The Jenner & Block Report
Updates on US Law for the Japanese Legal and Business Communities
() Class Action
: Patent Law: Recent Trends
Restructuring and Bankruptcy
/ Editors' Note
FCPAUnited States v. Hoskins 2FCPA
& South Dakota v. Wayfair, Inc.CFIUS FIRRMA 3 65
Welcome to the October 2018 edition of the Jenner & Block Report, a digest of updates about legal developments in the United States which are noteworthy to our valued clients and other leaders in the Japanese legal and business communities.
This edition's Featured Development discusses the US Court of Appeals for the Second Circuit's recent rejection of prosecutors' attempt to use conspiracy law to expand the reach of the Foreign Corrupt Practices Act (FCPA) in United States v. Hoskins. This ruling might have greater implications on foreign companies who are not subject to the FCPA, and gives
companies an argument that prosecutors cannot indict a company for violating conspiracy law if that company could not be charged with violating the FCPA itself.
This report also includes analyses of the US Supreme Court's ruling in South Dakota v. Wayfair, Inc., which creates new state tax concerns for international retailers, as well as the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), a bill strengthening the Committee on Foreign Investment in the United States (CFIUS). Also discussed are several important recent patent developments (three critical Supreme Court decisions that have altered the landscape of patentable subject matter eligibility in the life sciences area, as well as a Federal Circuit ruling which strictly construes an Inter Partes Review time-bar provision); a US Supreme Court ruling that narrows "safe harbor" defense in certain bankruptcy cases; and new changes to California's Proposition 65.
We hope that you find these summaries of interest and we thank you for taking the time to review the Jenner & Block Report.
Regards, The Jenner & Block Team
/ Featured Development
2FCPA United States v. HoskinsHoskins2
Hoskins2 2 FCPA FCPA FCPA
Hoskins2 FCPA HoskinsFCPAFCPA Hoskins FCPA FCPA
(1) FCPA (2) FCPA (3) FCPA (4) (1)~(3) FCPA
Court Limits FCPA Conspiracy Law
By Brandon D. Fox
US prosecutors routinely charge nearly any individual who has agreed to violate the law with a criminal conspiracy offense. This is so even if the individual could not be charged with committing the underlying offense. But the Second Circuit recently rejected prosecutors' attempt to use conspiracy law to expand the reach of the Foreign Corrupt Practices Act ("FCPA"). In United States v. Hoskins, the Court affirmed the dismissal of allegations that an executive of a European company had violated the law by conspiring with a subsidiary of a US company to provide corrupt payments to foreign government officials.
Using broad language, the Second Circuit held that US law "does not rule the world." As a result, courts should not apply US law for actions occurring outside of the US unless "the affirmative intention of the Congress [is] clearly expressed." Consistent with these propositions, the Second Circuit found that the FCPA does not allow prosecutors to have "jurisdiction over a foreign national who acts outside the US, but not on behalf of an American person or company as an officer, director, employee, agent or stockholder." Instead, the Court found that the individual could be charged with the crime of conspiracy only if he could be charged with violating the FCPA itself. Accordingly, in assisting with making corrupt payments, if the defendant allegedly acted within his role as an executive with a French company, he could not be charged with conspiring to violate the FCPA.
The ruling was a mixed-back for the defendant, however, as the Second Circuit also found that prosecutors properly charged him with violating the FCPA by alleging that he acted as an "agent" of a US company. Accordingly, while limiting the reach of conspiracy law to the FCPA, the Second Circuit reaffirmed the broad definition of the word "agent," by saying prosecutors could charge anyone acting on behalf of a company that is subject to the FCPA laws, from "executives" to "janitors" and "travel agents." As a result of the Court's ruling, the defendant will be tried for violating the FCPA. Additionally, US prosecutors are unlikely to become less aggressive in their charging decisions against foreign individuals. Instead, US prosecutors simply will allege in indictments that individuals were acting as "agents" of a company subject to the FCPA's reach, regardless of whether the individual was employed by a US company or by one that has no US connections.
While the defendant will still have to proceed to trial, the ruling might have greater implications on foreign companies who are not subject to the FCPA. Previously, US prosecutors might have tried to charge these companies with violating US conspiracy law if they, for example, allegedly agreed to help a US company bribe a foreign official. The ruling in Hoskins gives companies a good argument that prosecutors cannot indict a company for violating conspiracy law if that company could not be charged with violating the FCPA itself. The same is true for foreign officials receiving the bribes.
