Business Litigation Report — September 2014

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Business Litigation Report — September 2014

Within This Issue:

– Primary Article:

..The Final Court Revisits Patent Qualified Subject Material in Alice v. CLS Bank

– Practice Area Notes:

..Worldwide Arbitration Update

..Trial Practice Update

..Patent Litigation Update

..Entertainment Litigation Update

– Victories:

..Victory over Auditors for Parmalat

..Antitrust Victory for DIRECTV

..Quinn Emanuel Reforms RMBS Indenture

– Excerpt in the Top Court Revisits Patent Qualified Subject Material in Alice v. CLS Bank:

The Final Court lately addressed the issue of patent eligibility under Section 101 from the Patent Act, holding an application patent within the financial services industry invalid for neglecting to satisfy the minimum needs of Section 101. This decision calls into question the need for software patents and reinforces Section 101 like a potentially effective defense to violation allegations forwarded to such patents. The choice has were built with a significant impact, as courts round the U.S. have granted dispositive motions according to it.

Please visit full issue below to learn more.

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International Arbitration
Page 5
Trial Practice Update
Page 7

Patent Litigation Update
Page 8

Entertainment Litigation
Page 9
Victory Over Auditors for
Parmalat and Other Victories
Page 10
Attorney Advertising
September 2014
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(continued on page 2)
The Supreme Court Revisits Patent Eligible Subject Matter in Alice v. CLS Bank
The Supreme Court recently addressed the question
of patent eligibility under Section 101 of the Patent
Act, holding a software patent in the financial services
industry invalid for failing to meet the minimum
requirements of Section 101.  This decision calls into
question the value of software patents and reinforces
Section 101 as a potentially powerful defense to
infringement allegations directed to such patents. The
decision has already had a significant impact, as courts
around the U.S. have granted dispositive motions
based on it.
An Overview of Patent Eligibility Under Section
The Patent Act states that “[w]hoever invents or
discovers any new and useful process, machine,
manufacture, or composition of matter, or any new
and useful improvement thereof, may obtain a patent
therefore, subject to the conditions and requirements
of this title.” 35 U.S.C. § 101. There are, however,
certain implicit exceptions to this grant.  Specifically,
Section 101 has been found to exclude protection
for “[l]aws of nature, natural phenomena, and
abstract ideas.” Diamond v. Diehr, 450 U.S. 175,
185 (1981).  This restriction has been put in place to
avoid “monopolization of [the basic tools of scientific
and technological work that]…might tend to impede
innovation more than it would tend to promote it,”
thwarting the main objective of the patent laws. Mayo
Collaborative Services v. Prometheus Laboratories, Inc.,
566 U.S. ___, 132 S. Ct. 1289, 1293 (2012).
In recent years, the Supreme Court has addressed
Kathleen Sullivan Named the “Outstanding Practitioner”
by Euromoney Legal Media Group’s Americas Women in
Business Law Awards
Kathleen Sullivan was recently honored as the “Outstanding Practitioner” at the third
annual Euromoney Legal Media Group Americas Women in Business Law Awards. The
annual event recognizes the top female lawyers in North America and Latin America.
Honorees were selected based on their impact and success over the last 12 months.
Quinn Emanuel Opens Office in Houston Led by Standout Trial
Lawyer and White Collar Specialist David Gerger
The firm has opened an office in Houston, Texas, led by David Gerger, a top trial lawyer
and white collar specialist. Mr. Gerger has represented clients in prominent matters
across the U.S., including British Petroleum in the Deepwater Horizon oil spill and
Enron. Mr. Gerger is joined by the other lawyers in his former firm, Shaun Clarke,
Dane Ball, Samy Khalil, and David Isaak. Q
In Memory of Sam Shepherd
On July 15, Quinn Emanuel partner Sam Shepherd died of heart
failure at age 48. He was far too young.
Sam was one of the firm’s first summer associates, associates
and partners in an era when the firm had 20 lawyers and one
office. Twenty-three years later, the firm still benefits from Sam’s
influence. He was a unique person.  
Sam grew up in the Boston area and was an avid athlete. One of
his teammates on his high school basketball team was N.B.A. Hall
of Fame center Patrick Ewing. Sam enjoyed telling people he was
the only member of the team who could not dunk. After high school, Sam played one
(continued on page 4)
2the line between a patent-ineligible “building block”
and a patent-eligible transformation of this building
block into something more. 
The Court has addressed patent eligibility in relation
to laws of nature and natural phenomena, particularly
within the life sciences. For example, in Mayo, the
Court addressed patent eligibility of the relationships
between concentrations of certain metabolites in the
blood and the likelihood that a thiopurine drug dosage
will prove ineffective or cause harm.  132 S. Ct. at
1294.  In Association for Molecular Pathology v. Myriad
Genetics, Inc., the Court addressed patent eligibility of
a naturally occurring DNA segment.  559 U.S. __, 133
S. Ct. 2107, 2111 (2013). 
The Court has also dealt with patent eligibility as
it relates to known abstract ideas carried out through
software running on a computer.  For example, the
Court has found patent claims reciting an algorithm
for converting binary-coded decimal numerals into
pure binary form ineligible for patent protection. 
Gottschalk v. Benson, 409 U.S. 63, 67 (1972).   Patent
claims directed to a mathematical formula for
computing “alarm limits” in a catalytic conversion
process have also been found patent ineligible.  Parker
v. Flook, 437 U.S. 584, 594-95 (1978).  And in Bilski
v. Kappos, the Court found a claim directed to how
commodities buyers and sellers in the energy market
can protect, or hedge, against the risk of price changes
ineligible for patent protection.    516 U.S. 593, 599

