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October 17, 2018 |
SEC Warns Public Companies on Cyber-Fraud Controls

Click for PDF On October 16, 2018, the Securities and Exchange Commission issued a report warning public companies about the importance of internal controls to prevent cyber fraud.  The report described the SEC Division of Enforcement’s investigation of multiple public companies which had collectively lost nearly $100 million in a range of cyber-scams typically involving phony emails requesting payments to vendors or corporate executives.[1] Although these types of cyber-crimes are common, the Enforcement Division notably investigated whether the failure of the companies’ internal accounting controls to prevent unauthorized payments violated the federal securities laws.  The SEC ultimately declined to pursue enforcement actions, but nonetheless issued a report cautioning public companies about the importance of devising and maintaining a system of internal accounting controls sufficient to protect company assets. While the SEC has previously addressed the need for public companies to promptly disclose cybersecurity incidents, the new report sees the agency wading into corporate controls designed to mitigate such risks.  The report encourages companies to calibrate existing internal controls, and related personnel training, to ensure they are responsive to emerging cyber threats.  The report (issued to coincide with National Cybersecurity Awareness Month) clearly intends to warn public companies that future investigations may result in enforcement action. The Report of Investigation Section 21(a) of the Securities Exchange Act of 1934 empowers the SEC to issue a public Report of Investigation where deemed appropriate.  While SEC investigations are confidential unless and until the SEC files an enforcement action alleging that an individual or entity has violated the federal securities laws, Section 21(a) reports provide a vehicle to publicize investigative findings even where no enforcement action is pursued.  Such reports are used sparingly, perhaps every few years, typically to address emerging issues where the interpretation of the federal securities laws may be uncertain.  (For instance, recent Section 21(a) reports have addressed the treatment of digital tokens as securities and the use of social media to disseminate material corporate information.) The October 16 report details the Enforcement Division’s investigations into the internal accounting controls of nine issuers, across multiple industries, that were victims of cyber-scams. The Division identified two specific types of cyber-fraud – typically referred to as business email compromises or “BECs” – that had been perpetrated.  The first involved emails from persons claiming to be unaffiliated corporate executives, typically sent to finance personnel directing them to wire large sums of money to a foreign bank account for time-sensitive deals. These were often unsophisticated operations, textbook fakes that included urgent, secret requests, unusual foreign transactions, and spelling and grammatical errors. The second type of business email compromises were harder to detect. Perpetrators hacked real vendors’ accounts and sent invoices and requests for payments that appeared to be for otherwise legitimate transactions. As a result, issuers made payments on outstanding invoices to foreign accounts controlled by impersonators rather than their real vendors, often learning of the scam only when the legitimate vendor inquired into delinquent bills. According to the SEC, both types of frauds often succeeded, at least in part, because responsible personnel failed to understand their company’s existing cybersecurity controls or to appropriately question the veracity of the emails.  The SEC explained that the frauds themselves were not sophisticated in design or in their use of technology; rather, they relied on “weaknesses in policies and procedures and human vulnerabilities that rendered the control environment ineffective.” SEC Cyber-Fraud Guidance Cybersecurity has been a high priority for the SEC dating back several years. The SEC has pursued a number of enforcement actions against registered securities firms arising out of data breaches or deficient controls.  For example, just last month the SEC brought a settled action against a broker-dealer/investment-adviser which suffered a cyber-intrusion that had allegedly compromised the personal information of thousands of customers.  The SEC alleged that the firm had failed to comply with securities regulations governing the safeguarding of customer information, including the Identity Theft Red Flags Rule.[2] The SEC has been less aggressive in pursuing cybersecurity-related actions against public companies.  However, earlier this year, the SEC brought its first enforcement action against a public company for alleged delays in its disclosure of a large-scale data breach.[3] But such enforcement actions put the SEC in the difficult position of weighing charges against companies which are themselves victims of a crime.  The SEC has thus tried to be measured in its approach to such actions, turning to speeches and public guidance rather than a large number of enforcement actions.  (Indeed, the SEC has had to make the embarrassing disclosure that its own EDGAR online filing system had been hacked and sensitive information compromised.[4]) Hence, in February 2018, the SEC issued interpretive guidance for public companies regarding the disclosure of cybersecurity risks and incidents.[5]  Among other things, the guidance counseled the timely public disclosure of material data breaches, recognizing that such disclosures need not compromise the company’s cybersecurity efforts.  The guidance further discussed the need to maintain effective disclosure controls and procedures.  However, the February guidance did not address specific controls to prevent cyber incidents in the first place. The new Report of Investigation takes the additional step of addressing not just corporate disclosures of cyber incidents, but the procedures companies are expected to maintain in order to prevent these breaches from occurring.  The SEC noted that the internal controls provisions of the federal securities laws are not new, and based its report largely on the controls set forth in Section 13(b)(2)(B) of the Exchange Act.  But the SEC emphasized that such controls must be “attuned to this kind of cyber-related fraud, as well as the critical role training plays in implementing controls that serve their purpose and protect assets in compliance with the federal securities laws.”  The report noted that the issuers under investigation had procedures in place to authorize and process payment requests, yet were still victimized, at least in part “because the responsible personnel did not sufficiently understand the company’s existing controls or did not recognize indications in the emailed instructions that those communications lacked reliability.” The SEC concluded that public companies’ “internal accounting controls may need to be reassessed in light of emerging risks, including risks arising from cyber-related frauds” and “must calibrate their internal accounting controls to the current risk environment.” Unfortunately, the vagueness of such guidance leaves the burden on companies to determine how best to address emerging risks.  Whether a company’s controls are adequate may be judged in hindsight by the Enforcement Division; not surprisingly, companies and individuals under investigation often find the staff asserting that, if the controls did not prevent the misconduct, they were by definition inadequate.  Here, the SEC took a cautious approach in issuing a Section 21(a) report highlighting the risk rather than publicly identifying and penalizing the companies which had already been victimized by these scams. However, companies and their advisors should assume that, with this warning shot across the bow, the next investigation of a similar incident may result in more serious action.  Persons responsible for designing and maintaining the company’s internal controls should consider whether improvements (such as enhanced trainings) are warranted; having now spoken on the issue, the Enforcement Division is likely to view corporate inaction as a factor in how it assesses the company’s liability for future data breaches and cyber-frauds.    [1]   SEC Press Release (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236; the underlying report may be found at www.sec.gov/litigation/investreport/34-84429.pdf.    [2]   SEC Press Release (Sept. 16, 2018), available at www.sec.gov/news/press-release/2018-213.  This enforcement action was particularly notable as the first occasion the SEC relied upon the rules requiring financial advisory firms to maintain a robust program for preventing identify theft, thus emphasizing the significance of those rules.    [3]   SEC Press Release (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71.    [4]   SEC Press Release (Oct. 2, 2017), available at www.sec.gov/news/press-release/2017-186.    [5]   SEC Press Release (Feb. 21, 2018), available at www.sec.gov/news/press-release/2018-22; the guidance itself can be found at www.sec.gov/rules/interp/2018/33-10459.pdf.  The SEC provided in-depth guidance in this release on disclosure processes and considerations related to cybersecurity risks and incidents, and complements some of the points highlighted in the Section 21A report. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Enforcement or Privacy, Cybersecurity and Consumer Protection practice groups, or the following authors: Marc J. Fagel – San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Please also feel free to contact the following practice leaders and members: Securities Enforcement Group: New York Barry R. Goldsmith – Co-Chair (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld – Co-Chair (+1 212-351-2433, mschonfeld@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Laura Kathryn O’Boyle (+1 212-351-2304, loboyle@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Washington, D.C. Richard W. Grime – Co-Chair (+1 202-955-8219, rgrime@gibsondunn.com) Stephanie L. Brooker  (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Marc J. Fagel – Co-Chair (+1 415-393-8332, mfagel@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tdavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham – Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra – Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 1, 2018 |
Federal Circuit Update (October 2018)

