Business Methods Are Not Excluded from Patent Protection
On June 28, 2010, the United States Supreme Court handed down its ruling in the In Re Bilski case. With a 5-4 majority, the Supreme Court held that its precedents and the text of the Patent Act contemplate that at least some processes that can be fairly described as business methods are within patentable subject matter under 35 U.S.C. §101.
The Court also held that the machine-or-transformation test is not the sole test for determining whether a claimed process, such as a business method, is patent eligible under §101. The Court did note, though, that the machine-or-transformation test may be a useful and important tool for determining whether some claimed processes are patent eligible under §101. Thus, the machine-or-transformation test will likely continue to be used as a tool by courts and the United States Patent and Trademark Office in determining patent eligibility for processes under §101.
Additionally, the Court’s opinion also appeared to acknowledge that software may be patent-eligible subject matter. For example, the Court noted that it was once forcefully argued that until recent times, “well-established principles of patent law probably would have prevented the issuance of a valid patent on almost any conceivable computer program.” The Court stated that this fact does not mean that unforeseen innovations such as computer programs are always unpatentable. The Court continued by describing §101 as a dynamic provision designed to encompass new and unforeseen inventions and noting that contrary interpretations would frustrate the purposes of the patent law.
A more detailed analysis of In Re Bilski is provided on Alston & Bird’s web site: Intellectual Property Advisory/June 30, 2010
For more information:
Michael S. Connor
(704) 444-1022
mike.connor@alston.com
Break-Up Fees and Reverse Break-Up Fees: A Reminder about Tax Treatment
Deal termination fees have become increasingly common, particularly in negotiated private equity transactions. Both targets and acquirers should be aware of the federal income tax treatment of these payments.
Regardless of whether the fee is a break-up fee paid by the target, or a reverse break-up fee paid by the acquirer, Treasury Regulation 1.263(a)-5(c)(8) requires the payor to capitalize the fee if the payor is terminating the transaction in order to enter into another transaction, and the two deals are “mutually exclusive.” This tax treatment cannot be changed by drafting, and parties should take into consideration the financial impact of the possible lack of deductibility when negotiating the amount of the fee each is willing to pay.
However, there may be some authority in a 2009 U.S. Tax Court opinion for arguing that a break-up fee is deductible when paid by a target in the face of a competing deal that is hostile. In Santa Fe Pacific Gold Company v. Commissioner, the facts included that Santa Fe entered into a merger agreement with a white knight to avoid a hostile takeover bid by a different suitor. The hostile bidder then increased its offer price, and the Santa Fe board was compelled by fiduciary duties to accept the increased price. Santa Fe paid its white knight a break-up fee of $65 million. Payment of the termination fee was triggered and paid in 1997, prior to the 2003 effective date of the Treasury Regulation requiring capitalization when there are mutually exclusive deals. In ruling that Santa Fe could deduct the fee, however, the Tax Court was emphatic in its endorsement of deducting a fee paid to a white knight in light of a hostile topping bid, and never mentioned the subsequently adopted Regulation. Perhaps on facts similar to those in Santa Fe, a challenge could be made to the validity of the Regulation.
Of course, if the fee is paid to terminate for reasons other than a competing transaction, such as Prudential Plc’s recent termination of the AIA Group Ltd. acquisition due to lack of Prudential shareholder support, the fee is likely deductible.
By Jasper L. (Jack) Cummings
(919) 862-2302
jack.cummings@alston.com
For more information:
Kazuhiro Shimizu
(404) 881-4255
kazuhiro.shimizu@alston.com
California to Regulate Consumer Products Imported from Japan
For the past four to five years, with increased globalization shifting product manufacturing outside of California, California has been studying ways to impose its high environmental air, water and toxics regulatory standards on those operations, even though located out of state. To accomplish this, California has embraced the approach that is called the California Green Chemistry Initiative, a program passed in 2008 that would regulate the manufacture of products sold into California — regardless of where the manufacturing takes place — to ensure that the way in which those products are manufactured and transported, and the chemicals that they contain, are environmentally "safe" from California's point of view.
This "Green Chemistry Initiative" was one of the major projects of California Department of Toxic Substances Control (DTSC) during the years in which Maureen Gorsen was its Director. Maureen joined Alston & Bird in 2009 in order to provide the firm's consumer product manufacturing clients with advice and counseling on the Green Chemistry requirements.
For the past two years, DTSC has been developing and proposing regulatory concepts for implementing the Green Chemistry Program. Now, in June 2010, DTSC has released a comprehensive set of draft regulations for “Safer Consumer Product Alternatives” that it intends to enact by the end of the year.
