Category: Litigation

Washington Court of Appeals Rules that Liability Insurer Defending under Reservation of Rights is not Entitled to Reimbursement in the Absence of Express Policy Language Expressly Reserving Such a Right

Recently posted in the National Law Review an article by Dana Ferestien of Williams Kastner regarding when a liability insurer provides a reservation of rights defense, is it ever entitled to reimbursement of defense costs paid if a court later determines that there is no duty to defend?

 

On July 25, 2011, the Court of Appeals addressed what had been an open question in Washington:

The coverage dispute arose from claims that Immunex had artificially inflated the price of prescription drugs. After litigation had been pending for several years and Immunex had already incurred substantial defense fees and costs, Immunex tendered the claims to National Surety, its excess liability insurer, for defense and indemnity. National Surety denied coverage for the claims, but agreed under a reservation of rights to provide a defense with the right to reimbursement if a court later determined that there was no duty to defend.

The King County Superior Court determined that there was no coverage and, therefore, National Surety owed no duty to defend Immunex. But the trial court also ruled that National Surety was obligated to pay Immunex’s defense costs until the date that the court confirmed the claims were not covered, unless National Surety could establish actual prejudice resulting from Immunex’s late tender. Immunex appealed the finding of no coverage, and National Surety cross-appealed the trial court’s determination that its ruling applied prospectively only.

After agreeing that there was no coverage for the underlying claims, the Court of Appeals affirmed that National Surety remained obligated for defense costs incurred up until the trial court’s summary judgment rulings unless National Surety could prove actual prejudice resulting from Immunex’s late tender. Relying upon Washington cases noting the broader scope of a liability insurer’s duty to defend, the court reasoned that “payment of defense costs for claims that are potentially covered is part of the bargained-for exchange between the insurer and the insured” and the reservation of rights defense provides an insurer with “the benefit of insulating itself from a bad faith claim and possibly coverage by estoppel.”

Notably, the court indicated that its decision may have been different had National Surety’s policy included express language reserving to the insurer the right to reimbursement in the event that it defends a claim under a reservation of rights and then obtains a court determination of no coverage. Whether the Court of Appeals would actually enforce such a provision remains to be seen. But liability insurers now should give careful consideration as to whether to include a reimbursement provision in policies issued to Washington insureds.

In reaching this outcome, the Court of Appeals rejected several arguments advanced by National Surety. The court declined to draw any distinction between instances where an insurer defends under a reservation of rights because Washington law is unresolved as to the meaning of policy language as opposed to instances where a claim involves unresolved questions of fact for which there may or may not ultimately be coverage. The Court of Appeals also rejected reimbursement based upon theories of unilateral implied contract or unjust enrichment. And the court declined to reach a different outcome because National Surety had yet to reimburse Immunex for any of its defense costs, explaining that such a result would improperly reward insurers who withhold defense costs payments.

© 2002-2011 by Williams Kastner ALL RIGHTS RESERVED

Wisconsin Supreme Court Delivers Win for Hospital Systems with Offsite Facilities

Posted on August 10, 2011 in the National Law Review an article by Craig J. Johnson, Kate L. Bechen, David J. Hanson and Robert L. Gordon   of Michael Best & Friedrich LLP regarding  a major victory for hospital systems with offsite outpatient facilities in Wisconsin.

Last month the Wisconsin Supreme Court provided a major victory for hospital systems with offsite outpatient facilities. Its decision in Covenant Health Care, Inc. v. City of Wauwatosa (2011 WI 80) reversed a Court of Appeals decision and held that an outpatient clinic owned by St. Joseph Hospital (the “Clinic”) constituted property used for the purposes of a hospital under Wis. Stat. § 70.11(4m)(a). As a result, Covenant Healthcare System, Inc., the sole member of St. Joseph Hospital and the owner of the real property on which the Clinic stands, was entitled to a refund of real property taxes paid on the Clinic’s property.

Background

Wisconsin. Stat. § 70.11(4m)(a) excludes from taxation real property used exclusively for the purposes of any nonprofit hospital. The statute specifies that the exemption does not extend to property that is used for commercial purposes or as a doctor’s office, or the earnings from which inure to the benefit of a member.

