Small Business Health Care Affordability Tax Credits

Under the Affordable Care Act, small employers are not required to provide health insurance to their employees. However, many small employers plan to offer or continue to offer health insurance to their employees despite not being required to do so. An important factor in this decision has been the availability of the Small Business Health Care Affordability Tax Credits. Below are some of key components of the tax credit:

1.    The tax credits have been available since 2010. From 2010 to 2013, the available tax credits were:

  • Non-Profit Entity – 25% of employer contribution to employees’ health insurance premiums.
  • For-Profit Entity – 35% of employer contribution to employees’ health insurance premiums.

2.    The tax credit is available from 2014 to 2016. However, it is available only if the small business purchases an insurance product through the Small Business Health Options Program (SHOP) or from an insurance agent authorized to sell SHOP products.

  • Non-Profit Entity – 35% of employer contribution to employees’ health insurance premiums.
  • For-Profit Entity – 50% of employer contribution to employees’ health insurance premiums.The tax credit is available from 2014 to 2016. However, it is available only if the small business purchases an insurance product through the Small Business Health Options Program (SHOP) or from an insurance agent authorized to sell SHOP products.

3.    To qualify for a tax credit, the employer must meet the following requirements:

  • Have less than 25 employees;
  • Have average employee wages of less than $50,000; and
  • The employer must contribute at least 50% of health insurance premium costs.

4.    The maximum credit is available to employers with 10 or fewer full-time equivalent employees, who have average annual wages of $25,000 or less.

5.    The process to determine the number of employees, to calculate average wages and to apply the rules related to employer contributions can be complex. However, for some small employers, the ability to receive a tax credit of up to 50% of the employer’s contribution to the health insurance premiums of its employees can be significant.

To find out more about the Small Business Health Care Affordability Tax Credits and the impact the Affordable Care Act has on health care and your business, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

© 2014 Michael P. James, J.D., M.B.A., CSSGB

Independent Contractors and Health Care Reform

Independent contractors face unique challenges under the Patient Protection and Affordable Care Act (“ACA”).  Most notably, independent contractors (also referred to as “business professionals”) must look at health care reform from both the perspective of their external relationships and their internal business operations.  One the one hand, the ACA has motived many independent contractors to reexamine their relationships with the companies they work with.  At the heart of this analysis, these professionals focus on whether they should be classified as employees of the companies they work with or whether they are truly independent contractors.  Under health care reform, the differences between these classifications are substantial.  On the other hand, independent contractors are evaluating their own business operations to make sure these operations continue to make sense in the current health care reform environment.  Frequently, independent contractors discover that their existing business operations need to be modified to support their health care reform strategies.  Please allow me to discuss these challenges in greater detail.

Employees v. Independent Contractors

Every business professional should evaluate whether he or she is an independent contractor or an employee of the company he or she works with.  Unfortunately, this question does not always have an easy answer.  In most cases, the classification of a business professional hinges on an individual analysis of the specific facts surrounding his or her relationship with the company.

For purposes of the ACA, employees are classified according to common law standards. Under the common law, a number of factors are evaluated to determine whether a business professional is the common law employee of a company.  Generally, these factors weigh the level of control the company has over the business professional.  Ultimately, the determination of whether an individual is an employee or independent contractor is based on a holistic analysis of the relationship between the business professional and the company.  It should be noted that just because a company classifies and pays a business professional as an independent contractor, it does not always mean that the business professional is truly an independent contractor under the law.  Courts typically focus on the substance of the relationship over its form.

Over the last several years, courts across the country have been increasingly asked to determine whether business professionals are employees or independent contractors.  While many of these cases have focused on claims related to tax withholdings, wages and uncompensated work, it is possible that future litigation will focus on the health insurance regulations under the ACA.  Under the ACA, a large employer is required to offer health insurance to full-time employees or pay penalties to the IRS, under certain circumstances.  A large employer is an employer who employs an average of at least 50 full-time equivalent employees during an applicable year.  Furthermore, if a small employer offers health insurance to its employees, it is required to offer the coverage to all of its full-time employees.  As such, future cases may focus on whether business professionals, who have been classified as independent contractors by the companies they work with, are nevertheless entitled to participate in the applicable company’s health plan.  Cases may also consider whether these same business professionals should be included in the company’s calculation of full-time equivalent employees to determine whether the company is a large employer and subject to ACA requirements.

Clearly, many companies may prefer to have current independent contractors remain classified as independent contractors for health care reform purposes.  For business professionals, the answer may not be as clear.  On the one hand, some business professionals may desire to be classified as employees so they can participate in the health plans of the companies they work with, especially if health insurance premiums continue to rise.  On the other hand, some business professionals may prefer to remain independent contractors so they can take advantage of the tax incentives associated with health insurance plans under the ACA.  For example, individuals who purchase health insurance through the Health Insurance Marketplace may be entitled to premium tax credits and subsidies if they meet certain requirements.  However, if the individual is offered affordable coverage through an employer that provides minimum value under the law, the individual is not eligible to receive premium tax credits and subsidies, even if he or she otherwise qualifies for the credits and purchases his or her own insurance coverage through the Health Insurance Marketplace.  In addition, some business professionals that qualify as small businesses may be eligible to receive a small business health care tax credit of up to 50% of the employer’s contribution to its employees’ health insurance premiums.  If a business professional provides health insurance to his or her employees and the company that the business professional providers services to does not, the business professional may lose key employees if the business professional cannot maintain his or her independent contractor status.  Finally, a business professional may have more flexibility and choice in choosing a health plan as an independent contractor.

