Imagine a glass beaker filled with vinegar. Hovering above it is a heaping spoonful of baking soda. Mix the two together, and the vinegar will bubble out of control, flow over the rim of the beaker and make a huge mess.
This simple grade-school science experiment demonstrates how catalysts can cause chemical reactions. But it’s also a microcosm of the in-house legal world, in which lawsuits, regulations and other outside forces cause changes, some of which can drastically alter a company’s stability. It’s up to general counsel to help their companies navigate these changes, adapt to them and excel under them.
Over the past year, some noteworthy court cases and litigation developments have spurred change within the corporate realm and introduced new challenges to in-house lawyers. Last month, the Supreme Court wrapped up its 2011-2012 term, in which it delivered a steady stream of headline-making decisions that are now influencing companies’ priorities and operations. In addition, litigation tied to business practices, global change, social phenomena and the current administration’s regulatory goals has constantly reshaped inside counsel’s focus.
On the following pages, experts reflect on and discuss six litigation-themed catalysts that have unfurled over the past year and are significantly impacting the in-house bar.
The catalyst: Many intellectual property experts are calling Mayo the most significant IP decision of the 2011-2012 Supreme Court term.
The case centered on two patents belonging to Prometheus, a pharmaceutical and diagnostic products company. Prometheus’ patents concerned a medical diagnostic test for determining how much of a certain drug a doctor should give to a patient in order to treat him for certain autoimmune diseases. The test featured three steps: administer the drug to the patient, take a blood sample from the patient to measure the drug’s concentration level in his body, and compare the measured concentration level to predetermined levels indicating whether the concentration is too low (which would make the drug ineffective) or too high (which could produce harmful side effects).
Mayo previously had purchased and used Prometheus’ diagnostic test, but the medical center announced in 2004 that it planned on selling and marketing its own, slightly different test. Prometheus promptly sued Mayo for patent infringement.
A district court found in 2008 that Mayo’s test did infringe Prometheus’s patents, however, the court granted summary judgment to Mayo. The court reasoned that Prometheus’s patents were for laws of nature—in this case, the correlation between blood test results and patient health, which can’t be patented.
In 2009, the Federal Circuit reversed, finding Prometheus’ test to be patent-eligible. When Mayo appealed, the Supreme Court granted certiorari, but then it vacated and remanded the Federal Circuit’s decision in light of Bilski v. Kappos, in which the high court decided that the “machine or transformation test” is an important guide for determining whether a method is patent-eligible subject matter. In order to satisfy the test, a process must either use a particular machine or transform a particular article into a different state or thing. The Federal Circuit again found in 2010 that Prometheus’ test was patentable and that it satisfied the “machine or transformation test.”
But the Supreme Court unanimously decided March 20 that Prometheus’ patents were invalid because they claimed laws of nature.
The impact: Mayo clearly is going to have the biggest effect on burgeoning biotechnology and pharmaceutical companies that continuously seek patents for diagnostic tests.
“Some of my colleagues have said, if applied literally, the Supreme Court’s reasoning could invalidate thousands of already-issued patents,” says Marshall, Gerstein & Borun Partner Cullen Pendleton.
If plaintiffs challenge existing patents and courts find them invalid, investors likely will stop investing money in diagnostic test development. “They’re not going to put in the cash that it takes to devise a test because they’re scared that the courts will invalidate their patents,” Pendleton says. “If diagnostic claims are going down in flames, there will likely be a rush for the exits to try to get out of the industry, or certainly not waste money on it. That’s bad news for overall innovation in the long run. And it’s also bad news for anyone who might have a condition that they want to have tested.”
Mayo’s reach also could extend into the software industry. “Laws of nature, natural phenomena and other abstract ideas can’t be patented and, similarly, mathematical algorithms cannot be patented,” Pendleton says. “To the extent that some software is just a clever new way of doing an algorithm, it’s kind of like the Prometheus claims. It’s observing a natural phenomenon.”
Experts say in-house counsel at companies with vast patent portfolios should immediately evaluate whether their existing patents and patent applications are vulnerable in light of Mayo.
