WHAT’S HAPPENING TOUNITED STATES PATENTS?

by Alan G. Towner, Esq.

IntellectualProperty

Practice Focus

Inside This Issue:

PRACTICE SPOTLIGHT:INTELLECTUAL PROPERTY...........2

THE LEGAL AND PRACTICALIMPLICATIONS OF DOINGBUSINESS IN CHINA..................3

SUBGUARD INSURANCE - AGENERAL CONTRACTOR’S RISKMANAGEMENT OPTION FOR

DEFAULTS BYSUBCONTRACTORS......................4

EVERYTHING YOU WANTED TOKNOW ABOUT PENNSYLVANIA’SNEW RIGHT TO KNOW LAW........5

THE LILLY LEDBETTER FAIR PAYACT: WHAT IT IS ANDWHAT EMPLOYERS NEED TO DOTO PREPARE ...............................6

STARK SELF-REFERRAL REGULATIONDEADLINE LOOMS.........................7

RECENTSUCCESSES…….........……..........10

ATTORNEYS IN THE

NEWS………..............................11

UPCOMINGEVENTS…............………............11

PITTSBURGH

PHILADELPHIA

STEUBENVILLE

SHARON

WEIRTON

WEST CHESTER

www.PIETRAGALLO.com

Continued on page 8

The strength of U.S. patents has been calledinto question recently. In the 1980s and1990s, the value of patents was

considered to be very high, due in large part tothe establishment in 1982 of the Court ofAppeals for the Federal Circuit, which hasexclusive jurisdiction over patent appeals fromall of the U.S. district courts.

Before the Federal Circuit wasestablished, there was some degree of forumshopping in patent cases – some circuits wereconsidered to be “pro patent,” while one waseven known as the graveyard of patents. As itturned out, the Federal Circuit fell into the “propatent” camp and gained a reputation asupholding the validity of patents.

However, the tide has now begun toturn. In the past few years, certain types ofpatents and patent owners have come underincreased scrutiny. The pejorative name “PatentTroll” was coined to describe patent owners whoare not in business themselves, but rather seekonly to obtain patents and license their patents toothers for money.

High tech companies such as those inthe software and electronics industries wereparticularly hard hit by Patent Trolls. Althoughthe label “Patent Troll” has been largely replacedtoday with the less inflammatory name “Non-Practicing Entity,” there remains a strongsentiment in many industries that patent rightsshould be scaled back.

The U.S. Supreme Court recently dealta blow to patent owners in its 2006 eBay v.MercExchange decision, which wiped outlongstanding precedent that automatically gavepatent owners a permanent injunction if theirpatents were found to be infringed. In the eBaycase, the Supreme Court held that a patent owner

may not be entitled to a permanent injunctionand may instead only collect a reasonableroyalty from an infringer based upon the equitiesof the particular case. As a result, patent ownersare no longer guaranteed a permanent injunctionif their patents are found to be infringed,particularly if the patent owner is a Non-Practicing Entity.

In a setback to business method patents,an en banc panel of the Federal Circuit recentlyrestricted the scope of such patents. In its 2008In re Bilski decision, the Federal Circuit held thatan inventor’s claimed method of hedging risk incommodities trading was ineligible forpatenting.

Prior to the Bilski case, the FederalCircuit maintained a line of cases dating back tothe 1998 State Street Bank case which endorsedthe validity of business method patents. Manybusiness method patents were issued after theState Street decision and, not surprisingly,litigation followed.

A school of thought soon emerged thattoo many questionable business method patentswere being asserted against establishedcompanies. Again, whether right or wrong,Patent Trolls or Non-Practicing Entities wereblamed for taking unfair advantage of the patentsystem by asserting their business methodpatents. While the Federal Circuit’s October2008 Bilski decision does not eliminate businessmethod patents altogether, it does make it moredifficult to obtain and enforce them.

In another erosion of patent rights, theSupreme Court in its 2007 KSR International v.Teleflex decision gave the United States Patentand Trademark Office (“USPTO”) more powerto reject patent applications as being “obvious.”The Supreme Court indicated that the Examiners

SPRING 2009

2

PRACTICE SPOTLIGHT:INTELLECTUAL PROPERTY GROUP

Pietragallo’s Intellectual Property group is dedicated to providing quality full-service protection ofintellectual property rights in wide-ranging technologies and disciplines. Members of the IntellectualProperty group have extensive experience, including:

• Patentability evaluations

• Preparation and prosecution of domestic and foreign patent applications

• Patent validity, infringement opinions, and right-to-use opinions

• Patent litigation, including enforcement of patents and defense against claims of patentinfringement

• Trademark and service mark screening and clearances

• Preparation and prosecution of domestic and foreign trademark and service mark applications

• Trademark litigation, including enforcement of trademarks and defense against claims oftrademark infringement

• Unfair competition matters, including trade dress, false designation of origin and false advertisingissues

• Trademark opposition and cancellation proceedings

• Protection of copyrights, including registration and enforcement

• Protection of trade secret rights

• Negotiation and preparation of agreements, including non-disclosure, license, assignment,software and employment agreements

• Evaluation and transfer of intellectual property assets in mergers, acquisitions and divestitures

• Preparation of and counseling regarding research and development contracts, includinggovernment and university contracts

• General intellectual property counseling

The members of our Intellectual Property group are registered to practice before the US Patent andTrademark Office, and utilize a network of foreign associates to handle IP matters throughout the world.Our IP attorneys team with members of our Commercial Litigation group to handle patent litigation andother types of IP litigation in various US District Courts and the Court of Appeals for the Federal Circuit.

For more information, please contact Alan Towner at 412-263-2000 or via e-mail atAGT@PIETRAGALLO.com

3 Continued on page 8

THE LEGAL AND PRACTICAL IMPLICATIONS OF DOING BUSINESSIN CHINA

by Richard F. Moroco, Esq.

As a result of the financial crisis, theU.S. and global economies aresuffering one of the worst

economic meltdowns in history. While thecondition of the economy proveschallenging in the daily operation of manycompanies, this period is a perfect time toreview your company’s domestic andglobal marketing strategy so that when theeconomy begins to recover, your companywill be in a position to capitalize on manyof the opportunities that will presentthemselves.

