Merging companies should be aware that even if federal agencies do not raise antitrust concerns, state attorneys general (AGs) can still investigate and enjoin mergers under Section 7 of the Clayton Act. In particular, state AGs have been active in challenging mergers in the healthcare industry.

Recently, the Pennsylvania AG raised Section 7 concerns about a hospital merger which went unchallenged by the Federal Trade Commission (FTC). In Commonwealth of Pennsylvania v. Geisinger Health System Foundation, the Pennsylvania AG and the merging hospitals reached an agreement that permits the transaction to close but requires the hospitals to continue to operate Bloomsburg Hospital as a separate acute care hospital for eight years. Notably, the Pennsylvania AG declined to enjoin the transaction because, among other things, Bloomsburg Hospital would go out of business without the merger. Rather, the parties reached a settlement involving certain conduct remedies that will require significant monitoring, in part by the Pennsylvania AG.

Based on recommendations given by the FTC to the International Trade Commission (ITC), holders of standard-essential patents (SEPs) may find it difficult to use injunctions to protect their patent rights.

The FTC recently advised the ITC against blocking certain Apple and Microsoft imports that the ITC found to infringe Motorola Mobility's patents. The FTC went beyond the facts of that case and broadly rejected the use of injunctions to protect SEPs as anticompetitive.

A patent holder often commits to license its patent on reasonable and non-discriminatory (RAND) terms in return for becoming part of an industry standard. The FTC's concern is that injunctive relief will allow the SEP holder to seek high royalties inconsistent with both the value of its patent and its RAND commitment. An industry participant faced with an injunction who has already made investments based on the standard technology may have to choose between:

The FTC stated that either choice could result in higher costs to consumers and the breakdown of interoperability. While the FTC's opinion is not binding on the ITC, it clearly sets forth the FTC's stance against injunctive relief for certain SEP infringement.

For more information on antitrust issues related to SEPs, see Practice Note, Antitrust Risks in Standard-Setting Organizations.

International merger control should be an early checklist item for merging companies, particularly since recent changes made to the merger control laws in Brazil and China could mean additional delays in the merger review process.

The recent changes enacted in Brazil include some good news, such as requiring a greater nexus to Brazil which will help parties of foreign-to-foreign deals. However, changes also include both:

In addition, China made changes to its merger notification form that will go into effect in early July 2012. The form will include broader and more detailed information requests, including certain competitive analyses, that will likely take more time and effort to complete.

As merger filings increase in the US (up 24% in 2011 from 2010, according to the FTC's and Department of Justice's (DOJ's) Hart-Scott-Rodino annual report), more companies will need to consider early on whether their deals trigger foreign premerger filings and prepare accordingly.

For more information on US merger control, see Practice Note, Corporate Transactions and Merger Control: Overview and Practice Note, Hart-Scott-Rodino Act: Overview.

In light of a recent $2.4 million settlement by RealNetworks, companies offering online subscription services through free trials should "clearly and conspicuously" disclose the material terms of the offer, including any obligation to proactively cancel.

RealNetworks marketed its web-based subscription services through free trials, which automatically turned into paid subscriptions unless consumers cancelled during the trial period. The company used a pre-checked box to obtain the consumers' consent for payments.

In response to numerous complaints regarding unauthorized charges, the Washington State AG brought suit for violations of state consumer protection laws. The Washington State AG alleged that RealNetworks:

Under the settlement agreement, RealNetworks must, among other things, "clearly and conspicuously" disclose all material terms of its trial offers. The terms must be readily noticeable and understandable and prominently displayed. For example, disclosure cannot be made in fine print or made available solely through a hyperlink.

This settlement is the latest in a string of lawsuits alleging deceptive practices in free-to-pay trials, including two investigations in 2010 by the Florida AG of Rodale, Inc. and CleanWhites. Given this ongoing trend of close scrutiny by regulators, companies that offer free-to-pay trials should:

In addition to complying with state consumer protection laws, which include adequate disclosure regulations, companies should consider any applicable federal laws.

For general information on online advertising, see Practice Note, Online Advertising and Marketing.

Companies should review their insider trading policies to confirm they prohibit the pledging of company shares as collateral for loans and in margin accounts.

In May 2012, a prominent public company announced that two of its directors had engaged in prohibited stock sales during a blackout period under the company's insider trading policy. A significant decline in share price had triggered margin calls on loans secured by pledges of the directors' shares, forcing them to sell a portion of their holdings. Soon after, another company announced that, to avoid the risk of similar forced sales, its CEO had voluntarily sold some of the company shares he held to pay off personal debts tied to those shares.

Directors and officers who pledge company shares as collateral for loans or in margin accounts may be forced to sell their shares if the value of the collateral falls below margin requirements due to a drop in share price. This could occur at inopportune times, including:

Untimely forced sales can have a negative impact on share price and lead to reputational damage and legal and regulatory risks. Companies should ensure their insider trading policies prohibit the pledging of company shares as collateral. Companies that already prohibit pledging should confirm their directors and officers are in compliance.

