Category: Litigation

In Affirming a Preliminary Injunction Against Drug Companies, Second Circuit Finds Coercion in Product Hopping Scheme

In an earlier posting, I wrote about the lawsuit filed on December 10, 2014 by the Attorney General for the State of New York, People of the State of New York v. Actavis, PLC and Forest Laboratories, LLC .1  In that action, New York challenges on antitrust grounds plans by the defendant pharmaceutical companies to cease marketing the drug Namenda IR and substitute in the market-place a newer drug, Namenda XR.  Both drugs are used for the treatment of moderate to advanced Alzheimer’s disease.  Namenda IR and Namenda XR are the brand names for the drug memantine, and defendants have a monopoly for memantine in the United States. On May 22, 2015, the Second Circuit issued an Order affirming a preliminary injunction granted by the United States District Court for the Southern District of New York, enjoining Actavis and Forest Laboratories (“Forest”) from discontinuing the marketing of Namenda IR, and substituting its newer drug Namenda XR.2  The Second Circuit filed an opinion under seal concurrently with the issuance of its Order, allowing the parties to submit proposed redactions by May 26, 2015.  The court of appeals on May 28, 2015 issued a redacted version of its opinion.  At the time of my previous posting on the antitrust suit brought by New York against Actavis and Forest, the Second Circuit had not released it redacted version of its opinion.

In its opinion, the Second Circuit ruled that the district court did not abuse its discretion in granting a preliminary injunction, as sought by New York, precluding the defendants from implementing a marketing scheme known as “product hopping.”  This tactic was a means of maintaining the defendants’ monopoly in the memantine market and precluding competition by generic brands of that drug.  Of critical import to the court of appeals was that defendants relied upon consumer coercion, rather than persuasion on the merits of competing generics.  The coercive aspect of defendants’ marketing scheme violated section 2 of the Sherman Act.3  

The Second Circuit’s ruling in People of the State of New York v. Actavis, PLC and Forest Laboratories, LLC affirming the district court’s preliminary injunction is the first appellate decision to specifically opine on the antitrust implications of product hopping in the pharmaceutical industry.

Background

Forest holds a patent for its brand-name drug Namenda IR, with market exclusivity to expire on July 11, 2015.  On that date, Forest will no longer have market exclusivity for memantine.  Actavis and Forest issued several public statements regarding plans to withdraw Namenda IR from the market, ultimately announcing in June 2014 that Namenda IR would be available for sale until the fall of 2014.  Defendants indicated that upon withdraw Namenda IR from the market in the fall of 2014, its newer drug Namenda XR would be available as a substitute for the treatment of moderate to advanced Alzheimer’s disease.  Defendants took steps to notify physicians and caregivers of the discontinuance of Namenda IR and to contemplate switching from Namenda IR to Namenda RX.

Namenda XR has the same therapeutic effect as Namenda IR.  There is a difference between the two drugs regarding time-release.  Namenda IR is the immediate-release version of that drug, whereas Namenda XR is an extended-release version. Thus, consumers would take Namenda IR twice daily; in contrast, Namenda XR would be taken once daily.  Additionally, Namenda IR is in tablet form, and Namenda XR is in capsule form.

There are implications for generic drug competition in the market for memantine that arise from the marketing plans announced by Actavis and Forest.  In 1984, Congress enacted the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the “Hatch-Waxman Act.”4    That statute provides for dual purposes. On the one hand, Congress allowed a manufacture of a generic drug to use an abbreviated process to obtain approval to market the drug from the Food and Drug Administration (“FDA”).  Provision for an abbreviated process was to encourage price competition from  generic drugs.  The generic drug manufacturer can file an Abbreviated New Drug Application (“ANDA”) provided that the generic drug is “bioequivalent” to a previously approved brand-name drug.  This regulatory approach allows the generic manufacturer to rely on scientific data previously submitted for the brand-name drug to seek approval to market the generic drug.  The ANDA process affords generic manufacturers considerable cost savings, and a shorted period of FDA review.  The other purpose under the Hatch-Waxman Act was to incentivize drug innovation.  To do this, Congress provided that the manufacturer of a brand-name drug can obtain an additional extension of up to five years to the patent term of the drug to compensate for regulatory delay when seeking approval from the FDA for the new brand-name drug.5  Additionally, under amendments to the Hatch-Waxman Act by the Food and Drug Administration Modernization Act of 1997,6 provision was made for six months of non-patent “pediatric exclusivity” for qualifying pediatric research conducted by the drug manufacturer.7

States have drug substitution laws that either mandate or allow the substitution of a generic drug for a prescribed brand-name drug, except where the prescribing physician, or consumer, indicates otherwise. A generic drug that receives approval from the FDA under the ANDA process may be “AB- rated” by the FDA when the generic drug is “therapeutically equivalent” to its brand-name drug counterpart.  A generic drug deemed AB-rated allows a pharmacy, under a state’s substitution laws, to substitute the generic drug for the more expensive brand-name drug.  State substitution laws complement the provisions under the Hatch-Waxman Act which liberalize the drug approval process for generic drugs, to lower drug costs by encouraging greater competition from generic drugs in the market-place.

