On September 12, 2011 the Centers for Medicare and Medicaid services proposed a new rule that would amend the regulations promulgated under Clinical Laboratory Improvement Amendments of 1988 (“CLIA”). The proposed regulations specify that a lab must provide access to completed test reports upon a patient’s request. The lab’s authentication process must confirm that the reports belong to the patient making the request. Comments must be submitted to HHS by November 13, 2011.
The HIPAA Privacy Rule currently provides individuals the right to review and receive copies of their medical records. However, it currently contains exceptions for CLIA-certified and CLIA-exempt laboratories. The proposed rule would also amend these provisions of the HIPAA Privacy Rule. If adopted, covered entity laboratories would have to disclose laboratory results to patients unless another exception to the access rule under the HIPAA Privacy Rule would apply.
CLIA was enacted in 1988 to establish quality standards for laboratory testing. It covers all phases of laboratory testing, including the reporting of test results. The statute requires labs to disclose results only to “authorized persons, as defined by state law.” The current CLIA regulations also permit a laboratory to disclose test results to the person responsible for using the test results in the treatment context and, in the case of reference laboratories, the referring lab. Thus, if state law does not provide for individual access to the person’s test results, that patient must receive his results through the ordering provider.
Since CLIA was enacted in 1988, there have been many changes in the provision of healthcare, such as individualized medicine and a patient’s active involvement in her own healthcare. HHS determined that the CLIA limitations on the disclosure of laboratory test results interfere with these developments. Moreover, CMS believes the provision of direct patient access to laboratory test reports would support the commitment and goals of HHS regarding the widespread adoption of electronic health records by 2014.
As most readers know, HIPAA provided for the establishment of national standards to protect the privacy and security of personal health information. A laboratory that conducts electronic transactions, for example, electronic submission of healthcare claims for payment, is a “covered entity” under HIPAA.
Under the proposed rule, laboratories, just like other covered entities, could charge a reasonable, cost-based fee to provide individuals with copies of their results. This fee may include only the cost of copying, including supplies and labor, and postage if the patient requests that the copy be mailed. If the patient has agreed to receive a summary of the protected health information, the laboratory may also charge a fee for preparation of the explanation.
Another proposed but not yet enacted regulation also comes into play. On July 14, 2010, HHS issued a proposed rule to implement most of the privacy and security provisions of the HITECH Act. The draft regulation includes provisions to strengthen an individual’s right to receive an electronic copy of his protected health information, if the information is maintained electronically in a “designated record set” of the provider. (A “designated record set” is basically the group of records maintained by a provider that it uses to make decisions about patients, or the provider’s medical and billing records.) HHS also proposed to allow reasonable cost based fees reflecting the cost of labor for creating the electronic copy of the information and the supplies used, such as compact discs. HIPAA covered laboratories would be required to comply with the Privacy Rule’s provisions regarding the form of access provided and fees, as they exist currently and then are ultimately modified by a final rule implementing the HITECH Act. The individual could request an electronic copy of the information in the format of Microsoft Word or Excel, Text, HTML or PDF, among other formats.
HIPAA provides that the administrative simplification regulations preempt any contrary provision of state law. A provision of state law is “contrary” to a provision in the HIPAA rules if the covered entity would find it impossible to comply with both the state and federal requirements. It is also contrary if the provision of state law stands as an obstacle to the accomplishment and execution of the full purposes of HIPAA.
The HIPAA Privacy Rule includes an exception from general preemption if the provision of state law relates to the privacy of information and is more stringent than a HIPAA standard. With respect to a state law pertaining to an individual’s right to access her protected health information, a state law is more stringent than the Privacy Rule if the state law permits greater rights of access for amendment. A number of states have laws that would prohibit the laboratory from releasing a test report directly to the patient or that prohibit the release without the ordering provider’s consent. If adopted, these proposed regulatory changes would preempt contrary state laws that prohibit laboratories from directly providing the results to the patients.
Sometimes laboratories receive a test order with only an anonymous identifier, so they may be unable to identify the individual who is the subject of the test report. In that situation, the laboratory could not satisfy the verification requirement of the proposed rule and therefore is not required to provide an individual with access to the test. CMS indicated that it is not its intent to discourage anonymous testing.
The final rule will be effective 60 days after publication in the Federal Register, and HIPAA covered laboratories would be required to comply by no later than 180 days after the effective date of the final rule.
The proposed regulation would rationalize the law regarding clinical laboratory test results. Congress did not intend to prohibit patient access to his results in 1988; instead, it deferred to state law. Then in 1996, Congress enacted HIPAA, which preempted contrary state law. The Privacy Rule has been evolving since 2000, and so has the health care industry. Direct to consumer testing laboratories have developed that provide various types of screening tests, including thyroid monitoring, lipid panels, average glucose levels, etc., without requiring a physician prescription. The rule, when adopted, would recognize these realities.
