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Anthony J. COMUNALE, Plaintiff and Appellant, v. TRADERS & GENERAL INSURANCE COMPANY, a corporation, Defendant and Respondent.
Newlin, Tackabury & Johnston and Frank R. Johnston, Los Angeles, for appellant. W. P. Smith and Henry F. Walker, Los Angeles, for respondent. H. Thomas Ellerby, Los Angeles, amicus curiae on behalf of respondent.
Mr. and Mrs. Comunale were struck in a marked pedestrian crosswalk by a truck driven by Percy Sloan. Mr. Comunale was seriously injured, and his wife suffered minor injuries. Sloan was insured by defendant Traders & General Insurance Company under a policy that contained limits of liability in the sum of $10,000 for each person injured and $20,000 for each accident. He notified Traders of the accident and was told that the policy did not provide coverage because he was driving a truck that did not belong to him. When the Comunales filed suit against Sloan, Traders refused to defend the action, and Sloan employed competent counsel to represent him. On the second day of the trial Sloan informed Traders that the Comunales would compromise the case for $4,000, that he did not have enough money to effect the settlement, and that it was highly probable the jury would return a verdict in excess of the policy limits. Traders was obligated to defend any personal injury suit covered by the policy, but it was given the right to make such settlement as it might deem expedient. Sloan demanded that Traders assume the defense and settlement of the case. Traders refused, and the trial proceeded to judgment in favor of Mr. Comunale for $25,000 and Mrs. Comunale for $1,250.
Sloan did not pay the judgment, and the Comunales sued Traders under a provision in the policy that permitted an injured party to maintain an action after obtaining judgment against the insured. See Ins. Code, s 11580, subd. (b)(2). In that suit judgment was rendered in favor of Mr. Comunale for $10,000 and in favor of Mrs. Comunale for $1,250. This judgment was satisfied by Traders after it was affirmed in Comunale v. Traders & General Ins. Co., 116 Cal.App.2d 198, 253 P.2d 495.
Comunale obtained an assignment of all of Sloan's rights against Traders and then commenced the present action to recover from Traders the portion of his judgment against Sloan which was in excess of the policy limits. The jury returned a verdict in Comunale's favor, but the trial court entered a judgment for Traders notwithstanding the verdict.
The following questions are presented on Comunale's appeal from the judgment: (1) Did Sloan have a cause of action against Traders for the amount of the judgment in excess of the policy limits? (2) Was Sloan's cause of action against Traders assignable? (3) Was the cause of action barred by the statute of limitations?
In determining whether Traders is liable for the portion of the judgment against Sloan in excess of the policy limits, we must take into consideration the fact that Traders not only wrongfully refused to defend the action against Sloan but also refused to accept an offer of settlement within the policy limits. It is not claimed the settlement offer was unreasonable in view of the extent of the injuries and the probability that Sloan would be found liable, and Traders' only reason for refusing to settle was its claim that the accident was not covered by the policy. Because of its wrongful denial of coverage, Traders failed to consider Sloan's interest in having the suit against him compromised by a settlement within the policy limits.
There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. Brown v. Superior Court, 34 Cal.2d 559, 564, 212 P.2d 878. This principle is applicable to policies of insurance. Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 231 N.W. 257, 258 (affirmed on rehearing, 235 N.W. 413). In the Hilker case it is pointed out that the rights of the insured ‘go deeper than the mere surface of the contract written for him by the defendant’ and that implied obligations are imposed ‘based upon those principles of fair dealing which enter into every contract.’ 231 N.W. at page 258. It is common knowledge that a large percentage of the claims covered by insurance are settled without litigation and that this is one of the usual methods by which the insured receives protection. See Douglas v. United States Fidelity & Guaranty Co., 81 N.H. 371, 127 A. 708, 712, 37 A.L.R. 1477; Hilker v. Western Automobile Ins. Co., supra. Under these circumstances the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty.
The insurer, in deciding whether a claim should be compromised, must take into account the interest of the insured and give it at least as much consideration as it does to its own interest. See Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 320 P.2d 140. When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing to the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Its unwarranted refusal to do so constitutes a breach of the implied covenant of good faith and fair dealing.
There is an important difference between the liability of an insurer who performs its obligations and that of an insurer who breaches its contract. The policy limits restrict only the amount the insurer may have to pay in the performance of the contract as compensation to a third person for personal injuries caused by the insured; they do not restrict the damages recoverable by the insured for a breach of contract by the insurer.
The decisive factor in fixing the extent of Traders' liability is not the refusal to defend; it is the refusal to accept an offer of settlement within the policy limits. Where there is no opportunity to compromise the claim and the only wrongful act of the insurer is the refusal to defend, the liability of the insurer is ordinarily limited to the amount of the policy plus attorneys' fees and costs. Mannheimer Bros. v. Kansas Casualty & Surety Co., 149 Minn. 482, 184 N.W. 189, 191. In such a case it is reasoned that, if the insured has employed competent counsel to represent him, there is no ground for concluding that the judgment would have been for a lesser sum had the defense been conducted by insurer's counsel, and therefore it cannot be said that the detriment suffered by the insured as the result of a judgment in excess of the policy limits was proximately caused by the insurer's refusal to defend. Cf. Lane v. Storke, 10 Cal.App. 347, 350, 101 P. 937. This reasoning, however, does not apply where the insurer wrongfully refuses to accept a reasonable settlement within the policy limits.
Most of the cases dealing with the insurer's failure to settle involve an insurer who had assumed the defense of the action against the insured. It is generally held that since the insurer has reserved control over the litigation and settlement it is liable for the entire amount of a judgment against the insured, including any portion in excess of the policy limits, if in the exercise of such control it is guilty of bad faith in refusing a settlement. Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 682, 319 P.2d 69; Ivy v. Pacific Automobile Ins. Co., 156 Cal.App.2d 652, 320 P.2d 140; see Annotation, Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2d 168, 178; Roos, A Note on the Excess Problem, 26 Cal. State Bar J. 355, 356. Those cases are, of course, factually distinguishable from the present one since Traders never assumed control over the defense. However, the reason Traders was not in control of the litigation is that it wrongfully refused to defend Sloan, and the breach of its express obligation to defend did not release it from its implied duty to consider Sloan's interest in the settlement.
We do not agree with the cases that hold there is no liability in excess of the policy limits where the insurer, believing there is no coverage, wrongfully refuses to defend and without justification refuses to settle the claim. See State Farm Mut. Auto. Ins. Co. v. Skaggs, 10 Cir., 251 F.2d 356, 359, and Fidelity & Casualty Co. of New York v. Gault, 5 Cir., 196 F.2d 329, 330. An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer's breach of the express and implied obligations of the contract. Certainly an insurer who not only rejected a reasonable offer of settlement but also wrongfully refused to defend should be in no better position than if it had assumed the defense and then declined to settle. The insurer should not be permitted to profit by its own wrong.
It is clear that section 3300 of the Civil Code authorizes a recovery in excess of the policy limits, and in our opinion there is no merit in Traders' contention that section 3358 of the Civil Code so qualifies section 3300 as to prevent such a recovery. Section 3358 provides that a person cannot recover a greater amount in damages for the breach of an obligation than he could have gained by full performance. The question is what would Sloan have gained from the full performance of the policy contract with Traders. Cf. Henderson v. Oakes-Waterman, Builders, 44 Cal.App.2d 615, 618, 112 P.2d 662. If Traders had performed its contract, it would have settled the action against Sloan, thereby protecting him from all liability. The allowance of a recovery in excess of the policy limits will not give the insured any additional advantage but merely place him in the same position as if the contract had been performed.
It follows from what we have said that an insurer, who wrongfully declines to defend and who refuses to accept a reasonable settlement within the policy limits in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgment against the insured even if it exceeds the policy limits.
An action for damages in excess of the policy limits based on an insurer's wrongful failure to settle is assignable whether the action is considered as sounding in tort or in contract. See Civ.Code, s 954; Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 693-695, 319 P.2d 69. Traders relies on a clause in the policy which provides that an assignment of an interest under the policy shall be binding only if Traders consents thereto. However, it is well settled that such a provision does not preclude the transfer of a cause of action for damages for breach of a contract. Trubowitch v. Riverbank Canning Co., 30 Cal.2d 335, 339-340, 182 P.2d 182. This rule has been applied to provisions against assignability in insurance policies similar to the provision involved here. Vierneisel v. Rhode Island Ins. Co., 77 Cal.App.2d 229, 232, 175 P.2d 63; Pietrantonio v. Travelers Ins. Co., 282 Mich. 111, 275 N.W. 786, 788; see 7 Appleman, Insurance Law and Practice, s 4269, pp. 45-46. Accordingly, Sloan could assign his cause of action to Comunale.