The Clinic is a five-story building located approximately five miles from St. Joseph Hospital.  Two of the Clinic’s floors are leased to medical providers as office space. The remaining three floors are used to provide outpatient services and include an Urgent Care Center that is open 24 hours a day, seven days a week and is capable of treating all levels of emergency room care, which generally limits its treatment of serious cases to the extent of stabilizing a patient for transport to a different medical facility.

The City of Wauwatosa took the position that the Clinic was in fact a doctor’s office and, therefore, assessed real property taxes on the Clinic. Covenant challenged this assessment as it applied to the Clinic’s three floors that were not used as office space for medical providers.  The Circuit Court ruled in favor of Covenant but the Court of Appeals reversed, holding that the Clinic was a doctor’s office. The Wisconsin Supreme Court reversed the Court of Appeals, ruling in favor of Covenant.

Ruling

The City of Wauwatosa maintained its position that the Clinic was a doctor’s office. The City also took the alternative positions that the Clinic was used for commercial purposes and that the property’s earnings inure to the benefit of Covenant. The Wisconsin Supreme Court held that Covenant had satisfied its burden of proving that each of the City’s assertions was incorrect.

Doctor’s Office

The Wisconsin Supreme Court considered seven factors that were previously laid out by the Wisconsin Court of Appeals in 1997 in St. Clare Hospital v. City of Monroe, which also considered whether a health care facility constituted a doctor’s office. The Supreme Court concluded that five of those factors weighed against the Clinic being considered a doctor’s office, and the remaining two were not determinative.

The five factors which persuaded the Supreme Court that the Clinic was not a doctor’s office were: (1) physicians practicing at the Clinic do not receive variable compensation related to the extent of their services; (2) Clinic physicians do not receive extra compensation for overseeing non-physician staff; (3) the Clinic’s bills are generated on the same software system as those of St. Joseph Hospital; (4) Clinic physicians do not have their own offices at the Clinic but instead have access to communal cubicle space; and (5) Clinic physicians do not own or lease the building or any equipment at the Clinic.

The two remaining St. Clare factors that weighed in favor of the Clinic being a doctor’s office were (1) the Clinic does not provide inpatient services and (2) most patients are seen at the Clinic by appointment and during regular business hours. However, the Court pointed out that advances in technology have allowed for more procedures to be performed on an outpatient basis than when St. Clare was decided. In addition, St. Joseph Hospital (as well as several other large area hospitals) has an outpatient clinic on its hospital grounds.  This hospital-based outpatient center has never jeopardized the tax exemption of St. Joseph Hospital despite only seeing patients by appointment during regular business hours. Therefore, the Court did not weigh either of these factors as significant in reaching its conclusion that the Clinic is not a doctor’s office.

Commercial Purposes

The Court interpreted the statutory prohibition against commercial purposes as being a prohibition against a facility having profit as its primary aim. In determining that the Clinic did not have profit as its primary aim, the Court cited the Clinic’s business plan as listing several goals beyond increasing profit margin, including promoting a greater faith-based health care presence. Further, the Court found that the Clinic serves a greater portion of Medicare and Medicaid patients than other Milwaukee and Wisconsin hospitals, indicating to the Court a focus other than profit.

Private Inurement

Finally, the Court determined that the language of the statutory prohibition against private inurement to any member does not contemplate a not-for-profit member of a nonprofit corporation. According to the Court, interpreting the statute to penalize Covenant’s corporate structure would be an unreasonable construction, and would end up requiring a nonprofit corporation to distribute its assets upon dissolution to unrelated nonprofit entities, rather than its actual member(s), in order to qualify for property tax exemption.

Conclusion

The earlier Court of Appeals decision in this case called into question the property tax exemptions of nonprofit hospital systems with offsite facilities. The reversal by the Wisconsin Supreme Court has provided some reassurance to Wisconsin’s hospital systems. Although the decision was based on facts unique to the Clinic and did not set bright line standards going forward, the Court confirmed that offsite hospital facilities can qualify as exempt under Wis. Stat. § 70.11(4m)(a), and provided guidance on what types of facts and organizational structures will be considered to qualify an offsite facility for exemption.

