Opinion

Alison Frankel

Seismic fallout from ruling on drug marketing and free speech?

Alison Frankel
Dec 4, 2012 23:33 UTC

On Tuesday, the Justice Department announced its record recovery of nearly $5 billion in False Claims Act settlements in 2012, exceeding the previous annual record by $1.7 billion. In the last four years, according to remarks by Acting Associate Attorney General Tony West, the Justice Department had netted $13.3 billion in false claims settlements, much of it from pharmaceutical companies accused of healthcare fraud.

But will a blockbuster ruling Monday by the 2nd Circuit Court of Appeals turn off the spigot of false claims billions from the pharma industry?

As you’ve probably heard, a divided three-judge panel of the 2nd Circuit vacated the conspiracy conviction of Alfred Caronia, a pharmaceutical sales representative who was involved in the off-label marketing of an FDA-approved narcolepsy drug called Xyrem. The Justice Department, which charged Caronia under the Federal Drug and Cosmetic Act, did not allege that he lied or misrepresented the truth when he told a physician about off-label (but related) uses for the drug, but merely that he conspired to introduce a misbranded pharmaceutical product into interstate commerce. Second Circuit Judges Denny Chin and Reena Raggi found that Caronia’s prosecution was a violation of his First Amendment right to free speech. And they went a step further: Citing the U.S. Supreme Court’s 2010 decision in Sorrell v. IMS Health, Chin and Raggi held that the FDCA cannot restrict off-label marketing, as long as it’s truthful.

“We decline to adopt the government’s construction of the FDCA’s misbranding provisions to prohibit manufacturer promotion alone as it would unconstitutionally restrict free speech,” wrote Chin for himself and Raggi. “We construe the misbranding provisions of the FDCA as not prohibiting and criminalizing the truthful off-label promotion of FDA approved prescription drugs.” (Judge Debra Livingston, in a stinging dissent, said that under the majority’s reasoning, “if drug manufacturers have a First Amendment right to distribute drugs for any use to physicians or even directly to patients, then the entire FDCA may well be unconstitutional.”)

The 2nd Circuit’s decision had been hotly anticipated by lawyers on both sides of pharmaceutical fraud and false claims cases, since Caronia is the first defendant to mount an appellate challenge to off-label marketing accusations on First Amendment grounds. (As several lawyers noted in interviews Tuesday, pharmaceutical manufacturers have been reluctant to take on the Justice Department because they face the risk of being debarred from Medicare and Medicaid payments.) Former Justice Department healthcare prosecutor Michael Loucks, now at Skadden, Arps, Slate, Meagher & Flom, and former Food and Drug Administration deputy chief counsel Jeff Senger of Sidley Austin both said that the 2nd Circuit’s holding was presaged by the Sorrell case, in which the Supreme Court said that a Vermont statute restricting the sale of pharmacy prescription records violates free speech rights. But the Caronia ruling could have a much broader impact, since the Justice Department has made liberal use of off-label marketing accusations in False Claims Act and criminal actions against pharma companies.

In gene case, SCOTUS to confront Federal Circuit on patentability

Alison Frankel
Dec 3, 2012 22:50 UTC

One of the great judicial dialogues of the last few years has been the back-and-forth between the U.S. Supreme Court and the Federal Circuit Court of Appeals over what’s patentable. The roots of the debate predate the creation of the Federal Circuit in 1982, but valuable software and biotech patents have lent urgency to the issue — and divergent views by the Supreme Court and the Federal Circuit on patentability standards have led to a series of rulings in which the justices contradict the appeals court but the Federal Circuit refuses to take the hint and continues to go its own way. The conflict has created so much uncertainty that over the summer two petitions for en banc review, including one in a case remanded by the Supreme Court, begged the Federal Circuit to resolve its own internal split on how much deference to give the Supreme Court.

The Federal Circuit was at its most defiant last August, when Judges Alan Lourie and Kimberly Moore once again ruled that an isolated piece of human genetic code can be patented. The case, which involves Myriad’s patents on a gene mutation that denotes a tendency to develop breast and ovarian cancer, had been sent back to the appeals court by the Supreme Court for re-evaluation in light of the justices’ reminder in Mayo v. Prometheus Laboratories that naturally occurring phenomena are not patentable. But Lourie and Moore gave short shrift to the Supreme Court’s Mayo ruling. Lourie’s opinion for the majority and Moore’s concurrence basically repeated their previous findings on Myriad’s gene patents, with an extra paragraph or two about why Mayo isn’t applicable or is outweighed by the longstanding U.S. Patent and Trademark Office policy on granting patents on isolated g e nes. (Judge Curtis Bryson dissented with last summer’s Myriad decision, just as he did the first time the case was decided.) After the Federal Circuit’s decision, Daniel Ravicher of the Public Patent Foundation, who is co-counsel to the gene patent opponents, told me that the ruling was the latest shot in the ongoing patentability tennis match between the appeals court and the justices.

