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29 Sep 2017
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Unchartered Patent Territory: Allergan and Native American Tribe Sovereign Immunity

In an effort to protect a patent for the eye drops Restasis, Allergan PLC found a loophole around the Patent Trial and Appeal Board (PTAB) to safeguard the product from generic production. Allergan discovered that if they transferred the patent to a Native American tribe, who have sovereign immunity, the drug in question could not be reviewed by PTAB as it is outside the body’s jurisdiction. This idea originates from a case before the PTAB involving the University of Florida and Covidien LP regarding computer systems patents that ultimately could not be challenged because the university is a sovereign entity. Allergan adapted this cheeky tactic, which will only be “the tip of the iceberg”.

The company sold its ownership of the patent to the Saint Regis Mohawk Tribe and the tribe in return granted Allergan an exclusive license. In 2016 Restasis brought in roughly $1.5 billion in revenue, which would significantly decrease in following years if their patent was challenged. So how could this deal benefit the Tribe? Allergan agreed to license the patent for $13.75 million in addition to paying an annual $15 million in royalties.

Patents grant an exclusive right to the innovator or owner and due to the lack of direct competition with a new product pharmaceutical companies have a tendency to set high prices. Once the patent expires or if it is challenged under the Hatch-Waxman Act (which permits generic drug manufacturers to expedite approval for products with a biosimilarity to the original drug) the price of the drug falls as competition increases. Allergan’s efforts to avoid their drug patent from being challenged will safeguard the eye drops high price and ultimately bring in greater revenue.

The question remains whether this is permissible? It will create various hurdles for Congress, the PTAB, and generic drug manufacturers. A professor at Washington University, Rachel Sachs, explains that it is unlikely that Congress could have “envisioned that many patent owners would seek to transfer their patents to a tribe only to insulate themselves from IPR [inter parties review] review”. If Allergan wins, it will only be the beginning of pharmaceutical companies taking advantage of sovereign immunity to keep drug prices high, which fundamentally negates legislation that protects access to affordable medicine, such as the Hatch-Waxman Act.  It also poses the risk of opening the floodgates of litigation proceedings challenging the decision. If the issue gains significant traction Congress will need to regulate the loophole of sovereign immunity in regards to patents through legislation. 

29 Sep 2017
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Sag Harbor: The End of the Hill

Sag Harbor, situated towards the end of the South Fork of Long Island, is filled with a vibrant history, culture, and sought after real estate. Algonquin Indians were the first settlers in the areas and named the two square miles “Weg-quae-and-auke” which translates to the land or place at the end of the hill; a name fitting to this day as the village’s main street sits on a slope. Although the Hamptons have seen a significant transformation from luxury real estate to upscale shops, the village of Sag Harbor has retained its charm. The New York Times explains that “despite the flood of big money that continues to sweep the East End from Quogue to Montauk, [Main Street] retains its small-town aura.”

However, the small village has not been immune to change. The area’s real estate has become highly desirable as New Yorkers look for an escape from the City with excellent views of Gardiners Bay, Northwest Harbor, Sag Harbor Bay, and Noyac Bay. Sag Harbor is known for its shingled houses from the 1900s, but buyers have transformed a portion of the real estate market by developing more modern and larger homes. Older homes sell at around $600,000 but the new luxury homes on the waterfronts can go anywhere up to $30 million. The median price is around $1.65 million, and for larger, more modern homes with spacious outdoors buyers pay over $3 million. Although many buyers purchase homes for weekends and holidays, the area does not have a high renters market like in other parts of the Hamptons. Sag Harbor attracts New Yorkers who want to invest in the area and not just for the summer months.