The Court Revisits and Refines the Application of
Its Test for Patentability Under Section 101
Most recently, the Court again addressed the question
of patent eligibility in Alice Corp. v. CLS Bank Int’l.,
573 U.S. __ , 134 S.Ct. 2347(2014).  In Alice, the
patentee was the assignee of several patents disclosing
a scheme for mitigating “settlement risk”—i.e., the
risk that one party to a financial transaction will not
satisfy its obligations to the other party—by using a
computer system as a third-party intermediary.  The
patents, which generally share a common specification,
explain that the “invention relates to methods and
apparatus, including electrical computers and data
processing systems applied to financial matters and risk
management.”  Alice, 134 S.Ct. at 2352.
The claims at issue in Alice recite a scheme designed to
facilitate the exchange of financial obligations between
two parties by using a computer system as a third-party
intermediary.  This intermediary creates “shadow”
credit and debit records that mirror the balances in the
parties’ real-world bank accounts.  The intermediary
updates these records in real time as transactions are
entered and limits allowable transactions to those “for
which the parties’ updated shadow records indicate
sufficient resources to satisfy their mutual obligations.” 
At the end of the day, the intermediary instructs
the applicable financial institutions to implement
the “permitted” transactions in accordance with the
updated shadow records.  By tracking parties’ resources
in real time and approving only those transactions for
which the parties have sufficient resources, the risk that
only one party will perform the agreed-upon exchange
is mitigated.  Claims directed to this scheme are
presented in three formats: (1) a method for exchanging
obligations; (2) a computer system configured to carry
out the method for exchanging obligations; and (3) a
computer-readable medium containing program code
for performing the method for exchanging obligations. 
Each of these claims requires the use of a computer,
either expressly recited or required for performance of
applicable method steps.
Below, the district court, relying on Bilski, held that
all of the claims of Alice’s patents were patent ineligible
under Section 101 because they are directed to the
abstract idea of “employing a neutral intermediary to
facilitate simultaneous exchange of obligations in order
to minimize risk.”  768 F. Supp. 2d 221, 252 (D.D.C.
2011).  On appeal, a divided panel of the United States
Court of Appeals for the Federal Circuit reversed,
holding that it was not “manifestly evident” that Alice’s
claims were directed to an abstract idea.  685 F.3d 1341,
1352, 1356 (Fed. Cir. 2012).  The Federal Circuit then
granted rehearing en banc, at which time it vacated
the panel opinion and affirmed the judgment of the
district court.  717 F.3d 1269, 1273 (Fed. Cir. 2013). 
In affirming the district court, the Federal Circuit relied
on the Supreme Court’s decision in Mayo, reasoning
that a court must first “identif[y] the abstract idea
represented in the claim” and then determine “whether
the balance of the claim adds ‘significantly more.’”  Id.
at 1286.  In this instance, the Federal Circuit found
that the claims of Alice’s patents did not; they were
“drawn on the abstract idea of reducing settlement risk
by effecting trades through a third-party intermediary”
and the use of a computer to manage this risk by
maintaining, adjusting, and reconciling shadow
accounts added nothing of substance to this abstract
idea.  Id.
In addressing the Federal Circuit’s holding,
the Supreme Court applied the framework for
distinguishing unpatentable laws of nature, natural
phenomena, and abstract ideas from patent-eligible
applications of those concepts that it established
in Mayo.  The Mayo framework calls, first, for a
determination of whether the claims at issue are
directed to a patent-ineligible concept.  If so, a
determination is made of “[w]hat else is there in
the claims before us?”  The question is answered by
considering the elements of the claim both individually
and “as an ordered combination” to determine whether
the additions “transform the nature of the claim” into
something that is patent-eligible; in other words,
a determination is made whether an element or
combination of elements is “sufficient to ensure that
the patent in practice amounts to significantly more
than a patent upon the [ineligible concept] itself.” 
Mayo, 132 S. Ct. at 1294.
Petitioner argued that its claims, while describing
intermediated settlement, do not recite an abstract
idea.  Specifically, Petitioner argued that abstract ideas
are confined to “preexisting, fundamental truth[s]”
that “exis[t] in principle apart from any human
action.”  Alice, 134 S. Ct. at 2356.  The Court rejected
this argument, relying on Bilski.  As was the case in
Bilski, the Alice patents are directed to a “fundamental
economic practice long prevalent in our system of
commerce.”  Id.  The Court further found that the use
of a third-party clearing house was a “building block”
of the modern economy.  Id.  As a result, the Court
reasoned that the claimed “intermediated settlement”
of the Alice patents is an abstract idea beyond the scope
of Section 101.  Id. at 2357.
Finding the Alice claims directed to an abstract
idea, the Court then turned to the second step in the
Mayo framework to identify whether the elements of
the claim contain an “inventive concept” sufficient to
“transform” the claimed abstract idea into a patent-
eligible application.  Mayo, 132 S. Ct. at 1299.  Citing
Benson and Flook, the Court acknowledge that “the
introduction of a computer into the claims does
not alter the analysis of Mayo step two,” particularly
where the computer implementation was “purely
conventional.”  Alice, 134 S. Ct. at 2357.  This was
distinguished from the Court’s holding in Diehr, in
which a “‘well-known’ mathematical equation” was
used in a computer-implemented process to solve
a technological problem in “conventional industry
practice.”  In that case, a thermocouple was used to
record constant temperature measurements inside a
rubber mold—a result that “the industry ha[d] not
been able to obtain”—and a computer used these
measurements to repeatedly recalculate remaining cure
time using this mathematical equation.  Id. at 2358
(citing Diehr, 450 U.S. at 177-78).   Unlike in Benson
and Flook, the additional steps in Diehr “transformed