Ultimately, the determination of whether a business professional is an employee or independent contractor of a company will have a profound impact on the health care reform strategy for that business professional.  As such, business professionals should carefully evaluate their current classification with their trusted advisors and develop a health care reform strategy that is consistent with that classification.

Internal Business Operations

Business professionals should also evaluate their operations to make sure they continue to make sense in the current health care reform environment.  An important part of that process is looking at the structure of the independent contractor’s business. Some business professionals elect not to create a corporate entity for their operations.  This strategy has several potential pitfalls.  First, the existence of a separate business entity is a factor that weighs in favor of the business professional being classified as an independent contractor.  The contracting company pays the independent contractor’s corporate entity and enters into applicable contracts and agreements with that entity.  The business professional’s corporate entity helps substantiate the independence of the business professional from the contracting company.  Second, the corporate entity provides the business professional with a layer of protection from potential exposure and liability related to the independent contractor’s business activities.  Business professionals that do not utilize a corporate entity in their business dealings risk being personally liable for potential claims.  Third, if the independent contractor does have employees, the lack of a corporate entity may have a significant impact on tax matters related to the operations.  On a positive note, some corporate entities do not increase the tax liabilities associated with business operations, yet they provide the protection and independence the business professional desires. Ultimately, if a business professional does not currently utilize a corporate entity for his or her business dealings, he or she may want to speak with his or her trusted advisors about the structure of his or her business operations.

Many business professionals have engaged workers to help them with the operation of their businesses.  For example, in the real estate industry, some workers may be hired to hold open houses and discuss the price and terms with prospective buyers who come to see the property.  Other workers are hired to do more administrative tasks such as bookkeeping, scheduling and/or managing ads and social media.  Regardless of whether a worker is a family member, neighbor or intern, the critical question is: are these workers the employees of the independent contractor or are they independent contractors themselves?  Here, the business professional will have to engage in the same common law employee analysis discussed above to determine whether each worker is an employee or independent contractor.  As noted above, the more control the business professional has over the worker, the more likely it is that the worker is an employee.  If the business professional wants to classify his or her workers as independent contractors, it is possible that the business professional may have to make modifications to the existing relationships with the workers.

The classification of workers as employees may have important implications under the ACA.  While a few employees may not require the business professional to engage in a detailed analysis of whether he or she is a large or small employer under the ACA, these employees will likely trigger other requirements.  First, as an employer, the business professional is required under the ACA to provide notice to his or her employees about the Health Insurance Marketplace and the business professional’s existing health care coverage for eligible employees.  This requirement applies to all employers that have at least one employee.  Second, the business professional may be required to report information to the IRS related to his or her health care coverage and applicable employee data.  Third, even if the business professional does not offer health insurance to full-time employees, the business professional’s employees may, nevertheless, seek guidance from the business professional related to health insurance and the Health Insurance Marketplace.  Finally, if the business professional has employees, he or she will likely want to continue to monitor the health care reform landscape as ACA regulations are continually changing and numerous rules are scheduled to become effective over the next several years.

Conclusion

Ultimately, independent contractors should evaluate their operations to make sure they are consistent with the independent contractor’s overall business and health care reform strategies.  In light of the changes related to the ACA, it is possible that independent contractors may wish to modify their business structure and practices to provide them with greater stability, protection and flexibility.  Independent contractors may wish to discuss their business operations with their team of trusted advisors to develop a strategy that is aligned with their goals and objectives.

To find out more about the Affordable Care Act impacts independent contractors, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

© 2014 Michael P. James, J.D., M.B.A., CSSGB

(The Greater Lansing Association of Realtors has received permission to republish a similar version of this article I prepared for its Realtor members.)

Final Rules Regarding “Pay or Play” Create Important Changes for Employers Under ACA

IRS Final Regulations on Employer Shared Responsibility Released

On February 10, 2014, the United States Department of Treasury issued its final rules concerning the shared responsibility requirements for employers regarding health coverage under the Affordable Care Act.  Although these regulations affect numerous aspects of health care reform and its applicability to various employers, I have identified some of the most important changes that employers should be aware of:

1)     Large Employer Mandate Delayed (50-99 Employees, including full-time equivalent employees): The shared responsibility requirements for large employers, also known as “Pay or Play,” have been further delayed for some large employers.  Employers with 50 to 99 employees (including full-time equivalent employees (“FTEs”)) will not be penalized for failing to provide health insurance to their full-time employees until 2016.  Before this change, employers with 50 to 99 employees (including FTEs) were required to provide health insurance to their full-time employees starting in 2015 or face penalties.

2)     Large Employer Mandate Modified (100+ Employees, including full-time equivalent employees): The shared responsibility requirements for employers with over 100 employees (including FTEs) have also been changed.  Now, these employers are only required to provide adequate and affordable coverage to 70% of their full-time employees in 2015.  In 2016, these employers must provide appropriate coverage to 95% of their full-time employees.  Before this change, the requirement to provide appropriate coverage to 95% of full-time employees was slated to take effect in 2015.

3)     “Pay or Play” Penalties Modified for 2015:  For 2015 plus any calendar months of 2016 that fall within the employer’s 2015 plan year, if a 100+ FTE Employer is subject to the “Pay or Play” penalties for failing to provide health insurance coverage to its full-time employees, the employer must pay a penalty equal to: $2,000 x (# of full-time employees – 80).  Before this change, the employer only received a 30 full-time employee reduction to the “no coverage” penalty, instead of 80.  Starting in 2016, all large employers that fail to provide health insurance to their full-time employees will only receive a 30 full-time employee reduction to the “no coverage” penalty.

