Thalidomide in America

Posted by Steve Berman on Nov. 2, 2011 | 0 comments

On September 18, 1962, a baby boy was born in the small town of Brownfield, Texas. Immediately after he was born, doctors noted that the boy had serious and disfiguring birth defects. He was missing his right leg, including his foot. He had no fingers on his right hand and his right arm ended above the elbow.

The baby, named Philip Yeatts, has lived his life without the use of his right leg or hand. He persevered and grew into a strong-willed and determined man. In fact, he became a professional racecar driver, using a specially modified car to win a championship in the U.S. Legends Series in 2008.

Its tempting to end Philips’ story there, and honor his courage and determination to overcome his disability. But there is much more to this story. We believe that Philip was not simply victim of poor luck. We think that his birth defects were a preventable tragedy, side effects from a dangerous drug called thalidomide.

Those of us who were alive in the early 1960s remember the tragedy caused by thalidomide. The drug was widely available in Europe, given to pregnant women to ease morning sickness. We now know that the drug caused debilitating birth defects, resulting in thousands of infant deaths and shocking deformations throughout Europe and elsewhere around the world. The pictures Americans saw of thalidomide babies shocked the nation’s collective consciousness, infants with what appeared to be flippers where arms should be, among other severe malformations.

Yet, at the same time the tragedy seemed so far away. The FDA never approved the drug here, so it was never widely used in the U.S., or so we were told. Later, Billy Joel’s song “We Didn’t Start the Fire,” would juxtapose the European tragedy, “children of thalidomide,” with a much more American tragedy, “Starkweather homicide.”

The belief that America avoided the thalidomide tragedy has persisted for nearly 50 years now, but we believe we have discovered evidence that casts doubt on the story. Newly uncovered and translated documents, combined with new medical advances that help us to better understand how thalidomide works, suggests that there may be many victims in the United States that were never identified.

Even worse, our research has uncovered evidence that the thalidomide tragedy was foreseeable and preventable, but due to the greed of a number of drug companies, safety risks were overlooked and covered up.

The origins of thalidomide take us back to post-war Europe, specifically to the early 1950s in Germany. In 1953-54, German pharmaceutical company Chemie Grunenthal synthesized thalidomide for the first time, and subsequently received a German patent to begin producing and distributing the drug. Grunenthal originally considered the drug a panacea, or at least marketed it as such, claiming it could cure everything from the common cold to premature ejaculation.

New documents suggest that on Christmas Day 1956, an earless baby was born to the wife of a Grunenthal employee who had taken thalidomide during pregnancy. Yet, instead of slowing down development and running more tests, the company continued to push ahead. A mere 10 months later, in October 1956, the drug was released for commercial, over-the-counter sale in Germany.

In 1956, the company entered into an agreement with U.S. pharmaceutical company Smith Kline and French (SKF) to begin domestic testing of thalidomide on animals and humans, including pregnant women.

By August 1958, a pregnant woman participating in the SKF trial delivered a malformed baby. Unlike Grunenthal, who decided to move ahead with the drug, SKF declined to market it in the U.S. However, from what we have seen, the company never let the public know about its test results. The failure to disclose test results is no trivial matter; it is possible that if SKF had sounded an alarm bell early, the distribution of thalidomide in the United State and elsewhere might have been slowed, and less people would have been exposed to the drug.

Having failed to convince SKF to distribute the drug, Grunenthal signed a U.S. distribution agreement for thalidomide with the William S. Merrell Company. Merrell began human trials simultaneous with animal trials in February 1959, and expanded the trials to include pregnant women in May 1959, all while conceding that it had no access to any human clinical safety data.

We believe that sometime during 1959, Grunenthal destroyed its testing data. In September 1960, Merrell submitted a New Drug Application (NDA) with the FDA for commercial sale of thalidomide, which Merrell named Kevadon. The proposed label in the application specified that the drug was intended for use by pregnant women.

One month later, Merrell began its “Kevadon Hospital Program,” a series of large-scale “clinical trials” that we believe were nothing more than a marketing effort to pave the way for expected sales of the drug in the United States. Merrell kept disorganized and occasionally nonexistent records of who, where and when Kevadon was distributed and even informed doctors that they did not need to keep records of the “studies” either. Again, the drug was recommended for use treating morning sickness in pregnant women.

As part of this trial, we believe that more than 2.5 million doses of the drug were given to more than 20,000 patients. While those trials ran, the FDA’s Dr. Frances Kelsey repeatedly denied Merrell’s application to sell thalidomide, deeming its testing to be incomplete. She encouraged testing on pregnant animals.

Then, the truth about the drug began to come out. In July 1961, Australian Dr. William McBride suspected that thalidomide was responsible for recent birth-defect cases and contacted Distillers, the Australian distributor and licensee of thalidomide.

On November 26, 1961, German newspaper Welt am Sonntag, published an article revealing physician suspicions that thalidomide was causing malformations in babies. Grunenthal pulled the drug in Germany, but continued to dispute claims that thalidomide was responsible for the defects. Merrell did not pull its NDA, did not recall the drug and only alerted about 10 percent of its clinical investigators of the danger.

Sometime during the first three months of 1962, Jerry Sue Yeatts of Brownfield, Texas, began suffering from violent morning sickness and went to her physician, Dr. Noah Stone, for help. He prescribed a drug for her illness but did not tell her the name. He also performed at least one sonogram but did not share the results with her. Multiple babies born to Dr. Stone during this time period suffered from birth defects and several died.

On March 8, 1962, Merrell finally pulled its NDA. Like Grunenthal, Merrell contested the claim that thalidomide can cause birth defects and sent letters to doctors disputing the evidence against thalidomide.

In June 1962, Merrell’s Director of Medical Research Dr. Carl Bunde testified before Congress that thalidomide was never sold in the U.S., leaving out the fact that 2.5 million doses had been distributed to 20,000 people by 1,200 doctors.

Two months later, SKF President Walter Munns was also called before Congress, where he claimed that SKF’s clinical trial participants had not given birth to any babies with birth defects, a claim that we believe newly uncovered documents prove was a blatant lie intended to cover up SKF’s guilt.

