Category: Litigation

NY City Bar White Collar Crime Institute

The National Law Review is pleased to bring you information about the inaugural White Collar Crime Institute, on Monday, May 14, 2012 from 9 a.m. to 5 p.m. in New York City, NY.

This excellent review of developments in criminal and regulatory enforcement has been organized by our White Collar Criminal Law Committee, chaired John F. Savarese of Wachtell Lipton Rosen & Katz. Our program will feature keynote addresses by Preet Bharara, United States Attorney for the Southern District of New York, and Eric Schneiderman, Attorney General of the State of New York. The panels on key legal and strategic issues will include senior government officials, federal judges, academics, general counsel of leading New York based corporations and financial institutions, and top practitioners in the field. We have crafted the program to maximize their value for white collar practitioners and corporate counsel.

Plenary sessions will focus on:
  • Providing perspectives of top general counsel concerning the challenges they confront in this new era of expanded corporate prosecutions
  • Discussions of the increasing importance of media coverage in these cases and its impact on prosecutorial decision-making.

Break-out sessions will address:

  • Techniques for winning trials
  • Ethical issues presented by white-collar corporate investigations
  • Trends in white-collar sentencing, and
  • The special challenges of handling cross-border investigations.

The Growing Corporate Threat of Taxpayer Identity Theft Fraud

The National Law Review recently published an article by Latour “LT” Laffferty of Fowler White Boggs P.A. regarding Identity Theft:

Identity theft continues to be a growing problem nationwide, but particularly in Florida which continues to lead the nation per capita in reported incidents of identity theft according to the Federal Trade Commission (FTC), a national clearinghouse for consumer fraud complaints. Taxpayer identity theft fraud, a subset of identity theft in general, is the most prevalent form of identity theft according to the FTC which reported that tax-related identity theft incidents increased from 51,702 in 2008 to 248,357 in 2010. This is a dramatic increase from the 35,000 instances of employment-related identity theft cases reported in 2007.

Taxpayer identity theft fraud involves not only the theft of someone’s identity but also the filing of a fraudulent tax return using the victim’s social security number to receive a tax refund often totaling more than $9,000.00. The IRS identified and prevented the issuance of more than $14 billion in fraudulent refunds in 2011. A 2008 report issued by the Treasury Inspector General for Tax Administration (TIGTA), an IRS watchdog, stated that the prevention of taxpayer identity theft fraud is an employer’s issue involving the security of their systems and data. According to TIGTA, 938,664 of the 2.1 million fraudulent tax returns filed in 2011 involved identity theft and totaled $6.5 billion. The stolen information includes the person’s name, date of birth and social security number or Medicare beneficiary number.

The latest twist, however, is that your own employees are in on the crime as law enforcement agencies are reporting that employees at many businesses that compile personal information are misappropriating and selling the information to thieves who are filing fraudulent tax returns. The Centers for Medicare and Medicaid Services (CMS) issued a Fraud Alert in February 2012 warning healthcare providers that perpetrators are misappropriating the identities of Medicare beneficiaries from “employers, schools, hospitals, and prisons” but any businesses that store personal information are at risk from current or prospective employees. Recent law enforcement arrests report finding suspects with massive quantities of tax refunds and lists of prospective employers to apply for jobs with the specific intent to steal taxpayer identities from their databases.

The reality of this emerging threat is that perpetrators are actually targeting organizations for employment so that they can specifically breach their data security and commit identity theft and aid those committing tax refund fraud. These organizations have both a fiduciary and legal duty to safeguard that personal information, but also a legal duty to notify those consumers who they can reasonably identify that their personal information has been stolen.

©2002-2012 Fowler White Boggs P.A.

Supreme Court Broadens the Types of Federal Agency Actions That Can Be Challenged in Court

Recently an article by Jerry Stouck and David B. Weinstein of Greenberg Traurig, LLP regarding the  Types of Federal Agency Actions that can be Challenged in Court was published in The National Law Review:

GT Law

The Supreme Court recently held, in Sackett v. Environmental Protection Agency, that “compliance orders” unilaterally issued by the EPA, which the agency contended were informal directives not subject to judicial review, qualify as “final” agency actions that can be challenged in court under the Administrative Procedure Act (APA). The decision is not limited to EPA compliance orders, although many hundreds of those are issued each year, which now will be subject to judicial review. Sackett applies more broadly because it expands the types of federal agency actions that will be deemed final, and thus subject to judicial challenge, under the APA. Any agency action that has coercive legal effect, and no established avenue for agency-level review, is now potentially challengeable under Sackett.

The APA authorizes federal courts to enjoin or set aside agency action that is arbitrary, capricious, or contrary to law, and to compel agency action unlawfully withheld or unreasonably delayed. In any such case, however, it is a jurisdictional requirement that the agency action be “final.” The rationale is that courts should not interfere with ongoing agency decision-making. Such finality is relatively clear when a party challenges a regulation or an order resulting from formal agency adjudications (e.g., license or permit proceedings). But most actions of federal regulatory agencies fall into neither category, and instead constitute what practitioners call “informal” agency adjudication. EPA compliance orders are in that category; they do not result from any well-defined agency proceeding. So are many other types of agency directives and procedures.

Sackett involved a couple who, in the course of developing a residential lot they owned into a home site, filled in part of the lot with dirt and rock. Unbeknownst to the Sacketts, their lot contained wetlands that the EPA considered to be within federal regulatory jurisdiction under the Clean Water Act (CWA). If that were true, the Sacketts could not lawfully fill the wetlands without a federal permit. The EPA issued a compliance order containing “Findings and Conclusions” that the lot did in fact contain wetlands subject to EPA jurisdiction. The order also directed the Sacketts to restore the lot in accordance with an EPA work plan and to provide EPA with access to the lot and to records concerning conditions at the lot.

