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Building a Ready for Action Intellectual Property Portfolio Strategy for In-House Counsel

The National Law Review recently published an article by Marcus Evans Summits regarding Intellectual Property Portfolio Strategies:

In-house counsel and clients would have a better relationship if attorneys sent clients Intellectual Property (IP) reports on a more regular basis, according to Jeffrey Scott Leaning and Timothy B. Donaldson, Partners, at MH2 Technology Law Group. “This partnership makes for the ideal management of an IP portfolio,” they add.

Jeffrey Scott Leaning and Timothy B. Donaldson share their thoughts with Maria Gregoriou on why the managed legal services approach is mutually beneficial for attorneys and clients.

How can legal department management increase operational efficiency?

Timothy B. Donaldson: Open communication between attorneys and clients is key to building a strong business partnership. One way to keep clients informed about ongoing IP prosecution is through the use of regular status reports. These reports can include budgetary information issues, upcoming due dates, a summary of actions performed, or a projection of future action items, and can be customized to a client’s specific needs. Fostering this business partnership through open communication and recognizing a client’s specific needs makes for the ideal management of an IP portfolio.

Under a flat or fixed-fee arrangement, a team of attorneys can be assembled to review and share expertise on individual cases. Each team member brings his or her own technical, legal, and professional experiences to the table, making IP analysis more efficient and productive. In addition, each team member becomes familiar with a client’s technology and can be ready to respond as needs arise.

In view of the American Invents Act, what patent filing strategies can you recommend?

Jeffrey Scott Leaning: Clients should approach patent filing as if the US was an absolute novel country in this area. The ideal situation is that people who receive a disclosure should be under a confidentiality agreement. If this is not possible, the client should know who is going to be in the audience during disclosure.

What should legal departments keep in mind when dealing with pharmaceutical patents?

Timothy B. Donaldson: Patent term adjustments (PTAs) must not be overlooked when it comes to the pharmaceutical field. Unlike other technologies, the term of a pharmaceutical patent, including any PTA accrued during prosecution, can be critical to the patent’s ultimate value. Thus, the practitioner must keep up with current case law, like the recent Exelixis cases, as well as changes in United States Patent and Trademark Office policy and rules, to maximize any potential PTA and avoid unnecessarily losing valuable patent term during the course of prosecution.

Do you have any final thoughts?

Jeffrey Scott Leaning: Managed legal services approaches are currently being preferred as the law firm is closer in style to an in-house attorney, where a partnership is formed between the client and the law firm. A certain number of hours that expert attorneys should be on call every month for a fixed fee, would be part of the agreement. A good relationship is vital here as more time may be put into legal matters than was originally thought. Having this partnership model in place would be mutually beneficial and ensure that the client’s expectations are met.

Chief Litigation Officer Summit – March 21-23, 2013

The National Law Review is pleased to bring you information about the upcoming Chief Litigation Officer Summit:

The primary objective of the Chief Litigation Officer Summit is to explore the key aspects and issues related to litigation best practices and the protection and defense of corporations. The Summit’s program topics have been pinpointed and validated by leading litigation counsel as the top critical issues they face.

March 21-23, 2013

The Broadmoor, Colorado Springs, CO

Awuah v. Coverall: What If I Didn’t Know About The Mandatory Arbitration Provision In My Franchise Agreement?

The National Law Review recently featured an article by Matthew J. Kreutzer with Armstrong Teasdale titled, Awuah v. Coverall: What If I Didn’t Know About The Mandatory Arbitration Provision In My Franchise Agreement?:

A new ruling by the United States Court of Appeals for the First Circuit in Awuah v. Coverall case, No. 12-1301, — F.3d — (1st Cir. Dec. 27, 2012), is yet the latest in a string of recent court decisions that confirm the strength and enforceability of arbitration clauses in franchise agreements.

The Awuah case first made waves two years ago when the United States District Court for the District of Massachusetts compared the franchise relationship between Coverall (a janitorial service franchisor) and its franchisees to a “modified Ponzi scheme.” You can read more about that decision in my prior blog posts here and here. This latest ruling deals with the enforceability of the arbitration clauses in a number of the subject franchise agreements.

