It’s Obvious: Erroneous Claim Construction Can Be Harmless
The US Court of Appeals for the Federal Circuit affirmed a Patent Trial & Appeal Board obviousness determination even though it found the Board had improperly construed a claim term, because the Court found the error harmless in the context of the prior art. HD Silicon Solutions LLC v. Microchip Technology Inc., Case No. 23-1397 (Fed. Cir. Feb. 6, 2025) (Lourie, Stoll, Cunningham, JJ.)
During a 2022 inter partes review (IPR), the Board determined that all but one of the 17 challenged patent claims were unpatentable as obvious in light of a prior patent (Trivedi) and other secondary prior art. The patent described methods of creating “a local interconnect layer in an integrated circuit” using two films. The independent claim recited a first film composed of titanium nitride and a second film as “comprising tungsten.” The Board construed “comprising tungsten” to include either elemental tungsten or tungsten-based compounds. The Board also found that the Trivedi patent disclosed films comprising either elemental tungsten or tungsten compounds. Thus, the Board held that all claims except one were obvious in light of Trivedi and that a person of ordinary skill in the art would have been motivated to combine Trivedi with other prior art. The patent owner appealed, arguing that the Board’s obviousness finding was dependent on the Board’s incorrect construction of the phrase “comprising tungsten.”
The Federal Circuit agreed that the Board’s claim construction was erroneous, because the term “comprising tungsten” required elemental tungsten. The Court explained that the claims explicitly used compound names when referring to compounds, such as “titanium nitride.” Thus, when the drafters wrote “comprising tungsten” without more, they clearly intended to exclude non-elemental tungsten options. The Court also noted that the patent specification used “tungsten” to reference only elemental tungsten and used the word “based” to encompass both elements and their compounds. For example, the patent discussed “chlorine-based” and “fluorine-based” components. Thus, the Court concluded that the claim drafters knew how to delineate when terms should include compounds, and that there was no such delineation in the term “comprising tungsten.”
The Board relied on a single sentence in the patent that stated: “the second film may comprise tungsten, for example,” to support its construction. The Federal Circuit rejected such a broad reading of this language, explaining that it only provided for impurities mixed among the elemental tungsten in the second film, rather than the film comprising a tungsten compound. The Board also cited a European Union (EU) patent in support of the construction that “comprising tungsten” explicitly included tungsten compounds. The Court stated that such extrinsic evidence was insufficient to overcome the asserted patent’s intrinsic teachings.
The Federal Circuit analyzed whether the Board’s obviousness holding could stand given its erroneous construction. The Court found that because the Board determined that Trivedi disclosed layers made of a tungsten compound and elemental tungsten, the patent claims were obvious when the disputed term was properly construed to be limited to elemental tungsten. Thus, the Board’s error was harmless.
Religious Texts, Copyrights, and Estate Law: A Case of Strange Bedfellows
The US Court of Appeals for the Ninth Circuit affirmed in part and reversed in part a case involving a deceased religious leader who owned the copyrights to works reflecting his teachings. The Court found that the copyrighted works were not works for hire under copyright law, that the leader therefore had the right to license his copyrights, and that the subsequent owner of the copyrights (not a statutory heir) also had the right to terminate licenses. Aquarian Foundation, Inc. v. Bruce Kimberley Lowndes, Case No. 22-35704 (9th Cir. Feb. 3, 2025) (Hawkins, McKeown, de Alba, JJ.)
Aquarian Foundation is a nonprofit religious organization founded by Keith Milton Rhinehart. During his time as the leader of Aquarian, Rhinehart copyrighted his spiritual teachings. An Aquarian member, Bruce Lowndes, claimed that he obtained a license from Rhinehart in 1985. Upon Rinehart’s death in 1999, he left his estate, including interests in copyrights, to Aquarian. In 2014, Aquarian discovered that Lowndes was uploading Rhinehart’s teachings online and sent Lowndes takedown requests pursuant to the Digital Millennium Copyright Act (DMCA). In 2021, Aquarian sent Lowndes a letter terminating Lowndes’ license and sued Lowndes for copyright infringement, trademark infringement, and false designation of origin.
After a bench trial, the district court concluded that Rhinehart’s works were not works for hire under either the 1909 or the 1976 Copyright Act, so Rhinehart had the authority to grant Lowndes an unrestricted license. The district court also found that Aquarian did not have the authority to terminate the license as a nonstatutory heir and should have given Lowndes two years notice. The district court denied attorneys’ fees. Both parties appealed the district court’s ruling on ownership and attorneys’ fees, and Aquarian appealed the ruling on its lack of authority to terminate the license.
The Ninth Circuit, finding no clear error, affirmed the district court’s holding that Rhinehart’s works were not works for hire under either the 1909 or the 1976 Copyright Act. Under the 1909 Act’s “instance and expense” test, the Court found that “the creation and maintenance of the works was Rhinehart’s purview, and not the church’s domain.” Under the 1976 Act, which applies agency law, the Court similarly found that Rhinehart’s creation of the works was outside the scope of his employment as Aquarian’s president and secretary. Therefore, under either act, Rhinehart’s works were not works for hire, making Rhinehart the copyright owner. The Ninth Circuit affirmed the district court’s finding that as owner, Rhinehart had authority to grant the license to Lowndes. The Court also found that Lowndes’ license to “use copyrighted materials ‘without restriction’” referenced “a coming World Wide Network,” so Lowndes did not breach the license by posting the works online.
The Ninth Circuit also affirmed that the testamentary transfer of copyrights to Aquarian was permitted by both the 1909 and 1976 Copyright Acts: “Both the 1909 and 1976 Copyright Acts allow for the transfer of a copyright by will. 17 U.S.C. § 42 (repealed) (providing that copyrights ‘may be bequeathed by will’); 17 U.S.C. § 201(d)(1) (providing that that they ‘may be bequeathed by will or pass as personal property by the applicable laws of intestate succession’).”