This small village vibe keeps the culture rich. John Steinbeck lived in Sag Harbor in the late years of his life and the village influenced his works such as The Winter of Our Discontent where he wrote: “grab anything that goes by. It may not come around again.” Although Steinbeck could not have predicted the real estate boom in the Hamptons, he definitely had a point. As we have previously discussed, property in the Hamptons is running scarce as free parcels of land have been preserved for agricultural purposes and parks instead of the development of new holiday homes. In Sag Harbor, developers have had to work with the community and compromise on plans. A parcel of land has been split to develop a thirteen-unit condo but also keep enough space for the new John Steinbeck Waterfront Park. Sag Harbor Partnership board member, April Gornik, notes that this is “a compromise well worth making, and, frankly, I just give the village mayor and the Village Board of Trustees credit for having persisted in maintaining obviously friendly talks with the developer. I also give the developer credit for recognizing that this means so much to the community.” Although land in Sag Harbor has become an attraction to developers and buyers, the small village is eager to protect its charm.

22 Sep 2017
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Equifax Security Breach: The Impact on Investors

Equifax disclosed that it occurred a data breach on September 7, 2017, which impacted 143 million Americans. The New York Times adequately explains the magnitude of the recent Equifax data breach:

“Equifax warehouses the most intimate details of Americans’ financial lives, from the credit cards in their wallets to the size of their medical bills. But the company doesn’t face the constant monitoring and auditing that help strengthen banks’ systems and data protections. Despite the wealth of sensitive information in its database, Equifax, in essence, falls through the regulatory cracks.”

The compromised data included sensitive information such as Social Security numbers, credit card information, birth dates, and addresses. Equifax is now facing a variety of potential legal action. Consumers have brought a class action and there are clear regulatory failures that the company must face, however, for the purposes of this blog we are going to discuss the different types of claims investors can bring against Equifax.

Law360’s Pro Say podcast invited Carmen Germaine, a Senior Securities Reporter, to discuss the different legal avenues available to investors. Investors can bring two types of claims, the first being an investor class action, where the investors allege the company committed securities fraud and the investors in turn suffered economic loss. Here, investors are alleging that the company knew or ought to have known that the cybersecurity was insufficient, concealed its defects, or lied to investors about how the security quality. The second option is a derivatives lawsuit where investors allege that the company’s board of directors breached their fiduciary duty and knowingly used inadequate cybersecurity measures or actively attempted to harm the company and its investors. Germaine explains that these cases are hard for investors to bring because in class actions there needs to be a drop in the company’s stock price to claim damages, and typically companies who disclose data breaches do not see a shift in their stock price, and derivative suits need to demonstrate that the board of directors intentionally harmed the company or were negligent.

Showing a loss to the investors’ bottom line is not difficult here. Equifax’s stock decreased by 14 percent from the time they disclosed the data breach to when the market opened, giving investors proof of economic loss. Over the past three months the company’s stock steadily remained around $140, but on September 7, 2017 the stock took a significant dive and dropped to its lowest point in the past year on September 15 to $92.98. There have also been other factors that will help investors bring a claim. Equifax was hacked in May of this year, but was aware of their cybersecurity vulnerabilities in March and did not disclose the breach until September. This will bring up issues with the Securities and Exchange Commission (SEC) as they investigate whether Equifax took too long to disclose the information and if they took the appropriate measures to safeguard their systems. There have also been accusations that executives of the company committed insider trading as they sold around $1.8 million of stock a couple of days after the breach was discovered. Germaine points out how these executives most likely did not trade based on the non-public material information, however, this will still give weight to a derivatives law suit. It will exemplify how the executives were either not made aware of financially pertinent material after a data breach in their company when they should have been made aware, or that they knew and traded based on that information.

22 Sep 2017
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Co-op and Condo Common Funds

Shareholders and owners of co-op and condo units pay maintenance fees (or common charges) every month, but what are these payments going to and how can board members safeguard these funds? Co-op and condo boards owe shareholders and unit owners a fiduciary duty to protect their assets and use the common funds appropriately. Common funds make up the building’s operating account, reserve, and petty cash, and board members are responsible for allocating the funds appropriately.