Click for PDF This edition of Gibson Dunn’s Federal Circuit Update offers a reminder of the upcoming American Intellectual Property Law Association (AIPLA) Annual Meeting and of Supreme Court’s upcoming review of decisions coming up from the Federal Circuit.  We also briefly recap the rules for obtaining a stay of an order pending Federal Circuit appeal.  The Update also summarizes recent Federal Circuit decisions limiting the scope of fee awards, narrowing the window for IPR petitions, clarifying standing requirements for IPR appeals, and providing for the separate patentability for engineering mammalian versus bacterial genomes. Federal Circuit News The AIPLA’s Annual Meeting will take place at the Marriott Wardman Park Hotel in Washington, D.C. from October 25–27, 2018.  Keynote speakers at this meeting will include the Honorable Raymond T. Chen and the Honorable Kara F. Stoll of the Federal Circuit, as well as Andrei Iancu of the U.S. Patent and Trademark Office. Supreme Court:  Thus far, the only case from the Federal Circuit scheduled to be heard in the OT2018 Term is Helsinn Healthcare S.A. v. Teva Phar. USA Inc.  Twenty-three amicus briefs have been filed in that case, reflecting the high interest in the case: Case Status Issue Helsinn Healthcare S.A. v. Teva Pharm. USA Inc., No. 17-1229 Petition for writ of certiorari granted on June 25, 2018 Whether the sale of a patented invention by the inventor to a third party that is obligated to keep the invention confidential constitutes prior art for determining patentability Federal Circuit Practice Update This month, we highlight the Federal Rules of Appellate Procedure and the Federal Circuit Rules of Practice governing requests to stay lower court or agency orders pending appeal.  Stay requests in appeals from a district court are governed by Federal Rule of Appellate Procedure 8 and Federal Circuit Rule 8, with stays from PTAB proceedings governed by parallel Rules 18. Proceed Below First:  FRAP 8(a)(1) and 18(a)(1) provide that “ordinarily” a party must first move in the district court or PTAB for the stay pending appeal. Stay from Federal Circuit:  Under FRAP 8(a)(2) and 18(a)(2), if the party did not move for relief below, the party must include in its motion a showing that it would have been impractical to do so.  Alternatively, if the party did make a request below, the party must explain why the district court or PTAB denied the motion or otherwise failed to provide the requested relief.  Given these requirements, a stay from the Federal Circuit should not be viewed as an alternative to moving below but rather as a second chance if prior efforts failed. Evidentiary Support Required:  FRAP 8(a)(2)(B) and 18(a)(2)(b) also require that “affidavits or other sworn statements” accompany a motion for a stay to support the need for the relief sought.  Lawyer’s argument is generally deemed insufficient. Bond May be Required:  The Federal Circuit “may condition relief on the filing of a bond or other appropriate security.”  FRAP 8(a)(2)(E) and 18(b). Formal Requirements:  Federal Circuit Rules 8 and 18 provide further procedural guidelines.  The motion and opposition to stay may not exceed 5,200 words, and the reply may not exceed 2,600 words.  A list of exhibits required for stay motions is also provided.  The Federal Circuit also mandates that, if a motion to stay remains pending below, the moving party must include an explanation as to when it filed the motion and why it is not practical to await a ruling below. Key Case Summaries (August – September 2018) In Re: Rembrandt Techs. LP Patent Litigation, No. 17-1784 (Fed. Cir. Aug. 15, 2018 (Public Opinion)):  Attorneys’ fees awarded under § 285 must have a “causal connection” to the misconduct that rendered the case exceptional. Section 285 provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”  The statute, however, does not expressly state whether, in exceptional cases, the award must be apportioned between the exceptional and nonexceptional aspects of the case.  In Rembrandt the Federal Circuit suggests that only fees related to the exceptional aspects of the case should be shifted, which may portend a trend to narrower fee awards in the future. In a multidistrict litigation, Rembrandt asserted nine patents against dozens of parties.  After the Markman hearing, the court issued claim construction, which was adverse to Rembrandt for all patents.  The parties then agreed to covenants not to sue on eight of the patents and stipulated to non-infringement for the ninth.  After the Federal Circuit affirmed the claim construction for the ninth patent, the district court considered the defendants’ motion for fees.  The court found that Rembrandt had improperly revived two of the patents, allowed spoliation of evidence, and had improperly given fact witnesses interests contingent on the case’s outcome.  The court found these facts supported that the case was exceptional and awarded $51 million in fees. The Federal Circuit (O’Malley, J.) affirmed the court’s determination that the case is exceptional based on the above findings, but vacated the award of attorneys’ fees.  The panel held that, although the amount of a fee award is a matter of the district court’s discretion, the amount must bear a “causal connection” to the misconduct that makes the case exceptional.  The panel noted that, in less complicated or sprawling litigation, a “finding of pervasive misbehavior or inequitable conduct that affects all of the patents in suit may justify an award of all of the fees incurred.”  But here the district court awarded the entirety of the fees without making findings that, for example, spoliation affected every issue in the suit.  Likewise, the court did not explain why there was misconduct with respect to patents that were not improperly revived.  The panel thus remanded for a fee determination causally linked to the misconduct. Click-to-Call Techs., LP v. Ingenio, Inc., No. 15-1242 (Fed. Cir. Aug. 16, 2018) (key holding en banc): IPR one-year time bar under § 315(b) runs from when a complaint is served even if that complaint is then voluntarily dismissed without prejudice. In 2001, Inforocket sued Ingenio (then operating under a different name) for patent infringement.  After the complaint was served, the case was dismissed.  Click-to-Call (“CTC”) later acquired the patent and sued Ingenio a second time.  Ingenio filed an IPR petition, which CTC argued was time barred because the earlier complaint had been served well more than one year prior to the petition.  The PTAB rejected CTC’s § 315(b) argument and found the claims unpatentable. The Federal Circuit (O’Malley, J.) disagreed and vacated the ruling.  In a rare procedural move, a majority of the en banc court joined the panel’s holding that § 315(b)’s time bar runs from when a petitioner is served with an infringement complaint even if the complaint is dismissed.  The court explained that § 315(b) focuses on whether a petitioner “is served with a complaint alleging infringement.”  While the court recognized precedent stating that dismissals without prejudice leave the parties “as though the action had never been brought,” the panel also noted that the language of § 315(b) offers no exceptions.  The panel and en banc majority thus held that dismissal of a complaint does not negate the time bar triggered by service of that complaint. Regents of the Univ. of Calif. v. Broad Institute, Inc., No. 17-1907 (Fed Cir. Sept. 10, 2018):  Genetic engineering methods in mammalian cells are patentably distinct from those applied to bacterial cells. The University of California (UC) and the Broad Institute (along with their respective research partners) both claimed inventorship over CRISPR (Clustered Regularly Interspaced Short Palindromic Repeats) genomic editing using the Cas9 nuclease enzyme.  CRISPR-Cas9, which enables fast and precise genomic editing, is recognized as a potentially revolutionary next-generation tool in biomedical research and therapy development. The UC researchers reduced to practice (and published) using CRISPR-Cas9 in vitro in a non-cellular environment, and their patent application did not limit claims to any particular cell type.  The Broad team later reduced to practice in eukaryotic cells (specifically, human and mouse cells), filing claims covering CRISPR-Cas9 in eukaryotic cells.  The Patent Trial and Appeal Board issued an interference.  The Broad asserted that its later application was non-obvious and patentably distinct because a person of ordinary skill in the art would not have had a reasonable expectation of success in eukaryotic cells based on the UC’s research.  The PTAB agreed, citing differences between eukaryotic (e.g., plant or animal) and prokaryotic (e.g., bacterial) systems. The Federal Circuit affirmed.  The panel (Moore, J., joined by Schall, J. and Prost, C.J.) considered evidence of the unpredictability, more complicated protein folding, and greater genomic length and complexity of eukaryotic cells, as well as other prior art prokaryotic research that did not work fully in eukaryotic systems.  Although a motivation to combine was evidenced by multiple research groups succeeding in applying the CRISPR-Cas9 in eukaryotic cells shortly after the UC published its initial research, this did not necessarily indicate an expectation of success.  The panel thus found “substantial evidence” that “applying similar prokaryotic systems in eukaryotes was unpredictable” and that methods in eukaryotic cells were patentably distinct. While the panel cautioned that it was not “ruling on the validity of either set of claims,” its decision provides precedent that foundational research in bacterial systems and the same method applied to eukaryotic cells may be patentably distinct.  CRISPR-Cas9 and other biotechnologies stemming from prokaryotic research may now be subject to multiple patent estates, potentially subjecting industry participants to overlapping licensing obligations for the same technology.  From the perspective of foundational noneukaryotic-based research, such the UC’s work here, this decision may suggest future § 112 challenges for claims extending to eukaryotic systems or lead to narrower claiming to exclude such scope. JTEKT Corp. v. GKN Automotive, Ltd., No. 17-1828 (Fed. Cir. Aug. 3, 2018): Status as a competitor with potentially infringing product in development is insufficient to confer standing to appeal an adverse IPR decision Under § 311(a), any person or entity may petition to institute an IPR—there is no requirement of Article III standing.  But to appeal to the Federal Circuit, the petitioner must satisfy Article III, establishing an injury that is both concrete and particularized and not conjectural or hypothetical. GKN’s patent recites claims to vehicle drivetrains.  JTEKT was developing a competing drivetrain and initiated an IPR against GKN’s patent.  JTEKT sought to appeal the Board’s adverse decisions on several claims, but the Federal Circuit (Dyk, J., joined by O’Malley, J., and Prost, C.J.) held that the appellant lacked standing.  As the panel noted that, “[t]he fact that JTEKT has no product on the market at the present time does not preclude Article III standing.”  But, as the party seeking review, JTEKT had the burden to show the requisite injury.  The Federal Circuit noted that JTEKT was “currently validating its design” which could “continue to evolve and may change” before being finalized.  As such, the panel held that JTEKT failed to “establish that its planned product would create a substantial risk of infringing claims.” E.I. DuPont de Nemours & Co. v. Synvina C.V., No. 17-1977 (Fed. Cir. Sept. 17, 2018): Operating a factory capable of infringing a method of manufacturing is sufficient to confer standing to appeal an adverse IPR decision. DuPont petitioned for IPR of its competitor’s (Synvina’s) patent to methods of manufacturing FDCA.  On appeal, Synvina challenged DuPont’s standing to maintain the appeal, arguing that DuPont had not suffered an actual or imminent injury in fact.  The Federal Circuit (Lourie, J., joined by O’Malley, J. and Chen, J.) rejected the challenge.  The court held that, on appeal from an adverse IPR decision, “the petitioner must generally show a controversy of sufficient immediacy and reality to warrant the requested judicial relief.”  The court found this standard met because DuPont—a competitor of the patent owner—operates a plant capable of infringing the challenged patent, with the claimed reaction conditions.  Thus, “DuPont is engaged or will likely engage in an activity that would give rise to a possible infringement suit.”  Taken with JTEKT above, this illustrates the fact dependent and uncertain nature of the standing inquiry. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com) Raymond A. LaMagna – Los Angeles (+1 213-229-7101, rlamagna@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212-351-4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202-887-3669, nsaharsky@gibsondunn.com) Intellectual Property Group: Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 27, 2018 |
Supreme Court Round-Up: A Summary of the Court’s Opinions, Cases to Be Argued This Term, and Other Developments

As the Supreme Court begins its 2018 Term next week, Gibson Dunn’s Supreme Court Round-Up provides summaries of the questions presented in the cases that the Court will hear this Term as well as other key developments on the Court’s docket.  Gibson Dunn presented 3 arguments during the 2017 Term, securing wins for clients in all 3 cases, and was involved in 11 additional cases as counsel for amici curiae.  To date, the Court has granted certiorari in 42 cases for the 2018 Term, and Gibson Dunn is counsel for the petitioner in 2 of those cases. Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions.  The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions.  The Round-Up provides a concise, substantive analysis of the Court’s actions.  Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next.  The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions. To view the Round-Up, click here. Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases.  During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 17 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the class action, intellectual property, separation of powers, and First Amendment fields.  Moreover, while the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 24 certiorari petitions since 2006. *   *   *  * Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group. Theodore B. Olson (+1 202.955.8500, tolson@gibsondunn.com) Amir C. Tayrani (+1 202.887.3692, atayrani@gibsondunn.com) Brandon L. Boxler (+1 202.955.8575, bboxler@gibsondunn.com) Andrew G.I. Kilberg (+1 202.887.3759, akilberg@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 31, 2018 |
Federal Circuit Update – Intellectual Property and Appellate Practice Groups

