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.

Entrepreneur’s Guide to Litigation – Blog Series: Introduction

The words “lawsuit” and “trial” usually conjure up images based upon either media coverage of recent, significant cases or trials depicted on television and in movies. A real lawsuit and trial are significantly different than what we see on television or in the movies. Media coverage of a trial does not delve into the frequent reality of a lawsuit – the months and possibly years of pre-trial “discovery” and motion practice that occur before a case can even go to trial.

This upcoming blog series is aimed at removing some of the mystery of a lawsuit and a trial, and also at informing entrepreneurs what really happens prior to and during all those trials you see on television. The next seven blogs cover the basics on a lawsuit, from filing of a “Complaint” through trial and, ultimately, the appeal process. It can provide a complete picture of the litigation process to alert the entrepreneur what to expect as a potential party to a lawsuit.

There are other, important considerations to litigation not addressed in this series, such as insurance coverage, if any, and confidentiality agreements (known as protective orders) between the parties to a lawsuit. Additionally, a corporation usually cannot appear by one of its owners, but must be represented by counsel. Certainly, anyone that is sued or is thinking about suing another, should consult with a lawyer as soon as possible. We hope this blog series helps entrepreneurs develop a better understanding of the litigation process.

Entrepreneur’s Guide to Litigation – Blog Series: Complaints and Answers

A.  The Complaint

Litigation begins with a Complaint. “Complaint” is capitalized because it is a specific legal document, rather than a garden-variety complaint about something. The Complaint lays out the plaintiff’s specific legal claims against the defendant. It needs to contain enough facts that, if everything stated is true and there are no extenuating circumstances, a judge and jury could find in favor of the plaintiff.

As an example, Paul Plaintiff is suing Diana Defendant for violating a contract. Paul files a Complaint with a court claiming several facts: 1) Diana signed a contract to buy widgets; 2) Paul delivered the widgets; and 3) Diana did not pay the agreed-upon amount. If the court finds that these facts are true, then, unless there were extenuating circumstances, Diana probably breached a contract with Paul and should pay damages.

Paul’s Complaint also needs to allege facts showing that he has a right to be in that court. For example, if Paul wants to sue Diana inTexas, he has to show that the case and the parties have some connection toTexas. If he wants to sue her in a federal court, he has to meet a number of other criteria. (Federal court is generally only available if the parties are based in different states and the damages are relatively substantial or if the legal question is one of federal law.)

B.  Response to a Complaint

Once the defendant officially learns of the Complaint, she has a certain limited time to file some sort of response with the court. The time to respond, however, does not run from when the plaintiff filed the lawsuit, but generally when he officially delivered notice of the Complaint to the defendant. (There is a timeline that starts ticking when the defendant becomes aware of a state court lawsuit she wants to “remove” to federal court.) The amount of time for the defendant to respond varies by what court the case is in, but is generally a short period of time.

After receiving the complaint, the defendant has three options: 1) Ignore the Complaint and have the court grant judgment in favor of the plaintiff; 2) Tell the court that the Complaint is defective and ask for dismissal; or 3) Answer the Complaint. Option one is usually not a good plan; courts do not look favorably on defendants who ignore the legal process, and this option prevents a defendant from fighting the plaintiff’s claims.

Option two does not deal with the merits of the plaintiff’s issue. It is simply telling the court that the Complaint is defective for a variety of reasons including, for instance, how it was served, who the parties are (or are not), which court the case is in, or simply that, even if everything is true, the plaintiff cannot win. For example, if Paul sues Diana, but never tells Diana about the suit, Diana can then ask the court to dismiss the case. Also, if Diana works for DefendCo and Paul’s contract was actually with DefendCo and not with Diana, personally, she may be able to have the case dismissed because Paul sued the wrong party. If Paul sued Diana in a federal court inTexaswhen both parties are residents ofCaliforniaand neither has ever been to or done business in Texas, then Diana may be able to get the case dismissed, at least from theTexascourt.

Finally, there is the “So, what?” defense. If the Complaint doesn’t actually allege a cause of action, the defendant can ask the court to dismiss it. This usually happens because the plaintiff simply assumes a fact, but does not include it in the Complaint. If, for example, Paul alleges only that Diana failed to pay him a certain amount of money, but does not allege that a contract existed between them, then Diana can essentially say “So, what?” and ask the court to dismiss the case. She would ask the court to dismiss the case because, even if true (she really did not pay him any money), he did not plead any facts showing that she was supposed to pay him money. The defendant is not admitting the truth of the allegation; she is just saying that even if true, the plaintiff cannot win.

Finally, a defendant can file an Answer. Again, “Answer” is capitalized because it is a specific legal document. In an Answer, the defendant responds, paragraph by paragraph, to each of the plaintiff’s allegations. The defendant must admit, deny, or say that she does not know the answer to each specific allegation. Saying “I don’t know” functions as a denial.

For example, Paul’s Complaint probably alleges that Diana lives at a certain address. Assuming Diana actually lives there, she has to admit that fact. Paul may allege that he delivered the correct number of working widgets to Diana. If the widgets were not what she actually ordered or did not work, Diana would deny that allegation. Finally, Paul may claim that those widgets cost him a certain amount of money. Diana likely has no way to know how much Paul paid for the widgets, so she would say she does not know – thus leaving Paul to prove that allegation.

Also in the Answer, the defendant can claim affirmative defenses. Those tell the court that there were extenuating circumstances so that, even if everything the plaintiff says is true, the court should not find in favor of the plaintiff.

For example, if Paul told Diana not to worry about paying him for the widgets for six months but then turned around and immediately sued her, she would claim that as an affirmative defense.