The maintenance fee amount depends on the building and whether it is a co-op or a condo, but can range from the hundreds to the thousands. Co-ops tend to have higher fees as they are determined by the percentage of shares each shareholder owns and incorporate the building’s real estate tax. Condo owners own the title of their property separately so these fees are not added onto their common charges. Typically the sale price of a unit and the maintenance fees have an indirect relationship; apartments will sell for more if the maintenance fees are low. However, as new luxury buildings offer more amenities such as pools, gyms, spas and doggy-day-care, buyers have seen a dramatic increase in maintenance fees to contribute to a building’s common funds.

So what are common funds meant to contribute towards? Operating funds must be set aside to manage the building. This includes building maintenance, water and heat bills, repairs, staff salaries, management fees, and any other general expense the building has. In the co-op or condo’s governing documents there will be provisions setting out what building is obligated to maintain and repair, which would come out of the building’s operating account unless it is a bigger project. The building’s reserve is allocated for larger repairs and maintenance such as for the roof, sidewalks and courts, roads, and the building’s exterior. The Cooperator explains how the board will hire an engineer or architect to evaluate the condition of the building and determine how much future repairs and replacements will cost and when they will need to happen.  The petty cash fund is useful for small building expenses and the board should keep its balance low.

Board members must be diligent and safeguard the building’s funds. The Treasurer should examine monthly expenses to make sure funding was spent on approved services and to prevent board members using the fund for personal use. Even if a board hires an external management agency, the Treasurer should still have oversight of all expenditures and the board should still approve all projects and expenditures. The Cooperator urges board’s to be as transparent as possible with the building’s funds, which can be done by “using an accounting firm for monthly accounting duties when the association is self-managed or having an annual audit or review”. This provides a further layer of accountability for board members and security for the shareholders or unit owners.

20 Sep 2017
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New Development in Alphabet City

Alphabet City extends from 14th Street to Houston Street, in between Avenue A to Avenue D. Historically the area has always been diverse. German immigrants first developed the area in the 1800s, and later in the 1900s Irish, Italian, Jewish communities were established in the neighborhood. By the 1980’s a large number of Puerto Ricans settled in the area, many of whom were artists and musicians who helped establish the creative culture of the area. Additionally, the area is known for Tompkins Square Park, the Nuyorican Poets Café, galleries, cafes, and now for its apartments.

In recent years, Alphabet City has attracted developers and young buyers. Although the history of the area was once marred by drugs and violence (New Yorker’s coined different names for each avenue such as Alive, Breathing, Comatose, Dead), the growth of real estate developments and a vibrant artistic culture have transformed the area, making it a very sought after location to live. For instance the Flowerbox Building, the first luxury condo off Avenue D, developed by Seth Tapper and designed by Derek Sanders in 2007, is renowned for the flowerboxes on every window.

“The building’s name – along with its inspiration – was based on the idea that in any neighborhood, flowerboxes in windows are a sign that residents care about their building and their neighborhood.”

In 2014 the Adele, a luxury rental building, was developed and provides spacious, light, and modern apartments with excellent views. This up-scale building on Avenue D illustrates how development in the area has helped transform it to an attractive neighborhood to live. New developments are already underway, such as Extell Development Company who is constructing a new 106-unit building between Avenue A and B. Doug Steiner, developing a condo building on East 12th Street and Avenue A, initially had trouble securing financing since the “project was so unprecedented for the area”. The new development with large floor plans has secured a number of buyers who are expected to move in by the end of 2017. Curbed reports that these condos will be sold from $1.675 million and $5.395 million. Avenue D, once known for being dangerous, has become a highly desirable location.

Although there are many positives stemming from the residential growth of the neighborhood, some critics have been concerned that this new wave of development will make the area unaffordable for long term residents. The Housing Development Fund Corporation, run by the New York City Department of Housing Preservation and Development (HPD), has developed “tens of thousands of affordable homes as shareholder-owned … cooperatives” to help bridge the gap for affordable housing. Article XI of the Private Housing Finance Law requires that these co-ops are reserved for people or families whose incomes are not more than 165 percent of area median income (AMI), although some co-ops will have lower thresholds such as 120 percent AMI. In exchange for providing units to people under a certain income, HDFC co-ops benefit from paying less real estate taxes. HDFC buildings have become an important part of Alphabet City as these co-ops account for 40 percent of the housing. As new development boosts the real estate market and prices in the area, HFDC buildings maintain affordable housing for residents.