Sloan's cause of action against the insurer arose on August 13, 1950, when the judgment in the bodily injury action became final. The complaint in the present action was filed on May 28, 1954, less then four years but more that two years after the cause of action arose. Traders contends that an action on an implied obligation arising out of contract is not on the written instrument and that therefore the four year term prescribed in section 337, subdivision 1, of the Code of Civil Procedure is not applicable.[FN1] We do not agree. The promise which the law implies as an element of the contract is as much a part of the instrument as if it were written out. O'Brien v. King, 174 Cal. 769, 774-775, 164 P. 631; Tanzola v. De Rita, 45 Cal.2d 1, 9, 285 P.2d 897; Gardner v. Basich Bros. Construction Co., 44 Cal.2d 191, 194, 281 P.2d 521; Lawrence Barker, Inc., v. Briggs, 39 Cal.2d 654, 661, 248 P.2d 897. Traders relies on a statement in Scrivner v. Woodward, 139 Cal. 314, 316, 73 P. 863, that ‘Promises merely implied by law, and not supported by any express promise or stipulation in the written instrument, do not fall within the provision of section 337, relating to contracts in writing.’ This statement is too broad, and it was limited in O'Brien v. King, 174 Cal. 769, 774, 164 P. 631, as applying only to a quasi contractual liability. The cases of Thomas v. Pacific Beach Co., 115 Cal. 136, 46 P. 899, and Sunset Pacific Oil Co. v. Los Angeles etc. R. Co., 110 Cal.App.Supp. 773, 290 P. 434, which involved restitution, are explainable on the same ground.
Although a wrongful refusal to settle has generally been treated as a tort (see Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136, 1138; Annotation, 131 A.L.R. 1499, 1500), it is the rule that where a case sounds both in contract and tort the plaintiff will ordinarily have freedom of election between an action of tort and one of contract. Eads v. Marks, 39 Cal.2d 807, 811, 249 P.2d 257. An exception to this rule is made in sits for personal injury caused by negligence, where the tort character of the action is considered to prevail (Huysman v. Kirsch, 6 Cal.2d 302, 306, 57 P.2d 908; Krebenios v. Lindauer, 175 Cal. 431, 166 P. 17), but no such exception is applied in cases, like the present one, which relate to financial damage (cf. County of Santa Clara v. Hayes Co., 43 Cal.2d 615, 619, 275 P.2d 456; Jones v. Kelly, 208 Cal. 251, 255, 280 P. 942).
The judgment is reversed with directions to the superior court to enter judgment on the verdict.
SHENK, CARTER, TRAYNOR, SCHAUER, SPENCE, and McCOMB, JJ., concur.

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(1) APPOINTMAN is a service range from “APPOINTMAN UG (haftungsbeschränkt)” (called APPOINTMAN in the following).
(2) APPOINTMAN offers service providers from numerous sectors the opportunity to arrange appointments with their clients through their smartphones and the homepage of the service provider. Furthermore service providers as well as clients have the option to cancel appointments. This service is carried out in Oldenburg. (3) This does not result in a contractual relationship between APPOINTMAN and the clients of the service provider. APPOINTMAN is not bound to the contractual relationship between the service provider and their clients, neither as partner nor as representative, nor as a mediator.
(1) The terms and conditions presented contain all regulations between APPOINTMAN and the service provider regarding the contractual object. Previous agreements and specifications of the parties concerning the contractual object will be rendered invalid when this agreement comes into effect.
(2) Terms and conditions of the service provider are not and will not be subject of the contractual relationships of these parties. Their validity is hereby expressly objected.
(1) APPOINTMAN is available as a service provider to other service providers who wish to use its online booking system via the Internet. The online booking system allows service providers’ clients to book appointments online via the Internet.
(2) With the APPOINTMAN diary service providers have the option to manage their appointments via pc, tablet or smartphone using an Internet connection.
(1) APPOINTMAN receives appointment bookings from clients and service providers via the Internet.
(2) Through the booking system the service provider immediately receives a notification via email and an optional push notification on their smartphone or tablet.
(1) The service provider is responsible for the management of the bookings carried out through APPOINTMAN.
(2) If the service provider cannot keep an appointment – for whatever reason – then it is their responsibility to find a suitable arrangement with the customer.
(3) It is the service provider’s responsibility to comply with the legal requirements concerning the appointment offers and their own Internet appearance, especially their obligation to inform their clients.
(1) The remuneration of the use of APPOINTMAN depends on the current price list, which service providers can access any time under www.appointman.net.
(2) The monthly user fees will always be charged at the beginning of the following contract month. The invoice will be sent via email. A claim to a digitally signed invoice ($ 14 Abs. 3 UStG) does not exist.
(3) The payment will be carried out through SEPA direct debit, credit card payment, Paymill (www.paymill.com), PayPal, or on account. If necessary the service provider can share their bank details (bank name, IBAN and BIC) or their PayPal email-address with APPOINTMAN and grant a direct debit authorisation. (4) The service provider is obliged to inform APPOINTMAN regarding any changes of the details referred to in Article 3. of their own accord immediately. Any costs faced by APPOINTMAN which have arisen due to a breach of the service provider’s obligations according to Articles 4. and 5., have to be covered by the service provider.
In the event of a default of payment by the service provider for more than two months, APPOINTMAN has the right to deny its services and block the service provider from accessing APPOINTMAN until the default of payment has been redressed. For the service provider the obligation of payment remains regardless of the blocking. Additional rights of APPOINTMAN from law and contract remain unaffected.
(1) APPOINTMAN saves and processes personal data of the service provider in a scope that is necessary due to the contractual relationship.
(2) Personal data of the service provider’s customers is saved and processed by APPOINTMAN in accordance to § 11 BDSG and its specifications in compliance with the principles of proper data processing principles and under compliance of the necessary data protection measures. (3) For processing personal data APPOINTMAN only employs staff members who are committed to compliance with data protection as per §5 BDSG and who have been schooled on the relevant regulations of the BDSG.
(4) Both contractual parties are obliged to treat information of the other contractual party as confidential unless this information has been made public already.
(1) The copyright of the information, texts, pictures and programs contained in APPOINTMAN is reserved for APPOINTMAN.
(2) Paragraph (1) applies for trademarks and other corresponding industrial property rights. (3) Service providers can only make use of the rights according to paragraph (1) and (2) within the scope of the contractual object. Any additional use, especially further distribution on websites or through other media, as well as the use by a third party, requires written consent from APPOINTMAN.
(1) APPOINTMAN endeavours to match its services with current technical developments and current market developments. Thus APPOINTMAN reserves the right to make amendments concerning the agreed services, as long as these do not affect the core services and the interests of the contractual partner have been taken into account and deemed reasonable.
(2) The right to change prices is reserved. APPOINTMAN is obliged to announce the price change in good time, so that the service provider can terminate the contract within the agreed notice period, before the new prices come into effect. If the contractual partner does not exercise this right and continues to use APPOINTMAN’s services after the price has been changed, then the price change becomes contractually binding for both parties. The billing takes places on the basis of the changed price. (3) The announcement of any amendments to the terms and condition takes place on the website of APPOINTMAN. The contractual partners will be informed via post or email about amendments to the terms and conditions. The amendments are deemed accepted, if no objection is submitted in writing within two weeks of their announcement.
(1) APPOINTMAN guarantees an annual average 99% of the provision of services specified in the contract according to § 3 terms and conditions with their associated performance specifications.
(2) APPOINTMAN shall not be liable for errors resulting from the violation of the service provider’s obligation to cooperate according to § 4 or stemming from a cause falling within the scope of responsibility of a third party (for instance a network operator).
(3) APPOINTMAN only bears liability for the service provider’s damages, if their employees, legal representatives or other vicarious agents, caused these damages through wilful intent or gross negligence. Furthermore APPOINTMAN bears liability only for foreseeable damages, which APPOINTMAN caused through a violation of essential contractual obligations. Liability shall be excluded for loss of profits, a service provider’s failure to realise savings, consequential damages, damages caused by the telecommunications infrastructure of a third party, as well as damages caused by irregular conduct of the service provider according to § 4.
(4) The aforementioned limitations of liability shall not apply for cases of mandatory product liability or in case of injury to life, body or health.
(5) APPOINTMAN is not liable for damage due to force majeure. This especially includes natural disasters, effects of war, tariff disputes and similar events that caused operational disruptions.
(6) APPOINTMAN is not liable for the correct appointment bookings by the service provider’s clients. Only the service provider and their clients are responsible for those, especially since APPOINTMAN cannot verify the identity of the latter.
