Category: Litigation

eDiscovery for Pharma, Biotech & Medical Device Industries

The National Law Review is pleased to inform you of IQPC’s e-Discovery for Pharma, Biotech & Medial Device Industries Conference in Philadelphia on October 24-25, 2011.  We’ve provided some information on the conference for your convenience:

Mastering eDiscovery and Information management strategies and best practices fit for life sciences industries

Why attend eDiscovery for Pharma?

  • Learn from industry leaders who have successfully implemented technology solutions that have reduced cost and errors in eDiscovery production. Network with government and industry leaders who are influencing the practice and procedure of eDiscovery in the Pharmaceutical, Biotech and Medical Device Industries.
  • Prepare your organization with defensible information management techniques specifically geared toward global pharmaceutical data.
  • Join peer discussions on industry hot topics such as predictive coding, cloud computing and legal holds.
  • Avoid mistakes and costly sanctions for eDiscovery misconduct and Federal Corrupt Practices Act investigations.
  • Benchmark your internal processes and evaluate their effectiveness in practical scenarios.

Hear Perspectives from:

  • Edward Gramling, Senior Corporate Counsel at Pfizer
  • John O’Tuel, Assistant General Counsel at GlaxoSmithKline
  • Chris Garber, eDiscovery Manager atAllergan, Inc
  • HB Gordon, eDiscovery Analyst, Legal Affairs, Teva Pharmaceuticals USA
  • David Kessler, Partner at Fulbright & Jaworski
  • Phil Yannella, Partner at Ballard & Spahr

View Full Speaker List

Entrepreneur’s Guide to Litigation – Blog Series: Complaints and Answers

Recently posted at the  National Law Review  by John C. Scheller of Michael Best & Friedrich LLP an entrepreneur’s guide to the litigation process.

A.  The Complaint

Litigation begins with a Complaint. “Complaint” is capitalized because it is a specific legal document, rather than a garden-variety complaint about something. The Complaint lays out the plaintiff’s specific legal claims against the defendant. It needs to contain enough facts that, if everything stated is true and there are no extenuating circumstances, a judge and jury could find in favor of the plaintiff.

As an example, Paul Plaintiff is suing Diana Defendant for violating a contract. Paul files a Complaint with a court claiming several facts: 1) Diana signed a contract to buy widgets; 2) Paul delivered the widgets; and 3) Diana did not pay the agreed-upon amount. If the court finds that these facts are true, then, unless there were extenuating circumstances, Diana probably breached a contract with Paul and should pay damages.

Paul’s Complaint also needs to allege facts showing that he has a right to be in that court. For example, if Paul wants to sue Diana inTexas, he has to show that the case and the parties have some connection toTexas. If he wants to sue her in a federal court, he has to meet a number of other criteria. (Federal court is generally only available if the parties are based in different states and the damages are relatively substantial or if the legal question is one of federal law.)

B.  Response to a Complaint

Once the defendant officially learns of the Complaint, she has a certain limited time to file some sort of response with the court. The time to respond, however, does not run from when the plaintiff filed the lawsuit, but generally when he officially delivered notice of the Complaint to the defendant. (There is a timeline that starts ticking when the defendant becomes aware of a state court lawsuit she wants to “remove” to federal court.) The amount of time for the defendant to respond varies by what court the case is in, but is generally a short period of time.

After receiving the complaint, the defendant has three options: 1) Ignore the Complaint and have the court grant judgment in favor of the plaintiff; 2) Tell the court that the Complaint is defective and ask for dismissal; or 3) Answer the Complaint. Option one is usually not a good plan; courts do not look favorably on defendants who ignore the legal process, and this option prevents a defendant from fighting the plaintiff’s claims.

Option two does not deal with the merits of the plaintiff’s issue. It is simply telling the court that the Complaint is defective for a variety of reasons including, for instance, how it was served, who the parties are (or are not), which court the case is in, or simply that, even if everything is true, the plaintiff cannot win. For example, if Paul sues Diana, but never tells Diana about the suit, Diana can then ask the court to dismiss the case. Also, if Diana works for DefendCo and Paul’s contract was actually with DefendCo and not with Diana, personally, she may be able to have the case dismissed because Paul sued the wrong party. If Paul sued Diana in a federal court inTexaswhen both parties are residents ofCaliforniaand neither has ever been to or done business in Texas, then Diana may be able to get the case dismissed, at least from theTexascourt.

Finally, there is the “So, what?” defense. If the Complaint doesn’t actually allege a cause of action, the defendant can ask the court to dismiss it. This usually happens because the plaintiff simply assumes a fact, but does not include it in the Complaint. If, for example, Paul alleges only that Diana failed to pay him a certain amount of money, but does not allege that a contract existed between them, then Diana can essentially say “So, what?” and ask the court to dismiss the case. She would ask the court to dismiss the case because, even if true (she really did not pay him any money), he did not plead any facts showing that she was supposed to pay him money. The defendant is not admitting the truth of the allegation; she is just saying that even if true, the plaintiff cannot win.

Finally, a defendant can file an Answer. Again, “Answer” is capitalized because it is a specific legal document. In an Answer, the defendant responds, paragraph by paragraph, to each of the plaintiff’s allegations. The defendant must admit, deny, or say that she does not know the answer to each specific allegation. Saying “I don’t know” functions as a denial.