4)     Seasonal Employees Redefined: The definition of seasonal employees has been expanded to include workers in a position for which the customary annual employment period is 6 months or less.  Prior to this change, seasonal employees were those individuals that worked 120 days (roughly 4 months) or less during the year.

5)     Certain Hours of Service Performed by Members of Religious Orders are Exempt: In determining whether its members are full-time employees, a religious order is permitted to not count the hours of service related to any work performed by an individual who is subject to a vow of poverty as a member of that order when the work is in the performance of tasks usually required for active members of the order.

6)     Bona Fide Volunteers Do Not Count: Government entities and 501(c) organizations with tax-exempt volunteers do not need to count the hours of service provided by bona fide volunteers when determining their status as a large or small employer under the ACA.

7)     Work Study Program Student Employees Do Not Count:  Educational institutions do not need to count the hours worked by students that are employed in positions subsidized through the federal work study program or a substantially similar program at the State or local level in determining whether they are a large or small employer under the ACA.  However, the hours worked by students employed outside of these programs must be counted by the educational institution to determine whether it is subject to the shared responsibility requirements of the ACA.

8)     Approved Methodology for Determining Adjunct Faculty Hours:  Institutions that employ adjunct faculty are required to use a reasonable method to identify and track the hours of service for adjunct faculty.  The IRS has identified one method that it deems reasonable.  The institution must credit the adjunct faculty member with: (a) 2 ¼ hours of services per week for each hour of teaching or classroom time (this would add an addition 1 ¼ hours for activities such as class preparation and grading) and, separately (b) an hour of service per week for each additional hour outside of the classroom that the faculty member spends performing duties required to perform (office hours and faculty meetings).

To find out more about the Employer Shared Responsibility Requirements, “Pay or Play” Mandate, or how the final regulations impact employers and your business, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

© 2014 Michael P. James, J.D., M.B.A., CSSGB

Enrollment Delayed for Health Insurance Marketplace

The start of open enrollment on the Health Insurance Marketplace has been delayed by the federal government.  Millions of Americans expected to begin enrolling in health insurance products through the Marketplace on October 1st.  The delay will impact both individuals shopping for health insurance and small businesses looking to purchase insurance for their employees through the Small Business Health Option Programs (SHOP).

Sources in Washington have confirmed that October 1st will be a “soft launch” for the new Health Insurance Marketplace.  On October 1st, visitors to HealthCare.gov will experience the start of a “preview period,” during which individuals and small businesses will be able to browse insurance products but they not be able to enroll through the website.  The Health Insurance Marketplac website will initially only offer consumers information about the available plans and cost details.  Currently, HealthCare.gov contains a red flag on its main page that reads, “Plan & Cost Info Coming Oct 1”.  “Open enrollment” is noticeably missing from this message.

Sources indicate that small businesses will not be permitted to enroll in health plans through the SHOP Marketplace until November 1st.  Small businesses may still be able to purchase Marketplace products for their employees starting October 1st but will likely be forced to utilize paper applications or communicate directly with Federal Marketplace agents.  However, it remains unclear how this process will work.  Of significance, the government has not yet announced how long individuals will have to wait before they can start purchasing insurance products through the Marketplace.

Marketplace architects have encountered information technology complications that have caused the delay to open enrollment on the Marketplaces.  As a result of the data systems difficulties, key components of the Marketplace have been unable to operate without significant glitches.  It could be several weeks before the Marketplace is able work out all the kinks.

The impact of the delay to open enrollment in health insurance products through the federal Marketplace remains to be seen.  It will depend, in large part, on the duration and continued scope of the delay.  However, several immediate impacts are readily discernible.  First, unless the January 1st deadline to enroll in a health insurance plan is also delayed, consumers will have less time to evaluate their options, including the availability of tax subsidies, before making coverage decisions.  Second, the delay will likely enhance the confusion and anxiety already surrounding health care reform.  Finally, small employers will need to respond to inquiries and concerns from their employees who were expecting to be enrolled in a health plan in the coming month.

I will continue to update you as details related to the Health Insurance Marketplace unfold.

To find out more about the Health Insurance Marketplace and the impact the Affordable Care Act has on health care and your business, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

Government Pushes Pause on Pay or Play Mandate

On July 2, 2013, the Obama Administration delayed the implementation of the employer shared responsibility requirements of the Affordable Care Act (“ACA”).  Commonly referred to as the “Pay or Play Mandate,” the ACA requires that large employers provide affordable and comprehensive health care coverage to their employees or pay penalties.  The Pay or Play Mandate was scheduled to take effect on January 1, 2014.  Now, the Pay or Play Mandate will not apply until 2015.

The Obama Administrative cited the complexity of the reporting requirements and the need for more time to implement them effectively as reasons for the 1 year delay.  As part of Pay or Play Mandate, applicable employers will be required to report information to the government related to the health coverage offered to their employees.  The government hopes to use the additional time to simplify the reporting requirements for applicable employers and adapt health coverage and reporting systems related to this process.