In a good guide for companies, the Second Circuit provided the categories of individuals and entities that fall under the FCPA's jurisdiction:
(1) American citizens, nationals, and residents, regardless of whether they violate the FCPA domestically or abroad; (2) Most American companies, regardless of whether they violate the FCPA domestically or abroad;
(3) Agents, employees, officers, directors and shareholders of most American companies, when they act on the company's behalf, regardless of whether they violate the FCPA domestically or abroad; and (4) Foreign persons (including foreign nationals and most foreign companies) not within any of the aforementioned categories who violate the FCPA while present in the United States
Based on the prevalence of other international corruption laws, a company should not use this list as a guide for when a corrupt payment will not subject it to criminal liability. Should a company find itself as a target of an FCPA investigation, however, this list and Hoskins may provide an argument for why the company and its executives are not subject to the reach of US prosecutors.
() / Class Action
Proposition 65's Newest Requirement: "Clear and Reasonable" Warnings
By Alice S. Kim
New changes to California's Proposition 65 (also known as The Safe Drinking Water and Toxic Enforcement Act of 1986) require companies to make additional and more specific warnings about their products. These changes, effective August 30, 2018, also include new Internet and catalog warning requirements.
Companies must now identify one or more of the approximately 1,000 listed chemicals that can cause cancer, birth defects, and/or other reproductive harm. The word "WARNING" (in bolded, all capital letters) as well as a hazard symbol (a triangle with an exclamation point at the center) must appear. Companies can also choose to include supplemental information and precautions, so long as they do not conflict with the warnings.
Companies that refuse to comply with these new changes will be vulnerable to lawsuits. Under California law, anyone can act as a "citizen enforcer" of the law: in other words, anyone can test a company's products for hazardous substances, put the company on notice, and then sue the company for failing to adequately warn about exposure to hazardous substances.
Even foods naturally containing carcinogens may not be protected from lawsuits. For example, a California state court recently rejected the "naturally occurring" defense Starbucks presented--Starbucks essentially argued that the chemical acrylamide naturally formed when roasting coffee and therefore should not be subject to Proposition 65 requirements--and ordered Starbucks to display Proposition 65 warnings about acrylamide in its coffee.
In 2017 alone, companies paid out nearly $26 million in Proposition 65 settlements. Moving forward, private enforcement lawsuits--and their price tags--will only increase from there.
/ Corporate Update
SEC to "Study" Whether to Abolish Quarterly Reporting Requirements in Favor of BiAnnual Reporting
By Brian Adesman
On August 17, 2018, President Donald Trump announced in a tweet that he "asked the SEC to study" whether to allow publicly traded companies to "[s]top quarterly reporting & go to a six month [reporting] system." Donald J. Trump (@realDonaldTrump), Twitter (Aug. 17, 2018, 4:30 AM) Later that day, SEC Chairman Jay Clayton confirmed that the Securities and Exchange Commission is studying "the frequency of reporting."
Currently, publicly traded companies are required to report the state of their balance sheet, including the company's sales and profits, each quarter. Critics of the quarterly reporting requirement suggest quarterly reporting forces companies to hyper-focus on short-term gains at the cost of long-term growth.
/ International Trade
United States Passes First Major Change to Review of Foreign Investments in Over a Decade
By Michelle Peleg
Foreign individuals and entities interested in investing in United States companies have a new set of rules to familiarize themselves with. President Trump signed into law on August 23, 2018, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), a bill strengthening the Committee on Foreign Investment in the United States (CFIUS).
The law's stated aim is to create broader protections against the risk to United States national security posed by certain foreign investors. This in turn will require greater hurdles for foreign investors than have existed historically. This law is the first major change to the national security review process for foreign investment in over ten years.
With the new law, the CFIUS review process is now mandatory instead of voluntary for an expanded number of transactions. Additionally, the law expands CFIUS's reach to transactions which were previously uncovered, such as minority stakes, non-controlling investments, bankruptcy transactions, and real estate transactions. Foreign investors interested in the technology industry will likely be impacted.
The new law requires mandatory notice to CFIUS at least forty-five days before closing when a deal results in a foreign person or entity holding a "substantial interest" in a "critical technology" or infrastructure company, or in a US company
holding sensitive personal information. Investors from outside the United States should keep their eye out for upcoming regulations further clarifying "critical technology" and "critical infrastructure" standards.
