The National Law Forum

The federal government’s view of medical marijuana is evolving as the U.S. Food and Drug Administration (“FDA” or “Agency”), on June 25, 2018, approved Epidiolex, the first drug containing cannabidiol (“CBD”) ^[1], a marijuana derivative, and the U.S. Congress considers several bills aimed at relaxing regulatory standards for medical marijuana. In a press release regarding this recent approval, FDA Commissioner Scott Gottlieb reiterated the Agency’s commitment to “careful scientific research and development,” noting that the “approval serves as a reminder that advancing sound development programs that properly evaluate active ingredients contained in marijuana can lead to important medical therapies.” Before Epidiolex can be made available to patients, CBD must be rescheduled by the U.S. Drug Enforcement Administration (“DEA”) from its current Schedule I classification under the Controlled Substances Act (“CSA”).

This alert provides an overview of the roles of FDA and other federal agencies in regulating the research, development and marketing of medical marijuana, along with a discussion on DEA’s rescheduling process for controlled substances and its past actions related to marijuana. This alert also provides information on key proposed congressional legislation focused on relaxing medical marijuana regulations and considerations for stakeholders in light of this shifting regulatory landscape.

FDA’s Regulation of Marijuana in Development and Marketing

FDA takes the position that the drug approval process, which it regulates, is the most appropriate manner to determine whether a product derived from marijuana or its derivatives is safe and effective and has an acceptable medical use. Utilizing this pathway, on June 25, 2018, the Agency approved GW Pharmaceuticals’ Epidiolex, a CBD oral solution for the treatment of seizures in two rare forms of epilepsy, Dravet syndrome and Lennox-Gastaut syndrome. The drug is approved for such uses in patients 2 years of age and older. Epidiolex will be marketed in the United States by GW Pharmaceuticals’ U.S. subsidiary Greenwich Biosciences and is the first FDA-approved drug that contains a drug substance derived from marijuana. ^[2] FDA’s recent approval decision aligns with the FDA Peripheral and Central Nervous System Drugs Advisory Committee’s unanimous vote (13–0) in favor of the benefit-risk profile of Epidiolex issued on April 19, 2018. Research and development programs for products containing or derived from marijuana are ongoing for a variety of other diseases and conditions, including pain, substance use disorder, and graft-versus-host disease.

FDA’s approval of Epidiolex does not, however, change the Agency’s laws and regulations prohibiting the use of marijuana and its derivatives, including products containing CBD and tetrahydrocannabinols (THC), in food, dietary supplements and over-the-counter (“OTC”) drug products, such as oil drops, capsules, teas, and topical lotions and creams. Consistent with its previous actions, FDA’s enforcement priorities in this area will focus on marketing of unapproved drugs where firms have made health claims for products containing or derived from marijuana.

DEA Scheduling of Marijuana

Currently, marijuana and its derivatives, including CBD, are classified as Schedule I substances by DEA. ^[3] In accordance with the CSA, DEA classifies substances into five categories based on medical use, potential for abuse, and safety or dependence liability. As a Schedule I drug, marijuana is considered to have a high potential for abuse, have no currently accepted medical use in treatment in the United States, and lack an accepted safety for use under medical supervision. Under federal law, manufacturing and distributing marijuana is illegal and punishable by fines and/or imprisonment.

Before Epidiolex can be made available to patients, DEA will have to reschedule CBD from its current Schedule I classification. As part of this process, FDA will provide a scientific and medical evaluation, through the Secretary of Health and Human Services (“HHS”), and a rescheduling recommendation to DEA. DEA is required to make a rescheduling determination within 90 days. ^[4]

Federal Agencies and Medical Research Involving Marijuana

Numerous federal agencies currently regulate the clinical research of marijuana and its derivatives. Researchers must submit an Investigational New Drug (“IND”) application to FDA’s Office of New Drugs within the Center for Drug Evaluation and Research (“CDER”) in order to conduct research on marijuana. DEA oversees registration and licensure requirements for researchers and research sites. The National Institute on Drug Abuse (“NIDA”), which is part of the National Institutes of Health (“NIH”), oversees the cultivation of marijuana for medical research and supplies such product to researchers.

For many years, FDA and DEA have been in favor of expanding legitimate research into the medical use of marijuana and its derivatives. In 2003, FDA formed a Botanical Review Team to provide scientific and quality control advice to researchers developing drugs derived from plants, such as marijuana. In December 2016, this team published revised guidance on clinical studies involving botanical drugs and recommendations for quality controls for lot-to-lot consistency. ^[5] Further, in December 2016, DEA announced a new policy to increase the number of entities under the CSA permitted to grow marijuana for legitimate research purposes. ^[6] Prior to this policy, DEA relied on a single grower, the University of Mississippi, to produce marijuana for research purposes. The policy allows registrants to grow marijuana not only to supply federally funded and academic researchers, but also the private sector for medical product development. Since then, DEA has received at least 25 applications from entities seeking to grow marijuana for research purposes.

Congressional Bills on Medical Marijuana

There are currently several bills pending in the U.S. Congress that would impact the regulation of medical marijuana. H.R. 2020, authored by freshman Representative Matt Gaetz (R-FL), would direct DEA to transfer marijuana from Schedule I to Schedule III of the CSA. Representative Bob Goodlatte (R-VA), who chairs the House Judiciary Committee, is one of the bill’s co-sponsors. Rep. Goodlatte has long blocked marijuana-related legislation from advancing, so his co-sponsorship signals a shift in Congress.

Another bill seeking to amend the CSA is H.R. 3391, the Medical Marijuana Research Act of 2017, which would establish a new, separate registration process to facilitate research of marijuana for medical purposes. If passed, DEA would register practitioners to conduct medical marijuana research and manufacturers and distributors to supply marijuana for research. Interestingly, this bill is sponsored by Representative Andy Harris (R-MD), who has previously taken actions against marijuana legalization. Rep. Harris indicates that by sponsoring the bill, he expects such research to demonstrate that marijuana is not medically useful.