In the antitrust lawsuit filed by New York against Actavis and Forest, the State Attorney General alleges violations of the Sherman Act8 and state antitrust laws.9  In the action, New York contends that the marketing practice of product hopping that the defendants intend to pursue will have dire consequences for competition from generic drugs for Forest’s Namenda IR that would have occurred upon the expiration of market exclusivity for Namenda IR on July 11, 2015.  This anticompetitive impact will arise, according to New York, as a direct result of defendants’ plans to stop marketing Namenda IR and “force switch” physicians and payors to use Forest’s newer drug Namenda XR prior to loss of market exclusivity for Namenda IR on July 11, 2015.10  New York argues that removal from the market of Namenda IR prior to the loss of market exclusivity for Namenda IR will thwart state substitution laws since generics for the drug Namenda IR will not have been AB- rated for the newer Namenda XR, critical to enable pharmacists to substitute a generic version for the newer drug Namenda XR.  New York contends that defendants’ scheme will thus extend the national monopoly that Forest has for memantine for the term of the patent it has for Namenda XR, to expire in 2029.

In its lawsuit, New York argues that there is no legitimate business justification for the product hopping scheme defendants intend to pursue.  In its amended complaint, the State insists that Manenda XR lacks any meaningful benefits compared with Namenda IR.11  New York accuses the defendants of erecting barriers to entry to thwart competition from makers of the generic form of the drug Namenda IR.  The State contends that steps to force switch the prescribing of Namenda XR would impact negatively on thealready “financially strapped”12 health care system, and on Alzheimer’s patients who “must bear…unwanted costs” and “unnecessary changes to their medical routine.”13

The Second Circuit’s Analysis            

On appeal, the Second Circuit ruled that the district court did not abuse its discretion in granting a preliminary injunction, enjoining Actavis and Forest from discontinuing the marketing of Namenda IR.  Applying a heightened standard under the law in the Second Circuit for review of a preliminary injunction, the court of appeals concluded that New York demonstrated a “substantial likelihood of success on the merits” of its monopolization and attempted monopolization claims under section 2 of the Sherman Act, and has made “a strong showing” that defendants’ conduct “would cause irreparable harm to competition” in the memantine drug market and to consumers.14

The Second Circuit wrote that monopoly power does not, in and of itself, raise an antitrust concern.  To establish a violation of section 2 of the Sherman Act, it must be proved that the defendant not only possessed monopoly power in the relevant market, but that it “willfully acquired or maintained that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”15  The court of appeals recognized that defendants’ patent on Namenda IR grant them a legal monopoly in the national memantine drug market until July 11, 2015.  Thus, the Second Circuit explained that the issue is whether defendants “willfully sought to maintain or attempted to maintain” that monopoly in violation of section 2.  Citing United States v. Microsoft Corp.16 the court of appeals embraced a rule-of-reason test to determine when a product change violates section 2.  It wrote that generally, courts question assertions that competition is harmed by a dominant firm’s product design changes.  Such design changes can benefit consumers and represent innovation and efficiency. Thus, the court explained that, to be anticompetitive, a dominant firm’s design changes are those that impede competition through means “other than competition on the merits.”17  Relying  on its analysis in Berkey Photo, Inc. v. Eastman Kodak Co.,18 the Second Circuit reasoned that product withdrawal or product improvement, standing alone, is not anticompetitive.  The court wrote that under Berkey Photo, when a monopolist “combines product withdrawal with some other conduct,” such that consumers are “coerced” rather than persuaded based on the merits, and to “impede competition,” such actions are anticompetitive.19  The court of appeals concluded that defendants’ plan to force switch Alzheimer’s patients from taking Namenda IR to the newer drug Namenda XR (for which generic Namenda is not therapeutically equivalent) would impede generic competition by thwarting state substitution laws for generics.  Defendants’ force switch scheme “crosses the line from persuasion to coercion and is anticompetitive.”20  

The Second Circuit agreed with the district court’s view that the pharmaceutical market is unique, and the critical role that state substitution laws play in facilitating price competition between brand-name drugs and generics.  Competition through state substitution laws “is the only cost-efficient means” for generic drugs to compete.21  The court of appeals explained that defendant’s plan to force patients to switch to Namenda XR would preclude generic substitution because generic Namenda IR is not AB-rated to Namenda XR.  The Second Circuit viewed defendants’ plan to force switch consumers to Namenda XR as a practice not based on competition on the merits.  As such, defendants’ scheme was exclusionary, with the anticompetitive “effect of significantly reducing usage of rivals’ products and hence protecting its own monopoly,”22 in violation of section 2 of the Sherman Act.  The court of appeals took note of the record before the lower court indicating the defendants’ own predictions on the effect of its plan to force switch consumers.  Such a scheme would convert, in defendants’ judgment, 80-100 of Namenda IR patients to Namenda XR prior to entry into the market by generic Namenda IR.  Thus, there would be virtually no meaningful market in which generics could compete based on price for Namenda IR.23  The court of appeals also took note of defendants’ own views regarding the very low prospects that consumers would revert back to the generic version of Namenda IR once they were forced to switch to Namenda XR and manufacturers were free to sell the generic version of Namenda IR.24

The Second Circuit rejected the defendants’ procompetitive justifications for its marketing scheme as pretextual.  Relying on the record before the lower court, the court of appeals wrote that there is ample evidence indicating that defendants’ stated intent was to erect barriers to thwart generic competition, and maintain a monopoly in the memantine market.  Defendants argued that their conduct is procompetitive since introducing a new product, like Namenda XR, enhances competition and encouraging product innovation.  The Second Circuit disagreed.  It wrote that while introducing Namenda XR may, standing alone, be procompetitive, there is no competitive justification for withdrawing Namenda IR.25

The Second Circuit also concluded that New York made a strong showing “that competition and consumers will suffer irreparable harm” in the absence of the preliminary injunction awarded by the district court.26

The views and opinions expressed in this article are those of the author, and cannot be attributed to the Office of the Inspector General for the District of Columbia Government.