One country in the world that cannot be ignored, particularly for thosecompanies serving multi-national originalequipment manufacturers or sellingconsumer goods, is China. For the firsttime in its history, China sold moreautomobiles in January than those sold inthe United States and its middle-classcontinues to grow, now accounting forapproximately 35 percent of that country’seconomy in 2008.

Improved international relations,government reforms, an expandingeconomy and increased foreign investmentmake doing business in China an attractivebusiness opportunity. As in any country inwhich you are seeking to establishbusiness, it is important to familiarizeyourself with the manner in which businessis conducted and, while there is a newgeneration of workers in China that followmodern business practices, there are twovery important social concepts that remaincentral to business activities in China:“Guanxi” (relationship) and “Mianzi”(face).

The Chinese have a deeply rootedConfucian culture in which harmoniousrelationships play an important role in theirsociety. When doing business in China orestablishing an enterprise in China, youwill be required to establish manyrelationships, including those withgovernment bodies, investors, partners,customers, suppliers and the staff withinyour own facility or office in China.

Relationship, when properlyapplied, will enable you to develop closeties with individuals with whom youintend to conduct business and assist in thefacilitation of your business activities inChina. Because this aspect of doingbusiness is so important to your earlysuccess, whether seeking to conduct

sourcing activities or making a foreigndirect investment, it would be wise to seekhelp from an organization or consultantthat is familiar with the ways of doingbusiness in China.

Mianzi (face) is very similar tothe notion of one’s reputation in the U.S.The social codes of China require that youacknowledge the status or reputation of theperson with whom you are seeking toconduct business. If you fail to give face ordo not live up to the promises andcommitments you have made to those withwhom you intend to conduct business, youcan lose face and the opportunity todevelop a mutually beneficial businessrelationship.

This is one of the reasons whendoing business in China that you will rarelyhear the word “no” when engaging inbusiness discussions and attempting toqualify a particular sourcing ormanufacturing partner. There is aninherent desire not to lose face or causeyou to lose face during businessdiscussions; accordingly, one must alwaysattempt to conduct discussions that do notrequire “yes” or “no” answers.Selection of Entity

To the extent you choose toformally conduct business in China beyondsourcing activities, there are three differenttypes of incorporation vehicles that can beutilized:1. Representative Office2. Joint Venture (Equity Joint Venture orContractual Joint Venture)3. Wholly Foreign-Owned Enterprise

A representative office isessentially a subsidiary of a foreigncompany in China. It is not a legal entityunder Chinese law, and is unable toconduct business. The office provides alow-cost vehicle to establish a localpresence to manage services, coordinateoutsourcing business activities, or researchthe developing Chinese market. It can beutilized to conduct market research,monitor purchasing activities and engagein marketing and sales administration forsales conducted between China and yourparent company.

A representative office may notbill for services or sales to their customersin China, and is most often utilized as aliaison for ordering product, coordinatingits shipment, and collecting money.

A joint venture (equity jointventure or contractual joint venture) is abusiness in which a foreign firm goes intobusiness with local Chinese partners. Theutilization of a joint venture is often timesutilized to exploit the market knowledge,preferential market treatment, andmanufacturing capability of the Chineseside, along with the technology,manufacturing know-how, and marketingexperience of the foreign partner. It isimportant when considering this type ofenterprise to take into consideration theprotection of one’s intellectual property,technology and brand due to the fact thatChina’s protection of these intangibleassets continues to evolve.

A Wholly Foreign-OwnedEnterprise (WFOE) is a 100 percentforeign-owned company and has becomethe investment vehicle of choice for manycompanies that desire to manufacture,process or assemble in China. It negatesthe need for the Chinese partner and doesnot require large amounts of registeredcapital to fund. WFOEs have most oftenbeen used by companies looking toestablish production facilities, althoughservice industries have also begun to utilizethis vehicle as a means of establishingoperations in China, albeit with somerestrictions being placed upon them withregard to location.

A WFOE is a limited liabilitycompany established under ChinaCompany Law with 100 percent of itsshareholders being foreign. Limitedliability is recognized to the extent of theamount of registered capital injected intothe business. Registered capital can be acombination of the cash invested into theenterprise and the capital equipmentcontributed by the foreign shareholders andrepresents the extent of the WFOE’sliability.Practical Considerations

Once you have identified theentity in which you desire to conduct yourbusiness activities in China, there are anumber of practical issues that should beconsidered including location, personnel,and the potential for tax incentives.

When reviewing potentiallocations for your business operation inChina, it is important to consider whetherthe location has the appropriate logisticalsupport for the shipment of product and

4Continued on page 9

SUBGUARD INSURANCE - A GENERAL CONTRACTOR’SRISK MANAGEMENT OPTION FOR DEFAULTS BY SUBCONTRACTORS

by Joseph J. Bosick, Esq.

Subcontractor defaults often causemajor problems for constructionprojects which, in turn, cause

problems for the general contractor vis-à-vis the owner. A potential solution comesin the form of Subguard insurance. Itprovides the general contractor a way tocover a subcontractor default without theneed for the general contractor to financethe default from the contractor’s ownfunds, which is the norm in aproject involving aperformance bond. And so, ifa general contractor wantsinsurance coverage for thecosts associated with a defaultby a subcontractor on anenrolled project, there is analternative to subcontractorsurety bonds.

Subguard insurance is aninsurance policy that indemnifies thegeneral contractor for direct and indirectcosts incurred as a result of a default ofperformance by a subcontractor. In theSubguard policy, a “default ofperformance” means a failure of thesubcontractor to fulfill the terms andconditions of the construction subcontract,which results in a loss to the generalcontractor. This is broad language that canafford broad protection.

The direct costs that are coveredunder the Subguard policy are the costs ofcompleting a subcontractor’s obligations,sums a subcontractor is required to pay tothird parties, and the cost of correctingdefective or nonconforming work. Directcosts also include fees of attorneys andconsultants, as well as expenses associatedwith the investigation, adjustment anddefense of disputes. The indirect costs thatare covered under the Subguard policyinclude extended overhead, jobacceleration, delay costs, liquidateddamages and other expenses associatedwith a default of performance.