Moreover, CFIUS now explicitly has the right to review all transactions designed to evade CFIUS review. Using a strategy to avoid CFIUS is now more risky.
Foreign investors should note that only some parts of the bill take effect immediately, and others will take up to a year and a half before taking effect.
: / Patent Law: Recent Trends
101 1980 Diamond v. Chakrabarty
3 2012Mayo Collaborative Serv. v. Prometheus LabsMayo 2013DNA Ass'n for Molecular Pathology v. Myriad G enetics, Inc.2014Alice Corp. Pty. Ltd. v. CLS Bank Int'lAlice Alice Alice
2 1 2
2 Ariosa Diagnostics, Inc. v. Sequenom, Inc. Ariosa Mayo2 Mayo
Cleveland Clinic Found. v. True Health Diagnostics LLC
Vanda Pharm. Inc. v. W.-Ward Pharm. Int'l LtdVanda MayoVanda Vanda
Subject Matter Eligibility in the Life Sciences under US Law: Where Do We Go From Here?
By Louis E. Fogel and Smitha B. Uthaman
Under US law, 35 U.S.C 101 defines patentable subject matter as "any new and useful process, machine, manufacture, or composition of matter," excluding laws of nature, natural phenomenon, and abstract ideas. In 1980, the US Supreme Court described the metes and bounds of subject matter eligibility quite broadly by stating that "Congress intended statutory subject matter to include anything under the sun that is made by man." Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980).
Since that time, three critical Supreme Court decisions have altered the landscape of patentable subject matter eligibility in the life sciences area. In 2012, the Court ruled that the correlation between drug metabolite levels and the efficacy or toxicity of a drug is a law of nature and cannot be protected by a patent. Mayo Collaborative Serv. v. Prometheus Labs. 566 U.S. 66 (2012). In 2013, the Court held that a naturally occurring DNA segment is a product of nature even when isolated from an organism's genome, and is therefore patent ineligible. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. 576 (2013). And finally, in 2014, the Court held that exchanging financial obligations was an abstract idea and that implementing an abstract idea using generic computer systems and software did not make it patent eligible subject matter. Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014). While Alice is not a life sciences case, US courts apply it to the analysis of life science patents when there is a comparison step involved in the claims that may be equated to an abstract idea.
Critics argue that the Supreme Court should reconsider the breadth and scope of these rulings since they assert it stifles innovation in the life sciences industry. Courts currently use a two-step test to determine whether claims are directed to patent-eligible subject matter. Step one involves deciding whether the claim is directed to a judicially-excluded law of nature, a natural phenomenon, or an abstract idea. If so, then the analysis proceeds to step two which involves determining whether the claim includes an inventive concept. Courts have found an inventive concept to be absent (and thus not directed to patentable matter) in a number of situations, for example, if claim limitations merely add the instructions "apply it" to an abstract idea; they only add well-understood, routine, and conventional activity to the claim; they constitute insignificant incidental activities or routine data gathering steps; or if they merely restrict the claim to a particular technological field of use.
Application of this test has resulted in the invalidation of a number of life science patents directed to diagnostic methods for personalized medicine. For example, in Ariosa Diagnostics, Inc. v. Sequenom, Inc., the Federal Circuit invalidated a patent directed to a medical test for detecting fetal genetic conditions in early pregnancy that avoids invasive techniques that are
potentially harmful to both the mother and the fetus. 788 F.3d 1371 (Fed. Cir. 2015). The Federal Circuit held that the claims read on the use of a natural phenomenon in combination with well-understood, routine, and conventional activity. Id. at 1378. In his concurring opinion, Judge Linn elaborated that he only joined the court's opinion because he was "bound by the sweeping language of the test set out in Mayo...[t]his case represents the consequence--perhaps unintended--of that broad language in excluding a meritorious invention from the patent protection it deserves and should have been entitled to retain." Id. at 1380. The Supreme Court declined to grant certiorari.
Also, in Cleveland Clinic Found. v. True Health Diagnostics LLC, the patents at issue claimed methods for detecting the presence of an enzyme, myeloperoxidase, that is released into the blood when an artery wall is damaged, which is used to help predict the risk of cardiovascular disease. 859 F.3d 1352, 1355 (Fed. Cir. 2017). The Federal Circuit held the case to be similar to Ariosa in that the claimed method "starts and ends with naturally occurring phenomena with no meaningful nonroutine steps in between" and that therefore the claims are directed to a natural law. Id. at 1361. The Supreme Court declined to grant certiorari in this case as well.