the process into an inventive application of the
formula” as a function of their improvement on existing
technological processes (and not their implementation
on a computer).  Id. (citing Mayo, 132 S. Ct. at 1299).
The Court reasoned that these cases demonstrate
that neither the mere recitation of a generic computer,
nor limiting the use of an abstract idea to “a particular
technological environment,” is sufficient to establish
patent eligibility.  Id.  Merely taking an abstract idea
and “apply[ing] it with a computer” does not make this
idea patent eligible.  Id. at 2350-51 (“wholly generic
computer implementation is not generally the sort of
‘additional feature’ that provides any ‘practical assurance
that the process is more than a drafting effort designed
to monopolize the [abstract idea] itself ”) (citing Mayo,
132 S. Ct. at 1297).).  Applying this rationale, the
Court found that Alice’s claims do no more than simply
instruct the practitioner to implement the abstract
idea of intermediated settlement by virtue of generic
computer functions carried out on a generic computer. 
The Court further found that the steps of the claims at
issue amount to nothing more than the application of
“electronic recordkeeping,” which the Court refers to as
“one of the most basic functions of a computer.”  Id. at
2359 (citing Benson, 409 U.S. at 65).  And this generic
application does not change when the individual claim
limitations are taken “as an ordered combination,”
as again the claims in their entirety merely recite the
performance of intermediated settlement on a generic
The Court further found that Alice’s system and
computer-readable medium (or Beauregard) claims are
patent ineligible for the same reasons as its method
claims.  The recitation of “specific hardware” configured
to perform “specific computerized functions” does
nothing to change the result.  Id. at 2360.  The
“specific hardware”—e.g., a “data processing system”
with a “communications controller” and “data storage
unit”—is purely functional and generic.    None of
the recited hardware “offers a meaningful limitation
beyond generally linking ‘the use of the [method]
to a particular technological environment,’ that is,
implementation via computers.”  Id. (quoting Bilski,
561 U.S. at 610-11).  Thus, the Court found the system
claims to be no different from the method claims,
preventing any difference in result between the two. 
Id. (quoting Mayo, 132 S. Ct. at 1294 (This Court has
long “warn[ed]…against” interpreting Section 101 “in
ways that make patent eligibility ‘depend simply on the
draftsman’s art’.”)).
The Future of Software Patents?
The impact of the Court’s decision has already been
seen.   A multitude of courts across the country,
including the Federal Circuit, have already relied on
the Alice decision to invalidate software patents under
4Section 101.  For example, in Digitech Image Tech., LLC
v. Electronics for Imaging, Inc. et al, the Federal Circuit
affirmed a lower court ruling that a patent directed to a
device profile and a method for creating a device profile
within a digital image processing system is invalid under
Section 101. 758 F.3d 1344 (Fed. Cir. 2014); see also
BuySAFE, Inc. v. Google, Inc., No. 2013-1575, 2014
WL 4337771 (Fed. Cir. Sept. 3,2014) (invalidating
under Section 101 methods and machine-readable
media encoded to perform steps for guaranteeing a
party’s performance of its online transaction).  Courts
in Delaware, New York, California, Texas and Florida
have also invalidated software patents under Section
101 since the Supreme Court’s ruling.  See, e.g., Tuxis
Tech., LLC v., Inc., C.A. No. 13-1771-
RGA (D. Del. Sept. 3, 2014); Comcast IP Holdings
I, LLC v. Sprint Communications Company L.P., et
al., C.A. No. 12-205-RGA (D. Del. July 16, 2014);
Dietgoal Innovations LLC v. Bravo Media LLC, 13 Civ.
8391 (PAE) (S.D.N.Y. July 8, 2014); CMG Financial
Services, Inc. v. Pacific Trust Bank, F.S.B., Case No.
CV 11-10344 PSG (MRWx) (C.D. Cal. August
29, 2014); Loyalty Conversion Sys. Corp. v. American
Airlines, Inc., Case No. 2:13-cv-00655-WCB (E.D.
Tex. Sept. 3, 2014); Every Penny Counts, Inc. v. Wells
Fargo Bank, N.A., Case No. 8:11-cv-2826-T-23TBM
(M.D. Fla. Sept. 11, 2014).  As illustrated in these
cases, the analysis will be fact intensive, focusing on
the ability of a patentee to adequately persuade a Court
or jury that its software-based implementation is more
than merely the performance of a known, manual
procedure using a computer.  This will include proof
that the claimed invention is directed to a tangible,
hardware based implementation as opposed to merely
the underlying data itself.  This inquiry is also likely to
include an analysis of whether the method or system at
issue improves upon a known procedure, providing a
solution to a problem that had not previously been (or
could not be) achieved without the invention at issue.  
While this decision is unlikely to signify the death
knell of all software patents, one thing is clear—going
forward, a Section 101 defense will likely be raised in
any patent infringement in which software patents are
being asserted. Q
year of football at Southern Methodist University in
Texas. He had dreams of playing for his beloved Dallas
Cowboys in the National Football League, but the one
year at SMU taught him that professional football was
not in his future. He transferred to Bowdoin where he
continued to play sports, but academics became his
first priority. Sam graduated Phi Beta Kappa and was
the class speaker at his graduation.
Sam was admitted to the joint JD/MBA program
at the University of Chicago. He was proud of the
fact that he paid for graduate school by working at an
Irish pub that he owned. Many of his friends say that
patrons came to the pub more to talk to Sam than to
drink Guinness. That is not surprising because Sam
had a magnetic personality that drew people to him.
He graduated in 1992 and immediately started work
at Quinn Emanuel.
Sam’s performance as an associate at the firm was
stellar. He assumed partner level responsibility almost
immediately, making court appearances, taking
depositions, and actually trying a case as a third year
associate. Sam was elected partner when he was only
four years out of law school—a firm record that stands
to this day.
Sam was enthusiastic about everything he did—
including legal work. He loved being a lawyer.  He
also loved the underdog. When he was just three years
out of law school, Sam tried—and won—a case for a
would-be sheriff’s deputy who claimed he was
