would have to make every effort to complete the prioritization of all active substances in a timely manner. A state governor or agency could recommend chemical substances for prioritization; EPA would have to complete its prioritization of those substances within 180 days. If EPA were to need additional information before prioritizing a chemical substance, it could ask the public to submit existing data, but it could not require testing. Lists of high- and low-priority substances would be made public.

3. Safety Assessments and Safety Determinations

EPA would conduct a safety assessment and then a safety determination of each high-priority substance. The safety assessment would be based solely on considerations of risks to health and the environment. EPA would have to establish a methodology for conducting safety assessments and would have to rely on the best available science. The methodology would have to be reviewed every five years and updated as necessary.

Upon completing a safety assessment, EPA would make a safety determination, i.e., determine whether or not the chemical substance meets the safety standard under the intended conditions of use, taking into account factors such as the range of exposure, the weight of the evidence, and the magnitude of the risk.

EPA could require testing if necessary for it to complete either a safety assessment or a safety determination.

There would be no statutory deadlines, but EPA would have to set its own deadlines for completing each safety assessment and safety determination. Those deadlines could vary for different chemical substances. If EPA found that it could not meet a deadline, it would have to explain publicly the reasons for extending the deadline. This innovative approach would subject EPA to deadlines that are likely to be realistic (since it would set them itself), but would avoid the sue-and-settle litigation over failure to meet statutory deadlines that has proven problematic under some other environmental statutes.

Proposed safety assessments and safety determinations would be available for public comment. Final versions would also be made public. Safety determinations would be subject to judicial review.

4. Safety Standard

The safety standard used for safety determinations would be a standard that ensures that no unreasonable risk of harm to human health or the environment will result from exposure to the chemical substance. Compliance with the safety standard would be assessed in light of the intended conditions of use, meaning the circumstances under which a chemical substance is intended or reasonably anticipated to be manufactured, processed, distributed in commerce, used, or disposed of.

This “unreasonable risk” standard would differ from the “unreasonable risk” standard currently in TSCA. That one mandates a weighing of costs and benefits of regulation, the chemical substance, and its alternatives. The CSIA “unreasonable risk” standard would not be a weighing of competing economic and social factors, but rather a judgment after evaluation of various aspects of risk to health and the environment. Among the factors that EPA would consider would be the subpopulations that would be exposed, the degree of exposure, and the protections provided by the intended conditions of use (such as use of engineering controls, protective clothing, or warnings). For example, presumably EPA could find that a chemical substance meets the safety standard under the intended conditions of use for occupational exposure but not for exposure to children.

5. Risk Management

If EPA were to find that a chemical substance did not meet the safety standard under the intended conditions of use, it would have to adopt risk management measures through rulemaking. EPA could consider a wide variety of options, such as labeling, quantity or use restrictions, or even phase-outs or bans, if appropriate. Unlike under current TSCA, EPA would not be constrained to select the least burdensome option.

EPA would evaluate the different risk management options in terms of costs and benefits. It would have to consider whether technically and economically feasible alternatives exist; the risks of those alternatives as compared to the risks of the chemical substance under the intended conditions of use; the economic and social costs and benefits of the preferred regulatory option and other options considered; and the economic and social costs and benefits of the chemical substance and its alternatives.

6. New Chemicals and Significant New Uses of Existing Chemicals

Under the CSIA, the current approach for premanufacture notifications (PMNs), significant new use rules (SNURs), and significant new use notices (SNUNs) would continue. The bill would codify some of EPA’s current administrative practices for review of PMNs and SNUNs. The authority for the current PMN exemptions, such as those for R&D, polymers, and low volume, would remain unchanged.

In evaluating PMNs and SNUNs, EPA would determine whether or not the new chemicals and significant new uses were likely to meet the safety standard under the intended conditions of use. If so, EPA would allow the review period to end and the PMN submitter to submit a notice of commencement of commercial manufacture or import (NOC). If EPA were to determine that a new chemical substance or significant new use would not be likely to meet the safety standard, it would have to impose restrictions in a manner similar to section 5(e) consent orders under current TSCA.

If EPA were to determine that it needed more information in order to make a determination about likelihood of meeting the safety standard, it could require the submitter to develop the information through testing. However, rather than require test results to be submitted before manufacture or the significant new use could commence, EPA could allow the submitter to file an NOC, begin commercial manufacture or the significant new use, and thereby generate income to pay for the testing. If the test results later created concerns for EPA, it could prioritize the chemical substance as a high-priority substance.

7. Testing

Unlike the SCA, the CSIA would have no requirements for submission of minimum information sets in specified circumstances. Instead, under the CSIA, EPA could require testing where it found that it needed additional data in order to complete a safety assessment or a safety determination, or to make a determination of likelihood of meeting the safety standard for a new chemical substance or a significant new use. It could also require testing to meet agency needs under another federal law.

EPA would have to explain its need for testing, including an explanation of why existing information could not be extrapolated to meet the need. Testing requirements would have to be tiered. There would be provisions to encourage alternatives to animal testing.

It would generally be easier for EPA to require testing under the CSIA than under current TSCA. EPA would not have to establish that a chemical substance may pose an unreasonable risk or meets certain volume or exposure levels, and it would not have to proceed by rulemaking. Instead, it could issue an order or enter into a consent agreement to require testing.

8. Reporting and Recordkeeping

EPA currently has authority to require processors to report information, but it rarely exercises that authority. The CSIA would require EPA to adopt reporting requirements for processors, although the requirements could differ from those for manufacturers.

The CSIA would address some of issues of nomenclature used for naming chemical substances on the TSCA Inventory. For example, individual members of statutory mixtures listed on the Inventory would be declared to be on the Inventory. EPA would be directed to continue using its Class 2 and carbon chain length nomenclature.

EPA would have to identify those chemical substances on the Inventory that are active, i.e., have been manufactured or processed within the past five years. It would do so by establishing a candidate list of proposed active substances, then requiring manufacturers and processors to report either the candidate list substances or other substances on the Inventory that they have manufactured or processed in the past five years. For chemical substances on the confidential Inventory, manufacturers and processors would have to reaffirm (but not resubstantiate) that the identities continue to be confidential. If no one were to reaffirm that a chemical substance on the confidential Inventory was still confidential, EPA could make that identity public. EPA would publish the list of active substances (or generic names of confidential active substances). With few exceptions, EPA would prioritize only active substances.

