Updates and Legal Development - Spring 2019

STATE ATTORNEYS GENERAL FILE APPEAL FROM RULING INVALIDATING AFFORDABLE CARE ACT

ATTORNEYS GENERAL FROM 16 STATES AND THE DISTRICT of Columbia have filed a notice of appeal with the U.S. Court of Appeals for the Fifth Circuit following a ruling by a Texas federal judge striking down the Patient Protection and Affordable Care Act (ACA) (111 P.L. 148) in its entirety.

U.S. Judge Reed O’Connor of the Northern District of Texas ruled December 14 that as a result of a provision contained in the Tax Cuts and Jobs Act of 2017 (TCJA) (115 P.L. 97) effectively reducing to zero the ACA’s individual mandate tax penalty as of January 1, the individual mandate is no longer a valid exercise of Congress’ taxing power. Further, the judge said, the individual mandate is inseverable from the remainder of the ACA, rendering the entire statute invalid. Texas v. United States, 2018 U.S. Dist. LEXIS 211547 (Dec. 14, 2018).

“Congress was explicit: The Individual Mandate is essential to the ACA, and that essentiality requires the mandate to work togetherwith the Act’s other provisions,” Judge O’Connor said. “If the ‘other provisions’ were severed and preserved, they would no longer be working together with the mandate and therefore no longer working as Congress intended. On that basis alone, the Court must find the Individual Mandate inseverable from the ACA. To find otherwise would be to introduce an entirely new regulatory scheme never intended by Congress or signed by the President.

”Following passage of the TCJA in December 2017, a group of Republican state attorneys general led by Attorney General Ken Paxton of Texas filed suit in the Texas court challenging the constitutionality of the ACA. In addition to Texas, the plaintiff states were Alabama, Arizona, Arkansas, Florida, Georgia, Indiana, Kansas, Louisiana, Maine, Mississippi, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Utah, West Virginia and Wisconsin. Democratic attorneys general from 16 states—namely, California, Connecticut, Delaware, Hawaii, Illinois, Kentucky, Massachusetts, Minnesota, New Jersey, New York, North Carolina Oregon, Rhode Island, Vermont, Virginia, Washington—and the District of Columbia intervened as defendants. The same 17 attorneys general are parties to the appeal filed with the Fifth Circuit.

Judge O’Connor issued a stay of his ruling on December 30, citing the uncertainty that enforcement would create during the appeal process.

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Employee Benefits & Executive Compensation > Health and Welfare Plans > Health Plans and Affordable Care Act > Articles

CONTRACT PROVISION CONTROLS ON ARBITRABILITY QUESTION, U.S. SUPREME COURT RULES

A CONTRACT PROVISION DELEGATING TO AN ARBITRATORthe question of whether a claim is subject to arbitration is controlling despite a judicial finding that the arbitration request is without merit, the U.S. Supreme Court has ruled in Henry Schein Inc. v. Archer & White Sales Inc., 2019 U.S. LEXIS 566 (Jan. 8, 2019).

In a unanimous ruling, the justices found that the judicially created “wholly groundless” exception to arbitrability is inconsistent with the Federal Arbitration Act (9 U.S.C.S. § 1, et. seq.) and Supreme Court precedent.

Archer & White sought money damages and injunctive relief in a suit filed in the U.S. District Court for the Eastern District of Texas alleging violation of federal and state antitrust law by Schein. A clause in the parties’ contract provided that, with the exception of intellectual property claims, disputes under the contract would be resolved by arbitration in accordance with American Arbitration Association rules. Schein moved to compel arbitration; a federal magistrate judge granted the motion, but a federal judge vacated the order, finding that the dispute was not arbitrable.

On appeal, the Fifth Circuit affirmed, finding Schein’s claim that the dispute is arbitrable is “wholly groundless” within the meaning of its own holding in Douglas v. Regions Bank, 757 F.3d 460 (5th Cir. 2014).

In an opinion written by Associate Justice Brett Kavanaugh—his first since taking the bench—the Court said, “The exception is inconsistent with the statutory text and with our precedent. It confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability. When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.”

The justices remanded the case to the Fifth Circuit for consideration of whether the contract in fact delegated the arbitrability question to an arbitrator. “The Court of Appeals did not decide that issue,” the Court said. “Under our cases, courts ‘should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.’”

