Appeals Court Overturns Stem Cell Ban

On April 29th, in Sherley v. Sebelius, the U.S. Court of Appeals for the D.C. Cir., overturned the injunction imposed by the district court, which had blocked the implementation of the 2009 NIH Guidelines on finding research using human embryonic stem cells. 74 Fed. Reg. 32170(2009). The Guidelines, in turn, had been formulated to implement President Obama’s executive order 13505 that lifted President Bush’s executive order banning such funding. The suit, brought by two researchers working with adult stem cells, argued that the Guidelines were in conflict with the 1996 Dickey-Wicker Act, which banned funding for both research that would create human embryos for research purposes or would destroy human embryos. For more background, see this post from Sept. 1, 2010.

The Court found that preliminary injunction was improperly granted “because Dickey-Wicker is ambiguous and the NIH seems reasonably to have concluded that, although [D-W] bars funding for the destructive act of deriving an ESC from an embryo, it does not prohibit funding a research project in which an ESC will be used.”  In other words, if some other unfunded entity disassembles an unwanted embryo obtained with informed consent of the donor from an in vitro fertilization clinic and provides the ESCs to a researcher, the researcher can obtain federal funding to study them. Since establishing the Guidelines, the NIH has approved additional ESC lines for federal funding. While this is good news for researchers working with embryonic stem cell lines approved under the NIH Guidelines, the underlying suit will continue to threaten the administration’s more liberal view of stem cell research.

False Marking Claims Must Be Pled with Specificity as to Intent

The U.S. Court of Appeals for the Federal Circuit settled a split among the district courts when it held that false patent marking claims must be pled with particularity under Fed. R. of Civ. Pro. 9(b).   In granting the defendant’s petition for a writ of mandamus, the Federal Circuit held that the district court should have dismissed a false marking complaint for failure to plead, with particularity, the circumstances of defendant’s alleged intent to deceive the public.   In re BP Lubricants USA Inc., Misc. Docket No. 960 (Fed. Cir., Mar. 15, 2011) (Linn, J.).

The plaintiff had included in its complaint allegations that BP was a “sophisticated company” having experience applying for, obtaining and litigating patents.   Based on that categorization, the plaintiff claimed BP “knew or should have known” that the patent had expired.   The district court concluded that the complaint satisfied the requirements of Rule 9(b) because it had pled the who, how, what and when of the alleged fraud.  BP sought mandamus at the Federal Circuit.

The Federal Circuit clarified that in all cases sounding of fraud or mistake, Rule 9(b) requires the plaintiff to plead “with particularity the circumstances constituting the fraud or mistake.”   The Court noted that Rule 9(b) acts as a “safety valve to assure that only viable claims alleging fraud or mistake are allowed to proceed to discovery.   … Permitting a false marking complaint to proceed without meeting the particularity requirement of Rule 9(b) would sanction discovery and adjudication for claims that do little more than speculate that the defendant engaged in more than negligent action.” The Court stated that the district court erred in denying BP’s motion to dismiss because it expressly relied on the plaintiff’s general allegations that BP knew or should have known that the patent expired. The Court explained that a complaint must provide some objective indication to reasonably infer that the defendant was aware that the patent expired.  Accordingly, general allegations that the defendant is a “sophisticated company” and that it “knew or should have known” that the patent expired are insufficient under Rule 9(b).

The Court went further and provided exemplary allegations with which a court may reasonably infer an intent to deceive, “[alleging that a] defendant [had] sued a third party for infringement of a patent after the patent had, e.g., expired or made multiple revisions of the marking after expiration” may set forth facts upon which intent to deceive can be reasonably inferred.

United States Supreme Court Upholds Validity of Arbitration Agreements That Do Not Permit Class Action Litigation

In a decision with potentially far-reaching implications in employment cases, on April 27, 2011, the United States Supreme Court, in AT&T Mobility v. Concepcion held that arbitration agreements that bar class claims are valid, and federal law preempts state laws that bar such agreements. Consequently, the potential usefulness of arbitration agreements in employment contracts – which has been uncertain in recent years – has now increased greatly. Employers can now have some confidence that they may avoid class litigation (such as discrimination and wage claims) through use of arbitration agreements.

In this case, AT&T maintained a contract with consumers pursuant to which disputes between AT&T and consumers would be resolved through a multi-step arbitration process. The arbitration clause did not permit class action claims. A consumer challenged AT&T’s arbitration clause, claimed that it was “unconscionable” under California law, and therefore unenforceable. The Federal Arbitration Act (“FAA”) (9 U.S.C. § 2), provides as follows:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle arbitration a controversy thereafter arising out of such contract or transaction…shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

Plaintiffs argued that AT&T’s agreement was “unenforceable based on grounds which exist at law or in equity” in California for the revocation of such contracts. More specifically, Plaintiffs relied on the California Supreme Court case, Discover Bank v. Superior Court, 36 Cal. 4^th 148, 113 P.3d 1100 (2005), which held that a class action waiver is invalid

“in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small amounts of money…”

The Discover Bank Court declared such waivers unenforceable. Id. at 162.

In AT&T Mobility, the Supreme Court held that the FAA preempts California law, and the Discover Bank rule. AT&T’s arbitration clause was found enforceable, even though it effectively prohibits class action claims, notwithstanding the reasoning of the California Supreme Court in Discover Bank. The United States Supreme Court held that: “Requiring the availability of class wide arbitration interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA,” as it made the process slower and more costly.  Regarding the California law, the Supreme Court held: “California’s Discover Bank rule similarly interferes with arbitration.”

The usefulness of arbitration clauses in employment agreements has been widely debated in recent years. Such clauses were to have the supposed advantage of making litigation simpler, speedier, and less expensive. But arbitrators have added procedural elements to arbitration so that, now, arbitration might in some cases actually be slower, more cumbersome, and more expensive than court litigation

Furthermore, a major drawback to arbitration is that, for practical purposes, arbitration decisions are unappealable. The standard for judicial review of arbitration awards gives courts almost no chance to fix arbitrator errors, including on questions of law. These factors have led many employers not to utilize arbitration agreements.

The opportunity to avoid class action claims, however, likely alters the cost-benefit analysis. Arbitration still has significant limitations; but after AT&T Mobility, businesses will want to review existing arbitration agreements, and consider adding language to bar class action claims. Businesses not currently using arbitration agreements will want to reevaluate that decision now.