The facts can be summarized as follows: a class of franchisees sued their franchisor, Coverall North America, which is a janitorial cleaning service. The franchisees assert several state-law claims against Coverall, including claims for breach of contract, misrepresentation, and deceptive and unfair business practices. In addition, the franchisees claim that Coverall misclassified them as independent contractors when they are, in fact, employees, and that Coverall failed to pay wages due to them.

Appellees, who are a subset of the overall class, challenge Coverall’s contention that appellees should be required to arbitrate the dispute based on arbitration clauses in the subject franchise agreements. Appellees became Coverall franchisees by signing Consent to Transfer Agreements, or Guaranties to Coverall Janitorial Franchise Agreements. These documents did not themselves contain arbitration clauses, but instead incorporated by reference the terms and provisions of the transferor’s franchise agreements, which did contain such clauses. None of the appellees allegedly received (or requested) copies of the franchise agreement signed by its respective transferor.

Appellees argued to the U.S. District Court for the District of Massachusetts that “it is black-letter law in the First Circuit that an individual may not be bound to an arbitration clause if he does not have notice of it,” citing cases brought under federal employment statutes. Appellees made the point that Coverall had not demonstrated that any of them were shown the transferor’s franchise agreement, or that they were shown the arbitration clause contained therein. The District Court agreed, determining that the appellees did not have to arbitrate their claims against Coverall because they did not have adequate notice of the arbitration clause in the franchise agreement. Coverall appealed.

The U.S. District Court for the First Circuit overturned the District Court’s ruling, finding that under governing Massachusetts law, “one who signs a written agreement is bound by its terms whether he reads and understands them or not.” The Court further found that Massachusetts does not impose any requirement that the parties be given special notice of an arbitration provision. In any event, the Court stated, any such requirement would be preempted by the Federal Arbitration Act, 9 U.S.C. § 1, et seq., which requires that agreements to arbitrate be treated in the same manner as other contracts.

This latest decision serves as a reminder for prospective franchisees to carefully review a proposed franchise agreement before signing. For existing franchisees, it is a warning that mandatory arbitration clauses are not easily avoided. For franchisors, the decision highlights the importance of ensuring that, when a franchisee transfer or assign their franchises, the new franchisees receive and sign a full copy of the franchise agreement that will be effective post-sale.

Securities and Exchange Commission’s (SEC) Rule 10b5-1 Trading Plans Under Scrutiny

The National Law Review recently published an article, Securities and Exchange Commission’s (SEC) Rule 10b5-1 Trading Plans Under Scrutiny, written by the Financial, Corporate Governance and M&A Litigation Group of Barnes & Thornburg LLP:

For more than a decade, corporate officers and directors of publicly traded companies have relied on trading plans, known as Rule 10b5-1 trading plans, in order to trade stock in their companies without running afoul of laws prohibiting corporate “insiders” from trading on material information not known to the general public. Historically, effective 10b5-1 plans have provided corporate insiders with an affirmative defense to allegations of unlawful insider trading.

Such plans typically involve a prior agreement between a corporate executive or board member and his or her broker. Under such agreements, the insider would provide standing trading instructions to the broker, requiring the broker to trade at a set stock price or a set time, for example. The broker would then effect the trade at the required price or time, regardless of the information held by the insider.

Recently, notwithstanding the Securities and Exchange Commission’s (SEC) longtime knowledge of potential abuses, such 10b5-1 plans have been under fire. In a Nov. 27, 2012, article in the Wall Street Journal titled “Executives’ Good Luck in Trading Own Stock,” the authors aired several complaints about such plans, including that “[c]ompanies and executives don’t have to file these trading plans with any federal agency. That means the plans aren’t readily available for regulators, investors or anyone else to examine. Moreover, once executives file such trading plans, they remain free to cancel or change them—and don’t have to disclose that they have done so. Finally, even when executives have such a preset plan, they are free to trade their companies’ stock at other times, outside of it.” The article went on to chronicle several purported abuses by officers and directors of such plans.