Finally, the Answer may contain counterclaims. These claims are the defendant counter-suing the plaintiff for something. The counterclaims may be related to the original suit or not. Usually they are related, but they do not have to be. This section follows the same rules as if the defendant were filing a complaint.

For example, Diana may counterclaim against Paul because he sent her the wrong widgets and, perhaps, add a claim that when Paul delivered the widgets to her warehouse, he backed his truck into her building and caused damage. She would then counterclaim for breach of contract and property damage. The court would then sort out the whole mess to decide who owed whom how much.

“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.

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:

http://www.btlaw.com/fcwsite/img/bullet.gif); padding-top: 0px”>
• 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.

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.

The Perils of Email: Navigating the Legal Risks

In 2011, the typical corporate user will send and receive more than 110 electronic messages a day (over 40,000 per year), according to the Radicati Group. The number of worldwide email accounts is projected to increase from over 3.1 billion in 2011 to over 3.8 billion by 2014, 25% of which will belong to corporate users. As technology continues to drive growth and expansion for businesses, greater volumes of communication will be handled via email.

Although electronic messaging makes communication easier, faster and less expensive, it also creates an extraordinary set of issues. Identifying these perils and developing procedures to avoid them is critical for every company.

Information Preservation and Hold Notices

Various federal, state and local laws, rules and regulations require corporations to retain electronic communications and other information. For example, Rule 17a-4 of the Securities and Exchange Act requires SEC-regulated companies to retain all communications sent and received for at least three years, the first two in an easily accessible place. NASD Rule 3110 requires members to preserve books, accounts, records, memoranda and correspondence, and under the Sarbanes-Oxley Act, emails can become part of the business records of a company that are to be retained.

But, even when it is not required by law, an email retention policy should be in place. For example, according to a 2008 study by Osterman Research, 66% of the organizations surveyed rely upon email, IM archives or backup tapes to support and defend the organization in litigation. This should come as no surprise. Under the Federal Rules of Civil Procedure, a party generally is entitled to any document – in “hard” or “soft” (i.e., electronic) copy – that “appears reasonably calculated to lead to the discovery of admissible evidence.” Knowing this, litigation battle lines are often drawn around electronically stored information (ESI) and allegations that evidence has been destroyed (or “spoilated”). Savvy lawyers know that ESI discovery costs can drive settlement negotiations, or at least, distract parties from the real issues in the case. It is important, therefore, to have a sound retention policy to help make retrieving data for both business and legal purposes less painful.

Information Retention Policies

The adoption and enforcement of a retention policy is the first step to managing ESI. To be worthwhile, retention policies should: 1) reduce the risk of loss of critical and/or confidential business data, 2) alleviate burdens during an investigation or a lawsuit, and 3) account for information that needs to be retained to advance the goals of the business units and is legally required to be retained by the administrative and regulatory entities to which the corporation reports. What this means is that information critical for business continuity should be backed-up, retained and stored in a sensible way for retrieval. In developing retention policies, management should consider the importance and usefulness of information that is not legally required to be retained against the potentially high costs of locating and producing the information if required to do so later.

Determining what information to retain should be a collaborative process that includes at least one member of the IT department, the legal department, the affected business unit or units and human resources. That team should appoint a leader, most likely a legal department member, who is charged with mastering all facets of the policy and assuming ultimate responsibility for implementing and supervising all of its requirements. In terms of litigation, one of the requirements should include the process for retrieval, taking into consideration the time, manpower and monetary expense needed to actually assimilate relevant information for review and production.

After the policy is implemented, an ESI task force should schedule periodic reviews to test the retention procedures in order to confirm that the scope of retention adequately meets the over-arching goals, and that record-purging and backup activities are occurring and are documented. Additionally, the task force should ensure that data on all servers, desktops, laptops, PDAs, etc. is accounted for in the regularly scheduled purging cycle. When financially feasible, periodic audits of the policy and the processes, with the assistance of a third party, can verify and enhance reliability and compliance.

A lot of effort goes into formulating an effective retention policy and adequately communicating its importance to all of the persons affected by it.  As one analyzes ways to improve and enforce the policy, one should be mindful to consider whether the policy includes certain characteristics as suggested by information management firm Iron Mountain’s Records Management Best Practices Guide. These include:

• A sound and defensible record retention schedule that captures and reviews all records created by all business units.
• Electronic records that are migrated into a digital archive equipped with efficient and effective tools for searching, discovery organization and retention management.
• A retention program with components integrated into an internal audit process.
• Appropriate disposal methods, based on the different record classes or media types employed by the end-users of the electronic media.

Managing the Litigation Hold

Information retention policies that are reasonable outside the litigation context may nevertheless result in the destruction of ESI that would be relevant in litigation and give rise to a claim of spoliation. A proactive approach to thwart such a claim should require strong lines of communication between management, IT and legal and a keen appreciation for determining the date at which the company may “reasonably anticipate litigation.” Indeed, courts have insisted upon the suspension of routine document retention and destruction policies at the moment a party reasonably anticipates litigation. At that instance, a litigation hold notice should be prepared and distributed to all key personnel.

Obviously, deciding what to retain for purposes of a litigation hold is as equally important as determining when to distribute the litigation hold notice. For this reason, it is recommended that the litigation hold notice be a joint effort between in-house and outside counsel, and include language broad enough to describe categories of information that may be relevant to both the defense and prosecution of any reasonably anticipated claim. The litigation hold notice should also clearly identify one or two people to whom all questions should be directed and describe which ESI storage devices are subject to the hold. In more significant litigation, counsel should also plan to meet and interview key custodians and summarize the efforts undertaken to preserve and collect documents and ESI. While the summary should be privileged, it is an important document that counsel may refer to in defending a claim challenging the integrity of the litigation hold. In short, a well thought out and executed litigation hold plan may save a bundle of money (both in legal fees and possible sanctions) in responding to allegations of spoliation or other nonsensical litigation gamesmanship.

