DECEMBER 2002 e-BULLETIN MEMBER NEWS Page ...€¢ Clayton Utz - BATA Appeal Upheld 3 • Davis Wright Tremaine LLP - 63 lawyers named best in America 4 • Hale and Dorr LLP Awarded

PRAC December 2002 e-BulletinPage 1 of 30

DECEMBER 2002 e-BULLETIN

MEMBER NEWS Page• Chairman's Message 2• Clayton Utz - BATA Appeal Upheld 3• Davis Wright Tremaine LLP - 63 lawyers named best in America 4• Hale and Dorr LLP Awarded Outstanding Web Site 5• Kochhar & Co. Notice of Information Change 6• Tozzini Freire Texeira e Silva - Notice of Information Change 6

COUNTRY ROUNDUPS• AUSTRALIA - Clayton Utz - New ASX Disclosure Rules from January 1, 2003 7• CHINA - Hong Kong - Lovells - First Scheme of Arrangement Approved for Largest Corporate

Failure in the Hong Kong Insurance Sector 9• UNITED STATES - Brobeck Phleger & Harrison - California Court Rejects The Doctrine

of Inevitable Disclosure 11• UNITED STATES - Hale and Dorr LLP - Enhanced Patent Re-Examination Procedures 21• UNITED STATES - Hogan & Hartson LLP - International Trade and U.S. Homeland Security 15

CALENDAR WATCH 2003

• PRAC New Zealand Conference 2003 April 5-9 (Auckland) April 10-11 (Queenstown) hosted by Simpson GriersonPublic Seminar/Auckland - "Taking New Zealand's Biotechnology to the World Market"Public Seminar Queenstown/Entertainment/Tourism & Sports IndustryEarly Indication Form - on line at web sitePreliminary conference info NOW AVAILABLE on line @ PRAC web site

• INTA Reception May 4 - NautaDutilh reception for PRAC members attending INTA 2003 - AmsterdamContact NautaDutilh

• PRAC Vancouver Conference 2003 September 20-24 hosted by Richards Buell Sutton

Tools to Use available at PRAC web site

• PRAC Contacts Matrix - December Update (members distribution only) 28

• Seattle 2002 Conference Handbook NOW AVAILABLE on line at PRAC web site• PDF Directory 2002-2003 Member Firms• Expert System 2002 available at PRAC web site Private Libraries

PRAC e-Bulletin published monthly and emailed to member firm Primary, Practice Group & Marketing contacts Members are encouraged to distribute the e-Bulletin within your firm as appropriate.

Send member contributions to [email protected] on or before the 15th of each month Visit the PRAC web site www.prac.org to view this edition and other information on line


PRAC Chairman's Message

TO ALL PACIFIC RIM ADVISORY COUNCIL MEMBERS

Dear Colleagues:

Following unanimous approval of the PRAC Board of Directors, I am pleased to confirm that King & Wood PRCLawyers have formally accepted membership in PRAC effective January 1, 2003.

King & Wood PRC Lawyers is a leading law firm in the People's Republic of China with extensive experience in allmajor areas of domestic and international practices. We are both pleased and honoured to have a firm of theirdistinction as a member of PRAC.

King & Wood have expressed that they will be present at the upcoming PRAC New Zealand Conference to be held inApril, 2003 where we will formally welcome them. In the meantime, I encourage each of you express your welcometo our newest member of the PRAC family.

The Primary Contact information for King & Wood PRC Lawyers in Beijing is as noted below:

Primary Contacts:Ms. Wang Ling, Managing PartnerMs. Xu Ping, Partner

Address: Level 30, North Office TowerBeijing Kerry Center1 Guanghua RoadChaoyang DistrictBeijing 100020

Telephone: 86 10 6561 2299Direct Line: 86 10 6561 0848Fax: 86 10 6561 0830 or 0840Email: [email protected]: [email protected]

For additional information about King & Wood, please visit the King & Wood web site at www.kingandwood.com

As we close out 2002, I would like to take this opportunity to extend best wishes to our friends and colleagues for theNew Year. I look forward to seeing you in New Zealand in 2003.

Jan Willem SodderlandChairman, PRACNautaDutilh - Amsterdam


Clayton Utz - BATAS Appeal Upheld

Media Statement

Melbourne, 6 December 2002: Mr David Fagan, Chief Executive Partner of Clayton Utz, today issued the following statement:

Clayton Utz has welcomed the Victorian Court of Appeal's decision to uphold the Appeal against the ruling of the VictorianSupreme Court in the matter of McCabe v BATAS.

The Court of Appeal has exonerated Clayton Utz, and senior partner, Brian Wilson, of any wrong doing in relation to advicegiven by the firm to BATAS in relation to document management.

Mr Fagan said the Court of Appeal decision stated that:

There was no evidence to justify the finding that Clayton Utz devised a strategy for the destruction of documents or insertedwords in the defendant's policy for the destruction of documents in order to claim that it existed for innocent purposes. Thesolicitors did no more than review the policy and give advice as to its legal consequences. (Synopsis of judgment)

The finding that Clayton Utz, through Brian Wilson, devised a strategy in 1990 in which BATAS was advised that it coulddestroy documents relevant to anticipated litigation and assert an innocent intention was not justified. (para 90 of judgment)

It agreed with the submission that Mr Wilson's letter of advice of 29 March 1990 was not only legally correct, but was entirelyappropriate. (para 91 of judgment)

It was unjustified to describe the Oxland notes as notes which Mr Wilson "might have thought were never likely to see the lightof day" for there was nothing to indicate that Mr Wilson ever saw the notes, or approved them let alone concurred with them.(para 93 of judgment)

"I would like to thank our clients, partners and staff for their ongoing support. As one of Australia's pre-eminent law firmsClayton Utz remains committed to upholding our reputation for providing clients with the highest standards of professional andethical advice," Mr Fagan said.

"We have a national reputation for the quality of our advice to the corporate and government sectors. At the core of our valuesis the integrity of that advice. Our partners and staff have been, and are, committed to these values.""We look forward to continuing to provide our clients with outstanding professional service."

For Additional Information contact:

Name: Elizabeth Weaver- Corporate Affairs ManagerTel: +61 2 9353 5451Fax: +61 2 8220 6700Email: [email protected]


Davis Wright Tremaine LLP - 63 Lawyers Named The Best Lawyers in America

FOR IMMEDIATE RELEASE - December 2, 2002

63 DAVIS WRIGHT TREMAINE LAWYERS NAMED THE BEST LAWYERS IN AMERICA

SEATTLE, DEC. 2, 2002 - 63 Davis Wright Tremaine lawyers (42 in the Seattle office; 8 in Portland, Ore.; 4 in Bellevue, Wash.; 2in Anchorage; 2 in New York, 2 in Washington D.C., 2 in San Francisco; and 1 in Los Angeles) were recently listed among TheBest Lawyers in America, 2003 - 2004. The Best Lawyers in America is regarded as the preeminent legal referral guide in theU.S. Lawyers are selected by their peers for inclusion in the publication based on their experience and competence.Woodward/White, Inc., publisher of The Best Lawyers in America, conducts this extensive nationwide survey of attorneys on abiennial basis. This year, approximately 17,000 attorneys nationwide (less than three percent of all attorneys in the country) wereselected for this honor.

