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Nixon & Peabody, LLP

Supreme Court Dismisses LabCorp Appeal -- Personalized Medicine, Beware
Last month, the U.S. Supreme Court in Laboratory Corp. of America v. Metabolite Laboratories decided to dismiss LabCorp’s appeal, saying that it should not have been granted review. However, the dissent in that case shows that it has far greater significance for intellectual property rights in the life sciences, particularly in the field of personalized medicine, which, broadly speaking, includes pharmacogenomics, pharmacogenetics, pharmacoproteomics, nutrigenomics, and diagnostics.

The case stems from U.S. Patent No. 4,940,658, based on the discovery that there was a relationship between elevated levels of total homocysteine, an amino acid, and a deficiency in either cobalamin (vitamin B12) or folate (folic acid). The claim at issue in this patent was Claim 13, which specifically related to a method of detecting the deficiency of B12 or folic acid in warm-blooded animals that comprised the steps of assaying a body fluid from a subject for elevated levels of total homocysteine and correlating an elevated level of such levels in the body fluid tested with a deficiency of either vitamin B12 or folic acid.

The patent at issue in this case was assigned to a patent management firm, Competitive Technologies, Inc., with Metabolite Laboratories handling distribution. They, in turn, initially sublicensed the patent to Laboratory Corporation of America (LabCorp), one of the largest diagnostic testing labs in the U.S. In 1998, LabCorp started using a new test developed by Abbott. Thereafter, Competitive Technologies and Metabolite Laboratories filed suit against LabCorp for infringement of the patent. In 2001, LabCorp lost in the trial court and was ordered to pay $7.8 million in damages and attorney’s fees. LabCorp appealed the case to the Court of Appeals for the Federal Circuit, the appellate court that reviews all patent cases from all the district courts in the country. The appeal contained the standard arguments, namely, that Claim 13 in the patent was invalid because it did not comply with 35 U.S.C. § 112 on grounds of indefiniteness, lack of written description, and lack of enablement, and that it was anticipated and/or obvious and, thus, invalid under 35 U.S.C. §§ 102 and 103. The Federal Circuit rejected those arguments and affirmed the trial court decision in 2004.

In requesting that the Supreme Court review this case (grant request for certiorari), LabCorp argued, for the first time, that the case was invalid under 35 U.S.C. § 101 because it was attempting to patent a natural phenomenon, which is not permitted under the patent laws. The Supreme Court initially agreed to hear the case. In June of this year, the majority of the court dismissed the case as ""improvidently granted"" without providing any further explanation. However, the dissent of three members of the court – Justices Breyer, Stevens, and Souter – indicates that the majority dismissed the case because the issue of the patent being in violation of 35 U.S.C. § 101 had not been brought up below.

The significance of the LabCorp case is that, after being routinely granted for years, these types of patents are now being questioned. Namely, these patents relate to the discovery that there is a different level of a molecule in people afflicted with a certain condition, as opposed to people not afflicted with that condition. Sometimes it’s an elevated level of an amino acid or protein. In other cases, it can be a lower level. Indeed, there are certain instances where any major change in the level of the protein from the normal population indicates the problem. It is the ability to obtain intellectual property rights for these types of discoveries that has formed the basis for much of the personalized medicine field.

Accordingly, the dissent by three justices arguing that ""[t]here can be little doubt that the correlation between homocysteine and vitamin deficiency set forth in Claim 13 is a natural phenomenon"" shows an incredible lack of appreciation for the scientific process and for life sciences patents. In one sense, it can be argued that this occurred because there was not a full record developed below that truly explained that such discoveries are not observations of mere natural phenomena, as the dissenters believe. It can also be argued that legal arguments misled the dissenters. Others can take some comfort in the fact that the Supreme Court did nothing and, thus, the Federal Circuit’s decision stands. However, it is clear that the issue of whether a discovery in the life sciences area, particularly in the personalized medicine area, is entitled to IP protection or simply one trying to claim a ""natural phenomenon"" and, thus, is in violation of 35 U.S.C. § 101, is going to be raised in virtually every case until the Supreme Court ultimately deals with the subject.