On September 18, 1962, Phillip “Hook” Yeatts was born to Jerry Sue in Brownfield, Texas. He is one victim, we believe, of a silent epidemic that occurred in the United States during the early 1960s as a result of widespread distribution of thalidomide through a marketing program thinly disguised as a clinical trial.

Yeatts was overlooked as a possible victim of thalidomide not only because SKF and Merrell temporarily succeeded, we believe, in covering up the extent to which the drug was distributed in the U.S., but also because new medical advances have changed our understanding of thalidomide victims.

Yeatts’ deformities are mainly unilateral, affecting only the right side of his body. When thalidomide was first being studied and its horrific side effects being assessed, it was thought to be primarily a neurological drug that caused only bilateral injuries – those affecting both sides of the body. Through some very innovative new cancer research, it is now believed by many doctors that the drug’s mechanisms are actually vascular, enabling it to cause unilateral injuries as well. In the original judgment of thalidomide’s damage, anyone with a unilateral injury like Yeatts’ was summarily discounted as a victim.

Yeatts, along with 12 similarly affected plaintiffs, is part of a new lawsuit we have filed in Philadelphia. At trial, we will show that new documents prove that Grunenthal, SKF and Merrell were criminally negligent, ignoring the hazards of thalidomide and keeping the public in the dark.

The worst element of this entire situation is only now coming to light – the fact that hundreds or thousands of people who have struggled with birth defects their entire lives were originally told that they were just unlucky, when in fact they were victims of a senseless, preventable tragedy.

As Billy Joel might have said, we may not have started the fire, but the least we can do is care for those burnt by the flames.

Major Win for Consumer Class in Toyota Case

Posted by Steve Berman on Oct. 14, 2011 | 0 comments

Our case against Toyota, which alleges that the auto giant knew about a defect that causes sudden, unintended acceleration but did not take action immediately to protect consumers, is progressing toward a series of trials.

U.S. District Judge James Selna recently set a date for three bellwether trials in July, 2013 and ordered that Toyota’s motion and discovery practice should be limited to the states of those trials. Toyota’s lawyers were visibly upset at the judge’s decisions.

These bellwether trials will test some of the typical claims and help the parties determine how future cases might be resolved. In this case, the test case will involve a class comprised of Toyota consumers from California and two other states.

Toyota also asked the Court to brief motions to dismiss cases in over 30 other states. Judge Selna observed that just deciding the California motion to dismiss (largely denied) was a complex task and he was not going to devote massive resources to this task. He noted he would rather focus on managing the case toward trial. You could hear the cash flow watcher at Alston & Bird, a firm Toyota has hired to defend them, moan as they lost the opportunity to bill tens of thousands of hours on preparing the motions.

The same is true for depositions of plaintiffs. Toyota vigorously demanded that due process required that Toyota be allowed to depose over 250 plaintiffs. Imagine the billing frenzy on that project. Judge Selna rejected Toyota’s request, noting that Toyota had made no showing of the need for such blunderbuss discovery.

In an ironic twist, Toyota sought to justify the depositions by claiming fact sheets submitted by 80 plaintiffs were false. Each fact sheet indicated the consumer saw Toyota advertising about safety prior to buying a Toyota. Of course they did – Toyota spends billions a year on such advertisements – so that people see them.

But Toyota’s lawyers want to contest that and want to prove those billions are poorly spent – consumers don’t really see the advertisements.

Not only are Toyota’s lawyers claiming Toyota is wasting billions on advertising, but by calling into question the fact sheets, they are now calling the plaintiffs – who bought their product – liars.

Is this the Toyota way? I think not but perhaps the company’s leadership in Japan doesn’t know what the U.S. lawyers are doing.

Bottom line – these rulings are good for the good guys.

Whistleblowers an Effective Tool to Catch Tax Cheats

Posted by Steve Berman on Sep. 27, 2011 | 0 comments

A few weeks ago, perhaps the most reclusive and storied tax cheat in the modern era was discovered after more than 20 years in hiding. William Millard, the billionaire tech tycoon who founded ComputerLand, a popular retailer during the 1980’s, was found by investigators on Grand Cayman Island in the western Caribbean.

Millard reportedly went missing in 1990, when he and his family left Saipan. The local government, who claims he still owes millions in taxes, has been trying to track him down ever since. In the meantime, his outstanding tax bill has climbed past $100 million.

The arrogance of such behavior aside, Millard’s case is fascinating because he was able to stay hidden from the authorities for so long. One would assume that, at some point, someone would spot him and turn him in. After all, he was hardly hiding very effectively; authorities tracked him down to a large mansion, not exactly the best hideout.

Millard’s case reflects two key issues that governments face when collecting tax revenues. First, it can sometimes be hard to prove a violation and track down the tax cheat. Second, and this is the larger issue in the Millard case, complicated offshore structuring and strategic use of loopholes can make assets difficult to find.

Michael Kim, one of the lawyers working on that aspect of the case said, “This is one of the most sophisticated and complicated cases of offshore asset structuring that we have ever seen. He’s had more than 20 years to move money all over the world.”

In such difficult cases, governments need all the help they can get. A crucial resource in these investigations are insiders, especially accountants and auditors at major corporations, who report violations to the government. In order to encourage these whistleblowers to come forward, Congress passed a law in 2006 that rewards them with up to 30 percent of the money collected in a successful enforcement action by the IRS.

This reward can be quite the motivation. Consider that if someone had informed on Millard under the program, he or she might eventually receive $30 million, while at the same time saving taxpayers $70 million.

The Government Accountability Office, or the GAO, Congress’ watchdog and research agency, recently evaluated the program. Five years after the program’s passage it is struggling, according to the GAO’s report.

The scope of the problem is daunting. A number of loopholes have allowed corporate tax cheats to draw out the process for years. In fact, according to the report, two-thirds of the claims submitted in 2007 and 2008 are still in process.

Well-intentioned privacy regulations also stand in the way of the program’s success.

