Category: Health Care Law

Myriad Federal Circuit Decision Affirms Patentability of Claims to “Isolated” DNA but Methods Involving Only “Comparing” or “Analyzing” DNA Sequences Unpatentable and No Declaratory Judgment for Those Who Simply Disagree With Patent

Posted on Thursday, August 4, 2011 in the National Law Review an article by Thomas J. Kowalski and Deborah L. Lu of Vedder Price P.C.  about  long-awaited decision in the Association for Molecular Pathology v. Myriad Genetics, Inc. (“Myriad”).

On July 29, 2011, the Federal Circuit issued its long-awaited decision in the Association for Molecular Pathology v. Myriad Genetics, Inc. (“Myriad”).  The plaintiffs in Myriad are an assortment of medical organizations, researchers, genetic counselors, and patients who challenged Myriad’s patents under the Declaratory Judgment Act. The Federal Circuit Decision held that those parties who simply disagree with the existence of a patent or who suffer an attenuated, non proximate effect from the existence of a patent, do not meet the requirement for a legal controversy of sufficient immediacy and reality to warrant the issuance of a declaratory judgment and, thus, do not have standing to be a plaintiff. The Court could not see how “the inability to afford a patented invention could establish an invasion of a legally protected interest for purposes of standing.” However, with at least one plaintiff having standing, the Federal Circuit turned to the merits; namely, whether claims to “isolated” DNA and methods using that “isolated” DNA are eligible to be patented under Section 101 of the Patent Statute (35 U.S.C. § 101).

The Federal Circuit held that method claims directed to only “comparing” or “analyzing” DNA sequences are patent ineligible under Section 101 because they have no transformative steps and cover only patent-ineligible abstract, mental steps. However, the claim that recites a method that comprises the steps of (1) “growing” host cells transformed with an altered gene in the presence or absence of a potential therapeutic, (2) “determining” the growth rate of the host cells with or without the potential therapeutic and (3) “comparing” the growth rate of the host cells includes more than the abstract mental step of looking at two numbers and “comparing” two host cells’ growth rates and is eligible for patent protection. The steps of “growing” transformed cells in the presence or absence of a potential therapeutic, and “determining” the cells’ growth rates, are transformative and necessarily involve physical manipulation of the cells.

The Federal Circuit also held that isolated cDNA—DNA that has had introns removed, contains only coding nucleotides, and can be used to express a protein in a cell that does not normally produce it—while inspired by nature, does not occur in nature, and is likewise eligible to be patented under Section 101.

Most significantly, the Myriad Majority and Concurring Opinions concluded that isolated DNA molecules are patent-eligible under 35 U.S.C. § 101, and the Court reversed the previous holding by Judge Sweet of the Southern District of New York. Both the Myriad Majority and Concurring Opinions rely on U.S. Supreme Court precedent, and the Myriad Concurring Opinion states that claims to isolated DNA had previously been held to be valid and infringed by the Federal Circuit.

The distinction between a product of nature and a human made invention for purposes of Section 101 turns on a change in the claimed composition’s identity compared with what exists in nature. According to the Federal Circuit in Myriad, the US Supreme Court has drawn a line between compositions that, even if combined or altered in a manner not found in nature, have similar characteristics as in nature and compositions that human intervention has given “markedly different,” or “distinctive,” characteristics.

In reaching the conclusion that isolated DNA molecules are eligible to be patented under Section 101, the Myriad Majority Opinion focused on the fact that isolated DNA was cleaved or synthesized to consist of a fraction of a naturally occurring DNA molecule and therefore does not exist in nature. The Court stressed that isolated DNA is not the same as purified DNA. Isolated DNA is not only removed from nature, but it is chemically manipulated from what is in nature—in the human body in this case. Accordingly, isolated DNA is a distinct chemical entity from that which is in nature. The Myriad Concurring Opinion views isolated DNA as truncations that are not naturally produced without the intervention of man and can serve as primers or probes in diagnostics; a utility that cannot be served by naturally occurring DNA.