The current regulatory environment has simultaneously raised suspicions about plans and trades that are innocent, and potentially provided shelter for others that may be less so. In fact, in a Feb. 5, 2013, article in the Wall Street Journal entitled “SEC Expands Probe on Executive Trades,” the author noted that “[t]he Securities and Exchange Commission, expanding a high-profile investigation, is gathering data on a broad number of trades by corporate executives in shares of their own companies, according to people familiar with the probe.”

It would appear, from news like this, that the SEC is concerned that corporate insiders are adopting or amending 10b5-1 plans when in possession of non-public information that might affect market participants’ decision to trade in the company’s stock. Such changes could nullify the use of a 10b5-1 plan as a defense.

Seemingly in reaction to the perceived manipulation of 10b5-1 plans, the Council of Institutional Investors (CII) submitted a letter to the SEC on Dec. 28, 2012, requesting that the SEC implement rulemaking to impose new requirements with respect to Rule 10b5-1 trading plans. The CII letter calls for company boards of directors to become explicitly responsible for monitoring 10b5-1 plans, which undoubtedly will subject boards to increased scrutiny by the SEC. In addition, the CII letter proposes stricter regulatory rules including:

Adoption of 10b5-1 plans may occur only during a company open trading window
Prohibition of an insider having multiple, overlapping 10b5-1 plans
Mandatory delay of at least three months between 10b5-1 plan adoption and the first trade under the plan
Prohibition on frequent modifications/cancellations of 10b5-1 plan

The CII also advocates pre-announced disclosure of 10b5-1 plans and immediate disclosure of plan amendments and plan transactions. Under the CII’s suggested new rules, a corporate board also would be required to adopt policies covering 10b5-1 plan practices, monitor plan transactions, and ensure that such corporate policies discuss plan use in a variety of contexts. A similar set of suggestions can be found in Wayne State University professor Peter J. Henning’s Dec. 10, 2012, article, “The Fine Line Between Legal, and Illegal, Insider Trading,” found online at: http://dealbook.nytimes.com/2012/12/10/the-fine-line-between-legal-and-illegal-insider-trading/.

Given the uncertainty in the market concerning the current use of Rule 10b5-1 plans and the future of such plans, companies or individuals who may be subject to Rule 10b5-1 plans and/or future regulations in this area should consult with counsel before adopting or amending such plans.

Chief Litigation Officer Summit – March 21-23, 2013

The National Law Review is pleased to bring you information about the upcoming Chief Litigation Officer Summit:

March 21-23, 2013

The Broadmoor, Colorado Springs, CO

Chief Litigation Officer Summit – March 21-23, 2013

The National Law Review is pleased to bring you information about the upcoming Chief Litigation Officer Summit:

March 21-23, 2013

The Broadmoor, Colorado Springs, CO

Enforcement Implications of Already, LLC v. Nike, Inc.

The National Law Review recently published an article, Enforcement Implications of Already, LLC v. Nike, Inc., written by Karen A. Butcher, Michael F. Clayton, and J. Kevin Fee with Morgan, Lewis & Bockius LLP:

Brand owner’s broad covenant not to sue may render invalidity counterclaims moot.

On January 9, the U.S. Supreme Court in Already, LLC v. Nike, Inc.^[1] held that a plaintiff trademark owner’s dismissal of its infringement claims, coupled with the grant of a broad and irrevocable covenant not to sue a competitor, could render the competitor’s invalidity counterclaims moot. This holding clarifies the standard governing how counterclaims can be rendered moot in the event the underlying infringement claim is dropped. Intellectual property owners should take this standard into account when developing and refining their intellectual property enforcement strategies.

Background

Nike, a well-known designer and manufacturer of athletic footwear, filed a trademark infringement suit in federal district court against Already, another designer and manufacturer of footwear, alleging that Already’s “Sugars” and “Soulja Boys” shoe lines infringed and diluted Nike’s trademark in its “Air Force 1” product configuration. Already denied Nike’s allegations and filed a counterclaim alleging that Nike’s Air Force 1 claimed trademark was invalid.

