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Jenner & Block is excited to introduce “The Spotlight,” an electronic monthly newsletter from the Litigation Department Co-Chairs, Craig C. Martin and David J. Bradford, designed to highlight recent cases and legislative developments from across the United States. Additionally, The Spotlight recaps the high impact Litigation Department news, upcoming events and publications of interest.
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Interlocutory Appeal From Interim Arbitration Ruling Not Permitted.
By: Howard S. Suskin
A district court erred by prematurely entertaining an interlocutory challenge to an ongoing arbitration proceeding. Savers Prop. & Cas. Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburg, PA,Nos. 13-2288, 13-2289 (6th Cir. Apr. 9, 2014). One party to the arbitration raised multiple objections to the arbitrators’ procedural rulings, including allegations of arbitrator misconduct and partiality. The district court enjoined the proceedings, but the appellate court reversed. The court of appeals concluded that based upon the text, structure and purpose of the Federal Arbitration Act (FAA), the district erred in entertaining an interlocutory challenge to an ongoing arbitration proceeding. Parties to an arbitration generally may not challenge the fairness of the proceedings or the partiality of the arbitrators until the conclusion of the arbitration and the rendition of a final award.
New Arbitration Clause Does Not Cover Case Already Pending In Court.
By: Howard S. Suskin
An employee who signed an arbitration clause which covered only individual claims filed a wage and hour class action on behalf of similarly situated employees. The employee subsequently was asked to sign an updated arbitration agreement, which covered class claims. The employer moved to compel arbitration of the pending class action, but the district court refused and the court of appeals affirmed. Russell v. Citigroup, Inc., No. 13-5994 (6th Cir. Apr. 4, 2014). The court of appeals observed that the new agreement covered only disputes that “arise between [employee] and [employer]”, and the use of the present-tense “arise” suggested that the contract governs only disputes that begin in the present or future. The employee testified that this was his intent as well. Looking at the backdrop of the contract as a whole, the situation of the parties and the conditions under which the contract was written, the court concluded that the new arbitration clause did not apply to the pending class action claims.
Supreme Court Holds That Arbitrator, Not Court, Adjudicates Arbitration Precondition.
By: Howard S. Suskin
In disputes involving a multi-staged dispute resolution process, the arbitrator, not a court, determines whether a precondition to arbitration has been satisfied. BG Grp. PLC v. Republic of Arg., 134 S. Ct. 1198 (2014) (No. 12-138). Here, a treaty between the United Kingdom and Argentina required aggrieved investors to pursue claims against either of the two countries in the host country’s courts for at least 18 months before resorting to arbitration. An investor invoked the arbitration clause without first filing a claim in an Argentine court. The district court denied Argentina’s motion to vacate the arbitral award, rejecting the argument that an arbitration precondition had not been satisfied. The appellate court reversed. It found that the court was empowered to determine that the arbitrator was wrong to exercise jurisdiction over the dispute. The Supreme Court agreed with the district court, and found that the precondition was a matter for the arbitrator to interpret and apply, and the courts should review the arbitrator’s interpretation with deference.
Arbitration Clause Does Not Survive Entirely Superseding Contract.
By: Howard S. Suskin
Where a subsequent contract that is silent about arbitration entirely supersedes a prior contract that contained an arbitration clause, the arbitration clause does not survive. Dasher v. RBC Bank (USA), 745 F.3d 1111 (11th Cir. 2014) (No. 13-10257). The case involved a suit by bank customers complaining about excessive fees. The customers had an account agreement with a predecessor bank that contained an arbitration clause, but their agreement with the successor bank was silent about arbitration. Finding that the successor bank’s agreement clearly stated that it superseded all prior versions, the court concluded that the arbitration clause did not survive.
General Statements Of Reliance On Advice Of Counsel Don’t Waive Privilege.
In Gardner v. Major Automobile Cos., No. 11 Civ. 1664 (E.D.N.Y. Mar. 31, 2014), the court held that general statements made during a deposition that the Board of Directors relied on advice of counsel did not waive privilege where the company made it clear to the court that it did not intend to rely on an advice of counsel defense at trial. In this breach of fiduciary duty case brought by minority shareholders against officers and directors, plaintiffs deposed defendant’s secretary and general counsel, Keltz. During Keltz’s deposition, plaintiff asked Keltz, among other things, why no special committee had been appointed, and why a second valuation was not necessary. In both cases, Keltz testified generally that the Board had relied on the advice of outside counsel in making those decisions. Plaintiff sought the deposition of outside counsel, arguing that the deposition testimony put the advice of counsel “at issue.” The court disagreed. Here, defendant stated unequivocally to the court that it would not be relying on the advice of counsel in support of either a claim or a defense. Following the Second Circuit’s decision in In re Cnty. of Erie, 546 F.3d 222 (2d Cir. 2008), “at issue” waiver occurs when a party intends to rely on the advice of counsel in support of a claim or a defense, not simply where the advice of counsel may be relevant to an issue in the case. Denying discovery of outside counsel’s communications would not prejudice plaintiffs where, as here, defendant did not intend to rely on those communications in the case.
Tax Court Holds Assertion Of Reasonable Belief Defense Waives Privilege.
In Ad Investment 2000 Fund LLC v. Commissioner, 142 T.C. No. 13 (2014), the U.S. Tax Court held that a taxpayer’s assertion of a “reasonable belief” defense waived the attorney-client privilege. In this case, petitioner taxpayer asserted as a defense to “accuracy related” penalties that he reasonably believed that his tax treatment of partnership items was more likely than not the proper tax treatment at the time of filing. The tax regulations provide two methods for establishing this belief: (1) a “self-determination” method, based on the analysis of facts and authorities at the time of filing; and (2) reliance on the opinion of a professional tax advisor. It was undisputed that petitioner raised only a “self-determination” defense, and clearly stated that he did not intend to rely on the advice of counsel as a defense in the case. The Commissioner sought discovery of any tax opinions reviewed by the petitioner on the grounds that those opinions were relevant to the “good faith” belief asserted by petitioner. Petitioner argued that the statute provides two different methods for proving reasonable belief: one that would waive the privilege and one that would not. The court agreed with the Commissioner, holding that, by putting his “reasonable belief” at issue, petitioner waived privilege over any tax opinions that he received before taking the questioned positions and “presumably before making his alleged self-determination of authorities”.
Communications Among Non-Lawyers Privileged If Made At Lawyer’s Direction.