For example, Paul’s Complaint probably alleges that Diana lives at a certain address. Assuming Diana actually lives there, she has to admit that fact. Paul may allege that he delivered the correct number of working widgets to Diana. If the widgets were not what she actually ordered or did not work, Diana would deny that allegation. Finally, Paul may claim that those widgets cost him a certain amount of money. Diana likely has no way to know how much Paul paid for the widgets, so she would say she does not know – thus leaving Paul to prove that allegation.

Also in the Answer, the defendant can claim affirmative defenses. Those tell the court that there were extenuating circumstances so that, even if everything the plaintiff says is true, the court should not find in favor of the plaintiff.

For example, if Paul told Diana not to worry about paying him for the widgets for six months but then turned around and immediately sued her, she would claim that as an affirmative defense.

Finally, the Answer may contain counterclaims. These claims are the defendant counter-suing the plaintiff for something. The counterclaims may be related to the original suit or not. Usually they are related, but they do not have to be. This section follows the same rules as if the defendant were filing a complaint.

For example, Diana may counterclaim against Paul because he sent her the wrong widgets and, perhaps, add a claim that when Paul delivered the widgets to her warehouse, he backed his truck into her building and caused damage. She would then counterclaim for breach of contract and property damage. The court would then sort out the whole mess to decide who owed whom how much.

Click Here: to view the previous post in the Entrepreneur’s Guide to Litigation – Blog Series: Introduction

© MICHAEL BEST & FRIEDRICH LLP

New York’s Highest Court Reinstates $5 Billion Lawsuit By Big Banks Against MBIA

Posted recently at the National Law Review by Michael C. Hefter and Seth M. Cohen of Bracewell & Giuliani LLP news about New York’s highest court reinstating a $5 billion lawsuit brought by a group of banks, including Bank of America and Wells Fargo, against MBIA. 

New York’s highest court yesterday reinstated a $5 billion lawsuit brought by a group of banks, including Bank of America and Wells Fargo, against insurance giant MBIA. ABN AMRO Bank, et al. v. MBIA Inc., et al., — N.E. 2d –, 2011 WL 2534059, slip op. (June 28, 2011). The Plaintiffs-banks sought to annul MBIA’s 2009 restructuring, which separated the insurer’s municipal bond business from its troubled structured finance unit, on the grounds that the transactions left the insurer incapable of paying insurance claims in violation of New York’s Debtor and Creditor Law. The Superintendent of Insurance in New York approved the transactions that effectuated the split of MBIA’s business in 2009. 

The Court of Appeals’ decision represents a victory for Wall Street banks in one of the many battles being fought in connection with the collapse of the financial markets. Those banks saw their fraudulent transfer claims against MBIA dismissed earlier this year by the Appellate Division, First Department. The intermediate appellate court determined that the banks’ fraudulent transfer claims were a “collateral attack” on the Superintendent’s authorization of the restructuring and that an Article 78 proceeding challenging that authorization was the sole remedy available to the Plaintiffs. The banks’ remedies under Article 78 – a procedure entitling aggrieved parties to challenge agency decisions – would be limited compared to those remedies available in state or federal court under a fraudulent transfer theory. 

At issue for the Court of Appeals was whether the Plaintiffs-banks had the right to challenge the restructuring plan in light of the Superintendent’s approval. Plaintiffs argued that the restructuring was a fraudulent conveyance because MBIA Insurance siphoned approximately $5 billion in cash and securities to a subsidiary for no consideration, thereby leaving the insurer undercapitalized, insolvent and incapable of meeting its obligations under the terms of the respective insurance policies. MBIA countered that, as held by the First Department, Plaintiffs’ claims were impermissible “collateral attacks” on the Superintendant’s approval of the restructuring. 

In a 5-2 decision, the Court of Appeals modified the First Department’s decision and reinstated the Plaintiffs’ breach of contract, common law, and creditor claims. In an opinion authored by Judge Carmen Beauchamp Ciparick, the Court held that NY Insurance Law does not vest the Superintendent with “broad preemptive power” to block the banks’ claims. MBIA Inc., 2011 WL 2534059, slip op. at 16.

“If the Legislature actually intended the Superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions under the Debtor and Creditor Law or the common law, we would expect to see evidence of such intent within the statute. Here, we find no such intent in the statute.” Id.

Critical to the Court’s holding was that Plaintiffs had no notice or input into the Insurance Department’s decision to approve MBIA’s restructuring. “That the Superintendent complied with lawful administrative procedure, in that the Insurance Law did not impose a requirement that he provide plaintiffs notice before issuing his determination, does not alter our analysis,” Judge Ciparick wrote. “To hold otherwise would infringe upon plaintiffs’ constitutional right to due process.” MBIA Inc., 2011 WL 2534059, slip op. at 21. Moreover, the Court noted that Plaintiffs’ claims could not be properly raised and adjudicated in an Article 78 proceeding. Id.

The Court’s decision re-opens claims by multiple financial institutions that MBIA instituted the restructuring in order to leave policyholders without financial recourse. 

The case is ABN AMRO BANK NV. et al., v. MBIA Inc., et al, 601475-2009 (N.Y. State Supreme Court, New York County.)

