Obama Administration Delays Until 2015 Large Employer Shared Responsibility Requirements, Reporting and Tax Penalties

Dickinson Wright LogoOn July 2, 2013, the Department of Treasury announced a one-year delay in the employer shared responsibility mandate under the Affordable Care Act (“ACA”) and related information reporting.

Complexity Leads to Delayed Reporting Implementation

The Department said that over the past several months, the Administration engaged in dialogue with businesses about the new employer and insurer reporting requirements under ACA. It took into account employer concerns about the complexity of the requirements and their need for more time to implement them effectively. Based on this, the Administration announced that it will provide an additional year, to January 1, 2015, before the ACA mandatory employer and insurer reporting requirements begin. It said the delay is designed to meet two goals. First, it will allow the Department to consider ways to simplify the new reporting requirements consistent with the law. Second, it will provide time to adapt health coverage and reporting systems while employers are moving toward making health coverage affordable and accessible for their employees. The Department said that within the next week, it will publish formal guidance describing the transition. In doing so, it said it is working hard to adapt and be flexible about reporting requirements as it implements the law.

More specifically, the Department said that the ACA includes information reporting (under Code Section 6055) by insurers, self-insured employers, and other parties that provide health coverage. It also requires information reporting (under Code Section 6056) by certain employers with respect to the health coverage offered to their full-time employees. The Department expects to publish proposed rules implementing these provisions this summer, after a dialogue with stakeholders – including responsible employers that already provide their full-time work force with coverage that exceeds the minimum employer shared responsibility requirements – in an effort to minimize the reporting, consistent with effective implementation of the law.

Once these rules have been issued, the Administration will work with employers, insurers, and other reporting entities to strongly encourage them to voluntarily implement this information reporting in 2014, in preparation for the full application of the provisions in 2015. It said that real-world testing of reporting systems in 2014 will contribute to a smoother transition to full implementation in 2015.

Delayed Implementation of Shared Responsibility and Tax Penalties

The Department said it recognizes that this transition relief will make it impractical to determine which applicable large employers owe the shared responsibility tax payment for not providing minimum essential coverage that is affordable and provides minimum value (under Code Section 4980H) for 2014. Accordingly, the Department is extending transition relief on the employer shared responsibility payments. Under the transition relief, applicable large employers will not owe either the $2,000 tax or the $3,000 tax for 2014. Any employer shared responsibility tax payments will not apply until 2015. During the 2014 transition period, the Department strongly encourages employers to maintain or expand the health coverage they provide to their employees.

Importantly, the Department said its actions do not affect employees’ access to the premium tax credits available under the ACA, although without employers reporting on who they provide coverage to, it is hard to see how the government will know which individuals qualify for a tax credit. Without more, this suggests that the Department intends that marketplaces for individuals will still be available January 1, 2014. It also suggests that most Americans will still have to obtain health benefits coverage or pay the individual tax. It is not clear if the notice employers are required to send to all employees by October 1, 2013 advising them of the marketplaces will still be required. The upcoming guidance should address this and other requirements. The Department also said that this delay does not change the compliance requirements under any other provision of the ACA. This suggests that the PCORI fee payable by July 31, 2013 is still due, the 90-day maximum waiting period for benefits eligibility in 2014 still applies, etc.

Hopefully, the upcoming guidance will provide more detail on on-going employer responsibilities. Until then, it appears that, presuming there are no additional delays or relief:

  • Employers will not have to count full-time employees and full-time equivalents in 2013 to determine if they are applicable large employers beginning January 1, 2014.
  • Applicable large employers will not have to determine their full-time employees for purposes of providing minimum essential coverage in 2014.
  • Applicable large employers who do not provide minimum essential coverage to all full-time employees in 2014 will not owe the $2,000 tax times all full-time employees (minus 30) if one full-time employee purchases coverage through a marketplace and obtains a tax credit or subsidy.
  • Applicable large employers that provide minimum essential coverage that is not affordable or does not provide minimum value in 2014 will not owe the $3,000 tax times all full-time employees who purchase coverage through a marketplace and receive a tax credit or subsidy.
  • Employers will not have to report to the government on their full-time employees and health plan coverage in 2014, although the government will urge voluntary reporting.
  • Employers that have been considering adjusting the structure of their workforces to minimize the number of their full-time employees appear to have additional time in which to analyze and implement workforce changes.
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What Windsor Means for Same-Sex Married Couples Seeking U.S. Immigration Benefits

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On June 26, 2013, the Supreme Court ruled in United States v. Windsor that Section 3 of the 1996 Defense of Marriage Act (“DOMA”) is unconstitutional. This Section of DOMA prohibited the U.S. government from conferring any federal benefits to same-sex couples who were married in any jurisdiction in the world.