9. Confidential Business Information (CBI)

CBI would be protected from disclosure if certain requirements were met. Like the SCA, the CSIA would identify categories of information likely to be eligible for CBI protection or likely not to be eligible for CBI protection. New CBI claims would have to be substantiated. In most cases, previous CBI claims would not need to be resubstantiated.

Chemical identities could be protected as CBI, even if present in health and safety studies. Additional substantiation would be required, and a structurally-descriptive generic name would have to be made public. Chemical identities could be disclosed under prescribed circumstances, such as in a medical emergency.

Instead of setting fixed time periods for CBI protection, as under the SCA, the CSIA would allow CBI to be protected for the time period requested by the submitter, except where the submitter either withdrew the CBI claim or EPA otherwise learned that the claim could no longer be substantiated. In most cases, before releasing CBI publicly, EPA would have to notify the submitter and afford an opportunity to seek a court order barring release.

10. Preemption

Whereas the SCA would have allowed for virtually no preemption of state or local requirements, the CSIA would expand the preemptive effect of EPA actions as compared with current TSCA.

EPA testing requirements would continue to preempt new or existing state or local testing requirements. With limited exceptions, EPA rules, orders, and consent agreements under sections 5 or 6 for a chemical substance would preempt new or existing state or local restrictions or bans on the manufacture, processing, distribution in commerce, or use of that substance, as would a completed safety determination for the substance.

New state or local restrictions on the manufacture, processing, distribution in commerce, or use of a chemical substance would be preempted by EPA’s classification of a chemical substance as a high-priority substance or a low-priority substance.

State and local provisions relating to disposal of chemical substances, such as environmental monitoring requirements, generally would not be preempted.

A state or locality could seek a waiver of preemption if it could meet prescribed criteria. Waiver applications would be subject to notice and opportunity for comment, and waivers could be appealed to the D.C. Circuit.

11. Exports and Imports

Export notifications would only be required for chemical substances that EPA found under section 5 not to be likely to meet the safety standard under the intended conditions of use, or that a safety determination had found not to meet the safety standard under the intended conditions of use, or for which the U.S. was required by treaty to provide export notification. The latter provision refers to treaties which the U.S. has not yet ratified, such as the PIC and POPs Conventions.

Import certifications would be similar to those today, but would also require notification that an imported chemical substance was a high-priority substance or a substance for which the U.S. was required by treaty to provide export notification.

Prospects for Passage

No hearings on the CSIA have been announced, nor has a schedule for consideration been established. These are early days; some senators may still be evaluating the bill (for example, the Chair of the Environment and Public Works Committee, Senator Barbara Boxer, has not yet indicated whether she will support the bill).

Still, this bipartisan bill has fundamentally changed the prospects for passage of TSCA legislation in this Congress, which had been dim. It has effectively stopped any consideration of the SCA as a viable bill, although the SCA will serve as a touchstone for Democrats in evaluating whether to support amendments to the CSIA.

The House of Representatives remains unlikely to initiate its own TSCA legislation. However, if the Senate were to pass the CSIA with a large majority, including many Republicans, the House leadership would be likely to bring a companion bill up for consideration.

Some NGOs (e.g., the Environmental Working Group) have already announced their opposition to the bill, although others are taking a pragmatic approach of considering the CSIA as the best bill that has a realistic chance of passage.

Some Democrats are likely to seek to amend the CSIA, such as by adding statutory deadlines. Some Republicans may also want changes. Given that less than six months of the 113th Congress have passed, there is time for the Senate to consider the bill thoroughly, pass it or an amended version, and still have the House agree to what the Senate had passed. Another scenario, less likely but still possible with this breakthrough, is that both Houses would consider and pass the legislation within a short time. That is what happened with the Consumer Product Safety Improvement Act of 2008 and the Food Quality Protection Act of 1996. One thing is certain: it is important to stay tuned, because TSCA has suddenly become a hot topic on Capitol Hill.

[1] Chemical Safety Improvement Act, available atwww.bdlaw.com/assets/attachments/Chemical%20Safety%20Improvement%20Act.PDF.

[2] Senate Environment and Public Works Committee, Press Release, “Senators Lautenberg And Vitter Reach Groundbreaking Agreement To Reform Nation’s Chemical Laws; Bipartisan Legislation Would Protect Americans From Risks Posed By Exposure To Chemicals” (May 22, 2013),http://www.epw.senate.gov/public/index.cfm?FuseAction=Minority.PressReleases&ContentRecord_id=ccf8cd45-e41f-28bd-0252-9984333f7335.

[3] Beveridge & Diamond, P.C., “‘Safe Chemicals Act,’ First TSCA Reform Bill of 113th Congress, Reintroduced” (Apr. 16, 2013), http://www.bdlaw.com/news-1462.html; see also Beveridge & Diamond, P.C., “TSCA Modernization Proposals in Congress: Recent History and Prospects” (Feb. 25, 2013), http://www.bdlaw.com/news-1447.html.

[4] Senator Lautenberg is listed as the sponsor. Democratic co-sponsors include Senators Kirsten Gillibrand (D-NY), Richard Durbin (D-IL), Charles Schumer (D-NY), Tom Udall (D-NM), Robert Menendez (D-NJ), Tom Harkin (D-IA), and Patty Murray (D-WA).

[5] Senator Vitter is listed as a co-sponsor. Other Republican co-sponsors include Senators Mike Crapo (R-ID), Lamar Alexander (R-TN), James Inhofe (R-OK), Susan Collins (R-ME), Marco Rubio (R-FL), John Boozman (R-AR), John Hoeven (R-ND), and Lisa Murkowski (R-AK).

[6] Senators Mary Landrieu (D-LA), Joe Manchin (D-WV), and Mark Begich (D-AK).

[7] Democratic Senators Begich, Harkin, and Murray, and Republican Senator Murkowski.

[8] E.g., American Chemistry Council, Press Release, “ACC Commends Senators Lautenberg and Vitter for Bipartisan Leadership to Reform TSCA” (May 22, 2013),http://www.americanchemistry.com/Media/PressReleasesTranscripts/ACC-news-releases/ACC-Commends-Senators-Lautenberg-and-Vitter-for-Bipartisan-Leadership-to-Reform-TSCA.html/;American Cleaning Institute, Press Release, “Introduction of the Chemical Safety Improvement Act” (May 22, 2013), http://www.reuters.com/article/2013/05/22/aci-safety-act-reax-idUSnPNDC19227+1e0+PRN20130522.

