eBay Standard Applies to Preliminary Injunctions in Trademark Cases

Considering whether requests for preliminary injunctions against alleged trademark infringement are subject to the traditional equitable principles set forth by the Supreme Court of the United States in eBay v. MercExchange, the U.S. Court of Appeals for the First Circuit vacated the district court’s grant of preliminary injunction to a trademark owner. Voice of the Arab World, Inc. v. MDTV Medical News Now, Inc., Case No. 10-1396 (1st Cir., May 27, 2011) (Torruella, J.).

Voice of the Arab World filed an action against MDTV Medical News Now in the District Court of Massachusetts, seeking a declaratory judgment that the plaintiff’s use and registration of the mark “MDTV” did not infringe on the defendant’s trademark rights. After filing counter claims, including one alleging trademark infringement, the defendant moved to preliminarily enjoin the plaintiff from using the MDTV mark. After the district court granted the preliminary injunction, the plaintiff appealed to the 1st Circuit.

The plaintiff challenged the district court’s preliminary injunction order on three grounds. First, the plaintiff argued that the district court erred in finding that the defendant demonstrated a likelihood of success on the merits of its trademark infringement claim. Second, the plaintiff alleged that the lower court erred as a matter of law by presuming that the defendant would likely suffer irreparable harm in the absence of preliminary injunctive relief and in not requiring the defendant to actually demonstrate such likelihood of irreparable harm. Third, the plaintiff argued that even if a preliminary injunction was appropriate, the district court abused its discretion by issuing an overly broad injunction.

The plaintiff’s argument concerning irreparable harm was two-fold. First, the plaintiff argued that presuming irreparable harm in trademark infringement cases where preliminary injunctive relief is sought is inconsistent with the Supreme Court’s 2006 decision in eBay Inc. v. MercExchange, L.L.C. In the alternative, the plaintiff contended that even if irreparable harm is properly presumed in certain trademark infringement cases, such a presumption could not apply in this case due to the defendant’s excessive delay in seeking injunctive relief.

Citing eBay, which dealt with a request for permanent injunction in a patent infringement case, the court held that a request to preliminarily enjoin alleged trademark infringement is subject to the traditional equitable principles delineated in eBay. Specifically, the court reiterated the eBay holding that “the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.” In recognizing that eBay properly applies to non-patent cases, the court noted that “it is significant that the Court in eBay supported its formulation of the traditional four-factor permanent injunction standard by citing cases that were unrelated to patent law.” The court also recognized that “nothing in the Lanham Act indicates that Congress intended to depart from traditional equitable principles,” noting, “like the Patent Act, the Lanham Act provides a court the ‘power to grant injunctions, according to principles of equity and upon such terms as the court may deem reasonable, to prevent[,]’ among other things, trademark infringement and domain name cybersquatting” citing 15 U.S.C. § 1116(a) (emphasis supplied). The court stated that the fact that eBay dealt with a permanent injunction did not change the conclusion that the its principles are equally applicable in the context of preliminary injunctions.

Boston Scientific Corp. v. Johnson & Johnson: Written Description Requirement Spreads its Wings

On June 7^th, in a Fed. Cir. panel decision written by Judge Moore, the panel affirmed the invalidation of four J&J patents (a copy of these patents is available at the end of this post) for failure to meet the written description requirement of s.112(1). The patents claimed drug eluting stents, used to keep angioplastied arteries from re-closing, or undergoing restenosis. Boston Scientific Corp. v. Johnson & Johnson, App. No. 2010- 1230-1234 (Fed. Cir. June 7, 2011). The stents disclosed in the specifications all released rapamycin, a macrocyclic lactone, but the claims were broader, and used terms like “rapamycin or a macrocyclic lactone analog of rapamycin” or a” macrocyclic triene analog of rapamycin.” However, no such rapamycin analogs were disclosed in the specification.

The “problem” with the summary judgment below, at least as J&J saw it, was that a number of workable rapamycin analogs were known to the art as of the effective filing date of the applications. In fact, BSC was using one of them in its stents. J&J felt it could rely on the court’s holding in Capon v Eshhar, 418 F.3d 1349 (Fed. Cir. 2005) which affirmed that claims to chimeric DNA molecules were adequately supported by the specification in combination with evidence that many examples of useful subunits were known.

The court started out by quoting from UC v. Lilly – always a bad sign for patentee – and then reaffirmed that the Lilly standards for meeting the WDR applied both to novel compounds and to “inventions claiming combinations of prior art compounds with other elements,” citing Carnegie Mellon Univ. v. Hoffmann-La Roche, 541 F.3d 1115 (Fed. Cir 2008). “The test for WDR is the same whether the claim is to a novel compound or a novel combination of known elements. The test is the same whether the claim element is essential or auxiliary to the invention [Ed.: remarkably now citing Aro Mfg. Co. v. Convertible Top Replacement Co.!].”

However, at this point, Judges Moore and Bryson get a bit lost. Instead of explaining why the specification read in combination with the knowledge of the art about rapamycin analogs fails to meet the Lilly standards, the majority jumped back to the deficiencies in the specification:

“With no guidance at all in the specification as to how to properly identify or choose the claimed analogs, and in light of the unpredictability and nascent state of using drug-eluting stents to treat restenosis, we agree with the [grant of SJ below].” Slip op. at 21.

The panel put a great deal of emphasis on disclosures in the two specifications that “directly contradict information that the patentee alleges is ‘well-known’ to a person of skill at the effective filing date.”  In this case, the specifications of one group of patents stated that “the precise mechanism of action of rapamycin in still under active investigation…The shared specification indicates that the alleged correlation between structure and function was not well known by the effective filing date.” Slip. Op.. at 22. In other words, the panel used statements in the specification to effectively cut off the ability of the patentee to argue that knowledge available to the art could be used to meet the WDR:

“Given the absence of information regarding structural characteristics of [rapamycin analogs] in the specification, the unpredictability of the art and the nascent state of using drug eluting stents…we affirm the [grant of SJ]. The patent laws do not reward an inventors invitation to other researchers to discover which of the thousands of macrocyclic lactone analogs of rapamycin could conceivably work in a drug eluting stent.” Slip. Op. at 23.

This is starting to sound a lot like a holding based on “broader than the enabling disclosure,” and this was specifically noted by Judge Gajarsa, concurring-in-part, when he wrote: “The majority’s opinion further extends the [WDR] into the realm of enablement. Much of the confusion in this case is due to the difficulty of determining…how the [WDR] applies to novel compounds as opposed to novel combinations of known elements…the enablement analysis is simpler and more appropriate.” He would have affirmed the invalidation of the patent claims for non-enablement as well. If this opinion has anything to teach the court, it may be that the “easy button” of using the WDR to eliminate patents with claims a panel feels are just too broad, is not as easy as Lilly, Rochester and Ariad made it look.

Patents Invalidated

The Gabon Mistrial: DOJ Prosecution of Individuals Puts Aggressive FCPA Theories Under Fire

In a blow to the U.S. Department of Justice‘s (DOJ’s) efforts to increase enforcement of the Foreign Corrupt Practices Act (FCPA) against individuals, Judge Richard J. Leon of the U.S. District Court for the District of Columbia declared a mistrial on July 7 in a case against four defendants charged in connection with an extensive undercover sting operation executed by the FBI. The trial was against four of 22 defendants charged with conspiring to pay bribes to the Defense Minister of Gabon in order to secure a $15 million equipment contract.

The mistrial has been largely attributed to weaknesses in the sting operation itself, including alleged outrageous behavior by the key informant and suggestions that the defendants were entrapped by government operatives who concealed the illegal nature of the transaction. The Gabon mistrial represents a setback in efforts by the DOJ to prosecute individuals for FCPA violations. However, its greater significance lies in highlighting that prosecutions of individuals will likely backfire on the DOJ’s enforcement efforts against companies and result in a narrowing of the DOJ’s jurisdiction to enforce the FCPA. For example, one of the DOJ’s aggressive jurisdictional theories under Section 78dd-3 failed last month when Judge Leon dismissed an FCPA count against defendant Pankesh Patel.

Pankesh Patel is a citizen of the United Kingdom. Under Section 78dd-3 of the FCPA, in the absence of some other basis of jurisdiction, a party must have committed an act within the United States in furtherance of the improper payment or offer. After oral argument, Judge Leon determined that the DOJ failed to establish jurisdiction based on allegations that Patel had mailed an agreement relating to the alleged illegal deal from the United Kingdom to Washington, D.C. since Patel’s conduct of mailing the package occurred in the United Kingdom, not “while in the territory of the United States.” 15 U.S.C. § 78dd-3(a).

