By Jeffrey T. Cook
Last week, the Eleventh Circuit Court of Appeals affirmed the granting of a post-trial judgment as a matter of law for the defendants in a private securities fraud-on-the-market action, Hubbard v. BankAtlantic Bancorp, Inc., 2012 WL 2985112 (11th Cir. July 23, 2012). The case is noteworthy for its treatment of the required element of loss causation, in particular the Court’s lengthy evaluation of (without officially adopting) the alternative “materialization of concealed risk” form of proof that has developed in other circuit courts.
The plaintiffs alleged that BankAtlantic, a Florida-based community bank, had misrepresented the credit quality of its commercial real estate loan portfolio between October 2006 and October 2007 – a period of decline in the Florida real estate market. Allegedly BankAtlantic maintained an internal Loan Watch List, and officers had internal communications expressing concern about its commercial real estate portfolio. In April 2007, BankAtlantic began to disclose some of its concern with a certain segment of its particular portfolio. That disclosure was accompanied by discussions of signs of real estate slowdown, especially in Florida where its portfolio was concentrated.
The end of the class period was defined by the release of BankAtlantic’s 8-K, which disclosed dramatic increases in troubled loans. The stock dropped 38% that day, after having previously dropped an additional 40% earlier during the class period.
The plaintiffs’ only evidence of loss causation was the testimony of an expert who performed an event study to measure how much of the decline in the price of BankAtlantic’s stock was attributable to company-specific (as opposed to general market or industry) factors. The expert used broad indices (the S&P 500 Index and Nasdaq Bank Index) and analyst reports to conclude that the entire price decline was attributable to the concealed details of BankAtlantic’s portfolio.
The Court then elaborated on what standards to assess this testimony for loss causation. In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the United States Supreme Court held that loss causation requires more than proof that the stock was purchased at a price artificially inflated by fraud. The plaintiff also must show that the decline in the stock price came “after the truth ma[de] its way into the market place,” and was not caused by such other factors as “changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions or other events.” Id. at 342-43.
The entry of truth into the marketplace is typically considered under the “corrective disclosure” theory – that is, the stock price declined upon a disclosure that reveals precisely the facts concealed by the fraud. The Eleventh Circuit also acknowledged “what some courts [including the Second Circuit and Seventh Circuit] have called a ‘materialization of the concealed risk’ theory.” Under this theory, loss causation can be shown even absent a corrective disclosure if “the materialization of a fraudulently concealed risk caused the price inflation induced by the concealment of that risk to dissipate.” In simpler terms, the disclosure need be only of a sufficient manifestation of the fraud, not the fraud itself, to satisfy this element of loss causation. Some examples are bond defaults, accounting irregularities, and officer and director resignations – the question remains whether the disclosed event is sufficiently related to the concealed fraud so that the fraud itself can be deemed to have led to the loss.
The Eleventh Circuit found that the plaintiffs did not satisfy either form of loss causation. First, the October 2007 disclosure was not “corrective” because it did not disclose the alleged concealed facts and otherwise discussed facts that did not exist at the time of the misstatements. Second, the risk of BankAtlantic’s commercial real estate portfolio did not sufficiently materialize in October 2007 given the overall market deterioration. Specifically, the plaintiffs’ expert “failed to adequately separate losses caused by fraud from those caused by the 2007 collapse of the Florida real estate market” – for example, the Nasdaq Bank Index contains few Florida banks. In effect, the material risk was the non-concealed general downturn of the Florida real estate market. Thus, without sufficient materialization of the concealed risk, the plaintiffs failed to prove loss causation.
Notably, the Eleventh Circuit undertook this lengthy analysis by merely assuming, without deciding, the validity of the “materialization of concealed risk” theory. Nonetheless, the Court’s attention bestowed on this theory signifies that it should be given particular consideration by both plaintiffs and defendants as an alternative form of proof of loss causation in securities fraud-on-the-market actions.
By Sherwin P. Simmons, II, Jonathan E. Gopman, Barbara E. Ruiz-Gonzalez, and Leanne Reagan.
On July 26, 2012, the U.S. Department of Treasury (“Treasury”) published the intergovernmental model agreement for government-to-government information sharing (“model agreement”) to implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (“FATCA”). Enacted by Congress in 2010, FATCA provisions target non-compliance by U.S. taxpayers using foreign accounts. See our Practice Update.