In Helget v. City of Hays, No. 13-2228 (D. Kan. Mar. 28, 2014), the court held that communications among non-lawyer employees may be privileged so long as they were made in confidence for the purpose of obtaining legal advice. In this employment discrimination matter, the defendant City withheld on grounds of privilege emails among its employees, even where a lawyer was neither the author nor the recipient of the emails. The court denied plaintiff’s motion to compel. The court explained that it is well-established in the District of Kansas that the attorney-client privilege does not require an attorney to have either authored or received the document at issue to maintain the privilege. Organizational clients and business entities are personified by a number of employees. In preparation for, or in the midst of consultations with an attorney, employees may consult one another to gather factual information requested by the attorney. What is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice. Here, it was undisputed that the communications were the direct result of requests by counsel for the City and were for the purpose of obtaining legal advice with respect to responding to plaintiff’s discovery requests.
Non-Testifying Consultant’s Materials Privileged; Affidavit In Lieu Of Log Sufficient.
In Genesco, Inc. v. Visa U.S.A., Inc., No. 13-0202 (M.D. Tenn. Mar. 10, 2014), the court held that a non-testifying consultant’s report was privileged, and that affidavits in lieu of a traditional privilege log were sufficient to assert privilege. This case involved a dispute following a data breach. Plaintiff hired two consulting firms. The first consulting firm was hired pursuant to a contractual obligation with defendant, and the firm’s report was produced to defendant. At the same time, plaintiff’s general counsel engaged outside counsel and a second, non-testifying forensic consulting firm, Stroz Friedberg, to provide advice regarding the data breach and the first consultant’s report. Defendant subpoenaed Stroz for all documents relating to the engagement. Plaintiff’s general counsel submitted a detailed affidavit explaining Stroz’s role and the legal purpose of the engagement, but plaintiff did not submit a traditional document-by-document privilege log. Defendant argued that plaintiff waived privilege by failing to provide a traditional privilege log. The court held that discovery of the Stroz materials was governed by Fed. R. Civ. P. 26(b)(4)(D), which requires a showing of exceptional circumstances before a party may discover materials prepared by a non-testifying consultant. The court found that defendant did not make the necessary showing. In addition, the court held that the plaintiff’s affidavit provided sufficient information to assert privilege over the Stroz work product, and requiring a document-by-document log in this complex, international computer investigation would risk revealing opinion work product and was impracticable and unnecessary to present privilege issues for review by the court and defendant.
Borrower Successfully Blocks Assignment of Loan to Distressed Debt Hedge Funds.
In Meridian Sunrise Village, LLC v. NB Distressed Debt Investment Fund Ltd., et al., No. 13-5503(W.D. Wash. Mar. 7, 2014), the court held that hedge funds acquiring distressed debt did not constitute “financial institutions” for purposes of a loan agreement’s assignment limitation. Prior to bankruptcy, the debtor had borrowed money to construct a shopping center pursuant to a loan agreement. The debtor had negotiated specifically for a provision limiting the lender’s ability to assign the loan to a “commercial bank, insurance company, financial institution or institutional lender.” Following a nonmonetary default, the initial lender requested that the debtor waive the assignment limitation, and the debtor declined. The lender then began charging the default interest rate, which led the debtor to file for bankruptcy.
After the debtor filed for bankruptcy, one of the lenders assigned its interest in the loan, over the debtor’s objection, to funds specializing in the acquisition of distressed debt. The funds argued that the assignment was permissible under the loan agreement because the dictionary definition of “financial institution” included any institution handling and investing funds. Affirming the bankruptcy court, the district court rejected the use of common and legal dictionaries in this context, holding that the parties had intended a narrower meaning of “financial institution” that excluded distressed debt funds. The court explained that the funds’ definition of “financial institution” was unacceptably broad because it encompassed “virtually any entity that has some remote connection to the management of money––up to and including a pawnbroker.” The court also noted that the funds’ broad definition of “financial institution” would render meaningless the provision’s other terms (i.e., “commercial bank,” “insurance company,” and “institutional lender”). The court also highlighted extrinsic evidence supporting its interpretation, namely the lender’s attempts to convince the debtor to permit assignment of the loan to the funds––requests that would have been unnecessary under the funds’ construction. Meridian Sunrise Village is therefore a reminder to both borrowers and lenders not to overlook eligible assignee provisions and to ensure such provisions are drafted clearly to reflect the parties’ intent.
Debtor Permitted To Assume License Agreement But Reject Other Related Agreements.
In In re Physiotherapy Holdings, Inc., 506 B.R. 619 (Bankr. D. Del. 2014) (No. 13-12965), the debtor had entered into several agreements with a consulting company to license certain software. Pursuant to Section 365(a) of the Bankruptcy Code, the debtor sought to assume one of those agreements – the software license – but reject the other agreements, including the master agreement. The master agreement required the debtor to indemnify the consulting company for a wide range of liability including significant post-confirmation litigation. The consulting company argued that the debtor could not assume the license agreement without assuming the other agreements because the agreements together formed a single, integrated contract. The court disagreed and held that the agreements were not a single, integrated contract because (1) the parties executed the agreements at different times, (2) the agreements provided that in the event of a conflict, the license agreement trumped the master agreement, and (3) the integration clause in the master agreement simply eliminated parol evidence and did not render the license agreement a “mere component” of the master agreement. The court also noted that even though the master agreement contained a broad indemnity clause, the license agreement contained a limited one––something that would have been unnecessary had the agreements been integrated. In light of these provisions, the court concluded that the agreements were independent agreements. In re Physiotherapy Holdings, Inc. is a reminder that when entering into multi-agreement relationships, parties should consider whether they want the agreements to be integrated and steps that can be taken to obtain that treatment.
Second Circuit: CAFA Removal Triggered By Specification Of Damages.
By: Michael T. Brody
Defendant removed Cutrone v. Mortgage Electronic Registration Systems, Inc., No. 14-455 (2d Cir. Apr. 17, 2014), to federal court more than 90 days after it was filed. The district court found removal untimely and remanded. The Second Circuit reversed. Following authority in a non-CAFA case, and joining the decisions of other circuits, the Second Circuit held that a defendant’s obligation to remove under CAFA is not triggered until the plaintiff serves an initial pleading or other paper that specifies the amount of monetary damages sought. In this case, neither the complaint nor a later bill of particulars provided sufficient monetary specification. The court held that a defendant also may remove a case when, upon its own independent investigation, it concludes the case is removable. The court found this second basis for removal present in the case, concluded the defendant had timely removed based on its independent investigation, and reversed the remand to state court.
Ninth Circuit Rejects Objector Appeal Bond, Remands Fee Award For Reconsideration.