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What does the Windsor decision mean for same-sex couples seeking immigration benefits?

On the immigration front, DOMA has been the main obstacle prohibiting married same-sex couples from accessing any immigration benefits that would otherwise flow to a spouse. For example, a U.S. citizen may sponsor a spouse who is a foreign national for permanent residence, and that foreign national spouse is considered an “immediate relative” of a U.S. citizen and exempt from annual numerical limitations on immigrants. Before Windsor, this option of “immediate relative” sponsorship did not exist for same-sex couples. Same-sex spouses also were not able to qualify for derivative nonimmigrant visas, or to qualify as dependents in an employment-based immigrant visa or adjustment of status process. Windsor has permanently shifted this landscape, with same-sex married couples being recognized as married and therefore able to access immigration benefits, provided they can demonstrate eligibility under the law for the specific benefits sought.

What marriages are valid under Windsor?

Generally, if a couple’s marriage is valid where it is performed, it is valid for purposes of immigration law. If you and your foreign national spouse were married in one of the 12 U.S. states that recognize same-sex marriage or in a foreign country that recognizes same-sex marriage, such as Canada, your green card sponsorship and application process should be treated exactly like the application of a different-sex couple. In fact, Edie Windsor, the plaintiff in Windsor, married her wife in Canada. To determine the validity of the marriage, U.S. Citizenship and Immigration Services (“USCIS”) focuses on the place where the marriage took place, not the location where one or both spouses live. This same principle is applied by other agencies within the Department of Homeland Security as well as at U.S. Embassies and Consulates.

Recent Guidance from the Federal Government

We expect government agencies to implement the Windsor decision swiftly. This means that immediately we will see changes at the various federal agencies that process applications for immigration benefits and visas. Secretary of Homeland Security Janet Napolitano issued a statement following the Court’s decision. She directed USCIS “to review immigration visa petitions filed on behalf of a same-sex spouse in the same manner as those filed on behalf of an opposite-sex spouse.” Recent Department of Homeland Security guidance is now clear that family-based immigrant visas will no longer “be automatically denied as a result of the same-sex nature of your marriage.” Following the Court’s decision, Secretary of State John Kerry stated that the Department of State (DOS) will work with the Department of Justice and other agencies “to review all relevant statues as well as benefits administered” by DOS. We expect to see guidance from U.S. Consulates in the coming weeks.

Conclusion

Same-sex couples who are married now have equal access to immigration benefits. The scope of the Windsor decision extends to same-sex spouses of individuals pursuing employment-based immigration benefits, such as green card and nonimmigrant visa sponsorship. We will continue to monitor developments in the law and provide guidance on immigration options for LGBT families.

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SAP Joins Patent and Trade Office against Versata in Eastern District of Virginia

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You may recall that Versata sued the Patent Office in the Eastern District of Virginia to challenge the PTAB’s decision to institute a CBM review of Versata’s U.S. 6,553,350 patent.  Versata Development Group, Inc. v. Rea, 1:13-cv-00328-GBL-IDD (E.D. VA).  It turns out that SAP America, Inc. and SAP AG (collectively “SAP”) filed a Motion to Intervene in that suit.  On June 24, 2013, Judge Gerald Bruce Lee granted SAP’s Motion to Intervene over Versata’s objections (the PTO did not oppose the motion).  The motion was granted under Federal Rule of Civil Procedure 24(b).  SAP is now an intervenor in the lawsuit.

SAP also filed a motion to dismiss the suit under Federal Rule of Civil Procedure 12(b)(1), alleging a lack of subject-matter jurisdiction.  That motion has not yet been decided; however, this is a very important case for all post-grant practitioners because it will likely give guidance as to which types of PTAB decisions may be appealed.   First, SAP argues that the decision is not appealable under the AIA, in particular 35 U.S.C. § 324(e).  Second, SAP contends that a decision to institute trial is not appealable because it is not a final decision by the PTAB; it is the very beginning of the PTAB trial.  In its Memorandum in Support of Motion to Dismiss, SAP stated:

