Category: Litigation

“Levitating” Lawsuits: Understanding Dua Lipa’s Copyright Infringement Troubles

Even global stardom will not make copyright woes levitate away from British superstar Dua Lipa. The pop icon is making headlines following a week of back-to-back, bi-coastal lawsuits alleging copyright infringement with her hit “Levitating.” First, on Tuesday, March 1st, members of reggae band Artikal Sound System sued Dua Lipa for copyright infringement in a Los Angeles federal district court1. Then, on Friday, March 4th, songwriters L. Russell Brown and Sandy Linzer filed their own copyright infringement lawsuit against the pop star in a New York federal district court2. Both lawsuits were filed claiming violations of the Copyright Act, 17 U.S.C. §§ 101 et seq.3

The Artikal Sound System lawsuit is short and alleges that Dua Lipa and the co-creators of “Levitating” copied Artikal Sound System’s 2017 song “Live Your Life.”4 The lawsuit does not provide any details in the allegation, other than explaining that “Live Your Life” was commercially released in 2017, was available during the time Dua Lipa and her co-creators wrote “Levitating,” and that because the two songs are substantially similar “Levitating” could not have been created independently.5 As a remedy, Artikal Sound System seeks actual damages, a portion of Dua Lipa’s profits stemming from the alleged infringement, the cost of the lawsuit, and any additional remedies the Court sees fit.6

Similarly, the Brown and Linzer lawsuit alleges that Dua Lipa and her “Levitating” co-creators copied their works “Wiggle and Giggle All Night” and “Don Diablo.”7 More specifically, the Brown and Linzer lawsuit alleges that “Levitating” is substantially similar to “Wiggle and Giggle All Night” and “Don Diablo.”8

Accordingly, the lawsuit claims that the defining melody in “Levitating,” the “signature melody,” is a direct duplicate of the opening melody in “Wiggle and Giggle All Night” and “Don Diablo,” and therefore appears in all three songs.9 As additional support, the lawsuit points to professionals and laypersons noticing a similarity between the three songs, and Dua Lipa previously admitting that she “purposely sought influences from past eras for the album Future Nostalgia.”10

As for a remedy, Brown and Linzer request full compensatory and/or statutory damages, punitive damages, an injunction on “Levitating,” a portion of Dua Lipa’s profits stemming from the alleged infringement, the cost of the lawsuit, and any additional remedies the Court sees fit.11

The copyright infringement legal framework

A general overview of the copyright infringement legal framework is helpful in assessing the potential outcomes of the “Levitating” lawsuits. Specifically, the legal framework from the 9th Circuit, where one of the “Levitating” lawsuits was filed, provides great guidance.

In order to establish copyright infringement, one must prove two elements: owning a valid copyright and copying of “constituent elements of the work that are original.”12 Importantly, when there is no direct evidence of copying, but rather circumstantial evidence, plaintiffs must show that:

  1. the accused infringers had access to the copyrighted work, and

  2. the infringing work and the copyrighted work “are substantially similar.

Plaintiffs can easily show access to the copyrighted work, but “substantial similarity” is harder to show.

2-Part Test

Luckily, the 9th Circuit devised a 2-part test to prove “substantial similarity.”13 Under the test, there is sufficient copying, and therefore “substantial similarity,” if an infringing work meets an “extrinsic” and “intrinsic” prong.14 The intrinsic prong is met if there is “similarity of expression” between the works, as evaluated from the subjective standpoint of an “ordinary reasonable observer.”15 The extrinsic prong is objective and requires comparing the “constituent elements” of the copyrighted and infringing works to see if there is substantial similarity in terms of the “protected” elements in the copyrighted work.16

As such, if the commonality between the copyrighted and infringing works is not based on “protected” elements, then the extrinsic prong is not met, and there is no “substantial similarity” between the works for purposes of a copyright infringement action. It must be noted that the 9th Circuit recognizes that, in certain situations, there can be a “substantial similarity” even if the constituent elements are individually unprotected, but only if their “selection and arrangement” reflects originality.17

To understand “substantial similarity” one must define what is “protectable” under copyright law. Copyright protection extends only to works that contain original expression.18 In this context, the standard for originality is a minimal degree of creativity.19 According to the Copyright Act, protection does not extend to ideas or concepts used in original works of authorship.20 In the musical context, copyright does not protect “common or trite musical elements, or commonplace elements that are firmly rooted in the genre’s tradition” because “[t]hese building blocks belong in the public domain and cannot be exclusively appropriated by any particular author.”21

Katy Perry “Dark Horse” case and an ostinato

While the “Levitating” lawsuits are still young, a recent decision by the 9th Circuit in the infamous Katy Perry “Dark Horse” case is a good example of how courts conduct legal analyses in copyright infringement cases. The precedential ruling (Gray v. Hudson), released on March 10th, affirms a U.S. District Judge’s decision to vacate a jury verdict that awarded US$2.8 million in damages to a group of rappers who claimed Katy Perry’s “Dark Horse” copied their song “Joyful Noise.”22

The 9th Circuit’s opinion cogently applies copyright law to hold that the plaintiffs in the original lawsuit did not provide legally sufficient evidence that “Joyful Noise” and “Dark Horse” were “extrinsically similar” in terms of musical features protected by copyright law.23

Specifically, the Court reasoned that while “Dark Horse” used an ostinato (a repeating musical figure) similar to the one in “Joyful Noise,” the resemblance in the ostinatos stemmed from “commonplace, unoriginal musical principles” and made them uncopyrightable.24 Without the ostinatos, the plaintiffs could not point to any “individually copyrightable” elements from “Joyful Noise” that were “substantially similar” in “Dark Horse.”25

Additionally, the Court held that the “Joyful Noise” ostinato was not original enough to be a protectable combination of uncopyrightable elements.26 In turn, under the legal framework for copyright infringement the plaintiffs failed to meet their burden.27 The Court put it best by opining that:

“[a]llowing a copyright over [the] material would essentially amount to allowing an improper monopoly over two-note pitch sequences or even the minor scale itself, especially in light of the limited number of expressive choices available when it comes to an eight-note repeated musical figure.”28

“Levitating” lawsuits likely outcomes

Applying the copyright infringement framework to the “Levitating” lawsuits allows us to understand the likely outcomes. First, the Artikal Sound System lawsuit does not allege any direct evidence of copying. As such, Artikal Sound System must show that Dua Lipa had access to “Live Your Life” and that “Levitating” is “substantially similar” to their song under the 2-prong test. Access is easily proved, as “Live Your Life” was commercially available on multiple streaming services when Dua Lipa wrote “Levitating.”29

However, the Artikal Sound System lawsuit does not provide enough information to pass the 2-prong “substantial similarity” test. The lawsuit only alleges that “Levitating” is “substantially similar” to “Live Your Life,” but does not detail any similarities much less provide any evidence that there is similarity of expression between the works from the point of view of a reasonable observer, as required by the intrinsic component of the test.30

More importantly, the lawsuit does not even mention any protectable elements from “Live Your Life” copied in “Levitating” and would, therefore, fail the extrinsic prong of the “substantial similarity” test.31 In turn, as submitted, the Artikal Sound System lawsuit fails to make a prima facie case of copyright infringement by Dua Lipa’s “Levitating.”

The story may be different for the Brown and Linzer lawsuit. Like the first suit, the Brown and Linzer lawsuit does not provide direct evidence of copying and will therefore only succeed if it passes the circumstantial evidence requirements of 1) access and 2) “substantial similarity.” Unlike the first suit, however, the Brown and Linzer complaint includes comparisons of the notes in “Levitating” to the notes in “Wiggle and Giggle All Night” and “Don Diablo” as support for the allegation of “substantial similarity.”

The 2nd Circuit, where the lawsuit was filed, held that a court can determine as a matter of law that two works are not “substantially similar” if the similarity between the two works concerns non-copyrightable elements of the copyrighted work.32 In practice, this means that the 2nd Circuit can apply the 2-prong “substantial similarity” test. Brown and Linzer can easily prove access to “Wiggle and Giggle All Night” and “Don Diablo” since both songs are internationally popular.33

Brown and Linzer can also meet the intrinsic prong of the test because, as they point out, “laypersons” (ordinary reasonable observers) have noticed the commonality between their copyrighted works and “Levitating,” as supported by widespread postings on mediums like TikTok.34 The extrinsic prong of the test is more uncertain.

