Tag: Legal News

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.

Microsoft Corp. v. i4i Limited Partnership et al.: Supreme Court Observations

Posted today at the National Law Review  by Robert Greene Sterne  and Nirav N. Desai of Sterne, Kessler, Goldstein & Fox P.L.L.C  a great recap of today’s U.S. Supreme Court ruling in Microsoft Corp. v. i4i Limited Partnership et al.

In Microsoft v. i4i, the U.S. Supreme Court today unanimously (8-0) affirmed the clear and convincing evidence standard for invalidating issued U.S. patents under Section 282 of the Patent Act (1952).  In 2007, i4i sued Microsoft in U.S. District Court for infringement of i4i’s patent. As part of its defense, Microsoft asked for a jury instruction reciting a preponderance of the evidence standard for finding i4i’s patent invalid, rather than the long-standing clear and convincing evidence standard.  The District Court rejected Microsoft’s lower standard of proof, and a jury found that the patent was valid and that Microsoft infringed, awarding i4i a 9 figure damages sum.  Microsoft appealed to Federal Circuit, asserting in particular, that the District Court improperly instructed the jury on the standard of proof for invalidity.  The Federal Circuit affirmed the lower court’s holding and Microsoft petitioned the Supreme Court for certiorari, which was granted.

In its argument to the Supreme Court, Microsoft argued that either (1) a defendant in a patent infringement action need only convince the jury that an issued patent is invalid by a preponderance of the evidence standard, or (2) alternatively, that at the very least, the preponderance of the evidence standard should apply to evidence that was never considered by the PTO during examination.  The Supreme Court in its decision rejected both of Microsoft’s arguments.

In its decision, the Court first focused on the language of Section 282, which specifies that “[a] patent shall be presumed valid” and “[t]he burden of establishing invalidity of a patent … shall rest on the party asserting such invalidity.”  Microsoft had argued that Federal Circuit precedent establishing a clear and convincing evidence standard was not supported by the 1952 Act because Section 282 did not explicitly set forth that standard.  The Supreme Court noted that, while the statute includes no express articulation of the standard of proof, the statute does use the term “presumed valid,” which has a settled meaning in the common law.  Relying on its long-standing decision in Radio Corporation of America (RCA) v. Radio Eng’g Labs., Inc., 293 U.S. 1 (1934), the Court found that the common law jurisprudence dating back to the 19th century reflects that Microsoft’s proposed preponderance standard of proof “was too ‘dubious’ a basis to deem a patent invalid.”  According to the common law, the Court held, “a defendant raising an invalidity defense bore a ‘heavy burden of persuasion,’ requiring proof of the defense by clear and convincing evidence.”

The Court also noted that the Federal Circuit has interpreted Section 282 to require this clear and convincing evidence standard for nearly 30 years. And while Congress has amended the patent laws several times since the Patent Act was passed, “the evidentiary standard in § 282 has gone untouched.”  The Court concluded that Congress is well aware of the Federal Circuit’s treatment of the statute, but thus far has not amended the statute, and further that “[a]ny re-calibration of the standard of proof remains in [Congress’s] hands.”

The practical implications of the decisions are many.  First and foremost, the decision preserves the status quo, which in turn maintains the strength of U.S. patents and current patent enforcement mechanisms, particularly as they relate to innovation, business certainty, and job creation.  The Court has also sent a clear signal that, in view of well-established jurisprudence, if the standard is to change, it must be done by Congress, as any such change would have a profound ripple effect on the entire patent system.

© 2011 Sterne Kessler

U.S. Supreme Court Establishes State-of-Mind Requirement for Inducing Infringement Liability

As posted in the National Law Review yesterday by R. (Ted) Edward Cruz of Morgan, Lewis & Bockius LLP – a good overview of the knowledge a patent infringement plaintiff needs to prove:

Today (May 31), the U.S. Supreme Court issued its decision in Global-Tech Appliances, Inc., et al. v. SEB S.A., No. 10-6 (2011), holding that to prove inducing infringement under 35 U.S.C. § 271(b) a plaintiff must prove that the infringer had knowledge that “the induced acts constitute patent infringement.” The Court also held that this knowledge requirement can be satisfied by evidence of “willful blindness.”