Although there has been a delay in the implementation of the Pay or Play Mandate, large employers should continue to develop and implement strategies related to health care reform for their businesses.  The additional time may allow some employers to consider options previously unavailable to them.  In addition, because the health insurance marketplaces/exchanges are still slated to begin open enrollment on October 1, 2013, large employers should consider the effect the individual and SHOP marketplaces will have on their ability to satisfy their human capital needs.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

To find out more about the impact of health care reform on your business, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

Accounting for Accountable Care Organizations

My presentation to the Michigan Association of CPAs regarding Accounting for Accountable Care Organizations can be viewed on SlideShare at:

http://www.slideshare.net/FraserTrebilcockLawyers/accounting-for-accountable-care-organizations

Please do not hesitate to contact me to discuss the possibility of creating an ACO for your group practice, hospital or integrated delivery system.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

Michael James provides representation and counseling related to all facets of business enterprise and healthcare matters. For more information, you can contact Michael at mjames@michaeljameslaw.com, (810) 936-4040 or www.michaeljameslaw.com.

Health Insurance Exchanges: The Participation Paradox

As state and federal agencies work to create operational health exchanges, one critical question remains unanswered: How will the key stakeholders participate in the new health exchanges?  Health insurance exchanges are intended to be the vehicle through which millions of Americans will obtain health insurance as mandated by the Affordable Care Act (“ACA”).  The success of the health exchanges will largely rest on an equilibrium of participation by consumers, insurers and health care providers.  A lack of involvement by any one group could have a dramatic effect on the other stakeholders, and ultimately, the success of the health exchange.

For example, hundreds of thousands of Michigan residents are expected to utilize the exchange to obtain insurance.  However, an individual who does not maintain health insurance must make an additional payment to the IRS.  The difference between the IRS payment and the cost of a qualifying insurance policy is significant.  In its decision upholding the constitutionality of the ACA, the Supreme Court noted that, in 2016, the expected amount owed to the IRS is 50% to 85% less than the projected expense to purchase a qualifying insurance policy.  Therefore, it is possible that healthy, low-risk individuals will choose to pay the IRS rather than buying insurance.  This is especially true in light of the ACA’s elimination of pre-existing conditions from the coverage equation.

It is likely that such departure of the low-risk demographic from the market will have an impact on insurers.  Without a healthy population to equalize the risk on the exchange, insurers may attempt to increase insurance premiums for the remaining population.  However, given the regulatory environment, insurers will not be able to rely solely on premiums.  Instead, insurers may also seek to reduce reimbursements to providers who deliver care under plans offered on the exchange.  Ultimately, some insurers may simply choose not to participate in the exchange after evaluating the perceived risks associated with its population.  Less competition amongst insurers could also lead to increased insurance premiums.

Although the health exchange will increase the number of insured potential patients, not all health care providers will be interested in participating in the exchange.  Decreasing reimbursements may eliminate any incentive a provider has to increase the scope of health insurance plans he is willing to accept.  This is especially true if the new plans are associated with a higher-risk population.  In addition, the administrative costs associated with collecting patient contributions under these plans may be prohibitive.  Providers have historically opted in and out of various governmental programs for similar reasons.

Ultimately, the question remains how will consumers, insurers and health care providers participate in the health exchanges, and whether it will be in a way that creates a sustainable equilibrium.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

To find out more about the Michigan health exchange and the impact the Affordable Care Act has on health care, contact attorney Michael James at mjames@michaeljameslaw.com, 810-936-4040 or www.michaeljameslaw.com. Michael James provides representation and counseling related to all facets of business enterprise and health care matters.

Changes in Health Care Laws Allow Retailers to Expand the Scope of Rewards Programs

Introduction:

Rewards programs have become an increasingly popular and important way for businesses to attract new customers and retain their most profitable clientele.  In addition, these programs provide companies with a wealth of data related to consumer purchases that can be used to forecast demand and create targeted marketing initiatives. Typically, rewards programs consist of coupons or rebates given by a retailer to a customer after the customer surpasses specific spending thresholds.  Rewards are usually redeemable on future purchases at the retailer or one of the retailer’s business partners.

Prior to the Patient Protect and Affordable Care Act (“ACA”), retailers faced potential exposure if their programs rewarded customers for the dollars spent on items covered by federal health care programs.  Therefore, retailers generally excluded purchases of medical devices, medical supplies and prescription drugs covered by Medicare and Medicaid from their rewards programs. However, the ACA has created new regulations that directly affect the permissible scope of retailer rewards programs.  As a result, retailers that comply with the new regulations may be able to expand their programs to include purchases related to items covered by federal health care programs.

Changes in Health Care Regulations:

Civil Monetary Penalties

Section 1128A(a)(5) of the Social Security Act (“Act”) provides for the imposition of civil monetary penalties (“CMP”) against any person who offers or transfers remuneration to a Medicare or state health care program (including Medicaid) beneficiary that the benefactor knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of any item or service for which payment may be made, in whole or in part, by Medicare or a state health care program.  The Office of Inspector General (“OIG”) may also initiate administrative proceedings to exclude such party from the federal health care programs.  “Remuneration” includes the transfer of items or services for free or for less than fair market value.  The OIG has taken the position that incentives that are only nominal in value are not prohibited by the statute, and has interpreted “nominal in value” to mean no more than $10 per item or $50 in the aggregate on an annual basis.  Therefore, before the ACA, programs that offered significant rewards to customers based on their purchase of medical devices, medical supplies and prescription drugs covered by programs like Medicare would likely be in violation of the Act and be subject to CMP.