First, Versata invokes the APA to challenge a decision by the Director of the United States Patent and Trademark Office (“PTO”) made on her behalf by the newly-created Patent Trial and Appeal Board (the “Board”). 37 C.F.R. §§ 42.2, 42.4. Specifically, Versata challenges the Board’s initial decision to institute a post-grant review proceeding. But under the America Invents Act (“AIA”), Congress expressly precluded judicial review of the exact decision that Versata seeks to challenge: “The determination by the Director whether to institute a post-grant review . . . shall be final and nonappealable.” 35 U.S.C. § 324(e). Simply put, the APA does not apply—and this Court cannot exercise jurisdiction—where, as here, a “statute precludes judicial review.” 5 U.S.C. § 701(a)(1).

SAP’s Memorandum in Support of Motion to Dismiss, page 1 (italics in original).

This is certainly an interesting development.  We will stay tuned into the future events of this matter.

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In a Pro-Employee World, U.S. Supreme Court Rulings Offer Employers Hope

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In a pair of important opinions released last week, both of which are helpful to employers, the U.S. Supreme Court raised the bar for employees asserting claims under Title VII of the Civil Rights Act, 42 U.S.C. § 2000e. In University of Texas Southwestern Medical Center v. Nassar, 570 U.S. _, No. 12-484 (2013), the Court ruled that an employee claiming retaliation must do more than show that retaliatory animus was a “motivating factor” for discipline – it must be the “but-for” cause.  In Vance v. Ball State University, 570 U.S. _, No. 11-556 (2013), the Court ruled that for employers to be held vicariously liable for the actions of a “supervisor,” the plaintiff must demonstrate that the “supervisor” had power to take a “tangible employment action,” such as transferring or terminating the employee. Authority merely to direct aspects of the employee’s work will not suffice.

Nassar and Vance represent significant victories for employers faced with Title VII retaliation and discrimination claims. The heightened requirements that charging employees now face should enhance an employer’s prospects for obtaining summary judgment and, failing that, impose a more rigorous hurdle for plaintiffs at trial.

Nassar Imposes More Stringent “But-For” Causation Test for Title VII Retaliation Claims

Plaintiff in Nassar was a physician of Middle Eastern descent. The defendant university hired him as a member of its medical faculty, and under the terms of the university’s affiliation agreement with a local hospital, the plaintiff also worked at the hospital as a staff physician. The plaintiff alleged that the University’s Chief of Infectious Disease Medicine harassed him because of her discriminatory “bias against Arabs and Muslims.” The plaintiff ultimately resigned from the university faculty, and accused his superior of discriminatory bias in his letter of resignation, which he sent to the university’s chair of Internal Medicine and other faculty members. The chair was allegedly dismayed by the public accusations of discrimination, and said that the chief must “be publicly exonerated” of the charges against her. When he learned that plaintiff had been offered a staff physician position at the hospital, the chair objected that the affiliation agreement required all staff physicians to also be faculty members, and the hospital therefore withdrew its offer to plaintiff.

Plaintiff brought suit under Title VII, 42 U.S.C. § 2000e, alleging that he had been constructively discharged by reason of the chief’s discriminatory harassment, and that the chair subsequently allegedly retaliated against him for complaining of that harassment. A jury found for plaintiff on both claims, but the Fifth Circuit affirmed only as to the retaliation claim, holding that retaliation claims under Title VII required a showing merely that retaliation was a “motivating factor” for an adverse employment action rather than its “but-for” cause.

The Supreme Court vacated that decision, concluding that “the text, structure and history of Title VII demonstrate that a plaintiff making a retaliation claim … must establish that his or her protected activity was a but-for cause of the alleged adverse action by the employer.” The Court reasoned that because Title VII’s anti-retaliation provision appears in a different section from the status-based discrimination ban, which utilizes the lesser “motivating factor” causation test, the “but-for” standard applies to Title VII retaliation claims. Accordingly, “Title VII retaliation claims require proof that the desire to retaliate was the but-for cause of the challenged employment action.” To establish a retaliation claim, employees must now show that their employer would not have taken the challenged employment action but for the employee’s protected activity.

Vance Limits “Supervisors” to Those with Power to Take a Tangible Employment Action

In a second critical decision for employers, plaintiff in Vance, an African-American woman, worked in the university’s Banquet and Catering Division of Dining Services. Plaintiff alleged that a fellow employee, a white woman named Davis, harassed and intimidated her because of her race.  Plaintiff sued under Title VII, alleging that her white co-worker created a racially hostile work environment. “The parties vigorously dispute[d] the precise nature and scope of Davis’ duties, but they agree[d] that Davis did not have the power to hire, fire, demote, promote, transfer, or discipline Vance.”