The DOJ’s effort to charge Patel for sending a DHL package into the United States was not the first time the DOJ had prosecuted an FCPA case based on an aggressive interpretation of Section 78dd-3 when the conduct occurred outside the United States. In July 2004, foreign company ABB Vetco Gray UK, Ltd. (ABB Vetco) pled guilty to an FCPA violation; the information filed against the company alleged that the company had “caused a wire transfer . . . to be made by a Nigerian Agent from a bank account in London, England, to a bank account in Houston, Texas.” In October 2006, SSI International Far East, Ltd. (SSI), a South Korean company, pled guilty to violating the FCPA. The indictment against SSI alleged that the company had acted within the territorial jurisdiction of the United States by “transmitt[ing] requests to the United States for approval and wire transfer of funds.”

In other cases, DOJ prosecutors have gone so far as to suggest that they could assert jurisdiction over foreign companies based on the conduct of non-U.S. nationals taking place entirely outside the United States if emails sent from one person to another within a foreign country went through a U.S.-based server. Because ABB Vetco and SSI pled guilty, the DOJ’s arguments regarding jurisdiction under Section 78dd-3 were not subject to challenge or judicial scrutiny. However, the plain language of the statute and Judge Leon’s recent ruling in the case against Patel raises questions about the DOJ’s jurisdiction to prosecute FCPA violations in those cases.

While many companies are unwilling to face the risks associated with taking an alleged FCPA violation to trial, individuals facing a loss of liberty may have more motivation to fight and push back against the DOJ’s interpretations of the FCPA. When the DOJ brings cases against these opponents, it risks having its jurisdiction narrowed as some of its aggressive interpretations will fail under judicial scrutiny.

Standing Under California § 17200 Only Requires Injury From Business Practice

Drawing upon recent California Supreme Court rulings, the U.S. Court of Appeals for the Federal Circuit reversed a California federal district court’s dismissal of claims under the state’s unfair competition law, finding the court had wrongly dismissed the claims for lack of standing. Allergan, Inc. et. al. v. Athena Cosmetics, Inc. et. al., Case No. 10-1394 (Fed. Cir., May 24, 2011) (Gajarsa, J.).

Allergan, a manufacturer of an FDA-approved treatment for inadequate eyelash growth, Latisse®, brought suit alleging the defendants had infringed or induced infringement of multiple patents. Allergan also claimed defendants violated California’s unfair competition law, U.C.L. §§17200 et seq. With respect to the latter claim, Allergan contended that defendants’ manufacture, sale or marketing of hair/eyelash growth products that had not been approved by the FDA or state health regulators constituted unfair competition under the California statute.

The defendants countered that Allergan lacked standing because the statute only protects persons who have suffered a loss that is eligible for restitution. Restitution is a remedy that seeks to restore the status quo; it requires the plaintiff to have had an ownership interest in the money or property it seeks to recover. The district court found Allergan had no such interest in lost profits or market share because defendants’ profits derived from third-party consumers. Allergan appealed; its patent claims were stayed pending appeal of the unfair competition claim.

The Federal Circuit rejected the district court’s narrow view of the California unfair competition statute. While acknowledging that California voters had approved Proposition 64 to restrict standing requirements and address abuses that had resulted in frivolous lawsuits, the Court noted that the California Supreme Court’s decisions in two cases that were decided while the Allergan appeal was pending (Kwikset Corp. v. Superior Court of Orange County and Clayworth v. Pfizer, Inc.,), demonstrated that Proposition 64 did not limit standing solely to injuries compensable by restitution. Instead, a plaintiff need only allege an injury in fact that was the result of the unfair business practice. Applying this reasoning, the Court held that Allergan had adequately pleaded a claim under U.C.L. §17200.

Importantly, the Court also rejected the defendants’ claims that standing under U.C.L. §17200 required a plaintiff to have direct business dealings with a defendant. The Court denied that Proposition 64 added any such “business dealings” requirement to U.C.L. §17200 claims.

Practice Note: The Allergan decision demonstrates that while standing to file suit under §17200 is more limited than it was in the past, §17200 remains a potent tool that litigants can use to challenge a competitor’s practices.

“Supreme Court Decision Limits Use of “Stream of Commerce” Jurisdiction Theory to Subject Foreign Manufacturers to Suit in the U.S.” – Litigation Alert

At the end of its recent term, the United States Supreme Court decided J. McIntyre Machinery, Ltd. v. Nicastro (Case No. 09-1343, June 27, 2011). In McIntyre Machinery, the Court reversed a decision by the Supreme Court of New Jersey, finding that the New Jersey courts improperly asserted jurisdiction over an English machinery manufacturer in a product liability suit brought by an individual who was injured while using the manufacturer’s product in New Jersey.

The facts of the case are as follows: The defendant, McIntyre Machinery, is an English company that manufactures metal shearing devices used in the scrap metal industry. The plaintiff, Robert Nicastro, was severely injured while using a McIntrye shear in New Jersey. McIntyre sold its machines through an independent U.S. distributor, not controlled by McIntyre and not located in New Jersey. The distributor, however, followed McIntyre’s direction and guidance whenever possible. McIntyre officials also attended trade shows in the U.S., but not in New Jersey. McIntyre held U.S. and European patents on the machine. McIntyre generally desired to sell machines in the U.S., but there was no showing that New Jersey was targeted for sales, by advertising or otherwise. There was some evidence suggesting that as many as four McIntyre machines were located in New Jersey.

On these facts, six Justices of the Court agreed that the assertion of personal jurisdiction over McIntyre Machinery in New Jersey was improper. The six Justices did not agree on their reasoning. Justice Kennedy wrote the plurality opinion, joined by Chief Justice Roberts, Justice Scalia and Justice Thomas. Justice Breyer, joined by Justice Alito, concurred in the judgment. Justice Ginsburg dissented, joined by Justice Sotomayor and Justice Kagan.

The plurality stressed that the exercise of personal jurisdiction under the Due Process Clause of the Constitution generally depends on the defendant having purposefully availed itself of the privilege of doing business in the forum state, thus invoking the benefits and protections of its laws. Product liability cases, the plurality wrote, fall within this general rule. The plurality specifically rejected the notion that placing products in the stream of commerce in a manner such that it is foreseeable they will end up in a particular state is not enough: “The defendant’s transmission of goods permits the exercise of jurisdiction only where the defendant can be said to have targeted the forum; as a general rule, it is not enough that the defendant might have predicted that its goods will reach the forum State.” (Slip Op. at 7). Further, although the facts showed a general intent by McIntyre to serve the U.S. market, “they do not show that J. McIntyre purposefully availed itself of the New Jersey market.”

In the concurring opinion, Justice Breyer stated that he did not believe it was appropriate to use the facts of this case to set strict rules. He noted that the case does not “implicate modern concerns” (such as targeting the world for sales by selling on the Internet). Justice Breyer supported the view that a single isolated sale in a state is not enough, and that “something more” is required than simply putting a product in the stream of commerce with knowledge that it may be swept into the forum state. Justice Breyer also stressed his view that due process requirements, including “purposeful availment,” rest upon a notion of “defendant-focused fairness.” Such considerations may vary when comparing a large national manufacturer to a small manufacturer selling a small number of products through a distributor. “Further, the fact that the defendant is a foreign, rather than a domestic, manufacturer makes the basic fairness of an absolute rule yet more uncertain.” (Breyer J., concurring, Slip. Op. at 6).

McIntyre Machinery is important because it limits the grounds for U.S. courts asserting personal jurisdiction against foreign manufacturers. In this context, “foreign” means out-of-state manufacturers as well as international companies. Six of the nine Justices clearly indicated that the simple fact that a product has found its way into a jurisdiction is not enough to establish jurisdiction over a non-resident manufacturer even though the manufacturer realizes that the product might end up in the state. The case will likely lead lower courts to dismiss certain cases which would otherwise have remained in court. Because of the fractured nature of the decision, however, its overall significance remains to be seen. Issues of personal jurisdiction will remain highly dependent on the facts of a particular case.

Patents / Injunction Bond Wrongful Injunction Raises Presumption of Recovery of Bond

In a case of first impression, the U.S. Court of Appeals for the Second Circuit ruled that wrongfully enjoined parties are entitled to a presumption in favor of recovery against an injunction bond for provable damages.  However, the Court concluded that while InterDigital contention that it deserves damages associated with a stay of patent infringement action against Nokia has merit, the case record was insufficient for appellate review.  Nokia Corp. v. InterDigital Inc. et al., Case No. 10-1358 (2d Cir., May 23, 2011) (Parker, J.).

