By Richard Gilly
On May 21, 2012, the Supreme Court of the United States signaled its continued concern about potentially over-broad process or method patents by asking the Court of Appeals of the Federal Circuit to review a previous holding that a certain computer-implemented process was patentable. Ultramercial, LLC v. Hulu, LLC, 657 F.3d 1323 (Fed. Cir. 2011). Earlier this Spring, the Supreme Court invalidated two process patents relating to a medical diagnostic procedure as constituting merely unpatentable laws of nature. Mayo Collaborative Services v. Prometheus Laboratories, 132 S. Ct. 1289 (2012).
Specifically, the Court held that a patent claim is not valid if it merely “inform[s] the relevant audience about certain laws of nature; any additional steps consist of well-understood, routine, conventional activity already engaged in by the scientific community; and those steps, when viewed as a whole, add nothing significant beyond the sum of their parts taken separately.” The court likewise observed that simply implementing an abstract idea “on a …computer [is] not a patentable application of that principal.”
The holdings in such cases are also applicable to industrial process patents, including those in the composites industry. In fact, in its recent opinion in Prometheus, the court elaborated on the standards for finding a process eligible for patenting by reference to two previous cases involving industrial processes. In one well-known case, Diamond v. Diehr, 45 U.S. 175, 185 (1981), a process for molding raw, un-cured rubber into various cured, molded products was found eligible for patenting. Even though the claimed process used a known mathematical equation, the Arrhenius equation, which could not be the basis for patentability, the claim also involved the steps of (1) monitoring the temperature inside the mold, (2) feeding the resulting numbers into a computer, which would use the Arrhenius equation to continuously recalculate the mold-opening time, and (3) configuring the computer so that it would signal a device to open the press. In holding the processed patentable, the Court found the way the additional steps integrated the equation into the process as a whole and were tied to operations of the machine transformed the process into an inventive application of an otherwise unpatentable formula.
The second case discussed by the Court in its Prometheus decision, Parker v. Flook, 437 U.S. 584, 590 (1978), involved an improved system for updating alarm limits in a catalytic conversion of hydrocarbons. The process was found not to be eligible for patenting, even though it included several process steps separate from any unpatentable algorithm or law of nature, including: (1) measuring the current level of the temperature; (2) using an apparently novel mathematical algorithm to calculate the current alarm limits; and (3) adjusting the system to reflect the new alarm-limit values. The Court in Flook felt that the chemical processes involved in catalytic conversion of hydrocarbons, the practice of monitoring the chemical process variables, the use of alarm limits to trigger alarms, the notion that alarm limit values must be recomputed and readjusted, and the use of computers for automatic monitoring-alarming were all “well known,” and not sufficient to take the claim beyond an unpatentable algorithm.
From the brief discussion of the above cases, the patentability of industrial process may sometimes be a close question. Accordingly, it will be prudent to consider the Court’s guidance when drafting process patent claims, and to vary the scope of such claims so as to anticipate possible future skepticism from the courts as to what inventive processes are patent-eligible.
By Brian R. Harris
The recent U.S. Supreme Court decision in United States v. Home Concrete & Supply, LLC, Sup. Ct. No. 11-139 (Apr. 25, 2012) is a victory for taxpayers on the statute of limitations for federal tax assessments. The Supreme Court held that an overstatement of basis is not an omission of gross income under 26 U.S.C. 6501(e)(1)(A) that extends the statute of limitations for the Commissioner to assess a tax deficiency from three years to six years. The case also provides important guidance to tax professionals about how to interpret the Internal Revenue Code.
The Commissioner generally must assess a tax deficiency within three years after the tax return is due or filed, whichever is later. 26 U.S.C. 6501(a). There are several exceptions to this general rule, one of which is that if the taxpayer omits gross income by more than 25% of what is stated on the return, then the statute of limitations is extended from 3 years to 6 years. 26 U.S.C. 6501(e)(1)(A). The position of the IRS has been that an overstatement of basis can constitute an omission of gross income. In Home Concrete, the Supreme Court resolved this issue in the taxpayer’s favor and held that an overstatement of basis did not constitute an omission of gross income and therefore did not extend the statute of limitations.
In reaching its holding in Home Concrete, the Supreme Court followed its prior decision in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), which interpreted a virtually indistinguishable section in the prior version of the Internal Revenue Code. Colony held that a taxpayer omits income by leaving specific receipts or accruals of income out of the computations of gross income and that overstating basis was not the same as omitting income. The majority in Home Concrete found that it would be difficult, if not impossible, to give the same statutory language a different interpretation without overruling Colony, which it was not willing to do because of stare decisis, the doctrine of respecting and following prior judicial decisions.