Listed attorneys from Davis Wright Tremaine include: Antitrust Law: Francis A. Kareken (Seattle); Banking Law: William R.Miller (Portland), Norman B. Page (Seattle) and Daniel B. Ritter (Seattle); Bankruptcy and Creditor-Debtor Rights Law: C.Keith Allred (Seattle), Craig Miller (Seattle), David W. Oesting (Anchorage), Ragan L. Powers (Seattle) and James C. Waggoner(Portland); Business Litigation: Marvin L. Gray, Jr. (Seattle), Robert D. Newell (Portland), David W. Oesting (Anchorage) andStephen M. Rummage (Seattle); Corporate, M&A and Securities Law: Greg F. Adams (Seattle), Keith G. Baldwin (Seattle),Francis A. Kareken (Seattle), William G. Pusch (Seattle), John A. Reed (Seattle) and Daniel B. Ritter (Seattle); EmployeeBenefits Law: James F. Ambrose (Portland), Jeff Belfiglio (Bellevue), Ralph L. Hawkins, Jr. (Seattle) and Anne L. Northrup(Seattle); Environmental Law: Richard M. Glick (Portland); First Amendment: Laura R. Handman (New York), Bruce E. H.Johnson (Seattle), Victor A. Kovner (New York), Marshall J. Nelson (Seattle), Kelli L. Sager (Los Angeles), Daniel M. Waggoner(Seattle); Health Care Law: Susan G. Duffy (Seattle), Peter N. Grant (Seattle), Robert G. Homchick (Seattle), Keith M. Korenchuk(Washington D.C.), M. Steven Lipton (San Francisco) and Douglas C. Ross (Seattle); Intellectual Property Law: Stuart R.Dunwoody (Seattle) and Marshall J. Nelson (Seattle); Labor and Employment Law: Mark W. Berry (Bellevue), Robert A.Blackstone (Seattle), Mary E. Drobka (Seattle), Clifton L. Elliott (Seattle), Henry E. Farber (Bellevue), Parry E. Grover(Anchorage), Lawton Humphrey (Seattle), Mark A. Hutcheson (Seattle), Thomas A. Lemly (Seattle), and Michael Reiss (Seattle);Personal Injury Litigation: Dan O'Leary (Portland); Public Utility Law: Craig A. Gannett (Seattle), Lindsey How-Downing (SanFrancisco) and James B.Vasile (Washington D.C.); Real Estate Law: Thomas A. Goeltz (Seattle), John E. Keegan (Seattle),Dennis E. McLean (Seattle) and David W. Thorne (Seattle); Tax Law: C. James Judson (Seattle), Martin R. Morfeld (Seattle),LaVerne Woods (Seattle) and James E. Wreggelsworth (Seattle); Trusts and Estates: Steven W. Andreasen (Seattle), James A.Flaggert (Seattle), Patrick J. Green (Portland), Richard A. Klobucher (Bellevue), D. Charles Mauritz (Portland), Malcolm A. Moore(Seattle) and Kimbrough Street (Seattle).

DWT is a full service business and litigation law firm, with more than 400 attorneys in its 10 offices located throughout the PacificNorthwest, and in Anchorage, Los Angeles, San Francisco, New York, Washington D.C., Honolulu, and Shanghai, China.


Hale and Dorr Received Outstanding Web Site Award for Corporate Web Site Excellence

October 3, 2002

Hale and Dorr’s web site received an “Outstanding Web Site Award” in the 2002 WebAward Competition sponsoredby the Web Marketing Association.

Since 1997, the Web Awards have recognized web professionals for their outstanding work. Web MarketingAssociation (WMA), an independent organization, which evaluates and judges corporate sites on the World WideWeb, gives the awards. Over 800 sites were entered from around the world and judged during this year'scompetition. The entries were judged based on design, innovation, content, interactivity, navigation, ease of use, anduse of technology. The Hale and Dorr site was praised for its exceptional design, content and ease of use.

“Our web site reflects the high level of service and quality that our clients receive from Hale and Dorr,” said SilviaCoulter, director of marketing and business development, Hale and Dorr. “This award is a true testament to ourcommitment to client service and the hard work of the Hale and Dorr interactive, design and marketing teams.”Previous winners of this prestigious worldwide award include General Motors, CNET News.com, Deloitte Consultingand E! Online.

For additional information contact [email protected]


Kochhar & Co. - Notice of Information Change for New Delhi Office

Please note effective immediately the New Delhi office phone numbers have been changed from seven digits to eightby adding the number "2" to the number. The contact numbers are as follows:

New Delhi:

Phone: +91 11 2646 9606/ 264 75477Fax: +91 11 2646 9656/ 264 84932

Tozzini & Co - Notice of Information Change for Rio de Janeiro Office

Please note effective immediately the Rio de Janeiro office numbers have changed. The contact numbers are asfollows:

Rio de Janeiro

Phone: +55 21 3861 6100Fax: +55 21 3861 1111


AUSTRALIA - CLAYTON UTZ - New ASX Disclsoure Rules from 01 January 2003

1 January is the kick-off date for ASX's new continuous disclosure rules, which were officially released this afternoon (10December).

The new rules require disclosure of otherwise-confidential information where:• ASX believes that the information has ceased to be confidential; or• there is a danger of a "false market" in a company's securities.

This marks a significant change from the current regulatory regime.

The new rulesFor a long time, ASX Listing Rule 3.1 has required the immediate disclosure of information that would reasonably be expected tohave a material effect on the price or value of a company's securities.

There is a carve-out for confidential, incomplete business proposals and negotiations, where a reasonable person would notexpect the information to be disclosed. The "confidential" limb will now cease to apply if ASX forms the view that confidentiality islost. If ASX forms that view, it will tell the company immediately. Loss of confidentiality may be indicated by otherwise unexplainedchanges to the price of the company's securities or by reference to the information in media or analysts' reports.

Even when the three limbs of the carve-out are met, if ASX believes that there is (or is likely to be) a false market in thecompany's securities, it will require the company to make an announcement to correct or prevent the false market. A false marketcould arise through inaccurate or partly accurate media or other comment. However, ASX has said it would be more likely toconsider that a false market exists where comment about the company or its proposal is significant and credible and the detailsare reasonably specific or the market moves in a way that appears to be referable to such comment.

In a revised Guidance Note on continuous disclosure accompanying the new Rules, ASX indicates how it will require disclosure inthese circumstances.

For example, it may decide that the fact that negotiations are taking place is no longer confidential. In that case, it may ask thecompany only to confirm to the market that negotiations are taking place. The details of the transaction which have remainedconfidential may not have to be disclosed.

Where ASX believes that there is a false market in a company's securities, it will only require disclosure to the extent necessary tocorrect that false market. For example, it might only ask the company to confirm to the market that a media comment is accurate(or inaccurate).