The Ninth Circuit reversed in part and remanded for further proceedings the issue of whether Lowndes’ license was properly terminated. The Ninth Circuit found that the district court erred in applying 17 U.S.C. § 203 to Aquarian, a nonstatutory heir. Section 203 allows authors or statutory heirs to “terminate a license agreement of unspecified duration thirty-five years from the date of execution, subject to certain ‘Conditions of Termination.’” The Ninth Circuit found that the district court misconstrued § 203 as preempting nonstatutory heir beneficiaries from terminating licenses. Because the Copyright Act is silent on the termination rights of a nonstatutory heir, the Ninth Circuit referred to Washington and Colorado contract law. Both states permit at-will termination of contracts of unspecified duration. Therefore, the Court found that Aquarian properly terminated Lowndes’ license in May 2021. The Ninth Circuit affirmed the district court’s determination that no copyright infringement occurred prior to the termination but reversed and remanded for findings on whether Lowndes infringed the copyrights after May 2021.
Finally, the Ninth Circuit found that the district court did not abuse its discretion in denying admission of impeachment evidence: a recorded phone call to impeach Lowndes. The Ninth Circuit noted the district court did not even credit Lowndes’ testimony making impeachment “superfluous.” The Ninth Circuit also determined that the district court did not abuse its discretion in denying attorneys’ fees, explaining that the Lanham Act provides a district court discretion to award attorneys’ fees in exceptional cases. The Court found that Lowndes provided no evidence that Aquarian was unreasonable in pursuing its trademark claims.
SO IT GOES: Lead Buyer Out of ATDS Claim But Hooked on DNC and Texas Registration Claim in TCPA Class Action
Pretty common factual scenario.
Lead generator makes outbound calls and talks to consumer.
Consumer either pretends to be interested or actually is interested and then is transferred to a lead buyer who can actually provide the good or service the consumer wants.
But then consumer sues lead buyer for making the illegal call–even though the lead buyer did not make the call at all and likely had no idea the call was illegal.
It happens literally every day in TCPAWorld and it remains the biggest problem/risk with buying third-party leads.
Well in Ortega v. Ditommaso 2025 WL 440278 (W.D. Tx. Feb 6, 2025) a lead buyer walked away from a piece of a TCPA case–defeating the ATDS component.
In Ortega a call center run by Meridian Services, LLC allegedly contacted plaintiff to try to sell a business loan. Plaintiff stayed on the line and pretended to be interested to find out who was calling. As a result the call was transferred to Ditommaso, Inc. who tried to sell a loan.
Plaintiff sued Meridian and Ditomasso for the calls alleging they were made using an ATDS and violated his DNC rights since they were made without consent.
Ditomasso moved to dismiss and the court threw out part of the case.
As to the ATDS component the court adopted the narrow ATDS definition accepted in the Second and Ninth Circuit’s and determined that because there were no allegations establishing the calls were placed at random an ATDS was not used. (Careful with this folks because some courts apply a different standard.) Regardless, nice win for the defense on this piece.
Next Defendant asked the court to toss the case because only one call was placed to the Plaintiff and the follow up texts were only sent because he stated he was interested in the product. But the evidence of the flow of calls and texts was not on the face of the complaint so the court would not consider it and denied the motion on that basis.
The Court also found the vicarious liability allegations were sufficient because Meridian was alleged to be an agent of Ditomasso for purposes of making the calls.
The Court also determined Ditomasso could be vicariously liable for the Texas Business and Commerce Code § 302.101 violation–even though it was not itself required to register as a marketer in the state.
So, some good, some bad. But better than nothing.
Take aways here:
Buying third-party leads is dangerous;
Make sure you are working with only registered marketers in Texas;
Some courts will toss ATDS claims if calls are made from a list– but not all;
You cannot introduce evidence of consent at the pleadings stage (unless you are challenging standing, which Defendant did not do.)
New York Federal Court Ruling Highlights a Potential Pitfall in Settlement Agreement Enforcement
On January 8, 2025, the U.S. District Court for the Eastern District of New York held that an employee’s refusal to sign a confidentiality and nondisparagement acknowledgment form annexed to a settlement agreement resolving discrimination and retaliation claims invalidated the entire agreement.
Quick Hits
New York’s General Obligations Law (GOL) § 5-336 and Civil Practice Law and Rules (“CPLR”) § 5003-B both impose strict requirements on nondisclosure clauses in matters involving discrimination claims, including that the inclusion of such clauses in a settlement agreement be at the plaintiff’s preference.
The U.S. District Court for the Eastern District of New York recently held that an unsigned GOL § 5-336 and CPLR § 5003-B acknowledgment form annexed to a settlement agreement did not constitute a separate settlement agreement; rather, it was “a material component of the broader [s]ettlement [a]greement,” as its execution was required to make the settlement agreement “effective.”
Employers may want to consider how they structure settlement agreements involving discrimination claims subject to GOL § 5-336 and CPLR § 5003-B and ensure all material components of such agreements are fully executed to avoid settlement enforceability issues.
Separ v. County of Nassau: Background and Ruling
In Separ v. County of Nassau, the parties entered into a settlement agreement to resolve allegations of discrimination and retaliation. The agreement complied with New York’s statutory requirements under GOL § 5-336 and CPLR § 5003-B by including provisions for a twenty-one–day consideration period and a seven-day revocation window, both exercisable by the plaintiff, Anne Separ. However, the settlement’s enforceability hinged on the execution of an acknowledgment form annexed to the agreement documenting Separ’s preference for confidentiality and nondisparagement. While Separ signed the agreement itself, she refused to sign the acknowledgment, leading the employer to seek judicial enforcement of the agreement.
The U.S. District Court for the Eastern District of New York rejected the employer’s argument that the acknowledgment was “separate and apart” from the settlement agreement and “ha[d] no bearing on whether the [a]greement itself [was] binding and enforceable on the parties.”
Finding that the acknowledgment was a material component of the broader agreement and that enforceability depended on all required components being fully executed, the court held that the execution of the acknowledgment acted as a condition precedent to effectuate the settlement per the “effective date” provision contained in the agreement.