If these regulations are enacted, DTSC would identify and prioritize chemicals and the consumer products containing them for a variety of regulatory actions. Once listed as a priority product, the manufacturer will be required to perform an "alternatives analysis" based upon what the DTSC calls "life-cycle thinking": identifying whether there is a safer and more environmentally-friendly way in which it could have made and transported the product from Japan. If the DTSC determines in this analysis that what it considers to be a "safer" way exists, then DTSC may impose a ban of the product made the less safe way; a ban of ingredients for which a safer substitute was found; or other actions. If the DTSC determines that a "safer" way does not yet exist, then DTSC may impose a requirement that the manufacturer establish a take back or extended producer responsibility program, or require funding of green chemistry research and development in California to someday invent what the DTSC would consider as safer substitutes.
The deadline to provide comments to DTSC on its draft regulation ended on July 15, 2010. DTSC is expected to review those comments and proposed a revised draft at the end of August for formal adoption. If they keep that schedule, compliance requirements for Japanese companies could begin as early as January 2011.
For more information:
Ward L. Benshoof
(213) 576-1108
ward.benshoof@alston.com
Maureen F. Gorsen
(916) 498-3305
maureen.gorsen@alston.com
Recent Split in Federal Circuits on Spoliation Standards and Sanctions Regarding ESI
Two recent federal court opinions will significantly impact a litigant’s duty to preserve and collect electronically-stored information (ESI) and the sanctions that may be imposed when ESI is lost or destroyed. In both cases, the courts imposed the severe sanction of an adverse jury instruction due to spoliation of evidence. However, the courts disagreed on certain key issues such as when sanctions are warranted and the nature of the sanctions that should be imposed.
In Pension Committee of the Univ. of Montreal Pension Plan v. Banc of America Securities LLC, 685 F.Supp.2d 456 (2010), the U.S. District Court for the Southern District of New York held that severe sanctions may be appropriate for “gross negligence” alone and that failure to issue a written litigation hold or to take certain other steps may constitute gross negligence. This is in contrast to the holding by the U.S. District Court for the Southern District of Texas, in Rimkus Consulting Group, Inc. v. Cammarata, 688 F.Supp.2d 598 (2010), where the court held that “bad faith” is required for severe sanctions and that the party seeking sanctions must prove the relevance of the lost ESI and that it was prejudiced as a result of the loss of ESI before sanctions can issue.
These cases highlight the significant difference among the federal circuits in their approaches to spoliation allegations and the appropriate sanctions. While the Seventh, Eighth, Tenth, Eleventh and D.C. Circuits, like the Fifth, appear to require “bad faith,” the First, Fourth and Ninth Circuits, like the Second, do not. The Third Circuit, meanwhile, falls somewhere in between and requires a balancing between the degree of fault and prejudice. Both decisions provide valuable insight into what courts might expect of parties, and parties and their counsel would be well served to understand and follow the guidelines provided by the Pension Committee and Rimkus decisions.
For more information:
Douglas G. Scribner
(404) 881-7752
doug.scribner@alston.com
Joann M. Wakana
(213) 576-1059
joann.wakana@alston.com
U.S. Export Controls: 2010 Reform Effort
I. Goals of Export Reform
In August 2009, the Obama administration announced a full review of US export controls (administered by the Bureau of Industry & Security (BIS) under the authority of the Export Administration Regulations (EAR)) and defense trade export controls (administered by the Directorate of Defense Trade Controls (DDTC) under the authority of the International Traffic in Arms Regulations (ITAR)). The comprehensive review found the current U.S. export control systems are overly complicated, contain too many redundancies and do not sufficiently reduce national security risks.
There are four basic changes in the U.S export control system being considered as follows:
(1) One list of controlled items. The current two lists of controlled items – the Commerce Control List (CCL) for dual use items and the United States Munitions List (USML) for items controlled by the ITAR – will be combined into a single list of all controlled items. This single list will also make the USML, like the CCL, a “positive list” that clearly identifies items controlled.
(2) Creation of a single licensing agency. A new agency will replace BIS, DDTC and OFAC. Also there will be a new, single export license application.
(3) Creation of a single enforcement-coordination agency. The current system disperses enforcement responsibility to multiple agencies. While the enforcement agencies will remain the same, there would be a new group to coordinate investigations.
(4) Creation of a single IT system. Today there are multiple IT systems. The administration’s proposal is for a single online resource to receive, process and screen new license applications and end-users.
II. Implementation
The administration plans a three-phase approach to implementation of the changes: Phase I focuses on developing criteria-based control lists; Phase II focuses on consolidating licensing procedures; and Phase III focuses on congressional approval to complete the overhaul of U.S. export controls. Phases I and II involve reforms through regulatory changes, and progress against these goals is well underway. While the current aim of the administration was to have “as much done as possible” on Phases I and II of the export control reform initiative by August 2010, nothing is officially available yet.
III. Conclusion
While there is no dispute that the current U.S. export control systems need revision, past attempts of export reform have been unsuccessful. While the Obama administration is clearly strongly behind these changes, Phase III will face challenges in Congress.
Additional details are provided in the A&B International Trade & Regulatory Advisory.
For more information:
Kenneth G. Weigel
(202) 756-3431
ken.weigel@alston.com