By Nancy L. Perkins, Arnold & Porter LLP.

Clearly, the new final rule merits close attention and counsels in favor of proactive—and timely—compliance planning. The final rule takes effect March 26 and compliance with most of its provisions is required by Sept. 23.

Background on the HITECH Act and the HIPAA Privacy and Security Rules

In the HITECH Act, Congress prescribed a number of changes to the HIPAA Privacy and Security Rules, which collectively serve to protect the privacy and security of “protected health information” (PHI).  As originally adopted by HHS, consistent with HIPAA, the Privacy and Security Rules directly applied only to HIPAA “covered entities,” which are (1) health plans, (2) health care clearinghouses, and (3) health care providers who perform certain transactions involving health information in electronic form. The original rules affected, but did not directly apply, to business associates of those covered entities (such as billing and claims administrators, accountants, attorneys, and data management companies), by requiring that a business associate may receive an individual’s PHI from a covered entity only if the covered entity obtains satisfactory assurances from the business associate that it will protect the PHI in a manner consistent with the covered entity’s obligations under the Privacy Rule. Such satisfactory assurances are to be provided in a business associate agreement (BAA) between the parties that contains specific commitments.

What Has HHS Now Done With the “Business Associate” Definition?

Despite receiving many objections, HHS adopted in the final rule its proposed expansion of the HIPAA rules’ definition of business associate to include subcontractors of HIPAA business associates. HHS acknowledged that the proposed expansion was viewed by many as “not the intent of Congress and beyond the statutory authority of the Department,” and that commenters believed “creating direct liability for subcontractors will discourage such entities from operating and participating in the health care industry.”  But HHS disagreed, noting that the HITECH Act “does not bar the Department from modifying definitions of terms in the HIPAA Rules to which the Act refers,” and opining that the statute “expressly contemplates that modifications to the terms may be necessary to carry out the provisions of the Act or for other purposes.” 

According to HHS, its expanded business associate definition is necessary to prevent the lapse in protection for PHI once a subcontractor is enlisted to assist a primary business associate. Thus, under the final rule, “covered entities must ensure that they obtain satisfactory assurances required by the [HIPAA] Rules from their business associates, and business associates must do the same with regard to subcontractors, and so on, no matter how far ‘down the chain’ the information flows.”  And, as HHS further explained, the factors that determine whether a first-tier contractor is a business associate also govern the determination of whether a subcontractor is a business associate.

Who IS and Who Is NOT a Business Associate?

HHS received a number of comments objecting to the proposed expanded definition of business associate on the ground that it was confusing and ambiguous. As these comments emphasized, the ability to determine which entities are covered by the definition is critical, particularly in light of the enhanced penalties authorized by the HITECH Act. In response, HHS provided some further clarification and guidance on the scope of the new business associate definition. However, ambiguities remain…

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By Marc Dorfman and Ellen Wheeler, Foley & Lardner LLP.

This article highlights significant developments during 2012 in the enforcement program of the U.S. Securities and Exchange Commission (“SEC”). Developments were selected because they may signal future trends or establish new legal standards.

Last year we highlighted as the Number One enforcement development of 2011 the increasing scrutiny by courts of settlements negotiated between the SEC and defendants. As we noted a year ago,

In some ways, during 2012, SEC Enforcement developments were reminiscent of a Beckett play, but with a new title: “Waiting for Rakoff.” The appeal to the Second Circuit from Judge Rakoff’s order declining to approve a settlement between the SEC and Citigroup remains sub judice, with the Court having finally heard oral argument on February 8, 2013. The outcome of that appeal is expected to have a significant impact on the SEC’s practices in negotiating settlements, either in confirming or limiting the use of consents which “neither admit nor deny” the SEC’s allegations.

In November 2012, the SEC announced that it had filed 734 enforcement actions in the fiscal year ending September 30 (only one fewer than the record number of proceedings instituted in the prior year).  Many of these actions are reflective of much larger societal trends. For example, this year’s Top Ten reflects the growing significance of social media and the increased globalization of markets, particularly with respect to China.

The SEC and the U.S. Department of Justice are jointly responsible for enforcing the provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”). The Number Two enforcement development of 2012 is the joint release by the SEC and DOJ in November of “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” a 120-page guide providing a detailed analysis of the SEC’s and DOJ’s approaches to FCPA enforcement.

The remaining Top Ten developments illustrate other significant issues and trends in the SEC enforcement program:

•  Number Three is the Supreme Court’s grant of a writ of certiorari in 2012 and decision in February 2013 holding that the five-year clock in the statute of limitations applicable to SEC claims for fraud begins when the fraud occurs, not when it is discovered.

•  The Number Four enforcement development of 2012 is the SEC’s continued aggressive pursuit of insider trading cases.

•  Number Five is the easing of the standard for aiding and abetting liability by the Second Circuit.

•  Number Six is the opening for business of the SEC’s whistleblower program.

•  Number Seven is the SEC’s pursuit of cases against officers and directors for overvaluing their firms’ assets.

•  Number Eight is the SEC’s case against a “dark pool” for not being dark enough.

•  Number Nine is the SEC’s pursuit of cases involving pre-IPO trading.

1. The SEC’s Increasing Pursuit of Individuals, With Mixed Results

In its press release describing its enforcement results in 2012, the SEC touted its enforcement actions against individuals accused of wrongdoing related to the financial crisis. ² The SEC pointed out that it had filed 29 separate actions against 34 individuals, including 24 CEOs, CFOs and other senior corporate officers. Outgoing Chairman Mary L. Schapiro similarly focused on the SEC’s pursuit of individuals during her speech at the 2012 New England Securities Conference, explaining that the SEC is “determined in our pursuit of those whose actions fueled the Financial Crisis, bringing actions against over 100 individuals and firms – including more than 50 CEOs, CFOs and other senior officers, and obtaining more than $2.2 billion in monetary relief – not to mention dozens of orders barring individuals from the financial industry.”…

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By James C. Pistorino

I. Introduction

The year 2011 closed with the U.S. District Court for the District of Delaware becoming the most popular place for plaintiffs to file patent litigation after the effective date of the America Invents Act. ¹ From Sept. 16, 2011, when the AIA went into effect, through the end of 2011, more cases by more plaintiffs naming more defendants were filed in the District of Delaware than in any other district in the nation. The Eastern District of Texas dropped to being only the second most popular place for plaintiffs to bring patent infringement suits. Thus, to the extent that the AIA was intended to reduce the volume of cases in the Eastern District of Texas, it appeared to be working.

A full calendar year with the AIA in effect has now passed, and the AIA’s longer term effects on patent litigation have begun to emerge. The 2012 case filing data lead to four important takeaways:

•  The districts have returned to their pre-AIA rankings, with the Eastern District of Texas regaining the crown as the most popular place for plaintiffs to file patent suits and the District of Delaware somewhat behind in second place.