“It’s a cautionary tale to companies that are seeking IP protection to really review the factors that the Supreme Court set forth in Mayo to ensure that they really qualify for an appropriate patent,” says Madeleine McDonough, a partner at Shook, Hardy & Bacon.
Overall, Mayo signifies the Supreme Court’s increasing concern with the U.S. patent system. “The Supreme Court has for the first time suggested that there are going to be strong limitations on what is patent-eligible subject matter,” says Neal Katyal, a partner at Hogan Lovells and the former U.S. acting solicitor general. “There has been increasing concern that the patent system has gotten out of control and that people are patenting far too many things that are not eligible to be patented.”
In light of Mayo, the high court ordered the Federal Circuit to rehear the gene-patenting case Association for Molecular Pathology v. Myriad Genetics, in which the appeals court previously found that Myriad’s patents on two breast cancer genes were valid. Oral arguments are scheduled for July 20. The Supreme Court also ordered the Federal Circuit to rehear WildTangent Inc. v. Ultramercial, a case concerning a patent for placing advertisements prior to copyrighted content on web videos. At press time, oral arguments were expected to take place in the fall.
The catalyst: Although the Supreme Court decided Concepcion more than a year ago, the decision’s importance is still reverberating throughout the corporate world. And it’s sparking controversy, too.
The class action lawsuit concerned a California couple who had sued AT&T for false advertising and fraud because it charged them roughly $30 in sales tax for phones that were “free” to customers who signed two-year service contracts. AT&T contended that its consumer contract required the couple arbitrate the dispute outside of court.
A district court denied AT&T’s motion to compel arbitration. The court relied on a 2005 California Supreme Court decision, Discover Bank v. Superior Court, in which the state’s high court found that an arbitration provision was unenforceable because it prohibited classwide proceedings.
“The California Supreme Court held that contracts of adhesion have to be examined for unconscionability, which exists when one party to a contract has overwhelming bargaining power over the other party,” says Michael Tuteur, chair of Foley & Lardner’s litigation department.
On appeal, the 9th Circuit ruled in 2009 that a California consumer-protection law trumped the arbitration clause in AT&T’s contract. But in April 2011, the Supreme Court reversed, deciding 5-4 that the Federal Arbitration Act (FAA) preempts state law. The purpose of the act is to “allow for efficient, streamlined procedures tailored to the type of dispute,” Justice Antonin Scalia wrote for the court. The majority reasoned that allowing the class action to proceed would impede the federal law’s objective.
Additionally, “the Supreme Court found that when a court singles out arbitration clauses or class action waivers as a basis for finding unconscionability, as compared to looking at the contract as a whole, that is a violation of the Federal Arbitration Act,” Tuteur says.
The impact: Concepcion was music to corporations’ ears.
“It upheld the notion of having arbitration clauses and class action waivers in the myriad consumer contracts that people sign—or click through—every day,” Tuteur says. Unsurprisingly, many companies that didn’t previously have such clauses and waivers in their consumer contracts added them after the decision.
Mayer Brown Partner Andy Pincus, who argued on behalf of AT&T in Concepcion, says the decision has made more companies realize that “arbitration is a win-win for both corporations and their customers because the court system has gotten so expensive and difficult to navigate. Having fair arbitration gives ordinary people access to justice that they otherwise might not have.”
But Tony Lathrop, a member at Moore & Van Allen, notes that “in-house counsel’s wheels started turning” after Concepcion. “They started thinking about revising their agreements wherever they could,” he says.
For instance, labor law experts posited that Concepcion could help companies in the employment context. By including arbitration clauses and class action waivers in agreements with employees and independent contractors, companies could safeguard themselves from employee class actions.
So far, this concept has induced its fair share of litigation.
In Raniere v. Citigroup, a group of former Citi loan officers brought a Fair Labor Standards Act (FLSA) collective action against Citi, claiming the bank had misclassified them as exempt employees and had unlawfully denied them overtime pay. Citi contended that its employment agreement barred the former employees from bringing a collective action. But the U.S. District Court for the Southern District of New York decided in November 2011 that FLSA collective action waivers are unenforceable.
