Tag: Legal News

Federal Authorities Warn of Terrorism: Three Steps Toward Comprehensive Risk Management for the Hotel Industry

Recently posted at the National Law Review by Richard J. Fildes of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. – news about a recent federal government terror alert involving hotels and resort properties: 

Quality service, prime amenities, ideal locations and excellent accommodations are the repertoire of successful hotels. In light of a recent warning issued by federal authorities to the U.S. hotel industry, that checklist may need to expand, according to the American Hotel & Lodging Educational Institute. Though Mumbai-style attacks have thankfully not come to fruition on American soil in recent years, the need for vigilance is ever-present. Based on intelligence reports gathered by the U.S. government, terror plots on the hotel industry are a looming threat;however, a panic-free plan for potentially devastating crises can easily be developed.

Attacks of terrorism and natural disasters can often share the same elements of surprise, chaos, structural destruction and health-related concerns. Just as hotels should plan for before, during, and after a storm (more details), there should be a similarly structured program for staff and guests when dealing with terrorist attacks. Combining the consideration of both events can streamline the process of training employees and increasing familiarity with risk management in the aftermath of such events. Some considerations are as follows:

• Lobbies tend to be the most dangerous part of hotels because they are typically unsecured open areas where guests congregate. If finances permit, have plain clothed security personnel in the lobby. The presence of uniformed security guards can create a perception of safety; however, non-uniformed guards can be more attuned as the eyes and ears of hotel security.

• Staff should be trained to spot potentially dangerous activities. All employees who may have contact with guests, including housekeeping, maintenance, front desk, guest services, food and beverage, transportation, and parking should be given detailed instructions on what types of activity should be reported to hotel security.

• Staff should also have equally detailed instructions on panic control and ways to manage the turmoil of natural disasters.

• Record keeping is also vital, especially with health related issues. Knowing which employees have medical ailments or potential concerns will help reduce health risks stemming from natural disasters and terrorist attacks. Though some guests may not want to disclose such information, consider asking guests whether they have any heart conditions, diabetes or other issues that would be necessary for the staff to know in case of an emergency. Such inquiries should be phrased “as non-intrusive” inquiries geared toward providing the best possible customer care and service in the rare chance that something may happen.

• Keeping both paper and electronic copies of records, including which guests are checked into the hotel at any given time, is also key to minimizing confusion and chaos when responding to an emergency.

• Develop specific evacuation plans. The standard “in-case-of-a-fire” evacuation route may not be helpful during a chemical weapon attack, bombing or hurricane.

• Have designated evacuation areas equipped (or readily able to be equipped) with vital supplies. Back up energy sources, medical supplies and non-perishable foods, and bottled waters are all necessary to keep guests safe and calm.

• Make the evacuation routes easy to follow, and ensure that the staff knows exactly where guests should be located during the different emergencies.

Being vigilant, heightening security efforts, and ensuring staff preparedness will help reduce the stress, commotion and devastating aftermath of natural disasters and terrorist related incidents.

* Tara L. Tedrow is co-author of this article. She is a rising third year law student and has not been admitted to the Florida Bar.

To read the press release issued by the American Hotel & Lodging Association, please click on the following : AHLEI PR_TerrorWarningReinforcesNeedVigilanceTraining.pdf

© Lowndes, Drosdick, Doster, Kantor & Reed, PA, 2011. All rights reserved.

Supreme Court Grants Cert. In Caraco

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

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

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

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

Collision Occurs Between Copyrights and Misappropriation in Electronic News Media Space

Posted this week at the National Law Review by Bracewell & Giuliani LLP  and interesting article about copyrightable aspects of Wall Street research—the published models, insights, and facts:   

Despite winning in court to protect valuable copyrights, Wall Street firms are unable to protect their valuable trading recommendations as federal and state laws collide in Barclays Capital Inc. v. Theflyonthewall.com, Inc.1 (pending any potential review on appeal). The electronic news media continues to lead the charge, and now the walls of exclusivity are beginning to crumble for these respected recommendations.