•  The concentration of patent cases in the Eastern District of Texas and the District of Delaware remains very high, with approximately 40 percent of all patent cases brought and 37 percent of all defendants named in those two districts alone.

•  Compared to 2011, there was an 11 percent decrease in the number of defendants named in patent cases nationwide, with over 15 percent fewer defendants named in the Eastern District of Texas and District of Delaware.

•  Probably as a result of the joinder provisions of the AIA, patent plaintiffs filed 52 percent more cases in 2012, and the average number of defendants in each case dropped to less than three in nearly all the top 10 districts.

Overall, the AIA does not appear to have substantially reduced patent case concentration in the two small districts that are most popular with plaintiffs. Nevertheless, the AIA has reduced the number of defendants named in each case and may have reduced the total number of defendants somewhat.

This article begins by presenting the 2012 patent case filing statistics. It then compares those numbers to case filings in 2011 and explores possible reasons for the changes, including how districts and district judges have reacted to continued venue challenges.

A. The Data Sources

Docket data on patent lawsuit filings across the United States from Jan. 1, 2012, to Dec. 31, 2012, were retrieved from PACER and compiled into a database. Pacer classifies each party in a suit as a plaintiff, defendant, or something else (e.g., intervenor, third-party plaintiff/defendant and counter/cross-claimant). The secondary classifications were filtered out and only the primary plaintiff(s) and defendant(s) were examined. For the year 2012, the dataset included information on 21,541 parties involved in 5,584 cases. Combined with previous analyses of cases between 1999 and 2011, the dataset includes information on 179,638 parties involved in 41,747 cases. ²

² Some aspects of the Pacer dataset bear noting. First, it includes both information from the original case filing and any later added parties. Thus, the reported numbers are not a perfect reflection of the actions at the time of filing. Second, the data used in this article were retrieved from Pacer on Jan. 20, 2013, and represent a complete retrieval of all data for the year 2012. By contrast, earlier data reported for 2012 were based on data sampled periodically throughout the year. Third, the dataset only classifies parties as plaintiffs or defendants; it does not classify the parties as patentees or accused infringers. Thus, in actions seeking a declaratory judgment of noninfringement or invalidity, the parties bringing seeking declaratory relief, the accused infringers will be classified as the plaintiffs and the patent owners will be classified as the defendants. Fourth, named plaintiffs and defendants are counted each time they appear as a party. Thus, a single party that brings four lawsuits alleging patent infringement is counted as four plaintiffs in the reported data. Fifth, only cases coded as patent cases (code 830) were pulled. Cases that began as, say, copyright, trade secret, or breach of contract actions may not have been coded as patent cases. Finally, neither the Court of Federal Claims nor the International Trade Commission fully participate in Pacer, so patent cases filed there are not included.

Because of the passage of the AIA, no effort was made to identify false marking cases filed in 2012. The AIA effectively limited private false marking cases to those brought by competitors seeking only actual damages and rendered marking with an expired patent number non-actionable. See 35 U.S.C. §292(b) and (c). As a result, false marking cases have been all but eliminated, and they should not materially affect analysis of the larger trends. Slightly more than 1,000 false marking cases were filed in 2010 and 2011 and they have been excluded from the datasets for those years so that trends in traditional patent infringement cases can be analyzed.

B. 2012 Patent Filing Statistics

As shown in Table 1, the Eastern District of Texas led the nation in patent infringement case filings in 2012 based on: (a) the number of cases; (b) the number of plaintiffs; and (c) the number of defendants. In 2012, the average case in the Eastern District of Texas involved a single plaintiff suing two defendants (often corporate relatives). By comparison, in 2010, the average non-false-marking case in the Eastern District of Texas involved 13 defendants and the average case for the pre-AIA period in 2011 had 10 defendants.

Noteworthy in Table 1 is the general decrease in the number of defendants per case across all districts. In 2011 (even including the period after the enactment of the AIA), 8 of the top 10 districts averaged more than 3 defendants per case. In 2012, all but one of the top 10 districts averaged fewer than 3 defendants per case.

Table 2 shows the data of Table 1 as a percentage of the national totals. As an absolute number, nearly 21 percent of all the defendants named in patent cases filed in 2012 were sued in the Eastern District of Texas. By comparison, the District of Delaware accounted for 16 percent, the Central District of California accounted for nearly 12 percent, and no other district accounted for 6 percent or more.

For ease of comparison, Table 3 shows the 2012 and 2011 data and calculates the percentage change year over year. Compared to 2011, the number of cases non-false-marking cases increased from 3,660 to 5,584 (52 percent), the number of plaintiffs increased from 6,119 to 8,894 (45 percent), while the number of defendants dropped from 14,201 to 12,647 (decrease of 11 percent).

The decrease in the number of defendants named in the Eastern District of Texas and the District of Delaware was significant, with both districts seeing a drop of over 15 percent. The 2012 filings are generally in line with the 2011 filings in that seven of the top 10 districts in 2011 were again in the top 10 in 2012, with the Eastern District of Texas and the District of Delaware occupying the top two spots. Figure 2 depicts the combined Eastern District of Texas and District of Delaware case filings from 2000-2012 as a percentage of the national totals.

II. What Explains the 2012 Filings

A. AIA Joinder Provision

One important provision of the AIA that affects case filings relates to joinder. Before passage of the AIA, numerous defendants (including direct competitors) were frequently named in a single case based on the fact that the same patent was allegedly infringed—regardless of differences in the products accused of infringing. This practice was most pronounced in the Eastern District of Texas, where, on average, 13 defendants were named in each non-false-marking patent case filed in 2010. That figure decreased slightly in 2011 to 10 defendants per case through Sept. 16, 2011, when the president signed the AIA and the new joinder statute went into effect.

The AIA generally precludes joining multiple defendants in the same lawsuit unless the same product or process is accused of infringement. Before the AIA, tens of defendants with different accused products could be joined in a single suit alleging infringement of the same patent, and that practice was especially prevalent in the Eastern District of Texas. After the AIA, the same plaintiff wishing to bring suit against the same defendants would need to bring numerous separate suits. Thus, it is not surprising that AIA joinder provisions would result in an increase in the absolute number of cases and plaintiffs, and that is what the data indicate: the number of cases increased by 52 percent, and the number of plaintiffs increased by 45 percent over the 2011 figures.

In 2011, including the period after the AIA went into effect, there were 790 same-day, same-district plaintiffs in non-false-marking cases. That is, 790 times the same plaintiff had already filed a patent infringement case on that same day in that same district. By contrast, in 2012, there were 3,266 same-day, same-district plaintiffs. The difference (2,476) closely matches the increase in the number of plaintiffs between 2012 and 2011 (2,775). Thus, it appears that nearly 90 percent of the increase in plaintiffs can be attributed to multiple, same-day, same-district filings presumably resulting from the AIA’s stricter joinder provisions.