[9] Environmental Defense Fund, Press Release, “A bipartisan path forward to reform U.S. chemical safety law; Hard-fought compromise legislation would better protect American families” (May 22, 2013), http://www.edf.org/news/bipartisan-path-forward-reform-us-chemical-safety-law. For a variety of NGO viewpoints, see Safer Chemicals Healthy Families blog, “Reactions to the bi-partisan Chemical Safety Improvement Act” (May 23, 2013), http://www.microsofttranslator.com/BV.aspx?ref=IE8Activity&a=http%3A%2F%2Fblog.saferchemicals.org%2F2013%2F05%2Finitial-reactions-to-the-bipartisan-chemical-improvement-safety-act.html.

[10] E.g., Environmental Working Group press release, “EWG President Ken Cook Weighs In On Senate Chemical Policy Reform Bill” (May 23, 2013), http://www.ewg.org/release/ewg-president-ken-cook-weighs-senate-chemical-policy-reform-bill.

[11] Senate Environment and Public Works Committee, “Top EPA Toxics Officials Under Obama & Bush Admins Hail Lautenberg-Vitter Bill to Reform Nation’s Chemical Laws” (May 23, 2013),http://www.epw.senate.gov/public/index.cfm?FuseAction=Minority.PressReleases&ContentRecord_id=d2553c0f-beb5-e270-2971-ff2b84a06e88&Region_id=&Issue_id=.

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Watt’s New? Michigan Energy Newsletter – May 2013

Varnum LLP

New DTE Electric PPAs for Wind Energy

Two 20-year power purchase agreements (PPAs) between DTE Electric and Pheasant Run Wind, LLC and Pheasant Run Wind II, LLC received ex parte approval from the Michigan Public Service Commission (MPSC) on May 15, 2013. Each PPA is for 74.8 MW of wind energy for projects in Michigan’s Thumb region. Also approved was an option agreement wherein DTE Electric can purchase the Pheasant Run Wind II project. This option expires on March 31, 2014. These contracts resulted from unsolicited proposals from Next Era Resources on a timetable which would qualify for production tax credit benefits. The price in each PPA is “up to” $49.25 per MW hour (4.925¢ kWh). The average net capacity factor is estimated to be 43%. Geronimo Energy LLC attempted to intervene at the MPSC, arguing that its 100 MW Apple Blossom Wind Project in Huron County was a competing proposal that would pass through the same tax benefit. Its request that DTE Electric be made to undertake a competitive bidding process was rejected and its petition was denied.

Five Ethanol Plants in Michigan

Michigan has five corn ethanol refineries. In 2008 it appeared there would be six more, but ultimately the demand for ethanol in Michigan did not justify 11 facilities. The operating plants are in Riga Township, Albion, Caro, Marysville, and Lake Odessa. Generally they have 40-50 employees, each with a capacity between 50-60 million gallons per year. Total ethanol production in the state is approximately 240 million gallons per year.

Offshore Team Sails to Cleveland

Muskegon-based Andrie Inc. has been hired to assist in the development of an offshore wind energy project in Lake Erie. The company’s 90’ by 50’ jack-up barge recently traveled to Cleveland to assist in lake bottom sediment testing seven to nine miles offshore. A jack-up barge is a floating platform with long poles in each of the four corners that can be lowered into the water down to the lake bottom to secure the platform above the water surface. LEEDCo, a public-private partnership, is developing a 27 MW, five to nine turbine offshore project.

Energy Forum Update

Initial review and gap analysis of the information presented at the seven energy forums and on line is now being conducted. It is expected that the gap analysis will be complete by the end of May. The month of June will see an effort to fill in the gaps. By the end of June it is expected everything needed for reports will be in hand. Draft reports are targeted for the end of September, with public comment beginning as early as mid-October.

Nuclear Plant Off-Line Again

The Palisades Nuclear Power Plant in Covert has been shut down due to a water leakage issue in the Safety Injection Refueling Water Tank. The leak was estimated to be 34 gallons per day, with 79 gallons of slightly radioactive water having drained into Lake Michigan. A half-inch crack about the width of a thumbnail is believed to have been the source of the leak. Entergy Corporation, a New Orleans-based company, owns and operates the Palisades facility and has a 15-year power purchase agreement with Consumers Energy that will expire in 2021.

43 Degrees North @ Muskegon

The Michigan Energy and Technology Center has been formed by a consortium of companies to generate economic activity in the state. The founding members of the group include Consumers Energy, Energetx Composites LLC, Rockford Berge, Sand Products Co., and Verplank Dock Co. Initial affiliate members are Astraeus Wind Energy Inc. and Ventower Industries. The group will initially focus on two projects. The first is to enhance the infrastructure at the Port of Muskegon, the only deep water port on the Michigan side of Lake Michigan. In support of this project, Consumers Energy has made a commitment to allow access to its coal port at the Cobb generating plant, which will be idled within the next three years. The second project is a pilot program by Michigan State University to develop a virtual clean technology and logistics research center [MTEC @ MSU] to assist in developing clean energy technology, scaling up manufacturing, and transporting products.

Michigan Energy Fair Returns

The Great Lakes Renewable Energy Association will conduct the 13th annual Michigan Energy Fair in Ludington on June 7-8. The event will take place at the Mason County Fairgrounds. The program on Friday is intended for energy professionals, facility managers, and educators and will run from noon to 5 p.m. There is a $25 charge for the workshops. The Saturday events begin at 9 a.m., will be more oriented toward the general public, and are free. Energy Fair exhibits will provide information on solar, wind, energy efficiency, and other energy related topics.

Michigan Shorts

NextEra has ordered 59 1.7 MW wind turbines from General Electric for its Tuscola II project scheduled to be complete by the end of the year.  Tecogen has purchased the proprietary 5300 permanent magnet generation line as part of the liquidation of Danotek Motion Technologies of Canton.  The Great Lakes Renewable Energy Association has been awarded a $33,304 grant from the Michigan Energy Office to conduct a feasibility study of community solar in Michigan.  Ornicept, a startup with technology to study bird migration issues associated with wind turbines, has relocated to Ann Arbor.  Muskegon’s Wastewater Management System director has reported that six months of meteorological testing by Gamea Energy has confirmed average wind speeds are sufficient to support a viable wind energy project Ω The Michigan Public Service Commission has approved an opt out option for residential smart meters consisting of an initial fee of $67.20 and a $9.80 monthly fee.  NextEra has selected General Electric’s new 1.7-100 brillant wind turbine for its new Michigan wind farm project.  WindTronics LLC of Muskegon has ceased manufacturing its gearless wind turbine and ended operations.  Nexteers Sunsteer solar tracking system is manufactured in Michigan with 90 percent U.S. content and 50 percent Michigan content.