The District Court granted defendant summary judgment, holding the university was notvicariously liable for Davis’s alleged actions because she could not take tangible employment actions against the plaintiff and therefore was not a “supervisor.” The Seventh Circuit affirmed, and the Supreme Court granted certiorari to decide “who qualifies as a ‘supervisor’” under Title VII. The Court held that “an employee is a ‘supervisor’ for purposes of vicarious liability under Title VII [only] if he or she is empowered by the employer to take tangible employment actions against the victim” and affirmed.

In analyzing when an employer is vicariously liable for the actions of its employees, the Court defined “tangible employment actions” to include effecting “‘a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits.’” The Court specifically rejected the EEOC’s definition of “supervisor,” which tied “supervisor status to the ability to exercise significant direction over another’s daily work[,]” as “a study in ambiguity.” Hence, under Title VII, if an employee is not authorized to impose tangible employment actions against another, the employer cannot be vicariously liable for the subject employee’s alleged harassment.

Vance enhances an employer’s ability to limit the company’s responsibility for harassment. Employers should remain mindful of the duties of their employees, ensuring that only key management and supervisory personnel possess the power to effect a “significant change in employment status”. Clear definitions of an employee’s responsibilities should greatly limit any future claims of vicarious liability against employers. This more precise definition of “supervisor” should, like Nassar, increase the likelihood of dismissal at the summary judgment stage and help obtain favorable in limine and trial rulings.

Conclusion

Nassar and Vance afford significant advantages to employers defending against discrimination and retaliation claims.  Importantly, although the decisions themselves were concerned with claims arising under federal anti-discrimination (not just Title VII) laws, the Court’s reasoning may well find acceptance among state courts, which frequently apply the Title VII analysis to claims asserted under analogous state laws. Nassar and Vance are likely to prove valuable tools to employers defending against claims of discrimination and/or retaliation, increasing both the prospects of obtaining summary judgment and, if necessary, the odds of success at trial.

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New Requirement for Long-Term Care (LTC) Facilities That Arrange Hospice Services through a Medicare-Certified Hospice

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Effective August 26, 2013, the Centers for Medicare & Medicaid Services require that a long-term care, or LTC, facility that chooses to arrange for the provision of hospice services through a Medicare-certified hospice must have a signed agreement with the hospice delineating the services that will be provided by each.

New Condition of Participation Requirement for Long-Term Care Facilities

The Centers for Medicare & Medicaid Services (CMS) has added a new Condition of Participation (CoP) that requires that long-term care (LTC) facilities (that is, Medicare-certified skilled nursing and Medicaid-certified nursing facilities) that choose to arrange for the provision of hospice services through a Medicare-certified hospice must have in place a written agreement delineating the respective roles and responsibilities of each.  The CoP requires that the agreement, signed by an authorized official of the LTC facility and the hospice, must be in place before any hospice services can be provided through the arrangement by the hospice.  The new CoP requirement is effective August 26, 2013.

In its description of the requirement, published in the June 27, 2013, Federal Register, CMS explains that where LTC facilities and hospices provide many of the same services to residents who have elected the hospice benefit, the purpose of the agreement is to ensure that duplicative or conflicting services are not provided to the resident as part of the hospice benefit, and that there will be no missing hospice services.  CMS believes that the written clarification of the responsibilities of the LTC facility and the hospice will increase coordination of care for patients as well as foster communication between the two providers assisting patients and their families.  CMS also believes that the clear division of responsibilities and increased communication required by this new rule will help address the duplication of services criticized by the Office of Inspector General in a July 2011 report, and address situations where neither the LTC facility nor the hospice are providing a needed hospice service.

Options and New Requirement

An LTC facility has two options under the newly added CoP: it may arrange for the provision of hospice services through a written agreement with a Medicare-certified hospice specifying the services to be provided by the LTC facility and the hospice, or it may assist the resident in transferring to a facility that will arrange for the provision of hospice services when a resident requests a transfer.