Conversely, the AIA joinder provisions predictably resulted in a decrease in the number of defendants. In the pre-AIA period, the marginal cost of adding another defendant was low. Post-AIA, however, adding a new defendant requires filing another suit. Moreover, it is more likely (although not certain) that the case will be treated as a separate matter. The data suggest that the plaintiffs found that benefits from suing marginal defendants did not justify the increased burdens. As indicated above, there was a decrease of approximately 11 percent in the number of defendants named in 2012 over 2011. Of course, it is possible that there were simply fewer defendants to name in 2012 than in 2011. That seems unlikely, but 2013 may provide more information.

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B. The Eastern District of Texas

Figures 3 and 4 depict filings in the Eastern District of Texas from 2000-2012. Figure 3 reports the actual number of cases, plaintiffs and defendants, while Figure 4 reports the parties (combined plaintiffs and defendants) and cases as a percentage of national totals. As the figures show, there has actually been a reduction in both the absolute number and percentage of defendants named in the Eastern District of Texas from the 2010 peak. Nevertheless, the district is still the most popular with plaintiffs, and nearly 21 percent of all defendants were named in this single district in 2012.

Courts in the Eastern District of Texas continue to issue rulings that have the effect of keeping cases in the district even in the face of legislative changes and previous mandamus rulings by the U.S. Court of Appeals for the Federal Circuit.

(i) Joinder in Pre-AIA Cases.

In the week between passage of the AIA by Congress and the President’s signature, more than 1,500 defendants were named in patent cases in an apparent effort to avoid the non-retroactive AIA joinder provisions that would take effect. Indeed, more than 700 defendants were named in the Eastern District of Texas during that week with an average 13 defendants per case. ³ Thus, while the AIA joinder provisions will guide cases going forward, a substantial volume of pre-AIA cases with large numbers of defendants remain and those cases are not governed by the AIA.

The Federal Circuit addressed joinder standards in pre-AIA cases in a mandamus decision, In re EMC Corp. ⁴ The plaintiff, Oasis Research L.L.C., filed suit in August 2010 naming 16 unrelated defendants and asserting that Oasis’s principal place of business was in Marshall, Texas. In November 2010, several defendants moved to dismiss, sever, and/or transfer to various districts alleging, among other things, that Oasis alleged presence in Marshall was a sham created solely to manufacture venue. In May 2011, Magistrate Judge Amos L. Mazzant issued reports and recommendations denying all the motions to dismiss. Finding that the actions were “not dramatically different,” the magistrate judge recommended denying all the severance motions and, as a result, denying transfer.

In July 2011, District Judge Michael H. Schneider adopted the magistrate’s recommendations and refused to sever or transfer. The day before Congress passed the AIA, three defendants sought a writ of mandamus, arguing “not dramatically different” was not the appropriate standard for evaluating misjoinder under Fed. R. Civ. P. 20 and that their cases should be severed and transferred to other districts.

On review, the Federal Circuit confirmed that the AIA joinder provisions were not retroactive, but nevertheless held that in pre-AIA cases, independent defendants may be joined in a single case only where the accused products or processes “are the same in respects relevant to the patent” and that merely practicing the same alleged patent is not sufficient. ⁵ “Unless there is an actual link between the facts underlying each claim of infringement,” the Federal Circuit held, “independently developed products using differently sourced parts are not part of the same transaction, even if they are otherwise coincidentally identical.” ⁶

Although that standard did not exactly track the AIA’s requirement that the “same product or process” be accused, it was quite similar and far removed from the “not dramatically different” standard used by the district court. Rather than addressing severance and transfer in the first instance, the Federal Circuit remanded for the district court to reanalyze under the proper standard. ⁷

(ii) Non-Rulings.

In some cases, Eastern District of Texas judges have simply not ruled on transfer motions for extended periods of time. For example, in Software Rights Archive L.L.C. v. Google Inc., Google filed a motion to transfer in February 2009. ⁸ Having received no ruling on the motion by July 2010, Google filed a petition for a writ of mandamus with the Federal Circuit seeking an order compelling the district court to rule on the motion. Within days, the district court took up the motion and granted transfer before the Federal Circuit ruled.

In SimpleAir Inc. v. AWS Convergence Technologies Inc., the defendants filed a motion to transfer in March 2010. Magistrate Judge Chad Everingham did not rule until June 2011 and then denied the motion. The defendants petitioned for a writ of mandamus, but the Federal Circuit denied relief, noting, among other things, that they “failed to employ any strategy to pressure the district court to act, such as seeking mandamus to direct the district court to rule on the motion” and also waited over three months after the transfer motion to seek writ relief. ⁹

Of course, defendants may be reluctant to seek mandamus directing district courts to rule on severance and venue issues out of concerns that they might antagonize the district judge who may still need to rule on the merits, and/or that the Federal Circuit may treat a petition as premature if the defendants do not wait long enough for the district court to rule.

On the other hand, defendants may be encouraged by the Federal Circuit’s recent (albeit nonprecedential) decision in the second EMC mandamus petition in which the Court denied mandamus, but stressed “the importance of addressing motions to transfer at the outset of litigation,” that such motions should have “top priority,” and that “Congress’ intent ’to prevent the waste of time, energy and money and to protect litigants, witnesses and the public against unnecessary inconvenience and expense,’ … may be thwarted where … defendants must partake in years of litigation prior to a determination on a transfer motion.” ¹⁰ It is too early to tell whether that decision will result in more prompt rulings.

(iii) Consolidation of Cases for Pre-Trial Purposes and Deferring Transfer Until After Claim Construction.

One of the most remarkable decisions of 2012 occurred in Norman IP Holdings L.L.C. v. Lexmark International Inc. ¹¹ The day before the AIA was signed into law (Sept. 15, 2011), Norman IP filed one lawsuit in the Eastern District of Texas naming two defendants. Norman then filed a series of amended complaints in that suit naming additional, unrelated defendants so that by January 2012, 18 defendants had been named.

In August 2012, Chief District Judge Leonard E. Davis issued an order addressing numerous motions to dismiss or transfer claims against various defendants for misjoinder and convenience. In light of EMC, the court severed the cases against the various defendants. Nevertheless, the court further ruled that the cases would be consolidated for all pretrial purposes other than venue determination and that any transfer of venue would not take effect until after the court issued its claim constructions. Further the court stated:

This Court has limited resources and constantly strives to employ efficient and cost-saving case-management procedures for the benefit of the parties, counsel, and the Court. In response to the AIA’s joinder provision, plaintiffs now serially file multiple single-defendant (or defendant group) cases involving the same underlying patents. This presents administrative challenges for the Court and, left unchecked, wastes judicial resources by requiring common issues to be addressed individually for each case. For example, what was once a single motion to substitute parties (or join a plaintiff) becomes multiple motions. These must each be processed by the Court and staff, including review of the underlying motions and docketing individual orders addressing each motion. More substantive motions, particularly where the same arguments are used in each individual case, present even more difficulties. There, the Court is required to waste time digesting duplicate arguments to ensure that new arguments are not hidden among the plethora of common arguments. … Thus, to permit efficient case management, the Court ORDERS these newly severed actions consolidated with the original filed case as to all issues, except venue, through pretrial only.