The Myriad Majority and Concurring Opinions reject the Solicitor General’s “child-like simpl[e]” suggestion that for determining patent-eligible subject matter the Court use a “magic microscope” test, under which, if one can observe the claimed substance in nature, for example, by zooming in the optical field of view to see just a sequence of fifteen nucleotides within the chromosome, then the claimed subject matter falls into the “laws of nature” exception and is unpatentable subject matter—including because an isolated DNA molecule has different chemical bonds as compared to the “unisolated” sequence in the chromosome (because the ends are different). Simply, according to the Myriad Majority and Concurring Opinions, isolated DNA is a different molecule from DNA in the chromosome.

The Myriad Majority and Concurring Opinions also give great deference to the grant by the United States Patent & Trademark Office (“USPTO”) of numerous patents to isolated DNA over approximately the past thirty years, as well as that in 2001 the USPTO issued Utility Examination Guidelines, which reaffirmed the agency’s position that isolated DNA molecules are patent-eligible, and that Congress has not indicated that the USPTO’s position is inconsistent with Section 101. The Federal Circuit thus held that if the law is to be changed, and DNA inventions are to be excluded from the broad scope of Section 101, contrary to the settled expectation of the inventing community, the decision must come not from the courts, but from Congress.

In contrast, the Myriad Dissenting Opinion sought to hold isolated DNA as unpatentable and compared isolated DNA with a leaf snapped from a tree. TheMyriad Majority Opinion addresses the Dissent’s analogy by making clear that a leaf snapped from a tree is a physical separation that does not create a new chemical entity, whereas isolated DNA is a new chemical entity as compared with DNA in nature.

Myriad provides the biotechnology community with an immediate sigh of relief. However, it is expected that parties to Myriad will likely ask the Federal Circuit to review its divided Decision en banc and that whatever the result from that request, appeal to the US Supreme Court will also be inevitable. We expect there is more to come and that the July 29, 2011 Myriad Federal Circuit Decision may be only one step toward an ultimate Court decision finally concluding that isolated DNA is indeed patent-eligible subject matter.

© 2011 Vedder Price P.C.

 

Healthcare Alert: U.S. Announces Process for $3.8B in CO-OP Funds

Recently posted in the National Law Review an article by Mark E. Rust of Barnes & Thornburg LLP about the announcement that Medicare and Medicaid Services (CMS) will begin accepting applications for Consumer Oriented and Operated Plan (CO-OP) Start-Up Loans and Solvency Loans on Oct. 17, 2011 :

According to a recently released Federal Opportunity Announcement (FOA), TheCenter for Medicare and Medicaid Services (CMS) will begin accepting applications for Consumer Oriented and Operated Plan (CO-OP) Start-Up Loans and Solvency Loans on Oct. 17, 2011. Section 1322 of the Patient Protection and Affordable Care Act (PPACA) establishes the CO-OP program to foster the creation of nonprofit health insurance issuers. The CO-OP program will dispense $3.8 billion in Start-Up Loans and Solvency Loans to providers and buyers who sponsor new insurers regionally.

The FOA is subject to change pending the CO-OP final rule. Comments on the proposed CO-OP rule are due on Sept. 16, 2011.

The CO-OP program is designed to foster the creation of new consumer-governed, private, nonprofit health insurance issuers, known as CO-OPs. CO-OPs will offer plans under the Affordable Insurance Exchanges (Exchanges) by Jan. 1, 2014. Generally, CMS will provide Start-Up Loans for all costs associated with developing the CO-OP, and Solvency Loans for all state registered reserves (Loans) to CO-OP applicants in each state. The loans are awarded for the purpose of CO OP development and meeting state solvency requirements. The FOA provides general detail regarding the basis upon which loans are awarded.

FOA Application Timeline

Under the FOA, CO-OP applicants must immediately submit a Letter of Intent indicating intent to apply for joint Start-Up Loans and/or Solvency Loans. The CMS underscores the time urgency of application because the agency expects to provide notice of loan awards by Jan. 12, 2012 so that CO OP applicants can be prepared to accept contracts in late 2013. Because of this deadline, the first round of applications are due by Oct. 17, 2011.

Successful CO-OP applications receive a Notice of Award and a Loan Agreement. CO-OP applicants may request reconsideration of loan application to CMS within 30 days of receiving determination notice. CMS notes that redetermination results in a final decision that is not subject to further administrative review or appeal.