Considerations for Employers
The Separ decision emphasizes the importance of careful drafting and execution of settlement agreements, particularly when including nondisclosure provisions subject to GOL § 5-336 and CPLR § 5003-B. Moving forward, employers in New York may wish to review and update their internal settlement templates to ensure compliance with the Separ framework to avoid unintended pitfalls. Some suggestions include:
considering how the settlement agreement is structured;
ensuring all material components of the settlement agreement that require execution are fully executed; and
ensuring compliance with the consideration and revocation periods mandated by both GOL § 5-336 and CPLR § 5003-B.
Delaware Supreme Court Holds Business Judgment Governs Decision to Reincorporate Outside of Delaware For Purpose of Reducing Litigation Exposure In the Absence of Existing or Threatened Litigation
In Maffei v. Palkon, No. 125, 2024, 2025 Del. LEXIS 51 (Del. Feb. 4, 2025) (Valihura, J.), the Delaware Supreme Court held that a corporation’s decision to reincorporate in another state purportedly to reduce exposure to potential future litigation risk is subject to the deferential business judgment rule, as long as the decision is not alleged to have been made to avoid any existing or threatened litigation or in contemplation of a specific transaction. Reversing the decision of the Delaware Court of Chancery [see blog article here], the Supreme Court concluded that reduced exposure to potential liabilities that a controlling stockholder may face in the future is not a material, non-ratable benefit triggering the exacting entire fairness standard of review.
In Maffei, minority stockholders in TripAdvisor, Inc. and its controlling stockholder Liberty TripAdvisor Holdings, Inc. (collectively, the “Companies”) challenged the Companies’ decision to convert from Delaware corporations to Nevada corporations. In deciding to reincorporate in Nevada, the Companies cited what they believed were greater protections against liability for directors and officers under Nevada law. The boards of both Companies approved the conversions without implementing any procedural protections in favor of the minority stockholders. The controlling stockholder of the Companies exercised his control to approve the Companies’ reincorporation in Nevada.
Plaintiffs contended that the conversions were self-interested transactions that were not entirely fair to minority stockholders, arguing that the conversions accorded the controlling stockholder and other insiders a “non-ratable benefit” by allegedly reducing their exposure to future liability to the company and non-controlling stockholders. Defendants moved to dismiss for failure to state a claim and argued that the decision to reincorporate in Nevada should instead be governed by the more deferential business judgment rule. The Court of Chancery agreed with plaintiffs, holding that the entire fairness standard of review applied and denied the motion to dismiss.
The Delaware Supreme Court granted interlocutory review to consider which standard of review — entire fairness or the business judgment rule — applies to the conversion decisions. Defendants argued the business judgment rule applies because there was no pending or contemplated lawsuit and, therefore, they are not receiving a material, non-ratable benefit. They further argued that subjecting the conversions to entire fairness review raises comity concerns by requiring the court to quantify the extent of the harm, if any, that moving from Delaware to Nevada imposes on minority stockholders. Plaintiffs, in contrast, reiterated their prior argument that the entire fairness standard of review applies because the conversions conferred a non-ratable benefit on the controlling stockholder and other corporate insiders. The State of Nevada itself filed an amicus brief generally supporting defendants’ arguments and arguing that applying the entire fairness standard would risk creating an “exit tax” regime for corporations leaving Delaware.
The Delaware Supreme Court agreed with defendants holding that the conversions did not provide non-ratable benefits sufficient to trigger entire fairness review. The Court began its analysis by considering what constitutes a “non-ratable benefit,” which, if conferred on a controlling stockholder in a transaction with the controlled corporation, triggers entire fairness review under Delaware law. The Court confirmed that a non-ratable benefit must be “material” to avoid the business judgment rule. The Court then held that temporality, or whether the corporate decision is tied to obtaining a specific benefit to avoid an existing problem, is a key factor in determining the materiality of a potential non-ratable benefit. In reaching this conclusion, the Court cited Delaware cases illustrating the importance of temporality. For example, the Court cited cases in the advancement context holding that entire fairness review does not apply to director decisions adopting provisions regarding the advancement of litigation expenses when those provisions are adopted without regard to any particular litigation or expenses. The Court also pointed to Delaware cases distinguishing between the adoption of provisions limiting directors’ liability for future conduct with actions to extinguish directors’ existing potential liability for past conduct. Finally, the Court cited Delaware’s ripeness and standing jurisprudence, which it concluded show that Delaware courts routinely apply temporal distinctions and require more than mere speculation about future litigation for a party to litigate a claim. With this background in mind, the Court held that that distinguishing between transactions that might limit potential future liability and transactions extinguishing existing potential liability is a workable solution in deciding whether a transaction confers a material, non-ratable benefit.
The Court then held that in this case, plaintiffs failed to allege facts showing the controlling stockholder and other corporate insiders received a material, non-ratable benefit sufficient to warrant entire fairness review. It emphasized the absence of any allegations that the conversion decisions were made “to avoid any existing or threatened litigation or that they were made in contemplation of any particular transaction.” Thus, the Court found that the business judgment rule applied.
Concerns regarding comity and Delaware policy also supported its holding. While Delaware serves as the domicile for many U.S. corporations and other business entities, other states, including Nevada, are eager to compete by promoting their own corporate governance regimes. Where stockholder litigation rights as just “one stick in the corporate governance bundle,” the Court observed that its holding furthers the goals of comity by declining to engage in “a cost-benefit analysis” of one state’s corporate governance regime over another’s, something it noted courts are “ill-equipped to quantify.” Additionally, the Court concluded that not to second guessing directors’ decisions to redomesticate aligns with Delaware policy, which has “long recognized the values of flexibility and private ordering.” The Delaware Supreme Court’s decision in Maffei reflects the evolving juridical and academic discussion regarding the competition between states as forums for corporate domicile and the effect that corporate domicile decisions can have on the outcome of governance disputes [see, e.g., Harvard Law School Forum on Corporate Governance blog articles here and here]. By applying the business judgment rule to director decisions to reincorporate in another jurisdiction where such decisions are not motivated by existing operational issues, the Delaware Supreme Court leans into this competition by enhancing management’s flexibility.