Avoiding Sanctions

Spoliation is “the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.” Courts have broad discretion to impose appropriate sanctions under Rule 37 of the Federal Rules of Civil Procedure when a party spoliates evidence in violation of a court order. However, in the absence of a court order, a party asserting a spoliation motion has the burden to prove spoliation occurred. As a general rule, that party should prove: 1) the party charged with destroying the evidence had an obligation to preserve it; 2) the records were destroyed with a “culpable state of mind”; and 3) the destroyed evidence was relevant to the moving party’s claim or defense.

While evidence of the third point may be under the control of the moving party, proving the first two points will usually require evidence within the possession, custody and control of the party against whom the motion is filed.

As with most prudent plans, the key is to be proactive. The first step to potentially avoid sanctions for spoliation is to initiate the litigation hold as soon as possible. Thereafter, one should immediately identify and modify retention policy features, systems and devices that, in routine operation, would destroy potentially relevant ESI. Then, one should send a notice to all personnel affected by the hold. Purging functions should be disengaged and protocols to overwrite backup media should be suspended. It is also important to be diligent and anticipate what employees will hide, destroy or alter ESI; one should guard against such tactics by interviewing key employees early and monitoring their use of company email and electronic document storage systems for signs of tampering, destruction or other troublesome behavior. An “Electronic Discovery Response Team” composed of management, IT personnel and legal counsel, should be assembled and should secure all storage media containing potentially discoverable data immediately upon receiving a request for production, and document all preservation efforts. In significant matters, consider retaining forensic experts to segregate, image and examine potentially discoverable electronic media both to meet early disclosure deadlines and to be in a better position to avoid abusive fishing expeditions.

Forensic Reviews

No discussion about ESI is complete nowadays without a reference to forensics. According to a November 2007 article in the American Bankruptcy Institute Journal entitled “Digital Forensics 101: Where to Find Critical Evidence,” authors Walt Manning and Michelle Campbell define digital forensics as a practice that “combines elements of law and computer science to collect and analyze electronic data in a way that could be admissible as evidence.” Forensic tools and techniques search every obvious and hidden space for stored data, and usually uncover evidence missed by even a diligent custodian’s review. Common places where stored data is overlooked in the data retrieval process can include computer hard drives, telephones, fax machine transaction records, USB “thumb” drives, optical media such as CD-ROM or DVD disks, backup media, online storage services, off-site archival services, shared network drives, external hard drives, cell phones or PDAs capable of containing email or text messages.

Through the use of forensic tools, techniques and experts, it is possible to: 1) recover deleted files or email messages; 2) recover fragments of data, even if a portion of the original has been permanently deleted; 3) identify and capture relevant data saved on external data storage devices; 4) capture and search data from cellular telephones and personal digital assistants; 5) capture and analyze instant messaging traffic; and 6) analyze internet history and recover images of websites visited. Given the particularly aggressive nature of some lawyers, and the evolving procedural guidelines for ESI discovery, effective internal policies should consider the ability to resurrect and unveil deleted and/or “hidden” ESI. The simple, but harsh, truth is that the days of total document destruction (i.e., shredding) are gone. The concept of “shredding electronic data” is a complex, often incomplete, process.

New Technology, New Threats

The internet and email have revolutionized the way individuals and businesses communicate with each other. As email and text-messaging increasingly become the primary forms of communication, the continued widespread use of email and texting in the corporate setting creates a whole host of interesting issues for companies and their lawyers. In litigation, for example, emails are an important component of discovery and often contain the proverbial “smoking gun.” The best defense is a good offense, which starts with a thoughtful analysis of the threats, backed by sound policies and practices that may ensure the proper use, retention and handling of emails and other ESI.

One Year Post-Bilski : How the Decision is Being Interpreted by the BPAI, District Courts, and Federal Circuit -§101 Case Summaries v. 2.0: June 28, 2010 – June 27, 2011

One year ago, on June 28, 2010, the Supreme Court issued its decision in Bilski v. Kappos. The decision held that the machine-or-transformation test is not the exclusive test for patent eligibility, and that the three traditional exclusions of natural phenomena, abstract ideas, and laws of nature still apply. Since that time, 182 decisions involving statutory subject matter eligibility have been issued by the USPTO’s Board of Patent Appeals and Interferences (“the Board”). District Courts issued 6 decisions in the past year that substantively addressed statutory subject matter under § 101, while the Federal Circuit issued 3 decisions on the subject. The day after Bilski issued, the Supreme Court denied cert in In re Ferguson, and just recently picked up Mayo Collaborative Servs. v. Prometheus Labs for review.

Following is a summary of each decision that substantively discusses statutory subject matter under § 101 – from the Board and the Courts. Although the Board decisions are not precedential, they offer insight into what patent practitioners can expect in their own appeals. Similarly, both reported and unreported cases from the District Courts and Federal Circuit are provided to round out the statutory subject matter landscape. Section (I) outlines Board cases where the claims were found to be statutory. Section (II) outlines Board cases where the claims were found to be non-statutory. Section (III) provides a look at activity in the Courts.

Some trends from the Courts worth noting:

(1)  The District Courts appear to be very strict when reviewing statutory subject matter – out of the 6 District Court decisions that addressed § 101, only 2 found that the claims at issue were patent-eligible under § 101.

