EPA and the Army Make More Waves on WOTUS
On March 12, the Environmental Protection Agency and the Office of the Assistant Secretary of the Army took steps to address lingering questions about the meaning and implementation of “waters of the United States” (WOTUS) following the US Supreme Court’s 2023 decision in Sackett v. United States. Although the Sackett decision narrowed the types of features that could be WOTUS, there are several implementation questions that remain on particular issues related to identifying WOTUS. Further, subsequent litigation over the prior administration’s WOTUS rule has resulted in the 2023 WOTUS rules (as amended after Sackett) applying in 24 states, while the pre-2015 rules, as consistent with Sackett, are applied in 26 states.
As the agencies begin a new effort to promote clarity and uniformity for Clean Water Act implementation across the country, EPA Administrator Lee Zeldin announced the availability of new guidance for implementing the “continuous surface connection” requirement outlined in Sackett. Administrator Zeldin also announced that the agencies will conduct listening sessions in March and April to solicit feedback and hear public comment on implementation issues that remain post-Sackett. The agencies hope that the guidance and the listening sessions will assist their efforts to arrive at both (a) legally comprehensible and durable provisions for identifying jurisdictional features governed by the Clean Water Act, and (b) effective, transparent, and predictable field implementation of the principles for identifying WOTUS.
The Guidance
Whether a wetland is jurisdictional under the Clean Water Act depends on the connection that the wetland has to another jurisdictional water — a traditional navigable water or a relatively permanent body of water connected to a navigable water. When the Supreme Court confirmed in Sackett that a wetland needed to have a continuous surface connection with other covered waters, it seemed to provide additional clarity with respect to wetland jurisdiction. But guidance documents issued by the prior administration continued to generate controversy by concluding that “continuous surface connection” did not only mean that a wetland had to abut a covered water, but that it could be connected by a “discrete feature,” like a non-jurisdictional ditch, to a jurisdictional waterway.
The new guidance clarifies that wetlands must be “adjacent” to, or “directly abut” a jurisdictional water like a river or tributary and prohibits non-jurisdictional intermediate features from qualifying as a continuous surface connection. The guidance emphasizes that, after Sackett, the test for the jurisdictional status of adjacent wetlands is twofold. First, the wetland must be adjacent to a body of water that is itself a traditionally navigable water or a “relatively permanent” body of water that is connected to a traditionally navigable water. Second, the wetland (which must meet the existing regulatory definitions of wetlands) must have a continuous surface connection to a jurisdictional water such that it is difficult to determine where the jurisdictional water ends and the wetland begins. This eliminates the “discrete feature” test.
This continuous surface connection guidance supersedes all other guidance documents on the issue. The agencies recognize that the second prong of the test, the “line-drawing problem” that exists between waters and wetlands, may present case-by-case challenges in identifying a continuous surface connection in the field. The agencies commit to working with stakeholders to resolving these line-drawing problems on a case-by-case basis and may provide additional guidance on the line-drawing problem in the future.
Listening Sessions
The agencies have announced a series of six listening sessions to take place in late March and April to receive public input on several WOTUS topics:
Relatively Permanent Waters. To determine whether a tributary is a WOTUS, the agencies look to whether the tributary is a “relatively permanent water.” The agencies are soliciting feedback on what kinds of characteristics, like flow regime, flow duration, seasonality, or others should inform a definition of “relatively permanent.”
Continuous Surface Connection. Although the new guidance is clear that discrete features connecting a wetland to a traditionally navigable water is not a basis for treating a wetland as jurisdictional, there are lingering questions on what it means for a wetland to “abut” a jurisdictional water. The agencies are seeking input on whether wetlands behind natural (not artificial) berms or other landforms would be considered “abutting,” and whether artificial flood control structures, pumps, and other features would remove a wetland behind the feature from Clean Water Act jurisdiction.
Jurisdictional Ditches. The agencies are also seeking public response on whether flow regime, physical features, excavation location, biological indicators like the presence of fish, or other characteristics would make a ditch jurisdictional.
Listening sessions will be public and conducted in-person, as well as streamed. Individuals or organizations seeking to present comments will be selected on a first-come, first-served basis and will be required to limit their remarks to three minutes.
Two New Procedural Wrinkles That May Disincentivize Challenges to New Federal Policies
The first weeks of the Trump Administration have been defined by executive orders and new policies that were immediately challenged on constitutional or statutory grounds.
Recently, the US Environmental Protection Agency indicated its intent to “launch” the “biggest deregulatory action in U.S. History” under which it will undertake 33 separate actions impacting regulations ranging from emissions limits for power plants to internal calculations for the “social cost of carbon.” Even preceding this effort, more than 100 legal challenges to other Trump Administration actions have been filed.
As these disputes move through the litigation process (including appeals and, for at least some cases, likely US Supreme Court review), district courts have issued numerous preliminary injunctions to pause or delay the effects of executive orders until litigation is complete. While some of the new efforts will be challenged in appellate courts due to venue provisions in statutes including the Clean Air Act or Clean Water Act, other challenges will proceed in district courts.
Litigating these challenges can be expensive for both sides, but two recent developments could make litigation costs — particularly in challenges lodged in district courts — higher for challengers. First, the Trump Administration issued a Memorandum titled “Ensuring the Enforcement of Federal Rule of Civil Procedure 65(c),” and subsequently a related Executive Order on the same subject, seeking to require challengers to post bond before seeking preliminary injunctions. Second, the Supreme Court recently decided Lackey v. Stinnie, which — separate and apart from the Memorandum — makes it harder for some challengers to recover attorneys’ fees after a preliminary injunction is granted.