© 2011 Bracewell & Giuliani LLP

Texas Supreme Court Makes Enforcement of Noncompete Agreements Easier for Employers

Posted this week at the National Law Review by Morgan, Lewis & Bockius LLP  a good recap of the Texas Supreme Court decision which clarifies the standards for enforcing noncompete agreements: 

On June 24, the Texas Supreme Court issued a long-awaited decision clarifying the standards for enforcement of noncompete agreements under the Texas Business and Commerce Code. In Marsh USA Inc. and Marsh & McLennan Cos. v. Rex Cook, the court considered whether an employee’s receipt of stock options could sustain an agreement that prohibited the employee from soliciting or accepting business from certain customers of Marsh McLennan (Marsh).

Noncompete agreements, which include prohibitions on working for a competitor and limitations on an employee’s ability to solicit customers, are governed in Texas by the Texas Business and Commerce Code. Under that statute, such agreements may be enforced only if they contain reasonable limitations with respect to geography, time, and scope of activity to be prohibited and only if they are “ancillary to or part of an otherwise enforceable agreement.” Texas courts, as well as practitioners and employers, have struggled with this latter requirement. The Cook case represents a significant change in Texas law and a departure from the Texas Supreme Court’s previous analysis of noncompete agreements.

Under previous court decisions, the analytical focus was on the type of consideration provided by the employer in exchange for the employee’s promise to refrain from competing. Specifically, a Texas employer seeking to enforce a noncompete agreement must have been able to show that the consideration it provided to the employee “gave rise to an interest” in restraining competition. For example, an employer’s promise of trade secrets or confidential information was deemed sufficient consideration to support a noncompete agreement whereas simple cash consideration was not.

In Cook, the Texas Supreme Court considered whether an employer’s grant of stock options satisfied the “ancillary” prong of the Texas Business and Commerce Code. Cook joined Marsh in 1983 and signed an agreement under which he could exercise certain stock options in exchange for signing an agreement limiting his ability to solicit or accept business from clients of Marsh with whom he had business dealings during his employment. Cook thus signed the noncompete agreement not when he was provided the original grant of stock options, but rather when he chose to exercise the options.

After his separation from employment with Marsh, Cook went to work for a competitor. He thereafter was sued by Marsh for breach of his contract and for breach of fiduciary duty. Cook filed a motion for summary judgment in the district court on the grounds that the agreement was unenforceable under the Texas Business and Commerce Code. The trial court granted Cook’s motion and an appellate court affirmed that ruling.

The Texas Supreme Court, in a 6-3 opinion, disagreed with the lower courts and reversed the grant of summary judgment. Significantly, the court overruled previous authority that focused on the type of consideration provided by the employer and the assessment of whether or not that consideration “gives rise” to an interest in restraining competition. Rather, the court construed the Texas Business and Commerce Code as requiring simply that there be a nexus between the noncompete agreement and the employer’s interests, holding that the noncompete agreement “must be reasonably related to the [employer’s] interest worthy of protection.” The court emphasized Cook’s high-level executive position with the company and found that, by providing an ownership interest in the company, the stock options provided to Cook were “reasonably related to the company’s interest in protecting its goodwill, a business interest the [Texas Business and Commerce Code] recognizes as worthy of protection.” The noncompete was thus enforceable on that basis.

As a practical matter, Cook should make enforcement of noncompete agreements easier in Texas. The decision represents a shift from the previous, more technical focus on the type of consideration provided in the noncompete agreement to a more generalized assessment of the employer’s interests in restraining competition. Cook follows a trend of other recent Texas Supreme Court cases that have found that the enforcement of noncompete agreements should be decided in the context of the overall purpose of the Texas Business and Commerce Code, which is to provide for reasonable restrictions that protect legitimate business interests.

Copyright © 2011 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Don't Gamble with My Money: When a Lawsuit Seeks Damages in Excess of Policy Limits, What Are the Insured's Rights in Illinois?

Posted this week at the National Law Review by Daniel J. Struck and Neil B. Posner of Much Shelist Denenberg Ament & Rubenstein P.C.  a good overview of R.C. Wegman Construction Company v. Admiral Insurance Company which help address the issues involved with insurance claims in excess of policy limits in Illinois: 

In general, if a lawsuit is covered or potentially covered by a commercial general liability (CGL) insurance policy, the insurer has a duty to defend that claim. If the insurer provides that defense without reserving its rights to deny coverage, the insurer is entitled to select defense counsel and control the defense. But when the insurer defends under a reservation of rights, that reservation may create a conflict of interest between the insurer and the insured.

The leading Illinois Supreme Court case on this subject is Maryland Casualty v. Peppers, decided in 1976. According to Peppers, when an insurer defends an insured, but reserves the right to deny coverage based on an exclusion in the insurance policy (the applicability of which could be established during the course of defending the insured), there is a conflict of interest that gives the insured the right to select independent counsel to defend it at the insurer’s expense. But the Illinois Supreme Court did not say that this is the only conflict of interest that could give rise to the insured’s right to select independent defense counsel.

In R.C. Wegman Construction Company v. Admiral Insurance Company, decided in 2011, the United States Court of Appeals for the Seventh Circuit answered a question that has vexed Illinois insureds for a long time. Although the case involves a relatively uncommon set of facts, the court’s ruling in Wegman recognizes the conflicting interests that can arise between insureds and insurers when an insured faces a claim in which there is a “non-trivial probability” that there could be a judgment in excess of policy limits.