Wall Street firms have for long provided detailed research reports and trading recommendations—exclusively to firm customers—to drive order flow with the recommending firm, thereby generating commission revenue. Storming the walls, however, are those in the electronic news media blasting the once-exclusive information to all corners of the Internet, immediately upon its release by Wall Street. But for Wall Street, this widespread, uncontrolled dissemination has cut into profitability and has wreaked havoc on traditional business models for market research.

Although the electronic news media scored a fresh victory, Wall Street has not suffered a devastating loss. The copyrightable aspects of Wall Street research—the published models, insights, and facts, for example, are often more valuable to institutional customers than the basic recommendation itself (e.g., Buy, Sell, or Hold). These copyrightable aspects, of course, remain protected by federal copyright law.2 Outside the realm of finance, however, this case may signal much broader implications for any business with both feet in the Information Age.

The appeals court received this case after the District Court for the Southern District of New York granted injunctive relief to plaintiffs Barclays Capital Inc.; Merrill Lynch; Pierce, Fenner & Smith Inc.; and Morgan Stanley & Co. Inc. (“the Firms”), which prohibited Theflyonthewall.com, Inc. (“Fly”) from publishing information about the Firms’ recommendations, within certain parameters.3 The issue presented on appeal was whether Fly could be enjoined from publishing “news,” i.e., bare facts, that the Firms [had] made certain recommendations.4 The appeals court vacated the injunction, paving the way for the electronic news media to publish Wall Street recommendations far and wide, and of course, to direct profits to publishers and sponsors, away from the recommending firm. In the wake of this decision, Wall Street firms must now reconsider business models built upon the value of their proprietary information.

Without further recourse from federal copyright law, which does not protect bare “facts” alone, the Firms sought relief under New York tort law through the doctrine of “hot news” misappropriation of information. The appeals court was bound to consider, however, whether federal copyright law preempted the applicability of state law in these circumstances. To survive preemption, Firms were required to prove that Fly’s use of the information constitutes “free riding” on the Firms’ efforts.5 By concluding that there was no “free riding,” the appeals court significantly narrowed the circumstances in which similar state law misappropriation claims can survive preemption by federal copyright law. Accordingly, this case signals a broader victory for electronic publishers hoping to widely distribute, and to profit from, factual information created by others.

In determining whether Fly engaged in “free riding,” the court looked to precedent in National Basketball Association v. Motorola, Inc.6 (“the NBA Case”). In the NBA Case, the NBA collected and broadcast information, based on live sports games, over a communication network; and likewise, a competitor collected and broadcast its own information, based on live sports games, over a competing communication network. The appeals court noted that, in the NBA Case, there was no free riding, in part, because Motorola was bearing its own costs of collecting factual information.

In the present case, the appeals court’s ultimate inquiry was whether any of the Firms’ products enabled Fly “to produce a directly competitive product for less money because it has lower costs.”7 Extending the reasoning from the NBA Case to cover Fly’s actions, the appeals court concluded that that there was no “free riding” because approximately half of Fly’s twenty-eight employees were involved in the collection and distribution of Firms’ recommendations.8 According to the appeals court, Fly “is reporting financial news—factual information on Firm Recommendations—through a substantial organizational effort.”9

The appeals court, however, did not consider it important that the Firms had incurred substantial costs in research and analysis (i.e., acquiring and creating information) as the basis for their recommendations, whereas Fly’s only costs were in collecting and reporting the recommendations. The appeals court discarded the relevance of these basis costs—even though they provide an arguable distinction over the NBA Case—stating that although the Firms “may be ‘acquiring material’ in the course of preparing their reports . . . that is not the focus of this lawsuit. In pressing a ‘hot news’ claim against [Fly], [Firms] seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.”10 The appeals court concluded that there was no meaningful difference between “taking material that a Firm has created . . . as the result of organization and the expenditure of labor, skill, and money . . . and selling it by ascribing the material to its creator” and the “unexceptional and easily recognized behavior by members of the traditional news media [reporting on] winners of Tony Awards . . . with proper attribution of the material to its creator.”11 We expect that the contours of these differences to be a key issue if this case [is] heard on appeal, either at the Second Circuit en banc or at the United States Supreme Court.