07-14-2006

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Nixon & Peabody, LLP

After Aviall: Can PRPs Recoup Response Costs Absent a "Civil Action?"
In 2004, the United States Supreme Court held in Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004), that the right of Superfund contribution under §113(f)(1) is only available to potentially responsible parties (PRPs) who have been subject to government ""civil actions"" under CERCLA §§106 or 107. The Aviall decision created substantial uncertainty concerning PRPs’ rights of action under CERCLA §107. Arguably, PRPs who have incurred response costs at a Superfund site but cannot satisfy the ""civil action"" condition established by Aviall for contribution claims under §113(f)(1) have no recourse against other PRPs for recouping these costs. This is particularly onerous for ""volunteer"" PRPs who have undertaken remediation obligations at a site, or for PRPs who have settled their claims with state agencies but have not entered into similar settlements with the United States.

CERCLA expressly provides two different contribution remedies. The first remedy, set forth in §113(f)(1) and addressed by Aviall, gives PRPs – subject to a government civil action – a right of contribution against other PRPs. The second remedy, set forth in §113(f)(2), provides PRPs that settle their claims with the United States an absolute defense against other PRPs for contribution claims. This later ""settlement bar"" does not expressly bar ""cost recovery"" claims under §107(a).

The Aviall court declined to address the issue of whether cost recovery was still available to a PRP under §107(a) as a ""stand-alone"" claim, and directed the courts below to consider this issue. Since Aviall, no clear majority has prevailed, and courts have continued to wrestle with PRP rights of action under CERCLA. Some courts continue to restrict PRPs to contribution remedies authorized by §113(f)(1). Other courts have looked at §107(a) to provide PRPs who do not qualify for §113(f)(1) contribution some alternate form of relief, either through cost recovery actions against other PRPs or through an ""implied right of contribution.""

Recently, in Consolidated Edison Co. of New York, Inc. v. UGI Industries, Inc., 423 F.3d 90 (2nd Cir. 2005), the Second Circuit allowed a PRP otherwise barred from pursuing a §113(f)(1) contribution claim to seek a direct cost recovery action against another PRP under §107(a).

Most courts follow Aviall and restrict contribution claims to those authorized by Section 113(f)(1)
After Aviall, many courts have continued to hold that PRPs are restricted to contribution claims authorized by §113(f)(1). Before Consolidated Edison, 1 the Second Circuit followed a similar restrictive approach to PRP remedies. Although those courts continue to follow Aviall’s precedent, many have criticized the ruling as illogical and as creating an incentive for PRPs to wait until they are sued before incurring response costs. Other courts following Aviall have stressed underlying policy concerns for restricting PRP rights of contribution, such as preserving a strong disincentive for non-settling PRPs and protecting the ""settlement bar"" under §113(f)(2). A rule allowing a non-settling PRP to bring cost recovery claims against settling PRPs, as a means of circumventing §113(f)(1), would undermine the ""settlement bar"" and underlying policy considerations for encouraging PRPs to settle their claims with the government.

Some courts have recognized a right of action for PRPs under Section 107(a)

Notwithstanding Aviall, certain courts have recognized a PRP right of action by interpreting Section 107(a) as either creating an ""implied right of contribution"" or allowing for a direct cost recovery claim for joint and several liability.

The United States Supreme Court has refused to recognize an ""implied right of contribution"" in other federal statutes, notwithstanding compelling policy and fairness considerations. In Aviall, the Supreme Court cautioned against implying a right of contribution under CERCLA §107(a) because Congress expressly limited rights of contribution to §113(f)(1). 2 For these reasons, the ""implied right of contribution"" under the §107(a) approach to circumventing §113(f)(1) appears to be a waning minority precedent.

Two courts in the Second Circuit, including the United States Court of Appeals for the Second Circuit in Consolidated Edison, have allowed PRPs to sue other PRPs in direct cost recovery claims for joint and several liability.

