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TechNet periodically files friend of the court briefs in both federal and state court on issues of substantial concern to our members and the technology industry generally. Recently, TechNet has filed or joined in briefs related to the following issues.

Tortification of Contract Claims

In City of Hope v. Genentech, a superior court interpreting a contract dispute departed radically from adherence to contract principles when it instructed the jury that a company assumes a fiduciary duty to any inventor when that inventor -- in exchange for royalty payments -- entrusts a secret idea or invention to the company for commercial exploitation. This reasoning, if applied to other cases, could require licensees to act primarily for the benefit the inventor/licensor, and the licensee’s failure to do so could amount to wrongful, tortuous subject to punitive damages.

TechNet joined with the U.S. Chamber of Commerce and the California Chamber of Commerce, in urging both the appellate court and subsequently the Supreme Court to not impose tort principles in this case. In our view, the potential imposition of fiduciary duties, tort principles and punitive damages in contractual arrangements could severely impede the formation and operation of intellectual property agreements by imposing unpredictable and enormous potential liabilities on licensees in any contract dispute. If the risk of entering into IP agreements rises, prudent IP users may enter into fewer them, potentially chilling innovation and the commercialization of new technologies. There are a broad array of contractual terms – including royalty audits, best-efforts obligations, total sales licenses and binding arbitration clauses – that can be and often are used to protect the interests of inventors, without resort to punitive damages. (back to top)

Loss Causation in Federal Securities Litigation

In Broudo v. Dura Pharmaceuticals, which presents the issue of how plaintiffs establish loss in federal securities fraud class action lawsuits, TechNet filed an amicus brief urging the U.S. Supreme Court to adopt a uniform rule requiring plaintiffs to demonstrate that the price of the securities they purchased declined as a result of the disclosure of the alleged fraud. TechNet was represented in this matter by Bingham McCutchen LLP.

While most circuits have followed this so-called price-decline rule, the Eighth and Ninth Circuits, have adopted a rule permitting plaintiffs to establish loss even if the disclosure of an alleged misstatement did not result in a drop in stock price. This rule measures damages at the time of the purchase of the stock, and plaintiffs adequately allege loss causation by demonstrating that alleged misrepresentations artificially inflated the price of the company’s stock. Under this approach, a plaintiff could establish loss even if he or she had not incurred actual losses Defendant Dura Phamaceuticals petitioned the U.S. Supreme Court for review, contending the need for a uniform standard on loss causation.

TechNet believes that the ruling of the Eighth and Ninth circuit courts unduly burden technology companies, which are disproportionately affected by securities litigation because of the inherent volatility in the technology sector. By allowing plaintiffs who have suffered no cognizable damage to reach the discovery phase of litigation—where approximately 80% of the cost of securities litigation arises—the rule in the Eighth and Ninth Circuits imposes substantial and unwarranted costs on defendants. (back to top)

Liability for Online Content provided by Third Parties

In Barrett v. Rosenthal, TechNet has joined twenty-eight other organizations involved in the online and electronic communications industries in a friend of the court brief in support of preserving the Internet as a forum for the free exchange of information. In Barret, the key issue is whether Internet Service Providers (ISP’s) can be held liable for harmful content made available through their services but originating with a third party. Traditionally, 47 U.S.C. 230(c)(1) has held that ISP’s are not to be held liable for third party content expressed through their service. In this case, the appeals court held that any online intermediary is not protected if they know "or have reason to know" the nature of the third party content.

TechNet strongly disagrees with this view. If, simply by receiving "notice," service providers were potentially liable for the unimaginable volume of third-party content that constantly flows through their services, they would have little choice but to automatically and immediately take down and block third-party content in response to virtually all complaints. The narrowing of such protection could impose enormous potential liabilities and policing burdens on virtually all online forums, chilling the broad availability of content on the Internet. The technology sector’s brief was prepared by Wilmer Cutler Pickering Hale & Dorr LLP. (back to top)

Utilization of Research and Development Credits

In General Motors v. Franchise Tax Board, TechNet urged support of a rule that would permit maximum use of state research and development credits. This case presents the question of whether companies under common ownership may fully utilize research and development tax credits. This case involves an appeal of a California ruling preventing a parent company from using tax credits earned by a subsidiary. California is the only state in the nation whose administrative tax agency "silos" credits in this manner.

The implication of this is potentially important for any technology company with California tax liabilities and subsidiaries with usable California R&D credits exceeding their California tax liabilities. The opinion, if upheld, would mean that California would be the only state to administer the credit in this manner, and would lead some California companies to consider utilizing the R&D tax incentives provided by over 30 other U.S. states. Failure by the Court to hear the case could jeopardize the technological advances made possible by the credit, which have contributed to California’s world leadership in technology enabled companies to bring more products and services to market, and increased California employment. (back to top)

Shareholders Derivative Suits in Securities Litigation

In Gilead Sciences Inc. v. Peng, a shareholders derivative action filed in California state court, TechNet supported an appeal of a trial court decision that, if its reasoning had been applied by other courts, would have eliminated the "demand requirement" in shareholders derivative litigation involving a securities claim. Corporate law generally vests the major decisions of a company with its the board of directors but permits shareholders to sue derivatively – on behalf of the company – if they show that it would be futile to ask the board to sue.

In its brief, prepared by Bingham McCutchen LLP, TechNet argued that this "demand requirement" exists to upholds the principle that those best suited to make decisions for a corporation are its directors, while permitting shareholder suits where the directors are not capable of fulfilling their role. In Gilead, the board had voted to oppose the federal shareholders suit that underlay the shareholders derivative claim and the local trial court dispensed with the demand requirement for that reason, even though the plaintiffs had never formally demanded that the board of director’s take legal action.

TechNet believes that the trial court’s decision was in direct conflict with the policy underlying the demand requirement, and that by creating a new loophole for the entrepreneurial plaintiff, the decision risked encouraging abusive and duplicative state court litigation. The court of appeal ultimately granted a writ overturning the trial court’s ruling allowing plaintiffs to evade the demand requirement. (back to top)