Eight months after filing its complaint, Nike concluded that “‘Already’s actions . . . no longer infringe or dilute the [Air Force 1 mark] at a level sufficient to warrant the substantial time and expense of continued litigation'” and issued a covenant not to sue.^[2] In the covenant, Nike agreed not to assert any claim or demand against Already or any affiliated entity (including distributors and their employees and customers) based on any of Already’s existing shoe designs or any future Already designs that constituted a “colorable imitation” of Already’s current products. After issuing the covenant, Nike moved to dismiss both its infringement claim and Already’s invalidity counterclaim on the ground that the covenant eliminated the existence of a case or controversy necessary for the survival of Already’s counterclaim. Already argued that, even though Nike had agreed to refrain from suing Already, a case or controversy still existed because Already would still be injured by the continued existence of Nike’s trademark registration. The trial court dismissed Already’s counterclaim and the U.S. Court of Appeals for the Second Circuit affirmed the trial court’s decision. The Supreme Court granted certiorari.

The Supreme Court’s Decision

The Supreme Court unanimously affirmed the decision of the Second Circuit, which dismissed as moot Already’s counterclaim of trademark invalidity in light of Nike’s broad covenant not to sue Already in the future. The district court held that the plaintiff’s broad and irrevocable covenant not to sue removed the existence of an “actual case or controversy,” an element necessary to demonstrate standing in federal court.

Article III of the Constitution prohibits federal courts from rendering advisory opinions or deciding legal disputes in the absence of an “actual case or controversy.” The Supreme Court noted that an “actual controversy” must exist throughout the entirety of litigation, not just at the time the complaint is filed. A case becomes moot—and therefore no longer presents a case or controversy—when the issues presented are no longer live or when the parties no longer have a legally cognizable interest in the outcome. The Court held that the “voluntary cessation” doctrine applies when determining whether a declaratory judgment counterclaim is moot. Specifically, in this case, Nike bore the “formidable burden” of showing that another trademark infringement claim against Already was not reasonably likely to occur.^[3]

The Court determined that Nike had overcome its formidable burden under the voluntary cessation doctrine. Specifically, the Court reviewed Nike’s covenant and determined that it was sufficiently broad to render Already’s counterclaim moot for the following reasons: it was unconditional and irrevocable; it applied to Already’s past and current shoe designs, as well as future designs that were “colorable imitations”; it applied to its distributors and customers; and it prohibited Nike from not only filing a suit, but also from making any claim or demand. Because the Court was unable to imagine a scenario under which Nike could bring another Air Force 1 trademark infringement claim against Already (absent blatant counterfeiting), Already’s invalidity counterclaim was held to be moot.

The Court’s holding is consistent with its 2007 decision in MedImmune, Inc. v. Genentech, Inc.,^[4] which liberalized declaratory judgment jurisdictional considerations. In MedImmune, the Court held that a genuine threat of enforcement of intellectual property rights that inhibits commercial activity may support standing for a declaratory judgment claim. In the Already case, the Court found that Nike’s covenant eliminated any genuine threat of future enforcement by Nike.

Implications of the Court’s Holding

The Already decision is important to all trademark owners, particularly with respect to developing and implementing enforcement strategies. One of the risks associated with bringing a trademark infringement claim is that the defendant might file a counterclaim for a declaratory judgment that the plaintiff’s trademark is invalid. The Court’s decision clarifies that a plaintiff can successfully have the counterclaim dismissed by issuing a broad covenant not to sue.

Whether a covenant not to sue will divest a federal court of Article III jurisdiction over an invalidity counterclaim depends on whether the breadth of the covenant renders the threat of future litigation between the same parties based on the same trademark remote or nonexistent. Although future cases will hinge on the specific underlying facts, the Supreme Court’s opinion sets forth the general elements necessary for a sufficiently broad covenant, including that it (i) be unconditional and irrevocable; (ii) cover the defendant and related entities; (iii) cover not only all current and previous products, but also “colorable imitations”; and (iv) prohibit the plaintiff from making any future claims or demands with respect to the pertinent trademark.