If the hospice care is furnished in an LTC facility through an agreement with a Medicare-certified hospice, the agreement must ensure, among other things, that the hospice services meet professional standards and principles that apply to individuals providing services in the facility and to the timeliness of the services.  The regulations prescribe what must be addressed in the agreement.  For example, the agreement would specify that it is the LTC facility’s responsibility to furnish 24-hour room and board care, meet the resident’s personal care and nursing needs in coordination with the hospice representative, and ensure that the level of care provided is appropriately based on the resident’s needs.  The hospice’s responsibilities are delineated to include providing medical direction and management of the patient, nursing, counseling (including spiritual, dietary and bereavement), social work and medical supplies and drugs necessary for palliative care associated with the terminal illness.  The final regulation and CMS’ commentary published in the Federal Register provide considerable guidance to providers in developing new agreements, or amending existing agreements with hospices, to address the new requirement.

LTC facilities choosing to provide hospice services through arrangements with hospices without the required written agreement can face sanctions for their failure to meet the requirement of this new CoP.  While one commenter suggested extending the deadline for implementation of the rule to allow hospices and LTC facilities more time to develop agreements, CMS believes that the August 26, 2013, effective date is an adequate timeframe.

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Does a Valid Copyright Exist in the Song “Happy Birthday To You”?

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Ownership of a copyright in one of the most popular songs in the English language has recently been challenged in several lawsuits around the country.  At the heart of the dispute is whether the music publisher Warner Chappell legitimately owns a copyright in, and thus has the right to license (and enforce) the rights to, the ubiquitous song “Happy Birthday to You.”  Since it acquired a company in 1998 that claimed to own the rights in this song, some have estimated that Warner makes as much as $2M per year licensing the rights to use this song in various movies and television shows.  Two recently filed lawsuits are challenging this ownership claim and seek a ruling that the rights to the song have passed into the public domain.

The long and tortured history of the song, which has been methodically detailed by Professor Robert Brauneis in his excellent article on the topic, begins with the melody of the song which was originally written in the late 19th Century by two sisters, Mildred and Patty Hill.  Although there is still some dispute over the originality of the melody, Professor Bauneis’s research indicates it may have been wholly original even if loosely based on prior folk songs. What is undisputed, however, is that the Hill sisters’ melody was first published in a collection of children’s songs in 1893.  That melody (with different lyrics) was originally titled “Good Morning to All,” and was intended to be used as a greeting by teachers to their students.  What may be forever lost to history is who combined the current words with the Hill sisters’ melody and when. There is evidence from as early as 1911 that the current words and melody (i.e., the “Good Morning to All” melody) were being used together.

 Warner argues that its rights stem from two principal sources acquired over the years through many corporate mergers: (1) a 1935 piano arrangement of the melody of the song, which critics have noted is a specific arrangement of the song that is not the popular version known today, and (2) a copyright registration in a 1924 songbook containing the lyrics.

The suits challenge Warner’s claimed rights on several grounds. One is lack of originality. To be protected by copyright, a work must be sufficiently “original.”  Plaintiffs allege that Warner’s claimed versions of the song are not original enough, and do not protect the version of the song we know today.  Second, they allege that the version of the music in which Warner claims rights, the specific 1935 piano arrangement of the song, is not sufficiently similar to the current version to enable it to claim any rights in the current version. Finally, according to the Plaintiffs, any copyright in the prior versions expired long ago, either through term limits on copyright protection or through the failure of the original owners to properly renew those rights many years ago.

Since the license fees Warner charges for use of the song are not exorbitant, there has been little financial incentive for anyone to take Warner to court over the rights to the song. Since multiple litigations are now pending, there will likely be amicus briefs filed on plaintiffs’ side from many sources. This “crowdsourcing” of history, knowledge and effort (and cost) in re-creating as accurate a picture as possible of the history of the rights of this song is probably the best chance yet of getting to the bottom of the long open question regarding the ownership of “Happy Birthday to You.”

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Achieving Success in the Legal Profession: Women Helping Women

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The National Association of Women Lawyers (“NAWL”) is 115 years old this year.  It is not only the oldest women’s bar association, it is also the only national bar association for women, dedicated to advancing women lawyers and the interests and rights of women under the law.  NAWL truly is the voice of women in the law™.

As the voice of women in the law, in 2006, NAWL challenged corporations and law firms to double their number of women general counsel and equity partners from 15% to 30% by 2015.  Recent statistics indicate that the “NAWL Challenge” for corporate legal departments in Fortune 500 corporations is close to being met.  Women today comprise close to 30% of General Counsels, when only a few years ago they comprised only 15% of the General Counsels in the same companies.   This achievement is in sharp contrast to the fate of women lawyers in the 200 largest U.S. law firms (“AmLaw 200”), where women have stagnated at 17% or less of those law firms’ equity partners since NAWL’s annual survey of the advancement of women lawyers began.