Absent any legal recourse to ensure the exclusivity of their recommendations, Wall Street firms must now scramble to implement even greater security and counter-intelligence measures. After all, publishers such as Fly rely on information leaks and intelligence to timely obtain the recommendations in the first place. More likely, however, is that Wall Street firms will soon refine their business models to otherwise adequately monetize, or else reduce expenditures in, their intensive research and analysis efforts.

The broader implications of this case—that the “ability to make news . . . does not give rise to a right for it to control who breaks that news and how”12—will bear critically on the development, funding, and overall power of rapidly-advancing electronic information sources. In particular, businesses providing information aggregation services of all stripes—including, for example, those provided by Google, Inc. and Twitter, Inc.—will rejoice in the ability to gather and publish information from multiple sources across the entire nation with a lower risk of encountering divergent legal standards for misappropriation, on a state-by-state basis.

____________________

1 Barclays Capital Inc. v. Theflyonthewall.com, Inc., No. 10-1372-cv (2d Cir. June 20, 2011).
2 The District Court for the Southern District of New York awarded monetary relief for copyright infringement by Fly’s unauthorized distribution of the Firm’s actual reports. Issues concerning copyright infringement were not addressed on appeal.
3 The injunction allowed the Firms’ customers to trade on the Firms’ recommendations prior to the broader market. The injunction prohibited Fly from reporting a recommendation until (a) the later of one half-hour after the opening of the New York Stock Exchange or 10:00 am for those recommendations first distributed prior to 9:30 am, or (b) two hours after the recommendation is first distributed by one of the Firms to its clients, for those recommendations first distributed at or after 9:30 am on a given day. See Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 29, n.20.
4 For example, a headline covering one of the Firms’ recommendations may state: “EQIX initiated with a Buy at BofA/Merrill. Target $110.”
5 “Free riding” was but one factor in a five-pronged test, the remainder of which were not the basis of the decision. The appeals court speculated, however, that proving certain other factors may be troublesome, such as “direct competition” between Fly and the Firms.
6 105 17 F.3d 841 (2d Cir. 1997).
7 Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 67.
8Fly previously relied on employees at investment firms (without the firms’ authorization) to e-mail the research reports to Fly as they were released. Fly’s staff would summarize a recommendation as a headline, and sometimes, Fly would include in a published item an extended passage taken verbatim from the underlying report.  Fly maintains that it no longer obtains recommendations directly from such investment firms and, instead, that it gathers them using a combination of other news outlets, chat rooms, “blast IMs” sent by people in the investment community to hundreds of recipients, and conversations with traders, money managers, and its other contacts involved in the securities markets. Id. at 16-17.
9 Id. at 67.
10 Id. at 62.
11 Id. at 63-64.
12 Id. at 71.

© 2011 Bracewell & Giuliani LLP

Patent Reform Bill Passed by the United States House of Representatives

Posted yesterday at the National Law Review by Richard L. Kaiser and Brian J.N. Marstall of Michael Best & Friedrich LLP a good recap of the most recent action in Congress on patent reform legislation:  

The House of Representatives passed its version of the America Invents Act (H.R. 1249) by a 304-117 vote on June 23, 2011. This follows the Senate passing its version back in March. The House and the Senate must now rectify the differences between the bills, and then each chamber must pass the reconciled version before being sent to the White House for signature. There may still be disagreements during the reconciliation process.  Even if reconciled and enacted, there could also be additional challenges to the legislation forthcoming, as some opponents have questioned the constitutionality of a key provision changing the U.S. patent system to a first-inventor-to-file system. Nonetheless, patent reform is now closer to becoming a reality than it has ever been in the last six years. A few of the key provisions are highlighted below.