The Second Circuit and Con Edison v. UGI

The underlying facts of Consolidated Edison Co. of New York, Inc. v. UGI Utilities, Inc., 423 F.3d 90 (2nd Cir. 2005) gave rise to a scenario that, under Aviall, would have barred a settling volunteer PRP from seeking contribution against another PRP. Con Edison owned and operated manufactured gas plants in New York. The New York State Department of Conservation (NYSDEC) directed Con Edison to investigate and, if necessary, remediate contamination at these sites. In 2002, Con Edison entered into a Voluntary Cleanup Agreement with NYSDEC to remediate more than 100 of these sites. Con Edison then sued UGI under CERCLA Section 113(f)(1), seeking to recover cleanup costs from UGI as a former operator of sites in Westchester County. In March 2004, the district court granted UGI’s summary judgment motion. In May 2004, Con Edison appealed. After the parties had completed submitting briefs to the court, the United States Supreme Court issued the Aviall decision, and the Second Circuit asked the parties to ""re-brief"" on whether it had proper subject matter jurisdiction under §113(f)(1).

The Second Circuit decided that, in light of Aviall, Con Edison could not use §113(f)(1) as a basis for subject matter jurisdiction because a ""civil action"" had not yet been brought. Con Edison was not subject to any judicial or administrative measures compelling remediation at the sites in question. Con Edison could not use §113(f)(3)(B), either, as a basis for subject matter jurisdiction: Entering into a Voluntary Cleanup Agreement with NYSDEC provided a release from state liability only, and did not settle Con Edison’s CERCLA claims with the United States.

However, rather than preventing Con Edison from pursuing CERCLA remedies because it lacked a right to contribution claims under §113(f)(1), the Second Circuit instead held that Con Edison remained a ""person"" under §107(a) who was free to pursue cost recovery claims against other PRPs. The Second Circuit reasoned that the ""plain language"" of CERCLA §107(a) expressly authorizes such a claim by ""any person"" who has incurred response costs, including a PRP. 3 Because Con Edison was a ""person"" that had incurred ""costs of response,"" Con Edison could proceed with a cost recovery claim against UGI. Disagreeing with other circuits, the court held that a §107(a) cost recovery remedy was not limited to innocent parties, and that the remedy was available to ""any person"" who incurs cleanup costs, including PRPs.

The Second Circuit bolstered its decision with various policy considerations, most notably, that the court did not want to discourage voluntary cleanups. The court noted that Aviall created economic disincentives for voluntary cleanups if volunteers were precluded from recovering cleanup costs from other responsible parties. Without recourse to cost recovery actions under §107(a), parties would wait to be sued before commencing a site cleanup, to preserve their contribution rights. To hold otherwise would undercut one of CERCLA’s primarily goals, namely, encouraging private parties to assume the financial responsibility of cleanup by allowing them to seek recovery from others.

On April 18, 2006, UGI submitted a Petition for a Writ of Certiorari to the United States Supreme Court for review of the Second Circuit’s decision (Docket No. 05-1323). UGI has argued that the majority of Circuit Court of Appeals, including the Second Circuit before the Con Edison decision, have held that §113(f)(1) provides the sole federal mechanism by which private parties can recover equitable portions of their incurred cleanup costs from other PRPs. Contrary to the Second Circuit’s reasoning in Con Edison, §107(a) does not authorize PRP cost recovery suits, and the decision is inconsistent with CERCLA’s ""texture, structure and history.""

Analysis and the continued Aviall aftermath
The Second Circuit has made a bold attempt to extract an express cost recovery remedy from CERCLA §107(a) for volunteer PRPs such as Con Edison. Even so, most courts continue to follow Aviall’s restrictive interpretation of CERCLA, and limit PRPs’ rights of contribution to those expressly set out in §113(f)(1). There is hardly a uniform consensus among the circuits, as courts continue to struggle with the chilling effect on voluntary cleanups that Aviall has created.

Aviall and its progeny have significantly changed the dynamics and strategies for parties who incur or intend to incur response costs, especially for settling PRPs and volunteers. It is important that parties who may be affected by these court decisions continue to carefully evaluate their situations as they proceed with cleanups, and with negotiations among other PRPs and with regulatory agencies.
For example, PRP groups at Superfund sites may still have good reasons to avoid time-consuming and protracted litigation, by entering into settlement agreements with the United States. Although contribution rights are important, they are not necessarily the driving factor in all cases. However, such a settlement agreement is not a ""civil action"" under CERCLA, and settling PRPs should be aware of the impact that a loss of contribution rights may have in an individual case.