discriminated against because he was colorblind. That
was just one of Sam’s unusual cases. He tried a case
for a sports agent who claimed he had been bitten by
a poisonous spider on an airplane. He once deposed
a plaintiff in an employment case who kept a vial of
her boss’s blood around her neck.   Because of Sam’s
charisma and gift for making friends, generating
contacts and clients came naturally and he made
many long-lasting and loyal business and personal
relationships all over the U.S.
Sam loved children. Many Quinn Emanuel lawyers
have fond memories of Sammy making their kids laugh
and squeal with glee. Just four years ago he got his own
child to play with when his daughter Shelby was born.
Sam loved her. We all wish the two of them could have
more time together.
Nobody who met Sam will forget him. He was an
important contributor to Quinn Emanuel. We will
miss him.
In Memory of Sam Shepherd (continued from cover)
International Arbitration Update
Avoiding Litigation in the Host State’s Courts in
Investor-State Disputes After the Urbaser and Teinver
Decisions. Previously, foreign investors whose investments
have been damaged by governmental measures of the
host country, such as changing tax or currency laws,
other regulatory changes or forced liquidation, were
required by some bilateral investment treaties (“BITs”)
to pursue court litigation in the host country before
they could bring investment treaty arbitrations. To get
around this requirement, foreign investors relied on
the “Most Favored Nation” (“MFN”) clause of BITs
to argue that they need not observe the rule requiring
them to pursue domestic court litigation first because
other BITs did not contain that requirement. However,
while some tribunals accepted the MFN workaround,
other tribunals rejected it. Now, as a result of two recent
ICSID decisions—Urbaser S.A. and Consorcio de Aguas
Bilbao Bizkaia Ur Partzuergoa v. Argentine Republic
(“Urbaser”), ICSID Case No. ARB 07/26, Decision
on Jurisdiction (19 December 2012) and Teinver S.A.,
Transportes de Cercanias S.A. and Autobuses Urbanos del
Sur S.A. v. Argentine Republic (“Teinver”), ICSID Case
No. ARB/09/1, Decision on Jurisdiction (21 December
2012)—foreign investors may have another workaround
to the domestic litigation requirement that avoids the
MFN controversy.
At issue in both Urbaser and Teinver was whether
a foreign investor was required to pursue domestic
litigation before the foreign investor could file a request
for international arbitration under the Argentina-Spain
BIT. Article X(3) of the Argentina-Spain BIT states that
a “dispute may be submitted to an international arbitral
tribunal…when no decision has been reached on the
substance 18 months after the judicial proceeding” in the
host state began (“domestic litigation requirement”). By
its plain meaning, Article X(3) requires a foreign investor
to submit to the local courts of the host state for at least
a period of 18 months before the foreign investor may
pursue international arbitration.
Foreign investors have tried to get around the domestic
litigation requirement by relying on the MFN clause in
the Argentina-Spain BIT. The MFN clause states: “[i]n
all matters governed by this Agreement, such treatment
shall be no less favorable than that accorded by each
Party to investments made in its territory by investors
of a third country.” Prior to Urbaser and Teinver, the five
tribunals asked to decide, under the Argentina-Spain BIT,
whether a foreign investor must submit its dispute to the
local courts of the host state for a period of 18 months
before pursuing arbitration concluded that a foreign
investor did not by relying on the MFN clause to bypass
the domestic litigation requirement. See Emilio Agustín
Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision
of the Tribunal on Objections to Jurisdiction (25 January
2000); Gas Natural SDG, S.A. v. Argentine Republic,
ICSID Case No. ARB/03/10, Decision on Jurisdiction
(17 June 2005); Suez, Sociedad General de Aguas de
Barcelona S.A., and InterAguas Servicios Integrales del Agua
S.A. v. Argentine Republic, ICSID Case No. ARB/03/17,
Decision on Jurisdiction (16 May 2006); Suez, Sociedad
General de Aguas de Barcelona S.A., and Vivendi Universal
S.A. v. Argentine Republic, ICSID Case No. ARB/03/19,
Decision on Jurisdiction (3 August 2006); and Telefónica
S.A. v. Argentine Republic, ICSID Case No. ARB/03/20,
Decision of the Tribunal on Objections to Jurisdiction
(25 May 2006).
Nonetheless, the international community remains
divided on this issue as some tribunals have rejected the
MFN argument and refused to set aside the domestic
litigation requirement. Even concerning BITs with
similar wording, tribunals have reached different results.
In Vladimir Berschader and Moise Berschader v. The
Russian Federation, the Belgium/Luxembourg-Soviet
Union BIT was at issue, which contained “all matters”
language similar to the Argentina-Spain BIT. SCC Case
No. 080/2004, Award (21 April 2006). However, the
Berschader tribunal found that the “all matters covered
by the present treaty” cannot be interpreted “literally”
because the MFN clause could not be applied to several
of the matters covered by the BIT.
Now, however, Urbaser and Teinver may provide
another workaround that avoids the MFN controversy.
In Urbaser, the claimants were the holder of a
concession for the provision of drinking water supply and
sewage services in Argentina. The claimants submitted
a request for arbitration alleging that the impact of
the emergency legislation enacted during Argentina’s
economic and financial crisis violated the Argentina-
Spain BIT. The tribunal side-stepped the question of
whether the MFN clause applies to the jurisdictional
provisions of the Argentina-Spain BIT by shifting the
analysis to whether the domestic litigation requirement
was inapplicable because the local courts of Argentina
were unlikely to be able to issue a decision on the merits
within the applicable time limit. The Urbaser tribunal
reasoned that a host state cannot insist on an investor
resorting to domestic courts if the host state is not able to
offer courts capable of handling such disputes that may
reasonably contemplate an adjudication on the substance
of the dispute within 18 months. Accordingly, the
claimants were permitted to proceed with arbitration.
In Teinver, the claimants alleged that the government
of Argentina violated the Argentina-Spain BIT by
unlawfully re-nationalizing and taking other measures