Although a broad covenant not to sue may be desirable to obtain dismissal of a trademark invalidity counterclaim, the decision to issue such a covenant must be balanced against the risk that such covenants could negatively impact the strength and enforceability of the trademark in the future. For instance, depending on the facts, broad covenants not to sue on multiple occasions could result in the loss of trademark rights by the trademark owner or a decrease in the owner’s ability to assert such rights against other third parties not covered by the covenant. As a result, trademark owners should consider these issues before they initiate trademark infringement litigation, particularly when the alleged infringement is limited in scope and the infringement is not seriously impacting the trademark owner’s business.

_{[1]. Already, LLC v. Nike, Inc., No. 11-982 (U.S. Jan. 9, 2013), available here.}

_{[2]. Id. at 2.}

_{[3]. Id. at 5–6.}

_{[4]. 549 U.S. 118 (2007).}

NLRB Appointments are “Constitutionally Invalid”

Mark A. Carter with Dinsmore & Shohl LLP recently had an article, NLRB Appointments are “Constitutionally Invalid”, published in The National Law Review:

The D.C. Circuit Court of Appeals has invalidated the appointments of three members of the National Labor Relations Board who were designated on January 4, 2012. On January 25, 2013, the Court issued its ruling in Noel Canning v. NLRB, et al. Docket No. 12-1115. http://www.cadc.uscourts.gov/internet/opinions.nsf/ 13E4C2A7B33B57A85257AFE00556B29/$file/12-1115-1417096.pdf. In Noel Canning, the employer sought to prohibit enforcement of a February 8, 2012 NLRB decision concluding it violated the National Labor Relations Act.

The Court granted the Petition of Noel Canning on the basis that the NLRB lacked a sufficient quorum of members when it reached its decision. In February 2012, the NLRB was putatively staffed with a full complement of five members. However, three of those members were appointed by the President, without confirmation by the Senate, on January 4, 2012. The NLRB maintained the appointments were legitimate “recess” appointments made while the Senate was out of session. The Petitioner argued that, in fact, the Senate was in pro forma session and as such, the President had no constitutional authority to make “recess appointments” of the NLRB members.

The D.C. Circuit agreed with the Petitioner that the President’s appointments were “constitutionally invalid.” As such, the Board did not have a “quorum for the conduct of business” on the date of its decision as only two members of the NLRB were properly seated.

The impact of the decision is likely substantial. In an appearance before the Oversight Committee of the U.S. House of Representatives on February 1, 2012, Dinsmore Labor Practice Group Chair Mark Carter testified, that if the recess appointments on January 4, 2012 were determined to be improper “every administrative decision and every administrative rule or regulation implemented by the National Labor Relations Board will be subject to appeal or attack.” http://oversight.house.gov/wp-content/uploads/2012/02/2-1-2012_Carter-Full.pdf.

Carter testified that if the appointments were invalidated, as they have been, “the actions of the NLRB will be ultra vires” and every decision and regulation will be subject to attack. The NLRB has been active both in the arenas of decision-making and regulatory action over the past year. If the decision of the D.C. Circuit is upheld, the decisions of the Agency since January 4, 2012 may have no mandatory impact on employers, unions or employees.

The NLRB reacted to the decision on the afternoon of January 25 by insisting that the remaining recess appointees, Richard Griffin and Sharon Block, will continue to perform their statutory duties and issue decisions along with Chairman Mark Pearce. House Oversight Committee Chairman Darrell Issa (R – CA) called upon the NLRB to “take the responsible course and cease issuing further opinions until a constitutionally-sound quorum can be established.” Chairman Issa stated “(t)he unconstitutionally appointed members of the NLRB should do the right thing and step down.”

District Court Holds IRS Lacks Authority to Issue and Enforce Tax Return Preparer Regulations

The National Law Review recently featured an article, District Court Holds IRS Lacks Authority to Issue and Enforce Tax Return Preparer Regulations, written by Gale E. Chan and Robin L. Greenhouse with McDermott Will & Emery:

On January 18, 2013, the District Court for the District of Columbia (District Court) issued a surprising decision in Loving v. Internal Revenue Service, No. 12-385 (JEB), holding that the Internal Revenue Service (IRS) lacked the authority to issue and enforce the final Circular 230 tax return preparer regulations that were issued in 2011 (Regulations). The District Court also permanently enjoined the IRS from enforcing the Regulations.

