Bernstein Shur Business and Commercial Litigation Newsletter #35
December 2013 | Issue 35
We are pleased to present the 35th edition of the Bernstein Shur Business and Commercial Litigation Newsletter. This month, we highlight news that will have an impact on business and litigation, including stories addressed to patent protection for software, class actions involving Facebook and a unified fiduciary duty for broker-dealers and investment advisors. We hope you enjoy the newsletter.
In the News:
The U.S. Supreme Court has agreed to hear a case that will determine the scope of patent protection for computer software. In the underlying case, CLS Bank sued a software developer, Alice Corporation, seeking to invalidate its patent on a method used for electronic settlement of financial trades. CLS challenged Alice Corp.’s patent on grounds that the claimed invention was nothing more than an “abstract idea,” ineligible for patent protection. On appeal, the Federal Circuit, en banc, affirmed a District Court ruling that the claimed patents were invalid, including that Alice Corp.’s method claims were not eligible for patent protection. Under the Section 101 of the Patent Act, patent protection is available for inventions that are useful, novel and non-obvious, but mere abstract ideas cannot be patented. In general, mathematical formulas cannot be patented, but new and useful methods or processes that apply mathematical algorithms may be eligible for patent protection. For years, lower courts have struggled to reach consensus on the proper analytical framework to apply to patent disputes involving software. Analysts believe that review by the High Court will provide much needed clarity concerning the standards applicable to software patents.
Facebook must defend class action lawsuits regarding its initial public offering and purchases of “Facebook Credits” by minors. The first class action, pending in the U.S. District Court for the Eastern District of New York, concerns securities claims by investors alleging that Facebook was negligent in preparing its registration statement for its IPO. In particular, plaintiffs assert that Facebook made materially misleading statements and omissions by failing to disclose the effect of increasing mobile usage and limitations in its technological capabilities. Denying Facebook’s motion to dismiss the class action, U.S. District Judge Robert Sweet held that the class plaintiffs plausibly alleged that Facebook made inadequate disclosures and had a duty to correct flawed information about its technological capabilities. Separately, Facebook also must defend a putative class action in California addressed to minors’ purchases by credit card of “Facebook Credits,” which are used to buy Facebook applications and games. Plaintiffs in that case sought refunds from Facebook stemming from purchases of hundreds dollars of credits using their parents’ credit cards. Plaintiffs argued that the transactions are void or voidable based on their lack of legal capacity, but Facebook has denied liability on contract grounds and declined to issue refunds. Last week, U.S. District Judge Claudia Wilken held that the minor plaintiffs asserted plausible claims, denying Facebook’s motion to dismiss the action.
A SEC advisory committee has recommended that broker-dealers should be subject to the same heightened fiduciary duty standards as registered investment advisors. Under the present framework, broker-dealers are required to recommend only “suitable” investments, but are exempt from heightened fiduciary duties applicable to investment advisors. The fiduciary duties applicable to investment advisors include duties of good faith, loyalty and due care, and also require that the advisor act in the best interests of client. Under authority of the Dodd-Frank Act, the SEC has conducted a study that is expected to result in uniform fiduciary duties for broker-dealers and investment advisors. However, the SEC’s efforts to implement a unified fiduciary standard have stalled under the weight of implementation of other Dodd-Frank provisions. The recommendation of the SEC’s Investor Advisory Committee in favor of a unified fiduciary standard may renew momentum to impose heightened duties on broker-dealers.
Read more about this development here.