Category: Litigation

The Do’s and Don’ts of Videoconference Oral Proceedings

As many will be aware, there is a challenge to the legality of videoconference Oral Proceedings pending at the EPO’s Enlarged Board of Appeal (G 1/21).[1] In particular, the Enlarged Board has been asked to consider whether such proceedings can go ahead if the parties do not consent to use of the videoconference format. Although the question referred to the Board encompassed Examination, Opposition and Appeal proceedings, the EPO has decided to continue with videoconference Oral Proceedings for both Examination and Opposition matters irrespective of whether or not the parties involved consent to do so.[2]

A Decision from the Enlarged Board is expected to issue relatively quickly, but unlike most referrals to be Enlarged Board, there does not appear to be much confusion about the direction the EPO will take. The EPO is generally keen to embrace the digital format and recent case law from the Boards of Appeal seems to suggest that the EPO will continue with videoconference Oral Proceedings as the “new normal”.[3] In anticipation that the Enlarged Board agrees, we have compiled our top tips for videoconference Oral Proceedings.

DO ask for a test call. Even though we are all now familiar with the format, a test call is a good opportunity to confirm that the audio is clear, and the video is working correctly. The test call will also allow you to practice screen sharing and joining/leaving breakout rooms. Test calls need to be requested at least six weeks in advance of the hearing, as only limited time slots are available.

DON’T assume your laptop speaker and camera will be adequate. If translators are involved, the EPO requires participants to have a headset, and even an inexpensive microphone can be a significant improvement to the in-built one found on most laptops. If the proceedings use Zoom, check in advance that your screen name is appropriate, the brightness settings are adequate for where you plan to sit, and check that any filters/backgrounds are turned off.

DO have your ID ready. It’s easy to forget when the only travel involved is into your home office, but it will speed up proceedings on the day.

DON’T assume things will be the same as an “in-person” hearing. Videoconference Oral Proceedings do generally seem to take a little longer than in person hearings, and some nuances of body language can be lost. How you communicate with your team during the hearing will also be different if you are in separate locations. Have you thought about a virtual alternative to passing notes during the hearing?

DO ask for breaks if needed. Everyone now recognizes that screen fatigue can be a problem. Chances are that if you need a break, someone else in the proceedings will be glad you asked.

DON’T put up with technical issues. If you can’t hear or see the proceedings adequately, the EPO advises that you attract the attention of the chair by waving. Proceedings will then be paused while the technical issues are resolved.

DO have a backup plan in case of a loss of connectivity. The EPO will ask for a telephone number, but it is worth seeing if you could use a WiFi hotspot (e.g., from a mobile phone) if the internet connection drops.

DO think about how you will prepare and submit any amendments on the day. If you are the Applicant or Patentee, there is a chance your case may be upheld on the basis of amended claims, and therefore an amended description could be required. The amended description pages need to be signed and sent to the EPO in an EPO-compatible pdf format. Since most of us do not have printer/scanners at home, it is worth thinking in advance about how to do this.

Finally, DO remember that, everyone is in the same situation, with the same fears that the internet connection will drop at a critical time, the neighbors will choose that day to begin renovation work, or that a cat filter will appear out of nowhere.[4] Consequently, we have found the EPO to be understanding of any technical concerns and ready to work with us to resolve these.

[1] https://www.epo.org/law-practice/case-law-appeals/eba/pending.html

[2] https://www.epo.org/news-events/news/2021/20210324a.html

[3] https://www.epo.org/law-practice/case-law-appeals/recent/t162320eu1.html

[4] https://www.theguardian.com/us-news/2021/feb/09/texas-lawyer-zoom-cat-fi…

© 2021 Finnegan, Henderson, Farabow, Garrett & Dunner, LLP
For more articles on virtual proceedings, visit the NLR Litigation / Trial Practice section.

Teaching Tips for IP Trial Lawyers

Imagine this scenario: Your star witness, an expert on the topic of prosthetic device microprocessors, has been on the stand for an hour discussing the history of prostheses, the nature of integrated circuits, and the two-part test for determining actual controversy. Thus far, he has relayed his testimony calmly and thoroughly. You are so pleased with his performance, your confidence concerning the trial outcome is beginning to swell. When you look over at the jurors, however, your optimism is dashed. One juror is rubbing her temples. Another has departed into a daze. And several others are grimacing. “Why aren’t they paying attention?” you wonder.

In response to being slapped with too much complex information, your jurors are showing signs of anxiety. When information overwhelms them, jurors exhibit a panoply of physical and mental responses. They might, for instance, shrink back in their seats, slump their shoulders, roll their eyes, and sigh loudly. They may feel insecure, frustrated, and even angry. Were it not unseemly courtroom behavior, jurors (and even judges) would audibly groan, “ugh.”

If you are a trial lawyer who specializes in intellectual property cases, you have probably observed these sorts of responses. Jurors often do not understand the technology that is at issue in the case. Many of them possess little inkling about the workings of trademarks, patents, or copyrights. They understand they have a duty to reach conclusions based on evidence, but that obligation becomes impossible to fulfill when they find the evidence incomprehensible.

If you spot jurors exhibiting these signs of anxiety during trial, your IP case is in danger. Their responses indicate they have stopped listening to your argument, and thus, you have lost out on an opportunity to gain support for your client. Even if you eventually rouse these jurors back to attentiveness, the likelihood that they will side with your client has been diminished.

That is the bad news. The good news is, you can present complex material to jurors without triggering their malaise. It is not the material that is the problem, it is the teaching methods you and your witnesses are employing. This article reviews effective teaching techniques you can use in the courtroom. Employing them will make your jurors sit up, lean forward, listen, understand your case, and perhaps even enjoy jury duty.

GETTING JURORS TO “I GET IT”

Good teachers understand how people learn. In order to teach jurors, you must understand that process too. Once these connections are made, people progress to the second stage of learning in which they incrementally add layers of new information to knowledge they already solidly possess.

Here is another way to look at the learning process. It can be likened to plants growing on a garden lattice. The lattice is the solid base that enables plants to grow, just as familiar concepts act as a base that allows new ideas to bud for jurors. Slowly, plants sprout on the lattice, just as new knowledge begins to blossom for jurors. Eventually a garden grows, and for jurors, this garden is your argument. By allowing new information to slowly take root in their psyches, you enable them to eventually see your argument in its entirety. Jurors are then able to use this new information to properly perform their duty to carefully weigh the evidence in the case.