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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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Patent Exhaustion Rejected: Patented Seed Purchaser Has No Right to Make Copies

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The Supreme Court in Bowman v. Monsanto Co. ruled unanimously that a farmer’s replanting of harvested seeds constituted making new infringing articles.  While the case is important for agricultural industries, the Supreme Court cautioned that its decision is limited to the facts of the Bowman case and is not a pronouncement regarding all self-replicating products.

In a narrow ruling that reaffirms the scope of patent protection over seeds, and possibly over other self-replicating technologies, the Supreme Court of the United States held that a purchaser of patented seeds may not reproduce them through planting and harvesting without the patent holder’s permission.  Bowman v. Monsanto Co., Case No. 11-796 (Supreme Court May 13, 2013).

In this case, Monsanto had asserted two of its patents that cover genetically modified soybean seeds that are resistant to herbicide (Roundup Ready® seeds).  Monsanto broadly licenses its Roundup Ready® soybean seeds under agreements that specify that the farmer “may not save any of the harvested seeds for replanting, nor may he supply them to anyone else for that purpose.”  Vernon Hugh Bowman is a farmer who purchased soybean seeds from a grain elevator.  Bowman replanted Roundup Ready® seeds in multiple years without Monsanto’s permission.  The district court granted summary judgment of patent infringement against Bowman, and the U.S. Court of Appeals for the Federal Circuit affirmed.  Bowman appealed to the Supreme Court, which granted certiorari.

On appeal, Bowman heavily relied on the “patent exhaustion” doctrine, which provides that the authorized sale of a patented article gives the purchaser or any subsequent owner a right to use or resell that article.  Bowman argued that the authorized sale of the Roundup Ready® seeds exhausted Monsanto’s patent rights in the seeds, because “right to use” in the context of seeds includes planting the seeds and reproducing new seeds.

Patent Implications

Speaking through Justice Kagan, the Supreme Court unanimously affirmed the Federal Circuit’s decision that Bowman’s activities amounted to making new infringing articles.  The Supreme Court held that “the exhaustion doctrine does not enable Bowman to make additional patented soybeans without Monsanto’s permission.”  Specifically, the exhaustion doctrine restricts a patentee’s rights only as to the particular article sold, but “leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.”  The Supreme Court noted that if Bowman’s replanting activities were exempted under the exhaustion doctrine, Monsanto’s patent would provide scant benefit.  After Monsanto sold its first seed, other seed companies could produce the patented seed to compete with Monsanto, and farmers would need to buy seed only once.

In rebuffing Bowman’s argument that he was using the seed he purchased in the manner it was intended to be used, and that therefore exhaustion should apply, the Supreme Court explained that its ruling would not prevent farmers from making appropriate use of the seed they purchase—i.e., to grow a crop of soybeans consistent with the license to do so granted by Monsanto.  However, as the Supreme Court explained “[A]pplying our usual rule in this context . . . will allow farmers to benefit from Roundup Ready, even as it rewards Monsanto for its innovation.”

Tying the Supreme Court’s decision in this case narrowly to seed (as opposed to other self-replicating technologies), Justice Kagan noted that the decision is consistent with the Supreme Court’s 2001 decision in J.E.M. Ag. Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., in which the Supreme Court concluded that seeds (as well as plants) may simultaneously be subject to patent protection and to the narrower protection available under the Plant Variety Protection Act (PVPA).  PVPA protection permits farmers who legally purchase protected seed to save harvested seed for replanting.  However, reconciling the two forms of protection, Justice Kagan explained, “[I]f a sale [i.e., of a patented seed] cut off the right to control a patented seed’s progeny, then (contrary to J.E.M.) the patentee could not prevent the buyer from saving harvested seed.”

Other Self-Replicating Technologies

The Supreme Court’s decision in Monsanto is, of course, important for agricultural industries.  If extended to other self-replicating technologies, it may also prove important for biotechnology companies and others  that rely on self-replicating technologies, including, for example, companies that own patent rights over viral strains, cell lines, and self-replicating DNA or RNA molecules.  If subsequent cases extend the “no exhaustion” holding of Monsanto to these technologies, patent protection would extend to copies made from the “first generation” product that is obtained through an authorized sale.

However, the Supreme Court cautioned that its decision is limited to “the situation before us” and is not an overarching pronouncement regarding all self-replicating products.  The Supreme Court suggested that its “no exhaustion” ruling might not apply where an article’s self-replication “occur[s] outside the purchaser’s control” or is “a necessary but incidental step in using the item for another purpose,” citing computer software (and a provision of the Copyright Act) as a possible example.  As explained by Justice Kagan, “We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”  In this regard, the Supreme Court particularly noted that “Bowman was not a passive observer of his soybeans’ multiplication.”  Instead, Bowman “controlled the reproduction” of seeds by repeated planting and harvesting.  Thus, the Supreme Court suggests that a purchaser’s “control” over the reproduction process likely will be a key inquiry in considering the patent exhaustion doctrine as it relates to other self-replicating technologies.  Of course, it remains to be seen how broadly lower courts will interpret the Supreme Court’s ruling.

Antitrust Implications

By holding that Monsanto’s restriction on replanting was within the scope of its patent rights, the Supreme Court effectively immunized that restriction from antitrust scrutiny.  Other court decisions have called into question other license restrictions viewed as going beyond the scope of patent protection as being potentially susceptible to an antitrust or patent misuse challenge.

The Supreme Court highlighted its application of the exhaustion doctrine last addressed in Quanta, which held that “the initial authorized sale of a patented item terminates all patent rights in that article.”  This boundary line conventionally demarcated the end of a patent’s protection and the beginning of a potential antitrust minefield.  Some commentators may interpret the Monsanto decision to push that line further out.  Importantly, however, the Supreme Court deemed the seeds at issue to be a “new product.”  So construed, Monsanto’s restriction on replanting did not affect the product’s use, as in Quanta and Univis Lens, but rather came within the well-settled principle that “the exhaustion doctrine does not extend to the right to ‘make’ a new product.”

