Tag: Regulatory

The Consumer Financial Protection Bureau, Week in Review: June 10 – June 14, 2013

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CFPB Launches Regulatory Implementation Page

In an effort to streamline resources and better assist financial institutions implementing the many new rules and policies promulgated by the CFPB, the CFPB announced the launch of its “Regulatory Implementation” webpage, available here. The page is a one-stop shop for financial institutions looking for assistance in understanding some of the more salient differences and requirements of the rules. In addition to a number of quick-reference guides, the page also contains compliance guides for the following rules: (i) Ability to Repay/Qualified Mortgage; (ii) 2013 HOEPA Rule; (iii) Loan Originator Compensation; (iv) ECOA Valuations; (v) TILA HPML Appraisals; (vi) Escrows; and (vii) TILA and RESPA Servicing.

CFPB Examines Impact of Overdraft Practices on Consumers

On June 11, 2013, the CFPB released its “CFPB Study of Overdraft Programs” (the Report), which is available here. The Report was based upon (i) responses the CFPB received to a request for information published in the Federal Register in February 2012, and (ii) aggregate, institution-level information data and random samples of consumer checking accounts. Through the inquiry, the CFPB determined that overdraft programs are costly to consumers, provide substantial sources of checking account revenue for financial institutions, and vary widely across financial institutions.

The Report noted that overdraft practices employed by financial institutions are frequently very complex. Not only do the fees charged for overdraft protection vary, but many other differences exist throughout the industry, including: the number of times a consumer can be charged; whether there are caps on such charges; the amount of such caps; the scope of overdraft protection; and even the order in which transactions are posted. Each of these factors can play a significant role in determining the fees consumers will face. Accordingly, the CFPB’s report raises concerns about consumers’ ability to understand, navigate and anticipate fees.

In light of the Report’s findings, the CFPB has announced its intention to engage in further review of account-level data to better understand how differences in practices affect consumers.

CFPB Proposes New Redress System for Victims of Unlawful Activities

Under Section 1055(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB may obtain various types of monetary relief, such as restitution, refunds and damages, in both judicial and administrative proceedings. The CFPB collectively refers to such relief as “redress”, and can be required to receive such redress from a defendant and then distribute it to victims of unlawful activities. In order to better assist this process, which is known as “Bureau-Administered Redress,” the CFPB is proposing a new system of records that will enable the CFPB to manage distributions to consumers.

Specifically, the new system will enable the CFPB to: (i) track the collection, allocation and distribution of funds in the Civil Penalty Fund and redress monies; (ii) identify and locate victims who may receive such payments; (iii) determine the amounts that the CFPB will distribute to such victims; (iv) maintain associated account and financial information; and (v) develop reports to applicable tax officials regarding such payments.

The proposal, which is available here, states that any comments on the proposed system must be received no later than July 11, 2013. The new system will become effective on July 22, 2013, unless comments are received that result in a contrary determination.

CFPB Releases New Training Module to Combat Financial Exploitation of Older Americans

On June 12, 2013, the CFPB along with the Federal Deposit Insurance Corporation (FDIC), released a tool called “Money Smart for Older Adults.” The purpose of the module is to assist older adults (age 62 and older), as well as their caregivers, in avoiding and preventing financial exploitation. In addition, it provides information to educate consumers about planning for a secure financial future and making informed financial decisions.

The module, which consists of a scripted instructor guide, a participant/resource guide and Power Point slides, has been designed to be presented and administered by financial institution representatives, adult protective services agencies, senior advocacy organizations, law enforcement, and similar organizations and agencies.  The module is available, free of charge, on the FDIC website. Click here to view.

CFPB Assistant Director Tells Nonbanks to Quickly Implement Compliance Management Systems

During the American Bankers Association’s Regulatory Compliance Conference on June 12, 2013, Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, urged nonbank entities to implement compliance management systems without delay. She specifically pointed to many payday lenders, consumer reporting agencies, mortgage lenders and servicers, student lenders and debt collectors that have yet to implement these compliance management systems.

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Supreme Court Holds That Reverse Payment Patent Settlements Are Subject to Antitrust Scrutiny

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For over a decade, the antitrust enforcers at the Federal Trade Commission have challenged the type of patent settlement where a brand-name drug manufacturer pays a prospective generic manufacturer to settle patent challenges, and the generic manufacturer agrees not to bring its generic to market for a specified number of years. The lower federal courts have over the years rejected the challenges. However, on June 17, 2013, the Supreme Court addressed the issue in Federal Trade Commission v. Actavis, and in a 5-3 decision held that such settlements are subject to rule of reason antitrust scrutiny. However, beyond that conclusion, the Court left the questions of how to structure and resolve the rule of reason issue to the lower courts and future cases.

