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Legal UpdateWinter 2005-2006
Sour Berries: Recent Patent Case Ruling May Halt BlackBerry UseBy Shirley S. Dloomy and Andres F. Quintana With the growing dependence on remote and electronic forms of communication to maintain their competitive business advantages, many professional firms have incorporated the very popular BlackBerry line of wireless email and paging systems into their daily business operations. Among the many specialized applications, the BlackBerry system allows users to send and receive email without physically accessing a computer, thereby dispensing with the need to tow laptops or locate a dial-up Internet service for this purpose. In a short time, the mobile device has become infamously addictive, even earning the moniker “CrackBerry.” However, recent rulings from the nation’s leading court on patent law and the U.S. Supreme Court have renewed the possibility that U.S. service to the versatile BlackBerry may be halted. On October 26, 2005, newly appointed Chief Justice John Roberts denied Research In Motion’s (RIM) last-minute attempt to stay a patent infringement judgment against it. That judgment could now prohibit RIM from selling or providing its BlackBerry handhelds and server software to over a million users in the United States. This high-profile patent lawsuit is not over, as the case heads up to the U.S. Supreme Court and down to the District Court for further proceedings. Its resolution may have a significant impact on businesses across the nation. The Legal Background In November 2001, NTP, a small Virginia-based intellectual property holding company, filed suit in Virginia against RIM, the Canadian manufacturer of the BlackBerry, alleging that several of its patents had been infringed by various configurations of the BlackBerry system. The technology at issue related to systems for integrating existing electronic mail systems with radio frequency wireless communication networks, to enable a mobile user to receive email over a wireless network. In August 2003, the District Court awarded NTP monetary damages totaling $53.7 million. The Court also issued a permanent injunction against RIM, enjoining it from selling, using or importing its BlackBerry systems, software and handhelds in the United States. The injunction was stayed pending a federal appeal. The Legal Battle In The Appellate Court And U.S. Supreme Court In December 2004, the U.S. Court of Appeals for the Federal Circuit in Washington, an intermediate court that oversees all patent appeals in the United States, upheld the District Court’s ruling that RIM’s BlackBerry devices infringe several NTP patents. At that time, however, the Federal Circuit granted RIM permission to continue to market the services in dispute while the case was remanded to the District Court for further review. RIM thereafter filed a petition to rehear the appeal. In March 2005, prior to the Federal Circuit’s reconsideration of its December 2004 opinion, RIM announced that it had reached a $450 million settlement with NTP that appeared to end the protracted dispute. In June 2005, RIM went back to the District Court to enforce the agreement amid signs it was beginning to unravel. The deal subsequently collapsed, with each side accusing the other of adding unacceptable conditions. The battle continued in the appellate courts. In August 2005, a three-judge panel of the Federal Circuit withdrew its December 2004 opinion and definitively upheld some parts and struck down other parts of the District Court’s ruling. Specifically, the Federal Circuit opined that RIM had indeed violated seven of the patents under consideration. However, the Federal Circuit concluded that the District Court had wrongly construed the term “originating processor,” which it defined as “a processor in an electronic mail system that initiates the transmission of a message into the system.” As a result, it upheld the infringement rulings with respect to the claims that do not contain an “originating processor” limitation, but vacated rulings for those that contain the “originating processor” limitation. The Federal Circuit therefore returned the case to the District Court for further arguments over the claims that may have been affected by the flawed definition. In the interim, the Federal Circuit stayed the permanent injunction against RIM, ordering the District Court to revise the 2003 injunction to reflect decisions made on appeal. RIM, however, appealed again, asking that all twelve judges of the Federal Court (referred to as en banc request) reconsider the case. On October 10, 2005, the Federal Circuit refused to hear again RIM’s en banc request and on October 21, the Federal Circuit further refused RIM’s request to suspend the patent infringement lawsuit while RIM appealed the case to the U.S. Supreme Court. RIM immediately filed an emergency appeal with the Supreme Court, asking to suspend the District Court’s judgment until RIM exhausts its appellate options. On October 26, the Supreme Court denied without comment RIM’s request, prompting many to consider whether this latest setback will forecast the end of the road for RIM. Others, however, point out that the court rulings simply mean that the case will now return to the District Court in Virginia for further arguments on the merits of some of the patent claims and a decision on whether to impose the