07-14-2006

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Leonard, Street and Deinard

Federal Court Affirms FERC's Authority Over Regional Transmission Organizations
On June 30, 2006, the United States Court of Appeals for the District of Columbia Circuit affirmed the authority of the Federal Energy Regulatory Commission (FERC) over the development and approval of Regional Transmission Organizations (RTOs).

Background
Various Transmission Owners (TOs) and state public utility commissions petitioned for a review of FERC's orders conditionally approving a proposal to form a Regional Transmission Organization in New England. In particular, the Transmission Owners challenged: (1) FERC's rejection of a provision of their Transmission Operating Agreement subjecting FERC's review of withdrawals from the RTO to the more restrictive Mobile-Sierra's public interest standard, and (2) FERC's rejection of an incentive adjustment to the Transmission Owners return on equity (ROE) for local transmission service. The State Commissions, on the other hand, argued that FERC's approval of a 50 basis point incentive adjustment to the Transmission Owners' ROE for regional transmission was arbitrary and capricious.

Decision
The Court held that RTOs are a creation of FERC's ratemaking authority and FERC has broad authority over the decision to approve an RTO. Accordingly, the Court determined that FERC was not arbitrary and capricious in requiring the ""just and reasonable"" standard of review for withdrawals from the RTO. The Court reasoned that ""absent a pre-existing FERC-approved RTO operating agreement, the TOs fail to explain why FERC would be obligated, under either the FPA or the Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (2000), to approve all of the terms of the Transmission Operating Agreement, which is submitted as part of the RTO-NE proposal.""

The Court also found that FERC's ROE incentive adjustments were not arbitrary and capricious, determining that ""FERC's determinations on the ROE adders involve matters of rate design, which are technical and involve policy judgments at the core of FERC's regulatory responsibilities."" Consequently, the Court denied the petitions for review.

07-14-2006

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Jenner & Block LLP

U.S. Supreme Court Agrees to Review Two Antitrust Cases
Having decided three antitrust cases during its 2005-2006 term, the Supreme Court recently agreed to enter the antitrust thicket again. On June 26, the Court announced that next term it will review two cases involving issues of pleading and proof under the Sherman Act. In Bell Atlantic Corp. v. Twombly, No. 05-1126, the Court agreed to review whether a plaintiff states a claim for conspiracy to restrain trade in violation of Section 1 of the Sherman Act when the plaintiff couples allegations of parallel conduct with a bald allegation of conspiracy. In Weyerhaeuser v. Ross-Simmons Hardwood Lumber Co., No. 05-381, the Court agreed to consider whether a plaintiff alleging a predatory buying scheme in violation of Section 2 of the Sherman Act must prove that the defendant (1) paid so much for the raw materials that the price at which it sold its products could not cover its costs; and (2) had a dangerous probability of recouping its losses. In those cases, the Court will be reviewing decisions by federal courts of appeals making it easier for plaintiffs to plead and prove antitrust violations.

In Bell Atlantic, plaintiffs alleged that in the wake of the Telecommunications Act of 1996, certain former ""Baby Bell"" telephone companies (so-called ""ILECs""), which were required by the Act to provide other telephone companies (so-called ""CELECs"") with reasonable access to their networks, conspired with each other to prevent the CELECs from competing in the ILECs' respective regional territories. Plaintiffs supported these claims with factual allegations of parallel conduct by the ILECs. It is well established that when an antitrust plaintiff has no ""direct, smoking gun evidence"" of conspiracy, evidence of parallel conduct by defendants is insufficient to send the case to a jury unless it is accompanied by evidence of additional circumstances -- what courts have referred to as ""plus factors"" -- such as a common motive to conspire, evidence that the parallel acts were against the individual economic self-interest of the defendants, and evidence of high-level interfirm communications. In Bell Atlantic, the defendants moved to dismiss the conspiracy claims on the ground that plaintiffs' allegations of parallel conduct by the ILECs, without allegations of ""plus factors,"" failed to state a claim. The United States District Court for the Southern District of New York granted the motion. On appeal, the plaintiffs argued that the district court erred by applying the standard of proof at the summary judgment and trial stages to determine the adequacy of plaintiffs' pleading.