As Justice Breyer’s majority opinion summarized the issue and its holding:

Company A sues Company B for patent infringement. The two companies settle under terms that require (1) Company B, the claimed infringer, not to produce the patented product until the patent’s term expires, and (2) Company A, the patentee, to pay B many millions of dollars. Because the settlement requires the patentee to pay the alleged infringer, rather than the other way around, this kind of settlement agreement is often called a ‘reverse payment’ settlement agreement. And the basic question here is whether such an agreement can sometimes unreasonably diminish competition in violation of the antitrust laws.

In this case, the Eleventh Circuit dismissed a Federal Trade Commission (FTC) complaint claiming that a particular reverse payment settlement agreement violated the antitrust laws. In doing so, the Circuit stated that a reverse payment settlement agreement generally is ‘immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.’ And since the alleged infringer’s promise not to enter the patentee’s market expired before the patent’s term ended, the Circuit found the agreement legal and dismissed the FTC complaint. In our view, however, reverse payment settlement such as the agreement alleged in the complaint before us can sometimes violate the antitrust laws. We consequently hold that the Eleventh Circuit should have allowed the FTC’s lawsuit to proceed. (Citations omitted.)

The Court reasoned that even if the settlement agreement’s anticompetitive effects fall within the scope of the exclusionary potential of the patent, that fact or characterization cannot immunize the agreement from antitrust attack. Justice Breyer found that “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well” and that “patent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly’ — and consequently antitrust law immunity — that is conferred by a patent.”

Justice Breyer acknowledged that a conclusion of antitrust immunity would find some degree of support in a general legal policy favoring the settlement of dispute. However, he concludes that this factor should not “determine the result here” but is offset by five sets of considerations:

First, the specific restraint at issue has the potential for genuine adverse effects on competition. To the Court, even though the settlement permitted the challenger to enter the market before the patent expired, the settlement also entrenched the patent holder for the period the challenger agrees to stay out of the market in exchange for a payment, delaying the potential for lower prices. As the Court put it, “The patentee and the challenger gain; the consumer loses.”

Second, these anticompetitive consequences will at least sometimes prove unjustified. To be sure, in some circumstances, the reverse payment may amount to no more than a rough approximation of the litigation expenses saved through the settlement, or compensation for other services the generic has promised to perform. In such circumstances, a patentee is not using its monopoly profits to avoid the risk of patent invalidation or a finding of no infringement. In the antitrust proceeding, the Court concludes, the patentee should have to show that such legitimate justifications are present.

Third, where a reverse payment threatens to inflict unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about.

Fourth, the majority believes that an antitrust action would be administratively feasible. The majority did not believe that it would be necessary to litigate patent validity to normally answer the antitrust question — an unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. “In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.”

Fifth, the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling in some other way, without the potential to maintain and share patent-generated monopoly profits.

The FTC advocated that the Court adopt a rule that reverse payments are “presumptively unlawful” and that they be analyzed under a “quick look” approach, requiring the patentee to show empirical evidence of procompetitive effects. The Court rejected this position, instead instructing the issue undergo a full rule of reason analysis. In doing so, it left to the lower court the structuring of this and other rule of reason antitrust litigation on the issue.

In practical terms, the decision leaves many difficult issues to be grappled with, and the majority’s apparent confidence that the antitrust question is answerable without getting into the patent issues themselves may prove more aspirational than practical. Chief Justice Roberts’s dissent exposes one flaw:

The majority seems to think that even if the patent is valid, a patent holder violates the antitrust laws merely because the settlement took away some chance that his patent would be declared invalid by a court. …This is flawed for several reasons.

First, a patent is either valid or invalid. The parties of course don’t know the answer with certainty at the outset of litigation; hence the litigation. But the same is true of any hard legal question that is yet to be adjudicated. Just because people don’t know the answer doesn’t mean that there is no answer until a court declares one. Yet the majority would impose antitrust liability based on the parties’ subjective uncertainty about that legal conclusion.

The Court does so on the assumption that offering a ‘large’ sum is reliable evidence that the patent holder has serious doubts about the patent. Not true. A patent holder may be 95% sure about the validity of its patent, but particularly risk averse or litigation averse, and willing to pay a good deal of money to rid itself of the 5% chance of a finding of invalidity. What is actually motivating a patent holder is apparently a question district courts will have to resolve on a case-by-case basis. The task of trying to discern whether a patent holder is motivated by uncertainty about its patent, or other legitimate factors like risk aversion, will be made all the more difficult by the fact that much of the evidence about the party’s motivation may be embedded in legal advice from its attorney, which would presumably be shielded from discovery.

The FTC has hailed the decision:

The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets. The Court has made it clear that [reverse payment] agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws. With this finding, the Court has taken a big step toward addressing a problem that has cost Americans $3.5 billion a year in higher drug prices.