Consider an illustration of thetype of coverage that a Subguard policycould conceivably provide to a generalcontractor who expends money to maintainthe schedule and complete/correct the

defaulted subcontractor’s work. Suppose apile driving subcontractor defaults after1,000 of 2,000 piles are driven. In thiscase, Subguard would indemnify thegeneral contractor for the cost overrun tofinish the remaining 1,000 piles, for thecost of re-work, for payment to unpaidsub-subcontractors and suppliers, for thecost to accelerate the project with respectto other trades, and for extended overhead

due to inefficiencies caused by thesubcontractor’s default.

This type of coverage soundsexpensive. Fortunately, the generalcontractor has two options to considerwhen purchasing a Subguard policy. Thegeneral contractor can either enter into aretrospective premium agreement orpurchase a policy with a high deductible.If the contractor manages risk well anddoes not experience a high frequency orseverity of subcontractor defaults, there isan opportunity for the premium to bereturned to the general contractor with aretrospective premium agreement. If thegeneral contractor chooses to carry a highdeductible on its Subguard policy, the costof Subguard insurance is less than the costof subcontractor performance and paymentbonds. Additional advantages of Subguardinsurance versus surety bonds for a generalcontractor are that: the insurer iscontractually obligated to pay within 30days of receipt of a proof of loss; there isno dispute resolution process required totrigger coverage; and indirect costs arecovered, all of which increase thelikelihood of completing projects in atimely manner and within budget.

In addition to the advantages forthe general contractor that purchasesSubguard insurance instead of requiringsurety bonds from its subcontractors, there

are corresponding advantages forsubcontractors.

The most obvious is thatSubguard insurance eliminates the need fora surety bond from a subcontractor,potentially preserving the subcontractor’ssurety capacity for other projects. It alsoeliminates the need for an indemnityagreement or personal guarantee from thesubcontractor. It allows the general

contractor to default thesubcontractor without terminatingthe subcontract, thus allowing thesubcontractor to continue to workon the project. It is interesting tonote that the general contractor hascomplete control of the defaultprocess. The insurer cannotrequest the general contractor to

withhold funds owed to the subcontractorto cover the costs of the default. Thisallows the general contractor, if it is to thegeneral contractor’s benefit, to continuepaying the subcontractor to prevent thesubcontractor from stopping its work onthe project. Because there is no suretybond, it gives the subcontractor control ofits claim defense without the surety’sinvolvement in the project.

Note that, at first blush, Subguardinsurance appears to eliminate thecompetitive advantage of a subcontractorwith a favorable surety program (price andcapacity). While it is true that a worthy butunbondable subcontractor can be selectedby the general contractor to do work on theproject, the general contractor would bewise to select a subcontractor with afavorable surety program, good financialstrength, and a reputation for operationalexcellence because a default by asubcontractor will affect the Subguardpolicy premium during the term of a rollingretrospective premium program.

A project owner also receivessome advantages when the generalcontractor purchases a Subguard policy.One such advantage is that Subguardinsurance is looked upon favorably bylending institutions that finance largeprojects. Another advantage is that theproject owner is less concerned with

It provides the general contractor away to cover a subcontractor defaultwithout the need to finance it from its

own funds.

5

EVERYTHING YOUWANTED TO KNOW ABOUT PENNSYLVANIA’SNEW RIGHT-TO-KNOW LAW (BUT WERE AFRAID TO ASK)

by Gaetan J. Alfano, Esq. and Amy C. Lachowicz, Esq.

Pennsylvania’s new Right-to-KnowLaw (“RTKL”) represents adramatic policy shift in favor of

liberal access to records of public agencies.Under the new RTKL, which took effecton January 1, 2009, the party requestingthe information no longer bears the burdenof establishing why a record should bereleased. Rather, the burden has shifted tothe agency withholding the record to showwhy the record should not be released.

In other words, all agency recordsare presumed to be public records unlessdisclosure is barred by: 1) state or federallaw or regulation, or judicial order; 2) anapplicable privilege; or, 3) oneof the exceptions set forth in theRTKL. The new RTKL alsoestablishes an “Office of OpenRecords” which, according to itsMission Statement, exists to “enforce theRTKL and to serve as a resource forcitizens, public officials and members ofthe media in obtaining public records oftheir government.”

The RTKL applies to “allagencies,” which encompassesCommonwealth agencies, local agencies,judicial agencies and/or legislativeagencies. The term “record” is broadlydefined to include “documents, papers,letters, maps, books, photographs, tapes,film or sound recordings” and informationstored electronically. The RTKL contains30 exceptions to disclosure, which permitan agency to deny access to records incertain circumstances.

These exceptions addresssituations involving confidential personalinformation or public safety issues.Examples of exceptions include recordspertaining or referring to medical records;Social Security and drivers’ licensenumbers; performance evaluations;criminal and non-criminal investigations;and the internal, predecisionaldeliberations of an agency. In somesituations, redaction of records may beappropriate.

Obligations Under the New RTKLAppoint a Right-to-Know OfficerThe RTKL requires each agency to appointan “Open Records Officer.” The OpenRecords Officer receives requestssubmitted to the agency pursuant to theRTKL (“RTK requests”), directs thoserequests to the appropriate persons withinthe agency, and issues responses under theRTKL. Given the RTKL’s rapidturnaround time in which to respond torequests (in most instances, five businessdays), the Open Records Officer must befamiliar with the RTKL and have theability to respond to RTK requests on atime-sensitive basis.