(2) The Federal Circuit has offered some relief for patent owners. Out of the 3 Federal Circuit decisions that addressed § 101, 2 found that the claims at issue were patenteligible.

(3) The Supreme Court is staying close to the patent-eligibility issue, having granted cert in the Prometheus case on appeal from the Federal Circuit.

Some trends from the Board worth noting:

(1) The number of decisions where the claims were held by the Board to be nonstatutory under §101 significantly outweighs the number of decisions where the Board found that the claims satisfied §101. There are about 2.5 non-statutory decisions for every 1 statutory decision.

(2) It is not unusual for the Board to raise a §101 rejection on its own, even if patent eligibility was not a subject on appeal, and was not briefed.

(3) The Board still relies heavily on the machine-or-transformation test, although it does look at other factors as well. For most claims that satisfied the machine-or-transformation test, the Board has found them to be patent-eligible without further analysis.

(4) Although it is not an official test, the “mental steps” doctrine rings true – if the claims can be performed purely in the human mind, then they will be non-statutory.

(5) Even if the specification is silent as to whether a computer readable medium can be read on a signal, the Board will likely read a signal into a claim reciting a computer readable medium, rendering it non-statutory.

(6) The panel of judges assigned to a particular appeal matters. As can be seen from the following, several of the Board judges rarely find a claim patent-eligible, and often raise previously non-existent §101 rejections.

(7) There are no guarantees. Similar claims have been treated differently by different panels, and some BPAI judges appear inconsistent in applying the law to seemingly similar claims.

For a full review of §101 Case Summaries v. 2.0: June 28, 2010 – June 27, 2011 and the full text of this artilce please click here:

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.

U.S. Supreme Court Extends “Public Concern” Test To Lawsuits Brought By Public Employees Under The First Amendment’s Petition Clause

The U.S. Supreme Court Has provided some much needed guidance on when public employers may violate their employees’ right to petition the government for redress of grievances under the First Amendment.  In order to prove that the government violated his rights under the Petition Clause of the First Amendment, a public employee must now show that his petition related to a matter of “public concern,” as opposed to a private employment grievance.  This standard is substantially the same as the test applied under the Free Speech Clause of the First Amendment.

Writing for six other justices in Borough of Duryea, Pennsylvania v. Guarnieri, Justice Kennedy explained that while courts should not presume that there is always an equivalence between the Speech Clause and the Petition Clause, there is “extensive common ground in the definition and delineation” of the rights protected by the respective clauses justified extending the same “public concern” test to both the exercise of free speech by public employees and their right to petition the government.

The public concern test was first developed to protect the “substantial government interest” in preventing government employees from “constitutionaliz[ing]” the employee grievance process. [and clogging the court system with internal government matters]. Because public employees could readily bring the same claim under either the Speech or Petition Clauses, the Court reasoned that adopting a lower standard for claims brought under the Petition Clause would provide public employees a “ready means…to circumvent the [public concern] test’s protections.” However, the Court explicitly stated that this analysis only applies when a public employee is acting in his capacity as an employee. Rather, “[w]hen a public employee seeks to participate, as a citizen, in the process of deliberative democracy, either though speech or petition, it is necessary to regard the employee as the member of the general public he seeks to be.”

The Court’s full opinion can be found at: http://www.supremecourt.gov/opinions/10pdf/09-1476.pdf  read more

Patent Reform is on the Immediate Horizon – New Options for Challenging Patents Before the USPTO

On June 23, 2011, the U.S. House of Representatives passed the America Invents Act (H.R. 1249), which follows in the wake of the Senate version, S. 23, approved on March 8, 2011. Although differences between the two bills will have to be reconciled before the proposed legislation can be signed into law by the President, Congress is poised to enact major reforms to the patent laws. After many years of debate and compromise, patent reform seems to be just steps from the finish line.

We focus here on two provisions relating to challenging patents before the U.S. Patent and Trademark Office, as currently set forth in the House bill.  First, inter partes reexaminations will be replaced with inter partes review proceedings. Second, the legislation will create post-grant review proceedings for the first time. Together, these proceedings will expand the options available to competitors who wish to challenge patents before the USPTO.

Both inter partes review and post-grant review will be adjudicated by a three-judge panel of the Patent Trial and Appeal Board (PTAB). The PTAB will be formed from and supplant the current Board of Patent Appeals and Interferences. As with current interference proceedings, inter partes review and post-grant review will involve filing motions (e.g., to amend claims) and provide for limited discovery. Thus, there are likely to be many procedural parallels between interferences, inter partes review and post-grant review. Additionally, inter partes reviews and post-grant reviews must be concluded within one year, extendable to 18 months in unusual cases.

Inter Partes Review

Inter partes review includes some significant differences from the current inter partes reexaminations. Like inter partes reexamination, inter partes review will permit a third party to challenge one or more patent claims as anticipated or obvious on the basis of prior art patents or printed publications. Unlike reexamination, which can be ordered at any time during the period of enforceability of a patent, a petition for inter partes review can only be filed after the later of: (1) nine months after the grant of a patent or a reissue of a patent; or (2) the termination of post-grant review, if a post-grant review has been instituted for that patent. The standard for commencing an inter partes review will be higher than that for ordering reexamination. Reexamination is ordered if there is “a substantial new question of patentability affecting a claim of the patent.” In contrast, inter partes review will be commenced upon a determination that “there is a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged.” Thus, competitors will find it more difficult to mount challenges to patents under this provision of the law.