The FTC’s “victory lap” is probably premature. To be sure, we now know that blanket antitrust immunity for reverse payment settlements does not exist. However, everything else remains up for grabs. Until there are additional decisions grappling with the actual issue of liability issued, and reviewed, the extent and circumstances of antitrust liability is unclear. The risk-averse patent holder to whom Justice Roberts alluded might well be motivated to avoid utilizing reverse payments in structuring settlements in the future. In addition, the Competition Office of the European Union actively continues to examine reverse payments settlements, and there have been renewed calls for federal legislation banning such settlements.

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Basic Guidelines for Protecting Company Trade Secrets

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Under the Uniform Trade Secrets Act (UTSA), “trade secrets” are generally defined as confidential proprietary information that provides a competitive advantage or economic benefit. Trade secrets are protected under the Economic Espionage Act of 1994 (EEA) at the federal level, and the vast majority of states have enacted statutes modeled after the UTSA (note that some jurisdictions, such as California, Texas and Illinois, have adopted trade secret laws that differ substantially from the UTSA; thus, businesses should research laws in the relevant jurisdiction(s).). Under the UTSA, to be protectable as a trade secret, information must meet three requirements:

i. the information must fall within the statutory definition of “information” eligible for protection;

ii. the information must derive independent economic value from not being generally known or readily ascertainable by others using appropriate means; and

iii. the information must be the subject of reasonable efforts to maintain its secrecy.

Trade secret theft continues to accelerate among U.S. companies, and can have drastic consequences. To combat this threat, Congress and certain state legislatures have recently enacted legislation to broaden trade secret protection. As a result, it is paramount that companies safeguard all proprietary information that may qualify as protectable trade secrets. This blog post explains some key trade secrets concepts, and offers pointers on how to identify and protect trade secrets.

(1) Determine Which Data Constitutes “Information”

The UTSA-type statutes generally define “information” to include:

Financial, business, scientific, technical, economic, and engineering information;

Computer code, plans, compilations, formulas, designs, prototypes, techniques, processes, or procedures; and

Information that has commercial value, such as customer lists or the results of expensive research.

Courts have similarly interpreted “information” to cover virtually any commercially valuable information. Examples of information that has been found to constitute trade secrets includes pricing and marketing techniques, customer and financial information, sources of supplies, manufacturing processes, and product designs.

(2) “Valuable” and “Not Readily Ascertainable” Information

To be protectable, information must also have “economic value” and not be “readily ascertainable” by others. Courts generally determine whether information satisfies this standard by considering the following factors:

Reasonable measures have been put in place to protect the information from disclosure;

The information has actual or potential commercial value to a company;

The information is known by a limited number of people on a need-to-know basis;

The information would be useful to competitors and would require a significant investment to duplicate or acquire the information; and

The information is not generally known to the public.

(3) Take Reasonable Measures to Maintain Secrecy

Businesses should implement technical, administrative, contractual and physical safeguards to keep secret the information sought to be protected. Companies should identify foreseeable threats to the security of confidential information; assess the likelihood of potential harm flowing from such threats; and implement security protocols to address potential threats. Examples of security measures might include restricting access to confidential information on a need-to-know basis, employing computer access restrictions, circulating an employee handbook that outlines company policies governing confidential information, conducting entrance interviews for new hires to determine whether they are subject to restrictive covenants with former employers, conducting exit interviews with departing personnel to ensure that the employee has returned all company materials and agrees to abide by post-employment obligations, encrypting confidential information, limiting access to confidential information through passwords and network firewalls, track all access to network resources and confidential information, restrict the ability to email, print or otherwise transfer confidential information, employ security personnel, limit visitor access, establish surveillance procedures, and limit physical access to areas that may have confidential information.

Conclusion

This blog post is intended to provide some broad guidelines to identifying and protecting company trade secrets. Most if not all companies have confidential information that may be protectable as a trade secret. But certain precautions need to be in place to ensure that the information is protectable. Because each company and situation is different, you should seek advice about your specific circumstances.

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Tri-Agencies Release Final Rules on Wellness Programs

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On May 29, 2013, the U. S. Departments of Labor, Health and Human Services and the Treasury (the Tri-Agencies) issued final regulations (the final rules) implementing the changes that the Patient Protection and Affordable Care Act (PPACA) made to wellness programs. The final rules apply to both grandfathered and non-grandfathered group health plans and are effective for plan years beginning on or after January 1, 2014.