In their lawsuit, Brown and Linzer point to a “signature melody” that repeats in “bars 10 and 11 of all three songs… [and] with some slight variation, in bars 12 and 13.”35 The court may find that this “signature melody” is not protected by copyright if it reasons that a melody is a basic musical principle, much like the 9th Circuit did for ostinatos in the Katy Perry “Dark Horse” case.

At its core, it seems like Brown and Linzer will have to convince the court that a melody, which they define as “a linear succession of musical tones,” qualifies as copyrightable because it is an original creative expression. Conversely, Brown and Linzer can concede that a melody is not copyrightable, but that their original arrangement and use of the melody in their copyrighted songs is copyrightable. In the end, it will be up to whether or not a court finds that the “signature melody” is copyrightable. As such, the outcome of Brown and Linzer’s action for copyright infringement is uncertain.

Nonetheless, one thing is for sure, copied or not, “Levitating” will continue powering gym visits and nights out dancing.

Footnotes

  1. See Complaint, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  2. See Complaint, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  3. See Complaint at ¶ 7, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022); Complaint at ¶ 12, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  4. See Complaint at ¶ 17, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  5. See Complaint at ¶ 15-18, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  6. See Complaint at ¶ 19-22, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  7. See Complaint at ¶ 2, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  8. See Complaint at ¶ 2, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  9. See Complaint at ¶ 3, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  10. See Complaint at ¶ 49, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  11. See Complaint at 13-14, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  12. Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361 (1991).

  13. Apple Comput., Inc. v. Microsoft Corp., 35 F.3d 1435, 1442 (9th Cir. 1994).

  14. Id.

  15. Id.

  16. Swirsky v. Carey, 376 F.3d 841, 845 (9th Cir. 2004).

  17. Satava v. Lowry, 323 F.3d 805, 811 (9th Cir. 2003).

  18. See 17 U.S.C. § 102(a); Feist, 499 U.S. at 345.

  19. See Feist, 499 U.S. at 345.

  20. See 17 U.S.C. § 102(b); Skidmore as Tr. for the Randy Craig Wolfe Tr. v. Led Zeppelin, 952 F.3d 1051, 1069 (9th Cir. 2020) (en banc).

  21. Skidmore, 952 F.3d at 1069.

  22. Gray v. Hudson, No. 20-55401, slip op at 26 (9th Cir. Mar. 10, 2022).

  23. Id.

  24. Id. at 14-21.

  25. Id. at 17.

  26. Id. at 22.

  27. Id. at 26.

  28. Id. at 24.

  29. See Complaint at ¶ 16, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  30. See Complaint at ¶ 18, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  31. See Complaint at ¶ 18, Cope v. Warner Records, Inc., Case 2:22-cv-01384 (C.D. Cal. 2022).

  32. Peter F. Gaito Architecture, LLC v. Simone Dev. Corp., 602 F.3d 57, 63-65 (2d Cir. 2010).

  33. See Complaint at ¶ 35, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  34. See Complaint at ¶ 4, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

  35. See Complaint at ¶ 38, Larball Publ’g Co., Inc. v. Dua Lipa, Case 1:22-cv-01872 (S.D.N.Y. 2022).

Article By Adrian Gonzalez Cerrillo and Sana Hakim of K&L Gates

For more intellectual property legal news, click here to visit the National Law Review.

Copyright 2022 K & L Gates

Cartel Corner | March 2022

INTRODUCTION

The US Department of Justice’s (DOJ) Antitrust Division (Division) has continued to actively investigate and pursue alleged criminal violations of antitrust laws and collusive activity in government procurement. US Attorney General Merrick Garland noted in a March 2022 speech at the ABA Institute on White Collar Crime that the Division ended last fiscal year “with 146 open grand jury investigations—the most in 30years.”[1] As we near the end of the first quarter of 2022, the Division has a record number of criminal cases either in trial or awaiting trial.

In this installment of Cartel Corner, we examine and review recent and significant developments in antitrust criminal enforcement and profile what the Division has highlighted as its key priorities for enforcement. For 2022 and beyond, those priorities are—and likely will remain—identifying and aggressively pursuing alleged violations involving the labor markets, consumer products, government procurement and the generic pharmaceutical industry.

LABOR MARKETS

Criminal investigations and prosecutions in the labor markets continue to be a top priority for the Division. Such enforcement has been gaining momentum since the Division and the Federal Trade Commission (FTC) issued their joint Antitrust Guidance for Human Resources Professionals in 2016 which warned that the DOJ—for the first time— intended to proceed criminally against “naked wage-fixing or no-poach agreements” between horizontal employers. That momentum lifted off in December 2020 and continued throughout 2021, with the Division bringing 12 criminal cases against nine individuals and three companies. Alleged wage-fixing and no-poach agreements have historically been prosecuted in the civil context, meaning fines for companies and individuals.

Several recent developments are worth highlighting. First, in November 2021, a federal court determined for the first time ever that an alleged wage-fixing conspiracy could constitute a per se criminal violation of the Sherman Act. In U.S. v. Jindal, the Division alleged that two former executives of a physical therapist staffing company fixed the wages paid to physical therapists in the Dallas-Ft. Worth area. In denying the defendant’s motions to dismiss, a federal judge in the US District Court for the Eastern District of Texas determined that courts have not limited price-fixing conspiracies to the purchase and sale of goods but have also found them to cover the purchase and sale of services. The court continued, noting that buyers of services included employers in the labor market and that the alleged wage-fixing agreement was another form of price fixing.

Second, the DOJ’s aggressive posture in these cases continued in January 2022 when it charged four home healthcare staffing company owners with allegedly fixing workers’ wages and agreeing not to hire each other’s workers in 2020.

Third, until recently, each of the criminal charges brought by the DOJ have involved healthcare companies. The ability of the DOJ to criminally prosecute alleged non-solicit agreements is being challenged, where motions to dismiss are pending. However, in December 2021, the Division expanded its reach into the aerospace industry, charging a former government contractor and five employees of its suppliers for alleged allocation agreements relating to the hiring of engineers (U.S. v. Patel et al.). The DOJ’s indictment alleges that one of the defendants agreed with suppliers to allocate employees by restricting hiring and recruiting between the companies for almost a decade.

The increased focus and enforcement action relating to labor markets underscores the Biden administration’s stated priorities. For example, in July 2021, President Biden issued an Executive Order “Promoting Competition in the American Economy” which provided wide-ranging guidance and instructions to the federal government to promote and increase competition. One specific, identified initiative involved strengthening of guidance to prevent employers from collaborating to suppress wages, reduce benefits or engage in other anticompetitive practices. With the recent flurry of criminal labor market charges; repeated statements by the Division to the effect that protecting competition in the labor markets continues to be a top priority; the Division’s hosting of a joint workshop with the FTC in December 2021, titled “Making Competition Work: Promoting Competition in the Labor Markets”; and widespread support from the Biden administration, one can expect the Division’s focus on criminal enforcement in the labor markets to be an increasing refrain.

TAKEWAYS

The DOJ’s novel and aggressive stance on expanding Sherman Act criminal violations to include the ways in which companies engage with their workers may not ultimately be sustained by trial or appellate courts. For now, however, the DOJ remains determined to investigate and prosecute alleged “wage-fixing and no-poach” issues.

With the DOJ’s resolute approach changing the landscape of antitrust labor market cases, companies would be prudent to ensure that their compliance programs are up to date and include specific and appropriate guidance on these issues. When considering typical antitrust cartel investigations, the focus has traditionally been on alleged conspiracies relating to pricing, sales, and/or bidding of certain products or in certain geographic areas. The DOJ’s changing attitude toward labor market antitrust issues is a notable shift and may be directed at entirely different segments of a corporate business, including human resources and hiring, in any industry. To address the DOJ’s assertive approach, employers involved in hiring and compensation-related decisions would be well served to receive training addressing these potential antitrust issues.

CONSUMER PRODUCTS

Consumer products have recently been a hotbed of DOJ investigations for antitrust violations. The DOJ has several long-running investigations into a wide range of industries, including broiler chickens, commercial flooring and, most recently, DVDs and Blu-Rays in e-commerce. The latest developments in these investigations reflect the DOJ’s continued, and increasingly heightened, focus on prosecuting companies and high-ranking executives engaged in alleged anticompetitive conduct that directly affects American consumers.