The parties’ dispute first arose at the International Trade Commission, where InterDigital alleged that Nokia had infringed its patents.  In 2007, the ITC granted Nokia’s motion to consolidate the investigation with a separate investigation filed by InterDigital against Samsung over the same patents.  In December 2007, Nokia moved to stay the consolidated investigation, arguing that a pre-existing agreement between Nokia and InterDigital required arbitration.  The ITC denied the motion, and Nokia then sued in federal district court.  The district court granted Nokia’s motion for a preliminary injunction in March 2008 and ordered InterDigital to stay or terminate the ITC proceedings against Nokia and submit to arbitration.  The court required Nokia to post a $500,000 bond as a condition of obtaining the injunction.

The 2d Circuit subsequently vacated the injunction (see IP Update, Vol. 11, No. 8), and the district court dismissed Nokia’s suit.  Thereafter, InterDigital filed a motion in the district court to recover attorneys’ fees and expenses incurred in moving to stay the ITC proceedings and preparing to arbitrate with Nokia.   It asked to be awarded attorneys’ fees and costs incurred as a result of litigating separate proceedings against Nokia and Samsung.  The district court rejected InterDigital’s request, finding that InterDigital had failed to show that the damages sought were “proximately caused” by the injunction.  InterDigital appealed.

The 2d Circuit held that a wrongfully enjoined party is entitled to a presumption in favor of recovery, finding that the existence of such a presumption was implied by the text of Fed. R. Civ. Pro. 65(c), and that the First, Seventh, Ninth, Eleventh and D.C. Circuits followed similar rules.  However, the court ruled that the improperly enjoined party must still show that any damages claimed were proximately caused by the injunction.  Based on the lack of explanation by the district court for the denial of recovery, the 2d Circuit vacated the lower court’s order and remanded the issue for reconsideration and clarification.  However, the 2d Circuit noted that certain legal expenses, such as filing a motion to stay the ITC case with respect to Nokia that were ordered by the district court in its injunction order, should be recoverable absent a compelling reason otherwise.

Board Proposes Rules to Reform Pre- and Post-Election Representation Case Procedures

The National Labor Relations Board will publish in the Federal Register tomorrow a Notice of Proposed Rulemaking, which proposes amendments to its existing rules and regulations governing procedures in representation cases. The proposed amendments are intended to reduce unnecessary litigation, streamline pre- and post-election procedures, and facilitate the use of electronic communications and document filing.

“One of the most important duties of the NLRB is conducting secret-ballot elections to determine whether employees want to be represented by a labor union,” said Chairman Wilma B. Liebman in a statement. “Resolving representation questions quickly, fairly, and accurately has been an overriding goal of American labor law for more than 75 years.” Click here to view her full statement. 

If finally adopted after a public notice-and-comment process, the proposed amendments would:

•  Allow for electronic filing of election petitions and other documents.
• Ensure that employees, employers and unions receive and exchange timely information they need to understand and participate in the representation case process.
• Standardize timeframes for parties to resolve or litigate issues before and after elections.
• Require parties to identify issues and describe evidence soon after an election petition is filed to facilitate resolution and eliminate unnecessary litigation.
• Defer litigation of most voter eligibility issues until after the election.
• Require employers to provide a final voter list in electronic form soon after the scheduling of an election, including voters’ telephone numbers and email addresses when available.
• Consolidate all election-related appeals to the Board into a single post-election appeals process and thereby eliminate delay in holding elections currently attributable to the possibility of pre-election appeals.
• Make Board review of post-election decisions discretionary rather than mandatory.

For details on the proposed amendments, view our fact sheet here and summary here.

As the Notice of Proposed Rulemaking states:

The Board believes that the proposed amendments would remove unnecessary barriers to the fair and expeditious resolution of questions concerning representation. The proposed amendments would simplify representation-case procedures and render them more transparent and uniform across regions, eliminate unnecessary litigation, and consolidate requests for Board review of regional directors’ pre- and post-election determinations into a single, post-election request.  The proposed amendments would allow the Board to more promptly determine if there is a question concerning representation and, if so, to resolve it by conducting a secret ballot election.

Board Member Brian Hayes dissented from the proposed rulemaking.  In his opinion,

The Board and General Counsel are consistently meeting their publicly-stated performance goals under the current representation election process, providing an expeditious and fair resolution to parties in the vast majority of cases, less than 10 percent of which involve contested preelection issues.  Without any attempt to identify particular problems in cases where the process has failed, the majority has announced its intent to provide a more expeditious preelection process and a more limited postelection process that tilts heavily against employers’ rights to engage in legitimate free speech and to petition the government for redress.  Disclaiming any statutory obligation to provide any preliminary notice and opportunity to comment, the majority deigns to permit a limited written comment period and a single hearing when the myriad issues raised by the proposed rules cry out for far greater public participation in the rulemaking process both before and after formal publication of the proposed rule.  The majority acts in apparent furtherance of the interests of a narrow constituency, and at the great expense of undermining public trust in the fairness of Board elections.

His dissent may be found here.

In the Notice of Proposed Rulemaking, the Board responded to the dissent.

Public comments are invited on all aspects of the proposed rules and should be submitted within 60 days of publication in the Federal Register, either electronically to www.regulations.gov, or by mail or hand-delivery to Lester Heltzer, Executive Secretary, NLRB, 1099 14th Street NW, Washington DC 20570.  Reply comments to the initial comments may be filed during an additional 14 day period. In addition, members of the public will be invited to attend a public hearing, to be scheduled for July 18 and July 19, if necessary, to comment on the proposed amendments and make other suggestions for improving the Board’s representation case procedures.

EPA and Corps of Engineers Extend Comment Period for Revised Guidance on Identifying Waters Subject to the Clean Water Act

On May 2, 2011, the U.S. Environmental Protection Agency and the U.S. Army Corps of Engineers published proposed joint guidance (“Proposed Guidance“) describing how the agencies will identify waters regulated pursuant to Section 404 of the Clean Water Act (“CWA”).  The Proposed Guidance is intended to clarify and implement the Supreme Court’s decisions in Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers (“SWANCC”), 531 U.S. 159 (2001), and Rapanos v. United States, 547 U.S. 715 (2006).  The Proposed Guidance asserts that it is further intended to reaffirm federal jurisdiction over waters that currently lack clear protection under the law, and to provide clearer, more predictable guidelines to reduce uncertainty and delay for businesses and regulators.

The Proposed Guidance allows the EPA and the Corps to expand the universe of waters covered under Justice Kennedy’s Rapanos “significant nexus” text by allowing the use of a “watershed analysis” to aggregate similarly situated waters and wetlands within a watershed without requiring the kind of detailed site-specific analysis for individual adjacent wetlands required under the current Guidance.  The agencies acknowledge that the number of water bodies found subject to CWA jurisdiction will increase greatly under the new guidance.  The costs of such expansion of jurisdiction will be felt by the regulated community.

The comment period for the Proposed Guidance has been extended from July 1, 2011 to July 31, 2011.  The Proposed Guidance would supersede existing guidance documents including the 2008 Bush Administration Guidance (the 2008 Guidance will remain in effect until the Proposed Guidance is issued).  After the Proposed Guidance is issued, the agencies will likely conduct a formal rulemaking process to further clarify the extent of the CWA jurisdiction.

Delaware Supreme Court Holds That Insider Trading Claims Alleging Misuse of Confidential Corporate Information Need Not Show Injury To the Corporation

In Kahn et al v. Kolberg Kravis Roberts & Co., L.P., No. 1808, 2011 WL 2447690 (Del. June 20, 2011), the Delaware Supreme Court reversed the dismissal of breach of fiduciary duty claims brought by minority shareholders against corporate officers and a controlling shareholder. The Supreme Court held that plaintiffs could state a claim seeking disgorgement by fiduciaries who allegedly profit from using confidential corporate information, even if the corporation did not suffer actual harm. In so holding, the Court rejected earlier, lower court precedent, and declined to limit the disgorgement remedy to a usurpation of corporate opportunity or cases where the insider used confidential corporate information to compete directly with the corporation.