The final rules do not change the basic distinction between “participatory” wellness programs and “health-contingent” wellness programs. The final rules, consistent with the proposed rules, focus largely on revisions to health-contingent wellness programs. The key PPACA changes to the 2006 wellness regulations include:

  • Increases in the maximum allowable rewards under a health-contingent wellness program from 20% of the cost of coverage to 30% for non-smoking related programs and a 50% maximum for smoking related programs;
  • Clarifications of what constitutes a “reasonably designed” health-contingent wellness program; and
  • Additional guidance on reasonable alternatives that must be offered under any health-contingent wellness program so that the program remains non-discriminatory.

Participatory wellness programs are programs that either do not provide a reward or do not require an individual to meet a standard related to a health factor in order to obtain a reward. Participatory wellness programs are presumed to be nondiscriminatory if participation is made available to all similarly situated individuals, regardless of their health status. Examples include programs that reimburse employees for the cost of membership in a fitness center, or reward employees who complete a health risk assessment. These programs are easier to administer and not subject to the more exacting criteria that apply to health-contingent wellness programs.

Health-Contingent wellness programs require an individual to satisfy a health-related standard to obtain a reward. Examples include programs that provide a reward for smoking cessation, or programs that reward achievements for specified health-related goals, such as lowering cholesterol levels or losing weight. The final rules subdivide health-contingent wellness programs into two types: activity-only and outcome-based. An activity-only wellness program requires an individual to perform or complete an activity related to a health factor (e.g., a diet or exercise program), but it does not require the individual to reach or maintain a specific health result. In contrast, an outcome-based wellness program requires an individual to reach or maintain a specific health outcome (such as not smoking or attaining certain results on biometric screenings).

Modification to Maximum Rewards

All health-contingent wellness programs must satisfy five requirements to ensure compliance with the HIPAA non-discrimination rules. The final rules, as noted above, increase the maximum rewards allowed under a health-contingent wellness program. The five requirements are listed below and reflect the PPACA increases in the maximum rewards:

  1. The reward must be available to all similarly situated individuals;
  2. The program must give eligible individuals the opportunity to qualify for the reward at least once a year;
  3. The program must be reasonably designed to promote health and prevent disease;
  4. The reward must not exceed 30% of the cost of coverage (or 50% for programs designed to prevent or reduce tobacco use); and
  5. The program must provide a reasonable alternative standard to an individual who informs the plan that it is unreasonably difficult or medically inadvisable for him or her to achieve the standard for health reasons and therefore will not get the reward.

Clarifications to Reasonable Designs

Consistent with the 2006 regulations, the final rules continue to require that health-contingent wellness programs be reasonably designed to promote health or prevent disease. A program will meet this standard if it has a reasonable chance of improving health or preventing disease; is not overly burdensome; is not a subterfuge for discrimination based on a health factor; and is not highly suspect in the method chosen to promote health or prevent disease. The rules provide plan sponsors with a great deal of flexibility to design a wellness program.

Guidance on Reasonable Alternatives

The final rules modify the structure of the 2006 requirements with respect to providing reasonable alternatives for those individuals who are unable to attain the health-related goals of a health-contingent wellness program.

First, to satisfy the reasonable alternative requirement, the same full reward must be available to individuals who satisfy the reasonable alternative as is provided to individuals who are able to satisfy the standard program. As noted in the Preamble to the final rules, this means that the reasonable alternative must allow the individual a longer period to complete the program, and the reward earned must be the same as that given under the standard program.

The final rules do not require that the reasonable alternative be determined in advance and, consistent with past practice, allows the alternative to be set on an individual-by-individual basis. The final rules reiterate that, in lieu of providing a reasonable alternative, a plan or issuer may waive the otherwise applicable standard and simply provide the reward. Although in general a doctor’s verification is not needed for an individual to qualify for the reasonable alternative, the final rules do permit a doctor’s verification to be required under the activity-based reasonable alternative.

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New Data Breach Class Action has Two Million Plaintiffs

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Cyber breaches resulting in the release of personal identifiable information (PII) are increasingly common and now we are starting to see class action lawsuits filed as a result. In what will likely be the beginning of a wave of lawsuits filed as a result of cyber breaches, Schnucks Markets, operator of 100 supermarkets across the Midwest, recently removed a class action lawsuit filed against it to federal court stemming from a data breach that occurred in March in which 2.4 million credit card numbers were stolen.

The Class action complaint alleges Schnucks failed to properly and adequately safeguard its customer’s personal and financial data. In addition to common law negligence and disclosure, the plaintiffs allege a violation of the Illinois Personal Information Protection Act which requires a data collector of personal information to notify individuals in the most expedient manner possible and without unreasonable delay. The complaint alleges Schnucks waited over two weeks to notify its customers and then did so only through a press release as opposed to providing actual notice to individual consumers. Apparently Schnucks struggled to find the source of the breach and this delay may have continued to expose the PII of people who shopped at its stores.

cybercrime graphicSchnuck’s notice of removal to federal court states the grounds for removal include a class size of more than 100 people and damages at issue are greater than $5 million. Schnucks also explains that the data breach was the result of criminals hacking into its electronic payment systems at 23 stores. Further, during the relevant period, 1.6 million credit or debit card transactions took place at these stores. Schnucks calculates that 500,000 unique credit or debit cards were involved thus the putative class has at least 500,000 members.

