Drone Court

In the politically sensitive comic strip Prickly City a few days ago, a small drone is seen chasing a coyote across a vaguely desert-like terrain.  The coyote complains in effect “I know I don’t have identification papers but I’m a coyote.  I COME from here.”  The drone unthinkingly continues its pursuit.

The March 7 strip finds a conversation about the propriety of such use of drones.  The protagonist objects that there is no due process or rule of law in sending drones after people and demands “protections to make sure you don’t just drone people because you don’t like them.”  The response is that indeed such protections exist: “Drone Court.”

The morning papers of the same date carry news of Senator Rand Paul filibustering Obama’s designee as CIA chief, John Brennan, until the administration commits to never using drones to kill noncombatant Americans.

Press and television coverage has for many months been saturated with stories of the use of drones in the war against terror, although these drones seem to be of the non-autonomous variety; their deployment and functions seem to be controlled by human beings although at remote locations.

The current (March, 2013) issue of National Geographic carries a surreal article, replete with creepy pictures of creepy drones in the form of moths and hummingbirds, entitled “The Drones Come Home.”  Noting that Obama signed a law last year that requires the FAA to open US airspace to drones by September 30, 2015, the article traces the discrete but growing use of what are seemingly unarmed but spying drones by certain State, country and federal (CIA) governmental agencies.

The Boston Globe of Sunday, March 3, Section K (“Ideas” is the name of that section), leads with the following headline: “ROBOTS ON TRIAL—As machines get smarter – and sometimes cause harm – we’re going to need a legal system that can handle them.”  In one of the few articles I have seen that appropriately ignores the false distinction between robots and drones, we learn a lot about the ubiquitous nature of the present dialog about machine liability:  Harvard Law has a course on “robot rights” (leave it to Harvard to frame everything in terms of inherent rights), many universities host conferences on robotic issues, numerous books are being written (look for Gariel Hallevy’s upcoming “When Robots Kill,” and the more austerely titled book by philosophy professor Samir Chopra entitled “A Legal Theory for Autonomous Artificial Agents”).

My purpose here is to highlight what I consider to be the underappreciated dialog being conducted about THE central issue here: what system of laws ought to be applied to machines when outside human control.  Some of the popular dialog focuses on “robots” and some on “drones” but such a distinction interferes with a proper analysis: we have machines here that can kill or cause harm accidentally or on purpose.  Do you take the machine to Drone Court, as suggested by Prickly City today, or do you take the manufacturer, or the last human to set the machine on its course, out to the tool shed and tan its corporate or personal hide?

The next post, to follow in the next few days, will detour into what I maintain is the diversion caused by our cultural anthropomorphization of the machines we call “robots” and its possible ramification in the way in which we end up treating autonomous  non-human-controlled airplanes, cars, border guards, household servants and electronic girlfriends—all of which should be treated exactly the same because they are all just alloys, motors and computer chips.

Let the Sun Shine In

Many of us are vaguely aware of the so-called Sunshine Act, part of the ObamaCare legislation.  Briefly put, this Federal statute requires manufacturers of medical devices and pharmaceuticals to make public disclosure of many payments to licensed physicians and to academic research hospitals (but not other hospitals).

The statute is enormously complex; it is one of those statutes that, regrettably, likely requires manufacturers, physicians and research hospitals to seek the advice of counsel.  Final rules were promulgated by the Centers for Medicare and Medicaid Services (“CMS”) earlier this month.  In very broad outline:

  • Covered Manufacturers must start collecting data as of August 1st of this year.
  • By March 31, 2014, and for every full year thereafter, a covered manufacturer must provide information about payments to CMS.
  • Annually CMS will publish a report naming those people who paid monies to physicians and academic hospitals in connection with any “Covered Product,” for the whole world to see.

There are granular and specific rules concerning Group Purchasing Organizations (“GPOs”) and physician owned distributors (“PODs”).  And with respect to all else, the devil is in the details.

Covered Products include any drug, device, biologic or medical supply with respect to which there is “available” payments under Medicare, Medicaid or CHIPs (Children’s Health Insurance Programs).  Covered Manufacturers do not include either distributors or wholesalers who don’t hold title to Covered Products, or manufacturers for internal use only (including use by the manufacturer with its own patients).