The Nuts and Bolts of Wegman

R.C. Wegman Construction Company was the manager of a construction site at which another contractor’s employee was seriously injured. Wegman was an additional insured under a policy issued by Admiral Insurance to the other contractor. When the worker sued Wegman, Admiral acknowledged its duty to defend, apparently without reserving any rights, and undertook the control of Wegman’s defense. The Admiral policy provided $1 million in per-occurrence limits of liability. Although it soon became clear that there was a “realistic possibility” that the underlying lawsuit would result in a settlement or judgment in excess of the policy limits, Admiral never provided this information to Wegman.

Shortly before trial, a Wegman executive was chatting about the case with a relative who happened to be an attorney. That relative pointed out the risk of liability in excess of policy limits, and mentioned that it was important for Wegman to notify its excess insurers. But by then it was too late, and the excess insurer denied coverage because notice was untimely. A judgment was entered against Wegman for more than $2 million. Wegman sued Admiral for failing to give sufficient warning of the possibility of an excess judgment so that Wegman could give timely notice to its excess insurer. According to the Seventh Circuit, the key issue was whether this situation—in which there was a risk of judgment in excess of the limit of liability, and where the insurer was paying for and controlling the defense—gave rise to a conflict of interest.

Admiral’s explanation for failing to inform Wegman was ultimately part of its downfall. Because there were other defendants in the underlying lawsuit, there was a good chance that Wegman would not be held jointly liable and that if a jury determined that Wegman was no more than 25% responsible for the worker’s injury, Wegman’s liability would have been capped at 25% of the judgment. Admiral’s trial strategy was not to deny liability, but to downplay Wegman’s responsibility. Admiral, however, never mentioned this litigation gambit to Wegman!

In the Seventh Circuit’s view, this was a textbook example of “gambling with an insured’s money.” And that is a breach of an insurer’s fiduciary duty to its insured.

When a potential conflict of interest arises, the insurer has a duty to notify the insured, regardless of whether the potential conflict relates to a basis for denying coverage, a reservation of rights, or a disconnect between the available limits of coverage and the insured’s potential liability. Once the insured has been informed of the conflict of interest, the insured has the option of hiring a new lawyer whose loyalty will be exclusively to the insured. In reaching its Wegman conclusion, the Seventh Circuit cited the conflict-of-interest rule established by the Illinois Supreme Court’s Peppersdecision. Thus, a potential conflict of interest between an insured and an insurer concerning the conduct of defense is not limited to situations in which the insurer has reserved its rights.

In rejecting Admiral’s arguments, the Seventh Circuit explained that a conflict of interest (1) can arise in any number of situations and (2) does not necessarily mean that the conflicted party—the insurer—has engaged in actual harmful conduct. A conflict of interest that permits an insured to select independent counsel occurs whenever the interests of the insured and the insurer are divergent, which creates a potential for harmful conduct.

The conflict between Admiral and Wegman arose when Admiral learned that a judgment in excess of policy limits was a “non-trivial probability.” When confronted with a conflict of this type, the insurer must inform the insured as soon as possible in order to allow the insured to give timely notice to excess insurers, and to allow the insured to make an informed decision as to whether to select its own counsel or to continue with the defense provided by the insurer.

Looking Beyond Wegman

The fact pattern discussed in Wegman, however, is not the only situation in which there may be a conflict of interest between an insurer and an insured concerning the control of the defense. Under the supplemental duty to defend in a CGL policy, an insured is entitled to be defended until settlements or judgments have been paid out in an amount that equals or exceeds the limits of liability. The cost of defense does not erode the limits of liability, which means that the supplemental duty to defend is of significant economic value to an insured.

The following hypothetical situations (involving an insured covered by a CGL policy with $1 million in per-occurrence and aggregate limits of liability and a supplemental duty to defend) illustrate the economic value of the duty to defend:

  • The insured is sued 25 times in one policy year. In each instance, the insurer acknowledges coverage and undertakes to defend the lawsuits. Each lawsuit is dismissed without the insured becoming liable for any settlements or judgments. The total cost of defending these 25 lawsuits is $1.5 million. The limits of liability are completely unimpaired with $1 million in limits of coverage remaining available.
  • The insured is a defendant in dozens of lawsuits alleging that one of the products it sells has a defect that has caused bodily injury. The insurer agrees to defend. The lawsuits are consolidated, and the costs of defense accumulate to more than $2.5 million. Eventually, there is a global settlement of the lawsuits for $1 million. Thus, a total of $3.5 million has been paid out on an insurance policy with a $1 million limit of liability.
  • The insured is involved in a catastrophic accident for which he was solely responsible and in which four other people were permanently disabled. Each of the victims files a lawsuit and the realistic projected liability exposure to each victim is $1.5 million—or $6 million collectively. Shortly after the complaints are filed (and before there has been any significant discovery or investigation), three of the plaintiffs make a joint offer to settle their claims for a collective $1 million. The insurer and the insured both believe that this is an outstanding settlement opportunity, but the fourth plaintiff wants her day in court. If the insured agrees to this promising settlement opportunity, the limits of liability will be exhausted, the duty to defend will be extinguished, and the insured will be forced to pay for his own defense or rely on his excess insurance to reimburse him for defense costs.