Last year I posted about whether the HUD LEAN Mortgage Insurance Process is working. It appears that HUD still has an unmanageable backlog. Yesterday HUD’s Office of Healthcare Programs announced that it is changing its electronic firm application package requirements and deleting various documents from the firm application. These documents will only have to be submitted prior to OGC review. The new requirements should be posted shortly on the HUD Underwriting Guidance Home Page. Not sure that LEAN is working as hoped.
NEW IRS FORM FOR SOME EXEMPT ORGANIZATION DETERMINATIONS And a Refresher Course on Certain Private Foundation/Public Charity Issues
All nonprofits must file either a Form 1023 or a Form 1024 in order to obtain an initial determination of exempt status. The IRS has released a new form that tax-exempt organizations will use to request certain determinations about their tax exempt status. The new Form 8940, Request for Miscellaneous Determination, will be used to obtain advance approval of certain activities, exemption from Form 990 filing requirements and certain private foundation status issues. (Private foundations are a less favored category of charitable organizations, which are subject to stricter rules and certain excise taxes.) Use of Form 8940 is expected to be simpler, cheaper and faster than a formal request for a private letter ruling.
There is an eight-page set of instructions for the completion of Form 8940. These instructions specify what information needs to be submitted to support each of the nine types of requests that may be submitted. A user fee must accompany most requests. For the following three miscellaneous determinations, the user fee is $1,000:
- Advance approval of set-asides by private foundations;
- Advance approval of voter registration activities;
- Advance approval of scholarship procedures of private foundations.
For the other six types of miscellaneous determinations for which this form may be used, the user fee is $400:
- Exemption from Form 990 filing requirements;
- Advance approval of “unusual grants;”
- Determination of type of section 509(a)(3) supporting organizations;
- Reclassification of foundation status, including a voluntary request from a public charity for private foundation status;
- Termination of private foundation status – advance ruling request;
- Termination of private foundation status – 60 month period ending.
Minimum Distribution Rules Applicable to Private Foundations
One of the requirements applicable only to private foundations is that they must make a minimum amount of “qualifying distributions” each year. An amount set aside for a specific project may be treated as a qualifying distribution in the year it is set aside, rather than in the year that it is actually paid, if at the time it was set aside the foundation establishes that:
(1) The amount will actually be paid for the specific project within 60 months from the date of the first set-aside, and either
(2) (i) The set-aside satisfies the suitability test; that is, that the project is one that can be better accomplished by a set-aside than by immediate payment, or
(ii) the foundation has satisfied certain relatively complicated cash distribution rules in the past.
Private foundations may use Form 8940 to obtain advance approval of these set-asides.
Voter Registration Activities
Private foundations may not make any payments to carry on any voter registration drive. “Nonpartisan” activities are permitted. Activities that satisfy all of the following conditions are considered nonpartisan:
(1) The organization conducting the voter registration drive is an exempt § 501(c) (3) organization;
(2) Its activities are nonpartisan, are not confined to one specific election period and are carried on in at least five states;
(3) The organization spends at least 85% of its income directly for the active conduct of the exempt purpose for which it is organized and operated;
(4) The organization receives at least 85% of its support (other than gross investment income) from exempt organizations, the general public, and/or governmental units;
(5) It does not receive more than 25% of its support (other than gross investment income) from any one exempt organization;
(6) It does not receive more than 50% of its support from gross investment income; and
(7) Contributions to the organization for voter registration drives are not subject to conditions that they may be used only in specified localities of the United States or that they may be used only in one specific election period.
In determining whether the organization meets the support test in items (4), (5) and (6), the support received during the tax year and the four immediately preceding tax years of the organization is taken into account. For organizations with less than four years of operational experience, support tests may be determined by taking into account all available years the organization has been in existence. Again, a private foundation may use Form 8940 for advance approval of its voter registration activities.
Grants to Individuals
If a private foundation makes grants to individuals, such as scholarships, they must be awarded in accordance with procedures approved in advance by the IRS. To secure such approval, the private foundation must demonstrate in its request for advance approval that:
(1) Its procedure awards grants on an objective and non-discriminatory basis;
(2) The procedure is reasonably calculated to result in performance by the grantees of the activities that the grants are intended to finance; and
(3) The foundation will supervise the grants to determine whether the recipients have fulfilled the grant terms.
Approval is based on an evaluation of the foundation’s entire system of standards, procedures and follow-up. Therefore, separate approval for each grant program is not required. Once obtained, such approval applies to any subsequent grant program so long as the procedures under which it is conducted do not differ materially from those described in the original request for approval. A private foundation may use Form 8940 to obtain advance approval of its scholarship procedures.