A TEACHER’S TOOLKIT

The most effective classroom teachers use stories, analogies, and visual images to relay information to students. IP trial attorneys should employ these tools as well, and the specifics must be planned out and tested long before a witness takes the stand. Before getting into the nitty gritty of the technology at issue in the case, jurors should be provided the overarching story of the case—who did what to whom, when, and why—and most importantly, jurors should always be provided with the reason why they should care. When the case involves particularly complex topics, analogies that relate to concepts with which jurors are already familiar should, at the outset of the learning process, be used in place of complex case facts. As well, use pictures to help jurors visualize invisible concepts. Interactive tutorials can be particularly helpful since they enable jurors to study images and information at their own pace. When the timing of events at issue in the case are important, timelines should be displayed.

Just as the precise stories, analogies, and visual images teachers use depend on the subject matter they are presenting, the specific tools you will use will depend on the issues in your case.

The best stories, analogies, and visual images will have five characteristics in common.

The Five Key Tools Will:

  1. Use real-world language
  2. Employ familiar concepts and ideas
  3. Leverage memorable imagery
  4. Intrigue the listener
  5. Facilitate incremental or paced learning

HOW STORIES, ANALOGIES, AND PICTURES ENABLE COMPREHENSION TO TAKE FLIGHT

Let us say that you are defending an entrepreneur in a patent infringement case. In order to comprehend the evidence in the case, the jurors need to understand the concept of the enablement requirement for patent applications. Your expert witness might explain that the patent system has three primary disclosure requirements. These requirements consist of enablement, written description, and best mode. The enablement requirement compels the patent applicant to disclose the invention in a manner that allows a person of ordinary skill in the art to make and use the invention without an undue amount of experimentation. She might add that enablement is the only disclosure requirement internationally mandated by the agreement on Trade-Related Aspects of Intellectual Property, or TRIPS.

While there would be nothing inherently faulty about her explanation after hearing it, the jurors would be holding back their “ughs.” They would find the narration boring and barely comprehensible, and they would dread the prospect of spending the next few days sitting through similar testimony.

Now imagine how much more effective the expert would be if she started off discussing humans’ age-old desire to fly. “Every person has longed to fly at some point,” she might say. “Children try to fly off couches, adults dream of flying at night, and the Greek myth of Icarus centers on what happens when the joy of flying overtakes common sense.”

This story is appealing because it uses familiar concepts (Tool 2) and memorable imagery (Tool 3) to hook the audience.

The witness might go on, “People tried for centuries to build contraptions that would enable the dense-boned, unfeathered human mammal to fly. Many people died trying. Even the genius Leonardo da Vinci tried to come up with a flying machine. He eventually ended up declaring, ‘I have wasted my time.’”

By mentioning this famous artist, the expert will have again introduced subject matter with which jurors are familiar (Tool 2). And the fact that he tried yet failed at something will create intrigue (Tool 4) in jurors’ minds.

“None of these inventors could have received a patent under U.S. law,” your expert could explain, “because none of them successfully ‘enabled’ their ideas.” She might add, “In other words, their ideas didn’t work.”

Now she would be using everyday language (Tool 1) to communicate with real-world people.

“But man’s quest for flight finally was achieved, on December 17, 1903,” she could continue, “when brothers Orville and Wilbur Wright built and, yes, successfully flew the first airplane. Unlike everyone before them, these two Ohio bicycle makers successfully ‘enabled’ the idea of a flying machine by making a machine that actually flew. As a result, the US Patent Office granted the Wright brothers a patent to protect their years of hard work from any imitators. ”

(call out) When graphic displays are used, an already-interesting story could become riveting.

Suppose that during the expert’s testimony, jurors are shown how flying inventions evolved throughout the years. The progression and timing of inventions might be portrayed by building, bit by bit, new layers upon old inventions. As the witness talks about early attempts to fly, you might show Leonardo da Vinci’s sketches from the 1400s. You could then show pictures of aircrafts created by later inventors, such as the designs Sir George Cayley created in the early 1800s and the flying machines Claude Givaudan and Louis Bleriot made in the early 1900s.

By creating a graphic that layers crucial information, you will have facilitated paced learning (Tool 5).

The expert’s story might end with a display of the Wright brothers’ patent application and a historical photo of their machine actually taking flight. And just like that, your jurors’ understanding of the concept of enablement will have taken flight as well. They will realize that it was not enough for previous inventors to possess good ideas. Only once the Wright brothers created a machine that could actually fly was their invention enabled. The invention was worthy of a patent because now someone with requisite skill could actually copy and use this invention.

READY FOR TAKE-OFF

Without ever hearing one complex case fact, jurors can come to understand the issues at the crux of your case. Stories, analogies, and visual displays, will keep them interested in your presentations and enable them to painlessly accumulate a sound base of knowledge. With that base in place, they will then be ready to hear about the specific technology and other evidence related to your case. Chances are high, if you are willing to use effective teaching tools, jurors will not only understand your arguments, they will support them.

© Copyright 2002-2021 IMS ExpertServices, All Rights Reserved.
ARTICLE BY Chris Ritter of IMS ExpertServices
For more articles on IP trials, visit the NLR Intellectual Property section.

Pardon My French: France Wins Trademark Dispute Using Sovereign Immunity

The US Court of Appeals for the Fourth Circuit reversed a district’s court denial of sovereign immunity under the Foreign Sovereign Immunity Act (FSIA) and remanded the case to be dismissed with prejudice, holding that France was immune from a trademark infringement claim in the United States brought by the former owner of the domain name France.com. France.com, Inc. v. The French Republic, Case No. 20-1016 (4th Cir. Mar. 25, 2021) (Motz, J.)

Jean-Noel Frydman and his company France.com, Inc. (collectively, Frydman) purchased and registered the domain name France.com and trademarked the name in the United States and in the European Union. In 2015, the Republic of France (RoF) intervened in an ongoing lawsuit between Frydman and a third party, asserting the exclusive right to the use of the term “France” commercially. The RoF also insisted that the use of “France” by a private enterprise infringed on its sovereignty. The Paris District Court agreed and ordered the transfer of the domain name to the RoF.