Shareholders of Primedia, Inc. brought a derivative action against officers and directors of Primedia and against Kohlberg, Kravis, Roberts & Co. (“KKR”), which indirectly controlled a majority of Primedia’s common stock. Plaintiffs alleged that the defendants breached their duty of loyalty by causing Primedia to call hundreds of millions of dollars of preferred stock that it was not yet obligated to redeem, enriching KKR at Primedia’s expense. The complaint was amended several times — most recently to add a “Brophy claim” that the KKR defendants breached their fiduciary duties to Primedia by purchasing the preferred stock at a time when they possessed material, non-public information. A “Brophy claim” (see Brophy v. Cities Serv. Co., 70 A.2d 5(Del. Ch. 1949)), is one in which a corporate fiduciary possesses material nonpublic company information and the corporate fiduciary uses that information improperly by making trades because he or she was motivated, in whole or in part, by the substance of that information. See, e.g., In re Oracle Corp. Deriv. Litig., 867 A.2d 904, 934 (Del. Ch. 2004), aff’d, 872 A.2d 960 (Del. 2005).

The Delaware Court of Chancery granted the Primedia Special Litigation Committee’s motion to dismiss the derivative claims. The court held that under the law as explained in Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010), disgorgement was not an available remedy for the plaintiffs’ Brophy claims because Primedia was not actually harmed. Plaintiffs appealed.

The Delaware Supreme Court reversed. The Court explained that in Brophy, a corporate employee acquired inside information that the plaintiff issuer was about to enter the market and purchase its own shares. Using this confidential information, the employee, who was not an officer, bought a large block of shares and, after the corporation’s purchases had caused the price to rise, resold them at a profit. The court stated that because the employee occupied a position of trust and confidence within the corporation, his relationship was analogous to that of a fiduciary. The employee argued that the corporation failed to state a claim against him because the corporation suffered no loss through the purchase of its stock. The Delaware Supreme Court, however, disagreed, holding that “actual harm to the corporation is not required for a plaintiff to state a claim under Brophy.”

The Supreme Court recognized that the Brophy court relied on the principles of restitution and equity for the proposition that a fiduciary cannot use confidential corporate information for his own benefit. The Court explained that public policy will not permit an employee occupying a position of trust and confidence toward his employer to abuse that relation to his own profit, regardless of whether his employer suffers a loss. Hence, the Court held that “[e]ven if the corporation did not suffer actual harm, equity requires disgorgement of that profit.” The Court remanded and directed the trial court to analyze the Brophy claim “without any assumption that an element of harm to the corporation must exist before a disgorgement equitable remedy is available.”

In its decision, the Delaware Supreme Court clarified that Brophy focused on preventing a fiduciary wrongdoer from being unjustly enriched based on the misuse of confidential corporate information. In so holding, the Court declined to adopt Pfeiffer’s “thoughtful, but unduly narrow” interpretation of Brophy and its progeny. The Court also disagreed with Pfeiffer’s conclusion that the purpose of Brophy is to “remedy harm to the corporation.” This decision expands the availability of Brophy claims for insider trading, as potential plaintiffs need not prove a harm to the corporation before a disgorgement equitable remedy is available.

Labor & Employment Law Alert – Proposed NLRB Rules Would Shorten Union Elections

On June 22, 2011, the National Labor Relations Board (NLRB) published a Notice of Proposed Rulemaking (NPRM) in the Federal Register proposing rules that, if adopted, would make it significantly easier for unions to organize new members. More specifically, the proposed rules are designed to expedite the representation election process by:

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• Allowing election petitions, election notices and voter lists to be transmitted electronically, thus streamlining the election process for unions;
• Requiring the Regional Director to set a pre-election hearing to begin seven days after a hearing notice is served, thus posing a burden on businesses who might not have immediate access to counsel;
• Requiring parties to state their positions no later than the start of the hearing, and before any other evidence is accepted, or forfeit all legal right to pursue those issues;
• Deferring litigation of voter eligibility issues until after the election, thus casting a cloud of uncertainty over the validity of the election process;
• Requiring the non-petitioning party to produce a preliminary voter list, including names, work location, shift, and classification, by the opening of the pre-election hearing, thus making it easier for unions to campaign;
• Requiring employers to provide a final voter list in electronic form soon after the scheduling of an election, including voters’ telephone numbers and email addresses, also making it easier for unions to campaign;
• Eliminating the ability to request a pre-election review by the NLRB;
• Consolidating all election-related appeals to the Board into a single post-election appeals process; and
• Making NLRB review of post-election decisions discretionary rather than mandatory.

If adopted, the proposed rules are certain to have a profound impact on the election process. Quite often, the union’s election petition is the first time an employer becomes aware a union is seeking to organize its employees. Since elections typically run their course within 45-60 days, management has an already small window of time to interface with employees and make their case against unionization. Under the proposed rules, however, elections could occur in as little as 10 days. As a result, an employer’s ability to effectively mount an anti-union campaign is essentially short-circuited. Of course, there is no comparable burden on unions as they are free to campaign as long as they please prior to filing an election petition.

In the lone dissenting opinion, board member Brian Hayes expressed concern over the proposed rules by stating: “Thus, by administrative fiat in lieu of Congressional action, the Board will impose organized labor’s much sought-after ‘quickie election’ option, a procedure under which elections will be held in 10 to 21 days from the filing of the petition. Make no mistake, the principal purpose for this radical manipulation of our election process is to minimize, or rather, to effectively eviscerate an employer’s legitimate opportunity to express its views about collective bargaining.”

Additionally, the proposed rules would substantially limit the opportunity for full evidentiary hearing or NLRB review on contested issues involving, among other things, appropriate unit, voter eligibility and election misconduct. The NPRM provides a 60-day comment period for the rules, followed by a 14-day response period. In addition to issuing the NPRM, the NLRB has issued a “fact sheet” document outlining various aspects of the NPRM. The fact sheet is available at http://www.nlrb.gov/node/525.

The Employee Free Choice Act may have died in the Senate, but the NLRB, through decision and rulemaking, is continuing to bring the Act’s goals to fruition without the need for congressional action.

Sixth Circuit Holds Michigan Ban on Affirmative Action Unconstitutional – Labor & Employment/Higher Education Law Alert

In an opinion issued July 1, 2011, the Sixth Circuit Court of Appeals struck down Michigan’s constitutional amendment known as “Proposal 2,” finding it unconstitutional under the Equal Protection Clause of the U.S. Constitution’s Fourteenth Amendment. Proposal 2, which passed by public referendum in 2006, targeted affirmative action programs in public colleges and universities and added language to the Michigan Constitution which bans “preferential treatment” on the basis of “race, sex, color, ethnicity, or national origin” in public employment, education, and contracting. The Sixth Circuit’s decision may allow Michigan’s public colleges and universities to revive any minority scholarships or other programs that considered race as a criterion, but the full effect of the court’s decision will not be known until the time period for challenging the decision has been exhausted.

The plaintiffs in Coalition to Defend Affirmative Action et al. v. Regents of the Univ. of Mich. et al challenged Proposal 2 on two constitutional equal protection arguments. They argued that the amendment violated the Equal Protection Clause both by impermissibly classifying individuals on the basis of race (what the Sixth Circuit called the “traditional” argument) and by impermissibly restructuring the political process along racial lines (the “political process” argument). In deciding the case, the Sixth Circuit only addressed the “political process” argument, holding 2-1 that Proposal 2 “unconstitutionally alters Michigan’s political structure by impermissibly burdening racial minorities.”

In finding Proposal 2 unconstitutional, the Sixth Circuit looked to previous U.S. Supreme Court cases in which the Court found that state laws requiring a more rigorous process to pass certain local laws involving race were unconstitutional because they placed special burdens on minorities by making it more difficult for them to enact laws for their benefit. From these case precedents, the Sixth Circuit culled a two-part test for when enactment of a law deprives minority groups of equal protection of the laws. An enactment is unconstitutional under this test when (1) the law “has a racial focus, targeting a goal or program that inures primarily to the benefit of the minority” and (2) results in a “reallocation of political power or reordering of the decision making process that places special burdens on a minority group’s ability to achieve its goals through that process.”

The court then applied this test to Proposal 2 and found it to be unconstitutional. The majority found that Proposal 2 had a racial focus because it was targeted at affirmative action programs. It also found that Proposal 2 reordered the political process to place special burdens on minorities because it requires citizens who want Michigan’s public universities to adopt affirmative action programs to “begin by convincing the Michigan electorate to amend the Michigan Constitution,” while citizens seeking any non-race-related change would only have to lobby the school’s admissions committee or attempt to elect supportive candidates to the university’s board. The Sixth Circuit’s opinion emphasized that “Michigan cannot force those advocating for consideration of racial factors to go down a more arduous road than others without violating the Fourteenth Amendment.”