FOA CO-OP Loan Application Criteria

Generally, CMS will look for efficiencies and evaluate whether the business plan and budget is sufficient, reasonable, and cost effective to support activities proposed in the CO-OP application. CMS will review applications on a base total of 100 points weighted from five general criteria including: (1) statutory preferences (16 points); (2) project narrative (4 points); (3) business plan (62 points); (4) government and licensure (10 points); and (5) feasibility study (8 points). The feasibility study must be supported by an actuarial analysis.

FOA Loan Details

Both Loans are non-recourse and provided at a low interest rates. Start-Up Loans will be prepaid five years from startup and charged an interest rate equal to the average interest rate on marketable Treasury securities of similar maturity minus one (1%) percentage point (provided that interest shall not be less than 0 percent) on the amount of the drawdown. Solvency Loans will be repaid in 15 years and charged an interest rate equal to the average interest rate on marketable Treasury securities of similar maturity minus two (2%) percentage points (provided that the interest shall not be less than 0 percent) on the amount of the drawdown.

© 2011 BARNES & THORNBURG LLP

 

 

 

 

 

 

 

ALJ Upholds OIG’s Eight-Year Exclusion of Company Owner

Posted recently in the National Law Review an article by Meghan C. O’Connor of von Briesen & Roper, S.C. regarding OIG’s use of its exclusionary authority against individuals:

 

In yet another example of the OIG’s use of its exclusionary authority against individuals, an Administrative Law Judge (ALJ) upheld the OIG’s exclusion ofMichael D. Dinkel, the owner and President of a diagnostic imaging company. Dinkel has been excluded from participation in all Federal health care programs for a period of eight years.

The OIG has the authority to exclude individuals and entities from Federal health care programs for presenting or causing to be presented claims for items or services that the individual or entity knows or should know where not provided as claimed, or are otherwise false or fraudulent.

According to the OIG’s press release, Dinkel and his company, Drew Medical, Inc., submitted approximately 9,500 false claims worth $1.6 million to theMedicare and Medicaid programs for services related to venography, a radiology procedure. The OIG found that no venography services had actually been performed. Instead, claims were submitted to Medicare and Medicaid for a corresponding procedural code for MRI and CT procedures with contrast. Prior to Dinkel’s exclusion, a $1,147,564 civil False Claims Act settlement had been entered into with Dinkel and his company.

The ALJ found that Dinkel had a duty “to understand Medicare and Medicaid billing requirements and apply them scrupulously to the claims that he caused to be presented.” Furthermore, Dinkel’s failure to ensure his company properly claimed reimbursement “constituted reckless indifference to the propriety of the claims he cause to be presented.”

The ALJ’s full decision is available by request from the OIG.

©2011 von Briesen & Roper, s.c

Avoid Employer Liability with Safe Harbor Provisions under GINA

Recently posted in the National Law Review an article by George B. Wilkinson and Anthony “T.J.” Jagoditz of Dinsmore & Shohl LLP regarding the recently-enacted federal Genetic Information Non-Discrimination Act of 2008, otherwise known as “GINA”.

Employers should take note of the recently-enacted federal Genetic Information Non-Discrimination Act of 2008, otherwise known as “GINA”. Effective January 10, 2011, Congress added yet another acronym to the long list of federal laws impacting today’s employers (OSHA, ADA, FMLA, ADEA, etc). This new law prohibits an employer from requesting an employee’s genetic information and that of his/her family. The Act applies to requests for medical records,independent medical examinations, and pre-employment health screenings.

An employer may not request information about an employee’s health status in a way that is likely to result in exposure of genetic information of the employee and his/her family (which includes relatives up to the fourth degree). “Genetic information” is classified as genetic tests, the manifestation of a disease or disorder, and participation in genetic testing (i.e. studies by market-research firms sampling medications). Clarifications regarding sex, age, and race are not considered genetic information. Family history is considered genetic.

Fortunately, GINA provides safe-harbor language which is designed to protect employers. Inclusion of the safe-harbor language (which is contained within the statute itself) is important in medical records requests and in communicating with physicians who are doing independent examinations. This safe-harbor language will render receipt of the genetic information inadvertent, and therefore allow the employer to avoid liability under GINA.