The model agreements are based on a framework and negotiations Treasury announced in February with France, Germany, Italy, Spain, and the United Kingdom to set up government-to-government information-sharing deals. See our Practice Update.
These countries, along with the U.S., will, in close cooperation with other partner countries, the Organization for Economic Cooperation and Development, and, when appropriate, the European Commission, work toward common reporting and due diligence standards in support of a more global approach to effectively combatting tax evasion while minimizing compliance burdens.
Treasury indicated that this is a joint effort to combat offshore tax evasion and that “this agreement implements FATCA in a way that is targeted and effective, while also providing a foundation for further international coordination.”
Two versions of the model agreement were released; a reciprocal version and a non-reciprocal version. Treasury also released a joint communique with France, Germany, Italy, Spain, and the United Kingdom, endorsing the agreement and calling for a speedy conclusion of bilateral agreements based on the model.
The joint communique indicates that the model agreements establish a framework for reporting by financial institutions of certain financial account information to their respective tax authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements. The model agreements also address the legal issues raised in connection with FATCA, simplify its implementation for financial institutions, and provide for reciprocal information exchange.
The reciprocal version of the model agreement also provides for the U.S. to exchange information currently collected on accounts held in U.S. financial institutions by residents of partner countries. This version of the model agreement will be available only to jurisdictions with which the U.S. has in effect an income tax treaty or tax information exchange agreement and with respect to which the Treasury and the Internal Revenue Service (“IRS”) have determined that the recipient government has in place robust protections and practices to ensure that the information remains confidential and that it is used solely for tax purposes. Subject to certain exceptions, the governments must exchange information within nine months after the end of the year to which the information relates.
Alternatively, the non-reciprocal version of the model agreement would allow countries to comply with FATCA under the same obligations, however, these countries would not receive an exchange of client banking information. The non-reciprocal version will be used for countries that do not have in effect with the U.S. an income tax treaty or tax information exchange agreement.
The release of the model agreement comes just two days after Michael Plowgian, an attorney-adviser in Treasury’s Office of International Tax Counsel, stated that there most likely would not be any additional push back on the various deadlines related to FATCA.
Mr. Plowgian also stated that the final regulations related to FATCA should be released by the end of summer or early fall and that the final foreign financial institution agreement will be released around that time.
Finally, Mr. Plowgian stated that the model agreement would be released shortly (two days later in fact) and that a second alternative FATCA framework would be released soon after the model agreement with Japan and Switzerland.
FATCA requires foreign financial institutions to report U.S.-owned accounts to the IRS or face a 30 percent withholding tax. Foreign financial institutions in countries that do not sign up with Treasury will need to report client tax information directly to the IRS. Foreign financial institutions that do not share client information with the IRS will be subject to the 30 percent withholding tax beginning in 2014.
By Sherwin P. Simmons, II, Jonathan E. Gopman, Barbara E. Ruiz-Gonzalez, and Leanne Reagan.
A former bank client of global financial services provider, UBS, AG, was sentenced to four months in federal prison for willfully failing to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), for the account the man held with as much as $4,000,000 in it. This information was released by the U.S. Attorney for the Southern District of Florida on July 25, 2012.
The former bank client, from Miami Beach, Florida, paid a civil penalty of $2,000,000 related to the $4,000,000 high account balance stemming from tax year 2006. Additionally, the client was sentenced to four months in federal prison, three years of supervised release, 250 hours of community service, and a $20,000 criminal fine.
The bank account related to two offshore corporations owned by the man, one in the Virgin Islands and one in the Republic of Panama. These corporations opened the accounts. The man was not named as the direct owner but instead he was deemed only the “beneficial owner.” The accounts were opened from tax years 2005 through 2007.
It is stated that the man was aware of the obligation on the FBAR to report as he had previously filed FBARs for other offshore corporations. An FBAR is required to be filed by both U.S. citizens and residents who have a financial interest in or signatory authority over a non-U.S. financial account with a value of more than $10,000 at any point during the tax year. The $10,000 amount is an aggregation of all non-U.S. financial accounts and not just an analysis on an account by account basis. See our Practice Update.