Frydman filed suit for trademark infringement, expropriation, cybersquatting and reverse domain name hijacking, and federal unfair competition in a Virginia district court against the RoF. The RoF moved to dismiss the claim based on the FSIA. The district court denied the motion, stating that the FSIA immunity defense would be best raised after discovery. The RoF appealed.

The Fourth Circuit first determined, based on Supreme Court precedent, that sovereign immunity was a threshold question to be addressed “as near to the outset of the case as is reasonably possible” and not to be postponed until after discovery.

The Court next considered whether the RoF was immune to suit. The FSIA provides a presumption of immunity for foreign states that can only be overcome if the complaint provides enough information to satisfy one of the specified exceptions. Frydman argued that the commercial activity and expropriation exceptions applied.

The commercial activity exception removes immunity where a foreign state has commercial activity in, or that has a direct effect in, the United States. Essentially, a court must determine whether the actions of the foreign state are those of a sovereign or those of a private party engaged in commerce. The Fourth Circuit first identified that the actual cause of the injury at issue to Frydman was the French court’s ruling that the domain name belonged to the RoF, and found that all claims of wrongdoing by the RoF flowed form the French court’s decision. Additionally, even if it was solely the transfer of the domain name that harmed Frydman, and not the French court’s judgment, the transfer was still based on the French court’s judgment that provided the basis for RoF to obtain the domain name. Because the cause of action was based on the powers of a sovereign nation (the foreign judgment) and not the actions of a private citizen in commerce, the Fourth Circuit found that the commercial activity exception did not apply.

The Fourth Circuit next rejected Frydman’s assertion of the expropriation exception. This exception applies when property is taken in violation of international law that is present in the United States for commercial activity by a foreign state or owned by a foreign agency. The Court first stated that it is unclear whether French judicial decree would be considered an expropriation under the FSIA. Even if it was, however, Frydman did not identify any international laws that were violated, the Court noted. The Court reasoned that because Frydman invoked the power of the French courts in litigation against a separate party, it gave the RoF the right to intervene in the action and take ownership of the domain.

© 2021 McDermott Will & Emery

ARTICLE BY Joshua Revilla of McDermott Will & Emery
For more articles on trademarks, visit the NLR Intellectual Property section.

Supreme Court Finds Google’s Use of Oracle’s Java Code in Android Operating System to Be Fair Use

On April 5, 2021, the Supreme Court of the United States held that Google’s use of certain Java Application Programming Interfaces (API) in its Android operating system was not copyright infringement and instead constituted fair use of Oracle’s Sun Java API because Google  used “only what was needed to allow users to put their accrued talents to work in a new and transformative program.” In its decision, the Supreme Court articulated important policy considerations underlying its decision, noting that, “given programmers’ investment in learning the Sun Java API here would risk harm to the public. Given the costs and difficulties of producing alternative APIs with similar appeal to programmers, allowing enforcement here would make of the Sun Java API’s declaring code a lock limiting the future creativity of new programs” and interfere with the basic objectives of copyright law. In sum, the Supreme Court relied on policy considerations relating to the ability of programmers to use existing code to support the interoperability of software, a common practice that many in the industry advocated as a practice necessary to sustain the feasibility of mobile computing.

This case spans nearly a decade of litigation between Oracle and Google. After negotiations broke down between Google and Oracle’s predecessor to license the entire Java platform for development of Google’s Android operating system, Google developed its own platform tailored to be used exclusively with Android smartphone technology. In developing the platform, Google wrote millions of lines of unique code, but also copied 11,500 lines of code from the Java SE API. The API operated to identify and group tasks and to call up prewritten software to carry out those tasks. Google’s own code operated to actually carry out the called-up task.  After Oracle acquired the owner of the Java SE API and its corresponding copyrights, Oracle sued Google for copyright infringement.

Importantly, the Supreme Court did not address the question of whether the API was eligible for copyright protection.  Instead, for purposes of this case, the Supreme Court assumed the API was copyrightable, and held that Google’s use thereof was a fair use and did not violate copyright law. Writing for the majority, Justice Breyer examined the four guiding principles identified in the Copyright Act’s fair use provision: (1) the nature of the copyrighted work; (2) the purpose and character of the use; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. 17 U.S.C. § 107.  The Court found that all four factors weighed in favor of fair use.

The Supreme Court defined the nature of the work as a user interface, thus, the API was “inextricably bound up” with an organizational system—which is not copyrightable—and with an implementation system—which is copyrightable (but was not copied in this case). The Court held that overall, the program is further from “the core of copyright” than most computer programs and that this weighed in favor of fair use.

The Supreme Court held that Google’s use of the program was transformative in that its purpose was to create new products through the Android platform. The Court found this use was consistent with the constitutional objective of the Copyright Act to promote creative progress, which also weighed in favor of fair use.

With respect to the amount and substantiality of the portion of code used in relation to the copyrighted work as a whole, the Court did not consider the 11,500 lines of code as a single complete work but rather as a small part of a larger program consisting of several million lines of code—the rest of which Google did not copy. The court found that this factor weighed in favor of fair use.

Finally, in considering the effect of the use on the market, the record showed both that Google’s new smartphone platform was not a market equivalent of Java SE and that Java SE’s copyright holder would benefit from the reimplementation of its user interface into a different market. The Supreme Court held that enforcing copyrights based on the facts in this case would cause “creativity-related harms to the public” favoring fair use.

The Court’s detailed analysis of copyright fair use in the context of software programming provides much-needed clarification for software developers that engage in the common practice of using and reusing interfaces written by others. The Supreme Court, however, left open the question of whether such code is copyrightable as a matter of law. In a scathing dissent, Justice Thomas wrote that this decision “eviscerates copyright” and that the only reason the majority chose not to address the question of copyrightability was “because the majority cannot square its fundamentally flawed fair-use analysis with a finding that declaring code is copyrightable.” Whether such programming code is subject to copyright protection as a matter of law will likely be the subject of future debate and lawsuits alongside the ever-developing landscape of software programming.

2021 Goulston & Storrs PC.
ARTICLE BY Rebecca Harris of Goulston & Storrs
For more articles on Fair Use, visit the NLR Intellectual Property section.