Any insured who has been in the position of defending against either a serious claim or a multitude of smaller claims will understand that the supplemental duty to defend under a CGL policy may have much greater economic value than the limit of liability alone.

In these kinds of situations—when either the potential liability exceeds policy limits or there are multiple claims against the insured such that the economic value of the defense is worth more than the limit of liability—who should be allowed to control the defense of claims against the insured? In prior cases (Conway v. County Casualty Insurance Company [1992] and American Service Insurance Company v. China Ocean Shipping Co. [2010]), Illinois courts concluded that an insurer cannot be excused of any further duty to defend by paying out its remaining limits to the plaintiffs or by depositing its policy limits into court. But this rule does not address the conflict of interest when (1) it is in the insurer’s financial interest to avoid the potentially unlimited expense of defending its insured but (2) it is in the insured’s interest to continue receiving a defense that may have greater financial value than the limits of liability of a primary CGL policy.

Thanks to the Wegman decision, there is now some authority acknowledging that the insured’s right to select independent counsel may exist even if the insurer defends without a reservation of rights. The court recognized that the insurer-insured relationship and the right to control the defense is fraught with potential conflicts. Therefore, it is more important than ever for insureds to protect their interests.

Editor’s note: For more on the insured’s right to a defense, see “Policyholders and the Right to a Defense: Don’t Be Left Holding the Bag.”

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

 

Supreme Court Grants Cert. In Caraco

Posted yesterday at the National Law Review by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. deatils about the U.S. Supreme Court’s grant of certiorari in Caraco Pharm. Labs., Ltd., v. Novo Nordisk:   

Today (June 27, 2010), the Supreme Court granted cert. in yet another patent appeal, Caraco Pharm. Labs., Ltd., v. Novo Nordisk, (Supreme Ct. 10-844). Earlier this month, I did an extensive post on the decision below, in which the Fed. Cir. denied Caraco’s counterclaim seeking to strike the broad “use code” that Novo had put on its drug, Prandin (U-968). Even though Caraco would market the generic for a narrower use, the broad use code effectively prevented Caraco from “carving out” the still-patented use(s) from its labeling, thus effectively keeping it off the market.

I took a chance by posting on this one because the Solicitor General’s office recommended review and there was a strong dissent below. However, when the appeal started getting some attention in the press – though the issues were often mischaracterized – it began to look more likely that cert. would be granted. I am not so sure that the Fed. Cir.’s recent streak of affirmances will be left intact.

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

Supreme Court Limits Bankruptcy Court Jurisdiction – Stern v. Marshall

Posted recently at the National Law Review by Prof. G. Ray Warner of Greenberg Traurig, LLP – the latest installment of the Anna Nicole Smith / J. Howard Marshall estate issue and how it impacts the jurisdiction of bankruptcy courts:   

 

In a decision that may create serious problems for bankruptcy case administration, the Supreme Court this morning invalidated part of the Bankruptcy Court jurisdictional scheme. Stern v. Marshall, No. 10-179, 564 U.S. ___ (June 23, 2011). Specifically, the Court held that the Bankruptcy Courts cannot issue final judgments on garden variety state law claims that are asserted as counterclaims by the debtor or trustee against creditors who have filed proofs of claim in the bankruptcy case.

Thus, while the Bankruptcy Court could issue a final order resolving the creditor’s claim against the estate, it could issue only a proposed ruling with respect to the counterclaim. Final judgment on the counterclaim could only be issued by the District Judge after de novo review of any matters to which a party objects. See 28 U.S.C. § 157(c).

In a five-to-four opinion by Chief Justice Roberts, the Court affirmed the Ninth Circuit Court of Appeals decision that had reversed an $88 million judgment in favor of Vickie Lynn Marshall (a/k/a Anna Nicole Smith) against E. Pierce Marshall for tortious interference with Vickie’s expectancy of a gift from her late husband J. Howard Marshall, Pierce’s father and one of the richest people in Texas.

The Court’s decision was based on constitutional principles defining the limits of Article III of the U.S. Constitution. Thus, it is likely to have implications that reach far beyond the narrow issue resolved in the instant case. The majority relies on the “public rights” doctrine to define the class of judicial matters that can be resolved by non-Article III tribunals like the Bankruptcy Courts. However, it adopts a narrower view of what constitutes “public rights” than was generally understood prior to this decision.

In addition, although earlier cases could be read to adopt a flexible pragmatic approach to Article III that focused only on significant threats to the Judiciary, Chief Justice Roberts takes a very firm approach, stating, “We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.” Of particular interest, this case focuses on the nature of the Bankruptcy Judge as a non-Article III judge (i.e., no life tenure and no salary protection) and rejects the view that the Bankruptcy Courts are merely “adjuncts” of the Article III District Courts. Note that the “adjunct” construct was one of the foundations of the 1984 Act’s post-Northern Pipeline jurisdictional fix that created the core/non-core distinction. See Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).