Home Concrete is a significant case not just for the result but also because it stands as a restriction on the Treasury Department’s power to make regulations that interpret the Internal Revenue Code. The Treasury Department had recently promulgated a regulation on this specific issue. The Treasury Department’s regulation was unequivocal that an understatement of gross income resulting from an overstatement of basis constituted an omission of gross income. In Home Concrete, the Government argued that its regulation overturned Colony’s interpretation of the statute and controlled the outcome of the case. In making this argument, the Government relied upon the so-called “Chevron deference” given to an agency’s construction of a statute that it administers, which was recently reaffirmed in the tax context in Mayo Foundation for Medical Ed. and Research v. United States, 131 S. Ct. 704 (2011).
The Supreme Court rejected the Government’s argument by stating: “In our view, Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency.” Justice Breyer wrote for a 5-4 majority, however, he did not garner a majority for the subsection discussing why the Treasury’s regulation did not overrule Colony. Home Concrete, therefore, does not definitively foreclose the possibility that there is some instance in which an agency could promulgate a valid regulation that overrules a prior judicial interpretation of a statute. This means that the contours of Chevron deference and the scope of agency rulemaking authority remain unresolved and will continue to be litigated in the federal courts.
In the meantime, individual and corporate taxpayers whose gross income is dependent on transactions that take into account basis can be more confident that the statute of limitations may indeed close after three years. Moreover, Home Concrete also serves as a reminder to tax professionals that while the IRS has broad rulemaking authority, that authority has limits. The Treasury Regulations are not the definitive interpretation of the Internal Revenue Code, and they must be viewed in conjunction with any relevant judicial decisions.
By Valerie Hubbard, FAICP, LEED AP
On May 4, 2012, Governor Scott signed into law HB 503, the last of the growth management bills highlighted in our Practice Update of March 30, 2012, Florida Legislative Session Clarifies Growth Management, Provides New Opportunities. The Governor had previously signed two other important growth management bills discussed in that Practice Update. A brief summary of the three bills follows. For more information please see the previous Practice Update.
HB 503 (Chapter 2012-205, Laws of Florida)
Signed on May 4, this bill deals primarily with environmental issues, but also contains a new 2-year extension opportunity for certain development approvals and permits. The extension requires written notification to the authorizing agency by December 31, 2012. The bill prohibits local government from charging for the new extension or for the 2-year extensions provided under Sections 73 and 79 of the Community Planning Act. It also prohibits local governments from requiring a permit or approval from a federal or state agency as a condition of processing or issuing a development approval, unless the state or federal agency has already denied the permit or approval. The bill becomes effective on July 1, 2012.
HB 7081 (Chapter 2012-99, Laws of Florida)
This bill was signed on April 6. For the most part, this is a true “glitch” bill for the 2011 Community Planning Act, consisting primarily of clarifications and consistency fixes, in addition to a few minor statutory refinements. The bill also seeks to resolve a legal challenge to the Community Planning Act, relative to its prohibition on local charter provisions that require an initiative or referendum process for development orders or comprehensive plan amendments. HB 7081 grandfathers such provisions in effect as of June 1, 2011. The bill became effective upon becoming a law.
HB 979 (Chapter 2012-75, Laws of Florida)
This bill was also signed on April 6, and creates a new DRI exemption for projects that are the subject of a tax refund agreement for qualified target industry businesses, pursuant to s. 288.106(5), F.S. The project must also meet other criteria, including execution of an agreement between the applicant, the local government and the state land planning agency and approval as a comprehensive plan amendment under the state coordinated review process. The bill provides that changes to DRIs that do not increase external peak hour trips and do not reduce open space and conserved area are not substantial deviations. It provides for recission of DRIs that are exempt under the statutory exemption provisions (s. 380.06(24), F.S). For recission of DRIs, the legislation allows mitigation of impacts to be ensured pursuant to an enforceable permit or authorization, rather than requiring that mitigation be completed prior to rescission. The bill also addresses a number of regulatory consistency issues in the DRI process and creates a new time-limited opportunity relating to “agricultural enclaves.” The bill’s effective date is July 1, 2012.
Florida’s growth management framework has undergone enormous changes in the past few legislative sessions. Akerman can assist development interests and local governments in understanding and taking advantage of these changes and the opportunities they create, including the potential extension offered by HB 503. Akerman also offers a full array of lobbying services to represent clients’ interests with regulatory agencies and in the legislative arena.
By Richard T. Hurt, Jeffrey M. Gad, Drew LaGrande, and Megan Costa Devault
Due to the ever changing and broadly applied federal estate tax laws, families can face dire and catastrophic consequences, such as a forced-sale of assets at less than optimal values, even with extensive advance planning. Simply put, in the context of family wealth, the unexpected death of a family matriarch or patriarch is not only a family tragedy, but it can also significantly affect the family wealth and business. The federal estate tax can play a large part in this loss.