There must be reporting of most payments or other transfers of value, and value is measured as “on the open market.”  Payments may be made directly by a manufacturer, or through a third party instructed or controlled by a manufacturer; but manufacturers need report only those things of which they have actual or constructive knowledge.

There are some rather bizarre exceptions for providing things of value worth less than $10; picture a medical conference where a manufacturer can provide a tuna fish sandwich but not a lobster roll.  There are also exceptions for certain but not all educational materials, certain but not all product samples (or coupons for product samples) if utilized by patients, and for discounts or rebates on products purchased by doctors.  There are also rules concerning how manufacturers can avoid reporting while sponsoring  accredited or certified continuing medical education programs under the auspices of five specific professional organizations (such as the American Medical Association).

The statutory purpose is to bring  into daylight the benefits that manufacturers may provide  to physicians in order to induce physicians to utilize products of those manufacturers.  This is a reporting statute; nothing is banned.  It is designed to reach all sorts of benefits provided to doctors, whether they are payments, funding of projects, grants of stock or options or other ownership evidences, lavish travel or meals, whatever.

As you might have imagined, both manufacturers and physicians are going to want to take a careful look at the information that will be published about them.  The statute provides a forty-five day period for review of proposed publications during which manufacturers, physicians and academic hospitals may review the text of proposed publication, followed by a fifteen day period to object.  If the objection cannot be resolved, the information will be published anyway (with a footnote saying that it is disputed).

Certain but not all provisions of state laws now on the books are pre-empted by this statute.  Other provisions are not.  Any given situation in any given state must be analyzed on its own merits.  In addition to the survival of certain but by not all state regulation of similar import, the anti-kickback laws continue to apply in parallel, as do other Federal laws such as the Stark Act.

Lots of information and forms can be obtained at www.cms.gov/regulations-and-guidance/legislation/national-physician-payment-transparency-program/index.html. 

Covered Manufacturers and potentially covered manufacturers need to start now to put into place data gathering procedures and technologies so as to be ready to comply starting this August.  Good luck to all.

The Craft Beer Business

CEO and Harpoon Brewery founder Rich Doyle shared his marketing plans at the February 14th breakfast at the Association for Corporate Growth/Boston.  Plans include:

  • Aggressively promoting his new Boston beer garden and restaurant both for the general public and for private groups, with a focus on trying to identify Harpoon Brewery with the Boston experience.  He expects 200,000 visitors in the Boston Brewery in the next year; their Brewery in Vermont, at the old Catamount facility, also draws about 10,000 visitors a month.

 

  • Use of social media; the company has hired a new director of digital marketing and his task is to replace an email approach with a Twitter/Facebook approach.

 

  • Beer Fests: started around 1990, a low point in the company history where they were down to five employees, Beer Fest each year now attracts about 18,000 visitors.

 

  • Local involvement in charitable events and clean-up drives, with respect to which the company reaches out to its consumer base for volunteer participants.

 

  • Publicity within the consumer base, which is organized by, and communicated with by reference to, zip codes.

Harpoon is the only Boston based and Boston manufactured craft beer.  Craft beers make up about 6% of the United States market and Harpoon claims to be the eighth largest among these smaller brewers.  With sales about $50,000,000 last year, Harpoon distributes through 26 states as far West as Texas; its growth plans do not include making significant changes in either their product line or their geographic distribution, as they see ample growth opportunities within their existing markets and product lines.

One interesting fact for beer drinkers: while bottles for craft beer presently are and will remain far more significant than aluminum cans, Doyle anticipates growth in canned distribution because cans are more mobile, and furthermore are more popular in the South than in the North.

Doyle is a reformed New York investment banker who got the idea to start a brewery by writing a brewery business plan as part of his MBA requirement.  Throughout his presentation, he took long drinks – from a water bottle.  But then again, it was a breakfast meeting.

Tall Pygmies and CEO Succession

“Never measure the tallest of the pygmies.”

This advice comes from George Davis, Boston Managing Partner for the national search firm Egon Zehnder, commenting on the appropriate way to search for a CEO following a corporate merger.  Since CEOs should be selected based upon whether they fulfill future requirements for skill set and experience, it is possible that the existing CEOs and other C level executives of both constituent companies in a merger are not “tall enough”  to meet that standard; consideration should be given to looking to an outside player.   One must avoid the “brokered deal” where, for example, one senior position is given to the CEO of one constituent, another C level position to the CEO of the other constituent.