Below, we discuss these developments and how they might apply in the litigation context.
How to Challenge Executive Branch Actions
We have outlined some of the Trump Administration’s initial actions: initial Executive Orders; initial environmental policies; initial efforts to pause government grants; and policies in the energy space. We have also addressed the new Administration’s trade policies here and here.
Individuals and entities generally initiate a challenge to the legal basis for an executive order or other action by filing a complaint in a federal district court. Depending on what is at stake and whether the facts of the case require rapid resolution, the court may use briefings, hearings, or a trial to evaluate whether the order or action should be upheld, struck down, or modified. Parties that lose in district courts may appeal, and some disputes make their way to the Supreme Court, which has the final say on most constitutional issues.
Often, challengers ask for injunctive relief, which is a legal remedy in the form of a court order compelling a party to do, or not do, a particular thing. Injunctive relief is warranted when an award of a money judgment would be insufficient to resolve the harm. Injunctive relief can be temporary — a “preliminary injunction” — or permanent, requiring a party in perpetuity not to do a particular thing.
Courts will often use preliminary injunctions to temporarily preserve the “status quo” while litigation is ongoing. This means that a challenger may win a preliminary injunction, but ultimately lose the case (or have the case mooted if the government changes course on its own before a final judgment).
The White House Memorandum on Fed. R. Civ. P. 65(c)
On March 6, after district courts had issued numerous restraining orders and preliminary injunctions temporarily delaying or reversing executive orders, the Trump Administration issued a new memorandum titled “Ensuring the Enforcement of Federal Rule of Civil Procedure 65(c),” seeking to require plaintiffs to post a bond before requesting preliminary relief. (The White House fact sheet on the Memorandum is here.)
The memo asserts that the slate of lawsuits and preliminary injunctions constitutes an “anti-democratic takeover … orchestrated by forum shopping organizations that repeatedly bring meritless suits … without any repercussions when they fail.” The memo argues that taxpayers are harmed when program cuts are enjoined and substantial government resources are spent “fighting frivolous suits instead of defending public safety.”
In response to the issues it identifies, the memo invokes Federal Rule of Civil Procedure 65(c), which requires parties seeking a preliminary injunction to post security in an amount the court determines is sufficient to cover the costs and damages of the enjoined party if the enjoined party ultimately wins the case on the merits. The memo directs all federal department and agency heads to formally request security under Rule 65(c) in every case where plaintiffs seek a preliminary injunction against the government. It requires that the requests remind the court that Rule 65(c) is mandatory, reiterate that the government’s requested bond amount is “based on a reasoned assessment,” and demand that any party failing to comply with Rule 65(c) should lead to the “denial or dissolution of the requested injunctive relief.”
But despite its strong language, the memo is largely just a reminder of an already existing procedural rule. Judges have discretion to determine the appropriate amount for any Rule 65(c) bond, and, in the context of challenges to executive actions, many courts have determined that amount is zero. Federal judges are presumably aware of Rule 65(c), and many of the judges enjoining the Trump Administration already determined that Rule 65(c) did not require a bond in those cases. Two weeks before the memo, a federal district judge in Maryland granted a college diversity officer’s request for a preliminary injunction against executive orders cancelling diversity, equity, and inclusion (DEI) grants and contracts, but set the Rule 65(c) bond at $0 because the plaintiff’s constitutional rights were at issue and “a bond of the size Defendants appear to seek would essentially forestall Plaintiffs’ access to judicial review.”
Going forward, Rule 65(c) bonds will likely become a more actively contested issue and challengers to any executive action will need to provide arguments why they should not be required to pay.
Lackey v. Stinnie and Plaintiffs’ Attorney Fees
Separately but relatedly, the challengers who have successfully obtained preliminary injunctions blocking Trump Administration executive actions may have a harder time recovering their attorneys’ fees — after the recent Supreme Court decision in Lackey v. Stinnie, plaintiffs will need to see their cases through to final judgment before recovering legal fees.
42 U.S.C. § 1988 provides that civil rights plaintiffs may win reimbursement of their attorneys’ fees if they are the “prevailing party.” Historically, this fee-shifting mechanism has helped advocacy groups and law firms shoulder the substantial cost of civil rights lawsuits. For example the Lackey plaintiffs estimated that the federal appellate litigation in the case cost $800,000. In a procedurally similar case, the New York Civil Liberties Union was seeking $200,000 in attorneys’ fees against two upstate New York counties.
The Supreme Court has addressed when exactly a plaintiff becomes a “prevailing party” (and thus eligible for reimbursement) on several occasions. In Buckhannon Board and Care Home v. West Virginia Department of Health and Human Resources, the Court ruled that a party prevails only when it achieves a “judicially sanctioned changed in the legal relationship of the parties.” 532 U.S. 598, 601 (2001). If a plaintiff files a lawsuit and the defendant voluntarily does what the plaintiff asked for, the plaintiff does not “prevail” for purposes of attorneys’ fees. To prevail, the plaintiff must win a merits judgment from a court.
What if a plaintiff wins a preliminary injunction but loses a final merits judgment? That plaintiff also does not prevail, the Supreme Court has held, because the victory was only temporary, not enduring. Sole v. Wyner, 551 U.S. 74, 86 (2007). The Sole decision left open what happens when a plaintiff wins a preliminary injunction and then the defendant voluntarily provides the relief plaintiff was seeking.