The information on the former bank client was turned over after the bank agreed in February 2009, to pay $780,000,000 under a deferred prosecution agreement to settle the claim that the bank conspired to defraud the U.S. by impeding the Internal Revenue Service (“IRS”). The bank also agreed to turn over information to the U.S. Department of Justice on 300 account holders. See our Practice Update.
A U.S. citizen or resident that held an account with UBS or any other institution that has not filed the necessary FBARs for the last eight tax years, should immediately reach out to legal counsel to discuss any potential issues they may have and their alternatives.
By Richard P. Gilly
In a recent decision, the Federal Circuit held that a computer-based financial transaction platform was eligible for patenting under 35 U.S.C. §101 of the patent laws, reversing the District Court’s holding that the patent was invalid as claiming merely an abstract idea. The majority opinion in the case, CLS Bank v. Alice Corp, Fed. Cir. 11-1201, stated that the exclusion of so-called “abstract ideas” from being eligible for patenting would only apply to patent claims where it was “manifestly evident” that the claim language was directed to an abstract idea. It is significant that this ruling, finding the computer trading platform eligible for patenting, follows on the heels of a contrary holding of the U.S. Supreme Court in Mayo Collaborative Services v. Prometheus Laboratories, 132 S.Ct. 1289 (2012). In the Prometheus case, the Supreme Court reversed the Federal Circuit and held instead that a medical diagnostic procedure was an unpatentable law of nature. (It is longstanding jurisprudence that laws of nature, like algorithms and abstract ideas, are not eligible for patenting under 35 U.S.C. §101, whereas applications of laws of nature may be patent-eligible.) The Alice ruling by the Federal Circuit likewise comes in the face of a remand by the Supreme Court to the Federal Circuit of another computer software case, Ultramercial v. Hulu, to reconsider its decision in light of the Supreme Court’s decision in Prometheus.
In the Alice case, the Federal Circuit clarified that the patent eligibility determination of 35 U.S.C. §101 is only a gatekeeper to the patent system, a threshold test. More specifically, even if a claim is patent-eligible under 35 U.S.C. §101, it may still not be patentable by virtue of either lacking novelty or being obvious based on prior art, as provided by 35 U.S.C. §§102, 103, respectively, or the claims may not be sufficiently described or enabled, under 35 U.S.C. §112. What is significant about the Federal Circuit’s “clarification” is that the Supreme Court, in the Prometheus decision, had rejected a similar view taken by the U.S. Solicitor General, who appeared as an amicus in that case, and who had urged the Supreme Court to adopt a low threshold for 35 U.S.C. §101, patent-eligibility, and let 35 U.S.C. §§102, 103, and 112, perform the screening functions for the patent system.
Implications of Alice for Computer-Implemented Systems and Methods
The finding of patent eligibility by the Federal Circuit in the Alice case will no doubt ease concerns for patent holders of computer-implemented systems and methods. Such patents have come under increased scrutiny since the Supreme Court’s decision in In re Bilski, 130 S.Ct. 3218 (2010) invalidating a claim as merely an “abstract idea.”
One of the claims of the patents at issue in Alice called for (1) a data processing system with a data storage unit having certain particular records stored thereon, and (2) a computer “configured” (a) to receive and perform certain specific transactions related to the records stored on the database and (b) to generate appropriate instructions to permit two unrelated third parties to satisfy financial obligations without one being able to renege on the other.
The Federal Circuit in Alice noted that merely implementing an abstract idea on a computer will not render an invention patentable. Instead, adding a computer to a patent claim must “impose a meaningful limit on the scope of the claim and play a significant part in permitting the claimed method to be performed, rather than functioning solely as an obvious mechanism for permitting a solution to be achieved more quickly, i.e. , through the utilization of a computer for performing calculations . . . .” The court also ruled that it must consider the asserted claim as a whole and not paraphrase the claim in overly simplistic generalities when deciding whether that claim is patentable.