H.R. 2920/S. 1764, the Compassionate Access, Research Expansion, and Respect States Act of 2017 (“CARERS Act of 2017”), addresses enforcement of the CSA in states in which medical marijuana is legal. The bill would amend the CSA to provide that the administrative, civil, and criminal penalties do not apply to a person who produces, possesses, distributes, dispenses, administers, tests, recommends, or delivers medical marijuana in compliance with state law. This bill was first introduced last session and was re-introduced this session after Attorney General Jeff Sessions sought greater latitude in prosecuting medical marijuana cases. ^[7]

Moreover, Senators Cory Gardner (R-CO) and Elizabeth Warren (D-MA) recently introduced the Strengthening the Tenth Amendment Through Entrusting States (“STATES”) Act (S. 3032), which would amend the CSA so that it would not apply to persons or entities acting in compliance with state laws that allow for the manufacture, production, possession, distribution, and delivery of marijuana for recreational and medical purposes. Representatives David Joyce (R-OH) and Earl Blumenauer (D-OR) introduced a companion bill (H.R. 6043) in the House. Notably, President Trump has signaled that he would support the STATES Act, which is viewed as a compromise with Senator Gardner, who has held up several Department of Justice (“DOJ”) nominees since Attorney General Sessions announced that he would rescind the Obama Administration hand-off approach to enforcing federal marijuana laws.

Conclusion

The federal regulatory landscape for marijuana will shift depending on DEA’s rescheduling determination related to FDA’s recent drug approval of Epidiolex. This approval, however, does not change FDA’s prohibition on the use of marijuana and its derivatives in food, dietary supplements and OTC drug products. ^[8]

Further, while FDA has acknowledged that some states have legalized medical marijuana, it has continuously emphasized to states the importance of clinical research regarding the safety and effectiveness of products containing marijuana and its derivatives. Federal agencies have also supported efforts to enhance the generation of valid scientific data regarding marijuana’s safety and efficacy for medical use. Such research should demonstrate that products containing marijuana or its derivatives can be delivered in reliable dosages through reproducible delivery routes. Additionally, the regulation of medical marijuana may be relaxed based on pending congressional legislation.

Accordingly, opportunities exist for stakeholders, including growers, manufacturers and researchers, interested in advancing the development of medical marijuana. The K&L Gates FDA and Public Policy and Law practices will continue to monitor and provide updates on future developments in this area.

The authors thank Summer Associate Victoria K. Hamscho for her assistance in preparing this article.

_{[1] CBD is a chemical component of the Cannabis sativa plant, also known as marijuana.}

_{[2] While, to date, FDA has not approved an NDA for a drug product containing or derived from botanical marijuana, FDA has approved two drug products, Marinol and Syndros, containing dronabinol, a synthetic form of the marijuana derivative delta-9-tetrahydrocannabinol (“THC”) as the active ingredient. Marinol is classified as Schedule III, and Syndros is classified as Schedule II. Both Marinol and Syndros are indicated in adults for the treatment of anorexia associated with weight loss in patients with AIDS and nausea and vomiting associated with cancer chemotherapy in patients. In addition, FDA has approved Cesamet, a Schedule II drug that contains a synthetically-derived active ingredient with a chemical structure similar to THC.}

_{[3] THC and marijuana extract are also classified as Schedule I drugs.}

_{[4] DEA has denied all past requests to reschedule marijuana. As recently as 2016, after receiving two requests for rescheduling and subsequently requesting from HHS a medical evaluation and scheduling recommendation, DEA concurred with HHS’ recommendation not to reschedule marijuana. While DEA has acknowledged that medical research in this area has progressed over the past years, it takes the position that available evidence has not been sufficient to demonstrate that marijuana and its derivatives have an accepted medical use. Denial of petition to initiate proceedings to reschedule marijuana, 81 Fed. Reg. 53,687 (Aug. 12, 2016); Denial of petition to initiate proceedings to reschedule marijuana, 81 Fed. Reg. 53,767 (Aug. 12, 2016).}

_{[5] Botanical Drug Development, Guidance for Industry, https://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM458484.pdf.} 

_{[6] Applications To Become Registered Under the Controlled Substances Act To Manufacture Marijuana To Supply Researchers in the United States, 81 Fed. Reg. 53,846 (Aug. 12, 2016).}

_{[7] In January 2018, Attorney General Sessions rescinded the Department of Justice’s (“DOJ’s”) previous hands-off approach, adopted under the Obama Administration, of enforcing federal marijuana laws in those states where marijuana is legal for medical or recreational use, and Session directed all U.S. Attorneys to enforce federal law when pursuing marijuana-related prosecution. https://www.justice.gov/opa/press-release/file/1022196/download.}

_{[8] See, e.g., FDA Warning Letter to That’s Natural (Oct. 31, 2017), https://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2017/ucm583197.htm.}  

The Amsterdam Court of Appeal has approved a €1.3 billion collective settlement of claims asserted on behalf of shareholders of the former Fortis (now Ageas). The July 13, 2018 decision again shows that the Dutch Act on Collective Settlement of Mass Claims (the “WCAM”) can be used to resolve transnational disputes regardless of whether those claims could be litigated adversarially on a classwide basis in the Netherlands or elsewhere.

Background

The proposed settlement arose from shareholder litigation filed against Fortis in Belgium, the Netherlands, and elsewhere following the 2007/2008 financial collapse. In the past, global securities problems of this type had often been resolved in U.S. courts under the federal securities laws. However, in 2010, the U.S. Supreme Court held in Morrison v. National Australia Bank that the federal securities laws apply only to misstatements or omissions made in connection with the purchase or sale of (i) securities listed on a U.S. exchange or (ii) any other securities in U.S. transactions. Thus, persons who had purchased securities of Fortis (a Belgian/Dutch issuer) in non-U.S. transactions could not pursue their claims under the U.S. securities laws.

In 2005, the Netherlands enacted the WCAM, which authorizes classwide settlement of claims on an opt-out basis – unlike most other non-U.S. procedural rules, which, if they allow classwide resolutions at all, generally do so only on an opt-in basis. The settling parties enter into a settlement agreement and file a petition asking the Amsterdam Court of Appeal (which has exclusive jurisdiction over WCAM proceedings) to approve the proposed settlement and declare it binding on the class members, who are viewed as defendants in the petition proceeding. The signer(s) of the settlement on behalf of the class members must be one or more foundations (potentially including an ad-hoc or special-purpose vehicle created to enter into the settlement), rather than one of the allegedly injured class members.