regarding the claimants’ investments in two Argentine
airlines. In Teinver, proceedings had been instituted
in the local courts of Argentina before the claimants
filed for arbitration. Like Urbaser, the Teinver tribunal
did not base its decision on the MFN controversy. The
tribunal reasoned that “18 months have subsequently
passed, and the local suit remains pending. As such, the
core objective of this requirement, to give local courts
the opportunity to consider the disputed measures,
has been met.” Accordingly, the claimants survived the
respondents’ jurisdictional objections.
Because the Urbaser and Teinver tribunals’ approaches
to the domestic litigation requirement could influence
future tribunals, investors considering bringing investor
state arbitrations should examine whether the host state’s
courts could reasonably resolve their disputes within the
time frame that BITs may require for pursuing domestic
litigation before deciding whether or not they actually
need to incur the time and expense of litigation. Host
states should be aware that if their courts are unable to
address the claims of foreign investors within the time
frames prescribed in the domestic litigation provisions of
BITs, investors may be able to circumvent the domestic
litigation requirement and proceed directly to investor-
state arbitration.
Arbitration Award Set Aside—Carr v. Gallaway
Cook Allan [2014] NZSC 75. The cornerstone of
arbitration is the parties’ agreement to confer jurisdiction
upon an arbitral tribunal. Trouble can arise, however,
where this agreement is based on incorrect assumptions
as to available procedural rights. A recent New Zealand
decision held that a specific agreement to arbitrate,
which was conditional on procedural rights that were
in fact unavailable as a matter of law, was invalid. The
decision demonstrates the serious consequences which
may result from a defective agreement to arbitrate:
despite both parties having agreed to the arbitration
clause, and having conducted the arbitration without
complaint, the New Zealand Supreme Court exercised
its discretion to set aside the resulting arbitral award.
The decision is a lesson in the importance of considering
domestic arbitration statutes when drafting arbitration
agreements. It also highlights an issue worth re-checking
whenever an adverse arbitral award is delivered.
In Carr v. Gallaway Cook Allan [2014] NZSC 75, a
decision of New Zealand’s Supreme Court (its highest
court of appeal), Mr. Carr sued his former law firm,
Gallaway Cook Allan, alleging that its negligence had
caused a property transaction to fail. Mr. Carr and the
firm agreed to submit the dispute to arbitration, pursuant
to an arbitration agreement that gave the parties the
right to appeal on “questions of law and fact.” It is not
clear from the judgment whether this was a specifically-
negotiated agreement or a standard form. Both parties
participated fully in the arbitration, and following a
hearing, the arbitrator rendered a partial award in favor
of the firm.
Mr. Carr sought to appeal the arbitral award to a
domestic court on questions of fact. Only then, however,
did the parties learn that the New Zealand Arbitration
Act 1996 (the Act) restricts judicial review of arbitral
awards to questions of law.
Armed with the knowledge that he had agreed to
an arbitration on the assumption of unavailable appeal
rights, Mr. Carr changed tack, contending that the
award should be set aside because the parties’ agreement
was invalid. This argument found favor at first instance,
but was overturned by the intermediate appellate court.
That court adopted a “pro enforcement” interpretation
of the Act, finding that that the words “and fact” could
be severed from the arbitration agreement.
Mr. Carr appealed to New Zealand’s highest court,
which by a 4:1 majority held that the agreement to
arbitrate was invalid, and then exercised its discretion to
set aside the arbitral award. The majority interpreted the
right to appeal on questions of fact as being fundamental
to the arbitration agreement. As such, the fact that this
appeal right was not permitted by law meant that the
intention to arbitrate was vitiated.
On the question of whether the unavailable appeal
right could be severed from the arbitration agreement,
the majority considered three United States decisions,
Kyocera Corp v. Prudential-Bache Trade Services, Inc 341 F
3d 987 (9th Cir 2003); Hall Street Associates, LLC v. Mattel,
Inc., 113 Fed Appx 272 (9th Cir 2004) and Hall Street
Associates, LLC v. Mattel, Inc 552 US 576 (2008). The
majority noted that these decisions indicate that United
States federal law does not permit parties to expand the
review of arbitral awards beyond the grounds provided
by statute. In those decisions, the expanded review rights
were severed from the agreement. However, the majority
held that the decisions do not establish any principle
requiring severance, but instead are merely examples of
where severance was appropriate. In this case, because
the right to appeal was fundamental, its severance would
have impermissibly changed the substance of what
had been agreed. The majority went on to hold that
the invalidity of the arbitration agreement was such a
fundamental defect that it was proper for the award to be
set aside. In dissent, Justice Arnold focused on the proper
construction of the court’s power under the Act to set
aside an award, and held that that power should not be
This decision serves as another reminder of the
importance of careful drafting in arbitration agreements.
Often the focus in drafting is on capturing the parties’
intention and providing a clear procedure for the invoking
of arbitration. This decision shows that, even where the
parties are agreed on a matter and such matter is clearly
captured in the document, factors such as domestic
law, and specifically statutory arbitration frameworks,
may render the agreement to arbitrate void. Clearly,
these factors are worth re-checking any time an adverse
arbitral award is delivered. The outcome of the decision
reaffirms the parties’ agreement as the foundation of
arbitration, illustrating that a defect therein can have
dire consequences for the arbitration built upon it.
The invalidity of an agreement to arbitrate, discovered
after the parties have gone through the time and cost of
arbitration and received an award, can render the whole
process worthless, even where there has been no adverse
finding in respect of the award itself.