The reality of the federal estate tax on family wealth is compounded by the tremendous change that has surrounded the estate tax law for the last 10 years. Over the last decade, the federal estate tax has been manipulated by widely changing tax rates and exemptions and such changes make advance estate and succession planning for family wealth all the more challenging. With more dramatic changes to the federal estate tax law looming, and with the economic recovery still struggling to take hold, efforts must be made to solidify the foundation for future growth and family succession planning through a critical examination of the federal estate tax.
Summary of the Current Law
For the past several years, the federal estate tax law has provided elevated exemptions and lower tax rates. The key provisions of the current federal estate tax law, which sunsets on December 31, 2012, are as follows:
• $5.12 million gift and estate tax exemption indexed for inflation.
• $5.12 million Generation Skipping Transfer (“GST”) tax exemption indexed for inflation.
• 35% maximum, estate, gift and GST tax rates.
• For decedent’s dying in 2011 and 2012, a surviving spouse may use the most recent deceased spouse’s unused exemption amount (“portability”).
If no new legislation is enacted prior to December 31, 2012, then the estate, gift and GST tax exemptions revert back to $1 million, with maximum taxable rates of up to 60%.
The Obama Administration’s Fiscal Year 2013 Revenue Proposal recommends the following changes to the current federal estate tax law:
• $3.5 million estate and GST tax exemption.
• $1 million gift tax exemption.
• 45% maximum estate, gift and GST tax rates.
• Portability to remain intact.
• Require consistency in the reporting basis by the transferee of property received either through a gift or devise, with information reported by the transferor.
• Valuation rules will be enacted to limit the ability to discount closely-held entities for lack of marketability and lack of control.
• Require a minimum term of 10 years for grantor retained annuity trusts. The new proposals would also require the remainder interest to be more than zero in value.
• Require a trust to terminate if it has been in existence for 90 years, thus limiting the effectiveness of the GST tax exemption.
• Require inclusion of irrevocable trust assets in the estate of an individual who, for income tax purposes, is deemed to be the taxpayer of the irrevocable trust.
One of the few bipartisan proposals dealing with the federal estate tax law was introduced by Kevin Brady (R–TX) on March 30, 2011. H.R. 1259 is co-sponsored by two (2) Democrats and four (4) Republicans and entitled the “Death Tax Repeal Permanency Act of 2011.” This bill is presently before the House Committee on Ways and Means and provides for the following, to become effective upon the date of enactment:
• Repeal of federal estate tax.
• Repeal of the federal GST Tax.
• Make permanent the current $5 million federal gift tax exemption, with taxes levied at a rate of 35% for transfers over $5 million.
The reasons for repeal, as cited by sponsoring Representatives, can be summarized as follows:
• Hurts Small Business Owners, Farmers and Ranchers. The estate tax hurts families with small businesses and farmers by inhibiting their ability to transfer assets without imposing a second layer of taxes.
• Job Loss. By inhibiting the transfer of family businesses from one generation to the next, the estate tax affects jobs and diminishes employment opportunities within those businesses subject to estate tax.
• Punishes Prudent Investing. The estate tax punishes families who prudently invest and accumulate wealth over the course of their lifetime, by subjecting them to taxes upon death.
• Bereavement. The surviving family members must find ways to pay the estate tax liability at a time when they are struggling with the loss of a loved one, including the matriarch, patriarch or head of the family household. Family members should be allowed to deal with their bereavement, without having to be subjected to estate taxes on the assets which they inherit.
• Double taxation. The estate tax subjects taxpayers and their beneficiaries to double taxation, by taxing the same assets first during life and again upon death.
Impact of Federal Estate Tax (and Failure to Act by Congress) on Family Wealth
The worst case scenario for wealthy families is for Congress to ignore the estate tax issue. Indeed, no action by Congress will be more detrimental than the enactment of any of the lesser-favored proposals being debated. For instance, if the current law “sunsets,” many families will face a $1 million estate and gift tax exemption and increased estate and gift tax rates of 55% (and up to 60% for estates valued over $10 million).
Risk of Claw Back
There is also considerable uncertainty surrounding the application of any “claw back” penalty for gift and estate tax exemption. In other words, there is a risk that if permissible gifts of up to $5 million are made prior to December 31, 2012, and no further action is taken to clarify the federal estate tax laws going forward, a decedent’s estate could be forced to incur an additional tax based upon the difference of the gifts made during life and the exemption level upon death. If this occurs, families following the law and engaging in proactive planning to preserve family wealth could still face tax consequences which could undo important plans set in motion to ensure succession to future generations.