The best way to understand how this might work in practice is to look at three hypotheticals provided by ASX.

General speculationX Ltd proposes to acquire D Ltd, a listed entity in the same industry. Although the acquisition has been contemplated by the boardof X Ltd for some time, no formal approach has previously been made. X Ltd and D Ltd have just begun confidential negotiationswith a view to X Ltd effecting a friendly takeover of D Ltd. Information about the negotiations is strictly limited to the parties andtheir advisors. Coincidentally a small item appears in the Financial News speculating about rationalisation in the industry, andmentioning both X Ltd and D Ltd among others, as potential targets.

ASX says that it would normally not require a response. The media comment appears to be speculative and based on generallyknown circumstances about the industry and industry analysis of that information rather than the specific circumstances of X Ltd.

Inaccurate media comment — false marketDiscussions between X Ltd and D Ltd proceed as before but are significantly advanced. Only one significant issue remainsunresolved. After a few days of intense discussions it becomes apparent that neither party will concede and the proposal isabandoned. A day or so later, two of D Ltd's advisers are in a lift discussing the failed proposal. Only part of their conversation isoverheard by a senior reporter with the Financial News, and on the following day, that paper features an article about a proposeddeal between the parties under the headline "X Ltd to make bid for D Ltd".ASX says that both companies should confirm to the market that following negotiations there is no intention to proceed with a bid.In the absence of any clarification from the entities, the inaccurate media comment would be likely to create a false market in thesecurities of both entities, as investors would not know whether the comment is accurate or not.

Accurate media comment — confidentiality lostAfter a number of months and a change in circumstances relating to the "road-block" issue, the discussions between X Ltd and DLtd are resumed. After working late one night, two of X Ltd's advisers go to a bar and discuss a number of key details of thenegotiations. They are overheard by a freelance analyst and author of a popular securities newsletter available by subscriptiononly. Early the next morning, the analyst prepares a report on X Ltd which includes details of the negotiations, and circulates thereport to his subscribers by e-mail. Both X Ltd and D Ltd are alerted to the existence of the report by enquiries from shareholders.


The price of X Ltd's securities decreases by 5% and the price of D Ltd's securities increases by 10% immediately the marketopens.

ASX would require both companies to disclose the fact that negotiations are taking place. It says that such disclosure would berequired because the negotiations are no longer secret and their existence has been disseminated to a sector of the market. It isirrelevant who disclosed the details of the negotiations or how dissemination occurred. Details of the terms of the proposedtakeover need not be revealed until they are finalised.

ASX also says that it would be appropriate for both entities to request a trading halt pending the release of announcements by theentities.

For Additional Information contact Clayton Utz.


Lovells - Hong Kong - First Scheme of Arrangement proposed for largest corporate failure in Hong Kong InsuranceSector

First Scheme of Arrangement proposed from extended provisional liquidation approved for HIH Group's Hong Kongsubsidiaries, the largest corporate failure in the Hong Kong insurance sector.

December 5, 2002

On 25 November 2002, the Hong Kong High Court sanctioned schemes of arrangement under section 166 of the Hong KongCompanies Ordinance for three Hong Kong subsidiaries of the insolvent Australian HIH Insurance Group. These are HIHInsurance (Asia) Limited, HIH Casualty and General Insurance (Asia) Limited and FAI First Pacific Insurance Company Limited("the Companies"). The procedure under section 166 Companies Ordinance is substantially identical to that available undersection 425 of the English Companies Act 1985

The Schemes of Arrangement are ground breaking in a number of areas:

• The Schemes apply to the Companies and their Hong Kong insureds. This is because Hong Kong insurance claims havepreferential status. In the United Kingdom, insurance and reinsurance claims, by contrast, are unsecured claims, rankingequally for payment with other unsecured claims. From 20 April 2003, insurance (although not reinsurance) claims willreceive preferential treatment under the EC Directive on the Reorganisation and Winding-up of Insurers. The successfulproposal and implementation of schemes of arrangement against a current, similar legislative backdrop to that proposedin the United Kingdom will be a template for the London Market.

• The Schemes provide for the payment in full of small claims; in the case of HIH Insurance (Asia) Limited of up to HK$10,000.

• The Companies were writing new business until shortly before their provisional liquidations. The drafting, negotiation andapproval of the Scheme took place within a 12 month period.

• The repeated extension of the Companies' provisional liquidations and the use of the provisional liquidation regime asthe platform for drafting and implementing schemes of arrangement, while common practice in London Market insuranceinsolvencies was a first for Hong Kong.

• Lovells acted for Jan Blaauw and Peter Whalley, partners in PwC's Hong Kong practice, in the design and drafting of theschemes. Messrs Blaauw and Whalley were appointed as joint and several provisional liquidators of the Companies in April 2001.The appointment followed the provisional liquidation of the HIH Group in Australia after the disclosure of losses of Australiandollars 800 million. Now the schemes have been sanctioned, Messrs Blaauw and Whalley will also become SchemeAdministrators of the Companies and responsible for managing their affairs in accordance with the provisions of the Schemes.

The Schemes value the Companies' liabilities as at 30 September 2002. Creditors wishing to make claims against the Companiesmust submit details of those claims to the Scheme Administrators within the next six months. Claims will then be adjudicated bythe Scheme Administrators and disputed claims will be referred to a scheme adjudicator for final resolution.

In sanctioning the Schemes, Mr Justice Michael Hartmann said that the adjudication procedure would allow insureds of theCompanies to receive payment earlier and more cost effectively than would have resulted from their liquidation. The creditorsincluded 27,000 Hong Kong policyholders and organisations such as the Hospital Authority and Law Society.

The Lovells Hong Kong team was led by Philip Gilligan and Joe Bannister and included John Banks. Joe is now a partner inLovells' London business restructuring and insolvency practice, having returned there from Hong Kong in the Spring of 2002.

Philip Gilligan commented:

"We have enjoyed working with the provisional liquidators on this major Hong Kong insurance insolvency,particularly taking account of its far-reaching implications for this jurisdiction and the London Market. The claimsadjudication procedures in the Scheme both speed up the payment of creditors' claims and ensure theiradjudication in a consistent and transparent fashion"

For further information please contact:Joe Bannister, partner, London +44 (0) 20 7296 2000Philip Gilligan, partner, Hong Kong +852 2219 0888Anand Ramaswamy, marketing manager, Asia +852 2219 0888Alix Chapman, public relations, London +44 (0) 20 7296 5631

Notes for editors:


• Lovells is a leading international business law firm, with 334 partners, 1,500 lawyers worldwide, and a total of around3,000 staff across 26 offices in Europe, Asia and North America.

• In Asia Lovells has 22 partners and over 100 lawyers based in its Asian offices, providing a full range of business andlegal services.

• Lovells' Asian offices are: Hong Kong (1982), Tokyo (1990), Beijing (1992), Ho Chi Minh City (1994) and Singapore(1998).