If a company's directors and officers have pledged company shares, Item 403 of Regulation S-K requires the company to disclose in its SEC filings the amount of shares pledged as security. Companies should ensure their disclosure is accurate.

For a form of corporate insider trading policy that prohibits the pledging of shares, see Standard Document, Corporate Policy on Insider Trading.

Recently issued guidance by the Department of Labor (DOL) requires fiduciaries of ERISA retirement plans that offer brokerage windows, self-directed brokerage accounts and other similar investment arrangements that enable participants to select investments beyond those designated in the plan (SDBAs) to monitor investments in the SDBAs in certain circumstances.

Companies sponsoring participant-directed retirement plans must generally make significant disclosures to plan participants regarding the fees and expenses charged to their retirement accounts, by August 30, 2012. Plan administrators that offer SDBAs are generally exempt from providing the required disclosures for the underlying investments in SDBAs, except for minimal information.

The DOL's recently issued Field Assistance Bulletin 2012-02 (FAB 2012-02) describes the minimal information required to be disclosed for all SDBAs. However, FAB 2012-02 also adds a new requirement for plan administrators to:

FAB 2012-02 includes a safe harbor providing that the plan fiduciary is not required to make the additional disclosures if the SDBA holds more than 25 investment options and the disclosures are made for a certain number of the underlying investments.

This guidance comes as a surprise to many because it:

General counsel whose company retirement plans offer SDBAs should determine if disclosures are required for the investments available through the SDBAs and monitor further developments in the event the DOL modifies its position in future guidance.

For a comprehensive analysis of the requirements for plan administrators set out in the DOL's participant disclosure regulations, see Practice Note, Fee and Investment Disclosure Requirements for Participant-Directed Plans.

Banking organizations and their trade groups should consider submitting comments on the three proposed rules recently issued by the US federal banking agencies to implement the Basel III regulatory capital reforms and related changes required by the Dodd-Frank Act. Comments will be accepted until September 7, 2012 (subject to a pending request by the American Bankers Association for an additional 90-day extension).

The proposed rules consist of the following:

For more information on the proposed US rules implementing Basel III, see Article, Basel III and the New US Capital Framework Proposals.

A recent ruling by the Eleventh Circuit expands lenders' fraudulent transfer liability well past limits set by prior precedent.

In In re TOUSA, Inc., the Eleventh Circuit reversed a district court ruling and affirmed the widely-criticized decision of a bankruptcy court that found that liens granted by TOUSA's subsidiaries to secure TOUSA's debt constituted fraudulent transfers under section 548 of the Bankruptcy Code. The Eleventh Circuit held that:

As a result of this decision, lenders are once again in an uncertain position as to whether they may employ past lending practices based on credit support from subsidiary guarantors. Lenders may also have to meet the heightened due diligence standard cited by the bankruptcy court to avoid a determination that they acted in bad faith, which would deny them the benefit of the good faith defense for subsequent transferees under section 550(b) of the Bankruptcy Code.

Market participants can now look forward to the outcome of the lenders' appeal to a prior bankruptcy court ruling that questioned the enforceability of savings clauses, which was stayed pending the Eleventh Circuit's decision.

For more information on TOUSA, see Legal Update, In re TOUSA: Eleventh Circuit Reinstates Bankruptcy Court's Controversial Fraudulent Transfer Ruling.

The first opinion to address the copyrightability of application programming interfaces (APIs) illustrates for software owners and developers the functionality-based limits of copyright protection for software.

In Oracle America, Inc. v. Google Inc., the US District Court for the Northern District of California granted Google's motion to dismiss Oracle's copyright infringement claim. In its Android mobile device software, Google used the open-source Java language to write its own implementations for certain Java API functions. Oracle sued Google for infringement of Oracle's Java-related copyrights and patents. Oracle's copyright claim involved 37 Java API "packages" consisting of organizational folders within the Java API class libraries.

Finding that only 3% of Google's Android software platform duplicated Oracle's Java API packages, the court ruled this code was uncopyrightable because:

Although narrow and fact specific, this decision suggests that:

Copyright litigants should take note of a recent Seventh Circuit decision cautioning that in certain circumstances, a court can dismiss a case before discovery based on the fair use affirmative defense.

In Brownmark Films, LLC v. Comedy Partners, the Seventh Circuit affirmed the district court's dismissal of a copyright infringement action. The plaintiff, Brownmark, claimed infringement of its viral video by a parody appearing in the defendants' popular television show South Park.

The district court granted the defendants' Rule 12(b)(6) motion to dismiss for failure to state a claim, based on fair use. On appeal, the Seventh Circuit treated the defendants' motion as a motion for summary judgment, noting that:

Turning to fair use, the Seventh Circuit found that:

This decision shows that in cases where the relevant facts are presented and fair use is obvious, a court may dispose of an infringement action at the initial pleadings stage. It also counsels in favor of including substantive arguments in opposing these motions.

For more information on the fair use defense, see Practice Note, Copyright Infringement Claims, Remedies and Defenses.

Companies carrying out mergers, acquisitions and other business reorganizations should ensure that the restrictive covenants in non-compete agreements (non-competes) of predecessor company employees contain assignment and successor clauses. Otherwise, certain state courts may not enforce them.