The Supreme Court has now grabbed the ball in what should be the last game of the match. On Friday, the court granted a petition for certiorari filed by Public Patent and the American Civil Liberties Union, which asked the justice to answer, directly and with clarity, whether human genes or isolated pieces of genetic code can be patented as the product of man-made invention or are unpatentable because they are found in nature. “Despite Myriad’s claim that the law applied by the(Federal) Circuit is settled, it is clear that the circuit created new legal standards in upholding these patents, while simultaneously rejecting those articulated in this court’s Section 101 (patentability) precedents,” the ACLU and Public Patent wrote in their response brief in support of cert.

Defense firm vows to put an end to new wave of say-on-pay suits

Alison Frankel
Nov 30, 2012 22:42 UTC

Have you heard about the latest innovation of creative plaintiffs’ lawyers? As my Reuters colleague Nate Raymond reported Friday in a comprehensive piece on the trend that’s spawned a recent round of law firm client alerts, the New York shop Faruqi & Faruqi has filed almost two dozen suits asserting that corporate boards breached their fiduciary duties in connection with shareholder advisory votes on executive compensation. But unlike last year’s mostly unsuccessful suits against the boards of companies whose shareholders voted down pay packages, the Faruqi suits have been filed in advance of say-on-pay votes at annual shareholder meetings, with claims based on allegedly inadequate disclosures in proxy materials. As leverage, the suits seek to enjoin shareholder meetings. So far, according to Raymond, these say-on-pay injunction suits have produced a few beefed-up disclosures but no cash for shareholders. They’ve also netted the Faruqi firm legal fees, including $625,000 in one settlement.

A notable feature of the say-on-pay injunction litigation is venue. Faruqi has been filing the cases in state courts outside of Delaware. A couple defendants have attempted to remove the suits to federal court, but in May U.S. District Judge Thomas Griesa of Manhattan sent a say-on-pay complaint against Martha Stewart Living and its board back to state court; in July U.S. District Judge Susan Illston of San Francisco did the same with a suit against Ultratech and its board.

On Thursday, Faruqi & Faruqi won another forum fight in a say-on-pay injunction case. U.S. District JudgeSaundra Armstrong of Oakland, California, granted the plaintiffs’ firm’s motion to remand its suit against Accuray and its board to Superior Court in Santa Clara. But Accuray’s lawyer, Boris Feldman of Wilson Sonsini Goodrich & Rosati, told me Friday that he believes Armstrong is wrong on the law and that his theory on the proper jurisdiction for say-on-pay suits will ultimately doom the plaintiffs’ cause.

5th Circuit: International comity can’t save flawed bankruptcy plan

Alison Frankel
Nov 29, 2012 23:13 UTC

Distressed debt investors need strong stomachs. Consider the events of Wednesday afternoon, in cases in opposite corners of the country that featured big-money claims by Elliott Capital and Aurelius Capital. In New York, the 2nd Circuit Court of Appeals stepped in to save Argentina from economic catastrophe, staying a ruling by U.S. District Judge Thomas Griesa that would have required the country to cough up $1.3 billion for the hedge funds if it wanted to make good on payments to bondholders who participated in Argentina’s debt restructuring. That was a huge blow to Elliott and Aurelius, which had hoped the injunction would finally break Argentine defiance of U.S. judgments. But perhaps the pain was dulled by a ruling from the 5th Circuit in New Orleans, which affirmed U.S. Bankruptcy Judge Harlin Hale’s decision that the Mexican glassmaker Vitro can’t use the Mexican bankruptcy process to block Elliott and Aurelius from pursuing more than $1 billion in claims against Vitro subsidiaries.

The long-running Argentine debt saga is still the ultimate example of the risks of litigating for a return on defaulted bonds, but in the Vitro case, the hedge funds confronted similarly delicate foreign relations issues, since they were challenging the propriety of a Mexican court’s judgment in a matter that the Mexican government joined as an amicus. The 5th Circuit’s ruling Wednesday, as my Reuters colleague Tom Hals was the first to report, should embolden distressed-debt investors. It stands for the principle that foreign debtors can’t rely on international comity to shaft U.S. creditors, whoever those creditors might be.