The Supreme Court not only was doctrinally conservative in its Monsanto decision, it was also careful to explain that its holding is a narrow one.  Monsanto never exhausted its patent rights in the “new” seeds; indeed, it never truly “sold” them.  Rather, Bowman created new seed from seeds that Monsanto had sold.  The decision therefore may not portend a more general inclination to construe the scope of patent protection more broadly.  In fact, the Supreme Court went so far as to clarify that it could reach a different outcome were it presented with a different technology.

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Shippers Rolling the Dice to Gain Oil Pipeline Capacity

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With the growing capacity constraints on oil pipelines, the Federal Energy Regulatory Commission (“Commission”) has recently extended the bounds of what it considers acceptable methods of apportioning limited capacity. In Seaway Crude Pipeline Company LLC, 143 FERC ¶ 61,036 (2013), the Commission approved a new lottery system that will select, at random, new shippers who will be permitted to tender the minimum monthly volume requirement. The catch, however, is that there are approximately 275 new shippers on the system, meaning a given shipper has roughly only a 5 percent chance of winning the lottery each month. And to achieve regular shipper status and thus gain access to the 90 percent of system capacity reserved for regular shippers, it must win that lottery twelve consecutive times.

After reversing flow on its Longhaul System and commencing north-to-south transportation service, Seaway saw the number of new shippers dramatic multiply from 5 (when to service commenced) to 275 by April, 2013. Seaway alleged that some of the proliferation was due to shippers attempting to game the system and broker capacity in the secondary market. Like other oil pipelines, Seaway dedicates 90 percent of the system capacity to regular shippers and 10 percent to new shippers, and to achieve regular shipper status, Seaway’s customers must tender the minimum volume (60,000 barrels per month) for 12 consecutive months. Before the lottery, Seaway allocated the 10 percent of capacity to new shippers on a pro rata basis, but with so many new shippers, none was able to meet the requirements to achieve regular shipper status because of the relatively high minimum tender requirement. As a result the number of new shippers multiplied with those shippers informally aggregating batches to meet Seaway’s minimum monthly tender requirement.

Seaway concluded that such a system was unworkable and proposed a lottery system to replace its existing pro rata system. The lottery system will use a software-generated random process to determine which new shippers will be allowed to tender the 60,000 barrel minimum each month, meaning about 13 new shippers will get capacity for a given month.

Despite several protests, the Commission approved Seaway’s lottery system for two main reasons. First, the Commission reasoned that the lottery system will deter manipulation during the nomination process and thus make capacity more readily available to legitimate new shippers; and second, the lottery would not be unduly discriminatory because the system would apply to all new shippers.

Although this is not the first time that the Commission has approved the use of a lottery system to award new shipper capacity when a pipeline faces apportionment problems, Seaway’s proposed lottery system, coupled with the requirement that new shippers must tender the minimum monthly volumes for 12 consecutive months, means that it will be highly improbable for new shippers to ever achieve regular shipper status, unless the number of new shippers dramatically decreases. Thus, the decision treads slightly new ground on what the Commission is willing to consider as a “reasonable” remedy to address the multiplication of new shippers and the vast over-nomination issues some crude pipelines are facing in the current environment.

Finally, the Seaway decision underscores the importance of open seasons as being the principle method of obtaining reliable transportation service on oil pipelines. For example, gaining access to the Longhaul System as a new shipper is difficult enough because a prospective new shipper will now have to win the lottery simply to tender the minimum amount requirement in one month. However, to gain access to the remaining 90 percent of system capacity, that prospective customer must win the new shipper lottery 12 consecutive times. By contrast, Seaway held two opens seasons for capacity on its Longhaul System and committed shippers were able to access the 90 percent of the system capacity reserved for regular shippers. Thus, shippers seeking access to reliable capacity might consider a commitment during an open season rather than gambling on a future—and perhaps unforeseen—lottery.

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Is Environmental Protection Agency (EPA) Setting Its Sights on Hydraulic Fracturing Compounds?

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Agency implements rule requiring companies to disclose information regarding the use of certain industrial chemical substances commonly used in natural gas and oil well drilling.

On May 9, the U.S. Environmental Protection Agency (EPA) issued a Direct Final Rule[1] identifying 15 chemical substances[2] that will require notice prior to manufacturing, importing, or processing for an activity designated as a significant new use. These chemicals were flagged pursuant to the Toxic Substances Control Act (TSCA) significant new use rules (SNURs). The notices, referred to as Significant New Use Notices (SNUNs), must be submitted to EPA 90 days before a listed chemical is manufactured, imported, or processed for an activity designated as a significant new use. EPA states that this will provide the agency with an opportunity to evaluate the intended use and determine whether it is necessary under TSCA to prohibit or limit the activity before it occurs.

While chemicals in the rule include those that can be employed in a broad range of uses, of particular interest is the listing of one compound[3] used in natural gas and oil well drilling and hydraulic fracturing to eliminate bacteria in the water that produce corrosive by-products. EPA included this compound due to its potential toxicity to aquatic life at concentrations above 11 parts per billion (ppb). Pursuant to the Direct Final Rule, 40 C.F.R. Part 721, Subpart E [Significant New Uses for Specific Chemical Substances] is expected to be amended to include section 721.10666, which would require reporting and associated recordkeeping obligations for the following significant new uses of this compound:

  • Industrial, commercial, and consumer activities other than as described in the original premanufacture notice (PMN) for this substance (PMN P-12-437)
  • Release to water resulting in surface water concentrations exceeding 11 ppb

EPA also recommended additional testing to help characterize the fate and environmental effects of the substance.

This is in line with EPA’s declared intent to use TSCA to require companies to disclose information regarding chemical substances and mixtures used in hydraulic fracturing. However, it has been nearly two years since the agency, partly in response to a petition filed by Earthjustice, stated that it would propose rules to require certain reporting requirements for chemicals used in hydraulic fracturing.