Circuit Judge Julia Smith Gibbons dissented from the court’s opinion, arguing that Proposal 2 does not impermissibly restructure the political process in a way that burdens minorities because the university faculty committees to which admissions decisions have been delegated by the universities’ governing boards are not politically accountable to the people of Michigan, and therefore are not part of the “political process.” Judge Gibbons also pointed out that even if these institutions were considered part of the political process, Proposal 2 does not require a more onerous process for changing the law. She noted that the governing boards of Michigan’s public universities are entities created by Michigan’s Constitution, and Michigan voters “lack a viable electoral mechanism to change university admissions policies at a sub-constitutional level.” By enacting Proposal 2 at a constitutional level, therefore, Michigan voters have not “restructured the political process,” but “merely employed it.”

In overturning Proposal 2, the Sixth Circuit reversed the decision of the Eastern District of Michigan court, which had held the amendment to be constitutional. The Sixth Circuit’s decision also conflicts with decisions of the Ninth Circuit and California Supreme Court which have found a similar constitutional amendment in California not to violate the Equal Protection Clause, dismissing the constitutional arguments that the Sixth Circuit has now endorsed.

The Michigan Attorney General (a defendant in the case) has already indicated that the Attorney General’s office will be challenging the decision. Given the nature of the subject matter and the conflict with the Ninth Circuit, the Sixth Circuit may agree to reconsider its decision or the U.S. Supreme Court may grant review. If the Attorney General requests a rehearing by the Sixth Circuit, the court’s July 1 decision will not go into effect until after the petition for rehearing is considered. If the Attorney General petitions the Supreme Court for a writ of certiorari, this would not automatically stay the Sixth Circuit’s decision, although the Sixth Circuit may grant a stay of its July 1 decision if requested and for good cause shown. Either development could delay the current Sixth Circuit decision from going into effect for months, if not longer.

Vendor’s Economic Injury Is Insufficient to Establish DJ Jurisdiction, but Implicit Claim of Contributory Infringement Is Enough:

Patent / Declaratory Judgment Standing

The U.S. Court of Appeals for the Federal Circuit has now ruled that a supplier vendor has standing to commence a declaratory judgment action if a patent holder accuses the supplier’s customers of direct infringement and if the supplier’s product functions as a material component in the allegedly infringing system or the supplier’s product is used in the performance of the allegedly infringing method.   Arris Group v. British Telecommunications PLC, Case No. 10-1292 (Fed. Cir., May 19, 2011) (Dyk,  J.).

Arris makes and sells cable telephony and data products for use in networks with Voice over Internet Protocol (VoIP) telephone services.  British Telecommunications (BT) sent Arris’ customer, Cable One, a letter accusing Cable One’s network of infringing various system and method claims of the patents-in-suit.  Licensing discussions ensued.  BT sent Cable One a 118-page presentation comparing the patent claims to Cable One’s network, which included repeated identification of Arris’ products as meeting certain system claim elements and steps of the method claims.  BT’s presentation identified Cable One (not Arris) as a direct infringer.  Thereafter, at Cable One’s request, Arris became involved in the licensing discussions.  BT offered Cable One a license but declined to license Arris.  Arris filed a declaratory judgment action against BT; the district court dismissed the action, finding that Arris lacked standing because there was no case or controversy between Arris and BT.  Arris appealed.

The Federal Circuit rejected Arris’ argument that case or controversy exists because Arris has suffered an economic injury as a result of BT’s infringement threats.  The Court held that a mere adverse economic interest was insufficient to create declaratory judgment jurisdiction and that the Supreme Court’s MedImmune decision did not alter the prior law in this regard.  What is required to establish jurisdiction is an adverse legal interest of sufficient immediacy and reality.  However, the Federal Circuit found an adverse legal interest because BT implicitly asserted that Arris contributorily infringed the BT patents when it accused Cable One of direct infringement.  Arris’ products were “central” to the BT’s direct infringement allegations against Cable One and, for many of the asserted claims, BT identified Arris’ products as meeting virtually all of the claim elements.  The Court further found that, at a minimum, BT identified Arris’ products as satisfying at least one central element of every asserted claim.  BT allegations that Arris’ products complied with industry standards also suggested that Arris’ products were especially made or adapted for uses that infringe and are not staple articles of commerce.  Other relevant factors to the Court’s conclusion included Arris’ involvement in the prior licensing negotiations, as well as BT’s refusal to grant Arris a covenant not to sue.

Practice Note:   The “central” nature of Arris’ products in the infringement allegations entitled the Court to finding that standing existed.  However, the nature and quantity of contacts between the Arris and BT also strongly supported the Court’s conclusion.  Patent holders seeking to avoid declaratory judgment battles with indirect infringers should take care to minimize the nature of the allegations made about indirect infringers and should not rely on non-binding disclaimers that suppliers are not being accused of infringement.

Court of Appeals Upholds PPACA Individual Mandate

The Federal Court of Appeals for the Sixth Circuit ruled 2-1 in finding the minimum coverage provision of the Patient Protection and Affordable Care Act (PPACA) constitutional. The minimum coverage provision or individual mandate requires nearly all Americans to purchase minimum health insurance coverage by 2014 or face financial penalties.

In Thomas More Law Center v. Obama, No. 10-2388 (6th Cir. Jun. 29 2011), the Court found “that the minimum coverage provision is a valid exercise of legislative power by Congress under the Commerce Clause.”

Two more PPACA cases are pending before the federal court of appeals in Virginia and Atlanta. Those courts heard oral arguments in May and June. The Sixth Circuit’s opinion upheld the district court ruling, which also held the law constitutional.

To read the case: http://www.ca6.uscourts.gov/opinions.pdf/11a0168p-06.pdf

Texas Court of Appeals Rules Retroactive Application of Certain Minimum Medical Criteria Unconstitutional in Asbestos Case

On June 30, Texas’s First Court of Appeals ruled that retroactive application of a provision of state legislation establishing minimum medical criteria for asbestos claimants violates the Texas Constitution. Union Carbide Corp. v. Synatzske, et al., No. 01-09-01141-CV, slip op., 2011 Tex. App. LEXIS 4934 (Tex. App.-Houston [1st Dist.] June 30, 2011, no pet. h.). In doing so, the court upheld the Texas Asbestos Multidistrict Litigation (MDL) pretrial court’s order denying Union Carbide Corporation‘s (Union Carbide’s) motion to dismiss, and remanded the plaintiffs’ wrongful death claims based on the alleged asbestos exposure of Joseph Emmite, a former worker at Union Carbide’s Texas City facility.

Background

Effective September 1, 2005, Chapter 90 of the Texas Civil Practice and Remedies Code established minimum medical criteria standards applicable to asbestos claimants. The purpose of the statute was to curb the onslaught of cases litigated in Texas courts for nonmalignant, unimpaired claims that hindered the ability of seriously ill claimants to fairly and efficiently pursue their claims for compensation.

Under Chapter 90, the plaintiffs in Union Carbide were required to timely serve a medical report that complied with all applicable provisions of Chapter 90 in order to proceed with their wrongful death claim for Mr. Emmite’s pulmonary asbestosis. Union Carbide filed a motion to dismiss for failure to meet those requirements. To avoid dismissal, the plaintiffs had to comply with section 90.010(f)(1)(B)(ii), which required them to serve a report that verified that pulmonary function testing was performed on Mr. Emmite and that the physician making the report interpreted the pulmonary function test. This testing was not performed before Mr. Emmite’s death.

The plaintiffs instead proffered reports explaining such testing could not be performed due to Mr. Emmite’s extraordinary physical condition at the time of treatment and was not necessary because Mr. Emmite’s asbestosis diagnosis and asbestos-related impairment had been sufficiently confirmed by other medical means. Union Carbide maintained that meeting the requirements of section 90.010(f)(1)(B)(ii) was mandatory for the plaintiffs to proceed with their wrongful death claim. Unable to comply, the plaintiffs, on appeal, argued that at the time of Mr. Emmite’s death, on June 15, 2005, when the wrongful death claim vested, pulmonary function testing was not required to bring an asbestos claim in Texas; consequently, application of section 90.010(f)(1)(B)(ii) to their claim would violate the Texas Constitution’s prohibition on retroactive laws.

