The National Law Forum

Attorneys Facing An Uphill Battle In Litigation Should Consider Option Value When Arguing Valuation

Let me tell you a sad story; Joe owned a marketing company and earned a prosperous living for several years. Joe’s business was growing rapidly and all seemed right with the world. Then a trusted employee left Joe’s firm, taking with him half of Joe’s customers in violation of his non-compete agreement. Joe’s business slowly suffered and lost customers until eventually his firm declared bankruptcy.

Joe sued his former employee and asked for damages related to the value of his firm. Joe’s attorney argued to the court for compensation based on the value of Joe’s firm that was destroyed by the employee. Yet the attorney left out one critical question when arguing the case; how should the law account for the fact that Joe’s business was growing rapidly until the employee left?

Perhaps Joe had several big accounts that he might have been able to sign had the employee not engaged in unfair trade practices. Without taking these factors into account, Joe’s attorney is under-representing the value of Joe’s claim and leaving compensation on the table for no reason.

In finance, this idea of the possibilities that could plausibly occur in the future is called an embedded option or a real option and it is extremely useful in a variety of cases from divorce proceedings and business bankruptcies to merger disputes and matters of economic harm. In the scenario above, Joe’s firm had the ability to potentially continue to grow and become even more successful than it was at the time before Joe’s employee left. Hence the damage done to Joe is greater than simply the lost historical value of the firm. He has also lost the possibility of much more value in the future.

The crux of modern asset valuation is based on a concept called the time value of money. Essentially the idea is that because money received in the future is worth less than money received today, we can value assets or a business based on their associated cash flows and an appropriate discount rate. This approach forms the basis of everything from stock valuation on Wall Street to proper methods for computing interest rates in bankruptcy. This facet of valuation is well understood. But what about the future opportunities or chances of cash flows that are uncertain? That’s what embedded options address.

The concept of embedded options might seem abstract or even too nebulous for many judges to buy into in a court case, but the reality is that real options have significant value and are often a subject of serious financial negotiations. Particularly for small firms, real options are often important and serve as the basis for various types of convertible debt and warrant grants.

As a finance professor and frequent consultant to companies on matters of asset valuation and financial forecasting, I have long taken it for granted that the techniques used in the finance profession were well understood and universally applied across many other industries including the law. I was very surprised to learn when I started doing expert consulting work, this is not the case. Lawyers often neglect to ask for damages based on real options in their cases. This leaves an important tool out of the litigation toolbox.

In discussing real options thus far, it might seem like they are primarily useful for parties alleging damages, yet they can also be useful for defendants as well. In particular, defendants need to understand how real options are valued and also understand the four appropriate metrics for calculating economic harm as it relates to options (compensating variation, equivalent variation, Paasche indices, and Laspeyres indices). I’ll talk more about these in a future column though.

When valuing real options, there are various statistical techniques that can be used. The math is not necessarily important here, but the concepts are. Essentially, real options increase in value in situations where there is greater uncertainty, and when interest rates in the broader economy rise. Those conditions make real options an exciting tool in today’s courts. With the Fed finally starting to raise interest rates, real options should become marginally more valuable. More importantly, situations with significant amounts of uncertainty lead to greater volatility in intrinsic asset prices.

These volatile situations are often the very situations that lead to court cases for attorneys – a business deal that went wrong leads to a bankruptcy but could have led to a hugely successful company, a merger agreement could result in substantial cost savings for both firms or substantial value destruction for investors and is being challenged by shareholders, a wrongful death case for an individual in the prime of their lives leaves so many possible futures unexplored. Thanks to new statistical techniques and greater computing power, these situations and others can be effectively modeled through computer simulations and valued by economists in ways that would have been unimaginable a decade ago.

Representing clients fairly and to the best of one’s ability in court is the foremost duty of an attorney. To do that, attorneys need to understand the tools of business and the cutting-edge techniques being used in asset valuation. Failing to use these tools is not only a disservice to clients, but a severe hindrance to the attorney as well. In a competitive legal market, the Joes of the world will flock to those attorneys that free themselves to position their clients for maximum success in court.