BROILER CHICKENS

The DOJ’s first trial in its ongoing investigation into the $95 billion broiler chicken industry resulted in a hung jury. The lengthy trial began in October 2021, in Denver, against 10 current and former executives from major broiler chicken producers (and came on the heels of a guilty plea obtained by the DOJ earlier in 2021 in a price-fixing case against Pilgrim’s Pride Corp (Pilgrim’s Pride), which resulted in a $107 million criminal fine). The DOJ alleged that the defendants engaged in an overarching price-fixing and bid-rigging scheme for approximately a decade. But after seven weeks of trial, including four days of deliberation, the jurors remained deadlocked, resulting in the judge declaring a mistrial. The result highlights the challenge facing the DOJ in meeting its burden of proof on an alleged conspiracy based largely on documents and without cooperating witnesses.

After the mistrial, the defendants asked the court for a judgment of acquittal. The judge denied that request, and a retrial in the case began in late February 2022. Additionally, the DOJ has other cases in the pipeline in the same long-running investigation, including against broiler-chicken producers Claxton Poultry Farms and Koch Foods, Inc., as well as criminal charges against four additional former Pilgrim’s Pride executives. Trials for those additional corporate and individual defendants are set for October 31, 2022, and July 18, 2022, respectively.

In a related civil action, a federal judge in Illinois gave final approval for a $181 million settlement between six poultry producers and end-user consumers who claimed the companies conspired to fix broiler chicken prices. The deal was reached between the consumer plaintiffs and Peco Foods, Fieldale Farms, George’s, Tyson Foods, Pilgrim’s Pride and Mar-Jac Poultry. Consumers are still pursuing claims against 12 additional poultry companies.

Going forward, the DOJ indicated it will prioritize and pursue more matters that impact competition in agriculture. In fact, the DOJ and the Department of Agriculture (USDA) recently issued a joint statement on their shared commitment to effectively enforcing federal competition laws that protect farmers, ranchers, and other agricultural producers and growers from unfair and anticompetitive practices. As part of their effort to step up enforcement in the agriculture sector, the agencies launched farmerfairness.gov, a new online tool that allows farmers and ranchers to anonymously report potentially unfair and anticompetitive practices in the livestock and poultry sectors. If, after a preliminary review, a complaint raises sufficient concern under antitrust laws, it will be selected for further investigation, and may lead to the opening of a formal investigation.

One area to watch is the cattle civil antitrust litigation. While the DOJ is still in the investigation stage, direct purchaser plaintiffs filed a civil lawsuit against the Big Four meatpacking companies, accusing them of conspiring to drive up the price of beef to make bigger profits by suppressing slaughter volumes and constraining the supply of meat. On February 1, 2022, the proposed class of direct buyers reached a $52.5 million deal with one of the Big Four defendants JBS USA (JBS), which provided both monetary relief to the class, and JBS’s “extensive cooperation” in the buyers’ ongoing litigation against the three remaining nonsettling defendants. The settlement is currently before the US District Court for the District of Minnesota awaiting preliminary approval. It will be interesting to see what next steps the DOJ will take considering the civil litigation, particularly the evidence that will be provided by JBS’s cooperation.

COMMERCIAL FLOORING

Another long-running bid-rigging investigation in the commercial flooring industry resulted in additional indictments last year, as well. To date, the DOJ has indicted three companies and six individuals, including Mr. David’s Flooring International LLC (Mr. David’s), a Chicago-based commercial flooring contractor that pleaded guilty in August 2021. Like the first two companies that the DOJ charged, Mr. David’s was charged for conspiring with other companies—for at least eight years, from 2009 to 2017—to rig bids for commercial flooring by agreeing which company would win the bid and which would submit a complementary, intentionally losing bid. The DOJ also charged Mr. David’s with money laundering for allegedly concealing kickback payments the company made, in exchange for unauthorized discounts, to an account executive for a large flooring manufacturer.

As part of its guilty plea, Mr. David’s agreed to pay at least a $1.2 million criminal fine for its role in the conspiracies. This follows guilty pleas that the DOJ obtained from PCI FlorTech, Inc., in 2019 and Vortex Commercial Flooring in 2020, which resulted in a $150,000 criminal fine and $1.4 million in fines and restitution, respectively.

DVDS AND BLU-RAYS

With the expansion of e-commerce, the DOJ has also been active in prosecuting price-fixing conspiracies for consumer goods in online marketplaces. In 2021, the DOJ charged four individuals, one in June and three in November, with conspiring to fix prices of DVDs and Blu-Ray discs sold through an online marketplace. According to the charges, between November 2017 and October 2019 the defendants agreed to raise and maintain the prices of DVDs and Blu-Ray discs sold in the marketplace’s storefronts, the business addresses of which were located in five different states. The affected sales to customers throughout the United States by the four defendants ranged between $360,000 to $1,100,000. Each of the defendants have pleaded guilty. While the affected sales pale in comparison to large-scale matters like broiler chickens, the DOJ has shown equal willingness to aggressively pursue alleged collusive conduct in smaller and emerging sectors, particularly in online marketplaces.

TAKEAWAYS

Given the long-running nature of the investigations involving broiler chickens and commercial flooring, the change in the US presidential administration seems to have only increased the DOJ’s scrutiny into industries affecting consumer goods. Looking ahead, consumer products will likely remain one of the DOJ’s top priorities. Indeed, while the Biden administration recognizes the strain the pandemic has put on supply chain issues, resulting in higher prices in consumer goods, the White House has also placed the blame on “another culprit”: “dominant corporations in uncompetitive markets taking advantage of their market power to  raise prices.”

The DOJ recently announced an initiative to deter, detect and prosecute those who would exploit supply chain disruptions to engage in collusive conduct. As part of that initiative, the DOJ is prioritizing any existing investigations where competitors may be exploiting supply chain disruptions for illicit profit and is undertaking measures to proactively investigate collusion in industries particularly affected by supply disruptions. The DOJ is also working with authorities in other countries to detect and combat global supply chain collusion.

Those who work in the consumer goods space can expect additional scrutiny and enforcement from the DOJ in the months and years to come, especially in industries that have experienced higher consumer price increases. It is therefore important to have robust compliance programs, including appropriate employee training, in place to address and provide guidance on these issues.

PROCUREMENT

The DOJ’s Procurement Collusion Strike Force (PCSF)—an interagency partnership established in November 2019 to combat antitrust crimes and related fraud involving government procurement and funding—remained a top priority for the Division in 2021. Since its inception in 2019, the PCSF has significantly expanded in scope. The strike force now has offices in 22 federal districts staffed with DOJ trial attorneys, assistant US attorneys and agents from seven national law enforcement partner agencies. The PCSF has trained more than 17,000 special agents, attorneys, prosecutors, investigators, analysts, auditors, data scientists and procurement officials. In addition, in the spring of 2021 the PCSF announced the creation of PCSF Global. The goal of PCSF Global is to build connections with enforcement counterparts around the world and to investigate and prosecute collusion in procurement relating to US government funds spent overseas. The PCSF currently has almost three dozen investigations open domestically and internationally.

Below are a few key highlights from 2021:

PCSF’S RECENT WORK

On October 13, 2021, PCSF Director Daniel Glad delivered a speech recapping the strike force’s recent work and highlighting enforcement priorities, including “set-aside fraud” and collusion targeting infrastructure spending. Set-aside fraud refers to collusion and fraud affecting government programs that are designed to provide opportunities for disadvantaged communities and individuals to participate more fully in public procurement. Glad highlighted the PCSF’s recent investigation into set-aside fraud involving construction contracts in San Antonio. The director also commented that infrastructure will continue to be a focus for the PCSF as federal spending for infrastructure increases. Glad added that while the Sherman Act is the PCSF’s “lodestar,” the strike force’s focus includes prosecuting other crimes that also corrupt the competitive process for obtaining government contracts and funding.

BELGIAN SECURITY SERVICES

On June 25, 2021, a Belgian security services company, G4S Secure Solutions NV (G4S), pled guilty for its role in a conspiracy to rig bids, allocate customers and fix prices for contracts with the US Department of Defense and with the NATO Communications and Information Agency (NCI Agency) to provide security services for military bases and installations in Belgium. The NCI Agency is funded in part by the United States. This was the first international resolution obtained by the PCSF, as well as the PCSF’s first charged matter.

The DOJ alleged that G4S participated in a conspiracy with two competitors to coordinate price increases, submit artificially determined, non-competitive bids and refrain from bidding for certain contracts from spring 2019 through summer 2020. The DOJ further alleged that the conspirators colluded during in-person meetings and via phone, text messages, encrypted messaging applications and email. G4S agreed to pay a $15 million criminal fine. In October 2021, two former employees of G4S also pled guilty to charges relating to the same conspiracy. Both individuals are Belgian nationals residing in Belgium.