That issue has now been resolved. Until last month, 11 federal appeals courts held that a plaintiff that wins a preliminary injunction can be a “prevailing party” under some circumstances. Not so, said the Supreme Court in Lackey. The Court held that a plaintiff “prevails” when it wins permanent, on-the-merits judicial relief that materially alters the legal relationship of the parties. A plaintiff that wins only a preliminary injunction, which would include several plaintiffs suing the Trump Administration at this juncture, is not yet entitled to reimbursement of its attorneys’ fees. As a result, it’s not yet clear whether plaintiffs challenging the Trump Administration’s policies will receive attorneys’ fees. It will depend on how they are ultimately resolved.
What is AI Washing and Why are Companies Getting Sued?
With the proliferation of artificial intelligence (AI) usage over the last two years, companies are developing AI tools at an astonishing rate. When pitching their AI tools, these companies claim that their products can do certain things and promise and exaggerate their capabilities. AI washing “is a marketing tactic companies employ to exaggerate the amount of AI technology they use in their products. The goal of AI washing is to make a company’s offerings seem more advanced than they are and capitalize on the growing interest in AI technology.”
Isn’t this mere puffery? No, according to the Federal Trade Commission (FTC), Securities and Exchange Commission (SEC), and investors.
The FTC released guidance in 2023, outlining certain questions companies can assess to determine if they are AI washing. It urges companies to determine whether they are overpromising what the algorithm or AI tool can deliver. According to the FTC, “You don’t need a machine to predict what the FTC might do when those claims are unsupported.”
In March 2024, the SEC charged two investment advisors with AI washing by making “false and misleading statements about their use of artificial intelligence.” Both cases were settled for $400,000. The SEC found the two companies had “marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not.”
Investors are getting into the hunt as well. In February and March 2025, investors sued two companies in securities litigation that alleged AI washing. In the first case, the company allegedly made statements to investors about its AI capabilities and reported “impressive financial results, outlooks and guidance.” It was subsequently the subject of short-seller reports that alleged they were using “manipulative practices” that inflated its numbers and profitability. The litigation alleged that, as a result, the company’s shares declined.
In the second case, the class action named plaintiff alleged that the company overstated “its position and ability to capitalize on AI in the smartphone upgrade cycle,” which caused investors to invest at an artificially inflated price.
Lessons learned from these examples? Look at the FTC’s guidance and assess whether your sales and marketing plan takes AI washing into consideration.
Validity Analysis for Product-by-Process Claim Focuses on Product
The US Court of Appeals for the Federal Circuit affirmed a Patent Trial & Appeal Board patentability finding, explaining that an anticipation analysis for a product-by-process claim focuses on the product and not the process. Restem, LLC v. Jadi Cell, LLC, Case No. 23-2054 (Fed. Cir. Mar. 4, 2025) (Moore, Schall, Taranto, JJ.)
Jadi Cell owns a patent directed to stem cells that have specific cell markers expressed. These stem cells are obtained from the subepithelial layer of mammalian umbilical cord tissue by first placing the layer in contact with a tissue culture growth substrate and then culturing the layer. The claims of the patent are product-by-process claims. Restem challenged certain claims of the patent in an inter partes review (IPR) petition as being anticipated by the Majore reference or obvious in view of Majore in combination with other references. The Board found that none of the challenged claims were shown to be unpatentable. Restem appealed.
The Board construed the claim term “placing a subepithelial layer of a mammalian umbilical cord tissue in direct contact with a growth substrate” to mean “to intentionally place umbilical cord tissue comprising the subepithelial layer so that it touches a growth substrate to permit cell culture.” The Board found that while the prior art references disclosed the two-step process in the claims, the references failed to disclose the claimed cells because the references did not necessarily produce cells with the claimed cell marker expression profile. Restem argued that the Board erred by construing the claims to require steps beyond the claimed two-step process. The Federal Circuit rejected that argument, finding that the Board had made underlying factual findings that supported its anticipation analysis in construing the “placing” step and therefore did not err.
In the underlying proceeding, the Board declined to construe “isolated cell” but construed “expresses/does not express” to mean that “the marker is confirmed present/absent relative to a control sample,” consistent with its interpretation of isolated cell to indicate a cell population. In construing this claim, the Board relied on extrinsic evidence to assess how a person of ordinary skill in the art would determine whether the cell markers were expressed. The Board found that both parties’ experts agreed that cell marker analysis was done at the cell population level at the time of invention. Restem argued that the Board erred in implicitly construing “isolated cell” contrary to the express definition in the challenged patent. However, the Federal Circuit upheld that implicit construction as supported by the intrinsic evidence because the specification consistently described the claimed invention as a cell population and the prosecution history indicated that the examiner only allowed the patentee to claim a cell population.
As for the Board’s finding that the Majore reference did not inherently or expressly anticipate the challenged claims, the Federal Circuit affirmed. The Board found that the cell marker expression profile distinguished the claimed cells from other stem cells and was therefore limiting, and that Majore did not expressly disclose the nonexpression limitations included in the patent claims. Restem argued that inherency is automatic for product-by-process claims and that the Board erred in finding Majore did not inherently anticipate patent claims. The Court disagreed, explaining that in determining validity of a product-by-process claim, “the focus is on the product and not on the process of making it,” because “an old product is not patentable even if it is made by a new process.” The Court noted that when determining infringement (as opposed to validity), “the focus is on the process of making the product as much as it is on the product itself.” The Court explained that Restem’s invalidity argument conflated the anticipation and infringement analyses for product-by-process claims by improperly shifting the analysis from whether the prior art discloses the claimed product to whether the prior art discloses the claimed process.