By: Michael T. Brody
We previously reported that the Tenth Circuit enforced a lower court’s order requiring a class objector to post a sizeable bond to appeal. In In re Magsafe Apple Power Adapter Litigation, Nos. 12-15757, 12-15782 (9th Cir. Apr. 24, 2014), the Ninth Circuit, in an unpublished opinion, reached the opposite conclusion. The district court required each objector to post a $200,000 bond to secure expenses and attorneys’ fees on appeal. The Ninth Circuit found this to be an abuse of discretion. The fee shifting statute applicable in the case did not permit assessing plaintiffs’ fees against objectors. As a result, a bond to secure fees was inappropriate. As to the fee award the objectors challenged, following In re Bluetooth Headset Products Liability Litigation, 654 F.3d 935 (9th Cir. 2011), the Ninth Circuit found the district court had failed to explain why the lodestar amount was reasonable or why a multiplier was appropriate, it did not cross check its lodestar fee against the percentage recovery method, and it failed to address the indicia of self-dealing or collusion as identified in Bluetooth. Thus, the court remanded the case for consideration of the fee issues.
Ninth Circuit Clarifies Merits Review In Class Certification.
By: Michael T. Brody
In Stockwellv. City & County of San Francisco, No. 12-15070 (9th Cir. Apr. 24, 2014), plaintiffs claimed the police department’s decision to abandon a certain examination as a basis for assignments had a disparate impact on the class, based on age. Examining the merits, the district court found plaintiffs’ statistical model was inadequate and denied certification. The Ninth Circuit reversed, and explained that merits issues may be considered at class certification only to the extent they are relevant to determining whether Rule 23 prerequisites have been met. The issue at certification is whether the common issue is capable of class-wide resolution, not whether it will be resolved in favor of the class. The district court erred, the Ninth Circuit found, by denying class certification based on its conclusion that the plaintiffs would not prove their case. Whatever the failings of plaintiffs’ statistical model, those failings affected every member of the class uniformly. Thus, certification was proper.
Fifth Circuit Relies On Settlement Procedure To Establish Proof Of Standing.
By: Michael T. Brody
In In re Deepwater Horizon, 744 F.3d 370 (5th Cir. 2014) (No. 13-30315), BP entered into a settlement with a class of businesses that experienced economic loss as a result of the Deepwater Horizon oil spill. As part of the settlement, class members could submit claims for economic loss. BP opposed certain claims and argued that valid claims required proof of actual economic loss caused by the oil spill. Otherwise, according to BP, the class members would lack standing to sue and the case would not present a case or controversy under Article III. The district court rejected BP’s argument, and the Fifth Circuit affirmed. The court agreed that for there to be a case or controversy, plaintiffs must demonstrate an injury resulting from the wrong. In this case, however, the parties had agreed that the proof of injury could be satisfied by the attestation of claimants pursuant to the settlement agreement. BP had agreed to accept a claimant’s attestation, rather than require additional proof of causation.
Supreme Court Declines Review Of Moldy Washer Class Actions.
By: Michael T. Brody
We have previously reported to you concerning two class actions involving claims that washer/dryer units were susceptible to mold. In each case, the court of appeals upheld class certification, and the United States Supreme Court granted certiorari, vacated the lower court decisions, and remanded for reconsideration in light of Comcast. On remand in each case, the lower courts – the Sixth and Seventh Circuits – again upheld class certification despite the fact that damages might not be determinable on a classwide basis. Both lower court decisions contemplated the possibility that certification could be granted on liability issues, leaving damages for later individual determination. See SCOTUS Order List for February 24, 2014. Defendants again sought review in the United States Supreme Court. After listing the case on its conference list four times, the Supreme Court finally declined review.
Deficiencies Of Class Representative Defeat Certification.
By: Michael T. Brody
In In re Kosmos Energy Ltd. Securities Litigation, No. 12-CV-373 (N.D. Tex. Mar. 19, 2014), plaintiffs sought certification of a class to pursue claims under the Securities Act of 1933. The district court denied certification, finding the plaintiff was not an adequate class representative because he had only rudimentary knowledge of the case. Indeed, when deposed, the named plaintiff was unable to provide specifics of the claim. The court found adequacy of representation, which is an element of due process in a class action, to be absent. Following WalMart and Comcast, the court applied a rigorous analysis to adequacy of representation, which the plaintiff failed to meet. The court also found plaintiff had failed to provide sufficient evidence showing predominance.
Supreme Court Clarifies Standing Test For Lanham Act False Ad Claims.
In Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014) (No. 12-873), the Court addressed the issue of whether Static Control could bring a Lanham Act false advertising claim against Lexmark, notwithstanding the fact that Static Control and Lexmark were not direct competitors. The Court noted that the circuit courts had developed three competing tests to determine whether a plaintiff has standing to sue under the Lanham Act: (i) a strict, categorical test that requires that the parties be actual competitors, (ii) an approach allowing suits by any plaintiff with a “reasonable interest” to protect against the alleged false advertising, and (iii) application of the same multifactor standing test used for antitrust claims. The Supreme Court declined to adopt any of those tests. Instead, it applied traditional principles of statutory interpretation and held that a plaintiff may sue under the Lanham Act if it falls within the “zone-of-interests” protected by the Act and suffered injuries proximately caused by violations of the statute. Referring to the Act’s “unusual and extraordinarily helpful” detailed statement of its purpose, the Court ruled that to fall within the zone-of-interests of the Act’s false advertising provisions, a plaintiff must allege an injury to a commercial interest in reputation or sales, which flows directly from the alleged deception wrought by the defendant’s advertising.
3rd Circuit Clarifies Declaratory Judgment Jurisdiction Standard.
In Reifer v. Westport Insurance Corp., No. 13-2880 (3d Cir. Apr. 29, 2014), plaintiff filed a declaratory judgment action against defendant insurance company in Pennsylvania state court, seeking a declaration that defendant’s policies covered any liability arising out of a legal malpractice claim. Defendant removed the case to federal court and filed a motion to dismiss, which the parties fully briefed. The court, however, sua sponte declined to exercise jurisdiction over the matter and dismissed the case, ruling that, under the Declaratory Judgment Act (DJA), it had discretion to decline to hear such matters. On appeal, appellant argued that the court had abused its discretion because, among other things, there was no pending parallel state court proceeding. In affirming, the Third Circuit held, as a matter of first impression in that Circuit, that it was not a per se abuse of discretion for a court to decline to exercise jurisdiction under the DJA when pending parallel state proceedings do not exist. Rather, that was but one factor for a district court to consider. The court found that while the lack of state proceedings militates significantly in favor of exercising jurisdiction, the district court’s decision was sound because other factors supported the court’s refusal to hear the case, including the court’s finding that the claims implicated critical issues of state law and public policy that should be decided by Pennsylvania state courts.
Court Cannot Vacate Remand Order As A Sanction.