However, this case management approach should not be perceived as an invitation to file motions to transfer venue. In recent years, this Court has expended considerable time addressing venue. This Court has many, many, issues before it—both criminal and civil—and it carries one of the heaviest patent dockets in the country; yet, venue in patent cases has increasingly become an extremely expensive and time-consuming matter, not only for the Court but for the parties as well. For instance, in a recent set of serially filed cases involving only seven defendant groups, the parties had already expended over $700,000 on venue-related discovery and briefing before the cases were even ready for status conference (i.e., before all defendants had answered the complaint). This Court currently has approximately forty pending motions to transfer venue. If the average costs of discovery and briefing for each of these transfer motions is only $300,000, then approximately $12 million is being spent by the parties on an issue that does not move the ball down the field, but only seeks a new field upon which to play. Finally, some parties have even called courts in this district to essentially “threaten” mandamus if a venue ruling is not issued within the timeframe desired by the parties. This Court manages a very busy docket—as do all courts in this district—with pending motions of varying levels of priority. Criminal cases take first priority because individuals’ freedom is at stake. In the patent context, trials and Markman hearings are a high priority. Venue motions are important, but not any more important than everything else this court has to do. The court rules on these motions as soon as it can. The Civil Justice Reform Act of 1990 was instituted to provide checks on long-pending motions and cases. Courts in this district take their cases seriously and strive to timely address pending motions in an effort to resolve cases promptly. This Court will address motions to transfer venue as timely as possible, while balancing the many other issues unrelated to venue requiring the court’s attention. ¹²

Whether other district judges will follow this lead, and whether the Federal Circuit will endorse this approach, remains to be seen. ¹³

iv) Denials of Writ Relief by the Federal Circuit.

Although the Federal Circuit has granted mandamus to force transfers of venue in some cases, it has made clear that such relief will be granted only in extreme cases where it considers a district court’s ruling to be beyond the pale of reasonableness.

For example, in In re Amazon.com Inc., the Federal Circuit refused to order transfer to a district (the Western District of Texas) where none of the defendants was headquartered. According to the panel, the fact that none of the defendants was headquartered in the proposed forum made the situation significantly different from other cases where mandamus was granted. ¹⁴

Mandamus to transfer was also denied in In re Vicor Corp.. There, both the district court and the Federal Circuit focused on the fact that an earlier case that involved the defendants’ products (albeit different defendants) had been litigated in the Eastern District of Texas (albeit before a different judge). The newly assigned judge (Schneider) retained jurisdiction over that case for post-injunction damages and contempt issues. In the Federal Circuit’s view, the petitioner did not make a compelling showing that there was insufficient overlap between the earlier case and the current one such that judicial economy would not be gained. ¹⁵

Writ relief was also denied in In re Fusion-Io Inc. There, the plaintiff filed suit nine days before the AIA was signed, naming nine unrelated defendants. One of the defendants (Fusion-Io) filed a motion to sever and transfer in January 2012, before answering. In September 2012, Judge James Rodney Gilstrap severed the parties and denied the motions to transfer without prejudice, indicating that the defendants could file new motions to transfer that only addressed their severed case.

Fusion-Io first sought reconsideration of denial of its transfer motion in light of the fact that its original motion filed in January had addressed only the circumstances of its case and re-filing the same motion again would merely lead to delay. After the district court denied reconsideration, Fusion-Io sought a writ. The Federal Circuit denied relief, indicating that it would not weigh the facts on transfer before the district court. Nevertheless, the Federal Circuit suggested that Fusion-Io promptly re-file its motion to transfer with the district court along with a motion to stay and indicated that the district court should take up those motions before proceeding to any motion on the merits of the case. ¹⁶

The Federal Circuit also refused to order transfer in In re HTC Corp. There again, the district court and the Federal Circuit focused on the fact that the proposed transfer district (the Northern District of California) was not the headquarters district of either of the parties (although it did contain the headquarters for a third party, Google, whose relevance to the case was disputed). HTC’s relatively recent change of incorporation from Texas to Washington and refusal to waive privilege to disclose the reasons for that move were also noted. ¹⁷

v) Judge Selections by Plaintiffs.

As noted in a previous article, the Eastern District of Texas allows plaintiffs to influence which district judge is assigned to their case because case assignments are allocated based on the division where the case was filed. ¹⁸ The Eastern District has several divisions, six of which are relevant to civil cases: Beaumont (division 1); Marshall (division 2); Sherman (division 4); Texarkana (division 5); Tyler (division 6) and Lufkin (division 9). With the confirmation of Judge Gilstrap to replace Judge T. John Ward, case assignment practices were returned to those in place before Ward’s resignation. After a further general order dated Jan. 17, 2012, cases were assigned as follows:

•  Beaumont—100 percent of patent cases to Judge Ron Clark;

•  Marshall—75 percent of civil cases to Judge Gilstrap and 25 percent to Judge Schneider;

•  Sherman—50 percent of civil cases to Judge Richard A. Schell and 50 percent to Judge Marcia A. Crone;

•  Texarkana—90 percent of all cases to Schneider and 10 percent to Gilstrap;

•  Tyler—95 percent of patent cases to Chief Judge Davis and 5 percent of patent cases to Schneider; and

Table 4 shows the breakdown of cases and parties by division filing. As shown in the table, patent plaintiffs appear to have particular preferences for Davis and Gilstrap.

C. The District of Delaware

Figures 5 and 6 show patent case filings in the District of Delaware from 2000-2012. Figure 5 reports the actual number of cases, plaintiffs and defendants, while Figure 6 reports the parties (combined plaintiffs and defendants) and cases as a percentage of the national totals. As the figures show, both the absolute number and percentage of defendants named in Delaware declined in 2012 from the 2011 peak. Nevertheless, the district is still the second popular district with plaintiffs, and more than 16 percent of all defendants were named in this single district in 2012.

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As in the Eastern District of Texas, courts in Delaware continue to issue rulings that have the affect of keeping cases in the district.

At the close of 2011, in In re Link_A_Media Devices Corp., ¹⁹ the Federal Circuit issued a writ of mandamus ordering a case transferred from the District of Delaware. At issue in that case was the focus of District Court Judge Sue L. Robinson on the fact that the defendants were incorporated in Delaware. Although the dispute otherwise had little or no connection with Delaware, the district court denied a motion to transfer holding: “… because all [the] defendants are incorporated in Delaware, they have no reason to complain about being sued in Delaware.”