First-to-File

Perhaps the biggest change that will take place is the switch to a first-inventor-to-file patent system. As the language of the Senate and House versions stands now, the change to a first-to-file system will go into effect 18 months after the effective date of the final legislation. Under the new first-to-file system, there will be an increased urgency to get patent applications filed as early as possible because any third-party prior art available before the patent application filing date can be used to reject the application.

Post Grant Review

Another major change will be the creation of a new post-grant review system that will expand the ability to challenge the validity of granted patents. The legislation provides several options to challenge patents, each option having various timeframes and limitations as to the grounds for challenge. The details of the new system will be developed by the Patent Office.

Patent Office Funding

While a change in how the Patent Office is funded may sound like an accounting matter, its impact could be very significant.  Increased fee setting authority and an end to Congress’ ability to divert Patent Office fees for other uses should increase the speed with which the Patent Office can examine patent applications. The Senate version of the legislation gives the Patent Office fee setting authority that need not be approved by Congress and ends fee diversion. The House bill does not go quite as far in granting the Patent Office autonomy, but it establishes a separate Patent Office account into which Patent Office fees will be placed. Congressional appropriators would have the authority to release those funds only to the Patent Office. This is one of the differences that will need to be reconciled for the final legislation.

False Marking

Both the Senate and House versions limit false marking claims. Only the United States or a competitor who can prove a competitive injury will be able to bring a false marking lawsuit under 35 U.S.C. Section 292. This change will apply to any case pending on or after the date of enactment of the legislation.

© MICHAEL BEST & FRIEDRICH LLP

 

Supreme Court Limits Bankruptcy Court Jurisdiction – Stern v. Marshall

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

 

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

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

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

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

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

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

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

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

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

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

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

©2011 Greenberg Traurig, LLP. All rights reserved.

 

Supreme Court Grants Cert. In Mayo v. Prometheus

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

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

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

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

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

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

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

U.S. Supreme Court Rejects Gender Discrimination Class Action Against Wal-Mart

Posted earlier this week at the National Law Review by the Labor and Employment Group of Sheppard, Mullin, Richter & Hampton LLP a good overview of the implications of the Wal-Mart Stores, Inc. v. Dukes case. 

On June 20, 2011, the United States Supreme Court released its widely-anticipated decision in Wal-Mart Stores, Inc. v. Dukes, et al., 564 U.S. ___ (2011) (“Wal-Mart“). In Wal-Mart, the Supreme Court reversed the Ninth Circuit Court of Appeals and held that the proposed nationwide gender discrimination class action against the retail giant could not proceed. In a decision that will come as welcome news to large employers and other frequent targets of class action lawsuits, the Supreme Court (1) arguably increased the burden that plaintiffs must satisfy to demonstrate “common questions of law or fact” in support of class certification, making class certification more difficult, especially in “disparate impact” discrimination cases; (2) held that individual claims for monetary relief cannot be certified as a class action pursuant to Federal Rule of Civil Procedure 23(b)(2), which generally permits class certification in cases involving claims for injunctive and/or declaratory relief; and (3) held that Wal-Mart was entitled to individualized determinations of each proposed class member’s eligibility for backpay, rejecting the Ninth Circuit’s attempt to replace that process with a statistical formula.

The named plaintiffs in Wal-Mart were three current and former female Wal-Mart employees. They sued Wal-Mart under Title VII of the federal Civil Rights Act of 1964, alleging that Wal-Mart’s policy of giving local managers discretion over pay and promotion decisions negatively impacted women as a group, and that Wal-Mart’s refusal to cabin its managers’ authority amounted to disparate treatment on the basis of gender. The plaintiffs sought to certify a nationwide class of 1.5 million female employees. The plaintiffs sought injunctive and declaratory relief, punitive damages, and backpay.