Article By Dr. Michael McDonald of Fairfield University Dolan School of Business

The Proposed Political Subdivision Regulations: A Puzzling Reference Impacts Legal Framework of Official Legal Signals

Treasury recently issued proposed regulations that tell us whether an entity is a “political subdivision” that can issue tax-exempt bonds on its own behalf. One requirement is that an entity must serve a “governmental purpose” to be a political subdivision. The proposed regulations say that an entity is only organized for a governmental purpose if the entity operates “in a manner that provides a significant public benefit with no more than incidental benefit to private persons.” As support for this statement, the proposed regulations contain this citation: “Cf., Rev. Rul. 90–74 (1990–2 CB 34).”

This year marks the 90th anniversary of The Bluebook: A Uniform System of Citation, and last year, the 20th edition of the text was published. The Bluebook is written by law review editors at several top-tier law schools. Depending on your perspective, it is either what it purports to be (a uniform system of citation) or a loathsome testament to the “reflex desire of every profession to convince the laity of the inscrutable rigor of its methods.”[1] (Or both.) There have been several pretenders to the throne, including the Maroonbook, created at the University of Chicago law school years ago, which has faded away, and the ALWD Citation Manual, created by teachers of legal writing in law school as a more user-friendly alternative. The ALWD manual has been adopted by a few jurisdictions, but the Bluebook still reigns. Each text provides for the usage of “citation signals” that introduce the citation and explain its relevance to the point that the author is making; the “Cf.” signal in the proposed political subdivision regulations is an example.

The signal “cf.” is an abbreviation for the Latin word “confer,” which translates to “compare.” It depends on which edition of The Bluebook you’re reading, but the 18^th Edition (we work on a shoestring budget here at The Public Finance Tax Blog), like most modern editions, says this about the “cf.” signal: “Cited authority supports a proposition different from the main proposition but sufficiently analogous to lend support. . . The citation’s relevance will usually be clear to the reader only if it is explained.” Among the signals that an author can use to show that the cited authority supports the position the author asserts, “cf.” is the weakest.

But because the proposed political subdivision regulations offer no other support for the position that an entity cannot provide more than incidental private benefits and remain a political subdivision, one can only believe that Treasury must have meant something entirely different and that, at long last, the lowly “cf.” signal might be taking on new prominence.

And now, members of the legal citation community are scrambling to react to what could be a revolution in citation signal usage.

“Just as Darwin had his finches and Mendel had his peas, we now have these proposed regulations from Treasury,” said one editor of ALWD. “I guess ‘cataclysm’ is probably too strong of a word to describe it,” she told The Public Finance Tax Blog. “But oh yeah, we definitely noticed.”

She told us that “we at ALWD consider ourselves more describers of ‘what is’ in legal citation practice, rather than dispensers of ‘what ought to be’ like those silverspoons over at The Bluebook.”[2]

“The fact is,” the ALWD editor continued, “the meaning of ‘cf.’ has changed many times over the years, [3] and we may be witnessing the latest evolution of the phrase here. Who says that a government agency can’t be on the cutting edge of social change in important areas like citation policy?”

“It’s certainly true that ‘cf.’ has always been the signal that gives courts and lawyers the hardest time to understand,”[4] another editor told us. “But who says that regulations – particularly tax regulations – are supposed to be easy to understand?”

Over at The Bluebook, the editors were a bit less perturbed. “Look, we make the rules here,” said one editor, swatting away a fair trade soy latte offered up by a cowering 2L line-slugger. “We are mindful of the actual – I SAID NO FOAM! GET IT RIGHT, OR WE’RE CANCELING THE 5-HOUR BLUEBOOK EXAM FOR TOMORROW – usage of these terms, though,” she said, “and we’re obviously going to resist changing our minds based on a single usage, even if it comes from the federal government.”