For instance, the GAO found that the IRS fails in many cases to effectively communicate with whistleblowers. In keeping with its strict interpretation of privacy protections, the IRS will not inform whistleblowers on the progress of their claim, for fear of violating the law by releasing information about the violator’s taxes.

The only thing the agency will do, according to the GAO, is confirm that the claim is either open or closed.

If the IRS finally rejects a whistleblower’s claim, no reasons are given, again, for fear of violating regulations governing the release of confidential tax information. After all, if the IRS were to tell the whistleblower that the tip turned out to be inaccurate, that would be disclosing that the IRS conducted an audit.

Even when the IRS does take a case and succeeds in bringing a large tax cheat to justice with the help of a whistleblower reward, the agency does not publicly comment on the reward, again for fear of revealing confidential information.

This information blackout discourages potential whistleblowers from reporting what they know. After all, without a credible example of success and a high probability of a reward, a potential whistleblower is unlikely to risk their career in order to expose the truth.

Yet, it is hard to blame the IRS. They are playing it safe and following the rules, and I would suggest that legislators look at the issue. A balance has to be established between protecting the privacy of alleged tax violators and giving whistleblowers the communication and reassurance they need to come forward.

Perhaps the biggest challenge facing the program is the agency’s limited resources. Implementing some of the reforms suggested by the GAO may not be possible at this time.

Limited resources at the IRS have long been a problem, but with the current cuts being considered, conditions have gone from bad to worse. Earlier this month, the Senate Appropriations Committee voted in favor of a four percent cut to the IRS’ budget. The House Appropriations Committee voted to cut even more.

I would argue that these cuts are ill-advised, not simply because the program is valuable, but because successful prosecution of claims against tax cheats will create revenue, helping to solve our debt problem by closing the over $350 billion gap between what the government is owed and what it collects each year.

The benefits of this program clearly far outweigh the costs, and it is both the taxpayer and the government’s interest to give the IRS the resources it needs.

Even if budget cuts are enacted, there are steps the IRS can take to improve the program. Senator Chuck Grassley (R-IA), the architect of the whistleblower program, recently argued that the IRS is neglecting a crucial tool that can help it to take on more cases without spending more money.

According to the senator: “A key provision of the whistleblower law, and a big part of the success of the False Claims Act provisions that I co-wrote, is to allow the government to leverage the whistleblower’s resources. It’s worrisome that the IRS hasn’t taken advantage of this provision even once. The tax cheats shouldn’t be the only ones who can take advantage of outside legal talent.”

In other words, the IRS can employ private attorneys, who represent whistleblowers, to do research and develop claims for the IRS. This could lighten the load on the agency, help it process more claims and ultimately, catch more tax cheats and collect additional revenue for the treasury.

That’s why, when the government of the U.S. Commonwealth of the Northern Mariana Islands decided to investigate William Millard’s disappearance in hopes of forcing him to pay his outstanding taxes, they hired a private law firm. That firm’s investigation led to a breakthrough that uncovered Millard.

The IRS would do well to remember that it has allies in its battle against tax cheats, both in the form of whistleblowers and their attorneys.

College Sports: A New Gilded Age

Posted by Steve Berman on Sep. 27, 2011 | 0 comments

In 1969, Curt Flood, center fielder for the St. Louis Cardinals, was traded to the Philadelphia Phillies. Flood, who was black, knew that the Phillies reportedly had some of the most racist fans in baseball and expressed his concerns to management. At the time, Major League Baseball’s rules tied the player to the team; he had to move where management sent him or not play at all.

Flood sent a letter to then Baseball Commissioner Bowie Kuhn, saying, “I do not feel I am a piece of property to be bought and sold irrespective of my wishes. I believe that any system which produces that result violates my basic rights as a citizen and is inconsistent with the laws of the United States.”

These are strong words, but to many in professional baseball at the time, the rules tying a player to his team sounded an awful lot like slavery; players were bought and sold as a commodity.

Flood sued and took his case all the way to the U.S. Supreme Court. The court ruled against him, but the case set the stage for future negotiations that gave players the right to contract with any team they wished.

Recently, I saw a fascinating article in The Atlantic that reminded me of Curt Flood. Taylor Branch, a noted Civil Rights historian, wrote a piece titled “The Shame of College Sports.” in which he exposes some of the scandals and hypocrisies in college sports.

Many of the injustices that Flood and others succeeded in ending pale in comparison to the scandals still ongoing in college sports.

The worst of these scandals, which threatens to topple the NCAA, is that the organization collects millions upon millions in revenue each year, profits earned off the back of student-athletes. Those student athletes are plastered with corporate logos and sold to the public, but they are not paid for their services.

Branch stops just short of calling this system slavery, but he does conclude that “to survey the scene – corporations and universities enriching themselves on the backs of uncompensated young men … is to catch an unmistakable whiff of the plantation.”

I don’t think there is a moral equivalence between the NCAA and slaveholders, but the conditions for student athletes today certainly compare to another time period in American history; the gilded age. Throughout the industrial revolution and especially during the last 30 years of the 19th century, American workers found themselves slaves in all but one sense; they at least had a theoretical option to leave the job site and look for work elsewhere.

Of course, in practice, the decreased demand for unskilled labor brought about by automation meant that workers had no other option but to accept long work hours and unsafe working conditions in exchange for a low, unlivable wage.

If workers did strike, they could be assured that strikebreakers would be brought in immediately, sometimes with the support of the government. Jay Gould, a railroad owner and one of the richest businessmen in the second half of the 19th century, once said after bringing in strikebreakers, “I can hire one half of the working class to kill the other half.”

You probably won’t hear NCAA executives talking like that about student athletes, but the systems share many similarities.

Consider one of the first reforms passed in the wake of the worst abuses: workers’ compensation. During the industrial revolution, workers routinely found themselves in unsafe working conditions. They operated hazardous machinery in factories and breathed in toxic dust in mines. Cutthroat factory owners responded to injuries by firing workers and replacing them.