Davis spoke at the February 12th meeting of the National Association of Corporate Directors/New England, which meeting focused on the role of directors in CEO succession.  Other major takeaways:

  • It is appropriate for the board to ask of a CEO: “what do you want from your board of directors that you are not getting?”  (Pamela Godwin, President of Change Partners of Philadelphia and board member of Unum Group [NYSE]).

 

  • Boards should be  proactive in driving  CEO succession planning, and one device to consider is an educational/training session for the board, during a retreat, where lawyers or HR professionals discuss the fiduciary role of directors in planning succession.

 

  • The job description for a CEO should be updated annually to reflect strategic changes in a company’s business which may alter the criteria for the best choice of CEO (William Messenger, Director at ArQule, Inc.).

 

Since changing times may require changing strategy, to be implemented by a new CEO from outside the organization, it is essential prior to the arrival of that new CEO for the board to make sure that the executive ranks are educated as to these new challenges and the appropriateness of the changes that a new CEO may bring (Ellen Zane, CEO Emeritus of Tufts Medical Center).

Over the last five years, the average tenure of a CEO (based on a survey of many public and private companies) has shrunk from 7.3 years to 4.4 years.  Thus, focus on CEO succession is becoming more important.  Half the members of boards surveyed believe that their succession planning is inadequate; only 33% have a well-documented succession planning process.

The panel also agreed on the need to train internal people as possible CEO successors.  Although internal executives may not make it to CEO, a plan to rotate them through different functions and (if they are board members themselves) different committees should be presented to them  as building their own professional skills, and not as a step in a “horse race” to the top.  The panel also agreed that CEO selection is the task of the board, but that filling slots below the CEO level is the role of the CEO, with the board asking appropriate questions to make sure that the task is being handled properly.

Corporate Minutes as Trojan Horse

If you are involved with corporate governance, if you sit on any board including a non-profit, if you are a fan of keeping complete minutes of meetings as an archival record of what was discussed and decided– I suggest you read my current article about how to properly record meeting minutes.  It ain’t so easy as you might think….  The article appears on page 14 of the current issue of Mass Lawyers Weekly and shortly will be linked to my bio on the firm website but if you are interested in an advance copy please just send me an email.

The answer to good corporate minutes, by the way, is brevity while describing the process of discussion, not recording the substance of that discussion.

Update on Foreign Corrupt Practices Act

You might want to click to my recent article on the FCPA, which is rapidly becoming a huge problem for companies doing business overseas.  It is possible for a US company to get into deep financial trouble by reason of the actions of its sales reps and overseas partners; suggestions as to risk containment are included in text.  Enjoy.

New Rules for US Patents

On March 16, the most important part of the 2011 America Invents Act takes effect, and conforms the US patent system with the rest of the world.  On that date, we switch to measuring patent priority based on the first company to file an application.  Our old system is based on priority of invention, which meant that you got the patent if you could prove by notebooks and the like that you had the patentable idea first.

Other aspects of the Act already have taken effect.  Third parties now can themselves in effect intervene by providing proof of prior art, thereby short-circuiting a given application as lacking in novelty.  We have also added a procedure by which, for nine months after a patent issues, anyone can challenge it post-issuance.

What is the effect of the new system?.  We likely will see applications filed early, of course.  We will see larger companies monitoring filings so as to promptly provide proof of prior art and thus try to head off patent issuances.  We may see it become more difficult to obtain patents and that may further impact a difficult venture finance market.  We likely will see companies avail themselves of accelerated processing which will be available upon payment of an additional fee. And hopefully we will see the PTO eating into its substantial backlog of applications as it opens more offices and hires more staff with its increasing fee schedule.

Meanwhile the life science community has gotten in the habit of closely watching the US Supreme Court, which about a year ago (in the Prometheus case) put in doubt some patents covering methods and diagnostics.  A larger shoe may drop by this summer when the Court decides the Myriad Genetics case and addresses the patentability of genes and isolated DNA.

Financing Life Science Start-Ups

Those who despair of our ability to inspire or fund start-ups could take a lesson from Israel’s Chief Scientist Office.  Here is how the CSO does it:

* Pre-seed, the CSO may fund 100% of costs.