This Week in 340B: February 4 – 10, 2025
Find this week’s updates on 340B litigation to help you stay in the know on how 340B cases are developing across the country. Each week we comb through the dockets of more than 50 340B cases to provide you with a quick summary of relevant updates from the prior week in this industry-shaping body of litigation.
Issues at Stake: HRSA Audit Process; Rebate Model; Other
In a case brought by a 340B covered entity against the Health Resources and Services Administration (HRSA) alleging that HRSA prevented the covered entity from accessing the 340B Program, the covered entity filed a notice of voluntary dismissal.
In a case challenging HRSA’s policy prohibiting all manufacturer conditions on 340B transactions, plaintiffs filed a motion for summary judgment.
In a Freedom of Information Act (FOIA) case, the plaintiff filed a motion to strike HRSA’s motion for summary judgment.
In one HRSA audit process case, the plaintiff filed a brief in opposition to a drug manufacturer’s motion for leave to file as amicus curiae.
In four HRSA audit process cases, the parties filed joint stipulations that the government will provide to the plaintiffs thirty days’ written notice before termination of the plaintiffs from the 340B Program.
In five cases against HRSA alleging that HRSA unlawfully refused to approve drug manufacturers’ proposed rebate models:
In two cases, each drug manufacturer plaintiff filed a motion for summary judgment and a group of interested parties filed a motion to intervene.
In one case, two patient advocacy groups filed a motion for leave to file as amicus curiae.
In one case, the drug manufacturer plaintiff filed a motion for summary judgment, a group of interested parties filed a motion to intervene, and two patient advocacy groups filed a motion for leave to file as amicus curiae.
In one case, a group of interested parties filed a motion to intervene.
Kelsey Reinhardt and Nadine Tejadilla also contributed to this article.
Independent Manager Consent Requirement Upheld
Recently, the Bankruptcy Court for the Northern District of Illinois issued an opinion in In re 301 W N. Ave., LLC, dismissing a debtor’s bankruptcy filing for lack of proper authority to file and discussing the considerations for enforcing a requirement that an Independent Manager approve a bankruptcy filing for a Delaware limited liability company. 2025 WL 37897 (Bankr. N.D. Ill. 2025). The opinion is consistent with “Authority to File” opinions regularly provided in structured finance transactions involving Delaware LLCs that have Independent Managers whose consent is required to file bankruptcy. Practitioners should be aware of the Bankruptcy Court’s analysis concerning LLC agreements and may want to update future Authority to File opinions to reference this case.
Case Background
On January 6, 2025, the Bankruptcy Court dismissed a chapter 11 bankruptcy case, holding that the Debtor, which was organized as a Delaware LLC, lacked the requisite authority to file its bankruptcy petition under Delaware law. Prior to the bankruptcy filing, the Debtor entered into a $26 million secured Loan Agreement, which required the appointment of an Independent Manager. The Loan Agreement further required that the Debtor’s governing documents require the Independent Manager to consent to certain significant business decisions, including whether to authorize the Debtor to file bankruptcy. The Debtor’s LLC Agreement complied with the Loan Agreement’s requirements. The Debtor’s LLC Agreement also required the Independent Manager to consider the interests of the Debtor, including the Debtor’s creditors, when making any significant business decision, including any decision to file bankruptcy. Id. at *11. Nevertheless, the Debtor filed bankruptcy without the Independent Manager’s consent.
The Debtor’s lender filed a motion to dismiss the bankruptcy case, arguing that the Debtor lacked authority to file the bankruptcy petition because it failed to obtain the Independent Manager’s consent, as required by the LLC Agreement. The Bankruptcy Court agreed. The Bankruptcy Court first noted that under Delaware law, an LLC can act only through the authorization provided by its operating agreement, and that here, the LLC Agreement required the consent of the Independent Manager to file a bankruptcy petition. Id. at *7. As a result, the Bankruptcy Court concluded that the Debtor lacked the proper authority to file.
The Bankruptcy Court next considered whether the LLC Agreement impermissibly restricted the Debtor’s right to file bankruptcy. In this case, the LLC Agreement required the Independent Manager to consider only the interests of the Debtor, including the Debtor’s creditors, when deciding whether to file bankruptcy. Id. at *11. The LLC Agreement also expressly instructed the Independent Manager not to consider the interests of other third parties, including affiliates or groups of affiliates, when exercising its decision-making authority. Id. at *12. Although the Debtor argued that these provisions constituted an inappropriate restriction on the Debtor’s ability to file bankruptcy, the Bankruptcy Court concluded that restricting or eliminating the Independent Manager’s duties to the Debtor’s affiliates or groups of affiliates was “entirely consistent with Delaware law and cannot be construed to contravene public policy.” Id. at *12. After concluding that the LLC Agreement did not impermissibly restrict the Independent Manager’s obligation to consider the Debtor’s interests, and having already concluded that the Independent Manager did not consent to the bankruptcy, the Bankruptcy Court granted the motion to dismiss.
The Debtor appealed the Bankruptcy Court’s decision (appeal pending).
Potentially Updating Authority to File Opinions
Authority to File opinions are legal opinions provided in many structured finance transactions that address whether, under the terms of the applicable LLC agreement, the requirement that an Independent Manager consent to a bankruptcy filing of the LLC would be governed by state law, and not federal law. In other words, Authority to File opinions address whether a provision requiring an Independent Manager to consent to a bankruptcy filing would be preempted by federal law as an impermissible restriction. Authority to File opinions are only provided for LLCs because the law regarding corporations and partnerships is well settled.
The language in the 301W N. Ave Debtor’s LLC Agreement concerning what the Independent Manager should, and should not, consider is similar to language used in many LLC agreements that are subject to Authority to File opinions. In particular, since the In re General Growth Properties, Inc. bankruptcy case in 2009, many LLC agreements provide that Independent Managers should consider only the interests of the LLC, including its creditors, in deciding whether to consent to a bankruptcy, and should not consider the interests of affiliates or groups of affiliates. As the Bankruptcy Court here expressly analyzed such a provision, practitioners may want to update their Authority to File opinions to specifically reference 301 W N. Ave.
