text:
Phillips v. AWH to be heard by CAFC on Tuesday, February 8, 2005, 10:00 A.M., Courtroom 402.
a person already trained in the art.
Contemplate some of the cases.
particles dispersed in an aqueous medium. The patentee also invoked Liebel-Flarscheim v.
the use of one particular dictionary, and did not flow from other dictionaries.
specification. The arbitrariness of this is seen in Novartis.
written description or enablement, as with the Rochester COX-2 case.
artisan would look to, or rely upon, Webster’s.
breadth of embodiments should be stressed, up to the point of intrusion on prior art or 112 issues.
more limiting definition than contemplated, appropriate steps should be taken.
The discussion about dictionaries, and separately the discussion about patent reform (by the FTC and the NAS), reminds one more of an academic debate than one about policies affecting business. I don't think that practitioners are much enamored of the use of general purpose dictionaries, anymore than the PTO is. The NAS report flitted from law review article to another without getting much input from anyone who actually does prosecution.
A column by Ellen Goodman in December 2004 started --I like the old maxim that academic politics are vicious because the stakes are so small.-- Oddly, the stakes aren't necessarily small for patents, but it does not look like we're getting into the real issues in the debate so far.
By presidential decree of this week, India met a World Trade Organization (WTO) commitment to recognize foreign patents from Jan. 1, 2005. The change will become law if ratified by parliament at its next session in February, 2005. The new rules do not apply to drugs patented before 1995. The new law has compulsory licensing provisions allowing the government to force patent-holders to grant licenses to local firms in case of national emergencies or for exporting medicine to countries facing public health emergencies, provisions permitted under the WTO and already utilized by some countries in the AIDS area.
India can remain a production center. India has more than 70 U.S.-approved manufacturing plants -- the most in the world outside the United States -- and can remain a production hub because of its cheap, skilled labour. GlaxoSmithKline has already signed a drug research partnership with Ranbaxy, India's top drug maker by sales [recall past patent fights].
Turmoil at AeroTelesis over license?
AeroTelesis is a California company whose technology is based on a standard known as Ultra Spectral Modulation, or USM. The company's Internet site compares USM to two standards that transmit mobile-phone calls today -- Code Division Multiple Access (CDMA) and Global System for Mobile (GSM) communications.
-->The license covers patents for a design AeroTelesis is developing to send high-speed wireless phone calls, data and video -- a technology the company says on its Web site is ``core'' to the business. AeroTelesis valued the license at $2.7 million, or 96 percent of the company's assets as of Sept. 30.
Recall in 2003, Qualcomm charged that Texas Instruments violated a confidentiality agreement by disclosing key information about its business relationship in early May, 2003. About that time, Texas Instruments was making public its plans to manufacture and sell CDMA wireless phone chips.
Separately, Qualcomm and the Swedish Ericsson have been in a legal squabble over 3G (third generation) technical standards and alleged patent infringements since 1996. Ericcson's Global System for Mobile communications is a digital cellular system found in almost all of Europe, parts of Asia, and parts of North America, while Qualcomm's CDMA dominates in North America.
Law.com has a long article on the intellectual property activity at Ranbaxy.
Although the article by Sue Reisinger mentioned Ranbaxy's litigation against GlaxoSmithKline over Ceftin, the article somehow failed to mention Ranbaxy's deal with GlaxoSmithKline.
-->But the company [Ranbaxy] was at a crossroads about what it should do in the U.S. Should it wait until the drug went off patent before selling the generic? Or could it find a loophole in the patent and market a version of the drug that was close enough to it to be a generic, but different enough so that it wasn't covered by the Ceftin patent? Deshmukh thought Ranbaxy's product was unique enough that it could market its generic as soon as it was ready. He also knew that as soon as the company notified Glaxo of its plans, the drug giant was likely to sue to protect its patent, so Deshmukh quickly looked to make sure he had the right outside counsel to defend the company.
Ranbaxy had retained Proskauer Rose, the prominent New York-based firm, as its primary outside counsel when the company entered the U.S. market in the late 1990s. But Deshmukh wanted a firm that focused solely on IP. "I needed to shift [Ranbaxy] management from trying to save money [by avoiding litigation] to using the best lawyers money can buy [to litigate]. You either litigate fully or you don't litigate," he recalls. Caprariello says Deshmukh faced considerable opposition from Ranbaxy's R&D department over the law firm switch, but the lawyer persisted. That department, to which Deshmukh reported, was "comfortable" with Proskauer, says Caprariello. Going to trial over Ceftin, which ultimately cost Ranbaxy $5 million, was a commitment beyond anything the company had done before, Deshmukh says.
Charles Guttman, who leads Proskauer's IP practice, argued in vain that the firm's broad litigation experience shouldn't be tossed aside. "I had been working with other people there [at Ranbaxy], and Jay came in and made his decision," Guttman says. "What can I say? I wish him well."
Deshmukh first searched for a replacement for Proskauer on the East Coast, but he says that most of the top IP firms there were already on Big Pharma's payroll. So Deshmukh called his friend and protégé Zimmerman at Knobbe Martens, a large IP law firm out West.
Deshmukh's opening gambit against Glaxo started badly. After receiving Ranbaxy's letter, Glaxo sued in federal court and in early 2001 obtained a preliminary injunction that stopped Ranbaxy from going to market. (Glaxo declined to comment on the case.) The pressure on Deshmukh was intense. Zimmerman says, "It was our first case for Ranbaxy, and we had lost our first battle. He never told us, but we knew the substantial pressures on Jay to switch law firms. We sat down with him, and he decided to stick with us for an appeal." Deshmukh concedes that his job was on the line.
One does note that going with an IP boutique (Knobbe) over a GP firm is against current conventional wisdom. Many IP boutiques have been gobbled up with attorneys ending up at GP firms (eg, the story of Pennie & Edmonds and Jones, Day).
Deshmukh was able to parlay that success in several ways. He moved from being the sole IP lawyer reporting to R&D, to global vice president of intellectual property, reporting directly to CEO Tempest. Deshmukh oversees four other lawyers in the U.S. and in Europe, as well as a large technical staff of patent and chemical experts in India. (Ranbaxy's New Delhi-based GC spot was unfilled at press time.) Deshmukh says that the company has now established a $100 million threshold of sales; Ranbaxy primarily will look to develop drugs with revenues above that amount. Now, Deshmukh says, "We [the IP department] are the engine that drives the company train."
As a separate matter, the Public Patent Foundation initiated a re-examination of Pfizer's 5,969,156 based upon prior art within 5,273,995 (Roth) and 5,686,104 (Mills). The claims in the '156 are to specific crystalline forms of Atorvastatin.
Google's has filed a patent application for searching queries written in a different character-set or language from the target pages. (co-inventor Ghemawat). IBM has filed an application for creating a personalized search index based on a user's personal search term list - keywords known to be of interest to the user.
The CAFC decision is nominally about exceptional case under 35 USC 285. However, it gets into the distinction (or lack thereof) between chromium trioxide and chromic acid.
Chromic Acid: an aqueous solution of chromium trioxide (CrO3) or a commercial solution containing chromic acid, dichromic acid (H2Cr2O7), or trichromic acid (H2Cr3O10).
Chromium trioxide itself contains no protons and is not a Bronsted acid. Its chemistry is modified by contact with acids (eg, acetic acid) or bases (eg, pyridine) but those modified forms should not be equated with chromium trioxide itself.
Einstein's first significant paper, on the photoelectric effect, was sent to the journal Annalen der Physik on March 17, 1905, three days after his 26th birthday.
In the photoelectric effect experiment, shining light on a metal plate can cause the ejection of electrons from the metal plate. To measure the properties of the ejected electrons, one introduces a second metal plate, and applies a voltage differential across the two plates. If one starts with zero voltage across the plates, then some current will flow when the light is turned on: electrons knocked off the "source" plate with any speed will eventually reach the "target" plate. But if one gradually increases the voltage difference (to impede electron transit) fewer and fewer electrons will make the journey, and, at some voltage, the current disappears. The voltage wherein the current disappears can be used to give a measure of the maxiumum kinetic energy of the ejected electron.
--> The energy of the electrons does NOT depend on the intensity of the light.
--> The electrons always appear AS SOON AS the light reaches the plate (though a feeble light produces only a few).
--> NO electrons are produced if the frequency of the light waves is below a critical value.
That is, as the brightness (intensity) of light incident on a metal surface increased, more electrons were ejected from the metal. However, the energy of the electrons depended only on the frequency of the light, not on the intensity of the light. Shining more intense light (even for example a laser light) would not increase the energy of the electrons. To explain this, Einstein proposed energy quanta, which both explained the photoelectric effect and avoided the so-called ultraviolet catastrophe.
-->The energy of the electrons does NOT depend on the intensity of the light.
-->The electrons always appear AS SOON AS the light reaches the plate (though a feeble light produces only a few).
below some critical frequency v, no photon has enough energy to knock an electron free.
Moreover, Einstein's theory was able to make one very strong prediction: the maximum energy of ejected electrons should increase linearly with frequency of the applied light.
On May 11, 1905, Annalen received Einstein's paper on Brownian motion, and on June 30, 1905, the paper on special relativity. Thus, three significant papers were sent out in a little over three months. Einstein at the time was working at the Swiss Patent Office in Berne.
As a minor point, in the play Camping with Henry and Tom (by Mark St. Germain, nominally based in time around 1921), Thomas Edison mentions that he does not understand the photoelectric effect. However, Edison in 1883 discovered the "Edison effect" wherein electric current would flow from a light bulb filament to a positively charged metal plate inside the light bulb. Edison obtained a patent on using the "Edison effect" as a current measuring device; the flow of current was proportional to the incandescence of the bulb. More importantly, the "Edison effect" is the basis for the vacuum tube developed by Fleming and DeForest.