Vitro’s bankruptcy plan was particularly brazen. After its revenues went into steep decline in 2008, the company went through an extremely complicated restructuring that converted its biggest creditor into an ally and several of its subsidiaries into creditors. It subsequently underwent bankruptcy in the Mexican courts. A group of noteholders led by Elliott and Aurelius opposed the reorganization plan, which left them in the hole but preserved $500 million in Vitro equity. But because the pre-bankruptcy restructuring made Vitro subsidiaries into creditors, insiders had enough votes to push the bankruptcy through the Mexican courts despite noteholders’ objections.

Calpers and the Constitution: a looming confrontation?

Alison Frankel
Nov 28, 2012 23:26 UTC

On its face, the brief filed late Tuesday night by the California Public Employees’ Retirement System in the municipal bankruptcy of San Bernardino isn’t especially provocative. As Reuters was the first to report, Calpers wants U.S. Bankruptcy Judge Meredith Jury of Riverside to lift the automatic stay on litigation against San Bernardino, which filed for Chapter 9 protection in August, facing a gaping $46 million deficit. San Bernardino stopped making monthly payments to Calpers after it entered Chapter 9, and its debt to the pension fund now tops $5 million. Calpers’ lawyers at K&L Gates argued in Tuesday’s brief that under California’s pension and labor laws, as well as the federal bankruptcy code, San Bernardino must make good on its obligations and pay the money it owes the pension fund. Those pension contributions, Calpers argued, are part of employee compensation, which is entitled to priority in federal bankruptcy. If San Bernardino won’t pay, the brief said, the pension fund must be permitted to bring an enforcement action.

You won’t find any sweeping pronouncements of Calpers’ priority over San Bernardino’s other creditors in Tuesday’s brief. There’s not even any mention of the city’s proposed plan to resolve its deficit, which waspassed Tuesday by the city council and calls for the city to continue to defer payments to Calpers. It’s certainly possible that when Jury hears Calpers’ motion to lift the stay in December, she’ll treat it as a routine matter of Chapter 9 housekeeping.

But I don’t think that’s going to happen.

Calpers didn’t file Tuesday’s motion in a vacuum. The pension fund is the biggest creditor not just in San Bernardino’s municipal bankruptcy but also in Stockton’s; San Bernardino’s unfunded pension obligation is about $143 million and Stockton’s is about $245 million. In the Stockton case, which predates San Bernardino’s Chapter 9, Calpers has aggressively asserted its rights as a creditor. In response to complaints from bond insurers about Stockton’s failure to negotiate any reduction in payments to Calpers, the pension fund said that it has priority over all other creditors and that the pension rights of public employees are protected by California’s constitution. The bond insurers Assured Guaranty and National Public Finance Guarantee (an arm of MBIA) filed formal objections to Stockton’s eligibility for Chapter 9 protection, challenging Calpers’ claim of priority and hinting at a collision between the Supremacy Clause of the U.S. Constitution, which holds that federal law trumps state statutes, and the California state constitution’s pension protections. (I’ve previously written about the federalism issue in the Stockton Chapter 9, which hinges on the intersection between 10th Amendment limits on federal judges overseeing municipal bankruptcies and the simultaneous requirement that cities show they’re entitled to federal bankruptcy protection.)

SCOTUS confirms deference to arbitration, bench-slaps Oklahoma court

Alison Frankel
Nov 27, 2012 23:28 UTC

Woe unto state jurists who think they know better than the U.S. Supreme Court. And woe unto everyone possessed of the notion that state courts have the power to undo arbitration clauses on public policy grounds.

That’s the message of a summary decision Monday by the U.S. Supreme Court, which overturned the Oklahoma Supreme Court’s 2011 ruling that a non-compete clause in an employment arbitration agreement was unconscionable and therefore unenforceable. Monday’s per curiam ruling marks the third time in the last two years that the U.S. justices have overturned state-court decisions undercutting arbitration agreements.

In the most recent case, a Louisiana oil well servicing company called Nitro-Lift Technologies served two former employees from Oklahoma with a demand for arbitration after they quit and went to work for a Nitro competitor. Nitro asserted that the two had violated a non-compete provision in their employment agreements, and that under those agreements, they were required to submit to arbitration on Nitro’s claims. The former employees, in turn, sued in Oklahoma state court for a declaratory judgment that the non-compete clauses were unenforceable.