“In the past, we’ve resisted changing our minds based on some of the more fatuous uses of the cf. signal,[5] so we want to wait and see whether this is some kind of joke or mistake or just a passing fad, using ‘cf.’ to introduce the sole source of authority for a proposition.” She continued, “but it appears that this might be a good-faith attempt to finally give ‘cf.’ the rightful place it deserves instead of leaving it buried at the bottom of the pile of citation signals that show support.”

“But we’ve really got our hands full with preparations for the 21st edition, and dealing with those maniacs over at Baby Blue ripping off our work to worry about this, though. And no, all you weisenheimers; cf. does not stand for ‘couldn’t find,’ and no you’re not funny.”

It’s obviously easy to criticize the furor over the potential elevation of the status of the lowly “cf.” signal to something more as a tempest in the world’s nerdiest teapot. It’s not as though these mundane citation signal questions are literally[6] a matter of life and death.[7]

Calls to Judge Richard Posner, eminent judge of the U.S. Court of Appeals for the Seventh Circuit, and a frequent critic of the inanity of the world of legal citation, were left unreturned, although I think I heard the crackling of a bonfire in the background.

Article By John W. Hutchinson of Squire Patton Boggs (US) LLP

^{[1] Richard Posner, The Bluebook Blues, 120 Yale L. J. 850, 860-61 (2011).}

^{[2] Cf. (not really) Ian Gallacher, Cite Unseen: How Neutral Citation and America’s Law Schools Can Cure our Strange Devotion to Bibliographical Orthodoxy and the Constriction of Open and Equal Access to the Law, 70 Alb. L. Rev. 491, 500, at n. 48 (2007) (citing Alex Glashausser, Citation and Representation, 55 Vand. L. Rev. 59, 78 (2002), as “praising the ALWD Manual as a populist instrument that promulgates citation rules predicated upon a consensus among legal professionals, rather than “the judgment of student editors at elite law schools”).}

^{[3] Ira P. Robbins, Semiotics, Analogical Legal Reasoning, and the Cf. Citation: Getting our Signals Uncrossed, 48 Duke L.J. 1043, 1050 (March 1999) (“The authors of The Bluebook altered its definition – albeit subtly – almost every time the manual was printed between 1947 and 1996.”)}

^{[4] See A. Darby Dickerson, An Un-uniform System of Citation: Surviving with the new Bluebook (Including Compendia of State and Federal Court Rules Concerning Citation Form), 26 Stetson L. Rev. 53, 221, at n. 90 (1996) (citing Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 938 n.14 (2d Cir. 1984); Palmigiano v. Houle, 618 F.2d 877, 881 n.5 (1st Cir. 1980); Doleman v. Muncy, 579 F.2d 1258, 1264 (4th Cir. 1978); Gates v. Henderson, 568 F.2d 830, 837-38 (2d Cir. 1977); Local 194, Retail, Wholesale & Dep’t Store Union v. Standard Brands, Inc., 540 F.2d 864, 867 n.4 (7th Cir. 1976); Givens v. United States, 644 A.2d 1373, 1376 (D.C. App. 1994) (Mack, S.J., dissenting); Connell v. Francisco, 89a P.2d 831, 838 (Wash. 1995) (Utter, J., dissenting); see also Givens, 644 A.2d at 1374 n.3 (concerning the “but cf.” signal)). Dickerson goes on: “As one reviewer observed: ‘The introductory signals approved by the Bluebook have been the source of dispositive judicial debate. A single “cf.” signal in a Supreme Court decision fostered extensive scrutiny among the circuits, and, with singular irony, the Bluebook was the source of ultimate authority in settling the legal questions raised in the cases.’ Peter Phillips, Book Note, 32 N.Y.L. SCH. L. REV. 199, 199-200 (1987) (reviewing the Fourteenth Edition) (footnotes omitted). The case at issue was Stone v. Powell, 428 U.S. 465, 494 n.36 (1976). See Phillips, supra, at 200 n.8.”}