Click for PDF This July 2018 edition of Gibson Dunn’s Federal Circuit Update discusses the recent Federal Circuit Bar Association Bench and Bar Conference, provides a summary of the pending Helsinn Healthcare case before the Supreme Court regarding the on-sale bar, and briefly summarizes the joint appendix procedure at the Federal Circuit.  This Update also provides a summary of the recent en banc case involving attorneys’ fees for litigation involving the PTO.  Also included are summaries of recent decisions regarding means-plus-function terms, the entire market value rule, the interplay between software patents and section 101, and tribal sovereign immunity before the Patent Trial & Appeal Board. Federal Circuit News The annual Federal Circuit Bench and Bar Conference was held this year in Coronado, CA, from June 20 to June 23, 2018.  Nicole Saharsky, co-chair of Gibson Dunn’s Appellate and Constitutional Law practice, presented on the Supreme Court Term in Review panel, and Kate Dominguez, a partner in the firm’s New York office, participated in the conference’s first-ever moot oral argument. Supreme Court.  The Supreme Court decided three cases from the Federal Circuit in the recently concluded OT2017 Term (Oil States v. Greene’s Energy; SAS v. Iancu; WesternGeco v. ION Geophysical).  The Court also granted certiorari recently in a new case to be heard next Term: Case Status Issue Helsinn Healthcare S.A. v. Teva Pharm. USA Inc., No. 17-1229 Petition granted on June 25, 2018 Whether the sale of a patented invention by the inventor to a third party that is obligated to keep the invention confidential constitutes prior art for determining patentability Recent En Banc Federal Circuit Cases NantKwest, Inc. v. Matal, No. 16-1794 (Fed. Cir.) (July 27, 2018) (en banc):  The PTO cannot recover attorneys’ fees in litigation pursuant to 35 U.S.C. § 145. After the PTAB affirmed the rejection of NantKwest’s patent application, NantKwest appealed to the district court under Section 145.  The PTO prevailed and moved to recover both its attorneys’ fees and expert fees pursuant to section 145, which states that “[a]ll the expenses of the proceedings shall be paid by the applicant.”  Applying this statutory provision, the district court granted the expert fees, but rejected the request for attorneys’ fees.  On appeal, a Federal Circuit panel (Prost, CJ) reversed the award of attorneys’ fees, holding that the “[a]ll expenses” provision of section 145 authorizes attorneys’ fees.  Judge Stoll dissented.  The Federal Circuit sua sponte ordered that the panel decision be vacated and that the case be reheard en banc. The en banc majority (Stoll, J.) noted that the American Rule—where each litigant pays its own attorneys’ fees—is a “bedrock principle” of U.S. jurisprudence and prohibits courts from shifting attorneys’ fees from one party to the other absent a “specific and explicit directive from Congress.”  The en banc majority held that the phrase “all the expenses of the proceedings” falls short of this “stringent standard,” and thus affirmed the district court’s denial of the request for attorneys’ fees.  Chief Judge Prost dissented, joined by Judges Dyk, Reyna, and Hughes. Federal Circuit Practice Update This month, we are highlighting the difference between the Federal Rules of Appellate Procedure and the Federal Circuit Rules of Practice as relating to the content of the appendix to the briefs.  As the Federal Circuit explains in its practice notes, an appendix prepared without careful attention to Federal Circuit Rule 30 may be rejected and could result in dismissal. Contents:  In addition to the documents required by FRAP 30(a)(1)(A)-(C), Federal Circuit Rule 30(a)(2) requires that each appendix include: (1) the entire docket sheet from the proceedings below; (2) the judge’s charge to the jury, the jury’s verdict, and the jury’s responses to questions; (3) the patent-in-suit in its entirety; and (4) any nonprecedential opinion or order cited in the briefs.  Rule 30(a)(2) further explains that parties should not include other parts of the record unless they are “actually referenced in the briefs,” and the briefs should not contain “indiscriminate referencing” to blocks of pages.  To the extent the parties wish to include briefs and memoranda from the trial court in the appendix, the parties must obtain leave of the court to file the briefs or memoranda in their entirety; otherwise, the parties should include only excerpts of the documents cited in the briefs. Determination of Contents:  The Federal Circuit Rules do not follow FRAP 30(b)’s instructions for determining the contents of the appendix, but the Rules lay out a similar process.  In the absence of an agreement on the contents of the appendix, the appellant must serve on the appellee a designation of materials for the appendix within 14 days after docketing of the appeal from a court or the service of the certified list or index in an appeal from an agency.  The appellee then has 14 days to provide the appellant with a counter-designation that identifies additional parts to include.  The appellant then has 14 days to serve on all parties a table that designates the page numbers for the appendix.  The parties can agree to an extension of these time limits without leave of the court as long as it does not require an extension of the time required for filing the appellant’s brief. Format of the Appendix:  FRAP 30(d) governs the arrangement of the appendix except that the appellant must place the judgment or order from which it appeals, plus any opinion, memorandum, or findings and conclusions supporting it, as the first documents. Timing:  The Federal Circuit Rules disregard many of the FRAP 30(c) provisions relating to deferred appendices.  The Rules explain that the appellant must serve and file an appendix within seven days of the filing of the last reply brief.  If the appellant does not file a reply brief, the appellant must file the appendix within the time period for filing the reply brief. Key Case Summaries (June – July 2018) ZeroClick, LLC v. Apple Inc., No. 17-1267 (Fed. Cir. June 1, 2018):  Claim limitations without the word “means” require intrinsic or extrinsic evidence to support a finding that they are governed by § 112, ¶ 6. ZeroClick asserted patent infringement claims for patents related to modifications to a graphical user interface that allow the interface to be controlled using a pre-defined pointer or touch movements instead of a mouse.  The district court found that two claim limitations recite means-plus-function limitations:  (1) “program that can operate the movement of the pointer” and (2) “user interface code being configured to detect one or more locations touched by a movement of the user’s finger on the screen without requiring the exertion of pressure and determine therefrom a selected operation.”  After determining that these limitations were subject to § 112, ¶ 6, the district court found that the claims were invalid because the specifications do not disclose sufficient structure. The Federal Circuit (Hughes, J.) vacated the district court’s findings, explaining that, because the two limitations did not include the word “means,” the presumption is that § 112, ¶ 6 does not apply and the presumption had not been rebutted.  The court explained that the determination as to whether § 112, ¶ 6 applies must be made under the traditional claim construction principles, on an element-by-element basis, and in light of the intrinsic and extrinsic evidence.  The Federal Circuit reasoned that the district court improperly treated “program” and “user interface code” as nonce words that could substitute for “means” and presumptively bring the limitations within the ambit of § 112, ¶ 6.  The court therefore vacated the court’s invalidity finding and remanded for further proceedings. Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., Nos. 2016-2691, -1875 (Fed. Cir. July 3, 2018):  The entire market value rule for damages calculations is a narrow exception that a patentee can invoke only if it shows that the patented feature alone motivated consumers to buy the accused products. Power Integrations sued Fairchild for infringement of two patents.  In two separate trials, the first jury found that Fairchild infringed various claims of the asserted patents, and a second jury awarded damages of $140 million based on expert testimony from Power Integrations that relied solely on applying the entire market value rule.  The district court denied Fairchild’s post-trial motions, and Fairchild appealed. The Federal Circuit (Dyk, J.) affirmed the jury’s infringement finding but vacated and remanded the damages award.  The court reiterated that a patentee damages calculations must include apportionment so that royalties cover only the value that the infringing features contribute to the value of the accused product.  The court explained that the entire market value rule is “a demanding alternative to our general rule of apportionment,” and that it is appropriate “only when the patented feature is the sole driver of customer demand or substantially creates the value of the component parts.”  When the accused product “contains multiple valuable features, it is not enough to merely show that the patented feature is viewed as essential, that a product would not be commercially viable without the patented feature, or that consumers would not purchase the product without the patented feature.”  Instead, “the patentee must prove that those other features did not influence purchasing decisions.”  Because the patentee had failed to meet its burden showing that the patented feature “alone motivated consumers to buy the accused products,” the patentee could not invoke the entire market value rule.  The court accordingly vacated the damages award and remanded for a new damages trial. Interval Licensing LLC v. AOL, Inc., Nos. 2016-2502, -2505, -2506, -2507 (Fed. Cir. July 20, 2018):  Application of section 101 to software patents. After remand from an initial appeal to the Federal Circuit addressing claim construction issues, defendants moved for judgment on the pleadings, arguing that the claims were ineligible under 35 U.S.C. § 101.  The district court concluded that the claims were directed to the abstract idea and contained no inventive concept because the elements of the claims were “purely conventional” and did nothing more than apply the abstract idea in the environment of networked computers without any explanation as to how the claim elements solved technical issues. The Federal Circuit (Chen, J.) affirmed.  The majority explained that computer software inventions, due to their “intangible nature,” “can be particularly difficult to assess under the abstract idea exception.”  Although the court has found some software-based claims eligible for patentability, other claims “failed to pass section 101 muster” because they did not recite any “inventive technology for improving computers as tools” or “because the elements of the asserted invention were so result-based that they amounted to patenting the patent-ineligible concept itself.”  The majority concluded that the claims in this case were abstract because they were directed to “broad, result-oriented” terms that simply demanded “the production of a desired result” without “a solution for producing that result”; i.e., the claims never addressed how to reach the claimed result. Judge Plager concurred with the court’s opinion based on the “current state of the law” but wrote separately to “highlight the number of unsettled matters as well as the fundamental problems that inhere in this formulation of ‘abstract ideas.'”  In addressing the “almost universal criticism” of the application of “abstract idea” jurisprudence, he joined with Judge Lourie’s concurrence from Berkheimer v. HP Inc. in encouraging Congress to clarify § 101 law, and he also encouraged district courts to consider withholding judgment on § 101 motions until after addressing §§ 102, 103, and 112 defenses. Saint Regis Mohawk Tribe v. Mylan Pharm. Inc., Nos. 2018-1638, -1639, -1640, -1641, -1642, -1643 (Fed. Cir. July 20, 2018):  Tribal immunity does not apply in IPR proceedings. Mylan petitioned the Board to institute IPR proceedings on various patents owned by Allergan, Inc.  While the IPR was pending, Allergan transferred title of the patents to Saint Regis Mohawk Tribe, which in turn asserted sovereign immunity.  The Board denied the Tribe’s motion to terminate on the basis of sovereign immunity and Allergan’s related motion to withdraw from the proceedings.  The Tribe and Allergan appealed. The Federal Circuit (Moore, J.) held that tribal immunity does not apply in IPR proceedings.  The court explained that Indian tribes possess “inherent sovereign immunity” but that this immunity does not extend to actions brought by the federal government, including where the federal government, acting through an agency, engaged in an investigative action or pursued adjudicatory agency action.  The court concluded that IPR proceedings are hybrid proceedings, with elements of both judicial proceedings and specialized agency proceedings, but that they are more akin to specialized agency proceedings because the Director has full discretion whether to institute review of a petition, the Board can choose to continue review even if the petitioner chooses not to participate, and PTO procedures do not mirror the Federal Rules of Civil Procedure.  Because the court concluded that IPR proceedings are more akin to specialized agency proceedings, tribal sovereign immunity does not apply. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com) Blair A. Silver – Washington, D.C. (+1 202-955-8690, bsilver@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212-351-4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202-887-3669, nsaharsky@gibsondunn.com) Intellectual Property Group: Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 18, 2018 |
Second Quarter 2018 Update on Class Actions