• Lovells Hong Kong office was established in 1982 and is one of the leading international law firms in the region. The firmis celebrating 20 years in Hong Kong this year. The firm provides dedicated legal services to a broad range of clients incommerce, industry, banking and financial sectors. In Hong Kong over 60 lawyers provide dedicated legal and businessservices in key practice areas including corporate and commercial, banking and finance, capital markets, construction,project finance and infrastructure, restructuring and insolvency, information technology and e-commerce, venture capital,intellectual property, telecommunications, litigation and dispute resolution and property. Lovells is the Hong Kongmember of the Pacific Rim Advisory Council (PRAC).

The government of Indonesia officially converted the Tax Dispute Settlement Body (known as Badan Penyelesaian SengketaPajak or “BPSP”) into the Indonesian Tax Court by enacting Law Number 14 Year 2002 regarding the Tax Court (“Law on TaxCourt”), on 12 April 2002. The Tax Court, which according to this law is the continuation of the BPSP, will be authorized to handledisputes that pertain to taxation matters, and to examine and decide upon appeals that are brought against decisions that havebeen issued by the tax authorities.

The Law on Tax Court further states that the decision of the Tax Court is 'final', and that it is immediately executable in the sensethat it does not require the decision of other relevant authorities for its execution. Nevertheless, as a final resort, a request for areview (“peninjauan kembali”) of the Tax Court decision may be submitted to the Supreme Court through the Tax Court.

The enactment of the Law on Tax Court drew controversial media reactions. One argument states that it is not consistent with thestate constitution, the reason being that the constitution does not specify the Tax Court as one of the courts in the Indonesianjudicial system. Another argument along the same line points out that according to the Law Number 14 of 1970 on BasicProvisions on Judicial Authority, judicial authority is to be exercised by the General Affairs Court, the Religious Court, the MilitaryCourt and the Administrative Court.

Labor &Employment Law

Issue Alert

2002 CaliforniaLegislative Update

NOVEMBER

For information on Brobeck’s Labor & Employment Group,

please contact any of the following attorneys:

SAN FRANCISCOBrendan G. Dolan

(415) [email protected]

EAST PALO ALTOCarol Freeman (650) 331-4222

[email protected]

LOS ANGELESHoward Magee


SAN DIEGOJennifer A. Kearns


IRVINEGabrielle M. Wirth


AUSTINPaul Gleason


NEW YORKDaniel Weisberg


DALLASPaul Gleason


WASHINGTON DCStephen Riddick

(202) 220-5214 [email protected]

RESTONKevin Lavin

[email protected]

DENVER/BOULDERJulie Vehrenkamp


California Court Rejects The Doctrine Of Inevitable Disclosure

In Schlage Lock Co. v. J. Douglas Whyte, a California Court of Appeal unequivocally

rejected the inevitable disclosure doctrine, finding that application of this doctrine was

contrary to state public policy because it impermissibly restricted employee mobility by

creating an after-the-fact covenant not to compete.

Schlage Lock Company manufactures locks and related products, and competes with Kwikset

Corporation for, among other things, shelf space at The Home Depot. Whyte, a Schlage vice

president, was responsible for sales to Home Depot and other retailers. Whyte did not sign a

covenant not to compete, but he did agree to keep Schlage’s proprietary information

confidential. On June 3, 2000, Whyte accepted a position with Kwikset. He did not resign

from Schlage until June 14, however. While still employed by Schlage, but after he had

accepted a position at Kwikset, Whyte participated, on Schlage’s behalf, in a confidential

meeting with Home Depot. Following Whyte’s departure, Schlage filed suit (claiming that

Whyte stole confidential information and failed to return company property) and sought an

injunction.

The trial court directed Whyte to return Schlage’s property, and temporarily prohibited

Whyte from using twenty categories of trade secret information. Whyte returned to Schlage a

bag of shredded documents and several destroyed computers disks. After two hearings, the

lower court denied Schlage’s requested relief, and dissolved the temporary restraining order.

On appeal, one of the arguments raised by Schlage was that Whyte should be precluded from

working for Kwikset under the so-called “doctrine of inevitable disclosure.” Under this

doctrine, an employer can prove a claim of trade secret misappropriation by demonstrating

that a former employee’s new employment will “inevitably” lead him to rely on his former

employer’s trade secrets. The doctrine is premised on the assumption that an employee does

not have an “uncanny ability to compartmentalize information,” and that an employee “will

necessarily rely – consciously or subconsciously – upon knowledge of the former employer’s

trade secrets in performing his or her new job duties.” In applying this doctrine, which is

recognized in a number of states, courts have considered the degree of similarity between the

employee’s former and current positions, the degree of competition between the former and

current employers, and the employee’s forthrightness in his activities before accepting a new

job. In this case, Schlage argued that Whyte’s position at Kwikset is identical to the position

he held at Schlage, and that Whyte had improperly concealed his intentions from Schlage

while participating in confidential meetings on its behalf.

The Court of Appeal noted that under the inevitable disclosure doctrine, an employer may

successfully prevent a former employee from obtaining future employment without any proof

of actual or threatened use of trade secrets. Instead, the doctrine is based entirely upon the

assumption that the employee will “inevitably” use his former employer’s trade secrets in the

BROBECK Labor and Employment Law 2002 California Legislative Update2

new employment. The court found (1) that this result was

contrary to California public policy, which strongly favors

employee mobility, and (2) that applying the doctrine of

inevitable disclosure “creates a de facto covenant not to

compete.” The court refused to invoke the doctrine as a substi-

tute for proving actual or threatened misappropriate of trade

secrets.

Employer’s Unauthorized Access To Employee’s Secured Website

Is Not Unlawful Wiretap

The Ninth Circuit Court of Appeals recently held that an

employer’s viewing of its employee’s secured website was not a

violation of the federal Wiretap Act, because the employer’s

surreptitious viewing of the website was not an “interception”

of an electronic communication during its transmission.

Robert C. Konop v. Hawaiian Airlines, Inc., No. 99-55106

(9th Cir. August 23, 2002).

Robert Konop, an airline pilot, sued his employer, Hawaiian

Airlines, claiming that the company had violated both the

federal Wiretap Act and the Stored Communications Act by its

unauthorized viewing of the contents of his secured website.

Konop used the website to post bulletins that were critical of

the company and the pilots’ union, and that advocated differ-

ent union representation. Other company pilots accessed this

website using passwords. The terms and conditions of access to

Konop’s website specifically prohibited any member of manage-

ment from viewing site contents; it also prohibited authorized

website users from disclosing site contents to anyone else. All

of the website’s users were required to access the site’s terms and

conditions prior to use.

Konop learned that, on numerous occasions, James Davis, a

company vice president, had accessed his website using the

passwords of two other pilots. Konop filed his action, claiming

that Davis’ acts were an “interception of an electronic

communication” in violation of the Wiretap Act, and that

Hawaiian Airlines had violated the Stored Communications

Act by accessing his secured website without authorization. The

trial court rejected Konop’s claims under both laws.