Exemption from Filing Forms 990
Most organizations must file an annual information return (Form 990 or Form 990-EZ). However, organizations affiliated with one or more churches are exempted from filing Form 990, so long as they satisfy the requirements of 26 C.F.R. § 1.6033-2(g) and (h) (2011), as well as Revenue Procedure 96-10. In addition, organizations that are affiliated with a governmental unit are exempt as long as they qualify under the requirements of Revenue Procedure 95-48. An organization may request a determination that it is not required to file the annual information return when it applies for exemption by providing information requested on the application form (Form 1023 or 1024). If an organization does not request this determination at that time, or its initial request is not approved, it may request a ruling on its filing requirement by using Form 8940.
Publicly Supported Public Charities
Two types of public charities obtain that status based on their sources of support. If an organization receives a substantial part of its support in the form of contributions from other publicly supported organizations, governmental units and/or the general public, it may qualify under §170(b)(1)(a)(vi). For example, a human service organization whose revenue is generated through widespread public fundraising campaigns, United Way drives or government grants is considered a publicly supported charity. In addition, an organization that receives no more than one-third of its support from gross investment income and more than one-third of its support from contributions, membership fees and gross receipts from activities related to its exempt functions is also considered a publicly supported charity under § 509(a)(2). For example, a non-profit theater with box office revenue would usually qualify as a public charity under §509(a) (2).
The difficulty with these support tests is that they include in the definition of “support” contributions from each donor only up to two percent of the organization’s total support. This two percent limitation does not apply if a grant is considered an “unusual grant.” An “unusual grant” is one that is attracted because of the publicly supported nature of the organization, in an unusual or unexpected amount that would otherwise adversely affect the status of the organization as normally being publicly supported. An organization may use Form 8940 for an advance determination that a potential contribution is an unusual grant, excluded from these public support calculations.
Another type of public charity is a § 509(a) (3) supporting organization. This is an organization that carries out its exempt purposes by supporting other exempt organizations, usually other public charities.
A supporting organization must be organized and operated exclusively to support specified supported organizations. Moreover, it must have one of three relationships with the supported organizations, all of which are intended to ensure that the supporting organization is responsive to the needs of the supported organization and intimately involved in its operations and that the public charity is motivated to be attentive to the operations of the supporting organization. No supporting organization may be controlled by “disqualified persons,” usually substantial contributors. The following are the three types of supporting organizations:
- Type I – the supporting organization is operated, supervised or controlled by the supported organization;
- Type II – the supporting organization is supervised or controlled in connection with the supported organization;
- Type III – the supporting organization is operated in connection with the supported organization.
Because Type III relationships are less formal than a Type I or Type II relationship, Type III organizations must meet both a responsiveness test and an integral part test. These tests are designed to ensure that the supporting organization is responsive to the needs of the public charity and that the public charity oversees the operations of the supporting organization.
If a Type III supporting organization changes its governance or operational structure, it may qualify under as a Type I or Type II supporting organization. A supporting organization in that situation may use Form 8940 to request a determination in the change of type of supporting organization it is.
Reclassification of Private Foundation/Public Charity Status
Sometimes a private foundation expands its sources of support or operations so that it may in the future qualify as a public charity. On the other hand, a public charity may also change its organizational structure or sources of support and no longer qualify as a public charity. In both of those situations, the organization may request reclassification of its foundation status using Form 8940.
Once an organization is classified as a private foundation, it may only terminate that status under the provisions of § 507. Under § 507, there are four ways to terminate private foundation status, two of which involve tax liability:
(1) Voluntary termination by notifying the IRS of the intent to terminate and paying a termination tax. Unless the organization requests abatement, it must pay the tax at the time the statement is filed.
(2) Involuntary termination for either repeated or flagrant violation of the private foundation excise tax provisions, in which case the organization also becomes subject to a termination tax.
(3) Transfer of all its assets to one or more organizations that have been determined to be public charities under § 509(a) (1). The recipient organization must have been in existence and described under § 509(a) (1) for a continuous period of at least 60 months.
(4) An organization may operate as a public charity for a continuous period of 60 months after giving appropriate notice to the IRS. In this way it may terminate its private foundation status as long as it meets the requirements of § 509(a)(1), (2) or (3) for a continuous 60 month period beginning with the first day of any tax year. It must notify the IRS before beginning the 60-month period that it is terminating its private foundation status. The organization also must establish immediately after the end of the 60-month period that it has met these requirements. The organization may use Form 8940 both to give prior notice to the IRS as well as to demonstrate how it has satisfied the requirements at the end of the 60-month period.
If your organization is grappling with issues covered by Form 8940, this simplified process may expedite resolution of your concerns. However, if your organization is experiencing other issues, like how to handle a material change in its operations, it may have to fall back on the old, time-consuming and relatively expensive private letter ruling process.