An Odyssey of Timeliness: Appointments Clause Arguments Must Be Preserved
Citing forfeiture, the US Court of Appeals for the Federal Circuit upheld the dismissal of a complaint against the US Patent & Trademark Office (PTO). The complaint sought director review of a 2018 Patent Trial & Appeal Board decision that affirmed a rejection of claims in the subject patent application. In the initial appeal, no “appointments clause” argument was raised. Odyssey Logistics & Technology Corp. v. Stewart, Case No. 2023-2077 (Fed. Cir. Mar. 6, 2025) (Dyk, Reyna, Stoll, JJ.)
Background
In 2020, the Federal Circuit upheld a 2018 Board decision rejecting claims in a patent application owned by Odyssey Logistics. At that time, Odyssey did not raise an Appointments Clause challenge. However, following the Supreme Court’s 2021 ruling in United States v. Arthrex, Odyssey filed a request for PTO Director review of the 2018 Board decision, arguing that the decision was invalid under Arthrex. After its request was denied, Odyssey filed a district court complaint seeking to compel director review.
Arthrex addressed the Appointments Clause of the US Constitution, which provides that “Officers of the United States” must be appointed by the President with the advice and consent of the Senate, while Congress may permit the appointment of “inferior Officers” by the President, courts, or department heads. In that case, the plaintiff argued that the Board’s administrative judges were principal officers (rather than inferior) and should have been appointed by the President and confirmed by the Senate.
In 2019, the Federal Circuit ruled that there had been an appointments clause violation in Arthrex (coincidentally, this was during the time of Odyssey’s initial appeal to the Federal Circuit). In 2020, the Supreme Court agreed with the Federal Circuit’s ruling but provided a different remedy, holding that the Director “may review final PTAB decisions and, upon review, may issue decisions himself on behalf of the Board.”
Appeal
After Odyssey sought review of the 2018 decision, the PTO responded that it does not accept requests for Director review of ex parte appeal decisions. Odyssey then filed a district court complaint that was dismissed for lack of subject matter jurisdiction. The district court explained that judicial review of a decision committed to agency discretion was improper. Odyssey appealed.
The Federal Circuit affirmed the district court, not on the grounds of lack of jurisdiction but for failure to state a claim. The Federal Circuit ruled that the PTO did not abuse its discretion in denying review. Under Federal Rule of Civil Procedure 60(b), a district court can relieve a party from a final judgment even after an appeal mandate, as long as the relief sought does not fall within the scope of that mandate. The principles underlying this rule provide guidance for agencies regarding reconsideration of prior agency decisions.
Odyssey did not raise its Appointments Clause argument in its appeal of the 2018 Board decision. The Federal Circuit has consistently held that “a party’s failure to raise an Appointments Clause challenge in its opening brief constitutes forfeiture even when the argument was raised before the termination of direct appeal and immediately after our decision in Arthrex.” In this case, Odyssey did not raise the Appointments Clause issue in its appeal at the Board, even after Arthrex.
Supreme Court Limits Veterans’ Ability to Challenge Disability Denials
On March 5, 2025, the U.S. Supreme Court ruled against two veterans challenging the Department of Veterans Affairs (VA) in a case that impacts how veterans can appeal disability benefit denials. The 7-2 decision in Bufkin v. McDonough and Thornton v. McDonough affirms that the VA’s determinations of whether evidence is “in approximate balance” are factual findings subject to clear-error review, rather than legal questions eligible for de novo review by the U.S. Court of Appeals for Veterans Claims. This ruling raises the standard veterans must meet to successfully appeal a denial, reinforcing the VA’s discretion in these cases.
The Cases: Bufkin and Thornton
Joshua Bufkin, an Air Force veteran (2005-2006), applied for disability benefits due to post-traumatic stress disorder (PTSD) linked to marital difficulties experienced during his service. His claim was denied due to conflicting medical evaluations, leading to his legal challenge.
Norman Thornton, an Army veteran (1988-1991, Gulf War service), had an existing 50% disability rating for PTSD but sought a higher rating, arguing that his condition significantly impaired his ability to work. His claim was also denied, prompting him to contest the VA’s decision.
Both veterans asserted that the benefit-of-the-doubt rule, which directs the VA to rule in the veteran’s favor when evidence is evenly balanced, had not been properly applied in their cases.
The Supreme Court’s Ruling
Writing for the 7-2 majority, Justice Clarence Thomas emphasized that determining whether evidence is “in approximate balance” is a factual matter rather than a legal one. As a result, the Veterans Court must defer to the VA’s factual findings unless the decision is clearly erroneous. This limits appellate review and reduces veterans’ ability to challenge VA denials.
In dissent, Justice Ketanji Brown Jackson, joined by Justice Neil Gorsuch, criticized the decision as undermining veterans’ rights. She argued that the ruling weakens Congress’ pro-veteran intent, making it more difficult for veterans to contest unfair denials of benefits.
Takeaways for Veterans
The decision has implications for veterans seeking disability benefits. By affirming that VA benefit-of-the-doubt determinations are factual findings, the Court has made it more challenging for veterans to overturn VA denials on appeal.
Since the VA’s discretion in applying the benefit-of-the-doubt rule has been reinforced, moving forward:
Veterans must provide stronger medical and factual evidence when filing disability claims.
Veterans who receive an unfavorable VA decision must meet a higher burden to successfully challenge it in court.