The WCAM procedure is somewhat analogous to what U.S. lawyers know as a settlement class action, but with at least two key differences: (i) the WCAM cannot be used to litigate claims on a classwide basis, but only to settle them, and (ii) class members do not need to decide whether to opt out until after objections have been filed and the court has approved settlement.

The WCAM assumed a truly international scope in two global securities settlements: one involving Royal Dutch Shell (an Anglo/Dutch company) in 2009, and another involving the former Converium Holding AG and its parent (both Swiss companies) in 2012. Both settlements involved significant numbers of non-Dutch shareholders. In the Converium case, for example, only about 3% of the shares at issue were owned by Dutch residents. But the Amsterdam Court of Appeal (in different panels of three judges) approved both settlements and upheld jurisdiction over the global classes.

The Amsterdam Court of Appeal has invoked several bases to assert jurisdiction over transnational classes:

• For Dutch class members, jurisdiction exists under article 4 of the European Union’s Brussels I Regulation, which provides that domiciliaries of a Member State can be sued in the courts of that state.
• For domiciliaries of other EU countries, two jurisdictional bases exist:
  • Brussels I Regulation article 8(1) says that, in multi-defendant cases, domiciliaries of a Member State can be sued in a state where at least one defendant is domiciled if “[t]he claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.” This provision means that, as long as any class members (who are viewed as defendants here) are Dutch, the non-Dutch EU class members may also be sued in the Netherlands because all class members are subject to the same declaratory proceeding to bind them to the settlement and to limit the alleged wrongdoer’s liability.
  • Brussels I Regulation article 7(1)(a) says that, for matters relating to a contract, a domiciliary of a Member State may be sued in another Member State if that other state is the place where the contract will be performed. A WCAM contract can be and usually is structured to be performed in the Netherlands.
• For domiciliaries of Lugano Convention countries, the Lugano Convention has provisions similar to those of the Brussels I Regulation.
• For domiciliaries of other countries, article 6 of the Brussels I Regulation says that the Member State’s law (i.e., Dutch law) applies. Article 107 of the Dutch Code of Civil Procedure allows jurisdiction over codefendants if sufficient connectivity exists between or among the claims – so article 107 is similar to article 8(1) of the Brussels I Regulation.
  • Jurisdiction also exists over non-EU/EVEX class members for two other reasons: one or more petitioners (such as the foundation that is a party to the settlement) are domiciled in the Netherlands, and the matter is sufficiently connected to the Dutch legal order.

The Ageas Settlement

The Ageas settlement was proposed on behalf of persons who had purchased or held Fortis shares between February 2007 and October 2008. The settlement divided the class of eligible shareholders into Active Claimants and Non-Active Claimants. In the original proposal, Active Claimants – who had initiated (or had joined organizations that had initiated) timely proceedings against Ageas – were to receive a larger portion of the settlement amount than would Non-Active Claimants, who had not taken those steps.

The Amsterdam Court of Appeal disapproved of this allocation in a June 2017 decision. One of the judges on the panel (Judge Van Achterberg) had also sat on the panels that had ruled on the Shell and Converium settlements. The court did not reject differential treatment among class members based on substantivedifferences in their claims, but it held that differences in compensation could not depend solely on whether a class member was active or inactive in pursuing litigation. However, the court did not object to incentive awards for lead or active claimants as long as those awards are related to the claimants’ reasonable costs and expenses.

Determining the reasonableness of those costs, however, can be difficult. In Europe, unlike in the United States, multi-party or collective actions often are not financially viable unless allegedly injured persons step forward and register their claims (i.e., opt in) – a process that requires significant administrative investments. The court wanted to be informed about the costs and expenses incurred by the representative organizations and their success fees in order to determine whether the group members’ interests were being adequately protected.

A complicating factor was that the representative organizations propounding the Fortis settlement on behalf of the class had different governance structures and business models. The group included (i) ad-hoc foundations established solely to effectuate the proposed settlement (FortisEffect, SICAF), (ii) a pre-existing investor association that cross-finances its cases, not all of which are damages actions (the Dutch investor association known as VEB), and (iii) a commercial organization (Deminor). The ad-hoc foundations and Deminor apparently are externally financed by commercial litigation funders. VEB received some negative press coverage for negotiating a success fee of €25 million – an amount not directly related to its activities in this particular case – while portraying itself as a non-profit entity. VEB has been pivotal in the WCAM global settlements to date and has suggested to the Amsterdam court that no such settlement would be possible without VEB’s blessing.

The parties then amended the settlement to try to address the court’s concerns. Ageas increased the settlement amount by €100 million (from €1.204 billion to €1.3 billion), and the parties agreed to give Active and Non-Active Claimants the same base amounts of compensation, with Active Claimants being entitled to additional compensation of 25% to cover their costs. However, the parties did not amend the representative organizations’ fees.

On February 5, 2018, the Court of Appeal issued a second interim ruling, ordering the representative organizations to improve their submissions about their business models. The court held further hearings in March to discuss those additional submissions and the legal position of the shareholders.

The Court’s Final Decision

The court approved the proposed Fortis settlement on July 13, 2018, with one exception: VEB members who are Active Members will not get the additional 25% compensation, and the settlement agreement was not declared binding as to VEB itself. VEB’s members were “active” solely by virtue of their membership in VEB. But according to its articles of association, VEB is supposed to represent all Dutch shareholders, not just its own members (who pay membership fees), and certainly not just its members who purchased Fortis shares. The court saw a conflict in VEB’s negotiating an additional 25% only for its own members while purporting to represent all investors, including “non-active” ones. The court believed that giving VEB’s members an additional 25% would effectively be promoting membership in VEB.