A recent decision from the Federal Circuit, however, suggests the court is recognizing a safe harbor for specific applications of natural relationships in method of treatment claims. In Vanda Pharm. Inc. v. W.-Ward Pharm. Int'l Ltd., the patents at issue relate to a method of treating schizophrenia patients with iloperidone wherein the dosage range is based on the patient's genotype. 887 F.3d 1117 (Fed. Cir. 2018). The dosage range is arrived at by appreciating the relationship between enzyme metabolism and heart rhythm function. As in Mayo, the claims in Vanda also correlate an individual's ability to metabolize the drug with the proper dosage for that individual. However, in Vanda, while the inventors recognized the relationships between iloperidone, enzyme metabolism, and heart rhythm function, they did not claim those relationships; rather they claimed an application of that relationship. Id. at 1135. The Federal Circuit held that the specific dosage limitations recited in the claims were sufficient to make the claims patent eligible. The Federal Circuit denied a petition for en banc rehearing and it remains to be seen if a petition for certiorari will be filed to the Supreme Court.
These decisions indicate that while the determination of subject matter eligibility for life sciences patents is still evolving, there are some industry trends that are emerging. When claims are directed to a natural phenomenon, a law of nature, or an abstract idea, they should recite elements that are sufficiently concrete as well as novel and nonobvious in order to avoid invalidation under 35 U.S.C. 101. Life science companies that invest in bringing their inventions to market, particularly inventions directed to diagnostic methods, should ensure that their patents include claims that are application focused and apply steps that are not well-understood, routine, or conventional.
The America Invents Act 1 315(b)
2018816Click-to-Call Technologies, LP v. Ingenio, Inc.Click-to-Call Click-to-CallIngenio Keen, Inc.2001Cl ick-to-CallCTC2001112012Ingenio IngenioIngenio20 01CTC 2001 Ingenio
315(b) 1Ingenio Wifi One1
Federal Circuit Strictly Construes IPR Time-Bar Provision
By Nick G. Saros
The America Invents Act includes a time-bar provision that a petition for Inter Partes Review may not be instituted if the petition "is filed more than one year after the date on which the petitioner, real party in interest, or privy of the petitioner is served with a complaint alleging infringement of the patent." 35 USC 315(b).
On August 16, 2018, in Click-to-Call Technologies, LP v. Ingenio, Inc., an en banc Federal Circuit strictly enforced this provision. Prior to the Click-to-Call case, the defendant (then named Keen, Inc.) faced a patent suit in 2001, which was later dismissed without prejudice after resolution of that case. Click-to-Call (CTC) acquired the early-mentioned patent eleven years later in 2012 and filed suit against Ingenio. Ingenio responded with a petition for IPR seeking to invalidate those claims. Addressing CTC's objections that Ingenio was time-barred due to the complaint served in 2001, the PTAB found the dismissal in 2001 negated the effective service of the complaint and therefore did not invoke the time-bar provision.
On appeal, the Federal Circuit reversed. It found that the statute is unambiguous, and because Ingenio was served with a patent complaint more than one year before filing its IPR, the statute requires the petition must be denied as timebarred. The Court also noted its prior decision in WiFi One holding the time-bar provision "cannot be rectified" after failure to abide by the one year filing requirement.
This decision may have significant practical implications for defendants. For instance, a patentee may serve a complaint against a party, and then withdraw that complaint just one day later. Under Click-to-Call, the clock begins to run for that defendant to challenge the patent through IPR even though it no longer faces an actual controversy. If sued again later, that defendant will be precluded from seeking Inter Partes Review.