The National Labor Relations Board (NLRB) also has limited Concepcion’s reach in the employment context. In January, it held that a class action waiver in an employment contract was unenforceable under the National Labor Relations Act (NLRA). The case, D.R. Horton, concerned an arbitration agreement and class action waiver that homebuilder D.R. Horton required its employees to sign as a condition of their continued employment. The NLRB held that the agreement violated Section 7 of the NLRA, which gives employees the right “to engage in … concerted activities for the purpose of collective bargaining or other mutual aid or protection.”
In Chen-Oster v. Goldman Sachs, a group of plaintiffs brought a putative class action against their employer, Goldman, claiming the bank violated Title VII of the Civil Rights Act by discriminating against its female employees. Goldman moved to compel arbitration per its employment contract, and the U.S. District Court for the Southern District of New York denied the motion. After Concepcion, Goldman again filed a motion to compel arbitration, which the district court again denied.
The court reasoned that the case demanded consideration of an issue separate from the one at the heart of Concepcion: “whether the FAA’s objectives are also paramount when, as here, rights created by a competing federal statute [the Civil Rights Act] are infringed by an agreement to arbitration.” In the end, the court found that Concepcion didn’t reach rights secured under Title VII, and it refused to grant Goldman’s motion for reconsideration.
Experts note that there’s now a split in the circuits regarding arbitration clauses and class action waivers in contracts. While the 3rd, 5th and 9th Circuits have all broadened the scope of Concepcion, the 2nd Circuit hasn’t. On May 29, the 2nd Circuit said it wouldn’t rehear a case centered on an arbitration clause that prevents American Express merchant customers from filing antitrust lawsuits against the company. The court had decided in February that the clause was unenforceable because it violates customers’ rights under federal antitrust laws.
Writing for the majority in May, Judge Rosemary Pooler said the court’s decision not to rehear the case honors Supreme Court precedent in “preserving plaintiffs’ ability to vindicate federal statutory rights, rather than eviscerating more than 120 years of antitrust law by closing the courthouse door to all but the most well-funded plaintiffs.”
Tuteur says the circuit split “suggests to most practitioners that there’s going to be another round of Supreme Court arguments about the breadth of Concepcion.”
The catalyst: When President Obama signed the Patient Protection and Affordable Care Act into law in March 2010, he stirred up a whirlwind of controversy. The legislation effectively overhauls American health care and requires everyone to have minimum health care coverage by 2014 or pay a fee.
Opponents to the law say the federal enforcement of health care is unconstitutional and exceeds the scope of Congress’ power.
“The challengers have stuck to the proposition that the government cannot force someone to buy a product of a private marketplace,” says Katyal, who oversaw the health care litigation for the Department of Justice (DOJ) while he was acting solicitor general. “The government has responded by saying, ‘This isn’t really about buying a private product. This is about how you’re going to finance a product that everyone is going to consume, which is health care.’”
Dozens of states joined lawsuits opposing the law. And as the cases made their way through the lower courts, both sides pressured the Supreme Court to review the law as soon as possible. The high court finally heard oral arguments for three days in March.
According to argument attendees and news reports, the liberal justices seemed to be in favor of the insurance mandate, but conservative members of the court expressed concern about how much power the government should have to regulate markets. The justices also weighed the issue of severability, or whether the rest of the act can survive if the mandate falls. At press time, the court had not issued a decision. [UPDATE: The Supreme Court reached a decision on June 28.]
The impact: At press time, experts predicted that the high court wouldn’t strike down the entire law.
“The act is 2,400 pages long,” Katyal says. “It has all sorts of provisions for other things, including setting up health insurance exchanges, funding, medical research and the like. If all of that falls, that would be very significant. It’s likely that the court’s decision will be limited to the insurance reform aspects of the statute. To the extent that in-house counsel are thinking that other provisions in the act, such as billions of dollars for research, could possibly get struck down, it’s unlikely that that’s going to happen.”
But opinions were varied as to whether the court would decide to independently strike down the insurance mandate.