The legislation addresses the interplay between inter partes review and district court litigation, and it places constraints on the extent to which the proceedings will overlap. Inter partes review may not be instituted if the petitioner has already filed a civil action challenging the patent’s validity. However, a counterclaim by a defendant in a civil action may challenge the patent’s validity without barring inter partes review. Following a final decision in an inter partes review, a petitioner will be estopped from subsequently disputing a claim’s validity in litigation or before the USPTO on grounds that the petitioner “raised or reasonably could have raised” during the inter partes review. Settlement of the inter partes review proceeding will eliminate any estoppel, thus giving parties greater incentive to settle than under the current scheme. Thus, in a settlement context, the estoppel provisions underinter partes review are somewhat less onerous than under inter partes reexamination.

Finally, the legislation also provides for reexaminations that are instituted as the result of supplemental examination of the patent. A patent owner may request supplemental examination of a patent to have the Office consider, reconsider, or correct information believed to be relevant to the patent. In contrast to current law regarding reexaminations, this information is not limited to prior art patents and publications, and it may include, for example, information relating to an on-sale bar or experimental data relevant to the enablement requirement. If information presented in the request raises a substantial new question of patentability, the Director will order reexamination. Supplemental examination immunizes a patent against a later holding of unenforceability based on the same information provided during supplemental examination.

Post-Grant Review

As a supplement to inter partes review proceedings, the new legislation also creates post-grant review as a mechanism for challenging patents. Although there are many similarities between the two procedures, significant differences are present, and they warrant a closer look. Unlike inter partes review, a third party may challenge an issued patent on any invalidity ground by filing a petition within nine months after issuance or re-issuance of the patent. The broad grounds available for seeking post-grant review parallel those available for finding invalidity in a civil action in district court. For example, post-grant review will permit challenges based on lack of written description or lack of enablement, thus expanding the bases for attacking patents in proceedings before the USPTO. The USPTO will authorize a post-grant review upon a showing that “it is more likely than not” that at least one challenged claim is unpatentable. This standard is more stringent than the “substantial new question of patentability” standard for initiating inter partes reexamination under the current law. Alternatively, post-grant review may be authorized if a petitioner raises a novel or unsettled legal question that is important to other patents or applications. As with inter partes review, post-grant review cannot be initiated if the petitioner has filed a civil action challenging the validity of the patent. Additionally, a final decision in a post-grant review proceeding will create an estoppel on any ground that the petitioner “raised or reasonably could have raised” during thatpost-grant review.

Conclusion

The new legislation will give competitors greater options for challenging patents. Although it remains to be seen how effectively the USPTO will be able to handle the proceedings, given the one-year time constraint for concluding such proceedings, the existence of each option should be borne in mind both by patent owners who may seek to enforce their patents and by competitors who wish to eliminate the patents of others. As compared to civil litigation, post-grant review and interpartes review may prove to be attractive tools for challenging patents, particularly in view of the faster resolution and lower costs than typical district court litigation, the “preponderance-of-theevidence” standard of proof, and the broadest reasonable claim construction that are applied at the USPTO. Potential patent challengers will wish to stay informed regarding the patent landscape, so that they can timely file for post-grant review if desired.

Split Decision: U.S. Appellate Court Finds Health Reform Law is Constitutional

The Obama Administration enthusiastically embraced a legal victory yesterday  (June 30th) when, in a 2-1 split decision, a federal appeals court panel upheld a lower federal court decision finding that the federal Health Reform Law is constitutional.  Some observers quickly seized on the fact that one of the two votes upholding the Health Reform Law was a conservative Republican judge, Jeffrey Sutton, who once clerked for Supreme Court Justice Antonin Scalia.  The third judge, a Reagan appointee, dissented on the substantive issue, arguing that the Health Reform Law is unconstitutional.

The core question remains an extremely close one.  The three judges on the panel were not unanimous and the opinion itself gives some further indications that the matter could go either way when it is finally decided by the Supreme Court.   For example, Judge Sutton, who concurred in part and wrote the majority opinion in part, indicated that his opinion is just one step in the process – at one point he essentially refers to the appeals court as a “middle management judge” and then later goes on to observe that he is “[m]indful that we at the court of appeals are not just fallible but utterly non-final in this case…”

Whether today’s decision has any ultimate impact will turn on its persuasive power and, in particular, whether the logic of the opinion is deemed compelling by the Supreme Court of the United States.  Even before this case approaches the high court, several additional steps will occur. First, the challengers could request the Sixth Circuit Court of Appeals to re-hear the case en banc, although information posted on the lead challenger’s website indicates that this option will not be pursued and that the challengers prefer that the case proceed directly to the Supreme Court.  In any event, the Sixth Circuit decision is just the first of the three appellate court reviews; two other federal appeals courts are currently considering similar challenges to the Health Reform Law.  In contrast to the Sixth Circuit’s decision in which the lower court had already found the Health Reform Law to be constitutional, the other two circuits, the Fourth and the Eleventh, would have to reverse lower courts that have previously rejected the Health Reform Law as being unconstitutional.   If either of those circuit courts decides the opposite way of today’s decision, the odds will increase that the Supreme Court will take up the matter more quickly.   If the high court takes the case this fall, it could decide the constitutionality of health care reform just months before the 2012 election.

Choice of Law After England’s Blue Sky One Case

England’s Blue Sky One case presents perplexing problems for bankers, aircraft operating lessors, airlines and their lawyers.^[1]This note discusses the fallout from Blue Sky One, and explains how parties can address these problems in their affected aircraft financing deals.

