A group of oil and gas lessors/royalty owners — who won more than $21 million on fraud and breach of lease claims at trial but lost in the court of appeals — prevailed today in the Supreme Court of Texas.

A rarity for the producer-leaning Court, the 9-0 decision in Hooks v. Samson Lone Star, Ltd. P’ship, No. 12-0920 (Tex. Jan. 30, 2015), addresses several important oil and gas issues. They include:

  • whether false information in the public record can defeat a limitations defense;
  • the effect of a most-favored-nations clause on royalty obligations;
  • waiver of a claim for breach of a promise to drill an offset well;
  • calculation of post-judgment interest.

Blawgletter will provide specifics as time permits.

Auto PartsA beastly hard theory

The latest antitrust ruling by the Fifth Circuit favors a giant, General Motors, despite its huge share of the parts market that the plaintiff accused it of monopolizing. But the case says less about the Fifth Circuit's pro-defense leanings than it does about the steep odds against predatory-pricing cases in general.

The case

In Felder's Collision Parts, Inc. v. All Star Advertising Agency, Inc., No. 14-30410 (5th Cir. Jan. 27, 2015), the panel looked at whether the plaintiff Felder's had alleged a plausible antitrust claim. Felders alleged that a GM parts dealer, All Star, had engaged in below-cost pricing in order to drive out rivals like Felder's.

Speaking through Judge Gregg Costa — the Fifth Circuit's newest member and a very bright fellow indeed — the court agreed with a Louisiana district judge that Felder's could never prevail on its claim. A predatory pricing theory, the court noted, requires that the defendant sell something at less than "average variable cost", aiming to starve competitors of profits and later (after they die or quit) to recoup the losses by charging monopoly prices. Felder's, slip op. at 5 & 8. 

Rebate saves the day

But the GM parts dealer didn't charge less than its cost. Although All Star and others in GM's "Bump the Competition" program did undercut Felder's pricing and in doing so charged less than what they paid GM for the parts, GM gave the dealers rebates that turned nominal losses into real profits.

An alternative?

Why, you might ask, didn't Felder's complain about GM's prices instead of the dealers'? The panel wondered the same thing:

[I]t would seem that a successful predatory pricing scheme of this nature would primarily benefit GM by driving aftermarket equivalent parts from the market. But Felder’s has never alleged that GM is selling parts below its costs, focusing instead on allegations that GM dealer All Star is selling parts at prices below its costs. The viability of Felder’s claims thus turns on whether it can show that All Star is engaged in predatory pricing at the dealer level.

Felder's, slip op. at 6-7.

So why did Felder's limit its claim to the prices dealers charged? The likely answer arises from a simple fact about predatory pricing claims. If the claim had focused on what GM charged its dealers, Felder's would have had to show that GM's average variable cost of making the parts exceeded what GM sold the parts for. That task would require details about GM's manufacturing processes for multiple parts, reports and testimony by an economics expert or two, and hundreds of thousands of dollars in expense. Far better to cite the delta between the nominal price that dealers paid GM and the (lower) price they charged customers, no?

Lesson

Antitrust claims promise treble damages, but they involve a lot of risk, both factual and legal. Felder's claim foundered on a legal question — do the rebates count? — but many other things could have gone wrong (e.g., definition of the relevant product market).

Some kinds of antitrust claims present a better risk/reward ratio. These include allegations of price-fixing and other conduct that the Supreme Court has deemed per se unlawful under the Sherman Act. Current examples of such cases include ones relating to foreign exchange, the London Inter-bank Offer Rate (LIBOR), e-books, and — yes — after-market auto parts.

Both Felder's and In re Automotive Parts Antitrust Litigation, 12-md-02311 (E.D. Mich.), concern auto parts, but the latter involves claims of price-fixing rather than a (non-per se) monopolization theory. And the $100+ million in class settlements so far attests to the fact that per se beats "rule of reason" almost every time.

LIBORUnanimous Court orders review of key district court ruling 

The Second Circuit made a mistake when it refused to hear an appeal, the Supreme Court held 9-0 today in Gelboim v. Bank of Am. Corp., No. 13-1174 (U.S. Jan. 21, 2015); see Supreme Court Takes LIBOR Case, Blawgletter®, July 1, 2014.

The Court's ruling will hasten – by a year or more – review of a key decision by the district court that has the job of handling price-fixing and other claims in the massive In re Libor-Based Financial Instruments Antitrust Litigation, No. 1:11-md-02262-NRB (S.D.N.Y.).

Gelboim also will likely affect how district judges and parties deal with discrete legal issues that could dispose of some but not all claims in complex, multi-district cases like Libor.

Gelboim and Libor

The underlying case — in which Blawgletter's firm serves as co-lead counsel for a plaintiff class — arose from efforts by banks during 2007-10 to suppress the London Inter-bank Offer Rate, or LIBOR. Because trillions of (nominal) dollars in loans, swaps, and other financial instruments use LIBOR as a benchmark (according to one source, "Libor underpins approximately $350 trillion in derivatives"), the banks' machinations caused them to appear more financially sound and thus enabled them to pay less in interest to commercial paper and other lenders, counterparties to interest-rate swaps, and others.