In the midst of such estate tax turmoil, families should still consult with tax and legal professionals to ensure that they are maximizing all planning options and tools available to them to minimize adverse impacts of the estate tax law. Akerman has experts to assist in various areas of tax and estate planning. Please feel free to speak with one of our attorneys to find out more information and maximize your tax and estate planning.
Rick Hurt, Jeffrey M. Gad, Drew LaGrande and Megan Devault counsel families on matters integral to family enterprises, including litigation matters, estate and tax planning, corporate governance, mergers, acquisitions, business succession and more. As all individuals are aware, nothing is simple when it comes to taxes. This paper contains many general statements and simplifies complex concepts. There are many nuances in the issues discussed in this paper and exceptions to the general rules. A tax advisor should be consulted before taking any action with respect to a particular business or situation.
NOTE: This publication was written in collaboration with Family Enterprise USA.
By Michael P. Gennett
Big money penalties for routine HIPAA violations are becoming an everyday reality for health care providers. On April 11, Phoenix Cardiac Surgery, a cardiology practice in Arizona entered into a settlement agreement with the Department of Health and Human Services Office for Civil Rights (OCR) in which it agreed to pay $100,000 and implement a corrective action plan. The OCR began an investigation of the surgical practice after it received complaints from patients that the practice was posting their protected health information (PHI) on a publicly available internet-based calendar.
The government’s investigation revealed a number of specific HIPAA violations by the practice, including:
- From 2003 to 2009, the practice did not provide nor did it document training of its workforce members with policies and procedures on handling PHI.
- From 2007 to 2009, the practice posted over 1,000 entries of PHI on a publicly accessible, internet-based calendar.
- From 2005 to 2009, the practice transmitted daily PHI from an internet-based e-mail account to workforce members’ personal internet-based e-mail accounts.
- From 2005 to 2009, the practice failed to identify a security official.
The OCR has been actively investigating covered entities, including health care providers and health care insurers, for violations of HIPAA’s privacy protections, and recent changes in the law allow for significant monetary penalties for even unintentional violations. Covered entities are required, not only to come into compliance with HIPAA’s regulations, but also to monitor their own compliance efforts on an ongoing basis.
In light of the stepped-up compliance investigations and increased penalties, both covered entities and business associates are encouraged to revisit their HIPAA compliance programs to make sure they are up to speed.
By Christian E. Dodd
A “pay-for-delay” settlement agreement, also referred to as a reverse payment agreement, is a type of patent litigation settlement in which a patent holder pays an allegedly infringing generic drug company to delay entering the market until a specified date. This protects the patent monopoly against a judgment that the patent is invalid or would not be infringed by the generic competitor. In the past decade, pay-for-delay agreements have been repeatedly attacked by the Federal Trade Commission. In the FTC’s view, pay-for-delay agreements are unfair restraints on trade that violate federal antitrust laws because such agreements artificially preserve a patent holder’s monopoly profits, which are shared with the generic drug manufacturers who have agreed to stay out of the market. In a recent decision addressing yet another challenge by the FTC to a pay-for-delay agreement, the United States Court of Appeals for the Eleventh Circuit has reaffirmed that such agreements do not run afoul of antitrust law so long as the anticompetitive effects of the agreement fall within the exclusionary potential of the patent.
In Federal Trade Commission v.Watson Pharmaceuticals, Inc., et al., No. 10-12729 (11th Cir. April 25, 2012), the FTC filed an antitrust lawsuit against four entities that entered into a pay-for-delay agreement to settle patent litigation. In the underlying dispute, Solvay Pharmaceuticals, Inc. filed a New Drug Application (“NDA”) for the prescription drug AndroGel. After the FDA approved Solvay’s NDA, Solvay filed a patent application with the U.S. Patent and Trademark Office. The PTO granted the application, jointly awarding Solvay and the drug’s creator (a foreign entity) Patent Number 6,503,894 (“the ‘894 patent”). Solvay then asked the FDA to include the ‘894 patent in the Orange Book alongside the AndroGel listing.
A few months after the ‘894 patent issued, Watson Pharmaceuticals, Inc. and Paddock Laboratories, Inc. developed generic versions of AndroGel. Watson and Paddock both filed Abbreviated New Drug Applications (“ANDA”) with the FDA, with each making paragraph IV certifications that their generic AndroGel products did not infringe the ‘894 patent or that the patent was invalid. Within 45 days, Solvay filed a patent infringement lawsuit against Watson and Paddock in federal district court, which triggered a 30-month stay of the FDA’s approval process for Watson’s and Paddock’s generic versions of AndroGel pursuant to 21 U.S.C. § 355(j)(5)(B)(iii).