Ninth Circuit Drowns Out Alkaline Water Suit

The Ninth Circuit recently affirmed the dismissal of a putative class action alleging Trader Joe’s misled consumers by representing its Alkaline Water product as “ionized to achieve the perfect balance.”  In rejecting plaintiff’ allegations that the advertising referred to balancing the consumer’s internal pH rather than the balanced pH of the product itself, the Court recognized “a reasonable consumer does not check her common sense at the door of a store.”  Weiss v. Trader Joe’s, No. 19-55841 (9th Cir. Mar. 3, 2021).

The Alkaline Water product label states the water is “ionized to pH 9.5+,” will “refresh & hydrate,” and depicts “hundreds of plus symbols.”  An advertisement for the water in Trader Joe’s store newsletter likewise touted that the water was purified and charged through electrolysis, changing the structure of the water and raising the pH to 9.5+, making the product “water and then some.” Plaintiff alleged these representations were misleading because they implied that the water would “balance” a consumer’s internal pH after he or she has eaten acidic foods and would provide superior hydration as compared to other water.

The district court found several of these representations (including “water and then some,” “a drink that can satisfy,” and “refresh”) constituted non-actionable puffery.  The remaining challenged statements concerning the drink’s pH and ionization, the court found, would not mislead a reasonable consumer.

Agreeing with the district court’s analysis, the Ninth Circuit likewise found a reasonable consumer would not misinterpret these representations as suggesting internal pH balancing benefits or superior hydration.  When considered in the context of the package as a whole, the Court found the phrase “ionized to achieve the perfect balance” clearly referred to the water itself being balanced – rather than to balance within the body.

The Ninth Circuit also rejected plaintiff’s allegation that the term “hydrate” would mislead consumers into believing the water provided better hydration than other water. Plaintiff did not dispute that the water does, in fact, “hydrate.”  Finding this statement about the water’s hydrating capability true and undisputed, the Ninth Circuit agreed with the district court that it would not plausibly deceive a reasonable consumer.

The Court also affirmed the district court’s dismissal of plaintiffs’ breach of warranty claims based on the same advertising. The Court noted that though the reasonable consumer standard technically does not apply to warranty claims, those claims still require some sort of actionable representation. No such misrepresentation existed here because nothing in the challenged labeling promised health benefits or superior hydration.

This case serves as a reminder that allegations founded on fanciful interpretations of advertising claims may cause a “splash” when filed, but courts exercising common sense will not hesitate to dispose of them at the pleading stage.  While the Ninth Circuit’s decision in Weiss is unpublished, it is consistent with other precedential decisions from the court.  See for example Ebner v. Fresh, 838 F.3d 958 (9th Cir. 2016) – a case we have previously blogged about.

© 2020 Proskauer Rose LLP.
For more articles on water lawsuits, visit the NLR

CFPB Suit Against Student Loan Trusts Dismissed

On March 26, 2021, Judge Maryellen Noreika of the U.S. District Court for the District of Delaware dismissed a lawsuit brought by the Consumer Financial Protection Bureau (“CFPB”) in Consumer Financial Protection Bureau v. The National Collegiate Master Student Loan Trusts,1 finding, inter alia, that the CFPB’s suit was constitutionally defective due to the CFPB’s untimely attempt to ratify the prosecution of the litigation in the wake of the Supreme Court’s decision in Seila Law LLC v. Consumer Financial Protection Bureau.  This case has been closely watched by many participants in the structured finance industry, because the litigants had disputed over the question of whether the trusts at issue in the litigation are “covered persons” liable under the Consumer Financial Protection Act despite their status as passive securitization trust entities—a question that has important and wide-reaching implications for the structured finance markets.

Background

The National Collegiate Student Loan Trusts (the “Trusts”) hold more than 800,000 private student loans through 15 different Delaware statutory trusts created between 2001 and 2007, totaling approximately $12 billion.  The loans originally were made to students by private banks.  The Trusts provided financing for the student loans by selling notes to investors in securitization transactions.  The Trusts also provided for the servicing of and collection on those student loans by engaging third-party servicers.  However, the Trusts themselves are passive special purpose entities lacking employees or internal management; instead, to operate, the Trusts relied on various interlocking trust-related agreements with multiple third-party service providers to—among other things—administer each of the Trusts, determine the relative priority of economic interests in the Trusts, and service the Trusts’ loans.

On September 4, 2014, the CPFB issued a civil investigative demand (“CID”) to each of the Trusts for information concerning thousands of allegedly illegal student loan debt collection lawsuits used to collect on defaulted loans held by the Trusts.  On May 9, 2016, the CFPB alerted the Trusts to the fact that the CFPB was considering initiating enforcement proceedings against the Trusts based on the collection lawsuits through a Notice and Opportunity to Respond and Advice (“NORA”).  A few weeks later, the law firm McCarter & English, LLP (“McCarter”), purporting to represent the Trusts, submitted a NORA response to the CFPB.  McCarter and the CFPB then proceeded to negotiate a Proposed Consent Judgment to resolve the CFPB’s investigation of the Trusts.

The Litigation

On September 18, 2017, the CFPB filed suit against the Trusts in Delaware federal court (the “Court”), alleging that the Trusts had violated the Consumer Financial Protection Act of 2010 (the “CFPA”) by engaging in unfair and deceptive practices in connection with their servicing and collection of student loans.  Although the CFPB acknowledged that the Trusts had no employees and that the alleged misconduct resulted from actions taken by the Trusts’ servicers and sub-servicers in the course of their debt collection activities—rather than any actions taken by the Trusts themselves—the CFPB nonetheless named only  the Trusts as defendants.  On the same day, the CFPB also filed a motion to approve the Proposed Consent Judgment negotiated with McCarter.

However, within days of the CFPB’s initiation of the lawsuit, multiple parties associated with the Trusts intervened in the litigation to argue against the entry of the Proposed Consent Judgment.  The intervenors expressed concern that the entry of the Proposed Consent Judgment would impermissibly impair or rewrite their respective contractual obligations as set forth in the agreements underlying the Trusts.  After discovery, on May 31, 2020, the Court denied the CFPB’s motion to approve the Proposed Consent Judgement, holding that McCarter lacked authority to execute the Proposed Consent Judgment pursuant to terms of the agreements governing the Trusts and Delaware law.