However, the ACA amended the definition of “remuneration” for purposes of CMP by adding a new exception for rewards offered by retailers.  Under the ACA, retailer rewards do not constitute “remuneration” for CMP purposes if they meet the following three criteria:

1)     The rewards consist of coupons, rebates or other rewards from a retailer;

2)     The rewards are offered or transferred on equal terms available to the general public, regardless of health insurance status; and

3)     The offer or transfer of the rewards is not tied to the provision of other items or services reimbursed in whole or in party by the Medicare or Medicaid programs.

Based on this exception, retail rewards programs should be able to avoid CMP as long as they are structured correctly.  If the retailer offers rewards in the form of coupons, rebates or other types of rewards based on a customer’s purchases, the first prong of the exception will likely be satisfied.  In order to satisfy the second prong, the rewards program must be offered on equal terms to all customers.  In other words, all customers of the retailer must be eligible to participate in the rewards program.  The final prong will likely create the most difficulty for retailers.  The rewards program cannot be tied to the provision of other items or services reimbursable in whole or in part by the Medicare or Medicaid programs.  Retailers will have to develop rewards programs that comply with this regulation for both “earning” and “redeeming” transactions.  Retailers should make it a priority to utilize the knowledge of an experienced business and health care attorney to develop a plan that enhances business objectives, satisfies federal regulations and avoids liability.

The Anti-Kickback Statute

The Anti-Kickback Statute (“AKS”) prohibits the payment or receipt of remuneration in return for referring individuals for items or services reimbursable by a federal health care program.  See Section 1128B(b) of the Act.  Under the AKS, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind. The statute has been interpreted to cover any arrangement where one purpose of the remuneration is to obtain money for the referral of services or to induce further referrals.  Violation of the statute constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to five years, or both.  A violation of the AKS will also lead to an automatic exclusion from federal health care programs, including Medicare and Medicaid.

Unfortunately, the AKS does not have a exception to the definition of “remuneration” similar to the one that was created by the ACA for CMP.  However, the OIG recently released an Advisory Opinion related to the AKS and retailer rewards programs.  Although Advisory Opinions have limited application and authority, the OIG’s analysis and determinations are insightful.

The OIG was asked to evaluate a rewards program of a retailer that owned and operated thirteen supermarkets, most of which had in-store pharmacies.  The retailer’s rewards program permitted customers to earn gasoline discounts at a partnering gas station based on the amount customers spent on purchases in the retail supermarkets, including the cost-sharing amounts paid by customers on items covered by federal health care programs purchased at the in-store pharmacies.

After evaluating the retailer’s rewards program, the OIG found that the program posed a minimal risk of fraud and abuse.  The OIG noted that the retailer’s stores sold a broad range of groceries and other non-prescription items.  As such, the risk that the rewards program would steer beneficiaries to the retailer’s stores to purchase federally reimbursable items or services was low.  Customers were not required to purchase prescription items to earn rewards and there was no specific incentive for transferring prescriptions to the retailer’s pharmacies.  The OIG also determined that the rewards program would not likely lead to an overutilization or otherwise increase the costs to federal health care programs.  Any cost-sharing amounts counted towards a customer’s rewards would result from prescriptions already prescribed, and the rewards could not be used on future prescription purchases.  Ultimately, the OIG determined that it would not impose sanctions on the retailer in connection with the AKS.

Conclusion:

Based on the changes to the regulatory environment found in the ACA and recent insights from the OIG, retailers may be able to expand their rewards programs to include purchases related to items covered by federal health care programs.  However, retailers must engage in careful analysis and planning to ensure that their rewards programs do not violate health care regulations.  Retailers interested in expanding their rewards programs, or making sure their current rewards programs comply with health care regulations, should seek the advice of an experienced health care attorney and consider obtaining an Advisory Opinion from the OIG based on the specifics of the proposed program.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

Michael James provides representation and counseling related to all facets of business enterprise and healthcare matters. For more information, you can contact Michael at mjames@michaeljameslaw.com, (810) 936-4040 or www.michaeljameslaw.com.

Patent Law Update: The America Invents Act – Part 4: Patent Defense Considerations

Introduction

In the first three articles in the “Patent Law Update: America Invents Act” series, I discussed the changes to the patent application process and issues that may arise after your patent application has been filed ( Article 1, Article 2, Article 3).  In this final article, I will transition my discussion to issues that may arise in defending your patent rights against potential infringers.  Here, I will cover three critical topics.  First, I will evaluate the changes to the prior use defense and how these changes may be used to protect your intellectual property.   Second, I will examine the changes to the best mode required disclosure and how this may impact patent litigation.  Finally, I will discuss the changes to the advice of counsel defense to infringement actions and their impact on willful infringement claims.

Expansion of the Existing Prior Use Defense

Under the old law, alleged infringers were permitted to advance a “prior use” defense when faced with a patent infringement case.  However, the prior use defense was only permitted in cases involving a business method patent.  In order to properly assert the defense, an accused infringer had to have been able to demonstrate that he or she had practiced the business method at issue at least one year before it was patented.

As of September 16, 2011, the scope of the prior use defense has been expanded to include all subject matter.  Now, if you can demonstrate that you made commercial use of the subject matter in the United States, at least one year before the effective filing date of the patent, the prior commercial may be used as a defense against patent infringement.