The Ninth Circuit grappled with the issue of whether the

website was an “electronic communication” under the Wiretap

Act. Under that statute, “electronic communication” is defined

as “any transfer of signs, signals, writing, images, sounds, data,

or intelligence of any nature transmitted in whole or in part by

a wire, radio, electromagnetic, photoelectronic or photooptical

system that affects interstate or foreign commerce . . . .” 18

U.S.C.A. § 2510(12). The court found that Konop’s website

was an “electronic communication.”

The court then analyzed whether the website had been

impermissibly “intercepted” by company management. Under

the statute, “intercept” is defined as “the aural or other acquisi-

tion of the contents of any wire, electronic, or oral communi-

cation through the use of any electronic, mechanical, or other

device.” 18 U.S.C.A. § 2510(4). The court observed that, on

its face, this definition would encompass any acquisition of an

electronic communication “regardless of when or under what

circumstances the acquisition occurs,” but concluded that

“Congress intended a narrower definition of ‘intercept’ with

regard to electronic communications.”

The court considered the plain meaning of the word

“intercept,” as well as the provisions of the Stored

Communications Act, which governs access to “stored . . .

electronic communications and transactional records.” Finding

that the website was more akin to a stored communication, the

court rejected Konop’s claim that Davis’ viewing of the site

amounted to an “interception” in violation of the Wiretap Act.

According to the court’s interpretation, an electronic communi-

cation can only be “intercepted” if it is “acquired during

transmission, and not while it is in electronic storage.” For

this reason, the court found no violation of the Wiretap Act.

The court also analyzed Konop’s claim under the Stored

Communications Act. This statute prohibits intentional

unauthorized access to “a facility through which an electronic

communication service is provided ... and thereby obtaining ...

access to a wire or electronic communication while it is in

electronic storage in such system.” Under the statute, a “user”

of the service – defined simply as one who uses the service and

BROBECKLabor and Employment Law 2002 California Legislative Update 3

is authorized to do so – may authorize a third party to access

an electronic communication. The court rejected Hawaiian

Airlines’ argument that Davis’ access was “authorized” by the

pilots who allowed him to use their passwords. Finding that

simply having access to the website is not equal to “using” it,

the court held that there was no evidence that the pilots were

in fact “users” at the time they gave Davis their passwords. The

court therefore reinstated Konop’s claims under the Stored

Communications Act.

The Broad Protections Of The FMLA Reach Mr. Mom

A federal court in Louisiana recently held that a father’s

absence from work to stay home and care for his healthy

children, while his wife stayed in the hospital to care for their

sick child, was protected by the Family and Medical Leave Act

(FMLA). Briones v. Genuine Parts, No. Civ. A. 01-1792,

2002 WL 1870022 (E.D. La. Aug. 12, 2002).

In July 2000, Julian Briones’ youngest son became gravely ill

and was hospitalized. Briones’ wife was required to stay in the

hospital with their son for several days. While she stayed at the

hospital, Briones, who was employed by Genuine Parts, took

off from work to care for his other three children. As required

by company policy, Briones advised his supervisor that he

would need time off from work. On his third day off, Briones

spoke to a supervisor and requested FMLA leave. The supervi-

sor asked Briones to resign. Briones returned to work the

following day and was immediately terminated. Briones filed

suit, claiming that his termination violated the FMLA.

Genuine Parts argued that Briones’ claim should be dismissed

because staying at home to care for healthy children was not

an absence covered by the FMLA. The court rejected this

argument, reasoning that, had Briones been staying in the

hospital instead of his wife, he would have been entitled to

FMLA. While noting the absence of any controlling authority,

the court found that Congress had passed the FMLA “to aid

families . . . faced with a crisis such as the one faced by Briones’

family,” and that the scope of the FMLA was broad enough to

encompass Briones’ claim.

Arthur Andersen Failed To "Warn" Its Part-Time Employees

Among its other, more highly publicized problems, Arthur

Andersen was recently found to have violated the Worker

Adjustment and Retraining Notification Act (the WARN Act)

by failing to give the requisite advance notice to part-time

employees who lost their jobs as a result of a mass layoff.

Roquet v. Arthur Andersen, No. 02 C 2689, 2002 WL

1900768 (N.D. Ill. Aug. 16, 2002).

Under the WARN Act, an employer cannot implement a plant

closing or mass layoff “until the end of a sixty-day period after

the employer serves written notice of such closing or layoff.”

An “employer” is defined as “any business enterprise that

employs either (A) 100 or more employees, excluding part-

time employees; or (B) 100 or more employees who in the

aggregate work at least 4,000 hours per week (exclusive of

overtime).” 29 U.S.C. § 2101(1) (emphasis ours). A class of

former part-time Arthur Andersen employees sued, claiming

that they had not been given the requisite notice.

Arthur Andersen argued that its former part-time employees

were not covered by the WARN Act because the statutory

definition of “employer” excluded part-time workers from

consideration in determining whether a company was subject

to the statute. The court rejected this argument, and held that,

notwithstanding the WARN Act definition of “employer,”

other definitions included in the statute did not exclude part-

time employees. For example, the term “affected employees” is

defined as “employees who may reasonably be expected to

experience an employment loss as a consequence of a proposed

plant closing or mass layoff by their employer.” 29 U.S.C. §

2101(5). Accordingly, the part-time employees were entitled to

notice, and could proceed with their claims.

BROBECK Labor and Employment Law 2002 California Legislative Update4

The Labor & Employment Alert is prepared by the Labor & Employment Group of Brobeck, Phleger & Harrison LLP. It is provided for information purposes to clients and others interested in

the subject matter and is not intended as legal advice. Readers should not act upon information in this publication without seeking professional legal counseling. The Labor & Employment

Alert is an analysis of recent developments in state and federal law affecting the employment relationship; it should not be relied upon as an opinion of the firm regarding any specific

matter. Clients of the firm are permitted to make copies for internal distribution.

Employees Must Be Paid On Payday. It Seems Simple But . . .

An employer who failed to pay an employee her salary on time

but who on payday made the required tax withholdings violat-

ed the Fair Labor Standards Act. In what has to be one of the

more creative legal arguments ever advanced, the company

argued that by withholding taxes and paying an employee’s

health benefits premiums, which amounted to more than

minimum wage, the company met its obligations under the

FLSA, even though no salary was actually paid. Mathis v.

About Your Smile, P.C., No. Civ. A. 02-CV-597, 2002 WL

1878894 (E.D.Pa. Aug. 14, 2002).

Mathis, a dentist, notified her employer in December, 2000, of

her intent to resign. Following her resignation, her employer

failed to pay her final paycheck and filed an action in state

court claiming that Mathis had breached her employment

contract. Mathis filed a lawsuit in federal court, claiming that

her employer had violated the FLSA and the Pennsylvania

Wage and Collection Law by improperly withholding her final

paycheck.

Under the FLSA, employers are required to promptly pay each

employee not less than minimum wage. In the court’s words,

“an employer must pay its employees at least minimum wage

on payday.” The employer in this case argued that it did not

violate the FLSA by withholding Mathis’ final check because

“on payday, [she] received wages in excess of the minimum

wage ‘free and clear’ through Defendants’ payment of federal,

state and local taxes and health insurance benefits on [her]

behalf.”