ARTICLE BY Stuart Silverman of American University Washington College of Law
Copyright American University Washington College of Law

1  Amended Complaint, Case No. 14-CV-7473 (RWS) (S.D.N.Y. filed Dec. 10, 2014).

2 Case No. 14-4624 (2nd Cir. May 22, 2015)

3 15 U.S.C. § 2.  

4 Pub. L. No. 98-417, codified at: 21 U.S.C. § 355, 21 U.S.C. § 2201, and 35 U.S.C. §§ 156, 271, 282.

5 35 U.S.C. § 156.  

6 Pub. L. No. 105-115.

7 35 U.S.C. § 156; 21 U.S.C. § 355a.   

8 15 U.S.C. §§ 1 and 2.  

9   New York State General Business Law §§ 340-47; New York State Executive Law § 63(12).      

10 The district court’s preliminary injunction bars defendants from withdrawing Namenda IR until 30 days after July 11, 2015, the date when generic memantine will first be available in the market.    

11 Amended complaint, par. 78.  

12 Id. at par. 6.  

13 Id. at par. 100.  

14 Slip op. at 28.  

15 Id. at 29, quoting Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (internal quotation marks and citation omitted).    

16 253 F.3d 34, 58-60 (D.C. Cir. 2001) (en banc).  

17 Slip op. at 32.  

18 603 F.2d 263 (2nd Cir. 1979).  

19 Slip op. at 35-36.  

20 Id. at 37.  

21 Id. at 40-41. 

22 Id. at 40.                  

23 Id. at 39-40.  

24 Id. at 41-42.   

25 Slip op. at 47-49.  

26 Id. at 54.

Auto Insurers Again Seek Dismissal of In RE Auto Body Shop Antitrust Litigation

In early March, the auto insurer defendants in the In re Auto Body Shop Antitrust Litigation renewed their motions seeking the dismissal of plaintiffs’ action, this time directed at plaintiffs’ Second Amended Complaint. The insurer defendants urged the Court to dismiss the action with prejudice, maintaining that, despite three attempts, the plaintiff auto body shops have still failed to include sufficient facts to make their claim of conspiracy plausible.

The action, commenced well over a year ago as A&E Auto Body v. 21st Century Centennial Insurance Co. and subsequently transformed into a multidistrict litigation proceeding (In re Auto Body Shop Antitrust Litigation, MDL 2557) after similar cases were filed in a multitude of states, centers upon a claim that many of the leading auto insurers in the country conspired to reduce rates for the repair of damaged vehicles and to steer insureds away from auto repair shops that refused to accept lower reimbursement rates for their services. The cases were consolidated before Judge Gregory Presnell (M.D. Fla.) in late 2014, and in early 2015 Judge Presnell dismissed plaintiffs’ First Amended Complaint, finding that the plaintiffs had failed to plead an antitrust conspiracy with the degree of specificity required under Bell Atlantic v. Twombly, 550 U.S. 544 (2007).

In February, plaintiffs filed their Second Amended Complaint, seeking to cure the deficiencies in the complaint identified in Judge Presnell’s prior rulings. In March, the defendants filed several new motions to dismiss the action. One group of defendants (including State Farm, Allstate, Progressive and 21st Century) maintained that the plaintiffs’ allegations still failed to include sufficient factual support to plead an actionable antitrust conspiracy, which they described as the “crucial question” in the case. Claiming that the plaintiffs’ allegations demonstrated nothing more than “parallel conduct” towards the plaintiffs, not agreement, these defendants renewed their request to have the action dismissed as to them. Another group of defendants (which includes Hartford, Nationwide and Zurich American) went a step further, arguing that the plaintiffs had failed to allege any material facts specifically about them, despite Judge Presnell’s express instruction in his prior dismissal order in January (without prejudice, on that occasion) that plaintiffs provide detailed allegations about each defendant’s involvement in the alleged conspiracy. Finally, one defendant (Old Republic) filed a separate motion not only seeking dismissal, but sanctions as well, based on the claim that the plaintiffs had been put on notice by the Court that particularized allegations as to each defendant’s alleged conduct was required, and that plaintiffs’ failure to include any additional factual support for their claims against Old Republic was sanctionable conduct.

In late March, the plaintiffs filed an “omnibus” response to all of the defendants’ motions, arguing that dismissal of the case at this juncture was not warranted. Asserting that “the Second Amended Complaint complies in every respect with the Court’s [January] Order,” the plaintiffs urged the Court to permit them to proceed into discovery. Specifically, the plaintiffs maintained that the parallel conduct alleged in the Second Amended Complaint constitutes “circumstantial evidence of conspiracy” and that the Supreme Court has never expressly held how many “plus factors” supporting a claim of conspiracy are required to satisfy a plaintiff’s pleading obligations. Plaintiffs contended, therefore, that they are not required to “set out specific facts establishing the time, place or persons involved in the conspiracy” nor are they required to allege an “express agreement.” Instead, they maintained, their allegations of parallel conduct, coupled with their allegations about the defendants’ collective market share, motive to conspire and opportunity to do so are more than sufficient to meet their pleading obligations.

In early April, the auto insurers filed reply briefs responding to the plaintiffs’ contentions. Perhaps most significantly, those defendants that had argued that the Second Amended Complaint still failed to contain any significant allegations about their specific conduct noted that the plaintiffs’ response had failed to refute that assertion in any meaningful way (“Rather than simply admit that they failed to allege anything against the moving defendants under the Sherman Act…plaintiffs point to allegations against the other defendants….” emphasis in original).