After conducting discovery, Watson and Par/Paddock1 filed motions for summary judgment on the validity of the ‘894 patent. The motions were fully briefed and ready for decision when the 30-month stay on the FDA’s approval process for Watson’s ANDA ended.2 That same month, the FDA approved Watson’s generic AndroGel product. Before the motions for summary judgment were ruled on, and before any generic AndroGel product was brought to market, the parties settled their patent dispute. Under the terms of the settlement agreement, Watson, Par and Paddock agreed not to market generic AndroGel products for a period of approximately nine years—which fell within the remaining life of the ‘894 patent—unless another manufacturer of the generic product entered the market before then. Watson and Par further agreed to promote branded AndroGel to physicians. In exchange, Solvay agreed to pay Par/Paddock $10 million per year for six years (and another $2 million per year for serving as a backup manufacturer of the drug), and further agreed to share a portion of its AndroGel profits with Watson for the roughly nine year period Watson had agreed to stay out of the market. The payments from Solvay to Watson were projected to be between $19 million and $30 million per year. Pursuant to the settlement, the parties stipulated to the dismissal of the patent infringement lawsuit.
After receiving notice of the settlement agreements, the FTC filed an antitrust suit against Solvay, Watson, Par and Paddock. In its amended complaint, the FTC claimed that the settlement agreements were unlawful agreements not to compete in violation of Section 5(a) of the Federal Trade Commission Act.3 The FTC alleged that the agreements postponed the entry date of the generic drugs, thereby allowing Solvay to maintain monopolistic profits—which were shared with Watson, Par and Paddock—at the expense of consumer savings that would have resulted from price competition. The amended complaint further alleged that Solvay “was not likely to prevail” in the patent litigation because the ‘894 patent “was unlikely to prevent generic entry” into the marketplace. Therefore, according to the FTC, Solvay’s reverse payments to the generic drug producers continued and extended a monopoly that the patent laws did not authorize.
The four defendants moved to dismiss the amended complaint under Rule 12(b)(6), arguing that because the FTC had not alleged that the settlements imposed an exclusion greater than that authorized by the ‘894 patent, the amended complaint failed to state a viable claim. The United States District Court for the Northern District of Georgia agreed and dismissed the lawsuit. The FTC appealed.
On appeal, the Eleventh Circuit surveyed its prior decisions addressing pay-for-delay settlements, which taken collectively establish the rule that “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” This is because the patent holder, prior to a finding of invalidity or non-infringement, has the right to exclude others from entering the market consistent with the scope and duration of the patent. So long as a pay-for-delay settlement does not create restrictions beyond the patent holder’s potential power to exclude, there presumably has been no adverse effect on competition.
Notwithstanding the prior jurisprudence, the FTC urged the Eleventh Circuit to adopt a rule that “an exclusion payment is unlawful if, viewing the situation objectively as of the time of settlement, it is more likely than not that the patent would not have blocked generic entry earlier than the agreed-upon entry date” under the terms of the settlement. The Eleventh Circuit rejected this request outright. The Court noted that given its plain meaning, a patent holder’s claim of infringement that is “likely” to fail is just as likely to succeed 49 times out of 100. Given the high-stakes nature of patent litigation, a patent holder with nearly 50-50 odds of winning its case is motivated to settle. Likewise, one challenging a patent who has a better chance of prevailing has just that, a chance, not a certainty. As stated by the Eleventh Circuit, “[r]ational parties settle to cap the cost of litigation and to avoid the chance of losing.” When both sides of the dispute have a substantial chance of winning and losing, it is reasonable for them to settle. Indeed, as noted by the Court, “[w]hen hundreds of millions of dollars of lost profits are at stake, even a patentee confident in the validity of its patent might pay a potential infringer a substantial sum in settlement.”
The Eleventh Circuit further noted that the FTC’s approach would require a determination after-the-fact of how likely the patent holder was to succeed had it not settled its infringement lawsuit. According to the Court, this is “too perilous an enterprise to serve as the basis for antitrust liability and treble damages.” The FTC’s proposal would require the parties and the court to sift back through what often amounts to “mountains of evidence” to evaluate the likelihood of the patent holder’s success in the underlying litigation. Doing so would burden the legal system and discourage settlement. And a retrospective prediction of the outcome of an already settled case is unlikely to be reliable, as the parties to the prior suit are now aligned by virtue of their settlement. Consequently, the generic competitor no longer has the same incentive to vigorously attack the patent in issue. Finally, the Eleventh Circuit noted that the FTC’s approach—which would require the Eleventh Circuit and other non-specialized circuit courts to adjudicate patent issues on appeal—is inconsistent with Congress’ decision to grant exclusive appellate jurisdiction over patent cases to the United States Court of Appeals for the Federal Circuit.