Morgan Lewis represented SEB in this case. The leader of our U.S. Supreme Court and Appellate Litigation Practice, Ted Cruz, argued the case on February 23. In today’s decision, by an 8-1 vote, our client prevailed.

On the facts of the case, SEB had developed an innovative method to produce household deep fryers and received a U.S. patent for this invention. A foreign competitor, Global-Tech Appliances, purchased one of SEB’s fryers in Hong Kong where it would not have patent markings, reverse-engineered SEB’s fryer, and then copied the SEB fryer’s unique technology. Global-Tech hired a patent attorney to conduct a patent search, but deliberately chose not to tell that attorney that its fryer was a copy of another company’s commercially successful fryer. The attorney did not locate SEB’s patent in its patent search. Global-Tech then sold its fryers to U.S. companies to sell within the United States. SEB sued Global-Tech for patent infringement and inducing infringement, and the jury found for SEB on all counts.

On appeal, Global-Tech challenged the finding on inducing infringement liability due to a lack of evidence of its actual knowledge of SEB’s patent. Section 271(b) provides that “[w]hoever actively induces infringement of a patent shall be liable as an infringer.” Over the last two decades, the Federal Circuit has offered various formulations of what mental-state requirement must be proven to establish liability under § 271(b). On appeal in this case, the Federal Circuit held that the mental-state requirement could be satisfied by evidence of “deliberate indifference of a known risk that a patent exists” and that Global-Tech’s actions constituted such deliberate indifference.

The Supreme Court rejected the Federal Circuit’s analysis but nonetheless affirmed the judgment. The Court held that inducing infringement liability under § 271(b) requires evidence that the infringer had knowledge that “the induced acts constitute patent infringement.” Adopting the argument advanced by SEB, the Court held that this knowledge requirement could be satisfied by evidence of “willful blindness.” After analyzing the record, the Court held that the judgment for SEB could be affirmed based on the evidence of Global-Tech’s willful blindness. The Court focused on Global-Tech’s decision to purchase the fryer to reverse-engineer it overseas (where it would not have U.S. patent markings) and then to deliberately withhold from its attorney the basic information that its fryer was a copy of SEB’s fryer.

This decision clears up an issue of long-standing confusion in the Federal Circuit as to the mental-state requirement of § 271(b). The Court’s explication of the standard should be welcome news to both innovators and holders of patents. The decision prevents frivolous claims of inducing infringement by requiring proof of knowledge of infringement. At the same time, it allows companies to protect their intellectual property rights against those companies that willfully blind themselves to a lawful patent in order to copy a commercially successful product. Corporations hiring attorneys to conduct patent searches should be sure to disclose to their attorneys any products copied or relied upon in developing a new technology.

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

Florida Minimum Wage To Increase Tomorrow

An important FYI posted today by Jay P. Lechner of Greenberg Traurig, LLP about the impending increase in minimum wage in Florida:

 

Florida’s minimum wage increases tomorrow to $7.31 per hour — a 6 cent increase. The minimum wage for tipped workers also goes up 6 cents, to $4.29 per hour. These increases are the result of a recent circuit court decision in Leon County ruling that the state’s method of calculating minimum wage was incorrect under the Florida Constitution.

The Florida Constitution and the Florida Minimum Wage Act require the state to annually “calculate an adjusted state Minimum Wage rate by increasing the state Minimum Wage by the rate of inflation for the twelve months prior to each September 1st using the consumer price index (CPI) for urban wage earners and clerical workers….” Neither the Constitution nor the Act specifically addresses deflation in the computation of the minimum wage. Yet, due to a slight cost of living decrease during the 12-month period preceding September 1, 2009, the state lowered the state minimum wage rate in 2010 from $7.21 to $7.06, dropping it below the federal minimum wage. Then, in determining the 2011 rate, the state calculated an increase to $7.16 (still below the federal rate) based on a 1.4 percent cost of living increase during the 12-month period preceding September 1, 2010.