Today, high school recruits choose which college to attend, at least partially, based on that school’s scholarship offer. For lower- or middle-class athletes, the prospect of a scholarship is a dream come true, allowing them to earn a degree they otherwise might be unable to afford.

Yet, these student athletes, who the NCAA constantly reminds us are students first and athletes second, are forced to give up their scholarships when injured on the field.

We are currently litigating a case on behalf of a young man named Joseph Agnew. A highly sought-after high school football prospect from Texas, Agnew was courted by several top-tier Division I schools. He ultimately decided to accept a full-ride scholarship from Rice University.

We allege that during his sophomore season with Rice, Agnew sustained shoulder and ankle injuries on the field, and, as a result, his scholarship was revoked. Our case on behalf of Agnew is still working its way through the courts.

The way student athletes are compensated also bears a striking resemblance to the gilded age. One could draw a strong comparison between scholarships and the “company money” given to workers in some industrial towns.

Instead of being paid real wages, workers were often given company money, good only for buying goods and services from a company store. This allowed scrupulous robber barons to avoid paying workers a real wage and created a closed loop that allows them to profit again, selling workers goods at inflated prices.

Consider the scholarships that are given to student athletes today. Scholarships can only be used to pay for tuition at the institution offering the scholarship. Just like in company towns during the gilded age, the employer, or in this case, the university, profits without ever having to pay a real wage.

This practice illuminates the greatest problem with the NCAA today, the massive discrepancy between what student athletes earn for their work in the form of scholarships and what their services are worth.

By any estimation, the talents of student athletes are worth millions to the NCAA and its member universities. Revenue rolls in continuously from lucrative television deals, sponsorships, merchandising and even video game licensing.

That last revenue source is especially troubling, because students’ likenesses were featured in the games. A few years ago, we filed a lawsuit on behalf of a former starting Arizona State quarterback named Sam Keller, who alleged that the NCAA violated its own bylaws by conspiring with a video game company to use students’ likenesses, making millions off students who were not compensated.

Meanwhile, at the professional level, the NFL Players’ Association is paid $35 million each year for the right to show players’ likenesses in NFL video games.

All of these injustices demonstrate a system in serious need of reform. Student athletes have been made to suffer under this system for far too long.

I am hopeful, though, that change is coming. I believe that the NCAA will be forced by the outcry from politicians, educators and the public to reform its operations in the coming years.

Such reform will come not a minute too soon for thousands of student athletes, who deserve fair treatment and compensation for the services they provide to their schools.

Improving Whistleblower Programs

Posted by Steve Berman on Aug. 29, 2011 | 0 comments

In politics, language is everything. The politicians know that if you frame an issue properly, you are halfway to winning the battle. That’s why we often end up with names for laws that are terribly misleading or otherwise infused with partisan language.

There are many examples of this in the storied and often checkered past of American politics. Ronald Reagan had a delft touch in this; he came up with The Peacekeeper Missile. Two decades later, the Republican Party continued the practice of ‘winning by framing’ when the anti-choice wing introduced a bill banning certain types of abortions by calling the legislation “The Partial Birth Abortion Ban.”

Today, the trend continues. The Patient Care and Affordable Care Act becomes Obamacare. The Patriot Act was a convenient acronym and, to be fair, much easier to say than its full name, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act.

Recently, a piece of legislation called the “Whistleblower Improvement Act of 2011” was introduced in the U.S. House of Representatives. But far from improving whistleblower programs, the legislation would stop them before they get off the ground.

The proposed law would require whistleblowers to report fraud internally first, almost certainly tipping off the wrongdoers and giving them time to destroy evidence. It would also strip protections for whistleblowers whose employers retaliate against them for turning informant.

The bill, introduced by Representative Michael Grimm of New York, is currently being considered by the House Committee on Financial Services. Although it may pass in the House, it is fortunately unlikely to pass in the Democrat-controlled Senate.

One of the programs such a law would undermine is the Commodity Futures Trading Commission’s (CFTC) new whistleblower program, which was finalized last week. The program, nearly identical to the Securities and Exchange Commission’s program, will reward whistleblowers with up to 30 percent of the recovery if they provide information that leads to a successful enforcement action.

This program will help expose fraud in a number of areas and help to prevent another financial disaster like the one we saw in 2008. For one thing, thanks to new mandates from Congress under the Dodd-Frank Financial Reform Bill, the CFTC will have the authority to regulate the swaps market.

The swaps market played an important role in the financial crisis when American International Group (AIG), a massive international insurance company, used swaps to insure the investments of companies that held risky mortgage-backed securities. AIG collected premiums from the holders of this incredibly risky debt, offering to pay its policyholders a specified amount in the event that the loans went bad.

Of course, we know now that these investments included sub-prime loans made by predatory lending institutions that knew, or should have known, that the loans could not be repaid on time. When the loans began to go bad, policyholders put in claims with AIG, which soon found itself bankrupt and in need of a bailout.

If someone at AIG, or any one of the financial institutions it insured, had spoken up earlier to alert the government that they were trading in loans that were almost certain to go bad, the government might not have been forced to bail out the company.

The CFTC also regulates commodity futures markets, in which investors bet on the future price of various goods, such as oil or gold. The potential for fraud in these markets is immense, and a robust whistleblower program will help to deter it.

For instance, when the price of gas began to climb to record levels late this spring, President Obama and the Department of Justice launched an official investigation. The investigation is continuing to look into the role that commodity traders played in raising the price at the pump and whether or not any illegal activities have taken place.

A robust whistleblower program will strengthen this investigation and others like it in the future. It will help deter fraud by raising the risk of an insider turning informant.

Such a tool is even more necessary because the CFTC is chronically underfunded and undermanned. The swaps market alone is worth approximately $600 trillion per year, and that is only one part of the agency’s job. Yet the agency only has a budget of $202 million. Instead of getting a budget increase along with its new responsibilities under Dodd-Frank, a bill recently passed by the U.S. House of Representatives would instead cut its budget by 15 percent.