15 Sep 2017
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The SEC’s Response to Hurricane Irma and Hurricane Harvey

Hurricane Irma created unfathomable damage across the Caribbean and the southeastern United States. As organizations and government bodies commit to rescuing people and rebuilding communities, the Securities and Exchange Commission (SEC) has guaranteed to safeguard capital markets in the midst of implementing new trading regulations.

SEC Chairman, Jay Clayton, announced that the SEC “will be closely monitoring the effects of Hurricane Irma.” He continued, “[w]e will be making sure investors have access to their securities accounts, evaluating the need to extend deadlines for filings and other regulatory requirements, and keeping a watchful eye for storm-related scams”. The SEC, during this devastating time, has committed to continue protecting the interests of investors and the capital markets. Although the SEC’s Miami office is closed, individuals in Florida, Mississippi, Louisiana, U.S. Virgin Islands and Puerto Rico can contact the Atlanta regional office.

The SEC has been mindful of the loss people have experienced and has stated they will “evaluate the possibility of granting relief from filing deadlines and other regulatory requirements” to those impacted by Hurricane Irma and Hurricane . The Financial Times commented on Chairman Clayton’s populist shift as the SEC focuses on “Main Street” investors or “Mr and Ms 401-k”. Protecting everyday investors is particularly important in times of strife. As cyberattacks frequently threaten investment firms, Chairman Clayton explained that “If a company is being responsible … I don’t think we should be punishing them for being a victim.” The rhetoric of the SEC in response to the hurricanes is similar in that they are willing to give investors the relief necessary in the midst of uncontrollable circumstances.

As of late, the SEC has been determined to integrate new methods to create greater efficiency in the market, even during the chaos brought by the storms. The SEC’s amendment to Rule 15c6-1(a) of the Securities and Exchange Act 1934 to limit the timeframe to settle broker-dealer securities transaction from three business days to two has officially been enforced since September 5. The amendment is a promising step from the SEC to evolve in light of today’s new technology, which our economy is becoming increasingly reliant on.  Commissioner Kara Stein noted that this “shortened settlement cycle benefits investors and contributes to the resiliency of our securities market”.

[1] https://www.sec.gov/news/press-release/2017-164

[2]

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15 Sep 2017
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Co-op vs. Condo: New York’s Real Estate Battle

We have previously discussed the impact of the condo boom in New York City, which has led to a myriad of empty units and developers cutting sale prices. However, one thing these new luxury condos are not competing with are co-ops, especially pre-war co-ops on the Upper East Side. Apartments from East 59th to Eat 96th streets and Fifth to Lexington Avenue were once the most sought after units. The Upper East Side has been known for its spacious and prestigious buildings, so why are the sale prices continuing to drop? The answer is simple: Competition.

New developers who took advantage of the aftermath of the 2008 recession created a new market of luxury living. These condos are spread throughout the city giving buyers more options in regards to location. Developers built properties in trendy neighborhoods, which has lured particularly young professionals. Kirk Henckles, a broker for Stribling & Associates, told The Real Deal that the move to downtown neighborhoods is a “seismic shift in residential preference. This is not a trend.” The condo boom is even beneficial for potential buyers as condo prices drop, ultimately forcing co-ops to sell at lower prices. People are eager to live in lively neighborhoods and not sit through the intense vetting process by a co-op board. Not only do potential buyers have to receive co-op board approval before purchasing the shares that give them the right to live in their unit, it is also more difficult to sublet your apartment, permit children to live there on their own, take out a reverse mortgage, and transfer shares into a trust.

