Blawgletter®

Supremes Allow Class That New York Would Ban

The U.S. Supreme Court today reversed a Second Circuit ruling that upheld the right of New York to bar class actions seeking penalties under Empire State law.  The decision failed to net a majority, and as a result you'll need to study closely the concurrence and dissent to see what the Court actually said.  Shady Grove Orthopedic Assocs. P.A. v. Allstate Ins. Co., No. 08-1008 (U.S. Mar. 31, 2010).

Blawgletter said just before oral argument in Shady Grove and Jones v. Harris Assocs., which the Court decided yesterday (post here), that the cases struck us "as leading indicators of how far the Court will go this Term in cutting back civil claims."

Civil plaintiffs won both cases.  Dare we hope?

Supremes Remand Fee Fight

Last November, on the day the U.S. Supreme Court heard argument in an Investment Company Act case over fees that mutual funds pay their advisers, Blawgletter wrote:

Supremes Listen to Fee Fight

The U.S. Supreme Court today heard what "fiduciary" means for an investment adviser when it charges mutual funds more than institutional investors pay for similar services.  See Transcript, Jones v. Harris Assocs. L.P., No 08-586 (U.S. Nov. 2, 2009).  Briefs here.

Blawgletter predicts a close decision -- probably by one vote -- in favor of mutual fund investors, who claim the adviser breached its fiduciary duty under section 36(b) of the Investment Company Act.

The system for setting fees looks odd to us.  Mutual funds come into the world through the will of a Fidelity, a Templeton, a Vanguard, or some other outfit that aims to make money by selling its investment advice.  The money-making part comes in the form of adviser fees, which the creator/sponsor more or less negotiates with mutual fund offspring.  An independent board must okay the pay. 

But can the board, however independent, guard against too-high fees ex post facto?  In 1970, Congress feared not.  It said "the investment adviser . . . shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services".  15 U.S.C. 80a-35(b).  Congress also created a cause of action to recover excessive fees.  And it provided that the board's clearing of the fees didn't end the inquiry but that the okay “shall be given such consideration by the court as is deemed appropriate under all the circumstances".  `15 U.S.C. 80a-35(b)(2).

The Justices grappled with the idea of a "fiduciary" duty that an independent board mediates but that a court may then review afresh.  Two of them -- Chief Justice Roberts and Justice Scalia -- vocally doubted the practicability of having judges second-guess board decisions.

Five others spoke more charitably about the excessive fee claim.  The petitioners, who lost in the district court and the Seventh Circuit, pointed out that the fees at issue far exceeded the fees that the same adviser charged its more savvy institutional investors for the same kinds of services.  Justices Breyer, GInsburg, Kennedy, Sotomayor, and Stevens seemed to want to give "fiduciary" more meaning than the courts below did.

Today the Court, 9-0, held that the Seventh Circuit applied too easy a test for judging whether an investment adviser met its duty as a "fiduciary" in negotiating its fee for advice to a mutual fund.  Jones v. Harris Assocs. L.P., No 08-586 (U.S. Mar. 30, 2010).  The Court adopted a flexible definition of fiduciary duty and rejected the Seventh Circuit's approach that apotheosized the notion that the "market" adequately protects mutual fund shareholders against abuses.  Justice Sam Alito wrote the Court's opinion, which remanded the case for proceedings consistent with the opinion.

Creditor Inherits Wind, Fifth Circuit Holds

Two makers of spray-tanning machines, Mist-On and Laughlin Products, sued a customer, Nouveau Body & Tan, for saying ugly things about their devices. 

Bad move.

Nouveau struck back by charging Mist-On with selling it bad spray-tanners.  Nouveau won a judgment against Mist-On and its president, Thomas J. Laughlin, for more than $1 million.  They couldn't pay, and Mr. Laughlin filed for bankruptcy under Chapter 7.

Less than two months before he went into the tank, Mr. Laughlin had renounced his right to an inheritance of around $155,000 from his father's estate.  Nouveau asked the bankruptcy court to treat the renunciation as a fraudulent transfer and order that his daughter, who succeeded to the inheritance, to put the proceeds back into Mr. Laughlin's bankruptcy estate.  The bankruptcy court granted the request.

The Fifth Circuit reversed.  It held that, under Texas fraudulent transfer law, the property never passed to Mr. Laughlin and that, therefore, he couldn't have "transferred" it to his daughter.  The court thus agreed with the Ninth Circuit's like decision in Gaughan v. Dittlof Revocable Trust (In re Costas), 555 F.3d 790 (9th Cir. 2009).  Laughlin v. Nouveau Body & Tan, Inc. (In re Laughlin), No. 09-10622 (5th Cir. Mar. 29, 2010).

Quote of the Day: Federal Circuit

Among the named linkage groups was –CH=CH–CH2–NH– (the same group recited in the patents’ dependent claims) and –NH–(CH2)6–NH– (a new group that is not found in the specification and which contains only single bonds).