Under TSCA, SNUNs must contain the following:

  • Common or trade name of the chemical substance
  • The chemical identity and molecular structure of the chemical substance
  • The categories or proposed categories of use
  • The total amount of each chemical substance manufactured or processed per category or use
  • A description of by-products resulting from the manufacture, processing, use, or disposal of each such chemical substance or mixture
  • All existing data concerning the environmental and health effects of the substance
  • Estimates of the number of people exposed in their places of employment and the duration of such exposure
  • Changes in disposal methods
  • Any test data in the possession or control of the person giving the notice that is prescribed by EPA

Accordingly, while this rule does not implement a broad reporting requirement for hydraulic fracturing chemicals, it points to the likelihood of increased reporting for these substances. What is unclear, for the moment, is whether this new rule is a stopgap measure or a preview to a comprehensive proposal for TSCA reporting requirements for hydraulic fracturing chemicals.

The rule is effective on July 8, 2013, unless written “adverse or critical” comments on any of the SNURs, including potential alternatives and likely financial burdens, are received on or before June 10, 2013. Those chemical substance(s) and new use that receive comments or notice of intent to comment will be withdrawn before the effective date and a proposed SNUR for the specific chemical substance will be issued with a 30-day comment period. For purposes of judicial review, the rule is promulgated on May 23, 2013.

The rule highlights the need for firms using TSCA-listed chemicals for new and innovative technologies to bear in mind the PMN and SNUR implications for their applications. Additionally, the hydraulic fracturing industry should carefully watch for potential regulation of additional substances used in fracturing fluids.

[1]. View the Direct Final Rule here.

[2]. The chemical substances and associated PMNs subject to this Direct Final Rule are as follows:

  • Methylenebis[isocyanatobenzene], polymer with alkanedoic acid, alkylene glycols, alkoxylated alkanepolyol, and substituted trialkoxysilane (generic). PMN No. P-11-60.
  • Acetaldehyde, substituted-, reaction products with 2- butyne-1, 4-diol (generic). PMN No. P-11-204.
  • Functionalized multi-walled carbon nanotubes (generic). PMN No. P-12-44.
  • Alkenedioic acid dialkyl ester, reaction products with alkenoic acid alkyl esters and diamine (generic). PMN Nos. P-12-408, P-12-409, P-12-410, P-12-411, P-12-412, and P-12-413.
  • 2-Propenoic acid, (2- ethyl-2-methyl-1,3-dioxolan-4-yl)methyl ester. PMN No. P-12-414.
  • Quaternary ammonium compounds, bis(fattyalkyl) dimethyl, salts with tannins (generic). PMN No. P-12-437.
  • Slimes and sludges, aluminum and iron casting, wastewater treatment, and solid waste. PMN No. P-12-560.
  • Trisodium diethylene triaminepolycarboxylate (generic). PMN No. P-13-18
  • Tertiary amine alkyl ether (generic). PMN No. P-13-78.
  • Bromine, manufacture of, by-products from, distillation residues. PMN No. P-13-108.

A generic name was provided if the specific chemical substance named was claimed as confidential business information.

[3]. The “quaternary ammonium compounds, bis(fattyalkyl)dimethyl, salts with tannins (generic).”

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The Legal Challenge to the SEC’s Conflict Minerals Reporting Regulations

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In the 2010 Dodd-Frank Act, the United States Congress required, inter alia, the SEC to promulgate regulations requiring certain manufacturers to trace the sources of tin, tantalum, tungsten and gold that are contained in products they manufacture or contract to manufacture to allow them to report yearly to the SEC whether the products are “not DRC [Democratic Republic of the Congo] conflict free.” Conflict free was defined by Congress as meaning the products do not contain minerals that finance or benefit violent armed groups in the DRC or adjoining countries. Congress required the SEC action because “it [was] the sense of Congress” that the exploitation of conflict minerals from that region was financing armed groups that engaged in “extreme levels of violence” creating “an emergency humanitarian situation.”

Various industry groups lobbied heavily against the passage of the Dodd-Frank Act and later submitted comments during the SEC’s rulemaking challenging the proposed regulations’ due diligence and reporting obligations as unduly burdensome and costly. After considering the comments, the SEC, where it would not run afoul of the Congressional mandate, did reduce some of the burdens that would be imposed on industry. However, the SEC acknowledged that compliance with Congress’s intent precluded reduction of other burdensome aspects of the regulations. The SEC promulgated the regulations in August 2012.

In October, 2012, the National Association of Manufacturers, along with the U.S. Chamber of Commerce, commenced a legal challenge to the conflict minerals regulations. Since then, voluminous briefs have been filed by NAM and the SEC along with briefs by numerous interested groups. These briefs outline the parameters of the dispute and suggest that NAM faces an uphill battle.

The crux of the industry’s challenge is that the SEC failed to properly quantify the benefits and costs associated with the regulations and thereby acted arbitrarily and capriciously in promulgating them. NAM claims the reporting requirements will not aid the DRC and could cripple the region economically. It also claims that the SEC failed to agree to certain revisions that would have lessened the burdens and costs on business, like carving out a de minimus exemption for manufacturers whose products used only trace amounts of conflict minerals and predicating a burdensome due diligence requirement on whether a manufacturer had “reason to believe” that their products contained conflict minerals that may have originated in the DRC as opposed to whether the products “did originate” there. NAM asks the court to strike the entire regulation and send the SEC back to square one.

The SEC responds that it was not its responsibility to quantify the benefits of the regulations, noting that Congress had made that calculation and had determined that the benefits justified the reporting requirement Congress mandated. In fact, the SEC admitted it could not quantify the benefits because it lacked data to do so. Rather it performed a qualitative analysis. It also defends its rejection of NAM’s proposed revisions that would have reduced the costs of compliance. The SEC noted, and various members of Congress agreed, that Congress had considered and rejected the de minimus exemption because it would defeat the purpose of the rule. Congress concluded that thousands or millions of trace amounts can add up to a significant amount, the trade in which would undercut the rule’s purpose of stopping the flow of money to armed insurgents in the region. The second NAM proposal was rejected because in the SEC’s view, it would encourage willful blindness by industry. That is, if a business encountered a red flag suggesting the sources of its minerals were not conflict-free, it would investigate no further, so as to avoid a determination that they did originate there.

An interesting issue concerns the regulation’s imposition of the reporting requirements not just on manufacturers but also to those who contract for the manufacture of goods. NAM believes that this extension of the reporting requirements is contrary to the express language of Dodd-Frank. It supports its position through application of rules of construction routinely used in interpreting statutes and its argument is logical. However, former and current members of Congress came to the SEC’s aid on this issue claiming in their brief that they intended to include those who contract for the manufacturer of goods, again to prevent exemptions that would significantly undercut what the regulations sought to achieve.