Lisa Lippman, a broker with Brown Harris Stevens, explained that the Upper East Side “used to be the only game in town … If you needed a 5,000-square-foot space – a really large, beautiful apartment – your only option was to buy in a fancy building on Park Avenue or Fifth.” However, that is no longer the case as new condos downtown are built to be spacious with a lot of natural light. Data shows that from the period between 2012 and the first half of 2017 only 153 co-op contracts were signed (for units greater and equal to $4 million) as opposed to the 466 condo contracts. So although luxury condos are facing fierce competition with one another, they are not threatened by pre-war co-ops on the Upper East Side.

So how are co-op boards adjusting to the shift in the market? Co-op boards on the Upper East Side have adjusted their standards. Larry Kaiser, for Berkshire Hathaway Home Services New York explains that years ago boards were more concerned with the potential buyer’s familial lineage, whereas now the focus is on the individual’s financial history and ability to pay maintenance fees.  Co-op boards need to ease the interview process for new buyers to be truly competitive with condos. Co-op boards especially lose out on foreign buyers who make up roughly 20 percent of the market because boards are unwilling to take the financial risk.  Nonetheless, regardless of the dip in the co-op market on the Upper East Side there are still eager buyers. The development of the Second Avenue subway has made it easier for residents to commute and has attracted new buyers. Apartments sold east of Third Avenue have become increasingly more affordable as they sell on average of $1,855 per square foot.

08 Sep 2017
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The Risks of Breaching Antitrust Regulations

European competition law and policy is regulated by the European Commission. EU competition law is enforced to provide a free, fair and efficient integrated market, enhance consumer welfare, and to provide market structure.

Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits undertakings (entities engaged in an economic activity) from exploiting a dominant position in the market. The EU Commission notes that these dominant undertakings must “ensure that its conduct does not distort competition.” However, in recent years, big tech companies such as Intel and Google, which dominant their industries, have pushed the limits of existing competition law.  Many such laws, were written prior to the age of modern technology.

In June, the European Commission fined Google $2.7 billion for abusing its dominant position under Article 102. The EU Commission found that Google holds a super-dominant position in the internet search market in the EEA (except for the Czech Republic), which exceeds 90 percent.  The undertaking abused its dominant position and directly breached Article 102 by placing its own shopping service above its competitors. The Commissioner for competition, Margrethe Vestager explained:

What Google has done is illegal under EU antitrust rules. It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation.

The general counsel for Google, Kent Walker, noted that this exemplifies the Commission’s willingness to fine large American tech firms companies. This wasproven to be true, yet again, as on Wednesday September 6, 2017, Intel was fined $1.3 billion for abusing its dominant position in the microchip market by giving preferential treatment (such as rebates) to computer developers who used Intel’s product. Although there is criticism that the EU Commission is unfairly targeting large tech companies, the real issue is that they are abusing their dominant positions in the market.

EU competition laws are stricter than antitrust laws in the U.S., however, it is not illegal to hold a dominant position under EU law. The breach of the TFEU arises once these companies use their position to unfairly gain an advantage in the market. Article 102 prohibits the following types of abuse:

  • Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
  • limiting production, markets or technical development to the prejudice of consumers;
  • applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
  • making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Therefore, the EU Commission is unlikely to change its behavior towards these large tech companies that commit one or more of these abuses. Perhaps in the future the Commission will adjust how it deals with the tech industry, which is increasingly expanding, but for now these companies need to abide by the competition regulations set in place in each jurisdiction.

08 Sep 2017
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New York City Real Estate Forecast

Recently, in New York City there has been a development boom of luxury high-rise buildings. In the aftermath of the 2008 recession developers and buyers were eager to boost the real estate market, however, developers outnumbered the buyers, and today there are too many empty luxury buildings.

What does this mean for renters this fall? Landlords and developers are continuing the trend of incentivizing new renters with concessions, such as two months free rent or no deposits. Although landlords are unwilling to cut rent prices, the median rent for Manhattan apartments with a doorman (without the concessions) have actually decreased over the past year from $3,899 to $3,875. Manhattan properties without a doorman however have seen a slight increase over the same time period, from $2,932 to $3,000. These new luxury buildings without doorman tend to have extra costs associated due to location and the technology infrastructure implemented to maintain building security.