If the safe-harbor language is given to a health care provider and genetic information is provided, the employer must “take additional reasonable measures within its control” to make sure that the violation is not repeated by the same health care provider. However, such measures are not defined in the act.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

eDiscovery for Pharma, Biotech & Medical Device Industries

The National Law Review is pleased to inform you of IQPC’s e-Discovery for Pharma, Biotech & Medial Device Industries Conference in Philadelphia on October 24-25, 2011.  We’ve provided some information on the conference for your convenience:

Mastering eDiscovery and Information management strategies and best practices fit for life sciences industries

Why attend eDiscovery for Pharma?

  • Learn from industry leaders who have successfully implemented technology solutions that have reduced cost and errors in eDiscovery production. Network with government and industry leaders who are influencing the practice and procedure of eDiscovery in the Pharmaceutical, Biotech and Medical Device Industries.
  • Prepare your organization with defensible information management techniques specifically geared toward global pharmaceutical data.
  • Join peer discussions on industry hot topics such as predictive coding, cloud computing and legal holds.
  • Avoid mistakes and costly sanctions for eDiscovery misconduct and Federal Corrupt Practices Act investigations.
  • Benchmark your internal processes and evaluate their effectiveness in practical scenarios.

Hear Perspectives from:

  • Edward Gramling, Senior Corporate Counsel at Pfizer
  • John O’Tuel, Assistant General Counsel at GlaxoSmithKline
  • Chris Garber, eDiscovery Manager atAllergan, Inc
  • HB Gordon, eDiscovery Analyst, Legal Affairs, Teva Pharmaceuticals USA
  • David Kessler, Partner at Fulbright & Jaworski
  • Phil Yannella, Partner at Ballard & Spahr

View Full Speaker List

FTC And DOJ Issue Proposed Statement Of Antitrust Policy Regarding Accountable Care Organizations Seeking To Participate In The Medicare Shared Savings Program

Recently posted at the National Law Review by Scott B. Murray of  Sills Cummis & Gross P.C.  information about the  Federal Trade Commission (“FTC”) and Department of Justice’s Antitrust Division (“DOJ”)  joint Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations:    

The Federal Trade Commission (“FTC”) and Department of Justice’s Antitrust Division (“DOJ”) recently issued a joint Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (the “Policy Statement”). The Policy Statement details how the federal antitrust agencies will apply the nation’s antitrust laws to accountable care organizations (“ACOs”) created pursuant to the health care reform act, the Patient Protection and Affordable Care Act (the “Act”). Public comments were to be submitted by May 31, 2011.

The agencies identify the potential advantages and disadvantages of ACOs that they will examine under the antitrust laws. The agencies “recognize that ACOs may generate opportunities for health care providers to innovate in both the Medicare and commercial markets and achieve for many consumers the benefits Congress intended for Medicare beneficiaries through the Shared Savings Program.” Policy Statement, at p. 2. However, the agencies also understand that “not all such ACOs are likely to benefit consumers, and under certain conditions ACOs could reduce competition and harm consumers through higher prices or lower quality services.” Id.

ACOs Covered By Policy Statement

The Policy Statement applies to “collaborations among otherwise independent providers and provider groups, formed after March 23, 2010, that seek to participate, or have otherwise been approved to participate, in the Shared Savings Program.” Id. “[C]ollaboration” is defined to mean an agreement or set of agreements, other than merger agreements, thus, the Policy Statement does not apply to mergers among health care providers, which will still be analyzed under the Horizontal Merger Guidelines. Id.

The Rule of Reason Will Be Applied To ACOs

The agencies have previously stated that joint price agreements among competing health care providers are evaluated under the Rule of Reason, if the providers are financially or clinically integrated and the agreement is reasonably necessary to accomplish the pro-competitive benefits of the integration. The Rule of Reason “evaluates whether the collaboration is likely to have substantial anticompetitive effects and, if so, whether the collaboration’s potential pro-competitive efficiencies are likely to outweigh those effects.” Id., at p. 4. Thus, “the greater the likely anticompetitive effects, the greater the likely efficiencies must be to pass muster under the antitrust laws.” Id.