There are many, sometimes overlapping, ways to protect from misappropriation products designed and manufactured by a company. Patent law can be used to protect the “mechanics” of the product, the part of it that makes it perform what it was designed to perform. Copyright law protects the aesthetics of the product, its form as opposed to its function. Trademark law, specifically as it applies to “trade dress,” protects the appearance of the product to the extent that it identifies to the consuming public the source of the product: which company manufactures or sells it? Some examples of “trade dress” that have been recognized as protectable trademarks are McNeil Nutritionals’ yellow packaging for its Splenda® no-calorie sweetener, the octagonal shape of Black & Decker Corporation’s deadbolt door keys, the shape of a COCA-COLA® bottle, etc. In fact, Coca-Cola recently settled its case claiming that the packaging of PepsiCo’s Trop50 brand of fruit juices copied the look, or trade dress, of Coca-Cola’s billion-dollar Simply juice line.
A detailed explanation of patent law is beyond both the scope of this post and my ability. However, I would like to focus on how copyright and trademark law can be used to protect the form and source of a product.
The Copyright Act affords protection to “original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated.” 17 U.S.C. § 102(a). Copyright protection extends to three-dimensional “sculptural works,” including some useful articles. 17 U.S.C. § 102(a) (5). “The design of a useful article…shall be considered…a sculptural work only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.”[i]
In Universal Furniture International v. Collezione Europa USA, 618 F.3d 417 (4th Circuit 2010), available here: http://tinyurl.com/3e3baf6, Universal, a business that designs, imports and distributes furniture, sued Collezione for copyright infringement as well as certain state law claims. Collezione had a reputation of being a “knock-off” furniture company, that is, one that imitates the designs of its competitors for a lower cost. In fact, the company’s president acknowledged that it routinely imitated other company’s furniture designs. The designer retained by Universal’s predecessor had consulted public domain sources such as furniture books and antique magazines and combined elements of those designs to create a different look from what had been seen before. For its Grand Inheritance Collection, Universal filed copyright registration forms that described the subject of the registration as “decorative sculptural designs on furniture; an adaptation of pre-existing decorative designs; compilation of decorative designs on suites of furniture.” The registration form for its English Manor Collection noted that, although the collection contained “public domain elemental designs,” Universal sought copyright protection in the “original decorative designs appearing on suites of furniture including original adaptations of public domain designs and original compilations of decorative designs.”
A year following introduction of these two furniture lines, Collezione introduced collections that imitated both lines. These lines were displayed at the High Point, North Carolina Furniture Market in October 2004. To make matters worse, the trial court found that Collezione also displayed furniture pieces actually manufactured by Universal, from which it had simply removed Universal’s stickers and which it claimed as its own. The trial court awarded Universal more than $11 million in damages, representing the gross revenues that Collezione had earned from selling the infringing items.
On appeal, the Fourth Circuit first rejected Collezione’s argument that Universal failed to establish its title to the copyright. The court pointed out that the registration certificates were presumptive proof of Universal’s ownership of the asserted copyrights. In addition, the original design service agreement clearly transferred to Universal’s predecessor the intellectual property rights created by the designer. The court held that the merger documents between the predecessor and Universal sufficiently transferred the asserted copyrights to Universal.
Next, the Fourth Circuit assessed whether Universal’s designs were sufficiently original for copyright protection. To claim a valid copyright, one must show that the designs are (1) original and (2) conceptually separable from the utilitarian aspects of the furniture. Establishing originality is easy to do. “Original” means only that the work was independently created by the author, as opposed to copied from other works, and it possesses at least some minimal degree of creativity. The requisite level of creativity is extremely low. Again, the submission of a valid certificate of copyright registration creates a presumption of originality for five years from the date of registration. Both the trial court and the Fourth Circuit were satisfied that the original artist expended original skill and labor in selecting and adapting the decorative elements and created a new “separate entity” by blending elements from different historical periods. He modified and arranged the decorative elements in unique ways, which both courts held was more than sufficient to satisfy the low threshold for originality.
In a surprisingly complex portion of the opinion, the Court of Appeals then turned to what it called a more “vexing,” perhaps more metaphysical, question. Were Universal’s designs conceptually separable from the utilitarian aspects of the furniture? As noted above, the statute provides copyright protection only if the design of the useful article “… incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.” The court referred to this as the “conceptual separability test.” It noted that the decorative elements must be capable of separate identification from the utilitarian aspects of the furniture. They also must be capable of existing independently of the utilitarian aspects of the furniture. The court agreed with the trial court that the artistic and aesthetic features of the furniture could be conceived of as having been added to, or superimposed upon, an otherwise utilitarian article. They are therefore capable of existing independently of the furniture.