Damages alleged by the plaintiffs include having their credit card data compromised, incurring numerous hours cancelling their compromised cards, activating replacement cards and re-establishing automatic withdrawal payment authorizations as well as other economic and non-economic harm. Given that data breaches are becoming increasingly common it is likely that there will be more lawsuits filed similar to Schnucks in the near future. Legal counsel experienced in cyber risk and insurance can assist retailers and insurance companies with handling such problems as they arise.

Federal Energy Regulatory Commission (FERC) To Hold Technical Conference on Centralized Capacity Markets in Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs)

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The Federal Energy Regulatory Commission (FERC) announced this week that it will hold a technical conference on centralized capacity markets in Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). The purpose of the technical conference is to consider how current centralized capacity market rules and structures are supporting the procurement and retention of resources necessary to meet future reliability and operational needs. In its Notice, FERC pointed out that since their establishment, centralized capacity markets have continued to evolve. Meanwhile, the mix of resources is also evolving in response to changing market conditions, including low natural gas prices, state and federal policies encouraging the entry of renewable resources and other specific technologies, and the retirement of aging generation resources. This changing resource mix, according to FERC, may result in future reliability and operational needs that are different than those of the past. In addition, some states have pursued individual resource adequacy policies to ensure the development of new resources in particular areas or with particular characteristics, and questions have been raised as to how those individual policies can be accommodated in centralized capacity markets.

FERC noted that it has addressed a number of these issues in specific cases, based on the facts and circumstances presented in a given case and the particular centralized capacity market design implemented by individual regions. This technical conference will provide an opportunity to review at a high level the centralized capacity market rules and structures, and will examine how these markets are accomplishing their intended goals and objectives through a competitive, market-based process. Recognizing and respecting differences across the markets, the technical conference will focus on the goals and objectives of existing centralized capacity markets (e.g., resource adequacy, long-term price signals, fixed-cost recovery, etc.) and examine how specific design elements are accomplishing existing and emerging goals and objectives (e.g., forward period, commitment period, product definition and specificity, market power mitigation, etc.).

The technical conference will take place at the Commission on September 25, 2013 from 9:00 a.m. to approximately 5:00 p.m. All interested persons are invited to participate and the conference will be broadcast free by webcast. A supplemental notice will be issued in Docket No. AD13-7-000 with further details regarding the agenda and information regarding interest in speaking at the technical conference.

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U.S. International Trade Commission Grants Injunctive Relief on Standard Essential Patent

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The U.S. International Trade Commission has issued an exclusion order barring importation of certain older model Apple products for infringing a Samsung patent.  The case is significant because the infringed patent was standard essential and encumbered by a commitment to license on fair, reasonable and non-discriminatory terms.  Patent holders and potential defendants should carefully monitor further developments regarding the availability of injunctive relief for infringement of standard essential patents.

On June 4, 2013, the U.S. International Trade Commission (ITC) issued an exclusion order barring the importation and sale of several older model Apple iPhones and iPads for infringing a Samsung patent.  This in itself is unremarkable, as the patent laws permit patent holders to seek monetary and injunctive relief against anyone who infringes their patents, and injunctive relief is commonly granted to prevailing patent holders.  The ITC ruling is noteworthy, however, because the infringed patent was essential to the 3G standard and was subject to a fair, reasonable and non-discriminatory (FRAND) licensing commitment.  The ruling therefore runs counter to views expressed by the U.S. antitrust enforcement agencies to the effect that injunctive relief should be disfavored when dealing with FRAND-encumbered standard essential patents (SEPs), underscoring the growing debate as to the appropriate balance between the rights of SEP holders under the patent laws and antitrust policy.

In September 2012, the presiding administrative law judge (ALJ) ruled that Apple had not infringed any of the patents-in-suit, and that one of those patents was invalid.  Samsung and the staff attorney from the ITC’s Office of Unfair Import Investigations petitioned for review of the ALJ’s decision.  The ITC then requested public comment on its authority to issue an import ban (which is in essence injunctive-type relief) on products that infringe SEPs.  (Monetary damages are not awarded in ITC cases.)  After receiving a number of comments, the ITC issued its decision modifying the ALJ’s construction of certain terms in one of the patents and holding that, as modified, Apple had infringed the patent.  The ITC determined that two of the three remaining patents were not invalid, but also not infringed, and the final of those patents was both invalid and not infringed.  Based on the infringement of one of Samsung’s patents, the ITC issued an import ban with one commissioner dissenting on public interest grounds.