Analyze Records and ImplementNecessary Recordkeeping Requirements

Agencies should analyze theirrecords to determine which records are andare not subject to public access under theRTKL. Further, the Office of OpenRecords anticipates that many newsorganizations (as part of their year-endreviews in December 2009) will filerequests with agencies, seeking copies ofall RTK requests handled during 2009.These reviews will assess how each agencyhas complied with the RTKL. It isimportant, therefore, that agenciesmaintain accurate and complete recordsregarding each RTK request, as well as anyresponse thereto.Establish Written Policies and ConductStaff Training

Likewise, agencies shouldestablish a written policy outlining theprocedure for handling a RTK request andidentifying the Open Records Officer; and,conduct staff training for the procedure.Update Agency Websites

The RTKL requires an agency topost information on the agency’s website(if applicable) containing: 1) contactinformation for the agency’s Open RecordsOfficer and the Office of Open Records; 2)

a form that may be used to file a request(the Office of Open Records websitecontains uniform request forms and sampleresponse letters as resources for agencies);and, 3) policies and procedures of theagency relating to the RTKL.Procedure for Obtaining Records Underthe New RTKL

A party requesting informationunder the RTKL should make a request, inwriting, to an agency’s Open RecordsOfficer. Although an agency may honor averbal request for records, the request mustbe written if the requester wishes to pursuean appeal under the RTKL. The writtenrequest must identify or describe the

records sought with sufficientspecificity to enable the agencyto appropriately respond, andmust also include the requester’s

contact information.When an RTK request is

submitted, the agency must respond, inwriting, within five business days,exclusive of the date of receipt. Theresponse must either 1) grant the request;2) deny the request, citing the basis fordenial; or 3) invoke a 30-day extension. A30-day extension may be invoked incertain situations specified under theRTKL, such as those involving redactionor a legal review of the request. If anagency fails to respond within the allottedtime, the request is deemed denied.

If a requester does not agree withthe agency’s decision, he or she may file awritten appeal with the Office of OpenRecords within 15 business days of themailing date of the agency’s response. Theappeal must state the grounds upon whichthe requester believes he or she is entitledto access of the record, and should includea copy of relevant correspondence with theagency. The Office of Open Records has30 days in which to issue a FinalDetermination. A Final Determination isbinding on the agency. An appeal from aFinal Determination must be filed with theappropriate court within 30 days of mailingof the Final Determination.

The RTKL applies to “all agencies.”

Continued on page 9

6

THE LILLY LEDBETTER FAIR PAY ACT: WHAT IT IS AND WHATEMPLOYERS NEED TO DO TO PREPARE

by Kathryn M. Kenyon, Esq. and Jennifer R. Russell, Esq.

Title VII of the Civil Rights Act of1964 makes it an unlawfulemployment practice to discriminate

against any individual with respect tocompensation. To timely assert paydiscrimination under Title VII, anemployee must file a charge with the EqualEmployment Opportunity Commission(EEOC) within the applicable statute oflimitation, either 180 or 300 days after thealleged unlawful employment practiceoccurred, depending upon the state wherethe charge is filed.

After working 19 years as asupervisor at a Goodyear Tire and Rubberplant in Alabama, Lilly Ledbetter receivedan anonymous note informing her that shewas being paid considerably less than threeof her male counterparts. Days later, inMarch 1998, Ms. Ledbetter submitted aquestionnaire and, in July 1998, filed aformal charge with the EEOC. She filedsuit and a jury awarded her $3.8 million,which was reduced to the $300,000statutory cap and $60,000 in back pay.Goodyear appealed to the Eleventh Circuitand argued that the claim was time-barredbecause the EEOC questionnaire was notfiled within 180 days of the firstdiscriminatory paycheck. The court agreedand reversed the jury’s award. Ms.Ledbetter was granted review by the U.S.Supreme Court.

On May 29, 2007, in Ledbetter v.Goodyear Tire and Rubber Co., Inc., 550U.S. 618 (2007), the Supreme Courtaffirmed, holding that “the later effects ofpast discrimination do not restart the clockfor filing an EEOC charge,” and that thestatute of limitations runs from the day therate of compensation is first set, not thedate of the most recent paycheck. Thisdecision was contrary to decisions of nineof the 10 federal appellate courts toconsider the issue, including the Third andFourth Circuits, who applied the “paycheckaccrual” rule that provides that eachdiscriminatory paycheck re-starts the clockfor filing pay discrimination claims.

On January 29, 2009, PresidentObama signed into law the Lilly LedbetterFair Pay Act of 2009 (S. 181), the first law

passed by the new Congress and the firstlaw signed by Obama. The Act amendsTitle VII, the Age Discrimination inEmployment Act of 1967 (ADEA),Americans with Disabilities Act (ADA)and Rehabilitation Act, and applies to allTitle VII pay claims, including thosealleging discrimination on account of raceand national origin, as well as to those foralleged age and disability discriminationunder the ADEA, ADA andRehabilitation Act.

The Act reinstates the “paycheckaccrual” rule, and provides that unlawfulemployment practices occurs when 1) adiscriminatory compensation decision orother practice is adopted; 2) an individualbecomes subject to the decision or practice;or 3) an individual is affected byapplication of the decision or practice,including each time there is a payment ofcompensation. Thus, employees may nowfile pay discrimination charges with theissuance of each paycheck received,regardless of when the discriminatory paydecision was made. The Act alsoconceivably applies to retirement andpension benefits paid to former employees.

The Act is retroactive to the dateLedbetter was decided, May 28, 2007,which effectively revives all claimspending since that date. Employees mayrecover compensatory and punitivedamages for violations of the Act.Consistent with prior law, the Act caps therecovery of back pay at two years beforethe filing of the charge, but contains nopunitive damages cap, which mayencourage disgruntled employees to wait tofile suit knowing that the next paid benefitwill trigger another filing period allowingemployees to exploit the new limitationsperiod.

Employers’ current efforts toensure that their practices and theaccompanying recordkeeping practices aremost likely insufficient to counter thedistressing loopholes present in the Act andthe currently pending Paycheck FairnessAct. Employers will likely find themselveshaving to defend pay discrimination claimswell after a disputed pay decision. Those

involved in the original decision may havemoved on and the paperwork may havebeen routinely destroyed.

More disturbing is the vaguedescription of who can sue under the Act,which contains language allowing not justthe employee to sue but those “affected” byalleged discriminatory pay practices. Doesthis include family members or the bankthat holds the mortgage that was not paid?