Applying this standard, the court decided that the lower court oversimplified Alice Corp.’s patent claims and failed to analyze them as a whole. The court ruled that the computer-imposed limitations on the underlying abstract idea in Alice Corp.’s patents played a significant part in the performance of Alice Corp.’s invention. The court held that Alice Corp.’s claim limitations could be characterized “as being integral to the method as playing a significant part in permitting the method to be performed, and as not being token post-solution activity.” Additionally, because a party must use a very specific type of financial account to perform Alice Corp.’s patent, the court held that Alice Corp.’s patent claims do not preempt innovation related to the concept of using intermediaries in financial transactions to minimize risk.
Judge Prost’s Dissent and the Federal Circuit’s Interpretation of Prometheus
The three-judge panel in Alice included a vociferous dissent by Judge Prost, arguing that the majority opinion “failed to follow the Supreme Court’s instructions” in Prometheus v. Mayo, which held that the “prohibition against patenting abstract ideas cannot be circumvented by attempting to limit the use of the formula to a particular technological environment.”
The dissent argued that Alice Corp.’s patent claims, when “stripped of jargon,” simply presented the abstract idea of a financial intermediary “and then says apply it.” Judge Prost then argued the that computer implementation described in Alice Corp.’s claim does not make its invention patentable, because the Federal Circuit had previously decided that inventions with similar computer implementations did not limit or modify an abstract idea enough to make those inventions patentable.
Despite the signals from the U.S. Supreme Court to carefully scrutinize computer-related inventions under 35 U.S.C. §101, the Federal Circuit nonetheless found in the Alice case that the computer system and method claims did more than simply implement an abstract idea. The dissent in Alice felt the claim language of the Alice claims was simply window dressing and thus improperly claimed an abstract idea. So, in view of the split on the three-judge panel in Alice, it will be interesting to see if the Supreme Court further clarifies the “abstract idea” exception to patent eligibility in the computer or software context.
By Wayne A. Wald and Palash Pandya
On June 20, 2012, the Securities and Exchange Commission adopted a final rule, pursuant to Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, requiring national securities exchanges to establish listing standards for the independence of compensation committees and compensation advisers. The Dodd-Frank Act amended the Securities Exchange Act of 1934 to add Section 10C to the Exchange Act which requires the SEC to adopt rules directing the national securities exchanges to prohibit the listing of any equity security of an issuer that is not in compliance with Section 10C’s compensation committee and compensation adviser requirements.
New Rule 10C-1 of the Exchange Act requires national securities exchanges to establish listing standards with the following requirements:
• Each member of a listed issuer’s compensation committee must be a member of the issuer’s board of directors and “independent” as defined by the listing standards of the national securities exchange.
• A compensation committee that retains or obtains the advice of compensation advisers is directly responsible for the appointment, compensation, and oversight of that adviser.
• A compensation committee may select a compensation adviser only after considering six independence factors.
Smaller reporting companies and controlled companies are exempt from all of the requirements of the new listing standards. Certain categories of issuers are exempt from the compensation committee independence requirements.
The final rule also amends Item 407 of Regulation S-K requiring any public company subject to the proxy rules (whether listed or not listed) to disclose in its proxy statement any conflicts of interest that arise in connection with the work by a compensation consultant and how such conflict is being addressed.
Rule 10C-1 is effective on July 27, 2012. Each national securities exchange must provide the SEC with proposed listing rules that comply with the new rules by September 25, 2012. Each national securities exchange must have final listing rules approved by the SEC by June 27, 2013. Issuers must comply with the disclosure changes in Item 407 of Regulation S-K in any proxy or information statement for an annual meeting of shareholders (or a special meeting in lieu of an annual meeting) at which directors will be elected occurring on or after January 1, 2013.
The final SEC rule can be found here.
Compensation Committee Independence
The new rule directs each national securities exchange to establish listing standards that require each member of a listed issuer’s compensation committee to be a member of the issuer’s board of directors and “independent” as defined by the listing standards of the exchange. The new rule requires each national securities exchange to define “independence” with respect to a compensation committee member after considering several relevant factors including:
• A director’s source of compensation, including any consulting, advisory, or compensatory fee paid by the issuer; and
• Whether a director is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of an issuer.
The SEC does not define “affiliate” for purposes of Rule 10C-1. Although each exchange must consider affiliate relationships and sources of compensation in establishing a definition of independence for compensation committee members, there is no requirement to adopt listing standards precluding compensation committee membership based on the two factors listed above or any specific relationship.