The trial court and Ninth Circuit had agreed that the proposed class could be certified, reasoning that there were common questions of law or fact underFederal Rule of Civil Procedure 23(a), and that class certification pursuant to Rule 23(b)(2) – which permits certification in cases where “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole” – was appropriate because the plaintiffs’ claims for backpay did not “predominate.” The Ninth Circuit had further held that the case could be manageably tried without depriving Wal-Mart of its due process rights by having the trial court select a random sample of claims, determine the validity of those claims and the average award of backpay in the valid claims, and then apply the percentage of valid claims and average backpay award across the entire class in order to determine the overall class recovery.

The Supreme Court reversed. A five-justice majority concluded that there were not common questions of law or fact across the proposed class, and hence Federal Rule of Civil Procedure 23(a)(2) was not satisfied. Clarifying earlier decisions, the majority made clear that in conducting this analysis, it was permitted to consider issues that were enmeshed with the merits of the plaintiffs’ claims. The majority then explained that merely reciting common questions is not enough to satisfy Rule 23(a). Rather, the class proceeding needs to be capable of generating “common answers” which are “apt to drive the resolution of the litigation.” The four-justice dissent criticized this holding as superimposing onto Rule 23(a) the requirement in Rule 23(b)(3) that “common issues predominate” over individualized issues. The dissent believed that the “commonality” requirement in Rule 23(a) could be established merely by identifying a single issue in dispute that applied commonly to the proposed class. Because the trial court had only considered certification under Rule 23(b)(2), the dissent would have remanded the case for the trial court to determine if a class could be certified under Rule 23(b)(3).

The majority held that the plaintiffs had not identified any common question that satisfied Rule 23(a), because they sought “to sue about literally millions of employment decisions at once.” The majority further explained that “[w]ithout some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored.”

Addressing the plaintiffs’ attempt to provide the required “glue”, the majority held that anecdotal affidavits from 120 class members were insufficient, because they represented only 1 out of every 12,500 class members, and only involved 235 out of Wal-Mart’s 3,400 stores nationwide. The majority also held that the plaintiffs’ statistical analysis of Wal-Mart’s workforce (which interpreted data on a regional and national level) was insufficient because it did not lead to a rational inference of discrimination at the store or district level (for example, a regional pay disparity could be explained by a very small subset of stores). Finally, the majority held that the “social framework” analysis presented by the plaintiffs’ expert was insufficient, because although the expert testified Wal-Mart had a “strong corporate culture” that made it “vulnerable” to gender discrimination, he could not determine how regularly gender stereotypes played a meaningful role in Wal-Mart’s employment decisions, e.g., he could not calculate whether 0.5 percent or 95 percent of the decisions resulted from discriminatory thinking. Importantly, the majority strongly suggested that the rigorous test for admission of expert testimony (the Daubert test) should be applied to use of expert testimony on motions for class certification.

The Court’s other holdings were unanimous. For one, the Court agreed that class certification of the backpay claim under Rule 23(b)(2) was improper because the request for backpay was “individualized” and not “incidental” to the requests for injunctive and declaratory relief. The Court declined to reach the broader question of whether a Rule 23(b)(2) class could ever recover monetary relief, nor did it specify what types of claims for monetary relief were and were not considered “individualized.” The Court made clear, however, that when plaintiffs seek to pursue class certification of individualized monetary claims (such as backpay), they cannot use Rule 23(b)(2), but must instead use Rule 23(b)(3), which requires showing that common questions predominate over individual questions, and includes procedural safeguards for class members, such as notice and an opportunity to opt-out.

Lastly, the unanimous Court agreed that Wal-Mart should be entitled to individualized determinations of each employee’s eligibility for backpay. In particular, Wal-Mart has the right to show that it took the adverse employment actions in question for reasons other than unlawful discrimination. The Court rejected the Ninth Circuit’s attempt to truncate this process by using what the Court called “Trial by Formula,” wherein a sample group would be used to determine how many claims were valid, and their average worth, for purposing of extrapolating those results onto the broader class. The Court disapproved of this “novel project” because it deprived Wal-Mart of its due process right to assert individualized defenses to each class member’s claim.