The Sacketts, who believed their lot did not contain wetlands subject to the CWA, requested a hearing before the EPA, which the agency refused to provide. The Sacketts then filed suit, but the lower courts dismissed it, finding that the compliance order did not qualify as final agency action under the APA. Thus, the Sacketts were unable to initiate a judicial proceeding to resolve the dispute over whether their wetlands were subject to the CWA. But if the EPA later went to court to enforce its compliance order, the government contended that statutory per-day penalties owing from the Sacketts would double, and that obtaining a necessary permit would be more onerous under applicable regulations. In essence, therefore, the EPA compliance order was coercive — if the Sacketts “voluntarily” complied with the order, they would avoid the double penalties and the additional permitting requirements.

That coercive effect was central to the Supreme Court’s reasoning in holding that the compliance order was a final agency action, subject to judicial review. The coercive effect of the EPA compliance order in Sackett is also what makes the decision potentially applicable to other, similarly-coercive agency directives and procedures. Under the test articulated by the Court in a 1997 decision, Bennett v. Spear, agency action is “final” for APA purposes if it both “determines rights and obligations” and marks the “consummation” of the agency’s decision-making process. The Court in Sackett found the former requirement satisfied because “legal consequences” flowed from the compliance order, i.e., the doubling of the statutory penalties and tightening of the wetlands permitting requirements. The government contended, however, that even though the EPA refused the Sacketts’ request for a hearing, the compliance order was not the end of the Agency’s decision-making process. The government pointed to a portion of the order that invited the Sacketts to “engage in informal discussion” with the EPA regarding the order’s terms and requirements and/or any allegations in the order that they believed to be inaccurate. The Court rejected this argument, and found the compliance order sufficiently final, because it conferred no “entitlement” to further Agency review. The Court concluded that the “mere possibility” that an agency might reconsider as a result of informal discussions “does not suffice to make an otherwise final agency action nonfinal.”

Underlying the Sackett decision is a concern, expressly noted by the Court, that agencies should not be allowed to “strong-arm . . . regulated parties into ‘voluntary compliance’ without the opportunity for judicial review.” When regulated parties face such strong-arming at the hands of federal agencies they should now consider whether, pursuant to Sackett, judicial redress is available under the APA.

©2012 Greenberg Traurig, LLP

UK Court Decision on Objective Justification for Age Discrimination Claims

Long awaited judgment from the Court of Appeal focuses on the merits of the ‘cost-alone’ argument.

The UK Court of Appeal released the much anticipated decision in Woodcock v. Cumbria Primary Care Trust. The decision centred on objective justification. Unlike other forms of discrimination in the UK, direct age discrimination can be objectively justified.

The objective justification test has two key elements: (i) does the employer have a legitimate aim and (ii) are the means chosen a proportionate way of achieving that aim, bearing in mind the discrimination to which it gives rise?

Whilst various factors can be used to justify age discrimination, the status quo position is that ‘cost alone’ cannot be used to justify otherwise discriminatory conduct and that more is required. This has become known as the ‘cost-plus’approach. ‘Cost’ is anything that has a purely financial consideration, i.e. the motivation is purely to save costs.

The Court of Appeal in Woodcock looked at the possibility of an employer justifying discrimination on a ‘cost-alone’ basis.

Background

Mr Woodcock’s employer (the Trust) was going through a reorganisation which would result in the reduction of chief executives required in the Trust. He was made aware that his role was ‘at risk of redundancy’ in early 2006 and he therefore applied for one of the remaining chief executive roles left in the new structure. Following a selection process, Mr Woodcock was informed in July 2006 that he was not successful in his application. He then entered into informal discussions about finding alternative employment in the Trust, although no formal consultation began.

In 2007, the Trust realised that Mr Woodcock would receive a significant pension windfall if he were still employed by the Trust on his 50th birthday. The windfall amounted to approximately £500,000. Given this potential windfall, the Trust elected to give Mr Woodcock notice of termination on the grounds of redundancy before entering into a consultation process during Mr Woodcock’s 12-month notice period. No suitable alternative roles were found and Mr Woodcock’s employment terminated in May 2007. He received his contractual redundancy pay of £220,000 (well above the cap for unfair dismissal of approximately £70,000).

Mr Woodcock was clearly discriminated against on the grounds of age. He received his dismissal notice prior to consultation because of the pension windfall he would have received at his attainment of age 50. If he had been a year younger, a consultation process would have been followed first. In order to follow a fair process in the UK, an employer should consult with an employee before deciding whether he or she is redundant.

Age Discrimination Justified?

At first glance, it is hard to see how this case turns on anything other than the Trust’s financial considerations.

The lower courts, however, found that the discriminatory treatment was objectively justified using the ‘cost-plus’ approach—the ‘plus’ being the genuine redundancy situation and avoiding the potential windfall.

Although possible to pigeonhole these facts into the ‘cost-plus’ test, the lower courts agreed that it was slightly artificial. One of the questions the Court of Appeal considered was whether age discrimination could be objectively justified on a ‘cost-alone’ basis.

Court of Appeal Decision

Although the Court of Appeal agreed that the current ‘cost-plus’ approach results in a degree of artificiality, it accepted that the current guidance from the European Court of Justice is clear, i.e. an employer cannot justify discriminatory treatment ‘solely’ because of cost.

The Court of Appeal, however, agreed with the lower courts and held that the age discrimination in this case was objectively justified on a ‘cost-plus’ analysis because (i) the dismissal notice was served with the aim of giving effect to the Trust’s genuine decision to terminate Mr Woodcock’s employment on the grounds of his redundancy and (ii) it was a legitimate part of that aim for the Trust to ensure that, in giving effect to it, the dismissal also saved the Trust the potential pension fund windfall.