In Barlow v. Colgate Palmolive Co., Nos. 13-1840, 13-1839 (4th Cir. Apr. 30, 2014), plaintiffs sued Colgate and other defendants in Maryland state court, alleging that their products had exposed plaintiffs to asbestos. Notwithstanding the presence of two non-diverse defendants, Colgate removed to federal court, arguing that plaintiffs intended to pursue claims against only Colgate and that the other defendants had been fraudulently joined. After plaintiffs’ counsel represented that there were viable claims against the non-diverse defendants, the district court remanded the case. Thereafter, plaintiffs informed the state court they were pursuing only those claims based upon Colgate’s products. Colgate moved in the district court for a vacatur of the remand order as a sanction. The district court denied the motion and the Fourth Circuit, in a divided opinion, affirmed. The majority held that the federal courts lack power to revoke a remand because a remand order divests a district court of all jurisdiction and precludes it from entertaining any further proceedings of any character. Moreover, under the plain language of the removal statute, remands based on a lack of subject matter jurisdiction are not reviewable on appeal or otherwise. The court concluded that if Congress wanted to carve out an attorney-misconduct exception to the prohibition on review of remand orders, it would have done so expressly in the statute.
Contractual Prerequisite Of Indemnification Claim Required Threat, Not Just Facts.
In I/MxInformation Management Solutions, Inc. v. Multiplan, Inc., No. 7786 (Del. Ch. Mar. 27, 2014), the plaintiff sought funds escrowed by the defendant as part of the sale of assets to the plaintiff. The sales agreement allowed the defendant to withhold the escrowed funds if the defendant had an indemnification claim against the plaintiff for a breach of the plaintiff’s representations and warranties in the sales agreement. At issue was whether the defendant’s claim for indemnification, made months after the contractual deadline for identifying indemnification claims, provided a sufficient basis for withholding the escrowed funds. The Chancery Court answered that question in the negative, granted partial summary judgment to the plaintiff, and ordered the release of the escrowed funds. Central to the Chancery Court’s ruling was the view that “[t]he mere notice of an issue, standing alone, does not trigger [defendant’s] indemnification rights.” Thus, correspondence between the plaintiff and the defendant regarding the facts underlying the indemnification claim at issue, without an express threat of an indemnification claim, were not a sufficient basis for defendant to withhold the escrowed funds.
New Standard For Mergers Of Controlling Shareholder And Corporate Subsidiary.
In Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (No. 334, 2013), the Delaware Supreme Court adopted a new standard by which to evaluate mergers between controlling shareholders and a corporate subsidiary pre-trial. Traditionally, mergers of this type have been evaluated under the strict entire fairness standard. The Delaware Supreme Court changed the standard, holding that “in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” Here, a controlling stockholder of a corporate subsidiary, proposed a merger to take the subsidiary private, which was approved by a special committee and a majority of the minority stockholders. The plaintiff shareholders challenged the transaction, alleging breaches of fiduciary duty by the corporate subsidiary and its board, and asserting that the merger should be evaluated under the stringent, entire fairness standard because the merger involved self dealing by a controlling shareholder. The Delaware Supreme Court disagreed, holding that in a situation where “dual protections” were present, the business judgment rule satisfied Delaware’s objective of achieving fair transactions. The court ultimately held that under the business judgment rule, the defendants’ conduct was reasonable, and affirmed the Chancery Court’s grant of summary judgment in favor of defendants.
Pyrrhic Victory For Plaintiff In Books And Records Request.
In Caspian Select Credit Master Fund Ltd. v. Key Plastics Corp., No. 8625 (Del. Ch. Feb. 24, 2014), the plaintiff was the sole minority investor in the defendant, and in April 2013, submitted a books and records request to investigate self-dealing by the controlling shareholders and alleged corporate waste by the defendant. The defendant rejected the request, arguing that the request was made in order to improve the plaintiff’s litigation position rather than for any valid business purpose. The court disagreed, and held that the plaintiff was entitled to request books and records from the defendant pursuant to 8 Del. C. § 220 in order to investigate allegations of wrongdoing. The court left the parties to negotiate which documents would be provided, however, in essence, awarding the plaintiff nothing after a costly, nearly year-long court battle regarding the propriety of the plaintiff’s request in the first instance.
Court Rejects Contractually Shortened Time Limit For California FEHA Claims.
In Ellis v. U.S. Security Associates, 169 Cal. Rptr. 3d 752 (Cal. Ct. App. 2014) (No. A136028), plaintiff filed a sexual discrimination and harassment claim against her former employer under the California Fair Employment and Housing Act. The trial court dismissed the claim as untimely, finding that plaintiff had signed an application for employment in which she agreed that any claim or lawsuit must be filed no more than six months after the alleged action, and further agreed that she was waiving any statute of limitations to the contrary. A California court of appeals reversed, holding that the limitations provision in plaintiff’s employment application was unenforceable because it was unreasonable and against public policy. The court reasoned that although parties generally can contract to shorten applicable limitations periods, such agreements are only reasonable if the contractually shortened periods still provide a party sufficient time to investigate and effectively pursue a judicial remedy. Here, the court found that six months was too short, in part because it might not provide plaintiff sufficient time to exhaust her administrative remedies, and therefore, was unreasonable and against public policy.
Court Enters Sanctions For Alteration Of Metadata.
By: Daniel J. Weiss
In T&E Investment Group LLC v. Faulkner, Nos. 11-0724, 11-1158, (N.D. Tex. Feb. 12, 2014), the court affirmed a magistrate judge’s order sanctioning a defendant for using software to alter the metadata on files in order to hide the fact that the party used a different, unproduced computer during the period relevant to the case. The magistrate judge had appointed a third-party computer forensic expert to examine the defendant’s computers after earlier discovery problems. The expert reported that the defendant “used a bulk file changer to alter the data [from one computer] in an apparent attempt to make it look like that was his computer that he used all the time.” With respect to prejudice, the magistrate judge held that it was “impossible for Plaintiffs to prove directly that the [missing] computer’s contents were relevant to the litigation,” but that the defendant’s actions in attempting to hide that computer would permit a “reasonable factfinder [to] conclude that the [missing] computer contained information that was relevant and would have aided Plaintiffs.” The magistrate judge recommended that a permissive spoliation instruction would be read to the jury and further ordered $27,500 in monetary sanctions. The district court affirmed the sanctions.
Court Orders Production Of Third Party’s Cloud-Based Emails In Native Format.
By: Daniel J. Weiss
In Sexton v. Lecavalier, No. 13-cv-8557 (S.D.N.Y. Apr. 11, 2014), the court ordered a third party to produce emails stored on Google’s Gmail service in a “functionally native” format. The plaintiff issued a subpoena for the emails in the context of an arbitration. The third party responded to the subpoena by forwarding emails from his Gmail account to the plaintiff’s attorney. The third party contended that he could not produce the emails in “native” format because the emails were stored on the Gmail service. The court held that although the third party “may lack access to the files as they originally exist on Google’s servers, this does not absolve him of his obligation to produce the documents in a reasonably usable format.” Instead, a user of a third-party email service must download or export relevant emails from the service and produce the emails in a “functionally native format that preserves relevant metadata.”