Employers also need to be awareof the proposed Paycheck Fairness Act.The Act seeks to amend the Equal Pay Actportion of the Fair Labor Standards Act of1938 to increase the nature and extent ofdamages (compensatory and punitive) forgender-based pay discrimination. It wouldadd more teeth to the retaliation provision,which would open the door for additionalclaims that employees were retaliatedagainst for inquiring about, let alonediscussing, wages.

Moving forward, the proverbialounce of protection will be worth a poundof cure for employers who implementbetter recordkeeping practices. Recordssurrounding pay decisions should becondensed to allow for indefinite retention.Employers should take steps toconfidentially evaluate their internalpolicies on pay decisions, written andotherwise, to guarantee safeguards are inplace. Ideally, this internal evaluationstays confidential and steps should be takento keep the process privileged. Anyinconsistencies or red flags discovered inthis internal review should be addressedimmediately and confidentially. Regulartraining should be provided so thatdecision-makers receive suitable guidanceon implementing pay decisions and how todocument legitimate differences andoutcomes with such decisions, especially inthese trying economic times.

For more information, pleasecontact Kathryn M. Kenyon at 412-263-2000 or via e-mail atKMK@PIETRAGALLO.com or JenniferR. Russell at 412-263-2000 or via e-mail atJRR@PIETRAGALLO.com.

7

STARK SELF-REFERRAL REGULATION DEADLINE LOOMS

by Paul K. Vey, Esq.

Due to recent Centers for Medicareand Medicaid Services (CMS)rules revisions, certain contracts

between physician groups and hospitalsthat are currently legal will become illegal.These revisions were included in the CMSInpatient Prospective Payment Systemfinal rules adopted on August 19, 2008.

Hospitals and physician practicesmust review their current contractualarrangements to be sure that they arecompliant with these new regulationsbefore the October 1, 2009 deadline.

Since phases I and II of the Starkregulations have been in effect for asufficient period of time, CMS has come toidentify what it perceives to beshortcomings in the regulatory frameworkprohibiting self-referral.Importantly, CMS has revisedthe physician “stand in theshoes” provisions, so that morefinancial arrangements betweenphysician organizations and adesignated health service (DHS)entity are considered directcompensation arrangements andthe more stringent direct compensationexceptions need to apply. Further, CMShas significanlty altered the criteria bywhich “under arrangements” transactionsare evaluated in order to be compliant withStark.

There are nine changes ofsignificance in the recent CMS revisions,some of which CMS suggests may requireproviders to “unwind” financialarrangements previously thought to becompliant.

The 2009 IPPS Final Rule makesseveral of the following noteworthychanges:• Revisions to the physician “standing inthe shoes” provisions. Owners (other thantitular owners) are considered now to standin the shoes of the practice, closing aloophole identified by CMS. Non-ownerphysicians (and titular owners) arepermitted to stand in the shoes of theirphysician organizations. Many financialrelationships that previously would have

been considered indirect compensationarrangements will now be denied directcompensation arrangements. Accordingly,for these financial relationships to becompliant with Stark, the more stringentexceptions to direct compensationarrangements must be met. Theregulations also address the application ofthe rules to the academic medical center(AMC) exception. This provision iseffective October 1, 2009.• Percentage-based compensation formulaewere identified as a loophole under existingregu la t ions . Pe rcen tage -basedcompensation for office space andequipment lease arrangements will beprohibited. This provision has an October1, 2009 effective date.

• Per unit/per click rent for leases of spaceor equipment is prohibited to the extent therent reflects services provided to patientsreferred by the lessor to the lessee. Thisprovision is effective October 1, 2009.• The regulations expand the definition of“entity.” This results in significantlylimiting and perhaps eliminating any“under arrangements” joint ventures ownedby referring physicians. This provision iseffective October 1, 2009.• Provide an exception for obstetricalmalpractice insurance subsidies.• Finalizes the rules for the “period ofdisallowance” dictating the timeframewithin which claims may or may not besubmitted by an entity for servicesprovided by a physician who has a non-permitted financial relationship with theclaiming entity.• Includes provisions relating to thealternative method of compliance withcertain exceptions, ownership orinvestment interest in retirement plans,

and, finally, the burden of proof inconnection with enforcement proceedings.

The regulations contain 90 pagesof commentary from the healthcarecommunity and responses from CMS inconnection with the proposed rulemaking.A great deal of commentary and, in turn,the responses from CMS, dealt withconcerns over percentage-basedcompensation formulae.

No doubt CMS intends tocontinue to look extremely carefully atindirect compensation arrangements. Itwould appear that compensation forservices may continue to utilizepercentage-based, fee for service, or otherunit of service compensation constructs so

long as the rate of payment isbased on fair market value anddoes not change based upon thenumber or value of the referrals.However, CMS warns that it willcontinue to study this issue.Further rules may beforthcoming.

Notably, the 2009 rulesspecifically declare that rental paymentsfor equipment or space may not be basedupon revenue collected or otherwiseattributable to services performed orbusiness generated in the space or with theequipment. As noted above, per unit rentfor services provided to patients referred bythe lessor to the lessee will not passscrutiny.

Some legal commentators havesuggested that one potential restructuringoption allows an “under-arrangements”provider to change its business model byconverting to become a leasing and/ormanagement services joint venture.Nonetheless, compliance would berequired with the new restrictions onpercentage or per unit/per click rentalpayments as of October 1, 2009. Care mustbe taken, however, to avoid any newarrangements that are simply windowdressing for the prior practice of having

Due to recent CMS rules revisions,certain contracts between physician

groups and hospitals that arecurrently legal will become illegal.

Continued on page 9

8

United States Patents continued from page 1

at the USPTO were not being aggressiveenough when considering whether to rejectinventions described in patent applications.The perceived lack of aggressiveness camefrom a line of Federal Circuit cases whichestablished a rigid test that Examiners wererequired to follow before they could rejectan invention – the teaching, suggestion ormotivation (“TSM”) test.