The plaintiffs in Gelboim alleged one claim — that "a number of banks, acting in concert, had violated federal antitrust law" by fixing LIBOR, in violation of Sherman Act section 1. Gelboim, slip op. at 1. The Judicial Panel on Multidistrict Litigation assigned Gelboim and dozens of other cases from around the country to a single judge, in the Southern District of New York, "for pretrial proceedings" under 28 U.S.C. § 1407. Id.

Dismissal and appeal — and dismissal of appeal

Acting on the banks' motions to dismiss, the district court threw out the antitrust claims of all Libor plaintiffs, including those in Gelboim. The court held that the plaintiffs could not prove "antitrust injury" from the banks' conspiracy to suppress LIBOR.

The Gelboim plaintiffs filed a notice of appeal in the Second Circuit, which oversees district courts in New York, Connecticut, and Vermont. That court dismissed the appeal on its own motion. It explained that the "orde[r] appealed from did not dispose of all claims in the consolidated action." Gelboim, slip op. at 6.

High Court review — and reversal

The Gelboim plaintiffs filed a petition for review by the Supreme Court, which promptly granted it. The Court heard argument on December 9, 2014. Its unanimous ruling followed fewer than 60 days later.

The Court, per Justice Ginsburg, disposed of the issue before it in 10 pages. The putting of multi-district cases before one district judge for pretrial purposes does not, the Court ruled, effect a melding of them such that all dispositive orders must await a complete wrap-up of the MDL proceeding.

"Cases consolidated for MDL pretrial proceedings ordinarily retain their separate identities, so an order disposing of one of the discrete cases in its entirety should qualify under [28 U.S.C.] §1291 as an appealable final decision." Gelboim, slip op at 6-7.

Impact

The Court's ruling effectively permits all parties in Libor to obtain Second Circuit review of the district court's dismissal order. It also strengthens the hand of all Libor plaintiffs in any settlement talks with defendant banks, not least because the again-in-play antitrust claims allow joint and several liability regardless of contractual privity and permit recovery of treble damages and attorneys' fees. The state-law claims that remained after the dismissal of the price-fixing claims conferred neither advantage, the district court believed.

Gelboim may or may not speed up the handling of other MDL cases. MDL judges and parties now know that a dispositive ruling having "the hallmarks of a final decision" for even a single case among dozens, hundreds, or thousands can prompt appellate review as the other cases in the MDL lumber on.

Will that knowledge result in behavior that aims to postpone a "final decision" for strategic or tactical reasons? We will have to wait and see.

The U.S. Supreme Court held 8-2 today that the Federal Circuit may no longer ignore some rulings by trial court judges on how to construe patent claims. The outcome marks a major victory for parties that win the often-decisive battles over claim construction in Markman hearings in district court.

In Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., No. 13-854, slip op. at 4 (U.S. Jan. 20, 2015), the Court held that Rule 52(a)(6) governs review of "a district court's resolution of subsidiary factual matters made in the courtse of its construction of a patent claim."

The case turned on the meaning of "molecular weight" in a patent on a method for making a drug, Copaxone, that doctors prescribe for multiple sclerosis. The district court heard evidence on whether "a skilled artisan" in the field would know what the term meant, found that he or she would grasp it, and rejected Sandoz's attack on the patent as invalid for indefinitess.

On appeal, the Federal Circuit reversed, ruling de novo that "molecular weight" had no definite meaning in the patent.

Justice Breyer's majority opinion for the Court vacated the Federal Circuit's decision and remanded for the lower court to reconsider in light of its obligation under Rule 52(a)(6) to uphold the district court's fact findings unless Sandoz showed "clear error".

Although the Court's ruling applies both to infringement plaintiffs and infringement defendants, it as a practical matter helps plaintiffs more. Parties that claim infringement often have fewer resources than defendants do and must pursue claims — if at all — on a contingent-fee basis. For firms that handle infringement claims under a contingent-fee arrangement, winning in the trial court is crucial, and holding that victory on appeal is key.

By making trial courts' Markman determinations less subject to appellate tinkering, the Court even-handedly leveled the playing field. But infringement plaintiffs and their contingent-fee counsel are the ones smiling the most.

Quote of the Day: Martin Luther King, Jr.

MLK  
Martin Luther King, Jr. (1929-68).

I know you are asking today, "How long will it take?" Somebody’s asking, "How long will prejudice blind the visions of men, darken their understanding, and drive bright-eyed wisdom from her sacred throne?" Somebody’s asking, "When will wounded justice, lying prostrate on the streets of Selma and Birmingham and communities all over the South, be lifted from this dust of shame to reign supreme among the children of men?" Somebody’s asking, "When will the radiant star of hope be plunged against the nocturnal bosom of this lonely night, plucked from weary souls with chains of fear and the manacles of death? How long will justice be crucified, and truth bear it?"

I come to say to you this afternoon, however difficult the moment, however frustrating the hour, it will not be long, because "truth crushed to earth will rise again."

How long? Not long, because "no lie can live forever."

How long? Not long, because "you shall reap what you sow."

How long? Not long:

Truth forever on the scaffold,

Wrong forever on the throne,

Yet that scaffold sways the future,

And, behind the dim unknown,

Standeth God within the shadow,

Keeping watch above his own.

How long? Not long, because the arc of the moral universe is long, but it bends toward justice.

How long? Not long, because:

Mine eyes have seen the glory of the coming of the Lord;

He is trampling out the vintage where the grapes of wrath are stored;

He has loosed the fateful lightning of his terrible swift sword;

His truth is marching on.