© MICHAEL BEST & FRIEDRICH LLP

Wisconsin Supreme Court Addresses Issues Concerning the Default Judgment Statute, the Direct Action Statute, and Personal Liability for Corporate Officers

Recently posted  posted in the National Law Review an article by Heidi L. Vogt and Jessica M. Swietlik of von Briesen & Roper, S.C. regarding the Wisconsin Supreme Court issued a decision in Casper, et al. v. American International South Ins. Co.

 Casper, et al. v. American International South Ins. Co., et al., 2011 WL 81

On July 19, 2011, the Wisconsin Supreme Court issued a decision in Casper, et al. v. American International South Ins. Co., et al., 2011 WI 81 (“Casper”) in which it addressed three issues: 1) the excusable neglect standard relative to default judgments; 2) whether an insurance policy must be delivered or issued in the State of Wisconsin in order to subject the insurer to a direct action under Wis. Stat. §§ 632.24 and 803.04(2); and 3) whether a corporate officer may be held personally liable for non-intentional torts that occur within the scope of employment.

The Casper case arises from a motor vehicle accident. Mark Wearing, a co-employee of Bestway Systems, Inc. (“Bestway”) and Transport Leasing/Contract Inc. (“TLC”), struck the Caspers’ minivan from behind, seriously injuring all five passengers in the Caspers’ vehicle.

Investigators learned that Wearing was under the influence of oxycodone, diazepam, and nordiazepam when the collision occurred. At the time of the accident, Wearing was en route to make a delivery for a Bestway customer. Jeffrey Wenham, the CEO of Bestway, had allegedly approved a driving route for Wearing on this particular delivery that required him to drive 536 miles through several states overnight. Wearing claimed he was told he would be fired if he did not complete the route as planned. However, Wenham had never met Wearing and the route that Wenham apparently approved was designed a year and a half prior to the accident. An expert hired by the Caspers opined that the route violated the hours of service requirements of the Federal Motor Carrier Safety Regulations (“FMCSR”) and was unsafe.

The Caspers brought suit against fourteen named defendants, including: Mark Wearing, his co-employers Bestway and TLC, Bestway’s CEO Jeffrey Wenham, and TLC’s excess insurer, National Union Fire Insurance Company of Pittsburgh PA (“National Union”). The appeals in this case stem from three orders issued by the trial court, all of which were affirmed by the court of appeals: 1) its order granting National Union’s request for a 7-day extension to file its answer and denying the Caspers’ motion for default judgment against National Union on the grounds that National Union had demonstrated excusable neglect; 2) its order granting summary judgment to National Union on the grounds that under Kenison v. Wellington Ins. Co., 218 Wis. 2d 700, 582 N.W.2d 69 (Ct. App. 1998) the Caspers could not maintain a direct action against National Union because its insurance policy was not issued or delivered in Wisconsin; and 3) its order denying Wenham’s motion for summary judgment on the Caspers’ claims for negligent training and supervision. The Wisconsin Supreme Court considered each of these issues separately, and affirmed in part, reversed in part, and remanded with instructions consistent with its decision.

The court affirmed on the first issue, holding that the trial court did not erroneously abuse its discretion by finding that National Union’s “lost in the mail” excuse amounted to excusable neglect such that granting an extension and denying the motion for default judgment was appropriate. The court noted that “although courts should be skeptical of glib claims that attribute fault to the United States Postal Service,” it was satisfied that a reasonably prudent person could neglect a deadline when correspondence gets lost, as was the case with National Union here.

Second, the court reversed on the direct action issue and thereby explicitly overruled Kenison. In doing so, the court acknowledged that the court of appeals properly applied Kenison as it lacked authority to ignore it. In Kenison, the court of appeals concluded that Wis. Stat. § 631.01 limited the application of the direct action statute, § 632.24, to insurance policies issued or delivered in Wisconsin. The Casper court disagreed. After carefully examining the plain language and the legislative history of Wis. Stat. §§ 631.01, 632.24, and 803.04(2), the court concluded that “Section 803.04(2) explicitly and § 632.24 by necessary implication are intended to apply to liability insurance policies delivered or issued for delivery outside Wisconsin, so long as the ‘accident, injury or negligence occurred in this state.’” Accordingly, the Caspers should have been allowed to maintain a direct action against National Union even though its policy was neither issued nor delivered in Wisconsin because the accident occurred in Wisconsin.