Potential Amendments To ESI-Related Rules Approved By Advisory Committee.
By: Daniel J. Weiss
The Advisory Committee on Civil Rules met on April 10 and 11, 2014 and approved proposed amendments to some of the Federal Rules of Civil Procedure that concern e-discovery. Advisory Committee Meeting Agenda. The proposed amendments to Rule 26 would emphasize the concept of proportionality in discovery and suggest a narrower scope of permitted discovery by deleting language that currently authorizes discovery of “any matter relevant to the subject matter involved” upon a showing of “good cause.” The Advisory Committee also approved revisions to Rule 37(e) that would limit a court’s ability to award the most serious forms of sanctions for a failure to preserve electronically stored information to only those circumstances in which the court finds that the “party acted with the intent to deprive another party of the information’s use in the litigation.” That limitation would apply to spoliation instructions, presumptions that lost evidence was unfavorable, and dismissal or default judgment sanctions. Absent a finding of intentional spoliation, a court would be limited to ordering “measures no greater than necessary to cure the prejudice.” The amended rules will next be considered by the Standing Committee.
Court Holds That Documents Produced As ESI Need Not Be Organized As Kept.
By: Daniel J. Weiss
In Anderson Living Trust v. WPX Energy Production LLC, No. 12-0040 (D.N.M. Mar. 6, 2014), the court undertook a detailed analysis of an apparent conflict within Fed. R. Civ. P. 34(b)(2)(E), which governs the form of document production. One sub-clause of that Rule, (E)(i), provides that a party “must produce documents as they are kept in the ordinary course of business or must organize and label them to correspond to the category in the request.” Another sub-clause, (E)(ii), provides that “[i]f a request does not specify a form for producing electronically stored information, a party must produce it in a form or forms in which it is ordinarily maintained or in a reasonably usable form or forms.” Here, the plaintiff requested that hard-copy documents be produced electronically, but then demanded that the defendant also “organize the production” pursuant to the first sub-clause. The court held that the two sub-clauses are mutually exclusive: “Rule 34(b)(2)(E)(i) governs hard copy documents, and (E)(ii) governs ESI, with no overlap between.” Thus “[r]equesting parties are entitled to the guarantees of (E)(i) or (E)(ii), but not both.” Electronic documents need not be organized in a particular way because “parties requesting ESI [are] able to organize it themselves—in their own way, to their own satisfactory level of thoroughness, and at their own expense—through the use of text-searching technologies like filtering, grouping, and ordering.” Because plaintiffs demanded that the paper documents be produced as ESI, the requirements of (E)(i) did not apply, and defendants were not required to organize the documents in any particular way.
Protective Order Clawback Enforced; Party That Refused Demand To Pay Fees.
By: Daniel J. Weiss
In RIPL Corp. v. Google Inc., No. 12-02050 (W.D. Wash. Dec. 17, 2013), the court granted the defendant’s motion to enforce the clawback terms of an agreed protective over. The defendant inadvertently produced privileged documents on July 2, 2013. It discovered the mistake on August 12, 2013 and notified the plaintiff the next day. The plaintiff refused to return the documents, arguing that the production had “waived” the right to assert attorney client privilege and the clawback request was not “prompt” as required under the protective order. The plaintiff further contended that Federal Rule of Evidence 502, not the agreed protective order, controlled the question of waiver because the protective order did not define terms such as “inadvertent” and “prompt.” The court rejected those arguments, holding that the agreed protective order controlled and stated that an agreed protective order need not “provide adequate detail regarding what constitutes inadvertence, what precautionary measures are required, and what the producing party’s postproduction responsibilities are to escape waiver.” Rather, counsel’s declaration that the production was “inadvertent” satisfied the terms of the protective order, and the clawback request was “prompt.” The court then ordered the plaintiff to pay the defendant’s attorneys’ fees in bringing the motion, holding that “it was improper for [plaintiff] to hold the documents hostage for roughly two months in violation of the Protective Order.”
High Court: Involuntary Severance Payments Are Subject To FICA Taxes.
In United States v. Quality Stores, Inc., 134 S. Ct. 1395 (2014) (No. 12-1408), the Supreme Court held that severance payments made to employees terminated against their will are taxable wages under the Federal Insurance Contributions Act (FICA). In reversing the Sixth Circuit’s underlying decision, the Court held that the plain language of FICA broadly defines wages to include severance payments, and FICA contains no express exceptions for these types of severance payments. The Court reasoned that the Act’s express exemptions for certain other termination-related payments, such as payments made because of retirement for disability, further supported its conclusion that severance payments for involuntary separations are taxable.
At-Will Employees Can’t Sue For Fraud As To Promise Of Continued Employment.
In Sawyer v. E.I. du Pont de Nemours & Co.,No. 12-0626 (Tex. Apr. 25, 2014), defendant spun off a portion of its business into a wholly-owned subsidiary. Plaintiffs, former employees of defendant, allege that defendant, in an effort to encourage them to transfer to the newly-formed subsidiary, promised plaintiffs that it would not sell the subsidiary, even though, unbeknownst to plaintiffs, defendant was already in talks for such a sale. Shortly after plaintiffs accepted defendant’s offer, the subsidiary was sold and, as a result, plaintiffs’ compensation and benefits were reduced. Plaintiffs filed suit, alleging that defendant fraudulently induced them to terminate their employment and accept new employment with the subsidiary. The Fifth Circuit certified the following question to the Texas Supreme Court: may at-will employees bring fraud claims against their employers for loss of their employment. The Texas Supreme Court answered no. The court clarified that its holding did not mean that at-will employees can never sue for fraud. But, if the employer can avoid performance of a promise simply by exercising its right to terminate the at-will relationship, then the promise is illusory and it cannot support either an enforceable agreement or a claim for fraud.
Federal Appellate Court Rules Late Notice Does Not Bar Coverage.