He has sounded forth the trumpet that shall never call retreat;

He is sifting out the hearts of men before His judgment seat.

O, be swift, my soul, to answer Him! Be jubilant my feet!

Our God is marching on.

Glory, hallelujah! Glory, hallelujah!

Glory, hallelujah! Glory, hallelujah!

His truth is marching on.

Martin Luther King, Jr., March 25, 1965, Montgomery, Alabama.  Watch it here.

Global BusinessDear Blawgletterati:

A rebuke

Drop dead, the Seventh Circuit on November 26 told U.S. firms that want to collect treble damages under the Sherman Act for fixing prices on their foreign subs' purchases overseas.

Either have your subs buy the stuff in the U.S., the panel ruled, or purchase the goods for import into the U.S. yourself.

And quit your belly-achin', you could almost hear Circuit Judge (and antitrust maven) Richard Posner say.

Backdrop

The case that produced the Posner poke involved sales of liquid-crystal display panels by members of a price-fixing cartel. The price-fixers sold more than $5 billion worth of the panels to the Motorola phone-making enterprise, but only one percent of that amount went straight to the U.S. parent company; Motorola's non-U.S. subs bought the rest.

Motorola the parent joined with its overseas offspring in suing AU Optronics, Samsung, Sanyo, and other foreign members of the cartel. They noted, among other bits of proof, that a U.S. jury had already found AU Optronics guilty of fixing prices on LCD panels.

But, unlike the U.S. Department of Justice's Antitrust Division, Motorola and its subs had to prove not only that the bad conduct has a "direct, substantial, and reasonably foreseeable effect" on U.S. "trade or commerce", 15 U.S.C. 6a(1), but also that the "effect" on U.S. trade or commerce "gives rise to" the Sherman Act claim, id. 6a(2).These twin requirements of the Foreign Trade Antitrust Improvements Act (which Congress passed and President Ronald Reagan signed in 1982) doomed the claims by the non-U.S. Motorola entities to dismissal by the district court.

Affirmance

Without briefing or oral argument, the Seventh Circuit upheld the judgment. When Motorola protested, the same panel allowed both. But none of it mattered.

In Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003 (7th Cir. Nov. 26, 2014), the court affirmed on the basis of the "gives rise to" prong of the FTAIA test. Judge Posner put a spotlight on the problem:

What trips up Motorola’s suit is the statutory requirement that the effect of anticompetitive conduct on domestic U.S. commerce give rise to an antitrust cause of action. 15 U.S.C. § 6a(2). The conduct increased the cost to Motorola of the cellphones that it bought from its foreign subsidiaries, but the cartel-engendered price increase in the components and in the price of cellphones that incorporated them occurred entirely in foreign commerce.

Motorola, slip op. at 6. The "price increase . . . occurred entirely in foreign commerce" because Motorola's foreign subs bought and took delivery of the LCD panels outside the U.S. That the cartel members knew the subs would send the panels to Motorola for resale in the U.S. might have met the "direct, substantial, and reasonably foreseeable effect" prong of the FTAIA, but it couldn't satisfy the one requiring the domestic effect to "give[] rise to" the antitrust claim, the panel held.

Forum Shopping and Illinois Brick

Judge Posner gave two main reasons for the ruling. He explained that Motorola chose to run its business overseas through non-U.S. subsidiaries and must therefore live with the consequences of that choice. "For example," he noted, "although for antitrust purposes Motorola contends that it and its subsidiaries are one . . . , for tax purposes its subsidiaries are distinct entities paying foreign rather than U.S. taxes." Motorola, slip op. at 7. "No doubt Motorola thinks U.S. antitrust remedies more fearsome than those available to its foreign subsidiaries under foreign laws", he added. "But that’s just to say that Motorola is asserting a right to forum shop." Id. at 8. 

Nor did Motorola's position square with a bedrock doctrine of U.S. antitrust law — the "indirect purchaser" rule of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Illinois Brick "forbids a customer of the purchaser who paid a cartel price to sue the cartelist, even if his seller—the direct purchaser from the cartelist—passed on to him some or even all of the cartel’s elevated price." Motorola, slip op. at 9. The FTAIA's "gives rise to" requirement, Judge Posner urged, in effect enforces Illinois Brick's bar to damages suits by indirect purchasers. 

Bright-line rule?

Still, the Motorola opinion does leave a sliver of daylight for U.S. firms that buy components in foreign climes. The beam comes in the guise of the "pass-on defense" to Illinois Brick. As Judge Posner pointed out, the Court in Illinois Brick mentioned that a “situation in which market forces have been superseded and the pass‐on defense might be permitted is where the direct purchaser is owned or controlled by its customer.” Illinois Brick, 431 U.S. at 736 n.16. And a "customer" that "own[s] or control[s]" the "direct purchaser" sounds a lot like a parent company such as Motorola.

Judge Posner argued that the Illinois Brick exception may not matter, at least if you look at things from the subs' point of view:

Although Motorola, the “customer,” owns its foreign subsidiaries—the “direct purchasers” of the components—they are incorporated under and regulated by foreign law. What remedies they may have, if they overpay for inputs that they buy abroad, are determined not by U.S. anti‐trust law but by the law of the countries in which the subsidiaries are incorporated and are therefore citizens of, or the countries in which the price fixers they bought from operate, or the countries in which the purchases were made. And that is quite apart from Illinois Brick or other sources of U.S. anti‐trust law.