The new rule also applies to those members of a listed issuer’s board of directors or a committee of the board that oversees executive compensation matters on behalf of the board of directors in the absence of a compensation committee.
Section 10C of the Exchange Act provides that the compensation committee of a listed issuer may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other advisers (collectively, “compensation advisers”). A compensation committee that retains or obtains the advice of a compensation adviser is directly responsible for the appointment, compensation, and oversight of that adviser. A listed issuer must provide appropriate funding as determined by the compensation committee to ensure the compensation committee has the necessary funds to pay reasonable compensation to compensation advisers.
The new rule further provides that exchanges must establish listing standards that require a compensation committee to select a compensation adviser only after considering the following six independence factors:
• The provision of other services to the issuer by the person that employs the compensation adviser;
• The amount of fees received from the issuer by the person that employs the compensation adviser, as a percentage of the total revenue of the person that employs the compensation adviser;
• The policies and procedures of the person that employs the compensation adviser that are designed to prevent conflicts of interest;
• Any business or personal relationship of the compensation adviser with a member of the compensation committee;
• Any stock of the issuer owned by the compensation adviser; and
• Any business or personal relationship of the compensation adviser or the person employing the adviser with an executive officer of the issuer.
The new rules do not require that a compensation adviser be independent. Rather, a compensation committee must consider the six independence factors prior to selecting a compensation adviser. In addition, a national securities exchange may add other independence factors that a compensation committee must consider. A compensation committee is not required to consider these factors when it consults with or obtains advice from in-house counsel.
Opportunity to Cure Defects and Exemptions
The rule requires exchanges to provide appropriate procedures for listed issuers (if existing procedures are not adequate) to have a reasonable opportunity to cure any noncompliance with the new listing requirements based on the new rules before they are delisted.
The new rule exempts smaller reporting companies and controlled companies from all of the requirements of the new listing standards. Additionally, an issuer in the following categories cannot be prohibited from listing on an exchange for noncompliance with the compensation committee independence standards:
• Limited partnerships;
• Companies in bankruptcy proceedings;
• Open-end management investment companies registered under the Investment Company Act of 1940; and
• Foreign private issuers that disclose in their annual reports the reasons why they do not have an independent compensation committee.
The rule also authorizes exchanges to exempt a particular relationship from the compensation committee independence requirements as each exchange determines is appropriate, taking into consideration the size of the issuer and other relevant factors.
Compensation Consultant Disclosure and Conflicts of Interest
Existing Item 407(e) of Regulation S-K currently requires Exchange Act registrants that are subject to the proxy rules to disclose any role of compensation consultants in determining or recommending the amount or form of executive and director compensation. The amendment to Item 407(e) of Regulation S-K provided in the new rules requires disclosure of any conflicts of interest that arise in connection with the work by a compensation consultant and how the conflict is being addressed. The six independence factors used to determine the independence of a compensation consultant discussed above should be used to determine whether a conflict of interest exists. The new disclosure requirement applies only to compensation consultants (not all “compensation advisers”) and to issuers subject to the proxy rules (whether listed or not listed).
What Companies Should Do Now
New exchange listing standards will likely be effective for the 2013 proxy season. Companies listed on national securities exchanges should reevaluate the independence of their compensation committee members and compensation advisers in light of the new rules. Companies should consider whether changes to the composition of their compensation committee may be necessary once the final exchange listing standards are adopted and become effective. Companies will also need to develop or modify procedures to determine relationships between issuers and compensation committee members and compensation advisers, including modifications to director and officer questionnaires. Companies should also develop procedures to identify conflicts of interest between issuers and compensation advisers, including with the use of a questionnaire that includes the six independence factors mentioned above. Companies should also review their existing compensation committee charter to determine if modifications may be required to the charter.