The court found that the state’s method for calculating the state minimum wage rate was incorrect because, based on the constitutional language, the minimum wage cannot be decreased. Soon after the ruling, a Florida Senate bill intended to amend the Act consistent with the state’s approach was withdrawn from consideration.

When the federal and Florida minimum wage rates differ, Florida employers are required to pay the higher rate. Tomorrow’s increase raises the Florida minimum wage above the $7.25 federal minimum wage rate. Thus, employers currently paying federal minimum wage to eligible workers in Florida must adjust their pay practices accordingly.

©2011 Greenberg Traurig, LLP. All rights reserved.

 

Prevailing Antitrust Defendants Recover $367,000 in e-Discovery Costs

Posted yesterday at the National Law Review by Eric S. O’Connor  of  Sheppard Mullin – a recent case out of the Western District of PA – Race Tires America v. Hoosier Racing Tire Corp., where prevailing antitrust defendants were awarded  by the court $367,000 in e-discovery costs incurred by their vendor. 

Recently, prevailing antitrust defendants were awarded $367,000 in e-discovery costs incurred by their vendor. See Race Tires America v. Hoosier Racing Tire Corp., 2011 WL 1748620 (W.D. Pa. May 6, 2011). While the Court labeled the facts as “unique” and that its holding was limited, the Court’s opinion is very thorough and the facts may be familiar to many antitrust defendants.

In today’s age where the costs of e-discovery can run several hundred thousand dollars or more and outside vendors are routinely hired to help, this holding can be used as a shield and a sword. During discovery, a party can alert the other side that aggressive discovery requests and a demand for many electronic search terms is a major factor in awarding costs of e-discovery – if the responding party prevails. And, if a party should prevail, the potential for an award of the costs of e-discovery can be an additional bonus and/or leverage for any post-verdict resolution without appeal.

The facts are simple. Plaintiff Specialty Tires America (STA) brought antitrust claims against Hoosier Racing, its tire supplier competitor, and Dirt Motor Sports, Inc. d/b/a World Racing Group, a motorsports racing sanctioning body. STA claimed that a so-called “single tire rule” by various sanctioning bodies like Dirt Motor Sports, as well as the related exclusive supply contracts between some of these sanctioning bodies and Hoosier violated Section 1 and 2 of the Sherman Act and caused STA in excess of $80 million in damages. See Race Tires America v. Hoosier Racing Tire Corp., 614 F. 3d 57, 62-73 (3d Cir. 2010). The District Court granted summary judgment in favor of defendants finding that STA had failed to demonstrate antitrust injury, and the Third Circuit Court of Appeals affirmed. Id. at 83-84.

The normal rule that “costs — other than attorney’s fees — should be allowed to the prevailing party” (Fed. R. Civ. P. 54(d)(1)) creates a “strong presumption” that all costs authorized for payment will be awarded to the prevailing party, so long as the costs are enumerated in 28 U.S.C. § 1920, the general taxation-of-costs statute. As prevailing parties, the defendants each filed a Bill of Costs in which the majority of amounts requested were e-discovery costs. Plaintiff objected arguing that e-discovery costs were not taxable under 28 U.S.C. § 1920(4).


Section 1920(4) allows recovery of “[f]ees for exemplification and the costs of making copies … necessarily obtained for use in the case.” 28 U.S.C. § 1920(4). There are two statutory interpretation questions that have divided Courts. First, costs of electronic scanning of documents can be recoverable as “necessary” or unrecoverable as a mere “convenience.”

The other issue takes a few different forms, but focuses on whether the terms “exemplification” and “copying”, which originated in the world of paper, should be limited to physical preparation or rather updated to take into account changing technology and e-discovery. The Court discussed a litany of these cases. Some courts that have applied § 1920(4) to today’s e-discovery demands, have limited exemplification and copying to just the costs for scanning of documents, which is considered merely reproducing paper documents in electronic form, and refused to extend the statute to cover processing records, extracting data, and converting files. Courts are also divided on whether extracting, searching, and storing work by outside vendors are unrecoverable paralegal-like tasks, or whether such costs are recoverable because outside vendors provide highly technical and necessary services in the electronic age and which are not the type of services that paralegals are trained for or are capable of providing.