Motorola, slip op. at 12-13.

No cigar

But that rationale doesn't quite hold up. What if the relevant sale came not when the foreign subs bought the panels overseas but when Motorola purchased the phones that featured the panels in the U.S. from those subs? Wouldn't that avoid the moral peril of letting foreign firms reap the tax and other benefits of their non-U.S. status while also permitting them to morph into U.S. entities for purposes of suing under the Sherman Act?

Yes, it would. But Motorola had long before chosen not to base its claim in the passing-on theory. As Judge Posner put it:

In any event Motorola waived in the district court any argument that it could base damages on the effect of the cartel’s pricing of components on the cost to Motorola of cell-phones incorporating those components. It argued only that its foreign subsidiaries overpaid for the LCD panels. How the overcharge may have affected Motorola’s cellphone business because of the component price fixing was a path that Motorola stepped off of after the pleadings.

Motorola, slip op. at 13-14.

A U.S. enterprise whose non-U.S. subs buy goods overseas thus may have a claim despite the FTAIA, but the enterprise must base its damages model on the passing-on of price-fixing overcharges by the subs to the parent.

What to do?

If your company finds itself on the losing end of an international cartel, you should think about asking for a consultation with an antitrust expert. In many instances, the potential recovery would easily justify the expense of having the expert take a close look at the potential claim. 

Yours truly,
Blawgletter

Light BulbAnother patent just failed the Supreme Court's airy test for unpatentable "abstract ideas".

A whiter shade of pale

Patents that define ways to make money through commerce on the Internet never have gotten much respect.

In the last year, a series of rulings by the Federal Circuit and the Supreme Court bled much of the remaining color out of the "business method" patents.

A new decision in an old case has now turned them an even whiter shade of pale.

Patent-eligible subject matter

Before we get there, let's review some recent history on the general question of patentable (or patent-eligible) subject matter.

As Blawgletter noted a couple of months ago, under section 101 of the Patent Act:

A patent must do more . . . than link a notion — however clever — to a device that carries it out. You need "something 'inventive' that somehow 'transforms' the unpatentable subject matter into something other than a law of nature, natural phenomenon, or abstract idea."

Blawgletter, Sept. 7, 2014, "Federal Circuit Forecloses Online-Guaranty Patent".

We also explained:

Section 101 of the Patent Act allows patents on "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof". 35 U.S.C. 101. But, the Supreme Court has held, it does not make laws of nature, natural phenomena, or abstract ideas patentable. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013). Those things "are the basic tools of scientific and technological work" and therefore fail section 101's test for patentable subject matter. Gottschalk v. Benson, 409 U.S. 63, 67 (1972).

Alice Corp.

Then we turned to the big business method patent case that the Supreme Court had decided a few months before, at nearly the end of its 2013-14 Term:

In Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014), the Court declined to adopt a per se rule against patents that involve "business methods", which some people maintained do nothing more than describe patent-ineligible ideas about how to engage in commerce. The Court nonetheless struck down Alice Corp.'s patent on "financial intermediation" as not "inventive" enough to "transform" the concept of having a third-party intermediate a business transaction into something more than an abstract idea. See Blawgletter, June 19, 2014, "You Still Can't Patent Ideas".

buySAFE v. Google

We went on to describe the Federal Circuit's ruling in the first post-Alice Corp. business methods patent case it decided:

In buySAFE, Inc. v. Google, Inc., No. 13-1575 (Fed. Cir. Sept. 3, 2014), the patent owner, buySAFE, accused Google's "Trusted Stores" feature of infringing buySAFE's patent on "Safe transaction guaranty". As the court described it, the patent claimed a method in which

(1) a computer operated by the provider of a safe transaction service receives a request for a performance guarantee for an “online commercial transaction”; (2) the computer processes the request by underwriting the requesting party in order to provide the transaction guarantee service; and (3) the computer offers, via a “computer network,” a transaction guaranty that binds to the transaction upon the closing of the transaction.

buySAFE, slip op. 3.

The patent didn't get beyond an abtract idea, the panel ruled:

The [patent] claims are squarely about creating a contractual relationship—a “transaction performance guaranty”—that is beyond question of ancient lineage. See Willis D. Morgan, The History and Economics of Suretyship, 12 Cornell L.Q. 153 (1927). The dependent claims’ narrowing to particular types of such relationships, themselves familiar, does not change the analysis. This kind of narrowing of such long-familiar commercial transactions does not make the idea non-abstract for section 101 purposes. . . . The claims thus are directed to an abstract idea.

buySAFE, slip op. 9.

Nor did invoking the use of computers or limiting the claims to online transactions supply the necessary transformation of an abstract idea in an inventive way. Such "narrowing has long been held insufficient to save a claim in this context." Id.

The new old case — Ultramercial, Inc. v. Hulu, LLC, No. 10-1544 (Fed. Cir. Nov. 14, 2014)

Ultramercial describes itself as "a technology company offering patented financial engines for monetizing online content". What does its financial engines do? They allow "users [to] watch our ad to get free content that otherwise would cost money."