(1) The service provider hereby exempts APPOINTMAN from all claims made against APPOINTMAN by a third party or clients due to a violation of rights through the Internet conduct of the service provider.
(1) Service provider accounts can be terminated with an email to info@appointman.net, allowing three business days to process and delete the account at the end of the month. The service provider needs to send the email from the email address they use for their APPOINTMAN account und advise in it that they wish to delete the account. (2) The right of both parties to immediate termination for good cause remains unaffected. A good cause of termination for APPOINTMAN exists when the service provider violated the conditions of §§ 4 and 5.
(1) One contractual party is not permitted to assign any one or all of the rights of the contract to a third party without a previous written consent of the other party. Consent cannot be denied without a valid reason. Paragraph (2) remains unaffected.
(2) APPOINTMAN is permitted to employ third parties as a subcontractor to ensure provision of services. It is up to APPOINTMAN to ensure an appropriate illustration of the contractual duties in the contracts with these third parties, especially the duties according to § 7.
(1) Place of performance is Oldenburg.
(2) Only the law of the Federal Republic Germany applies to the contractual relationship of these parties. Application of the agreement of the Vienna UN Convention on Contracts for the International Sale of Goods is excluded.
(3) Oldenburg will be agreed on as place of jurisdiction for all legal disputes, as long as the contractual partners are businessmen, legal entities according to public law or special funds under public law.
(1) Amendments, additions and the termination of conditions and of the contract as well as the strict requirement for a written form must be made in writing.
(2) All announcements, clarifications and terminations, which are mentioned in these conditions or find their foundation in them, must be made in writing. A fax or email is sufficient to the written form.
Should any one of these terms and conditions be or become ineffective or unenforceable, it would not affect the validity of these provisions thereby. The contractual parties are obliged to replace a consequential gap in the agreement by a provision that meets the economically intended purpose and effect of the original provision and of the agreement as closely as possible.


This report represents the professional, nonpartisan views of staff in OLR, the Office of Fiscal Analysis (OFA), and the Legislative Commissioners' Office (LCO) of possible upcoming legislative issues. It does not represent staff suggestions or recommendations. We identified issues based on interim studies; research requests; nonconfidential discussions with legislators, other legislative participants, and executive branch agencies; and our general subject matter knowledge.
OLR compiled this report on the major issues for the 2013 session in consultation with OFA and LCO. Except for the Appropriations Committee issue description, which was provided by OFA, the issue descriptions below were written by OLR analysts.
We list the issues according to the committee in whose jurisdiction they primarily fall. Since more than one committee may consider aspects of the same issue, descriptions may overlap. Where appropriate, we provide links to OLR reports and other on-line documents that provide additional information about particular issues.
Like many states, Connecticut is confronting a growing elderly population, high nursing home Medicaid costs, and an increasing desire among seniors to remain in their own homes while receiving care (i.e., “aging in place”). A task force established by SA 12-6 may make legislative recommendations to help the state encourage aging in place initiatives that provide seniors with the necessary support services to remain in their own homes as they age, allowing them to delay or avoid entering long-term care facilities.
On November 15, 2012, OFA projected a General Fund deficit of $320.7 million in FY 13, which represents about 1.7% of total estimated expenditures. In addition, OFA projected deficits over the next three years ranging from $934.1 million to $1,138.1 million. For FY 13, the deficit is made up of two components: expenditures and revenue. Expenditures are $195.7 million higher than originally budgeted and revenues are $128.1 million less than originally budgeted. Table 1 shows the overall budget outlook for FY 13 through FY 16.
It should be noted that $93.3 million is currently available in the Budget Reserve Fund (BRF). However, PA 12-104 requires that, at the Office of Policy and Management's (OPM) request, $15 million be transferred from the BRF to the General Fund to offset a FY 13 revenue loss from an amendment to the Indian casino compact. As of this writing, this request has not been made although the consensus revenue estimates agreed to by OFA and OPM on November 9, 2012 assumed this transfer. Were this transfer to take place, $78.3 million is anticipated to be available after the close of the fiscal year to fund a deficit. In addition to the potential BRF transfer of $78.3 million, it is anticipated that approximately $3 million of carry-forward funds from prior years will lapse and help to reduce the estimated FY 13 deficit.
The state is scheduled to convert to a Generally Accepted Accounting Principles (GAAP) basis of accounting on July 1, 2013. OPM has indicated that it intends to implement GAAP by creating line items for accruals in each agency rather than incorporating it into agency operational accounting methods. Due to the availability of information on GAAP accruals, our projections for FY 14 to FY 16 include OPM's calculations of these accruals which range from $85.4 million in FY 14 to $124.6 million in FY 16.
The state is under the spending cap in the current year, assuming no FY 13 deficiency appropriations are made. Calculations for the out-years are based on Current Services estimates of all appropriated funds, and assume that expenditure amounts in excess of the cap are not built into the subsequent year's base for cap calculation purposes. Table 2 shows the spending cap figures.
*The FY 13 total appears to not add up due to a rounding effect.
Unfunded liabilities are legal commitments incurred during the current or a prior year that must be paid at some time in the future but for which no reserves have been set aside. Connecticut's unfunded obligations are primarily in four areas: (1) bonded indebtedness (debt outstanding), (2) state employees' and teachers' retirement, (3) state employees' and teachers' post-employment benefits, and (4) the GAAP deficit. The state's unfunded liabilities total $63.9 billion, a decrease of 10.3% from last year's reported amount of $71.2 billion, primarily due to a decrease in the Other Post-Employment Benefits unfunded liability. Table 3 includes the unfunded liabilities for these four areas.
PA 12-1 from the June Special Session made it easier for homeowners to qualify for the state's emergency mortgage assistance program. However, because the high foreclosure rate continues, the legislature may consider additional ways to help homeowners facing possible foreclosure.
Childhood obesity is a problem nationally as well as locally. According to the Department of Public Health (DPH), nearly one in six Connecticut kindergarteners and third graders are overweight and almost the same number of kids are obese. The Connecticut Coalition Against Childhood Obesity, which includes 30 member organizations, met in November 2012 to discuss the health implications and policy solutions for this epidemic. The Select Committee on Children may wish to consider some of these solutions during the upcoming legislative session.
With an economic dark cloud looming over Europe, Connecticut's Department of Economic and Community Development (DECD) is making plans to increase trade in new, emerging markets, such as Brazil's and China's. But it takes time and money before trade contacts turn into trade deals. For one thing, businesses must learn the legal and cultural rules for doing business in these nations. Consequently, legislators may consider proposals to establish trade and liaison offices in emerging market nations or send trade missions there.
In 2013, the legislature may consider more options for sustaining Connecticut's bioscience industry, which, in 2008, contributed over $14 billion to the state's economy and employed almost 10,000 people. In 2011, the legislature approved a $291 million package for Jackson Labs, symbolizing the state's commitment to this industry. But nurturing and sustaining any major industry cluster takes more than capital for new facilities and grants for research and development. It also involves training researchers and technicians and fostering closer collaboration between businesses and colleges and universities.
Environmental regulations are a double-edged sword, protecting the public's health and safety while potentially increasing businesses' operating costs. Since 2010, the legislature has enacted many initiatives that attempt to ease the regulatory burden without compromising environmental protection, including establishing a permit ombudsman position and having qualified professionals certify stormwater general permits. In 2013, the legislature may evaluate the effects of these initiatives and consider new ones.
When the subprime mortgage crisis rippled through the financial sector, banks tightened credit, crimping businesses' plans to expand plants, purchase machinery and equipment, and hire more workers. The legislature responded by creating new programs designed to accelerate capital flows, especially to cash-strapped small businesses. Because the demand for credit exceeds the available supply, the legislature may look for ways to replenish the capital flow.
At $1.9 billion, the Education Cost Sharing (ECS) program is the largest form of state aid for public education. The current state budget increased ECS funding to Connecticut's towns by $50 million, with most of the funds going to the districts with the greatest educational need. In 2013, the legislature will consider changes to the funding formula used to distribute ECS aid.
At the start of the 2013 session, the ECS Task Force will present recommendations for formula changes to the legislature. With the budget constraints of recent years, the legislature has not revised or updated the formula since 2007. This year, the task force's recommendations may prompt the legislature to consider formula revisions such as (1) changing the way the formula measures student need (currently it gives extra weight for poverty and English language learners), (2) increasing the per student foundation amount, and (3) making increases in aid contingent on demonstrating student improvement and meeting other conditions. The task force is also considering whether to make funding for magnet and charter schools part of the formula.