The whistleblower program will help relieve the burden on the CFTC, allowing it to do its job more effectively, but its limited resources will mean that it can only take on the most well-developed and credible cases brought by insiders.

Private attorneys will be needed to develop clear and actionable claims for the CFTC. At Hagens Berman, we have extensive experience in financial fraud cases as well as traditional False Claims Act qui tam cases. We also have a track record of taking on and defeating some of the largest companies in the United States.

In the coming years, we will be representing whistleblowers that expose fraud in the areas the CFTC regulates, including the derivatives and commodities markets.

That fraud will not be brought to light if Congress dismantles the program, and that’s why, even if the name sounds nice, we can not endorse the Whistleblower Improvement Act.

Creative Destruction and the Ebooks Market

Posted by Steve Berman on Aug. 16, 2011 | 0 comments

In 1982, Clint Eastwood appeared before a congressional committee to testify about the dangers of VCRs. He testified alongside Jack Valenti, then president of the Motion Picture Association of America.

Fearing that the VCR would destroy the film industry, Mr. Valenti argued, “the VCR is to the American film producer and the American public as the Boston Strangler is to the woman home alone.”

Frankly, I think the line would have sounded better coming from Dirty Harry.

Americans bought the VCR despite the film industry’s objections and by innovating and providing high-quality recordings, the film industry benefited from the invention. It also encouraged innovation at theatres, which, having lost some of their power over moviegoers had to find new ways to attract customers.

In 1942, author Joseph Schumpeter coined the term “creative destruction” to explain how new technologies can supplant old ones and radically change an industry. When this happens, established players, usually relying on an older business model, do everything in their power stop innovation and preserve the status quo.

Nothing has caused more creative destruction in recent years than the internet. To name one example, the film industry now fears Netflix at least as much as it ever feared the VCR. So it is hardly surprising that in response to Netflix’ success, the industry is refusing to grant immediate access to new releases, fearing the availability of titles on Netflix will cannibalize rental and DVD sales.

The internet also threatened to change a much older industry; the book publishing business. Advances in display technology have enabled a new wave of devices that allow an entire library of ebooks to be stored in the palm of your hands.

To be fair, this isn’t the first time the book business has undergone such a change. Following the invention of the printing press in the 15th century, a monk and scholar named Johannes Trithemius wrote an essay entitled “In Praise of Scribes.” Trithemius worried that the printing press would not only put scribes out of work, but also make monks lazy. After all, copying the Bible by hand built character.

It should come as no surprise then, that the age-old giants of the book publishing business have concerns over the inevitable transition to ebooks.

In fact, we recently filed a fascinating lawsuit alleging that five of the largest publishers, with a helping hand from Apple, cooked up an illegal agreement to slow down and control the growth of ebooks by fixing prices.

Ebooks have certainly increased in popularity over the last few years, especially since Amazon’s release of the Kindle in 2007. There had been ebooks before then, of course, but the Kindle’s paper-like screen and realistic looking text made it the first device that was truly accessible to mainstream consumers. Reading on the Kindle is as easy as reading a real book.

Following the release of the Kindle, Amazon began offering large discounts on ebooks in order to encourage the adoption of the device. Amazon set a price of $9.99 for all new releases, even if that meant it had to sell some ebooks for a small loss.

This is in line with how books have been sold in the past, under what is called the wholesaler model. Under this model, publishers sell books to retailers like Barnes and Noble or Amazon who then can set a price for the book and resell it to consumers.

The wholesaler model encouraged retailers to compete on price, allowing consumers to bargain-shop for discounted books. While consumers celebrated $9.99 new releases, the publishers worried. If people became used to paying $9.99 for a fiction or non-fiction new release, they might demand low prices in the future.

Worse still, if Amazon became the dominant retailer in the ebook market, they too might pressure the publishers to lower their prices.

At the height of publishers’ anxiety over Amazon’s low prices, Apple was looking to get into the ebook market. With its iPad consumers who already used the iTunes store for music, movies and other media would be able to purchase and read ebooks.

We believe that Apple feared Amazon’s low prices, and worked with the publishers to cook up a plan that would not only force Amazon to raise its prices, but also help publishers to regain some of the power they had lost since the advent of electronic publishing.

Nearly simultaneously last year, five of the largest ebook publishers announced that they had reached a deal with Apple to publish ebooks for the iPad. This deal had two major components. First, it guaranteed that no ebook could be sold for a lower price than on Apple’s iBookstore.

Second, the deal restructured the age-old “wholesaler” model for selling books and instituted a new “agency” model. Under the model, retailers would no longer be able to discount books. Instead, the publishers would set the prices for ebooks, and retailers would be entitled to a pre-determined markup, in this case 30 percent, on each book sold.

Following signing of agreements with Apple, the five publishers approached Amazon and informed the retailer that due to both of these clauses in their contracts with Apple, Amazon would also have to switch to an agency model.

Amazon, faced with losing access to books from five of the six largest publishers, capitulated and agreed to the change.

The new system was clearly not helpful to consumers, as it meant that they could no longer shop for a bargain amongst retailers. Instead, prices at each retailer would be identical. Alongside the elimination of competition between retailers over price, the agency model allowed, we believe, a 30 to 50 percent increase in the price of the ebooks.

Each publisher’s decision to sign an agreement with Apple was not illegal by itself. What would be illegal, however, would be the coordination of five of the largest publishers joining forces to thwart price competition. Given the nearly simultaneous timing of the actions of these five publishers, and the fact that their actions coincided with the launch of the iPad, we believe there was coordination.

Apple’s part in this is troubling as well. The company played a large part in the transformation of our daily lives over the last several decades. If our suspicions are proven true, then it acted to prevent innovation in order to increase its profits.

We have filed suit against Apple and the publishers for violations of the federal antitrust laws. These laws protect consumers from artificially high prices caused by anticompetitive activity. More importantly, though, these laws encourage innovation in the marketplace by preventing competitors from joining forces to slow down market-driven changes.

In addition to our work to preserve innovation by litigating antitrust cases, we recently opened a new intellectual property practice. Our IP practice seeks to protect the rights of inventors, who often face infringement from large corporations with legions of defense attorneys.