The investigation demonstrates that the PCSF is focused on conspiracies that victimize the US government, whether the conspiracies or government activities are based in the United States or abroad. The PCSF remains committed to actively investigating and prosecuting companies and individuals based outside of the United States, such as the defendants here, who distort the competitive process for US government contracts.

NORTH CAROLINA ENGINEERING

In June 2021, a North Carolina engineering firm pled guilty to conspiring to rig bids and defraud the North Carolina Department of Transportation (NCDOT). Contech Engineered Solutions LLC and Brent Brewbaker, one of its former executives, had been indicted in October 2020. They were charged with six counts of bid rigging, conspiracy to commit fraud, mail fraud and wire fraud. The conspiracies, reaching back to at least 2009, involved water drainage systems projects. Contech agreed to pay a criminal fine of $7 million and approximately $1.5 million in restitution to the NCDOT. On February 1, 2022, Brewbaker was convicted by a jury of all six charged counts.

Contech argued that the conspiracy was not a per se violation because Contech and Pomona Pipe Products, its co-conspirator, competed vertically: Contech as the supplier, Pomona Pipe as the reseller. The district court disagreed, holding that Contech and Pomona held themselves out to NCDOT as competitors and, as such, this was bid-rigging subject to the per se analysis.

This matter is precisely the type of case the PCSF was designed to investigate. The PCSF trains law enforcement officers, procurement officials and others across the country “to better deter and detect antitrust crimes affecting government procurement, grant, and program funding.” With more government funding earmarked for infrastructure and an increased budget for the Antitrust Division, the PCSF is likely to increase its footprint at all levels of government.

MINNESOTA CONCRETE 

In September 2021, Minnesota concrete contractor Clarence Olson pled guilty to a bid-rigging charge. Olson and his co-conspirators conspired to rig bids on concrete repair and construction contracts submitted to at least four municipalities in Minnesota, including local governments and school districts in the Minneapolis-St. Paul area. The conspiracy began as early as September 2012 and continued through at least June 2017. Minnesota law required that municipalities obtain two or more quotations from independent bidders before awarding contracts above a certain threshold. According to the plea agreement, at a competitor’s request Olson submitted bid quotes with prices higher than that of the competitor to ensure that Olson would lose the bid.

RISKS BEYOND PRISON AND FINES 

Charges of bid rigging and procurement fraud can have collateral consequences beyond criminal liability. Companies and individuals are subject to state and federal suspension and debarment procedures. A suspension temporarily prevents a company from government contracting and typically lasts until the investigation or subsequent legal proceedings have terminated. If a company pleads guilty or is convicted, it may be debarred—a permanent ban from doing business with a government for a specified time period. The duration of the debarment typically correlates to the severity of the offense. Under federal law, a contractor may be debarred without a conviction if the evidence shows a knowing failure to disclose credible evidence of a criminal violation of federal antitrust law (48 CFR § 9.406-2(b)(vi)(A)).

Moreover, charges filed against affiliated individuals may impute the company when that individual was acting as an agent of the company. Although suspensions and debarments may last for shorter periods of time, the reputational damage may last far longer. If made public, the debarment could also impact a company’s or individual’s ability to do business in the private sector. Suspension and debarment are collateral consequences that the DOJ may consider in the process of investigating and prosecuting a criminal antitrust violation.

THE FUTURE OF THE PCSF 

The first year of the PCSF was dedicated to outreach, education and partnership implementation. The PCSF has now established partnerships with many law enforcement agencies across the country. Beyond domestic interagency investigations, the PCSF has launched initiatives that will expand its reach and target acute problems in government procurement. Investigations initiated by the PCSF have taken time to be investigated (particularly with a global pandemic making certain investigative steps more challenging), but in some instances these investigations have reached the recommendation and/or charging stage. We expect to see additional PCSF cases in the coming year.

PCSF Global: The PCSF has launched PCSF Global, an initiative aimed at fostering partnerships with international enforcement authorities. The US government spends considerable funds abroad, particularly for military contracts. International partners lend their expertise with foreign markets and give the PCSF eyes and ears on the ground abroad.

Set-Aside Fraud: One of the PCSF enforcement priorities is combating fraud in government set-aside programs. Such programs set aside government contracting opportunities for special interest groups such as disabled veterans, small businesses and minority-owned businesses. In January 2021, President Biden signed “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government,” an executive order aimed at increasing equal access to government contracting and procurement opportunities. While the PCSF mandate to combat fraud on set-aside programs existed before the executive order, it is strengthened by the Biden administration’s directive.

Data Analytics Project: The PCSF has hosted webinars attended by data scientists, analysts and auditors focused on using data analytics to detect procurement fraud. Data Analytics Project attorneys have engaged analytics shops to build tools for detecting collusion using bid data. Currently, the Data Analytics Project is focused on US procurement. In light of the PCSF Global initiative, it is possible that international partners will engage with the PCSF to develop cross-border tools.

Criminal Antitrust Anti-Retaliation Act (CAARA): CAARA, the first antitrust-specific whistleblower protection legislation, became law in December 2020. It prohibits employers from retaliating against employees, contractors, subcontractors and agents of employers for reporting antitrust violations or participating in antitrust government proceedings. The Securities and Exchange Commission (SEC), Internal Revenue Service (IRS) and other government agencies saw increased reporting since implementing similar whistleblower protections. CAARA is a tool that can be used to encourage early reporting and cooperation because of the legal protection it offers to whistleblowers, furthering the PCSF’s goals to deter and detect fraud.

GENERICS

For more than seven years, the generic pharmaceutical industry has been caught up in investigations and litigation asking whether the industry has engaged in a conspiracy to violate the antitrust laws.[2] In 2014 the Connecticut attorney general opened a civil investigation into whether manufacturers of generic pharmaceuticals had fixed prices and allocated markets. Shortly thereafter, the DOJ joined the mix, first opening a criminal investigation into these issues and then, a few years later, opening a civil False Claims Act (FCA) investigation into the same conduct. And by 2016, the plaintiffs’ bar had joined the fray, filing the first complaints of what soon became a massive and unwieldy multidistrict litigation (MDL), ultimately consolidated in the United States District Court for the Eastern District of Pennsylvania.

Below, we provide a brief update on this massive MDL and the DOJ investigation that started it.

MULTIDISTRICT LITIGATION: IN RE: GENERICS PHARMACEUTICALS PRICING ANTITRUST LITIGATION, NO. 16-MD-2724 (E. D. PA. 2016)

In re: Generics, the broad and long-running MDL, remains at the center of the pharmaceutical cases this past year. In addition to the governments of 49 states, the District of Columbia, American Samoa, Guam, Puerto Rico, Northern Mariana Island and the US Virgin Islands, the MDL also includes three putative plaintiff classes (direct purchaser, end-payer and indirect reseller plaintiffs), and more than a dozen individual entities (including major retailers, healthcare insurers and even some local governments) that filed opt-out complaints (e.g., The Kroger Co. et al, Humana Inc., and United Healthcare Services, Inc.). At present, the MDL involves at least 85 complaints alleging misconduct regarding more than 285 drugs, 38 manufacturers and 25 individual defendants.

The first civil complaints were filed in 2016, initially encompassing claims concerning just two drugs, digoxin and doxycycline. The Judicial Panel on Multidistrict Litigation later consolidated claims involving other drugs into the MDL. As the litigation has evolved, private plaintiffs and state attorneys general have since filed complaints involving numerous drugs, focusing on an alleged overarching conspiracy to fix prices, rig bids and allocate customers across the generic pharmaceutical industry. The state attorneys general, which have led the expansion of the MDL, have filed three such overarching conspiracy complaints: (1) a June 2018 complaint focused on Heritage Pharmaceuticals; (2) a May 2019 complaint focused on Teva Pharmaceuticals; and (3) a May 2020 complaint focused on dermatology products.  Many plaintiffs are seeking joint and several liability for the alleged overarching conspiracy—the scope of which is unprecedent and untested in antitrust litigation.