Enzo Biochem, Inc. v. Applera Corp., No. 09-1281, slip op. at 15-16 (Fed. Cir. Mar. 26, 2010) (reversing summary judgment of invalidity of two patents relating to detecting and labeling nucleic acids as indefinite and due to anticipation by prior art and affirming summary judgment of another patent's invalidity as result of anticipation and non-infringement of fourth patent).

False Claims Act Claim Died in Pre-Suit Release, Fourth Circuit Holds

The False Claims Act lets people sue on behalf of the U.S. government to fight fraud it didn't know about -- and collect a nice reward.  But does it let the FCA plaintiff -- or qui tam relator -- release claims against the target but sue anyway?

Today the Fourth Circuit said no.  Mark Radcliffe, an employee of Purdue Pharma, contacted an Assistant United States Attorney and asked whether the government would consider an FCA case against Purdue.  But he said nothing about the particulars of what such an FCA claim against Purdue might entail.  The government in fact opened an investigation of Purdue, including of the matters that Radliffe later complained about in his FCA case.

Several months after the AUSA contact, Radcliffe took a severance package from Purdue.  In the process, he signed a release that covered "all liability to Employee for . . . claims" that "Employee . . . ever had, may now have or hereafter can, shall or may have against" Purdue. 

The court held that the release didn't require the U.S. Attorney General's okay and that by its terms it wiped out the Radcliffe's right to bring an FCA claim. 

The panel also opined that public policy didn't bar the release because the government started probing Purdue's practices regarding its marketing of OxyContin, the same drug that Radliffe based his qui tam lawsuit on.  The government's pre-release knowledge of the potential OxyContin fraud trumped the Radcliffe's argument that enforcing the release would frustrate the purposes of the FCA.  United States ex rel. Radcliffe v. Purdue Pharma, No. 09-1202 (4th Cir. Mar. 24, 2010).

An Ugly Mood

Bloomberg reports today the results of a survey on how much Americans like business execs, insurance companies, banks, and -- yes -- the folks who work in the Capitol.  Just look:

• 54 percent feel unhappy about banks
• 57 percent dislike Wall Street, a little or a lot
• 65 percent distrust business executives
• 67 percent disdain Congress
• 70 percent admit to bad thoughts about insurance companies

Also:

• 75 percent see losses of jobs as a "high threat".
• 90 percent believe middle class people will have to make sacrifices to cut the federal budget deficit

Think about the numbers next time you pick a jury.  You'll find a lot of folks in distress.  They'll have little patience for anyone who wastes their time, complains about trivialities, or tries to hide bad facts.  And you'll need to work as hard as you ever have -- harder -- to earn their trust.  Go do it.

You Can't Patent Basic Research, En Banc Federal Circuit Rules; Harvard Loses 9-2

You know something odd has happened in the law when a court takes 38 pages to say a basic thing -- like that a patent must describe the invention it aims to cover. 

The 11-judge Federal Circuit did just that today, 9-2. The court held that 35 U.S.C. § 112, first paragraph, "contains a written description requirement separate from enablement".  Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co., No. 08-1248, slip op. at 2 (Fed. Cir. Mar. 22, 2010) (en banc).

Ariad, MIT, the Whitehead Institute, and Harvard claimed that Eli Lilly infringed their patent on ways to reduce the symptoms of some diseases by causing a protein -- Nuclear Factor kappaB -- to behave.  The problem (as Blawgletter gleans from the judges' five opinions) arises from the fact that the inventors seem not to have figured out how to suppress symptom-causing NF-kB activity.  They appear simply to have discovered that NF-kB existed and guessed that somehow bringing it to heel would help sick people feel better.

Ariad, MIT, Whitehead, and Harvard urged that the first paragraph of section 12 requires a patent to say only enough to "enable" an in-the-know person to build something that makes NF-kB curtail its hurtful conduct inside human cells.  But read the first paragraph for yourself:

The specification [in a patent] shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor of carrying out his invention.

Id. at 7 (quoting 35 U.S.C. § 112).  The "shall contain a written description of the invention" suggests to us that section 112 does demand "a written description of the invention".  And we dare say that, if it doesn't, a lot of normal people would shake their heads in wonderment at the state of patent law.

The patent holders disagreed with these common folk, arguing that "as to enable" defines the purpose and function of the "written description of the invention" and puts the phrase in the sole service of enablement.

Does all this come under the head of metaphysics?  Semantics?  Symbology?  Why does it matter?

It matters, as one brave judge kindly explained, because the patentees hoped to patent "basic scientific research."  Id. additional views at 2 (Newman, J.).  Harvard, MIT, and the rest had found out that NF-kB existed!  No matter that they didn't also figure out how to get it to do what they wished it to do!  Others can do the dirty work!  Reward our brilliance!