Some highlights of the court’s ruling include the following:

• In the past, parties to WCAM settlements had been able to keep fee discussions private by addressing fees in separate documents. The Court of Appeal has now warned that fees must always be part of the court’s review of a proposed WCAM settlement, regardless of whether the parties have expressly included fee provisions in the settlement documents.
• The court was satisfied in this particular case with the level of information (or lack thereof) provided by some of the representative organizations concerning the identity of the external funders and the terms of the financing agreements, but the court warned thhttps://www.corporatedefensedisputes.com/wp-admin/users.phpat, in future cases, it might require fuller disclosure of that information.
• Until now, the general view had been that only non-profit organizations (ad hoc or pre-existing) could act as petitioners for the class in a WCAM proceeding. But we now know that this assumption might not always be true. Deminor, one of the petitioners, is a commercial organization. However, the court was not faced with a situation where the only petitioner acting for the class was a commercial entity. The other petitioners for the class included two ad-hoc non-profit foundations and VEB. The safer practice might be to include at least one non-profit organization as a petitioner.
• Until now, people had wondered whether a global securities settlement could be concluded under the WCAM without VEB’s blessing and participation. The court’s critical comments about VEB could reduce VEB’s role in future WCAM settlements – although the court did approve VEB’s €25 million fee.
• The settlement provides a recovery not only to investors who purchased Fortis shares during the relevant period, but also to those who held shares during that time – although the holders will receive a lower percentage of recovery than will the purchasers. The court appeared to be skeptical about the speculative nature of holders’ claims, but was willing to approve the allocation of settlement funds to holders inasmuch as the percentage of recovery was low. This decision marks the first time the court has addressed holders’ claims, although the ruling was not issued in an adversarial proceeding and thus does not mean that the court would sustain such claims in future litigation.

Class members will now be given notice of the settlement and a chance to opt out of it.

Implications

The Amsterdam court’s decision confirms that the WCAM remains a viable way to settle – on a transnational, opt-out basis – potential securities and other claims that might not be litigable or resolvable on a classwide basis in many countries. The WCAM has received much scrutiny from commentators over the past decade, but the Dutch legislature and the Amsterdam Court of Appeal have continued to uphold its use.

The potential availability of a Dutch forum has become more important as the United States has retreated from serving as an international dispute-resolution jurisdiction. We will see whether other litigants turn to the WCAM in coming years to resolve transnational problems that cannot be settled or litigated in U.S. courts.

*Special thank you to Ianika Tzankova from the University of Tilburg for her contributions to the blog post.*

A new U.S. Citizenship and Immigration Services (USCIS) policy published on July 5, 2018 instructs USCIS officers to issue a notice to appear (NTA) to any individual who is “not lawfully present” in the United States at the time his or her immigration benefit is denied. An NTA is a document issued to a foreign national when the government determines that the foreign national is removable from the United States. The issuance of an NTA marks the commencement of removal proceedings (commonly referred to as deportation proceedings) and requires the foreign national to appear before an immigration judge.

The new policy, which is already in effect, is expected to impact a broad range of immigration cases. For example:

• A person with an H-1B visa will be issued an NTA and placed in removal proceedings if his or her application for an H-1B extension is denied and his or her underlying H-1B visa expired while waiting for USCIS to review their application.

• A person with a student visa will be issued an NTA and placed in removal proceedings if, while adjudicating the student’s request for an immigration benefit such as an extension or change of status, USCIS determines the student has fallen out of status under his or her student visa and is thus unlawfully present.

This new mandate updates the 2011 policy that established the initial guidelines that USCIS used for issuing NTAs and brings the policy into closer alignment with President Trump’s executive order dated January 25, 2017, by placing a greater emphasis on the enforcement of federal immigration laws. Under the earlier version, USCIS was seen as the more service oriented branch of the U.S. Department of Homeland Security, leaving U.S. Immigration and Customs Enforcement (ICE) and U.S. Customs and Border Protection to handle a majority of the immigration enforcement efforts. In many instances, USCIS was only responsible for referring questionable cases to ICE, which would then make the ultimate determination as to whether or not to issue an NTA. The new guidelines, however, not only require USCIS officers to issue NTAs directly, they virtually eliminate the officer’s discretion to do otherwise.

Key Takeaways

The new guidelines are likely to result in the initiation of scores of new deportation proceedings, potentially affecting even those who have lived and worked in the United States legally for years. It is unclear how the already overburdened immigration courts will absorb the influx of new cases when, as of May 2018, the courts were reporting a backlog of approximately 700,000 cases and a nationwide shortage of immigration judges. At a minimum, processing times are expected to lengthen.

Individuals subject to an NTA should be aware that they must appear before the immigration judge at the date and time specified in the NTA. Those tempted to self-deport and return to their home country before their court dates may be removed in absentia by an immigration judge. Such a removal will, in turn, limit the foreign national’s ability to seek relief from removal and will significantly impact his or her access to immigration benefits in the future.

President Trump announced his pick for his Supreme Court nomination on Monday night, tapping Brett Kavanaugh for the position.  While Republicans hold a majority in the Senate, and Senate actions taken last year reduce the threshold for nomination approval to a simple majority, confirmation promises to be a stiff fight.  Kavanaugh has served as a DC Circuit judge since 2006, and he has provided many writings in the form of court opinions for analysis and discussion on a variety of issues.

In this series, the National Law Review will examine Kavanaugh’s record on some major issues as well as synthesize external analysis of his positions from major players in the field.

Gun Control is up first, as Kavanaugh’s nomination has many Americans asking about his record on the Second Amendment and looking to his judicial record for clues to his thinking on the issue.

Everytown for Gun Safety, a major organization supporting gun control regulations, opposes Kavanaugh’s nomination and released the following in a statement:

“President Trump vowed he’d never let the NRA down, and with the Kavanaugh pick, he chose someone whose judicial record demonstrates a dangerous view of the Second Amendment that elevates gun rights above public safety.”

This analysis is based on the DC Circuit decision that Kavanaugh dissented from after the Supreme Court issued a ruling in Heller v. D.C. The DC Circuit upheld the semi-automatic rifle ban, but Kavanaugh dissented from that decision, saying:

There is no meaningful or persuasive constitutional distinction between semi-automatic handguns and semi-automatic rifles. Semi-automatic rifles, like semi-automatic handguns, have not traditionally been banned and are in common use by law-abiding citizens for self-defense in the home, hunting, and other lawful uses.