In May 2021, US District Judge Cynthia M. Rufe selected the state attorneys general overarching conspiracy complaint centered on over 80 dermatology products to serve as a bellwether case in the MDL. Two drug-specific complaints filed by the direct purchaser and end payer plaintiffs will also proceed as bellwethers. The court originally selected the state attorneys general May 2019 Teva-centric overarching conspiracy complaint as the bellwether. A coalition of 44 state attorneys general led by Connecticut filed the Teva-centric case in May 2019. However, following the DOJ’s August 2020 grand jury indictment of Teva on criminal price-fixing charges (see below), Teva petitioned to have the selection of its case as bellwether overturned. The pharmaceutical companies then sought to have the states’ first filed case, which centered around Heritage Pharmaceuticals, chosen as a replacement bellwether because the case involved a smaller scope and was more manageable to litigate. The states advocated for the May 2020 dermatology action as the bellwether. Despite involving over 80 drugs, the states contended this complaint was more indicative of the alleged conspiracy and their investigation had evolved in the years since the Heritage complaint was filed. Judge Rufe found that “the dermatology action [wa]s more typical of the overarching conspiracy cases than the Heritage-centric action and w[ould] provide overall a more comprehensive view of the positions of more parties in the MDL.”[3]

The bellwether selection was just the first step in what will continue to be a long series of cases. At present, class certification briefing in the drug-specific bellwether cases is scheduled to be completed by mid-October 2023. The district court will schedule hearings on class certification for dates to be determined in November 2023.[4] All motions for summary judgment regarding the states’ bellwether case must be filed by October 16, 2023, and motions for summary judgment regarding the drug-specific bellwether cases must be filed no later than November 16, 2023.[5] Pretrial conferences are not yet scheduled.

CRIMINAL LITIGATION: UNITED STATES V. TEVA PHARMACEUTICALS USA, INC. AND GLENMARK PHARMACEUTICALS, USA (E.D. PA. 2020)

While the MDL has proceeded, the DOJ has continued with its separate criminal investigation. In June 2020, the DOJ indicted Glenmark Pharmaceuticals, USA, alleging that it engaged in a conspiracy to fix prices for pravastatin and other undisclosed drugs from around May 2013 through December 2015. In August 2020, the DOJ filed a superseding indictment naming Teva as an alleged co-conspirator.[6] Glenmark sought to sever the cases to proceed with separate trials, but US District Judge R. Barclay Surrick recently denied that motion and ruled that a joint trial could proceed.[7] In June 2021, the Antitrust Division filed a scheduling order motion seeking a trial date of January 18, 2022; however, counsel for Glenmark and Teva found this date “unrealistic in light of the enormous volume of complex discovery in this case (more than 22 million documents and counting), as well as the backlog of trials in this District due to the pandemic.”[8] To date, no schedule has been set.

GENERIC DRUG COMPANY PENALTIES AND SETTLEMENTS

DOJ Investigations

Nonetheless, the DOJ has already obtained several settlements in both the criminal and civil FCA investigations, including securing several deferred prosecution agreements (DPAs) from the targets of its investigations.[9] In fact, the DOJ’s Antitrust Division and Civil Division have already collected more than $1 billion in penalties as a result of their investigations into the generic drug industry, as detailed below.

Most recently, in October 2021, Taro Pharmaceuticals USA, Inc., Sandoz Inc., and Apotex Corporation agreed to pay $213.2 million, $185 million and $49 million, respectively, to settle alleged False Claims Act violations stemming from conspiracies to fix prices of multiple generic drugs.[10] The Civil Division alleges that the three companies illegally paid and received compensation between 2013 and 2015 resulting from alleged agreements on price, supply and allocation of customers with other generic pharmaceutical manufacturers for 20 generic drugs, including etodolac, nystatin-triamcinolone cream and ointment, benazepril HCTZ and pravastatin. In addition, the companies entered into five-year corporate integrity agreements with the Health and Human Services Office of the Inspector General, which provides oversight for federal healthcare programs like Medicare and Medicaid. These agreements require internal monitoring and price transparency.

Multidistrict Litigation

In connection with the In re: Generics MDL, the first civil settlements with certain plaintiffs were announced in 2021. In June 2021, Teva announced it settled, for $925,000, all claims brought by the state of Mississippi. In November 2021, two US subsidiaries of Sun Pharma—Taro Pharmaceuticals U.S.A., Inc., and Sun Pharmaceutical Industries, Inc.—agreed to pay a total of $85 million to a proposed class of direct purchaser plaintiffs (DPPs) in the MDL. The settlement can be reduced, however, by $10 million if the direct purchasers that opt out of the putative class collectively account for 20% or more of Taro’s and Sun Pharmaceutical Industries, Inc.’s aggregate dollar sales of the generic drugs at issue in the direct purchaser action.

Entity/Individual Date Charges/Resolution Settlement Amount
Jeffrey Glazer and Jason Malek (former Heritage Pharmaceuticals executives) Dec. 2016 Pleaded guilty to conspiring to fix prices, rig bids, and allocate customers for doxycycline hyclate and glyburide. Both awaiting sentencing. TBD
Heritage Pharmaceuticals May 2019 Entered into a DPA with the Antitrust Division to resolve the DOJ’s charges relating to glyburide, a drug used to treat diabetes, agreeing to pay a criminal penalty and cooperate fully with the ongoing criminal investigation. In a separate civil resolution with the Civil Division, Heritage agreed to pay to resolve allegations under the FCA related to the alleged price-fixing conspiracy. $225K criminal penalty and $7.1M civil settlement
Rising Pharmaceuticals Dec. 2019 Entered into a DPA with the Antitrust Division to resolve the DOJ’s charges regarding an alleged conspiracy to fix prices for a hypertension medication. $3.5M criminal fine and civil penalty combined
H. Armando Kellum (former Sandoz executive) Feb. 2020 Pleaded guilty to fixing prices, rigging bids and allocating customers for several drugs, including clobetasol and nystatin triamcinolone cream. Kellum is awaiting sentencing. TBD
Sandoz Inc. Mar. 2020 and Oct. 2021 Agreed to pay a criminal penalty for allegedly conspiring to fix prices on several generic drugs, including, but not limited to, drugs used to treat brain cancer, cystic fibrosis, arthritis and hypertension. Agreed to pay a civil penalty for aiding and receiving compensation prohibited by the Anti-Kickback Statute through arrangements on price, supply, and allocation of customers for drugs such as benazepril HCTZ and clobetasol. $195M criminal penalty and $185M civil settlement
Apotex Corporation May 2020 and Oct. 2021 Agreed to pay a criminal penalty to resolve allegations that it conspired to fix prices for pravastatin. $24.1M criminal penalty and $49M civil settlement
Taro Pharmaceutical USA, Inc. July 2020 and Oct. 2021 Entered into a DPA with the Antitrust Division to resolve the DOJ’s charges regarding an alleged conspiracy related to several drugs with affected sales of over $500 million. $205.6M criminal fine and $213.2M civil penalty

TAKEAWAYS

Although the district court has allowed several cases to proceed past the motion to dismiss stage, it remains unclear if the plaintiffs’ expansive allegations will survive summary judgment and later proceedings. In the months to come, there will continue to be interplay between the criminal trial proceeding against Teva and Glenmark and the civil cases proceeding in the MDL. For example, the MDL court is currently considering whether the DOJ should be allowed to extend a continued stay of depositions in the civil cases of specific individuals it views as “key” to its criminal investigation.

This investigation and litigation has brought significant attention to the generic drug and pharmaceutical industry at large, including increased scrutiny and calls for action by Congress (such as the US House of Representatives Committee on Oversight and Reform’s three-year Drug Pricing Investigation, which culminated in a majority staff report released in December 2021). Several pieces of legislation aimed at reigning in pharmaceutical prices have also been introduced. In all, these investigations and litigation, coupled with the increases in oversight and willingness to investigate by state and federal governments, suggest that the pharmaceutical industry will remain subject to heightened scrutiny of its business practices for many years to come.