The narrow holding is that Bankruptcy Judges, as non-Article III judges, lack constitutional authority to hear and “determine” counterclaims to proofs of claim if the counterclaim involves issues that are not essential to the allowance or disallowance of the claim. Here, although the counterclaim was a compulsory counterclaim, it was a garden variety state law tort claim and did not constitute a defense to the proof of claim. Contrast this with the preference claim involved in Langenkamp v. Culp, 498 U.S. 42 (1990). The receipt of such an unreturned preference is a bar to the allowance of the claim. See 11 U.S.C. 502(d). The opinion also distinguishes Langenkamp (and the earlier pre-Code case of Katchen v. Landy, 382 U.S. 323 (1966)) on the ground that the preference counterclaims in those cases were created by federal bankruptcy law. It is unclear whether that reference establishes a second condition to Bankruptcy Court resolution of counterclaims — i.e., that the counterclaim be based on bankruptcy law in addition to its resolution being essential to claim allowance.

The Court begins its opinion by interpreting the “core” jurisdictional grant of 28 U.S.C. 157(b)(1). The Court finds the provision ambiguous, but rejects the view of the Ninth Circuit that the Bankruptcy Court’s jurisdiction to determine matters involves a two-step process of deciding both whether the matter is “core” and whether it “arises under” the Bankruptcy Code or “arises in” the bankruptcy case. The Court states that such a view incorrectly assumes there are “core” matters that are merely “related to” the bankruptcy case (and which cannot be “determined” by the Bankruptcy Court). The Court states that core proceedings are those that arise in a bankruptcy case or arise under bankruptcy law and that noncore is synonymous with “related.” Thus, since counterclaims to proofs of claim are listed as core in the statute, the Bankruptcy Court has statutory authority to enter final judgment. (Note that the opinion does not explain how a tort claim that arose before the bankruptcy and that was based on non-bankruptcy state law could be a claim “arising in” the bankruptcy case or “arising under” bankruptcy law. Possibly the fact that procedurally it arises as a counterclaim is sufficient to convert a “related” claim into an “arising in” or “arising under” claim. Cf. Langenkamp.)

The Court also rejects the argument that the personal injury tort provision of 28 U.S.C. 157(b)(5) deprives the Bankruptcy Court of jurisdiction to resolve the counterclaim. The Court holds that section 157(b)(5) is not jurisdictional and thus the objection was waived.

Although the statute authorized the Bankruptcy Court to determine the counterclaim, the Court holds that grant violates Article III. The Court rejects the view that the Article III problem was resolved by placing the Bankruptcy Judges in the judicial branch as an “adjunct” to the District Court. The Court focuses on the liberty aspect of Article III and its requirement of judges who are protected by life tenure and salary guarantees. After outlining the extensive jurisdiction of Bankruptcy Judges over matters at law and in equity and their power to issue enforceable orders, the Court states “a court exercising such broad powers is no mere adjunct of anyone.”

The Court then uses the “public rights” doctrine as the test for which matters can be delegated to a non-Article III tribunal. Although Granfinanciera v. Nordberg, 492 U.S. 33 (1989), suggested a balancing test that considered both how closely a matter was related to a federal scheme and the degree of District Court supervision (a test that arguably supports the Bankruptcy Court’s entry of a judgment on a compulsory counterclaim), the Court settles on a new test for public rights limited to “cases in which resolution of the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency’s authority.” The state common law tort counterclaim asserted here does not meet that test. Instead, adjudication of this claim “involves the most prototypical exercise of judicial power.”

Interpreted in the most restrictive fashion, this ruling might create serious problems for case administration. In proof of claim matters, the Bankruptcy Court would be limited to proposed findings on most counterclaims, with the District Court entering the final order after de novo review. Query whether the majority’s limited view of “public rights” would prevent the Bankruptcy Judge from entering final judgment in other disputes that involve the non-bankruptcy rights of non-debtor parties. Bankruptcy Courts regularly resolve inter-creditor disputes and resolve disputes regarding the non-bankruptcy rights of parties to the bankruptcy case in contexts other than claim allowance. Whether the Bankruptcy Court’s exercise of this power is constitutional may turn on how broadly the courts interpret the “cases in which resolution of the claim at issue derives from a federal regulatory scheme” prong of the “public rights” test.

©2011 Greenberg Traurig, LLP. All rights reserved.

 

Supreme Court Grants Cert. In Mayo v. Prometheus

Posted this week at the National Law Review by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. – an overview of the implications for biotech IP law involving the Mayo Collaborative Services v. Prometheus Labs case:  

June 20th, in what may be an ominous turn for biotech IP law, the Supreme Court granted cert. for the second time in Mayo Collaborative Services v. Prometheus Labs., Inc, Supreme Court No. 10-1150. Post-Bilski, the Supreme Court granted cert., vacated and remanded the Fed.  Cir.’s decision, rendered December 17, 2010, (related posts are archived under “patentable subject matter”) that reaffirmed that claims involving methods of medical treatment coupled with determining the levels of metabolites of the administered drugs were directed to patentable subject matter, and were not directed to abstract ideas or phenomena of nature. 628 F.3d 1347 (Fed. Cir. 2010).

Is it pay-back time? In the decision below, the Fed. Cir. pointedly in fn. 2, declined to give weight to the “Metabolite Labs. dissent,” 548 U.S. 124) in which Justices Breyer, Souter and Stevens would have found claims to an assay for cobalamin deficiency patent-ineligible as involving “natural correlations and data-gathering steps.” The Prometheus claims are not without vulnerable points. The Fed. Cir. agreed that the steps recited comparing the determined level of the metabolite to a benchmark level and concluding that a need exists to increase or decrease the amount of the drug administered were mental steps and not per se patentable. The Fed. Cir. also held that the first steps of the claims – the administering and determining steps – were not merely data gathering steps, but were central to the claimed method of optimizing therapeutic efficacy of the treatment.