To be sure, there are thousands of women lawyers in this country in many different practice settings who have advanced, are leaders, and love the practice of law.  I am one of them and have spent almost 35 years loving what I do as a professional each and every day.   Many of NAWL’s leaders and members have similar feelings. As an organization, NAWL brings those lawyers together whenever it can to share their experiences with younger lawyers and impart views as to how the practice of law can be a nurturing professional experience for women, and one in which they can achieve whatever success they desire.

This year’s NAWL Annual Meeting on July 24-25, 2013, at the Waldorf=Astoria in New York, brings together the remarkable attorneys who are the NAWL Annual honorees; an exceptional series of CLE programs that will benefit younger lawyers in their career development, to more senior lawyers, in theirs; and networking opportunities that will help lawyers advance in their careers and defy the statistics.

The Annual Meeting is the culmination of a year in which NAWL presented its three major national programs—the 8th Annual General Counsel Institute, its Mid-Year Meeting and now the Annual Meeting—and several regional programs, all designed around the central theme of what women lawyers in different practice settings, at different stages of their careers, need to advance into the upper echelons of the legal profession.   At the Annual Meeting, NAWL will honor lawyers who have advanced women and women lawyers in a variety of ways:   Yale Law School Professor Judith Resnik, for her work in advancing women and women lawyers in the justice system; Sheila Kearney Davidson and the corporate law department that she heads (New York Life Insurance Company), for their work together in advancing women lawyers in the corporate setting; Veta Richardson, for her tireless work in promoting diversity in the legal profession; Catherine Douglass, founder of inMotion, for her inspirational work in helping women under the law; Daniel Goldstein, for the example he sets for all by his devotion to the advancement of women in the corporate setting; and four outstanding members of NAWL—April Boyer, Sandra Cassidy, Jennifer Champlin and Elizabeth Levy—for their hard work in helping NAWL provide its members, and women lawyers across the country, with the skills and strategies they need to chart their own course and reach the highest echelons of the profession.

The July 25th Annual Meeting will conclude with a networking reception with a philanthropic bent (a NAWL Night of Giving), which will benefit inMotion and its remarkable efforts on behalf of victims of domestic violence.   The Annual Meeting events will be preceded by an afternoon of NAWL committee and practice group meetings on July 24th.       The two-day event will bring together women lawyers from across the country and will inspire them in their efforts to achieve what they aspire to in their own careers and to help their colleagues, and those coming along behind them, in achieving their own aspirations.

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No Implied Duty to Develop Particular Strata in Pennsylvania (e.g. Marcellus Shale)

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On June 21, 2013, the Superior Court of Pennsylvania (the “Court”) held that a lessee does not owe a duty to a lessor to develop each and every “economically exploitable strata” under an oil as gas lease in Pennsylvania.

In early 2012, Terry L. Caldwell and Carol A. Caldwell, husband and wife (“Plaintiffs”) sued Kriebel Resources Co., Range Resources—Appalachia, LLC and others (“Defendants”) regarding an oil and gas lease executed between the Plaintiffs and Defendants on January 19, 2001 (the “Lease”). The Lease provided for a primary term of twenty four (24) months and so long thereafter as oil or gas was being produced. The Defendants drilled a number of shallow wells on the property that Defendants alleged held the entire property under the terms of the Lease. Plaintiffs brought suit against the Defendants in early 2012 alleging that, among other things, Defendants breached the implied duty to develop the property by not drilling deeper wells to exploit the valuable Marcellus Shale and, based on such potential unexploited value, the current production did not amount to production in paying quantities. The trial court sustained certain preliminary objections raised by the Defendants that resulted in a dismissal of Plaintiffs’ claims. In Terry L. Caldwell et al. v. Kriebel Resources Co. et al. (1305 WDA 2012), the Court affirmed the trial court’s dismissal of the case.