In prior pronouncements regarding health care provider collaborations, the agencies have stated that sufficient financial integration exists if the collaboration’s participants have agreed to share substantial financial risk, because such risk-sharing generally establishes both an overall efficiency goal for the venture and the incentives for the participants to meet that goal. The agencies have previously provided a number of examples of satisfactory financial risk-sharing arrangements, while noting that the examples did not represent an exhaustive list.

Regarding clinical integration, while not previously providing specific examples, the agencies have noted that such integration must be “sufficient to ensure that the venture is likely to produce significant efficiencies.” Id., at p. 4. The Act authorizes CMS to approve ACOs meeting certain eligibility criteria, and the Policy Statement indicates that “CMS’s proposed eligibility criteria are broadly consistent with the indicia of clinical integration that the Agencies previously set forth [and that] organizations meeting the CMS criteria for approval as an ACO are reasonably likely to be bona fide arrangements intended to improve quality, and reduce the costs, of providing medical and other health care services through their participants’ joint efforts.” Id., at p. 5. Because many health care providers will want to use the ACO structure in both the commercial market and the Medicare context, “if a CMS-approved ACO provides the same or essentially the same services in the commercial market the Agencies will provide rule of reason treatment to an ACO if, in the commercial market, the ACO uses the same governance and leadership structure and the same clinical and administrative processes as it uses to qualify for and participate in the Shared Savings Program.” Id., at p. 5. The Rule of Reason analysis applies to ACOs for the length of their participation in the Shared Savings Program.

Streamlined Approach For The Rule Of Reason Analysis Of ACOs

The Policy Statement provides a streamlined approach to determining market shares for the common services provided by an ACO’s participants. The first step is to list the common services provided by two or more of the ACOs’ participants. The list of services for the various types of health care providers ( i.e., physicians, inpatient facilities, and outpatient facilities) will be made available by CMS. The second step is to determine the Primary Service Area (“PSA”) for each common service of the ACO participants. “The PSA is defined as the lowest number of contiguous postal zip codes from which the participant draws at least 75 percent of its patients for that service.” Id., at pp. 7 & 12.

If the ACO participants do not provide any common services in any of the same PSAs, then the ACO needs to determine if any ACO participant is a “Dominant Provider,” meaning a participant with greater than 50 percent market share for a service in a PSA. If the ACO does include a Dominant Provider, such participant must be non-exclusive to ACO, and the ACO cannot require commercial payers to be exclusive to ACO or otherwise restricted in dealing with other ACOs or providers.

Safety Zone Applies If ACO Has Less Than 30 Percent Combined Market Share For All Common Services In All PSAs

If there are common services provided by two or more ACO participants in the same PSA, then the ACO must calculate its combined market share for each such common service in each PSA. CMS will make available Medicare fee-for-service data sufficient for physicians and outpatient facilities to calculate their market shares. For inpatient facilities, market shares should be calculated based on “inpatient discharges, using state-level all-payer hospital discharge data where available, for the most recent calendar year for which data are available.” Id., at p. 13. Where such data is not available, Medicare fee-for-service payment data should be used, or other available data if such Medicare data is insufficient.

If the combined market share for each common service in each PSA is less than 30 percent, then the ACO falls within the “safety zone,” meaning that there will be no agency challenge of the ACO absent extraordinary circumstances. If the combined share for even one common service is greater than 30 percent in a PSA, the safety zone does not apply.

In addition, for the safety zone to apply, any hospital or ambulatory surgery center participating in the ACO must be non-exclusive – i.e., allowed to contract or affiliate with other ACOs or commercial payers – regardless of its PSA market shares. If the ACO falls within the safety zone, but includes a Dominant Provider, then the same Dominant Provider requirements described above must be met.

An ACO may include one physician per specialty from each “rural county” (as defined by the U.S. Census Bureau), and a Rural Hospital, on a non-exclusive basis and still qualify for the safety zone even if the inclusion of the rural provider or Rural Hospital makes the ACO’s combined market share for a common service greater than 30 percent in a PSA.

Mandatory Review By The Agencies Applies If ACO Has Greater Than A 50 Percent Combined Market Share For Any Common Service In A PSA

If an ACO’s combined market share for any common service in any PSA is greater than 50 percent, the ACO must make a submission to the agencies for a mandatory initial review of the ACO’s potential competitive effects. Thus, if the combined share for even one of the ACO’s common services is greater than 50 percent in a PSA, review by the antitrust agencies is mandatory. The mandatory review requirement does not mean that the ACO is presumed to be anticompetitive, but only that an initial review is necessary.