Trial Practice Update
Amendments to the Federal Rules of Evidence on
Hearsay Issues. The federal hearsay rules will undergo
amendments later this year to (1) expand the scope
of prior consistent statements such that they can be
admitted as substantive evidence (that is, not to simply
rehabilitate a witness); and (2) confirm the opponent of
a business or public record bears the burden of showing
lack of trustworthiness to get an otherwise-admissible
record excluded under Rule 803. The amendments,
endorsed by the Supreme Court earlier this year, will
automatically become law on December 1, 2014 unless
Congress takes affirmative action to override them.
Federal Rule of Evidence (“FRE”) 801. FRE 801
is being amended to change how jurors can use prior
consistent statements. Under the current rule, a fact-
finder can only consider such statements for their truth
if offered to rebut a charge that the declarant recently
fabricated his testimony or acted from a recent improper
influence or motive in testifying. The current version of
the rule reads as follows in relevant part:
(d) Statements That Are Not Hearsay. A statement
that meets the following conditions is not hearsay:
(1) A Declarant-Witness’s Prior Statement. The
declarant testifies and is subject to cross-examination
about a prior statement, and the statement: . . . (B)
is consistent with the declarant’s testimony and is
offered to rebut an express or implied charge that the
declarant recently fabricated it or acted from a recent
improper influence or motive in so testifying . . . .
If the statement does not counteract a charge of recent
fabrication or improper influence, that statement can
only be offered to rehabilitate the witness’s testimony by
showing consistency between his in-court and out-of-
court statements; it cannot not be offered “substantively”
to prove the truth of what was asserted in the prior
consistent statement. See generally Seeking Consistency
for Prior Consistent Statements: Amending Federal
Rule of Evidence 8-1(d)(1)(B), 46 Conn. Law Rev. 3
(Feb. 2014); FRE 801(d) Advisory Committee Notes
to 2014 Amendments (discussing “premotive” prior
consistent statements under existing law, and that “[t]
he intent of the amendment is to extend substantive
effect to consistent statements that rebut other attacks
on a witness—such as charges of inconsistency or faulty
FRE 801(d)(1)(B) will be amended to add the
italicized text below:
(d) Statements That Are Not Hearsay. A statement
that meets the following conditions is not hearsay:
(1) A Declarant-Witness’s Prior Statement. The
declarant testifies and is subject to cross-examination
about a prior statement, and the statement: . . . (B)
is consistent with the declarant’s testimony and is
offered: (i) to rebut an express or implied charge that
the declarant recently fabricated it or acted from a
recent improper influence or motive in so testifying;
or (ii) to rehabilitate the declarant’s credibility as a
witness when attacked on another ground . . . .
With this new language, prior consistent statements need
not rebut a charge of recent fabrication to be admissible
for their truth. Thus, for example, a prior consistent
statement offered to rebut a claim of longstanding bias
would come in for its truth under the revised rule.
Federal judges have not expressed ringing
endorsements of this amendment. When polled, 52%
of judge respondents indicated that they believed the
amendment was a “negative result.” See Survey of
District Court Judges on a Proposed Amendment to
Federal Rule of Evidence 801(d)(1)(B) Concerning Prior
Consistent Statements, Federal Judicial Center, at 12
(March 2, 2012) (“Rule 801(d)(1)(B) Survey”). At the
same time, 69% of these polled judges also expressed
belief that the admission of prior consistent statements
for substantive purposes would have “little practical
effect on juror deliberations”—apparently believing that
jurors are unable or unwilling to adhere to the limiting
instructions on use of rehabilitative statements under the
current rule. See id. at 6-8.
FRE 803. FRE 803 is being changed to clarify that
the opponent of a business or public record—which
otherwise qualifies for admission under the hearsay
rules—must show that the record is not trustworthy in
order to keep it out of evidence. At least one court had
interpreted these rules to require the party offering such
a record to establish its trustworthiness as a precondition
to admissibility. See Report of the Advisory Committee
on Evidence Rules at (May 7, 2013) available at http://
The current versions of FRE 803(6)-(8) will be
amended to include the following language (in italics):
(6) Records of a Regularly Conducted Activity.
A record of an act, event, condition, opinion, or
diagnosis if: (A) the record was made at or near the
time by—or from information transmitted by—
someone with knowledge; (B) the record was kept
in the course of a regularly conducted activity of a
business, organization, occupation, or calling, whether
or not for profit; (C) making the record was a regular
practice of that activity; (D) all these conditions are
shown by the testimony of the custodian or another
qualified witness, or by a certification that complies
with Rule 902(11) or (12) or with a statute permitting
certification; and (E) the opponent does not show that
the source of information or the method or circumstances
of preparation indicate a lack of trustworthiness.
(While we provide only the full text of the FRE 803(6),
the italicized clause is to be similarly appended to FRE
803(7) and (8).) In proposing this amendment, the
Advisory Committee expressed the view that the other
requirements of the rules demonstrate the basic reliability
of record-related evidence in the absence of any evidence
to the contrary. See FRE 803(6) Advisory Committee
Notes to 2014 Amendments. These changes to FRE
803(6)-(8) should re-establish uniformity among federal
courts on the admissibility of business and public records
over hearsay objections, and avoid placing an undue
burden on a proponent of such evidence to independently
establish the trustworthiness of each such record.
Patent Litigation Update
Supreme Court Raises the Bar for Establishing Induced
Infringement in Limelight Networks, Inc. v. Akamai
Technologies. In Limelight Networks, Inc. v. Akamai
Techs, Inc., __ U.S. __, 134 S. Ct. 2111 (2014), the
Supreme Court unanimously reversed an en banc Federal
Circuit decision that lowered the bar for establishing
induced infringement. Specifically, the Supreme Court
reversed the Federal Circuit’s ruling that inducement
may be found where there was no single, direct infringer.
The Court instead reaffirmed the Federal Circuit’s earlier
reasoning that inducement may be found only when there
is a single, direct infringer.
Akamai Technologies is the exclusive licensee of a
patent on a method of content delivery that requires a
content delivery network (“CDN”) to “tag” content to
be stored on its own servers. Limelight Networks, the
defendant in Akamai, operates a CDN but does not tag
content stored on its servers. Instead, Limelight asks its
users to tag their own content to be stored on its servers.
Limelight performs each step of Akamai’s patent except
for tagging. At trial, the jury found Limelight liable for
inducement and awarded $40 million in damages.
Soon after the jury’s verdict, the Federal Circuit
decided Muniacuction, Inc. v. Thomson Corp., 352 F.3d
1318 (Fed. Cir. 2008), in which it found that inducement
required an act of direct infringement and, further, that
direct infringement “requires a single party to perform
every step of a claimed method.” Id. at 1329. Limelight
moved for reconsideration of the jury’s verdict in light of
Muniauction, and the district court granted Limelight’s
motion. The Federal Circuit affirmed, explaining that
a defendant (such as Limelight) that does not perform
all the steps of a claimed method may only be liable
for direct infringement if it directed or controlled the
actions of other participating parties, or “when there is
an agency relationship between the parties who perform
the method steps or when one party is contractually
obligated to the other to perform the steps.” Akamai
Tech. v. Limelight Networks, 692 F.3d 1301, 1320 (Fed.
Cir. 2012). Since there was no evidence of an agency