On June 29, 2020, in another lawsuit involving the CFPB, the United States Supreme Court held in Seila Law LLC v. Consumer Financial Protection Bureau that the CFPB’s structure violated the Constitution’s separation of powers.2  Specifically, the Supreme Court held that “an independent agency led by a single Director and vested with significant executive power” has “no basis in history and no place in our constitutional structure,”3 and that the statutory restriction on the President’s authority to remove the CFPB’s Director only for “inefficiency, neglect, or malfeasance” violated the separation of powers.4  The Supreme Court then concluded that the proper remedy was to sever the removal restriction, and ultimately allowed the CFPB to stand.  The Supreme Court also noted that an enforcement action that the CFPB had filed to enforce a CID while its structure was unconstitutional may nonetheless be enforceable if it was later successfully ratified by an acting director of the CFPB who was removable at will by the President.  If not so ratified, however, the enforcement action must be dismissed.

Around the time the Supreme Court issued its decision in Seila Law, various intervenors were briefing multiple motions to dismiss the CFPB’s complaint against the Trusts.  One subset of intervenors—Ambac Assurance Corporation, the Pennsylvania Higher Education Assistance Agency, and the Wilmington Trust Company5 (collectively, “Ambac”)—argued, inter alia, that: (i) the Supreme Court’s decision in Seila Law required dismissal of the CFPB’s complaint because the CFPB’s ratification of the litigation against the Trusts was untimely, and (ii) the Court lacked subject matter jurisdiction over its asserted claims because the Trusts are not “covered persons” as required under the CFPA.  Another intervenor, Transworld Systems, Inc.6 (“TSI”) also argued that the CFPB’s complaint merited dismissal for lack of subject matter jurisdiction as well.

The Court’s Holding

Subject Matter Jurisdiction

The Court held that it possessed the requisite subject matter jurisdiction to decide the CFPB’s claims, and rejected the contention that a showing of whether the Trusts are “covered persons” is a jurisdictional requirement under the CFPA.  To determine whether a restriction—such as the term “covered persons”—is jurisdictional, the Court looked to “whether Congress has clearly stated that the rule is jurisdictional.”7  “[A]bsent such a clear statement,” courts “should treat the restriction as nonjurisdictional.”8

The Court then examined the CFPA, observing that there is no clear statement in the CFPA’s jurisdictional grant that “covered persons” is required.  The Court noted that only one section of the CFPA addresses the issue of subject matter jurisdiction, and that section granted jurisdiction over “an action or adjudication proceeding brought under Federal consumer law” with no mention of “covered persons” whatsoever.9

While the Court agreed that the term “covered persons” appeared multiple times throughout the CFPA, it pointed out that none of the sections where “covered persons” appeared mentioned jurisdiction.

Enforcement Authority

In light of the Supreme Court’s holding in Seila Law, the Court granted Ambac’s motion to dismiss the CFPB’s complaint due to the CFPB’s lack of enforcement authority as a result of its untimely ratification of the litigation.

As an initial matter, the Court observed that there was no question that the CFPB initiated the enforcement action against the Trusts at a time when its structure violated the constitutional separation of powers.  The task facing the Court, then, would be to determine (i) whether that constitutional defect has been cured by ratification, or (ii) whether dismissal of the suit is required.  Under the applicable Third Circuit precedent, there are three general requirements for ratification of previously-unauthorized action by an agency: (1) “the ratifier must, at the time of ratification, still have the authority to take the action to be ratified”; (2) “the ratifier must have full knowledge of the decision to be ratified”; and (3) “the ratifier must make a detached and considered affirmation of the earlier decision.”10  Here, the parties’ dispute centered around the first requirement.

Under the first requirement, the Court noted that “it is essential that the party ratifying should be able not merely to do the act ratified at the time the act was done, but also at the time the ratification was made.”11  On July 9, 2020, the CFPB’s then-Director, Kathy Kraninger, had ratified the decision to initiate the CFPB’s litigation against the Trusts a few weeks after the Supreme Court’s decision in Seila Law.  The Court held that Director Kraninger’s ratification was ineffective, because (i) an enforcement action arising from alleged CFPA violations must be brought no later than three years after the date of discovery of the violation to which the action relates,12 (ii) ratification is ineffective when it takes place after the relevant statute of limitations has expired, and (iii) the CFPB clearly had discovery of the Trusts’ alleged CFPA violations more than three years before the ratification date, i.e., before July 9, 2017.  Thus, Director Kraninger’s ratification of the CFPB’s decision to file suit against the Trusts failed to cure the constitutional defects raised by Seila Law, and the CFPB’s complaint—initially filed by a CFPB director unconstitutionally insulated from removal—could not be enforced.

In so holding, the Court rejected the CFPB’s argument that the timeliness requirements for ratification were satisfied because the CFPB had brought the original suit within the applicable limitations period.  The Court likewise rejected the CFPB’s request to equitably toll the statute of limitations for ratification, because the CFPB “could not identify a single act that it took to preserve its rights in this case in anticipation of the constitutional challenges that could have reasonably ended with an unfavorable ruling from the Supreme Court.”13

Key Takeaways

The securitization industry has operated for decades on the premise that agreements governing securitization transactions provide that transaction parties are responsible for their own malfeasance and, barring special circumstances, will not be held accountable for the misconduct of other parties to the transaction.  A decision holding that passive securitization entities like the Trusts are “covered persons” under the CFPA—and thus potentially responsible for the actions of their third-party service providers—would undermine the certainty of contract terms that undergirds the success of the structured finance industry, with grave implications for the heathy functioning of the industry.  While the substantive question of whether passive securitization entities like the Trusts could indeed be “covered persons” and held accountable for the actions of their third-party service providers remains to be answered for another day, the Court did observe that it “harbor[ed] some doubt” that the plain language of the CFPA extended to passive statutory trusts,14 and expressed skepticism as to whether the CFPB could successfully replead in a manner that would successfully cure the deficiencies in its original complaint.

1   2021 WL 1169029, at *3 (D. Del. Mar. 26, 2021).

2   140 S.Ct. 2183, 2197 (June 29, 2020).  For a detailed discussion on Seila Law, please see our July 2, 2020 Clients & Friends Memo, “Seila Law LLC v. Consumer Financial Protection Bureau: Has the Supreme Court Tamed or Empowered the CFPB?”, available at https://www.cadwalader.com/resources/clients-friends-memos/seila-law-llc-v-consumer-financial-protection-bureau-has-the-supreme-court-tamed-or-empowered-the-cfpb.