Inventor’s Motivation to Combine Does Not Control Obviousness
The US Court of Appeals for the Federal Circuit affirmed a district court decision rejecting claims of a patent application directed to a dosing regimen for a cancer treatment, finding the claims to be obvious where the motivation to use the claimed dosing was not the same as the inventor’s motivation. ImmunoGen, Inc. v. Coke Morgan Stewart, Case No. 23-1763 (Fed. Cir. Mar. 6, 2025) (Lourie, Dyk, Prost, JJ)
The claims at issue involved a dosing regimen for administering IMGN853, an already-patented antibody drug conjugate used for treating certain cancers, at a claimed dose of six milligrams (mg) per kilogram (kg) of adjusted ideal body weight (AIBW) of the patient.
ImmunoGen argued that it was undisputed that, at the time of the invention, a person of ordinary skill in the art would not have known that IMGN853 caused ocular toxicity in humans and that without a motivation to address the problem of ocular toxicity, the claimed dosing limitation could not have been obvious. Therefore, according to ImmunoGen, the district court erred in its motivation-to-combine analysis. The Federal Circuit disagreed, stating, “that the specific problem the inventors . . . purported to solve via the claimed dosing regimen was unknown does not necessarily mean that the dosing regimen itself was not obvious.” The Court also noted that because ocular toxicity was a well-known adverse event in the administration of drugs containing a payload included in IMGN853, “a person of ordinary skill in the art, despite not knowing of IMGN853’s ocular toxicity, would have nonetheless been motivated to monitor for those side effects when administering the drug to a human.”
ImmunoGen also argued that the district court erred in finding that a person of ordinary skill in the art would have been motivated to use AIBW dosing to eliminate ocular toxicity. The Federal Circuit again disagreed, reasoning that although AIBW dosing has not been used for drugs such as IMGN853, it would still have been within the range of knowledge of a person of ordinary skill in the art when addressing dosing-induced ocular toxicity. The Court explained that AIBW was well known, had been used for drugs both smaller and larger than IMGN853, and had proven effective in reducing ocular toxicity.
The Federal Circuit concluded that the district court did not clearly err in determining that a person of ordinary skill in the art would have been motivated to select the claimed dose of six mg/kg AIBW with a reasonable expectation of success. The claimed dose had already been described in the literature for patients at their ideal body weight, regardless of whether a doctor was aware of AIBW dosing specifically. The Court also noted that the district court was not required to find that a person of ordinary skill in the art would have had a reasonable expectation of eliminating ocular toxicity using the claimed dose, as “the obviousness inquiry is generally agnostic to the particular motivation of the inventor” and the claims made no reference to ocular toxicity.
Practice Note: The motivation to combine analysis is not limited by the problem or need recognized by the inventors. Instead, any problem known at the time of the invention can provide a reason for combining elements as claimed.
Economic Prong of Domestic Industry Requirement Includes All Sorts of Labor and Capital
Addressing the economic prong of the domestic industry requirement under Section 337(a)(3)(B) of the Tariff Act of 1930, the US Court of Appeals for the Federal Circuit reversed a US International Trade Commission decision, finding that the Commission had applied an overly narrow interpretation of the requirement. The Court explained that expenses related to sales, marketing, warehousing, quality control, and distribution may qualify as “labor and capital” for establishing the existence of a domestic industry, even if there is no domestic manufacturing. Lashify, Inc. v. International Trade Comm’n, Case No. 23-1245 (Fed. Cir. Mar. 5, 2025) (Taranto, Prost, Chen, JJ.)
Lashify is a US-based company that sells eyelash extension products. Concerned about the importation of similar goods, Lashify filed a complaint with the Commission, alleging that certain importers were infringing its patents. As an importer itself, Lashify had its products manufactured abroad before selling them to customers in the United States. In doing so, Lashify incurred significant expenses related to warehousing, distribution, quality control, sales, and marketing. These expenses were critical to Lashify’s domestic industry case.
The Commission rejected Lashify’s claims, reasoning that it did not demonstrate the establishment of, or effort to establish, a domestic industry. This is known as the “economic prong” of the domestic industry requirement. One way to satisfy this prong is by showing the expenditure of significant labor or capital within the US. Lashify’s domestic expenses were limited to warehousing, distribution, quality control, sales, and marketing costs, and in the Commission’s view, these expenses did not constitute significant “labor or capital” under Section 337 (a)(3)(B). The Commission determined that these expenses were no greater than those any importer would incur once its products arrived in the US. Lashify appealed.
The Federal Circuit reversed, citing the text of the provision recognizing significant labor or capital as a means of establishing a domestic industry and noted that the statutory language did not exclude expenses related to warehousing, distribution, quality control, sales, and marketing. Considering the domestic industry requirement under Section 337(a)(3)(C), the Court noted that the reference to labor and capital in part (B) was analogous to investments in plant and manufacturing in part (C), which similarly did not limit the “enterprise functions” to which the investments must be directed.
The Federal Circuit cited its 2015 decision in Lelo, which defined “labor” as “human activity that produces goods or provides the services in demand in an economy” and “capital” as “a stock of accumulated goods,” not simply money to finance an enterprise. The Court held that complainants may satisfy the economic prong by demonstrating the “employment of a large enough stock of accumulated goods [i.e., capital] or of a significant amount of human activity for production goods or providing the services in demand in an economy [i.e., labor].” The Court determined that Lashify’s warehousing, distribution, quality control, sales, and marketing expenses fit within this definition and should therefore be considered in assessing whether Lashify had employed sufficient labor and capital within the US to satisfy the economic prong.