Court’s Analysis and Conclusion

To determine the constitutionality of Chapter 90 as applied to the plaintiffs’ wrongful death claim, the court applied the Texas Supreme Court‘s three-prong test for whether retroactive application of a statute violates article I, section 16 of the Texas Constitution: (1) the nature and strength of the public interest served by the statute as evidenced by the legislature’s factual findings, (2) the nature of the prior right impaired by the statute, and (3) the extent of the impairment. The court further considered the “ultimate test,” i.e., whether the statute has the effect of either establishing or eliminating tort liability for conduct that occurred before the enactment of the statute.

To guide its analysis, the court looked to the fundamental objectives of the prohibition against retroactive laws:

(1) it protects “settled expectations” which “‘should not be lightly disrupted,'” i.e. “the rules should not change after the game has been played,” and (2) it protects against “abuses of legislative power” which “‘offer[s] special opportunities for the powerful to obtain special and improper legislative benefits.'”

Statutes that thwart these fundamental objectives by “act[ing] on things which are past,” disrupting “settled expectations” and “chang[ing] the [tort liability] rules after the game has been played” are strictly forbidden by the Texas Constitution.

The court reasoned that the pulmonary function testing requirement of section 90.010(f)(1)(B)(ii) impermissibly extinguishes the rights of the plaintiffs to bring a well-established, factually substantiated claim for an asbestos-related injury (failing prongs 2 and 3) and serves no public interest (failing prong 1); rather, it turns the Texas legislature’s intent on its head by preventing “the right of people with impairing” asbestos-related injuries “to pursue their claims for compensation in a fair and efficient manner.” As a result, the court held that under the “ultimate test” for determining whether a statute is unconstitutionally retroactive, section 90.010(f)(1)(B)(ii) only serves to save Union Carbide from tort liability for conduct that took place before the statute was enacted.

Further, the court concluded that section 90.010(f)(1)(B)(ii) violates the fundamental principles to act on “things which are past,” disrupt “settled expectations,” and “change the rules [of tort liability] after the game has been played.” Therefore, the court affirmed the order of the MDL pretrial court denying Union Carbide’s motion to dismiss.

As a result of the court’s holding that the pulmonary function testing provision of Chapter 90 is unconstitutional in circumstances where tort liability is established or eliminated for conduct that occurred before the enactment of the statute, the future of the Texas asbestos inactive docket is unclear-but the Texas MDL pretrial court will likely have the opportunity to consider the ramifications of this opinion in the near future.

D.C. Circuit Limits the DOT’s Authority to Regulate Air Charter Brokers

On April 1, 2011, the U.S. Court of Appeals for the D.C. Circuit issued an opinion in CSI Aviation Services, Inc. v. U.S. Department of Transportation,^[1]in which it found that the Department of Transportation (DOT) violated the Administrative Procedure Act (APA) when the DOT failed to justify its authority to issue a cease-and-desist letter to CSI ordering CSI to terminate its business contractual relationships with various federal agencies.^[2]

The CSI case is significant on many levels. First, the case is the first successful challenge of the scope of DOT’s consumer protection regulatory authority and it established the first precedent limiting DOT’s broad interpretation of what constitutes “common carrier” in the context of the definition of “air transportation”. Second, the case involved an inter-agency dispute involving the General Services Administration (GSA), which strongly disagreed with DOT’s position on having the authority to regulate CSI’s ability to enter into government contracts with various federal agencies. Finally, the case is significant because the court held that the DOT does not possess the authority to interfere with business relationships between the federal government and air charter brokers unless and until the DOT provides a reasonable explanation for its actions.

Background

Since 2003, CSI has been under contract with the GSA to broker air charter service for various federal agencies. On March 10, 2009, CSI won a competitive bid to renew its status as a GSA contractor through 2014. A few days prior, on March 6, the DOT sent CSI a letter requesting information to determine whether the company was engaging in “indirect air transportation” without the certificate of authority required by the Federal Aviation Act (FAvA). After the company provided the requested information, the DOT sent another letter, stating that based on the information CSI provided, CSI was acting as an unauthorized indirect air carrier in violation of the FAvA with respect to business transacted via its GSA schedule listing. The DOT also stressed that violations of the FAvA constitute unfair and deceptive practices and unfair methods of competition in violation of 49 U.S.C. § 41712.

Six other companies received similar letters. All six complied by terminating their status as contractors for GSA. Convinced that the DOT was exceeding its statutory authority, CSI alone chose to challenge DOT’s determination, asking the DOT to withdraw the cease-and-desist letter on the grounds that the Act requires a certificate of authority only for companies that operate “as a common carrier,”^[3]and that CSI’s charter flights for the federal government are not common carriage.^[4]

On November 25, 2009, seeking to avoid shutting down its business, CSI submitted a petition to DOT for an emergency exemption from the certification requirement. GSA supported CSI’s petition and in a letter to the DOT GSA explained at length why the Act’s certification requirements for common carriage should not apply to government contracts. “Acquisition [of air service] by the Federal Government . . . is distinct in several ways from acquisition in the private sector and does not present the consumer protection related concerns typically at issue in the private sector.”^[5]GSA also added that Federal agencies which purchase air charter broker services are protected from unscrupulous contractors in a number of ways.^[6]Although DOT granted CSI a temporary exemption, it indicated that it “remain[ed] of the view that . . . the provision of air services for U.S. Government agencies through the GSA contracting system constitutes an engagement in air transportation, necessitating that brokers conducting such business hold economic authority from the Department to act as indirect air carriers.”^[7]

The Court’s Decision

The primary issue in the case was whether DOT properly concluded that air charter brokers that operate under GSA contract engage in indirect air transportation and therefore require certification from DOT despite the statutory provision that requires certification only for those who provide air transportation “as a common carrier.”

Initially, DOT argued that its letter was not a “final order” and that the court did not have jurisdiction. The court, however, rejected the DOT’s position and held that the letter was indeed an order because (1) it marked the consummation of the agency’s decision making process; (2) it  was not merely of a tentative or interlocutory nature; and (3) the order was an action in which “rights or obligations have been determined” or “from which legal consequences will flow.”^[8]The court noted that CSI was faced with a choice between costly compliance and the risk of prosecution. The court also stressed that “an agency may not avoid judicial review merely by choosing the form of a letter to express its definitive position on a general question of statutory interpretation.”^[9]

The court stressed that “at the very least, the DOT’s letter cast a cloud of uncertainty over the viability of CSI’s ongoing business. It also put the company to the painful choice between costly compliance and the risk of prosecution at an uncertain point in the future—a conundrum that we described in Ciba-Geigy as “the very dilemma [the Supreme Court has found] sufficient to warrant judicial review.”^[10]The court reasoned that the DOT’s action was sufficiently burdensome to make six other GSA contractors terminate their air charter operations for fear of prosecution. The court stressed that “having thus flexed its regulatory muscle, DOT cannot now evade judicial review.”^[11]

Next, the court explained why the DOT’s actions violate the Administrative Procedure Act. Specifically, the court explained that the fundamental question in reviewing an agency action is whether the agency has acted reasonably and within its statutory authority. The agency must not only adopt a permissible reading of the authorizing statute, but must also avoid acting arbitrarily or capriciously in implementing its interpretation,^[12]which requires the agency to “take whatever steps it needs to provide an explanation that will enable the court to evaluate the agency’s rationale at the time of decision.”^[13]In the CSI case, the DOT simply failed to explain why the Federal Aviation Act requires a certificate of authority for air charter brokers operating under GSA contract.

The court focused on the definition of air transportation under the Federal Aviation Act and stressed that the Act states that “an air carrier may provide air transportation only if the air carrier holds a certificate issued under this chapter […] The term “air carrier” means “a citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation.”^[14]The DOT’s position was that, as a broker of charter flights for the federal government, CSI was engaged in the indirect provision of “air transportation.” But the DOT’s reading failed to engage with the special statutory definition of that term. Under section 40102(a)(5), “‘air transportation’ is defined to include ‘interstate air transportation,’ which in turn means the interstate ‘transportation of passengers or property by aircraft as a common carrier for compensation,’ id. § 40102(a)(25) (emphasis added).”^[15]“Common carrier” refers to a commercial transportation enterprise that “holds itself out to the public” and is willing to take all comers who are willing to pay the fare, “without refusal.”^[16]Some type of holding out to the public is the essential requirementof the act of “provid[ing]” “transportation of passengers or property by aircraft as a common carrier.”^[17]

The court relied heavily on the fact that CSI performs under its contract with the GSA as a dedicated service provider, not as a common carrier. Under the GSA contract, CSI provides charter service to government agencies only, not to all comers. Thus, within the scope of the contract, CSI does not appear to provide “transportation of passengers or property by aircraft as a common carrier.”^[18]If CSI is not a common carrier under its GSA contract, then it does not engage in “air transportation” and its services for GSA do not fall within the certification requirement of the Federal Aviation Act.