On the writ of mandamus, the Federal Circuit ordered the case transferred, noting that place of incorporation is not a factor listed for consideration in either 28 U.S.C. §1404 or Third Circuit case law. In the Federal Circuit’s view, the place of incorporation should not have been given “dispositive” weight, and placing “heavy reliance” on place of incorporation was inappropriate. ²⁰

If place of incorporation were removed as a consideration in transfer motions, it would be expected that many more cases should be subject to transfer from the District of Delaware because few companies have significant operations in Delaware. Nevertheless, Delaware district courts have distinguished Link_A_Media and the Federal Circuit has since refused to overturn a ruling denying transfer in a case where the district court continued to rely, in part, on the defendants’ Delaware incorporation.

In Intellectual Ventures I L.L.C. v. Altera Corp, all the plaintiffs and the defendants were Delaware corporations with headquarters on the west coast (Washington and California) and none had offices or employees in Delaware. Further, the named inventors, prosecuting attorneys, and a number of potential witnesses resided in California. The defendants sought to transfer the case to the Northern District of California, where most of the defendants’ accused products were developed and where the plaintiff also had an office.

Instead of the “heavy reliance” disapproved of in Link_A_Media, Delaware District Court Judge Leonard P. Stark placed “substantial weight” on place of incorporation and found that the convenience of the parties favored transfer, “but only slightly.” With regard to the convenience for the witnesses, the court first found that the location of party witnesses carried no weight in the “balance of convenience” because parties are required to produce witnesses wherever the case is pending. With regard to non-party witnesses (e,g., the inventors, prosecuting attorneys, or likely third-party witnesses), none of whom resided in Delaware or were within the subpoena power of the Delaware court, the court held that the relevant inquiry was only whether the witnesses were within the subpoena power of the court for trial.

Thereafter, the court held that the fact that the non-party witnesses were beyond the subpoena power of the court in Delaware for trial (but many would be within the subpoena power of the Northern District of California) favored transfer but was entitled to “little weight” because, in the court’s view, it would be “statistically rare” for a case to go to trial and witnesses could be presented by deposition in any event. The fact that none of the relevant evidence was in Delaware also favored transfer but was given “little weight” because of alleged technological advances. Weighing all the factors, the court found that the defendants had not shown that the factors strongly favored transfer. ²¹

On a petition for mandamus, the Federal Circuit agreed that the place of incorporation could be considered and distinguished Link_A_Media, stating:

Although the circumstances here are in certain respects similar to those in the petition we granted in Link_A_Media, that precedent did not go so far as to limit the trial court’s discretion to deny transfer in this case. The trial court in Link_A_Media disposed of the transfer motion based on the plaintiff’s forum preference and the fact that the defendant had incorporated in Delaware. In doing so, the court failed to give any consideration to the fact that transfer would significantly minimize the travel and cost to the identified witnesses and move trial to where the accused products were developed. Because the court viewed those considerations as entirely superfluous, its error could not have been more clear. On that view, this case is clearly distinguishable; in its thorough opinion, the district court endeavored to evaluate each of the forum non conveniens factors in light of the same arguments raised in the petition, and there is no clear indication that the court failed to meaningfully consider the merits of the transfer motion. Moreover, … in this case, unlike Link_A_Media, there are rational grounds for denying transfer given that all of the parties (not just a single defendant) had incorporated in Delaware and some witnesses would potentially find Delaware more convenient. ²²

With this road map, transfer out of Delaware may be difficult in all but extreme cases.

III. Conclusion

Although the AIA appears to have had some effect on the absolute number of defendants in traditional patent cases, the effect on patent case concentration has been muted. In 2012, more than 40 percent of all the patent cases in the United States (with nearly an equal percentage of defendants) were filed in just two small districts with small numbers of like minded judges and policies seen as plaintiff-friendly.

Absent a sea change by one of the involved courts (e.g., random assignment of judges in the Eastern District of Texas, according more than “little weight” or “no weight” to the location of witnesses and documents in the convenience inquiry in Delaware), there is no reason to expect a reduction in patent case concentration. The Federal Circuit also appears to be less and less inclined to police refusals to transfer by writs of mandamus. Those desiring significant change in the venue situation may need to look to the Supreme Court or Congress for relief.

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The Treasury Department and the Internal Revenue Service issued long-awaited final rules T.D. 9610 on the Foreign Account Tax Compliance Act Jan. 17, with changes intended to harmonize the rules with FATCA agreements negotiated with other countries.

The 2010 law is intended to stop cross-border tax evasion. It requires foreign financial institutions to tell the Internal Revenue Service about their U.S.-owned accounts. If the banks do not comply, they could face a 30 percent withholding tax on the accounts.

“The final rules mark a critical milestone in international cooperation on these issues, and they provide important clarity for foreign and U.S. financial institutions.”
Treasury Deputy Secretary Neal Wolin

“These regulations give the administration a powerful set of tools to combat tax evasion and efficiently,” Treasury Deputy Secretary Neal Wolin said in a news release. “The final rules mark a critical milestone in international cooperation on these issues, and they provide important clarity for foreign and U.S. financial institutions.”

Treasury said the rules are intended to finalize a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.

Rules Intended to Build On IGAs

The rules also are intended to build on intergovernmental information sharing agreements (IGAs) that allow financial institutions to report information on U.S.-owned accounts directly to their own governments, which then would share the data with the United States.

Treasury said it has signed or initialed such agreements with the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain, and announced for the first time Jan. 17 that Norway has joined this group.

A Treasury official said in a news conference that such IGA harmonization is a key goal of the final rules. She stressed that the general approach and intent of the Jan. 17 guidance remains the same as the proposed rules (REG-121647- 10) the government unveiled in February 2012.

The official said the refinements to the rules came in response to the hundreds of comments Treasury and IRS received on the proposed guidance.

Timelines Phased In

According to the news release, the final rules phase in the timelines for due diligence, reporting, and withholding in order to give financial institutions time to build systems to comply. Another goal for the government was to align these time frames with those for the IGAs. The Treasury official said this phase-in is consistent with Announcement 2012-42.

Treasury also said the rules expand and clarify the scope of payments not subject to withholding with respect to certain grandfathered obligations and certain payments made by nonfinancial entities. This is to “limit market disruption, reduce administrative burdens and establish certainty,” the government said.

In another major development, the rules are intended to “better align the obligations under FATCA with the risks posed by certain entities,” Treasury said. The guidance allows more flexible treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds.

Changes to Reporting for Investment Entities

The final rules also provide that some investment entities may be subject to being reported on by FFIs with which they hold accounts, rather than being required to register as FFIs and report to IRS, Treasury said. The final rules also clarify the types of passive entities that must be identified and reported by financial institutions…

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By Paul L. Lee, Debevoise & Plimpton LLP.