In Acordia of Ohio, LLC v. Fishel, the Ohio Supreme Court held that while employee non-competes could be transferred as assets to the new entity in an acquisition, the new entity could not enforce the restrictive covenants because the non-competes did not include assignment and successor clauses. As a result, Acordia, whose predecessors had bound employees to two-year non-competes, had no recourse when four insurance salespersons left to work for a competitor and, within six months, took 19 customers with policies generating $1 million. The court's rationale could equally be applied to any reorganization forming a business entity and to any type of restrictive covenant.

Following the Acordia decision, employers should consider:

For a model employee non-compete, with explanatory notes and drafting tips, see Standard Document, Employee Non-compete Agreement.

For more information about labor and employment issues in corporate transactions, see Practice Note, Labor and Employment Issues in Corporate Transactions: Strategic Considerations and Hidden Liabilities.

Following a recent US Supreme Court decision, employers in the pharmaceutical industry may properly classify their outside pharmaceutical sales representatives as exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA).

In Christopher v. SmithKline Beecham Corp., the Supreme Court held in a 5-4 decision that pharmaceutical sales representatives, who spend most of their time obtaining nonbinding commitments from doctors to prescribe certain prescriptions, are engaged in "sales" within the meaning of the FLSA and qualify for the outside sales exemption. The Supreme Court found that:

The decision also noted that the pharmaceutical sales representatives were highly paid and minimally supervised. The Supreme Court refused to give deference to the DOL's interpretation that a sale required a "transfer of title" because:

The decision resolves a split between the Second and Ninth Circuits.

For more information on the FLSA's outside sales exemption, see Practice Note, Wage and Hour Law: Overview.

Companies obligated to arbitrate disputes should evaluate the forum selection clauses in their agreements given a recent circuit split affecting the enforceability of contractual waivers of class arbitration. A company's choice of forum may depend on whether they wish to:

Despite the US Supreme Court decisions in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. and AT&T Mobility LLC v. Concepcion (see GC Agenda: June 2011), circuit courts remain divided on the enforceability of class arbitration waivers.

In Reed v. Florida Metropolitan University, Inc., a putative class action involving an online learning program brought by a former student, the Fifth Circuit held that an arbitrator had exceeded his powers by finding an implied agreement to allow class arbitration in an agreement that was otherwise silent on the issue. While the Reed decision does not directly concern a class arbitration waiver, it seems likely, given its outcome, that the Fifth Circuit would enforce such a waiver.

However, in In re American Express Merchants' Litigation, the Second Circuit affirmed its earlier decision that, because the practical effect of enforcing a class arbitration waiver would be to preclude the plaintiffs from bringing their claims against the defendant, the waiver was unenforceable. Similarly, in Sutter v. Oxford Health Plans LLC, the Third Circuit found that an arbitrator did not exceed his powers in finding an implied agreement to class arbitration in a uniquely broad arbitration clause.

Counsel should monitor developments in the case law, as this issue is not yet settled in other circuits.

For a clause that may be inserted into a corporate or commercial agreement to expressly prohibit class arbitration, see Standard Clause, Class Arbitration Waiver (US).

For a webinar on how to draft class action waivers in arbitration agreements, see Webinar, Class Action Waivers in Arbitration Agreements: Drafting Effective Clauses in the New Environment.

In-house law departments located in New York should monitor developments on a proposed rule requiring attorneys seeking admission to the New York Bar to complete 50 hours of law-related pro bono service.

Although a formal rule has not yet been drafted, in-house law departments should be aware of the following issues:

Regardless of whether in-house counsel will be exempt from the pro bono requirement, companies may view this as an opportunity to bolster their pro bono efforts. For example, in-house law departments could play an important role in helping junior attorneys fulfill their pro bono requirement through formal mentoring programs, if allowed under the rule.

Companies seeking to invest in commercial real estate to take advantage of the historically low interest rates and a relatively soft commercial market should negotiate the right to perform sufficient due diligence.

Investing in commercial real estate requires a certain level of due diligence that is unique to real property and unlike any other commercial acquisition. The purchaser and its counsel should consider:

For more information on due diligence in commercial real estate acquisitions, see Standard Document, Due Diligence Request List: Real Estate.

The IRS recently issued temporary and proposed regulations that make it more difficult for US multinationals to reduce their US tax bill by "expatriating" or "inverting."

A US multinational group generally expatriates or inverts by changing its US parent company's country of incorporation. Under Internal Revenue Code Section 7874, unless the new foreign parent company and its "expanded affiliated group" have substantial business activities in the foreign country where the new parent company is organized (substantial business activities test), the new foreign parent company is either:

To meet the substantial business activities test, the regulations require that the new foreign parent company's expanded affiliated group meet a new bright-line test, rather than the more lenient facts and circumstances test from prior guidance. The new bright-line test will be difficult for many US multinationals to meet because it is only satisfied if at least 25% of the expanded affiliated group's employees, assets and income are located in the country where the new foreign parent company is incorporated.