The expansion of the prior use defense provides you with a new tool to protect your intellectual property.  If your inventions involve subject matters that are readily understandable once they are placed on the market, the expansion of the public use defense may be of little consequence to you.  It is likely that your intellectual property may be protected against potential infringers as prior art.  However, if your inventions are not self-disclosing, the prior use defense may be an incredibly valuable resource.  Inventions that are not self-disclosing include many business processes and inventions are that concealed within other end products.

Under the old system, inventors were faced with two choices: 1) disclose their non-self-disclosing invention to the public through a patent; or 2) treat the invention as a trade secret and keep it secret.  If the invention was disclosed through a patent, the inventor would gain patent protections, but lose the strategic advantage of maintaining the subject matter’s secrecy.  If the invention was treated as a trade secret, the inventor may preserve his or her confidential information, but risks losing rights to the invention as a result of someone obtaining a patent for the same subject matter.  Both options had their advantages and disadvantages. The new prior use defense under the AIA reduces the difficulty faced by inventors as a result of this trade-off.  Instead, the new law favors maintaining secrecy because it eliminates the risk of someone else being able to patent your invention.

Best Mode Requirement

Under the old patent system, a patent could be invalidated if the inventor failed to disclose the “best mode” of the invention.  The law required that an inventor disclose the best mode for carrying out the invention in his or her application.  The purpose of this requirement was to deter inventors from applying for a patent, while at the same time, concealing from the public the preferred use of the subject matter.  If the inventor was going to receive the exclusive right or monopoly to the invention under a patent, the law required the applicant to disclose its best use.

As of September 16, 2011, the America Invents Act (“AIA”) has eliminated the failure to disclose the best mode for an invention as a basis for invalidating a patent.  This appears to be true even if it is later determined that the inventor knew of a best mode and intentionally failed to disclose it on the patent application.  In eliminating the invalidity or unenforceability defenses from patent litigation, Congress has seemingly eliminated a rule that often conflicted with a patent applicant’s desire to maintain certain aspects of an invention as trade secrets.

However, even though the “best mode defense” has been eliminated from litigation, the best mode requirement has not been eliminated from the patent application process.  Not surprisingly, there remains some debate over how these two best mode provisions will interact with each other.  It is clear that an applicant must include a description of the subject matter that allows an examiner to use the invention over the full scope of its claimed purposes.  What is unclear is whether the application must also delineate a use that is of special value or interest to the inventor.  A potential consequence of failing to disclose a best mode on your patent application is that the application may be rejected by the patent examiner.  In addition, the absence of a best mode description in your application may expose your patent to attacks from third parties under the newly created post-grant review procedures (discussed in Article 3).

Advice of Counsel

Under the old patent law system, the “advice of counsel” defense played a critical role in defending infringement actions, especially when those actions included claims of willful infringement.  Once you were put on notice of an alleged infringement, you were faced with a critical decision.  Do you continue to manufacture and sell the accused product or not?  If you elected to continue with your business enterprise, you could have been subjected to treble damages and attorneys’ fees under a theory of willfulness and bad faith if you lost the infringement claim.  The solution many alleged infringers implemented was to obtain a non-infringement or invalidity opinion regarding the uniqueness of their product and/or the merits of the infringement allegations.  Even if the opinion was ultimately wrong and it was determined that the product infringed upon a valid patent, the opinion could be used to support a finding that no willful infringement took place.  As such, an opinion letter served as potential insurance against treble damages and attorneys’ fees in an infringement litigations.

As of September 16, 2011, judges and juries are not allowed to drawn an adverse inference from an accused infringer’s failure to obtain an opinion letter from counsel as to the alleged infringement.  The same holds true in situations where an alleged infringer refuses to waive attorney-client privilege when asked to disclose an attorney’s opinion regarding his or her own product or the alleged infringement.  As a result, an alleged infringer’s failure to obtain an opinion letter cannot be used to prove willful infringement or bad faith in infringement cases.

Even though AIA prevents an adverse inference from being drawn for failing to obtain the advice of counsel, it may still be in your best interest to obtain a non-infringement or invalidity opinion letter.  When a person becomes aware that he or she may be infringing upon a patent, a duty arises to exercise due care and investigate whether or not your product infringes upon the subject patent.  Most courts consider the totality of the circumstances when deciding if a defendant has willfully infringed a patent.  As part of this analysis, the courts will consider whether the alleged infringer investigated the scope of their patent when he or she learned of the claim and whether he or she formed a good-faith belief that the claim was invalid or that the competing patent was not infringed.  It may be difficult to demonstration that you have performed your due diligence without a non-infringement or invalidity opinion letter.

Conclusion

The AIA involves a number of changes to strategies routinely used and relied on by patent holders in patent litigations.  You should contact your attorney to develop a litigation strategy that capitalizes on the recent changes to the patent laws.

© 2013 Michael P. James, J.D., M.B.A., CSSGB

Michael James provides representation and counseling related to all facets of business enterprise and healthcare matters. For more information, you can contact Michael at mjames@michaeljameslaw.com, (810) 936-4040 or www.michaeljameslaw.com.

Patent Law Update: The America Invents Act – Part 3: Patent Ownership, Validity & Conflicts

Introduction

In the first two articles in the “Patent Law Update: America Invents Act” series, I discussed the changes to the patent law that affect the patent application process. (Article 1Article 2) In this third newsletter, I will transition my discussion to issues that may arise after your patent application has been filed.  Here, I will cover four critical topics.  First, I will evaluate the new derivation proceedings and how they differ from the existing interference proceedings to resolve conflicts between competing inventors applying for patents on the same invention.  Second, I will examine the expansion of the current procedures for third parties to submit evidence of prior art to the United States Patent and Trademark Office (“USPTO”) to derail a pending patent application.  Third, I will discuss the new supplemental examination procedures and how they can be used to as both an offense and defensive resource related to a patent’s legitimacy.  Finally, I will survey the new procedures developed by the USPTO to resolve the validity of a recently issued patent through formal trial proceedings.