Those inventors rely on patents, which provide an incentive for them to innovate, and to continue transforming our world for the better. Their rights as inventors must be respected.

Innovation is the lifeblood of our economy. Whether it is threatened by a large company determined to infringe on an inventor’s patent or by collusion and anticompetitive behavior by a group of companies, we will work tirelessly to preserve it.

I think that even Dirty Harry would agree with that.

A Banana's Shelf Life

Posted by Steve Berman on Jul. 7, 2011 | 0 comments

Bill Gates reportedly once said that “Intellectual property has the shelf life of a banana.”

It’s easy to see why he feels that way. Microsoft files numerous patent applications each year. If one of them doesn’t work out or is outdated by the time it comes to market, there is always another bunch of bananas that haven’t spoiled yet.

One patent is unlikely to make a huge difference for a company like Microsoft.

Individual inventors rarely have that luxury. For them, a single patent application may represent the sum total of a life’s work and fortune. They might spend years developing, refining and testing a single idea. They must consider very carefully before committing their financial resources in the form of filing fees and development costs.

An inventor’s worst nightmare is to use all of their resources patenting and bringing an idea to market, only to have the patent invalidated after the fact.

This point was proven when Microsoft recently argued, and lost, an important case in front of the Supreme Court. In their ruling, the justices refused to reverse a long-standing precedent in patent law, and in so doing, the court protected the rights of small companies and individual inventors.

The case was brought by a small Toronto-based company named I4I. I4I challenged Microsoft’s decision to include pieces of software, to which I4I held the patent, in Microsoft Word. The lower courts initially awarded a $290 million verdict to compensate I4I for Microsoft’s infringement of the patent.

However, Microsoft appealed the decision. Their argument hinged upon the allegation that I4I had used the software in a published product of its own over a year before applying for the patent.

As Bill Gates said so eloquently, new technology can spoil quickly. While the details were disputed, I4I may have feared that their intellectual property would be worth less if they waited. So before fully developing it, they used some preliminary ideas in their own software.

In this case, Microsoft alleged that that I4I’s sale of its software more than a year before filing for a patent invalidated the patent and exonerated Microsoft’s infringement. I4I countered Microsoft’s claim, saying that while it was true they released a piece of software that had elements of or similarities to the patent they ultimately filed, there were also major differences, and those differences meant that the patent they filed was based on new technology.

For decades, courts in the United States have required “clear and convincing evidence” to invalidate an issued U.S. patent. Microsoft sought to change all of that by asking the court to adopt a lighter standard. The standard, which would have required merely a “preponderance of evidence” would have made it easier for Microsoft to invalidate I4I’s patent, and thus escape paying over $290 million in compensation to the company.

The Supreme Court got this one right for a few reasons. First, the court correctly pointed out that the ball really is in Congress’ court. Clear and convincing evidence has been the burden of proof to invalidate a patent both before and after Congress passed the law noting that patents are “presumed valid” in 1952. If the standard is going to be changed, it should be changed by Congress.

Second, patent applications undergo an always long, and often rigorous, approval process to make certain that they are valid. Invalidating the patent without an equally rigorous process would greatly diminish their value. It would place an undue burden upon inventors, especially in a 21st-century economy that demands innovation and invention at a rapidly increasing rate.

Lastly, the court’s decision affirms that even the largest and most well-financed corporations with the best legal teams cannot always get away with patent infringement. It sends a signal to small companies that they can and should continue to innovate, file patents and defend their intellectual property.

Bill Gates was onto something when he pointed out that intellectual property has a short shelf life. That is exactly why it is important to protect the patent claims of small companies and individual inventors.

Whistleblower Program Will Help Expose Fraud

Posted by Steve Berman on Jun. 27, 2011 | 0 comments

In 2002, Time magazine gave its coveted “Person of the Year” award to three women, including Sherron Watkins, who was formerly the vice-president of corporate development at Enron. Before the company went bankrupt, Ms. Watkins helped to expose the company’s illegal accounting practices that brought down the company. After the company tumbled, investors lost tens of billions of dollars, pension holders lost over $2 billion and thousands lost their jobs.

I saw the damages firsthand when my firm worked as co-lead counsel in a case representing former Enron employees. Following the collapse of the company, the employees lost much of their retirement savings. We were able to secure a $220 million settlement for the employees, but that fell well short of what employees had lost; the bankrupt company simply did not have the resources to repay any more.

I often wonder how things might have turned out differently if someone within Enron has spoken up sooner. Back then, there were very few incentives for insiders to stand up and alert the Securities and Exchange Commission, the government agency that oversees securities fraud.

While one might hope that simple human decency would encourage those with knowledge of criminal activity to come forward, the reality is that the risks are often too great. Choosing to stand up and call out the fraud often means the end of an individual’s employment with the company. It also means one is ostracized not only within their company but often within their field.

What was missing from the system then was a positive incentive to convince whistleblowers to come forward. On May 25 the Securities and Exchange Commission (SEC) approved a new program that does just that.

Under the program, any whistleblower that provides original information leading to an SEC enforcement action with penalties totaling at least $1 million can receive up to 30 percent of the recovery.

Given that these cases often involve tens of millions of dollars, this represents quite an incentive.

Perhaps more importantly, the program includes special protections for whistleblowers that will encourage them to come forward and tell what they know. It is now illegal for an employer to retaliate against a worker who provides information to the SEC.

The program is part of the agency’s response to the financial crisis. Imagine if in 2006, insiders at various hedge funds had told regulators when they saw risky mortgage-backed securities being packaged in with safer investments. At the same time, the investors were mislead about the nature and risk of their investments.

If a credible whistleblower program had existed then, someone might have alerted regulators. Given the size of the fraud being committed, a whistleblower would have been able to make millions and society would have benefited by stemming at least some of the damage that ultimately brought the entire financial system down. Instead, insiders kept quiet, bet against the risky investments and stood idly by while investors on main street lost everything.