On the flip side, the National Rifle Association expressed support for the nomination.  Chris W. Cox, Executive Director of the NRA,  said: “ “President Trump has made another outstanding choice in nominating Brett Kavanaugh for the U.S. Supreme Court. He has an impressive record that demonstrates his strong support for the Second Amendment,” calling for a swift confirmation process.

The Supreme Court last issued a major decision on gun control in the case referenced above, Heller v. D.C. , which said clearly that individuals could have a gun in their home for self-defense under the Second Amendment.  Since this case, the Supreme Court has not taken a case related to gun control, despite having opportunities to do so.  With gun control becoming a major issue following the Parkland High School shootings in Florida and politicians coming under increased scrutiny for their action (or lack thereof) on the issue, one wonders if that streak is about to be broken.

Summary

In response to increasing concerns about foreign investment and access to sensitive US technology, particularly by Chinese investors, the US Senate and House of Representatives recently passed slightly different versions of a bill, the Foreign Investment Risk Review Modernization Act (FIRRMA).

This legislation will update and expand the role of the Committee on Foreign Investment in the United States (CFIUS) in reviewing possible US national security implications of acquisitions and investments in US businesses by foreign parties. House and Senate conferees will now meet to form a single bill, which is expected to pass into law with firm support from the Trump administration.

Parties to transactions involving foreign investment in US business are well advised to consider the impact of FIRRMA’s amendments to the CFIUS process.

In Depth

A bipartisan group from the US Senate and the House of Representatives introduced legislation in 2017 to update and expand the role of the Committee on Foreign Investment in the United States (CFIUS) in reviewing possible US national security implications of acquisitions and investments in US businesses by foreign parties. Congress has continued to debate and refine the legislation, known as the Foreign Investment Risk Review Modernization Act (FIRRMA). Riding a wave of increased scrutiny surrounding foreign investment and access to sensitive technology in US businesses, particularly by Chinese investors, a version of FIRRMA passed the Senate on June 18, 2018. A slightly different FIRRMA bill passed the House of Representatives on June 26, 2018, with significant bipartisan support. House and Senate conferees will now meet to form a single bill, which is expected to pass into law with firm support from the Trump administration. FIRRMA will impact a wide range of new foreign acquisitions and investments in the United States.

Parties to transactions involving foreign investment in US business are well advised to consider the impact of FIRRMA’s amendments to the CFIUS process.

Both versions of FIRRMA would broaden the scope of CFIUS’s jurisdiction to include review of any investment (other than passive investment) by a foreign person in any US critical technology business, including:

• Emerging or breakthrough technologies;

• Real estate transactions with access to air, land (i.e. border crossings), or sea ports or with proximity to sensitive US government facilities;

• Bankruptcy and other default transactions;

• Existing investments under which a foreign stakeholder has gained rights of control or influence over the US entity; and

• Any other investments which CFIUS deems designed to evade CFIUS review.

The House bill would additionally require CFIUS to review transactions allowing a foreign investor to influence or gain access to sensitive personal information of US citizens.

While the new versions of FIRRMA would significantly expand CFIUS’s authority, certain limitations would be introduced as well. Under the Senate’s version, CFIUS could exempt from review transactions in which all foreign investors involved are from “friendly countries” (i.e., countries that have shared security interests with the US and effective review processes to safeguard them, NATO member countries and major non-NATO allies, and countries that adhere to nonproliferation control means). The Senate bill would also expand the definition of “passive” investments (which are exempt from CFIUS oversight) to include transactions involving investment funds with non-controlling foreign investors.

Both current versions of FIRRMA removed language included in the original draft of the FIRRMA bill that would have allowed CFIUS to review licensing and joint venture transactions with foreign parties for the transfer of US intellectual property.

For FIRRMA to become law, the two houses of Congress must agree on an identical version of the bill, and President Trump must sign it. The president has stated that he expects Congress to pass “strong FIRRMA legislation that better protects the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security—and future economic prosperity.” However, if Congress does not pass a bill, or if it passes a bill that does not contain language sufficiently strong in the eyes of the administration, then President Trump may seek to impose additional foreign investment restrictions.

Specifically, the president has raised the possibility of imposing restrictions under Section 301 of the Trade Act of 1974 (Section 301) on China’s laws, policies, and practices relating to technology transfer, intellectual property, and innovation. Section 301 grants authority to “investigate foreign trade practices and take action to compel another country to eliminate unfair, unreasonable or discriminatory practices that burden US commerce.” On March 22, 2018, President Trump issued a Memorandum directing the Secretary of Treasury to report within 60 days regarding measures “to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States,” including “options for new investment restrictions using ‘any available statutory authority.’” The investment restrictions were expected to target China’s key sectors, including information technology, aerospace, marine engineer, pharmaceuticals, advanced energy vehicles, robotics and other technologies.

On June 27, 2018, President Trump announced that he would not enforce new investment restrictions against China under Section 301, provided that Congress passes FIRRMA. It remains to be seen whether any final version of FIRRMA will impose restrictions stringent enough to satisfy the president and forestall additional China-specific restrictions pursuant to Section 301.

Companies planning transactions or investments pursuant to which a foreign (non-US) party would acquire an interest in a US business should carefully consider and take appropriate steps to address whether/how the deal would be treated by CFIUS, as amended by FIRRMA. Such consideration would be particularly important in the case of a Chinese investment.

Over the last few years, the United States Supreme Court has changed the landscape of patent eligibility with its decisions in Mayo Collaborative Servs v Prometheus Labs, Inc. 132 S. Ct. 1289 (2012) and Alice Corp Pty Ltd v CLS Bank Int’l, 134 S. Ct. 2347 (2014).  While patent eligibility was not a primary focus in the life sciences area, the Supreme Court decisions and their progeny have sent shock waves through the life sciences field.  Numerous biotech and diagnostic patents have been found to be ineligible under the threshold patent statute.  This article addresses the changing landscape and key court decisions, suggests new avenues for companies to navigate the changed landscape and provides practical suggestions for companies in protecting and enforcing patents in the life sciences area.