The entire set of motions are now before Judge Presnell for consideration, with the defendants urging the Court to take a “three strikes, you’re out” approach to the plaintiffs’ case. Whether Judge Presnell will adopt defendants’ baseball analogy and dismiss the case, with prejudice, as to all or some of the defendants remains to be seen. What is certain is that this matter will continue to be a significant focus of attention for the entire auto insurance industry over the coming months. Stay tuned.

Authored by James M. Burns of Dickinson Wright PLLC

© Copyright 2015 Dickinson Wright PLLC

Quicken Loans Takes on the DOJ & HUD

Quicken Loans, the nation’s largest Federal Housing Administration (FHA)-backed mortgage lender,filed suit on Friday, April 17 in the United States District Court in Detroit against the United States Department of Justice (DOJ) and the Department of Housing and Urban Development (HUD). In the suit, Quicken alleged that it is a target of a probe in “which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into publicly ‘admitting’ wrongdoing.” Quicken says the government threatened to file a lawsuit against it unless the company paid damages based on a sampling of its loans backed by the FHA. The government wanted payment of damages to be coupled with an admission by Quicken that its lending practices were “significantly flawed,” and that it had committed wrongdoing.

The company says that the public statements the government wanted it to make were blatantly false. Quicken also asserts that, before filing its lawsuit, it had already provided the DOJ with more than 85,000 documents, including 55,000 emails. In addition, the DOJ, without filing any lawsuit against Quicken, has conducted hundreds of hours of depositions from numerous Quicken team members. Three years later, the DOJ inquiry has (according to Quicken) resulted in the threat of a federal lawsuit based on “faulty analysis of a miniscule number of cherry-picked mortgages from the nearly 250,000 FHA loans the company has closed since 2007.”

According to FHA statistics, Quicken has originated the government agency’s best performing loan portfolio. The FHA’s publicly available data appears to establish that Quicken has the lowest “compare ratio” — the default rate of a single lender compared to FHA’s total mortgage portfolio — in recent years.

Not surprisingly, the DOJ responded by filing its own lawsuit against Quicken on Thursday, April 23, contending that it made hundreds of improper loans through the FHA lending program, allegedly costing the agency millions of dollars. The Justice Department contends that from September 2007 through December 2011, Quicken knowingly submitted claims — or caused the submission of claims — on hundreds of bad loans, and encouraged an underwriting process in which employees disregarded the program rules and falsely certified that loans met the requirements.

The F.H.A. — which allows borrowers to make down payments of as little as 3.5 percent — has already paid millions of dollars in insurance claims on the improperly underwritten loans, according to the complaint; it said many additional loans had become at least 60 days delinquent and could result in further claims.

The Justice Department, which has filed the suit under the False Claims Act, has already reached settlements with several lenders over their F.H.A. lending practices, including JPMorgan Chase, SunTrust, U.S. Bank, and Bank of America.

It is likely that many other lenders, feeling unduly scrutinized by government agencies, are cheering Quicken’s decision to file suit and are more than a little sympathetic to Quicken’s position in the two suits currently pending (which may be consolidated at some point). The prospects for success for Quicken in the suit that it filed, however, are not necessarily bright. The government generally has immunity, and great discretion even when it does not have immunity, with respect to how it conducts its investigations or settles enforcement actions.

Nevertheless, the lawsuit may at the very least succeed in forcing government agencies to explain and justify their conduct, which might have an effect strongly desired by numerous lenders feeling “targeted” by those agencies. Specifically, the effect of reining in the excesses of governmental enforcement efforts, and making responsible government officials more inclined either to forgo certain investigations entirely, or streamline them in ways that place lesser burdens on companies that, after all, should be presumed not to be liable until the government actually proves otherwise.

© 2015 Bilzin Sumberg Baena Price & Axelrod LLP Authored by:  Philip R. Stein

Quicken Loans Takes on the DOJ & HUD

Quicken Loans, the nation’s largest Federal Housing Administration (FHA)-backed mortgage lender,filed suit on Friday, April 17 in the United States District Court in Detroit against the United States Department of Justice (DOJ) and the Department of Housing and Urban Development (HUD). In the suit, Quicken alleged that it is a target of a probe in “which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into publicly ‘admitting’ wrongdoing.” Quicken says the government threatened to file a lawsuit against it unless the company paid damages based on a sampling of its loans backed by the FHA. The government wanted payment of damages to be coupled with an admission by Quicken that its lending practices were “significantly flawed,” and that it had committed wrongdoing.

The company says that the public statements the government wanted it to make were blatantly false. Quicken also asserts that, before filing its lawsuit, it had already provided the DOJ with more than 85,000 documents, including 55,000 emails. In addition, the DOJ, without filing any lawsuit against Quicken, has conducted hundreds of hours of depositions from numerous Quicken team members. Three years later, the DOJ inquiry has (according to Quicken) resulted in the threat of a federal lawsuit based on “faulty analysis of a miniscule number of cherry-picked mortgages from the nearly 250,000 FHA loans the company has closed since 2007.”

According to FHA statistics, Quicken has originated the government agency’s best performing loan portfolio. The FHA’s publicly available data appears to establish that Quicken has the lowest “compare ratio” — the default rate of a single lender compared to FHA’s total mortgage portfolio — in recent years.