Conclusion
301 W N. Ave re-affirms the validity of LLC agreement provisions requiring an Independent Manager’s consent to file bankruptcy when the Independent Manager is required to consider the interests of only the LLC, including its creditors, and not the interests of the LLC’s affiliates or groups of affiliates. Accordingly, 301 W N. Ave also re-affirms the analysis used in Authority to File opinions in structured finance transactions.
The 340B Reimbursement Battle: What Hospitals and Insurers Need to Know
The U.S. Supreme Court’s ruling in American Hospital Association (“AHA”) v. Becerra (2022) sent shockwaves through the 340B drug pricing program when it held that CMS’ reduction of reimbursement for drugs purchased under the 340B program was not permitted by law.
The Supreme Court chose not to address potential remedies and remanded the case back to the D.C. District Court for further proceedings on how to correct the underpayments. Instead of vacating the unlawful reimbursement rates, the District Court decided to remand without vacatur, allowing HHS the opportunity to remediate its underpayments.[1] AHA v. Becerra (2023).
In response, the Centers for Medicare & Medicaid Services (CMS) issued a 2023 Final Rule mandating a retroactive lump-sum reimbursement to 340B participating hospitals for 340B underpayments made between 2018 and 2022. The Supreme Court’s decision, coupled with CMS’s administrative action, has led to significant contractual disputes and regulatory challenges as 340B contract hospitals seek restitution for past financial shortfalls while Medicare Advantage organizations (“MAOs”) grapple with the fiscal implications of these payment adjustments. The stakes are high, with hospitals seeking significant back payments and MAOs pushing back, arguing that their obligations are dictated by contracts, not federal rulemaking. As legal battles unfold, the question remains: Who is financially responsible for correcting these underpayments? This article analyzes these developments, focusing on the litigation between hospitals and MAOs and offering strategic contractual considerations in this shifting landscape.
Historical and Legal Context
The Supreme Court’s ruling in AHA v. Becerra represents a pivotal moment in healthcare law, particularly for hospitals participating in the 340B program. The litigation centered on the legality of CMS’s previous reductions in reimbursement rates for 340B drugs, a policy the Court ultimately found to be incompatible with statutory mandates. Hospitals that rely on the 340B program had long contended that CMS’s payment reductions disproportionately impacted their ability to provide essential care to economically disadvantaged populations. By invalidating CMS’s reimbursement policy, the Court reaffirmed that federal payment methodologies must meet certain statutory processes that support transparent and non-discriminatory reimbursement practices.
Following the ruling, CMS issued the 2023 Final Rule to remedy previous underpayments by providing a lump-sum reimbursement to 340B participating hospitals for the period spanning 2018 to 2022. CMS, however, did not extend this corrective measure to MAOs, which negotiate contracts independently with healthcare providers.[2] This regulatory gap has resulted in legal disputes over whether MAOs bear a similar obligation to rectify past underpayments.[3] Given the absence of explicit regulatory directives, hospitals and MAOs are now engaged in legal disputes with potentially far-reaching consequences for reimbursement policy and contractual obligations.
Medicare Advantage Regulatory Framework – Federal Law Considerations
Medicare Advantage (Part C) plans operate under federal law (42 U.S.C. § 1395w-22 et seq.), with regulations from the Centers for Medicare and Medicaid Services (CMS) (42 C.F.R. § 422.504) mandating that MAOs contracting with CMS must provide benefits that are “at least as favorable” as those under traditional Medicare Fee-for-Service (FFS) structure. Hospitals may argue that this federal requirement implies an obligation for MAOs to reimburse 340B providers at corrected rates, particularly in light of CMS’s 2023 Final Rule. They may further contend that CMS’s failure to extend the same correction to MAO reimbursements constitutes an arbitrary and capricious action under the Administrative Procedure Act (APA), as it undermines the statutory requirement for parity between MAO and FFS coverage.
However, MAOs will likely argue that CMS regulations do not require payment parity with 340B participating hospitals. Moreover, because reimbursement rates are determined through contractual agreements rather than statutory mandates, CMS’s decision to correct 340B payments for FFS Medicare does not automatically extend to MAOs. This position is supported by cases such as Caris MPI v. UnitedHealthcare, Inc. (5th Cir. 2024) and Wise v. UnitedHealthcare of Florida, Inc. (M.D. FLA. 2019), where courts upheld MAOs’ autonomy in structuring reimbursement rates with providers, distinguishing them from traditional Medicare FFS.
At their core, these legal disputes revolve around the interpretation of contractual terms and obligations. The outcomes hinge on how courts construe key provisions governing pricing, reimbursements, and program compliance. Provider agreements that specify reimbursement at the Medicare allowable rates and in accordance with Medicare Advantage rules, laws and regulations, raises the question of whether CMS’s retroactive correction of 340B underpayments creates contractual obligation for MAOs to make corresponding adjustment, even in the absence of explicit regulatory mandates. Hospitals argue that references to Medicare rates imply a duty for MAOs to adhere to CMS’s updated methodology. See Baptist Health v. Health Value Management, Inc. (2024); see also University of Alabama Hospital v. UnitedHealthCare of Alabama, Inc. et al., (2024). However, MAOs will likely assert that their contractual obligations are limited to the reimbursement rates “in effect at the time services were rendered.” Further, because CMS’s remedy was issued post hoc, MAOs may contend that it does not alter historical payment obligations, thus precluding any duty to make retrospective adjustments. In support, MAOs may cite cases like UnitedHealthcare Ins. Co. v. Becerra, (2021) and Bowen v. Georgetown University Hospital (1988), where courts sided with insurers, concluding that CMS’s policy guidance did not mandate retroactive application. Moreover, many MAO contracts employ independently negotiated rate structures rather than directly incorporating Medicare payment policies, further complicating claims of automatic applicability.