The Problem

Following the Blue Sky One case, there is an issue as to whether an English law mortgage creates a valid security interest in an aircraft in certain situations. A valid security interest is created under English law without additional requirements only when an aircraft is located in England at the time of closing or where the location of an aircraft is unknown.^[2]

In all other situations there are now complicated legal and practical risks to address before parties can be comfortable that an English law mortgage is effective. In summary, the requirements are as follows:

• If an aircraft is outside England at closing, an English mortgage must be valid under the law of the jurisdiction where the aircraft is located in order to be effective.
• If an aircraft is over international waters at closing, best practice is to ensure the mortgage is valid under the law of the jurisdiction where the aircraft is registered to ensure the mortgage is effective.^[3]

These new requirements have cost, risk and timing implications for transactions using an English law mortgage. A best case scenario resolution addressing the new requirements is that local counsel in the jurisdiction where an aircraft is located or registered will be able to give a clean opinion confirming that the English law mortgage is valid under local law. At worst, local counsel will give an opinion containing assumptions or exclusions that push the risk of a mortgage being invalid back to the parties, or will not be able to give an opinion at all – potentially because the English law mortgage will not, in fact, be effective under local law (as was the case in Blue Sky One).

Whichever scenario applies, Blue Sky One means that using English law will now result in higher legal costs and potential timing and closing risk.  Consequently, lenders, lessors and airlines should question their counsel carefully to understand new risks that may exist, even where a local law opinion has been provided.

The Solutions

The issues with Blue Sky One can be side-stepped by having an aircraft mortgage governed by laws other than English law. New York law is an alternative to consider, with a developed body of case law, and courts and a legislature that openly induce commercial contracts to designate New York law.

A choice of New York law in a commercial case will receive nearly absolute respect in New York courts. Section 5-1401 of New York’s General Obligations Law provides that:

“The parties to any contract, agreement or undertaking…covering in the aggregate not less than two hundred and fifty thousand dollars… may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.”

The general rule in Section 5-1401 leaves little scope for the type of uncertainty created by Blue Sky One. If an aircraft is worth more than $250,000, a mortgage under New York law will validly create a security interest in it regardless of aircraft location.^[4]

A second solution is to rely solely on a mortgage governed by the law of the jurisdiction where the aircraft is located or registered at closing.^[5]This will be less desirable if local rules on enforcement are not as familiar or as effective as the laws of a “moneycenter” jurisdiction like New York. Taking only a local mortgage may also necessitate local counsel and local courts becoming more involved in the enforcement process, potentially reducing certainty and increasing enforcement risk for lenders.

It is worth noting that, if the debtor is located in a country that has adopted the Cape Town Convention, then the parties arguably have a broader choice for the mortgage’s governing law. The Cape Town Convention provides that, so long as the relevant contracting state has made the election under Article XXX(1), the transaction parties are free to choose the governing law of their agreements.^[6]In this case, a New York law mortgage still would be a sensible choice, as this would give the parties the choice of law protections afforded by both The Cape Town Convention and New York law.

Conclusion

Following Blue Sky One, lenders taking English law mortgages over aircraft that are not located in England at closing must take additional steps to ensure that they have an effective security interest including confirming that the English law mortgage is valid under the law of the jurisdiction of the location of the aircraft or considering a New York law governed mortgage.

Ninth Circuit Finds Jurisdiction Over Foreign Corporation Based On Its Subsidiary’s Contacts in the United States

In the recent case of Bauman v. DaimlerChrysler Corp. (No. 07-15386 (9th Cir. May 18, 2011)), the Ninth Circuit expanded the use of “agency theory” to impose personal jurisdiction over a foreign corporation doing business in the U.S. solely through its U.S. subsidiary. The court found jurisdiction based on the subsidiary’s contacts within California, even though the lawsuit was initiated by non-U.S. residents regarding acts allegedly committed in a foreign country that had nothing to do with the subsidiary’s contacts.

If this decision stands, it has the potential to affect any foreign company doing business in the U.S. through subsidiaries, even if those subsidiaries have nothing to do with the company’s alleged actions giving rise to the lawsuit.

In the decision, the Ninth Circuit held that personal jurisdiction existed over DaimlerChrysler AG (DCAG), a German company, based in part on its right to maintain control over Mercedes-Benz USA LLC (MBUSA), its wholly owned U.S. subsidiary. The court held that DCAG could be haled into court in California due to MBUSA’s contacts within California.

Background

The plaintiffs in Bauman are 22 Argentine nationals who allege that DCAG’s Argentine subsidiary, Mercedes-Benz Argentina (MBA), collaborated with the Argentine government during its “Dirty War” in order to break up the union at an MBA plant. The plaintiffs brought suit under the Alien Tort Statute and the Torture Victims Prosecution Act of 1991. 

Suit was brought against DCAG in the Northern District of California. Like many global companies doing business in the U.S., DCAG owns an American holding company, DaimlerChrysler North America Holding Corp., which in turn owns MBUSA. MBUSA is a Delaware company with its principal place of business in New Jersey, but it has a regional office in California, as well as other centers of operation located in California.

The relationship between DCAG and MBUSA is governed by a General Distributor Agreement which establishes requirements for MBUSA as the general distributor of Mercedes-Benz cars in the U.S. MBUSA is the single largest supplier of luxury vehicles to the California market, and MBUSA’s sales in California alone account for 2.4 percent of DCAG’s total world wide sales. DCAG did not dispute that MBUSA was subject to general personal jurisdiction in California.

However, DCAG did dispute that it was subject to personal jurisdiction in California. At the district court level, DCAG’s motion to dismiss for lack of jurisdiction was granted. Plaintiffs appealed to the Ninth Circuit, which reversed the district court’s holding.

Ninth Circuit’s Decision

The question before the Ninth Circuit was whether the district court has general personal jurisdiction (i.e. jurisdiction over any claims against DCAG, regardless where they arise) over DCAG through the contacts of MBUSA. The court recognized that the district court did not have specific personal jurisdiction over DCAG, since the plaintiffs’ claims did not arise from DCAG’s contacts with California. Instead, the court determined whether general jurisdiction was appropriate over DCAG.