The FTC argued that if its proposal of looking back to decide the likely outcome of the previously settled patent infringement litigation was not adopted by the Eleventh Circuit, patent holders and potential competitors would forego patent litigation and instead divide among themselves the stream of monopoly profits even in those situations in which it is more likely than not that the patent would be found invalid or not infringed. According to the FTC, this will result in a lack of competition and higher prices to the end consumer of prescription drugs. The Eleventh Circuit disagreed with the FTC’s “ominous forecast,” stating that if the patent is actually vulnerable to attack, several other generic companies who are not party to the pay-for-delay agreement will attempt to enter the market and challenge the patent. As more and more generic manufacturers file their own paragraph IV certifications challenging the patent, the patent holder’s monopolistic profits will come under continued attack and, presumably, eventually dry up.
The decision in Watson Pharmaceuticals reaffirms that so long as the anticompetitive effects of a pay-for-delay settlement do not extend beyond the scope of the exclusionary potential of the patent, the settlement should withstand an antitrust attack by the FTC in the Eleventh Circuit.4 However, given the FTC’s propensity to continue challenging such settlements, we likely have not heard the last word on this issue. The ball is squarely back in the FTC’s court at this point in time.
1. Paddock partnered with Par Pharmaceuticals Companies, Inc., which agreed to share the costs of litigation with Paddock in exchange for part of the profits from Paddock’s generic AndroGel product if that product gained final approval from the FDA.
2. Because Watson filed its ANDA before Paddock, it was eligible for the 180-day exclusivity period under 21 U.S.C. § 355(j)(5)(B)(iv).
3. See 15 U.S.C. § 45(a)(1) (banning “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce”).
4. It bears mentioning that in the Sixth Circuit and the District of Columbia Circuit, pay-for-delay agreements are per se unlawful under the Sherman Act. See In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003); In re Andrx Pharms., Inc. v. Biovail Corp., Int’l, 256 F.3d 799 (D.C. Cir. 2001). The Second and Federal Circuits, like the Eleventh Circuit, have held that pay-for-delay agreements are neither per se unlawful nor unreasonable restraints on competition so long as they fall within the exclusionary scope of the patent. See Ark. Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98 (2d Cir. 2010); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008). The issue of whether pay-for-delay agreements violate antitrust law is presently before the Third Circuit. See In re K-Dur Antitrust Litig., Case No. 10-2077, United States Court of Appeal for the Third Circuit.
By Richard D. Tuschman
Using arrest and conviction records as a basis for employment decisions
may violate Title VII if employers fail to take certain precautionary measures, according to the Equal Employment Opportunity Commission’s latest enforcement guidance, which was released on April 25, 2012. The new guidance consolidates and clarifies prior EEOC guidance in light of judicial decisions on the use of arrest and conviction records.
The guidance begins by making the obvious point that the selective use of arrest and conviction records may constitute disparate treatment discrimination in violation of Title VII. For example, an employer that disqualifies an African American based on a prior drug conviction, but is more lenient toward a white candidate with a similar criminal record, would likely be in violation of Title VII.
Less obviously, the guidance clarifies that a neutral policy or practice that has the effect of disproportionately screening out a protected group may violate Title VII under a disparate impact theory, if the employer cannot show that the policy or practice is job related for the position in question and consistent with business necessity.
Exclusions based solely on arrests may have a disparate impact, according to the EEOC, because African Americans and Hispanics are arrested in higher numbers than their representation in the general population. Further, such a policy will not satisfy the employer’s defense, because an arrest does not establish that criminal conduct has occurred. As an example, the EEOC cites the hypothetical case of an African American employee who was arrested years earlier for disorderly conduct after complaining that he had been stopped for “driving while Black.” Although no charges were filed against the employee, he is denied a promotion because his employer does not promote employees with arrest records. If the policy has a disparate impact on African Americans in practice, the EEOC would find reasonable cause to believe that the employer is in violation of Title VII.
An employer may use an arrest, however, to inquire into whether the conduct underlying the arrest justifies an adverse employment action. For example, if the arrest was for a serious offense, and the employer investigates and finds that the employee’s explanation is not credible, adverse employment action against the employee may be appropriate, even if his trial has not yet occurred, or if he has been acquitted. Although the employee is presumed innocent in his criminal case, the employer need not apply this presumption in making employment decisions.
An employer may treat a conviction as evidence that the employee engaged in criminal conduct. Nevertheless, the EEOC recommends as a “best practice” that employers not ask about convictions on job applications. The rationale for this recommendation is that an employer is more likely to fairly assess the relevance of an applicant’s conviction once the employer is knowledgeable about the applicant’s qualifications and experience.