State Law Considerations
The specific language in provider contracts is critical in determining payment obligations. Courts will assess whether MAOs agreed to pay Medicare-equivalent rates, whether contracts reference CMS payment policies, and whether such references include retroactive corrections. If contract language is ambiguous, courts may construe terms against the drafter (usually the MAO) under standard rules of contract interpretation.
Further, most states recognize an implied duty of good faith and fair dealing in contracts. Hospitals may argue that MAOs acted in bad faith by refusing to adjust payments after CMS corrected its 340B policy. MAOs, however, will likely assert that they followed their contracts as written and that good faith does not translate into retroactive payments unless explicitly stated. Courts have previously ruled in Empire HealthChoice Assurance, Inc. v. McVeigh, (2006) that contract disputes in federally regulated insurance contexts require explicit statutory or regulatory guidance to override private agreements.
Hospitals may also bring equitable claims, asserting that MAOs benefited financially from lower reimbursement rates while hospitals unfairly bore the losses. In Maine Community Health Options v. United States, (2020), the Supreme Court recognized the federal government’s obligation to honor payment commitments under statutory frameworks, which may be used to argue that similar obligations apply to MAOs operating under Medicare Advantage. Under quantum meruit (fair value claims), hospitals might argue that they provided services at a discounted rate due to an unlawful payment cut and should be reimbursed at corrected rates. MAOs will likely counter that they were not unjustly enriched, since they paid in accordance with contractual agreements at the time.
MAOs may also argue that federal law preempts state contract law in Medicare Advantage disputes, which could limit hospitals’ ability to seek remedies under state law. Prior cases, such as UnitedHealthcare Ins. Co. v. Becerra (2021) and Empire Health Foundation v. Becerra (2022), illustrate courts’ deference to clear CMS regulatory guidance in contractual disputes. Courts deferring to CMS’s lack of explicit guidance requiring retroactive MAO reimbursements, could further limit hospital recourse under state contract laws.
Additionally, statutes of limitations could play a role in determining the viability of hospitals’ claims. Federal law typically imposes a six-year statute of limitations for claims involving Medicare payments, while state contract laws vary widely, ranging from three to ten years depending on the jurisdiction. Further, some contracts contain “claim reconciliation” provisions, which establish a time limit for providers to submit adjustments or appeals for payment discrepancies. MAOs may use these statutory and/or contractual deadlines as a defense, arguing that claims for underpayments made in earlier years are time-barred, limiting hospitals’ ability to recover retroactively. Hospitals seeking reimbursement must be mindful of these limitations, as failure to file claims within the applicable timeframe could preclude recovery.
Given the complex interaction between federal administrative law and state contract enforcement mechanisms, courts will need to assess whether claims fall within permissible legal timeframes or if they are procedurally barred due to expiration of applicable statutes of limitations. In Heckler v. Community Health Services of Crawford County, (1984), the Supreme Court examined equitable tolling in Medicare disputes, a concept that could be relevant in assessing whether hospitals’ claims should be extended due to CMS’s prior miscalculations. In Sebelius v. Auburn Regional Medical Center, (2013), the Supreme Court ruled that administrative appeals involving Medicare payments are subject to strict statutory deadlines, which could be relevant in determining whether hospitals’ reimbursement claims are time-barred.
Further, if MAOs knowingly underpaid hospitals despite CMS’s acknowledgment that its 340B reductions were unlawful, they could face claims under state bad faith insurance laws or deceptive trade practice statutes.
Budget Neutrality and Fiscal Considerations
A critical consideration in this area is CMS’s budget neutrality principle, which offsets the cost of the 340B reimbursement correction by reducing future outpatient payments to hospitals. CMS’s approach to correcting underpayments for 340B participating hospitals adhered to this principle by offsetting increased payments with corresponding reductions. However, the application of budget neutrality in the Medicare Advantage context is less defined, raising questions about how funding structures impact reimbursement obligations. Because the corresponding reductions are spread out over sixteen (16) years, it raises questions as to how the MAOs might benefit from this split process. However, CMS plans to adjust premiums for reductions beginning in 2026, so MAOs will likely argue they do not benefit from the split process. See CMS’s January 10, 2025 Advance Notice.
Hospitals may contend that MAOs should apply a similar adjustment framework, given that CMS’s corrective action was internally funded within the Medicare system. Without requiring MAOs to adjust payments, financial disparities could be further exacerbated, disproportionately impacting 340B hospitals already burdened by CMS’s budget neutrality offsets.
Conversely, MAOs may highlight that CMS’s corrective action did not allocate funding for retroactive adjustments to MAOs. MAOs operate within a fixed payment framework, with capitation rates determined by CMS based on actuarial assumptions. If compelled to issue retroactive payments to hospitals, MAOs may argue that such obligations would disrupt the actuarial stability of their reimbursement models and create an unanticipated financial burden. Unlike traditional Medicare, where CMS can implement budget-neutral adjustments across the broader system, MAOs do not have a direct mechanism to recover additional expenditures incurred due to retroactive payment obligations. They argue that imposing reimbursement obligations without corresponding federal compensation would constitute an unfunded mandate, contravening CMS’s budget neutrality principle. This raises other complex questions regarding whether requiring MAOs to adopt CMS’s revised methodology would necessitate a recalibration of their funding structure, potentially leading to increased premiums or reduced benefits for beneficiaries.
Key Takeaways – Strategic Considerations for Hospitals and MAOs
Hospitals pursuing retroactive reimbursement from MAOs should undertake a detailed review of their agreements with those MAOs to ascertain whether their reimbursement provisions provide a contractual basis for such claims. Key considerations include explicit references to Medicare FFS methodologies, provisions regarding compliance with CMS payment policies, and any clauses addressing retroactive adjustments. In cases where contractual language supports reimbursement at corrected Medicare rates, hospitals may pursue breach of contract claims or seek recovery for unjust enrichment, particularly where MAOs benefited from reduced payments now deemed unlawful.
Conversely, MAOs should conduct a rigorous evaluation of their contractual obligations to determine the extent to which retroactive adjustments may be required. If agreements do not explicitly incorporate Medicare FFS revisions, MAOs may argue that any retroactive payment obligations fall outside the scope of their contractual responsibilities.