Regarding the duty to develop, Plaintiffs argued that without direct Pennsylvania case law on topic the Court should follow a Louisiana case, Goodrich v. Exxon Co., 608 So.2d 1019 (La. App. 1992), which held that Exxon’s duty to develop as a reasonably prudent operator included the obligation to develop valuable oil-producing sands underlying the leased premises. Based on this rationale, Plaintiffs alleged there is an implied duty to “develop all strata, not simply to extract shallow gas . . .” The Court rejected the application of the Goodrich rationale and held that the specific terms of the Lease were to control. Therefore, because the Lease provides for the continued validity of the Lease upon production of gas and allows for the guarantee of delay rentals if no gas is produced, the Court found that it was “not compelled to follow Louisiana law.” The production from various shallow wells was found to be sufficient to hold the entirety of the leased estate.

The Court also rejected Plaintiffs’ claim that the concept of “paying quantities” should be based on all potential gas strata underlying the Lease and should impose some obligation relating to good faith. The Court quickly dismissed this claim and made clear that “paying quantities” in Pennsylvania merely requires the well to “consistently pay[] a profit, however small.” It is of no legal effect that the extent of the profit produced from these shallow wells is “not to the extent appellants desire.” Due to the continued production in paying quantities and the Court’s failure to impose a duty on Defendants to develop all potentially economic strata, the Court chose not to terminate Defendants’ Lease.

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America Invents Act – Practical Considerations for Portfolio Companies

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Private equity funds should familiarize themselves with recent changes to U.S. patent law that affect patent protection strategies for their portfolio companies.  In September 2011, the U.S. Congress enacted the America Invents Act (AIA) patent reform bill, which significantly overhauled U.S. patent law.  This article summarizes practical considerations that private equity funds should bear in mind when evaluating and managing the patent portfolio of their investments.

First Inventor to File 

In the broadest sense, the AIA converts U.S. patent law into a “first-inventor-to-file” system from a “first-to-invent” system.  This conversion harmonizes U.S. patent law with the rest of the world’s patent laws.  In practice, it means that businesses should not delay filing patent applications, as they can no longer antedate patent-defeating prior art with an earlier invention date.

Challenges to Patent Rights 

Effective September 12, 2012, the AIA provided businesses new post-issuance patent validity challenge options that may be exercised before the U.S. Patent and Trademark Office (USPTO).  The new post-issuance challenges provide businesses new and predictable avenues to test the validity of a competitor’s patent that is, or may in the future be, an impediment to commercialization.  These post-issuance challenges include post-grant review, inter partes review and the Transitional Program for Covered Business Methods.  Each of the three post-issuance challenges is defined briefly here.

Post-Grant Review

Someone other than the patent owner may file a petition for post-grant review challenging the validity of a patent within nine months of the patent’s date of issue or reissue on any statutory grounds for invalidity.  Thus, even if a patent has been grated to a portfolio company, it may be subject to challenge by third parties in the time period immediately following issuance.  Similarly, a portfolio company could elect to challenge a competitor’s rights, even after a patent has been issued.

Inter Partes Review 

Someone other than the patent owner may file a petition for inter partes review challenging the validity of the patent nine months after the date of issue or reissue on limited invalidity grounds.  Inter partes review may only be instituted after the time period for post-grant review has expired and offers only a subset of the challenges available in post-grant review.  This means that throughout the entire life of an issued patent, generally 20 years from the filing date of the earliest priority document, it may be subject to challenge and invalidation.  Private equity funds should closely consider any potential challenges that could be lodged against a portfolio company and should evaluate potential risk before investing.

Transitional Program for Covered Business Methods

With regard to business method patents, someone other than the patent owner may file a petition for covered business method review challenging the validity of a patent if (1) the petitioner has been sued for infringement or threatened with an infringement suit, and (2) the patent claims a financial product or service.  Practically speaking, this scope is broader than mere financial products or services, such that any patent claiming anything related to money may potentially be challenged using a covered business method review.  Versata Development Group Inc. recently filed suit against the USPTO in the Eastern District of Virginia alleging that such a scope is impermissibly broad.  Until the result of that case or guidance is issued by the USPTO, private equity funds should proceed under the broad definition of “financial product or service” when evaluating a portfolio company with patents that may be challenged under the covered business method review.

Conclusion

Whether used against competitors’ patents or in defense of a business’ own interests, the new post-issuance challenges available under the AIA are powerful new tools in a portfolio company’s strategic toolbox.

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Mind Versus Body: Does “Bodily Injury” Encompass Purely Emotional or Mental Harm?

Dickinson Wright LogoIn Garrison v. Bickford, 377 S.W.3d 659 (Tenn. 2012), the Tennessee Supreme Court was called upon to determine whether emotional distress, standing alone, falls within the ambit of “bodily injury” as that term was used not only in the uninsured motorist policy at issue in the case, but is also used in Tennessee’s uninsured motorist statute.