Looking forward, the Wal-Mart decision will strengthen the arguments of employers and other companies facing large class action lawsuits. In particular, the decision reaffirms that trial courts must closely scrutinize the evidence when deciding whether to certify a class action, especially in “disparate impact” discrimination cases. Statistical evidence that is based on too small a sample size, or is not well-tailored to the proposed class action, should be insufficient to support class certification. Likewise, expert testimony that is over-generalized and incapable of providing answers to the key inquiries in the case (here, whether a particular employment decision was motivated by gender discrimination) should also be insufficient to support class certification. Finally, the Court’s holding that defendants have the right to present individualized defenses as to each class member, and that this right cannot be short-circuited through statistical sampling, will provide defendants with a greater ability to defeat class certification where such individualized determinations would otherwise prove unmanageable.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

California and Florida Lead Trend of New State-Level Iran Sanctions

Posted this week at the National Law Review by Reid Whitten  of Sheppard, Mullin, Richter & Hampton LLP a good summary of recent  state legislation targeting potential contractors that deal with Iran.  

On June 2, 2011, Florida Governor Rick Scott signed a new state law prohibiting Florida government entities from contracting with companies invested in Iran’s petroleum energy sector.  Florida’s law, and a similar California law that went into effect on June 1, 2011, announce a coming trend of state laws targeting potential contractors that also deal with Iran.  These two laws, and several others on the horizon, present pitfalls for unwary companies as well as unique opportunities for informed, well-advised businesses.

On July 1, 2010, President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”) into law.  CISADA targets companies invested in Iran’s petroleum sector through provisions prohibiting the U.S. Government from contracting with such companies.  CISADA also permits the states to enact similar prohibitions against state contracts with companies invested in the Iranian petroleum sector.  Within months of enactment of the U.S. law, California and Florida passed their own laws, citing the desire to put further economic pressure on such companies. The legislatures of Oregon, Kansas, and other states are considering similar actions. Arizona also has a prohibition on contracting with companies invested in Iran that became law as part of a 2008 divestment act. Companies, particularly non-U.S. companies, intending to bid on state government contracts need to pay close attention to individual state statues, and review their own investments for connections to Iran’s petroleum energy sector.  U.S.-organized companies are unlikely to have such investments because (except in very narrow circumstances) the pre-existing U.S. economic embargo against Iran prohibits them.

On September 30, 2010, California passed the Iran Contracting Act of 2010 (“California Act”) requiring, among other actions, that the California Department of General Services compile a list of persons or companies involved in business or investment activities in Iran.  The California Act also declares that any person identified as having business or investment activities of $20 million dollars or more in the energy sector of Iran “is ineligible to, and shall not bid on, submit a proposal for, or enter into or renew, a contract with a public entity for goods or services of one million dollars ($1,000,000) or more.”  See Cal. Pub. Contr. § 2203(a)(1) (West 2010). Companies that are notified of their designation as doing significant business in Iran’s petroleum energy sectors must demonstrate to the government’s satisfaction that they should not be so designated. If they fail to do so, they will be subject to the contracting prohibition.

Similarly, the Florida Scrutinized Companies law (“Florida Act”) will take effect July 1, 2011. Under a 2008 Iran divestment act, Florida’s State Board of Administration maintains a “Scrutinized Companies with Activities in the Iran Petroleum Energy Sector List” (“Scrutinized Companies List”). The Florida Act prohibits a Florida state agency or local governmental entity from contracting for goods and services of more than $1 million dollars or more with any company on the Scrutinized Companies List.

The Florida Act requires contractors to certify that they are not on the Scrutinized Companies List before submitting a bid for, entering into, or renewing a contract with, a state agency or local government entity. In addition, any contract entered into or renewed on or after July 1, 2011 must contain a provision allowing for termination of that contract if the company is found to have submitted a false certification. Further, the bill would require the Florida state government to bring a civil action against any company that does not disprove a determination of false certification within a specified time.