First, the court considered whether DCAG had “the requisite contacts with the forum state to render it subject to the forum’s jurisdiction” by considering either “substantial” or “continuous and systematic” contact with the forum state. The real question was whether the court could impute MBUSA’s contacts in California to DCAG. To decide this, the Ninth Circuit said that courts can use the “alter ego” test or the “agency” test. Recognizing that the alter ego test was not met in this case, the court turned to the agency test.

The agency test is predicated upon showing the “special importance of the services performed by the subsidiary.” Specifically, the agency test is satisfied by a showing that the subsidiary functions as the parent corporation’s representative in that it performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services.

Further, the parent company must also exert, or have the right to exert, sufficient control over the subsidiary, though “not as much control as is required to meet the ‘alter ego’ test.”

The court held that MBUSA’s services were sufficiently important to justify personal jurisdiction over DCAG via the agency test. The court explained that “DCAG simply could not afford to be without a U.S. distribution system,” given the amount of cars sold in the U.S. and in California. Moreover, DCAG had the right to control MBUSA’s activities under the distributor agreement.

Second, the court analyzed whether the assertion of jurisdiction would be fair and reasonable under the circumstances of this case. Looking at several factors, the court concluded that it was reasonable to assert jurisdiction over DCAG.

Of importance, the court focused on DCAG’s purposeful interjection into the California market. The court looked at the importance of the California market to DCAG’s car sales and the fact that DCAG had initiated lawsuits in California to challenge clean air laws and to protect its patents. The court also found that DCAG was a large sophisticated company, therefore the burden to litigate the dispute in California was not enough to preclude jurisdiction.

The court also found Germany’s sovereignty concerns trumped by California’s interest in adjudicating important questions of human rights. Finally, the court expressed doubts that Argentina was an adequate alternative forum to address allegations involving the “Dirty War.”

Conclusion 

The importance of Bauman is that the Ninth Circuit’s use of the “agency” test makes it easier for foreign corporations to be sued in the U.S. based on the unrelated activities of an American subsidiary. Foreign corporations exercising control, or which have clauses in distribution or other agreements with their U.S. subsidiaries which allow them to control their subsidiary’s activities, should pay close attention to the court’s analysis in Bauman

However, Bauman’s importance may be limited depending on the Supreme Court’s approaching decision in Goodyear Dunlop Tires, S.A. v. Brown (No. 10-76), which raises similar issues regarding personal jurisdiction over a foreign company when the lawsuit does not arise from events in the U.S. It is possible that the Ninth Circuit views their “agency theory” as a way around any Supreme Court decision, but until Goodyear is decided, Bauman’s reach remains uncertain.

Texas Legislature Amends Statute on Choice of Law

On May 27, 2011, the Governor of the State of Texas signed into law amendments to the Texas choice-of-law statute that, effective September 1, 2011, will afford parties greater flexibility when choosing a governing law for many transactions involving at least $1,000,000.

The amendments expand and clarify existing statutory rules and include, among other things, an important change for syndicated loan and other multi-lender transactions, in that the amendments permit parties to a loan transaction to choose, as the governing law for the transaction, the law of any jurisdiction in the United States where a party to the transaction has an office, so long as the transaction also involves at least $25,000,000 of credit extended by at least three lenders.

These changes are contained in H.B. No. 2991, which amends the choice-of-law statute adopted by the Texas Legislature in 1993, later recodified in what is now Chapter 271 of the Texas Business and Commerce Code.  Under the statute, parties to a transaction involving at least $1,000,000 may, with certain exceptions, agree in writing that their agreements will be governed by the laws of a particular jurisdiction if the transaction bears a reasonable relation to the chosen jurisdiction. Since its original passage, the statute has set out five safe-harbor factors as to what ─ under Texas law ─ constitutes a reasonable and enforceable choice of governing law.  These safe harbors have never applied to certain types of transactions, such as those involving transfers of title to real property, methods of foreclosure, marriage, adoption and matters of inheritance, and H.B. No. 2991 does not change any of these exclusions from the coverage of the statute.

H.B. No. 2991 is intended to reflect modern business practice by adding to, and clarifying, the list of statutory safe harbors. In addition to the new safe harbor for multi-lender loan transactions noted above, H.B. No. 2991:

• amends an existing safe harbor ─ in recognition of the fact that negotiations are often conducted by telephone and e-mail without in-person meetings ─ to clarify that the parties to a transaction may choose the law of a particular jurisdiction to govern their transaction if a substantial part of the negotiations relating to the transaction occurs in or from that jurisdiction and an agreement relating to the transaction is signed in that same jurisdiction by one of the parties,
• clarifies that the statutory list of safe-harbor contacts is a non-exclusive list so that parties to transactions covered by Chapter 271 of the Texas Business and Commerce Code may also rely on other choice-of-law rules, such as those found in the Restatement (Second) of the Law of Conflict of Laws,
• expressly authorizes parties to choose the law of the jurisdiction of formation of an entity to govern any transaction involving at least $1,000,000 that relates to the governing documents or internal affairs of that entity, such as a transaction involving:
  • a shareholder or other agreement among members or owners of the entity,
  • an agreement or option to acquire a membership or ownership interest in the entity,
  • the conversion of debt or other securities into an ownership interest in the entity, or
  • any other matter relating to rights or obligations with respect to the entity’s membership or ownership interests, and

• clarifies that a choice of law may continue to apply to a transaction, notwithstanding changes in facts and circumstances (including changes in parties and amendments or restatements of agreements relating to the transaction), if the chosen law was reasonably related at the outset of the transaction.