Every patent application has atleast one “claim” which defines the legalboundaries within which the patent ownercan claim exclusive rights, much like afence around one’s property. The USPTOExaminers compare the claims in a patentapplication with the “prior art” (such asprior patents and other printedpublications) to make sure that a claimedinvention is not too similar to the prior art,and hence obvious. Under the FederalCircuit’s TSM test, if an Examiner could

not point to some teaching, suggestion ormotivation explicitly spelled outsomewhere in the prior art that would leadone to arrive at an applicant’s claimedinvention, the Examiner could not maintainan obviousness rejection of a patent application.

The Supreme Court in its KSRdecision gave USPTO Examiners moretools to reject inventions by adding a levelof common sense to the process. Not onlycan Examiners use the longtime TSM testto reject a patent application as beingobvious, they can now add their owntechnical reasoning as to why a particularclaim is obvious when compared to the prior art.

A result of the KSR decision isthat fewer patents may be issued because itcan now be more difficult to convince aUSPTO Examiner that a claimed inventionis not obvious. Another effect of the KSRdecision is that patents that were previously

granted under the TSM test are beingsubjected to higher levels of scrutiny whenthey are litigated. Although this change inthe law may not represent a death sentencefor most U.S. patents, an alleged infringermay now have stronger arguments whenseeking to invalidate a patent it has beenaccused of infringing.

Although the courts have recentlytaken more of a hard-line stance, the vastmajority of U.S. patents continue to havesignificant value. The key for inventorsand patent owners is to stay ahead of thetrends in the law, and tailor their patentportfolios accordingly.

Alan G. Towner is Chair ofPietragallo’s Intellectual Propertypractice group. He can be reached at 412-263-2000 or via e-mail atAGT@PIETRAGALLO.com.

Doing Business in China continued from page 3

supplies in and out of China; whether thelocation has the appropriate personnel toman your operation, especially aproduction operation that requires that theemployees possess the skills and abilities toappropriately manufacture the goods youdesire to sell directly in China or export toother markets; and whether a specificlocation may be able to provide taxincentives for locating in a particularregion.Tax Considerations

On January 1, 2008, Chinaadopted the new Chinese EnterpriseIncome Tax. The effect of this law endednearly three decades of preferential taxtreatment for foreign invested enterprises,bringing all enterprises operating in Chinaunder the same tax code. The result wasthe elimination of regionalized taxincentives to locate in a particular area anda focus on tax incentives being provided toinvestment in technology and high valuecapabilities. The purpose is to focus taxincentives on particular industries thatpromote technology, energy savings andenvironmental protection.Additional Legal Consideration - ChinaEmployment Law

Another important legalconsideration when doing business inChina is to understand the relationshipbetween employer and employee. OnJanuary 1, 2008, China also introduced the

China Employment Law. This law governsthe establishment of employmentrelationships between employers andworkers in China.

As with any new law introducedin China, there are several considerationsthat must be taken into account whenconsidering how the new employment lawwill be implemented and interpreted. Thisis consistent with the state of flux that lawsand regulations regularly undergo in Chinaand the potential for differentinterpretations. Changes to the laws ofChina will regularly be encountered andthe inconsistency of their interpretation anduniform implementation would be in linewith the transformation of the country fromthe “rule of man” to the “rule of law.”More practically speaking, however, whendoing business in China, the requirementsof the China Employment Law and itsinterpretation and implementation in theprovince, municipality or industrial park inwhich you may conduct business, shouldbe reviewed.

This is an important considerationdue to the fact that its interpretation andimplementation may impact the manner inwhich you develop a workforce(outsourcing the hiring of personnel to aservice company), and the directmanufacturing costs incurred at thelocation in which you may conductbusiness.

Best PracticesThe following are five key legal

and practical considerations when doingbusiness in China:1. Always research applicable China lawand proposed law when considering ordoing business in China as Chinese law israpidly changing and may impact yourcommercial activities;2. When negotiating contracts withChinese business counterparts, alwaysconsider a format that minimizes the risk ofintellectual property rights violations;3. Contracts and business transactionsshould be drafted in a manner thatminimizes disputes with Chinese jointventure partners and suppliers;4. Chinese and U.S. cultural norms aredifferent, and all agreements should beconfirmed to be commonly understoodbetween the parties;5. Always consider U.S. trade laws as theymay contain restrictions which may affectcurrent and future commercial activities inChina, as well as export laws which affectthe export of goods and services and“know-how” to China.

Richard F. Moroco is a Partner inPietragallo’s Sharon office and an experton international business, with a particularemphasis on China. He may be reached at724-981-1397 or via e-mail atRFM@PIETRAGALLO.com.

9

Subguard Insurance continued from page 4

Right-to-Know Law continued from page 5

Penalties for Violating the RTKLThe RTKL provides civil

penalties of up to $1,500 if an agencydenies access to records in bad faith, and upto $500 per day when an agency does notpromptly comply with a court orderrequiring disclosure of records, until therecords are produced. The RTKL alsocontains a provision for an award of

attorney’s fees for situations where anagency denies records based on anunreasonable interpretation of the law or inbad faith. Likewise, attorney’s fees can beawarded when a requester pursues afrivolous RTK request.

Information about the RTKL, aswell as guidelines, sample forms anddecisions, can be found on the

Pennsylvania Office of Open Recordswebsite at: http://openrecords.state.pa.us.

Gaetan J. Alfano is a namePartner of Pietragallo and Amy C.Lachowicz is an associate. They can bereached via phone at 215-320-6200 or viae-mail at GJA@PIETRAGALLO.com orACL@PIETRAGALLO.com.

physician-owned joint venturesperforming the services that now will bebilled by the hospital.

Physician groups should becertain to understand the application of thenew regulations to their practices andshould be mindful of the fact that whenpayment for designated health services isdenied on the basis that the service wasfurnished pursuant to a prohibited referral,the burden of proof at each level is on theentity submitting the claim.

Following the fiscal year 2009IPPS proposed rule, CMS also has

finalized the Disclosure of FinancialRelationships Report (DFRR), aquestionnaire that will be sent toapproximately 500 hospitals requiring thatthey report information concerningownership/investment and compensationarrangements between hospitals andphysicians. The hospital scheduled toreceive the report shall have 60 days withinwhich to respond.