relationship or contractual obligation, there was no direct
infringement and Limelight therefore could not have
induced infringement.
Akamai sought rehearing en banc, which the Federal
Circuit granted. The en banc court reversed, finding
Limelight liable for induced infringement. It found
that even though there was no single direct infringer,
inducement could still be established if there was proof
that multiple parties committed all the acts necessary
to constitute infringement and a single party could have
infringed: “[r]equiring proof that there has been direct
infringement . . . is not the same as requiring proof that
a single party would be liable as a direct infringer.” Id.
at 1308-09 (emphasis added). Thus, the Federal Circuit
reasoned that a defendant can be liable for inducing
infringement under §271(b) even if no one has committed
direct in fringement within the terms of §271(a).
The Supreme Court reversed the Federal Circuit,
holding that, under the Federal Circuit’s precedent,
Limelight’s conduct could not induce infringement under
§271(b) because no direct infringement under §271(a)
had occurred. The Court started with the well-established
principle that “inducement liability may arise ‘if, but
only if [there is] . . . direct infringement,’” commenting
that “[o]ne might think that this simple truth is enough
to dispose of this appeal.” Akamai, 134 S. Ct. at 2117.
The Court continued, finding that “Limelight cannot
be liable for inducing infringement that never came to
pass.” Id. at 2118. Notably, the Court’s holding is limited
to inducement actions where no one party’s conduct has
risen to the level of “directing or controlling” the actions
of other entities who may perform some method steps. In
cases where a central entity “directs or controls” others,
direct infringement under §271(a) occurs and §271(b)
liability may attach to an inducer.
One issue left open by the Court, however, is whether
direct infringement requires an act of direct infringement
by a single entity (or more than one entity controlled in
some way by the defendant). In remanding the case, the
Court specifically invited the Federal Circuit to revisit
this question. The Akamai plaintiffs have announced their
intention to argue on remand that, notwithstanding the
Supreme Court’s new standard for inducement under
§271(b), Limelight should be liable for direct infringement
under §271(a).
The impact of Akamai has already been seen in the
district courts. In Emblaze Ltd. v. Apple Inc., No. 5:11-cv-
01078-PSG, 2014 WL 2772731 (N.D. Cal. June 18,
2014), defendants moved for summary judgment for
noninfringement of certain claims based on Akamai,
arguing that the plaintiff could not prove infringement
because those claims required actions by multiple actors.
Id. at *2. As there was no proof of any contractual or
other control by defendant over the other actors, the
court granted summary judgment. Other courts have
been more reluctant to grant summary judgment where
there is at least some evidence of a relationship between
the defendant and other actors that performed some steps
of the claims. Digital Reg of Texas, LLC v. Adobe Systems,
Inc., No. C-12-1971-CW, 2014 WL 2604324 (N.D. Cal.
June 10, 2014).
Entertainment Litigation Update
ABC v. Aereo: Supreme Court Holds that Aereo’s System
of Streaming Television Broadcasts via the Internet
Infringes Copyrights in Programs Broadcast.  On June
25, 2014, the Supreme Court issued its opinion in the
closely-watched case of American Broadcasting Companies,
Inc., et al. v. Aereo, Inc., 132 S. Ct. 2498 (2014). In a 6-3
opinion authored by Justice Breyer, the Court held that
Aereo’s system of streaming television broadcasts via the
Internet violated the exclusive public performance rights
in those programs held by the Petitioners.  Although
this decision protects the intellectual property rights of
content providers, it could have a chilling effect on means
for delivering multimedia content.
Aereo provided a system through which its subscribers
could watch over-the-air television shows via the Internet,
including on mobile devices, at virtually the same time the
shows were being broadcast. When an Aereo subscriber
selected a program, an antenna operated by Aereo at a
central location would tune to that show. Aereo would
then record the program and stream it to the subscriber’s
device with a delay of only a few seconds. Each of Aereo’s
thousands of antennas was devoted to only one user at a
time, and each recording was streamed only to that one
Petitioners—television producers, distributors and
broadcasters—claimed that such streaming violated their
exclusive public performance rights under the Copyright
Act of 1976. The Court had to determine, first, if Aereo’s
streaming constituted a performance and, second, if such
a performance was “public.” The majority answered yes to
both questions.
Aereo contended that it did not “perform” any of the
copyrighted works because it did “no more than supply
equipment that emulate[d] the operation of a home
antenna and digital video recorder (DVR).” It argued that
its equipment simply responded to subscriber directives
and, therefore, it was the subscribers who “performed”
the work when streaming television programs. The Court
flatly rejected this argument based on the legislative
history of the Copyright Act. The Act was amended in
1976 to address community antenna television (CATV)
systems (the precursor to modern cable systems) that had
previously been deemed outside its scope. Aereo, like cable
providers, used its equipment to receive programs that had
been released to the public and transmit them to users via
private channels. Due to what it called an “overwhelming
likeness” between Aereo and cable companies—despite
“technological difference[s]”—the Court determined that
Aereo’s streaming constituted a performance.
Aereo also claimed that it did not perform the works
“publicly” (if they were performed at all) because each
program was recorded for a specific subscriber and
streamed only to that individual. The Court disagreed.
Regardless of whether a particular recording was streamed
to one user or multiple users, Aereo’s conduct was found
to fit within the meaning of a public transmission under
the Copyright Act. The Court again relied on Aereo’s
similarity to cable TV providers, noting that technological
innovations “do not render Aereo’s commercial objective
any different from that of cable companies. Nor do
they significantly alter the viewing experience of Aereo’s
subscribers.” Further, the Court held that a “public”
performance could be received by different members of
the public at different times.
The Court attempted to tailor its decision narrowly
to the particular technology at issue, expressly avoiding
a discussion of cloud computing, remote-storage DVRs
or “other novel issues not before the Court.” However,
Justice Scalia noted in a dissent that this decision could
“sow confusion for years to come” as to how the Copyright
Act applies to new technologies that are challenging
the traditional methods of transmitting content to
consumers. Q
Victory over Auditors for Parmalat
On June 25, 2014, Quinn Emanuel obtained a
major victory in the U.S. Court of Appeals for the
Seventh Circuit on behalf of Dr. Enrico Bondi,
the Extraordinary Administrator (akin to a U.S.
bankruptcy trustee) of the estate of Parmalat.   The
Seventh Circuit reversed a judgment against Dr.
Bondi and ordered that the case should proceed anew
in Illinois state court.
Parmalat collapsed in 2003 after revelation of fraud
undertaken by several high-ranking insiders.  In 2004,
the firm filed suit on Dr. Bondi’s behalf in Illinois
state court against Parmalat’s auditor Grant Thornton
S.p.A. and its affiliated U.S. and international entities.
The suit asserted causes of action for, among other
things, accounting malpractice in failing to detect
and to report the fraud.   Grant Thornton removed
the case to the U.S. District Court for the Northern
District of Illinois (“N.D. Ill.”) as related to a Parmalat
bankruptcy proceeding that was then pending in
the U.S. District Court for the Southern District of
New York (“S.D.N.Y.”); Dr. Bondi’s case was then
transferred to S.D.N.Y. Although a federal statute,
28 U.S.C. § 1334(c)(2), provides for mandatory
abstention and remand to state court of a case like Dr.