Consequently, both hospitals and MAOs should consider negotiating more precise contractual terms regarding the applicability of CMS rate adjustments—particularly those with retroactive implications—to minimize financial uncertainty and potential disputes.
Conclusion
The battle over 340B reimbursement through MAO-hospital relationships highlights the complex interplay between contractual obligations, regulatory policies, and financial feasibility under Medicare’s budget neutrality framework. As this conundrum continues to unfold, hospitals and MAOs must carefully assess their contractual positions and financial exposure while remaining attuned to judicial and regulatory developments that will shape the future of 340B reimbursement obligations.
ENDNOTES
[1] The court reasoned that vacatur would be highly disruptive due to the complexity of the Medicare system and potential budget neutrality concerns.
[2] Per 42 U.S.C. § 1395w-24(a)(6)(B), CMS is prohibited from requiring a particular payment structure in contracts between MAOs and providers.
[3] CMS’s 2023 Final Rule restates that MAOs must pay non-contract hospitals at least the amount such hospitals receive under Original Medicare payment rules but fails to comment on MAOs obligations with respect to contracted hospitals. See 88 FR 77150, 77184.
Alabama Appellate Court Appears Poised to Deliver Big Win for Cannabis Commission
Longtime readers of Budding Trends (and there are dozens of you) know that I have been saying over and over recently that – as counterintuitive as it may sound – the fastest way to get Alabama’s medical cannabis program launched is through the court system.
At times did it feel like I was trying to speak it into existence in the face of facts on the ground? Look, I majored in history not psychology. But whether I was well-informed, clairvoyant, or just lucky, it appears as though we had our first breakthrough in Alabama’s medical cannabis program, and it came courtesy of the court system.
What Happened?
Yesterday the Alabama Court of Civil Appeals heard arguments in an appeal from the Montgomery County Circuit Court hearing all of the medical cannabis cases. Specifically, the court focused its inquiry on two questions: (1) does the circuit court have jurisdiction to entertain the claims of Alabama Always, an applicant for an integrated facility license who has not been awarded a license, against the Alabama Medical Cannabis Commission, and (2) does the temporary restraining order halt the AMCC from taking any steps towards issuing integrated facility licenses?
Over the course of three hours, it became apparent to the author that the court was prepared to rule in the AMCC’s favor on both issues. I got the sense that the panel believed disappointed applicants should have exhausted their administrative options – including, most importantly here, participating in the investigative hearing process – before resorting to litigation. It also seemed clear that the panel believed the existing TRO was unnecessarily broad and should be modified to, at a minimum, call for the AMCC to conduct investigative hearings and then perhaps refrain from actually issuing the licenses until further word from the court.
What’s Next?
As always, what happened is only part of the analysis, and often the harder question is what happens next. I believe the tone and substance of the questions from the court very well may impact the next steps.
Less than two hours after the oral argument in the Alabama Court of Civil Appeals, the circuit court had a status conference to discuss steps moving forward in the various medical marijuana cases currently pending. The court set several briefing schedules and appears to be taking steps to move the cases along. It will be interesting to see whether the circuit court, which has not been moving with all deliberate speed, will now begin to move more quickly with a decision from the appeals court looming.
Then, there’s the ole “legislative fix.” As I wrote previously:
Looking around and finding themselves in this maze, many have turned to the Alabama Legislature for help. This is nothing new to those who have been working on medical cannabis since it was enacted into law in 2021. Like clockwork, every year when a new legislative session approaches, certain dissatisfied applicants use the specter of a “legislative fix” in an effort to bring other stakeholders to the table to find a compromise. The problem with finding a compromise under the existing law is that limited licensing is a zero-sum proposition and there is very little chance all applicants will agree to the same rules.
True to form, and as we wrote earlier this week, Alabama Senate Bill 72 dropped last week. It would, among other things, (1) expand the total number of integrated licenses from five to seven; (2) shift the authority of issuing licenses from the AMCC to a consultant; and (3) shield the decision from any judicial review. At the time, I wrote that “this bill has little chance of becoming law as drafted.” Having now heard oral arguments and believing that the court may expedite this process, I think the chances are even lower.
It’s faint, but I believe that just might be light at the end of this long and winding tunnel. It’s impossible to know when the court will hand down its ruling in this case. Prognosticators predict a ruling in late March or early May. As always, we’ll stay on top of this so you don’t have to.
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Operating Social Casino-Style Applications Continues to be Costly in Washington State
In the latest string of gambling cases involving social casino-style apps out of Washington state, a federal jury has awarded a class of players nearly $25 million for injuries arising from the use of two of High 5 Game’s mobile applications: High 5 Casino and High 5 Vegas.
The award comes after a U.S. District Court judge ruled last June that the two apps amount to illegal gambling under Washington law. Continuing a line of cases that started with the Ninth Circuit’s landmark decision in Kater v. Churchill Downs Inc., and the resultant $155 million settlement, the ruling stems from the specific statutory definition of “gambling” in Washington state, which broadly define “things of value” to include an extension of play. Following the Kater decision, courts applying Washington law have relied on this broad definition to reject defendants’ assertions that the activities do not fall within the purview of the state’s gambling statutes because the virtual currencies used in these social casino-style apps do not constitute “things of value,” as they are only usable within the particular platform or gameplay and cannot be exchanged for real currency.
Putting it into Practice: Businesses operating social casino-style applications or platforms should strongly consider excluding players from Washington state, as Kater and its progeny suggest that the statutory interpretation of the gambling statutes applied to such apps appears well-settled. Additionally, business should be aware that there are at least a handful of other states with similar “extension of play” langauge in their gambling statutes, and while the case law may not be as well-developed in these states, there is a risk that courts in those jurisdictions will take a similar position to that of Washington.