The United States Court of Appeals for the Second Circuit reversed. It held that antitrust complaints filed in federal court are subject to the same notice pleading requirements as other types of cases, and that generally, ""a Section 1 plaintiff must allege that (1) the defendants were involved in a contract, combination, or conspiracy that (2) operated unreasonably to restrain interstate trade together with the factual predicate upon which those assertions are made."" In order to survive a motion to dismiss, the Court concluded, conspiracy must be a plausible inference from the facts alleged, but no more. While the Court observed that a plaintiff may plead ""plus factors"" to support such an inference, it held that a plaintiff was not required to do so. The Court concluded that plaintiffs' allegations that the ILECs employed two anticompetitive tactics to maintain monopoly control over their respective geographic markets -- conspiring to keep CLECs from entering the ILECs' respective markets and agreeing not to enter each other’s markets as CLECs -- were sufficient to give defendants notice of the claims against them, and thus to survive a motion to dismiss.

In Weyerhaeuser, both plaintiff and defendant ran saw mills. They bought saw logs from loggers and processed them into finished alder lumber. Between 1998 and 2001, the price of saw logs rose while the price of finished lumber decreased. Plaintiff's production declined, and in 2001 it went out of business. Plaintiff alleged that defendant artificially increased saw log prices to drive plaintiff and other competitors out of business. At trial, plaintiff presented evidence that defendant engaged in predatory overbidding -- paying a higher price than necessary -- for the saw logs, overbuying of saw logs, and other anticompetitive conduct. The jury entered judgment for the plaintiff. On appeal, defendant argued, among other things, that in instructing the jury and ruling on defendant's motion for judgment as a matter of law, the district court misapplied the applicable law. Defendant argued that the district court erred in refusing to apply the law of predatory pricing as set forth in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) to plaintiff's claims. Specifically, defendant argued that the jury should have been instructed that plaintiff had to prove that 1) the prices defendant paid for the saw logs were so high that it operated at a loss; and 2) there was a dangerous probability that it would recoup that loss.

The Ninth Circuit Court of Appeals rejected defendant's claim that the Brooke Group test for predatory pricing should apply to predatory overbidding. It explained that Brooke Group set a high standard for liability in predatory pricing cases because consumers benefit from lower prices and cutting prices fosters competition, and no similar consumer benefits flow from predatory overbidding. The Court therefore upheld the district court’s denial of defendant's requests for a new trial and for judgment as a matter of law.

The Supreme Court's decisions in these two cases could be quite significant. The Sherman Act outlaws any ""contract, combination or conspiracy in restraint of trade."" It does not forbid unilateral parallel conduct such as, for example, a unilateral decision to follow the price decisions of competitors. The courts of appeal have grappled over the last few years regarding how to apply the standards of FRCP 8 to allegations of antitrust conspiracy involving parallel conduct. The Court's decision in Bell Atlantic may provide some needed guidance regarding the minimum prerequisites for pleading an antitrust conspiracy claim. Similarly, in the Trinko case, two years ago, the Court issued some guidelines regarding when conduct by individual firms could violate Section 2 of the Sherman Act. The Court's decision in Weyerhaeuser may provide further guidance to businesses regarding when single firm conduct, particularly in the buying context, is sufficient to violate the antitrust laws.

07-14-2006

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Fredrikson & Byron, P.A.

SEC Approves Nasdaq's Registration as a National Securities Exchange
On June 30, 2006, the Securities and Exchange Commission (“SEC”) approved certain rule changes of the National Association of Securities Dealers, Inc. (“NASD”) relating to the national exchange status of the Nasdaq Stock Market LLC (“Nasdaq”). This change is primarily one of legal form and is unlikely to have any significant impact on Nasdaq companies. There are, however, several minor effects discussed below of which current Nasdaq issuers should be aware.