Article 4

Derivation Proceedings

Under the current system, special examiners from the USPTO use interference proceedings to resolve conflicts between competing inventors applying for patents on the same invention.  During these proceedings, inventors are permitted to submit signed and dated notes, prototypes, affidavits and secondary evidence like credit card statements and receipts to prove that he or she was the first to create the disputed invention.  An inventor is also permitted to contest the sufficiency of the other’s inventor’s supporting documentation. Ultimately, interference proceedings are designed to determine who was the first to invent the object or process and/or whether the competing claim is novel or obvious in light of the competitor’s claimed subject matter.

On March 16, 2013, the first-to-file system will eliminate interference proceedings and the practice of “swearing back” (where the inventor submits documentation of a date of conception or reduction to practice prior to the date of the disclosure or filing).  Instead, conflicts between inventors will be entitled to resolution through a derivation proceeding.  However, derivation proceedings will operate differently than the current interference proceedings.  The focus of these new proceedings is to determine whether the subject of a patent application was derived from the invention of someone else.  Although this may seem synonymous to an interference proceeding, there is a subtle difference: an interference proceeding is designed to establish your ownership in an invention, whereas a derivation proceeding is designed to prevent someone else from obtaining the rights to a derivative of your invention.  Under the new system, disputes over the ownership of an invention will be resolved solely based upon the priority and disclosure rules discussed in my first article.  In light of the changes to the disclosure and prior art rules, the new derivation proceedings will inevitably be more complex than the old interference proceedings.

Third Party Submission of Prior Art

Third party submissions of prior art are designed to strengthen the patent system by quickly eliminating patents that are obvious in light of prior art.  The process helps the USPTO identify prior art that is relevant to its evaluations and determinations.  Currently, third parties are permitted to submit prior art to the USPTO they believe are applicable to pending patent applications.  However, third parties are not permitted to explain why the alleged prior art is relevant to the PTO’s evaluation of the subject patent.  As discussed in Newsletter 1, the scope of prior art will be expanded beyond just patents and publications under the America Invents Act (“AIA”) in the Spring of 2013.

On September 16, 2012, third parties will still be permitted to submit prior art believed to be relevant to a pending patent application.  However, the new patent system will also allow third parties to provide statements about the relevance of the prior art that they submit.  Third parties will be permitted to submit prior art before the issuance of the patent or within six months after first publication of a patent application.  Third parties will also be permitted to submit prior art six months after the first rejection of a patent application.

AIA’s expansion of a third party’s ability to submit prior art and explain its relevancy to a pending patent application will be an important tool to ward off potential infringers.  A prior art submission may preclude the need to initiate lengthy review procedures (discussed below) or to file infringement claims in court.  Ultimately, a submission of prior art may prevent infringement before it even starts.

Supplemental Examination Procedure

After September 16, 2012, the supplemental examination procedure will allow a patent owner the ability to request a  supplemental examination of a patent to consider, reconsider or correct information believed to be relevant to the patent.  A patent owner can utilize this procedure to put his or her patent in the best form possible before initiating infringement litigation against an infringer.  Although the scope of the patent cannot be enlarged, the patent can be rewritten to strengthen its claims and protections.  In addition, a supplemental examination may give the perception that the patent has been doubly confirmed by the USPTO.  If modifications/corrections are concluded before litigation is initiated, the infringer cannot use the changes as a basis to support an argument that the subject patent is unenforceable.

The supplemental examination procedure can also be used by a third party to challenge the validity of a patent.  Here, the filing party must demonstrate that a substantial new question of patentability exists with the subject patent.  The new evidence regarding the patentability of the subject invention is limited to existing patents and printed publications.

The USPTO has ninety (90) days from that initial request to decide whether to grant the supplemental examination.  If the supplemental examination is granted, the patent holder is permitted to file a response.  In doing so, the patent holder may rewrite the patent so that the new evidence no longer invalidates the patent.  An ex parte filer is permitted to file a reply to the patent holder’s response.  Then, the USPTO will issue a ruling as to the validity of the patent.  The USPTO’s decision is appealable to the Patent Trial and Appeal Board (“PTAB”) and then to the Federal Circuit.

The supplemental examination process can be a powerful tool for a patent owner to prepare for litigation over the validity of someone else’s patent.  The process can also be a relatively cheap way for a party to challenge the validity of a patent, even though the patent holder may be able to prevent invalidation by amending the patent.  The key aspect to supplemental examinations is that they are administrative in nature.  Unlike the review processes discussed below, supplemental examinations do not mimic trial practices.  As a result, these examinations require less time and resources to reach resolution.

Post-Grant Review Procedures

Although this change will not become effective until September 16, 2012, the new post-grant review procedures will have an important impact on one’s ability to challenge the validity of a patent.  These procedures contain a number of new requirements that affect the nature and scope of the evaluation of process.  Ultimately, these procedures are designed to quickly eliminate conflicting patents that are obvious and provide a speedy alternative to civil litigation when a claimant seeks to invalidate a patent based on prior art.  For the sake of clarity, I will address the new procedures individually.