The United States Court of Appeals for the Tenth Circuit has held that a policyholder’s delay in providing notice of loss to its insurer did not bar coverage at the summary judgment stage due to the insurer’s inability to demonstrate that it was substantially prejudiced. B.S.C. Holding, Inc. v. Lexington Ins. Co., No. 13-3142 (10th Cir. Mar. 11, 2014). Lexington Insurance Co. (“Lexington”) insured B.S.C Holding, Inc. and Lyons Salt Co. (collectively, “Lyons”) under an all risks property policy. While Lyons discovered water intrusion in its salt mine in January 2008, it did not notify Lexington of the water intrusion until July 2010 after Lyons had spent more than $2.5 million to find the cause of the water intrusion and indentify a solution. The policy provided for notice to be made as soon as practicable, with a proof of loss due within 90 days of discovery of loss, damage or occurrence. The court assumed that Lyons had waited too long to notify Lexington, but stated that under governing Kansas law, such delay would only relieve Lexington of coverage obligations if Lexington proved substantial prejudice. There was no presumption of prejudice, rather the insurer must factually demonstrate that it would have handled the investigation, discovery or defense of a claim differently and that such difference likely would have led to the insurer defeating the underlying claim or settling for a lower amount. Lexington argued it suffered prejudice in investigating and remediating the water intrusion as well as prejudice in underwriting renewal policies. The court rejected these arguments, reasoning that Lexington had failed to provide sufficient evidence to back up its arguments.
Connecticut Supreme Court Holds That Claims Arising From One Fire Were Not “Related” And SIR Provision Did Not Reduce Limits Of Liability.
The Supreme Court of Connecticut recently interpreted a “related” claims provision and a self insured retention (“SIR”) endorsement in a professional liability insurance policy in a manner that maximized coverage. Lexington Ins. Co. v. Lexington Healthcare Grp., Inc., 84 A.3d 1167 (Conn. 2014) (en banc). Following a deadly fire at a nursing home on property leased by the policyholder, the insurer sought to limit the amount of professional liability coverage available for thirteen negligence actions seeking damages for wrongful death or serious bodily injury on behalf of the fire victims. In declining to reduce coverage, the court held that the claims did not allege “related medical incidents” and, therefore, a separate per medical incident coverage limit applied to each fire victim. The court reasoned that the policy term “related” was ambiguous in the context and, thus, construed the term in favor of coverage. Although each claim arose from “a common precipitating factor” (i.e., the fire), the claims were not unambiguously “related” because they alleged “distinct losses to different individuals” and each loss was caused by different alleged negligent acts, errors or omissions by the policyholder, as each victim was “differently situated in terms of his or her proximity to the fire and resultant smoke, access to an exit, and personal health and mobility issues.” The court also held that the policy SIR did not reduce the limits of liability because the policy’s SIR endorsement was ambiguous to the extent it provided that the limits of liability “will be reduced by the payment of damages and expenses paid within the [SIR].” The provision was triggered by “payment” and did not account for the policyholder’s insolvency. In addition, the endorsement “purported to be” a SIR provision but “attempted to retain for itself the advantageous reduction in liability limits associated with a deductible.” The court held that “such a hybrid approach is readily susceptible to confusion” and construed it in favor of the policyholder.
Supreme Court Clarifies Fee-Shifting Provision Of Patent Act.
The Patent Act’s fee-shifting provision, 35 U.S.C. § 285, authorizes district courts to award attorneys’ fees to prevailing parties in “exceptional cases.” In a pair of recent opinions, the Supreme Court clarified the meaning of that provision and the proper standard of review that applies to it. In Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (U.S. 2014) (No. 12-1184), the Supreme Court clarified the meaning of that provision, holding that “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” In so holding, the Court rejected the Federal Circuit’s interpretation of this provision in Brooks Furniture Manufacturing, Inc. v. Dutailier International, Inc., 393 F.3d 1378 (2005), which had held that a case was exceptional only where there was litigation-related misconduct of an independently sanctionable magnitude or a finding that the litigation was both objectively baseless and brought in subjective bad faith. The Court concluded that the Federal Circuit’s formulation was “overly rigid” and unsupported by the plain text of the Patent Act. In a second decision issued the same day, Highmark Inc. v. Allcare Health Management System, Inc., 134 S. Ct. 1744 (U.S. 2014) (No. 12-1163), the Court further held that all aspects of a district court’s exceptional-case determination under the Patent Act’s fee-shifting provision should be reviewed for abuse of discretion. The Court concluded that exceptional-case inquiries are rooted in factual determinations and that the district court, using its discretion and considering the totality of the circumstances, is better positioned to decide whether a case is exceptional.
Illinois Appellate Court Reinstates $10 Billion Verdict Against Philip Morris.
By: Barry Levenstam
In Price v. Philip Morris, Inc., No. 5-13-0017 (Ill. App. Ct. Apr. 29, 2014), the Illinois Appellate Court reviewed a trial court order denying plaintiffs’ petition for relief from the Illinois Supreme Court’s judgment, which has reversed a $10 billion jury verdict against Philip Morris in a case alleging that its use of the terms “light” and “low tar” in advertising its cigarettes constituted fraud. The Illinois Supreme Court had reversed based on its conclusion that the Federal Trade Commission had authorized manufacturers to use those terms through a process of “informal regulatory activity,” including consent decrees. Within two years of the ruling becoming final, the FTC made two statements stating that it never intended to provide guidance to the cigarette industry that cigarette manufacturers could use those terms. The first statement was in an amicus brief filed before the United States Supreme Court, and second was in a document called a rescission of guidance. Relying on these statements, plaintiffs filed a post-trial motion seeking reinstatement of the $10 billion judgment with the trial court, which denied any relief. Plaintiffs appealed to the Appellate Court, which held that the Illinois Supreme Court would not have reversed the trial court judgment if it had had the subsequent FTC statements. Accordingly, the Appellate Court ruled that the trial court had erred in denying the post-trial motion and reinstated the verdict of $10 billion against Philip Morris.
Jury Decides If Post-Sale Modification Absolves Manufacturer.
By: Barry Levenstam
In Hoover v. New Holland North America, Inc., No. 36 (N.Y. Apr. 1, 2014), the New York Court of Appeals addressed a defendant equipment manufacturer’s argument for judgment on the ground that changes the owner made to the machine after defendant manufactured it rendered the machine dangerous and relieved the manufacturer from any liability caused as a result. The defendant manufacturer asserted that New York law recognizes a substantial modification doctrine, which barred plaintiff’s claim because the owner had removed a protective shield which was on the machine at the time of sale but had become damaged after years of use by the owner. The trial court had ruled that the issue was a question of fact concerning the adequacy of the design of the machine. The Court of Appeals affirmed, concluding that the plaintiff had adduced sufficient evidence that damage to the shield during the ordinary use of the machine was foreseeable as was the likelihood that people would then use the machine with no protective shield. Consequently, the court affirmed the judgment for plaintiff.
Jury Decides If Sophisticated User/Forum Law Controls Punitive Damages.