Again, while I wish that the fear of prosecution or simple human decency might drive insiders to inform regulators about fraudulent activities, the recent financial crisis demonstrates that these factors are simply not enough.

I think the SEC’s decision is an appropriate response to the financial crisis. First of all, it will help the SEC do its job more efficiently and effectively.

It is no secret that SEC is chronically overburdened and underfunded. The Dodd-Frank Wall Street Reform Bill signed into law by President Obama last July required that the SEC hire an independent consultant to assess the organization’s strengths and weaknesses and make recommendations on how to make the organization stronger. The consultant’s final report, which was released in March, concluded that the SEC needed at least an additional 400 additional employees to handle its current workload.

Instead of increasing funding, however, the U.S. House of Representatives passed a budget resolution in April that would decrease the SEC’s budget by $212 million. SEC Chair Mary Schapiro testified at a Senate hearing that this would mean cutting the SEC’s 3,800-member staff by 1,000.

All of this might sound like a hopeless situation, but the new whistleblower program should help relieve the burden on the SEC, allowing it to act more nimbly. The expected payout will encourage whistleblowers to work with investigators and attorneys in drafting their claim to the SEC.

Those investigators and attorneys will also help save the SEC time by more fully developing the legal case before the whistleblower files a claim. For instance, SEC enforcement official Stephen Cohen disclosed that a whistleblower in a large case recently came forward with enough evidence and direction to save the agency at least six months of time investigating.

The program will also encourage insiders to expose fraud to the light of public scrutiny. In fact, shortly after President Obama signed the Dodd-Frank bill, which authorized the creation of the program, the SEC saw a dramatic uptick in the number of high-quality tips reported. Before the bill passed, the SEC normally received about two dozen high-quality tips per year. Since the bill passed, the SEC has reported receiving one or two per day.

Perhaps most importantly, the program will deter future fraud. The increased risk of being caught will encourage large corporations and financial institutions to steer clear of illegal activities, saving investors and consumers millions in the long run.

There are some pitfalls with the SEC’s approach however, that whistleblowers should be careful to avoid.

The SEC is already overloaded with more cases than it can handle, so it will be looking only to pursue new cases that are thoughtful, well-reasoned and immediately actionable. Thus, whistleblowers will have to make sure to do the appropriate research and investigative leg work to present a clear and actionable claim to the SEC.

Professional investigators and attorneys who have experience in both whistleblower and securities law will play a crucial role in helping whistleblowers develop a claim that gets the SEC’s attention.

At Hagens Berman, we have extensive experience in both areas. We’ve won some of the largest settlements in decisions in securities law, unlike most other whistleblower firms, who have little or no experience in the area.

I’ve seen firsthand the impact that securities fraud can have on investors, employees and others. The SEC’s whistleblower program will help the agency deter malfeasance and prosecute violators, helping us to avoid another financial crisis.

Bill Gates' Towel Boy

Posted by Steve Berman on May. 19, 2011 | 0 comments

Several years ago, Scott Adams, the author of “Dilbert,” published a comic strip that has stuck with me throughout the years.

In the strip, Dilbert buys a new piece of Microsoft software. So excited to see what the software has to offer, he neglects to read the license agreement. He soon learns that there is a clause buried in the text of the massive agreement that mandates the user of the software must become Bill Gates’ towel boy for life.

Funny, sure, but if you spend time looking at the law, and the evolution of the law in this area, you will see more truth in this than humor.

Every day, busy consumers are confronted with agreements and contracts for the most mundane services and products. Online consumers routinely scroll through user agreements on software and websites without reading the text.

Consider the contracts consumers are given when purchasing a cell phone; do the cell phone providers really expect purchasers to wade through the pages of small type? Are the sales staff equipped to answer questions about the terms, or to explain the nuances of the arbitration clauses? Most would say “no” to both of these questions.

A few years ago, Vincent and Liza Concepcion, a Californian couple, purchased a new cell phone from AT&T. The phone was advertised as “free,” so the couple was understandably confused when they received a bill for $30.

What they found after doing some digging is that -- according to AT&T – ‘free’ doesn’t really mean ‘free’ – taxes and other fees weren’t included in the deal.

Upset at what they perceived as false advertising, the Concepcion’s sued AT&T. They weren’t the only ones who found the offer disingenuous, and the lawsuit was ultimately combined into a class action law suit.

That is where things get interesting – most people think that if they feel a company cheated them, or did them wrong, they have the right to take the company to court.

Not in this case.

Unbeknownst to the Concepcions and many others, buried in AT&T’s contract is the following clause: “Any arbitration under this Agreement will take place on an individual basis; class arbitrations and class actions are not permitted.”

In other words, people purchasing phones unknowingly signed away their right to a common form of redress, the class action lawsuit.

Paint me a hardened cynic, but I know why AT&T did this, why they would rather face thousands of individual claims than one large lawsuit.

First, AT&T knows that the Concepcions could never afford to hire a lawyer to fight a case in which the total loss is only $30. The only way consumers can defend their rights in these types of cases are by joining together, sharing the cost of legal representation across thousands, even millions of plaintiffs.

Second, AT&T knows that professional arbiters are usually much more likely to decide a case in favor of the defendant in these kinds of consumer cases. One study by Public Citizen, a non-profit research organization, found that businesses win a stunning 96.8 percent of the time in arbitration handled by the National Arbitration Forum.

Perhaps most important, companies like AT&T know that by building these barriers to redress, most consumers would throw up their hands in disgust, mark up the monetary loss to experience and move on.

In this specific case, AT&T argued that the Concepcion’s class action should be tossed from court because their contracts excluded any right to a class-action lawsuit.

In turn, the Concepcion’s lawyers argued that, according to the Federal Arbitration Act, contracts requiring arbitration are not to be enforced if a state law says the contracts are unenforceable. In this case, Californian courts have generally ruled that these contracts are unenforceable.

The case was appealed all the way up to the Supreme Court. In a contentious 5-4 decision, the court ruled in favor of AT&T.

Justice Stephen G. Breyer asked the key question in his dissenting opinion: “What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?”