The state laws present both a concern and an opportunity for contracting companies. Concerns, in particular, arise because states lack substantial experience in administering international sanctions policy. As a result, Companies may be mistakenly designated as a business significantly invested in Iran’s energy petroleum industry. Individual state resources, already spread thin, may not provide the means accurately to designate the correct companies falling under the new laws’ prohibitions. States are likely to borrow names of possible target companies from Federal CISADA actions and from one another, sometimes without independently verifying the alleged reasons for designating a company. Additionally, we have seen instances of private groups (such as human rights and anti-nuclear activists groups) distributing inaccurate lists of companies alleged to be violating CISADA.

Contracting companies may be presented with an opportunity, however, to get ahead of this trend of state sanctions in a number of ways. If a company receives notice that it is under scrutiny from one state, that company and its counsel can prepare a response that is both tailored and general;  a response that not only answers the initial notice but that can also be repeated to respond to any other notices it might receive from other states in the future. Companies may also have opportunities to communicate with the state administrators of these new laws about their application. Many of these administrators may not have extensive substantive experience with international sanctions policy;  therefore, companies and their counsel, particularly counsel with experience in international sanctions work, would be in a strong position to discuss with state officials the laws and the means of implementation.

Companies intending to contract with any state agencies need to pay close attention to the changing landscape of state-level sanctions laws and remain aware of the continuing risks and opportunities that landscape presents.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

 

Comments to CMS’ 2011 IPPS Proposed Rule are due by June 20th

Posted this week at the National Law Review by Scott J. Thill of von Briesen & Roper, S.C. – a reminder about the comment deadline for  CMS’ 2011 Inpatient Prospective Payment System Proposed Rule  

 

Just a reminder, comments to CMS’ 2011 Inpatient Prospective Payment System Proposed Rule are due by June 20, 2011.  Several notable provisions in the Proposed Rule include:

  • Policies for several hospital quality initiatives, including policies related to the Hospital Readmissions Reduction Program and the Hospital Value-Based Purchasing Program.
  • The addition of contrast-induced acute kidney injury as a hospital acquired condition.
  • The removal of excisional debridement cases from the current MS-DRG and assignment of them to three new MS-DRGs that would provide more accurate, but lower, payment.
  • The creation of two new MS-DRGS for autologous bone marrow transplants.  One MS-DRG would apply to such transplants with complications or comorbidities, while another MS-DRG would apply to such transplants without any complication or comorbidity.
  • Revisions to the rules for determining pension costs for Medicare cost-finding and wage index purposes.
  • Clarification that Medicare’s 3-day/1-day payment window policy applies to both preadmission diagnostic and non-diagnostic services furnished at a physician practice wholly owned or wholly operated by the admitting hospital.
  • The exclusion of patient days and bed days for inpatient hospice services from the Medicare disproportionate share adjustment and indirect medical education adjustment.
  • Clarification of CMS’ “under arrangements” requirements.

You may access the Proposed Rule here.

A summary of the Proposed Rule is available from CMS here.

©2011 von Briesen & Roper, s.c  

Tax Court Decision Subjects LLP Service Providers/Equity Partners to Self-Employment Tax

Posted last week at the National Law Review by Paul A. Gordon and Casey S. August of  Morgan, Lewis & Bockius LLP new developments concerning partners in a law firm established as a limited liability partnership (LLP) under state law  subject to Self-Employment Contributions Act (SECA) tax on their distributive share of LLP income received in respect of their services.

In a decision issued February 9, the U.S. Tax Court ruled, in part, that the partners of a law firm established as a limited liability partnership (LLP) under state law were subject to Self-Employment Contributions Act (SECA) tax on their distributive share of LLP income received in respect of their services. In doing so, the court determined that the LLP partners could not avail themselves of the exemption from SECA for nonguaranteed service payments to “limited partners.” This ruling illustrates the potential risk for service provider limited partners and limited liability company members of assuming that state law entity and limited liability classifications alone shield them from being subject to SECA tax.