Connecticut has one of the largest gaps in student academic achievement between white students and minority students in the country. This has been a growing concern for the legislature and has been the focus of the Achievement Gap Task Force, which is set to release a second round of recommendations in January. The recommendations are likely to include proposals for (1) implementing a master plan to end the achievement gap, (2) improving early childhood literacy, (3) improving programs for English language learners, and (4) lengthening the school day or school year to provide additional class time for struggling students. The legislature will likely weigh the options and decide which ones, if any, should be adopted.
But the SBE's funding decision only applies to the 2012-13 school year. That leaves a long-term solution, with its $4 million price tag, up to the General Assembly.
The situation is further complicated by the fact that all-day pre-K in the Hartford area helps lure suburban white students to magnet schools that help address the Sheff v. O'Neill court settlement's desegregation goals. In Sheff, the state Supreme Court ruled that racial isolation caused educational inequities for Hartford's minority students. Free all-day pre-K is a major attraction for parents, and it is seen as a strong inducement to get suburban students into magnet schools serving the Hartford area. Possible options for the legislature to consider include requiring (1) the state to pay the tuition; (2) the sending towns to pay; (3) parents to pay, possibly on a sliding scale; or (4) some combination of the above.
Under the Sheff v. O'Neill school desegregation court settlement, the state is required to meet specific desegregation goals for Hartford public school students. Recently, the State Department of Education (SDE) reported it fell 4% short of the goal of at least 41% of Hartford students attending integrated schools. This means the state and the Sheff plaintiffs must now negotiate a new settlement. In the meantime, SDE has submitted a plan to OPM that includes additional funding for Sheff solutions but acknowledges that the plan may change depending upon the outcome of the negotiations. In any case, the legislature may face the task of whether to approve (1) actions necessary to work toward the goals of the new settlement, (2) SDE's plan, (3) some combination of the two, or (4) another approach.
SDE's plan, now under consideration at OPM, includes (1) a higher reimbursement for districts that reach certain enrollment thresholds for accepting more Hartford students, (2) opening two new magnet schools, and (3) possibly opening a new charter school. But the legislature must weigh such ideas against the cost of implementing them given the ongoing budget constraints.
If the state fails to comply with the court settlement on Sheff, the other alternative is for the courts to mandate a remedy.
While Hurricane Sandy resulted in fewer outages than the 2011 storms (Tropical Storm Irene and the October snowstorm) and power was restored more quickly, the effect of three major storms in 14 months will likely prompt proposals to further improve the utilities' preparations for and response to major storms. Among other things, legislation may be proposed to address the vulnerability of electric substations and other key facilities.
PA 11-80 required the Department of Energy and Environmental Protection (DEEP) to prepare a comprehensive energy strategy addressing a wide range of issues. The draft strategy proposes to use gas company ratepayer money and other funds to encourage residents and businesses who heat with oil to convert to natural gas. It also proposes (1) substantially expanding funding of energy efficiency programs, (2) modifying the relationship between utility sales and rates (i.e., “decoupling”), and (3) developing financing programs to make residential renewable energy investments more affordable. The legislature may discuss the energy strategy and consider legislative options derived from its proposals.
In February 2012, the House speaker created a legislative task force to study and make recommendations regarding storm impacts on homeowners and businesses on Connecticut's shoreline. According to its website, the Shoreline Preservation Task Force's mission is to study the effects of climate change on efforts to preserve Connecticut's shoreline. It is charged with reviewing sea-level rise data and identifying solutions that will protect families, keep businesses open, and provide municipalities with tools to address shoreline issues. It is expected that the task force will forward recommendations to the General Assembly for consideration during the 2013 legislative session. Additional proposals about coastal management are anticipated because of the effects of the state's most recent storm, Hurricane Sandy.
Assorted reports about storm preparation and response are available on OLR's Natural Disaster Focus Area webpage.
Last session, the Environment Committee favorably reported a bill, HB 5117, that, among other things, would have required the labeling of certain foods that are genetically engineered, or have been produced or may have been produced by genetic engineering. After the 2012 session, the House speaker formed a legislative task force to examine the issue of genetically modified organisms (GMOs) in food and whether food containing GMOs should be labeled. The Environment Committee may be asked again to consider a proposal that would require the labeling of foods containing GMOs or foods produced by genetic engineering.
Bills have been proposed to allow Sunday deer hunting in certain circumstances since at least 2006. Most recently, sSB 83 (2012) would have permitted Sunday deer hunting with a bow and arrow. Such hunting (1) would have to be according to DEEP wildlife management principles and practices and (2) could not take place within 40 yards of a blazed hiking trail. And if such hunting was on private property, the hunter would have to receive the property owner's written consent and carry it while hunting. In 2013, the Environment Committee is likely to again consider matters related to deer hunting.
In addition, several local news stories have reported on the increased number of bear sightings in Connecticut. DEEP reports that from November 2, 2011 to October 18, 2012, there were 2,756 reported bear sightings in the state. This has raised some discussion about whether Connecticut will establish a bear hunting season and the Environment Committee may see proposals for such a hunt.
In recent sessions, the legislature sought to improve the state's business climate, grow its economy, and create jobs. In 2012, the governor formed a Business Tax Policy Task Force to identify specific changes in the state's business taxes that would promote these goals. The legislature may consider the group's proposals, which include (1) phasing out the business entity and minimum corporate income taxes; (2) standardizing apportionment, factor weighting, and sourcing requirements that multi-state companies must use to calculate their Connecticut corporate income tax liability; (3) requiring an annual budget for total tax credits authorized and claimed by businesses; and (4) decreasing the sales tax on consumer and business-to-business purchases.
The legislature may consider reevaluating the costs and benefits of the various tax exemptions, credits, deductions, and other “tax expenditures” that reduce the revenue the state and municipalities collect. Proposals may include (1) reducing or eliminating particular tax expenditures, (2) evaluating their economic impact, or (3) requiring those benefiting from tax expenditures to disclose more information about themselves and their business and employment practices.
The legislature may be asked to extend a number of temporary tax provisions enacted in 2011 or substitute other measures to preclude state revenue losses in FY 14. These include the (1) 20% corporation tax surcharge expiring at the end of the 2013 income year; (2) electric generation tax expiring on June 30, 2013; and (3) lower limit for tax credits allowed against the insurance premium tax that expires at the end of 2012.
In 2012, the legislature capped the amount of gross earnings from gasoline and gasohol sales subject to the petroleum products gross earnings tax. In 2013, it will likely consider bills to (1) delay or eliminate an increase in the tax rate from 7% to 8.1%, currently scheduled to take effect on July 1, 2013 and (2) limit the types of petroleum products to which the tax applies.
There may also be proposals to modify the way the state calculates the diesel tax rate. The current calculation method is partially based on the petroleum products tax rate and has led to increases in five of the six years since it was enacted.
The Competitive Alcoholic Liquor Pricing Task Force, established by PA 12-17, was tasked with examining, reviewing, and analyzing Connecticut's alcoholic liquor taxes, quantity and volume discounts, existing liquor permit restrictions, and minimum pricing and price posting laws. There may be proposals introduced during the 2013 legislative session to alter the alcohol minimum pricing laws based on the task force's findings.
The law prohibits retailers from raising the price of any item offered for sale in an area covered by a disaster or transportation emergency declaration that the president or governor issues (CGS § 42-230). In the aftermath of Hurricane Sandy, there may be proposals to expand the scope of the current price gouging laws to include services. Such a bill proposed in response to situations that occurred after Tropical Storm Irene and the October snowstorm failed last year (SB 60).
3. raised the limits on various contributions from individuals to political committees (known as PACs) and party committees.
This session, the legislature may consider similar legislation to provide for increased disclosure of political spending.
In 2012, the legislature passed a resolution (RA 12-1) proposing a constitutional amendment to (1) remove restrictions on voting by absentee ballot and (2) permit a person to vote without appearing at a polling place on Election Day. The resolution also lifts the constitutional deadlines by which the lists of results (i.e., moderator's returns) for state officers and General Assembly members must be delivered to town clerks and the secretary of the state (within three and 10 days after an election, respectively). The statutory deadlines remain in place (CGS § 9-314).
Because the resolution did not pass by a three-fourths vote in each chamber, it will be referred to the 2013 legislative session, where it must again pass each chamber by a majority vote in order to appear on the 2014 general election ballot. If a majority of those voting in the general election approves the amendment, it will become part of the state constitution.
The law authorizes state agencies to enter into agreements with private entities to finance, design, construct, develop, operate, or maintain certain facilities (i.e., public private partnership (P3) agreements). However, firms seeking to enter into P3 agreements often insist on maintaining confidentiality, as recently seen with a P3 proposal for the Stamford Transportation Center. The legislature may consider proposed legislation that seeks to balance the principle of open government with the private entities' desire for confidentiality.