^{[5] See, e.g., Peter Lushing, Book Review, 67 Colum. L. Rev. 599, 601 (1967) (providing a review of The Bluebook’s Eleventh Edition) (“Use cf. when you’ve wasted your time reading the case.”); Hohri v. United States, 793 F.2d 304, 312 n.4 (D.C. Cir. 1986) (Bork, J., joined by Scalia, Starr, Silberman, & Buckley, JJ., noting that the use of the cf. signal means that the cited authority is “probably inapposite”).}

^{[6] Oxford English Dictionary, Third Ed., Sept. 2011, item I(1)(a), (b), but not (c). (available online at http://www.oed.com/view/Entry/109061?redirectedFrom=literally).}

^{[7] Gallacher, supra n. 2 at 536, n. 38 (“At least one capital punishment appeal appears to have been decided based on the Supreme Court’s interpretation of a bibliographical signal, “cf.,” and the signal’s meaning in the context of the prisoner’s brief. Lambrix v. Singletary, 520 U.S. 518, 528-29 (1997).”). The language from the Lambrix opinion: “And it introduced that lone citation with a “cf.”–an introductory signal which shows authority that supports the point in dictum or by analogy, not one that “controls” or “dictates” the result.” 520 U.S. at 529.}

Health Care Companies Agree to “Core Commitments” to Improve Access to EHR

Last month, the Department of Health and Human Services (HHS) announced that a number of large health care companies and providers had “agreed to implement three core commitments” to improve access to electronic health records (EHR). HHS touted the commitments as a significant step toward increased EHR interoperability.

The three core commitments to which the health care entities agreed are as follows:

Consumer Access: To help consumers easily and securely access their electronic health information, direct it to any desired location, learn how their information can be shared and used, and be assured that this information will be effectively and safely used to benefit their health and that of their community.
No Blocking/Transparency: To help providers share individuals’ health information for care with other providers and their patients whenever permitted by law, and not block electronic health information (defined as knowingly and unreasonably interfering with information sharing).
Standards: Implement federally recognized, national interoperability standards, policies, guidance, and practices for electronic health information, and adopt best practices including those related to privacy and security.

HHS highlighted the number and importance of the entities that have agreed to this “Interoperability Pledge.” According to HHS, the nation’s five largest private health care systems signed the Interoperability Pledge, as well as “[v]endors who provide 90 percent of hospital electronic health records used nationwide.”

Notably, the three commitments in the Pledge are not enforceable. At most, the Interoperability Pledge represents an agreement by its signatories that access and interoperability are key goals of EHR use.

Article By Philip Peisch of Covington & Burling LLP

Department of Justice Launches Targeted Elder Justice Task Forces

Woman Pushing Man in Wheelshair On March 30, the Department of Justice (“DOJ”) announced the formal launch of 10 regional Elder Justice Task Forces designed to identify nursing homes and other long-term care (“LTC”) facilities that provide “grossly substandard care” to residents.

Similar to DOJ’s previously launched Medicare Fraud Strike Force and Health Care Fraud Prevention & Enforcement Action Team (“HEAT”) initiative, the newly created Elder Justice Task Forces will focus on coordination and information sharing among federal, state and local enforcement agencies to combat suspected cases of physical abuse and financial fraud. Each task force will consist of representatives from the U.S. Attorneys’ Offices, state Medicaid Fraud Control Units, state and local prosecutors’ offices, the Department of Health and Human Services, state Adult Protective Services agencies, Long-Term Care Ombudsman programs and other law enforcement officials.

Part of the larger DOJ Elder Justice Initiative, the task forces will have a national footprint with locations in the following districts: Northern District of California, Northern District of Georgia, District of Kansas, Western District of Kentucky, Northern District of Iowa, District of Maryland, Southern District of Ohio, Eastern District of Pennsylvania, Middle District of Tennessee and the Western District of Washington.