Not surprisingly, the DOJ responded by filing its own lawsuit against Quicken on Thursday, April 23, contending that it made hundreds of improper loans through the FHA lending program, allegedly costing the agency millions of dollars. The Justice Department contends that from September 2007 through December 2011, Quicken knowingly submitted claims — or caused the submission of claims — on hundreds of bad loans, and encouraged an underwriting process in which employees disregarded the program rules and falsely certified that loans met the requirements.

The F.H.A. — which allows borrowers to make down payments of as little as 3.5 percent — has already paid millions of dollars in insurance claims on the improperly underwritten loans, according to the complaint; it said many additional loans had become at least 60 days delinquent and could result in further claims.

The Justice Department, which has filed the suit under the False Claims Act, has already reached settlements with several lenders over their F.H.A. lending practices, including JPMorgan Chase, SunTrust, U.S. Bank, and Bank of America.

It is likely that many other lenders, feeling unduly scrutinized by government agencies, are cheering Quicken’s decision to file suit and are more than a little sympathetic to Quicken’s position in the two suits currently pending (which may be consolidated at some point). The prospects for success for Quicken in the suit that it filed, however, are not necessarily bright. The government generally has immunity, and great discretion even when it does not have immunity, with respect to how it conducts its investigations or settles enforcement actions.

Nevertheless, the lawsuit may at the very least succeed in forcing government agencies to explain and justify their conduct, which might have an effect strongly desired by numerous lenders feeling “targeted” by those agencies. Specifically, the effect of reining in the excesses of governmental enforcement efforts, and making responsible government officials more inclined either to forgo certain investigations entirely, or streamline them in ways that place lesser burdens on companies that, after all, should be presumed not to be liable until the government actually proves otherwise.

© 2015 Bilzin Sumberg Baena Price & Axelrod LLP Authored by:  Philip R. Stein

Fourth Circuit Sustains Securities Fraud Claim Against Drug Manufacturer

Katten Muchin Rosenman LLP

On March 6, the US Court of Appeals for the Fourth Circuit found that the United States District Court for the Western District of North Carolina had erred in dismissing a class action lawsuit filed under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) because the lower court had inappropriately relied on regulatory filings provided to the Securities and Exchange Commission and had incorrectly applied case law precedent. The plaintiff class contended that the defendants, Chelsea International, Ltd. and several of its corporate officers, materially misled investors over the risk associated with securing Food and Drug Administration (FDA) approval for a blood pressure medication that Chelsea was developing. Notably, the plaintiffs alleged that defendants had misled investors to believe that the FDA would approve the drug at issue based on the results of only one successful efficacy study, even though the FDA repeatedly had warned Chelsea that two successful studies and evidence of “duration of effect” would be necessary for approval of the new drug. The Fourth Circuit first held that the District Court erred in finding that Chelsea had failed to demonstrate the scienter necessary to sustain a securities fraud claim under the Exchange Act. The Fourth Circuit found that the District Court erred in its scienter analysis by considering SEC documents submitted by the defendants that were not integral to the complaint. The documents purportedly showed that the defendants did not sell any Chelsea stock during the class period. However, stock sales were never a part of the plaintiffs’ complaint and thus, the Fourth Circuit reasoned that the lower court should not have considered these SEC documents as evidence of the defendants’ intentions. Further, the Fourth Circuit held that material, non-public information known to the defendants about the status of the drug application conflicted with the defendants’ public statements on those subjects, which was an inconsistency the Fourth Circuit deemed sufficient to establish the severe reckless conduct necessary to establish an inference of scienter in securities fraud cases.

Zak v. Chelsea Therapeutics No. 13-2370 (4th Cir. Mar. 16, 2015)

ARTICLE BY

Michael S. Gordon
Katten Muchin Rosenman LLP

“Hello, Newman” Government Continues to Litigate Reversed Insider Trading Convictions

Barnes & Thornburg LLP Law Firm

The U.S. Attorney for the Southern District of New York, Preet Bharara, has decided not to go down without a fight. Following a Second Circuit panel’s reversal of Bharara’s signature achievement, the insider-trading convictions of former hedge fund managers Todd Newman and Anthony Chiasson, the U.S. Attorney’s office has petitioned the court for rehearing and rehearing en banc. The Securities and Exchange Commission has also weighed in on the U.S. Attorney’s side, arguing in an amicus brief that the panel seriously erred in its decision. Meanwhile, in other cases, particularly outside the Second Circuit, the Justice Department, and the SEC have argued strenuously that the Second Circuit’s panel decision should not be followed.

In the Second Circuit, the battle lines are being drawn. Bharara’s office has asked both the panel and the full Second Circuit to rehear the case. The US Attorney’s office has argued that the panel erred by imposing two requirements that are purportedly contrary to law– first, that a tipper act for a “personal benefit” of financial consideration, or something at least akin to monetary gain; and second, that the tippee know that the tipper supplying the inside information acted for such a benefit. The SEC has concurred with this assessment, elaborating on Newman’s conclusion that evidence of friendship between tipper and tippee is insufficient to prove the “personal benefit” necessary for tipping liability. The Commission contends that this contradicts Dirks v. SEC, the Supreme Court’s seminal insider trading decision. Both the U.S. Attorney and the SEC contend that, if Newmanremains the law, it will seriously threaten the integrity of the securities markets, and government regulators will be dramatically limited in their ability to prosecute “some of the most common, culpable, and market-threatening forms of insider trading.”

In opposition, Newman and Chiasson, along with various law professors, the criminal defense bar, and even Marc Cuban, have argued that the Second Circuit panel got it right when it imposed an important, objective outer bound to an otherwise amorphous illegal activity. The defendants even engaged in ad hominem criticism of Bharara, analogizing him to a “Chicken Little” complaining that the sky is falling, or more precisely, a “petulant rooster whose dominion has been disturbed.” Those supporting the opinion assert that any perceived difficulty created by the decision can, and should, be rectified by Congress.