“Obviously the constitutional question on the individual mandate is going to be close,” Katyal says. “The biggest challenge for the court is that Congress has never quite acted in this way before, and so there is an element of novelty.”
If the justices were to strike down the insurance mandate, Katyal says, “it would portend the possibility that the Supreme Court and other federal courts would look at other legislation with a critical eye as opposed to a deferential eye.”
The catalyst: In January, the NLRB issued a social media report examining 14 recent social media cases. Half of the cases involved questions about employers’ social media policies. The board found that five of the policies in question were unlawfully broad, one was lawful, and one was lawful after it was revised.
The other seven cases in the report concerned employees whose companies had discharged after they posted comments to Facebook. “Several discharges were found to be unlawful because they flowed from unlawful policies,” NLRB’s Acting General Counsel Lafe Solomon said in a statement.
The impact: The report made one thing clear: The NLRB doesn’t approve of sweeping social media policies that infringe on employees’ rights protected under federal labor laws. But as more and more employees jump into the social media pool, companies are struggling to create legal, enforceable social media policies.
Free-speech proponents, as well as some lawmakers, have balked at some companies’ social media rules—particularly those that require prospective or existing employees to disclose their social media login information. In March, Facebook issued a statement saying no one should be “forced to share your private information and communications just to get a job. … That’s why we’ve made it a violation of Facebook’s Statement of Rights and Responsibilities to share or solicit a Facebook password.”
Barnes & Thornburg Partner and InsideCounsel.com columnist John Kuenstler wrote in April that “NLRA claims also could be a potential concern arising out of employer requests for applicant login information. Information found on social networking sites regarding an applicant’s union affiliations or activities could bolster a refusal to hire claim based on ties to organized labor, just as information regarding an applicant’s age could bolster an age discrimination claim.”
At InsideCounsel’s 12th annual SuperConference in April, in-house counsel discussed ways to best manage corporate social media policies. Kimberly Cilke, deputy general counsel of Go Daddy Operating Co., shared six suggestions for creating effective policies:
1. Include a general disclaimer to indicate Section 7 rights are not infringed, and include specific examples.
2. Limit the policy to communications about company products or services and anti-harassment guidelines.
3. Exclude general information on wages, hours, and terms and conditions of employment from the definition of “confidential” information.
4. It’s OK to ban “maliciously false” communications that intend to harm the company and co-workers.
5. Indicate restrictions on use of company logos and trademarks.
6. Consider separate social media policies for employees’ general use and for when they’re representing the company.
The catalyst: In the fall of 2010, the U.S Chamber of Commerce issued a report telling the DOJ it must file more Foreign Corrupt Practices Act (FCPA) cases in order to develop more case law on the subject and shine more light on the agency’s broad definition of who constitutes as a “foreign official” under the act. The FCPA prohibits bribing such entities for business or financial benefits.
The impact: The DOJ has since aggressively brought FCPA actions against some well-known corporations.
On Jan. 2, Germany-based Deutsche Telekom AG agreed to pay more than $95 million to settle U.S. criminal and civil charges claiming it violated the FCPA by bribing officials in Macedonia and Montenegro.
And on March 26, medical device company Biomet Inc. agreed to pay more than $22 million to settle Securities and Exchange Commission (SEC) and criminal charges related to FCPA violations in Argentina, Brazil and China. Interestingly, the case lambasted the company’s top officials and auditors for not catching and stopping more than $1.1 million in bribes paid to doctors in Latin America and China between 2000 and 2008.
“A company’s compliance and internal audit should be the first line of defense against corruption, not part of the problem,” said Kara Novaco Brockmeyer, chief of the SEC’s Enforcement Division’s FCPA unit, in an SEC release.
Another especially prominent FCPA case began in the fall of 2011, when the DOJ began investigating Avon Products Inc. for possible FCPA violations. The case is ongoing, and prosecutors are focusing on an internal audit report from the mid-2000s in which Avon determined that employees in China may have paid hundreds of thousands of dollars to bribe Chinese officials.
In light of the investigation, Avon shareholders have filed a suit against the company, claiming the head of the internal audit department received a larger severance package upon his termination than he otherwise would have received because he threatened to reveal evidence of Avon’s involvement in bribery to foreign officials.