Background

Generally, payments to service providers who are not classified as employees for federal payroll tax purposes are not subject to any payroll tax withholding or payment liability on the part of the payor. Instead, Section 1401 imposes SECA tax on “self-employment” income at the rate of 15.3%, a combination of a 12.4% old-age, survivors, and disability insurance (OASDI) tax and a 2.9% Medicare tax. The OASDI tax is only imposed on the first $106,800 of “net earnings” (which allows for offsets to gross earnings for deductible expenses associated with the creation of the income) for 2011. Subject to certain exemption rules, self-employment earnings include income derived by an individual from any trade or business carried on by such individual plus his or her distributive share of partnership income or loss from any trade or business carried on by a partnership in which he or she is a partner. One of the exemption rules, included in Section 1402(a)(13) of the Internal Revenue Code, excludes from self-employment earnings “the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in Section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services” (emphasis added). Unfortunately, Congress failed to provide a definition for limited partner in the statute.

In order to resolve this definitional ambiguity, the U.S. Treasury released temporary regulations in 1997 under which partners with either authority to contract on behalf of the partnership or who participate in the partnership’s trade or business for more than 500 hours during the partnership’s taxable year could not be limited partners for Section 1402(a)(13) exemption purposes. In addition, no service partner in a service partnership could be a limited partner. This guidance created political shockwaves so extensive that Congress imposed a 12-month moratorium on Treasury’s ability to issue further guidance under Section 1402(a)(13). Since that time, Treasury has not provided guidance on the limited partner exemption from SECA tax.

Confronted with the dearth of authority on this issue, many tax practitioners have taken the position that all partners in a tax partnership, who are limited partners or limited liability company members under state law, are per se eligible for the Section 1402(a)(13) limited partner exemption. Others, although not required by law, have followed the guidance under the proposed regulations.

Renkemeyer Decision

It was this definition of “limited partner” that was at issue before the Tax Court in Renkemeyer, Campbell & Weaver, LLP v. Commissioner, 136 T.C. No. 7 (2011). In that case, the Tax Court addressed an IRS challenge to both (1) the special allocation of the LLP’s (a law firm treated as a partnership for federal income tax purposes) distributive share of income to its partners and (2) the treatment of the LLP distributive share allocations of business income to its service partners (the law partners) as being exempt from SECA tax. After ruling in favor of the IRS on the allocation issue (the petitioner could not produce a partnership agreement supporting the challenged special partnership allocations), the court turned to the SECA tax issue.

The LLP partners argued that the limited partner exemption should apply because (1) the LLP organizational documents designated their interests as limited partnership interests and (2) they enjoyed limited liability under state law. The Tax Court disagreed, reaching the result that would have been required under the temporary regulations. Noting that Congress passed the limited partner exemption prior to the state law advent of LLPs and LLCs, the court reviewed the exemption’s legislative history and determined that the impetus for the exemption was not a limited partner’s individual protection from the partnership’s liabilities, but instead its status as a nonservice investment partner in a traditional limited partnership. In doing so, the court found that Congress did not intend for active service partners, such as the LLP partners, to be exempt from self-employment taxes. Specifically, the court referred to the partners’ minimal LLP capital contributions in exchange for their interests in LLP as indicating that the partners’ distributive share of income arose from the legal services performed on behalf of LLP and “not . . . as a return on the partners’ investments and . . . not [as] ‘earnings which are basically of an investment nature.'” (citing the Section 1402(a)(13) legislative history). Additionally, the Renkemeyer opinion hinted that the same rationale could be applied to prevent members of an LLC from qualifying as Section 1402(a)(13) limited partners.

Implications

Renkemeyer demonstrates the hazards of assuming that state law entity and limited liability classifications should control for purposes of determining eligibility for the Section 1402(a)(13) SECA tax limited partner exemption. That is, there may be danger in taking the per se limited partner exemption position described above. Service providers to tax partnerships (including LLCs treated as tax partnerships) in which they are also equity partners should thus be wary of whether both their service-related payments and guaranteed partnership equity allocations would be considered self-employment income subject to SECA tax.

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