Fleming (who at one time worked for Edison) noted that the alternating current being applied to the bulb filament was leaving the tube (via the metal plate) as direct current. Such tube was called the Fleming Valve and its ability to rectify AC current was used in the Diode tubes that followed (and the same concept applies to silicon diodes today). DeForest recognized the opportunity for amplification and modified the tube so it could not only rectify AC current but also amplify it. The De Forest Audion (now triode) contained the filament and plate of the Fleming valve, but interposed between them was a zigzag wire called the grid. A small electric current applied to the grid would result in the proportionate flow of a much larger current from the filament to the plate- creating amplification.
FET/(solid state rectifier) : triode/diode.
This analogy was recognized (and patented by) Lilienfeld approximately twenty years BEFORE Bell Labs developed the transistor.
-->The turmoil over ratifying the European Union's patent directive has exposed the fear and confusion surrounding the concept of ownership of intellectual property. As originally proposed by the European Commission, the directive would allow software patents. But subsequent versions by the European Parliament were changed to disallow software patents, and just before the end of the year it became apparent that a vote in another legislative body, the Council of Ministers, would be postponed, apparently because political pressure had smashed a consensus about which version to ratify.
Large companies are for increased predictability in business. That is why they generally ENDORSED the absolute bar of Festo (which curtailed patent rights), even though they are the ones that have the most patents. Further, in cases such as Eolas v. Microsoft, it is the big company that is the defendant. See also Acacia. The consortium of large companies did not buy the Commerce One patents; an entity about which there is little knowledge did buy the Commerce One patents (see earlier posts on IPBiz).
In February and March 2005, the Federal Trade Commission (FTC), the National Academy of Science's (NAS) Board on Science, Technology, and Economic Policy (STEP), and the American Intellectual Property Law Association (AIPLA) will co-sponsor a three-part series of town meetings on patent reform. The first three meetings will take place in San Jose, California, on February 18, 2005; Chicago, Illinois, on March 4, 2005; and Boston, Massachusetts, on March 18, 2005.
In the last two years, there has been much discussion of patent reform.
-->In October 2003, the FTC released its report entitled, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,” available at http://www.ftc.gov/opa/2003/10/cpreport.htm.
-->In 2004, the NAS's STEP Board released its report entitled, “A Patent System for the 21st Century,” available at www.nap.edu/html/patentsystem. A draft had been issued earlier in 2004. Within the section on --seven recommended changes--, the NAS suggests modification or elimination of litigation concerning willful infringement, best mode, and inequitable conduct.
-->The AIPLA has issued detailed responses to both reports; they are available at www.aipla.org.
Shields to Infringement Liability: Prior User Rights and Experimental Use Exception.
The full agenda, including schedules and a list of speakers is available on the FTC’s Web site at www.ftc.gov/ogc/workshops/patenttownmeetings/index.htm.
http://jip.kentlaw.edu/art/volume%204/4-1-4.htm. The NAS report by Stephen A. Merrill, Richard C. Levin, and Mark B. Myers, A Patent System for the 21st Century, was available in draft form at http://books.nap.edu/catalog/10976.html.
The final version of the NAS report does differ from the draft form that was available in April 2004.
For example, in the section on "seven criteria for evaluating the patent system"
one has the text: "Acceptance rates by themselves ignore how claims are modified, nearly always by narrowing their scope, in the course of examination, surely a key determinant of quality. Moreover, rigor of examination is only one of several factors that may affect allowance rates. The fact is that the examination procedure, allowing an applicant multiple attempts to persuade a critical examiner to approve a patent (see Appendix A) is designed to yield a high "success" rate, at least for persistent applicants."
This text does resemble the old Chinese birth/gender problem. If some Chinese families decide to continue to have children until they obtain a male child (analogous to obtaining an issued patent), this strategy does NOT alter the percentage of male children, which remains at whatever the birth probability was (approximately 50/50). A strategy of insisting on a male child does NOT alter the resultant gender distribution. Similarly, if the patent office continues to apply the same criteria to each application, the fact that some applicants keep trying to obtain an issued patent DOES NOT YIELD a higher "success" rate.
One company, Transgenic (principal David Avner) is suing another company Allerca (principal Brodie) over improper use of trade secrets to hypoallergenic cats. Avner had sought out Brodie for financial backing for his ideas, so this is an example of a funding deal gone bad. The case is complicated by the fact that the trade secrets are within U.S. patent applications, at least one of which is published, US application no 20030177512.
Transgenic claimed breach of a nondisclosure , non-use agreement, deceptive trade practices, misappropriation of trade secrets and tortious interference.
Plus, it asked for injunctive relief to prevent Allerca and Brodie from further disclosure of Transgenic's trade secrets, from taking any further deposits from the public, from competing with Transgenic, and from representing that it's entitled to the transgenic cat technology and patents.
The lawsuit said Highlands Ranch resident Avner, who's an emergency room physician, revealed trade secrets and proprietary information to Los Angeles resident Brodie because he viewed Brodie as a potential investor in Transgenic. Brodie signed a nondisclosure and non-use agreement in February 2004, the lawsuit said.
Thus, Avner filed a provisional in 1995, a non-provisional in 1996, a continuation-in-part in 1999, and a continuation 2002.
A transgenic cat with a phenotype characterized by the substantial absence of the major cat allergen, Fel d I. The phenotype is conferred in the transgenic cat by disrupting the coding sequence of the target gene with a specialized construct. The phenotype of the transgenic cat is transmissible to its offspring.
1. An isolated polynucleotide sequence encoding a disrupted Fel d I gene.
2. A sequence according to claim 1, wherein said Fel d I gene has been disrupted by sequence replacement.
3. A sequence according to claim 1, wherein said Fel d I gene has been disrupted by sequence insertion.
4. A sequence according to claim 1, wherein said Fel d I gene has been disrupted by deletion of all or a part of said Fel d I gene.
8. An embryonic cat stem cell comprising a sequence according to claim 1.
9. An embryonic cat stem cell comprising a vector according to claim 7.
10. A transgenic cat comprising a disrupted Fel d I gene.
 This invention is a new alternative to traditional treatments for allergies. Rather than recommending avoidance or immuno-therapy, this invention eliminates the allergen at its source. In the case of the cat, sensitivity has been attributed to one major cat allergen (Fel d I) (Ohman, JACI, 1977). Using, newly developed gene targeting techniques it is possible to "knock-out" the Fel d I genes in an embryonic cell ie. Embryonic Stem (ES) Cells. These modified ES cells can then be introduced into a developing blastomere. During normal embryonic development the ES cells will then be incorporated into part of the germ line (Capecchi, Science, June 1989), (Robbins, Circulation Research, July 1993).
 The resulting chimeric offspring will be heterozygous for the inactive Fel d I gene. When cross-bred with another heterozygous cat, one fourth of the progeny will be homozygous to the inactive Fel d I gene. These homozygous cats are major allergen free and are a revolutionary alternative to immuno-therapy for allergic cat owners (FIG. 1).
The various discussions in the '512 application are in the present verb tense, not in the past tense, suggesting that they may be prophetic, rather than examples actually carried out. Applications that rely on prophetic examples may issue as patents, but there can be issues of enablement under 35 USC 112, first paragraph.
This lawsuit illustrates the divergence between trade secrets and patents. The whole point about trade secrets is that one must keep them secret. Patent applications now are (generally) published, and once the information in an application is published, it cannot be considered a trade secret. If the application ISSUES as a patent, competitors whose product/process falls within the scope of issued claims may be liable both for pre-grant AND post-grant damages. HOWEVER, if the published application (or continuing applications therefrom) does/do not issue, the information therein is dedicated to the public. One suspects that information in a patent application published in Sept. 2003 would not be considered a trade secret (under, for example, the definition in the uniform code) in the context of an agreement signed in Feb. 2004.
Assuming (contrary to fact) that there were no applications in the Transgenic v. Allerca matter, Transgenic would face a tedious, lengthy legal battle in enforcing its trade secret rights, especially for a prophetic concept relying on analysis of the published literature. Thus, in some sense the Transgenic v. Allerca matter speaks to Judge Posner's comments about the relative value of trade secrets and patents, and is another example wherein trade secret rights are markedly inferior to rights that might be secured by patent.
DataTreasury: using the Acacia strategy against banks?
Jennifer Kingson in the Dec. 25 issue of the New York Times has an article discussing law suits brought by DataTreasury against various financial companies.
The Times article mentions that DataTreasury has only two patents, which describe a way to store and retrieve transaction records electronically. DataTreasury has sued about a dozen companies, including J. P. Morgan Chase & Company, the First Data Corporation, the biggest credit card processor; and the Electronic Data Systems Corporation. The Times article does not mention the patent numbers, but mentions the name Claudio Ballard.
The Time article notes that one company, Affiliated Computer, settled what it viewed as a nuisance lawsuit for an amount which may be $50,000. The Times article did not note that patent holders often make initial low cost settlements to bootstrap their way to settle with others for more money.
As many articles have pointed out, various business method patents long antedated the State Street decision.
at least one communication network for the transmission of the transaction data within and between said one or more data access subsystems and said at least one data processing subsystem, with the data access subsystem providing encrypted subsystem identification information and encrypted paper transaction data to the data processing subsystem.
transmitting the transaction data and the subsystem identification information within and between the remote location(s) and the central location.
A system for remote data acquisition and centralized processing and storage is disclosed called the DataTreasury.TM. System. The DataTreasury.TM. System provides comprehensive support for the processing of documents and electronic data associated with different applications including sale, business, banking and general consumer transactions. The system retrieves transaction data at one or more remote Locations, encrypts the data, transmits the encrypted data to a central location, transforms the data to a usable form, performs identification verification using signature data and biometric data, generates informative reports from the data and transmits the informative reports to the remote location(s). The DataTreasury.TM. System has many advantageous features which work together to provide high performance, security, reliability, fault tolerance and low cost. First, the network architecture facilitates secure communication between the remote location(s) and the central processing facility. A dynamic address assignment algorithm performs load balancing among the system's servers for faster performance and higher utilization. Finally, a partitioning scheme improves the error correction process.
The filing firm was McGuire, Woods, Battle & Boothe LLP. As of December 26, 2004, the patent has been cited by 18 US patents.