In this case, because the Court and the parties anticipated that discovery would be in the form of electronically stored information and because plaintiff aggressively pursued e-discovery (e.g., directing 273 discovery requests to one defendant and imposing over 442 search terms), defendants’ use of e-discovery vendors to retrieve and prepare e-discovery documents for production was recoverable as an indispensable part of the discovery process. The Court also found that the vendor’s fees were reasonable, especially because the costs were incurred by defendants when they did not know if they would prevail at trial.

The Court also denied the plaintiff’s request for a Special Master to assess the reasonableness of e-discovery costs incurred by the prevailing defendants as an unnecessary cost and delay.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP. 

Which Employers Will Be Responsible For Health Coverage In 2014?

Recently posted at the National Law Review by Abby Natelson  of  Greenberg Traurig, LLP – provides more details about which employers will be responsible for providing healthcare coverage in 2014:

The new health care law, otherwise known as the Patient Protection and Affordable Care Act (PPACA), requires that, beginning after December 31, 2013, “applicable large employers” must provide affordable health coverage to their full-time employees.   Failure to do so may subject these employers to a shared responsibility payment, or an “assessable payment,” pursuant to Internal Revenue Code §4980H.

An “applicable large employer” is defined as “an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.” A full-time employee with respect to a given month is defined as “an employee who is employed on average at least 30 hours of service per week.”

While these definitions may appear to be straightforward, the recent Notice issued by the Internal Revenue Service, together with the Department of Labor and the Department of Health and Human Services, indicates that the analysis is not so simple.

Notice 2011-36 was issued on May 2, 2011, seeking comments and providing suggested rules for interpreting and applying the meaning of “full-time employees” for purposes of IRC §4980H.

Notably, the Notice provides rules for determining whether an employer has “50 full-time employees,” which includes full-time equivalents. This means that, on a monthly basis, an employer must take the following steps to determine whether 50 full-time employees are employed:

1)                  Determine the number “full-time” employees. 
This group includes seasonal employees and all employees of a controlled group, an affiliated group, and a predecessor employer. This group does not include leased employees.

2)                  Determine the “full-time equivalents.”
This number is determined by aggregating the number of hours of service for all employees determined not to have a full-time status for the month, and then dividing these hours by 120.

At the end of a calendar year, the employer must add together the 12 monthly calculations, and divide the sum by 12 to get the average monthly full-time employees for the prior year. If the final number is 50 or more, the employer is an “applicable large employer.” 

For example, if a business employs 40 full-time employees with 40 hours of service per week and 20 part-time employees with an average of 20 hours of service per week, the employer will still be considered an “applicable large employer.”   This is because each month, the employer will have to add approximately 13.3 “full-time equivalents” (approximately 80 hours worked per month by each part-time employee, multiplied by 20 part-time employees, divided by 120) to the 40 full-time employees, bringing the total “full-time employees” for purposes of health coverage obligations to 53.3. As this example demonstrates, an employer that relies on part-time employees may still be subject to the shared responsibility provisions of the PPACA.

The Notice provides for an exception in the case of seasonal workers. This seasonal employees exception applies where an employer’s workforce exceeds 50 full-time employees for 120 days or less during a calendar year and the employees in excess of 50 were employed during those days as seasonal employees. In this case, the employer is not considered an “applicable large employer.”

Employers “not in existence during an entire preceding calendar year,” are not exempt from assessment payment liability pursuant to the Notice, and will be considered an applicable large employer if the employer reasonably expects to employ an average of at least 50 full-time employees on business days during the current calendar year.

The Notice also indicates the intent of the IRS, DOL, and HHS to allow employers to measure 130 hours of service per month to determine full-time status, rather than 30 hours of service per week. Further, the Notice includes a safe harbor for determining an employee’s full time status for future months based on the employee’s status as a full-time employee in prior months, which is intended to make administration of this rule for full-time employees easier.

In short, the proposed guidance set forth in Notice 2011-36 expands upon the inclusive definition of “full-time employees” set forth by the PPACA and reinforces the continuous burden imposed on employers to evaluate the “full-time” status of each of their employees.

©2011 Greenberg Traurig, LLP. All rights reserved.