Ultramercial sued Hulu — which calls itself "a premium streaming TV destination" — for infringing a patent "directed to a method for distributing copyrighted media products over the Internet where the consumer receives a copyrighted media product at no cost in exchange for viewing an advertisement, and the advertiser pays for the copyrighted content." Ultramercial, slip op. at 3.

The district court dismissed Ultramercial's case on the ground that the patent claimed patent-ineligible subject matter. The Federal Circuit reversed the dismissal, but the Supreme Court vacated its ruling. On remand, the court of appeals again reversed, and the Supreme Court again vacated and remanded.

The third time proved the charm for Hulu. This time the panel affirmed the dismissal, holding that under the test of Alice Corp. the Ultramercial patent did nothing more than claim an abstract idea:

We conclude that the limitations of the ’545 claims do not transform the abstract idea that they recite into patent-eligible subject matter because the claims simply instruct the practitioner to implement the abstract idea with routine, conventional activity.

Ultramercial, slip op. at 11.

[Curiously, the panel did not mention the decision in buySAFE. The court's mandate in that case issued on October 10. We cannot explain it.]

Blistering concurrence

One of the panel members wrote a stinging concurrence. He summarized his views thus:

I agree that the claims asserted by Ultramercial, Inc. and Ultramercial, LLC (together, “Ultramercial”) are ineligible for a patent, but write separately to emphasize three points. First, whether claims meet the demands of 35 U.S.C. § 101 is a threshold question, one that must be addressed at the outset of litigation. Second, no presumption of eligibility attends the section 101 inquiry. Third, Alice Corporation v. CLS Bank International, 134 S. Ct. 2347, 2356–59 (2014), for all intents and purposes, set out a technological arts test for patent eligibility. Because the purported inventive concept in Ultramercial’s asserted claims is an entrepreneurial rather than a technological one, they fall outside section 101.

Ultramercial, concurring op. at 1.

"Technological arts test"

His development of his last point — the most interesting one — warrants full reproduction:

Alice recognized that the patent system does not extend to all products of human ingenuity. 134 S. Ct. at 2358–60; see also [Ass’n for Molecular Pathology v. Myriad [Genetics, Inc., 133 S. Ct. 2107,] 2117 [(2013)] (“Groundbreaking, innovative, or even brilliant discovery does not by itself satisfy the § 101 inquiry.”). Because the system’s objective is to encourage “the onward march of science,” O’Reilly v. Morse, 56 U.S. (15 How.) 62, 113 (1853), its rewards do not flow to ideas—even good ones—outside of the technological arena.

In Alice, the claimed intermediated settlement technique was purportedly new and useful, but the Supreme Court nonetheless unanimously concluded that it fell outside section 101. 134 S. Ct. at 2358–59. The problem was not that the asserted claims disclosed no innovation, but that it was an entrepreneurial rather than a technological one. In effect, Alice articulated a technological arts test for patent eligibility, concluding that the asserted method and system claims were patent ineligible because they did not “improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field.” Id. at 2359; see also id. at 2358 (explaining that the claims in Diamond v. Diehr, 450 U.S. 175, 177–79 (1981) (“Diehr”), were patentable because they disclosed an “improve[ment]” to a “technological process”). In assessing patent eligibility, advances in non-technological disciplines—such as business, law, or the social sciences—simply do not count.

In Bilski[ v. Kappos, 561 U.S. 593 (2010)], the Supreme Court recognized that “business method patents raise special problems in terms of vagueness and suspect validity,” 561 U.S. at 608, but it declined to hold “that business methods are categorically outside of § 101’s scope,” id. at 607. Notably, however, it invited this court to fashion a rule defining a “narrower category” of patent-ineligible claims directed to methods of conducting business. See id. at 608–09 (“[I]f the Court of Appeals were to succeed in defining a narrower category or class of patent applications that claim to instruct how business should be conducted, and then rule that the category is unpatentable because, for instance, it represents an attempt to patent abstract ideas, this conclusion might well be in accord with controlling precedent.”). A rule holding that claims are impermissibly abstract if they are directed to an entrepreneurial objective, such as methods for increasing revenue, minimizing economic risk, or structuring commercial transactions, rather than a technological one, would comport with the guidance provided in both Alice and Bilski.

To satisfy the technological arts test, claims must harness natural laws and scientific principles—those “truth[s] about the natural world that ha[ve] always existed,” Alice, 134 S. Ct. at 2356 (citations and internal quotation marks omitted)—and use them to solve seemingly intractable problems. They must, moreover, not only describe a technological objective, but set out a precise set of instructions for achieving it. An idea is impermissibly “abstract” if it is inchoate—unbounded and still at a nascent stage of development. It can escape the realm of the abstract only through concrete application. Mackay Radio & Tel. Co. v. Radio Corp., 306 U.S. 86, 94 (1939) (“While a scientific truth, or the mathematical expression of it, is not patentable invention, a novel and useful structure created with the aid of knowledge of scientific truth may be.”). This concrete application is new technology—taking a scientific principle or natural law and “tying it down” by implementing it in a precisely defined manner. See Mayo, 132 S. Ct. at 1302 (rejecting claims, in part, because they did “not confine their reach to particular applications”). The claims in Diehr, 450 U.S. at 187, for example, were deemed patent eligible because they provided a clearly delineated set of instructions for carrying out a new technique for curing rubber and their reach was confined to a particular industrial application.