One notes the divergence between what is emphasized in the abstract and what is in the above-noted claims. For example, the abstract mentions --system RETRIEVES transaction data at one or more remote Locations-- but claim 1 discusses remote systems--for capturing and SENDING paper transaction data and subsystem identification information-- and claim 26 states --collecting, processing, SENDING and storing the transaction data AT a central location--.
A second patent to Ballard is US 6,032,137, which contains the text: This application is a continuation in part of application Ser. No. 08/917,761 filed Aug. 27, 1997, now U.S. Pat. No. 5,910,988.
The '137 patent has been cited by 15 US patents as of Dec. 26.
In an article on December 26, 2004, Paul Jacobs uses the story of Epogen to question aspects of U.S. patent policy. The news story is not unrelated to the Lemley/Moore article in the Boston University Law Review concerning "ending abuse" of patent continuations.
In December 1983, the company [Amgen] filed its first patent application. But the filing proved to be a work in progress, the opening argument in a lengthy debate between patent office examiners and attorneys representing the company.
A leading protein researcher, unconnected to Amgen or its competitors, recently agreed with that assessment.
``There was nothing in it that was new except that it was Epo,'' said the researcher, Russell F. Doolittle of the University of California-San Diego.
But in the end, the patent examiners not only gave the company the patent protection it sought but extended it far beyond the usual 17 years that was allowed at the time.
In a key decision, the patent office allowed the company to divide its original application into a series of separate ``inventions,'' each with a patent life of 17 years after approval.
Critics say the idea was ridiculous. ``How many times can you invent the same product?'' said Jamie Love, who directs the non-profit Consumer Project on Technology.
Divisional patent applications arise from restriction requirements made by the USPTO. The Patent Office is telling the patent applicant that there are separate inventions in the claims of an initial application and the Patent Office requires the separation of the initial claims into different applications, called divisionals. By statute (35 USC 121), the claims of the different divisionals are insulated from obviousness-type double-patenting rejections.
Divisional application practice was not eliminated by the change in the law in 1995. What did change is patent life. Any patent which issues from an application which claims priority to an earlier application has a lifetime of twenty years from the date of earliest application. Effectively, the change in the law created an incentive to file all related applications as soon as possible.
Continuation applications, unlike divisional applications, are not insulated from obviousness-type double-patenting rejections. A key case involving the denial of multiple patents for the "same" invention concerns Lilly's PROZAC.
Separately, one can file a later application without claiming priority. This avoids the issue of the 1995 change in law. HOWEVER, prior work in the area is available as prior art.
If someone wants to complain about multiple patents for the "same" invention, distinction has to be made between divisionals and continuations. In divisionals, the Patent Office is saying that the claims are for different inventions, and the Patent Office is responsible for errors in the assessment. In continuations, the applicant is saying the claims are for different inventions, and a competitor is free to challenge that assessment in court.
The confusion between DIVISIONAL and CONTINUATION applications also permeates the Quillen/Webster work. Although they argue that much burden would be removed from the PTO by eliminating all continuing applications (which include divisionals and continuations), they neglect to point out that it is the PTO (not the applicant) which creates the need for divisional applications. Further, they neglect to point out that the PTO gets added revenue from the divisionals created by restriction requirements AND that the burden of examining divisionals is less than examining unrelated applications.
Amgen's original application ultimately resulted in seven patents. The first expired on Oct. 27, 2004. The others expire between 2012 and 2016 -- three decades after the initial discovery.
In contrast, Amgen's European patent for Epogen expired Dec. 12, swinging open the door to potential competitors who want to produce the drug in China and Eastern Europe.
Amgen contends it did not manipulate the U.S. system.
``Extending the patent life has not been part of our strategy and never has been,'' said Amgen spokesman Michael J. Beckerich. Instead, he points to delays caused by a five-year legal battle that pitted Amgen against a rival biotech company, Genetics Institute, over which company was the first to create a genetically engineered Epo.
Jacobs does bring up a different issue, that of FDA approval of generic "equivalents" of biotech products. This is a different problem from the "multiple patent" issue.
-->Even when biotech patents expire, companies have used the legal system to keep out generic competition.
The biotech and pharmaceutical industries argue that biotech drugs are different from other prescription drug products because they are difficult if not impossible to copy exactly. The companies are thus challenging the authority of the FDA to approve knock-off versions without requiring the same expensive and time-consuming testing required of the originals.
The result: A year after the patents expired on human growth hormone, one of the most expensive medications ever sold, there is still no generic version. The drug, used for treating short stature in children who don't make enough of the hormone themselves, costs as much as $30,000 for a year's supply.
Five companies, including Genentech of South San Francisco, are selling brand-name human growth hormone in the U.S. market -- a result of settlements of bitter patent disputes.
But there's little price competition among the brands, said Dr. Selna Kaplan, a University of California-San Francisco growth hormone researcher. ``You can shift from one to the other, but that doesn't help because they're all the same price,'' Kaplan said.
Recently it looked like that might change. Before he stepped down as FDA commissioner early this year, Dr. Mark McClellan said the agency was considering approval of generic versions of human growth hormone and two other major biotech drugs whose patents have expired, insulin and interferon.
But the biotech industry has deluged the agency with legal petitions to stop those plans.
Genentech's top lobbyist, Walter Moore, argues that there can be small but important differences in different versions of biotech drugs. He cites the example of Eprex, a genetically engineered version of Epo, manufactured and sold in Europe by Johnson & Johnson for treating kidney dialysis patients. A small change in the manufacturing process in 1998 has been linked to potentially deadly complications in 175 patients, who simply stopped making any red blood cells at all.
The generic drug industry says that such fears are unfounded.
``I believe there will have to be clinical trials. They just don't need to be that big,'' said Dr. Carole Ben-Maimon, president of Barr Research, a subsidiary of generic drug-maker Barr Laboratories.
The FDA has put off considering any biotech generics until it completes a series of public workshops on the subject, set to continue next year.
The final decision on how to move ahead could be affected by the current controversy over the safety of several non-biotech drugs, including Vioxx, the arthritis drug that was pulled from the market by manufacturer Merck because of a study showing that the drug increased the risk of heart attacks and strokes.
Going forward, the FDA may require the industry to provide more data or studies prior to product approval, said Kathleen Jaeger, chief executive of the Generic Pharmaceutical Association, which maintains that large-scale testing is unnecessary.
In a non-precedential opinion (per Rule 47.6), the CAFC determined that Crown did not infringe the '987 patent BUT that there was a claim construction error as to Crown's '634 patent (thus, vacate and remand).
The case is about the "geometry of can ends" and is vaguely reminiscent of the 19th century Winans v. Denmead case on the "geometry of railroad cars."
Anheuser initiated suit, seeking a DJ of noninfringement as to Crown's '634 AND infringement as to Busch's '987 patent. Crown counterclaimed for the opposite. This case thus is also in the "be careful of what you wish for" category, because Anheuser, the litigation initiator, so far has ended up on the wrong end of both parts of the action.
As to the '634 patent, Crown contended that the district court erred in reading a "flat" chuck wall limitation into claim 1. The CAFC agreed, citing Dupont ( 849 F3d 1430 ) that where a specification does not require an extraneous limitation it should not be read into the claims. Further, because claim 1 was a product claim, the CAFC declined to read in a process limitation, citing Cordis v. Medtronic, 339 F3d 1352.
There was an argument by Busch about inventor testimony, which was also rejected by the CAFC, citing to Bell & Howell v. Altek, 132 F3d 701.
-->Crown Holdings, maker of about one-fifth of the world's beverage cans, claims that the "Lid of the Future" by Anheuser-Busch and its Metal Container Corp. unit infringes on a patent owned by Crown and used for its "SuperEnd" beverage can.
The dispute centers on efforts in the can industry to save metal costs with a new beverage can end that uses less metal while maintaining its strength and allowing for stacking.
CHRISTINE EVANS-PUGHE, in an article "Small but deadly," reviews some of the issues with toxicity of buckyballs.
-->The first evidence came earlier this year when Eva Oberdorster, an American toxicologist at the Southern Methodist University in Dallas, published a study showing how, after two days of swimming in water containing buckyballs, largemouth bass fish suffered damage to the fat membranes in their brains. Their livers had responded as though there was a toxin present.
The work does not seem to address the instability of buckminsterfullerene to oxygen. That is, unless properly protected from oxygen, buckminsterfullerene reacts with oxygen to make, initially C60O. The story of the reaction of C60 with fluorine (to attempt to form C60F60) is also an interesting one. Part of it involves Henry Selig, then at the Hebrew University of Jersusalem.
Separately, Carbon Nanotechnologies Inc. (CNI) and C Sixty Inc. announced on Dec. 21, 2004 the completion of a merger of the two companies. C Sixty will operate as a wholly owned subsidiary of CNI. C Sixty has patents directed to biomedical uses of fullerenes and methods for modification and synthesis of these compounds.
The In re Crish case decided by the CAFC has an interesting "been there done that" footnote. Footnote 1 basically says because of the many cases on the subject of molecular biology, familiarity with the language of molecular biology is presumed.
Patent applicant Crish lost on anticipation (35 USC 102(b)) based on articles that he authored/co-authored. In the context of a review of the PTO/Board, the CAFC noted a two step process in anticipation. First, determining whether the Board's construction was reasonable (the broadest reasonable construction under In re Morris, 127 F.3d 1048). Second, the factual finding of matching claimed elements to the prior art is reviewed for substantial evidence under In re Gartside, 203 F.3d 1305. Substantial evidence is relevant evidence that a reasonable mind might accept as adequate to support a conclusion. The CAFC also mentioned the "two inconsistent conclusions" language of Consolo, 383 US 607, 620 (1966).
In affirming, the CAFC did diverge from the Board in reasoning. The CAFC noted that the sequence is the IDENTITY of the gene, not one of its properties. The CAFC noted one cannot establish novelty by claiming the properties of a known material, citing among other cases Titanium Metals, 778 F2d 775. There was a debate about whether a certain feature was present in the prior art. Basically, the CAFC indicated if the inference of the PTO was reasonable, the evidence will compel the conclusion UNLESS applicant produces evidence to rebut the inference, citing Spada, 911 F.2d at 708, n.3.