With regard to the third issue, the Wisconsin Supreme Court agreed with the lower courts that there are some instances where corporate officers like Wenham can be held personally liable for non-intentional torts committed in the course of employment. Both the trial court and the court of appeals had ended their inquiries there, finding that issues of fact existed regarding Wenham’s alleged negligent supervision and training of Wearing such that summary judgment was not appropriate on those claims. However, the Wisconsin Supreme Court considered and ultimately reversed on public policy grounds, holding that even if Wenham’s approval of the route that allegedly violated the FMCSR was a cause of the accident, “the results are so unusual, remote, or unexpected that, in justice, liability ought not be imposed.”

Justice Bradley issued an opinion concurring in part and dissenting in part, and Chief Justice Abrahamson joined in Justice Bradley’s concurrence/dissent.

©2011 von Briesen & Roper, s.c

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.

 

This (Retractable) Needle Is Going to Sting a Bit: Next Chapter in the Adventures of Post-Phillips Claim Construction

Posted on July 31, 2011 in the National Law Review an article by David M. Beckwith and Paul Devinsky of McDermott Will & Emery regarding how the U.S. Court of Appeals for the Federal Circuit addressed the claim construction tension between broadly drafted claims and the written description contained in the patent specification:

The U.S. Court of Appeals for the Federal Circuit addressed the claim construction tension between broadly drafted claims, and the written description contained in the patent specification, revealing a deep split among the panel members. Retractable Technologies, Inc. v. Becton, Dickinson Co., Case No. 07-CV-0250 (Fed. Cir,. July 8, 2011) (Lourie, J.) (Plager, J., concurring) (Rader, J. dissenting-in-part).

Retractable Technologies (RT) sued Becton Dickenson (BD) for infringing three patents related to syringes with retractable needle technology. Following an adverse jury verdict, BD appealed on multiple grounds, including a challenge to the claim construction of the term “body,” which the district court had determined could include a multi-part structure.

The Federal Circuit affirmed in part and reversed in part, specifically rejecting the district court’s broad claim construction the term “body.”  BD argued that the district court erred in ruling the syringe “body” is not limited to a one-piece structure, noting the specifications describes “the invention” as including a one-piece body.  In addition, the background section of the patent criticized prior art syringes that contain a two-piece body.  Finally, BD argued that claim differentiation does not apply in light of the written description’s limiting statements concerning the nature of the invention and the structure of the syringe body.

RT responded that the ordinary meaning of the term “body” should apply and is not limited to a one-piece body.  RT also argued application of the claim differentiation canon based on a dependent claim that included the limitation of a one-piece body.

Judge Lourie wrote for the majority of the panel, agreeing with BD that the claim term “body” is limited to a one-piece structure as described in the specifications. The majority noted that the specification indicates what was invented, holding that the claim language should not be interpreted to extend the invention beyond that set forth in the written description.  The majority also rejected RT’s claim differentiation argument as “weak” in the face of the language of the specification.  The majority noted that no dependent claim recited a non-one piece structure and concluded that the language of the specification that criticized two-piece structures was of greater significance than the dependent claim to a one-piece body.

Judge Plager, concurring, warned courts to turn a deaf ear to the siren song of giving claims wide scope.  In Judge Plager’s opinion, the written description requirement imposes an obligation to make full disclosure of what is actually invented and to claim that and nothing more.  As Judge Plager noted, “I have written elsewhere about the curse of indefinite and ambiguous claims, divorced from the written description, that we are regularly are asked to construe, and the need for more stringent rules to control the curse.”

In dissent, Judge Rader focused on the ordinary meaning of the term “body” and explained that since there was no special meaning provided by the patent specification to supplant the ordinary meaning of the term “body,” it was error to limit the construction to only a one-piece structure.  Rader wrote,  “In this case, neither party contends that ‘body’ has a special, technical meaning in the field of art, and thus claim construction requires ‘little more than the application of the widely accepted meaning of commonly used words.’”