The en banc court would have none of it.  Good on them, we say.

Farm Boy Images Won't Likely Confuse, Federal Circuit Affirms

The farm boy on Odom's Tennessee Pride Sausage logos show him at an angle from the viewer, wearing a Pilgrim's hat, holding a stick over his right shoulder, smiling with his mouth open, waving with his left hand (index finger pointing up), and sporting bare feet. 

Fresh Farm Supermarket's image portrays a farm boy facing straight ahead, with a cowboy hat on his head, a straw of hay in his mouth, a wide grin, his right hand up and open to the viewer, and manly footwear upon his dogs.

Would the Fresh Farm image likely confuse customers into thinking that Fresh Farm products in fact came from Odom's Tennessee Pride?

The Trademark Trial and Appeal Board thought not.  It granted summary judgment to Fresh Farm on its application to register its farm boy image as a trademark.  The Federal Circuit today affirmed.  Odom's Tennessee Pride Sausage, Inc. v. FF Acquisition, Inc., No. 09-1473 (Fed. Cir. Mar. 19, 2010).

Fifth Circuit Weighs Passive Voice, Holds Insurers Must Pay for Stanford Defense

Blawgletter disdains passive voice.  If you don't believe us, look here, where we said:

[P]assive voice in legal writing shows disrespect to the reader.  It lengthens, complicates, and obstructs writing; it forces the reader to remember too much, to fill too many gaps, to work too  hard.  The audience deserves better.

*  *  *  *

Please use active voice always.  Or consequences will be suffered.

"They Will Be Killed by Us", Blawgletter, Aug. 25, 2007.

But, really, you ask -- does passive voice hurt anything?

It'll likely cost D&O insurers millions of dollars, per a Fifth Circuit decision on Monday.  Does that count?

The case turned on whether the D&O (directors and officers) policy required the carriers to advance defense costs for former officers of Stanford Financial, which the U.S. accuses of running a Ponzi scheme (out of Antigua).  The government shut down Stanford and brought criminal charges against founder Allen Stanford and two of his helpers.  The insurers argued that they needn't front the cost of defense by pointing to a "Money Laundering" exclusion as a reason for refusing to advance criminal defense costs.  The exclusion included this caveat:

Notwithstanding the foregoing Exclusion, Underwriters shall pay Costs, Charges and Expenses in the event of an alleged act or alleged acts until such time that it is determined that the alleged act or alleged acts did in fact occur.  In such event the Directors and Officers and the Company will reimburse Underwriters for such Costs, Charges and Expenses paid on their behalf.

Alert readers will note that the p.v. shows up in "until such time that it is determined that the alleged act or alleged acts did in fact occur".  The phrase doesn't say who will make the determination.  The underwriters urged that they could decide; the Stanford ex-execs said only a judge could do that.

The Fifth Circuit agreed with the Stanfordites.  It noted that courts construe unclear language in policy exclusions against the author -- the insurers.  Holding that the insurers must advance costs, the court (per Judge Higginbotham) said this:

[T]he underwriters -- as drafters of the policy -- could have unambiguously reserved a unilateral right to determine that the alleged acts in fact occurred.  Rather than saying "until it is determined . . . in fact," they could have avoided ambiguity by providing "until we have determined" or "until Underwriters determined.  The parties' word choice -- "it is determined" -- leaves us guessing, but it hardly seems a drafting error, at least not an inadvertent one.

Pendergest-Holt v. Certain Underwriters at Lloyds of London, No. 10-200069, slip op. at 13 (5th Cir. Mar. 15, 2010).

As we said:  Consequences will be suffered.

Cable Can't Deny Programs to Competitors, D.C. Circuit Holds; FCC Wins One

The Federal Communications Commission, in Blawgletter's view, has done a not-very-good job of curbing abuses by Titans of Telecom -- your Wizards of Wireless, your Imperators of the Internet, and -- yes -- your Caliphs of Cable.

But the FCC did okay in 2007, when the Commissioners voted to extend a rule that bars big cable outfits from denying their "must have" programming to competitors -- stuff like regional sports.

The D.C. Circuit last Friday upheld the FCC's order, finding it neither arbitrary nor capricious.  The majority noted recent changes in the multi-channel video programming distribution business, which includes satellite providers DISH and DirecTV as well as AT&T's U-Verse and Verizon's FiOS.  But the panel deferred to the FCC's reading of the evidence, which suggested that cable companies could and would hurt competition by withholding programs that other MVPD providers couldn't compete effectively without.  Cablevision Systems Corp. v. Federal Comm. Comm'n, No. 07-1425 (D.C. Cir. Mar. 12, 2010).

The FCC may make more trouble for the cable folks.  See FCC Aims to Shut Cable Loophole for Local Sports.

As it did earlier.  See D.C. Circuit Upholds Bar on Cable-Only Contracts; Curbing Monopoly.