injunction. Ordinarily, imposing such an injunction would likely take many weeks, if not months, making an immediate end to BlackBerry service unlikely. Nonetheless, since about 75 percent of RIM’s business is reportedly in the U.S. market, any termination of operations would be a serious impediment to RIM. RIM also announced that it plans to appeal the Federal Circuit decision to the U.S. Supreme Court, arguing that the “case raises significant national and international issues warranting further appellate review.” In particular, RIM has argued that U.S. patent law should not apply because the controlling BlackBerry software is found on computers in Canada – beyond the jurisdiction of U.S. courts. According to RIM, this case pushes United States laws beyond the country’s borders because the disputed email software at its heart resides only on servers near the company’s head office in Canada. It is unknown whether and when the Supreme Court will review this case. USPTO Reexamination Of The Disputed Patents Following the District Court’s 2003 judgment, the United States Patent and Trademark Office (USPTO) initiated an independent reexamination of several of NTP’s patents at issue in the lawsuit. While the reexamination process has not been completed, the USPTO recently cast doubt on all eight of the patents involved in the dispute, issuing a preliminary rejection of a key patent in the case. If all eight NTP patents being reexamined are eventually overturned, NTP’s court case against RIM would be null and void. NTP has dismissed the USPTO rulings as a common formality in the agency’s lengthy review process and is expected to appeal that decision. NTP can respond to the preliminary ruling, after which the USPTO will issue a final ruling. It is unclear what impact, if any, this development might have on any settlement negotiations between RIM and NTP. NTP has said that it will ask the District Court to confirm the permanent injunction. RIM Co-Chief Executive Jim Balsillie has maintained that RIM has a “workaround” technology designed to avoid the patents in question and that RIM is “committed to supporting [its] market and supporting [its] customers.” U.S. District Court Denies Settlement On November 30, 2005, the District Court ruled that the companies did not reach a valid and binding settlement in March 2005. RIM had renewed its request that the trial court enforce the terms of the settlement. NTP, on the other hand, has maintained that the companies failed to reach a definitive agreement over licensing terms for the patents in dispute. The District Court also denied RIM’s request to stay the case until the USPTO completes its review of the patents at issue. The District Court will likely next consider reissuing an injunction that could halt BlackBerry use in the United States. A ruling could be out as early as January 2006. RIM still hopes that the USPTO rulings, which are independent of the litigation process, will boost its arguments before the trial court against reissuing an injunction until a final ruling by the USPTO. In the meantime, BlackBerry users remain tuned to the highly anticipated outcome of this lawsuit. How The Sarbanes-Oxley Act Fits Into Your Company’s GrowthSince the passage of the Sarbanes-Oxley Act (SOX) in 2002, public companies have dealt firsthand with the heightened financial reporting, disclosure and corporate governance requirements imposed upon them by SOX, as well as by regulations promulgated by the New York Stock Exchange, Nasdaq and others in response to SOX. Although not expressly subject to SOX or these regulations, private companies also have been impacted as the effects of SOX have rippled throughout the business world. Private companies that are on a growth trajectory, including those considering exit strategies such as an initial public offering (IPO) or a sale of their assets or equity to third parties, should review the provisions of SOX and the exchange regulations and select those provisions that would make sense for them to adopt. Although the start-up cost of Sarbanes-Oxley compliance can be great, the benefits for a growing company may be significant, both operationally and financially. By complying with the financial reporting and governance requirements, a private company can increase the accuracy and improve the timeliness of its information, thereby reducing the time and energy that management sometimes spends in this area. A company can enhance its books and records for potential or expected audits in the future. As discussed below, a company also can eliminate litigation or reduce damages that may be assessed in a lawsuit. SOX has certain provisions that, by their terms, are directly applicable to all companies, including privately held ones. These provisions relate to document retention (and criminal liability for document destruction), liability for retaliation against whistleblowers, criminal and securities fraud and blackout notices (in the ERISA context). Other provisions are not mandatory for private companies, but should be considered by them in formulating their compliance policies. Some of the suggestions include establishing:
In some cases, key business partners, lenders, investors and others may demand that a company comply with one or more of these and other provisions before they will enter into any business arrangement with it. For instance, insurance companies may require the CEO and CFO of a private company to certify its financial statements before issuing director and officer insurance. Lenders may require a company to make representations and warranties that it complies with certain governance or financial provisions. Investors and buyers can insist on audited financials, controls over and disclosure of related party transactions, and the inclusion of a Management’s Discussion and Analysis (MD&A) section to provide management’s take on the financial performance of the company. This is particularly true if the company is the potential target of a public company in a merger or acquisition transaction, as SOX requires the public company’s CEO and CFO to certify its consolidated financial statements that would include the financials of any private company that it acquires. A director nominee also may make certain demands prior to accepting a nomination to the board of directors of a private company. SOX has raised the bar of what is considered “best practices” for a corporation. Where the fiduciary duties of a director have been elevated because of SOX, individuals who are directors of both public and private companies often insist that the private companies have similar corporate governance and financial control and reporting features. Rightfully so, these directors often believe that Sarbanes-Oxley compliance will help them fulfill their fiduciary duties with care and loyalty. If a company is considering an IPO, it is very important to voluntarily comply with SOX as soon as possible before filing a registration statement with the Securities and Exchange Commission. Doing so would tell investors and underwriters that the company is serious and is knowledgeable about its obligations once it does file its registration statement. In addition, getting a jump start on Sarbanes-Oxley compliance can save precious time during the work-intensive IPO process. For example, it may be difficult to find enough independent directors or set up adequate internal accounting controls and procedures in time. A private company also can use SOX to avoid litigation or to minimize any damages that may be imposed upon it in a litigation or alternative dispute resolution context. If a company adopts a code of conduct for its senior management and directors, and takes steps to enforce this code, it can argue in litigation that it has done everything in its power to prevent fraud or other criminal activity. Private companies should view SOX as an opportunity to enhance themselves rather than viewing the panoply of provisions as cumbersome or daunting. In fact, one of the benefits of being a private company (and one reason some public companies choose to go private) is that private companies are not expressly subject to the financial reporting, disclosure and corporate governance provisions of SOX. Therefore, by picking and choosing the provisions of SOX that best suit their business needs, and keeping in mind their growth strategies or exit plans, private companies can make themselves more valuable, and therefore more attractive, to investors, lenders, business partners, buyers, directors, executives and others. Contracts Waiving Jury Trials Ruled UnenforceableIn a unanimous decision, the Supreme Court of California in the case of Grafton Partners LP v. The Superior Court, PricewaterhouseCoopers LLP, Real party in interest (“Grafton”), 36 Cal.4th 944, 116 P.3d 479, ruled that pre-dispute agreements between parties that waive the right to a jury trial are contrary to the protections of the California Constitution, which deems trial by jury an inviolate right. This decision clearly impacts California businesses and employers, who routinely Tamara L. Dewar use retainer agreements or pre-dispute contracts that waive jury trials should a dispute between the parties later arise. In Grafton the parties signed a retainer agreement that included a standard waiver clause, which stated: “In the unlikely event that differences concerning [PricewaterhouseCoopers’] services or fees should arise that are not resolved by mutual agreement, to facilitate judicial resolution and save time and expenses of both parties, [the parties] agree not to demand a trial by jury in any action, proceeding or counterclaim arising out of or relating to [PricewaterhouseCoopers’] services and fees for this engagement.” Later, a dispute did arise and Grafton filed a complaint against PricewaterhouseCoopers for negligence and other causes of action. The trial court enforced the jury waiver, but Grafton appealed and the Court of Appeal deemed the waiver invalid, as did the subsequent ruling by the Supreme Court. The Supreme Court’s decision stated that the right to a jury trial is guaranteed by the Constitution and a waiver of this right is permissible only if expressly authorized by statute. Moreover, the only statute authorizing such a waiver, Section 631 of the California Code of Civil Procedure, does not provide for a pre-dispute waiver. In fact, there are only six means by which a valid waiver may occur under Section 631, and this statute applies only once litigation has commenced. They include:
However, on a practical note, this decision does not invalidate all pre-dispute judicial waivers. For instance, pre-dispute arbitration agreements remain enforceable because unlike pre-dispute jury waivers, arbitration provisions are specifically authorized by statute (C.C.P. Section 1281). Indeed, the Court emphasized that the Legislature had enacted a strong policy favoring arbitration. Thus, these arbitration agreements can forego trial resolution altogether so long as there is an alternative forum for resolution, such as arbitration. Thus, as a result of this recent decision, businesses must reevaluate their agreements and policies and are encouraged to review their agreements with experienced counsel to ensure that their contracts are enforceable. Partner Profile: Kelly O. ScottKelly Scott is a partner and the head of the firm’s Employment Law Department. He is also a member of the Litigation Department and has practiced law since 1987. His areas of practice include representation of employers in all types of employment matters, including wrongful termination, sexual harassment, employment discrimination, investigations of employment claims, and advice and/or training for compliance with various employment laws. Kelly serves as editor of ECJ’s Employment Law Reporter, a monthly publication dealing with a variety of employment and labor law issues. In addition to his contributions to the Employment Law Reporter, Kelly has authored numerous articles for local and national publications on a variety of employment law topics including successful terminations, non-compete covenants, telecommuting and various employer liability issues. Kelly is also a highly sought-after speaker on these subjects. He has provided training on sexual harassment and employment-related issues to privately owned corporations, public service organizations, professional associations and small business owners. Kelly was named a “Super Lawyer” in the February 2004 and in the upcoming February 2006 issues of Los Angeles magazine and Southern California Super Lawyers magazine. He also has been appointed to the Business and Legal Reports Advisory Board and the Board of Directors for the Beverly Hills Chamber of Commerce. He is an approved MCLE provider and a member of the American Bar Association, the State Bar of California and the California Lawyers for the Arts. Kelly has a Martindale-Hubbell peer review rating of AV (standing for grade “A” and Veritas meaning very high professional ethics) and received his B.A. from the University of California, Los Angeles, and his J.D. from the University of Southern California Law Center. Kelly lives in Los Angeles with his wife, Mari, who is from Prescott, Arizona, and their two children. Riley Quinn Scott, age 4, attends preschool at the Hollywood Schoolhouse and Keaton Roan Scott, age 7 months, basically focuses on eating and sleeping. In his rare spare time, Kelly enjoys playing organized soccer, vacationing with his family anywhere near a beach (Kelly is from La Jolla) and dabbling in the fine art world. Kelly and Mari currently manage the careers of a number of notable artists! ECJ’s Super Lawyers 2006Our clients are impressed with our service and results, and so are our peers. The six ECJ partners who have been named Super Lawyers represent the high level of professionalism and responsiveness of the entire firm and are making history in the legal community. Allan B. Cooper, head of the Litigation Department; Bertram K. Massing, head of the Business and Corporate Law Department and member of the Executive Committee; and Melvin S. Spears, head of the Taxation Department and member of the Business and Corporate Law, Health Care Law and Estate Planning, Probate and Trusts Departments, have all been named Super Lawyers for the third year in a row. Reeve E. Chudd, who practices primarily in the fields of estate planning, probate and trust administration, planned charitable giving and tax-exempt entities, and Kelly O. Scott, head of the Employment Law Department and member of the Litigation Department, were designated Super Lawyers in 2004 and again this year. Finally, joining his distinguished colleagues as a Super Lawyer in 2006 is Gary Q. Michel, co-chair of the Health Care Law Department and partner in the Business and Corporate Law, Real Estate and Taxation Law Departments. Our six partners were all selected as “Super Lawyers” as part of the Southern California Super Lawyer magazine for 2006. “Southern California Super Lawyers” is a product of more than six months of polling, surveying and researching attorneys to identify “top legal talent” in more than 50 areas of law. In addition to being included in Los Angeles magazine’s annual listing of top lawyers in the Los Angeles region, this list will appear in an extensive special advertising section in the February 2006 issue, as well as in a separate publication which is distributed to all active attorneys in Los Angeles and Orange counties. Legal Update is published by the law firm of Ervin, Cohen & Jessup LLP as a service to clients and friends of the firm. Articles are intended as summaries of the law and should not be relied upon as substitutes for legal consultation. Authors will, on request, be pleased to discuss in greater detail the information contained in their articles. Correspondence regarding information contained in this issue or address corrections should be addressed to Cynthia Kaiser, c/o Ervin, Cohen & Jessup LLP, 9401 Wilshire Boulevard, Ninth Floor, Beverly Hills, CA 90212-2974 or ckaiser@ecjlaw.com. * * * |
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9401 Wilshire Boulevard, Ninth Floor Beverly Hills, CA 90212-2974 |