On Dec. 22, 2004, Biovail Corp. stated it has filed suit against Anchen Pharmaceuticals in California and Abrika Pharmaceuticals in Florida after they sought approval through an ANDA under the Hatch-Waxman Act to market a generic version of Biovail's Wellbutrin XL anti-depression drug.
Biovail said it filed the suits on behalf of itself and SmithKline Beecham Corp.
Relevant to the discussion on Judge Posner's blog about the value of trade secrets, the fate of Microsoft in Europe gives another reason why Microsoft (and others) might be preferring patents to trade secrets.
The European Court of First Instance rejected Microsoft's appeal for suspension of punitive measures and the fine levied by Brussels in March, 2004 of 497 million euros remains.
On Dec. 21, 2004, Geron Corp. reported that it received a U.S. stem cell patent for a technology that the company hopes could be used to develop a possible treatment for Parkinson's disease. Stock shares increased 7.6%. U.S. Patent No. 6,833,269 covers the production of human neural cells from human embryonic stem cells. Geron said the patent covers technology that can be used to produce dopaminergic neurons, or the dopamine-producing cells that are lost in Parkinson's disease.
Some of Geron's work has been with the University of Wisconsin (through WARF).
In an agreement announced Dec. 21, 2004, Microsoft has extended a technology-sharing arrangement with Citrix Systems to include a five-year patent cross-licensing plan between the two companies. The deal also calls for Citrix to get access to the source code of Longhorn, the forthcoming version of Microsoft's Windows Server operating system, which is due out in 2007. This follows a cross-licensing deal between Microsoft and Autodesk [see earlier post on IPBiz].
The cross-licensing deal also confirms Microsoft's strategy of obtaining patents, and dealing through licensing, as distinct from using trade secrets. This has relevance to the discussion on Judge Posner's blog about the value of trade secrets. Microsoft values the patent approach to that of trade secrets.
In a design defect case involving a fire arising from a Pop-Tart in a Hamilton Beach toaster, Michael Wald, an EE with no toaster manufacturing experience and no special insight into the qualities of Pop-Tarts, has been qualified as an expert witness.
The judge wrote: "Wald's education and experience in electrical engineering and his experience determining the cause of electrical fires and mechanical malfunctions is sufficient foundation for him to testify as to the design of the toaster which may have resulted in a fire." The judge functioned in the "gatekeeping" role of the judiciary as required under Daubert v. Merrell Dow Pharmaceuticals, 509 US 579 (1993).
In his report, Wald stated that toasters generally have a strip made of two metals that bends when heated. At a certain temperature, the strip touches a rod, which closes the switch contacts and turns off the toaster. Wald said that as far as he can tell, every manufacturer except Hamilton Beach has something between the rod and the toasting chamber to prevent food debris from mucking up the works.
Hamilton Beach had argued that Wald is not an expert as defined under Rule 702 of the Federal Rules of Evidence.
The court disagreed, saying, "In this case, the testing that was performed by Wald was so specific to this situation that it is not reasonable to require that it have been subject to peer review, have a known or potential rate of error, or have general acceptance within the scientific community."
One recalls that in the Dash case on a patent application in the cold fusion area, the court did not require that the evidence relied on by the examiner be subject to peer review.
Agilent Technologies Inc. has filed a lawsuit against Elan Microelectronics Corp. for patent infringement in the U.S. District Court for the Northern District of California. The lawsuit asserts that Elan infringes Agilent's U.S. Patent No. 5,786,804 and U.S. Patent No. 6,433,780 relating to optical mouse sensor technology. Agilent is seeking an injunction and money damages.
Agilent had previously filed a lawsuit against PixArt Imaging Inc. alleging that PixArt infringed Agilent's U.S. Patent No. 6,433,780, which relates to optical mouse sensor technology. In October 2004, the U.S. District Court for the Northern District of California granted a motion by Agilent to add two patents (U.S. Patents No. 5,686,720 and 5,786,804) to the pending patent infringement lawsuit against PixArt.
There has been a settlement between Flo Healthcare Solutions and Jaco / Info Logix concerning litigation over U.S. Patents 6,493,220 and 6,721,178 in the medical workstation area.
-->So our flagship university, like the rest of American society, which it purports to lead by example, appears to be condoning dishonesty instead of punishing it in clear, public and no uncertain terms. Bravo President Summers. Bravo Dean Kagan. Your failure to act accords with the dishonesty that is rampant in society today. And the actions of a flagship should accord with those of the society it leads, shouldn’t they?
Curiously, the episode of "Law & Order" on Saturday, Dec. 18, 2004, had a plotline on improper credit. The dead person was a medical researcher, who was killed via a patch of fentanyl/DMSO applied shortly before jumping into a swimming pool. An initial suspect was her research assistant, with the alledged motive being the removal of the assistant's name from a grant application. The research assistant, as was the case in the earlier episode with the law clerk whose work was plagiarized by the murdered judge, was not guilty of murder. However, in the Dec. 18 episode, the research assistant played a key role in the rest of the plot. He aided the police in conducting a (fabricated) experiment involving (eye movement) responses from a woman in a semi-vegetative state.
The Law & Order episode offers an interesting analysis of incentives. The assistant was punished (in having his name removed from the grant application) for telling the truth about the experiments. The assistant was rewarded (in helping the police) by misrepresenting the experiments. Dean Velvel's analysis of the incentives in the Tribe matter is correct. The unpleasant aspects of the event will be allowed to fade away. For better or worse, the matter will be largely forgotten. The same is true of the various false footnotes of intellectual property articles in recent law reviews.
The authors also noted: -->In one of the rare surveys conducted about plagiarism, two University of Alabama economists this year asked 1,200 of their colleagues if they believed their work had ever been stolen. A startling 40 percent answered yes. While not a random sample, the responses still represent hundreds of cases of alleged plagiarism.
THOMAS BARTLETT and SCOTT SMALLWOOD also discuss mentor vs. protege issues. -->The aura of mutual admiration began to fade in July 2003. That's when Mr. Kirk discovered that Mr. Arntzen had copied large portions of his paper without his permission. About one-third of Mr. Arntzen's article -- which was published as a chapter in the 2004 book Vaccines: Preventing Disease and Protecting Health -- was taken directly from Mr. Kirk's paper, which was published two years before in the book Genetically Modified Foods. The graduate student's paper was not cited, but Mr. Arntzen did mention Mr. Kirk among the dozen people he thanked in the acknowledgements.
One wonders how the absence of peer review influences whether or not something is deemed plagiarized. Most law review articles are not peer reviewed, so does that mean plagiarism does not occur when the author "borrows" text from another? Separately, although Lemley wrote of "rational ignorance" in the Northwestern University Law Review, don't we also have "rational ignorance" on the part of his readers who accept, without analysis, false footnotes, like the comments about Clarke in the Lemley/Moore paper in the 2004 Boston University Law Review? Are law reviews, as they have existed in the past 50 years, on the verge of extinction? Contemplate the following.
On-line electronic law journals will begin to proliferate. [The Appellate Practice & Advocacy Section has an electronic Section Report at http://www.txdirect.net/users/rrichard/appellat.htm.] E-journals will specialize in narrow areas. "The next decade could witness the end of the law review as we know it." Hibbitts, Bernard J., Last Writes? Re-Assessing the Law Review in the Age of Cyberspace, http://www.law.pitt.edu/hibbitts/lastrev.htm.
The next decade could witness the end of the law review as we know it. At first glance, this contention might seem implausible - after all, the law review is the supreme institution of the contemporary American legal academy. Virtually all accredited law schools have one; quite a few have several. Law schools depend upon law reviews for publicity and prestige. Law professors depend upon law reviews for publication and promotion. Law students depend upon law reviews for education and employment.
Yale's Fred Rodell made it plain that he had had enough. In his Virginia Law Review article "Goodbye to Law Reviews"59 (which in later years would ultimately, and perhaps ironically, become the most-cited law review article on law reviews) he declared that there were two problems with legal writing in general, and law review writing in particular: "One is its style. The other is its content"
Speaking from the bench of the United States Supreme Court in 1911, former commercial law journal editor Oliver Wendell Holmes Jr. dismissed law reviews in general as "the work of boys".
Under increasing pressure to write, many professors moreover lacked the time or the inclination to read others' submissions or give quality advice.151 In this context, the editorial process was left "in the hands of young people with little experience in evaluating legal skills, few standards by which to do so, natural naivete, and scant regard for the institutional future."
It is no accident that James Lindgren, whose interests run from law and sociology to legal history, has lately written that "in other parts of the academy, legal journals are considered a joke. Scholars elsewhere frequently can't believe that, for almost all our major academic journals, we let students without advanced degrees select manuscripts."
One reform has entailed the formal or informal adoption of editorial policies more explicitly deferential to faculty authors: in 1994, for instance, the articles editors of the University of Chicago Law Review publicly promised to show "substantial deference", by which they meant that they would respect the author's "voice" and would give the author final say on whether suggested changes would be made.
The case for the self-publishing of legal scholarship on the Web is clear and strong. Law professors working at terminals with an Internet connection to the Web need not worry any more about whether the subject of a piece is too esoteric, too doctrinal, too complicated or even too impolitic for law review editors; we are free to write and publish on the topics of our choice. This freedom might give us a useful antidote to the substantive (conservative or "trendy") sameness of the reviews as they now exist. On the Web, we need not endure months of frustrating or embarrassing delay while our papers are judged, peer-reviewed, edited or printed in formal journals; we can disseminate our work instantly, as soon as we are satisfied with it. Our work can appear when we want it to, as opposed to when someone else's printing and publication schedule allows it to appear. On the Web, we are under no compulsion to tolerate the indignities and inaccuracies of line-editing: we can present our own work in our own terms, in our own "voice", in our own words, in our own ways. On the Web, we need not cater to the technologically- conservative expectations of peer-reviewers or even of editors themselves; on the Web, we can "push the envelope", constructing our presentations in what we regard as the most technologically-effective manner. On the Web, we need not turn our backs on our own work once it is printed, without the benefit of revision, correction or change; we can conveniently and immediately improve our own articles days, months or even years after initial publication, without going through an editorial middleman. On the Web, we can even save money: if the practice of Web self-publishing becomes sufficiently generalized, our institutions will no longer have to spend hundreds of thousands of dollars paying for both the publication of our own (print or electronic) law reviews and our subscriptions to the law reviews of others.