Click for PDF This update provides an overview and summary of significant class action developments during the second quarter of 2018 (April through June), as well as a brief look ahead to some of the key class action issues anticipated later this year. Part I discusses the U.S. Supreme Court’s decisions in two key cases, Epic Systems Corp. v. Lewis, and China Agritech, Inc. v. Resh. Part II looks forward to the Supreme Court’s October 2018 Term and previews a new class action case on the Court’s docket, Nutraceutical Corp. v. Lambert. Part III discusses two recent circuit-level cases involving class action settlements. I.     The U.S. Supreme Court Affirms Validity of Arbitration Clauses in Employment Agreements, and Limits American Pipe Tolling to Individual Suits The Supreme Court issued two important opinions in the past quarter of significant relevance to class action defendants. First, in the consolidated cases of Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA, Inc., 138 S. Ct. 1612 (2018), the Supreme Court held that arbitration agreements in which an employee waives his right to bring a claim against an employer on a class or collective basis are enforceable under the Federal Arbitration Act (“FAA”) and do not violate the National Labor Relations Act (“NLRA”).  The Court’s ruling resolved a longstanding circuit split on this issue. In a 5-4 decision written by Justice Gorsuch, the Court held that “Congress has instructed in the Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Arbitration Act’s saving clause nor the NLRA suggests otherwise.”  138 S. Ct. at 1616, 1624–27.  The Court rejected the employees’ argument that the FAA’s savings clause—which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract”—precludes enforcement of their arbitration agreements.  Because the employees’ argument was not applicable to “any” contract, and instead singled out “individualized arbitration proceedings” as invalid, the Court explained that the savings clause was not implicated, and there was no “generally applicable contract defense[]” to overcome the FAA’s presumption of enforceability.  Id. at 1622–23. The Court also rejected the argument that enforcing an arbitration agreement’s class action waiver would violate employees’ right to engage in collective action under the NLRA.  It disagreed with the suggestion that the later-passed NLRA had impliedly repealed portions of the FAA, emphasizing that “repeals by implication are ‘disfavored,’” and “Congress ‘does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions.’”  Id. at 1624, 1626–27.  Section 7 of the NLRA, moreover, “focuses on the right to organize unions and bargain collectively,” “does not express approval or disapproval of arbitration,” and “does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly.”  Id. at 1624. Finally, the Court declined to apply Chevron deference to the NLRB’s contrary conclusions, noting that Congress had not given the NLRB any authority to interpret the FAA, a statute that the agency does not administer.  The Court also observed that although Chevron deference is premised on the notion that “‘policy choices’ should be left to the Executive Branch,” “here the Executive seems to be of two minds, for [the Court] received competing briefs from the [NLRB] and the United States (through the Solicitor General),” the latter of which had supported the employers.  Id. at 1630. Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, dissented.  They expressed concern that “underenforcement of federal and state” employment statutes will result from the majority’s decision, because employees will be deterred by the relative expense and “slim relief obtainable” in individual suits.  Id. at 1637, 1646–48 (Ginsburg, J., dissenting).  In response, the majority observed that “the dissent retreats to policy arguments,” and underscored that “[t]he respective merits of class actions and private arbitration as means of enforcing the law are questions constitutionally entrusted not to the courts to decide but to the policymakers in the political branches where those questions remain hotly contested.”  Id. at 1632. Epic Systems confirms that courts will continue to enforce agreements between employers and employees to arbitrate their disputes on an individual—rather than class or collective—basis, and continues the Supreme Court’s trend of enforcing the FAA’s strong policy favoring arbitration. In the second important class action case of the Term, China Agritech, Inc. v. Resh, 138 S. Ct. 1800, the Court declined to extend the rule of equitable tolling announced in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), to the filing of successive class actions. Under American Pipe, the timely filing of a class action tolls the applicable statute of limitations for “all persons encompassed by the class complaint” to intervene in the action or to file individual suits after the denial of class certification.  China Agritech, 138 S. Ct. at 1804–05.  The Ninth Circuit had extended that ruling to the successive filing of class actions, but the Supreme Court reversed, explaining that the concerns underlying American Pipe simply do not apply in the class action context.  The rule announced in American Pipe serves to promote “the efficiency and economy of litigation” embodied in Rule 23, on the theory that plaintiffs “reasonably rel[y] on the class representative . . . to protect their interests in their individual claims,” and without equitable tolling, potential class members “would be induced to file protective motions to intervene” (id. at 1806), or “a needless multiplicity of [separate] actions” to protect their interests in the event certification is denied (id. at 1810). Extending American Pipe tolling to successive class actions, however, “would allow the statute of limitations to be extended time and again” and allow plaintiffs “limitless bites at the apple.”  Id. at 1808–09.  The Court noted that in those circuits that had already declined to extend American Pipe to successive class actions, there had not been “a disproportionate number of duplicative, protective class action filings.”  Id. at 1810.  The Court also reasoned that “efficiency favors early assertion of competing class representative claims” (id. at 1807), and early filing “may aid a district court in determining, early on, whether class treatment is warranted” (id. at 1811). All of the justices joined the Court’s opinion in China Agritech except for Justice Sotomayor, who wrote an opinion concurring in the judgment but expressing the view that the Court’s holding should be limited to cases governed by the Private Securities Litigation Reform Act.  Id. at 1811–15 (Sotomayor, J., concurring in the judgment). China Agritech emphasizes the importance of timely filing putative class actions and reaffirms the class action defendant’s reasonable expectation that class claims will not continue to emerge after the statute of limitations period has expired. II.     The U.S. Supreme Court Is Poised to Weigh In on the Timing of Rule 23(f) Petitions, Arbitration Issues, and the Validity of Cy Pres-Only Settlements The Supreme Court’s October 2018 Term promises to be another active one in the class action space, particularly on a number of bread-and-butter issues relating to class action procedure, settlement, and arbitration. On June 25, 2018, the Supreme Court granted certiorari in Nutraceutical Corp. v. Lambert (No. 17‑1094) to resolve whether equitable exceptions apply to non-jurisdictional claims-processing rules, and specifically, to decide if and when an appellate court may equitably toll the time to file a petition for permission to appeal the grant or denial of class certification under Federal Rule of Civil Procedure 23(f).  Ordinarily, a Rule 23(f) petition must be filed within 14 days following the grant or denial of class certification or decertification, but the Ninth Circuit held that, under the particular circumstances of the case, the filing of a motion for reconsideration 20 days after the decertification order equitably tolled the 14-day deadline.  The Ninth Circuit acknowledged, however, that its ruling conflicted with the other circuit courts that have considered the issue.  (We covered the Ninth Circuit’s decision in Lambert in our third quarter 2017 update.) As noted in our first quarter 2018 update, the Supreme Court is also expected to resolve a series of other issues of interest to class action practitioners in the coming Term.  In New Prime Inc. v. Oliveira (No. 17‑340), the Court will decide whether (a) a dispute regarding the applicability of the FAA must be resolved by an arbitrator under a valid delegation clause, and (b) an exemption for contracts of employment for transportation workers in Section 1 of the FAA applies to independent contractors.  Briefing is currently underway.  (Gibson Dunn represents the petitioner, New Prime, Inc.)  In Lamps Plus, Inc. v. Varela (No. 17‑988), the Court will decide whether the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in such agreements.  And in Frank v. Gaos (No. 17-961), the Court will consider the validity of cy pres-only settlements that provide no direct compensation to class members.  Opening briefs were filed in both cases on July 9, 2018. III.     The Seventh and Eighth Circuits Issue Notable Class Action Settlement Decisions The federal courts of appeals continue to closely scrutinize class action settlements, and this past quarter saw the issuance of two significant decisions (which both coincidentally involved Target Corp.). In Pearson v. Target Corp., No. 17‑2275,  — F.3d —, 2018 WL 3117848 (7th Cir. June 26, 2018), the Seventh Circuit examined a common tactic employed by professional objectors—filing baseless appeals from a settlement approval as a form of “blackmail,” hoping that the parties will pay them to dismiss the appeals so that the settlement can become effective. In 2014, the parties in Pearson had agreed to a classwide settlement in response to allegations that the defendants had “violated consumer protection laws by making false claims about the efficacy of [a dietary] supplement.”  Id. at *1.  Ted Frank, a frequent objector to class action settlements, objected to the awards to class counsel in the district court, and appealed the settlement approval order to the Seventh Circuit.  The Seventh Circuit agreed with Frank’s objections and reversed the district court, holding that “the settlement provided outsized benefits to class counsel.”  Id. On remand, the parties reached a new settlement, which the district court approved.  It then dismissed the case “‘without prejudice’ so as to allow the Court to supervise the implementation and administration of the Settlement.”  Id.  Three different class members then objected and filed appeals.  Id. at *2.  All three subsequently dismissed their appeals, and the district court entered a new order dismissing the case with prejudice.  Id.  Frank then moved to intervene and disgorge any side settlements made with the other three objectors.  His concern was “‘objector blackmail’” in which an “absent class member objects to a settlement with no intention of improving the settlement for the class,” “appeals, and pockets a side payment in exchange for voluntarily dismissing the appeal.”  Id. at *1.  The district court refused to hear the motion, reasoning that the dismissal with prejudice had divested the court of jurisdiction.  Frank then moved under Federal Rule of Civil Procedure 60(b) to vacate the dismissal with prejudice and restore the court’s jurisdiction over the settlement.  Id. at *2.  The district court denied that motion as well, which led to Frank’s second appeal and the subject of this decision.  Id. The Seventh Circuit again ruled in Frank’s favor.  Writing for a three-judge panel, Judge Wood explained that Frank could bring a Rule 60(b) motion because he had objected the settlement and thus qualified as a “party.”  Id.  On the merits, the court held that the district court should have granted the Rule 60(b) motion because (1) the objectors voluntarily dismissed their appeals before briefing raised concerns that they had done so at the expense of the class; (2) the class was comprised of ordinary consumers rather than sophisticated financial institutions (and thus needed greater protection from the court); (3) Frank sought only to effectuate the limited ancillary jurisdiction contemplated by the settlement itself, so the interest in finality was less compelling that it would be had Frank sought to unwind the settlement and re-litigate merits issues; and (4) Rule 60(b)(6) exists as an “‘equitable’” “safety valve” for precisely these types of situations.  Id. at *3-4. This decision continues the trend among the federal courts of appeals to carefully scrutinize class settlements, particularly when they involve “ordinary consumers.”  And, as the Seventh Circuit recognized, it also highlights the importance of “an amendment of Rule 23”—Rule 23(e)(5)(B)—which is “designed to prevent this problem from recurring.”  Id. at *5.  That proposed rule would require district court approval, after a hearing, of any “‘payment or other consideration’ provided for ‘forgoing or withdrawing an objection’ or ‘forgoing, dismissing, or abandoning an appeal.’”  Id.  If Congress allows this new rule to go into effect, observers will be keen to see whether it “solve[s] the problem” of “objector blackmail,” or whether objectors will find new, creative ways to “leverage[]” the process “for a purely personal gain.”  Id. at *1, *5. The second case, In re Target Corporation Customer Data Security Breach Litigation, 892 F.3d 968 (8th Cir. 2018), also involved the re-examination of a class action settlement, at the urging of an objector, after the Eighth Circuit had rejected an earlier settlement. With the earlier settlement, the Eighth Circuit concluded the district court had “failed to conduct the appropriate pre-certification analysis.”  Id. at 972.  On the second go-around, however, the Eighth Circuit affirmed the judgment of the district court, reasoning that the court had not “fundamentally misunderstood the structure of the settlement agreement” (id. at 973), nor was separate legal counsel required to protect the interests of the subclass of plaintiffs who had yet to suffer any material loss from the data breach that formed the basis for the suit (id. at 976).  On the latter point, the Eighth Circuit maintained that the interests of those class members with “documented losses” and those without losses were “more congruent than disparate” because it was “hypothetically possible that a member” of either subclass could “suffer some future injury.”  Id. at 975-76. The Eighth Circuit also affirmed the district court’s approval of the settlement.  Even though it noted the district court’s analysis of the $6.75 million fee award may have been “perfunctory,” it held the court’s reasoning was sufficient and that the lodestar multiplier applied was “well within amounts [the court had] deemed reasonable in the past.”  Id. at 977.  The court also held that the district court was within its discretion to approve the settlement despite the objectors’ concerns about what arguably constituted a “clear-sailing” provision requiring defendants not to oppose the attorney’s fees request, and a “kicker” provision that permitted unused settlement funds to be returned to defendants rather than distributed to the class.  Id. at 979. The following Gibson Dunn lawyers prepared this client update: Christopher Chorba, Theane Evangelis, Kahn A. Scolnick, Bradley J. Hamburger, Brandon J. Stoker, Jeremy S. Smith, Lauren M. Blas, Michael Eggenberger, and Gatsby Miller. Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
Kennedy, Kavanaugh and the OT 2017 Term

Orange County partner Blaine Evanson is the author of “Kennedy, Kavanaugh and the OT 2017 Term” [PDF] published in The Daily Journal on July 12, 2018.