The real estate market, although still strong, will likely see a dip in luxury rental prices since landlord concessions are not sustainable for the long term. Commentator, Jonathan Miller, explains that:

“What’s happening is that the concessions for about the last 10 months have been unusually high, but they’re not steadily climbing … I think the reason for that is that where they’re sitting is this threshold where, if it’s higher than that, then the tenants are concerned that if the concessions are removed [when it comes time for lease] renewal, they won’t be able to afford the apartment.”

Therefore, it is predicted that the rent for these luxury developments will eventually decrease to accommodate the needs of the market. However, for the time being, it is a renter’s market for luxury properties, especially in areas where there is an over saturated market. As we discussed in our previous blog, condos and luxury rental developers need to adapt to this new market before empty units lead to a loss of profits (read the blog here).

As plans for the L train shut down in April 2019 move forward, condo sale prices in Williamsburg have dropped by 13 percent and 43 percent more condos were sold from April to June 2016 compared to 2015. Although these residents will not be impacted from the train shut down until 2019, there has already been a noticeable shift in Williamsburg’s real estate market. Luckily it is now a good time for buyers looking to relocate to Manhattan.

In today’s economy, where interest rates are at a low, it is a good time for potential buyers to take out a mortgage to purchase their next home. Robbie Gendels, VP and loan officer at National Cooperative Bank, told Brick Underground that currently rates for co-ops and condos in the City are at 3.875 percent. This is ideal for potential buyers who need to take out a mortgage, but as the economy strengthens interest rates will rise, therefore it is key to buy now.

06 Sep 2017
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The Complexities of Small Co-ops and Condos

Small residential properties, whether co-ops or condos, can be difficult to manage. There is an overwhelming sense of community, but also fewer people and less funding compared to residential high rises in New York City. Board meetings are smaller and personalities can be larger, making it difficult to resolve the myriad issues that plague residential buildings. Conversely, because there are fewer people, board meetings can also be more intimate, casual, and open. So what is the best way to cope with your neighbors in a small property?

Smaller properties have a greater sense of culture and community. Ms. Braddock of William Raveis told the New York Times that in smaller co-ops “[y]ou have to consider how you fit with the building’s dynamic and whether the shareholders share your beliefs about how to handle problems”. Residents in small buildings are usually more involved with the day-to-day maintenance of the property. The key to success is participation. Residents need to be available to attend board meetings, be willing to contribute in the decision making process, and most importantly, pay their maintenance fees and common charges on time.

Naturally, smaller properties have less funding making it difficult to attract managing agents. Jeffrey Stillman, vice president of Stillman Management, told The Cooperator that these smaller properties are not “cost effective” as agency fees are around $20,000 to $25,000, which is a greater burden for small buildings. However, luxury co-ops and condos do not usually face this problem as residents typically have the resources to hire a managing agent. Managing agents do everything from collecting common charges, paying bills, maintaining permit deadlines, hiring architects, and handling large construction projects. Managing agents can take a large burden off residents’ shoulders as self-management is akin to having a second job.

In small buildings, a lack of funding also becomes a problem when the property needs to undergo extensive work, such as repairing a leak in the roof or the exterior of the building. These repairs are expensive and more weight is put on each shareholder or property owner. It is important to consult with experienced professionals in case of an emergency. Managing agents, or even firms who specialize in helping self-managed co-ops and condos usually have existing relationships with engineers and contract workers, making it easier for co-op and condo boards to make repairs.

Tight quarters can bring the worst out in residents, especially when sharing amenities such as the washer and dryer. To avoid future feuds it is important to ensure the building has enough resources for the amount of people on the property. Having one washer and dryer in a five-unit property might be enough if each unit only has one resident, but is woefully insufficient for people who have families.  As board members of a small property, it is important to guarantee that reasonable needs of residents are met. Fortunately technology today has been able to ease the burden of small buildings such as by installing virtual doormen, key lock boxes, and arranging dry cleaning services for the property.

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