How Argentina lost game of chicken with renegade bondholders

Alison Frankel
Nov 26, 2012 22:03 UTC

The integrity of the federal judicial system rests on the bedrock principle that judges will put aside personal feelings and issue rulings based on the facts and the law. No matter how odious litigants (or their lawyers) may be, our system says they’re entitled to fair treatment. But judges are also human. If you push them hard enough, over a long enough period of time, they’re going to push back. And that is why Argentina now faces a dire choice: Either it puts $1.3 billion into an escrow fund to pay off renegade bondholders who refused to participate in the country’s two rounds of sovereign debt restructuring or it risks entering a technical default on $24 billion of restructured bonds. Argentina’s crisis is the product of almost 10 years of litigation, in which U.S. courts have labored to honor the rights of a foreign sovereign — and Argentina has offered no such reciprocal respect for the power of our courts.

Argentina is imminently expected to ask the 2nd Circuit Court of Appeals to reinstate a stay on a series of injunctions issued earlier this year by U.S. District Judge Thomas Griesa of Manhattan. You probably remember the background. The bond exchange holdouts filed suits in federal court in Manhattan, claiming that Argentina was violating the pari passu, or equal footing, clause of their contracts when it paid exchange bondholders without paying them. Griesa, who has been supervising litigation between Argentina and the holdouts for almost a decade, agreed. He enjoined Argentina from making payments to exchange bondholders before paying the holdouts what they’re owed. In October, the 2nd Circuit affirmed Griesa, sending the case back to him for clarification of the terms of the payments Argentina must make to holdouts. After the appeals court’s ruling, Argentina’s political leaders nevertheless vowed not to pay the renegade bondholders, which they (and others) call vultures.

At a hearing earlier this month, Griesa warned Argentina’s longtime lawyers at Cleary Gottlieb Steen & Hamilton that if their client continued to defy U.S. court rulings, “steps can be taken to sanction any misconduct.” Last Wednesday night, Griesa laid down the law. Despite pleas by Argentina and the exchange bondholders, the judge lifted the stay on his injunctions. He ruled that Argentina may not pay the exchange bondholders the $3.41 billion they’re due in December unless it also puts up $1.3 billion for the holdouts. With Argentina steadfastly insisting it will not pay holdouts, Griesa’s ruling puts the country on the brink of an economic catastrophe.

Apple and Motorola talk arbitration. End in sight to patent war?

Alison Frankel
Nov 20, 2012 22:24 UTC

In the two weeks since U.S. District Judge Barbara Crabb of Madison, Wisconsin, unceremoniously tossed Apple’s breach-of-contract against Motorola just as a trial to determine a fair licensing rate for Motorola’s standard-essential wireless tech patents was to begin, Apple’s lawyers at Covington & Burling andTensegrity Law Group have been struggling to persuade the judge to change her mind and dismiss the case without prejudice. I already told you about the bench memo Apple submitted on Nov. 5, after Crabb said at a hearing that if Apple wouldn’t agree to abide by the licensing rate she set, she would dismiss its declaratory judgment and specific performance claims. Apple argued, in essence, that since Crabb was dismissing on jurisdictional grounds, she hadn’t reached the merits of Apple’s case, so she couldn’t preclude Apple from refiling its claims. Apple repeated those arguments in a brief filed last week, responding to a Nov. 14 brief by Motorola’s lawyers at Quinn Emanuel Urquhart & Sullivan that urged Crabb to stick by her decision to toss the case with prejudice. “No litigant,” Motorola wrote, “should be permitted to try to engineer a judgment to its liking on the eve of the trial, then seek to walk away so that it can reengineer and refile its claims elsewhere, at some later date.”

That might seem like the same old bomb-throwing by two companies that have spent the last three years (and untold millions of dollars) attempting to litigate the other’s smart devices into oblivion, but last week’s briefing, as well as another brief Motorola filed Monday, revealed something new: a tantalizing step toward arbitration that could be, to quote Winston Churchill, the end of the beginning of the smartphone patent wars.