The ACO must submit to the agencies a copy of its application and all supporting documents that the ACO plans to submit, or has submitted, to CMS or that CMS requires the ACO to retain as part of the Shared Savings Program application process. In addition, the ACO must submit other documents that will allow the agencies to analyze the ACO’s potential competitive effects. If the agencies receive all such documentation in a timely fashion, they have committed to completing the review in an expedited, 90-day time period. The additional documents that must be submitted include documents relating to the ability of the ACO’s participants to compete with the ACO, the ACO’s business strategies, competitive plans, and likely impact on prices, cost, or quality of any service the ACO provides, any other ACOs created by or affiliated with the proposed ACO or its participants, the ACO’s market share calculations, the identity of the ACO’s five largest payer customers, and the identity of any competing ACOs. Id., at pp. 9-10.

After receiving this documentation, the reviewing agency will advise the ACO within 90 days of whether it has no intent to challenge the ACO or is likely to challenge it. CMS will not approve an ACO that has received a letter of likely challenge.

No Man’s Land If > 30 Percent, But << 50 Percent Combined Share

Given the safety zone and mandatory review thresholds, there is a no man’s land for ACOs with market shares for common services that fall between these two thresholds – i.e., if the ACO has a combined market share for any common service in any PSA greater than 30 percent, but no combined market share greater than 50 percent in any PSA. While there is no presumption that ACOs falling in this no man’s land will have anticompetitive effects, the agencies have identified certain conduct that such ACOs should avoid to reduce the risk of challenge by the antitrust agencies:

1. Steering or incentivizing commercial payers away from providers outside the ACO.

2. Tying sales of the ACO’s services to the purchase of non-ACO services (and vice versa).

3. Contracting with ACO participants on an exclusive basis (except for primary care physicians, who can be exclusive to an ACO).

4. Prohibiting commercial payers from providing health plan participants with the ACO’s cost, quality or other performance information.

5. Sharing price or other competitive information among the ACO’s participants that can be used to collude regarding non-ACO services.

ACOs with market shares requiring mandatory review should also avoid such conduct to reduce the risk of antitrust challenge.

If an ACO falling within the no man’s land desires to obtain further certainty regarding whether it will face an antitrust challenge, it can request expedited antitrust review by the agencies similar to the mandatory review process.

Likely Concerns Regarding The Proposed Policy Statement

Potential public comments to the Policy Statement include:

1. Whether non-exclusivity should be required for a hospital or ambulatory surgery center if the ACO still falls within the safety zone for all common services and does not include a Dominant Provider for any service.

2. Whether the 30 percent and 50 percent market share thresholds are appropriate.

3. Are PSAs an appropriate proxy for the relevant antitrust geographic market?

4. Will the Medicare and other publicly available data allow for accurate market share calculations?

5. Will the mandatory review process represent an unreasonable time and cost burden to be incurred by proposed ACOs?

6. Should the Policy Statement include additional examples of market share calculations for hypothetical ACOs?

The Policy Statement represents a substantial and welcome effort on the part of the agencies to provide guidance to the health care industry regarding the antitrust analysis to be applied to ACOs seeking to participate in the Shared Savings Program; however, it is likely that some procedural and substantive modifications will be necessary to help health care providers fully achieve the goals of the Act through the formation of ACOs.  

This article appeared in the June 2011 issue of The Metropolitan Corporate Counsel. 

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.  

Copyright © 2011 Sills Cummis & Gross P.C. All rights reserved.

 

 

An Ounce of Prevention – The Importance of Periodic Corporate Audits

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

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

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

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

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

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

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

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

© 2011 Poyner Spruill LLP. All rights reserved.

 

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

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

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

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

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

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

© 2011 Poyner Spruill LLP. All rights reserved.

Supreme Court Grants Cert. In Mayo v. Prometheus

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

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

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

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

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

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

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

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

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

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

Facts of Bayer

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

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

The Supreme Court’s Decision

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

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

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

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

Implications of Bayer

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

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

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

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