Oral arguments are scheduled for May 15, 2013. It will be very interesting to see how receptive the panel from the DC Circuit is to NAM’s arguments. Asking the court to scuttle the entire regulation, the parameters of which Congress as a matter of policy framed, makes NAM’s challenge all the more difficult.

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Replication without Human Intervention: Lessons from Monsanto v. Bowman

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Until now, the practicing of an invention needed some direct form of human action; someone was needed to “do something” to bring the invention into existence, as well as replicate it by making more (in the case of a physical object) or performing it again (in the case of a method). However, this may no longer be necessary in all instances. At least in the case of some biological technologies, once an invention has been created by a human, further human intervention may no longer be needed for replicating the invention. In these instances, does a patent owner lose the right to exclude future uses, sales, offers for sale or importations of such an invention?

In Monsanto v. Bowman, the Supreme Court is poised to bring some clarity to this question. Monsanto Company designs and manufactures herbicide-resistant soybean seeds and related technology. Monsanto sold patented seeds to farmers for growing and resale as commodity items to be used in such things as public-school lunches and animal feed. Such sales were made under license agreements that allowed the beans to be sold without any ongoing restrictions on the use of those beans.

Vernon Bowman is a soybean farmer. Bowman purchased these beans and replanted them as second-generation seeds, which were the products of seeds purchased from a licensed Monsanto technology distributor.

Monsanto sued Bowman for patent infringement, arguing that the beans were products of Monsanto’s patented herbicide-resistant seeds and that, by planting them instead of purchasing new seeds, Bowman violated the Monsanto Technology Agreement for the seeds. The U.S. District Court found that Bowman’s activities infringed upon Monsanto’s patent and awarded damages to Monsanto for violation of its patented technology. The Federal Circuit agreed and upheld the decision, holding that Monsanto’s patent covered both the original seeds and a product of the original seeds, such as those second-generation beans grown by Bowman.

Bowman appealed, arguing that, under the doctrine of patent exhaustion, Monsanto’s patent rights were exhausted upon its initial sale of the seeds that Bowman later purchased from the licensed distributor, and that use of progeny seeds is an expected use of the product. In response, Monsanto argued that in the case of self-replicating technologies, such as seeds that grow and produce more seeds, the patent extends to the underlying technology (i.e., herbicide resistance) and not only to the seed itself.

The important question raised in this case is whether an exception to the doctrine of patent exhaustion for self-replicating technologies is needed and/or warranted. While this question is clearly important to the biotechnology and agricultural industries, it also has the potential to significantly affect the software and robotics industries. For example, as robotics and artificial intelligence become increasingly sophisticated in their abilities to adapt and “grow,” it does not seem too outlandish to think that, one day, these may also become self-replicating technologies.

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Vapor Intrusion Regulation and Environmental Remediation

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EPA recently issued two draft guidance documents on vapor intrusion and will accept comments on them through May 24, 2013. If finalized in current form, these guidance documents would formalize and enhance EPA’s existing practice of prioritizing vapor intrusion as a central issue in environmental remediation and could result in increases in the expense and effort required from responsible parties to achieve compliance for cleanup of contaminated sites conducted under federal authorities such as CERCLA or RCRA. They could also be highly influential in clean-ups overseen by state regulators.

Lastly, while intended for use in the regulatory context, recommendations in these guidance documents may be used to establish a standard of care in litigation involving vapor intrusion (e.g., RCRA citizen suits or common law toxic tort litigation).

Vapor intrusion is the migration of hazardous vapor from contaminated soil or groundwater into an overlying building.  It is considered potentially harmful to human health, creates risks in real estate transactions and financing due to potentially diminished property values and environmental liability, increases exposure in toxic tort litigation, and, in the federal regulatory context, is considered a pathway of possible exposure that must be evaluated as part of the evaluation and selection of a site remediation plan.

The first of these two guidance documents was prepared by EPA’s Office of Solid Waste and Emergency Response (OSWER) and is a comprehensive set of technical and policy recommendations regarding indoor air contamination arising from subsurface-source vapor intrusion attributable to all classes of volatile, or vapor-forming, chemicals (VI Guidance).[1]  The VI Guidance modifies and expands draft guidance on vapor intrusion issued by the agency in 2002 (2002 Draft VI Guidance), which provided general direction for evaluating the potential for vapor intrusion pathways at cleanup sites but omitted any measures for delineation and mitigation of potential risks.[2]  In a 2009 report, EPA’s Office of the Inspector General (OIG) recommended that EPA update the 2002 Draft VI Guidance to reflect the numerous technical and policy advancements made since that time in both the public and private sectors.

The second guidance document was prepared by EPA’s Office of Underground Storage Tanks (OUST) and is focused on investigations and assessments at petroleum contaminated sites where vapor intrusion by petroleum hydrocarbons may occur (Petroleum VI Guidance).[3]

VI Guidance

The VI Guidance presents a step-by-step vapor intrusion assessment plan, beginning with gathering and evaluating data for an initial conceptual site model, through collecting and evaluating additional data from various sources, and culminating in a risk assessment.  According to EPA, the VI Guidance addresses the recommendations made in the OIG’s 2009 report and takes into consideration more recent guidance developed by states and other technical working groups.  Some of the elements in this document may well trigger an increase in expense in addressing VI risks and lengthen the site evaluation process.

·        Superfund Five-Year Reviews: At Superfund sites that require five-year reviews,[4]EPA will gather data on vapor intrusion pathways and assess the sufficiency of the selected remedy for follow up in the five-year review report.  Therefore, according to the VI Guidance and related Directive 9200.2-84,[5] the five-year review process could result in the re-opening of established Superfund remedies to address vapor intrusion, “even if vapor intrusion was not addressed as part of the original remedial action.”[6]

·        Preemptive Mitigation/Early Action: EPA recommends consideration of engineered methods to reduce vapor in buildings (e.g., by installing a radon-type detection system or vapor barriers), even in the absence of all pertinent lines of evidence necessary to characterize the vapor intrusion pathway.  Any such measure would be an early effort to cut off exposure before completing investigations, but would not address the subsurface vapor source.  The agency’s rationale is that installation of engineered exposure controls in buildings is typically more cost-effective and less disruptive than conventional vapor intrusion investigations and subsurface characterization.  Once preemptive mitigation measures are installed, however, that may conclude only an initial step rather than complete remediation.  In the context of brownfields programs, treating preemptive mitigation now as only an interim solution may affect long term redevelopment plans.