Practice Note: This ruling broadens the scope of domestic industry in Section 337 cases, allowing intellectual property holders to count additional operational expenses toward establishing the domestic industry requirements. Those seeking to enforce their intellectual property rights at the Commission, particularly where their own products are manufactured abroad, will likely benefit from this decision.
Proving Fraud is and Should Be Hard: Lessons from a Recent Medicare Advantage False Claims Act Decision
The litigator’s adage “it’s easy to plead, it’s hard to prove” once again came true in the long-running False Claims Act (FCA) case targeting Medicare Advantage (“MA”) plans operated by UnitedHealth (United). Eight years after the complaint was filed, a Special Master recommended granting United’s motion for summary judgment. U.S. ex rel. Poehling v. UnitedHealth Group, Inc., 2025 U.S. Dist. LEXIS 40921 (CD CA). Both the litigation and the Special Master’s report contain valuable insights for all FCA defendants, and especially for those matters involving allegations related to diagnosis coding.
The government alleged that United violated the FCA’s “reverse false claim” provision by failing to return overpayments related to the submission of allegedly invalid diagnosis codes in connection with the MA program. The Special Master recommended summary judgment in United’s favor due to the government’s inability to prove both that United was actually overpaid, and that it improperly avoided an obligation to repay the government. In doing so, the ruling highlights the government’s burden to prove that 1) a diagnosis code is false; and 2) that a defendant “deceived” the government in “improperly” withholding an overpayment. It also confirms that materiality is an essential element of a “reverse” FCA violation.
Lesson #1: The Government Must Prove Its Case
The Special Master found that the government did not prove the diagnosis codes were unsupported by medical records because the government did not actually review the medical records. Instead, the government identified nearly 28 million diagnosis codes that it argued were invalid, but “did not compare the diagnosis codes submitted by United’s doctors against the underlying medical records to identify unsupported diagnosis codes.” Rather, “if United’s coders did not identify a diagnosis code during chart review as supported by a medical record, the government assume[d] the diagnosis code was, in fact, not supported.” (Emphasis in original). The Special Master found that assumption woefully insufficient.
The Special Master also found it compelling that CMS’s own RADV audits “found support in medical records for diagnosis codes that the government has alleged were unsupported based solely on such codes not having been coded during United’s chart review. These findings undercut the government’s theory that any diagnosis code submitted by United to CMS but not identified by coders in chart review is presumptively invalid.”
The Special Master further pointed out that “the government has repeatedly attempted to shift the burden to United to disprove the government’s allegations. Rather than review medical records itself, the government served discovery asking United to identify which of the approximately 28 million diagnosis codes, if any, United contends were supported by medical records and to produce the medical records providing such support.” (Emphases in original). United properly objected to this as “‘an improper contention interrogatory that impermissibly seeks to shift the burden of proving an essential element of the government’s False Claims Act case on to UnitedHealth . . .’” but offered to produce the 21 million underlying medical records in order to resolve the discovery dispute. The government rejected that offer, apparently, due to the volume of documents. The Special Master wryly noted that “the government was responsible for placing that volume of records in dispute.” Defendants should push back on government attempts to force them to prove their innocence, and to take on the government’s own investigatory and evidentiary obligations.
Lesson #2: The FCA Is A Fraud Statute
At base, the False Claims Act is a “fraud statute.” See e.g., United States ex rel. Schutte v. SuperValu, Inc., 598 U.S. 739, 750-51 (2023). As such, the Special Master appropriately focused on the government’s position that “mere avoidance of an obligation to repay money to the government is enough to create liability under the FCA, without the need to prove any deceptive conduct” and found that this position obviates the nature of a fraud statute. The Special Master ruled that “the impropriety of a defendant’s retention of an overpayment cannot be grounded in the mere fact of the defendant having received the overpayment, or even of being obligated to return it. Otherwise, the requirement of ‘improper’ conduct would introduce circularity and surplusage into a statute where Congress clearly intended nothing of the kind.” Quite simply, “a reverse FCA claim requires proof that the defendant engaged in conduct that deceived the government about an obligation to repay funds.”
Here, the government did not allege “any sort of deception.” Even if United had retained an overpayment, “[t]he mere retention of overpayments may deprive the government of funds it is owed, but that is not fraud.” While the failure to allege deception was fatal by itself, here there was also evidence that “the government knew of the very chart review practices of which it now claims United prevented it from learning, and thus the government cannot have been duped into relying on any action or inaction by United in determining whether it had been the victim of overpayments.”
The bar for both pleading and proving fraud is high. Fed. R. Civ. Pro. 9(b). Here, the Special Master correctly recognized that “[i]n relying upon only the ‘knowing and improper avoidance’ formulation of reverse FCA liability, the government must establish that United knew it had received overpayments and acted in a way that kept the government from learning of the overpayment.” Defendants should hold the government to those requirements. Quite simply, fraud and breach of contract are radically different, and proving fraud is, and should be, hard.
Lesson #3: Materiality Matters
In the eight years since the publication of Universal Health Services v. United States ex rel. Escobar, 579 U.S. 176 (2016), this blog has written extensively about materiality. More than 1,100 court decisions cite to Escobar. Escobar’s impact is significant and pervasive. Here, the government argued that “materiality is not a required element of establishing liability under the second prong of the reverse false claim provision.” The Special Master disagreed:
Escobar and subsequent Ninth Circuit cases recognize that, like the FCA as a whole, its reverse false claims provision incorporates the elements of common law fraud (although the provision expands the notion of what constitutes a “false claim” under the statute). Accordingly, a materiality element must apply to that provision, regardless of which of its two prongs is the basis for the government’s claim in a given case, because of the inconceivability of fraud absent a materiality element.