Background

As part of the IRS’s initiative to increase oversight of the tax return preparer industry by creating uniform and high ethical standards of conduct, the IRS created a new category of preparers, “registered tax return preparer,” to be subject to the rules of Circular 230. Attorneys, certified public accountants, enrolled agents and enrolled actuaries were already subject to IRS regulation under Circular 230, and thus, were not affected by the issuance of the Regulations.

In June 2011, the IRS and the U.S. Department of the Treasury (Treasury) issued the Regulations relating to registered tax return preparers and practice before the IRS. T.D. 9527 (June 3, 2011). Under these rules, registered tax return preparers have a limited right to practice before the IRS. A registered tax return preparer can prepare and sign tax returns, claims for refunds and other documents for submission to the IRS. A registered tax return preparer who signs the return may represent taxpayers before revenue agents and IRS customer service representatives (or similar officers or employees of the IRS) during an examination, but the registered tax return preparer cannot represent the taxpayer before IRS appeals officers, revenue officers, counsel or similar officers or employees of the IRS. In addition, a registered tax return preparer can only advise a taxpayer as necessary to prepare a tax return, claim for refund or other document intended to be submitted to the IRS.

The Regulations also impose additional examination and continuing education requirements on registered tax return preparers in addition to obtaining a preparer tax identification number (PTIN). Under the rules, to become a “registered tax return preparer,” an individual must be 18 years old, possess a current and valid PTIN, pass a one-time competency examination, and pass a federal tax compliance check and a background check. The Regulations require a registered tax return preparer to renew his or her PTIN annually and to pay the requisite user fee. To renew a PTIN, a registered tax return preparer must also complete a minimum of 15 hours of continuing education credit each year that includes two hours of ethics or professional conduct, three hours of federal tax law updates and 10 hours of federal tax law topics.

Loving v. Internal Revenue Service

In Loving, three individual paid tax return preparers (Plaintiffs) filed suit against the IRS, the Commissioner of Internal Revenue and the United States (collectively, Government) seeking declaratory relief, arguing that tax return preparers whose only “appearance” before the IRS is the preparation of tax returns cannot be regulated by the IRS, and injunctive relief, requesting the court to permanently enjoin the IRS from enforcing the Regulations. In filed declarations, two of the Plaintiffs indicated that they would likely close their tax businesses if they were forced to comply with the Regulations, and the third Plaintiff, who serves low-income clients, indicated that she would have to increase her prices if forced to comply with the Regulations, likely resulting in a loss of customers. The Plaintiffs and the Government each filed separate motions for summary judgment.

At issue in the case was the IRS’s claim that it can regulate individuals who practice before it, including tax return preparers. The IRS relied on an 1884 statute, 31 U.S.C. § 330, which provides the Treasury with the authority to regulate the people who practice before it. The statute currently provides that the Treasury may “regulate the practice of representatives of persons before the Department of the Treasury.” 31 U.S.C. § 330(a)(1) (emphasis added). The statute further requires that a representative demonstrate certain characteristics prior to being admitted as a representative to practice, including “competency to advise and assist persons in presenting their cases.” 31 U.S.C. § 330(a)(2)(D) (emphasis added). The statute also gives the Treasury authority to suspend or disbar a representative from practice before the Treasury in certain circumstances, as well as to impose a monetary penalty. 31 U.S.C. § 330(b).

The District Court’s Application of Chevron

The District Court applied the framework of Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and concluded that the text and context of 31 U.S.C. § 330 unambiguously foreclosed the IRS’s interpretation of the statute. Chevron applies a two-step inquiry to determine whether a statute is ambiguous. The first step asks whether the intent of Congress is clear in the statute—i.e., has Congress “directly spoken to the precise question at issue.” Chevron, 467 U.S. at 842. If a court determines that the intent of Congress is clear, under the Chevron framework, that is the end and the court “must give effect to the unambiguously expressed intent of Congress.” Id. at 842–43. However, if the court determines that the statute is silent or ambiguous, the court must proceed to step two of Chevron and ask whether the agency’s interpretation “is based on a permissible construction of the statute.” Id. at 843. An agency’s construction under step two is permissible “unless it is arbitrary or capricious in substance, or manifestly contrary to the statute.” Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 711 (2011) (citation omitted).