If and when employers make inquiries about criminal convictions, the inquiries should be limited to convictions for which exclusion would be job related for the position in question and consistent with business necessity. To make this determination, the EEOC recommends that an employer either: (1) validate the criminal conduct screen for the position in question per the Uniform Guidelines on Employee Selection Procedures; or (2) develop a “targeted screen” that considers the nature of the crime, the time elapsed, and the nature of the job, and then provides an opportunity for an individualized assessment for people excluded by the screen.
The EEOC’s guidance concludes by listing examples of “best practices” for employers to use when they are considering using criminal records in making employment decisions. These “best practices” include:
Eliminate policies or practices that exclude people from employment based on any criminal record
Train managers, hiring officials, and decision-makers about Title VII and its prohibition on employment discrimination and how to implement policies and procedures consistent with Title VII
Developing a Policy
Develop a narrowly tailored written policy and procedure for screening applicants and employees for criminal conduct
Determine the duration of exclusions for criminal conduct based on all available evidence
Record the justification for the policy and procedures
Note and keep a record of consultations and research considered in crafting the policy and procedures
Questions about Criminal Records
When asking questions about criminal records, limit inquiries to records for which exclusion would be job related for the position in question and consistent with business necessity
Keep information about applicants’ and employees’ criminal records confidential; only use it for the purpose for which it was intended
Employers would be well-advised to consult the EEOC’s guidance, and only carefully and cautiously use arrest and conviction records as a basis for employment decisions.
By Kenneth G. Alberstadt
Since the enactment of the Jumpstart Our Business Startups Act (The “JOBS Act”), the Division of Corporation Finance of the SEC has issued three sets of Frequently Asked Questions related to the JOBS Act, addressing general questions related to emerging growth company (“EGC”) status and the IPO on-ramp, scaled disclosure and other provisions of the JOBS Act benefiting EGCs; confidential staff review of registration statements pursuant to new Section 6(e) of the Securities Act of 1933; and changes to requirements for registration and deregistration under the Securities Exchange Act of 1934. The following is an overview of the key guidance provided in the FAQ releases. Our prior Practice Update discussed the significant aspects of the JOBS Act.
Determination of Emerging Growth Company Status
The JOBS Act provides that an issuer may not qualify as an EGC if its first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011. The limitation may arise not only from a filing related to a primary initial public offering but also from a resale registration statement or an employee benefit plan registration on Form S-8. However, if no sales occurred on or prior to the cutoff date, an issuer can qualify even if a registration statement had been declared effective on or before December 8, 2011. The determination of whether an issuer’s total annual gross revenues were less than $1 billion during its most recently completed fiscal year will be made under U.S. GAAP (or IFRS as issued by the IASB, if adopted by a foreign private issuer).
EGC status for purposes of making test-the-waters communications to QIBs and institutional accredited investors in reliance on new Section 5(d) of the Securities Act should be determined at the time of each communication. Brokers and dealers distributing research reports about EGCs in reliance on amended Securities Act Section 2(a)(3) should determine EGC status at the time the research report is distributed.
Confidential Submission of Draft Registration Statements
EGC status must be determined at the time of submission if an issuer seeks to submit a draft registration statement for confidential staff review. If the issuer ceases to be an EGC during the confidential review process (for example, because it completes a fiscal year in which its gross revenues equal or exceed $1 billion), a registration statement will be required to be publicly filed. The date of a public filing, and not the date of a confidential draft submission, will be the “initial filing date” for purposes of Securities Act Rule 401(a), which provides that the form and content of a registration statement must conform to the rules in effect on the initial filing date for the registration statement. Accordingly, issuers that believe they may cease to be EGCs before review of a confidential submission is completed may wish to file publicly before they would otherwise be required to do so in order to preserve the benefit of scaled disclosure requirements related to the registration statement.
An issuer that has had registered sales of securities other than common equity securities can qualify to use the confidential submission process as long as it otherwise qualifies as an EGC.
For purposes of determining whether the requisite 21-day period has elapsed between the public filing of a confidentially submitted registration statement and the commencement of the road show, the staff has indicated that it will not object if test-the-water meetings with QIBs and institutional accredited investors are not treated as part of the road show. However, a public filing will be required to take place 21 days before any test-the-water communications that are not limited to QIBs and institutional accredited investors, even if they do not constitute a traditional road show.
If a foreign private issuer chooses to take advantage of any benefit available to EGCs, it will be required (as are domestic EGCs that submit confidential registration statements) to publicly file its confidential submissions at least 21 days before its road show. If a foreign private issuer chooses not to take advantage of any EGC benefits, it will be permitted to follow existing staff practices regarding confidential submissions by foreign private issuers, which do not require that 21 days elapse between the public filing of the registration statement and the road show but that since December 2011 have generally been limited to foreign governments registering debt securities; foreign private issuers that are listed or are concurrently listing securities on a non-U.S. securities exchange; foreign private issuers that are being privatized by a foreign government; and foreign private issuers that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.