Precise instructions for implementing an idea confine the reach of a patent, ensuring that the scope of the claims is commensurate with their technological disclosure. In assessing patent eligibility, “the underlying functional concern . . . is a relative one: how much future innovation is foreclosed relative to the contribution of the inventor.” Mayo[ Collaborative Services, Inc. v. Prometheus Laboratories, Inc.], 132 S. Ct. [1289,] 1303 [(2012)]; see Motion Picture Patents[ Co. v. Universal Film Mfg. Co.], 243 U.S. [502,] 513 [(1917)] (“[T]he inventor [is entitled to] the exclusive use of just what his inventive genius has discovered. It is all that the statute provides shall be given to him and it is all that he should receive, for it is the fair as well as the statutory measure of his reward for his contribution to the public stock of knowledge.”). At its core, the technological arts test prohibits claims which are “overly broad,” Mayo, 132 S. Ct. at 1301, in proportion to the technological dividends they yield.

Ultramercial, concurring op. at 7-11.

Need for close review

Only the rare business method patent will get through the filter that the Federal Circuit and Supreme Court have fashioned for cases involving what they deem abstract ideas.

If you have a patent that describes a way to do commerce online, make sure you show it to someone who knows how to evaluate it properly. That may save both you and your counsel much expense and even more heartache.

ComplaintTime to assess Twombly

Has the United States Supreme Court backed away from its landmark toughening of the test for pleading a claim in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)?

Seven years after Blawgletter said that "[w]e'll save our assessment of [Twombly's] impact until the impact becomes clearer", we can now aver that the signs point to a clear yes answer.

Sort of.

The Court's Twombly record

Counting today's ruling in Johnson v. City of Shelby, No. 13-1318 (U.S. Nov. 10, 2014) (per curiam), a majority opinion of the Court has applied Twombly a total of five times.* 

The tally so far? 

Plaintiffs four, defendants one — an 80 percent win rate for plaintiffs.**

The new case

In Johnson v. City of Shelby, two police officers claimed that the City of Shelby fired them "because they refused to turn a blind eye to the criminal activities of one of the [Shelby] aldermen". Johnson v. City of Shelby, No. 12-60735, slip op. at 2 (5th Cir. Nov. 19, 2013) (per curiam). The defect in their complaint, according to the Fifth Circuit, arose from the fact that "it does not invoke [22 U.S.C.] § 1983 for claims of constitutional violations under color of state law." Id. at 4. 

The Court "summarily reverse[d]" on the ground that "no heightened pleading rule requires plaintiffs seeking damages for violations of constitutional rights to invoke §1983 in order to state a claim." Johnson v. City of Shelby, slip op. at 1. The Fifth Circuit's justification for requiring an express mention of section 1983 — that it "bears on" whether a defendant may assert a "qualified immunity" defense — did not persuade the Court; "[n]o 'qualified immunity analysis' is implicated here," the Court pointed out, "as petitioners asserted a constitutional claim against the city only, not against any municipal officer." Id. at 2.

The Court went on to distinguish Twombly and Iqbal – the only defense win that Twombly has prompted in the Court — thus:

Our decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), are not in point, for they concern the factual allegations a complaint must contain to survive a motion to dismiss. A plaintiff, they instruct, must plead facts sufficient to show that her claim has substantive plausibility. Petitioners’ complaint was not deficient in that regard. Petitioners stated simply, concisely, and directly events that, they alleged, entitled them to damages from the city. Having informed the city of the factual basis for their complaint, they were required to do no more to stave off threshold dismissal for want of an adequate statement of their claim. See Fed. Rules Civ. Proc. 8(a)(2) and (3),(d)(1), (e).

Id. at 2-3.

What it means

A five-to-one win record for plaintiffs in any kind of case before this Court means something. But what?

Blawgletter suspects that it signifies the Court feels sheepish about coming up with the "plausibility" test in the first place. Twombly followed decades of rulings that required courts to assume the truth of all factual allegations, plausible or not, so long as they didn't descend into the realm of fantasy.

The Court never says anything like that, of course, but we think we see a clue in the last sentence of their per curiam opinion (with our emphasis):

For clarification and to ward off further insistence on a punctiliously stated “theory of the pleadings,” petitioners, on remand, should be accorded an opportunity to add to their complaint a citation to §1983. See 5 Wright & Miller, supra, §1219, at 277–278 (“The federal rules effectively abolish the restrictive theory of the pleadings doctrine, making it clear that it is unnecessary to set out a legal theory for the plaintiff’s claim for relief.” (footnotes omitted)); Fed. Rules Civ. Proc. 15(a)(2) (“The court should freely give leave [to amend a pleading] when justice so requires.”).

Id. at 3. The stress on "insistence" and "punctiliously" implies a certain irritation, perhaps even a bit of petulance, at the many gripes about the Court's abrupt "break from the liberal pleading doctrine enunciated in 1957 by Conley [v. Gibson, 355 U.S. 41]."*** 

An appearance of possible sheepishness about Twombly of course does not wipe Twombly off the books. But it does help explain why lower courts appear not to have radically changed the frequency of dismissals for failure to state a claim. Maybe they feel sheepish about it too.