Practice Note:  This decision reflects a fundamental division within the Federal Circuit on the importance of the written description as a limitation on claim scope, as compared to the view that the claim language itself should be of paramount importance in construction. Until there is either some post-Phillips en bancclarification or Supreme Court consideration of the issue, the outcome of contested constructions in such a circumstance may demand on the panel hearing the appeal.

© 2011 McDermott Will & Emery

Unsecured Creditors Beware! The Western District of Texas Bankruptcy Court Declares an Unsecured Creditor Cannot Have Its Cake (Unsecured Claim) and Eat It Too (Post-Petition Legal Fees)

Recently posted in the National Law Review an article by Evan D. Flaschen, Renée M. Dailey, Mark E. Dendinger of Bracewell & Giuliani LLP about the issue of whether an unsecured creditor can recover post-petition legal fees under the Bankruptcy Code:

Bankruptcy courts have long debated the issue of whether an unsecured creditor can recover post-petition legal fees under the Bankruptcy Code. In the recent decision of In re Seda France, Inc. (located here(opens in a new window)), Justice Craig A. Gargotta of the United States Bankruptcy Court for the Western District of Texas denied an unsecured creditor’s claim for post-petition fees. In doing so, the Court has once again left the unsecured creditor with a bad taste in its mouth by declaring that an unsecured creditor seeking post-petition fees is asking permission to have its cake (a claim for principal, interest and pre-petition legal fees under applicable loan documents) and eat it too (a claim for post-petition legal fees).

Proponents of the view that an unsecured creditor cannot recover post-petition legal fees point to section 506(b) of the Bankruptcy Code, which allows as part of a creditor’s secured claim the reasonable attorneys’ fees and costs incurred during the post-petition period, and note the Bankruptcy Code is silent on anunsecured creditor’s right to post-petition legal fees. Essentially, the argument is since Congress provided for post-petition fees for secured creditors, it could have explicitly provided for post-petition fees for unsecured creditors but chose not to. Proponents of the alternative view cite the Second Circuit decision United Merchants and its progeny, where those courts refused to read the plain language of section 506(b) as a limitation on an unsecured creditor’s claim for recovery of post-petition legal expenses. The theory is that while the Bankruptcy Code does not expressly permit the recovery of an unsecured creditor’s claim for post-petition attorneys’ fees, it does not expressly exclude them either. The basic tenant is that if Congress intended to disallow an unsecured creditor’s claim for post-petition legal fees it could have done so explicitly.

In Seda, Aegis Texas Venture Fund II, LP (“Aegis”) timely filed a proof of claim in Seda’s Chapter 11 bankruptcy case claiming its entitlement to principal, interest and pre-petition attorneys’ fees under its loan documents with Seda as well as post-petition attorneys’ fees for the duration of the case. Aegis made various arguments in support of the allowance of its post-petition legal expenses including: (1) the explicit award of post-petition fees to secured creditors under section 506(b) does not mean that such a provision should not be implicitly read into section 502(b) (i.e., unim est exclusion alterius (“the express mention of one thing excludes all others”) does not apply), (2) the United States Supreme Court decision in Timbers does not control as Timbers denied claims of anundersecured creditor for unmatured interest caused by a delay in foreclosing on its collateral, (3) the right to payment of attorneys’ fees and costs exists pre-petition and it should be irrelevant to the analysis that such fees are technically incurred post-petition, (4) because the Bankruptcy Code is silent on the disallowance of an unsecured creditor’s post-petition attorneys’ fees, these claims should remain intact, and (5) recovery of post-petition attorneys’ fees and costs is particularly appropriate where, as in Seda, the debtor’s estate is solvent and all unsecured creditors are to be paid in full as part of a confirmed Chapter 11 plan.