In Loving, the District Court concluded that 31 U.S.C. § 330 was unambiguous as to whether tax return preparers are “representatives” who “practice” before the IRS for three reasons. First, the District Court stated that 31 U.S.C. § 330(a)(2)(D) defines the phrase “practice of representatives” in a way that does not cover tax return preparers. As noted above, 31 U.S.C. § 330(a)(2)(D) requires a representative to demonstrate that he or she is competent to advise and assist taxpayers in presenting their “cases.” The District Court stated that the statute thus equates “practice” with advising and assisting with the presentation of a case, which the filing of a tax return is not. Thus, the District Court concluded that the definition in 31 U.S.C. § 330(a)(2)(D) “makes sense only in connection with those who assist taxpayers in the examination and appeals stages of the process.”

Second, the District Court stated that the IRS’s interpretation of 31 U.S.C. § 330 would undercut various statutory penalties in the Internal Revenue Code (Code) specifically applicable to tax return preparers. The District Court noted that if 31 U.S.C. § 330(b) is interpreted as authorizing the IRS to penalize tax return preparers under the statute, the statutory penalty provisions in the Code specific to tax return preparers would be displaced, thereby allowing the IRS to penalize tax return preparers more broadly than is permissible under the Code. Thus, the District Court stated that the specific penalty provisions applicable to tax return preparers in the Code should not be “relegated to oblivion” and trumped by the general penalty provision of 31 U.S.C. § 330(b).

The District Court also stated that 31 U.S.C. § 330(b) does not authorize penalties on tax return preparers because Section 6103(k)(5) of the Code, which provides that the IRS may disclose certain penalties to state and local agencies that license, register or regulate tax return preparers, does not identify 31 U.S.C. § 330(b) as one of the reportable statutory penalty provisions.

Finally, the District Court stated that if the IRS’s interpretation of 31 U.S.C. § 330 is accepted, Section 7407 of the Code would be duplicative. Section 7407 of the Code provides the IRS with the right to seek an injunction against a tax return preparer to enjoin the preparer from further preparing returns if the preparer engages in specified unlawful conduct. This right is similar to the authority under 31 U.S.C. § 330(b) to penalize if the IRS’s interpretation of 31 U.S.C. § 330 is accepted. Under the IRS’s interpretation of 31 U.S.C. § 330, the IRS could disbar a representative from practice before the IRS if a tax return preparer engages in the conduct described in 31 U.S.C. § 330(b) (incompetence, being disreputable, violating regulations and fraud). Thus, the District Court noted that disbarment under 31 U.S.C. § 330(b) is wholly within the IRS’s control and would be an easier path to penalize a tax return preparer than offered by Section 7407 of the Code. The District Court stated that under the IRS’s interpretation, the IRS likely would never utilize the remedies available under Section 7407 of the Code, thereby rendering the statute pointless.

Conclusion

The District Court granted the Plaintiffs’ motion for summary judgment, holding that the IRS lacked statutory authority to issue and enforce the Regulations against “registered tax return preparers,” and permanently enjoined the IRS from enforcing the Regulations. The Government will likely appeal the District Court’s decision. Nevertheless, the District Court’s decision will have a great impact on the hundreds of thousands of tax return preparers ensnared by the Regulations and the clients they serve.

Chief Litigation Officer Summit – March 21-23, 2013

The National Law Review is pleased to bring you information about the upcoming Chief Litigation Officer Summit:

March 21-23, 2013

The Broadmoor, Colorado Springs, CO

Category: Litigation

Building a Ready for Action Intellectual Property Portfolio Strategy for In-House Counsel

How can legal department management increase operational efficiency?

In view of the American Invents Act, what patent filing strategies can you recommend?