The year 2012 proved to be an annus horribilis for the banking industry at least from the perspective of regulatory and enforcement risk. Some might counter with the observation that 2012 was simply another annus horribilis in a series of such years for the banking industry. But by virtually any measure the horrors of 2012 exceed those of prior years. The regulatory and enforcement developments in 2012 prompt the question whether a permanently heightened regulatory and enforcement risk profile is now the new baseline for large banking institutions. This essay analyzes the most significant enforcement developments in 2012 and assesses the prospects for heightened scrutiny and increased enforcement action against the banking industry in 2013.

Unprecedented Enforcement Action

There is no precedent for the heightened regulatory and enforcement action seen in 2012. A faint precedent at best can be glimpsed from experience in the years following the dotcom crash and the Enron-like scandals. Under the title “Wall Street Fine Tracker,” Forbes tracked the fines paid by Wall Street firms from 2001 through 2003. It calculated the amount paid in total fines and settlements of class actions by Wall Street firms at almost $3 billion in 2002 and in excess of $4.2 billion in 2003. By contrast, the fines alone paid by UBS, HSBC and Standard Chartered Bank in the month of December 2012 exceeded $3.7 billion, including in the case of HSBC and UBS the two largest individual fines in U.S. banking history. Together with the fines paid earlier in 2012 by Standard Chartered Bank, Barclays and ING, the total for these five institutions exceeded $5.1 billion. Surveying the new enforcement scene, Adair Turner, chairman of the U.K. Financial Services Authority, is reported to have observed — in a private setting — that there is now an “arms race” among the regulators in pursuit of larger fines.

The Banking Industry as Public Enemy

The individual fines do not begin to tell the full story. They do not take account of the significant potential liability to private litigants, for example, in the LIBOR and other matters. Nor do they take account of the substantial reputational damage done to the institutions involved and the banking industry as a whole. In any event, fines do not appear to satisfy the public demand for retribution. The editorial pages of leading publications have for several years called for criminal prosecutions following the perceived misdeeds that led to the financial crisis. As the details of the LIBOR scandal emerged in June and July of 2012, such estimable publications as Bloomberg andThe New York Times encouraged the law enforcement authorities to seize the opportunity presented by these investigations to indict institutions and individuals at last. The announcement in December 2012 of the deferred prosecution agreement with HSBC for anti-money laundering and sanctions law violations resulted in press criticism of the fact that neither the institution nor any individuals were indicted. It also confirmed the suspicion in the mind of many observers that the regulators and law enforcement authorities view large financial institutions as “too big to indict.”

These criticisms may have been anticipated by the authorities because only a week after announcing the HSBC deferred prosecution agreement, the Department of Justice announced a settlement of LIBOR bid-rigging charges with UBS involving an agreement by a Japanese subsidiary of UBS to plea to a felony count as well as the criminal indictment of two former UBS traders. If the Department of Justice officials thought that the additional criminal action against the UBS subsidiary and former traders would go any distance to satisfy the critics, they were mistaken. The New York Times for one concluded that the settlement was structured so as to permit the plea by the subsidiary to shield the parent company and the indictment of the two traders to shield the management of the parent company. In some respects the Department of Justice may have become a victim of its own rhetoric. In announcing the settlement and the plea by the subsidiary, the Department described the UBS bid-rigging as an “epic” scandal. The New York Times editorial wanly concluded that there was nothing “epic” in the Department of Justice response. The equally esteemed Financial Times opined in words borrowed from the Department of Justice that the scale of UBS’s involvement in the bid-rigging was “astonishing” and in its own words that the bank’s “cavalier” attitude to compliance “simply beggars belief.”

The public discourse over the banking industry has acquired a poisonous tone. It has admittedly been many decades since an observer would have presumed to suggest that it might be a wonderful life to be a banker — at least in the popular estimation. The opprobrium currently attached to Wall Street and the banking industry exceeds anything encountered since the time of the Great Depression. One does not require polling results to gauge the public distemper. A casual reading of reportage by the press and declamations by legislators in the U.S. and the U.K. indicates the anger and disdain directed at the financial sector. This anger was on prominent display during the U.S. Senate subcommittee hearing on HSBC and U.K. Parliamentary committee hearings on Barclays in July of 2012. These hearings can be seen in the most generous light as designed to seek truth, but certainly not reconciliation. A Parliamentary Commission has continued the quest in the New Year with hearings on the UBS involvement in the LIBOR bid-rigging scandal.

One may also question whether the press in its reporting and the legislators in their pronouncements simply reflect the public anger or actually amplify it. It is likely a bit of both. In any event it seems clear that the public outcry has influenced the approach of law enforcement and regulatory authorities to their LIBOR and other enforcement actions. When the New York Department of Financial Services pronounced Standard Chartered Bank a “rogue institution” in its August 2012 enforcement action, it merely borrowed a phrase used by a member of Parliament to describe Barclays during the Parliamentary committee hearings on the LIBOR scandal. The public anger from the financial collapse and the government financial assistance to the banking sector (to banks both large and small) is still strong and, if anything, will metastasize with each new hint of scandal in the banking sector. The Wall Street Journal editorial writers in fact suggest that the LIBOR scandal has become the regulators’ surrogate for all that supposedly went wrong in finance before the panic of 2008. It seems that through the inadvertence of some and the malfeasance of others, the banking sector has constituted itself a public enemy. All the current signs suggest that notwithstanding the doubts of The New York Times, this will bean epic period of regulatory and law enforcement action against the banking sector in terms of penalties and remediation requirements.

Governance Challenges in the New Enforcement Era

This new era of regulatory and law enforcement action in the banking sector presents significant new challenges for governance in the sector. There are several different perspectives that may be brought to bear on the problem of governance. The first and most obvious perspective is how more robust governance might reduce regulatory and enforcement risk at least for future activities. A related perspective is how more robust governance might help as well to manage the risks of legacy activities, as these risks are actualized through existing investigations and enforcement actions. The banking sector is already experiencing an explosion of liability, some actualized from regulatory fines and settlements of civil litigation, other still potential from pending regulatory and law enforcement investigations and civil litigation, from a wide range of historical business practices and activities. Many of the practices and activities have been changed or terminated, but the prospect of regulatory, law enforcement and civil litigation action against institutions for past practices and activities is substantial and a matter of concern to the market since the ultimate size of any actualized liability is difficult to project.