The court next considered whether Collezione infringed Universal’s copyrights. A successful claim of copyright infringement requires a plaintiff to prove that the defendant copied the original elements of the work. Usually a plaintiff will possess no direct evidence of copying. However, courts have held that an author may create a presumption of copying by indirect evidence establishing that the defendant had access to the copyrighted work and that the defendant’s work is substantially similar to the protected material. Substantial similarity is a two-pronged test. The plaintiff must show that the two works are (1) extrinsically similar because they contain substantially similar ideas that are subject to copyright protection, and (2) intrinsically similar in the sense that they express those ideas in a substantially similar manner from the perspective of the intended audience of the work. The extrinsic inquiry is an objective one, and the intrinsic analysis is subjective – it involves the perspective of the object’s intended observer. The Fourth Circuit affirmed the trial court’s determination that Collezione’s furniture collection shared with Universal’s a “highly decorative appearance with a traditional feel” and “very ornamental designs combined with basic styles that resemble furniture pieces from England in the 18th and 19th centuries.” In so finding, the court relied on the plaintiff’s expert’s testimony. In addition, the district court properly assessed that the ordinary observer of individual pieces of furniture within the disputed collections would see each piece as the same, discounting any trivial differences. Although the trial court did mention certain non-copyrightable features, such as the furniture’s shape and color, it appropriately focused on whether the ordinary, reasonable observer would find the furniture lines, as a whole, to be substantially similar.
The Fourth Circuit then moved on to the Lanham Act claim that Collezione marketed actual pieces from Universal’s line as its own furniture. The Lanham Act prohibits a “false designation of origin” that is “likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association…or as to the origin” of “goods, services, or commercial activities.” 15 U.S.C. § 1125(a) (1) (A). The type of false designation of origin at issue in this case is called “reverse passing off,” which occurs when a producer misrepresents someone else’s goods or services as his own. The reverse passing off claim required Universal to prove four elements: (1) that the work at issue originated with it; (2) that the origin of the work was falsely designated by Colleziones; (3) that the false designation of origin was likely to cause consumer confusion; and (4) that Universal was harmed by Collezione’s false designation. The district court properly found that Collezione falsely designated the origin of the furniture by displaying as its own actual pieces from Universal’s line at the High Point Furniture Market. In addition, the court of appeals agreed that…“it would be difficult to fathom a situation where a customer would not be confused by seeing two different companies marketing the same furniture under different names.” Finally, Universal introduced evidence that Collezione sold pieces in its collection to customers who placed their orders during the period in which the company displayed corresponding pieces of Universal’s line. Therefore, the ruling that Collezione violated the Lanham Act was affirmed.
Thus, in that situation, the original furniture maker was able to protect the ornamental features of its products, although the products themselves were highly functional. However, in the Seventh Circuit, a trademark registrant was unable to protect the x-frame design, or trade dress, of its folding chairs. See Specialized Seating, Inc. v. Greenwich Industries, L.P., 616 F.3d 722 (2010), available here: http://tinyurl.com/3gjsu8m. Greenwich Industries had been using that x-frame for many years. In 2004, Greenwich, doing business as Clarin, obtained a trademark registration for a particular x-frame design of folding chairs. In 2001, its competitor, Specialized Seating, began to sell folding chairs that to an untrained eye looked like Clarin’s trademark chair. There were differences in construction and detail, but the basic design tracked the registered mark.
Clarin’s rights in the mark by this time were “incontestable” under 15 U.S.C. § 1065. However, Specialized Seating asserted that it could raise two of the defenses available in a case involving infringement of an “incontestable” mark. The first defense was that “the registration…was obtained fraudulently,” § 115(d) (1), and the second defense was that “the mark is functional,” § 115(d) (8). The district court found that the x-frame construction was functional because it was designed to be an optimal trade-off between the chair’s weight (and thus its cost) and its strength. An x-frame chair also folds itself naturally when knocked over, can be attached to neighboring chairs and supports greater vertical loads than other designs. It concluded not only that the overall design of Clarin’s chair was functional but also that each feature was functional. Moreover, it concluded that Clarin had defrauded the Patent and Trademark Office by giving misleadingly incomplete answers to the trademark examiner’s questions. The examining attorney initially had turned down Clarin’s proposal to register the design as a trademark, observing that the design appeared to be functional. Clarin replied that a patent it held on the x-frame chair did not include all of the features in the mark’s design. What Clarin did not tell the examiner is that it held three other patents on x-frame designs. The district judge concluded that the four patents collectively covered every feature on the design submitted for a trademark, including a functional improvement over the original back support. Clarin should have disclosed all of these utility patents. Had it done so, the judge thought, the examiner would have refused to register the proposed mark.
The Court of Appeals held that since utility patents are supposed to be restricted to inventions that have utility, and thus are functional, inventions covered by utility patents pass into the public domain when the patents expire. Therefore, it is inappropriate to use trademark law to afford extended protection to a patented invention. Although there are many ways to design folding chairs, the Court of Appeals held that all of the designs are functional, in the sense that they represent different compromises along the axis of weight, strength, kind of material, ease of set up, ability to connect the chairs together for maximum seating density, etc. Because the district court did not commit clear error in finding Clarin’s design to be functional, the Seventh Circuit concluded it was unnecessary to decide whether the company committed fraud on the Patent and Trademark Office. A finding of fraud would only knock out the mark’s incontestable status and registration, but it would not affect the mark’s validity. However, a finding of functionality affects the very validity of the mark.