By Martin R. Dix
In 2011, as part of the “Pill Mill” legislation (HB 7095), the Florida legislature required any drug wholesale distributor, out-of-state prescription drug wholesale distributor, retail pharmacy drug wholesale distributor, manufacturer, or repackager that engages in the wholesale distribution of controlled substances to report any controlled substance distributions. Penalties for non-compliance can range from a fine to license revocation. According to Department of Business and Professional Regulation (“DBPR”) staff, even after sending notices to those required to submit reports, compliance has been “abysmal” with less than 20 percent participation. DBPR staff has therefore informally advised that it will begin an auditing and enforcement process to seek compliance with the reporting requirements set forth in Section 499.0121(14), Florida Statutes. The following is a summary of the requirements:
Once you engage in wholesale distribution of controlled substances, then reporting is required, even if it is a “0″ report. The above prescription drug distributors must register with the DBPR Controlled Substance Reporting database (“CSR”) and submit monthly controlled substance distribution reports. These reports must be filed electronically with DBPR by the 20th day of the month following the month of the sale of the controlled substance. An online CSR account is required in order to submit the controlled substance information electronically.
According to the DBPR website, DBPR can take the following actions for non-compliance:
(i) denial, refusal to renew, revocation, or suspension of any permit or certification issued to the offender under the Florida Drug and Cosmetic Act;
(ii) emergency suspension of or restriction on such a permit or certification;
(iii) a cease and desist order;
(iv) civil action for injunctive relief;
(v) fine assessment in an amount not to exceed $5,000 – per violation, per day;
(vi) any other action or relief provided by law; or
(vii) some combination of the foregoing.
The following are questions and answers about the program:
Question: My company (wholesale distributor) distributed two cases of a Schedule IV drug back in November, do I have to continue to report when I have no further distributions?
Answer: Yes, once you engage in the distribution of controlled substances, then reporting is required even if it is a “zero” report.
Question: I have a drug wholesaler distributor’s permit, but no Drug Enforcement Agency (“DEA”) registration, do I have to report?
Answer: No, the law only applies to persons engaged in the distribution of controlled substances.
Question: I have a drug wholesaler distributor’s permit and a DEA registration, but have not distributed any controlled substances, do I have to report?
Answer: No, the law only applies to persons engaged in the distribution of controlled substances.
Question: I have already reported through Automation of Reports and Consolidated Orders System (“ARCOS”), why do I have to report monthly to Florida?
Answer: Because Florida requires separate monthly reporting of controlled substance distributions.
Question: Can I just submit my ARCOS report to satisfy Florida’s requirements?
Answer: No. ARCOS is for Schedule I and II drugs only (Schedule IIIs with GHB) and submitted quarterly. Florida requires information on all controlled substance (CH. 893, FS) distributions and is monthly.
Question: Do I only report Florida distributions or all distributions?
Answer: If the facility is in Florida, report all distributions. If the facility is out of state, only report distributions into Florida.
Question: My company has a DEA registration, but only distributes List 1 chemicals (pseudoephedrine), do I have to register and report?
Answer: No. Reporting is only for Florida controlled substances.
Question: My pharmacy has a retail pharmacy wholesaler permit and I already report prescriptions under the Prescription Drug Monitoring Program. Do I have to report under this program as well?
Question: What has to be reported?
Answer: The statute states that the report must include the following:
(a) Your federal DEA registration number
(b) The federal DEA registration number of the entity to which the drugs are distributed or from which the drugs are received
(c) The transaction code that indicates the type of transaction
(d) The National Drug Code identifier of the product and the quantity distributed or received
(e) The DEA Form 222 number or Controlled Substance Ordering System Identifier on all Schedule II transactions
(f) The date of the transaction
Question: What happens to my data after it is reported?
Answer: It is shared with FDLE and local law enforcement upon request.
Question: Is there a website where I can find out more?
Answer: Yes, the DBPR has a website:
By Rachel B. Rudensky
Performing a heroic act of CPR on the common law trademark rights held by New York’s famous Second Avenue Deli, U.S. District Judge Engelmeyer ruled last week that the restaurant could continue to sell its INSTANT HEART ATTACK SANDWICH and its TRIPLE BYPASS SANDWICH to its local customers. Judge Engelmeyer’s ruling underscores the importance of conducting a thorough trademark search before adopting and attempting to enforce trademarks. A poorly researched and misjudged cease and desist letter proved disastrous to the owner of federally registered trademarks.