The new Elder Justice Task Forces signal heightened interest and attention on the LTC industry, a move that comes on the heels of last summer’s Centers for Medicare and Medicaid Services’ proposed rule to overhaul requirements for participation by LTC facilities in federal health care programs.

Article By Jessica Talati of Barnes & Thornburg LLP

Are they Worth Price of Paper They’re Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers. The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers. Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable. In later 2014 and 2015 Agreements, Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it. Language also was added to explain the significance of arbitration and the right to opt-out. Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too). As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class. However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation. Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance. Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable. In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements. For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement. While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument. He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees. It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law. Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention. For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration. For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber. Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers. As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable. Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written?

Arbitration agreements are evaluated on a case-by-case basis. While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable. The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself. This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things. The substantive component looks at the unfairness of the agreement. Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship. Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.
While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.
If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.
Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.
The remedies available in arbitration should be similar to those available in court.
Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC

Are they Worth Price of Paper They're Printed On? – Ubersization of Arbitration Clauses

Drivers v. Uber – The Arbitration Dispute

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

Can an enforceable arbitration agreement even be written?

Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.
While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.
If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.
Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.
The remedies available in arbitration should be similar to those available in court.
Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC

EPA OIG Will Evaluate EPA’s Management of Resistance Issues Related to Herbicide Tolerant GE Crops

EPA On March 25, 2016, the U.S. Environmental Protection Agency’s (EPA) Office of Inspector General (OIG) sent a memorandum to Jim Jones, Assistant Administrator, Office of Chemical Safety and Pollution Prevention (OCSPP), announcing that it plans to begin preliminary research to assess EPA’s management and oversight of resistance issues related to herbicide tolerant genetically engineered (GE) crops. OIG states that its review will include the Office of Pesticide Programs (OPP), as well as other applicable headquarters and regional offices. OIG’s objectives are to determine:

What processes and practices, including alternatives, EPA has provided to delay herbicide resistance;
What steps EPA has taken to determine and validate the accurate risk to human health and the environment for approved pesticides to be used to combat herbicide resistant weeds; and
Whether EPA independently collects and assesses data on, and mitigates actual occurrences of, herbicide resistance in the field.

OIG states that the anticipated benefit of the project “is a greater understanding of herbicide resistance[,] which will lead to an enhancement of EPA’s herbicide resistance management and oversight.”

Commentary

Pesticide resistance is not a new issue and is one that EPA has affirmatively addressed when granting registrations for new products, GE or not, for some time. In fact, that newer chemistries often have a more niche mode of action to reduce potential toxicity concerns has led some observers to speculate that greater resistance is one potential trade-off for the development of less toxic materials.

This “investigation” may appear to some to be a response to concerns raised by critics of GE crops generally and to a recent EPA decision to approve Enlist Duo herbicide, a new formulation of 2,4,D- and glyphosate designed to address the problem of weed resistance to glyphosate-tolerant crops. Glyphosate tolerant crops were first approved some years ago, and their use was so broadly and readily adopted that issues have arisen with regard to potential resistance to some weed species. EPA is currently expected to approve another GE strain, Dicamba-tolerant crops, to control glyphosate tolerant weeds.

To critics of GE crops, using more herbicides to control problems caused by what they claim is overuse of another herbicide is evidence of a troubling “pesticide treadmill,” which they believe should not have been allowed to occur in the first place. Rebutting this criticism, others assert that resistance is a problem for all pesticides, not only genetically modified ones, and that with sufficient controls, resistance can be delayed, if not avoided. Registrants point out that it is very much in their self-interest to take steps to avoid resistance to their products — once that occurs, the market viability of the product is significantly reduced.

ARTICLE BY Lisa M. Campbell, James V. Aidala & Carla N. Hutton of Bergeson & Campbell, P.C.

Supreme Court Rules Against Freezing “Untainted” Assets

In a ruling that could have far-reaching implications for criminal defendants’ right to counsel of their choice, the Supreme Court decided on March 30, 2016 that the government cannot freeze “untainted” assets that are not related to any alleged wrongdoing. Reaching this conclusion, the Court overturned an Eleventh Circuit decision affirming an order freezing a defendant’s assets that, while not obtained as a result of, or traceable to, the criminal conduct alleged, represented property of “equivalent value” to the illegal proceeds.