United States Code 35. U.S.C. § 101 informs practitioners on what it takes for an invention to pass the threshold test of patentability. Considering all of the controversy that it invites, it may surprise some that patent eligibility is addressed in just one sentence: “Whoever 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.”  Interpretation of this section has changed significantly as the Supreme Court and the Court of Appeals for the Federal Circuit (Federal Circuit) decide complex patent infringement issues involving patent eligibility. Patent eligibility, once deemed a gatekeeper in name only, has now become one of the most prominent defenses to patent infringement.

In many ways, life science patent disputes have formed the foundation of the current patent eligibility landscape. Cases like Mayo and Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (2013) are nearly synonymous with the term “patent eligibility.”  In perhaps the first recent disruptive patentability case, the Supreme Court, in Mayo held that claims for methods of detecting a correlation between a metabolite, and the likelihood of a drug response, were not patentable. In invalidating the patent in question, the Court found that its claims did not recite anything “significantly more” than a natural law.  The following year, in Myriad the Court held that claims directed toward cDNA (synthesized DNA) for BRCA1 and BRCA2 genes, were patent-eligible.  However, the Court held that the claims to an isolated nucleic acid that encodes BRCA1 and BRCA2 genes, were not patent-eligible because they were directed to a natural product. The Myriad decision reversed Diamond v. Chakrabarty, 100 S. Ct. 2204 (1980) which had long held that isolated biological materials, which were otherwise not found in nature, were patentable.

In view of these decisions, both courts and the United States Patent Office (USPTO) use a two pronged test that combines the logic in Mayo and Myriad:  (1) is the patent claim directed to a judicial exception and (2) is there any element or combination in the claims that amount to “significantly more” than the judicial exception.

Post Mayo and Myriad, the Federal Circuit addressed the “significantly more” standard created in Mayo in Myriad Genetics et. al. v. Ambry Genetics Corp., 774 F.3d 755 (Fed. Cir. 2014). The Court evaluated Myriad’s nucleotide primers for amplifying BRCA1 and BRCA2 genes, and methods of comparing BRCA genotypes to diagnose breast cancer, and held that neither sets of claims were patent eligible. First, it found that since Myriad’s primers shared sequences, as well as a base-pairing function, with those of naturally occurring nucleic acids they were not patent-eligible. Second, applying the two-pronged Mayo test, it determined that the method claims were directed to an abstract idea of comparing and determining the existence of alterations, with the absence of “significantly more.”

Myriad Genetics gives patent attorneys direction when drafting and prosecuting patents and litigants guidance when assessing claims. Even if the invention appears to be directed to an abstract idea, there is a chance at patentability if a patentee can show something significant that the invention adds to the idea. These cases have also formed the foundation of the Supreme Court’s Alice v. CLS Bank International, 134 S. Ct. 2347 (2014) decision that is now also referenced to denote the two step patentability test used in almost every forum of patentability dispute.

Key Developments Post Mayo and Myriad

Courts have applied the Mayo and Alice tests to determine patentability in countless disputes in the life sciences space. Each application of the test has given courts new opportunities to clarify the Mayo and Alice tests for different applications.

In Ariosa Diagnostics v. Sequenom, Inc., 788 F.3d 1371, 1373 (Fed. Cir. 2015), the claims at issue were directed to a method of using cell-free fetal DNA (cffDNA) circulating in maternal plasma to diagnose fetal abnormalities. The method included amplifying a paternally inherited nucleic acid from the serum or plasma sample, and detecting the presence of a paternally inherited nucleic acid of fetal origin in the sample.

The Federal Circuit held that the patent failed the two step Mayo test.  First, the Court determined that the claims were directed to patent-ineligible subject matter, because the “method begins and ends with a natural phenomenon.”  Second, it held that the claimed method does not “transform” the naturally occurring phenomenon into a patent-eligible application. The Court emphasized that the process steps for encompassing a natural phenomenon must be “new and useful” to transform the phenomenon into one that’s patent eligible. The patentee’s petition for rehearing en banc, as well as a petition to the Supreme Court, were both denied.

Nevertheless, in a rare bright spot, in Rapid Litigation Management Ltd. v. CellzDirect, Inc, 827 F.3d 1042 (Fed. Cir. 2016), the Federal Circuit overturned the District Court’s finding of patent ineligibility. The patents-in-suit related to a method of preserving hepatocytes.  The District Court, applying the Mayo test, found the patents directed to a law of nature, in that the cells were able to survive freeze-thaw cycles, and thus lacked an inventive concept. The Federal Circuit on the other hand held that the patent was not directed to a law of nature, but instead, a “new and useful laboratory technique.” Further, the Court found that, even if the patent was directed to a law of nature, it possessed an inventive concept. The Court proffered some guidance, stating that “patent-eligibility does not turn on ease of execution or obviousness of application.” Thus, while pre-emption is not the test for eligibility, a lack of pre-emption can show that a natural law is not being monopolized and can indicate the possibly of patentable subject matter.

In a further development, in June 2018, the USPTO issued new guidance that suggests that patents on methods of treating disease should usually be considered patent-eligible.  In its memo, the USPTO explained that examiners should apply the Federal Circuit’s ruling in Vanda Pharmaceuticals Inc. v. West-Ward Pharmaceuticals Int’l Ltd., 87 F.3d 117 (Fed. Cir. 2018) which held that its schizophrenia drug Fanapt is eligible for patenting under the Mayo test.  In particular, the Court emphasized that method of treatment patents should be analyzed as a whole not just by looking at the parts dealing with natural phenomena.  This guidance provides much needed relief for the life sciences industry and indicates that when patents cover methods of treatment involving practical applications of natural relationships, they should be considered patent eligible.

A New Layer to the Landscape

A more recent case Steven E. Berkheimer v HP INC., FKA Hewlett-Packard Company, 881 F. 3d 1360 (2018) adds yet another layer to the evolving Mayo/Alice framework. In Berkheimer the Federal Circuit raised the evidentiary requirements for patent ineligibility petitioners. Using the Alice analysis, the Court stated: “[f]irst, we determine whether the claims at issue are directed to” a patent ineligible concept. If so, “we consider the elements of each claim both individually and ‘as an ordered combination’ to determine whether the additional elements ‘transform the nature of the claim’ into a patent eligible application.” Id. at 1365.