Conclusion

It appears as though the ‘cost-plus’ approach is here to stay. The good news is that the courts appear able to find their way around the problem of having to follow the ‘cost-plus’ approach in most cases.

Despite the courts’ current flexibility, employers should remain hesitant to commit to a ‘cost-alone’ approach and should continue to look for the ‘further factor’.

Copyright © 2012 by Morgan, Lewis & Bockius LLP

The BankAtlantic Bancorp Decision — Roadblock or Detour to Open Bank Sale of Distressed Banks?

Recently The National Law Review published an article regarding The Bank Atlantic Bancorp Decision written by The Financial Institutions Group of Schiff Hardin LLP : 

Any bank holding company with trust preferred securities (“TRuPs”) outstanding and in need of capital in this stressed operating environment for banks has had its strategic options limited by a recent decision of the Delaware Chancery Court. The court’s opinion makes it more difficult to recapitalize a distressed bank by giving the TRuPs bondholders enhanced blocking power. This newsletter summarizes the recent court action, explains its implications for bank recapitalizations, and offers the strategic solution of a Bankruptcy Code Section 363 sale to address capital needs while reconciling the rights and remedies of TRuPs trustees and bondholders.

The February 27, 2012 decision of the Delaware Court of Chancery to permanently enjoin the proposed sale of the stock in a financially distressed bank as “substantially all of the assets” of a savings bank holding company in violation of several indentures for outstanding issues of TRuPS offers many lessons for boards of directors, CEOs, investment bankers and lawyers dealing with the recapitalization or sale of distressed banks. In re BankAtlantic Bancorp, Inc. Litigation, Slip. Op. Consol. C.A. No. 7068 VCL (Del. Ch. February 27, 2012). Vice Chancellor Laster held that the sale met both tests for a sale of substantially all of a corporation’s assets. It met the quantitative test because the $306 million book value of the common stock in BankAtlantic, a federal savings bank (“Bank”) constituted approximately 90% of the $341 million book value of all assets of BankAtlantic Bancorp (“Holdco”) and the bank accounted for 69% of consolidated revenues and Holdco’s principal source of liquidity. The sale likewise met the qualitative test because Holdco’s public filings referred to itself as a “unitary savings bank holding company,” which was contractually bound not to compete with the buyer of Bank and owned no other subsidiaries other than a workout subsidiary to warehouse nonperforming assets. The plaintiffs were entitled to enjoin the transaction because the TRuPS trustees and holders would have been irreparably injured by the transfer of the Bank stock that left Holdco without sufficient liquid assets to pay the accelerated TRuPS.

The transaction and its context

The transaction culminated a series of efforts by Holdco to escape from $630 million in losses during 2008-2010 from commercial real estate loans in South Florida. Bank was blocked from paying dividends or upstreaming assets under a cease and desist order. Bank had raised some cash from a branch sale transaction in 2011 after a prior unsuccessful sales effort. Holdco tried unsuccessfully to raise equity capital and floated three partially subscribed rights offerings during 2009-2011. Holdco and its principals lost a summary judgment and a jury verdict for securities fraud in part of a class action about misstatement of loan losses. Finally, 11 issues of TRuPS, aggregating $25 million principal amount had been placed on interest deferral since early 2009. While Holdco was not formally insolvent or in capital violation under its cease and desist order, the accrual of deferred interest on the TRuPS increased the debt to $322 million by 2011 and a projected $368 million by 2013.

The court found that Holdco ran a sales process, but its controlling stockholders rejected every structure other than the transaction selected. One buyer expressed interest in a cash purchase of Bank for $158 million but cut its bid to $50 million after the securities fraud verdict was entered against Holdco. Instead, Holdco opted for a sale of its stock in Bank in an innovative transaction that involved no cash payment from the buyer, BB&T, other than a $10 million payment for a covenant not to compete from Holdco’s insiders. The transaction offered a 10% premium over deposits for the Bank stock, because BB&T would assume $3.4 billion in liabilities (principally to depositors) but only purchase $3.1 billion in assets. To adjust its balance sheet for closing, Bank planned to drop cash and nonperforming and criticized assets with a book value of $623.6 million into a new subsidiary named Retained Asset LLC (“Residco”). At closing, the membership interest in Residco would be distributed by Bank to Holdco. Residco was projected to generate $14 million in annual interest income, but Holdco’s annual expenses, including TRuPS interest, topped $30 million. To obtain regulatory approval, BB&T agreed to recapitalize Bank after closing with $538.8 million to fill the capital hole left by the creation of Residco and achieve a 6.84% ratio of tangible common equity to tangible assets).

One of Holdco’s investment banks called BB&T’s recapitalization the “purchase price” of the transaction, in effect satisfying the contingent liability that took the form of the amount of new capital necessary to meet ongoing capital requirements. Its other investment banker issued a fairness opinion that the book value of the membership interest in Residco was a fair purchase price. In either event, Holdco’s pro forma balance sheet after closing would improve by over $300 million and current deferred interest on the TRuPS would be paid. Holdco’s stock jumped 111% while one publicly traded issue of TRuPS rose 99.5% in value. Nevertheless, several TRuPS trustees and holders (including several activist secondary buyers) filed suit, perhaps because the transaction did not even generate cash sufficient to match Holdco’s prior offer to purchase the TRuPS for twenty cents on the dollar in early 2010.

What constitutes “substantially all of the assets” of a single bank holding company?

The plaintiffs successfully interrupted the transaction by enforcing a common “boilerplate” provision that appears in all of Holdco’s TRuPS indentures. The indentures allow acceleration of the TRuPS upon the sale of “substantially all of the assets” of Holdco unless the buyer assumes the indenture. Under established New York law, which each underwriter provided was to govern, the court applied both a “quantitative” and a “qualitative” test of what constitutes “substantially all of the assets.” Even if the seller retains assets making up most of its book value, the sale of the crown jewels of a company can trigger the qualitative test by fundamentally changing the nature or character of the seller’s business.