The case arose as part of the broader ongoing intellectual property disputes between Apple and Samsung over popular consumer electronics devices.  The matter has been submitted to the White House and U.S. Trade Representative for a 60-day presidential review period, but it has been decades since an administration overruled an ITC exclusion order.  If the administration does not reverse the decision, Apple can appeal the decision to the U.S. Court of Appeals for the Federal Circuit.

In a recent policy paper entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments,” the U.S. Department of Justice Antitrust Division and the U.S. Patent and Trademark Office argued that the ITC and the courts generally should not grant injunctive relief for infringement of SEPs.  The Federal Trade Commission argued the point even more forcefully in a statement submitted last year in ITC investigation 337-TA-752, In re Certain Gaming and Entertainment Consoles, Related Software, and Components Thereof, asserting that on the basis of its mandate to consider the public interest, the ITC should not issue exclusion orders related to FRAND-encumbered SEPs.  In support of their position, these agencies have advanced two principal arguments.  First, they assert that the fact that the patentee voluntarily agreed to license the patent on FRAND terms implies that money damages are a sufficient form of relief.  They therefore argue that if the patentee’s first priority was excluding others from using the patent, it would not have bound itself to FRAND terms or tried to secure the patent’s incorporation into a standard.

Second, the agencies argue that injunctive relief may enable patent “hold-ups” by SEP holders.  At the time a standard setting organization is deciding what technology to adopt, patentees often compete with one another as to whose technology will be adopted.  But once a standard is adopted and large investments are made based on that standard, sunk costs often make switching to a different technology or innovating around the patent prohibitively expensive.  Thus, a company wishing to have its patent incorporated into the standard typically must agree to license that patent on FRAND terms.  The antitrust agencies fear that SEP owners can use the threat of injunctive relief to extract above-FRAND royalties from rivals, and that these additional costs are likely to be passed on to consumers.  The agencies therefore argue that the public interest, which the ITC is charged with taking into account, counsels against exclusion orders in these circumstances.

On the other side of the ledger, SEP holders point out that when a patent holder agrees to license its patent on FRAND terms, it is only making a commitment about the terms on which it will grant a license, not surrendering any remedy afforded by the patent laws.  They go on to argue that the position staked out by the agencies places them in an untenable position because prospective licensees may not accept a proposed license on FRAND terms or may disagree with the SEP holder about whether the terms are, in fact, FRAND.  When a dispute arises over the terms on which a SEP will be licensed, patent holders have a legitimate interest in wanting to ensure their ability to pursue all remedies authorized under the patent laws.  These remedies afford patent holders the ability to protect their intellectual property rights and thereby promote innovation.  Making it more difficult to obtain injunctive relief on SEPs would diminish their incentive to invest in innovation, which is one of the fundamental objectives of the patent laws.

The recent ITC decision represents a clear win for SEP holders, but as noted above, it is subject to further review and possible appeal.  And in all events, the underlying policy debate will most assuredly continue.  As a consequence, it is incumbent both upon patent holders and potential defendants to continue to carefully monitor developments in evaluating the availability of injunctive relief in the context of SEPs.

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I-94 Automation and the I-9 Process: Making the Immigration Form I-9 More Complicated

Sheppard Mullin 2012

This spring U.S. Customs and Border Protection (CBP) began implementation of a phased in Form I-94, Arrival/Departure Record, automation process. The Form I-94 is issued to all visitors entering the U.S. and assists CBP in tracking temporary non-immigrants, visa overstays, and other relevant information concerning foreign nationals entering the U.S. The new program created a paperless admission process with the ultimate goal of eliminating the paper I-94 card for foreign travelers. The automation enables CBP to organize admission data for sea and air entries easily and accessibly, saving an estimated $15.5 million per year in related costs (not from a reduction in paper). While the effort to move to an electronic system should be commended, the new system may make life a bit more complicated for employers sponsoring foreign workers due to the requirements of the Form I-9, Employment Eligibility Verification Form process. Travelers, with the exception of asylees and refugees who will continue to receive paper Form I-94 cards, will now receive an admission stamp together with a tear sheet providing instructions on how they may access and print their electronic Form I-94 by visiting www.cbp.gov/I94.

How will I-94 automation impact the Form I-9 Employment Eligibility Verification process?

For those employees entering the United States to work for a sponsoring employer, current Form I-9 instructions state that the individual must present his/her foreign passport and I-94 card for recording List A document information. With the new system, however, workers will need to go online to retrieve their I-94 numbers and present employers with their foreign passport and I-94 printout from the CBP Website. Based on our conversations with U.S. Citizenship and Immigration Services (USCIS), it appears that the Service will accept either the paper I-94 card or the printout of the I-94 for Form I-9 purposes in combination with the employee’s foreign passport. Employers collecting an I-94 printout should record it as an “I-94” for Form I-9 purposes, with the issuing authority as “CBP” and the document number and expiration date taken from the printout itself.