(Emphasis added, citations omitted). FCA defendants should continue to hold the government to its burden to prove materiality as well.
Conclusion
While the threat of treble damages, per claim penalties, and a variety of administrative remedies (including, but not limited to, suspension and debarment) are intimidating, FCA defendants should take comfort in this decision, which underscores the value of investing in a good defense and litigation strategy. Courts will hold the government’s feet to the fire and require it to meet its burden to prove fraud which, as here, it often simply cannot do.
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PTO Reverts to Prior Post-Grant Guidelines for Cases Involving Parallel District Court Litigation
On February 28, 2025, the acting director of the US Patent & Trademark Office (PTO) announced that the agency will revert to previous guidelines for discretionary denials of petitions for post-grant proceedings where there is ongoing district court litigation.
This announcement rescinds the PTO’s June 21, 2022, memorandum entitled “Interim Procedure for Discretionary Denials in AIA Post-Grant Proceedings with Parallel District Court Litigation.” The memorandum stated that the Patent Trial & Appeal Board “will not deny institution of an IPR or PGR under Fintiv (i) when a petition presents compelling evidence of unpatentability; (ii) when a request for denial under Fintiv is based on a parallel ITC proceeding; or (iii) where a petitioner stipulates not to pursue in a parallel district court proceeding the same grounds as in the petition or any grounds that could have reasonably been raised in the petition.” The memorandum effectively limited the discretion granted in Fintiv, which outlined six factors for the Board to consider when making decisions on post-grant proceedings involving parallel district court litigation.
Now that the 2022 memorandum has been rescinded, parties to post-grant proceedings should refer to Board precedent, including Fintiv and Sotera Wireless v. Masimo, for guidance when there are parallel district court proceedings. In accordance with prior guidelines, the PTO’s objective is to achieve greater consistency in its decision-making processes, especially in situations where patent validity is contested both in the courts and before the Board. The PTO emphasized that any portions of future Board decisions that rely on the 2022 memorandum will not be binding or persuasive.
Practice Note: Because of this action, the Board will now enjoy greater discretion when ruling on post-grant petitions, which may result in an increase of discretionary denials.
Delaware’s Fight to Remain Preeminent Home for Corporations
Delaware is feeling the pressure of backlash from resident corporations over recent decisions by the Delaware Court of Chancery in stockholder litigation, as well as from significant competition from other states, like Texas and Nevada, which are making material changes to their respective corporate laws to attract corporations looking for a friendlier new home state. As Foley reported previously, Texas is vying hard to become the preferred jurisdiction for legal domestication. Senate Bill No. 29 and companion House Bill 15 were filed in the Texas Legislature on February 27, 2025. Those bills introduce a series of corporate reforms, the most significant of which include the codification of the so-called “business judgment rule” and the permission for Texas corporations to adopt an ownership threshold that must be met for derivative claims.
And that is only the most recent step by Texas. In September 2024, Texas opened a statewide business court judicial district modeled after Delaware’s Court of Chancery to accommodate the booming corporate community in Texas, which only continues to grow due to a number of geographic and economic factors. Texas Governor Greg Abbott also recently announced the creation of the Texas Stock Exchange, which will begin facilitating trades and listings in Dallas in 2026. Nevada also has a leg in this race. Its legislature introduced Assembly Bill 239 on February 17, 2025, which, among other things, introduces new processes for reorganizations and revises processes for which a board of directors approves a plan of merger, conversion, or exchange. Notably, that bill also proposes to amend Nevada’s codification of the business judgment rule to require directors to act on an “informed basis.”
To preserve its position as the premier “home” to American corporations, the Delaware legislature is likewise proposing changes to Delaware corporate law. On February 17, 2025, it introduced Senate Bill 21. Among other things, that bill would establish:
New safe harbor protections for directors, officers, or controlling stockholders or control groups, shielding such individuals or groups of individuals from liability if they have interests rendering them “not independent” regarding transactions or other actions taken, and terms for deeming directors and stockholders independent (see proposed revisions and amendments to § 144 of Title 8 of the Delaware Code);
An amendment to stockholder books and records inspection rights to limit by definition the materials a stockholder may demand to inspect and to impose conditions upon bringing a demand to inspect a corporation’s books and records (see proposed revisions and amendments to § 220 of Title 8 of the Delaware Code); and
That controlling stockholders and control groups cannot be held liable for monetary damages for breach of the duty of care (see proposed revisions and amendments to § 144(c) of Title 8 of the Delaware Code).
Among other things, these proposed changes to Delaware’s corporate law seek to ease the volume of stockholder litigation brought in the state, as well as class attorney fees resulting from any successful stockholder action. However, these proposed changes are facing substantial pushback within the state, only a few weeks after the bill’s introduction. Part of that pushback stems from the source of the bill itself — reportedly, it was quickly developed by a working group convened by Delaware’s recently elected Governor Matt Meyer, who specifically cited concern with corporate rumblings of charters moving to other states, like Texas.
Only in its infancy, Delaware’s Senate Bill 21 has already had practical effects, with a stockholder complaint filed in the Court of Chancery on February 26, 2025, alleging that the defendant corporation has strategically (but improperly) avoided direct demands for inspection of books and records in reliance on Senate Bill 21, anticipating its passage will avoid liability as to the corporation. See Assad v. Altair Engineering Inc., No. 2025-0217 (Del. Ch. Ct.).