________________

* The other cases: Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014) (post here); Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011); Ashcroft v. Iqbal, 556 U.S. 662 (2009) (post here);  Erickson v. Pardus, 551 U.S. 89 (2007) (post here). A sixth decision, in Pacific Bell Telephone Co. v. Linkline Communications, Inc., 555 U.S. 438 (2009), remanded to the court of appeals for the purpose of applying the Twombly standard in the first instance.

These cases do not include Justice Breyer's mention of Cy Twombly — a Blawgletter favorite — in a recent copyright case, Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013) (post here).

** In Dudenhoeffer, the Court rejected a "presumption of prudence" for defendants in some retirement-fund cases. In Matrixx Initiatives, the majority held that the plaintiffs in a securities fraud case had adequately pleaded the materiality element. Erickson v. Pardus upheld a prisoner's complaint about improper denial of access to medication for hepatitis C. The sole defense win, in Iqbal, went against plaintiffs who claimed that high government officials violated the first and fifth amendment rights of Arab Muslims by permitting their arrest and confinement in the wake of the 9-11 attacks.

*** Alexander A. Reinert, The Burdens of Pleading, 162 U. Pa. L.Rev. 1767, 1773 (2014) (footnote omitted). The article collects a good number of the complaints about Twombly.

Shutterstock_174040418Good faith and fair dealing

New York law "implies" a duty in all contracts — a duty to perform promises in good faith.* 

Does that mean a party must adjust a contractual benchmark rate if it knows something has distorted the benchmark?

Yes, the Second Circuit held in Security Plans, Inc. v. CUNA Mut. Ins. Society, No. 13-384-cv (2d Cir. Oct. 17, 2014).

The ruling may prove important in pending cases that involve trillions of dollars in benchmark transactions.

Credit insurance

The case before the court arose from the sale of a credit insurance business. The asset purchase agreement required CUNA Mutual, the buyer, to pay an "earnout" that tracked future profits from the business.

The problem arose from the "loss ratio" that CUNA Mutual used to deduct "losses" from premium payments to compute the profits. As it realized before the earnout period ended, the loss ratio it applied to all its lines of business — including the credit insurance segment — overstated actual losses.

Lawsuit

The unduly high loss ratio produced a zero earnout. That upset the seller, Security Plans.

It sued, alleging, in relevant part, that CUNA Mutual breached the covenant of good faith and fair dealing — both by setting the loss ratio too high and by failing to adjust it at the end of the earnout period.

The district court granted CUNA Mutual summary judgment in relevant part.** Security Plans appealed.

Second Circuit ruling

The Second Circuit affirmed in part and reversed in part. It laid out the pertinent law as follows:

Under New York law, all contracts that confer discretion include an implied promise that neither party will "act arbitrarily or irrationally" in exercising that discretion.

*  *  *  *

The implied covenant [of good faith] does not "undermine a party's 'general right to act on its own interest in a way that may incidentally lessen'" the other party's expected benefit. . . . The covenant will be breached only in a narrow range of cases. A plaintiff must show substantially more than evidence that the defendant's actions were negligent or inept. . . . The plaintiff must instead demonstrate something more, such as that the defendant "act[ed] arbitrarily or irrationally in exercising [the] discretion" afforded to it under the contract.

Security Plans, slip op. at 3 & 24-25 (citations omitted).

CUNA Mutual's error in setting the loss ratio, the panel held, did not support a bad faith claim "inasmuch as the record contains nothing to suggest anything more than negligence" on its part. Id. at 26.

But CUNA Mutual's "refus[al] to provide a revised earnout calculation in light of an alleged system-wide error concerning claim reserves" presented a different matter, the court believed. Id. The panel said:

[T]he contract places on the defendant the responsibility for calculating the earnout, thereby conferring a limited discretion in selecting the values — such as loss ratios and written premium — that enter into the calculation in the first place. . . . This latter form of discretion is indeed the subject of plaintiff's claim in this case, and the plaintiff may therefore argue that the defendant acted arbitrarily or irrationally in handling the earnout calculation.

Id. at 26-27 (citations and footnote omitted). The panel concluded:

Making all inferences in the plaintiffʹs favor, a rational trier of fact could properly conclude that it was arbitrary for the defendant to refuse to revise the earnout calculation in order to correct for the suspect numbers. On this record, a trier of fact could, but would not necessarily be required to, conclude that: (i) the initial decision that set high claim reserves for the earnout period was made by mistake, and not as a result of actuarial judgment; (ii) this mistake caused Security Plansʹ performance data to be distorted in ways that negatively affected the earnout; (iii) this mistake30 was noticed in time to revise the earnout calculation accordingly, and such revision was possible; (iv) the mistake was acknowledged by all parties concerned; and (v) CUNA Mutual, for no valid business reason, decided not to adjust the earnout calculation. In making this second decision not to revise the calculation, CUNA Mutual was exercising its contractually conferred authority as the party charged with calculating the earnout, but a trier of fact could find it exercised this discretion arbitrarily.

Id. at 29-30.

Implications

The Southern District of New York has before it several cases that involve claims of deliberate manipulation involving benchmark rates. These include In re Foreign Exchange Benchmark Rates Antitrust Litigation, No. 13-07789 (S.D.N.Y.), In re North Sea Brent Crude Oil Futures Litigation, No. 13-md-02475 (S.D.N.Y.), and In re LIBOR-Based Financial Instruments Antitrust Litigation, No. 11-md-2262 (S.D.N.Y.).***

The benchmarks at issue affect trillions of dollars in transactions.