In Garrison, a car driven by Andy Bickford struck and killed Michael Garrison. Michael Garrison’s parents, Jerry and Martha Garrison, and younger brother, Daniel Garrison, heard, but did not see, the collision. They did, however, respond to the accident in an attempt to render aid. Following Michael’s death, the Garrisons filed claims for wrongful death and negligent infliction of emotional distress against Andy Bickford and the owner of the car, Rita Bickford. According to the complaint, the Garrisons “suffered grief, fright, shock, depression, loss of sleep and other problems” as a result of what they saw.

In addition to filing suit against the Bickfords, the Garrisons served a copy of the complaint upon their own insurance company, State Farm Mutual Automobile Insurance Company (“State Farm”), pursuant to the uninsured motorist provision of their policy. The Garrisons’ policy with State Farm covered “damages for bodily injury an insured is legally entitled to collect from the owner or driver of an uninsured motor vehicle.” The policy defined “bodily injury” as “bodily injury to a person and sickness, disease, or death that results from it.”

As the litigation progressed, the Garrisons settled their claims against Andy Bickford. The Garrisons also settled their wrongful death claim with State Farm. However, State Farm refused to pay damages for the Garrisons’ emotional distress claims on the basis that emotional harm did not fall within the policy’s definition of “bodily injury.”

After the trial court found in favor of coverage, State Farm appealed to the Tennessee Court of Appeals, who reversed the trial court’s decision. On appeal to the Tennessee Supreme Court, the Garrisons argued that the policy’s definition of “bodily injury” was broad enough to encompass emotional harm and, even if it was not, the uninsured motorist statute, Tenn. Code Ann. § 56-7-1201(a), was broad enough to include emotional injuries, thereby superseding the policy’s more restrictive language. In response, State Farm maintained that the Garrisons’ mental injuries did not constitute “bodily injury.”

In evaluating the parties’ respective positions, the Supreme Court started by reviewing the relevant portion of Tennessee’s uninsured motorist statute, which states:

Every automobile liability insurance policy…shall include uninsured motorist coverage…for the protection of persons insured under the policy who are legally entitled to recover compensatory damages from owners or operators of uninsured motor vehicles because of bodily injury, sickness or disease, including death, resulting from injury, sickness or disease.

Tenn. Code Ann. § 56-7-1201(a) (emphasis added).

Noting that the uninsured motorist coverage statute’s meaning of “bodily injury” was an issue of first impression in Tennessee, the Supreme Court decided to look to the decisions of other jurisdictions that had been called upon to evaluate the meaning of “bodily injury” in various contexts. The Supreme Court ultimately adopted the majority view, concluding that the term “bodily injury,” as used in both Tenn. Code Ann. § 56-7-1201(a) and in the Garrisons’ policy of insurance, did not include damages for a mental or emotional injury by itself. In support of its decision, the Supreme Court noted that the words “bodily injury to a person and sickness, disease, or death that results from it” (as used in the policy) and the words “bodily injury, sickness, or disease, including death” (as used in Tenn. Code Ann. § 56-7-1201 (a)) are unambiguous and, when used to define “bodily injury,” refer to physical, not emotional, conditions of the body. More specifically, the Tennessee Supreme Court held:

In sum, a bystander claim for negligent infliction of emotional distress, such as that asserted by the Garrisons, is not a claim for bodily harm…Thus, we hold that, as applied to this case, “bodily injury” does not include damages for emotional harm alone. We further conclude that the definition of “bodily injury” in the policy does not conflict with the uninsured motorist statute, section 56-7-1201(a). Consequently, we reject the Garrisons’ argument that the statute supersedes the policy language.

Garrison, 377 S.W.3d at 671.

In holding that the term “bodily injury,” as used both in the policy at issue and the Tennessee uninsured motorist statute, does not include damages for emotional harm alone, the Tennessee Supreme Court held that the policy did not cover the Garrisons’ emotional distress claims. Accordingly, the Garrisons’ emotional distress claims against State Farm were dismissed.

While the ruling in Garrison certainly favors insurers, the case does highlight a potential area of weakness in insurance policies. For this reason, it may be advisable for insurers to consider whether it might be a better practice to include language in their policies expressly stating that the term “bodily injury” does not include damages for “emotional harm” standing alone.

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