The court rejected this argument, finding that even if, for

argument’s sake, the employer’s payment of taxes and health

benefits were “pay” under the FLSA, there was no evidence that

those payments were made on payday. The fact that those

benefits were withheld on payday did not establish that they

were actually paid that day on Mathis’ behalf. Because the

employer had intentionally withheld Mathis’ paycheck, the

court ruled that she was also entitled to liquidated damages.

Note: Many state laws require that an employee’s final

paycheck be paid either at termination or on the next regular

payday. See, e.g., Cal. Lab. Code, §§ 201-208; 227.3 (if an

employer discharges an employee, the wages earned and unpaid

at the time of discharge are due and payable immediately);

N.Y. Labor Law § 191 (employers shall pay the wages not later

than the regular pay day for the pay period during which the

termination occurred).

If you have any questions about any of the issues addressed in

this Update, contact Karen Solimando at (212) 237-2594 or

[email protected]; or Tracy Thompson at (415) 442-

1758 or [email protected].

©2002 B

robeck, Phleger &

Harrison LLP

www.brobeck.com

AUSTIN · DALLAS · DENVER · EAST PALO ALTO · IRVINE · LONDON · LOS ANGELES · MUNICH · NEW YORK · OXFORD · RESTON · SAN DIEGO · SAN FRANCISCO · WASHINGTON, D.C.

focus onInternational Trade and U.S. Homeland Security

November 2002

Secure Trade of Goods: The Homeland Security Act of2002, Maritime Transportation Security Act of 2002,Advance Notice of Cargo Manifest Information and OtherRecent Initiatives

Several recent security-related developments will require importers, exporters, carriers, brokers and others to change their practices and expectations regarding the efficient movement of goods across U.S. borders. Additionally, the increasing focus of the U.S.Government and ports on improving security offers companies with innovative solutionspotential opportunities to help facilitate security throughout the supply chain. The focus ofthis overview is the landmark Homeland Security Act of 2002 ("Homeland Security Act," H.R.5005), the Maritime Transportation Security Act of 2002 ("Maritime Security Act," S. 1214), newrequirements regarding advance notice of cargo manifest information and several existingAdministration initiatives related to the secure transport of goods entering the United States.1

On November 19, 2002, the Senate passed the Homeland Security Act, thereby setting inmotion the planned establishment of the Department of Homeland Security. As the newhome for the U.S. Customs Service (Customs) and the Transportation Security Administration

Copyright © 2002.Hogan & Hartson L.L.P.All rights reserved.

1. Ensuring the secure movement of particular goods – specifically food, pharmaceuticals, medical devices, andcosmetics – presents additional implications for producers who manufacture such products within, or shipsuch products to, the United States. For a summary of the new Public Health Security and BioterrorismPreparedness and Response Act (Pub.L. 107-188) enacted in June 2002, please see http://www.hhlaw.com/pub-lications/ (Food, Drug, Medical Device and Agriculture: "The U.S. Food and Drug Administration'sImplementation of the Bioterrorism Act: Applicability to Exporters of Products to the United States"). Rules gov-erning the movement of people across U.S. borders have also been the focus of significant recent revisions.More information on legislative changes, as well as new regulations regarding special registration require-ments for nationals of certain countries and tracking of students and non-U.S. citizens within the United States,are also available at http://www.hhlaw.com/publications/ (Immigration).

http://www.hhlaw.com/publications



(TSA), the Department of Homeland Security will now assume lead responsibility for inspect-ing goods that enter the United States and directing projects to ensure a more secure globalsupply chain. In addition, on November 14, 2002, Congress approved the Maritime SecurityAct, often referred to as the "Port Security Act." This bill imposes new obligations on ship-ping companies, importers and others, authorizes funding for new technologies to improvesecurity at American seaports and calls for improved security measures at foreign seaportsthrough which goods destined for U.S. ports travel. Closely intertwined with the MaritimeSecurity Act and U.S. Government security-related efforts are new cargo manifest require-ments and other Administration initiatives that affect the monitoring, securing and reportingof goods being transported to the United States.

The Homeland Security Act

By combining approximately 170,000 federal workers from 22 current government agencies,the new Department of Homeland Security will represent the largest federal governmentreorganization since the creation of the Department of Defense in 1947. The Department'sinitial annual budget is expected to exceed $35 billion. The Act creating the Department willtake effect 60 days after the date of enactment, and the President must submit a reorganiza-tion plan to Congress no later than the effective date.

The functions of the new Department will revolve primarily around four directorates: (1) Information Analysis and Infrastructure Protection (to assess U.S. vulnerabilities and mapthem against foreign threats); (2) Science and Technology (to consolidate disparate effortsand policies related to chemical, biological, radioactive and nuclear threats); (3) EmergencyPreparedness and Response (to direct one overarching response in the event of terroristattacks and other emergencies); and (4) Border and Transportation Security (to prevent theentry of terrorists and instruments of terrorism into the nation's ports and transportation systems). The Directorate for Border and Transportation Security is expected to have themost significant effect on the flow of international trade.

Both Customs and TSA will be transferred as distinct entities into the Border andTransportation Security Directorate.2 The Department of Homeland Security also will assumeauthority over the U.S. Coast Guard, which will remain an independent entity and be respon-sible for policing U.S. waters through which goods are transported. The Homeland SecurityAct does not alter the missions of these agencies. The new Department is, however, expect-ed to proceed with implementing the changes mandated by the Maritime Security Act andother initiatives discussed below. For example, the Homeland Security Act contains a provi-sion to fund the continued construction of Customs' Automated Commercial Environment(ACE), a new mechanism for importers to monitor their trade accounts.3 Furthermore, theHomeland Security Act requires the Department of Homeland Security, the Department ofAgriculture, the Department of Health and Human Services and other relevant agencies todevise a plan no later than 18 months after the enactment date to exchange informationregarding goods that are imported into the United States and inspected or regulated by oneor more agencies.

2. Selected Customs revenue-related functions will remain under the authority of the Treasury Department.3. On May 1, 2002, Customs announced the first phase of the ACE, which will replace its existing Automated

Commercial Systems (ACS) and develop full electronic processing of commercial importations. 67 Fed. Reg.21800 (May 1, 2002).

International Trade and U.S. Homeland Security | 2

Funding authorization for the changes anticipated in the Homeland Security Act is not yetcomplete, with Congress having specified funding at 2002 levels until January 11, 2003.Additional funding measures will await Congress' return in January 2003.