While two of the three Justices who wrote the Metabolite dissent have retired, the Court clearly feels that there are issues here that need resolution. However, it is difficult to see how “methods of medical treatment” could remain patentable subject matter if these claims are held not to be. While processes are s. 101 patentable subject matter, John L. White’s Chemical Patent Practice (1993) felt it necessary to include a section “Process of Treating Humans.” Paragraph three begins:

“Claims to the treatment of humans medicinally are now allowed. Ex parte Timmis (POBA 1959) 123 USPQ 581 (treatment of chronic myeloid leukemia). The fact the claimed process for modifying a function of the human body (combating the clotting of blood) involves a mental determination of the amount administered is not a bar to patentability where that portion is an incidental feature of the process. Ex parte Campbell et al., (POBA 1952) 99 USPA 51.”

These decisions are from the nineteen fifties not the eighteen fifties! In Prometheus, the Fed. Cir. explicitly noted that claims to methods of medical treatment are patentable subject matter. Are modern medicine and IP law about to part ways?

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

U.S. Supreme Court: Federal Court Could Not Enjoin State Court from Addressing Class Certification Issue

Posted yesterday at the National Law Review by Scott T. Schutte of Morgan, Lewis & Bockius LLP a great overview of  the U.S. Supreme Court’s recent ruling  in Smith v. Bayer Corp.   

In a decision with implications for companies facing class action litigation, the U.S. Supreme Court ruled unanimously that a federal district court, having rejected certification of a proposed class action, could not take the additional step of enjoining a state court from addressing a motion to certify the same class under state law. In an opinion authored by Justice Kagan, the Court inSmith v. Bayer Corp., No. 09-1205, 564 U.S. ____ (June 16, 2011), held that principles of stare decisis and comity should have governed whether the federal court’s ruling had a controlling or persuasive effect in the later case, and the state court should have had an opportunity to determine the precedential effect (if any) of the federal court ruling.

Facts of Bayer

In Bayer, a plaintiff sued in West Virginia state court alleging that Bayer’s pharmaceutical drug Baycol was defective. After removal to federal court, the plaintiff moved to certify the action as a class action on behalf of all West Virginia purchasers of Baycol. The federal court rejected class certification because proof of injury from Baycol would have required plaintiff-specific inquiries and therefore individual issues of fact predominated over common issues. It then dismissed the plaintiff’s claims on independent grounds.

A different plaintiff, who had been a putative class member in the first action and was represented by the same class counsel in the federal action, moved to certify the same class in West Virginia state court. Bayer sought an injunction from the federal court in the first case, arguing that the court’s rejection of the class bid should bar the plaintiff’s relitigation of the same class certification question in state court. The district court granted the injunction, and the Circuit Court affirmed.

The Supreme Court’s Decision

The issues before the Court were (i) the district court’s power to enjoin the later state-court class action to avoid relitigation of the previously decided classcertification determination; and (ii) whether the federal court’s injunction complied with the Anti-Injunction Act, 28 U.S.C. § 2283, which permits a federal court to enjoin a state court action when necessary to “protect or effectuate its judgment.” The Court granted certiorari to resolve a circuit split concerning the application of the Anti-Injunction Act’s relitigation exception.

The Supreme Court overturned the injunction. It determined that enjoining the state court proceedings under the circumstances of the case was improperly “resorting to heavy artillery.” The Court noted that “[d]eciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court.” It observed that a federal court may under the relitigation exception to the Anti-Injunction Act enjoin a state court from relitigating an already decided issue-including whether to certify a case as a class action-when two conditions are met: “First, the issue the federal court decided must be the same as the one presented in the state tribunal. And second, [the party in the later case] must have been a party to the federal suit, or else must fall within one of a few discrete exceptions to the general rule against binding nonparties.” Notably, the Court commented that, in conducting this analysis, “every benefit of the doubt goes to the state court” being allowed to determined what effect the federal court’s prior ruling should be given.

The Court held that neither condition was met in Bayer. The issue of class certification under West Virginia’s Rule 23 (the language of which mirrored Federal Rule of Civil Procedure 23) was not “the same as” the issue decided by the federal court because the West Virginia Supreme Court had expressly disapproved of the approach to the “predominance” analysis adopted by federal courts interpreting the federal class action rule. In addition, the Court also held that unnamed persons in a proposed class action do not become parties to the case if the court declines to certify a class. By contrast, the Court affirmed the established rule that “a judgment in a properly entertained class action is binding on class members in any subsequent litigation.”

According to the Court, Bayer’s “strongest argument” centered on a policy concern that, after a class action is disapproved, plaintiff after plaintiff may relitigate the class certification issue in state courts if not enjoined by the original court. The Court suggested that these concerns were ameliorated by the Class Action Fairness Act of 2005, through which Congress gave defendants a right to remove to federal court any sizable class action involving minimal diversity of citizenship. The Court noted the availability of consolidating certain federal class actions to avoid inconsistent results and offered that the Class Action Fairness Act’s expanded federal jurisdiction should result in greater uniformity among class action decisions and in turn reduce serial relitigation of class action issues.