3   Id. at 2201.

4   Id. at 2197.

5   Ambac Assurance Corporation provided financial guarantee insurance with respect to securities in over half of the Trusts.  The Pennsylvania Higher Education Assistance Agency is the Primary Servicer for the Trusts, while the Wilmington Trust Company is the Trusts’ Owner Trustee.

6   TSI is a sub-servicer responsible for the collection of the Trusts’ delinquent loans.

7   Nat’l Collegiate Master Student Loan Tr. at *3 (citing Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 153 (2013)).

8   Id.

9   See 12 U.S.C. § 5565(a)(1).

10  Nat’l Collegiate Master Student Loan Tr. at *4 (quoting Advanced Disposal Serv. E., Inc. v. Nat’l Labor Relations Bd., 820 F.3d 592, 602 (3d Cir. 2016)).

11  Id. (quoting Advanced Disposal, 820 F.3d at 603) (emphasis in original).

12  12 U.S.C. § 5564(g)(1).

13  Nat’l Collegiate Master Student Loan Tr. at 7.

14  Id. at 3.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

ARTICLE BY Ellen Holloman,  Neil J. Weidner,  Cheryl D. Barnes
Rachel Rodman, Scott A. Cammarn and Ailsa Chau of
Cadwalader, Wickersham & Taft LLP

For more articles on the CFPB, visit the NLR Financial Institutions & Banking section.

Supreme Court “Unfriends” Ninth Circuit Decision Applying TCPA to Facebook

In a unanimous decision, the Supreme Court held that Facebook’s “login notification” text messages (sent to users when an attempt is made to access their Facebook account from an unknown device or browser) did not constitute an “automatic telephone dialing system” within the meaning of the federal Telephone Consumer Protection Act (“TCPA”).  In so holding, the Court narrowly construed the statute’s prohibition on automatic telephone dialing systems as applying only to devices that send calls and texts to randomly generated or sequential numbers.  Facebook, Inc. v. Duguid, No. 19-511, slip op. (Apr. 1, 2021).

The TCPA aims to prevent abusive telemarketing practices by restricting communications made through “automatic telephone dialing systems.”  The statute defines autodialers as equipment with the capacity “to store or produce telephone numbers to be called, using a random or sequential number generator,” and to dial those numbers.  Plaintiff alleged Facebook violated the TCPA’s prohibition on autodialers by sending him login notification text messages using equipment that maintained a database of stored phone numbers. Plaintiff alleged Facebook’s system sent automated text messages to the stored numbers each time the associated account was accessed by an unrecognized device or browser.  Facebook moved to dismiss, arguing it did not use an autodialer as defined by the statute because it did not text numbers that were randomly or sequentially generated.  The Ninth Circuit was unpersuaded by Facebook’s reading of the statute, holding that an autodialer need only have the capacity to “store numbers to be called” and “to dial such numbers automatically” to fall within the ambit of the TCPA.

At the heart of the dispute was a question of statutory interpretation: whether the clause “using a random or sequential number generator” (in the phrase “store or produce telephone numbers to be called, using a random or sequential number generator”) modified both “store” and “produce,” or whether it applied only to the closest verb, “produce.”  Applying the series-qualifier canon of interpretation, which instructs that a modifier at the end of a series applies to the entire series, the Court decided the “random or sequential number generator” clause modified both “store” and “produce.”  The Court noted that applying this canon also reflects the most natural reading of the sentence: in a series of nouns or verbs, a modifier at the end of the list normally applies to the entire series.  The Court gave the example of the statement “students must not complete or check any homework to be turned in for a grade, using online homework-help websites.” The Court observed it would be “strange” to read that statement as prohibiting students from completing homework altogether, with or without online support, which would be the outcome if the final modifier did not apply to all the verbs in the series.

Moreover, the Court noted that the statutory context confirmed the autodialer prohibition was intended to apply only to equipment using a random or sequential number generator.  Congress was motivated to enact the TCPA in order to prevent telemarketing robocalls from dialing emergency lines and tying up sequentially numbered lines at a single entity.  Technology like Facebook’s simply did not pose that risk.  The Court noted plaintiff’s interpretation of “autodialer” would, “capture virtually all modern cell phones . . . .  The TCPA’s liability provisions, then, could affect ordinary cell phone owners in the course of commonplace usage, such as speed dialing or sending automated text message responses.”

The Court thus held that a necessary feature of an autodialer under the TCPA is the capacity to use a random or sequential number generator to either store or produce phone numbers to be called.  This decision is expected to considerably decrease the number of class actions that have been brought under the statute.  Watch this space for further developments.

© 2020 Proskauer Rose LLP.

ARTICLE BY Lawrence I Weinstein and
Anisha Shenai-Khatkhate of Proskauer Rose LLP
For more articles on the TCPA, visit the NLR Communications, Media & Internet section

Vanilla Flavoring Class Action Lawsuit Against McDonald’s Dismissed

On March 24, 2021, the U.S. District Court for the Northern District of California dismissed a consumer class action lawsuit against McDonald’s which had alleged various causes of action relating to McDonald’s sale of vanilla ice cream that the plaintiff alleged derived some portion of its vanilla flavor from vanillin rather than vanilla bean.

The Court found that the Plaintiffs had not established that their claim—that consumers were misled by the vanilla flavor labeling—was plausible as required to survive a motion to dismiss. Specifically, the court found that the allegations of consumer deception were merely conclusory and did not establish that it was “probable that a significant portion of the general consuming public or of targeted consumers, acting reasonably in the circumstances, could be misled.” The court noted the labeling regulations that govern the retail sale of vanilla ice cream added no support for Plaintiffs’ claims because they indisputably did not apply to sales at fast-food establishments. Additionally, and serving as an independent grounds for dismissal, the court found that Plaintiffs’ had not established that they had paid a premium for the vanilla ice cream; rather the court found it to be “counter-intuitive” in the market context presented.

We have reported on a variety of vanilla flavoring class action lawsuits, many of which have not survived the motion to dismiss stage. This case is another demonstration of the difficulty that plaintiffs have had in convincing the court that consumers expect vanilla flavored products to contain not only the flavor of vanilla but also the ingredient vanilla bean. An amended complaint may be filed within 30 days of the order.