The court chastised DOT for failing to address this critical issue both in its cease-and-desist order and in its brief to this court. “This failure is all the more baffling because CSI twice informed DOT that it does not believe it is covered by the “air transportation” portion of the Federal Aviation Act—once in CSI’s letter to DOT dated November 19, 2009, and again in CSI’s brief before this court.”^[19]Yet DOT’s brief inexplicably claims, ‘It is undisputed that CSI’s service is indirect air transportation.’^[20]The court emphasized that “not only is this a disputed point, it is at the very heart of the present controversy.”^[21]

In conclusion, the court stressed that “given DOT’s complete failure to explain its reading of the statute, we find it impossible to conclude that the agency’s cease-and-desist order was anything other than arbitrary and capricious, and hence unlawful.  It appears to us that the law cannot support DOT’s interpretation, but we leave open the possibility that the government may reasonably conclude otherwise in the future, after demonstrating a more adequate understanding of the statute.”^[22]

Impact of the CSI Decision

The immediate impact of the CSI decision is that CSI, along with other air charter brokers, will be able to continue to enter into contracts to arrange air transportation as a principal without the fear of a potential DOT enforcement action. Air charter brokers will continue to perform a valuable service for the federal government. The federal government spends several million dollars annually procuring air transportation services and the use of brokers enables the federal government to obtain the best possible prices and options for air transportation services from FAvA and DOT certificated air carriers.  For example, most of the nation’s Immigration and Customs Enforcement deportations and federal interstate prisoner movements are arranged by air charter brokers.

CSI’s position throughout the entire dispute was that DOT’s consumer protection regulations simply don’t apply because the federal government is not the “public,” and the court agreed. Indeed, the protections afforded the federal government under the Federal Acquisition Regulations are much more effective that DOT consumer protection regulations. Unscrupulous contractors may be prosecuted by the U.S. Department of Justice under a wide variety of civil and criminal fraud statutes.

Special Touch Home Care Services, Inc.(29-CA-26661; 357 NLRB No. 2) Brooklyn, NY, June 30, 2011

This case, on remand from the Second Circuit, involved a strike by employees of a home health care provider.  The Board majority, consisting of Chairman Liebman and Member Becker, found that the employer violated the Act by refusing immediate reinstatement to 47 economic strikers.  The Union had provided the employer with timely notice of the strike, as required by the Act when striking a health care institution.  The employer contended, however, that it lawfully denied immediate reinstatement because the 47 employees told the employer during a pre-strike poll that they planned to work during the time period of the strike and because they failed to comply with an employer rule that required them to notify the employer if they would not be reporting to work for any reason.

In rejecting the employer’s arguments, the Board majority noted that employees are not required to give individualized advance notice of their intent to participate in a strike, that there was no evidence that the employees’ conduct created an imminent danger, and that there was no evidence of a concerted effort to mislead the employer in responding to the poll.  Dissenting, Member Hayes found that the employer had shown a sufficiently compelling business justification for enforcing its notification rule, that this justification outweighed the minimal burden imposed on employees’ protected right to strike, and that the majority’s position eviscerated the usefulness of the pre-strike poll.

Chairman Liebman and Members Becker and Hayes participated.  Member Pearce was recused and took no part in consideration of the case. Charge filed by New York’s Health and Human Service Union 1199/SEIU.  Adm. Law Judge Raymond P. Green issued his decision on September 15, 2005.  The Board issued a Decision and Order on September 29, 2007, and the United States Court of Appeals for the Second Circuit remanded the case to the Board on May 12, 2009.

Speaking of Rodents and Labor Disputes…Disneyland Resorts

Even the workers at the Happiest Place on Earth occasionally find themselves in a labor dispute. Disneyland Resorts, which employ 2,100 workers, and UNITE HERE Local 11, which represents them, have been locked in negotiations for more than three years since expiration of the last contract. On May 25, 2011, Disneyland Resorts indicated it had enough and advised the Union that it considered the parties at an impasse and would implement the terms of its “last, best and final” offer. The Union disagreed that impasse was present and claimed that implementation of the employer offer at the Magic Kingdom would be in violation of federal labor law. In the event UNITE HERE decides to picket Disneyland Resorts, there is no word on whether Mickey Mouse will cross.

June Proves To Be A Busy Month For ARB And Its Proposed Cap-and-Trade Program

June was certainly an interesting month for those following the progression of California’s Global Warming Solutions Act (“AB 32”), which requires that California cut greenhouse gas (“GHG”) emissions to 1990 levels by 2020. The “linchpin” of AB 32 is a proposed cap-and-trade program, a market-based approach to reducing GHG emissions in which the California Air Resources Board (“ARB”) sets a collective cap on GHG emissions and then allows under- and over-polluters to buy and sell credits among themselves. However, recent judicial and agency developments have altered the cap-and-trade landscape. At the very least, the cap-and-trade program, if it survives judicial review, will not begin in earnest until 2013 (instead of the planned January 1, 2012 start date).

LITIGATION DEVELOPMENTS

(1) Association of Irritated Residents v. California Air Resources Board

In 2009, a citizen’s group, Association of Irritated Residents (“AIR”), challenged ARB’s adoption of the cap-and-trade program found in the AB 32 Scoping Plan (the Plan for compliance with AB 32), alleging that ARB failed to adequately analyze alternatives to the cap-and-trade program, thereby violating the California Environmental Quality Act (“CEQA”).

On March 18, 2011, Judge Ernest H. Goldsmith of the San Francisco County Superior Court agreed with AIR’s contention that ARB was in violation of CEQA. Judge Goldsmith found ARB had not adequately weighed or analyzed the alternatives to the cap-and-trade program when it adopted an implementation strategy for AB 32. Judge Goldsmith’s final order, including a writ issued on May 20, halted all rule-making activities related to the cap-and trade program until ARB complies with the requirements proscribed under CEQA. (For further discussion on this, please see prior article here.)

(2) District Court of Appeal Grants ARB’s Petition for a Writ of Supersedeas

On June 1, ARB appealed Judge Goldsmith’s final order to the First District Court of Appeal. ARB then filed a petition for a writ of supersedeas, which requested the Court confirm that Judge Goldsmith’s injunction on the implementation of the cap-and-trade program was automatically stayed pending the determination of the underlying appeal. On June 3, the Court of Appeal issued a temporary stay while it considered whether the lower court’s injunction was “mandatory” or “prohibitory.” (For further discussion on this, please see prior article here.)

AIR argued that Judge Goldsmith’s final order was both mandatory and prohibitory. The mandatory element, according to AIR, requires ARB to conduct an appropriate alternative analysis for the Scoping Plan. AIR argued that this part of the injunction may be automatically stayed pending the appeal. However, AIR argued the prohibitory element – the instruction in Judge Goldsmith’s order preventing ARB from continuing to implement and develop its cap-and-trade program – is not automatically stayed once an appeal is filed.

ARB argued that the lower court’s final order would force ARB to miss the first year deadline for completing the necessary rulemaking procedures as directed under the state’s Administrative Procedures Act, thereby eliminating its ability to timely implement AB 32 in accordance with statutory requirements. This injunction, according to ARB, results in improper interference. In the alterative, ARB argued, under a balancing of the harms test, the Court should grant a “discretionary” stay if an automatic stay is determined to be inappropriate.

On June 24, the First District Court of Appeal issued an order granting ARB’s petition for a writ of supersedeas. Pending the Appellate Court‘s consideration of ARB’s appeal, the San Francisco County Superior Court order requiring ARB to halt all development and implementation of the cap-and-trade program is stayed. This means ARB is permitted to continue to advance and finalize plans for the cap-and-trade program while the Appellate Court determines the merits of ARB’s appeal.

Ass’n of Irritated Residents v. CARB, Case No. A132165, in the California First District Court of Appeal can be found here.