/ Restructuring and Bankruptcy
5482 544 546(e) 546(e) Merit Management Group, LP v. FTI Consulting, Inc. Merit Management 546(e) Merit Management 546(e) 546(e) Merit Management
546(e) 546(e) 546(e)
Supreme Court Narrows "Safe Harbor" in Merit Management
By Melissa M. Root
The Bankruptcy Code permits a trustee to avoid and recover certain prepetition transfers that were constructively fraudulent (i.e. made for less than reasonably equivalent value at a time when the debtor was insolvent or about to become insolvent, and made within two years of the petition date under 548 or within the applicable state statute of limitations under 544). Section 546(e) contains an exception, providing a "safe harbor" for transfers that are margin payments or settlement payments made to financial institutions, brokers, clearing agencies, etc. Section 546(e) was intended to avoid potential market disruption if these sorts of transactions were avoided. In recent years, courts have applied Section 546(e) very broadly. This year, in Merit Management Group, LP v. FTI Consulting, Inc., the Supreme Court departed from that trend and narrowed the ability of defendants to rely upon 546(e) as a defense to an avoidance action. Prior to Merit Management, most circuits had held that every exchange of cash for stock was protected from avoidance if the cash transferred through the banking system. Those circuits reasoned that even if the persons buying and selling the stock were not the types of entities protected by 546(e), if those persons wired money or otherwise used the banking system to accomplish the transaction, money moved through financial institutions--making 546(e) applicable. In Merit Management, the Court affirmed and rejected a broad reading of 546(e), holding that the "relevant transfer for purposes of the 546(e) safe-harbor inquiry is the overarching transfer that the trustee seeks to avoid under one of the substantive avoidance provisions." The fact that there are related "component transactions" that would be subject to the safe harbor defense if the trustee sought to avoid those transfers does not shield the transfer the trustee is actually seeking to avoid if that transfer, standing alone, would not qualify for 546(e) protection.
20186South Dakota v. Wayfair, Inc.Wayfair sales tax 50 Wayfair
substantial nexus Wayfair Wayfair
Wayfair(1) 10 200(2) Wayfair
(1) Wayfair (2) (3) 7.25% 10.25%Wayfair 1Wayfair
Supreme Court Decision Creates New State Tax Concerns for International Retailers
By Gail H. Morse, Geoffrey M. Davis, Mark A. Reinhardt and David D. Heckman
This June, the United States Supreme Court in South Dakota v. Wayfair, Inc., overturned fifty-year-old precedent that prohibited a State from imposing State sales tax (or a State tax collection responsibility) on a business, unless the business had a physical presence in the State. States are generally not bound by international tax treaties because they are not a party to the treaty. Consequently, the Wayfair decision requires non-US companies that sell goods or provide taxable services to US customers to now consider whether they have State sales tax collection and filing obligations in the States in which their products are shipped or services are received.
Physical presence has been the "bright line" test for determining whether a business has a "substantial nexus" in a State so the State could impose a sales tax or sales tax collection responsibility on the business. In eliminating the physical presence test, the Court did not provide a replacement bright-line rule for what would satisfy the "substantial nexus" test going forward. Instead, the Court held only that "substantial nexus" may be satisfied by a business's "economic" and "virtual" contacts with the taxing State. As a result of the Wayfair decision, States are now free to impose taxes on sales of goods and services (and collection responsibilities on the seller) regardless of whether the seller has a physical presence in the State.
To measure the economic and virtual presence of a business, States set economic thresholds that, when exceeded, create a taxable presence in the State. In Wayfair, the Court strongly implied the South Dakota statute was acceptable because it (1) applies only to sellers that deliver more than $100,000 of good or services into the State or engage in 200 or more separate transactions for delivery of goods or services into the State and (2) does not apply to any sales that pre-date the Court's Wayfair decision. Many States have similar statutes with varying thresholds, or are expected to adopt similar statutes soon.
In light of Wayfair, Japanese companies making significant sales to US purchasers should consider, at a minimum, the following three questions:
(1) In which States does the company make significant sales, and do those States have, or might they soon adopt, laws imposing State sales tax (or collection responsibility) on sales into the State via the internet? There are several States that have already adopted laws similar to the South Dakota law at issue in Wayfair. (2) Are any exemptions available? Many States exempt from sales tax goods such as cold food products and medical supplies and devices.
(3) What is the company's potential exposure under such State laws? Sales tax rates can vary by State and local jurisdictions within States. For example, California's sales tax rate is a minimum of 7.25% (when combined with local sales taxes, the rate may be as high as 10.25% in some California counties). Exposure could also be retroactive, going back several years in the past. However, there are defenses to a State's aggressive attempt to apply Wayfair to collect
tax for past periods, including the Wayfair decision itself. There, the Court cited the lack of retroactivity as a favorable
aspect of the South Dakota tax, and would likely be skeptical of an attempt to apply Wayfair to past periods.
 https://twitter.com/realDonaldTrump/status/1030416679069777921  https://www.sec.gov/news/public-statement/statement-clayton-081718  https://www.whitehouse.gov/briefings-statements/remarks-president-trump-roundtable-foreign-investment-risk-reviewmodernization-act-firrma/  https://www.law.com/americanlawyer/2018/08/10/081018cfius/
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