In at least two of the three, the plaintiffs assert state law claims (as well as federal ones). The Second Circuit's ruling in Security Plans should give those claims a legal boost, pointing the way to showing conduct that violates the covenant of good faith and fair dealing in the setting or adjustment of the relevant benchmarks.

 _________________

* Moran v. Erk, 901 N.E.2d 187, 190 (N.Y. 2008) (stating that "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract").

** We've ignored other parts of the case to focus on the benchmark aspect.

*** Blawgletter's firm serves as lead counsel for one of the plaintiff classes in the LIBOR litigation.

Shutterstock_162913184Trying cases

Trial lawyers believe they pay a trial judge a high compliment when they say "she'll let you try your case."

The praise implies a few things — that the judge doesn't make you do everything exactly the way she did when she practiced law, doesn't interrupt you on cross right as you go in for the kill, and doesn't rescue your opponent when he makes a fatal mistake.

The fact that trial lawyers see she'll-let-you-try-your-case as laudable in a member of the judicial priesthood tells you something — that not all members have the trait. Maybe less than half do. Possibly a lot less.

Still, the great mass of them won't actually hijack your case. What do you do if one does?

The question arose this week in a case about insurance — travel insurance.

The dispute

Trip Mate, which served as an agent for issuers of travel insurance policies, including Stonebridge Casualty, made an agreement with Stonebridge Casualty to collect premiums on policies that Trip Mate placed with travel organizers and pay the premiums to Stonebridge Casualty.

The agreement allowed Trip Mate to deduct "refund of premiums" from its collections but made Trip Mate responsible for "commissions".

Trip Mate and Stonebridge Casualty got into a fight over whether profit-sharing deals that Trip Mate had made with a pair of travel organizers had made Stonebridge Casualty directly responsible for sharing profits with them and whether the deals involved "refund of premiums", which Trip Mate could deduct, or "commissions", which Trip Mate had to eat.

An ensuing trial (to the bench instead of a jury) saw the lawyers for Trip Mate and Stonebridge Casualty slugging it out over Stonebridge Casualty's direct liability to the travel organizers and the refund-of-premiums v. commissions question.

The hijack

The judge had his own, different idea about the case. He saw the dispute as turning on whether the parties had tacitly amended their contract by behaving over a period of years as if it allowed Trip Mate to charge Stonebridge Casualty for the profit-sharing. After the first day of the two-day trial, he said:

Obviously, one of the issues here is, irrespective of what the [agreement] says, was there a course of dealing which effectively modified the terms of the [agreement]. I don't know whether you want to deal with that in your presentations tomorrow or whether you want to deal with it posttrial by way of additional briefing, but I'll tell you that that is an issue that I see, and I would like some help in trying to make my way through it. Okay. . . . Those are legal issues that I think need to be addressed at some stage.

Trip Mate, Inc. v. Stonebridge Casualty Ins. Co., No. 13-2032, slip op. at 6 (8th Cir. Oct. 6, 2014) (emphasis Blawgletter's).

Judge-ment

How did the lawyers react? Basically by ignoring His Honor's remarks. Neither side briefed the modification-by-conduct issue or even mentioned it in post-trial submissions.

The result? The court rejected both sides' theories.

"The district court instead held in favor of Trip Mate based on a theory . . . that Stonebridge's 'knowing acquiescence' in Trip Mate's use of Premium Trust Account funds to pay profit sharing indicated that 'Stonebridge effectively agreed profit sharing was a debt it would pay out of its share of the premiums.'" Id. at 7. Stonebridge Casualty thus had to pay Trip Mate $424,827.30 to cover what Trip Mate owed to the profit-sharing travel organizers.

Reversal

The Eighth Circuit held that the district court erred by effectively amending the pleadings without telling the parties. It noted that Rule 15(b)(2) allows a court to amend pleadings simply "by entering findings regarding the implied amendment" but that it doesn't permit secret amendments. The panel required "actual notice of the implied amendment . . . and an adequate opportunity to cure any surprise." Id. at 9.

The panel concluded:

Through the lens of hindsight we can see that the district court probably attempted to amend the pleadings during the first day of trial. The parties, however, reasonably and quite clearly misunderstood the district court's vague comments about their course of dealings, and the court took no steps to clarify this obvious misunderstanding during the trial or in its instructions to the parties regarding their post-trial briefs. The parties thus did not have actual notice of the implied amendment issue or an adequate opportunity to cure the surprise of this issue being added to the case. . . . The parties therefore did not consent to trying the implied amendment issue, and the district court abused its discretion by adding it to the pleadings.

Id. at 11.

Lesson

Most of the time, you will know when the judge has hijacked your case. You will get more clues than the judge in Trip Mate v. Stonebridge Casualty gave. But then you must raise heck about it. If you don't, you will have consented to the judge's effective amendment of the pleadings.

But you may not have to alert the trial judge to your complaint if he rules before you know that he's made a sub silentio amendment. The Eighth Circuit reversed despite the fact that Stonebridge Casualty apparently did not fuss about what the district judge did until it filed its opening brief on appeal.

Why did it wait? Likely because it thought the trial judge would have given it a chance to cure any prejudice from the late development. And it still would have lost.

That scenario seems likely to Blawgletter. We wonder why the Eighth Circuit didn't think the same thing.