An issuer submitting a draft registration statement confidentially should advise the staff at the time of submission whether it will elect scaled disclosure relating to the adoption of new or revised accounting standards (an election that must be complied with for the entire period the issuer remains an EGC). Even if scaled disclosure is adopted, the date of applicability to non-EGCs and the anticipated date of adoption by the EGC (assuming it remains an EGC as of such date) should be disclosed for each applicable accounting standard.
An EGC is not required to submit a draft registration statement under cover of a Rule 83 confidentiality request in order to preserve confidentiality. Each draft registration statement and amendment should be filed as a separate 99-series exhibit to the first publicly filed registration statement.
Amendment of Previously Filed Registration Statements; EGCs that are Existing Reporting Companies
An issuer that qualifies as an EGC may, on either a pre-effective or post-effective basis, amend a registration statement filed prior to April 5, 2012 (the date of enactment of the JOBS Act) to provide the scaled disclosures available to EGCs. Similarly, an issuer that completed its IPO after December 8, 2011 but before April 5, 2012 may file periodic reports using the scaled disclosure provisions of the JOBS Act.
An issuer that is in registration or is a reporting company should disclose whether or not it is electing scaled disclosure relating to the adoption of new or revised accounting standards in its next registration statement amendment or publicly filed report, as applicable.
Other Foreign Private Issuer Considerations
As noted, the determination of whether a foreign private issuer’s total annual gross revenues were less than $1 billion during its most recently completed fiscal year will be made under IFRS as issued by the IASB, if adopted by a foreign private issuer. Foreign private issuers reporting in a currency other than U.S. dollars should calculate total annual gross revenues in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year.
The staff clarified that it will not object if a qualifying foreign private issuer uses the scaled disclosure provisions for EGCs in preparing filings on the basis of Form 20-F even though the JOBS Act refers only to Regulation S-K and not the corresponding items in Form 20-F.
Canadian issuers filing under MJDS may qualify as EGCs. Disclosure requirements will continue to be established under home country standards but other provisions of the JOBS Act such as those permitting test-the-waters communications and deferral of internal controls attestation pursuant to Sarbanes-Oxley Section 404(b) will be available to an MJDS filer that qualifies as an EGC.
Exchange Act Registration and Deregistration
If an issuer (other than a bank holding company) triggered a Section 12(g) registration obligation as of a fiscal year-end before April 5, 2012 but would not trigger the obligation under the amended holders-of-record threshold contained in the JOBS Act and the Section 12(g) registration has not been completed, the issuer is no longer subject to the Section 12(g) registration obligation and need not file an Exchange Act registration statement. If the issuer has filed an Exchange Act registration statement that is not yet effective, the issuer may withdraw the registration statement.
The revised registration thresholds are interpreted by the SEC staff to eliminate Section 12(g) registration requirements for bank holding companies determined as of any fiscal year-end prior to April 5, 2012. If a bank holding company has filed an Exchange Act registration statement that is not yet effective, it may be withdrawn. If a bank holding company has registered a class of equity security under Section 12(g), it may terminate the registration by filing a Form 15 if the security is held of record by less than 1,200 persons (consistent with the JOBS Act revision to Section 12(g)(4) of the Exchange Act). Unless the bank holding company is eligible to deregister under Rule 12g-4, however, which has not yet been amended to incorporate the new 1,200 holder deregistration threshold for bank holding companies, the bank holding company would have to continue to comply with Exchange Act reporting obligations for 90 days after filing a Form 15. A bank holding company deregistering now should include an explanatory note in its Form 15 disclosing that it is relying on Section 12(g)(4) of the Exchange Act, as amended by the JOBS Act.
An issuer that deregisters equity securities under Section 12(g) must consider any reporting obligations under Section 15(d) of the Exchange Act, which are suspended while a Section 12 registration is in effect but otherwise must be complied with for each fiscal year unless, for a fiscal year other than one in which a Securities Act registration statement became effective (or during which a Securities Act registration statement is updated pursuant to Section 10(a)(3) of the Securities Act), there were fewer than 300 holders of record or, for a bank holding company, as a consequence of the JOBS Act amendments, 1,200 holders of record at the beginning of such fiscal year.
In determining the number of holders of record, issuers may exclude present and former employees who received securities pursuant to an employee compensation plan in transactions that were exempt from the registration requirements of Section 5 of the Securities Act even though the safe harbor provisions the SEC has been directed to adopt for this purpose has not been promulgated.