By: Barry Levenstam
In Scott v. Ford Motor Co., 169 Cal. Rptr. 3d 823 (Cal. Ct. App. 2014) (No. A137975), a California plaintiff sued a Michigan defendant in California, alleging injuries resulting from exposure to asbestos during his career as an auto mechanic and service station owner. The trial court granted the defendant’s motion to apply Michigan law, which bars punitive damages. The trial court also rejected defendant’s motion arguing that, as a matter of law, plaintiff was a sophisticated user of asbestos-bearing auto parts. Instead, the court submitted plaintiff’s claims to the jury, which found for plaintiff. Both parties appealed. The court of appeals affirmed the trial court’s rejection of the defendant’s sophisticated user defense as a matter of law, and affirmed the decision to submit the sophisticated user defense to the jury, holding that this defense rested on disputed issues of fact. With respect to punitive damages, the court reversed. Applying a government interests analysis, the court of appeals concluded that, in California courts, California’s legislative decision to permit punitive awards to deter and punish misconduct outweighed Michigan’s prohibition on punitive damages, and it would be improper to permit the defendant to carry its home-state’s bar against punitive damages with it when it decides to do business in other jurisdictions that permit punitive damages.
California Court Addresses Consumer Expectation Test In Automobile Crash Case.
By: Barry Levenstam
In Romine v. Johnson Controls, Inc., 169 Cal. Rptr. 3d 208 (Cal. Ct. App. 2014) (No. B239761), plaintiff was injured when the back of her driver’s seat collapsed after her vehicle had been hit from behind, causing her to slide backward and hit her head against the back seat of her vehicle, rendering her quadriplegic. Plaintiff sought to prove her strict liability claim using the consumer expectations design defect test rather than the risk/benefit design defect test. The consumer expectations test assesses whether the product performed as safely as an ordinary user of the product would expect when used in reasonably foreseeable manner; the risk/benefit test determines whether the benefits of the product’s design outweigh the risks of danger inherent in the design. The trial court allowed her to do so over defendant’s objection that the complexity of the accident required risk/benefit analysis. The trial court also excluded the defendant’s evidence on the risk benefit aspects of its products design. The jury found for plaintiff. On appeal, defendant argued that both the vehicle seat and the nature of the multi-car collision in which plaintiff was injured were too complex to permit plaintiff to pursue consumer expectation test in lieu of the risk/benefit test. The court of appeal ruled both that the nature of how a vehicle’s seat should perform in an accident and the nature of the rear-end collision in this case were not so complex as to bar plaintiff from pursuing liability on the consumer expectations test. Consequently, the court affirmed judgment for plaintiff.
Brand Name Manufacturer May Be Liable For Injury By Generic Drug.
By: Barry Levenstam
In Dolin v. SmithKline Beecham Corp., No. 12-6403 (N.D. Ill. Feb. 28, 2014), plaintiff sued the manufacturer of a generic drug, paroxetine, which her husband had taken shortly before committing suicide, and also sued the manufacturer of the brand name version of that drug, Paxil. The generic manufacturer filed a motion to dismiss and the brand name manufacturer filed a motion for summary judgment. The court noted that the Hatch-Waxman Act provides that drug manufacturers may make a generic version of a drug where the brand name manufacturer has obtained FDA approval once the brand name manufacturer’s patent expires. The Act specifies that the generic drug manufacturer must use a warning and label that matches identically with the brand name drug’s warning and label in all material respects. The court held that, under the Hatch-Waxman Act, the claim against the generic manufacturer had to be dismissed as preempted because the generic manufacturer was bound by federal law to follow the brand name manufacturer’s warning and label design. With respect to the brand name manufacturer, however, the district court denied summary judgment. The court reasoned that although the decedent had never actually taken the brand name drug, its manufacturer was legally responsible for the warning and label design associated with the generic drug and could be held liable if plaintiff were able to establish that it negligently failed to change the label and warning after experience demonstrated that the warning and label were not accurate.
Delaware Applies Forum Non Conveniens Doctrine In Asbestos Litigation.
By: Barry Levenstam
In Martinez v. E.I. DuPont de Nemours & Co., 86 A.3d 1102 (Del. 2014) (No. 669, 2012), plaintiffs residing in Argentina brought suit in Delaware to recover damages for injuries sustained by them or their family members as a result of exposure to asbestos on the job in Argentina. The trial court had dismissed on several grounds, including the forum non conveniens doctrine. The Delaware Supreme Court addressed that issue, noting that Argentine law controlled the rights of the parties, and that the case raised several important issues of first impression under Argentine law, which the court opined should be addressed by an Argentine court in the first instance. The Delaware Supreme Court also observed that its ability to address such questions was severely hampered by the fact that Argentine law is set forth in Spanish. Furthermore, the court held that plaintiffs who did not live in Delaware, whose injuries did not occur in Delaware, and whose claims are not governed by Delaware law have a less substantial interest in having a Delaware forum resolve their claims. As a consequence, the court affirmed the dismissal on forum non conveniens grounds.
Firm Disqualified For Violating Fiduciary Obligation To Prospective Client.
Quinn Emanuel was disqualified from representing defendants after using information obtained from Mayers when it was a prospective client in a court filing against Mayers. Mayers v. Stone Castle Partners, LLC, 43 Misc. 3d 1203(A) (N.Y. Sup. Ct. Mar. 28, 2014) (No. 650410/2013). In May 2011, Mayers made an unsolicited call to a Quinn Emanuel attorney not involved in the instant litigation. The two spoke for 30 minutes to an hour, but the attorney declined the representation because of an unrelated conflict. The attorney who spoke with Mayers then discussed the call with defendants’ lead counsel (also at Quinn Emanuel) in the instant case, who used information obtained from Mayers, as well as details of Mayers’s call, in a court filing. Even though defendants’ lead counsel did not seek this information from his colleague; the information obtained from Mayers was not particularly prejudicial; most of the facts were public knowledge at the time; and Mayers did not establish significant harm caused by Quinn Emanuel’s representation of defendants, Quinn Emanuel’s use of its attorney’s phone call with Mayers in a court filing mandated disqualification.
Whistleblower Suit Brought By Employee Of Non-Publicly Held Subsidiary Proceeds.
A Pennsylvania federal court partially denied Tyco Electronics Corp.’s motion to dismiss a whistleblower suit brought by a longtime former accountant. Wiest v. Lynch, No. 10-cv-03288 (E.D. Pa. Apr. 16, 2014). Wiest pleaded an adverse employment action by alleging constructive discharge. The court noted that although the prohibition against retaliation contained in SOX § 806 is relatively ambiguous, it shows a clear intent to prohibit a “very broad spectrum of adverse action” against whistleblowers. Thus, the court declined to dismiss Wiest’s complaint at an early stage because a jury could find that Wiest’s continued employment with Tyco had become so “objectively intolerable” that he was forced to resign. Further, SOX whistleblower protection does apply to Wiest as an employee of a non-publicly held subsidiary of a publicly held corporation, finding “[t]here is no reason to think that the Supreme Court’s holding in Lawson [issued March 14, 2014] does not also apply, beyond contractors of public companies, to agents of public companies and those agents’ employees.”