The court held that the transaction met both tests. The transaction satisfied the qualitative test because Holdco sold its sole banking subsidiary, which generated the dominant share of revenues, provided all of Holdco’s liquidity and cash flow and employed almost all of the employees of the combined enterprise. Holdco’s business was fundamentally changed by the transaction because it was contractually bound not to compete with the buyer in the banking business. The court also found that the quantitative test was satisfied because the book value of the Bank stock (the $306 million) constituted 90% of the book value of Holdco’s assets ($341 million). The court rejected Holdco’s argument that the Bank stock had no value. Holdco argued that the book value of Residco (which was stripped out of Bank at closing) should be deducted from the book value of the Bank stock, leaving a “negative book value” of over $300 million. The court found this counter-intuitive because BB&T was buying the “good bank” and leaving behind the “bad bank.” Evidence of the positive value of Bank was the fairness opinion of one of Holdco’s investment bankers, which pointed out that BB&T thought that Bank’s franchise was worth enough to justify a $538.8 million post-closing investment to recapitalize it.

The court also rejected Holdco’s “valueless stock” argument because New York excluded the buyer’s purchase price from the total assets of the seller in determining whether the seller sold “substantially all” of such assets. The court pointed to statements by Holdco’s insiders that the membership interest in Residco was the “purchase price.” One of Holdco’s investment bankers opined that Holdco received a fair price equal to 166% price-to-book ratio calculated by dividing the book value of Residco by the book value of the Bank stock ($607/306 million). Indeed, the court observed that no transaction would meet the “substantially all of the assets” test if the seller’s assets were grossed up by the purchase price paid.

Availability of Injunctive Relief

The court granted the plaintiffs’ request for a permanent injunction against the transaction because it held that they would be irreparably harmed. Even though the TRuPS would receive $39 million to pay down deferred interest, Holdco lacked the liquidity to pay the remaining $290 million that would be due on the acceleration of the TRuPS. Holdco would have had no assets to pay the TRuPS except a “fire sale” of the assets of Residco that would have been “suicide” according to Holdco’s principal stockholder. The court also believed that the $10 million to be paid to senior executives and shareholders in new severance and non-compete agreements violated the established liquidation rules giving creditors priority over shareholders. It also pointed to New York law holding that creditors are irreparably injured by transferring all collectible assets, which fundamentally shifts the risks that creditors agreed to assume.

The court rejected the view that an “untenable” status quo made the balance of hardships favor Holdco. While the court noted that there was a risk that Holdco would fail, it pointed to the fact that Holdco was not presently insolvent or in violation of its capital requirements, particularly because the TRuPS still counted as Tier I capital for Bank. It seemed particularly concerned with flaws in Holdco’s sales process whereby the controlling shareholder frustrated other alternatives to the transaction by misstatements to the board and the frustration of other bidders. Even though the only bid on the table offered just $50 million, the court believed that it might have been superior to the creditors if the TRuPS had been assumed. In essence, Holdco never made a case that such a transaction was impossible.

Post-Litigation Settlement

Two weeks after the decision in the BankAtlantic litigation, BB&T and Holdco revised the transaction to include the assumption of the TRuPS. BB&T protected its investment, however, by its simultaneous acquisition of a 95% preferred membership interest in an LLC to be formed to hold $424 million in loans and $17 million in real estate and associated deposits, escrows, rights, obligations, loss reserves and claims (presumably the bulk of the assets that BB&T previously agreed to leave behind in Residco). BB&T’s preferred interest will terminate when it receives a preferred amount of distributions equal to the additional $285 million investment that it made by assuming the TRuPS indentures. Finally, BB&T received Holdco’s guaranty of the preferred amount of distributions. The legal fees of the TRuPS trustees in the BankAtlantic litigation will be paid from the transaction. In sum, the TRuPS holders received exactly what they wanted.

Lessons Learned

The BankAtlantic litigation shows a number of developments in the distressed, open-bank arena:

  • The terms of TRuPS indentures can impede an open-bank sale even if the sale improves the holding company balance sheet, pays deferred interest and offers the prospect of full payment to creditors and value to shareholders. Most distressed bank situations do not offer such advantages to holding company creditors and shareholders.
  • TRuPS holders have become better organized and are able to persuade or direct trustees to take legal action to contest transactions. The ruling in the BankAtlantic litigation will encourage more aggressive litigation in the future.
  • Analogous events of default allow acceleration of secured and unsecured bank loans to bank holding companies.
  • Courts will closely scrutinize the marketing process where a seller restricts bidders to a structure that benefits insiders and does not allow all bidders reasonable due diligence.
  •  Non-bankruptcy courts may not give much weight to the difficult regulatory and economic environment for open-bank sales of financially distressed banks.
  • To be persuasive, the investment bankers’ fairness opinions must pass the common-sense test, even in a transaction that positively benefits creditors.

Would a Bankruptcy Court have approved the Original Transaction as a Section 363 Sale of Holdco’s stock in Bank?

The court’s ruling suggests that Holdco may have had a more favorable outcome if it had structured the original transaction to close in a Section 363 sale of assets in a Chapter 11 proceeding. See Fisher, J.M., Bankruptcy Sales to Facilitate Open-Bank Recapitalizations, Pratt’s Journal of Bankruptcy Law (January 2011) at 64. Bankruptcy courts are more familiar with the practical exigencies of selling financially distressed businesses, a point that the Chancery Court discounted. These include the need for a speedy sale and the fact that creditors may have to wait to be paid and be satisfied with a partial payment of their claims. In essence, the BB&T bid could have been signed up with the contingency that the bankruptcy court (i) approve bidding procedures setting a marketing period for higher and better bids for a reasonable but brief period after the bankruptcy and giving BB&T a breakup fee as compensation for being the stalking horse, (ii) allow other bidders to compete against the price and structure of the stalking horse bid so long as the other bidder had comparable financial qualifications, due diligence and financing contingencies, if any, and comparable ability to obtain regulatory approval, and (iii) approve the sale to the highest and best bid based on the values received by Holdco’s creditors with due regard to the urgent risk of regulatory action.