Sanofi-Aventis has clearance from the U.S. patent office to obtain reissue on a patent for Lovenox, an anti-thrombosis drug threatened by competition from generic versions, the world's third-largest drugmaker said on December 20, 2004.
Based on the United States Patent Office's decision, the "618" [5,389,618] patent of the blockbuster drug could be reissued towards the middle of 2005 in the United States, Sanofi-Aventis said.
A heterogeneous intimate admixture of sulfated heparinic polysaccharides, such sulfated polysaccharides having a weight average molecular weight less than that of heparin and said admixture consisting essentially of from 9% to 20% of polysaccharide chains having a molecular weight less than 2,000 daltons from 5% to 20% of polysaccharide chains having a molecular weight greater than 8,000 daltons, and from 60-86% of polysaccharide chains having a molecular weight of between 2,000 and 8,000 daltons, the ratio between the weight average molecular weight and the number average molecular weight thereof ranging from 1.3 to 1.6 said admixture (i) exhibiting a bioavailability and antithrombotic activity greater than heparin and (ii) having an average molecular weight of between approximately 3,500 and 5,500 daltons.
Accordingly, a major object of the present invention is the provision of novel combinatory immixtures of particular heparinic polysaccharide fractions, such novel immixtures being especially useful for the prophylaxis and treatment of acute thrombotic events/episodes.
Indeed, it has now surprisingly and unexpectedly been found that mixtures of both high and low molecular weight heparinic polysaccharides, nonetheless having an average molecular weight less than that of heparin, exhibit desirable balance of antithrombotic/anticoagulant activity. Contrary to the direction of the prior art, a certain fraction of relatively high molecular weight heparinic polysaccharides and a certain degree of heterogeneity are required to provide such balance of biological activity.
-->This doctrine has been used to combat what some commentators describe as a frequently "used and abused" practice of "continuation" applications.
The term "continuation" is not used to describe a patent applicant's ability to get perpetual "bites at the apple" by resubmitting applications. Under current law, the patent term is limited to 20 years from the date of filing of the earliest priority application. There is nothing "perpetual" about this. Further, if the applicant submitted the same claims in a later continuation application with no different argument, the applicant would get an immediate "final" rejection of the claims in the continuation application. Of "withdrawals from issue," one notes that they are not frequent and most typically occur because of newly uncovered prior art. Further, if an applicant merely wanted broader claims, the applicant would take allowance of the application with narrower claims (and file an application with broader claims), rather than abandon the application with narrower claims.
Later, the court mentions the BULR article again: See, e.g., Lemley and Moore, supra, at 65 (noting that "In the last ten years, [the courts] created an entirely new defense of prosecution laches." The authors later note, however, that prosecution laches is really a "revived" defense).
n6 "Analyzing the 2,224,379 patents that issued from 1976 through 2000, two commentators found that prosecution of these patents 'took an average of 2.47 years from the earliest claimed filing date to issuance date.'" Pls.' Mem. in Supp. of Mot. for Prelim. Injunction at 29 n.8 (quoting Mark A Lemley & Kimberly A Moore, "Ending Abuse of Patent Continuations," 84 B.U. L. Rev. 63, 71 (2004)).
>> One of the oddest things to an outsider about the United States patent system is that due to continuation practice it is impossible for the U.S. Patent and Trademark Office (PTO) ever to finally reject a patent application.
>> Continuation applications have led to abuse of the patent prosecution process.
>> and what benefits they confer may be outweighed by their potential for mischief.
+++>Perhaps I am missing something by only reading the abstract but, aside from the misleading premise that it is "impossible...to ever finally reject an application", what is inherently bad about continuations that this author predicts that "The world would probably be a better place if they were abolished"?
Moreover, the article had been criticized in the legal literature.
The argument by Quillen/Webster and Lemley/Moore has been that continuing application practice (including continuations, continuations-in-part, divisionals) both diminishes patent quality (as manifested by an elevated grant rate) and consumes resources at the PTO for aggressive re-argumentation. Lemley/Moore asserted that there is no such thing as a final rejection at the PTO.
The idea that there is an elevated grant rate has been challenged, first by Robert Clarke. The article by Lemley and Moore in the Boston University Law Review misrepresented the work of Robert Clarke on patent grant rate. Contrary to what Lemley and Moore said, Clarke did not assume that every continuation application resulted in a patent. With this assertion of Lemley and Moore invalidated, there is nothing within the Lemley and Moore article to distinguish between the models of Clarke and those of Quillen/Webster and no justification for saying that the patent grant numbers of Quillen/Webster are the best we have. In fact, they are not.
If you're interested in applying for a patent, contact your attorney to act promptly. You need to secure your rights and file continuation and divisional applications. Otherwise, you run the risk a court ruling involving the laches doctrine when you try to enforce the validity of the patent.
The technology concerns using alpha 1-antitrypsin, or AAT, for treating hereditary emphysema and studying AAT for the treatment of inflammatory ear disease and asthma. The fight has been severe.
Judge Paul Katz was unhappy with both sides.
"This court has deep concerns with respect to the conduct of the plaintiff, Dr. Allan Wachter, and with the respect to the conduct of the defendants, John Lezdey and Jarett Lezdey, throughout this litigation," Katz said, according to court transcripts. "This court has little doubt that the Wachters may have been threatened and that certain Lezdey properties may have been burglarized, but this court believes that both plaintiffs and defendants have such animosity toward one another, that they have deeply exaggerated their fears and the nature of their confrontations."
"You know this is one of these things where I shouldn't say too much other than that the whole case was a complete atrocity. One of these days we need to write up a pretty thorough account of what happened during the case, but it really opened up my eyes to patents and the American legal system... it was quite bizarre."
Anybody interested in writing up this saga?
Jason McIsaac has a discussion of the first video game, stated to have been created in 1958 by William A. Higinbotham at Brookhaven National Labs.
-->The black-and-white game consisted of just two lines and a dot. The lines were shaped like an upside-down “T,” forming the net as though viewed from the side. The dot was the ball. The ﬁrst video game was also the ﬁrst multiplayer video game — two players bounced the ball back and forth over the net. No paddles or players were visible onscreen. And you had to keep score in your head, unlike the somewhat similar Pong, which wouldn’t be released for another 14 years.
Willie Higinbotham did not file patents on the game, because he was a government employee and would achieve no direct benefit. [remember this theme in the history of radio patents, wherein one of the pioneers was an employee of the U.S. weather service and lost out big time?] Higinbotham did have US patents in other areas.
The first patent application for a video game was filed by Ralph Baer on January 15, 1968. PART of the first ever commercially available home videogame system did superficially resemble Higinbotham's game [but was developed by Baer] and was released to Magnavox dealers as the 'Odyssey' in May 1972. Of relevance to the Nichia blue LED saga, Baer offered the deal to RCA, and they turned it down.
Higinbotham did become involved in patent activity. When video games became big business in the late ‘70s and early ‘80s, several lawyers interviewed and took depositions from Willie Higinbotham, as the issue of who owned video game technology and who truly created Pong erupted between Atari and Magnavox. In July 1976, Magnavox offers Atari a settlement of a pending suit claiming that PONG violates several Magnavox Odyssey patents. For $700,000, Atari became a "prepaid licensee". Magnavox's generosity in consideration of Atari's fledgling size will work out as a coup for Atari. Soon, Atari grows substantially and retains rights to the patents as a prepaid licensee.
Some patents of Ralph H. Baer include 3,659,285 [Televison Gaming Apparatus], 3,728,480 [Television Gaming and Training Apparatus] , 3,737,566, 3,921,161, 3,993,761, RE28,598 and 4,034,990 [Interactive television gaming system, cited by 32 patents between 1977 and 2004]. Ralph Baer was at the independent inventors conference on August 21, 2004.
During the lawsuits, the opposition (Bally-Midway, Seeburg, etc) tried to make the judge believe that our circuits were analog and theirs were digital and hence they didn't fall under the Claims of our patents. The judges ruled otherwise and saw through this ploy in a hurry.
So forget analog computers as a means of playing home "video" games, except in the context of a demo in a lab environment where one or more analog computers were sitting around and one could temporarily borrow one for a "fun" ballistics demo (like Higginbotham's so-called tennis game).
After ten years of litigation in courts from Chicago to San Francisco we collected many tens of millions of dollars. I spent a great deal of time working with our lawyers and testifying in court. The outcomes of all of our lawsuits were completely successful (for our side) and the infringers uniformly had to cough up large sums of money. At the same time, we (Magnavox under the Sanders patents) had well over a hundred patent licensees all over the world in the mid-seventies and collected large amounts of license income from those licenses, also.
We won our lawsuits because our patents covered both what is termed "means plus function"...i.e. we showed in the patents and claimed the concepts of the interaction of machine controlled screen symbols (such as a ball) and player controlled symbols such as the player paddles ( the functions). We also showed how this interaction could be accomplished (the means). Any game made by a manufacturer that exhibited the type of interaction defined by our patents was found to be infringing...and the judges in Federal District Courts and in the Court of Appeals all saw it that way.