One additional perspective on governance may come from the analysis of how improved governance might have helped the institutions to identify the risks in their legacy practices and mitigate those risks at an earlier stage. The recent enforcement actions provide useful insights for this historical analysis. In some cases they indicate that an institution’s governance and control structure had simply not identified the risk. In other cases they indicate that the risk had been identified by a control function such as compliance but was not addressed because the business function overrode the control function. In still other cases they indicate that the business and control functions identified the risk and the need to change practices but lacked the resources or a sense of urgency to correct the practices. In the most extreme cases there is even the suggestion that senior business and control functions may have simply decided as a business matter that they would run the risk of liability. Regulators have long known that control functions in many institutions do not have a strong enough voice and can be easily overridden by the business managers. The regulators will find confirmation of this belief in virtually all of the recent enforcement actions and may find further reason to be concerned that in some cases senior management and control functions were complicit in, or turned a blind eye to, the activity.

The recent law enforcement actions suggest that there is still another perspective to be brought to governance of regulatory and compliance risks. The law enforcement and regulatory actions themselves have had a profound effect on governance, in the short-term leading to the replacement of senior management and board members and in the long-term leading to changes in governance structure and board responsibility. This analysis here partakes of an oscillating nature, alternating between the effects of governance on these risks and the effects of these risks (or more precisely, their actualization from enforcement and litigation actions) on governance. To put this idea in a more pointed way, one might contrast the aspirational effect that sound governance might have on mitigating regulatory and enforcement risk with the demonstrable effect that recent regulatory and enforcement actions have had on governance from the perspective of management and the board. As even a cursory review of the recent regulatory and law enforcement actions indicates, the enforcement process itself has fundamentally affected governance. In announcing its settlement agreements with HSBC and UBS, the Department of Justice specifically noted that each institution had changed its senior leadership and restructured its compliance structure and taken numerous steps to enhance compliance and other control functions. In the case of Barclays, the effects of the law enforcement and regulatory actions on management and board were even more dramatic, playing out virtually in real-time as the Parliamentary committee hearings were in progress. Both the chairman of the board and the chief executive officer were forced to resign. Corporate accountability, as guided not so very gently by the regulators, was particularly swift in its exactions for Barclays…

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NEW YORK—The London-based HSBC Group and HSBC Bank USA have agreed to pay $1.9 billion and enter into a deferred prosecution agreement (DPA) to resolve charges of money laundering and doing business with countries subject to U.S. sanctions, the Justice Department and banking regulators announced Dec. 11 (United States v. HSBC, E.D.N.Y., No. 12-cr-763, deferred prosecution agreement 12/11/12).

Charged in the U.S. District Court for the Eastern District of New York with helping narcotics traffickers and others to launder their criminal proceeds and illegally handling transactions for customers in Cuba, Iran, Libya, Sudan, and Burma, HSBC has agreed to forfeit $1.256 billion and pay $665 million in civil penalties—including $500 million to the Office of the Comptroller of the Currency and $165 million to the Federal Reserve.

The U.K. Financial Services Authority is pursuing a separate action, DOJ said.

The U.S. case charged violations of the Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA), and the Trading With the Enemy Act (TWEA).

In the five-year corporate monitoring agreement, HSBC consented to submit to an enhanced compliance regimen and oversight by an independent monitor.

HSBC Bank USA, based in McLean, Va., was charged with violating the BSA by failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders. The HSBC Group violated IEEPA and TWEA by illegally conducting transactions barred by sanctions enforced by the Office of Foreign Assets Control (OFAC) at the time of the transactions, DOJ said.

HSBC has waived federal indictment, agreed to the filing of a criminal information containing the charges, and has accepted responsibility for its criminal conduct and that of its employees, DOJ said.

Breuer: ‘Stunning’ Oversight Failures

In announcing the resolution, Assistant Attorney General Lanny Breuer said that HSBC was “being held accountable for stunning failures of oversight—and worse—that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries, and to facilitate hundreds of millions more in transactions with sanctioned countries.”

Calling HSBC “one of the largest financial institutions in the world,” U.S. Attorney Loretta Lynch said that the bank’s “blatant failure to implement proper anti-money laundering controls” aided in the laundering of at least $881 million in drug proceeds through the U.S. financial system and that its “willful flouting of U.S. sanctions laws and regulations” allowed “hundreds of millions of dollars in OFAC-prohibited transactions” to be processed.

She added, “Today’s historic agreement, which imposes the largest penalty in any BSA prosecution to date, makes it clear that all corporate citizens, no matter how large, must be held accountable for their actions.”

HSBC has replaced almost all of its senior management, clawed back deferred compensation bonuses given to its most senior anti-money laundering and compliance officers, and has agreed to partially defer bonus compensation for its most senior executives during the five-year DPA, prosecutors said.

New York prosecutors also joined in the HSBC probes and settlements. Manhattan District Attorney Cyrus R. Vance Jr. noted that his office had entered into DPAs with six banks over the past four years…

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Big foreign banks would face capital standards applied to their U.S. counterparts and be required to maintain a 30-day buffer of highly liquid assets under a proposal Dec. 14 by the Federal Reserve that makes significant change in its regulation of overseas lenders.

The Fed proposal would have a foreign bank organize its U.S. subsidiaries under a single U.S. intermediate holding company subject to the same risk-based capital and leverage standards applied to U.S. bank holding companies. The proposal would apply to foreign banks with total global consolidated assets of $50 billion or more and U.S. assets of at least $10 billion; the Fed estimates about 107 firms would be affected.

The $10-billion threshold excludes assets held by a U.S. branch or agency. While the intermediate holding company would be subject to enhanced prudential standards on a consolidated basis, U.S. branches and agencies of a foreign banking organization can continue to operate outside of the intermediate holding company.

A reduced set of requirements would apply to 84 foreign banks that each have total global assets of $50 billion or more, but have less than $50 billion in combined U.S. assets, reflecting “the limited risk to U.S. financial stability posed by these firms,” according to a staff memo on the proposal. The 23 banks with more than $50 billion in combined U.S. assets would face more stringent standards.

The proposal would also apply to foreign nonbank financial companies. The Financial Stability Oversight Council, made up of U.S. financial regulators, is expected to designate certain nonbanks as systemically important but hasn’t done so yet.

Financial Crisis Revelations

The financial crisis revealed limitations on the ability of foreign banks to act as a source of support to their U.S. operations under stressed conditions. Congress directed the Fed, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, to impose enhanced prudential standards on foreign banks.

The Fed will accept comments on the proposal through March. The regulator is giving foreign banks considerable time to implement the requirements. Organizations with global consolidated assets of $50 billion or more on July 1, 2014, would be required to meet the new standards on July 1, 2015, according to the Fed.

“What does all this mean for covered foreign and non-bank banks? Of course, an FRB proposal is not a final rule,” Federal Financial Analytics said in a comment. “But, if the FRB proceeds as planned, covered firms will be governed by the Federal Reserve and, thus, an array of increasingly stringent standards, in ways their home-country regulators or non-bank business plans never anticipated.”