The Maritime Transportation Security Act

The purpose of the Maritime Security Act is to address security vulnerabilities related totrade through U.S. seaports. The bill – which the President is expected to sign in lateNovember 2002 – imposes new obligations on businesses that import or export goods to theUnited States, companies that operate facilities at U.S. ports, brokers, carriers and non-ves-sel operating common carriers. Notable provisions include:

l Automatic identification systems (AIS) on all commercial vessels: All commercial vessels navigating in U.S. waters must be equipped with AIS. Vessels that are built on orafter January 1, 2003, must be equipped with AIS at the time of construction. Vessels builtbefore January 1, 2003 that are also passenger vessels required to carry a SOLAS certifi-cate, tankers or towing vessels that move tank vessels must install AIS by July 1, 2003.All other vessels built before January 1, 2003, must be equipped with AIS by December 31,2004. In addition, the Department of Homeland Security may implement a long-rangeautomated vessel tracking system for all vessels in U.S. waters that employ the GlobalMaritime Distress and Safety System or other satellite technology.

l Restrictions on entry of goods originating from or transshipped through foreign portswith inadequate security: The bill requires the Department of Homeland Security toassess the antiterrorism measures implemented at foreign ports served by U.S.-boundvessels. If the Secretary determines that a foreign port does not maintain effectiveantiterrorism measures, the Secretary of the Department of Homeland Security may takeactions 90 days after notifying the foreign government, including prescribing conditionson goods originating from or transshipped through that port.

l Mandatory development of security plans by certain vessels and facilities at U.S. ports:The bill requires owners or operators of vessels and facilities that the Secretary of theDepartment of Homeland Security believes "may be involved in a transportation securityincident" to develop security plans for deterring such incidents to the maximum extentpracticable. The owners or operators must develop and submit such plans to theSecretary of the Department of Homeland Security within six months after interim finalregulations are issued regarding these security plans.

The Maritime Security Act also mandates several additional security features involving U.S.ports and the supply chain that may affect companies doing business through those ports.

l Developing secure systems of cargo transportation: Consistent with Customs' ContainerSecurity Initiative, the Act mandates development of a program to evaluate and certifysecure systems of cargo transportation. The program will include developing standardsand procedures for screening cargo prior to loading in a foreign port; establishing standards for securing cargo and monitoring it during transit; and setting performancestandards for seals and locks on shipping containers. The Secretary of the Department ofHomeland Security must develop these antiterrorism systems and performance standardsno later than January 1, 2004.

l Biometric transportation worker identification cards: The Act authorizes the develop-ment of transportation worker identification cards for access to secure areas of ports.


In addition, the Act directs the Secretary of the Department of Homeland Security to under-take a number of projects to enhance the physical security of seaports, including conductingvulnerability assessments, establishing local port security committees to coordinate lawenforcement efforts, and developing comprehensive security plans and incident responseplans for all ports, facilities and vessels.

While authorizing approximately $250 million in funds for security measures, the Act alsodirects the U.S. Government to devise additional fundraising proposals. Within six months ofthe enactment of the bill, the Secretary of the Department of Homeland Security must trans-mit a report to the Senate that includes a funding proposal for various Coast Guard projectsand development of port facility security plans for fiscal years 2003 through 2008. The reportmust also include projected funding proposals for the AIS, the secure system of cargo trans-portation, the transportation worker identification cards, a system of polling vessels enteringU.S. waters, maritime intelligence requirements and the Sea Marshall program. A hotly dis-puted provision that would have imposed a port security user fee as a method of generatingfunds was removed from the legislation prior to final passage.

Advance Notice of Cargo Manifest Information

In addition to the above changes, the Maritime Security Act would amend relevant portionsof the Trade Act of 2002 (Pub.L. 107-210) to require regulations to be issued, no later thanOctober 1, 2003, regarding the electronic transmission from bonded carriers of cargo mani-fest information prior to the arrival or departure of the cargo. These requirements are to beimplemented for all modes of transportation, including sea, air, rail, and surface.

The U.S. Customs Service issued final regulations related to sea transport on October 31,2002, requiring that bonded carriers electronically transmit cargo manifest information 24hours in advance of loading of U.S.-bound cargo in foreign ports. 67 Fed. Reg. 66,318.Customs' final regulations have generated significant concern in the trade communitybecause of potential delays that may result from inadequate documentation, as well as theextensive information required. For example, Customs has stated that it will no longer acceptgeneric cargo manifest descriptions such as "freight of all kinds" (FAK), "general cargo" or"said to contain" (STC). Carriers are instead required to provide a precise description (orHarmonized Tariff Schedule numbers to the 6-digit level) and weight of the cargo or, for asealed container, the shipper's declared description and relevant weight.4

Customs states that it will not grant permits to unlade any cargo for which it has not receivedtimely or accurate manifest information. Violations may result in penalties or liquidated dam-ages. The new manifest rule will take effect on December 2, 2002, although Customs willdelay enforcement actions for non-fraudulent violations of the new rule for an additional 60days (January 31, 2003). Bulk cargo is exempt from the advance notification requirement;break-bulk cargo is not exempt, but Customs will consider administrative exemptions for

4. Other information required will now include: (i) the last foreign port before the vessel departs for the UnitedStates; (ii) the Standard Carrier Alpha Code (SCAC); (iii) the carrier-assigned voyage number; (iv) the vessel'sscheduled arrival date at the first U.S. port in Customs’ territory; (v) the numbers and quantities from the carrier's ocean bills of lading; (vi) the first foreign port where possession is taken of the U.S.-bound cargo; (vii) the shipper's complete name and address, or identification number upon implementation of the ACE, fromall bills of lading; (viii) the complete name and address of the consignee or the owner or owner's representa-tive, or ACE identification number, from all bills of lading; (ix) the vessel name, country of documentation, andofficial IMO vessel number; (x) the foreign port where the cargo is laden on board; (xi) the internationally recognized hazardous material code if applicable; (xii) the container numbers if applicable; and (xiii) the sealnumbers for all seals affixed to containers.


break-bulk cargo on a carrier-by-carrier basis. Customs considers the new manifest require-ments to be a critical part of its Container Security Initiative (CSI), a new program (describedbelow) that includes targeting high-risk containers through the use of automated information.

In anticipation of meeting the October 1, 2003, deadline for issuing regulations for othermodes of transportation, Customs expects to begin consulting with the trade community inJanuary 2003.5 In addition, the Security Assistance Act of 2001, incorporated into Public Law107-228, requires advance manifest information for exporters, and the Public Health Securityand Bioterrorism Preparedness and Response Act will require presentation to the Food andDrug Administration of advance manifest information for importers and exporters of productscovered under that Act (foods, pharmaceuticals, medical devices and cosmetics).