In the last biennium, the governor proposed, and the legislature enacted, several pieces of legislation to reorganize state government, which resulted in reducing the number of budgeted state agencies from 81 to 60. In 2013, the legislature may consider further reorganization proposals, including a possible merger of the Department of Administrative Services and the Department of Construction Services.
PA 11-48 reorganized the state system of higher education by establishing a Board of Regents for Higher Education (BOR) to serve as the governing body for the Connecticut State University System, the community-technical colleges, and Charter Oak State College. As part of its oversight of the reorganization, the legislature may address recent issues concerning salary increases in the BOR central office and the employment status of the community college presidents.
Section 37 of PA 11-1, October Special Session, requires the Connecticut Academy of Science and Engineering (CASE) to (1) study strategies for evaluating the effectiveness of programs and resources for assuring the state's skilled workforce meets business and industry's current and future needs and (2) report its findings, by January 1, 2013, to the Higher Education, Commerce, Education, and Labor committees. The General Assembly may consider measures that implement CASE's recommendations.
PA 12-1, June Special Session, established the Department of Housing (DOH) and made it the lead agency responsible for all housing matters. It also established an Interagency Council on Affordable Housing to advise and assist the department's commissioner. The legislature is likely to consider the council's recommendations, due to the governor and committees of cognizance by January 15, 2013, concerning (1) transferring programs from DECD to DOH, including a timeline for implementation; (2) changing the state's housing delivery systems; and (3) prioritizing housing resources.
Demand in the U.S. housing market appears to be shifting from a preference for owning toward one for renting. This is especially true among young people, immigrants, and individuals who lost homes in the foreclosure crisis. Because of increased demand, rental vacancy rates have dropped and prices have increased.
The legislature may thus look at ways that the state can help finance and develop rental housing, particularly affordable rental housing. For example, it may reconsider legislation increasing the authorized aggregate tax credits for the Housing Tax Credit Contribution program under which businesses qualify for credits in exchange for contributions to nonprofit organizations developing low- and moderate-income housing. It may also consider proposals to rehabilitate and maintain public housing units to prevent them from becoming uninhabitable and the state's affordable housing portfolio from shrinking.
The Department of Social Services (DSS), and the Medicaid program in particular, continue to consume a large portion of the state budget as more and more residents apply for public assistance. Yet the department often has had difficulty administering its myriad of federal and state programs in a timely manner and is currently being sued for these failures. While the department is undergoing a modernization project to alleviate the backlog, which should include an electronic application process, it is not clear when and if this will fully address the problem.
A number of factors could place an even greater strain on agency resources. First, the federal Affordable Care Act's expansion of Medicaid to individuals with incomes of up to 138% of the federal poverty level is set to occur in January 2014. Thousands more will become eligible for assistance on that date. Second, the recession and the weather events of 2011 and 2012 have forced more individuals to reach out to DSS for aid and enrollments have soared. And third, the agency is in the midst of converting its Medicaid program to a “medical home” model.
The convergence of these and other factors could force the 2013 legislature to take a closer look at the department's administrative capacity.
Legislation adopted last session (PA 12-102) expanded the information health insurers must provide to covered persons or their authorized representatives, upon request, when they make an adverse determination (e.g., deny coverage), both in the initial determination and reviews of this determination. It is likely that legislation will be proposed this session to require insurers to continue to cover a patient's medical treatments or medications while his or her appeal of a determination is pending.
The Insurance Department is likely to submit proposed legislation to establish a formal mechanism for the non-adversarial mediation of disputes between a homeowner and his or her insurer for the settlement of a claim arising under the homeowner's policy following a major catastrophe for which the governor has declared a state of emergency.
In 2011, the legislature enacted and the governor vetoed PA 11-170, An Act Concerning the Rate Approval Process for Certain Health Insurance Policies. The act would have imposed new requirements on insurers and the Insurance Department with regard to health insurance rates, including requiring a public symposium on certain rate filings. Subsequently, the Insurance Department and healthcare advocate reached an agreement that allows the healthcare advocate to request the department to conduct up to four public hearings per calendar year for insurance rate increases of at least 15% for individual and small group HMO policies. In 2012, insurers requested rate increases that approached but did not trigger the 15% threshold. Legislators may seek to introduce bills in 2013 to codify the agreement, with possible revisions.
By law, before filing a medical malpractice lawsuit, a claimant or attorney must obtain an opinion letter from a health care provider similar to the defendant, stating that there appears to be evidence of malpractice (the letter is sometimes referred to as a certificate of merit). In recent years, the legislature has considered bills that would make changes to this requirement, such as expanding the types of health care providers who are qualified to offer the opinion letter. The legislature may again consider this issue.
The legislature may also consider bills addressing various issues that concern condominiums and other common interest communities. For example, last session, the governor vetoed legislation (PA 12-180) that would have changed the requirement for budget approval for certain large common interest communities. This session, the legislature may again revisit the law's approval requirements for common interest community budgets. Under existing law, such a budget is approved unless a majority of all unit owners (not just a majority of those participating in the vote) votes to reject it.
A number of criminal justice proposals will likely be introduced in the 2013 session. These might include expanding reentry programs for inmates returning to the community, increasing the use of electronic monitoring for offenders in the community, and managing the prison population.
Legislators may propose changes to the risk reduction earned credits law. Inmates can earn these credits to reduce their sentences and become eligible for parole sooner. Such proposals could include changing how inmates qualify for the credits or prohibiting inmates convicted of certain crimes from earning them.
The legislator may debate altering provisional pardons, which relieve an offender of certain barriers to employment because of a criminal conviction. It has considered changing these pardons in recent years and the Sentencing Commission may submit a proposal this year. Proposals include (1) changing their name to certificates of relief from barriers, (2) allowing them to relieve a person of barriers related to public housing, and (3) allowing courts to issue them as well as the Board of Pardons and Paroles.
A recent state Supreme Court case (State v. Fourtin, 307 Conn. 186) upheld the Appellate Court's reversal of a man's conviction for sexually assaulting a woman with severe disabilities. The majority opinion concluded that the state failed to prove that the victim was physically helpless (physically unable to communicate her lack of consent), as was required by the statute under which the man was charged. Proposals may be introduced to amend the statutory definition of “physically helpless” or otherwise change the sexual assault laws to afford greater protection to persons with disabilities.
The Sentencing Commission may submit a proposal on what is often referred to as the “drug free zone law,” which imposes higher penalties for drug crimes near schools, day care centers, and public housing. The legislature has considered bills on this topic for a number of years, including proposals to shrink the size of the zones and eliminate the zones around public housing.
In response to recent U.S. Supreme Court opinions, changes to juvenile sentencing laws may be considered by the legislature during the 2013 session. In 2010, the Court ruled that the Eighth Amendment prohibits sentencing a defendant younger than 18 to life without the possibility of release for a non-homicide crime. The Court ruled that states must provide a “meaningful opportunity” for release based on demonstrated maturity and rehabilitation (Graham v. Florida, 130 S.Ct. 2011). This year, the Court ruled that the Eighth Amendment prohibits automatically imposing a sentence of life without parole on offenders who committed homicides while under age 18. The Court did not categorically bar these sentences, but required consideration of how children are different (Miller v. Alabama, 132 S.Ct. 2455).
In Connecticut, juveniles who are tried as adults can be sentenced to life without the possibility of release for committing murder with special circumstances (previously capital felony). The Sentencing Commission is considering how these rulings impact Connecticut's laws and what changes should be made. The commission will likely submit a proposal to the legislature for consideration this session. Other criminal justice advocates may push for additional changes.
A prolonged period of high unemployment drove the state's unemployment compensation fund to insolvency in October 2009, forcing it to borrow roughly $1 billion from the Federal Unemployment Account. Federal stimulus legislation provided these loans interest-free through 2010, but Congress has not further acted to extend the interest-free period or delay repayment requirements.
In August 2011, federal law required employers to begin repaying interest on the loans through a special assessment of roughly $25 per full-time employee. In January 2012, the law required employers to begin repaying the loan's principal through a 0.3% unemployment tax increase. As of September 2012, the state had repaid over $270 million of the loan with a balance of $630 million remaining. Due to the reduction in the loan principle and lower interest rates, employers were charged about $19.50 per full-time employee in the August 2012 Special Assessment to pay interest on the loan. However, employers' unemployment taxes will continue to increase 0.3% annually until the loan is repaid.