CONCLUSION

As we move into the second quarter of 2022, one thing is abundantly clear: The DOJ’s aggressive criminal antitrust enforcement will only continue to increase. The Division ended the last fiscal year with 146 open grand jury investigations—the most in 30 years.[11] President Biden has made competition a priority for his administration.[12] Attorney General Garland has specifically identified “reinvigorating antitrust enforcement” as at the center of the DOJ’s mission.[13] In its FY 2022 budget request, the DOJ requested a 9% increase in spending, amounting to an additional $200 million.[14]

At the same time, there seems to be a shift in tone and approach at the Division. The Division has started to push the boundaries of criminal antitrust enforcement. As noted above, it has pursued naked no-poach agreements criminally, something that it had never done prior to 2020. In recent remarks to the ABA Institute on White Collar Crime, Richard Powers, the US Deputy Assistant Attorney General for Criminal Enforcement in the Division, noted that the Division is also prepared to criminally charge individual executives for violations of Section 2 of the Sherman Act, the provision that prohibits market monopolization—another exceedingly aggressive and controversial approach and something that the Division has not done in decades. To cap it off, the Division has shown a tendency, of late, to take cases to trial, rather than negotiate resolutions. And, it has hired a number of prominent Criminal Division alumni, several with significant trial experience, to help with this effort. All of this suggests that the Division is prepared to stretch the law in places and go the distance to pursue what it views as criminal violations of the antitrust laws.

 

 

ENDNOTES

[1] Attorney General Merrick B. Garland Remarks to the ABA Institute on White Collar Crime, Thursday, March 3, 2022, https://www.justice.gov/opa/speech/attorney-general-merrick-b-garland-delivers-remarks-aba-institute-white-collar-crime

[2] Christopher Rowland, Investigation of generic ‘cartel’ expands to 300 drugs, THE WASHINGTON POST (Dec. 9, 2018), https://www.washingtonpost.com/business/economy/investigation-of-generic-cartel-expands-to-300-drugs/2018/12/09/fb900e80-f708-11e8-863c-9e2f864d47e7_story.html

[3] Pretrial Order No. 171 (Revised Bellwether Selection; Stay of Certain Discovery), MDL 2724 Dkt. 1769 (E.D. Pa. May 7, 2021), at p. 3.

[4] In re: Generics, Pretrial Order No. 188 (Schedule of Further Proceedings in Bellwether Cases), available at https://www.paed.uscourts.gov/documents/MDL/MDL2724/16md2724%20PTO188.pdf

[5] Id.

[6] U.S. v. Teva Pharmaceuticals USA, Inc. and Glenmark Pharmaceuticals, USA, U.S. DEP’T OF JUSTICE (Aug. 25, 2020), https://www.justice.gov/atr/case/us-v-teva-pharmaceuticals-usa-inc

[7] US v. Teva Pharmaceuticals USA, Inc. and Glenmark Pharmaceuticals, USA, No. 20-200 Dkt. 146 (E. D. Pa. Jan. 14, 2022).

[8] Letter from D. Axelrod and K. Stojilkovic to Judge Surrick re: United States v. Glenmark Pharmaceuticals Inc., USA et al., 20-cr-200 (RBS), No. 2:20-cr-00200-RBS Dkt. 94 (June 10, 2021).

[9] Normally, in a cartel investigation, guilty pleas would be used; however, because a guilty plea would bar these companies from participating in certain government healthcare programs, which would effectively terminate business for some of the companies involved and deprive millions of Americans of important, often life-saving medication, the DOJ used DPAs in these settlements.

[10] Pharmaceutical Companies Pay Over $400 Million to Resolve Alleged False Claims Act Liability for Price-Fixing of Generic Drugs, U.S. DEP’T OF JUSTICE
(Oct. 1, 2021), https://www.justice.gov/opa/pr/pharmaceutical-companies-pay-over-400-million-resolve-alleged-false-claims-act-liability

[11] Id.

[12] https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/07/09/remarks-by-president-biden-at-signing-of-an-executive-orderpromoting-competition-in-the-american-economy/

[13] https://www.appropriations.senate.gov/imo/media/doc/Statement%20of%20Attorney%20General%20Merrick%20Garland%20-%20June%209,%2020213.pdf

[14] Id.

© 2022 McDermott Will & Emery

Article By Justin P. Murphy, Paul M. Thompson, Han Cui, Joshua W. Eastby, Anthony S. Ferrara and Alexandra Lewis and Marisa E. Poncia of McDermott Will & Emery

Electronic Medical Record Provider Pays $930,000 in First Civil Cyber-Fraud Initiative Settlement

For the first settlement as part of the Department of Justice’s Civil Cyber-Fraud Initiative, DOJ settled a case against medical services government contractor Comprehensive Health Services, LLC (CHS) for $930,000.  This settlement resolves allegations brought forth in two qui tam lawsuits, where four whistleblowers filed suit on behalf of the government under the qui tam provision of the False Claims Act.  Three of the whistleblowers received $15,000, in addition to attorneys’ fees, and one relator received $127,050 for reporting fraud.

“This settlement serves notice to federal contractors that they will be held accountable for conduct that puts private medical records and patient safety at risk,” said the United States Attorney for the Eastern District of New York.

CHS, as part of the medical services they provided to the U.S. government, was paid to implement a secure electronic medical record (EMR) system as part of contracts with the State Department and Air Force at various U.S. consulate and military locations in Iraq and Afghanistan.  The EMR system housed personal health information and medical records for anyone who received medical treatment at the locations CHS served, including U.S. service members, diplomats, officials, and contractors.  According to the allegations, CHS did not consistently store patients’ medical records on the secure EMR system and indeed left scans on a network drive which non-clinical staff could access.

As part of several contracts to which CHS was a party, CHS was supposed to provide medical supplies, including controlled substances subject to U.S. Food and Drug Administration (FDA) or European Medicines Agency (EMA) approval.  According to the allegations, CHS “knowingly, recklessly, or with deliberate ignorance” submitted claims for payment for controlled substances that they obtained by means not sanctioned by these contracts.  Not only did CHS lack a Drug Enforcement Agency license to export controlled substances, but CHS also obtained controlled substances by having their U.S.-based subsidiary request that a South African physician prescribe controlled substances, according to the allegations.  The South African physician prescribed these controlled substances, absent FDA or EMA approval, and a shipping company from the same country imported the substances to Iraq.

Government contractors are supposed to adhere to the terms of their contracts in order to receive reimbursement from the U.S. government.  This medical services provider ignored procurement guidelines to obtain controlled substances, undermining safety controls and misrepresenting their adherence to contract terms in providing medical services to U.S. military personnel.  The DOJ’s Civil Cyber-Fraud Initiative brings the power of the False Claims Act to bear on contractors whose job is to protect sensitive information and critical systems.  Representing that data is secure when it is, in fact, not is a violation of the False Claims Act and constitutes cyber-fraud.  As the Special Agent in Charge of the U.S. Department of State OIG, Office of Investigations noted, “…this outcome will send a clear message that cutting corners on State Department contracts has significant consequences.”

Whistleblowers raised data privacy concerns to CHS, but the contractor failed to implement better cybersecurity protocols in response to their concerns.  The Department of Justice has rewarded its first whistleblowers as part of the Civil Cyber-Fraud Initiative, and they’re just getting started.

© 2022 by Tycko & Zavareei LLP
For more articles about digital health, visit the NLR Health Care Law section.

One Less Way for Ohio Landowners to Challenge Royalty Severances

On February 15, 2022, the Ohio Supreme Court issued a significant decision in Peppertree Farms, L.L.C. v. Thonen establishing that, unless expressly stated otherwise, an oil and gas royalty interest retained in a deed executed prior to 1925 is not limited to the lifetime of the grantor. In so holding, the Ohio Supreme Court cut off one of the only grounds, other than the Dormant Minerals Act and Marketable Title Act, for landowners to quiet title and eliminate past oil and gas severances.

Ohio follows a legal tradition under which the default rules of English “common law” were adopted and then adapted by statute to form the basis of our legal system. At common law, a conveyance of real property had to include “words of inheritance” (i.e., an express statement that the royalty interest would last in perpetuity and be inheritable) or the interest being conveyed would be limited to the lifetime of the grantee (a life estate). Additional complications arose when a grantor sought to retain an interest by deed. If the grantor was retaining a right which had already been conveyed to him in perpetuity, then the retention qualified as a “technical exception” of a pre-existing right and additional words of inheritance were not required. However, if the grantor was creating and then retaining a new right, the retention qualified as a “technical reservation” and was limited to a life estate.

As new modes of production and corresponding property rights were discovered, it became unclear exactly what rights pre-existed a severance and the whole system of distinctions fell apart. In 1925, the General Assembly passed a law establishing that all future conveyances of real property were presumed perpetual unless stated otherwise. While eliminating this issue as to future deeds, the General Assembly did not settle the issue as to deeds executed before 1925 or clarify whether the retention of an oil and gas royalty was a “technical exception” or “technical reservation.”