Other Developing Initiatives

In addition to implementing new legislation, the Department of Homeland Security plans tocontinue several trade-related initiatives already begun in response to September 11:

l Customs-Trade Partnership Against Terrorism (C-TPAT): In April 2002, Customs launchedC-TPAT, a joint government and business partnership which asks businesses to ensurethe security of their own supply chain in an effort to strengthen overall supply chain secu-rity. Participation in C-TPAT is open to most aspects of the supply chain, includingimporters, carriers (air, rail, sea), air freight consolidators/ocean transportation intermedi-aries, brokers, non-vessel operating common carriers and manufacturers. To encourageenrollment, Customs offers several potential benefits to C-TPAT participants, including thepossibility of fewer inspections, an assigned account manager, access to the C-TPATmembership list, and eligibility for account-based Customs processes. C-TPAT is alsobecoming a prerequisite for participation in selected other Customs programs.Businesses must apply for membership and must agree to implement a security programin accordance with C-TPAT guidelines, as well as provide Customs with a range of infor-mation. According to Customs, over 1100 companies have enrolled in C-TPAT as ofNovember 2002.

l Container Security Initiative (CSI): In January 2002, Customs launched the CSI to reducethe risk of a terrorist attack stemming from containerized cargo. CSI consists of four coreelements: (1) using automated information to identify and target high-risk containers; (2) pre-screening those containers identified as high-risk before they arrive at U.S. ports;(3) using detection technology to pre-screen high-risk containers quickly; and (4) usingsmarter, tamper-proof containers. Customs has initially targeted twenty of the world'slargest seaports responsible for more than half of all seagoing containers bound for theUnited States. Its goal is to place Customs inspectors in foreign ports to help pre-screencargo containers before departing for the United States.

l Free and Secure Trade (FAST): The FAST program is a bilateral initiative between theUnited States and Canada to facilitate secure trade at the border. Importers, carriers andcommercial drivers who enroll in FAST may benefit from more efficient clearanceprocesses for commercial shipments. FAST processing is based upon advanced trans-mission of information relating to known low-risk shipments. A truck that uses the FASTlanes must be a FAST approved carrier, carrying qualifying goods from a C-TPAT


5. Initial meetings are currently scheduled for January 14 (air), January 16 (truck), January 21 (rail) and January23 (sea).

approved importer, and be in possession of a valid FAST-Commercial Driver Card. Theprogram is scheduled for implementation at Canadian ports in December 2002.

Given the breadth of the security-related changes being implemented, they are likely to havesignificant consequences for an extended period. Hogan & Hartson will continue to trackthese new developments.

For more information, please contact the following Hogan & Hartson attorneys:

Jeanne S. Archibald Washington, DC202/637-5740email: [email protected]

H. Deen Kaplan Washington, DC202/637-5799email: [email protected]

Lucinda T. Yeh Washington, DC202/637-5867email: [email protected]

www.hhlaw.com

This article is for informational purposes only and is not intended as basis for decisions in specific situations. Thisinformation is not intended to create, and receipt of it does not constitute, a lawyer-client relationship.


mailto:[email protected]



http://www.hhlaw.com


UNITED STATES - Hale and Dorr - Enhanced Patent Re-Examination Procedures

Enhanced Patent Reexamination ProceduresDecember 2, 2002

For the second time in three years, Congress has made substantial revisions to the laws governing the reexamination of issuedU.S. patents. The changes are intended to make the reexamination procedure a more effective means for interested third partiesto challenge the validity of issued patents, and a more attractive alternative to litigation. However, despite the changes,reexamination continues to allow only limited challenges to patent validity, and differs significantly from patent litigation.

Reexaminations provide a means for patent owners or third parties to request that the Patent Office reexamine patent claims inlight of a "substantial new question of patentability" that casts doubt upon the validity of the issued claims.

Such new questions of patentability are limited to those arising from patents or printed publications filed or published before thepriority date of patent. The substantial question cannot be based on other information that could otherwise be considered prior art,such as a public use or a commercial offer for sale of the invention more than a year before the filing date, or other grounds forinvalidity, such as a failure to provide an adequate written description or failure to "enable" the invention.

Until the most recent change to the law, reexaminations required that the "new question" be based at least partly on "new" priorart, which had not previously been considered by the Patent Office.

When the reexamination procedure was created in the early 1980's, it was limited to a largely "ex parte" procedure conductedbetween the patent owner and the Patent Office. Even when the reexamination was requested by a third party, that third-partyrequester had no right to participate actively in the proceedings after the preliminary stages. Thus, although a third-party requestercould review the written proceedings between a patent owner and the Patent Office, there was no opportunity to rebut thearguments of the patent owner or to submit additional evidence after the initial phase of the proceeding, except by filing a furtherrequest for reexamination, which would require another new question of patentability.

In 1999, the American Inventors Protection Act ("AIPA") created a new "inter partes" reexamination procedure as an optionalalternative to the largely "ex parte" procedure. The inter partes procedure is limited, however, to patents that issued fromapplications filed on or after November 29, 1999.

The new procedure affords third-party requesters much greater participation in patent reexaminations. A third-party requester inan inter partes proceeding can:

• provide written comments on each of the patent owner's written submissions to the Patent Office;• present new arguments and submit new evidence in rebuttal if the patent owner raises new issues or presents new

evidence; and• appeal an adverse reexamination decision to the Patent Office's Board of Appeals (but, unlike the patent owner, under

the AIPA the requester did not have the right to appeal an adverse decision to a federal court).

The inter partes procedure also has some drawbacks. The third-party requester is estopped from asserting invalidity in a laterlitigation on any ground raised or that could have been raised in the inter partes reexamination. The statute provides that theestoppel does not apply to newly discovered prior art, not available to the requester at the time of the reexamination.

In October, Congress passed new legislation, which further amends the reexamination laws. The new law provides that asubstantial new question of patentability need not be based on "new" prior art for either ex parte or inter partes reexaminations.Rather, it can be predicated on prior art that was previously cited or considered by the Patent Office. Although this revision allowsthird parties to question the Patent Office's original determination of patentability without any need to identify new prior art, it is stillnecessary to raise a substantial new question of patentability.

The new law also provides a third-party requester of an inter partes reexamination with the right to appeal adverse Patent Officedecisions to the Court of Appeals for the Federal Circuit, thereby putting patent owners and third-party requesters on more equalfooting.

The cost of a reexamination proceeding to a third-party requester may be a small fraction of the cost of litigation. A reexaminationmay also provide for a quicker determination of the effects of the prior art. In addition, a third-party may request reexamination ofa patent without engaging in any allegedly or potentially infringing commercial activity. This allows a company to test the validity ofa patent's claims before expending substantial resources to develop a product or process that might later be found to infringe.

However, reexaminations have significant limitations:• some issues of patentability that can be considered in litigation, such as the adequacy of a patent's written description,

compliance with the "best mode" requirement, or bars arising from prior public use or commercialization cannot beconsidered in a reexamination;

• a reexamination is limited to considering documentary prior art (patents and printed publications);


• unlike court proceedings, reexamination does not allow for subpoenas, interrogatories, depositions, or live testimony andcross-examination of witnesses;

• an inter partes reexamination can create an "estoppel," preventing the requesting party from raising arguments inlitigation that could have been raised in the reexamination.

A reexamination that does not invalidate or significantly narrow the claims of a patent can leave the patent stronger than before.Thus, it should be used only in limited circumstances.

Michael [email protected] [email protected] PRAC Members: see Web Site for Matrix & Conference info

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DECEMBER 2002 e-BULLETIN MEMBER NEWS Page ...€¢ Clayton Utz - BATA Appeal Upheld 3 • Davis Wright Tremaine LLP - 63 lawyers named best in America 4 • Hale and Dorr LLP Awarded