Amending Away Federal Jurisdiction: Supreme Court Holds That Federal Jurisdiction Can Be Divested by Amendment
Federal courts can adjudicate state-law claims arising out of the same facts as federal-law claims under 28 U.S.C. § 1367, but what happens if, after removal, the plaintiff amends her complaint to remove the federal questions supporting jurisdiction? Until recently, the circuit courts that had addressed the issue unanimously concluded that, as a general rule, a post-removal amendment does not automatically divest a federal court of jurisdiction.[1] That changed in July 2023, when the Eighth Circuit created a split by reaching the opposite conclusion.
In a recent decision, the Supreme Court unanimously adopted the Eighth Circuit’s view, holding that federal courts lose jurisdiction over state law claims if a plaintiff amends away her federal law claims. Justice Elena Kagan made clear that “[w]hen an amendment excises the federal-law claims that enabled removal, the federal court loses its supplemental jurisdiction over the related state-law claims.”
Royal Canin bounced around before ending up before the Supreme Court. It began as a state court antitrust class action brought under the Missouri Antitrust Law, the Missouri Merchandising Practices Act, and common law principles of unjust enrichment under Missouri law. The named plaintiff alleged that a consortium of pet food manufacturers, retailers, and veterinary clinics created a system by which prescriptions were needed to purchase certain varieties of dog and cat food. This practice allegedly led consumers to believe that the prescription pet food was healthier and better for their pets than “ordinary” pet food — and they thereby overpaid for the prescription pet food — when, in reality, the prescription pet food was no different than ordinary pet food.
The defendants removed the case to the Western District of Missouri under 28 U.S.C. § 1331, which provides for federal question jurisdiction, and the Class Action Fairness Act (CAFA). Although the plaintiff did not explicitly assert any federal claim, the removing defendant argued that the court had federal question jurisdiction because (1) the state law claims explicitly and necessarily turn on an interpretation of the Federal Food, Drug, and Cosmetic Act (FDCA); and (2) the plaintiffs sought an injunction requiring the defendants to adhere to federal law.
The district court initially remanded the case to state court because the state law claims did not “necessarily implicate” federal law to support federal question jurisdiction, and because the parties were not minimally diverse to support CAFA jurisdiction. The remand was appealed to the Eighth Circuit, which decided that the case belonged in federal court on federal question grounds. Once back at the district court, the plaintiff amended her complaint to remove references to federal law and the state antitrust and unjust-enrichment claims. The district court later granted the defendants’ motion to dismiss for failure to state a claim, and the case ended up back before the Eighth Circuit. That court determined that “there [was] nothing federal about” the amended complaint, vacating and remanding the case to the district court with directions to remand it to Missouri state court.
The Supreme Court affirmed and announced a bright-line rule that dismissing federal issues ends federal jurisdiction. The Court recognized that the answer to the questions before it was “certain,” noting that “[w]hen a plaintiff, after removal, cuts out all her federal-law claims, federal-question jurisdiction dissolves.” Consequently, “with any federal anchor gone, supplemental jurisdiction over the residual state claims disappears as well.” A district court considering a complaint devoid of original and supplemental jurisdiction must remand the case to state court. The Court rooted its decision in the text of Section 1367 and its non-removal precedents that found that amending away federal issues removes federal jurisdiction in cases originally filed in federal court.
Royal Canin provides a clean answer to a common issue, though that answer may require some nuance in future cases. Questions remain at the periphery of supplemental jurisdiction. For example, can a district court retain jurisdiction over state law claims after dismissing or granting summary judgment on federal law claims? And what happens when a plaintiff’s amendment is less absolute than the amendment in Royal Canin? Crafty plaintiffs may try to avoid federal court while also keeping as many paths to recovery open as they can. The Royal Canin plaintiffs got a clean rule because they made a clean cut of all their federal issues. Will a plaintiff cutting less get the same result? These, and many other, issues remain to be fleshed out.
There is a broader lesson here as well. The circuits were nearly unanimous in rejecting (or at least not adopting) the bright-line rule that the Supreme Court unanimously adopted in Royal Canin. While the Court’s decision is not altogether unexpected or earth shattering, it is a reminder that important matters of procedure are not always as settled as they seem. Just because the circuits have done things a certain way and more or less agreed on it does not mean that the Supreme Court will go along.
Notes
[1] E.g., Ching v. Mitre Corp., 921 F. 2d 11, 13 (1st Cir. 1990); In Touch Concepts, Inc. v. Cellco P’ship, 788 F.3d 98, 101–02 (2d Cir. 2015); Collura v. Philadelphia, 590 F. App’x 180, 184 (3d Cir. 2014) (per curiam); Harless v. CSX Hotels, Inc., 389 F. 3d 444, 448 (4th Cir. 2004); Louisiana v. Am. Nat. Prop. Cas. Co., 746 F.3d 633, 636–38 (5th Cir. 2014); Harper v. AutoAlliance Int’l, Inc., 392 F. 3d 195, 210–211 (6th Cir. 2004); In re Burlington N. Santa Fe Ry. Co., 606 F.3d 379, 380 (7th Cir. 2010); Broadway Grill, Inc. v. Visa, Inc., 856 F.3d 1274, 1277 (9th Cir. 2017); Behlen v. Merrill Lynch, 311 F. 3d 1087, 1095 (11th Cir. 2002).
Employment Law This Week- Federal Agencies Begin Compliance Efforts Under Trump Administration [Video} [Podcast]
This week, we’re highlighting notable employment law updates from federal agencies and the courts, including the Equal Employment Opportunity Commission (EEOC), the Department of Labor (DOL), and the U.S. Court of Appeals for the Fifth Circuit.
EEOC Releases FAQs on the State of the Agency
The EEOC, under the leadership of Acting Chair Andrea Lucas, recently released answers to frequently asked questions (FAQs) following President Trump’s series of executive orders affecting the agency.
DOL Halts OFCCP Activity Under Rescinded Executive Order
Acting Secretary of Labor Vince Micone recently issued an order directing the Office of Federal Contract Compliance Programs (OFCCP) to stop all enforcement activity under rescinded Executive Order 11246.
DOL Independent Contractor Rule Paused
The Fifth Circuit recently granted the DOL’s request to delay oral arguments, and it seems likely that the independent contractor rule will be short-lived.