AGENCY DEVELOPMENTS

(1) ARB Releases Supplemental Analysis of Scoping Plan Alternatives

While the Court of Appeal took into consideration the arguments regarding ARB’s petition for the stay, ARB pursued another course of action. On June 13, ARB released a revised and supplemental analysis of alternatives to the Scoping Plan (the “Supplement”). (The Supplement can be found here.)  The release began a forty-five (45) day public review and comment period. In addition, ARB has scheduled two public hearings for July 8 and July 15 to discuss the Scoping Plan.  ARB also formally noticed a hearing before the full Board for August 24, 2011.

The Supplement presents a revised analysis for five (5) proposed alternative measures to be potentially utilized in implementing AB 32’s Scoping Plan and is much more detailed than the original environmental analysis. The Supplement reassesses the following alternatives, which were included in the original analysis:

a.       A “no project” alternative (or taking no action at all);[1]
b.      A plan relying on a cap-and-trade program for sectors included in a cap;[2]
c.       A plan relying more on source-specific regulatory requirements with no cap-and-trade component;[3]
d.      A plan relying on a carbon fee or tax;[4] and
e.       A plan relying on a variety of proposed strategies and measures.[5]

This new analysis incorporates emissions projections that take into account current economic forecasts and already implemented reduction measures. All the alternatives discussed, excepting the no project alternative, would achieve 2020 target levels. According to the Supplement, ARB believes that the cap-and-trade program and the mixed strategy approach would have the best chance of success. Importantly, the Supplement not only includes a revised alternatives analysis, it also includes significant revisions to the amount of GHG emissions needed to reach 1990 levels by the target date.[6]

After the forty-five (45) day review period, ARB will consider and prepare written responses to the public comments received. This should discharge Judge Goldsmith’s determination that ARB violated CEQA by commencing the implementation of the Scoping Plan prior to adequately responding to comments.

At the August 24 hearing, which will be at the Cal/EPA headquarters in Sacramento at 9:00 a.m., the Board will then determine, in light of the comments, responses and revised environmental analysis, whether the selection of the cap-and-trade program was appropriate. Thus, the Supplement offers a shield to protect ARB regardless of the determination of the appeal. With the Supplement and the subsequent review process, ARB retains the ability to request Judge Goldsmith dissolve his final order and injunction as the agency would have remedied the violations noted in the final order and would now be in compliance with CEQA.

(2) ARB Delays Required Compliance with Cap-and-Trade Program Until 2013

On June 29, ARB Chairwoman Mary Nichols told lawmakers at the California Senate Select Committee on the Environment, the Economy and Climate Change that ARB is planning to “initiate” the cap-and-trade program on January 1, 2012 but not “start the requirements for compliance” until January 1, 2013. Nichols stated the decision came “in light of the importance of this regulation to the success of California’s climate change program and the need for all necessary elements to be in place and fully functional.” (Nichols’ full transcript can be read here.)  In conjunction with news of this delay, ARB will release a draft of regulations regarding offset protocols and allowance distribution within the next two (2) weeks.

In her testimony, Nichols stated that the postponement of the compliance date would not affect the stringency of the program or the total amount of GHG emissions that industries would be mandated to reduce by 2020. Specifically, Nichols believes, “It gives [ARB] 2012 to work our stress tests, go through any issues anyone might raise…and come up with answers.” In short, the delay will not extend the 2020 target date required by AB 32.

Under the delay, the quarterly auctions of emissions allowances that each large emitter in California must turn in would commence in the second half of 2012, and not in February 2012 as originally planned. Entities that emit more than 25,000 metric tons of carbon dioxide per year will begin trading credits at the end of 2012 to cover emission reduction obligations for 2013 and later.

The cap-and-trade program requires covered facilities to surrender allowances and offsets once every three (3) years. Under this newly announced delay, the original first three (3) year compliance period (2012-2014) will be shortened to two (2) years.

According to Nichols’ testimony, the decision to delay the compliance requirements came after Nichols conferred with the State Attorney General’s Office and experts on California’s disastrous attempt to participate in deregulated electricity sales, which lead to widespread fraud and rolling black-outs experienced by much of the State in 2000-2001. Despite Nichols assertion that the pending litigation was not a deciding factor, many commentators believe that a principal reason for the delay is to ensure compliance with CEQA.

In an emailed statement issued by ARB clarifying Nichols’ testimony, ARB spokesperson Stanley Young, stated: “ARB will be initiating all elements of the cap-and-trade program throughout 2012, including establishing a market infrastructure, developing market oversight mechanisms, conducting trainings, holding auctions and developing linkages with partners in the Western Climate Initiative. This will ensure that we have tested the program prior to moving into the first year of compliance. The only change is shifting the first compliance obligation to 2013.”

Josh Margolis, CEO of CantorCO2e, a Cantor Fitzgerald LP subsidiary that provides financial services to the environmental and energy markets, offers the following take-aways from Nichols’ statement, as determined through CantorCO2e’s interactions with ARB staff:

a.       The most significant change is excusing sources from the need to secure and retire allowances or offsets to account for 2012 emissions;
b.      There will be no 2012 allowances issued;
c.       There will be the same reduction obligation by 2014 as under the original schedule, but “[t]he reduction forced by the declining cap that was originally scheduled to occur over a three (3) year period will now occur over a two (2) year period;”
d.      An underdetermined number of auctions will happen in 2012;
e.       In the 2012 auctions, 2013 and future vintage allowances will be auctioned; and
f.       ARB will issue a statement this week that clarifies and answers many of the above items, and addresses other issues as well.

Some commentators see this delay as a potentially detrimental roadblock for the future of the cap-and-trade program.  Peter Asmus, a senior analyst at Pike Research, stated: “I think it’s a sign of a lack of faith in the whole cap-and-trade concept, which was also shot down at the federal level…[It] shows the push back on the environmental regulations is even occurring in California.”

However, not all are pessimistic. State Senator Fran Pavely (D), author of AB 32, had originally called this meeting to discuss the implications and consequences of Ass’n of Irritated Residents v. CARB. After the meeting, Pavely stated: “This modest delay in implementation is prudent. The one-year period will provide flexibility; allowing us to road-test market mechanisms to see how they will work, while ensuring that the greenhouse gas pollution reductions required by the program remain intact.”

Margolis is equally optimistic about the delay, as he believes it might have the effect of keeping more businesses in the California. According to Margolis, “Chairman Nichols has delivered an elegant solution that will keep the environment whole and have a minimal impact on sources.”

Again, only time will tell what the final determination of Ass’n of Irritated Residents v. CARB and the future of the cap-and-trade program as proposed by AB 32 will be. More updates to come…

[1] This alternative is based on “existing conditions.” In establishing this baseline, the Supplement reflects the current status of other Scoping Plan measures. This includes those already adopted by ARB under AB 32 or enacted independently by State Legislature. The Supplement estimates the no-project approach would fall 22 million metric tons of CO₂-equivalent emissions short of the 2020 target reduction levels.

[2] This alternative looks at several examples of cap-and-trade programs enacted throughout the country and internationally. The Supplement identifies problems associated with these existing programs and offers ways California can avoid similar concerns. The Supplement also proposes an “adaptive management program” that would require ARB to monitor local air quality impacts and provide adjustments in order to deal with such impacts. This provision is probably included in response to AIR’s original challenge that the use of cap-and-trade could result in the concentration of emissions in low-income and minority neighborhoods.

[3] This alternative uses remediation measures that target specific sources of GHG emissions – including, but not limited to, oil and gas extraction plants, refineries, transportation sources, and cement plants. ARB states there is significant concern in implementing this alternative as it poses a substantial risk of emissions “leakage” or the relocation of these sources to other states.

[4] This alternative discusses examples of currently enacted fee programs and design considerations. ARB believes enacting a carbon fee or tax would be inefficient and potentially impossible. (In California, any tax must obtain a two-thirds (2/3) vote of the State Legislature and that any fee must be placed within the boundaries of California Supreme Court’s Sinclair decision and Proposition 26.) ARB has leakage concerns in regards to this alternative as well.

[5] This alternative proposes a mix of the three previous alternatives, not including the no project alternative.

[6] The original Scoping Plan estimated that the 2020 target level was 427 million metric tons of CO₂-equivalent emissions (the 1990 level). Under a “business-as-usual” approach, which was assumed to result in 596 million metric tons of CO₂-equivalent emissions, the Scoping Plan estimated a reduction of 169 million metric tons. However, with the economic recession and the reduction measures currently implemented, the Supplement states the current reduction needed to attain 2020 target level is now 80 million metric tons. The 2020 level under the same “business-as-usual” approach is estimated to be 507 million metric tons.