The Seda Court rejected Aegis’ arguments and held that an unsecured creditor is not entitled to post-petition attorneys’ fees even where there is an underlying contractual right to such fees and unsecured creditors are being paid in full. With respect to Aegis’ argument on the proper interpretation of sections 506(b) and 502(b), the Court cited the many instances in the Bankruptcy Code where Congress expressed its desire to award post-petition attorneys’ fees (e.g., section 506(b)), and found that Congress could have easily provided for the recovery of attorneys’ fees for unsecured creditors had that been its intent. Regarding Aegis’ argument that Timbers does not control, the Court held that in reaching its decision on the disallowance of a claim for unmatured interest the Timbers Court found support in the notion that section 506(b) of the Bankruptcy Code does not expressly permit post-petition interest to be paid to unsecured creditors. The SedaCourt held this ruling should apply equally to attorneys’ fees to prohibit recovery of post-petition fees and expenses by unsecured creditors. The Court further held that section 502(b) of the Bankruptcy Code provides that a court should determine claim amounts “as of the date of the filing of the petition,” and therefore attorneys’ fees incurred after the petition date would not be recoverable by an unsecured creditor. In response to Aegis’ argument that non-bankruptcy rights, including the right to recover post-petition attorneys’ fees should be protected, the Seda Court noted that the central purpose of the bankruptcy system is “to secure equality among creditors of a bankrupt” and that an unsecured creditor’s recovery of post-petition legal fees, even based on a contractual right, would prejudice other unsecured creditors. The Court held this is true even in the case where the debtor was solvent and paying all unsecured creditors in full. The Court noted that a debtor’s right to seek protection under the Bankruptcy Code is not premised on the solvency or insolvency of the debtor and, therefore, the solvency of the debtor has no bearing on the allowance of unsecured creditors’ post-petition legal fees.

Seda is the latest installment in the continued debate among the courts whether to allow an unsecured creditor’s post-petition attorneys’ fees. The Seda Court is of the view that an unsecured creditor cannot recover post-petition legal fees for the foregoing reasons, most notably that the Bankruptcy Code is silent on their provision and public policy disfavors the recovery of one unsecured creditor’s legal expenses incurred during the post-petition period to the prejudice of other unsecured creditors. Depending on the venue of the case, there will undoubtedly be many more instances of unsecured creditors seeking recovery of their post-petition attorneys’ fees in a bankruptcy case until the Supreme Court definitively rules on the issue. Until then, keep asking for that cake . . . .

© 2011 Bracewell & Giuliani LLP

Entrepreneur’s Guide to Litigation – Blog Series: Discovery

Recently posted in the National Law Review an article by  Joseph D. Brydges of Michael Best & Friedrich LLP regarding the Discovery is a pre-trial phase of litigation.

 

Discovery is a pre-trial phase of litigation during which a party to a lawsuit seeks to “discover” information from the opposing party. Discovery is meant to facilitate the truth-finding function of the courts and, as such, parties to a lawsuit have an automatic right to discovery. From a strategic standpoint, discovery is used to gather and preserve evidence in support or defense of the claims made in the complaint. Further, discovery often helps parties narrow the focus of the litigation in preparation for trial and, in some cases, may lead to a pre-trial settlement. Discovery is an extremely important phase of litigation because the evidence gathered during discovery will serve as the foundation of a motion for summary judgment and/or strategy at trial.

Discovery proceedings are typically governed by state statutes in state court and by the federal rules of civil procedure in federal court. Generally, the scope of discovery permitted under these rules is very broad. Discoverable information may include any material which is reasonably calculated to produce evidence that may later be admitted at trial. However, certain information, including information protected by the attorney-client privilege and the work product of an opposing party, is generally protected from discovery. During the discovery period, parties may serve discovery requests upon one another. These discovery requests are made through one of several available discovery mechanisms including interrogatories, requests for admission, document requests and depositions.

Interrogatories are written discovery requests often utilized to obtain basic information such as names and dates. Any party served with written interrogatories must answer the questions contained therein in writing and under oath. Similarly, requests for admission consist of written statements directed towards an opposing party for the purpose of having the opposing party “admit” or “deny” the statements. Often, these statements seek to establish undisputed facts, authenticate documents and pin an opposing party to a particular position. Document requests are an important component of discovery in which a party may be required to make any relevant and nonprivileged documents available for inspection by the opposing party. Document production will be covered in greater detail in the following section entitled “Document Production.”