© 2020 Keller and Heckman LLP

ARTICLE BY Food and Drug Law at Keller and Heckman
For more articles on food flavoring, visit the NLR Biotech, Food, Drug section.

Farm Lending Pitfalls For Urban Lawyers

OK, so you’re a sophisticated lending attorney in Metropolis who is comfortable with everything from aircraft financing to syndicated loans secured by casinos in Macau. Yet you feel a twinge of uncertainty when a business loan is to be secured by wine inventory made from grapes grown in both California and Washington. You know intuitively that anytime farmers, ranchers or food processors are in the mix, either as a borrower or a supplier to the borrower, the underwriting and documentation challenges are not uniform on a state-by-state basis, and are compounded by an overlay of federal laws designed to protect growers of perishable crops and providers of livestock. To get a reality check, you sometimes will secretly call your law school classmate who oddly returned to Smallville and now represents its one bank.

Your concerns are justified but can be reduced by understanding a handful of specific laws that should prompt discussion of documentation and collection risks. First and foremost, all 50 states have unique lien statutes designed to protect those who provide goods, services, land and labor to farmers, ranchers and food processors. Dealing with competing liens and quantifying risk is nothing new to lenders, but the problem posed by agricultural liens is that they often are not searchable (no public filing is required), yet they often are senior in lien priority to conventional Uniform Commercial Code (UCC) security interests. As a result, the number and size of such liens are unknowable except from reliance on the borrower’s own books and records, which hopefully are current and accurate.

To exemplify this risk, let’s return to the winery loan that made you uneasy. California law provides a Producers Lien (Cal. Food & Agric. Code 55631-55653) to unpaid grape producers in an unlimited amount without requiring any public or searchable filing. A Producer Lien’s priority is senior to all UCC security interests and other claims, except for UCC warehouse liens and laborers’ wage claims. Cal. Food & Agric. Code 55633; Frazier Nuts v. American AgCredit, 141 Cal. App. 4th 1263 (2006). The Producers Lien attaches not only to the wine sitting in the borrower’s inventory, but also to the accounts generated by the sale of wine. Frazier Nuts, supra, at 1270. Thus, the lender’s $10 million revolving line of credit, ostensibly well secured by wine inventory and accounts valued at $20 million, has a far different risk profile if the borrower did not fully disclose the amount of unpaid grower claims, an amount which varies during the winery’s business cycle. The full amount of these Producer Liens will prime the lender’s unpaid loan if collection remedies ever become necessary. Cal. Food & Agric. Code 55634.

Faced with this risk, a reasonable lender might attempt to identify likely holders of Producer Liens and obtain a waiver or subordination of the statutory liens. This solution is possible but not foolproof; waivers of Producer Liens laws have been overturned on grounds showing they were not knowingly and intentionally given. See, e.g., Silva Farms v. Wells Fargo Bank (In Re GVF Cannery, 202 B.R. 140 (N.D. Cal. 1996).

Before throwing in the towel, however, bear in mind that some statutory agricultural liens are searchable because of public filing requirements and are also governed by the UCC’s “first in time” priority rules. See, e.g., California’s Dairy Cattle Supply Lien, Food & Agric. Code 57401-57414; Agricultural Chemical and Seed Lien, Food & Agric. Code 57551-57595; and Poultry and Fish Supply Lien, Food & Agric. Code 57501-57545. These filing and priority rules resulted from efforts by the UCC’s Permanent Editorial Board to bring statutory liens within the UCC’s framework, but only with partial success. Thus, the lawyer’s analysis includes not only spotting the potential statutory lien, but knowing when its risk is manageable or mitigated by the specific lien’s UCC-like searchability and collection priority.

Moving beyond state lien laws, which by themselves are powerful tools in a priority dispute with a conventional UCC lender, federal laws sometimes provide an even more powerful tool. Growers of perishable fruits and vegetables, as well as providers of livestock and poultry, are afforded federal protections under the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. 499, and the Packers and Stockyards Act (PASA), 7 U.S.C. 181. PACA and PASA do not simply create a lien that competes with a UCC security interest; they may actually impose a trust on the farm products, the inventory created from such products and all receivables and other proceeds generated by those perishable commodities and livestock. 7 U.S.C. 499e(c)(2). By placing these products and proceeds in a trust, any purported security interest in the same assets is limited to the residual value after the trust beneficiaries – the unpaid suppliers – are paid. And when assets are subject to a PACA or PASA trust, certain individuals are saddled with the legal duties of a trustee to pay those unpaid beneficiaries, creating strong incentives for the PACA or PASA trustee to do so to avoid personal liability.  See, e.g. Coosemans Specialties v. Gargiulo, 485 F. 3d 701 (2d Cir. 2007).

To quantify the risks posed by these federal statutory trusts, the limits of these statutes and common defenses to them must be understood. For example, the most common questions for the application and extent of the PACA trust include: (1) is the product a perishable agricultural commodity under 7 U.S.C. 499a(b)(4); (2) was the receiver of the produce licensed or otherwise subject to PACA under 7 U.S.C. 499a(b)(6); and (3) did the PACA claimant comply with, or waive the protections of, PACA? A common defense to a PACA claim is that the payment terms exceeded 30 days. 7 C.F.R. 46.46(e)(2). Other more technical disqualifying terms or deficiencies are numerous. But once the lender is aware of the possibility of a federal trust being imposed on the collateral in question, the lender cannot rely upon the prospect of the trust beneficiary’s mistakes to value its own collateral when making underwriting decisions.

In short, an agricultural loan backed by a UCC security interest must be underwritten, sized and subsequently monitored based on the risks posed both by these federal trust statutes and a host of non-uniform, state agricultural liens. A survey of state agricultural liens, PACA and PASA are the subject of entire treatises and beyond the scope of this overview.  (Excellent scholarly papers and 50 state surveys are available from the National Agricultural Law Center, https://nationalaglawcenter.org.) The key for the careful transactional lawyer is to identify the risks and ask the right questions. Because these statutory liens and federal trusts reflect strong public policies, most of these statutory liens and trust rights cannot easily be waived or avoided, but they can be understood and the associated risks managed. In few areas of commerce is this exercise more challenging than agricultural lending to farmers, ranchers and food processors of every type.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP
For more articles on the agriculture industry, visit the NLR  Environmental, Energy & Resources

Farm Lending Pitfalls For Urban Lawyers

OK, so you’re a sophisticated lending attorney in Metropolis who is comfortable with everything from aircraft financing to syndicated loans secured by casinos in Macau. Yet you feel a twinge of uncertainty when a business loan is to be secured by wine inventory made from grapes grown in both California and Washington. You know intuitively that anytime farmers, ranchers or food processors are in the mix, either as a borrower or a supplier to the borrower, the underwriting and documentation challenges are not uniform on a state-by-state basis, and are compounded by an overlay of federal laws designed to protect growers of perishable crops and providers of livestock. To get a reality check, you sometimes will secretly call your law school classmate who oddly returned to Smallville and now represents its one bank.