Even as the Newman case continues forward, its repercussions are being felt within the Second Circuit and beyond. In the Southern District alone, at least a dozen defendants, who were convicted or pleaded guilty underpre-Newman law, have argued that their cases need to be revisited in light of Newman. No court yet has agreed with that argument, but most of these motions remain pending.

Outside the Second Circuit, the Government is looking to ring-fence the Newman decision and limit its applicability elsewhere. Federal prosecutors, for example in North Carolina, have argued that Newman is not the law in the Fourth Circuit and therefore should not be followed. Meanwhile, defendants in other jurisdictions are invokingNewman in pending, and even resolved, insider trading matters, both civil and criminal.

Defendants are even arguing Newman’s applicability within the SEC’s administrative courts – with success. In In re Peixoto, an SEC administrative proceeding related to Herbalife, the Commission voluntarily dropped its case against Peixoto after Newman. Other cases in the agency’s courts (including against SAC founder Steven Cohen) remain on holding pending final resolution of Newman. And in In re Ruggieri, the administrative law judge said that he would require the SEC to demonstrate the Newman standard of “personal benefit.”

Clearly, the Newman saga has not reached its conclusion, but the fall-out already demonstrates what a momentous decision the Second Circuit panel made.

ARTICLE BY

Brian E. Casey
OF
Barnes & Thornburg LLP

“Hello, Newman" Government Continues to Litigate Reversed Insider Trading Convictions

Barnes & Thornburg LLP Law Firm

The U.S. Attorney for the Southern District of New York, Preet Bharara, has decided not to go down without a fight. Following a Second Circuit panel’s reversal of Bharara’s signature achievement, the insider-trading convictions of former hedge fund managers Todd Newman and Anthony Chiasson, the U.S. Attorney’s office has petitioned the court for rehearing and rehearing en banc. The Securities and Exchange Commission has also weighed in on the U.S. Attorney’s side, arguing in an amicus brief that the panel seriously erred in its decision. Meanwhile, in other cases, particularly outside the Second Circuit, the Justice Department, and the SEC have argued strenuously that the Second Circuit’s panel decision should not be followed.

In the Second Circuit, the battle lines are being drawn. Bharara’s office has asked both the panel and the full Second Circuit to rehear the case. The US Attorney’s office has argued that the panel erred by imposing two requirements that are purportedly contrary to law– first, that a tipper act for a “personal benefit” of financial consideration, or something at least akin to monetary gain; and second, that the tippee know that the tipper supplying the inside information acted for such a benefit. The SEC has concurred with this assessment, elaborating on Newman’s conclusion that evidence of friendship between tipper and tippee is insufficient to prove the “personal benefit” necessary for tipping liability. The Commission contends that this contradicts Dirks v. SEC, the Supreme Court’s seminal insider trading decision. Both the U.S. Attorney and the SEC contend that, if Newmanremains the law, it will seriously threaten the integrity of the securities markets, and government regulators will be dramatically limited in their ability to prosecute “some of the most common, culpable, and market-threatening forms of insider trading.”

In opposition, Newman and Chiasson, along with various law professors, the criminal defense bar, and even Marc Cuban, have argued that the Second Circuit panel got it right when it imposed an important, objective outer bound to an otherwise amorphous illegal activity. The defendants even engaged in ad hominem criticism of Bharara, analogizing him to a “Chicken Little” complaining that the sky is falling, or more precisely, a “petulant rooster whose dominion has been disturbed.” Those supporting the opinion assert that any perceived difficulty created by the decision can, and should, be rectified by Congress.

Even as the Newman case continues forward, its repercussions are being felt within the Second Circuit and beyond. In the Southern District alone, at least a dozen defendants, who were convicted or pleaded guilty underpre-Newman law, have argued that their cases need to be revisited in light of Newman. No court yet has agreed with that argument, but most of these motions remain pending.

Outside the Second Circuit, the Government is looking to ring-fence the Newman decision and limit its applicability elsewhere. Federal prosecutors, for example in North Carolina, have argued that Newman is not the law in the Fourth Circuit and therefore should not be followed. Meanwhile, defendants in other jurisdictions are invokingNewman in pending, and even resolved, insider trading matters, both civil and criminal.

Defendants are even arguing Newman’s applicability within the SEC’s administrative courts – with success. In In re Peixoto, an SEC administrative proceeding related to Herbalife, the Commission voluntarily dropped its case against Peixoto after Newman. Other cases in the agency’s courts (including against SAC founder Steven Cohen) remain on holding pending final resolution of Newman. And in In re Ruggieri, the administrative law judge said that he would require the SEC to demonstrate the Newman standard of “personal benefit.”

Clearly, the Newman saga has not reached its conclusion, but the fall-out already demonstrates what a momentous decision the Second Circuit panel made.

ARTICLE BY

Brian E. Casey
OF
Barnes & Thornburg LLP

Subpoenas Without Depositions: A Valuable Point From The North Carolina Business Court

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Can you send a subpoena duces tecum — which translated from Latin is “a writ commanding a person to produce in court certain designated documents or evidence ” —  without coupling it with a deposition?

Maybe that question has never puzzled you, but in an Order of the Business Court on February 12, 2015 in Harriott v. Central Carolina Surgical Eye Associates, P.A. Judge Bledsoe answered whether a subpoena duces tecum can be served without noticing a deposition in conjunction with the subpoena.