Jaret Seiberg, an analyst at Washington Research Group, a unit of Guggenheim Securities, called the proposal a negative for the large foreign banks that operate extensive broker-dealer and banking activities in the United States.

“An example of a foreign bank at risk from this approach would be Deutsche Bank,” he said. “For the domestic mega banks, this is a mixed development. It should give them a competitive advantage over their foreign bank rivals for lending and investment banking activities. Yet it also runs the risk of triggering a trade war that could result in domestic banks facing costly requirements in foreign countries. The mega banks include JP Morgan, Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley. For the large regional banks, this should be all upside. These banks operate only domestically, which means foreign country retaliation will not impact them.”…

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Ending weeks of speculation, Securities and Exchange Commission Chairman Mary Schapiro Nov. 26 announced that she will step down on Dec. 14.

Schapiro—who was appointed by President Obama in January 2009—is the first woman to serve as a permanent SEC chair, and one of the longest serving chairmen at the financial services regulator. She also tirelessly advocated for a strong SEC, even as critics called for its dismantling following one of the worst economic periods in U.S. history.

On the same day, the White House announced that it intends to designate SEC Commissioner Elisse Walter to the chairmanship after Schapiro departs. However, a White House official later told BNA that while Walter will be designated as the new chairman, President Obama intends to nominate someone for a full term in the near future.

Busy Tenure

Under Schapiro’s leadership, the SEC revitalized its enforcement program in the wake of its high profile failure to uncover Bernard Madoff’s massive Ponzi scheme, even as it embarked on the busiest rulemaking agenda in its history. On the other hand, the SEC also has suffered some significant embarrassments, including loss of a legal challenge over its proxy access rule, and a controversy over conflicts of interest regarding former general counsel David Becker’s participation in Madoff-related commission decisions.

In a statement, Schapiro called her time at the SEC “incredibly rewarding.” “Over the past four years, we have brought a record number of enforcement actions, engaged in one of the busiest rulemaking periods, and gained greater authority from Congress to better fulfill our mission,” she said.

Schapiro and SEC officials did not offer reasons for her departure. Her term would have expired June 5, 2014. However, other sources suggested that the heavy workload has taken its toll.

Meanwhile, President Obama expressed his “deep gratitude” to Schapiro for taking on the job shortly after the 2008 financial crisis. “When Mary agreed to serve nearly four years ago, she was fully aware of the difficulties facing the SEC and our economy as a whole,” he said in a statement. “But she accepted the challenge, and today, the SEC is stronger and our financial system is safer and better able to serve the American people—thanks in large part to Mary’s hard work.”

Speculation

In the weeks leading up to Schapiro’s announcement, rumors had circulated widely about her possible departure and replacement. Media reports and other sources suggested that likely candidates for the chairmanship included Treasury official Mary John Miller, Walter, former banking executive Sallie Krawcheck, and Mellody Hobson, president of Chicago-based investment firm Ariel Investments LLC and a member of the SEC’s Investor Advisory Committee (44 SRLR 760, 4/16/12)…

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The Federal Reserve Board plans to overhaul how it regulates the U.S. operations of large foreign banks, Fed Governor Daniel K. Tarullo said Nov. 28, outlining a three-part framework based on a new holding company structure, uniform capital and stress-testing requirements, and liquidity standards.

Tarullo, who said he expects a proposal “in the coming weeks,” said regulatory requirements have changed little over the past decade, despite an increase in the concentration and complexity of foreign bank assets in the United States and new limits on the ability of home-country regulators and foreign parent firms to support their institutions here.

Those concerns, as well as recent changes by Congress, call for a new recognition that “while internationally active banks live globally, they may well die locally,” he said.

“By imposing a more standardized regulatory structure on the U.S. operations of foreign banks, we can ensure that enhanced prudential standards are applied consistently across foreign banks and in comparable ways between U.S. banking organizations and foreign banking organizations,” Tarullo told the Yale School of Management Leaders Forum in New Haven, Conn.

Tarullo Cites Three Changes

Although discussions are still ongoing at the Fed on how to address challenges posed by foreign banks, Tarullo offered a glimpse, saying three basic changes “are desirable.”

First would be a requirement for large foreign institutions to establish a U.S. intermediate holding company (IHC) over their U.S. bank and nonbank subsidiaries. Tarullo said the IHC would promote more consistent and uniform regulation.

In addition, U.S. IHCs would have to comply with the same capital rules that apply to U.S. bank holding companies, and large foreign banks would have to comply with liquidity standards designed to reduce the chance of bank runs during periods of financial stress.

Not all U.S. operations would be affected, or affected in the same way. For example, branches of foreign banks and agency offices generally would not be part of an IHC, because they are part of the foreign parent company.

Some Revisions Already In Play

The approach laid out by Tarullo is not entirely new. The Fed already plans to propose capital, stress testing, and other requirements for large foreign banks as required under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act…

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By Daniel R. Foster, McDermott Will & Emery, Irvine, Calif.

Patents are emerging as a valued currency. This is creating significant opportunities for businesses to generate revenue. Banks are finding new business opportunities advising companies on patent sales, a turf typically dominated by lawyers. 2012 also marks the launch of Intellectual Property Exchange International, which is self-described as “the world’s first financial exchange focused on Intellectual Property.” Whether done as a private or public sale, the science—and often art—of pricing patents is maturing as an asset valuation.

Despite the maturing market for patents, pricing patents can still be tricky and highly subjective, and can depend on many factors. Eastman Kodak Co. recently failed to generate sufficient bids to “auction” off its digital imaging patents. By comparison, Nortel Networks successfully auctioned off its patent portfolio in 2011 for a $4.5 billion haul received from a consortium of Apple Inc., EMC Corp., Ericsson, Microsoft Corp., Research in Motion Ltd., and Sony Corp. Consortiums, as contrasted with a single entity, were rumored to be among the bidders in the Kodak auction as well.

These auctions, as well as other recent high-profile transactions, illustrate how patents are more than ever a central determinant of a company’s success and its failure. However, it remains somewhat of a mystery as to how these patents are actually valued. The valuation of patents, using both objective and subjective factors, is critically important whether an individual or company is looking to buy or sell a large portfolio, such as Nortel or Kodak, or just a single patent. The value of each invention will generally depend on some common factors, which are discussed below.

The importance of the patent.

This is an obvious consideration, but one that is often not given its full due. Some questions to ask: Do the claims cover a fundamental technology or an incremental improvement over the prior art? How often is this patent cited in other patents or patent applications? Has there been a business plan developed for the patent? Has it been involved in litigation and, if so, how has the patent fared? Has the patent been subject to reexamination (and what were the results)? What does the prosecution history reveal, such as disclaimers of subject matter of the patent claims? Has this patent been licensed and, if so, for how much? Are there foreign counterparts? If there is a portfolio of patents, how do they relate to each other, and what is the scope of their collective coverage? …

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