Writing for the majority in Luis v. United States, 578 U.S. ___ (2016), Justice Breyer, joined by Justice Roberts, Ginsburg and Sotomayor, drew a bright constitutional line, rooted in principles of property law, between tainted and untainted assets. The Court stated that the latter “belongs to the defendant, pure and simple. In this respect, it differs from a robber’s loot, a drug seller’s cocaine, a burglar’s tools, or other property associated with the planning, implementation, or concealing of a crime.” Weighing these property rights, together with the “fundamental character” of a criminal defendant’s Sixth Amendment right to counsel, against the government’s stated interests, the Court reasoned that “in our view, insofar as innocent (i.e., untainted) funds are needed to obtain counsel of choice, we believe that the Sixth Amendment prohibits the court order that the Government seeks.”

The Court found further support for its decision in the fact that, absent the ability to use untainted funds to secure counsel, “[t]hese defendants, rendered indigent, would fall back upon publicly paid counsel, including overworked and underpaid public defenders” and that “increasing the government-paid-defender workload [would] render less effective the basic right the Sixth Amendment seeks to protect.”

The majority’s opinion also sought to address the concerns of the dissenting justices that, given the fungible nature of money, “sometimes it will be difficult to say whether a particular bank account contains tainted or untainted funds.” Justice Breyer noted that “the law has tracing rules that help courts implement the kind of distinction we require in this case.”

Notably, while the petitioner’s assets in Luis had been frozen under a statute applying to violations of health care laws,” see 18 U.S.C. § 1345(a), the same statute also applies to a wide range of white collar crimes, including bank theft and bribery, as well as money laundering.

Article By Glen A. Kopp & David A. Shargel of Bracewell LLP

Supreme Court Rules Against Freezing "Untainted" Assets

Article By Glen A. Kopp & David A. Shargel of Bracewell LLP

The Smart Phone Patent Saga Continues: Apple Inc. v. Samsung Electronics Co., Ltd., et al.

In a case involving suits, countersuits and multiple appeals by the two giants of the mobile phone space, the US Court of Appeals for the Federal Circuit reversed a jury’s finding of infringement, voiding the accompanying award to Apple of more than $119 million. Apple Inc. v. Samsung Electronics Co., Ltd., et al., Case Nos. 015-1171, -1195, -1994 (Fed. Cir., Feb. 26, 2016) (Dyk, J).

In this case’s third appeal, the Federal Circuit was asked to deal with “the core infringement and invalidity issues with respect to the asserted patents.” At issue were five patents asserted by Apple against Samsung (four of which a jury found to be infringed) and two patents asserted by Samsung against Apple (one of which the same jury found to be infringed).

After the district court entered judgment on the jury verdict ($120 million to Apple and $160,000 to Samsung), both sides appealed.

The Apple Patents

With regard to the Apple “click structure” patent, the Federal Circuit found that no reasonable jury could have concluded that the accused Samsung devices included the claimed “analyzer server,” and reversed the judgment of infringement. Before trial, neither party sought construction of “analyzer server,” agreeing that it should be given its ordinary meaning. On the last scheduled day of the trial, the Federal Circuit construed this term (in the Motorola case) as “a server routine separate from a client that receives data having structures from the client.” The district court adopted this construction and permitted the parties to recall their expert witnesses to provide testimony under this construction. However, the Federal Circuit concluded that Apple failed to present sufficient testimony that the accused software library programs in the Samsung phones ran separately from the programs they served (i.e., the Browser and Messenger applications), as required by the Federal Circuit’s construction. Accordingly, the Federal Circuit reversed the district court’s denial of judgment as a matter of law (JMOL) of non-infringement.