In addition, CBP will issue Form I-94 cards to refugees, asylees, and parolees with preprinted numbers on the documents that have been crossed out. CBP officials will hand write the valid admission number on the I-94 card. When completing a Form I-9 for an employee with a paper Form I-94 with a crossed out number, be sure to record the handwritten admission number in Section 2 of the Form I-9 if that employee presents his or her I-94.

Making the process more confusing, the new Form I-9 requires employees to know which government agency issued the I-94 number: USCIS or CBP. If CBP issued the employee’s I-94 number, the employee must complete Section 1 of the Form I-9 with an I-94 number instead of an Alien Registration/USCIS Number and must complete the Form I-9 with their admission number, foreign passport number and country of issuance. Generally, CBP will issue the Form for visitors entering through a land or sea port of entry. However, if USCIS is the government entity that issued the I-94 admission number “N/A” should be entered by the employee for the foreign passport number and country of issuance and the employee should record his/her Form I-94 admission number in Section 1 of the Form I-9. USCIS will issue the Form when there is a change, amendment, or extension of an employee’s status in the United States.

Issues with the Automated System

Some employers have already encountered issues with this new system, as not all new hires have been able to access their I-94 information from the online system. After speaking with CBP officials, it appears that this mainly is occurring when employees enter the country and then begin work almost immediately after entry. CBP is working to correct the problem. In the meantime, employers processing Form I-9 paperwork for new foreign national hires with electronic I-94 documents should use caution when completing the Form and should document the reason for any delays in processing if they are due to errors with the new government system. Completing the Form I-9 paperwork should not be delayed under any circumstance, as late completion could expose a company to liability. In addition, employees with issues accessing their I-94 information should call CBP at 1-877-221-5511 and inquire into their case status and the reason for the delay. Calls to USCIS inquiring into what employers should do in this situation were met with the same response.

If CBP is unable to provide the information for a new hire, the employee may want to consider adding a note to the Form I-9 in Section 1, explaining “No I-94 number available due to a government system issue.” The employee should be reminded to call CBP and continue to check the I-94 website. After the employee’s information is loaded to the system and the employee receives the I-94 number, Section 1 should be amended to include the I-94 number with the appropriate initial and dating. In Section 2 of the Form I-9, the employer should record the foreign passport information and the I-94 stamp information. In the “document number” field, the employer should indicate “I-94 number pending.” Upon receipt of the I-94 printout, the Form should be amended to include the appropriate I-94 number and should be initialed/dated by the employer.

Hopefully the issue of lag time between the entry of data and employee’s first day of work will be remedied by CBP in the coming weeks, but until then be sure that your company has a policy for addressing the situation and that the policy is applied consistently to all foreign national workers.Jennifer Biloshmi also contributed to this article.

Jennifer Biloshmi also contributed to this article.

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Does A Securities and Exchange Commission (SEC) Attorney Commit An Ethical Violation By Encouraging Whistleblowing Lawyers?

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The Harvard Law School Forum on Corporate Governance and Financial Regulation included a comprehensive post by Lawrence A. West which tackles the question of whether attorneys can be award seeking whistleblowers.  I want to approach the topic from the other direction.  May an SEC attorney actively solicit disclosure of client confidences from an member of the California State Bar?

California lawyers are governed by the State Bar Act (Cal. Bus. & Prof. Code §§ 6000 et seq.) and the California Rules of Professional Conduct adopted by the Board of Governors of the State Bar of California and approved by the Supreme Court of California pursuant to Sections 6076 and 6077 of the Business and Professions Code.  The federal District Courts located in California have adopted California’s statutes, rules and decisions governing attorney conduct.  Central District Local Rule 83-3.1.2, Eastern District Local Rule 180(e), Northern District Local Rule 11-4, and Southern District Local Rule 83.4(b).

Section 6068(e) provides that members of the California bar must “maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client”.   The only statutory exception permits, but does not require, an attorney to ”reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual”.

Rule 1-120 of the California Rules of Professional Conduct provides that a member “shall not knowingly assist in, solicit, or induce any violation of these rules or the State Bar Act,” including Section 6068(e).   Thus, an SEC attorney who is a member of the California State Bar (or subject to the local rules of the U.S. District Court) could be found to violate Rule 1-120 if she actively induces an attorney to violate of Section 6068(e).