As the discord between stockholders or other plaintiff classes affected by corporate law and corporations continues to grow within Delaware and its Chancery Court, in the midst of immense competition from Texas, Nevada, and other states, it is yet to be seen whether Delaware can maintain its position as the preeminent home for America’s corporations and, consequently, where and with what success stockholders can file and maintain actions against the corporations in which they own interests.
Impact of the USPTO’s Rescission of its Discretionary Denial Memorandum
In May 2020, the PTAB panel in Apple Inc. v. Fintiv, Inc. (IPR2020-00019) denied institution of Apple’s petition in view of the advanced state of a parallel district court litigation and set forth six non-exclusive factors to be considered when a patent owner requested that the PTAB deny institution based on this ground. Those six factors would become known as the Fintiv factors and are:
whether the court granted a stay or evidence exists that one may be granted if a proceeding is instituted;
proximity of the court’s trial date to the Board’s projected statutory deadline for a final written decision;
investment in the parallel proceeding by the court and the parties;
overlap between issues raised in the petition and in the parallel proceeding;
whether the petitioner and the defendant in the parallel proceeding are the same party; and
other circumstances that impact the Board’s exercise of discretion, including the merits.
After the Fintiv decision, discretionary denials in view of parallel district court proceedings spiked considerable.
In June 2022, then-USPTO Director Kathi Vidal issued a memorandum titled “Interim Procedure for Discretionary Denials in AIA Post-Grant Proceedings with Parallel District Court Litigation” (the “Interim Guidelines”) in response to this spike in discretionary denials. The Interim Guidelines stated that a petition would not be denied:
based on a parallel U.S. International Trade Commission (ITC) proceeding;
when a petitioner stipulates not to pursue in the parallel litigation the same grounds of invalidity as raised in the petition or any ground that could reasonably have been raised in the petition (referred to as a “Sotera stipulation” based on a PTAB decision by that same name); or
when a petition present “compelling evidence” of unpatentability.
The Interim Guidelines also recognized that a court’s scheduled trial date, a key factor in Fintiv discretionary denials, is not always a good indicator of when trial will actually occur. Accordingly, the Interim Guidelines allowed parties to present evidence of the median time-to-trial statistics for civil actions in the district court where the parallel litigation was pending.
After the Interim Guidelines, the pendulum swung back against discretionary denials with a notable decline in discretionary denials following thereafter.
On February 28, 2025, the USPTO issued an unsigned notice stating that the Interim Guidelines are rescinded and instructed parties and practitioners to again refer to the Fintiv and Sotera decisions when determining whether to deny institution based on a parallel proceeding.
The USPTO’s decision to rescind the Interim Guidelines is expected to increase the number of discretionary denials by removing the safe harbors for petitioners previously available under the Interim Guidelines. But it remains unclear how PTAB panels will address requests for discretionary denials where the parties’ arguments were submitted in view of the Interim Guidelines but were published after their rescission. The first such decisions are now being published and shed some early light on this question.
In Hulu LLC v. Piranha Media Distribution, LLC (IPR2024-01253), published March 4, 2025, the panel cited the USPTO’s Interim Guidelines before declining to deny institution based on the parallel proceeding. This decision was likely authored prior to the USPTO’s February 28, 2025 notice rescinding the Interim Guidelines and was simply published after without revision.
The first PTAB institution decision addressing the USPTO’s rescission of the Interim Guidelines was Savant Technologies LLC v. Feit Electric Company, Inc. (IPR2024-01357), published March 5, 2025. In this case, patent owner requested that the PTAB deny institution based on two related litigations in different districts—the Eastern District of Kentucky and the Northern District of Texas.
In considering the Kentucky litigation, where no trial date had been set, the board considered the parties’ proffered median time-to-trial statistics and found that the trial would likely occur “well after” a final written decision would issue.
Notably, in considering the Texas litigation, which was scheduled for trial on January 20, 2026, the panel noted that “[w]hen the parties filed their papers, the USPTO was following now-rescinded guidance” that allowed parties to present median time-to-trial statistics. Nevertheless, the panel stated that the time-to-trial evidence was not relevant “because we agree with Patent Owner that the time-to-trial statistics are congruent with the scheduled trial date.” In particular, the parallel litigation was schedule for trial on January 20, 2026, while the average time to trial in the Northern District of Texas suggested an earlier trial date in December 2025. After considering the other Fintiv factors, including the merits of Petitioner’s arguments, the panel instituted the IPR.
Another decision published on March 5, 2025, Mobileye Global, Inc. v. Facet Technology Corp. (IPR2024-01110), also addressed patent owner’s request for discretionary denial. In that decision, the panel applied the Fintiv factors without any mention of the Interim Guidelines, which is notable because each party filed two post-preliminary response replies addressing the Interim Guidelines. After considering the Fintiv factors, the panel instituted IPR in this matter.
As can be seen from this small sample of decisions, there is no uptick in discretionary denials since the USPTO rescinded its Interim Guidelines. However, as shown by the Savant Technologies’s decision, the PTAB may continue to consider median time-to-trial statistics in the absence of a trial date but will likely disregard such evidence when a trial date is set. Accordingly, at this time, we suggest that parties continue to cite median time-to-trial statistics in the absence of a trial date but should be prepared for the PTAB to disregard such evidence if or when a trial date is set.