To sum up, in order to protect an industrial design under either copyright or trademark law, the design must not be “functional.” For copyright protection to be available, the design must be “creative” and “original.” For trademark protection to apply, the design must identify the source of the product.
[i] “Useful article” is an article having an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information.” 17 U.S.C. § 101.
I discussed at http://tinyurl.com/2b9c9pt the cases from the First Circuit holding constitutional New Hampshire and Maine statutes restricting the sale of prescriber identifiable prescription information. The Supreme Court declined to hear appeals from these cases. I predicted that it would take a conflict among the circuits, i.e., a holding from another circuit striking down such a statute as unconstitutional, for the issue to reach the Supreme Court. That is exactly what has happened.
In 2007, the State of Vermont enacted the following statute:
”A health insurer, a self-insured employer, an electronic transmission intermediary, a pharmacy, or other similar entity shall not … exchange for value regulated records containing prescriber-identifiable information, nor permit the use of regulated records containing prescriber-identifiable information for marketing or promoting a prescription drug, unless the prescriber consents …. Pharmaceutical manufacturers and pharmaceutical marketers shall not use prescriber-identifiable information for marketing or promoting a prescription drug unless the prescriber consents ….”
The same prescription drug data intermediaries that challenged the New Hampshire and Maine statutes filed suit against the Vermont attorney general, seeking an injunction against enforcement of the law. The district court found that the statute was a constitutionally permissible commercial speech restriction and that the statute did not violate the dormant Commerce Clause. Plaintiffs appealed, and the Second Circuit Court of Appeals reversed, holding that the statute is an impermissible restriction on commercial speech. IMS Health Inc. v. Sorrell, No. 09-1913-cv(L), 09-2056-cv (CON) (2d Cir., Nov. 23, 2010), available here http://tinyurl.com/48nhak6. The Supreme Court granted the State’s petition for a writ of certiorari on January 7, and oral argument is set forth Tuesday, April 26.
In the Second Circuit, the State of Vermont attempted to avoid a First Amendment analysis by claiming that the data constitute merely a commodity, which is subject to regulation. The court rejected that argument, holding that the data in fact comprise information protected by the First Amendment. “The statute is … clearly aimed at influencing the supply of information, a core First Amendment concern…. [W]hen a statute aims to restrict the availability of [truthful] information for some purposes, that restriction must be judged under the First Amendment.”
The data mining companies argued that the statute restricted noncommercial speech, such that a strict scrutiny standard of review applied. The court noted that the primary purpose of detailing is to propose a commercial transaction (the sale of prescription drugs to patients), so it analyzed the statute as a restriction on commercial speech.
To sustain a restriction on commercial speech, the government must assert a substantial interest to be achieved by the regulation. The state alleged that the statute advances three substantial state interests: (1) protection of public health; (2) protection of the privacy of prescribers and prescribing information, and (3) containment of health care costs in both the private and public sectors. The appellants did not argue that protection of public health and cost containment are not substantial state interests. They did dispute whether protecting the privacy of prescribers and prescribing information is a substantial state interest.
The court noted that the statute neither forbids the collection of prescriber-identifiable data nor bans any use of the data other than for marketing purposes. The state argued that use for marketing purposes threatened the integrity of the prescribing process and damaged patients’ trust in their doctors by preventing patients from believing that their physicians are inappropriately influenced by such marketing. The court held that this interest is too speculative to qualify as a substantial state interest.
Next, the state had to demonstrate that the regulation directly advances the state interest involved. The court held that the statute does not advance the state’s interests in public health and reducing costs in a direct and material way. It restricts the information available to detailers so that their marketing practices will be less effective and less likely to influence the prescribing practices of physicians. “The appellees have failed to cite to any case … that has upheld a regulation on speech when the government interest in the regulation is to bring about indirectly some social good or alter some conduct by restricting the information available to those whose conduct the government seeks to influence.”
To uphold the statute, the government would also have to demonstrate that its governmental interest could not be served as well by a more limited restriction on commercial speech. The court stated:
“The statute prohibits the transmission or use of [prescriber-identifiable] data for marketing purposes for all prescription drugs regardless of any problem with the drug or whether there is a generic alternative. The statute bans speech beyond what the state’s evidence purportedly addresses.”
Moreover, the court believed that Vermont does have more direct, less speech-restrictive means available. The state could wait to assess what the impact of a newly funded counter-speech program will be, including academic detailing and sample generic vouchers. Interestingly, the court also believed that the state could mandate the use of generic drugs as a first course of treatment, absent a physician’s determination otherwise, “for all those patients receiving Medicare Part D funds.” It is not clear how a state can mandate or restrict the use of Medicare Part D funds, but, if the Attorney General raised that concern, the court ignored it.
The court concluded that the statute cannot survive intermediate scrutiny and is an unconstitutional regulation of commercial speech. Therefore, it did not have to reach the dormant Commerce Clause issue, i.e. whether the statute unconstitutionally restricts commerce outside Vermont.