But, the Federal Circuit decided that “[t]he mere fact that something is disclosed in a piece of prior art, for example, does not mean it was well-understood, routine, and conventional.” Id. at 1369. It went on to say: “[t]he question of whether a claim element or combination of elements is well-understood, routine and conventional to a skilled artisan in the relevant field is a question of fact. Any fact, such as this one, that is pertinent to the invalidity conclusion must be proven by clear and convincing evidence.” Id. at 1367. The Federal Circuit effectively raised the minimum requirement for patent invalidity.

It is no longer enough for a court, board, or examiner to conclude patent invalidity due to a plausible showing of “not significantly more.” The invalidator must see support for such an argument with clear and convincing evidence. This applies to both patent validity disputes, and patent prosecution. Indeed, the USPTO has instructed its patent examiners to provide evidence to substantiate their “not significantly more” arguments during the patent prosecution process. This may raise the acceptance rate for patents that otherwise would be rejected.

Using Alternative Forums

As the law and industry evolve, litigants are increasingly seeking resolution for their patentability disputes in new forums. Many disputes now take place in forums such as the PTAB and the ITC, which can offer streamlined processes that resolve faster than District Court litigation. Practitioners, particularly in the ever-evolving life sciences industry, should strategize to take advantage of the most appropriate forum given their differences and limitations.

The Patent Trial and Appeals Board (PTAB)

While the PTAB is an increasingly popular forum, practitioners should keep in mind key  differences between the PTAB and the courts when planning patent infringement actions.  A case in point is Phigenix, Inc. v. ImmunoGen, Inc,845 F.3d 1168 (Fed. Cir. 2017). Phigenix initiated an Inter Partes Review (IPR) against ImmunoGen’s patent for an antibody maytansinoid conjugate before the PTAB and was ultimately unsuccessful. On appeal to the Federal Circuit, ImmunoGen filed a motion to dismiss based on Phigenix’s lack of standing which was granted.

While Phigenix’s original cause of action did not require a “case or controversy” and “injury in fact” because the PTAB is an Article I Tribunal, the Article III Federal Circuit where an appeal was sought does.  Phigenix informed the PTAB that it brought the IPR to bolster the value of its patent portfolio — a “cause of action” that does not rise to the level of standing required for an Article III court leading to dismissal based on standing.  This case serves as a good reminder of forethought and procedural awareness in deciding between forums.

The International Trade Commission (ITC)

Although not as popular as the PTAB, the ITC is an increasingly utilized forum for life sciences patent disputes. This is possible because Section 337 of the Tariff act of 1930 specifies that:

“The importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that… are covered by the claims of a valid and enforceable United States patent” is “unlawful.” 19 U.S.C. §1337

In light of this prohibition, patent owners often bring claims against importers of goods that may infringe on patented inventions. While Section 337 of the Tariff act of 1930 does not create a cause of that encompasses patent eligibility, as with many patent matters, the issue of patent infringement may turn on patent eligibility in an ITC Section 337 hearing.

One of the most notable such examples is Administrative Law Judge (ALJ) Shaw’s analysis in the ITC investigation, Certain Portable Electronic Devices and Components Thereof, (337-TA-994).  ALJ Shaw evaluated whether the organizational methods, claimed in U.S. Patent No. 6,928,433, were patentable. Using the Mayo/Alice test, ALJ Shaw determined that the claim in question was “directed to the abstract idea of an organizational hierarchy,” and invalidated the patent. This shows that patent owners, engaging in any form of patent dispute must be aware of the implications of patent validity and also be aware of the forum’s ability to make a determination of patentability. It is possible to walk into an ITC investigation with a valid patent and leave without it.

Looking Ahead

As the jurisprudence continues to evolve, practitioners can be confident that there will be many more changes in the patent eligibility battle. Life science patents have formed the foundation of the patent eligibility landscape and they continue to significantly impact the law and industry as they have over the past decade. As we look forward at the changing patentability landscape, it is likely that practitioners will see life science patents at the forefront of the changes to come.

A federal court in California agreed to remove the two songwriters of the Disney animated film Frozen from a copyright infringement lawsuit, for now. The lawsuit claims that the hit song “Let It Go” was copied from a Chilean song called “Volar,” and that the two songs are so strikingly similar that Disney could not claim its song was independently created.

The plaintiff, Jamie Ciero, originally filed the lawsuit in November 2017 wherein he alleged that the songwriters, Bobby Lopez and Kristen Anderson-Lopez, copied “quantitatively and qualitatively distinct, important, and recognizable portions of his song.” This included note combinations, hooks, and melodies that are, according to Ciero, almost identical to those in his song.

Copyright infringement occurs when someone uses a copyrighted work without permission of the copyright holder. A copyright holder has certain exclusive rights to his or her work, including the right to reproduce, distribute, display, or perform the protected work, as well as the right to make any derivative works (like sequels or spin-offs) from the original. A copyright owner’s rights are limited, however, by the doctrine of fair use, which allows copying for purposes of education, journalism, commentary, and criticism.

According to the Copyright Act, a copyright owner has three years from the date of to bring suit assuming the owner knew or should have known about the infringement. Evaluation of when an owner’s claim arises for purposes of the three-year statute of limitations is often a complicated process and very fact sensitive.

Attorneys for the Frozen team argued that the clock had already run out on any copyright infringement lawsuit, as the film had been released in November of 2013 and Ciero waited four years to bring suit. The court agreed, and removed the songwriters from the suit, observing that Ciero should have “known about ‘Let It Go’ prior to November 23, 2014,” as the song had been a smash hit and even won an Academy Award for Best Original song.

The fight might not be over just yet. According to the Supreme Court in Petrella v. MGM, 134 S. Ct. 1962 (2014), a copyright owner who is aware of an infringed can sit back and wait for years until the infringer’s profits justify the cost and effort of suing and then bring the lawsuit. In that case, the copyright owner will only be able to collect damages for the three years prior to suit. As such, every separate act of infringement gives rise to a separate cause of action, and is subject to a separate statute of limitations clock.

The California court has given Ciero the opportunity to amend its complaint to take another shot at the dismissed defendants. This time, he should include “all factual allegations supporting his claims . . . because that opportunity to amend his complaint might be his last,” according to the court.