Implications of Bayer

Bayer exposes defendants to the potential for repetitive class action litigation by plaintiffs in state courts. Bayer does not alter existing standards for class certification, however, and its holding is a limited one: a defendant who has defeated class certification may not invoke the “heavy artillery” of an injunction against future state-court bids for class certification in a case raising the same legal theories unless that future bid is advanced by the same named plaintiff(s) (or a person who falls within one of the few discrete exceptions to the general rule against binding nonparties) and the defendant can establish that state standards for class certification are similar to Federal Rule 23. In this regard, the Court held that “[m]inor variations in the application of what is in essence the same legal standard do not defeat preclusion,” but if the state courts would apply a “significantly different analysis” than the federal court, an injunction will not be upheld. The Anti-Injunction Act analysis from Bayer applies directly only where the enjoining court is a federal court and the second court is a state court.

The Bayer opinion also highlights avenues for companies facing serial class actions to mitigate risk. The Court all but acknowledged that “class actions raise special problems of relitigation.” These relitigation problems in the class action context and beyond will remain after Bayer. But a number of strategic steps can be taken to reduce the burdens, expenses, and risks associated with multiple lawsuits. For example, the enactment of the Class Action Fairness Act provides expanded federal jurisdiction over many class actions and therefore permits enhanced removal opportunities for state court class actions. If subsequent class actions are filed and removed, the Court noted that multidistrict litigation proceedings may be available for coordination of pretrial proceedings to avoid repetitive litigation. Even if transfer and consolidation cannot be effectuated, the Court observed that “we would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.”

Finally, the Court’s treatment of absent class members as nonparties to the class certification question in the first action may have significance to other issues in class actions, including often hotly disputed issues relating to communications with putative class members by the defendant before class certification.

Copyright © 2011 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

 

Microsoft Corp. v. i4i Limited Partnership et al.: Supreme Court Observations

Posted today at the National Law Review  by Robert Greene Sterne  and Nirav N. Desai of Sterne, Kessler, Goldstein & Fox P.L.L.C  a great recap of today’s U.S. Supreme Court ruling in Microsoft Corp. v. i4i Limited Partnership et al.

In Microsoft v. i4i, the U.S. Supreme Court today unanimously (8-0) affirmed the clear and convincing evidence standard for invalidating issued U.S. patents under Section 282 of the Patent Act (1952).  In 2007, i4i sued Microsoft in U.S. District Court for infringement of i4i’s patent. As part of its defense, Microsoft asked for a jury instruction reciting a preponderance of the evidence standard for finding i4i’s patent invalid, rather than the long-standing clear and convincing evidence standard.  The District Court rejected Microsoft’s lower standard of proof, and a jury found that the patent was valid and that Microsoft infringed, awarding i4i a 9 figure damages sum.  Microsoft appealed to Federal Circuit, asserting in particular, that the District Court improperly instructed the jury on the standard of proof for invalidity.  The Federal Circuit affirmed the lower court’s holding and Microsoft petitioned the Supreme Court for certiorari, which was granted.

In its argument to the Supreme Court, Microsoft argued that either (1) a defendant in a patent infringement action need only convince the jury that an issued patent is invalid by a preponderance of the evidence standard, or (2) alternatively, that at the very least, the preponderance of the evidence standard should apply to evidence that was never considered by the PTO during examination.  The Supreme Court in its decision rejected both of Microsoft’s arguments.

In its decision, the Court first focused on the language of Section 282, which specifies that “[a] patent shall be presumed valid” and “[t]he burden of establishing invalidity of a patent … shall rest on the party asserting such invalidity.”  Microsoft had argued that Federal Circuit precedent establishing a clear and convincing evidence standard was not supported by the 1952 Act because Section 282 did not explicitly set forth that standard.  The Supreme Court noted that, while the statute includes no express articulation of the standard of proof, the statute does use the term “presumed valid,” which has a settled meaning in the common law.  Relying on its long-standing decision in Radio Corporation of America (RCA) v. Radio Eng’g Labs., Inc., 293 U.S. 1 (1934), the Court found that the common law jurisprudence dating back to the 19th century reflects that Microsoft’s proposed preponderance standard of proof “was too ‘dubious’ a basis to deem a patent invalid.”  According to the common law, the Court held, “a defendant raising an invalidity defense bore a ‘heavy burden of persuasion,’ requiring proof of the defense by clear and convincing evidence.”

The Court also noted that the Federal Circuit has interpreted Section 282 to require this clear and convincing evidence standard for nearly 30 years. And while Congress has amended the patent laws several times since the Patent Act was passed, “the evidentiary standard in § 282 has gone untouched.”  The Court concluded that Congress is well aware of the Federal Circuit’s treatment of the statute, but thus far has not amended the statute, and further that “[a]ny re-calibration of the standard of proof remains in [Congress’s] hands.”

The practical implications of the decisions are many.  First and foremost, the decision preserves the status quo, which in turn maintains the strength of U.S. patents and current patent enforcement mechanisms, particularly as they relate to innovation, business certainty, and job creation.  The Court has also sent a clear signal that, in view of well-established jurisprudence, if the standard is to change, it must be done by Congress, as any such change would have a profound ripple effect on the entire patent system.

© 2011 Sterne Kessler