In the Peppertree Farms case, Plaintiffs Peppertree Farms, Jay Moore and Amy Moore (collectively, “Peppertree”) sought to quiet title to certain lands in Monroe County, Ohio, against a severed oil and gas royalty interest (the “Royalty Interest”) originally retained by the grantor under a 1921 deed. In addition to a claim for extinguished under Ohio’s Marketable Title Act, Peppertree asserted that the Royalty Interest did not include words of inheritance and was therefore a newly created right which terminated upon the death of the grantor under the 1921 deed. Conversely, the defendant royalty owners (“Royalty Owners”) argued that the Royalty Interest was a pre-existing right which the grantor already held, and therefore could retain, in perpetuity without words of inheritance.

While Peppertree was able to convince both the trial and appellate court that the Royalty Interest was a newly created interest which was limited to a life estate, it was unsuccessful with the Ohio Supreme Court. Reasoning that a royalty was nothing more than the retention of part of the right to receive the proceeds of oil and gas production, the Court ultimately found that the Royalty Interest was a “technical exception” which survived the lifetime of the grantor. As a result, Peppertree was limited to its claims for extinguishment under the Marketable Title Act and Ohio surface owners lost another means to challenge ancient royalty reservations.

©2022 Roetzel & Andress
For more articles on local state litigation, visit the NLR Litigation section.

Broad Majority Decisions in Terrorist Torture and Abortion Law Cases Resolve Important State Secrets and Intervention Procedural Issues: SCOTUS Today

The Court has decided two important cases today, United States v. Zubaydah, upholding the government’s assertion of the state secrets privilege and rejecting the al Qaeda terrorist leader’s discovery request for information concerning his torture by the CIA, and Cameron v. EMW Women’s Surgical Center, P.S.C., allowing the intervention of the Kentucky attorney general to assume the defense of the state’s abortion law after the official who had been defending the law decided not to seek further review. Both cases are, at root, about significant issues of public interest and policy—the torture of terrorists and restrictive abortion policies—but neither opinion resolves any such question. Indeed, the lessons learned from each of these cases are essentially procedural, and though the outcomes are determined by significant margins, the alliances of Justices on the multiple opinions published are also instructive.

Zubaydah has been among the most closely watched cases on the Court’s docket. Full disclosure: I am a board member of the Center for Ethics and the Rule of Law at the University of Pennsylvania, which has advocated for the closing of the Guantanamo Bay Naval Base in Cuba, where Zubaydah is detained, and for the rejection of privilege claims as to non-classified information concerning torture. Though I am not surprised by the outcome in the case, it is contrary to what many human rights organizations have been advocating. The admixtures of Justices also provide interesting insights as to how they approach matters of privilege and national security.

In what likely will be one of the last majority opinions written by retiring Justice Stephen Breyer, and subject to various concurrences by Justices Thomas, Kagan, Kavanaugh, and Barrett, the Court reversed the Ninth Circuit and upheld the government’s assertion of state secrets privilege to deny Zubaydah’s attempt to subpoena two CIA contractors from whom he sought to obtain information for use in litigation in Poland concerning his torture at an alleged “black site” in that country. The state secrets privilege allows the government to bar the disclosure of information that, were it revealed, would harm national security. United States v. Reynolds, 345 U. S. 1, 6–7 (1953). While the Ninth Circuit had accepted much of the government’s claim, it concluded that the privilege did not cover information about the location of the detention site, which the court believed had already been publicly disclosed. Indeed, it is clear from the record in the case that there has been substantial public discussion of such a detention site in Poland. However, although the government has concluded that the “enhanced interrogation” to which Zubaydah had been subjected constituted torture, the fact of its location in Poland has never been formally confirmed by the United States. The state secrets privilege permits the government to prevent disclosure of information when that disclosure would harm national security interests, such as “the risk of revealing covert operatives, organizational structure and functions, and intelligence-gathering sources, methods, and capabilities.” Here, Justice Breyer, in a textbook case displaying the essential role that he has played on the Court in pragmatically fashioning majorities to form consensus opinions in controversial cases, accepted the view that verifying the existence, or non-existence, of a CIA black site in Poland, falls within the state secrets privilege because confirmation or denial of the site’s existence and location, even if such information has already been made public through unofficial sources, would harm relations among foreign intelligence services vital to U.S. interests. The majority also noted that the locational information is not essential to the case that Zubaydah is attempting to make, but it also rejected the remand to consider issues of Zubaydah’s treatment that Justices Kagan, concurring, and Justice Gorsuch (interestingly, joined by Justice Sotomayor), dissenting, would have allowed. In a case where there is virtually no disagreement among the Justices as to what the law is, the decision comes down to a procedural formulation that Justice Breyer loosely compares to applying exemptions under the Freedom of Information Act. In any event, the majority held that, as an objective matter, the government’s assertions of privilege and national security risk satisfied its burden of responding to the demand for information.

Notwithstanding the great public interest that surrounds the debate and litigation concerning the efforts of various state legislatures to restrict abortion and to obtain the reversal or narrowing of Roe v. Wade, the Court’s 8-1 majority (only Justice Sotomayor dissented) held only that the Court would not adopt an arbitrary claims-processing rule barring a non-party intervener from taking over an appeal, especially under the conditions presented here. Having first concluded that neither a jurisdictional requirement nor a mandatory claims-processing rule barred consideration of the attorney general’s motion, the Court concluded that no statute or rule restricts the jurisdiction of a court of appeals or provides a general standard to apply in deciding whether intervention on appeal should be allowed. The one passing reference to intervention made in the Federal Rules of Appellate Procedure only concerns the review of agency action. Accordingly, with “respondents cit[ing] no provision that deprives a court of appeals of jurisdiction in the way they suggest, and no such supporting language can be found in 28 U. S. C. §2107, Federal Rules of Appellate Procedure 3 and 4, or any other provision of law. . . [the] Court refuses to adopt what would essentially be a categorical claims-processing rule barring consideration of the attorney general’s motion. When a non-party enters into an agreement to be bound by a judgment in accordance with the agreement’s terms, it is hard to see why the non-party should be precluded from seeking intervention on appeal if the agreement preserves that opportunity. Here, the attorney general reserved ‘all rights, claims, and defenses . . . in any appeals arising out of this action.’ That easily covers the right to seek rehearing en banc and the right to file a petition for a writ of certiorari.”

Justice Sotomayor’s dissent, like the cheese, stands alone. She argues that every case should have a certain end point, and one should be applied here. One wonders if she would entertain a similar opinion in a case like this but where the plaintiffs are appealing. In any event, all of the other Justices are unified by the absence of any textual limitation on their jurisdiction to entertain a motion to intervene on appeal and the reasonable justification made for it by the state attorney general. Where Justice Alito found a constitutional basis for this conclusion and Justice Kagan would only have relied upon statutory interpretation, the vast majority of the Court agreed on the procedural regime adopted irrespective of the fact that there likely would be considerable disagreement about the constitutionality of the statute at issue in the underlying litigation.

©2022 Epstein Becker & Green, P.C. All rights reserved.
For more articles about Supreme Court cases, visit the NLR Litigation section.

What You Don’t Know Can’t Hurt You: SCOTUS Rules Inadvertent Legal Errors Cannot Overturn Copyright Infringement Decisions

“No harm, no foul.” That was the message the U.S. Supreme Court delivered Feb. 24 in ruling that a copyright infringement verdict should not have been overturned because of inaccurate information in the copyright registration asserted. The Court’s 6-3 opinion vacates a Ninth Circuit decision that threw out an infringement verdict on the ground that the registrant should have known the law regarding filing multiple works within one registration, a practice referred to as group registrations.

In Unicolors Inc. v. H&M Hennes & Mauritz LP, a jury found that Unicolors’ fabric pattern copyrights were violated and the district court entered judgment for H&M to pay nearly $800,000 for selling jackets that infringed on Unicolors’ copyrights.  H&M moved for judgment as a matter of law that Unicolor’s copyright registration was invalid because for group registrations, all works in the applications must be published “in the same unit of publication.”  Unicolor released some of the garments containing the protected patterns to private customers, and released the others to the public at a different time.  Thus, the asserted registration did not technically satisfy the requirements.  The district court denied H&M’s motion and found that safe harbor provision of the Copyright Act allows for innocent mistakes of fact and law.  In this case, Unicolor was not aware that all works in a group registration had to be published “in the same unit of publication.”