I/We did not see it but heard about the demo of the first Pong unit built by Alan Alcort about September of 1972. The minute we got wind of its existence, it was clear that there had to be some reason why a ping-pong arcade game (of all things) popped up from nowhere. It did not take long to find out that Nolan Bushnell and other Nutting Associates employees had signed the guest book at a Magnavox new-product demonstration at the Airport Marina in LA (on May the 26th, 1972 I believe) and that they (including Nolan Bushnell) had played the Odyssey ping-pong gamed hands-on there. Later denials by Bushnell and others in court or in depositions (or to the press) that playing the Odyssey ping-pong game had nothing to do with creating the Pong game were found less than credible by the courts and, in any event, defy logic and common sense. Bushnell's 1972 Computer Space game (being produced by Nutting Associates) was a commercial failure because it was too hard to play. When the visitors saw and played the Odyssey game, at least one light went on in Nolan Bushnell's head: Hey this is neat and easy to play! And secondly, somewhere along the line Bushnell recognized that there was such a thing as a consumer home game market (as introduced by the Odyssey game) and that 40 million homes are a slightly larger base for a new business than a few thousand arcades. And so Atari entered the home video game business in 1975 and made big success of it. But Odyssey had shown the way! With 360,00 games out there by early 1975, it was also a resounding success.

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text:
CIVIL ACTION commenced in the Superior Court Department on April 30, 1990.
Following review by this court, 424 Mass. 501 (1997), motions for judicial recusal, to vacate prior orders, for relief from judgment, and to alter or amend a supplemental judgment were heard by Maria I. Lopez, J.
Edward J. Barshak (Christine M. Netski & Susan A. Hartnett with him) for Demoulas Super Markets, Inc., & others.
Robert C. Gerrard (Carol R. Cohen & Thomas S. Fitzpatrick with him) for the plaintiff.
LYNCH, J. The defendants appeal from a Superior Court judgment denying their motions for judicial recusal, to vacate all prior orders, and for relief from judgment. The defendants also appeal from the entry of a supplemental judgment after remand. We granted the defendants' application for direct appellate review. For the reasons set forth below, we affirm the denial of the recusal motion. However, we remand the supplemental judgment to the Superior Court for further proceedings in accordance with this and our earlier opinion. Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501 (1997) (Demoulas I).
Facts. The facts surrounding the dispute between the parties are more thoroughly set out in Demoulas I.
The present case arises from a shareholder derivative action, brought in 1990 by Arthur S. Demoulas, on behalf of Demoulas Super Markets, Inc. (DSM), and Valley Properties, Inc. (Valley), against Telemachus A. Demoulas and others, alleging that the defendants fraudulently and in breach of their fiduciary duties, conspired to divert corporate opportunities from DSM and Valley to Market Basket, Inc.; Doric Development Corporation, Inc.; Lee Drug, Inc.; and 231 Realty Associates.
The defendants' pretrial motions included a motion for judicial recusal which was denied. [Note 2] After a jury-waived trial, judgment was entered for the plaintiff, and the defendants appealed.
At about the time that the appeal in Demoulas I was entered in the Appeals Court the defendants began their fifteen-month investigation regarding allegations of ex parte contact and improper conduct involving the trial judge and the plaintiffs attorney. On March 13, 1997, we affirmed the judgment in all material respects. Demoulas I, supra at 503-504. In accordance with the judgment, a transfer of assets from Market Basket and 231 Realty Associates was scheduled to occur on June 28, 1997, and June 30, 1997. The defendants filed the recusal and other motions now before us on June 25, 1997, almost two years after the entry of judgment in favor of the plaintiff, mere days before the transfer was to take place.
with the lead counsel for the plaintiff in a restaurant owned by the judge's husband during the pendency of the Superior Court trial. The defendants argued that recusal was required and that they were entitled to relief from judgment based on Canon 3 of the Code of Judicial Conduct, which provides that '[a] judge should disqualify himself in a proceeding in which his impartiality might reasonably be questioned . . . ." S.J.C. Rule 3:09, Canon 3 (C) (1), as appearing in 382 Mass. 811 (1981).
The judge referred the defendants' motions to the Chief Justice of the Superior Court, who referred the pending motions back to her. [Note 3] In his order, the Chief Justice concluded that it was within the discretion of the judge to decide whether recusal was required. He ruled that the judge was in the best position to hear and to decide the motions, and noted his confidence in her ability to be impartial.
"(1) [H]aving examined my conscience, I know there is no truth to the allegations and thus no reason to recuse myself or to vacate the judgments; (2) the motion is untimely; (3) having examined my conscience, I can impartially discharge the two remaining issues in these cases; (4) no objective, knowledgeable member of the public would find a reasonable basis for doubting this Judge's impartiality with regards to these two issues; and (5) the attorneys involved in this motion have not complied with their duty . . . to conduct a reasonable inquiry in order to acquire knowledge, information and form a belief that the allegations made in this motion have a basis in fact."
judgment in this case. The supplemental judgment did not contain any provision regarding investment credits due to the defendants, but did however, contain a provision regarding tax credits for taxes paid by the individual defendants. The defendants' motion to alter or to amend the supplemental judgment was denied on November 3, 1997.
1. The recusal motion. The defendants' main contention is that the judge erred in denying the defendants' motion for recusal under Canon 3 (C), [Note 4] and relief from judgment pursuant to Mass. R. Civ. P. 60 (b) (6), 365 Mass. 828 (1974).
the facts before us, no evidentiary hearing was required and that the denial of the defendants' motions was not error.
(a) Timeliness of the recusal motion. The judge ruled that the motion was not timely. The defendants contend the timeliness of the motion is not relevant to the determination whether the defendants are entitled to an evidentiary hearing before another judge. Our analysis takes into consideration both the timeliness of the motions and the substance of the allegations.
Substantial authority exists that recusal motions filed after trial are presumptively untimely at least absent a showing of good cause for tardiness. "Discharge of a judge from a case after hearings have begun is unusual and ought not to be done in the absence of compelling reasons." MacCormack v. Boston Edison Co., 423 Mass. 652 , 665 (1996), quoting Edinburg v. Cavers, 22 Mass. App. Ct. 212 , 217 (1986). See Commonwealth v. Davis, 13 Mass. App. Ct. 179 , 187-188 (1982). "[A] motion for recusal filed weeks after the conclusion of a trial is presumptively untimely absent a showing of good cause for its tardiness." United States v. Studley, 783 F.2d 934, 939 (9th Cir. 1985), [Note 7] citing United States v. Hurd, 549 F.2d 118, 119 (9th Cir. 1977). See Waggoner v. Dallaire, 649 F.2d 1362, 1370 (9th Cir.
1981) ("A disqualification motion filed after trial and judgment is generally considered untimely"); Crawford v. Crawford, 429 Pa. Super. 540, 550-551 (1994) (failure to request recusal before judge has ruled on substantive matter precludes right to have judge disqualified; court affirmed denial of recusal motion on grounds it was waived and stated judicial bias may not be raised for first time during posttrial proceedings).
one seeking the disqualification of the judge must do so at the earliest moment after knowledge of the facts demonstrating the basis for such disqualification." United States v. Kelly, 519 F. Supp. 1029, 1050 (D. Mass. 1981). "[A] party, knowing of a ground for requesting disqualification, can not be permitted to wait and decide whether he likes the subsequent treatment that he receives." Matter of United Shoe Mach. Corp., 276 F.2d 77, 79 (1st Cir. 1960).
"The employees referenced in the motion were all readily available to the investigators and defendants' counsel during this entire nineteen month period. At no time prior to this motion was any allegation made by defendants' counsel or any third party impugning my conduct and defendants did not raise this issue when they argued for my recusal in their appeal to the Supreme Judicial Court. Thus, this motion was not timely filed."
Nor are we required to turn a blind eye to the fact that the motion was filed at the eleventh hour after years of maneuvering by the defendants on the losing side of a judgment in excess of one hundred million dollars.
In these circumstances, there is an obligation on the part of the movants to make a strong showing that they were not waiting until the last minute as a trial tactic. If the parties were under no obligation to file a motion for recusal immediately on obtaining information suggesting grounds for such a motion, litigants would be encouraged to hold recusal motions until after the judge had decided the case. A party disappointed with the decision would "then pull the recusal option off the shelf in hopes of locating a more sympathetic trier." In re Cargill, Inc., 66 F.3d 1256, 1263 (1st Cir. 1995), cert. denied, 517 U.S. 1156 (1996). "The judicial process can hardly tolerate the practice of a litigant with knowledge of circumstances suggesting possible bias or prejudice holding back, while calling upon the court for hopefully favorable rulings, and then seeking recusal when they are not forthcoming." Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451 , 464 (199 1), quoting Franks v. Nimmo, 796 F.2d 1230, 1234-1235 (10th Cir. 1986). "[T]he risk of injustice to the parties weights far more heavily on [the plaintiff's] side of the scales . . . and the public's confidence in the judicial process . . . would be more likely to be undermined if the law were to countenance a sundering of the result [over three years after the judgment was entered] later on grounds other than the merits." Anthony's Pier Four, Inc., supra, quoting Polaroid Corp. v. Eastman Kodak Co., 867 F.2d 1415, 1420 (1st Cir.), cert. denied, 490 U.S. 1047 (1999). "[T]iming of the recusal motion (some eleven months after the judge had started presiding over the many aspects of this complicated litigation) bespeaks an attempt on [the movant's] part to minimize the disastrous effect upon her case of her admissions of perjury and document fraud." Edinburg v. Cavers, 22 Mass. App. Ct. 212 , 218 (1986).
The timing of this motion makes it inherently suspect. The defendants have failed to demonstrate that the filing of this motion was not a last-minute attempt to nullify an adverse judgment.
Paul A. Finn, an affiant with no apparent interest in the case, stated that he recalled seeing the judge and the plaintiff's lead counsel sitting at a table in a restaurant between the fall of 1993 or early winter of 1994. His affidavit, however, makes no reference to what was being said, how long the judge was there, or the circumstances of the meeting. See Carbana v. Cruz, 595 F. Supp. 585, 587 (D.P.R.), aff'd, 767 F.2d 905 (1st Cir. 1984) (affidavit for disqualification which merely alleged "connection" between certain attorneys in case and judge, without specifying nature, time, conditions, or circumstances of such "connection," was merely conclusory and legally insufficient to warrant recusal [28 U.S.C. s. 144]).
attendant. [Note 12] While we emphasize that even this limited social contact between a judge and a lawyer appearing before her is to be discouraged, we think it not advisable to promulgate a rule that every chance meeting or a public social discussion between judge and lawyer requires an evidentiary hearing before another judge to ascertain whether anything occurred that might lead one reasonably to question the impartiality of the judge. See In re United States, 666 F.2d 690, 695 (1st Cir. 1981) (charge of partiality must be supported by factual basis and judge must ignore rumors, innuendos, and erroneous information).