The U.S. Supreme Court recently issued its long-awaited decision on the validity of class action waivers in employment arbitration agreements. In Epic Systems Corp. v. Lewis, a 5-4 decision, the Supreme Court held that such waivers are valid and must be enforced as written. In reaching this conclusion, the Court rejected the position that class action waivers are invalid because they violate an employee’s right to engage in protected concerted activity under the National Labor Relations Act (NLRA).

The core highlights of the Supreme Court’s decision are as follows:

• The Federal Arbitration Act (FAA) favors the enforcement of employment agreements, and courts are required to enforce terms of employment agreements under the FAA. This includes terms requiring individualized arbitration.
• Although the FAA has a savings clause allowing courts to invalidate employment agreements “upon such grounds as exist at law or in equity for the revocation of any contract,” this applies only to contract defenses such as “fraud, duress or unconscionability.”
• Congress never intended for the NLRA to override the FAA. Moreover, class actions are not the type of concerted activities protected by Section 7 of the NLRA. Instead, the NLRA focuses on the right to organize and bargain collectively. It does not address the matters of arbitration or the right to bring class or collective actions.
• The National Labor Relations Board’s (NLRB’s) contrary view was not entitled to deference because it involved interpretation of the FAA, which falls outside the NLRB’s statutory authority.

In an opinion speaking for the four dissenting judges, Judge Ruth Bader Ginsburg criticized the majority’s decision as “egregiously wrong,” and as sanctioning employee oppression:

“[T]he edict that employees with wage and hours claims may seek relief only one-by-one does not come from Congress. It is the result of take-it-or-leave-it labor contracts harking back to the type called “yellow dog,” and of the readiness of this Court to enforce those unbargained-for agreements. The FAA demands no such suppression of the right of workers to take concerted action for their ‘mutual aid or protection.’”

The Supreme Court’s decision resolves the uncertainty that prevailed over the enforceability of class action waivers in employment arbitration agreements. In 2012, the NLRB held that class action waivers in the employment context violate the NLRA because they bar employees from exercising their right to act concertedly for mutual aid and protection under Section 7 of the statute. This set off a series of splits in authority in which some of the federal circuit courts of appeal affirmed the NLRB’s reasoning and other circuits rejected it. The Seventh Circuit, sitting in Chicago, was one of the circuits siding with the NLRB’s view. The Supreme Court’s decision settles that split, holding that these agreements arevalid and enforceable.

What This Means for Employers

In various articles, we have reported on the benefits that employment arbitration agreements with class action waivers can provide for employers. (See “Employee Arbitration and Class Action Waiver Agreements Help Limit Employer Liability and Lower Costs” and “Class Action Waivers: Should Employers Be Adopting Them in Their Employment Agreements?”)

The following scenario is typical of what a class action waiver agreement is designed to avoid:

An employee or a couple of employees file suit claiming they were not paid overtime pay either because they were misclassified as exempt employees or independent contractors, or because they worked certain pre- or post-shift time or off-the-clock time that was not counted as time worked in computing their overtime compensation. The lawyer bringing the lawsuit styles it as not only being brought on behalf of the named plaintiff(s) but also on behalf of “all other similarly situated employees” and seeks collective action or class certification from the court. This creates great pressure on the employer: the larger the number of employees in the sought-after class, the greater potential claimed owed wages. The plaintiffs’ lawyer will also seek liquidated damages (which is an additional amount equal to the amount of wages claimed), plus payment of his or her attorneys’ fees. In this way, the potential exposure can easily reach well into the six-figure range or beyond. The risks and potential costs of litigation often force the employer into an expensive settlement – even if the employer may not have engaged in wrongdoing.

By implementing employment arbitration agreements with class action waivers, the employer avoids this situation. The Supreme Court’s decision validating such agreements will likely result in more employers taking advantage of this mechanism. If an employer already utilizes arbitration agreements, adding a class action waiver provision should not entail much cost or expense, while providing the employer with a great benefit.

In making the decision whether to adopt such agreements, employers should nonetheless weigh certain considerations. The advantages are manifest: privacy, expedition, closure on the merits of the dispute, control over the process, avoidance of potential jury trials and, of course, lower cost and exposure.

But there are some other factors to be considered as well:

• Class and Collective Action Waivers May Not Be a Panacea: Arbitration awards are very difficult to appeal, so an employer may be stuck with an adverse award. That may then be used as a stepping stone for the plaintiff’s attorney to file similar arbitration claims for other employees.
• Consider Whether to Make Only Some Types of Workplace Disputes Subject to Arbitration:The Supreme Court’s decision involved a wage and hour claim of the type that is well-suited for class or collective action. But other types of workplace disputes may not be. For example, sexual harassment claims are typically highly individualized and may not be suitable for class treatment. Also, the #MeToo movement has mobilized against employers that compel the use of private methods such as arbitration to resolve harassment claims. Given that harassment claims are usually brought by single plaintiffs who do not seek class action treatment and are typically individualized cases, employers may want to consider whether to include such types of disputes in their arbitration agreements.
• Consider How Employees May React to Implementing Arbitration/Class Waiver Agreements: If imposing a company-wide arbitration/class action waiver requirement may be negatively received, then consider whether or when to implement, perhaps in conjunction with a bonus rollout or an annual salary review.
• Arbitration/Class Action Waiver Agreements Must Still Meet Certain Standards: While arbitration/class action waiver agreements will be enforceable generally, employees can still attempt to void them by claiming unconscionability, fraud or duress. Also, if an arbitration agreement does not include certain procedural protections, or if the remedies allowable are less than those provided by statute (e.g., the employees cannot recover liquidated damages or attorneys’ fees), then a court may not enforce it. An employer should therefore work with experienced employment law counsel to prepare or review its arbitration/class waiver agreement.

What’s Next?

The Supreme Court majority began and ended its decision by observing that it was simply interpreting the FAA as written and that if Congress felt it needed to amend the FAA to bar arbitration/class action waiver employment agreements, it can do so. Given the current political makeup of Congress, that is not likely to happen in the near future, but it is always a possibility with a future Congress. For now, however, the debate is over.