There is little doubt that theinformation provided by hospitals inresponse to this questionnaire will serve asthe basis for additional rulemaking and will

allow CMS to develop a betterunderstanding of the extent of Starkregulation compliance in currentrelationships and financial arrangementsbetween physicians, their practice groups,their related organizations and hospitals.

For more information, pleasecontact Paul K. Vey or Kevin E. Raphael,Co-Chairs of Pietragallo’s Health CareLitigation Practice. Mr. Vey can bereached at 412-263-2000 or via e-mail atPKV@PIETRAGALLO.com; Mr. Raphaelat 215-320-6200 or via e-mail atKER@PIETRAGALLO.com.

Stark Self-Referral continued from page 7

defaulting subcontractors because theSubguard policy provides funding in theevent of a subcontractor default. A thirdadvantage is that the Subguard insurancepolicy provides cash for curing thesubcontractor default which has thesalutary effect of keeping the project ontime and on budget. A fourth advantage isthat the Subguard policy provides coveragefor latent defects caused by a defaultingcontractor for 10 years after substantialcompletion of the project. Finally, theproject owner benefits by the fact that ageneral contractor can often secure aperformance bond under favorable terms ifthe Subguard policy is in place.

Subguard insurance is not forevery general contractor. The generalcontractor must be a substantialcommercial or industrial general contractorto qualify for the insurance coverage. Thegeneral contractor must be a contractorwho understands, accepts and manages risk

as part of the normal course of its business,and must have a revenue base that includesa high volume of subcontracted values.Typically, $75 million of enrolledsubcontractors’ values annually would bethe norm.

Subguard insurance is a first-partyinsurance policy. As such, it does notcover third party injury claims.Accordingly, the general contractor needs ageneral liability insurance policy and othertraditional coverages. Additionally, theSubguard policy excludes professionalservices provided by the generalcontractor. It is not an Errors andOmissions policy. Subguard insurance iswritten on an “occurrence” basis (riskattaching) and not a “claims made” basis.A proof of loss must be made at the earlierof the expiration of any applicable statuteof limitations, expiration of any contractlimitations period, or 10 years aftersubstantial completion of the subcontract.

In conclusion, Subguardinsurance offers a cost-effective alternativeto requiring the purchase of surety bondsby the subcontractors on the constructionproject. It increases profitability so long aslosses are controlled. It promotes on timeand on budget projects. Finally, in theevent of a subcontractor default, control ofthe project continues to remain with thegeneral contractor.

Joseph J. Bosick is a namePartner and Chair of Pietragallo’sConstruction Practice Consortium. He canbe reached at 412- 263-2000 or via e-mail atJJB@PIETRAGALLO.com.

10

Recent Successes

Medical Malpractice Defense: Tyler J. Smithsuccessfully won a jury trial in Allegheny County Common PleasCourt on behalf of a chiropractor in a malpractice case. Theplaintiff had been under the treatment of the defendant for lowerback pain for which he had received medical and chiropractictreatment. In July 2005, the plaintiff visited the chiropractorcomplaining of right leg pain in addition to the existing back pain.The chiropractor did not take an x-ray and adjusted the patient ashe previously had. When the plaintiff said the pain remained, thechiropractor offered a new adjustment, which occurred on acollapsible table. During the adjustment, the patient said he feltvery uncomfortable, but the chiropractor continued the treatmentand the patient immediately developed an intense pain in his lowerback and left leg. The pain worsened, and the plaintiff went to thehospital emergency room the next day, at which point he wasadmitted to the hospital for five days. Several months later, heunderwent surgery. Following a four-day trial, the jury returned itsverdict for the defendant.

Summary Judgment: Mark T. Caloyer obtained asummary judgment for a client in a case where the plaintiff lost herhand in a punch press at a manufacturing facility. The client hadsold the machine along with other plant assets to the woman’s employer.

Dismissal of Claims: Shannon Poliziani successfullyrepresented a chiropractor in a licensing investigation. Ms.Poliziani met with an investigator from the Pennsylvania Bureauof Enforcement & Investigations to discuss claims made againstthe chiropractor by a former employee. Ms. Poliziani received aletter from the Senior Prosecutor with the Commonwealth ofPennsylvania advising that no formal charges would be filed.

Product Liability Action: Bryan S. Neft and RonaldD. Morelli were successful in obtaining a compressive opinion infavor of a client from the U.S. District Court for the WesternDistrict of Pennsylvania. The Court issued the opinion in favor ofour client, who removed a product liability action on the basis ofthe federal officer defense for products it supplied under contractto the U.S. Navy.

Motion to Dismiss Upheld: Robert J. D’Anniballe, Jr.obtained a verdict before the West Virginia Supreme Court ofAppeals to uphold a motion to dismiss a medical malpracticeclaim on the basis of a statute of limitations defense. The stateSupreme Court examined the continuous medical treatment andcontinuous tort doctrines in upholding the dismissal by the trialcourt. The case involved a portion of a scalpel allegedly being leftin the plaintiff’s hand following carpal tunnel surgery.

Dismissal: Michael A. Morse and Amy C. Lachowiczwere successful in the dismissal of Community Behavioral Healthfrom a case involving the death of a juvenile at a facility inTennessee. CBH is a non-profit organization that funds behavioralhealth services for Medicaid-eligible residents of the City ofPhiladelphia. The plaintiff – the mother of the deceased – suedCBH and the City of Philadelphia under Section 1983’s state-created danger theory, alleging that the two entities wereresponsible for her son’s transfer to Chad Youth Enhancement Centerin Tennessee, where he died as a result of the improper use of physicalrestraints by a Chad staff member. The case was particularlynoteworthy as the juvenile was under Philadelphia’s Department ofHealth Services care at the time he was sent to the facility.

Sale of Stock Transaction: David P. Franklin,Richard F. Moroco, James E. Abraham and Robert J.Monahan assisted R.B. Watkins, Inc. in the sale of its stock toAreva T&D, Inc., a subsidiary of Areva, world energy expert,which offers its customers technological solutions for highlyreliable, nuclear power generation, transmission and distribution.