The Current Review Process:  Reexamination Procedures

The current patent system has a reexamination process.  The process was designed to allow the validity of a patent to be challenged without having to initiate litigation.  However, due to the increased volume of petitions that have been filed over the years, reexaminations routinely take many years to be resolved.  Reexamination procedures often involve multiple Office actions, several rounds of third party and patent owner responses to the Office actions and numerous other petitions.  Although the reexamination is conducted by the USPTO, the process resembles civil litigation in practice.

A reexamination petition can be filed any time during the life of the subject patent.  In order for a reexamination petition to be granted, the petitioner must demonstrate a substantial, new question of patentability exists with respect to the patent.  However, the scope of  the petition is limited to existing patents and printed publications.  A party is permitted to simultaneously pursue a declaratory action related to the validity of the patent in civil court and a reexamination process through the USPTO.  In order to prevail in the reexamination process, the petitioner must prove the unpatentability of the device, plant or process at issue by a preponderance of the evidence.

The Future Review Process:  Post-Grant Procedures and Inter Partes Procedures

Post-Grant Review Procedures

The post-grant review procedure is an entirely new process created under AIA.  A post-grant review is a trial proceeding under the jurisdiction of the PTAB.  Through the post-grant review process, a third party may request a proceeding to challenge the validity of a recently issued patent.  A post-grant review can be initiated under nearly any invalidity defense, including its patentability, novelty, obviousness, evidence of prior sale, prior use or public knowledge.  Post-grant review proceedings may also focus on deficiencies in the patent applicant, including the applicant’s failure to comply with the specification and best mode requirements.  These proceedings are designed to be resolved within twelve (12) to eighteen (18) months after they begin.

A third party can request a post-grant review by filing a petition within nine (9) months after the subject patent has been granted.  In light of this short time frame, I believe that it will be necessary to actively monitor your industry and evaluate the patents registered by your competitors.  As noted above, the scope of the possible grounds that will be available to challenge a competitor’s patent is much broader under the new system.  As such, I believe that it will be important to take advantage of these post-grant procedures in the future.

In order for a post-grant review proceeding to be granted, the petition must demonstrate that it is more likely than not that at least one of the claims challenged in the petition is unpatentable.  However, unlike the current reexamination process, a post-grant review would not be granted if the petitioner has already filed a civil suit challenging the validity of the patent.  If granted, the petitioner has the burden of proving unpatentability by a preponderance of the evidence.  This is the same burden of proof required under the current reexamination procedure and is more favorable to petitioners than the clear and convincing standard faced in the courts.  Once the patentability of a subject matter has been adjudicated by the PTAB, petitioners are precluded from challenging the validity of the patent involved in subsequent federal court or International Trade Commission proceedings on any grounds that were raised or reasonably could have been raised during the post-grant review proceeding.  However, the PTAB’s post-grant review decisions are appealable to the Federal Circuit.

Inter Partes Review Procedures

Under the AIA, the inter partes review process will be available to third party petitioners after the nine (9) month post-grant review period has expired or a post-grant review proceeding has been terminated.  An inter partes review process may be initiated any time during the remaining life of the subject patent.  In many ways, the inter partes review procedures are similar to the current reexamination procedures.

Much like the current reexamination process, the scope of inter partes review is limited to prior art consisting of patents and printed publications.  In addition, the petitioner has the burden of proving unpatentability by a preponderance of the evidence under both sets of procedures.  However, an inter partes review may only be initiated if there is a reasonable likelihood that the petitioner would prevail with respect to at least one of the claims challenged in the petition.  This is a much higher standard than required under the current reexamination procedures.

An inter partes review cannot be initiated by a petitioner who has filed a civil suit challenging the validity of the patent.  However, if the petitioner files a civil action to challenge the validity of the patent on or after the date the petitioner files a request for inter partes review, the civil action is automatically stayed.  In addition, if a petitioner is defending an infringement claim, the petitioner cannot request inter partes review more than one year after being served with the complaint.  Taken together, these new timing restrictions will limit a petitioner’s flexibility in instituting a concurrent challenge against an infringer.

Overall, the post-grant review process and the inter partes review process create a new system to contest the validity of a recently issued patents.  Both the post-grant review process and the inter partes review process will make it more difficult to seek patent invalidation before the USPTO.  However, the post-grant review process has significantly broadened the scope of issues that can be considered by the USPTO to invalidate an infringing patent.  While the inter partes review process maintains the safeguards found under the current reexamination process, it also limits your ability to pursue remedies in multiple venues at the same time.  Because of the intricacies involved in the new system, you should meet with your attorney before its implementation to devise a strategy that will allow you to capitalize on its advantages and avoid its pitfalls.

Conclusion

The new patent law involves a number of new and revised procedures that may be applicable to your patent or patent application once it has been filed.  These procedures are designed to resolve disputes faster and reduce the cost associated with enforcing your intellectual property rights.  You should work with your attorney to determine how these new procedures can be utilized to protect your interests in existing and future patents.

My final article will discuss issues under the new patent law related to defending the interest in your patent.  In doing so, I will discuss three important areas of the new law.  These areas include: 1) the prior use defense; 2) the best mode requirement; and 3) advice of counsel.

© 2012 Michael P. James, J.D., M.B.A., CSSGB

Michael James provides representation and counseling related to all facets of business enterprise and healthcare matters. For more information, you can contact Michael at mjames@michaeljameslaw.com, (810) 936-4040 or www.michaeljameslaw.com.