July 10, 2018 |
President Trump Nominates Judge Brett Kavanaugh To Supreme Court

Click for PDF On July 9, 2018, President Trump nominated Judge Brett Kavanaugh of the United States Court of Appeals for the District of Columbia Circuit to fill seat on the Supreme Court of the United States being vacated by Justice Anthony Kennedy. To assess Judge Kavanaugh’s potential impact on the Supreme Court, should the Senate confirm his nomination, we have started reviewing his written opinions and other legal writings.  This Memorandum briefly summarizes Judge Kavanaugh’s noteworthy opinions in several key areas of law, including (1) administrative law, (2) antitrust, (3) arbitration, (4) immigration, (5) labor and employment, (6) religious liberty, and (7) tax. Based on Judge Kavanaugh’s prior opinions, President Trump appears to have fulfilled his campaign promise to “appoint judges very much in the mold of Justice Scalia.”  Like Justice Scalia, Judge Kavanaugh often decides cases by focusing on the text of the relevant statute or constitutional provision, without resorting to legislative history.  Judge Kavanaugh also frequently resolves constitutional cases by examining the document’s original meaning in light of history and tradition. Judge Kavanaugh, who is 53 years old, is admired on both sides of the political aisle.  He is credited with a keen legal mind and praised for writing opinions that are clear and concise.  Judge Kavanaugh earned his law degree in 1990 from Yale Law School.  Following law school, he clerked for Judge Walter King Stapleton on the Third Circuit and Judge Alex Kozinski on the Ninth Circuit.  He then completed a one-year position with the United States Solicitor General’s Office (later called a Bristow Fellowship) before clerking for Justice Kennedy.  Judge Kavanaugh joined the Office of the Independent Counsel under Kenneth Starr and later went into private practice.  In the George W. Bush administration, Judge Kavanaugh served as Assistant to the President and Staff Secretary to the President.  President George W. Bush nominated him to the D.C. Circuit in 2006.  The Senate confirmed his nomination to that seat by a vote of 57-36. Gibson Dunn will continue to review his jurisprudence and monitor the confirmation proceedings, and provide periodic updates. Administrative Law In two significant decisions addressing the process for appointment of executive branch officials, and the President’s power to remove them, Judge Kavanaugh authored opinions that construed the Constitution’s separation of powers in the context of the modern administrative state. PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018) (en banc).  Judge Kavanaugh dissented from the en banc opinion holding that the statute providing that the Consumer Financial Protection Bureau’s director could be removed by the President only for cause was constitutional.  According to Judge Kavanaugh, vesting authority in a single director removable only for cause violates historical precedent, threatens individual liberty, and diminishes the President’s Article II authority over the Executive Branch. Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 537 F.3d 667 (D.C. Cir. 2008), aff’d in part, rev’d in part and remanded, 561 U.S. 477 (2010).  Judge Kavanaugh dissented from a panel opinion holding that the Public Company Accounting Oversight Board did not violate the Appointments Clause or separation of powers principles.  He reasoned that the PCAOB violated separation of powers because PCAOB members were only removable for cause by another independent agency, the Securities and Exchange Commission, and not by the President or his alter ego, such as the head of an executive agency.  The Supreme Court later reversed the panel decision and largely endorsed Judge Kavanaugh’s reasoning. * * * An important question in administrative law is the continued vitality of Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), under which courts examine agency interpretations of statutes in two steps, such that if the statute itself unambiguously forecloses the agency’s interpretation, it is invalid, but if the statute is ambiguous, the agency’s interpretation is upheld if merely reasonable.  Chevron deference, Judge Kavanaugh has explained, is the rule that “in cases of textual ambiguity, [courts] defer to an executive agency’s reasonable interpretation of a statute.”  Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118, 2135 (2016) (reviewing Second Circuit Judge Katzmann’s book on statutory interpretation). One potential limitation on the reach of Chevron deference is the “major rules” doctrine, and Judge Kavanaugh’s dissent from denial of rehearing en banc as to the D.C. Circuit’s upholding of the FCC’s 2015 net neutrality rule indicates that he takes that limitation seriously.  See U.S. Telecom Ass’n v. FCC, 855 F.3d 381, 417-35 (D.C. Cir. 2017).  The major rules doctrine requires Congress to speak clearly when it authorizes an agency rule that is of “vast ‘economic and political significance,’” and Judge Kavanaugh has explained that it “helps preserve the separation of powers and operates as a vital check on expansive and aggressive assertions of executive authority.”  And, in his view, “while the Chevron doctrine allows an agency to rely on statutory ambiguity to issue ordinary rules, the major rules doctrine prevents an agency from relying on statutory ambiguity to issue major rules,” although he acknowledged that “determining whether a rule constitutes a major rule sometimes has a bit of a ‘know it when you see it’ quality.”  Id. at 419, 423. That said, Judge Kavanaugh’s day job for 12 years has required application of Chevron as it currently exists, and in doing so, he has often written for the D.C. Circuit in reining in exercises of authority by agencies—perhaps most prominently, the EPA.  For example, in Mexichem Fluor, Inc. v. EPA, 866 F.3d 451 (D. C. Cir. 2017), writing for the divided panel, he concluded that a Clean Air Act provision which requires manufacturers to replace ozone-depleting substances with safe substitutes does not grant EPA authority to require replacement of hydroflourocarbons, a set of compounds which are not ozone-depleting substances.  Focusing on the plain statutory text at the first of the two steps under Chevron, he concluded that “EPA’s current reading stretches the word ‘replace’ beyond its ordinary meaning.”  He nevertheless pointed to other sources of statutory authority for regulating HFCs. In two prominent cases, the Supreme Court relied on and agreed with Judge Kavanaugh’s opinions, which had differed from his colleagues’ upholding of EPA actions: Coalition for Responsible Regulation, Inc. v. EPA, 684 F.3d 102 (D.C. Cir. 2012) (per curiam), reh’g en banc denied, No. 09–1322, 2012 WL 6621785 (Dec. 20, 2012), rev’d in part by Utility Air Regulatory Group v. EPA, 134 S. Ct. 2427 (2014).  The D.C. Circuit upheld challenged EPA greenhouse-gas actions, and Judge Kavanaugh urged rehearing en banc, disagreeing with EPA’s construction of the term “air pollutant.”  The Supreme Court, in a 5-4 opinion by Justice Scalia, rejected EPA’s construction, quoting an admonition from Judge Kavanaugh’s opinion:  “Agencies are not free to ‘adopt . . . unreasonable interpretations of statutory provisions and then edit other statutory provisions to mitigate the unreasonableness.’” White Stallion Energy Center, LLC v. EPA, 748 F.3d 1222 (D.C. Cir. 2014), rev’d by Michigan v. EPA, 135 S. Ct. 2699 (2015).  After Judge Kavanaugh dissented in part from the D.C. Circuit panel’s upholding of an EPA power-plant emission rule, the Supreme Court reversed in a 5-4 opinion by Justice Scalia.  The Court quoted Judge Kavanaugh’s opinion for the principle that, where Congress instructed EPA to add power plants to the program only if EPA found regulation “appropriate and necessary,” the term “appropriate” was “broad and all-encompassing” enough to include consideration of cost.  “Read naturally in the present context,” the Court explained, “the phrase ‘appropriate and necessary’ requires at least some attention to cost.” In another case, however, the Supreme Court overturned Judge Kavanaugh’s conclusion and instead deferred to the EPA’s views under Chevron: EME Homer City Generation, L.P. v. EPA, 696 F.3d 7 (D.C. Cir. 2012), rev’d and remanded by EPA v. EME Homer City Generation, L.P., 134 S. Ct. 1584 (2014), on remand, 795 F.3d 118 (D.C. Cir. 2015).  Judge Kavanaugh’s opinion for a divided panel entirely set aside the Transport Rule, also known as the Cross–State Air Pollution Rule, under the Clean Air Act, but the Supreme Court, in a 6-2 opinion by Justice Ginsburg (Justice Alito was recused), disagreed.  The Supreme Court concluded that the Rule was not invalid “on its face,” but allowed certain “particularized, as-applied challenge[s]” to proceed.  On remand, Judge Kavanaugh’s opinion for a unanimous opinion remanded actions as to some states to the EPA for reconsideration (without vacating them). To be sure, Judge Kavanaugh has written unanimous and divided panel opinions upholding EPA rules against private challengers.  See, e.g., Am. Trucking Ass’s, Inc. v. EPA, 600 F.3d 624 (D.C. Cir. 2010) (upholding, over a dissent, EPA approval of California’s rule regulating emissions from transportation refrigeration units in trucks); Energy Future Coalition v. EPA, 793 F.3d 141 (D.C. Cir. 2015) (upholding unanimously EPA regulation requiring test biofuels be commercially available against biofuel producer challenge). And Judge Kavanaugh’s rejection of EPA’s efforts to interpret the statutes it administers have not only favored regulated entities:  In NRDC v. EPA, 749 F.3d 1055 (D. C. Cir. 2014), writing for a unanimous panel, he held that EPA exceeded its authority when it created an affirmative defense for private civil suits in which plaintiffs seek penalties for violations of emission standards by sources of pollution. Antitrust FTC v. Whole Foods Market, Inc., 548 F.3d 1028 (D.C. Cir. 2008).  The FTC moved to preliminarily enjoin Whole Foods’s merger with Wild Oats.  The district court denied the injunction, and the panel majority reversed.  Judge Kavanaugh dissented, writing that he would have affirmed the denial of the injunction, and that the FTC’s position opposing the merger “calls to mind the bad old days when mergers were viewed with suspicion regardless of the economic benefits.”  He accused the majority of reviving the Supreme Court’s “moribund Brown Shoe practical indicia test” and of applying “an overly lax preliminary injunction standard for merger cases.” Arbitration Verizon New England v. NLRB, 826 F.3d 480 (D.C. Cir. 2016).  In the collective bargaining agreement between Verizon New England and its employees’ union, the employees waived their right to picket.  Later, during a labor dispute, employees displayed pro-union signs on Verizon’s property.  Verizon demanded that the employees take down the signs, and the union challenged Verizon’s action before an arbitration panel, which interpreted the collective bargaining agreement’s waiver of the right to picket as including waiver of the right to display of pro-union signs.  The union sought relief from the NLRB, which is allowed to review arbitral decisions but must apply a highly deferential standard to the arbitrator.  The agency overturned the arbitration decision, and Verizon appealed to the D.C. Circuit.  Judge Kavanaugh, writing for the Court, held that the NLRB had not deferred sufficiently to the arbitration decision.  His opinion stressed the importance of deference to arbitrators, noting that the NLRB was required to defer unless “the arbitration decision was ‘clearly repugnant’ to the National Labor Relations Act.”  Here, Judge Kavanaugh wrote, it did not matter whether the agency read the collectively bargaining agreement differently than the arbitrator; instead, what mattered was that the arbitrator’s reading was not “egregiously wrong” because the term “picketing” may, under certain circumstances, include the mere display of signs. Immigration Garza v. Hargan, 874 F.3d 735 (D.C. Cir. 2017) (en banc).  In this litigation over whether a teenager who was in the United States unlawfully could be released from government custody to obtain an abortion, the en banc D.C. Circuit vacated the panel opinion granting the government additional time to find an immigration sponsor and thus delaying the abortion.  In dissent from the en banc order, Judge Kavanaugh wrote that the majority wrongly concluded “that the Government must allow unlawful immigrant minors to have an immediate abortion on demand.”  He stated that the en banc order ignored the government’s “permissible interest in favoring fetal life, protecting the best interests of a minor, and refraining from facilitating abortion.” Fogo de Chao (Holdings) Inc. v. U.S. Dep’t of Homeland Sec., 769 F.3d 1127 (D.C. Cir. 2014). The panel majority held that the agency failed to sufficiently explain its newly adopted conclusion that cultural knowledge was categorically irrelevant to the “specialized knowledge” required to obtain an L-1B work visa. Judge Kavanaugh dissented, agreeing with the agency that a chef’s cultural background does not constitute “specialized knowledge,” and that American chefs could learn the relevant Brazilian cooking techniques within a reasonable time.   He concluded: “In our constitutional system, Congress and the President determine the circumstances under which foreign citizens may enter the country.  The judicial task is far narrower: to apply the immigration statutes as written.” Labor and Employment Venetian Casino Resort LLC v. NLRB, 793 F.3d 85 (D.C. Cir. 2015).  The Venetian, a luxury hotel and casino complex operating from the Las Vegas Strip, asked police to issue criminal citations to union-demonstrators who were blocking an entrance to the casino.  The demonstrators filed a petition with the NLRB, claiming that the Venetian committed an unfair trade practice by interfering with the demonstration. Writing for a unanimous panel, Judge Kavanaugh determined that the Noerr-Pennington doctrine—which provides that “employer conduct that would otherwise be illegal may be ‘protected by the First Amendment when it is part of a direct petition to government’”—shielded the Venetian from liability.  The court explained that “the act of summoning the police to enforce state trespass law is a direct petition to government,” and therefore constitutionally protected conduct. Ayissi-Etoh v. Fannie Mae, 712 F.3d 572 (D.C. 2013).  Judge Kavanaugh, writing in concurrence, emphasized that a single workplace use of an offensive racial epithet could be severe enough to establish a hostile work environment for purposes of federal anti-discrimination laws.  He noted that although “[i]t may be difficult to fully catalogue the various verbal insults and epithets that by themselves could create a hostile environment,” no other “act can more quickly alter the conditions of employment and create an abusive working environment that the use” of the n-word “by a supervisor in the presence of his subordinates.” Religious Liberty Priests for Life v. U.S. Dep’t of Health & Human Services, 808 F.3d 1 (D.C. Cir. 2015).  This constitutional challenge to the scheme for opting out of contraceptive coverage under the Affordable Care Act (“ACA”) was brought by several pro-life, religiously-affiliated employers.  They contended that the statutory and regulatory scheme (which allowed religious nonprofits to opt out from including contraceptive coverage in their health insurance plans only by completing forms that prompted others to cover contraceptives to employees) violated the Religious Freedom Restoration Act (“RFRA”), among other laws.  RFRA prohibits the federal government from substantially burdening any person’s exercise of religion, unless there is both a compelling government interest and no less restrictive mean of achieve that interest.  A three-judge panel of the D.C. Circuit (which did not include Judge Kavanaugh) held that the contraception scheme did not violate RFRA because it did not impose a substantial burden on religious exercise.  The en banc D.C. Circuit denied review over a dissent by Judge Kavanaugh.  In his dissent, Judge Kavanaugh argued that:  (1) the contraception scheme substantially burdened the plaintiffs’ exercise of religion because “submitting the form actually contravenes plaintiffs’ sincere religious beliefs” and refusing to submit the form would trigger a monetary penalty; (2) the federal government “has a compelling interest in facilitating access to contraception for the employees of these religious organizations”; and (3) the government could have facilitated access to contraception without requiring religious organizations to submit any forms.  Judge Kavanaugh concluded that the contraceptive scheme violated RFRA, but along the way he identified the “less restrictive” way the government could have lawfully ensured contraceptive coverage. In addition, Judge Kavanaugh has been involved with several other challenges to the Affordable Care Act: Sissel v. U.S. Dep’t of Health & Human Services, 799 F.3d 1035 (D.C. Cir. 2015).  Judge Kavanaugh dissented from the denial of a petition for rehearing en banc, and would have granted the petition to fix the rationale of the panel opinion while reaching the same outcome.  In Sissel, the plaintiffs argued that the Affordable Care Act was unconstitutional because it is a revenue-raising bill that, per the Origination Clause, must originate in the House of Representatives rather than the Senate.  The panel opinion, relying on Supreme Court precedent, determined that the Origination Clause was not implicated because the revenue-raising function of the ACA was not the primary purpose of the Act.  Judge Kavanaugh would have granted the petition to hold that the ACA was a revenue-raising bill because it raised an “enormous” amount of revenue that is not earmarked for a program created by the Act.  However, he would have found that the Act originated in the House of Representatives and therefore satisfied the Origination Clause. Seven-Sky v. Holder, 661 F.3d 1 (D.C. Cir. 2011), abrogated by National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012).  Judge Kavanaugh dissented from a panel decision upholding the Affordable Care Act’s individual mandate, and would have found that the Anti-Injunction Act deprived the panel of jurisdiction to decide the issue.  He regarded the individual mandate, which is enforced and collected by the Internal Revenue Service, as a tax, and therefore the Anti-Injunction Act, “which carefully limits jurisdiction of federal courts over tax-related matters,” prevents a federal court from passing on its constitutionality until a challenger pays the tax or faces an enforcement action by the IRS.  Judge Kavanaugh’s dissent previewed Chief Justice Robert’s later opinion upholding the individual mandate as a permissible tax. Tax Cannon v. District of Columbia, 783 F.3d 327 (D.C. Cir. 2015).  The District of Columbia requires retired police officers who work in the D.C. Protective Services Division to offset their salary by the amount of their police pension.  Judge Kavanaugh, writing for a unanimous panel, determined that the offset did not constitute a tax.  “It does not raise revenue.  Rather, it operates on the opposite side of D.C.’s financial ledger.  It reduces D.C.’s total expenditures on salaries.”  Judge Kavanaugh characterized the salary reduction statute as “nothing more than a way for D.C. to prevent so-called double-dipping and thereby reduce its expenditures on employee salaries.” Gibson Dunn Supreme Court Practice: Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States.  No law firm has a stronger record of success in representing clients before the Supreme Court. Gibson Dunn lawyers have argued more than 150 cases before the Supreme Court. Twelve of our current attorneys have argued before the Supreme Court Our Supreme Court victories have been some of the biggest in history, including Bush v. Gore, Citizens United v. Federal Election Commission, Hollingsworth v. Perry, Wal-Mart Stores, Inc. v. Dukes, Alice Corp. v. CLS Bank International, N.L.R.B. v. Noel Canning, Daimler AG v. Bauman, and many more. While the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 23 certiorari petitions since 2006. We are also unmatched in advocacy before the federal and state courts of appeals. Gibson Dunn attorneys argue one appeal approximately every three business days. Each year, we brief and argue federal appeals in every regional circuit, the D.C. Circuit, and the Federal Circuit. We also argue dozens of state court appeals annually.  Numerous currently serving state solicitors general began their careers at Gibson Dunn. Appellate and Constitutional Law Group Co-Chairs: Mark A. Perry – Washington, D.C. (+1 202.887.3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212.351.4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202.887.3669,nsaharsky@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 22, 2018 |
Allyson Ho Receives Outstanding Appellate Lawyer Award from Texas Bar Foundation

The Texas Bar Foundation presented Dallas partner Allyson Ho with its 2018 Gregory S. Coleman Outstanding Appellate Lawyer Award. The award is given to a lawyer who exhibits “an outstanding appellate practice while maintaining a strong commitment to providing legal services for the underserved,” a “dedication to mentoring young attorneys” and “a strong moral compass to guide both professional and personal pursuits.”  Honorees were recognized at the annual dinner in June 2018.