Your concerns are justified but can be reduced by understanding a handful of specific laws that should prompt discussion of documentation and collection risks. First and foremost, all 50 states have unique lien statutes designed to protect those who provide goods, services, land and labor to farmers, ranchers and food processors. Dealing with competing liens and quantifying risk is nothing new to lenders, but the problem posed by agricultural liens is that they often are not searchable (no public filing is required), yet they often are senior in lien priority to conventional Uniform Commercial Code (UCC) security interests. As a result, the number and size of such liens are unknowable except from reliance on the borrower’s own books and records, which hopefully are current and accurate.

To exemplify this risk, let’s return to the winery loan that made you uneasy. California law provides a Producers Lien (Cal. Food & Agric. Code 55631-55653) to unpaid grape producers in an unlimited amount without requiring any public or searchable filing. A Producer Lien’s priority is senior to all UCC security interests and other claims, except for UCC warehouse liens and laborers’ wage claims. Cal. Food & Agric. Code 55633; Frazier Nuts v. American AgCredit, 141 Cal. App. 4th 1263 (2006). The Producers Lien attaches not only to the wine sitting in the borrower’s inventory, but also to the accounts generated by the sale of wine. Frazier Nuts, supra, at 1270. Thus, the lender’s $10 million revolving line of credit, ostensibly well secured by wine inventory and accounts valued at $20 million, has a far different risk profile if the borrower did not fully disclose the amount of unpaid grower claims, an amount which varies during the winery’s business cycle. The full amount of these Producer Liens will prime the lender’s unpaid loan if collection remedies ever become necessary. Cal. Food & Agric. Code 55634.

Faced with this risk, a reasonable lender might attempt to identify likely holders of Producer Liens and obtain a waiver or subordination of the statutory liens. This solution is possible but not foolproof; waivers of Producer Liens laws have been overturned on grounds showing they were not knowingly and intentionally given. See, e.g., Silva Farms v. Wells Fargo Bank (In Re GVF Cannery, 202 B.R. 140 (N.D. Cal. 1996).

Before throwing in the towel, however, bear in mind that some statutory agricultural liens are searchable because of public filing requirements and are also governed by the UCC’s “first in time” priority rules. See, e.g., California’s Dairy Cattle Supply Lien, Food & Agric. Code 57401-57414; Agricultural Chemical and Seed Lien, Food & Agric. Code 57551-57595; and Poultry and Fish Supply Lien, Food & Agric. Code 57501-57545. These filing and priority rules resulted from efforts by the UCC’s Permanent Editorial Board to bring statutory liens within the UCC’s framework, but only with partial success. Thus, the lawyer’s analysis includes not only spotting the potential statutory lien, but knowing when its risk is manageable or mitigated by the specific lien’s UCC-like searchability and collection priority.

Moving beyond state lien laws, which by themselves are powerful tools in a priority dispute with a conventional UCC lender, federal laws sometimes provide an even more powerful tool. Growers of perishable fruits and vegetables, as well as providers of livestock and poultry, are afforded federal protections under the Perishable Agricultural Commodities Act (PACA), 7 U.S.C. 499, and the Packers and Stockyards Act (PASA), 7 U.S.C. 181. PACA and PASA do not simply create a lien that competes with a UCC security interest; they may actually impose a trust on the farm products, the inventory created from such products and all receivables and other proceeds generated by those perishable commodities and livestock. 7 U.S.C. 499e(c)(2). By placing these products and proceeds in a trust, any purported security interest in the same assets is limited to the residual value after the trust beneficiaries – the unpaid suppliers – are paid. And when assets are subject to a PACA or PASA trust, certain individuals are saddled with the legal duties of a trustee to pay those unpaid beneficiaries, creating strong incentives for the PACA or PASA trustee to do so to avoid personal liability.  See, e.g. Coosemans Specialties v. Gargiulo, 485 F. 3d 701 (2d Cir. 2007).

To quantify the risks posed by these federal statutory trusts, the limits of these statutes and common defenses to them must be understood. For example, the most common questions for the application and extent of the PACA trust include: (1) is the product a perishable agricultural commodity under 7 U.S.C. 499a(b)(4); (2) was the receiver of the produce licensed or otherwise subject to PACA under 7 U.S.C. 499a(b)(6); and (3) did the PACA claimant comply with, or waive the protections of, PACA? A common defense to a PACA claim is that the payment terms exceeded 30 days. 7 C.F.R. 46.46(e)(2). Other more technical disqualifying terms or deficiencies are numerous. But once the lender is aware of the possibility of a federal trust being imposed on the collateral in question, the lender cannot rely upon the prospect of the trust beneficiary’s mistakes to value its own collateral when making underwriting decisions.

In short, an agricultural loan backed by a UCC security interest must be underwritten, sized and subsequently monitored based on the risks posed both by these federal trust statutes and a host of non-uniform, state agricultural liens. A survey of state agricultural liens, PACA and PASA are the subject of entire treatises and beyond the scope of this overview.  (Excellent scholarly papers and 50 state surveys are available from the National Agricultural Law Center, https://nationalaglawcenter.org.) The key for the careful transactional lawyer is to identify the risks and ask the right questions. Because these statutory liens and federal trusts reflect strong public policies, most of these statutory liens and trust rights cannot easily be waived or avoided, but they can be understood and the associated risks managed. In few areas of commerce is this exercise more challenging than agricultural lending to farmers, ranchers and food processors of every type.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.
ARTICLE BY Richard W. Brunette, Jr. and Kenneth D. Fox of Sheppard, Mullin, Richter & Hampton LLP