A bankruptcy would involve several key differences in the judicial process:

  • The existence of a default and acceleration under the TRuPS indentures would be irrelevant because the automatic stay prohibits the TRuPS trustees from exercising remedies.
  • Bankruptcy courts are comfortable with a stalking horse process, particularly where there has been substantial pre-bankruptcy marketing.
  • All constituencies, including TRuPS and shareholders, have input into the judicial process approving bidding procedures that test the stalking horse bid and ultimate fairness of the value provided to holding company stakeholders.
  • Bankruptcy courts are accustomed to considering valuation testimony as well as treating the judicially approved auction result as the “market” value.
  • The $626 million value of the Residco membership interest would have been considered a substantial purchase price to be balanced against the investment banker’s valuation of the BankAtlantic stock. The “book value” of the Bank stock likely would have been viewed as inflated, in light of the value of Residco and the large investment that BB&T was required to make to recapitalize Bank after closing.
  • A fair auction process and the protections afforded a buyer under Section 363 might have induced competitive bidding by the other interested party and likely captured the proposed noncompete payment from BBT to insiders for the benefit of creditors.
  • The holding company could have taken its time, protected by the automatic stay or a discharge, in working out the nonperforming assets in Residco.
  • The holding company might have been able to preserve valuable tax attributes through a plan of reorganization.

Even though the matter appears to be settled, the BankAtlantic decision suggests a change in the landscape for the open-bank sale of a financially distressed bank and a possible detour through bankruptcy that can level the playing field for all stakeholders.

© 2012 Schiff Hardin LLP

NY City Bar White Collar Crime Institute

The National Law Review is pleased to bring you information about the inaugural White Collar Crime Institute,

on Monday, May 14, 2012 from 9 a.m. to 5 p.m. in New York City, NY.

 

This excellent review of developments in criminal and regulatory enforcement has been organized by our White Collar Criminal Law Committee, chaired John F. Savarese of Wachtell Lipton Rosen & Katz. Our program will feature keynote addresses by Preet Bharara, United States Attorney for the Southern District of New York, and Eric Schneiderman, Attorney General of the State of New York. The panels on key legal and strategic issues will include senior government officials, federal judges, academics, general counsel of leading New York based corporations and financial institutions, and top practitioners in the field. We have crafted the program to maximize their value for white collar practitioners and corporate counsel.

Plenary sessions will focus on:
  • Providing perspectives of top general counsel concerning the challenges they confront in this new era of expanded corporate prosecutions
  • Discussions of the increasing importance of media coverage in these cases and its impact on prosecutorial decision-making.

Break-out sessions will address:

  • Techniques for winning trials
  • Ethical issues presented by white-collar corporate investigations
  • Trends in white-collar sentencing, and
  • The special challenges of handling cross-border investigations.

USPTO Preliminary Guidelines Spread Mayo on Patent-Eligibility

The National Law Review recently published an article by Christopher L. Drymalla, Jeffrey B. Swartz, Jeffrey S. Whittle and Michael R. Samardzija, Ph.D. of Bracewell & Giuliani LLP regarding Patent-Eligibilty:

A day after the United States Supreme Court delivered its decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc.,1 the United States Patent and Trademark Office issued preliminary guidance2 instructing examiners to reject process claims that invoke laws of nature and only add steps which constitute “well-understood, routine, conventional activity” that is described in the most general of terms regardless of whether there is a transformation involved.

According to the Patent Office, although the “machine or transformation test” remains an “important and useful clue,” it is not to be considered “the sole or a determinative test” for eligibility as it does not “trump the ‘law of nature’ exclusion.” Moreover, the Mayo decision reinforces the need for a patent applicant whose claims include a law of nature, a natural phenomenon, or an abstract idea to ensure the “claimed product or process amounts to significantly more than a law of nature, a natural phenomenon, or an abstract idea with conventional steps specified at a high level of generality appended thereto.” (emphasis in original). Although the guidelines put special importance on process claims as were at stake in Mayo, the guidelines appear to indicate this analysis may apply to all claims related to laws of nature, natural phenomena, or abstract ideas.

Neither the guidelines nor Mayo provide specific guidance for what would make a product or process significantly more than a law of nature, a natural phenomenon, or an abstract idea. Nevertheless, the Patent Office sees the claim at issue inMayo as a prime example of one which merely includes a highly general and conventional step of which patent examiners are expected to be more cautious.  As explained in the guidelines, the claims in Mayo emphasize the “law of nature” correlation between the concentration of the drug and its threshold limits for therapeutic effects and harmful side effects.

Simply adding the well-understood, routine, conventional actions of administering the drug and checking its blood concentration in the most general of terms, however, does not confer patent eligibility as the claims themselves are “effectively directed to the [law of nature] exception itself.” Based on the new guidelines, an examiner confronting a similar claim set is directed to reject the claim as non-statutory subject matter under 35 U.S.C. § 101 (utility or patent-eligibility requirement section). The guidelines do specifically note that the applicant in such a case will then have the opportunity to defend the claim and show why it is not drawn to the patentability exception itself. The applicant will have to rely on other claim limitations to support the argument.

The Patent Office’s guidelines suggest that the Mayo decision should be viewed as a cautionary tale for applicants who intend to direct claims to inventions which arguably incorporate the use of laws of nature, natural phenomena, or abstract ideas.