The legislature may want to address this situation and any future difficulties with the unemployment compensation fund's solvency by considering ways to (1) pay off the federal loans at a lower total cost, (2) increase the unemployment fund's financing, (3) reduce unemployment benefits, or (4) enact some combination of these.
6. diversifying municipal revenue by allowing towns to impose other taxes or fees in addition to property taxes.
This session, the legislature may consider changes to the scope of practice for various health professions, including homeopaths, medical assistants, and nuclear medical technologists. Under a process established in 2011, scope of practice review committees created by DPH review and evaluate requests by health care professions seeking to change or establish a scope of practice. The review committees then provide findings to the Public Health Committee.
A September 2011 ruling by the U.S. Department of Justice (DOJ) appears to clear the way for Internet wagering not involving sports. Many say Internet gaming is an idea whose time has come. Also, last August a U.S. District Court judge in New York ruled that poker is a game of skill and not chance (U.S. v. Dicristina, 2012 WL 3573895 (E.D.N.Y. August 21, 2012)). The legislature may debate legalizing Internet gaming and poker, in light of the ruling, its growing popularity, and what some claim to be a potential source of generating revenue.
Growing concern about the increase in gun violence throughout the country may spur the legislature to review the state's gun laws and address gun control issues.
2011-R-0137, OLR Backgrounder: Firearm Preemption Issues - Does Connecticut Law Preempt Municipal Firearm Ordinances?
Increasingly, police are using electronic defense weapons, including Tasers, which are intended to be a non-lethal alternative to deadly force. The legislature may look at creating statewide standards for their use in light of (1) the increasing number of Taser-related injuries, (2) increasing use of the weapons, and (3) the aggressive marketing of the weapons to the civilian market.
Amidst controversy, during the 2012 June Special Session the legislature removed the minimum 1,248 state police staffing requirement and authorized the Department of Emergency Services and Public Protection commissioner to determine and set the staffing level. The Program Review and Investigations Committee must submit a report by January 9, 2013, giving him standards to use to set the level. The legislature may revisit this issue during the 2013 session.
A statement by the U.S. DOJ has made it clear that federal law protects citizens' rights to videotape police officers performing their official duties. Legislation to allow people to sue police officers who try to stop such filming failed in both the 2011 and 2012 sessions (SB 245 and sSB 1026, respectively). The legislature may again address the issue this year.
Proposals allowing towns to install red light cameras will likely resurface in the 2013 session. The cameras would record vehicles that run red lights and the photographs would be used as evidence in ticketing violators. Proponents say the cameras would improve safety; opponents argue that the cameras raise privacy concerns. Other arguments revolve around how effective the cameras are in reducing crashes and whether they would be used more to raise revenue than improve safety.
Bills that would have allowed towns that met certain population thresholds to install red light cameras failed in both the 2011 and 2012 sessions (sSB 706 and sHB 5458, respectively).
Bills that would have established temporary tolling to pay for an 8.5 mile extension of Rt. 11 failed in both the 2011 and 2012 sessions, but the proposal is likely to be back on legislators' calendars in 2013. The previous bills (HB 6200 and SB 289, respectively) would have allowed the state to use the toll revenue to extend Rt. 11 from Salem to I-95 in East Lyme and Waterford. The measures failed, in part, because opponents expressed concern that their passage would open the door to tolling on other highways in the state.
A Department of Transportation (DOT) study of the proposed Rt. 11 extension may come into play in 2013. DOT and its consulting firms are conducting an environmental impact and engineering study of the proposed extension, as well as looking into the feasibility of using electronic tolling to pay for all or part of it.
established the Unemployed Armed Forces Member Subsidized Training and Employment Program to provide grants to subsidize businesses' costs in hiring unemployed veterans. Similar legislation may be proposed during the 2013 legislative session.
Veterans consistently represent 10% of people staying in Connecticut's emergency shelters and transitional housing programs, according to the Connecticut Coalition to End Homelessness. During the 2012 legislative session, a Veterans' Affairs Committee bill (HB 5374) would have established a foster home pilot program to provide transitional housing opportunities to homeless veterans and their families. This year, the legislature may again see this proposal and weigh other options to provide housing for homeless veterans.


In these cases, the Court held that a Chapter 7 debtor may not void a junior lien under 11 U.S.C. § 506(d) when the debt owed on a senior lien exceeds the current value of the collateral if the junior creditor’s claim is both secured by a lien and allowed under § 502 of the Bankruptcy Code.
In each case, Bank of America holds a junior mortgage lien on a home owned by a Chapter 7 Debtor. The amount owed on each debtor’s senior mortgage lien exceeds each home’s market value.
The bankruptcy court in each case granted the debtor’s motion to strip off Bank of America’s junior lien. The district court and the U.S. Courts of Appeals for the Eleventh Circuit affirmed on appeal. All other Circuit Courts of Appeal that have addressed the issue have held that lien stripping is not permitted in Chapter 7 cases.
The Supreme Court reversed. The Court noted that “under a straightforward reading of the statute” the debtors would prevail because Bank of America’s claims are not “secured” under § 506(a)(1). Under this reading, Bank of America’s claims cannot be “allowed secured claims,” so they are void under § 506(d).
However, in Dewsnup v. Timm, the Court held that a claim was “secured” as long as it was “supported by a security interest in the property, regardless of whether the value of that property would be sufficient to cover the claim.” Thus, under Dewsnup, § 506(d) voids a lien only when the claim supporting the lien was not allowed under § 502. And because both of Bank of America’s claims are secured by liens, Dewsnup resolved the issue in both cases - the debtors cannot strip off the liens because the existence of the liens categorizes the claims as secured.
The Court explained that the debtors did not ask the Court to overrule Dewsnup. Rather they asked the Court limit Dewsnup to partially, rather than wholly, underwater liens. The Court declined to do so, explaining that Dewsnup’s definition did not depend on whether a lien is partially or wholly underwater, and that the debtors’ argument would result in the term “secured claim” having a different meaning under § 506(d) than it does under § 506(a). The debtor’s interpretation would also result in an “odd statutory framework” where a debtor would not be able to strip a junior lien if a court valued the collateral at one dollar more than the senior lien, but could strip it if the collateral was valued at one dollar less.
If you have any questions about this case, or bankruptcy issues in general, please contact Laura Genovich at lgenovich@fosterswift.com.


What Does the Bilski Hearing Tell Us?
Home / Intellectual PropertyArticles / What Does the Bilski Hearing Tell Us?
On 9 November 2009, the Supreme Court of the United States heard oral arguments in Bilski v. Kappos, a case that could have — and most likely will have — an impact on all IEEE members. Just how important is this case? Well, should this be your first encounter with the case, Today’s Engineer has already provided a discussion of the problem , an overview of the case , and a discussion of an amicus brief filed by Professor Lee Hollaar and joined by IEEE-USA . If you are not familiar with the Bilski case, these articles provide a thorough explanation of the issues it presents. This article provides a brief discussion of how the case may affect IEEE members and a brief synopsis of what took place during oral arguments before the Supreme Court.
So, why has Today’s Engineer provided such extensive coverage of this case? Well, it’s because, as Steven Rubin  noted, what’s at stake is no less than a determination, in certain areas of technology, as to “what is patentable?” For patent practitioners, inventors and all advocates of the progress of science and the useful arts, the answer to this general question has at times, if not at all times, been elusive, and interested parties are holding out hope that the Supreme Court will provide a more concrete answer to this question .
With respect to how Bilski may impact members of IEEE, the questions presented by the Bilski case, and either their answers or their continued existence, will likely have the greatest impact in the context of software patents . Software designers, software companies, and others who have an interest in whether software can be patented and the extent of its patentability, will be paying close attention to any answer or guidance the Supreme Court provides regarding these questions.
The reason why the software industry may be the most directly impacted industry is because the particular patent claims involved in the Bilski case are directed to a business method — a method of hedging risk in the field of commodities trading. Under Federal Circuit jurisprudence, business method patents have been closely linked to software patents because both are often considered processes. For instance, in State Street Bank v. Signature Financial Group, Inc. , the patent at issue involved both software and business methods and the language in that decision has been widely applied to both types of patents — which have been tied together, and at times, characterized as patents that relate to “abstract ideas.” Further, the question of whether these types of patents can be viewed as patents protecting the “useful arts” has often been tied together.
Justice Breyer: [with respect to the link between a computer and a business method] . . . All you do is just have a set of instructions for saying how to set a computer to do it. Anyone can do that. Now, it’s a machine.
Counsel for the USPTO: [following up on Justice Breyer’s questions]. . . we recognize that there are difficult problems out there in terms of patentability of software innovations . . .