The lynchpin of discovery proceedings is the deposition. Depositions are used to obtain the out-of-court testimony of a witness with knowledge relevant to the litigation. They allow a party to discover any relevant information known to a witness and are often the only method of discovery available with regard to obtaining information from witnesses that are not a party to the litigation. During a deposition, the witness is questioned under oath and must answer the questions asked truthfully to the extent that the answer would not lead to the disclosure of privileged information. The rules governing depositions also allow for the deposition of an organization or corporation where a party is unable to identify the particular witness within the organization that may have knowledge of the information sought. In that instance, a party may identify the information sought and the organization will be required to designate a representative to testify on its behalf.

A party served with a discovery request must respond to the request within the specified time period or object to the requested discovery and state reasons for its objection. If, for some reason, a party refuses to respond to a discovery request, the party serving the request may move the court to compel a response. It is within the court’s power to compel a response to a discovery request and impose penalties on a party refusing to comply with a discovery request.

Click Below for previous posts from the Entrepreneur’s Guide to Litigation Blog Series:

© MICHAEL BEST & FRIEDRICH LLP

Supreme Court Affirms Clear and Convincing Standard of Patent Invalidity Proof

Posted on July 26, 2011 in the National Law Review an article by Jeremiah Armstrong and Paul Devinsky of  McDermott Will & Emery regarding the Supreme Court of the United States’ decision to  unanimously reject Microsoft’s plea to modify the clear and convincing evidence standard of proof required to invalidate a patent.

Delivering what is likely the final blow to its battle against a $240 million infringement judgment, the Supreme Court of the United States unanimously rejected Microsoft’s plea to modify the clear and convincing evidence standard of proof required to invalidate a patent. Microsoft v. i4i, Case No. 09-1504 (Supr. Ct., June 9, 2011) (Justice Sotomayor) (Justices Breyer and Thomas, concurring).

The appeal stems from a 2009 jury verdict that certain versions of Microsoft Word were found to infringe plaintiff i4i’s patent related to editing and formatting XML documents. Microsoft challenged the validity of the patent, based on the §102(b) on-sale bar, citing i4i’s sales of a software product called S4 more than a year before applying for the asserted patent. The S4 product was never presented to the U. S. Patent and Trademark Office (USPTO) examiner.

The U.S. Court of Appeals for the Federal Circuit squarely rejected Microsoft’s argument that the jury should have been instructed to apply a preponderance of the evidence standard of proof to the issue of patent invalidity. The Federal Circuitalso rejected Microsoft’s request to reduce the willful damages award, partially due to Microsoft’s failure to file a pre-verdict judgment as a matter of law (JMOL).

History

Microsoft petitioned the Supreme Court for certiorari to consider whether an accused infringer that challenges patent validity based on prior art not considered by the USPTO during prosecution must overcome the 35 U.S.C. §282 presumption of validity by “clear and concurring evidence” or whether some lower standard of proof will suffice (see IP Update, Vol. 13, No. 12).

The “clear and concurring” standard of proof has been used by Federal Circuit since its pronouncement in the seminal 1984 case, American Hoist & Derrick v. Sowa & Sons. Prior to the 1982 establishment of the Federal Circuit, most of the regional courts of appeal applied the less differential “preponderance” standard to the issue. However, the Federal Circuit, in setting its rule, took note of the “the deference that is due to a qualified government agency presumed to have properly done its job.”

Microsoft, in its certiorari petition, was supported for review of the Federal Circuit standard of proof by 11 amici representing major corporations, law professors and trade associations. Most of the amici faulted the deference given to the USPTO examiners who have limited time and resources for the examination of any particular application, who examine applications on a strictly ex parte basis and who only infrequently consider non-patent prior art publication or prior products. The amici also note that juries already tend to give undue deference to the decision of the USPTO in issuing a patent, especially in cases where the technology is complex.

Microsoft and the amici characterized the Federal Circuit rule as inflexible and another “bright line” test, a characterization that has resulted in the reversal of several Federal Circuit rulings in recent history, including the KSR obviousness case; a case in which the Supreme Court, in dicta, noted that the rational for showing deference to the USPTO was “much diminished” where the prior art in issue was not before the examiner.