Plaintiff had served a subpoena duces tecum on several entities which were not party to the case. Those entities objected contending that a “subpoena duces tecum must be issued in conjunction with a proceeding in which testimony is to be received.”

Judge Bledsoe disagreed, ruling “a subpoena duces tecum . . . can . . . be used to compel a non-party to produce documents without a concurrent request to testify.”  Order at 1-2.

The governing Rule of Civil Procedure (NCRCP 45) is less than clear on this point. It says that a “command to produce records, books, papers, electronically stored information, or tangible things may be joined with a command to appear at trial or hearing or at a deposition, or any subpoena may be issued separately.” NCRCP 45(a)(2).

The federal rule, by contrast,  is explicit on being able to serve a subpoena for documents without a contemporaneous deposition.  It says that:

Combining or Separating a Command to Produce or to Permit Inspection . . . . A command to produce documents, electronically stored information, or tangible things or to permit the inspection of premises may be included in a subpoena commanding attendance at a deposition, hearing, or trial, or may be set out in a separate subpoena.

FRCP45(a)(1)(C).

So, if there was any doubt about this practical nuts and bolts issue, state law practice is now consistent with the federal rule.  Subpoena away.  At least in the Business Court.

Goodyear Pays for Sins of Subsidiaries in $16 Million Settlement

Proskauer Rose LLP, Law Firm

Following recent trends, the U.S. Securities and Exchange Commission brought an administrative proceeding against a U.S. issuer for the corrupt activities of its foreign subsidiaries. Earlier this week, Goodyear Tire & Rubber Company agreed to pay the SEC over $16 million to settle charges that it violated the accounting provisions of theForeign Corrupt Practices Act by failing to prevent or detect over $3 million in bribes paid by its Angolan and Kenyan subsidiaries. Goodyear also must report its compliance remediation efforts to the SEC annually for the next three years.

The SEC’s Charges

According to the SEC’s cease and desist order, between 2007 and 2011, Goodyear’s downstream subsidiaries in Kenya andAngola bribed employees of both private and government-owned companies to obtain business. The subsidiaries also bribed police, tax authorities and other local officials, though the SEC’s order did not allege the purposes of those payments. The bribes “were falsely recorded as legitimate business expenses in the books and records of the subsidiaries, which were consolidated into Goodyear’s books and records.”

The SEC found that “Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries” and, for the Kenyan subsidiary, “because it failed to conduct adequate [pre-acquisition] due diligence.” Goodyear was not alleged to have any involvement with or knowledge of its subsidiaries’ illicit conduct. Nonetheless, comments by Scott Friestad, Associate Director of the SEC’s Enforcement Division, displayed the SEC’s willingness to hold parent companies responsible for failing to adequately supervise their subsidiaries: “Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books.”

Lessons Learned

  1. Benefits of self-disclosure, cooperation, and remediation: Although Goodyear had to disgorge over $14 million in profits from its Kenyan and Angolan operations, and over $2 million in prejudgment interest, it avoided a civil penalty. This relatively favorable outcome likely is due to Goodyear’s timely self-disclosure to the SEC after receiving information about the bribes (through internal whistleblower mechanisms), its substantial cooperation with the SEC during the course of the investigation, and its extensive remediation efforts. Those efforts included divesting one subsidiary and preparing to divest the other, disciplining employees, and enhancing its anti-corruption compliance program. The settlement bolsters repeated assertions by law enforcement and regulatory officials that companies who self-disclose and cooperate will be rewarded with leniency.

  2. Buyers (and parents) beware: Parent companies may be on the hook for their subsidiaries’ misconduct, even when the parent company does not participate in or know about the illicit activities. Indeed, the SEC was careful to note that the Kenyan subsidiary’s corrupt activities may have begun prior to Goodyear’s acquisition, and could have been identified through adequate pre-acquisition due diligence. Pre- and even post-acquisition anti-corruption due diligence has become mandatory for companies that seek to acquire entities in high-risk foreign jurisdictions. And after the transaction is consummated, parents who are subject to the FCPA’s accounting provisions must ensure that their subsidiaries maintain robust internal controls and accurate books and records, regardless of whether they too are issuers.

  3. FCPA charges may include commercial bribery: According to the SEC’s order, both of Goodyear’s subsidiaries paid bribes not only to employees of government-owned entities, but also to employees of private companies. This settlement should serve as a reminder that although the FCPA’s anti-bribery provisions only extend to the bribery of foreign government officials, the accounting provisions may be used to prosecute commercial bribery.

  4. Expect more FCPA enforcement actions in administrative proceedings: Companies facing a civil FCPA enforcement action by the SEC must remain cognizant of the likelihood that the proceedings will play out on the administrative stage. Defendants in administrative forums face truncated deadlines, an absence of judicial scrutiny and limited appellate rights, and cannot avail themselves of the protections in the Federal Rules of Evidence and Civil Procedure. The SEC likely will continue to seek home-court advantage, whenever possible.

ARTICLE BY

Sigal P. Mandelker
Rochelle H Emert
Phillip J. Caraballo-Garrison
Proskauer Rose LLP

Chase Barfield v. Sho-Me Power Electric Cooperative: Major Verdict in Electric Utility Easement Case

Lewis Roca Rothgerber LLP

More than five years after starting in state court before later restarting in federal court, a federal court jury in Missouri has issued a major verdict in litigation concerning the use of electric utility easements for commercial telecommunication purposes.  On February 6, 2015, the jury in Chase Barfield, et al., v. Sho-Me Power Electric Cooperative, et al., (U.S.D.C. Western District of Missouri, 2:11-cv-4321NKL), found that the compensation owed to the plaintiff-landowners totaled $79,014,140 representing the fair market rental value of the defendants’ use of the utility easements for commercial telecommunication purposes.  While there have been other cases around the country alleging similar misuse of utility easements, those cases have all settled and the Sho-Melitigation appears to be the first to proceed through trial to a final jury verdict.