[W]e don’t want the Court, for instance, in the area of software innovations . . . to use this case as the vehicle for identifying the circumstances in which innovations of that sort would and would not be patent eligible . . .
And the questions the Supreme Court Justices asked suggested that this link was on the Court’s mind. Following is a brief synopsis of what took place at the hearing.
During the hearing, Justices Sotomayor, Kennedy and Breyer were particularly active, closely followed by Justices Scalia and Ginsburg and Chief Justice Roberts. Throughout the hearing, the Justices appeared to be struggling to find the “right” answers and appeared to be mindful of the potential consequences their ruling may have on various industries.
The hearing started out with a focus on the “useful arts,” and what constituted “useful arts.” Justice Scalia began by indicating that such arts included the manufacturing arts, but should not include a book on “how to win friends and influence people.” Justice Sotomayor followed up with a question regarding the difficulty in where to draw the line when an invention is not tied to “technology” or “the sciences” and recited the parade of horrors of potentially patentable methods for estate plans or tax avoidance that could follow should there be no limit to the “useful arts.” In the same context, Justice Breyer questioned whether it was the framers of the Constitution’s intent that every “new” and useful business method be patentable, intimating that Bilski’s proposed test could be too encompassing. Justice Sotomayor further asked whether a method to cure someone that involves only human activity would fall within the intent of the patent law. In response to these questions, Bilski’s counsel responded that yes, many of these things, if they were new and useful, should be patentable, assuming they met other statutory requirements — appearing to suggest that 35 U.S.C. § 101 should be broadly construed to encompass as potentially patentable any process that is new and useful.
Justice Breyer asked Bilski’s counsel to propose a back-up test if the Court hypothetically decided to reject the broad suggestion that any set of steps could be patentable, and while Bilski’s counsel agreed that “abstract ideas per se are not patentable,” he maintained his prior broad position. Chief Justice Roberts and Justice Kennedy both followed this line of questioning with comments indicating that certain ideas that are abstract should not be patentable, with Justice Kennedy indicating that it would be difficult to think that the actuarial tables used in the insurance industry could have been monopolized by one person.
Justice Ginsburg, like Justice Sotomayor, suggested that an invention should be tied to “science or technology,” and asked Bilski’s counsel to explain why such a requirement, as she understood European laws to also require, would not be consistent with the fundamentals of our patent system. Bilski’s counsel pointed out that the U.S. patent system was unique and that defining what constituted “technology” would be difficult in terms of U.S. patent jurisprudence and also due to the changing landscape of technology. To follow-up on this questioning, Justice Scalia asked why, in a horse-based economy (in the 1800s) there were no patents directed to methods of training horses, as this would certainly have been useful at the time. Justice Sotomayor further indicated that “how” to approach a problem can’t be enough to make it patentable.
After some discussion with Justice Breyer regarding the positives and negatives of patent monopolies, Justice Sotomayor commented that it might be sufficient to patent useful knowledge if it were tied to some transformation, indicating that she might be open to adopting the Federal Circuit’s machine or transformation test  or a close adaptation of the same. Just before Bilski’s counsel finished his argument, several of the Justices began a conversation with him concerning the Morse code patent and Alexander Graham Bell’s telegraph patent, asking questions relating to what types of transformations were occurring, and appearing to see the fit between the Federal Circuit’s test and these earlier granted patents.
Counsel for the USPTO defended the Federal Circuit’s test and responded to criticisms that the test was not “inflexible” by asserting that it only required some link between the method and the transformation. Counsel for the USPTO also indicated during the argument that there would be many difficult questions to answer in the future, but that the Federal Circuit’s test could accommodate difficult questions and allow for exceptions. Justice Sotomayor expressed concern regarding applying a rigid exclusive test, in that potential patentable subject matter would be excluded from the patenting process.
Next, the State Street Bank decision was discussed and Justices Stevens, Scalia and Breyer questioned whether this case would have the same end result if the Federal Circuit’s current “machine or transformation” test were utilized. Counsel for the USPTO indicated that State Street would have ended with the same result because the claims were directed to a machine (a computer). This answer led to a discussion regarding the USPTO’s apparent position, set forth in its last footnote on its brief, which Chief Justice Roberts was troubled about — that if the method is simply tied to a calculator or a computer, then it would be patentable, and this seemed to place form over substance. Both Justices Kennedy and Stevens were curious with respect to what was “transformed” by the State Street computer program, indicating that it appeared to be merely a new process on an old machine. The USPTO did not have a ready answer, deflecting the question by indicating that hardware could be present that would transform the machine. During these discussions, the questions linking software to business methods arose, as noted above, and the USPTO appeared to disfavor tying any decision in this case to a decision that would impact software technologies.
In rebuttal, Bilski’s counsel stressed its position against a rigid test, such as the “machine or transformation” test, which could be avoided by simply looking at whether the invention is attempting to patent an abstract idea.
Overall, it is hard to determine which way the Court will rule, but there is a good chance that the Court’s ruling will have an impact on software patents and those interested should keep reading Today’s Engineer to get the latest news on the aftermath of the Bilski decision.
 Lee Hollaar, “What should be patentable?,” Today’s Engineer, [online], (April 2009), Available http://www.todaysengineer.org/2009/Apr/patents.asp.
 Steven Rubin, “Here’s an Idea, Why not Patent It? A Brief Summary of the Issues and Complexities of Bilski v. Doll,” Today’s Engineer, [online], (September 2009), Available http://www.todaysengineer.org/2009/Sep/Bilski.asp.
 Lee Hollaar, “IEEE-USA Joins Bilski Amicus Brief,” Today’s Engineer, [online], (October 2009), Available http://www.todaysengineer.org/2009/Oct/Bilski.asp.
(2) Whether the Federal Circuit’s “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.” 35 U.S.C. § 273.
 See State Street Bank and Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).
 The United States Court of Appeals for the Federal Circuit held, in the appellate proceedings below, that “[a] claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” See In re Bilski, 545 F.3d 943, 954 (Fed. Cir. 2008).
Nathan J. (“Nate”) Bailey is a member of IEEE-USA’s Intellectual Property Committee. He holds a J.D. from Southern Illinois University School of Law and an M.S. in Electrical and Computer Engineering from Southern Illinois University. He currently practices as an intellectual property attorney with the law firm Greenblum & Bernstein, P.L.C., mainly focusing on patent litigation. He can be reached at nbailey@gbpatent.com.
Jill M. Browning is an intellectual property attorney with the law firm Greenblum & Bernstein, P.L.C., and is a regular contributor to various publications on the latest intellectual property decisions by the Supreme Court. She holds a J.D. from the University of Virginia and has over thirteen years of experience assisting clients in obtaining patent rights and protecting and enforcing those rights. She can be reached at jbrowning@gbpatent.com.


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Today, I (provocatively) develop that analysis further by arguing that, contrary to the position expressed by the European Commission in its Communication and in the Q&A, the findings of the CJEU in Achmea might not necessarily mark the end of (arbitration clauses in) all intra-EU bilateral investment treaties (intra-EU BITs)*. In addition, I also argue that, in some aspects, Achmea might also affect other types of international agreements concluded by the EU or other BITs concluded by EU Member States with one or more non-EU countries (extra-EU BITs).
Importantly, I must emphasize that this article is based on my reading of the Achmea judgment, and in particular of the relevant paragraphs regarding the applicable law clause at issue in that case. This article does not discuss whether other reasons (such as the principle of non-discrimination) not discussed in Achmea, might also justify the termination of all intra-EU BITs.
– whether judicial review of awards rendered pursuant to the Czechoslovakia-Netherlands BIT guaranteed the autonomy of the EU legal order (see paras 50 to 56 in Achmea).
The starting point of this analysis is the fact that the CJEU answered positively to the first question of whether arbitral tribunals established pursuant to the Czechoslovakia-Netherlands BIT were obliged to apply and interpret EU law (meaning that it became necessary to consider also the second and third questions). However, had the CJEU found that arbitral tribunals established pursuant to the Czechoslovakia-Netherlands BIT were not obliged to apply and interpret EU law, it likely would have decided that the arbitration clause in that BIT did not undermine the autonomy of EU legal order and was thus valid. In that event, there would have been no need to address questions 2 and 3.