Supreme Court Decision

In its analysis, the Supreme Court considered whether §282 established the standard of proof for invalidity as requiring clear and convincing evidence given the statutory language that a “patent shall be presumed valid” and “[t]he burden of establishing invalidity … rest[s] on the party asserting such invalidity.” While §282 does not explicitly state an invalidity standard, the Supreme Court explained that the language used when the statute was enacted in 1952 was synonymous with the clear and convincing evidence standard that was part of the recognized common law, as described by Justice Cardozo in Radio Corp. of America v. Radio Engineering Laboratories, Inc. Accordingly, the Supreme Court deferred to the opinion of Judge Rich, a primary author of the 1952 Patent Act, in American Hoist & Derrick, where he wrote that under §282 the “burden is constant and never changes and is to convince the court of invalidity by clear evidence.”

The Supreme Court said this strict invalidity standard always applies, even when evidence before the fact-finder was not previously available to the USPTO during the examination process: “[H]ad Congress intended to drop the heightened standard of proof where the evidence before the jury varied from that before the PTO—and thus to take the unusual and impractical step of enacting a variable standard of proof that must itself be adjudicated in each case —we assume it would have said so expressly.”

However the Supreme Court did suggest the use of tailored jury instructions: “When warranted, the jury may be instructed to consider that it has heard evidence that the PTO had no opportunity to evaluate before granting the patent” and “may be instructed to evaluate whether the evidence before it is materially new, and if so, to consider that fact when determining whether an invalidity defense has been proved by clear and convincing evidence.”

Notably, the Supreme Court recognized that new evidence not considered by the USPTO during examination—like the S4 software product in issue here—may “carry more weight” at trial (i.e., “the challenger’s burden to persuade the jury of its invalidity defense by clear and convincing evidence may be easier to sustain”) and, citing its earlier KSR decision, conceded that where prior art was not before the USPTO, “the rational underlying the presumption—that the PTO, in its expertise, has approved the claim—seems much diminished.” As the Supreme Court explained, “if the PTO did not have all of the material facts before it, its considerable judgment may lose considerable force. And, concomitantly, the challenger’s burden to persuade the jury of its invalidity defense by clear and convincing evidence may be easier to sustain.”

© 2011 McDermott Will & Emery

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

D.C. Circuit Invalidates SEC's Proxy Access Rules

Posted on Sunday, July 24, 2011 in the National Law Review an article by John D. Tishler  and Evan Mendelsohn of Sheppard, Mullin, Richter & Hampton LLP regarding the  United States Court of Appeals for the District of Columbia Circuit’s decision invalidating the SEC’s proxy access rules adopted in August 2010:

July 22, in Business Roundtable v. Securities & Exchange Commission, No. 10-1305 (D.C. Cir. July 22, 2011), the United States Court of Appeals for the District of Columbia Circuit issued its decision invalidating the SEC’s proxy access rules adopted in August 2010 with the intention that they be effective for the 2011 proxy season (see our blog here). The Business Roundtable and U.S. Chamber of Commerce filed the lawsuit in September 2010 challenging the SEC’s adoption of proxy access rules and separately requesting for the SEC to stay implementation of the rules pending the outcome of the lawsuit. The SEC granted the request for stay in October 2010 and issuers were relieved of the burdens of proxy access for the 2011 proxy season. (See our blog posts here and here.)

The Court found that the Commission “neglected its statutory responsibility to determine the likely economic consequences of Rule 14a-11 and to connect those consequences to efficiency, competition, and capital formation.” The Court also criticized the SEC’s reliance on empirical data that purported to demonstrate that proxy access would improve board performance and increase shareholder value by facilitating the election of dissident nominees, pointing out numerous studies submitted in the rule comment process that reached the opposite result.

The SEC’s proxy access rules also included an amendment to Rule 14a-8 that would authorize stockholder proposals to establish a procedure for stockholders to nominate directors. The SEC stayed implementation of the changes to Rule 14a-8 at the same time it stayed implementation of Rule 14a-11; however, the changes to Rule 14a-8 were not affected by the Court’s decision.

The SEC will now need to decide whether to propose new regulations for proxy access and whether to permit Rule 14a-8 to go effective.  However the SEC decides to proceed, it seems unlikely that public companies will face mandatory proxy access for the 2012 proxy season. 

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.