Plaintiff, Second Avenue Deli, brought a declaratory judgment action against the Las Vegas-based Heart Attack Grill after receiving an aggressive cease-and-desist letter concerning Second Avenue Deli’s use of the trademark HEART ATTACK SANDWICH and its planned launch of TRIPLE BYPASS SANDWICH for certain menu items. As Heart Attack Grill came to discover, Second Avenue Deli first featured the HEART ATTACK SANDWICH item on its menu as early as 2004, though it did not apply for federal registration of the marks until 2010.
Heart Attack Grill was founded in 2005 as a “medically-themed” restaurant. Its waitresses (called “nurses”) take orders (called “prescriptions”) from customers (called “patients”). The menu tracks the theme of the restaurant, offering patrons a SINGLE BYPASS BURGER, a DOUBLE BYPASS BURGER, a TRIPLE BYPASS BURGER and a QUADRUPLE BYPASS BURGER. Heart Attack Grill promptly filed trademark applications for its marks in 2005, and the applications registered in 2006.
Under Section 7(c) of the Trademark Act, the date of filing an application establishes a registrant’s constructive date of first use, establishing nationwide priority except with respect to a party who began using the mark before that date. A prior user can defeat the registrant of a federal trademark for any territory in which the prior user can show that it (1) used the mark before the registrant’s date of filing; and (2) acquired common law rights as a result of its use in that territory. That is precisely what Second Avenue Deli did in this case. Careful research on Heart Attack Grill’s part would have revealed Second Avenue Deli’s status as a prior user, and spared Heart Attack Grill the pain and suffering of this declaratory judgment action.
The court considered the likelihood that consumers could be confused by concurrent use of Second Avenue Deli’s INSTANT HEART ATTACK and TRIPLE BYPASS SANDWICH on the one hand, and Heart Attack Grill’s SINGLE BYPASS BURGER, DOUBLE BYPASS BURGER, TRIPLE BYPASS BURGER and QUADRUPLE BYPASS BURGER. Though the court held that the marks were visually and aurally similar, conveying a similar overall commercial impression, other factors weighed against a finding of likelihood of confusion. First, the court found that the goods were dissimilar, inasmuch as Heart Attack Grill serves cheeseburgers fried in lard, while Second Avenue Deli is a kosher restaurant that abjures cheeseburgers and lard. Warming to this analysis, the court also found that the parties’ customers differed because Heart Attack Grill attracted customers who were looking for unhealthful food, while Second Avenue Deli’s customers were kosher-observant patrons.
However, the meat of the decision rested on the court’s view of Second Avenue Deli’s prior rights, and the territory to which it extended. Despite the presumptions afforded by Heart Attack Grill’s federal trademark registrations, the court focused its analysis heavily on the fact that Heart Attack Grill has one location only, in Las Vegas, while Second Avenue Deli is located only in Manhattan. Because restaurants require a customer’s physical presence, the court found that customer bases in remote geographic locations are necessarily different. Additionally, the court found no evidence that Heart Attack Grill had any plans to expand to New York.
Accordingly, the main question concerning the court was how large a territory to afford Second Avenue Deli based on its prior rights in its INSTANT HEART ATTACK SANDWICH. While Second Avenue Deli sought exclusive rights in the common tri-state area of New York, New Jersey and Connecticut, the court held that its rights extended only as far as the island of Manhattan. Otherwise, the court’s order largely preserves an arrangement the parties devised, in which Second Avenue Deli will use its trademarks on its menus, and in some advertising.
This case demonstrates that, while filing for trademark protection provides many significant benefits, registration by itself does not conclusively establish the owner’s exclusive right to use the mark, given the protections afforded common law trademark rights in the United States. One of the biggest mistakes a business can make is spending years building a brand, only to realize that it cannot expand to an important market because of a prior user. Furthermore, overly-aggressive enforcement measures can backfire without thorough research and confirmation of priority. This decision proves that a comprehensive assessment of third-party trademark rights can be just as crucial to enforcement efforts as to trademark adoption and use consideration. Taking the time to conduct a thorough trademark search before sending out that letter will prevent a party’s goose from being cooked.