We conclude the denial of the recusal motion was not erroneous considering that it was the second recusal motion coming at the end of complex litigation decided against the moving party, with no substantial justification for its lack of timeliness, where the defendants had some of the information at their disposal for as much as fifteen months, and where the defendants' affidavits taken at face value were insufficient to establish a reasonable basis for questioning the judge's impartiality. In sum the defendants' motion offers too little, too late. We affirm the judge's denial of the motion to recuse.
"[S]ome revision of the ordered relief [was] necessary to ensure that the defendants [were] not being required to repay more than their actual gains. In particular, the defendants should be given credit for any investments that they have personally made in the affected companies and for any taxes on those companies' profits that they were required to pay. The defendants bear the burden of proving that they are entitled to such credits. . . . Where a corporate fiduciary obtains a gain or advantage through a violation of his duty of loyalty, a court may properly order restitution of the gain, so as to deny any profit to the wrongdoer and prevent his unjust enrichment. See Broomfield v. Kosow, 349 Mass. 749 , 758 (1965); Production Mach. Co. v. Howe, 327 Mass. 372 , 377-378 (1951); Durfee v. Durfee & Canning, Inc., 323 Mass. 187 , 198 (1948)."
We then remanded the case to the trial court to afford the appropriate relief pursuant to our instructions. On remand, the judge entered a supplemental judgment which granted the defendants a credit for the taxes paid by the defendants on the earnings of the business entities. The judge did not make specific findings regarding the credits in this supplemental judgment to which the defendants were entitled for investments they made in the companies.
(a) Deductions for payments of future Federal and State income taxes. The defendants now argue that the supplemental judgment was in error because it failed to provide the defendants with a credit for any additional taxes paid. We agree.
In Demoulas I, we stated that the defendants should be allowed to deduct their tax payments, recognizing "[w]here a corporate opportunity has been wrongfully diverted or a trade secret misappropriated, we have required the transgressor to repay only net profits, not the gross income from sales." Demoulas I, supra at 558, citing Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159 , 174 n.14 (1979); Durfee v. Durfee & Canning, Inc., supra at 203-204. "We have recognized that, where such a deduction is allowed for taxes, it will be necessary to track any tax benefits received by a defendant resulting from repayments made to a plaintiff . . . . Otherwise unjust enrichment would still occur." (Emphasis added). Demoulas I, supra, quoting USM Corp. v. Marson Fastener Corp. 392 Mass. 334 , 346-347 (1984).
The tax credits granted to the defendants were based on the estimated taxes paid on estimated earnings for 1997, rather than actual 1997 earnings. [Note 13] An audit of the companies by the taxing authorities may result in changes of prior years' earnings causing the individual defendants to pay additional amounts for prior tax years. The theory of unjust enrichment requires that the defendants not repay to the plaintiff more than their actual gains, and that DSM be required to credit or to pay the defendants the amount of any additional taxes due as a result of the actual earnings or an audit.
The plaintiff, on the other hand, points out that the judge had already amended the judgment in the stock transfer action, [Note 15] on February 26, 1997, to grant the defendants a credit for their investments in usurped corporate opportunities.
This case is remanded to the Superior Court to make a provision in the supplemental judgment requiring DSM to reimburse the defendants for payment of future taxes, if any, or to pay the taxes directly. The investment credit has adequately been treated in the amended judgment of February 26, 1997, in the stock transfer action. We affirm the judgment of the denial of the recusal motion and the denial of the motion for relief from judgment.
[Note 1] Valley Properties, Inc.; Market Basket, Inc.; Doric Development Corp.; Lee Drug, Inc.; and Telemachus A. Demoulas, Irene Demoulas, Arthur T. Demoulas, Frances D. Kettenbach, Glorianne D. Farnham, and Caren D. Pasquale, individually and, where applicable, as general partners of 231 Realty Associates.
[Note 2] The defendants argued that the judge was biased because she had presided over another action between the same parties. We affirmed the judge's denial of the recusal motion in Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501 , 524-526 (1997) (Demoulas I).
[Note 3] The plaintiff suggests that the defendants cannot properly raise the denial of their recusal motion on appeal because they did not appeal from the order of the Chief Justice of the Superior Court referring the defendants' motions back to the trial judge. The record shows however that the defendants filed a notice of appeal on August 18, 1997. See Mass. R. A. P. 3, as amended, 397 Mass. 1229 (1986); Mass. R. A. P. 4 (a), as amended, 395 Mass. 1110 (1985). See also Richman v. Richman, 28 Mass. App. Ct. 655 , 666 (1990).
[Note 4] The defendants argue that the judge erred in failing to refer the motion to another judge for an evidentiary hearing because she disputed the factual allegations supporting the recusal motion.
[Note 5] "The matter of recusal is generally left to the discretion of the trial judge . . . and an abuse of that discretion must be shown to reverse a decision not to allow recusal" (citations omitted). Haddad v. Gonzalez, 410 Mass. 855 , 862 (1991). See S.J.C. Rule 3:09, Canon 3 (C) (1) (a), as appearing in 382 Mass. 811 (1981).
[Note 6] Usually when a judge is confronted with a recusal motion she follows a two-prong analysis. A "judge [must] consult first [her] own emotions and conscience" to determine whether she is free from bias or prejudice. Id., quoting Lena v. Commonwealth, 369 Mass. 571 , 575 (1976). If the judge determines she is impartial, then she must objectively evaluate whether this was a proceeding in which "[her] impartiality might reasonably be questioned." Haddad v. Gonzalez, supra, quoting S.J.C. Rule 3:09, Canon 3 (C) (1). But in Furtado v. Furtado, 380 Mass. 137 , 140 n.1 (1980), this court stated that "[a] judge may not rely on his private knowledge of particular facts that are not matters of which he can take judicial notice." The closest case to this one is MacCuish v. Volkswagenwerk A.G., 22 Mass. App. Ct. 380 , 391-392 (1986), where the trial judge and the plaintiff's counsel disputed the nature of what was said in chambers. The court determined that there was no basis for recusal where the entire proceeding revealed no evidence of bias. Other State courts have addressed the narrow issue whether the party moving for recusal is entitled to a heating before another judge where the trial judge contests the veracity of the affidavits. See North Carolina Nat'l Bank v. Gillespie, 291 N.C. 303, 310-311 (1976) (trial judge should have either disqualified himself or referred matter to another judge before whom he could have filed affidavits in reply or sought permission to give oral testimony); Municipal Publications, Inc. v. Court of Common Pleas, 507 Pa. 194, 196 (1985) ("where the judge has personal knowledge of disputed facts and permits himself to be a crucial witness in the proceedings . . . [he] mast recuse himself and the issue of impartiality must be litigated before and decided by another judge").
[Note 7] Federal courts are governed by the Federal recusal statutes, 28 U.S.C. s. 144 and 455 (1994). We therefore only rely on the Federal decisions by way of analogy.
"Whenever a party to any proceeding in a district court makes and files a timely and sufficient affidavit that the judge before whom the matter is pending has a personal bias or prejudice either against him or in favor of any adverse party, such judge shall proceed no further therein, but another judge shall be assigned to hear such proceeding.
"The affidavit shall state the facts and the reasons for the belief that bias or prejudice exists, and shall be filed not less than ten days before the beginning of the term [session] at which the proceeding is to be heard, or good cause shall be shown for failure to file it within such time. A party may file only one such affidavit in any case. It shall be accompanied by a certificate of counsel of record stating that it is made in good faith."
"(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.
"(iv) Is to the judge's knowledge likely to be a material witness in the proceeding."
[Note 8] The judge stated that "[t]he Movants' strategy herein epitomizes the gamesmanship, judge-shopping, and sandbagging which the First Circuit has condemned." In re Petit, 204 B.R. 271, 274 (Bankr. D. Me. 1997), citing In re Cargill, Inc., 66 F 3d 1256, 1263-1264 (1st Cir. 1995), cert. denied, 517 U.S. 1156 (1996).
[Note 9] Allegations which require a hearing to determine the credibility of the judge against whom recusal is sought should, of course, be decided by another judge. See Dyson v. Sposeep, 637 F. Supp. 616 (N.D. Ind. 1986).
[Note 10] Social contact between the judge and litigants in the course of trial is certainly disfavored and should not occur. See Selfridge v. Gynecol, Inc., 564 F. Supp. 57, 58 (D. Mass. 1983) (trial judge personally acquainted and shared professional friendship with plaintiff's counsel similar to what judge had with many members of local bar did not require recusal). See also United States v. Balistrieri, 779 F.2d 1191, 1204 (7th Cir. 1985), cert. denied sub nom. DiSalvo v. United States, 475 U.S. 1075 (1986) (judge did not abuse discretion in denying recusal motion and hearing was not required before another judge where affidavits considered together did not require recusal under 28 U.S.C. s. 455[b] [affidavit including alleged remark of judge at social gathering had character of rumor or gossip, not specific as to time, place, or source, did not require recusal]).
[Note 11] The affidavit from John Labadini, former manager of the Charles Restaurant, states that he recalled seeing the judge and the plaintiffs lead attorney sitting at a table on at least two occasions ("for conversation and drinks"). Labadini's employment was terminated on March 31, 1997, when the restaurant was closed.
[Note 12] John Labadini stated that, on at least two occasions, the plaintiff's lead attorney and the judge were alone together outside the restaurant under an awning for ten to fifteen minutes.
[Note 13] The defendants state that the tax returns for Market Basket and 231 Realty Associates have now been prepared and reflect that additional payments are owed. They state that the individual defendants' tax liability on account of the actual earnings of the companies for the 1997 tax period is approximately $3,200,000 greater than the estimated taxes paid prior to the entry of the supplemental judgment.