Apple also asserted its “slide to unlock” patent, whereby a user can slide a moving image across the screen with a finger in order to unlock the phone, and its “auto correct” patent, whereby a phone automatically corrects typing errors. At the district court, Samsung sought JMOL that both of these patents were invalid as obvious. The Federal Circuit agreed.

For the “slide to unlock” patent, Apple did not dispute that the prior art combination disclosed all of the claimed features. Rather, Apple argued that the jury could have reasonably found that one of the references taught away from using the “slider toggle” feature, and that a skilled artisan would not have been motivated to combine these references, since the slide toggle reference describes a wall-mounted touch-screen device, not a mobile phone. The Federal Circuit disagreed, concluding that “[t]he fact that [the prior art reference] notes that users did not prefer the particular design of the slider toggle is not evidence of teaching away.” The Federal Circuit reasoned that a motivation to use the teachings of a particular prior art reference need not be supported by a finding that the feature is the “preferred, or the most desirable” option.

The Federal Circuit also concluded that no reasonable jury could find that the reference is not analogous art since it concerned user interfaces for touch-screen devices, noting that the asserted patent and the reference both disclose essentially the same structure: a touch-screen device with software that allows the user to slide his or her finger across the screen to change interface states.

The Federal Circuit also dismissed Apple’s secondary considerations argument, noting that although Apple identified the unsolved problem as the lack of an “intuitive” method of unlocking a touch-screen portable device, it provided no evidence showing that the asserted need was recognized in the industry. With respect to industry praise, the Court noted that evidence of approval by Apple fans—who may or may not have been skilled in the art—is not legally sufficient.

With respect to copying, the Federal Circuit noted the only evidence of copying went to an unlock mechanism using a fixed starting and ending point for the slide—a feature disclosed in the prior art. Finally, with respect to commercial success, the Federal Circuit reasoned that Apple’s evidence was not sufficient to show a “nexus” between the patented feature and the commercial success of the iPhone. Accordingly, the evidence of secondary considerations was insufficient as a matter of law to overcome the prima facie obviousness case.

Apple also asserted its “universal search” patent that permits a user to search for results from both the phone and the internet based on a single search term. On appeal, the issue was whether the search feature on the Samsung phones “locates” information on the internet. The district court found that Samsung devices do not search the internet, but rather blend data previously retrieved from a Google server and a local database. Apple argued that the plain meaning of the claim covered search information previously downloaded from the internet, a construction the district court denied. The Federal Circuit agreed with the district court’s denial.

The Samsung Patents

Samsung asserted a patent directed to capturing, compressing and transmitting videos. In its claim construction order, the district court construed “means for transmission”—a means-plus-function claim limitation—to require software in addition to hardware. Samsung argued that the district court erred in its construction because the specification did not “require any software for transmission, and including such software [in addition to hardware] as necessary structure was error.” The Federal Circuit agreed with the district court that the term “transmission” implies communication from one unit to another, and the specification explains that software is necessary to enable such communication. The Federal Circuit noted that software is necessary because hardware alone does nothing without software instructions telling it what to do, and affirmed the district court’s construction of the term and the judgment of non-infringement.

As for Samsung’s patent directed to a camera system for compressing, decompressing and organizing digital files, the jury found that Apple had infringed, and the district court denied Apple’s post-trial motion for JMOL of non-infringement. Apple argued that no reasonable jury could have found that the Apple products met the “compressor” and “decompressor” limitations of the claim because these limitations require components that compress or decompress both still images and videos, and its products use separate and distinct components to compress and decompress still images and videos. The Federal Circuit rejected this argument, finding that Samsung presented testimony that identified a single Apple design chip with circuitry that performs compressing/decompressing methods for both images and videos.

Practice Note: Assuming this decision resolves the utility patent fight, the only remaining battle shifts to the Supreme Court of the United States, which has now agreed to hear Samsung’s appeal on the issue of damages in connection with design patent infringement. See CertAlert in this issue of IP Update.

Article By

Nitin Gambhir

McDermott Will & Emery

The National Law Forum

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