Avon has terminated several high-ranking executive since the probe began. Andrea Jung also has stepped down from her 12-year reign as the company’s CEO. According to the Wall Street Journal, Avon last year alone spent $93.9 million on legal fees associated with the FCPA investigations.
But the world’s largest retailer—Wal-Mart Stores Inc.—is at the center of the most high-profile bribery scandal of the past year. In April, news broke that the company allegedly covered up $24 million in bribes that its Mexican subsidiary, Wal-Mart de Mexico, paid to expand its Latin American business. At press time, the DOJ was still investigating the allegations but had yet to pursue FCPA litigation.
In light of these cases, business interests, the Chamber of Commerce and corporate lawyers are entreating the government to more clearly and narrowly define the term “foreign official.” Fortunately, answers could come soon.
Last fall, a Florida district court delivered the longest FCPA prison sentence in history. The court sentenced Joel Esquenazi, the former president of Terra Telecommunications Corp., to 15 years in prison for authorizing nearly $1 million in illegal payments to officials in Haiti. In May, Esquenazi filed an appeal to the 11th Circuit challenging his conviction.
“For FCPA practitioners, an answer to the question of who is a foreign official cannot come soon enough,” Foley & Lardner Partner and InsideCounsel.com columnist Jaime Guerrero wrote in May. “Moreover, an answer will provide companies operating abroad a proper framework from which they can operate within the terms of the FCPA. The 11th Circuit need only answer the question put before it by Esquenazi … in order to clarify a law that is in desperate need of judicial interpretation.”
Until the 11th Circuit addresses the issue, in-house counsel should peruse an interactive website that The Mintz Group, an international investigative services firm, developed this past November. The site, FCPAmap.com, features a map that allows users to pinpoint the locations of bribes that led to FCPA penalties around the world.
The catalyst: An historic law went into effect this past spring that will for the first time allow consumers to bring class action lawsuits in Mexico.
Since the mid-1990s, Mexico’s Consumer Protection Law has allowed the country’s consumer protection agency to bring limited collective actions on behalf of consumers. But consumer groups pressured the government to create legislation that would allow consumers to file their own claims. After much debate, the Mexican Congress amended Mexico’s constitution to allow class actions in the country and scheduled the law to take effect on March 1.
Under the law, groups of at least 30 people can obtain restitution or compensation of damages, and injunctive relief, through consumer products and services claims, environmental claims, and some financial services and antitrust claims.
The law divides claims into three categories of class actions. The first type—diffuse actions—protect the general rights of society. The second type—collective actions—protect the rights of a group of people linked by noncontractual relationships. And the third type—homogenous individual rights class actions—protect the rights of individuals linked by contractual relationships. Because Mexico’s collective and homogeneous individual rights actions are opt-in, consumers can join a class up to 18 months after a case’s final judgment or settlement.
The impact: Before the law went into effect, some lawyers predicted that companies operating in Mexico would see an increase in litigation.
Dechert Partner Sean Wajert told InsideCounsel in November 2011 that some U.S. lawyers speculated that Mexico’s generous opt-in period would create a “piling-on effect” in which droves of eligible class members would join classes that courts had certified, making it difficult for companies to estimate class sizes, damages and litigation costs.
But companies operating in Mexico are still holding their breath for the foretold uptick in lawsuits. At press time, plaintiffs had yet to file any class actions in Mexico.
Meanwhile, as they anticipate future suits, litigation experts worry about the short time frame in which defendants must submit their arguments and evidence, as well as the small five-day period in which they must take a position as to whether a class should be admissible. And if a case does go to trial, parties have a 60- to 80-day discovery period before trial, which can’t exceed 40 days.
“That gives the defendant very limited options in terms of timing as to produce a solid defense,” Chadbourne & Parke Partner Luis Enrique Graham told InsideCounsel in November 2011.
As plaintiffs firms could soon begin to test the waters with the new class action law, experts suggest that companies that do business in Mexico should partner with Mexican outside counsel, who may be able to more closely monitor litigation developments.