July 5, 2018 |
Supreme Court Finds Failure to Prove a Sherman Act Section 1 Violation in Credit Card Market

Click for PDF On June 25, 2018, the Supreme Court of the United States assuaged the concerns of many that antitrust enforcement would hobble new and creative ways of conducting business, particularly businesses that have relied on technology to bring consumers and sellers together by offering a “platform” that creates a highly convenient way for them to interact and consummate sales. In Ohio v. American Express, the Court held that plaintiffs failed to prove a Sherman Act Section 1 violation in the credit card market because they presented evidence of alleged anticompetitive effects only on the merchant side of the relevant market. Without evidence of the impact of the challenged practices on the cardholder side of the market, the Court concluded that plaintiffs failed to carry their burden to prove anticompetitive effects. The Court’s opinion has several important elements beyond its holding that certain two-sided platform markets must be evaluated as a single relevant market: Significantly, the Supreme Court discussed a framework for analyzing alleged restraints under the rule of reason for the first time.  Both the majority and dissent adopted the parties’ agreed-upon, three-step framework for analyzing restraints under the rule of reason.  Under this framework, the plaintiff bears the initial burden of proving anticompetitive effects, which shifts the burden to the defendant to show a procompetitive justification.  If the defendant meets its burden of proving procompetitive efficiencies, then the burden shifts back to the plaintiff to show that those efficiencies could have been achieved through less restrictive means.  Notably, the Court did not mention any balancing of anticompetitive effects against procompetitive justifications. The third step in the above rule of reason framework may be the focus of scrutiny as plaintiffs look to find “less restrictive alternatives” to overcome defendants’ evidence of a procompetitive rationale for a challenged practice.  DOJ-FTC Competitor Collaboration Guidelines provide, however, that the agencies “do not search for a theoretically less restrictive alternative that is not realistic given business realities.”  Section 3.36(b). The Court also found that evidence that output of transactions in the relevant market had increased during the relevant period undercut plaintiffs’ reliance solely on evidence of price increases by Amex.  The Court’s reliance on the failure to prove output restriction reinforces the continued vitality of the Court’s prior decision in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). The Court rejected the argument that market definition could be dispensed with based on evidence of purported actual anticompetitive effects in the form of merchant fee increases by Amex.  The Court in this regard distinguished horizontal restraints, which in some cases may be analyzed without “precisely defin[ing] the relevant market,” and vertical restraints, stating that vertical restraints frequently do not pose any threat to competition absent the defendant possessing market power. Therefore, it is critical to precisely define the relevant market when evaluating vertical restraints. The case arose out of a decades-old practice.  For more than fifty years, American Express Company and American Express Travel Services Company (together, “Amex”) have included “anti-steering” provisions in contracts with merchants who agree to accept American Express cards as a means of payment. These provisions prohibited merchants from trying to persuade customers to use cards other than American Express cards or imposing special conditions on customers using American Express cards. Absent the challenged provisions, merchants had a strong incentive to encourage customers to use other credit cards because other credit card providers charged merchants lower fees than Amex.  Amex uses the money received from its higher merchant fees to fund investments in its customer rewards program, which offers cardholders better rewards than those offered by rival credit card companies. The United States and several States (“plaintiffs”) sued Amex in October 2010, alleging that the anti-steering provisions violated Section 1 of the Sherman Act. The United States District Court for the Southern District of New York entered judgment for plaintiffs, finding that the provisions violated Section 1 because they caused merchants to pay higher fees by precluding merchants from encouraging cardholders to use an alternative card with a lower fee at the point of sale. The district court sided with plaintiffs in finding that the credit card market was really two separate markets: a merchant market and a cardholder market. The United States Court of Appeals for the Second Circuit reversed, holding that the district court erroneously considered only the dealings between Amex and merchants.  As a result, it failed to recognize that the credit card market was a single, “two-sided” market, not two separate markets.  Therefore, the impact of the anti-steering provisions on the cardholder side of the market had to be analyzed in order to determine if those provisions had a substantial anticompetitive effect in the relevant market.  The Supreme Court affirmed in a 5-4 decision. The majority, in an opinion authored by Justice Thomas, agreed with the Second Circuit that the credit card market should be considered as a single market because credit card providers compete to provide credit card transactions, but can create and sell those services only if both the cardholder and the merchant simultaneously choose to use the credit card network as a means of payment. The market is “two-sided” in that it involves the simultaneous provision of services to both cardholders and merchants; in any transaction, a credit card network cannot sell its payment services individually to only the cardholder or only the merchant. The majority observed that the credit card market exhibited strong “indirect” network effects because prices to cardholders affected demand by merchants and prices to merchants affected demand by cardholders.  Higher prices to cardholders would tend to decrease the number of cardholders, which would decrease the attractiveness of that card to merchants, which in turn would decrease the attractiveness of the card to cardholders.  Conversely, higher prices to merchants would decrease the number of merchants accepting the card, which would decrease the utility of the card to cardholders, decreasing the number of cardholders. In either case, the provider increasing prices faced the risk of “a feedback loop of declining demand.”  Providers therefore had to strike a balance between the prices charged on one side of the platform and the prices charged on the other side. In the credit card market, different cardholders might attribute different value to broad acceptance of their card by numerous merchants or to generosity of “cash back” or other loyalty or usage rewards. Similarly, merchants might assign different values to the level of fees by a credit card provider versus the card’s ability to present the merchant with a higher proportion of “big spenders.” Significantly for future cases, the majority observed that not every “platform” business bringing together buyers and sellers should be considered to be a single market. The majority focused on the strength of the indirect network effects—that is, the potential for increased prices on one side to reduce demand on the other side, prompting a feedback loop of declining demand.  The majority discussed a newspaper selling advertisements to advertisers as an example of a “platform” that should not be considered a single market. According to the majority, the indirect network effects operated only in one direction. Advertisers might well care if high subscription prices reduced the number of readers. But because readers are largely indifferent to the amount of advertising in a newspaper, a reduction in advertisements caused by higher advertising rates would not lead to a reduced number of readers. The Court emphasized the importance of market definition in analyzing alleged anticompetitive effects caused by vertical restraints. Unlike horizontal restraints among competitors, the majority wrote, “[v]ertical restraints often pose no risk to competition unless the entity imposing them has market power, which cannot be evaluated unless the Court first defines the relevant market.” Thus, the Court disagreed with plaintiffs’ assertion that under FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986), evidence of actual adverse effects in the form of increased merchant fees was sufficient proof.  The Court distinguished Indiana Federation of Dentists by noting that it involved a horizontal restraint, and therefore the Court concluded it did not need to precisely define the relevant market to evaluate the restraint’s competitive impact. The dissent, authored by Justice Breyer, accused the majority of “abandoning traditional market-definition approaches” by declining to define the relevant market by assessing the substitutability of other products or services for the product or service at issue. As the dissent noted, because consumers’ ability to shift to substitutes constrains the ability of a seller to raise prices, it is necessary to include reasonable substitutes within the relevant market. The dissent argued that the card providers’ services to merchants and services to cardholders were complements, not substitutes, in the sense that, like gasoline and tires for a car, both must be purchased to have value. But this analogy is inapt in at least two respects. First, there is no need for simultaneity in the purchase of gasoline and tires. Few, if any, consumers buy new tires each time they purchase gasoline. Second, the two complementary products are both purchased by the owner or operator of the vehicle. The seller of gasoline and tires does not have to purchase a service from anyone in order to sell the gasoline or tires (unless the buyer wishes to use a credit card, in which case both the buyer and the merchant must simultaneously choose to use the payment services offered by the credit card provider). This is unlike the credit card context where both the cardholder and the merchant must simultaneously choose to use the payment services offered by the credit card provider. The Court’s acceptance that some businesses operate in a single, two-sided market has implications for antitrust cases involving technology-based “platform” businesses, such as ride-sharing and short-term home rentals, that have become a substantial and growing component of the economy. The outcomes in future cases are likely to turn on the strength of the evidence showing that network effects constrain pricing decisions. Makan Delrahim, the head of the DOJ’s Antitrust Division, said this past week that he had feared the Supreme Court would cause “harm to our economy” by creating a rule for evaluating two-sided markets that would harm new “platform” business models like Uber, AirBnB and eBay. He described DOJ’s philosophy with respect to the case as “it’s one interrelated market, it’s a new business model, and you can’t stick your head in the sand and say, ‘If you’re raising the prices – whether on the consumer or driver – it can’t have an effect.’ And it could be a positive effect, because a Lyft can do the same thing and now be able to compete better with an Uber or whatever the next one would be.”  While Mr. Delrahim acknowledged that the Amex ruling likely would apply to companies like Uber and AirBnB, he does not believe Google will benefit from it, noting that consumers do not use Google Search just to see advertisements. Although the Amex decision is notable for its focus on commercial realities and acceptance of the existence of two-sided markets, there are other significant aspects of the decision.  Most notably, the Court discussed a three-step, burden-shifting framework for analyzing restraints under the rule of reason. This provides welcome guidance, as the Court had not previously discussed any framework or methodology for evaluating claims under the rule of reason.  While the framework was agreed-upon among the parties below, its adoption by the majority (and acceptance by the dissent) nevertheless provides important instruction regarding the steps to be conducted by courts in weighing rule of reason claims under either Section 1 or Section 2.  In the first step of the decision’s framework, the plaintiff bears the burden to prove anticompetitive effects in the relevant market. If the plaintiff carries that burden, in the second step the burden shifts to the defendant to demonstrate a procompetitive rationale for the challenged restraint. If the defendant makes that showing, then in the third step the burden shifts back to the plaintiff to “demonstrate that the procompetitive efficiencies could reasonably be achieved through less restrictive means.” The Court held that plaintiffs had not satisfied the first step of the rule of reason framework. As with many cases, the Court’s definition of the relevant market determined the outcome. To prove anticompetitive effects, plaintiffs relied solely on direct evidence of Amex’s increases in merchant fees during 2005-2010. However, the Court concluded that because the market was two-sided, such evidence was incomplete and did not demonstrate anticompetitive effects in the form of either higher prices for credit card transactions or a reduction in the number of such transactions. Indeed, the Court found that certain evidence in the record cut against plaintiffs’ claim that the anti-steering provisions were the cause of any increases in merchant fees by Amex—for example, rival card companies had also increased merchant fees. The Court also noted that credit card transaction output had increased substantially during the relevant period, further undermining any claim of anticompetitive effects. Quoting from Brooke Group, 509 U.S. at 237, the majority wrote that it will “not infer competitive injury from price and output data absent some evidence that tends to prove that output was restricted or prices were above a competitive level.”  The Court’s focus on output restriction under Brooke Group demonstrates that the Court’s continued insistence on the application of sound economic principles in evaluating antitrust claims. While it noted Amex’s rationale for the anti-steering provisions, the Court did not address the second or third step of the rule of reason framework given its finding that the plaintiffs had failed to satisfy the first step. The Court’s recognition in the third step that proven procompetitive efficiencies may be overcome by a showing of less restrictive means of achieving those efficiencies will likely cause private plaintiffs and enforcement agencies to increase their focus on potential alternatives. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact any member of the firm’s Antitrust and Competition practice group or the following authors: Trey Nicoud – San Francisco (+1 415-393-8308, tnicoud@gibsondunn.com) Rod J. Stone – Los Angeles (+1 213-229-7256, rstone@gibsondunn.com) Daniel G. Swanson – Los Angeles (+1 213-229-7430, dswanson@gibsondunn.com) Richard G. Parker – Washington, D.C. (+1 202-955-8503, rparker@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Chelsea G. Glover – Dallas (+1 214-698-3357, cglover@gibsondunn.com)