*Promising ideas are funded for two or three years at 85%;  these companies are placed in incubators.  The CSO takes no equity and is repaid, if at all, from a royalty on sales.

*The incubators are for-profit private companies that fund the other 15%, so they have skin in the game.  The incubators get between 30% and 50% of the equity.

*The founders are not expected to invest their own monies.  They get 50% to 70% of the initial equity.

What kinds of life science companies are incubated?  About 55% are med device companies, and 30% are biopharmas.  About 200 companies now are resident in 25 or so government supported incubator facilities.  Recent experience is that about 90% of recently incubated companies have been successful in obtaining additional outside financing, reflecting an improving quality of enterprise being accepted into the program.

More mature companies may continue to get CSO funds, ranging from 30% to 75% of needs.  Additionally, the incubators themselves are free to participate in later equity rounds to increase or protect their stakes.

Israel invests about 4.5% of its GDP in life science, by far the highest percentage of any country, and about double the US percentage.  48% of incubated life science companies (all incubated over the last six years or so) have reached the revenue stage; 60 life science companies are listed on the Tel Aviv stock exchange (where, I am told [having no direct experience] that listing of very small companies is typical).

(Thanks to David Barone of Boston MedTech Advisors for some of the information and all of the statistics cited above.  David was addressing a presentation by emerging Israeli med device companies held January 29 at Newton Wellelsey Hospital.)

SEC Meeting on Fostering Emerging Companies

The SEC may be behind schedule in promulgating regulations mandated by Federal Law, most notably relative to crowd funding under the JOBS Act, but it continues to discuss other possible initiatives to loosen regulation in an effort to spur the economy.

This Friday, February 1, the SEC will hold a public meeting of its Advisory Committee on Small and Emerging Companies to consider several possible stimuli: increasing the “tick size” in trading shares of emerging companies (brokers claim they cannot sustain a trading market and make a proper profit unless the pricing moves in larger increments, creating a profit potential; recall that until fairly recently the minimum tick was 1/8th); encouraging  a new stock exchange for small companies; revisiting the scope of required disclosure.

There is no mention of “Broker-dealer Lite,” a registration scheme for intermediaries who raise capital (and perform M&A) for smaller companies; these intermediaries typically are not registered as broker dealers, an expensive and time-consuming process, and thus operate outside of the stated law regulating such functions. Emerging companies have argued that some sort of modest registration for such “finders” would spur business development, particularly at the pre-IPO stage, without imperiling the public.

If you want to observe the meeting on-line, or submit comments on-line to the meeting, go to the SEC home page; reference is file # 265-27.

Private Equity Prognosis for 2013

According to Kevin Callahan, Managing Director of Berkshire Partners (which has a $4,500,000,000 Fund 8), the year 2013 will be complicated, but with many PE opportunities for the careful investor.

Speaking before a Boston meeting of the Association for Corporate Growth on January 17th, Callahan started with a summary of 2012, which he characterized as a “rough year”: the whole industry took heat through criticism of Bain during the election, the recognition of income inequality as a social problem made it a difficult year to do PE, LBO and other acquisition activities fell off somewhat from 2011 (and remain massively below peak years 2006 and 2007), and price multiples and leverage increased across both large and small transactions.

What about 2013?

There is a “bear” case for 2013: Europe is in a mess, U.S. economy is not clarified, unemployment is high, prices and leverage remain high.

But there is also a “bull” case for 2013: Berkshire believes that the micro opportunities in particular industries such as consumer goods, technology and healthcare will trump macro negatives; interest rates remain low; certain US market segments such as manufacturing and construction are on recovery cycles.

Callahan then launched into a defense of the role of private equity: it fills a void in the capital markets, it is a proven asset class through three cycles, at least the top half of the funds out-perform public securities markets, PE is a constant performer during recession.  He does not see the number of private equity funds falling substantially; unlike hedge funds which operate on “one bad year and you are out,” hedge funds have a longer horizon and structurally are not built to disappear rapidly given the provisions of their partnership agreements.

Finally and most controversially, Callahan gave up the ghost on tax treatment of carried interests; as a logical matter, he suggested, they really are ordinary income, and are not entitled to favored capital gains treatments.  He does not see this as the slightest impediment to the growth of private equity; to paraphrase, he observed that “no one entered this business because of the tax breaks.”