The SEC had previously approved Nasdaq’s exchange registration on January 13, 2006. Among the rules approved June 30 were those relating to the establishment of The Trade Reporting Facility LLC, an entity jointly owned by the NASD and the publicly traded parent of the Nasdaq Stock Market LLC. The Trade Reporting Facility LLC will be used to report over-the-counter trades of Nasdaq securities. Nasdaq has indicated it intends to begin operating as an exchange as early as the third quarter of 2006. Nasdaq currently operates as an interdealer quotation system exempt from registration as an exchange under Rule 3(a)(1)-1 of the Securities Exchange Act of 1934 because it is operated by the NASD.

Since 1971, Nasdaq has operated under NASD supervision as a wholly-owned (and since June 2000 majority-owned) NASD subsidiary. Upon registration as a national securities exchange, Nasdaq will break from the NASD and become a separate self-regulatory organization, responsible for its own federal securities law compliance and that of its members. Benefits of the split from the NASD have been said to include the removal of a perceived conflict of interest between Nasdaq and the NASD’s regulatory division, as well as the enhanced ability of Nasdaq to compete with other national and international exchanges that comes with being an independent public exchange. Becoming an exchange will also ensure Nasdaq issuers are treated the same as NYSE and AMEX issuers for state law purposes (e.g., the laws of some states require financial institutions and other regulated entities to invest only in securities “listed on an exchange.”)

As a national exchange, all securities listed on Nasdaq will be required to be registered under Section 12(b) of the Securities Exchange Act of 1934. Currently, most securities traded on Nasdaq are registered under Section 12(g) of the 1934 Act. To avoid the administrative cost and inconvenience of thousands of Nasdaq issuers filing registrations under Section 12(b), Nasdaq has requested and received permission from the SEC to file a single Section 12(b) registration for all securities traded on Nasdaq the day before it begins operating as a national exchange. Investment company securities currently exempt from registration under Section 12(g)(2)(B) of the 1934 Act will now be required to register under Section 12(b).

There is no material distinction in the regulatory requirements for issuers between being registered under Section 12(b) or Section 12(g) of the 1934 Act. It should be noted, however, that issuers will need to begin identifying themselves as registered under Section 12(b) where applicable on their 1934 Act filings, such as on the cover of Annual Reports on Form 10-K. The change is not anticipated to have any other disclosure impact. There are, however, minor variations in the delisting process for securities registered under Section 12(b) as compared to those registered under Section 12(g). Finally, ownership reporting forms under Section 16, Schedules 13D and 13G filings and Forms 144 typically must be filed with the exchange on which securities are listed. It is anticipated that filing reports electronically on the SEC’s EDGAR system will satisfy the requirement of filing them with Nasdaq. Any such reports not filed on EDGAR should be mailed to the Nasdaq Listing Qualifications Office. Nasdaq has indicated that its current listing and corporate governance standards will not be materially changed following its registration as a national exchange. Exchange Act and CIK numbers will also remain unchanged.

In other recent activity, Nasdaq has undergone a restructuring that includes a new market category known as The Nasdaq Global Select Market. Effective July 3, 2006, the new market is open to those Nasdaq-listed issuers that can satisfy more stringent listing standards, including those related to market value, liquidity and financial performance. Additional changes included changing the names of the Nasdaq National Market and Nasdaq SmallCap Market to the Nasdaq Global Market and Nasdaq Capital Market, respectively.

07-14-2006

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Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Supreme Court to Clarify What Can Be Patented
Finnegan Henderson lawyer Leslie McDonnell authored a Mass High Tech article that describes the U.S. Supreme Court case, Laboratory Corporation of America v. Metabolite Laboratories. As the Supreme Court will consider what types of inventions and discoveries may be patented, this case could have far-reaching consequences for the biotechnology and medical research community.

07-14-2006

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Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Licensing in a Flat World
In this Licensing Executives Society publication, Pat O'Reilley of Finnegan Henderson comments on the book, The World is Flat, by Thomas Friedman. Part of the book focuses on the current popular concern, outsourcing. Friedman makes the case that, despite short term labor disruptions, outsourcing from one country to another will be the net positive for all in a flat world. In the article, O'Reilley discusses the role and importance of licensing in Friedman's flat world. This article also appeared in the August 2005 issue of LES Viewpoints.

07-14-2006

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