[Note 14] The defendants argue that, if the judgment in the stock transfer action is reversed on appeal, the entire investment credit would disappear, leaving DSM unjustly enriched over twenty-eight million dollars. They also argue that the plaintiff suffers no harm if we decide to transfer the investment credit from the stock transfer action to this case. Additionally, they argue that, if we decline to transfer the investment credit to this action, they request that the execution on the supplemental judgment be stayed until all the proceedings in the stock transfer action are concluded.
[Note 15] Paragraph 6 of the judgment states: "The parties agree that Defendant Children invested a total of $28,205,000 of their DSM and Market Basket Subchapter S distributions in DSM related entities. Equitable considerations entitle Defendant Children to a credit for these investments. Because DSM and its shareholders are the beneficiaries of these investments, DSM shall reimburse Defendant Children."

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Addition of a rebuttable presumption of “identify of interest” affiliation pursuant to 13 C.F.R. § 121.103(f) based on 70% economic dependence between companies (for more information see our previous blog).
In addition to this rule, the SBA recently issued a “Statement Of General Policy” relating to the interaffiliate sales exclusion.
Prior to these recent revisions, the regulation dealing with affiliation (13 C.F.R. § 121.103) contained a narrow exception applying to certain joint ventures. Specifically, there was no “affiliation” between two or more joint venture members if the procurement was: (1) bundled, or (2) “large” – large meaning, in this context, that either: (a) in a revenue-based size standard, the value of the procurement was greater than half the size standard corresponding to the NAICS code assigned to the contract; or (b) in an employee-based size standard, the value of the procurement was over $10 million.
Under the new regulations, a joint venture will be considered a “small” business for federal procurement purposes as long as each individual joint venture partner individually qualifies as a “small” business under the relevant contract. Essentially, this rule expands the exception to affiliation for all joint ventures where both concerns making up the joint venture are individually “small.” Of course, each small business must not otherwise be affiliated.
This revision to the regulations will make it much easier to enter into JVs in connection with set-aside contracts. Now, as long as both JV partners are individually “small”, the JV is considered “small” as well!
When the federal small business set-aside programs were created, there was some concern about “pass-through” situations – i.e. situations in which a small business, awarded a set-aside contract, would subcontract almost all the contract work to a large business. This kind of set-up would divert government dollars from the intended small business beneficiaries, and thereby negate the purpose of the agency’s small business programs. To avoid this problem, SBA enacted 13 C.F.R. § 125.6, which establishes minimum self-performance requirements for small business prime contractors performing various types of set-aside contracts.
Under the old version of the regulation, compliance with the performance of work requirements was determined using a percentage threshold, which the prime contractor had to meet. That percentage varied based on whether the acquisition was for services, supplies, general construction, or specialty trade construction. The revised regulation approaches the situation a little differently. The overall goal remains the same: Keep a minimum of small business dollars in small business pockets. However, as the SBA explains, the revised regulation “creates a shift from the concept of a required percentage of work to be performed by a prime contractor to the concept of limiting a percentage of the award amount to be spent on subcontractors.” For instance, rather than requiring a contractor to self-perform 15% of the contract work, the revised regulation mandates that the prime contractor cannot subcontract more than 85%. While the old rule created a threshold, the new rule uses a sort of cap and that’s a slightly different way of looking at things.
Another important change concerns subcontracts to “similarly situated entities.” Under the revised subcontracting limitation regulations, such subcontracts will not count to the above-mentioned cap. A similarly situated entity is defined as “a small business subcontractor that is a participant of the same small business program that the prime contractor is a certified participant and which qualifies the prime contractor to receive the award.” In other words, a HUBZone could subcontract to another HUBZone, or a 8(a) could subcontract to another 8(a), without counting those subcontracts towards the applicable limit. A common question is how to calculate compliance when subcontractors themselves enter into subcontracts. When drafting the revised regulations, the SBA was concerned that if compliance was determined by looking at first tier subcontractors only, a first tier “similarly situated” subcontractor could, in turn, pass its subcontract through to a large or otherwise not similarly situated entity through a second subcontract. In doing so, they could circumvent the purpose of the regulation entirely. To address these concerns, the SBA explained in the final rule that work that is not performed by the employees of the prime contractor or employees of first tier similarly situated subcontractors will count towards the subcontracting cap.
An additional change under the revised regulation relates to how the percentage of work is calculated. Under the old rule, some self performance requirements were calculated using “the cost of the contract incurred for personnel” while others used “the cost of the contract (not including the costs of materials)” or “the cost of manufacturing the supplies or products (not including the costs of materials).” These small differences between the manner of calculation caused a lot of confusion. It often proved very difficult for contractors to figure out what, exactly, they had to do, or what work they had to perform, in order to be compliant.
The revised regulation is much simpler. Regardless of whether the contract is one for services, supplies, or construction (general or specialty), the subcontracting limitations are described in terms of “the amount paid by the government to [the prime contractor].” That said, construction contractors will still have to exclude costs of materials from their calculations. Even so, this revision will make it easier to determine exactly how much you can subcontract and still be compliant.
The revised subcontracting limitation regulations have been streamlined, which should make it much easier to analyze whether or not you are in compliance. In addition, the new “similarly situated entity” subcontracting exception should make it much easier to subcontract work while remaining compliant. That said, self-performance is always a complicated issue, and you should check with a legal expert if you have any questions about your compliance with the revised regulation.
13 C.F.R. § 121.103(f) discusses the circumstances where an “identity of interest” between two or more persons or entities leads to a finding of “affiliation” among those persons/entities, and, consequently the “aggregation” of their respective assets for purposes of determining size. “Identity of interest” affiliation encompasses two different kinds of affiliation.
The first type of identity of interest affiliation is based on a familial relationship. The SBA has interpreted 13 CFR 121.103(f) as creating a rebuttable presumption that family members with identical or similar interests must be treated as one person (with their individual ownership interests aggregated), unless the family members are estranged or not involved with each other’s business transactions. However, decisions analyzing familial relationship-based identify of interest affiliation have been inconsistent and hard to interpret. For that reason, the SBA proposed to add additional guidance on how to analyze this issue, narrowing the types of familial relationships that result in a presumption of affiliation.
The final rule explains that the presumption of “identify of interest” affiliation based on familial relationships applies to firms that conduct business with each other and are owned or controlled by married couples, parties to a civil union, parents, children and siblings. This presumption may be rebutted by showing a clear line of fracture between the firms. It is notable that the rule suggests that affiliation is presumed only if the firms conduct business with each other. This appears to allow family members who own firms to escape the presumption of affiliation so long as the companies are not engaged in any business transactions with each other.
Contractors must make sure to be extra careful when doing business with other companies owned, run by or employing spouses, parents, children and siblings of the contractor’s owners, executives, or employees. Failure to observe proper formalities could result in a finding of affiliation.
The second type of an “identity of interest” affiliation is based on economic dependence. Under the new rule, if the firm in question “derived 70% or more of its receipts from another concern over the previous three fiscal years,” there is a presumption of affiliation. Under the old rule, there was no such fixed percentage, however, the 70% figure was regularly used by SBA’s Office of Hearings and Appeals in its decisions. The presumption may be overcome by a showing that the firm in question is not solely dependent upon the other firm. The final rule suggests that this presumption may be rebutted by, for example, a showing that a concern has only been in business for a short period of time, and therefore has only been able to secure a limited number of contracts.
As many of you already know, Federal contractors should be very careful when doing business with the same businesses over and over. Constant subcontracting to/from the same company, or any other interactions leading to 70% dependence on another company, could result in a finding of affiliation.
13 C.F.R. § 121.104(a) explains how the SBA should calculate a company’s “receipts” for purposes of determining that company’s size. That regulation provides that a company’s “total receipts” should not include “proceeds from transactions between a concern and its domestic or foreign affiliates.” The purpose of this interaffiliate transactions rule is to prevent “double counting of income” during the size determination process.
Based on that stated purpose, most contractors (and legal experts) believed that the interaffiliate transactions exception operated to exclude, when calculating a company’s receipts, all transactions between a company and any of its affiliates. However, last year, in Size Appeals of G&C Fab-Con, LLC (a case in which Cohen Seglias represented the appellant), OHA reached a different conclusion. Specifically, OHA concluded that the “the interaffiliate transaction exclusion applies only if the concerns in question have a parent-subsidiary relationship and are eligible to file a consolidated tax return.” Many contractors, attorneys, and federal contracting experts felt that this was an improper interpretation of 13 C.F.R. § 121.104(a).
Recent SBA size determinations and decisions of the Office of Hearings and Appeals have limited the exclusion by applying it only to transactions between affiliates that are eligible to file a consolidated tax return . . . The regulation does not include a limitation on the types of affiliates for which interaffiliate transactions can be excluded, and in no way ties the exclusion to a concern’s ability to file a consolidated tax return with the identified affiliate.SBA believes that the current regulatory language is clear on its face. It specifically excludes all proceeds from transactions between a concern and its affiliates, without limitation.
Therefore, the SBA concluded that, going forward, when calculating a company’s receipts, it would not restrict the exclusion for interaffiliate transactions to transactions between a concern and a firm with which it could file a consolidated tax return. Rather, the exclusion for interaffiliate transactions may be applied to all interaffiliate transactions between a concern and a firm with which it is affiliated under the principles in 13 CFR 121.103. However, the SBA noted that contractors seeking to exclude certain transactions under this exception must specifically identify and explain the transactions they seek to exclude, and must also properly document the transactions.
If you have been found affiliated with another company, there might still be hope that you are “small”. Your size standard will be calculated using the sum total of you and your affiliates’ revenue, or employees. But in a revenue-based size standard context, you will now be able to exclude ALL interafilliate transactions, which just might make the difference between falling under or over the “small” business threshold. If you have questions about how to calculate your size, consult a legal or accounting expert familiar with Federal small business procurement.
These changes are all very positive developments. They clarify the regulations, and improve efficiency without circumventing the purpose of the SBA’s small business programs (i.e. the economic development of small businesses through performance of government contracts). It will be interesting to see what further tweaks are needed as these new regulations are used. We will keep you posted in future editions of the Legal Landscape.