By Christian E. Dodd and Richard H. Martin
On July 5, 2012, the Florida Supreme Court adopted amendments to the Florida Rules of Civil Procedure concerning the discovery of electronically stored information (ESI). The amendments – which should serve to provide trial courts and counsel a practical framework for addressing ESI discovery issues – track the manner in which ESI is currently addressed by the Federal Rules of Civil Procedure. Consequently, the amended Florida Rules will have a very familiar feel to parties accustomed to litigating in federal court. Parties who litigate predominantly in Florida state courts, and are not as familiar with federal civil procedure, will need to familiarize themselves with the amended Florida Rules. The following presents an overview of the amendments to the Florida Rules, which become effective on September 1, 2012, and suggested recommendations.
Rule 1.200 case management conferences are expanded to consider ESI issues. Courts may consider facilitating admissions of fact, voluntary exchange of ESI and stipulations as to authenticity. Courts may make advance rulings on admissibility of ESI. Most importantly, courts may facilitate agreements as to the scope of preservation, the form of production and limitations on the timing, scope and sources of ESI discovery.
For cases designated complex under Rule 1.201, the Parties’ case management report must address agreements between the parties as to the scope of preservation, form of production and whether ESI discovery should be conducted in phases, or limited to particular individuals, time periods or sources.
Scope and Limitations Regarding Discovery
Rule 1.280(b) as amended, will make explicit that ESI is discoverable. However, Rule 1.280(d) will provide a framework for imposing limitations on ESI discovery similar to Federal Rule 26. ESI that is not reasonably accessible because of burden or costs is not discoverable absent a showing of good cause. If such discovery is ordered, the court has the authority to shift costs. The court must limit ESI discovery if it is unreasonably cumulative, duplicative, or may be obtained from another source or in a less costly or burdensome manner. These proportionality and reasonableness factors can significantly curtail abusive discovery practices.
Under certain circumstances a party may respond to an interrogatory by specifying records from which the answer to the interrogatory may be derived or ascertained and making the specified records available for inspection and copying to the requesting party. Under amended Rule 1.340(c), the records specified in such an interrogatory response may include ESI.
Requests for Production of Documents and Things
Amended Rule 1.350(b) allows a party requesting ESI to specify the form or forms in which it is to be produced. For example, a requesting party may specify that responsive MS Excel spreadsheets be produced as “.xls” files. If the responding party objects to the requested form of production, or if the requesting party does not specify a form, the responding party must state the form(s) it intends to use. In the above example, if the responding party objects to producing .xls files in their native file format (i.e. as .xls files), the responding party must state in its written objection to the request the form it will use when producing MS Excel spreadsheets, such as TIFF images or .pdf files.
Amended Rule 1.380 provides: “Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information as a result of the routine, good-faith operation of an electronic information system.” As this language mirrors the corresponding Federal Rule, Florida courts likely will look to federal case law for guidance. The Committee Notes explain that the good-faith requirement of Rule 1.380(e) should prevent a party from exploiting the routine operation of an information system to thwart its discovery obligations by allowing that routine operation to destroy information the party is required to preserve or produce.
Rule 1.410(c) addresses subpoenas for the production of documentary evidence. The amendment to Rule 1.410(c) closely tracks the amended Rule 1.280(d) discussed above. A party responding to a subpoena may object to the discovery of ESI from sources identified as not reasonably accessible: on a motion to compel discovery or to quash the subpoena, the responding party bears the burden of showing that the information sought, or form of production requested, is not reasonably accessible. Even if that showing is made, the court may order the discovery from the identified sources, or in the requested forms, if the requesting party shows good cause, and considering the limitations set out in Rule 1.280(d)(2). The court may order that some or all of the costs be shifted to requesting party.
Form of Production
The amended rules provide that where a document request does not specify the form of production of ESI, or ESI is produced in response to an interrogatory (in lieu of a written response), the responding party must produce the ESI in a form or forms in which it is ordinary maintained or in a reasonably usable form. See Amended Rules 1.340(c), 1.350(b) and 1.280(d)(2). These rules discourage litigants from producing ESI in a format that renders them difficult to utilize (e.g., converting lengthy spreadsheets to non-searchable TIFF images).
Many of our clients are implementing litigation hold procedures and standardized protocols so they can consistently advise their outside counsel on their organization’s position in responding to requests for electronic discovery. Akerman has qualified lawyers who can assist you in developing these procedures to avoid undue burdens being placed upon your organization.