Settlement Negotiation: Kevin E. Raphael and Amy C.Lachowicz negotiated a significant settlement on behalf of theirclient, a national demolition company, which was the plaintiff in amulti-million-dollar lawsuit for breach of contract concerningdemolition work.

Pietragallo has added three associates and a patent agent in its Pittsburgh office. Robert A. Diaz, Emily J. Hicks and GrantH. Hackley have joined Pietragallo as associates, and Suzanne Kikel has joined the firm as a patent agent.

Mr. Diaz is a member of the Intellectual Property Practice Group. He joins Pietragallo from the intellectual property departmentof a global leader in the coatings industry.

Ms. Hicks is a member of the Commercial Litigation Practice Group. She is a civil litigator with expertise in product liability,negligence and commercial litigation. Ms. Hicks rejoins Pietragallo after five years practicing product liability litigation in California.

Mr. Hackley is a member of the Risk Management Practice Group. He has experience in toxic torts, product liability defense,professional malpractice, personal injury and civil rights. He had been a law clerk for Commonwealth Court Judge Bernard L. McGinley.

Ms. Kikel is a patent agent in the Intellectual Property Practice Group. She has worked in both industry and private practice,with extensive experience in the chemical and minerals industry and in the mechanical sector. She is registered to practice before theU.S. Patent and Trademark Office.

Pietragallo Adds Three Associates and Patent Agent

11

Mark Gordon was selected as a BTI Client Service All-Star for 2009, a designation afforded to only 176 lawyers in theUnited States. The award was issued by the BTI Consulting Groupafter surveying corporate counsel at Fortune 1000 companies toidentify lawyers who provide superior client service.

William Pietragallo, II was appointed Chairman of theDisciplinary Board of the Supreme Court of Pennsylvania, onwhich he previously served as Vice Chair.

Marc S. Raspanti spoke on “Defending White CollarCases - The Ultimate Heavyweight Fight” for the PennsylvaniaBar Institute.

Tyler J. Smith presented on “Safe Informed Consent: ACost-Effective Systems Approach” at the Pennsylvania BarInstitute’s 15th Annual Health Law Institute.

Marc S. Raspanti and Michael A. Morse made apresentation on “Qui Tam Litigation” at the Civil Legal EducationSeminar at the Delaware County Bar Association.

Kevin E. Raphael spoke on “We PREEMPT OurRegularly Scheduled Program to Bring You this SpecialEvent...Duty To Warn and Preemption,” and “Self-Disclosure andthe Ethical Duties of a Health Lawyer,” at the Pennsylvania BarInstitute’s 15th Annual Health Law Institute.

Douglas K. Rosenblum presented on “A Judge with aGrudge” to the J. Willard O’Brien American Inn of Court.

Andrea M. Bartko co-presented the “Year in Review”portion of the Pennsylvania Bar Institute’s “Day on Real Estate”seminar.

Kathryn M. Kenyon sat on a panel at the AlleghenyCounty Bar Association’s Young Lawyer’s Division on “TrialTechniques.”

Richard J. Parks presented on “Bankruptcy PreferenceLitigation: Navigating the System in 2009” at a NationalConstitution Center Audio Conference.

Marc S. Raspanti and Divya Wallace authored anarticle in The Champion titled, “Will an Independent InternalInvestigation Always Make a Difference to a Corporation?”

Francis E. Pipak, Jr. spoke on “Understanding theWorkers Compensation Litigation System” at the PennsylvaniaChamber of Business and Industry Seminar.

Alexandra C. Gaugler will serve as co-chair of the Mid-Atlantic Chapter of the ABA’s Criminal Justice Section WhiteCollar Crime Young Lawyer’s Division.

Shannon Poliziani was recently elected to the Board ofDirectors of Pittsburgh AIDS Task Force.

Anthony J. Giaramita has been appointed to theAdvisory Board of the Haller Enterprise Institute at Thiel Collegein Greenville, PA.

Attorneys in the News

Upcoming EventsApril 22, 2009, Malvern, PA- Joseph D. Mancano will speak on “Financial Prosecutions: Be Aware of the Trends,” at the 2009Treasury Initiatives Conference.

April 23, 2009, Atlantic City, NJ- Marc S. Raspanti will present on “New Jersey False Claims Act,” at the Seminar for NJ Judiciary.

April 24, 2009, Washington, DC- Marc S. Raspanti will speak at the American Health Lawyers Association’s “Convener on Stark Law.”

April 28, 2009, Las Vegas, NV- Michael A. Morse will speak on “Apologies and Reporting of Medical Errors,” at the Health CareCompliance Association’s Compliance Institute.

April 29, 2009, Las Vegas, NV- Marc S. Raspanti will speak on “Negotiating False Claims Act Settlements” at the Health CareCompliance Association’s Compliance Institute.

May 6, 2009, Pittsburgh, PA- William Pietragallo, II, will speak at The Third Circuit Conference on “Demonstrative Video Evidence.”

May 8, 2009, Washington, DC- Marc S. Raspanti will present on “Whistleblowers and Subtle Retribution - Is the Concept ofWhistleblower Illusory?” at the First Annual National Institute on Internal Corporate Investigations and In-House Counsel Program.

May 15, 2009, Phoenix, AZ- Marc S. Raspanti will speak on “Alternative Dispute Resolution in Fraud Cases,” at the ABA FraudConference.

May 18, 2009, Pittsburgh, PA- Mark Gordon will sponsor a golf outing as a member of the Executive Committee of the AmericanCancer Society.

June 2-3, 2009, Pittsburgh, PA- William Pietragallo, II, will speak at the Pennsylvania Bar Institute’s seminar on “Developing andPresenting Your Case: A Case Study of A Few Good Men.”

June 3, 2009, Philadelphia, PA- Marc S. Raspanti will present on “Anatomy 101 of a False Claims Act Case,” at the PICPA HealthcareConference.

June 11-14, 2009, St. Paul, MN- Marc S. Raspanti will present on “Industry Spotlight: Drugs, Devices, and the False Claims Act,” atHamline University School of Law.

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