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RESEARCH PATH: Civil Litigation > Arbitration and Other ADR > Articles

THE QUESTION OF WHETHER SHAREHOLDERS MUST show intentional wrongdoing in order to pursue class action claims related to pre-merger activities under Section 14(e) of the Securities Exchange Act of 1934 (15 U.S.C.S. § 78n(e)) will come before the U.S. Supreme Court later this year. (Emulex Corp. v. Varjabedian, No. 18-459, U.S. Sup. Ct.)

The justices on January 4 granted a petition by Emulex Corp. for review of a ruling by the U.S. Court of Appeals for the Ninth Circuit, Varjabedian v. Emulex Corp., 888 F.3d 399 (9th Cir. 2018), reinstating a securities class action alleging that Emulex Corp. concealed from shareholders that an acquisition offer from Avago Technologies Ltd. was too low.

The Ninth Circuit’s ruling came in a putative class action filed in the U.S. District Court for the Central District of California by Jerry Mutza on his own behalf and that of former Emulex shareholders contending that Emulex misled them by failing to share expert analysis showing that the premium offered to investors as part of a merger offer from Avago was below the industry average. The merger was completed, with Emulex shareholders receiving $8 per share, representing a premium of 26.4% on the Emulex stock price the day before the merger was announced.

U.S. Judge Cormac J. Carney dismissed the action in Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226 (C.D. Cal. 2016), finding that the shareholders failed to show intentional misconduct as required by Section 14(e). On appeal, the Ninth Circuit reversed and reinstated the suit, holding that Section 14(e) requires only a showing of negligence, not intent.

In so ruling, the Ninth Circuit parted company with five other federal appeals courts—the U.S. Courts of Appeals for the Second, Third, Fifth, Sixth, and Eleventh Circuits—but said that it is “persuaded that intervening guidance from the Supreme Court compels the conclusion that Section 14(e) of the Exchange Act imposes a negligence standard.”

The case is expected to be heard in the spring, with a decision issued before the end of the Supreme Court’s term in late June.

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RESEARCH PATH: Corporate and M&A > Tender Offers > General Considerations in a Tender Offer > Articles

PATENT AND TRADEMARK OFFICE ISSUES GUIDANCE ON PATENT ELIGIBILITY

THE U.S. PATENT AND TRADEMARK OFFICE (USPTO) has issued new guidance for patent examiners to follow when considering applications that contain abstract ideas that could otherwise lead to a finding of ineligibility. 2019 Revised Patent Subject Matter Eligibility Guidance, Department of Commerce, U.S. Patent and Trademark Office, No. PTO-P-2018-0053,https://www.federalregister.gov/documents/2019/01/07/2018-28282/2019-revised-patent-subject-matter-eligibility-guidance. The guidance, which is published in the Federal Register for public comment, governs all applications, and all patents resulting from applications, filed on or before January 7. Written comments on the guidance must be received by the USPTO by March 8.

The guidance, which is published in the Federal Register for public comment, governs all applications, and all patents resulting from applications, filed on or before January 7. Written comments on the guidance must be received by the USPTO by March 8.

The USPTO issued the guidance in response to what it called “uncertainty” in the legal community about the application of the Alice/Mayo test for eligibility under Section 101 of the Patent Act (35 U.S.C.S. § 101), set forth by the U.S. Supreme Court in Alice Corp. v. CLS Bank, 573 U.S. 208 (2014). In Alice, the high court, citing its own decision in Mayo v. Prometheus, 566 U.S. 566 (2012), established a two-part test for determining patent eligibility: (1) whether the claims are directed to a patent-ineligible concept and (2) whether the elements of the claim, both individually and in combination, transform the nature of the claims into a patent-eligible application.

The new guidance lists three categories of inventions deemed to constitute abstract ideas or “judicial exceptions” that, standing alone, are patent-ineligible: mathematical concepts, such as mathematical relationships, formulas or equations, and calculations; certain methods of organizing human activity, including economic principles or practices, commercial or legal interactions, and managing personal behavior or relationships; and mental processes or concepts performed in the human mind. All other inventions, with limited exception, do not fall within the definition of abstract ideas, the guidance states.

If an invention falls within one of the three categories, the guidance says, the examiner should determine if the idea is “integrated into a practical application.” If the idea is not integrated into a practical application, it is considered to be “directed to” the abstract idea under the guidance and is not patent eligible, according to the guidance.

In a statement, Andrei Iancu, director of the USPTO, said that the new guidance will “improve the clarity, consistency, and predictability of actions across the USPTO.” The agency will provide training to examiners and administrative patent judges to ensure proper administration of the guidance.

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RESEARCH PATH: Intellectual Property & Technology > Patents > Patent Litigation > Articles