The Ninth Circuit overturned this ruling, siding with H&M that Unicolors’ copyright registration was invalid because of legal errors in the application, saying a safe harbor provision for copyright registration errors only applies to factual mistakes, not unintentionally misreading the law. Justice Stephen Breyer, writing for the majority, pushed back on this idea:

“In our view, however, §411(b) does not distinguish between a mistake of law and a mistake of fact. Lack of knowledge of either fact or law can excuse an inaccuracy in a copyright registration,” he wrote.

Justice Breyer also noted that many copyright applicants are often “novelists, poets, painters, designers, and others without legal training” and said Congress never intended to make it more difficult for those non-attorneys to successfully apply for a copyright. “Given this history, it would make no sense if §411(b) left copyright registrations exposed to invalidation based on applicants’ good-faith misunderstandings of the details of copyright law,” he said.

The Supreme Court’s decision is s a victory for creators’ rights and provides some peace of mind for those creators filing copyright applications without the assistance of an attorney.  However, this decision will focus discovery on whether any errors in a registration—be them factual or legal—were made “with knowledge that [the error] was inaccurate.”

Copyright © 2022 Womble Bond Dickinson (US) LLP All Rights Reserved.
For more articles about the U.S. Supreme Court, visit the NLR Litigation section.

Intra-Class Conflict Dooms Auto Insurance Class Action in Fifth Circuit

Last week the Fifth Circuit issued a short opinion that made an important point that does not arise often in class certification decisions. Class certification failed because the plaintiffs’ proposed theory of liability would benefit only some class members and disadvantage others, who would be overpaid if the plaintiffs’ theory were correct. For that reason alone, the plaintiffs could not adequately represent the class.

Prudhomme v. Government Employees Insurance Company, No. 21-30157, 2022 WL 510171 (5th Cir. Feb. 21, 2022) (per curiam) was similar to another case I recently wrote about—the plaintiffs claimed that their insurer undervalued their vehicles that were deemed total losses, in violation of Louisiana statutes. Sidestepping questions about commonality and predominance, which are usually the focus of class certification decisions, the Fifth Circuit affirmed the denial of class certification because the adequacy of representation requirement was not met. This was because “a portion of the proposed class members received payments above (that is, benefitted from) the allegedly unlawful valuation.” According to the district court opinion, an expert witness opined that approximately one-fifth of the class would have received less on the plaintiffs’ theory than they received from GEICO. While the plaintiffs argued that class members who were overpaid on their theory might still be entitled to some damages under Louisiana law, that would likely create a typicality problem. Class representatives cannot adequately represent a class if they offer “a theory of liability that disadvantages a portion of the class they allegedly represent.”

Look out for this type of issue the next time you are litigating a class action. It might be lurking in your case when you peel back the onion.

Copyright © 2022 Robinson & Cole LLP. All rights reserved.
For more articles about class-action lawsuits, visit the NLR Litigation section.

Securities Litigation: An Emerging Strategy to Hold Companies Accountable for Privacy Protections

A California federal judge rejected Zoom Video Communications, Inc.’s motion to dismiss securities fraud claims against it, and its CEO and CFO, for misrepresenting Zoom’s privacy protections. Although there have been a number of cases challenging inadequate privacy protections on consumer protection grounds in recent years, this decision shifts the spotlight to an additional front on which the battles for privacy protection may be fought:  the securities-litigation realm.

At issue were statements made by Zoom relating to the company’s privacy and encryption methods, including Zoom’s 2019 Registration Statement and Prospectus, which told investors the company offered “robust security capabilities, including end-to-end encryption.” Importantly, the prospectus was signed by Zoom’s CEO, Eric Yuan. The plaintiffs, a group of Zoom shareholders, brought suit arguing that end-to-end encryption means that only meeting participants and no other person, not even the platform provider, would be able to access the content. The complaint alleged that contrary to this statement, Zoom maintained access to the cryptographic keys that could allow it to access the unencrypted video and audio content of Zoom meetings.

The plaintiffs’ allegations are based on media reports of security issues relating to Zoom conferences early in the COVID-19 pandemic, as well as an April 2020 Zoom blog post in which Yuan stated that Zoom had “fallen short of the community’s  ̶ ̶  and our own  ̶ ̶  privacy and security expectations.”  In his post, Yuan linked to another Zoom executive’s post, which apologized for “incorrectly suggesting” that Zoom meetings used end-to-end encryption.

In their motion to dismiss, the defendants did not dispute that the company said it used end-to-end encryption.  Instead, they challenged plaintiffs’ falsity, scienter, and loss causation allegations – and all three attempts were rejected by the court.

First, as to falsity, the court did not buy the defendants’ argument that “end-to-end encryption” could have different meanings because a Zoom executive expressly acknowledged that the company had “incorrectly suggest[ed] that Zoom meetings were capable of using end-to-end encryption.”  Thus, the court found that the complaint did, in fact, plead the existence of materially false and misleading statements. The court also rejected the defendants’ argument that Yuan’s understanding of the term “end-to-end encryption” changed in a relevant way from the time he made the challenged representation to his later statements that Zoom’s usage was inconsistent with “the commonly accepted definition.” The court looked to Yuan’s advanced degree in engineering, his status as a “founding engineer” at WebEx, and that he had personally “led the effort to engineer Zoom Meetings’ platform and is named on several patents that specifically concern encryption techniques.”

Lastly, the court rebuffed the defendants’ attempt at undermining loss causation, finding that the plaintiffs had pled facts to plausibly suggest a causal connection between the defendants’ allegedly fraudulent conduct and the plaintiffs’ economic loss. In particular, the court referenced the decline in Zoom’s stock price shortly after defendants’ fraud was revealed to the market via media reports and Yuan’s blog post.

That said, the court dismissed the plaintiffs’ remaining claims, as they related to data privacy statements made by Zoom or, in general, by the “defendants,” unlike the specific encryption-related statement made by Yuan. The court found that the corporate-made statements did not rise to the level of an “exceptional case where a company’s public statements were so important and so dramatically false that they would create a strong inference that at least some corporate officials knew of the falsity upon publication.” Because those statements were not coupled with sufficient allegations of individual scienter, the court granted the defendants’ motion to dismiss those statements from the complaint.

© 2022 Proskauer Rose LLP.
For more articles about business litigation, visit the NLR Litigation section.

When Board Conflict Crosses the Line…

Elected officials are, naturally, sometimes at the center of conflict and division within their board.  Conflict is to be expected.  However, what happens when board members take action to freeze out a minority board member from information that he or she needs to do his or her respective job?  The use of information-control tactics against minority members on a board, impeding their ability to receive that information necessary to perform his or her duties is problematic – and it may be unconstitutional.\

Elected officials have duty to be informed. Palm v.Centre Tp., 415 A.2d 990, 992 (Pa. Commw. Ct. 1980):

It is the duty of a school board member, a commissioner, a councilman, or a supervisor to be informed. Supervisors are not restricted to information furnished at a public meeting. A supervisor has the right to study, investigate, discuss and argue problems and issues prior to the public meeting at which he may vote. Nor is a supervisor restricted to communicating with the people he represents. He is not a judge. He can talk with interested parties as does any legislator.

This responsibility extends beyond the contours of the public meeting and what is discussed at those meetings.

Elected officials have protections under the First Amendment. The Third Circuit has historically recognized that a public official’s right to free speech under the First Amendment will be violated when the retaliatory conduct of her peers interferes with her ability to adequately perform her elected duties. See Werkheiser v. Pocono Tp., 780 F.3d. 172, 182 (3d Cir. 2015); Monteiro v. City of Elizabeth, 436 F.3d 397, 404 (3d Cir. 2006).

To avoid entering the territory of this kind of interference, everyone can play a role in ensuring the government functions adequately and that Board members’ rights, duties, and privileges are protected.  Board division, when gone too far, can cross constitutional lines.  To avoid walking that line, there are things that everyone can do to make for a well-functioning Board or meeting:

  • Managers can stay neutral and ensure that every board member is kept up to date on significant municipal operations and projects.
  • Solicitors can host a meeting with the board to educate the board on laws pertaining to their position, such as a municipal code and the Pennsylvania Sunshine Act.
  • Board members can foster respect for fellow board members and learn how to communicate so that each board member can participate in healthy debate on contentious issues.  Enacting policies related to meeting decorum can be helpful, but they need to be enforced evenhandedly.

For more tips for handling divisiveness among a board, see the December 2021 article on “Tips for Handling Board Conflicts” in the Pa Township News.

©2022 Strassburger McKenna Gutnick & Gefsky