Bondi’s if it can be “timely adjudicated” in state court,
S.D.N.Y. denied Dr. Bondi’s motion for that relief.
S.D.N.Y. then denied Dr. Bondi’s request to take an
immediate appeal. The case proceeded on the merits
in S.D.N.Y., and, several years later, S.D.N.Y. granted
summary judgment against Dr. Bondi on the ground
that Illinois’ in pari delicto (in equal fault) doctrine
is a complete defense to Dr. Bondi’s action; the
court reasoned that the former Parmalat insiders had
participated in the fraud on behalf of the company,
and that Dr. Bondi stands in the company’s shoes and
cannot sue other alleged collaborators in the fraud.
Quinn Emanuel filed Dr. Bondi’s appeal to the
U.S. Court of Appeals for the Second Circuit, and
persuaded the Second Circuit to reverse S.D.N.Y.’s
judgment on the ground that S.D.N.Y. should have
abstained from exercising jurisdiction; the Second
Circuit instructed S.D.N.Y. to transfer the case back
to N.D. Ill. so that court could in turn remand the
case to Illinois state court. The case was transferred
back to N.D. Ill., but, before that court remanded
the case to Illinois state court, Grant Thornton filed a
motion requesting N.D. Ill. to retain jurisdiction and
to enter judgment in Grant Thornton’s favor. Grant
Thornton’s asserted basis was that a recent decision by
the Seventh Circuit had clarified what previously was
unsettled Illinois law on in pari delicto.
The firm then filed another appeal on Dr. Bondi’s
behalf, this time to the Seventh Circuit. Dr. Bondi’s
brief argued that N.D. Ill. lacked authority to revise
the Second Circuit’s judgment; that the Second
Circuit’s mandatory abstention ruling is correct and
not drawn into question by the recent Seventh Circuit
decision; and that, on the merits (which the Second
Circuit had not needed to reach), Dr. Bondi’s case
should survive summary judgment because, among
other reasons, in pari delicto does not typically apply
to bar a claim against a company’s auditors. The case
was argued on May 27, 2014, and, on June 25, 2014,
the Seventh Circuit issued a published opinion (by
Judge Posner) that accepted Dr. Bondi’s argument
that N.D. Ill. had erred in departing from the Second
Circuit’s instruction to send the case back to Illinois
state court.  The case is now active in Illinois state
Antitrust Victory for DIRECTV
A Los Angeles Superior Court Judge recently granted
Quinn Emanuel client DIRECTV’s Motion for
Summary Judgment on a former retailer’s antitrust
claims brought under California’s Cartwright Act.
The Court concurrently denied the Motion for
Summary Adjudication brought by plaintiff Basic
Your Best Buy. The Complaint alleged that Basic
was one of DIRECTV’s largest retailers who, as of
2007, was selected by DIRECTV to be the only
retailer allowed to advertise DIRECTV’s products
and services in telephone directory listings, such as
yellow and white pages. Basic invested millions of
dollars in these directory listings, which, according to
Basic, generated 60,000 – 80,000 calls per month. In
late 2008, DIRECTV terminated Basic as a retailer
pursuant to the terms of the parties’ agreement, at
which time other DIRECTV retailers expressed
interest in buying the calls or “sales leads” generated
by Basic’s directory listings, which used DIRECTV’s
trademarks and logos. According to the complaint,
DIRECTV coerced its retailers into agreeing not to
bid on or purchase Basic’s sales leads under threat
of termination, such that DIRECTV was the only
potential purchaser for Basic’s calls, which, according
to Basic, DIRECTV was able to purchase at a
reduced price. The Complaint alleged that had Basic
been able to sell these calls to other retailers, it could
have made nearly $30 million over the life of these
directory listings and, therefore, Basic was seeking
approximately $90 million after trebling.
In granting DIRECTV’s Motion for Summary
Judgment, the Court found that the case involved
vertical restraints on intrabrand competition, which
are tested under the rule of reason, requiring plaintiff
to establish, among other things, an anticompetitive
purpose, harm to interbrand competition, antitrust
injury and market power in a relevant market. The
Court found that plaintiff had failed to establish a
triable issue of material fact for any of these elements.
The Court also rejected plaintiff’s “monopsony” theory
(i.e., a single buyer with market power) as unsupported
speculation. The Court rejected Basic’s arguments
that DIRECTV is in a horizontal relationship with
its retailers and that its conduct should be treated as
illegal per se based on theories of price fixing, finding
the argument “unpersuasive.”
Quinn Emanuel Reforms RMBS Indenture
In July 2014, Quinn Emanuel obtained a landmark
victory on a question of first impression in New
York regarding whether an RMBS indenture can
be reformed nine years after execution to correct
a scrivener’s error that reversed the priority of two
classes of notes. The case was initiated by Wells Fargo
Bank, N.A., as Securities Administrator of the RMBS
Trust governed by the Indenture, seeking judicial
instruction on how to handle a discrepancy that had
become apparent between the Indenture and the
related marketing materials regarding the allocation
of losses as between two classes of notes. The firm’s
client, Sceptre, LLC, had purchased Class I-A-2 Notes
governed by the Indenture, which were intended to be
senior to the Class I-A-3 Notes in the capital structure.
Under the Indenture, the Class I-A-2 Notes and
Class I-A-3 Notes received distributions of principal
and interest on a pari passu basis and, consequently,
such distributions created no difference in the risk
profile of these two classes of Notes. The factor that
differentiated the Class I-A-2 and Class I-A-3 Notes
in terms of risk was the allocation of losses to these
notes. The notes were marketed pursuant to offering
materials, including a Prospectus Supplement, which
provided that any losses attributable to these two
classes of notes would be allocated first to the Class
I-A-3 Notes and then to the Class I-A-2 Notes,
evincing the intended seniority of the Class I-A-2
Notes. However, the Indenture governing the notes
inadvertently reversed the loss allocation as between
these two classes, allocating losses first to the Class
I-A-3 Notes and then to the Class I-A-2 Notes, in
apparent contradiction to the offering materials
pursuant to which the notes were marketed and sold.
Quinn Emanuel successfully argued, over the course
of a three-day bench trial, that the Indenture’s loss
allocation provision was the result of a scrivener’s error
and that the Indenture should be reformed to allocate
losses first to the Class I-A-3 Notes and then to the
Class I-A-2 Notes, in accordance with the Prospectus
Supplement. Reformation was opposed by a Class
I-A-3 Noteholder on the basis that the inconsistency
between the Prospectus Supplement and the
Indenture had been publicly-available in the market
for years and that reformation was inappropriate now
that secondary note purchasers had acquired the notes
with knowledge of the inconsistency. Quinn Emanuel
nonetheless convinced the court that there was “clear
and convincing” evidence that the Indenture’s loss
allocation provision was the result of a scrivener’s
error that did not reflect the true intent of the deal
and that there were no inequities to secondary market
purchasers that would result from reforming the
Indenture to correctly allocate losses as per the intent
of the original dealmakers. The firm also successfully
argued, and the Court concluded, that the Indenture,
when read together with the offering materials, was
ambiguous on its face and should be construed to
provide for losses to be allocated first to the Class
I-A-3 Notes and then to the Class I-A-2 Notes, as set
forth in the Prospectus Supplement. Based on Quinn
Emanuel’s presentation at trial, the court issued a
decision requiring the Securities Administrator to
reform the Indenture to allocate losses first to the
Class I-A-3 Notes and then to the Class I-A-2 Notes,
as set forth in the Prospectus Supplement, thereby
restoring the seniority of Sceptre, LLC’s Class I-A-2
Notes. Q
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Published by Quinn Emanuel
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