Should you have any questions, please contact your Bracewell & Giuliani LLP patent attorneys. We will, of course, keep you advised as to any new developments in this area.

_______________________________________

1No. 10-1150, 566 U.S. ___, 2012 WL 912952 (S. Ct. Mar. 20, 2012) (for a more thorough discussion of Mayo and the particular facts and determinations involved,see Update: Can’t Touch This – Supreme Court Finds Personalized Medicine Patent Claims Invalid, Bracewell & Giuliani LLP (Mar. 20, 2012).

2See Memorandum: Supreme Court Decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc. (Mar. 21, 2012).

© 2012 Bracewell & Giuliani LLP

Supreme Court Invalidates Biotech Method Patent in Mayo v. Prometheus

Recently an article by Richard G. Gervase, Jr. and Daniel W. Clarke, Ph.D. of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding Biotech Patents recently appeared in The National Law Review:

On March 20, 2012, the United States Supreme Court handed down a groundbreaking decision in the field of biotechnology; however, the repercussions of this decision will be felt throughout the patent community. In a highly anticipated decision, the Court reversed the United States Court of Appeals for the Federal Circuit in Mayo Collaborative Services and Mayo Clinic Rochester v. Prometheus Laboratories, Inc., unanimously finding that process claims directed to optimizing the dosage of a drug for treatment of an immune-mediated gastrointestinal disorder are invalid because they effectively claim no more than an underlying law of nature.

The two patents at issue are exclusively licensed to Prometheus, who sells diagnostic tests that employ the patented processes. At first, Mayo bought and used these diagnostic tests; however, in 2004, Mayo decided to use and sell a slightly different diagnostic test. Prometheus responded by bringing an infringement action in the United States District Court for the Southern District of California, which found that although Mayo infringed a claim of a Prometheus-licensed patent, the asserted claims were invalid for being drawn to non-statutory subject matter. The District Court reasoned that the patents claimed “natural laws or natural phenomena,” which are not entitled to patent protection. Specifically, the District Court opined that the correlations between metabolite levels and the toxicity and efficacy of drug dosages are patent-ineligible laws of nature. The Federal Circuit reversed, and held that the claims were directed to patent-eligible subject matter because they “transform an article into a different state or thing,” and the transformation was “central to the purpose of the claimed process.” The Federal Circuit subsequently reaffirmed this decision on remand from the Supreme Court for reconsideration in view ofBilski v. Kappos.

The question presented to the Supreme Court in Mayo v. Prometheus was “whether the claimed processes have transformed unpatentable natural laws into patent-eligible applications of those laws.” The Court recognized that the threshold inquiry to determine whether a claim is directed to patent-eligible subject matter is governed by 35 U.S.C. § 101, which provides “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”

The representative claim analyzed by the Court was directed to methods of calibrating the optimal dosage of a thiopurine drug by administering the drug, and determining the level of subsequent metabolites, where certain metabolite levels correlate with certain results. The Court relied on case precedent, including Diamond v. Diehr and Gottschalk v. Benson, for the proposition that the meaning of “process” in § 101 has been limited to exclude fundamental principles, such as “laws of nature, natural phenomena, and abstract ideas,” but noted that “an application of a law of nature or mathematical formula to a known structure or process may well be deserving of patent protection.” The Court concluded that the claims were not patent eligible, reasoning that the claims were merely instructions to apply a natural law, i.e., a natural correlation.

Specifically, the Court stated that the additional steps of “administering” and “determining,” along with the “wherein” clauses, “add nothing specific to the laws of nature other than what is well-understood, routine, conventional activity, previously engaged in by those in the field.”

Although the Court recognized that in determining whether additional claim steps are routine or conventional, a § 102 novelty inquiry and a § 101 statutory subject matter inquiry “might sometimes overlap,” Justice Breyer repeatedly emphasized that from a policy perspective, a patent should not preempt natural correlations, thereby improperly inhibiting future innovation. The Court also warned that a non-statutory law of nature cannot be transformed into subject matter that is eligible for patent protection by mere clever claim drafting that amounts to no more than “insignificant post-solution activity.”

How the Supreme Court’s decision will impact medical diagnostic patents and patent applications in the future remains to be seen. We note that the Court declined to opine on the desirability of increased protection for diagnostic correlations, inviting Congress to develop “more finely tailored rules” for patent eligibility should the legislature disagree with the Court’s conclusion.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Slogans versus substance in the battle over ObamaCare's future: ANALYSIS

An article regarding ObamaCare written by Wendell Potter of the Center for Public Integrity recently appeared in The National Law Review:

Cries of ‘Hands off my health care’ mask the benefits of the Affordable Care Act

Hands off my health care!

Remember those words from the health care reform debate of two years ago? I’m confident we’ll be seeing them on protest signs in Washington again this week as the Supreme Court hears arguments on the constitutionality of the Affordable Care Act. And we’ll see them again when the protest campaigns shift into high gear this summer.

One of the rules of effective communications is to keep it simple. In attacking something you don’t like, use as few words as possible, and make sure those words pack an emotional wallop. That’s why lies about “death panels” and a “government takeover” of health care have been so potent. Unfortunately for those advocating reform, it’s far more challenging to explain and defend a law as complicated as the Affordable Care Act.

Maybe, then, supporters of the law should co-opt the “hands off” slogan and make it their own. That would require adding just a few more words here and there to make clear what would be lost if the law is repealed, gutted or declared unconstitutional.

Here’s are some suggestions:

“Hands off my health care! Granny doesn’t need her meds all year anyway!”