As indicated above, oral argument is set forth April 26. Because argument will take place so close to the end of the Court’s term on June 30, we may not have a definitive ruling until next fall or later.
At http://tinyurl.com/2bqsuty I discussed the Harper v. Maverick Recording Company case. In that case, the Fifth Circuit held that a 16-year old cheerleader was properly held liable for copyright infringement by downloading 37 audio files through the file-sharing program LimeWire. It also held that she was not an “innocent infringer” and imposed minimum statutory damages of $750 per infringed work.
Ms. Harper filed a petition for a writ of certiorari in the Supreme Court on May 26. However, on November 29, 2010 the Supreme Court decided not to consider the case. Justice Alito dissented from the denial, arguing that the Fifth Circuit’s refusal to consider her youth and lack of sophistication in determining whether she was an innocent infringer was “not necessarily … correct.” However, at least as of November 29 there were no conflicting Circuit decisions, so it is unlikely that the issue will reach the Supreme Court any time soon.
Fairly contemporaneously with the Harper litigation, thirteen major record companies filed suit against Lime Group LLC, affiliated entities and certain officers. They claimed inducement of, contributory and vicarious copyright infringement. On May 25, 2010, the U.S. District Court for the Southern District of New York granted the recording companies judgment on the claims of inducement of copyright infringement, common law copyright infringement and unfair competition. The decision is available at http://tinyurl.com/26h7yl9.
The district court reviewed the uncontroverted evidence and concluded that the LimeWire entities were aware of their users’ substantial infringement of copyrighted music and in fact purposefully marketed to infringing users of their software. They enabled and assisted users to commit infringement and in fact depended on infringement for the financial success of the business. In addition, it did not implement in a meaningful way any of the available technological barriers to diminish infringement. Thus, it concluded that LimeWire was liable on the claim of “inducement of infringement.” Based on the same uncontroverted evidence, the court denied LimeWire’s motion for judgment that it was not liable as a matter of law for vicarious copyright infringement. The court concluded that there exists a genuine issue of material fact as to whether LimeWire is “capable of substantial non-infringing uses,” so it also declined to rule on the recording companies’ “contributory copyright infringement” claim.
On October 26, 2010 the parties entered into a Consent Injunction prohibiting Lime Wire from making the copyrighted sound recordings available and operating and advertising the Lime Wire software. It was ordered to use all reasonable technological means to halt infringement by “Legacy Users,” i.e., users prior to the date of the injunction. It was required to give wide public notice of the injunction. Visitors to its website at http://limewire.com/ will see the following Notice:
“LimeWire is under a court order dated October 26, 2010 to stop distributing the LimeWire software. A copy of the injunction can be found here. LimeWire LLC, its directors and officers, are taking all steps to comply with the injunction. We have very recently become aware of unauthorized applications on the internet purporting to use the LimeWire name. We demand that all persons using the LimeWire software, name, or trademark in order to upload or download copyrighted works in any manner cease and desist from doing so. We further remind you that the unauthorized uploading and downloading of copyrighted works is illegal.”
The litigation continues on the issue of damages.
Deciding whether a departing CEO should serve on the board and oversee a successor might seem like a benign consideration. But it can impede an organization’s efforts to move forward and ultimately affect the bottom line, a recent study found.
Matteo Tonello, director of corporate governance research at The Conference Board, said the findings aren’t surprising because “it’s something we have been anecdotally seeing as The Conference Board works with board members.”
“This is a very timely study because companies are changing their lead executives more often than in the past,” Tonello noted.
Powerful CEOs Linger Longer
The report, released Oct. 5, 2010, analyzed 358 CEO turnovers for reasons other than mergers, reorganizations, spinoffs and death at S&P 1500 firms from 1998 to 2001. It looked at a variety of data, including length of the departing CEO’s board service, personal and professional attributes of the incoming CEO, and the firm’s subsequent stock performance.
According to the study, the effects of a former CEO’s retention on the board also seem to vary based on individual attributes. For example, there was a negative correlation between postturnover stock returns and board retention of a CEO who wasn’t a founder of the firm. In addition, the study found that board retention frequently involves powerful, aging CEOs who have achieved a less-than-distinguished record of financial performance at their firm in the years leading up to their departure, Schloetzer said.
One-Third Invited to Stay
While retaining the departing CEO on the board is done less frequently than in the past, “it still occurs somewhat frequently today,” Schloetzer said. According to The Conference Board’s 2010 Survey of Board Practices, about 35 percent of surveyed companies said they invite the departing CEO to remain on the board.
According to Schloetzer’s study, former CEOs remained on their companies’ boards for at least two years in 130 of 358 (36 percent) of turnovers reviewed.
Attributes that appear to impact the decision include whether the CEO owns a large percentage of the firm’s stock, whether he or she is holding the board chairman position jointly and whether the board has relatively few independent directors.