Thus, central to the CJEU’s analysis was its assessment of the specific choice of law clause in Article 8.6 of the Czechoslovakia-Netherlands BIT. That clause defined (in a non-exhaustive manner) the law to be applied, in resolving disputes between a contracting party and an investor, by arbitral tribunals established pursuant to that BIT. The applicable law included “the law in force of the Contracting Party concerned” and “other relevant agreements between the Contracting Parties“. Taking into account that EU law is part of the law in force in every Member State and derives from an international agreement between the Member States, the CJEU concluded that an arbitral tribunal established pursuant to the Czechoslovakia-Netherlands BIT could potentially apply and interpret EU law. Given that such interpretation and application of EU law by arbitrators would affect the autonomy of the EU legal order, the CJEU concluded that the arbitration clause contained in the Czechoslovakia-Netherlands BIT was contrary to EU law. The CJEU also made clear (see para. 57 in Achmea) that other international agreements concluded by the EU or other extra-EU BITs must also respect the autonomy of the EU legal order.
With this in mind, I argue that Achmea does not necessarily have consequences for all intra-EU BITs. Intra-EU BITs containing a clause on the applicable law that does not include (or does not allow for the application of) the domestic law of the contracting parties would not necessarily affect the EU legal order on the basis of the reasoning in Achmea (irrespective of the answers that the CJEU brought to questions 2 and 3 above).
Conversely, the judgment in Achmea might be relevant also to the validity of arbitration clauses in BITs (and other international agreements) concluded by the European Union (or one of its Member States) with one or more third countries. Indeed, if such extra-EU BITs (or other extra-EU agreements) contain a choice of law clause which makes it possible for arbitral tribunals to interpret and apply the domestic law of an EU Member State, then the ruling of the CJEU to the first question in Achmea, will apply equally to that type of BIT.
Therefore, the central issue to the assessment of the validity of intra-EU (and extra-EU) BITs in light of the Achmea decision is the assessment of the applicable law clause contained in those BITs.
Non-exhaustive research among existing BITs shows that various forms of applicable law clauses co-exist. Some BITs do not contain rules on applicable law (or only contain very vague clause). Other BITs provide that the applicable law will be the BIT itself and other relevant rules of international law. Finally, some BITs contain more detailed clauses which provide that the applicable law will be the BIT itself, the domestic law of the State party to the dispute and the rules and principles of international law and any other agreement concluded between the States that have concluded the BIT.
I will examine the consequences of the judgment of the CJEU in Achmea in light of all those possibilities.
Within the EU, the Netherlands-Bulgaria (1999) BIT, the France-Czechoslovakia (1990) BIT or the France-Croatia (1996) BIT provide concrete examples of BITs which are silent on the issue of the applicable law.
When BITs are silent on the issue of the applicable law and this question cannot be resolved through the interpretation of the BIT, the application of the residual rules provided for in the arbitration rules chosen by the parties to the dispute will resolve the matter.
Article 42(1) of the ICSID Convention, for instance, provides that “[t]he Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable” (emphasis added).
Article 35 of the 2010 UNCITRAL Arbitration Rules provides that “[t]he arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate“.
In light of those provisions, it is very likely that, even if a BIT does not contain any applicable law clause, an arbitral tribunal established pursuant to that BIT is nevertheless susceptible of applying and interpreting the domestic law of the responding State. If this dispute involves an EU Member State (and since EU law is part of the law in force in every Member States), the arbitral tribunal will therefore be likely to apply and interpret EU law. Keeping in mind that the CJEU in Achmea found that such an application or an interpretation of EU law by an arbitral tribunal would affect the autonomy of the EU legal order, arbitration clauses contained in BITs which are silent on the applicable law clause (irrespective of whether they are intra-EU or extra-EU BITs) are also likely to violate EU law.
The Energy Charter Treaty offers a good example of a treaty with an applicable law clause that provides for the application and interpretation of the rules of international law together with the Energy Charter Treaty itself. Article 26(6) of the Energy Charter Treaty provides that an arbitral tribunal with jurisdiction to rule on a dispute between an investor and a contracting party “shall decide the issues in dispute in accordance with [that] Treaty and applicable rules and principles of international law“.
It can be argued that such treaties or BITs are also likely to be contrary to EU law in the light of the Achmea judgment. Indeed, even if those BITs do not provide for the application and interpretation of the domestic law of the responding State, they are nevertheless susceptible to lead to the application and interpretation of EU law given that EU law is … international law.
Of course, it could be argued that EU law forms an legal order of its own, which is distinct from public international law (see for instance Case C-26/62 Van Gend en Loos). Nevertheless, under such an applicable law clause, a foreign investor (which has established a business in the EU) could potentially rely on EU law (and in particular on the fundamental freedoms provided for under the EU Charter of fundamental rights) in a dispute against an EU Member State even if the underlying BIT (or the Energy Charter Treaty) does not provide for the application and interpretation of the domestic law of that State but merely provides for the application of the relevant rules of international law.
In such a case, the arbitral tribunal with jurisdiction to rule on this dispute will be requested to apply and interpret EU law. However, since the judgment of the CJEU in Achmea provides explicitly that such interpretation and application of EU law by arbitral tribunals affect the autonomy of the EU legal order, arbitration clauses contained in such BITs shall also be considered as invalid under EU law. Again, this conclusion applies irrespective of whether the underlying BIT is an intra-EU BIT or an extra-EU BIT.
The third category of BITs that I wish to examine are BITs that contain an applicable law clause that provides for the application and interpretation of the BIT, the domestic law of the responding State or the rules and principles of international law.
The applicable law clause at issue in Achmea provides a good example. This clause (found in Article 8.6 of the Czechoslovakia-Netherlands BIT) reads as follows: “The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively: (i) the law in force of the Contracting Party concerned; (ii) the provisions of this Agreement, and other relevant Agreements between the Contracting Parties; (iii) the provisions of special agreements relating to the investment; (iv) the general principles of international law“.
In Achmea, the CJEU clearly ruled that the arbitration clause in intra-EU BITs which contain such an applicable law clauses were contrary to EU law since they made it possible for arbitral tribunals to apply and interpret EU law (and they therefore affected the autonomy of the EU legal order). Although this conclusion by the CJEU was given in the intra-EU context, I see no reason not to expand this reasoning to arbitration clauses in extra-EU BITs that contain a similar applicable law clause.
The ISDS provision in the Sweden-Estonia (1992) BIT only applies to “dispute[s] between one of the Contracting Parties and an investor of the other Contracting Party concerning the interpretation or application of this Agreement“. Consequently, such a clause appears to provide for the resolution of disputes based on the interpretation or application of solely those BITs. This clause does not seem to allow for the application or interpretation of EU law.
I argue that – under Achmea – such intra-EU BITs (or extra-EU BITs containing a similar clause) could be valid under EU law. Indeed, such a clause could potentially pass the Achmea test given that it avoids (at least in theory) any application or interpretation of EU law (since the dispute is limited to the interpretation and application of the BIT in question) and thus avoids any interference with the EU legal order.
If the applicable law clause contained in a BIT (either an intra-EU BIT or an extra-EU BIT) provides and clarifies that the arbitral tribunal should consider domestic law as a matter of fact, such clause could also potentially avoid any application or interpretation of EU law and avoid any interference with the autonomy of the EU legal order. Therefore, contrary to the arbitration clause contained in the underlying BIT at stake in Achmea, a BIT containing such applicable law clause will (probably) be seen as valid under EU law.
When rendering its decision, the Tribunal established under this Section shall apply this Agreement as interpreted in accordance with the Vienna Convention on the Law of Treaties, and other rules and principles of international law applicable between the Parties.
The Tribunal shall not have jurisdiction to determine the legality of a measure, alleged to constitute a breach of this Agreement, under the domestic law of a Party. For greater certainty, in determining the consistency of a measure with this Agreement, the Tribunal may consider, as appropriate, the domestic law of a Party as a matter of fact. In doing so, the Tribunal shall follow the prevailing interpretation given to the domestic law by the courts or authorities of that Party and any meaning given to domestic law by the Tribunal shall not be binding upon the courts or the authorities of that Party.
By stating that domestic law is to be treated as a matter of fact, Article 8.31 of CETA may be interpreted as avoiding any interference with the autonomy of EU legal order. In Opinion 1/17, the CJEU will likely need to address whether treating EU law in such context as a question of fact nonetheless involves interpreting EU law (as it appears from the hearing report).
This being said, if the BIT at stake also includes international law as the applicable law, then what has been presented above (see section 2) also applies (to the extent that you can consider that EU law is international law).
* This would have been the case if the CJEU had ruled on the discriminatory nature of an arbitration clause contained intra EU-BITs. However, the CJEU refused to do so (para. 61 of the judgment in Achmea).
** Yas Banifatemi, The Law Applicable in Investment Treaty Arbitration, in Arbitration Under International Investment Agreements: A Guide to the Key Issues, Katia Yannaca-Small (ed.), Oxford University Press, 2010, p.200.

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