H.B. No. 2991 leaves unchanged the following additional safe harbors contained in existing Chapter 271 for determining when a transaction bears a reasonable relation to a particular jurisdiction:

• a party to the transaction is a resident of that jurisdiction,
• a party to the transaction has the party’s place of business or, if that party has more than one place of business, the party’s chief executive office or an office from which the party conducts a substantial part of the negotiations relating to the transaction, in that jurisdiction,
• all or part of the subject matter of the transaction is located in that jurisdiction, or
• a party to the transaction is required to perform in that jurisdiction a substantial part of the party’s obligations relating to the transaction, such as delivering payments.

---

These amendments were part of a legislative package sponsored by the Texas Business Law Foundation, a non-profit organization founded in 1988 to support a favorable business climate in the State of Texas. The Foundation is currently chaired by Gail Merel, a partner of the Firm who also worked on drafting these amendments. Mike Jewesson, Counsel in the Firm’s Dallas office, serves as Secretary-Treasurer of the Foundation.

Prejudgment Interest in Copyright Infringement Suit Tracks to Date of First Infringement – William A. Graham Co. v. Haughey

The U.S. Court of Appeals for the Third Circuit affirmed a nearly $20 million verdict in favor of a plaintiff-appellee, finding that an additional award of prejudgment interest should be applied from the date when a fraud that resulted in a copyright infringement began, not when the plaintiff discovered the infringement.   William A. Graham Co. v. Haughey et al., Case No. 10-2762 (3d Cir., May 16, 2011) (Smith, J.).

In 1991, Thomas P. Haughey left his position with The Graham Company, an insurance brokerage, to join USI MidAtlantic Inc., one of Graham’s competitors.  When Haughey left Graham, he took two binders containing hundreds of pages of text describing various types of insurance coverages, exclusions, conditions and similar matter.  The materials had been prepared by Graham employees and were protected by Graham’s copyrights.  From July 1992 until 2005, Haughey and employees at his new employer used the materials to prepare insurance coverage proposals for presentations to clients.

Graham did not discover the unauthorized use of its binder materials until November 2004.   In February 2005, plaintiff Graham filed a copyright infringement suit against Haughey and USI MidAtlantic.  The defendants argued that the Copyright Act’s three-year statute of limitations barred the plaintiff’s claims, but the district court rejected their argument.  The district court determined that the “discovery rule,” which tolls the limitations period until the plaintiff learns of the cause of action or with reasonable diligence could have done so, applied to the Copyright Act.  At trial, the plaintiff did not seek statutory damages, but instead sought actual damages in the form of the defendants’ profits attributable to the infringement.  The plaintiff argued that defendant USI MidAtlantic had earned $32 million in profits that was directly attributable to the infringement, with defendant Haughey personally earning $3 million from the infringement due to commissions.  The burden then shifted back to the defendants to prove that their revenues were attributable to factors other than the copyrighted work.  The jury found for the plaintiff, awarding more than $16.5 million against defendant USI MidAtlantic and nearly $2.3 million from defendant Haughey, representing about 70 percent of USI’s profits and 75 percent of Haughey’s profits.  Subsequently the court set aside the jury’s verdict, determining that Plaintiff had in fact been placed on notice of Defendants’ conduct as early as fall of 1991.  A second trial, limited to damages, resulted in a second jury verdict awarding $1.4 million in damages against defendant USI and $268,000 against defendant Haughey.

The parties appealed to the 3d Circuit (Graham I).  The plaintiff argued that the district court’s holding regarding notice was mistaken, while the defendants argued that the plaintiff had failed to prove a causal nexus between the defendants’ alleged infringement and profits.  The 3d Circuit ruled in Graham I that the plaintiff had effectively shown causation and that the district court had erred in finding that the plaintiff could have reasonably discovered the infringement before February 2002.  The 3d Circuit remanded the case to the district court for a determination of whether the defendants were correct in their argument that 70 percent and 75 percent apportionments of the defendants’ profits was “excessive.”  On remand, the district court rejected the “excessiveness” argument and reinstated the original jury verdict.

In their second appeal to the 3d Circuit (Graham II), the defendants argued that the nearly $20 million jury verdict “shocks” the judicial conscience and was improper.   The defendants further argued that the award of prejudgment interest dating from when the fraud allegedly began was improper, maintaining that such interest should only be applied from 2004, the date when the plaintiff allegedly discovered the infringement.  The defendants also argued that the district court’s tolling of the limitations period because of the “discovery rule” and USI MidAtlantic’s alleged concealment of the infringement should also toll the interest period.

The 3d Circuit disagreed, upholding the jury verdict and finding that use of the discovery rule to change the date of accrual and delay the onset of prejudgment interest would “warp its fundamentally plaintiff-friendly purpose” and would “give defendants additional incentive to conceal their tortious or otherwise illegal acts,” given that “a fraudster would owe no interest on his purloined cash until discovery of the theft, and would thus be allowed to benefit from an interest-free loan.”  The 3d Circuit also rejected USI’s arguments that its profits could be attributed to the expertise and hard work of its brokers, more than its use of the plaintiff’s copyrighted materials, noting that while it had some sympathy for USI MidAtlantic, “such sympathy is not, however, sufficient to justify overturning the jury’s verdict.”

Practice Note:   If a plaintiff overcomes the tolling of the statute of limitations based on the “discovery rule,” that rule has no effect on the date upon which prejudgment interest begins to accrue.  Prejudgment interest will accrue beginning on the date the infringement occurred, not the date when the plaintiff discovered the infringement.