Don’t get too excited, because Apple and Motorola are still squabbling over the terms of such an arbitration. But here’s where things stand. At the Nov. 5 hearing before Crabb, Motorola suggested, apparently for the first time in open court, that it would be willing to submit to binding arbitration to set a fair and reasonable licensing rate for both its portfolio of patents essential to wireless technology and Apple’s corresponding portfolio. Apple General Counsel Bruce Sewell followed up with a letter on Nov. 8 to Motorola GC Kent Walker(cc’ing Google lawyer David Drummond). “Your offer to arbitrate made before Judge Crabb on November 5, 2012, was … welcome news,” the Apple letter said. “We agree to arbitrate the value of mutual licenses to our respective (standard-essential patent) portfolios.”

Saving the U.S. financial system trumps Fed’s duty to AIG: NY judge

Alison Frankel
Nov 19, 2012 22:16 UTC

Near the end of his 89-page opinion dismissing Starr International’s breach-of-duty case against the Federal Reserve Bank of New York, U.S. District Judge Paul Engelmayer of Manhattan engaged in a thought experiment. What’s more important, he asked: the Fed’s mission to stabilize the U.S. economy or the state-law fiduciary duties it might assume in the bailout of a private company?

In the abstract, this might seem like an easy question to answer. But Engelmayer was presented with a complaint, filed in November 2011 by Starr in its capacity as a major shareholder of AIG, that posited a breathtaking $25 billion government conspiracy against AIG. Conventional wisdom may regard AIG and its structured products division as a villain of the 2008 economic meltdown; Starr’s lawyers at Boies, Schiller & Flexner and Skadden, Arps, Slate, Meagher & Flom offered a different (and singular) view of recent financial history, in which the U.S. government pushed AIG to the brink of bankruptcy by refusing it access to capital; seized control of the company via an offer AIG’s board had no choice but to accept; plundered the company’s assets while paying off AIG’s credit-default swap counterparties in full; and then illegally engineered a reverse stock split to dilute the interests of AIG’s pre-bailout shareholders. “Starr’s amended complaint paints a portrait of government treachery worthy of an Oliver Stone movie,” Engelmayer wrote.

In the first part of his decision, Engelmayer concluded that Starr (which is controlled by former AIG CEO Hank Greenberg) failed to establish the Fed’s fiduciary duty under Delaware corporate law to AIG shareholders in the actions that weren’t already time-barred when Starr sued last year (namely, th e t akeover of AIG assets and the agreement under which proceeds from their sale would be allocated between the Fed and AIG shareholders; and the mechanism by which the Treasury became AIG’s majority shareholder). In detailed analysis, the judge said, in essence, that the Fed didn’t control AIG at the time of these deals, so it had no fiduciary duty to shareholders. AIG’s board could, after all, have refused to accept the credit facility the Fed offered and entered bankruptcy. It wasn’t a good option, the judge conceded, but the choice between a rock and a hard place is still a choice.

A cautionary tale for whistle-blowers, from the SEC’s own ranks

Alison Frankel
Nov 16, 2012 23:21 UTC

On Thursday, the Securities and Exchange Commission released its annual report on the activities of the whistle-blower office it established in late 2011, at the direction of the Dodd-Frank Act. The office’s eight lawyers received 3,001 whistle-blower tips in the SEC’s fiscal year 2012, which ended on Sept. 30. A total of 547 tips involved alleged misconduct in corporate disclosure, 465 alleged offering fraud and 457 related to stock manipulation. At least one bore fruit: In August, the SEC made its first bounty payment to a whistle-blower whose tip led to a judgment of more than $1 million. The agency said the whistle-blower office is processing an undisclosed number of additional whistle-blower bounty applications.

In an odd quirk of timing, on the same day that the SEC reported on the whistle-blower tips it has received, it was hit with a $20 million suit by a former member of its own inspector general’s office. David Weber, who was terminated last month from his post as assistant IG for investigations, claims he was fired for blowing the whistle on misconduct by former IG David Kotz, the aggressive ethics cop known for probes of the SEC’s former general counsel David Becker and enforcement director Robert Khuzami.

Weber’s 77-page complaint, filed by his lawyers at Joseph, Greenwald & Laake in federal district court in Washington, portrays the SEC IG’s office as a hotbed of sexual tension and professional backstabbing — irony indeed, considering that the office’s entire purpose is to police the conduct of SEC employees. From Weber’s telling, the top echelon of the IG’s office seemed to spend a disproportionate amount of time on internecine accusations and investigations. His own downfall, he asserts, was triggered by his report to the five SEC commissioners that the acting IG, who allegedly had a sexual history with Kotz, was covering up Kotz’s conflicts of interests in high-profile investigations. (Seriously, the allegations in Weber’s complaint could be the basis of a prime-time soap opera.)

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