·        Aggregate Noncancer Health Risk: Even when the exposure level for each contaminant at a site is below screening levels and it is assumed that each “acts independently (i.e., there are no synergistic or antagonistic toxicity interactions among the chemicals)”, the VI Guidance nevertheless proposes that a risk manager aggregate the individual noncancer health risks associated with each contaminant exposure to determine whether a response is warranted.  The aggregated risk is reflected in a “noncancer hazard quotient” that would ultimately drive the response.  This approach could be overly precautionary if the aggregated sum overstates the actual risks presented by the individual constituents.  Furthermore, the VI Guidance recommends use of multiple lines of evidence in calculating and evaluating these risks, a process that may prolong response decisions and negatively affect situations where quick resolution of VI issues is paramount (e.g., brownfield redevelopment projects).  On the other hand, evaluation of multiple lines of evidence may be more advantageous to the extent it provides for a more informed view of likely risk.

·        Background Levels: Time-integrated sampling of volatile chemicals (as opposed to short-duration, or “grab” sampling) at multiple locations in and around a site is, in EPA’s view, necessary to distinguish among potential sources of these chemicals (i.e., ambient sources, indoor sources, or vapor intrusion).  In the past, generic values of historic background concentrations have been used to characterize ambient or indoor source concentrations.  However, EPA now recommends against the use of these generic values, even those from peer-reviewed sources, and instead asserts that only site-specific data (e.g., sub-slab, indoor air, and ambient air sampling data) should be used.  This recommendation will likely lead to improved accuracy and better understanding of site conditions, while at the same time increasing the time and cost related to characterization efforts.

Petroleum VI Guidance

The 2009 OIG report expressed concern that EPA’s 2002 Draft VI Guidance did not address petroleum vapor intrusion at UST sites.  The proposed Petroleum VI Guidance seeks to address that concern for UST sites and RCRA-driven activities undertaken by private UST owners and operators.  In addition to the traditional chemicals found in petroleum products (such as benzene), the Petroleum VI Guidance would require consideration of vapor risks associated with gasoline additives (such as MTBE) and chemicals that develop from biodegradation of petroleum in soil and groundwater (such as methane).

As proposed, at least two parts of the Petroleum VI Guidance may, in comparison with past experience, result in increased response costs and delays for responsible parties.[7]  First, the Petroleum VI Guidance rejects the notion that a single sampling event is a sufficient basis to conclude that further vapor intrusion investigation is unnecessary because “periodic monitoring and sampling over more than one annual cycle is generally needed” to address fluctuations in groundwater levels and contaminant plumes over time.  Second, the Petroleum VI Guidance includes a number of recommendations that suggest EPA seeks to reduce reliance on models.  Specifically, when modeling requires the use of literature values due to the unavailability of site-specific data, EPA “recommends that an uncertainty analysis be conducted to provide error bounds on predictions of the computer model,” and that the results of any modeling exercise be verified with field data.

Considerations for Both Guidance Documents

In conclusion, both of these proposed guidance documents signal an increased focus on vapor intrusion within EPA.  As they are amended and finalized, there is a limited opportunity to comment on them to try to encourage a final guidance that is workable and effective for remediation of sites with vapor intrusion issues.  There may be ways to improve the guidance by clarifying where there is site-specific flexibility and where the guidance is overly prescriptive.

Notably, these guidance documents may help define the standard of care in the context of RCRA citizen suits or common law toxic tort litigation.  Clarifying key assumptions in the guidance may buffer some of that impact.

Even though these guidance documents are in draft form and will likely be subject to considerable comment, EPA regions and states can be expected to consult and employ them during what may be a long interval before they are finalized.  To the extent EPA or a state regulatory agency does so and an affected party disagrees with aspects of the guidance at issue, parties should be aware that the draft guidances are non-binding on their face.  The documents state that they do “not impose any requirements or obligations on the [EPA], the states, or the regulated community.”  Accordingly, parties should be free to suggest alternative, technically sound approaches to regulators.  Moreover, because these documents are solely drafts and have not been tested by external expertise that will be provided in public comment, reliance on them in their current state is arguably premature.

Given the potential long term impact on cleanup requirements, interested parties should evaluate the guidance and strongly consider submitting comments to EPA by May 24, 2013.  In light of the complex technical issues involved, interested parties may also wish to request that EPA extend the comment period.

[1] EPA OSWER, “Final Guidance for Assessing and Mitigating the Vapor Intrusion Pathway from Subsurface Sources to Indoor Air” (Apr. 11, 2013)

[2] EPA OSWER, “Draft Guidance for Evaluating the Vapor Intrusion to Indoor Air Pathway from Groundwater and Soils” (Nov. 29, 2002).  This draft document was never finalized.

[3] EPA OUST, “Guidance for Addressing Petroleum Vapor Intrusion at Leaking Underground Storage Tank Sites” (Apr. 9, 2013).

[4] Section 121 of CERCLA (42 U.S.C. § 9621) requires that remedial actions that result in any hazardous substances, pollutants, or contaminants remaining at the site be re-evaluated every five years to ensure that the remedy is and will continue to be protective of human health and the environment.

[5] “Assessing Protectiveness at Sites for Vapor Intrusion: Supplement to the ‘Comprehensive Five-Year Review Guidance’” (Nov. 14, 2012).

[6] In a related context, EPA officials have already acknowledged that later discovery of vapor intrusion at Superfund sites may trigger parties to litigate over whether site remedies provided for in consent decrees should be revisited under the reopener provisions in those decrees.  SeeInsideEPA, “EPA Official Says Vapor Intrusion May Drive Suits To Reopen Cleanup Pacts” (May 3, 2013), available at http://insideepa.com/201305032433234/EPA-Daily-News/Daily-News/epa-official-says-vapor-intrusion-may-drive-suits-to-reopen-cleanup-pacts/menu-id-95.html?s=mu. 

[7] These issues may also be relevant in scenarios involving vapor intrusion from sources other than those covered by the Petroleum VI Guidance.  However, because these points were emphasized in that guidance document, we highlight them here.

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