Of course, the SEC has taken the position that its attorney conduct rules (aka “Part 205 Rules”) preempt conflicting state law.  However, there is a real question of whether the SEC acted in excess of its authority in purporting to immunize lawyers.  More importantly, it is questionable whether the SEC can preempt state law in this regard.  In 2004, I co-wrote a law review article for the Corporations Committee of the Business Law Section of the State Bar that considered these questions in detail, Conflicting Currents: The Obligation to Maintain Inviolate Client Confidences and the New SEC Attorney Conduct Rules, 32 Pepp. L. Rev. 89 (2004).  The other authors were James F. Fotenos, Steven K. Hazen, James R. Walther, and Nancy H. Wojtas.

If you think it is ok to violate your client’s confidences, you may want to reflect on the case of Dimitrious P. Biller.  In 2011, an arbitrator order Mr. Biller to pay his former employer $2.6 million in damages and $100,000 in punitive damages.   According to the arbitrator,Hon. Gary L. Taylor (Ret.), Mr. Biller “did the professionally unthinkable: he betrayed the confidences of his client.”  The arbitration award was confirmed by the trial court and upheld by the Ninth Circuit Court of Appeals, Biller v. Toyota Motor Corp., 668 F.3d 655 (9th Cir. 2012).  You may also want to consider what Justice Shinn had to say about an attorney who disclosed confidential client information after being ordered to do so by a trial court:

Defendant’s attorney should have chosen to go to jail and take his chances of release by a higher court

People v. Kor, 277 P.2d 94, 101 (Cal. Ct. App. 1954) (emphasis added).

Finally, you may want to put yourself in the position of a client.  How effectively represented would you feel if you knew that your lawyer could be rewarded for violating your confidences?  How would you feel about a government agency that believes it is permissible to encourage lawyers to do the “professionally unthinkable”?

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FTC v. Actavis, Inc.: Supreme Court Rules That Reverse Patent Settlements May Violate Antitrust Laws

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On April 29, 2013, the Supreme Court declined to review a decision that had created uncertainty as to when a manufacturer’s customer loyalty program may violate antitrust laws. Most circuits considering the issue have found that companies can use loyalty programs or long-term agreements, as long as the rebates do not price the product below cost. The Third Circuit, however, found that a manufacturer’s customer loyalty program amounted to an unlawful “de facto exclusive dealing contract,” despite the above-cost price of the product. The Supreme Court’s decision to allow the Third Circuit opinion to stand raises many questions as to when manufacturers may use incentive programs and which legal standard will be used to analyze these agreements. Regardless of where a company is located, if the company’s products are sold within the Third Circuit (Pennsylvania, New Jersey, Delaware and the U.S. Virgin Islands), then that company may be impacted by this decision.

The case of ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012) cert. denied, ___ U.S. __, 2013 WL 673880 (U.S. Apr. 29, 2013), involved two manufacturers of heavy-duty truck transmissions. The defendant, a leading supplier of these transmissions in North America, signed long-term agreements with its customers. Those agreements provided incentives to its customers, offering rebates to those who purchased a specified percentage of their parts from the defendant manufacturer. The plaintiff, a competitor in the heavy-duty transmission market, brought suit, claiming that the defendant’s long-term agreements constituted illegal exclusive dealing contracts. After trial, a jury found that the agreements stifled competition and violated antitrust laws. The defendant sought to overturn the jury verdict, arguing that its agreements were lawful, because it priced its transmissions above cost. The U.S. District Court for the District of Delaware upheld the jury verdict, however, finding that there was sufficient evidence to conclude that defendant’s conduct unlawfully foreclosed competition. Defendant appealed to the Third Circuit.

On appeal, the defendant urged the Third Circuit to follow the First, Second, Sixth, Eighth, and Ninth Circuits, which apply a “price-cost test” when analyzing long-term agreements which offer above-cost rebates. Under the “price-cost test,” a company is not engaging in anticompetitive conduct if it prices its products above cost. Instead, the Third Circuit applied the “rule of reason” test and found that the customer loyalty program constituted a “de facto exclusive dealing arrangement.” Under the rule of reason, “exclusive dealing arrangements can exclude equally efficient (or potentially equally efficient) rivals, and thereby harm competition, irrespective of below-cost pricing.” Therefore, the Third Circuit upheld the District Court jury verdict, stating that defendant’s  “conduct unlawfully foreclosed a substantial share of the HD transmission market, which would otherwise have been available for rivals.” The defendant then appealed to the Supreme Court, which declined to hear the case, allowing the Third Circuit’s decision to stand.

In refusing to consider the Third Circuit’s decision, the Supreme Court has failed to resolve a conflict in the circuits as to how long-term agreements containing rebates or other incentives will be analyzed by the courts. This conflict removes the predictability of a single “price-cost” standard applied across all circuits and creates uncertainty for manufacturers who wish to offer loyalty programs to their customers. In the future, manufacturers hoping to offer such programs may want to ensure that their agreements can withstand both the price-cost test and rule of reason analysis.