In 2010, a small group of Missouri landowners filed a state court lawsuit, which was subsequently dismissed and refiled in federal court the next year, alleging that certain electric utilities and affiliated entities in Missouri and Oklahoma installed and operated commercial fiber optic lines on the plaintiffs’ properties without the right to do so and without paying compensation to the landowners.  The lawsuit alleged that Sho-Me Power Electric Cooperative and its subsidiary Sho-Me Technologies, LLC, KAMO Electric Cooperative and its subsidiary K-PowerNet, LLC, and Cooperatives’ Broadband Network, collectively installed over 2,000 miles of fiber optic lines within easements that were limited to electric transmission and distribution line purposes.

While some of the fiber optic capabilities were utilized for the utilities’ own operations consistent with the underlying easements, the plaintiffs alleged that some of the fiber optic lines were used by the defendants or leased to third-parties for commercial telecommunication purposes in violation of the limited utility easements that had been granted.  The landowners asked the court to declare that the defendants had no legal rights to use the easements for commercial telecommunication purposes and also brought claims for trespass, disgorgement of profits, an injunction to prevent future commercial fiber optic uses of the easements, and punitive damages.  The defendant utilities and their subsidiaries admitted many of the facts related to their telecommunication activities, however, they denied that such activities were inconsistent with their easement rights.

In 2013, the federal court granted class status thereby allowing the named plaintiffs to represent the interests of more than 3,000 landowners who were crossed by the defendants’ fiber optic lines.  After many months of complex litigation addressing multiple issues, in March, 2014 the federal court issued its summary judgment decision on the primary claims.  The court adopted the plaintiffs’ categorization of the nearly 6,500 express easements and condemnation orders describing the property rights at issue; then proceeded to conduct a detailed analysis of whether the defendants’ fiber optic lines and the uses thereof were permitted under the terms of the easements and orders.  The court concluded that, under Missouri law, the defendants’ actions were inconsistent with the easements and court orders in three of the eight categories, totaling more than 3,000 individual easements and orders.

The jury’s recent decision sets the damages attributable to the defendants’ breach of the easements and court orders and resulting trespass, as found by the court.  In determining this amount, the jury considered the parties’ evidence that the value of the landowners’ claims was between $100,000, as argued by the defendants, and in excess of $100 million dollars, as argued by the landowners after considering the revenue the defendants received from the fiber optic lines and the associated expenses.  The jury’s award covered only the ten year period prior to the judgment and did not include prejudgment interest, attorney fees and costs, or future compensation.

Lessons Learned

As the national demand for improved and expanded electrical and telecommunication infrastructure continues to grow at an apparently ever-increasing pace, utilities and telecommunication service providers are faced with the challenge of where to locate such new and improved infrastructure.  Opportunities to site brand new infrastructure corridors are becoming more limited.  To the extent such opportunities exist, many landowners do not welcome such uses on their property and some complain of “easement fatigue” as a result of requests from multiple utility, telecommunication, pipeline, and other infrastructure companies.  As a result, local governments frequently require infrastructure companies to consider first the use of existing easements and corridors so as to minimize impacts on private property and to optimize the land uses within their jurisdictions.

Whether motivated by landowner concerns, local government requirements, or other project considerations, utilities and other infrastructure companies are trying to squeeze every permissible use out of their existing land rights.  For example, use of technologies such as fiber optic ground wires that combine an electrical ground wire with bundled fiber optic lines allow electric utilities to maximize the use of their existing easements with little or no physical intrusion on the property on which the infrastructure is located.  This technology was at issue in theSho-Me litigation.  However, the analysis is not limited to the extent of the physical intrusion on the underlying property.  At the heart of such disputes is the landowner’s right to control and be compensated for the beneficial use of his or her property.

The Sho-Me court explained that resolution of such issues requires consideration of “how changing technologies should be harmonized with historic real property principles.”  Furthermore, “[w]hether an additional use is reasonable and necessary depends on whether the additional use represents only a change in the degree of use, of whether it represents a change in the quality of the use.  If the change is in the quality of the use, it is not permissible, because it would create a substantial new burden on the servient estate.”  As the court concluded, where the additional use exceeds that which is authorized by the easement, a trespass occurs and a landowner may be entitled to compensation.

As demonstrated by the recent decision in the Sho-Me litigation, such compensation can be substantial.  Given that most instances of this type of dispute involve lengthy linear infrastructure projects – electric transmission or distribution lines, pipelines, railroads, etc. – crossing many landowners’ properties, the risk associated with large awards for trespass or unjust enrichment cannot be ignored.

It is important to note that real property law is, for the most part, a matter of state law.  While the basic principles of real property law are generally similar among most jurisdictions, the specific law and the analysis of the facts under that law will vary from state to state.  Therefore, before proceeding with a new or additional use on an existing easement, utilities and other infrastructure companies must conduct a careful analysis of the land rights supporting a particular project  considering the laws of the specific states involved.  The decisions and jury verdict in the Sho-Me litigation should provide an instructive, cautionary tale.

ARTICLE BY

Thomas J. Dougherty
OF
Lewis Roca Rothgerber LLP