As you might expect, I do not agree with the decision. I believe the Supreme Court has stripped consumers of one of the most important tools left in their battle against unscrupulous businesses. What the court has done – unintentionally or not – is to say to businesses, “go ahead and have your way with consumers, but do it in small ways so they can’t rebel at the abuse.”

Already, many defense lawyers are filing motions to compel arbitration in a variety of cases, including a case against a payday lender in Philadelphia, a case against U.S. Bancorp and a case in Los Angeles against Alliance Data Systems Corporation.

AT&T’s contract terms are hardly unique among cell phone providers. In fact, both Verizon and T-Mobile have nearly identical forced arbitration clauses in their contracts.

In the longer term, this ruling will compel companies throughout the country to work forced arbitration clauses into their agreements. Like the Concepcions, consumers will be unlikely to discover these clauses before it is too late.

Amid all these dire predictions, I do have two pieces of news that offer some hope for consumers.

First, the Supreme Court has agreed to take another case on this issue. The case involves credit card companies that charge massive fees for low-rate credit cards. The companies have claimed the case must be handled through arbitration because of a clause in the credit card agreement. I hope the Supreme Court will clarify its position and support consumers’ rights when this case is decided next fall.

Second, the new Bureau of Consumer Finance Protection (BCFP), created by the recent Dodd-Frank Wall Street reform bill, may have the power to restrict companies from putting forced arbitration clauses in their contracts. There are those in the house and senate, though, trying to gut the BCFP just as it is getting on its feet.

In the meantime, consumers should read contracts carefully and seek the best legal counsel available in the event of a serious complaint.

After all, who wants to be Bill Gates’ towel boy?

Accutane Trials Continue to Reach Verdicts

Posted by Steve Berman on Apr. 21, 2011 | 0 comments

We like to think that the law is precise, consistent and linear – if in some hypothetical world you could present the identical facts to different courts, or different juries, that you would get the same outcome.

We know that’s not the case. The law – and the systems we use to administer the law – is fluid, dynamic and, frankly inconsistent.

We’ve all seen examples of this inconsistency. For instance, our nation recently came very close to suffering a complete meltdown of our financial systems, caused by what I would characterize as the illegal, fraudulent and morally reprehensible actions of a group of Wall Street traders, yet there has not been one significant indictment of these individuals, much less a conviction. While millions of Americans saw their net-worth plummet and many others continue to lose their homes, we’ve not been able to tap anyone for criminal intent.

That’s one inequity of many.

A recent verdict returned by a jury in New Jersey illustrates the dynamics of the law in an equally apparent way, albeit to a smaller group of people. The case, brought by three plaintiffs, became a bit of a media sensation because one of the plaintiffs was actor James Marshall.

Marshall is perhaps best known for his role as PFC Louden Downey in the Oscar-nominated “A Few Good Men,” in which he co-starred alongside Tom Cruise, Jack Nicholson and Demi Moore.

In the case, Marshall and two others claimed that they took the drug Accutane in order to clear up acne outbreaks. After taking the drug, all three developed debilitating bowel conditions and sued Roche, the company who created Accutane.

Scientists now suspect that the use of Accutane can lead to a number of harmful side effects in some patients. One of them is a set of conditions collectively known as inflammatory bowel disease, or IBD. The conditions, which include ulcerative colitis and Crohn’s Disease, can lead to intense bowel pain, intestinal bleeding, rupturing of the bowel, and increase a person’s risk of developing colon cancer.

Marshall claims the drug caused such extensive damage to his gastrointestinal system that he had to spend four months in the hospital. Eventually, his colon had to be removed entirely. He claims that the symptoms made it impossible to continue his acting career.

The second plaintiff, a woman named Kelly Andrews, has been hospitalized 25 times and has had seven surgeries, including the removal of her colon, since she took Accutane eight years ago. She was only 17-years-old when she was prescribed the drug.

The third plaintiff, a nursing assistant named Gillian Gaghan, was 22 when she took Accutane. Now, 12 years later, she has been hospitalized repeatedly and likely will have debilitating symptoms for the rest of her life.

The court awarded a verdict of $2 million to Ms. Gaghan but awarded nothing to the other two plaintiffs.

The court found that Accutane can cause IBD and that Roche did not provide sufficient warnings about the potential side effects. Despite this, the court ruled that neither Marshall nor Andrews should receive compensation.

In Marshall’s case, the court found that because Marshall had a pre-existing bowel condition; it could not be proven that Accutane caused his IBD.

In Andrews’ case, the court found that Accutane did cause her condition, and she was not given enough warning about the side effects. However, the court found that the lack of a warning was not an important factor in her choice to take the drug.

These three individuals are not alone. Since Accutane was introduced in 1982, more than 12 million people worldwide have used it and thousands of lawsuits have been filed against Roche, the company that made the drug. Many of these lawsuits are continuing to work their way through the courts.

This case underscores the importance of having top-notch legal representation. For two of the plaintiffs, the case was lost due to small factors that might have been better explained to the jury.

As future cases go forward, plaintiff’s attorneys will have to make sure to consider the facts of each client carefully. Roche brings a large team of highly-paid defense attorneys and researchers to every case. If there is any technicality or small factor that can tip the case in Roche’s favor, they will find it.

At Hagens Berman, we are representing more than 50 individuals who took Accutane and claim to have experienced serious side effects. We hope to find justice for these individuals, and we believe our track record in successfully taking on the pharmaceutical industry proves we can win.

We’ll be watching the next major trial, which will probably begin next month in New Jersey. The case involves Kamie Kendall, who was previously awarded $10.5 million, but it will be tried again because an appeals court ruled that Roche was prevented from presenting some of its best evidence in the original case.

We hope that the court once again finds that Kendall is entitled to compensation for the intense suffering she has endured since taking Accutane.

It would be nice if law was always precise, consistent and clear. These cases prove that small factors often can completely change how a jury interprets the evidence and arrives at a decision. Having excellent legal counsel can make the difference by spotting these factors and using well-reasoned arguments to effectively explain the case to the jury.

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