June 28, 2018 |
Supreme Court Round-Up (June 28, 2018)

Following the close of the Supreme Court’s 2017 Term, Gibson Dunn’s Supreme Court Round-Up provides summaries of the Court’s opinions, the questions presented in cases that the Court will hear next Term, and other key developments on the Court’s docket.  Gibson Dunn presented 3 oral arguments during the 2017 Term, securing wins for clients in all 3 cases, and was involved in 11 additional cases as counsel for amici curiae.  To date, the Court has granted certiorari in 37 cases for the 2018 Term, and Gibson Dunn is counsel for the petitioner in one of those cases. Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions.  The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions.  The Round-Up provides a concise, substantive analysis of the Court’s actions.  Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next.  The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions. To view the Round-Up, click here. Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases.  During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 21 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the class action, intellectual property, separation of powers, and First Amendment fields.  Moreover, while the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 23 certiorari petitions since 2006. *   *   *  * Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group. Theodore B. Olson (+1 202.955.8500, tolson@gibsondunn.com) Amir C. Tayrani (+1 202.887.3692, atayrani@gibsondunn.com) Brandon L. Boxler (+1 202.955.8575, bboxler@gibsondunn.com) Rajiv Mohan (+1 202.955.8507, rmohan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 27, 2018 |
Supreme Court Holds That Public-Sector Union “Agency Fees” Violate The First Amendment

Click for PDF Decided June 27, 2018 Janus v. American Federation of State, County, and Municipal Employees, Council 31, No. 16-1466  Today, the Supreme Court held 5-4 that the First Amendment does not permit public-sector unions to collect mandatory fees from non-members to cover the costs of collective bargaining. Background: Mark Janus, a non-union State employee, brought a First Amendment challenge to mandatory “agency fees” that public-sector labor unions collect from non-members ostensibly to cover the costs of collective bargaining with government employers.  Janus argued that the Supreme Court’s 1977 decision in Abood v. Detroit Board of Education—which upheld agency fees because they avoid labor strife and prevent non-members from benefiting from collective bargaining without paying for union membership—should be overruled because agency fees compel non-members to subsidize union speech intended to influence governmental policies on matters of public importance, such as education, healthcare, and climate change, that frequently arise in collective bargaining between public-sector unions and government employers. Issue: Whether Abood should be overruled and compulsory public-sector agency fees invalidated under the First Amendment. Court’s Holding: Yes.  Public-sector agency fees violate the First Amendment because they compel non-members to subsidize union speech on matters of public concern.  Abood is overruled. “Because the compelled subsidization of private speech seriously impinges on First Amendment rights, it cannot be casually allowed.” Justice Alito, writing for the 5-4 Court What It Means: This issue was presented to the Court in 2016 in Friedrichs v. CTA.  Following the death of Justice Scalia, however, the Court split 4-4 and summarily affirmed the judgment below.  In Janus, the Court reached the issue that it had not addressed in Friedrichs. The Court embraced a broad view of the First Amendment’s limitations on compelled speech.  The agency fees at issue infringed non-members’ First Amendment rights by forcing them to lend their support to union speech on a host of controversial issues of public concern that could arise during collective-bargaining discussions.  According to the Court, that was unacceptable, and the First Amendment instead requires public-sector employees to affirmatively choose to support a union before any fees can be collected from them. The Court expressly overruled Abood because its “free-rider” rationale—that agency fees were necessary to prevent non-members from enjoying the benefits of union membership as to collective bargaining without incurring the costs—could not justify the burdens imposed on First Amendment rights by agency fees.  The fees were unnecessary to ensure that unions were willing to serve as the exclusive representative for all employees, because that designation included numerous other benefits (such as a privileged place in negotiations). The Court’s decision invalidates the laws of more than 20 states that require public-sector unions to collect agency fees.  Public-sector unions may see their funding and membership levels drop as a consequence. The Court’s holding applies “when a State requires its employees to pay agency fees,” and thus does not reach private-sector unions.  The Court deemed it “questionable” whether the First Amendment would be implicated when a State merely authorizes—yet does not require—private parties to enter into an agency-fee agreement, but left the question open. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   Related Practice: Labor and Employment Catherine A. Conway +1 213.229.7822 cconway@gibsondunn.com Eugene Scalia +1 202.955.8206 escalia@gibsondunn.com Jason C. Schwartz +1 202.955.8242 jschwartz@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 25, 2018 |
Supreme Court Raises The Bar For Antitrust Plaintiffs Challenging Two-Sided Platforms

Click for PDF Ohio v. American Express Co., No. 16-1454  Decided June 25, 2018 The Supreme Court held 5-4 that plaintiffs challenging American Express (“Amex”) credit-card rules for merchants did not prove an antitrust violation because their evidence focused on only one side of the relevant market (the effect of Amex’s rules on merchants) while ignoring the other side (the effect on cardholders). Background: To compete in the market, credit-card companies need a critical mass of both consumers holding their card and merchants who are willing to accept it for payment.  Amex offers cardholder reward programs to encourage cardholders to use its cards.  To fund those programs, Amex charges merchants higher fees than other credit-card companies.  To sustain this business model, Amex’s merchant agreements contain “anti-steering” provisions that prohibit merchants from encouraging cardholders to use other, lower-fee cards at the point of sale.  The federal government and 17 states brought an antitrust suit under the Sherman Act, 15 U.S.C. § 1, arguing that these provisions unreasonably restrain trade. Issue: Whether plaintiffs could prove an antitrust violation by showing that Amex’s anti-steering provisions caused merchants to pay higher prices. “[C]ourts must include both sides of the platform—merchants and cardholders—when defining the credit-market.” Justice Thomas, writing for the 5-4 Court Court’s Holding: No; because both merchants and cardholders participate in the same “credit-card transaction market,” plaintiffs could not prove an antitrust violation based solely on evidence that Amex’s anti-steering provisions increased the price to merchants without considering the net effects on the market as a whole. What It Means: The Court explained that the credit-card industry represents what economists refer to as a “two-sided” market in which credit-card companies provide services to two different groups:  cardholders and merchants.  The Court stated that two-sided markets are often different from other markets because the value of the product to both sides of the market depends on the level of participation by those on the other side of the market. The Court held that in a two-sided market, antitrust violations often—but not always—must be analyzed by looking at the effects of a practice on the market as a whole, rather than looking at just one side of the market.  The Court thus held that plaintiffs could not prove an antitrust violation by showing that Amex’s anti-steering provisions increased the prices paid by merchants, without considering the effect of those provisions on cardholders. The Court noted that it might not be necessary to consider both sides of a two-sided market when participation on one side of the market does not significantly impact participation on the other side of the market.  The Court gave the example of the newspaper advertisement market, where readers are largely indifferent to the number of advertisements that the newspaper contains.  By contrast, the court explained that two-sided “transaction” platforms like the credit-card industry—where companies compete for transactions between merchants and cardholders—usually should be analyzed as a single market. This decision raises the threshold for antitrust plaintiffs, whether private or governmental, in challenging potentially two-sided platforms.  These platforms have recently become substantial parts of the economy. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   Related Practice: Antitrust and Competition Scott D. Hammond +1 202.887.3684 shammond@gibsondunn.com M. Sean Royall +1 214.698.3256 sroyall@gibsondunn.com Daniel G. Swanson +1 213.229.7430 dswanson@gibsondunn.com   David Wood +32 2 554 7210 dwood@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 22, 2018 |
Supreme Court Holds That Individuals Have Fourth Amendment Privacy Rights In Cell Phone Location Records

Click for PDF Carpenter v. United States, No. 16-402  Decided June 22, 2018 The Supreme Court held 5-4 that law enforcement officials must generally obtain a warrant when seeking historical cell phone location records from a telecommunications provider. Background: Wireless carriers regularly collect and store information reflecting the location of cell phones when those phones connect to cell sites to transmit and receive information.  Prosecutors collected a suspect’s cell-site location data from wireless carriers following the procedure in the Stored Communications Act, 18 U.S.C. §§ 2701-12, but without obtaining a warrant.  The suspect argued that the Government’s acquisition of this data without a warrant was an unconstitutional search that violated the Fourth Amendment.  This argument set up a conflict between two lines of Supreme Court precedent: the longstanding third-party doctrine, which holds that information a person voluntarily reveals to others is not protected by the Fourth Amendment; and several recent cases holding that cell phones implicate significant privacy concerns because so many people store large amounts of information on them. Issue: Whether an individual has a protected privacy interest under the Fourth Amendment in historical cell phone location records. Court’s Holding: Yes.  The Fourth Amendment protects cell phone location records because of their comprehensive and private nature, even though they are collected and held by the phone company.  The Government must ordinarily obtain a warrant before acquiring the records. “In light of the deeply revealing nature of [cell site location data], its depth, breadth, and comprehensive reach, and the inescapable and automatic nature of its collection, the fact that such information is gathered by a third party does not make it any less deserving of Fourth Amendment protection.” Chief Justice Roberts, writing for the 5-4 majority What It Means: The decision continues a trend of recent Supreme Court decisions limiting Government access to personal information stored electronically.  In United States v. Jones (2012), the Court unanimously rejected the Government’s argument that it could place a GPS tracker on a suspect’s car without a warrant, although it divided as to the reason.  Likewise, in Riley v. California (2014), the Court unanimously declined to allow police officers to routinely search cell phones incident to arrest, based in part on the volume and importance of personal information stored on them. The Court emphasized that its decision was limited to the collection of historical cell phone location records covering an extended period of time.  The Court declined to consider whether the Fourth Amendment protected real-time cell phone location information or historical location data covering a shorter period of time than the Government collected here (seven days).  The Court also emphasized that it was not calling into question conventional surveillance tools such as security cameras, or collection techniques involving foreign affairs or national security. The Court expressly declined to overrule the third-party doctrine.  Instead, it stated that the doctrine should not be extended to historical cell site location data because the breadth and depth of the information available made that data “qualitatively different” from other information that the Court had previously allowed the Government to obtain from third parties without a warrant. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   Related Practice: Privacy, Cybersecurity and Consumer Protection Ahmed Baladi +33 (0) 1 56 43 13 00 abaladi@gibsondunn.com Alexander H. Southwell +1 212.351.3981 asouthwell@gibsondunn.com   Related Practice: White Collar Defense and Investigations Joel M. Cohen +1 212.351.2664 jcohen@gibsondunn.com Charles J. Stevens +1 415.393.8391 cstevens@gibsondunn.com F. Joseph Warin +1 202.887.3609 fwarin@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 22, 2018 |
Supreme Court Says That Patent Holders May Recover Lost Foreign Profits Resulting From Patent Infringement In The United States

Click for PDF WesternGeco LLC v. ION Geophysical Corp., No. 16-1011  Decided June 22, 2018 Today, the Supreme Court held 7-2 that federal law permits a patent holder to recover damages for overseas losses from a defendant that infringes its patent by shipping components of a patented invention from the United States to be assembled abroad. Background: 35 U.S.C. § 271(f)(2) imposes liability for patent infringement when a company ships components of a patented invention overseas to be assembled in a way that would constitute patent infringement in the United States.  35 U.S.C. § 284 permits patent owners who prove infringement under § 271(f)(2) to recover damages, but the statute is silent on whether damages are available for losses incurred outside of the United States as a result of the infringement.  WesternGeco, which owns patents related to ocean-floor surveying technology, proved patent infringement under § 271(f)(2) and was awarded damages pursuant to § 284 for lost profits incurred abroad. Issue: Whether awarding damages for lost foreign profits to a patent owner who proves patent infringement under 35 U.S.C. § 271(f)(2) comports with the presumption that federal statutes apply only within the territorial jurisdiction of the United States. Court’s Holding: Yes.  Awarding damages for lost foreign profits to a patent owner who proves patent infringement under § 271(f)(2) does not violate the presumption against extraterritoriality. “[T]he focus . . . , in a case involving infringement under [35 U.S.C.] § 271(f)(2), is on the act of exporting components from the United States.” Justice Thomas, writing for the 7-2 majority What It Means: The Court’s holding means that a patent holder who proves infringement under 35 U.S.C. § 271(f)(2) can recover damages for lost foreign profits.  The Court expressly declined to decide whether a patent holder can recover lost foreign profits for infringement under other provisions of the Patent Act. The Court did not reach the question of whether the damages provision of the Patent Act, 35 U.S.C. § 284, applies extraterritorially.  Instead, the Court concluded that WesternGeco’s claim for lost foreign profits involved a domestic application of § 284 because it sought a remedy for conduct that occurred in the United States—the export by domestic entities of component parts from the United States. Whether the decision will have broader implications in other areas of U.S. law remains to be seen, since the language of the decision strongly suggests that its holding will be cabined to the context of patent infringement. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   Related Practice: Intellectual Property Wayne Barsky +1 310.552.8500 wbarsky@gibsondunn.com Josh Krevitt +1 212.351.4000 jkrevitt@gibsondunn.com Mark Reiter +1 214.698.3100 mreiter@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice

June 21, 2018 |
Supreme Court Holds That States Can Require Internet Retailers To Collect Sales Taxes

Click for PDF South Dakota v. Wayfair, Inc., No. 17-494  Decided June 21, 2018 Today, the Supreme Court held 5-4 that States may require internet retailers to collect sales taxes on online purchases. Background: In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Supreme Court reaffirmed that States could not require catalog retailers to collect sales taxes if the retailers were not physically present in the State.  In a 2015 concurrence, Justice Kennedy urged the Court to reconsider Quill because it inflicted “extreme harm and unfairness” on States unable to tax the ever-growing number of online transactions.  That urging spurred multiple States, including South Dakota, to require internet retailers to collect sales taxes notwithstanding their lack of a physical presence in the State.  South Dakota then sued a number of internet retailers for not collecting sales taxes. Issue: Whether the Court should overrule Quill’s physical presence requirement and allow States to require retailers to collect sales taxes, even if the retailer is not physically present in the State. Court’s Holding: States may require the collection of sales taxes by retailers with no physical presence in the State. “In the name of federalism and free markets, Quill does harm to both. The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.” Justice Kennedy, writing for the majority What It Means: The Court overruled Quill because its physical presence rule was unnecessary to satisfy due process or the Commerce Clause’s requirement that state taxes not “unduly burden” interstate commerce.  The Court observed that “Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers,” and that the “Internet revolution” has only made Quill’s rule “further removed from economic reality.” Still, under the Commerce Clause, States may tax only those activities that have a “substantial nexus” to the State.  The Court held that South Dakota’s tax satisfied that test because it applied only to retailers that delivered more than $100,000 of goods in the State or engaged in more than 200 transactions in the State. South Dakota, and the other States that have passed similar tax laws, will now require internet retailers to charge sales taxes on online purchases.  States lost between $8 and $33 billion in sales taxes every year under the old physical presence rule. More States may now require internet retailers to collect sales taxes.  These States may also change alternative tax provisions that they had enacted to make up for sales-tax shortfalls from internet retailers under Quill. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 21, 2018 |
Supreme Court Rules That SEC ALJs Were Unconstitutionally Appointed

Click for PDF Lucia v. SEC, No. 17-130  Decided June 21, 2018 Today, the Supreme Court held that administrative law judges of the Securities and Exchange Commission are inferior “Officers of the United States” within the meaning of the Constitution’s Appointments Clause.  Thus, the ALJs were unconstitutionally appointed by SEC staff. Background: The SEC has relied on ALJs to resolve hundreds of enforcement actions.  Raymond Lucia challenged the lawfulness of sanctions that the SEC had imposed on him, arguing that the ALJ hearing his case was not constitutionally appointed.  He asserted that SEC ALJs are “Officers of the United States” under the Constitution’s Appointments Clause, which requires such officers to be appointed by the President, “Courts of Law,” or “Heads of Departments.” SEC ALJs, however, were appointed by agency staff.  A panel of the D.C. Circuit held that the ALJs are mere “employees”—governmental officials with lesser responsibilities than “Officers” and thus not subject to the Appointments Clause.  An evenly divided en banc court affirmed. Issue: Whether SEC ALJs are “Officers of the United States” subject to the Appointments Clause. Court’s Holding: Yes.  Because SEC ALJs exercise “significant authority pursuant to the laws of the United States,” they are inferior “Officers” under the Appointments Clause.  As such, the ALJs may not be appointed by agency staff and must instead be appointed by the President, the SEC itself, or a court of law. “[T]he Commission’s ALJs issue decisions containing factual findings, legal conclusions, and appropriate remedies. . . . And when the SEC declines review (and issues an order saying so), the ALJ’s decision itself ‘becomes final’ and is ‘deemed the action of the Commission.’” Justice Kagan, writing for the Court Gibson Dunn represented the winning party:  Raymond Lucia What It Means: The ruling largely rests on the Court’s conclusion that SEC ALJs are “near-carbon copies” of special trial judges of the Tax Court that the Court had previously found were inferior “Officers” because they exercise “significant authority.”  See Freytag v. Commissioner, 501 U.S. 868 (1991). The ruling provides new guidance on the relief available for litigants who make a timely Appointments Clause challenge:  The Court ordered the SEC to provide Mr. Lucia a new hearing before a different ALJ who has been constitutionally appointed, reasoning that the ALJ who originally presided over Mr. Lucia’s case could not be expected to consider the case “as though he had not adjudicated it before.” Before the Court issued its decision, the SEC released an order purporting to “ratify” the past ALJ appointments, but the Court did not address the validity of that order.   Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   Related Practice: Securities Enforcement Marc J. Fagel +1 415.393.8332 mfagel@gibsondunn.com Barry R. Goldsmith +1 212.351.2440 bgoldsmith@gibsondunn.com Richard W. Grime +1 202.955.8219 rgrime@gibsondunn.com Mark K. Schonfeld +1 212.351.2433 mschonfeld@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 11, 2018 |
Supreme Court Rejects Tolling Of Statute Of Limitations For Successive Class Actions

Click for PDF China Agritech Inc. v. Resh, No. 17-432 Decided June 11, 2018 Today, the Supreme Court held that the filing of a class action does not toll the statute of limitations for putative class members to file their own class actions. That means that if class certification is denied, putative class members cannot file successive class actions after the statute of limitations has expired. Background: Stockholders filed two timely class actions against China Agritech, Inc. alleging that the company violated the Securities Exchange Act of 1934.  After class certification was denied in both actions, stockholders filed a third class action, well outside the two-year limitations period.  They argued that their claims were timely because the limitations period was tolled while the earlier class actions were pending. Issue: Whether previously absent class members may bring a class action outside the applicable limitations period on the theory that the pendency of a previous class action (in which the court ultimately denied class certification) tolled the statute of limitations during the pendency of earlier class actions. Court’s Holding: No. Previously absent class members may not bring successive (also called “stacked”) class actions outside the limitations period. “The ‘efficiency and economy of litigation’ that support tolling individual claims, . . . do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.” Justice Ginsburg, writing for the Court Gibson Dunn filed amicus briefs arguing against tolling for successive class actions for the Chamber of Commerce, Retail Litigation Center, and the American Tort Reform Association What It Means: The Court declined to extend the equitable tolling rule established in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), which permits putative class members to wait for a decision on class certification before filing an individual claim or intervening in the original lawsuit.  The Court held that the American Pipe rule does not toll the statute of limitations for putative class members to file class actions, so all class claims must be filed within the limitations period. The ruling ensures that when class certification is denied, a new plaintiff cannot revive otherwise expired claims by filing the case as a class action.  The Court explained that the decision about whether to certify a class should be made at the outset of the case for all would-be class representatives, and class members should not be able to extend the statute of limitations indefinitely by filing successive class actions each time class certification is denied. The Court made clear that its ruling applies regardless of the reason the court denied class certification in the first case. The Court stated that its ruling is not likely to lead to a dramatic increase in the number of protective class actions filed during the limitations period.  The majority of courts of appeals had already adopted the same rule, and those courts did not experience an increase in protective class action filings. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: Class Actions Theodore J. Boutrous, Jr. +1 213.229.7804 tboutrous@gibsondunn.com Christopher Chorba +1 213.229.7396 cchorba@gibsondunn.com Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 4, 2018 |
Supreme Court Holds That The Colorado Civil Rights Commission Violated Cake Baker’s Religious Freedom Rights

Click for PDF Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission, No. 16-111 Decided June 4, 2018 The Supreme Court held 7-2 that the Colorado Civil Rights Commission violated the Free Exercise Clause when it rejected a baker’s religious justification for refusing to create a wedding cake for a same-sex couple. Background: Jack Phillips, a Christian baker, refused to create a wedding cake for a same-sex couple.  The couple then filed a discrimination complaint with the Colorado Civil Rights Commission.  After investigating, the Commission concluded that Phillips had violated the Colorado Anti-Discrimination Act and rejected his argument that providing the cake would violate his First Amendment rights to free speech and free exercise of religion.  The Commission held formal public hearings about the case, during which some commissioners disparaged Phillips’ religious beliefs and suggested they were insincere. Issue: Whether the Commission’s decision violated the Free Speech Clause or Free Exercise Clause of the First Amendment. Court’s Holding: Yes.  The Commission violated the Free Exercise Clause because it did not give “neutral and respectful consideration” to the sincere religious beliefs that motivated Phillips’ objection. What It Means: The Court resolved the case on narrow grounds, focusing on the Commission’s animus toward Phillips’ religious beliefs and avoiding broader questions regarding the scope of religious exemptions to facially neutral laws of general applicability. The Court articulated principles that should guide the resolution of similar cases in the future, recognizing that “religious and philosophical objections to gay marriage are protected views and in some instances protected forms of expression,” yet cautioning that “such objections do not allow business owners and other actors in the economy and in society to deny protected persons equal access to goods and services.”  The Court emphasized that “gay persons and gay couples cannot be treated as social outcasts or as inferior in dignity and worth.” State agencies, courts, and other tribunals responsible for enforcing anti-discrimination statutes must consider sincere religious beliefs in a tolerant, neutral, and respectful way, consistent with “the religious neutrality that the Constitution requires.” Any future decision in favor of a business owner who refuses goods or services to a same-sex couple based on sincere religious beliefs must be “sufficiently constrained” to avoid imposing a “serious stigma on gay persons.” “[T]hese disputes must be resolved with tolerance, without undue disrespect to sincere religious beliefs, and without subjecting gay persons to indignities when they seek goods and services in an open market.” Justice Kennedy, writing for the majority Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 1, 2018 |
Supreme Court Round-Up (June 1, 2018)

As the Supreme Court continues its 2017 Term, Gibson Dunn’s Supreme Court Round-Up is summarizing the issues presented in the cases on the Court’s docket and the opinions in the cases the Court has already decided.  The Court has finished hearing arguments this Term, and we are awaiting decisions in 29 cases.  Gibson Dunn presented 3 oral arguments this Term, in addition to being involved in 11 cases as counsel for amici curiae.  Additionally, to date, the Court has granted certiorari in 18 cases for the 2018 Term, and Gibson Dunn is counsel for the petitioner in one of those cases. Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions.  The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions.  The Round-Up provides a concise, substantive analysis of the Court’s actions.  Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next.  The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions. To view the Round-Up, click here. Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 21 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the class action, intellectual property, separation of powers, and First Amendment fields. Moreover, while the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 23 certiorari petitions since 2006. *   *   *  * Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group. Theodore B. Olson (+1 202.955.8500, tolson@gibsondunn.com) Amir C. Tayrani (+1 202.887.3692, atayrani@gibsondunn.com) Brandon L. Boxler (+1 202.955.8575, bboxler@gibsondunn.com) Rajiv Mohan (+1 202.955.8507, rmohan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 31, 2018 |
California Supreme Court Spring 2018 Round-Up

Click for PDF Spearheaded by Daniel M. Kolkey, a former Associate Justice on the California Court of Appeal, Third Appellate District, and former Counsel to the Governor of California, Gibson Dunn’s California Appellate Practice Group has prepared the attached California Supreme Court Spring 2018 Round-Up, which previews upcoming cases and summarizes select opinions issued by the Court.  This edition includes opinions handed down from September 2017 through April 2018, organized by subject.  Each entry contains a description of the case, as well as a substantive analysis of the Court’s decision.  The Round-Up provides a resource for busy practitioners seeking an in-depth, timely, and objective report on the California Supreme Court’s actions. To view the Round-Up, click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court, or in state or federal appellate courts in California.  Please feel free to contact the following lawyers in California, or any member of the Appellate and Constitutional Law Practice Group. Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Daniel M. Kolkey – San Francisco (+1 415-393-8420, dkolkey@gibsondunn.com) Julian W. Poon – Los Angeles (+1 213-229-7758, jpoon@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Jennafer M. Tryck – Orange County (+1 949-451-4089, jtryck@gibsondunn.com) Michael Holecek – Los Angeles (+1 213-229-7018, mholecek@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.