The Affordable Care Act is closing the despised and even deadly “doughnut hole” in the Medicare prescription drug program, which was designed in 2003 largely by lobbyists for insurance and pharmaceutical companies who were more interested in protecting their companies’ profits than helping seniors stay alive. The way the law was cobbled together, Medicare beneficiaries get prescription drug coverage only up to a certain amount. When they reach that limit, they fall into the “doughnut hole” and have to pay about $4,000 out of their own pockets for their prescriptions before coverage resumes. As a consequence, many people stop taking their medications because they don’t have the money to pay for them. And many of them die. The Affordable Care Act has already shrunk that gap and will close it completely in 2020.

“Hands off my health care! Who cares if insurers refuse to cover sick kids?”

Before the Affordable Care Act, insurance companies routinely refused to insure children who were born with disabilities or who developed life-threatening illnesses like diabetes or cancer. It was perfectly legal for them to refuse to sell coverage to anyone — even children— who had what insurers call a “pre-existing condition.” The reform law already requires insurers to cover all kids, regardless of health status. It will apply to the rest of us in 2014.

“Hands off my health care! My 24-year-old daughter can just stay uninsured!”

Insurers have long had a policy of kicking young adults off their parents’ policies when they turn 23. Many of these young folks don’t have the money to buy coverage on their own—and a lot of them can’t buy it at all because of, you guessed it, pre-existing conditions. That’s why young people comprise the biggest segment of the uninsured population. Because the Affordable Care Act allows parents to keep dependents on their policies until they turn 26, an estimated 2.5 million young people had become insured again as of the end of last year.

“Hands off my health care! If I lose my coverage because I lose my job, so be it!”

Millions of Americans fall into the ranks of the uninsured every year when they get laid off. That’s one reason the number of people without coverage swelled to 50 million during the recession. Many of them can’t afford to buy insurance on their own and many of them have—you guessed right again—pre-existing conditions and can’t buy it at any price. Starting in 2014, not only will the Affordable Care Act prohibit insurers from refusing to sell coverage to people of any age because of their medical history, it will also provide subsidies to low-income individuals and families to help them buy insurance.

“Hands off my health care! It’s not my problem if your insurance company dumps you when you get sick!”

To avoid paying claims, insurers for years have cancelled the coverage of policyholders when they got sick. A former nurse in Texas testified before Congress in 2009 about getting a cancellation notice from her insurer the day before she was to have a mastectomy because she had failed to note on her application for coverage that she had been treated for acne. The Affordable Care Act makes it illegal for insurers to cancel policies for any reason other than fraud or failure to pay premiums.

“Hands off my health care!” Maybe we ought to think that through a little bit more before we take to the streets with those words on our placards. Insurers who profited from the way things used to be will laugh all the way to the bank if you start waving those signs, but you and people you love might live to regret it. On the plus side, at least for the special interests, you probably won’t live as long.

Slogans versus substance in the battle over ObamaCare's future

Signs from a Tea Party protest in St. Paul, Minn.Flickr Creative Commons/Fibonacci Blue

Reprinted by Permission © 2012, The Center for Public Integrity®

Supreme Court's Decision in Kawashima v. Holder and the Hard-Learned Lessons of an Old Tax-Crime Conviction

An article regarding a recent Supreme Court Decision written by Dawn M. Lurie of Greenberg Traurig, LLP was published in The National Law Review:

GT Law

A married couple, natives of Japan, small business owners, who immigrated to the U.S. legally and became Legal Permanent Residents (green card holders) in 1984, began, and continue to run, successful Japanese restaurants in various affluent areas of California. Over two decades ago, in 1991, the couple made false statements on their federal corporate tax return, and were convicted of the related crimes in 1997 in federal court, one spouse for making the false statements, the other for assisting with making them. The spouse convicted of making the false statements served a four-month prison sentence, and the couple paid $245,000 back to the government that it was found to have owed in taxes and penalties.

Their troubles, however, were far from over, as many long-term green card holders who were convicted of certain crimes have come to know in the severest of ways.

Three years after their convictions in 2001, the legacy Immigration and Naturalization Service (INS) brought removal (deportation) charges against the couple in immigration court, alleging their convictions amounted to commissions of “aggravated felonies,” types of crimes, which, if committed, result, according to the immigration law, in automatic removal from the U.S.

Thus began a legal battle through the Immigration Court, the Board of Immigration Appeals, the United States Court of Appeals for the Ninth Circuit and, finally, the Supreme Court of the United States, in what is now the precedent to be known as Kawashima v. Holder, 565 U.S. ____ (2012), decided on February 21, 2012.

In this case, the couple argued that the crimes for which they were convicted, specifically those related to making false statements on a tax return in violation of 26 U.S.C. §7206(1) and (2), respectively, did not meet the relevant statutory definition of an “aggravated felony.” The Supreme Court, in a 6-3 decision, disagreed, affirming the Ninth Circuit’s decision and finding that the crimes for which the couple were convicted indeed qualify as aggravated felonies that render them automatically deportable from the United States.

Which particular crimes will be classified as aggravated felonies is not always clear, hence, the lengthy court battles that can ensue. Congress provides categories of offenses to be considered aggravated felonies at 8 U.S.C. §1101(a)(43). Some of the categories appear more explicit, such as “murder, rape, or sexual abuse of a minor,” (8 U.S.C. §1101(a)(43)(A)), and “a theft offense (including receipt of stolen property) or burglary offense for which the term of imprisonment [is] at least one year,” (8 U.S.C. §1101(a)(43)(A)(G)), while others, like the one the Court addressed in Kawashima, appear to leave more room for interpretation.

In the case of the Kawashimas, the government sought to have them deported from the U.S. based upon the definition of “aggravated felony” found at 8 U.S.C. §1101(a)(43)(M), for having been convicted of “an offense that (i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or (ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.” The couple was convicted of crimes related to false statements on tax returns, not tax evasion specifically, and so the Immigration Judge found that it was “clause one,” i.e., crimes involving fraud or deceit in which the loss to the victim (in this case, the U.S. government) exceeds $10,000, which qualified the crimes for which they were convicted for the “aggravated felony” classification thus rendering them both deportable.