Meanwhile, the study found that departing CEOs were often retained if the succession choice enabled the former CEO to keep a relatively powerful bargaining position within the firm.
- Are we doing this because of “solid pre-departure performance” or because of his or her power and influence over the board?
- Will the departing CEO harm the successor selection process or alter the quality and characteristics of prospective successors?
- Should the successor define his or her relationship with the former CEO, or should directors decide?
- Are we prepared to take action should conflict arise?
- Instead of a board position, could we engage in informal communication when questions arise or retain access to the former CEO through a well-defined short-term consulting agreement?
Few companies have explicit policies on retaining departing CEOs on their boards. Most consider it on a case-by-case basis, Tonello said. He added that there’s no “one-size-fits-all solution” because some companies might decide that “the benefits of retaining a CEO on the board outweigh the negatives.”
A board that opts to retain the former CEO should take “appropriate safeguards,” according to Tonello:
- The time frame of the former CEO’s board tenure should be determined clearly in advance so that “it’s well known that this would be a temporary thing and that at some point the CEO will step down from his director role as well,” Tonello said.
- Activities and functions of the former CEO as director should be overseen by the board’s lead independent director, if one exists. Increasingly, boards have added such positions to help guarantee a balance of power that helps facilitate a smooth transition, Tonello noted.
- All board members, including retained former CEOs, should undergo performance evaluations. Many boards assess performance as a whole annually but do so less frequently with specific directors.
Although the study shows that successors are constrained by the presence of predecessors, Quigley said it’s not clear why that happens.
“Predecessors might wield their influence by saying ‘no’ a lot, or it might be that successors limit certain initiatives because they sense they could face resistance or worse.” Furthermore, Quigley said, predecessors might be “selectively resistant to certain changes, and perhaps the best CEOs are those who can figure out where and how they can have influence without running afoul of the predecessor.”
Meanwhile, Quigley admitted that when it comes to hard-charging CEOs, personality traits could play a role.
“Future work needs to consider how factors like narcissism or openness to change might influence the process,” Quigley said.
Reprinted with permission of the Society for Human Resource Management (www.shrm.org), Alexandria, VA, publisher of HR Magazine. © SHRM
“A new CEO is likely to bring change and change is very difficult for any organization. It makes it even harder if the old CEO is still around. Old loyalties are there, and that will make any change that the new CEO makes even harder for people in the organization to accept.”
At http://tinyurl.com/2d6zfy6 I discussed Spencer v. World Vision, the 9th Circuit case holding that World Vision could terminate employees on the basis of religion. Since the opinion was rendered, additional proceedings have been filed.
On September 7 the employees filed a petition for rehearing en banc (i.e., rehearing by the entire panel of 9th Circuit judges). They stated that the panel decision conflicted with prior decisions of the 9th Circuit; therefore, consideration by the full court is necessary to secure and maintain uniformity of the court’s decisions and to provide clear guidance to employers and employees within the 9th Circuit. As I noted, all three judges disagreed as to the proper test for determining which employers qualify for an exemption from Title VII as a “religious corporation,” leaving the law with respect to religious discrimination, according to the employees, in a state of disarray and confusion. The perition also stated that the case presents an issue of exceptional importance in that it involves the conflict between rights of employees to be free from religious discrimination and the ability of employers whose primary purpose is “other than worship and religious learning” to claim the exemption.
On September 17 Americans United for Separation of Church and State, The Interfaith Alliance Foundation, the American Humanist Association and the Anti-Defamation League filed a friend of the court brief “in support of neither party.” Their brief noted that the employees submitted limited evidence in the district court that World Vision receives a significant portion of its funding from government sources only to support their argument that it is not a religious organization. However, the district court and Judge O’Scannlain both concluded that World Vision’s receipt of government funds was immaterial to whether it can justify religious discrimination in employment. The amici stated that sanctioning religion-based employment discrimination for government-funded jobs raises signifiicant constitutional concerns under the First Amendment’s Establishment Clause. They requested that the court revise the panel decision to expressly reserve the question of whether the statutory exemption is constitutional if construed to permit religious discrimination in employment decisions for government-funded jobs.
At the court’s request, World Vision filed a response to the petition for rehearing en banc. As is to be expected, it argued that the employees failed to meet the standard for en banc rehearing. It reviewed 9th Circuit precedents and argued that the decision took the same approach as in prior cases and weighed World Vision’s significant characteristics to determine its “general picture” and employed most of the factors previously used in that circuit. It also addresses the employees’ argument that the statutory exemption is limited to churches and entities similar to churches, concluding that the assertion that prior decisions singled out religious indoctrination to be the touchstone for non-educational employers claiming the exemption was incorrect. It discussed the 9th Circuit decision and argued that its test is apt for a Christian humanitarian relief organization and avoids the constitutional pitfalls that it argued the employees “church-test” would create.
Hopefully we will learn soon whether the 9th Circuit issues a brief “rehearing denied” opinion or sets in motion further proceedings.