The Supreme Court rejected all arguments made by the Kawashimas, including that the crimes for which they were convicted were not crimes of “fraud and deceit,” since fraud and deceit were not specific elements of the crimes for which they were convicted; that by only specifically including tax evasion in the category of definitions, Congress intended that to be the only tax crime that should fall within the aggravated felony definition; that, if tax crimes were to be deemed crimes of fraud and deceit in accordance with “clause one,” then “clause two,” which addressed tax evasion only, would be rendered superfluous; and that the statute was ambiguous and should, therefore, given the severity of the punishment of deportation, be construed in their favor, citing the Court’s decision in INS v. St. Cyr, 533 U.S. 289 (2001).

The Court found that making false statements on tax returns necessarily entails fraud and deceit, that there were likely special reasons for why Congress determined it needed to mention tax evasion specifically in its own clause that had nothing to do with intending to limit the scope of crimes, tax crimes included, that could be included in the definition of aggravated felony under “clause one,” thus rendering “clause two” non superfluous. Moreover, it stated, the statute’s meaning was clear enough not to warrant a St. Cyr type of deference.

Justice Ginsberg, on the other hand, joined by Justices Breyer and Kagan in her dissent, agreed with the Kawashimas that the statute was ambiguous, and that, given the severity of the deportation punishment, its meaning should be construed in their favor. She also pointed out that the crimes for which the Kawashimas were convicted were lesser offenses than crimes of tax evasion, and surmised that Congress likely intended to limit the tax crimes that could be deemed to be aggravated felonies to tax evasion by giving it its own clause in the list of aggravated felony definitions. She further expressed concerns that this precedent would hurt the prosecution of tax cases by dissuading foreign nationals charged with tax crimes from pleading to lesser offenses, thus delaying the government’s ability to collect on and enforce the tax laws. Moreover, she worried about the floodgates aspect of the case, namely, that the Court’s decision throws open the definition of “aggravated felony” under “clause one” to encompass a vast array of tax crimes at the federal, state and local levels, including misdemeanors.

Obviously and unfortunately, dissenting opinions, no matter how well-reasoned and humanitarian, are not binding precedent, and, the law that allows foreign nationals to be deported based on an aggravated felony conviction is discomfortingly unambiguous: “[a]ny alien who is convicted of an aggravated felony at any time after admission is deportable,” (8 U.S.C. §1227(a)(2)(A)(iii). This means that if the court finds that a crime for which a foreign national was convicted is deemed to fit within one of the descriptive categories of aggravated felonies as laid out by Congress in the immigration law, no matter how long ago the conviction was, no matter how dearly the foreign national paid for it through imprisonment and/or fines, and regardless of whether the foreign national otherwise has led, and now leads, a perfectly law-abiding life that includes raising a family here in the U.S., and running successful businesses that create jobs and fuel the economy, that foreign national is still deportable.

It goes without saying that here the importance of honestly and meticulously filing tax returns cannot be overestimated. The IRS can and does investigate businesses large and small, as well as individuals. Small business owners and green card holders should enlist the professional help of seasoned, reputable tax accountants in preparing their returns, and make sure that they are given complete copies of the returns that were filed with all of the worksheets. These records should be maintained indefinitely, in an organized manner, and in a safe place.

Green card holders should also seriously consider applying for U.S. citizenship through naturalization as soon as they are eligible to apply. Generally, to become a naturalized citizen, the legal permanent resident must complete the U.S. Citizenship and Immigration Services (“USCIS”) Form N-400 with supporting documentation, be at least eighteen years old and of good moral character, must pass a civics exam and meet certain English language requirements, and meet a physical presence requirement.

To meet the physical presence requirement, the individual generally must have resided continuously as a Legal Permanent Resident in the U.S. for at least five (5) years prior to filing the N-400 application, or for at least three years if married to and living with the same U.S. Citizen for the last three (3) years; have been physically present in the U.S. for at least thirty (30) months out of the previous five (5) years (absences of more than six (6) months but less than one year break the continuity of residence unless it is established that residence was not abandoned during such period); and have resided within the state or USCIS district in which they are applying for naturalization for at least three months. Certain applicants such as members of the U.S. Armed Forces serving during periods of conflict are not subject to the continuous residence requirement, and, in many cases, the naturalization process for U.S. military personnel is expedited.

It bears remembering that while there are certain situations in which individuals can be stripped of their naturalized U.S. citizenship and face deportation (e.g., treason, fraud on a citizenship application), they are rare and extreme. Critically, naturalized citizens cease to be “aliens” in the eyes of U.S. immigration law, and are not deportable under the aggravated felony provision.

Foreign nationals charged with crimes while in the U.S. should, before entering a plea agreement or otherwise, make certain to secure seasoned immigration counsel with specific experience in navigating the immigration consequences of criminal convictions, in addition to any counsel that may be representing them on the criminal charges. This cannot be emphasized enough. A seasoned immigration attorney will have an in-depth knowledge of the aggravated felony provisions and the laws governing deportation and will be able to work with criminal counsel to competently try his or her best to achieve an outcome that will not have the brutal after-effect of triggering the aggravated felony provisions of the immigration law.

Finally, it should also be remembered that there is more cooperation among related U.S. government agencies. Cooperation has been observed in similar cases where Immigration and Customs Enforcement (ICE), the Department of Labor, the Department of Justice and/or the Internal Revenue Service increased investigations, including worksite enforcement actions, based on tax evasion issues. Foreign nationals with businesses in the United States need to ensure that they are in compliance with all applicable laws.

©2012 Greenberg Traurig, LLP