Unclean Hands Allegations Did Not Mandate Dismissal Of Legal Malpractice Action.
The Ninth Circuit reversed the dismissal of trustee’s complaint for legal malpractice against a law firm. In re Estate Fin. Mortg. Fund, LLC, Nos. 12-56009, 12-56011 (9th Cir. Mar. 24, 2014). Under California law, a client who engages in wrongdoing in reliance on an attorney’s negligent legal advice may be barred from pursuing a legal malpractice claim based upon a defense of unclean hands. To prevail, however, the client’s conduct must be so obviously wrongful that, notwithstanding the negligent legal advice, the client could not have been confused about the illegality of its actions. Here, the debtor’s misconduct admitted in the trustee’s complaint – failing to comply with disclosure and licensing requirements – was “not so obviously wrongful” that the debtor must have known it to be unlawful.
Malpractice Claim Accrues When Allegedly Negligent Work Performed.
XE Partners brought an action for legal malpractice against a law firm arising from legal advice the firm provided to XE in 2008 regarding the withdrawal of certain LLC members. XE Partners, LLC v. Skadden Arps, Slate Meagher & Flom LLP, No. 152994/2013 (N.Y. Sup. Ct. Mar. 6, 2014). In 2008, the withdrawing members filed an arbitration against XE Partners seeking a larger buyout. In November 2010, the arbitration panel ruled against XE Partners. In March 2013, XE Partners filed suit against the law firm, alleging that the firm’s advice in 2008 led to the conduct cited by the arbitration panel as the basis for its decision. The law firm moved to dismiss the complaint as time-barred under New York’s three-year statute of limitations for legal malpractice claims. XE Partners countered that its malpractice claim was timely because it accrued when XE suffered an injury: the arbitration award against it in 2010. The court rejected this argument and held that XE Partners’ complaint was time-barred because the claim accrued in 2008 when the allegedly negligent work product was received by XE Partners. The court held that collateral adjudication like the arbitration was not a prerequisite to the existence of an actionable injury.
Sanctions For Lawyers Who Incentivize Keeping Whistleblower Complaints In-house.
During a panel discussion at the Georgetown University Law Center Corporate Counsel Institute reported by Law360, the head of the SEC’s Office of the Whistleblower, Sean McKessy, warned attorneys that they may be disciplined if they draft contracts offering incentives for employees to keep securities fraud whistleblower complaints in-house. According to McKessy, the Office of the Whistleblower is actively looking for employment agreements or confidentiality agreements that provide a benefit to the employee contingent upon his or her promise not to report anything to a regulator or file a whistleblower complaint with the SEC. If the Office of the Whistleblower discovers an attorney is drafting contracts that incentivize company whistleblowers to not report company wrongdoing to the SEC, the Office will go after the attorney who drafted the contracts, including by barring the attorney from practice before the SEC and by reporting the attorney to his or her company. See Brian Mahoney, SEC Warns In-House Attys Against Whistleblower Contracts, Law 360 (Mar. 14, 2014), available at http://www.law360.com/articles/518815/sec-warns-in-house-attys-against-whistleblower-contracts.
Second Circuit Rejects “Listing Theory” In Dismissing Claims Of Foreign Investors Purchasing Foreign Securities On A Foreign Exchange.
On May 6, 2014, the Second Circuit affirmed the dismissal of a securities class action brought by foreign investors in foreign-issued securities on a foreign exchange notwithstanding that those securities were also cross-listed on a U.S. exchange. City of Pontiac Policemen’s & Firemen’s Retirement Sys., et al, v, UBS AG, et al, No. 12-4355 (2d Cir. May 6, 2014). One group of plaintiffs consisting of foreign institutional investors sought to bring a putative class action alleging violations of Sections 10(b) and 20(a) of the Exchange Act of 1934 in connection with the purchase of ordinary shares of UBS AG. Plaintiffs alleged that UBS overvalued $100 billion in residential mortgage backed securities. In affirming the dismissal, the Second Circuit applied the Supreme Court’s decision in Morrison v. National Bank of Australia, 561 U.S. 247 (2010). Morrison held that Section 10(b) only provided a cause of action arising out of transactions in securities listed on domestic exchanges and domestic transactions in other securities. Plaintiffs argued that their claims were proper under Morrison as the securities at issue were cross-listed on a U.S. exchange, thus bringing their claims under the purview of Section 10(b). The Second Circuit rejected this argument, reasoning that the intent of the Supreme Court’s Morrison decision was to limit the application of Section 10(b) to purely domestic transactions, “with a domestic listing serving as a proxy for a domestic transactions.” The Second Circuit held that the claims by foreign investors, of a foreign security on a foreign exchange are not saved “simply because those shares are also listed on a domestic exchange.”
Court Finds That Whistleblower Is Not Required To Report To SEC To Receive Protection Under Dodd-Frank Act.
On May 8, 2014, the United States District Court for Southern District of New York found that a former public company employee may proceed with her retaliation claims stemming from her dismissal after complaining of faulty risk-control practices at her former employer. Yang v. Navigators Group Inc.,13-2073 (S.D.N.Y. May 8, 2014). The defendant sought judgment on the pleadings on plaintiff’s claims under Dodd-Frank’s anti-retaliation provisions under the theory that plaintiff failed to raise her concerns to the SEC. Rather, plaintiff , the former chief risk officer, only raised her concerns about her company’s risk management practices, which she alleged violated the federal securities laws, internally at the company. In rejecting the defendant’s argument, the court stated that Dodd-Frank “does not clearly and unambiguously limit whistleblower protection to individuals who report violations to the SEC.” In reaching its decision, the court noted the ambiguity in the statute and stated that the SEC's interpretation, as expressed in its whistle-blower regulations, “is a reasonable reading of the statute that resolves the ambiguity.” In reaching this conclusion, the court declined to follow the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), which found the Dodd-Frank anti-retaliation provisions to be unambiguous and refused to give deference to the SEC’s rules implementing the anti-whistleblower provisions of Dodd-Frank.
The Fourth Circuit Holds That The Supreme Court’s Janus Decision Does Not Apply To Criminal Prosecutions Under Rule 10b-5.
On May 7, 2014, the Fourth Circuit held that the Supreme Court’s decision in Janus Capital Group, Inc, v. First Derivative Traders, 131 S. Ct. 2296 (2011), does not apply to criminal prosecutions under Rule 10b-5. Prousalis v. Moore, No. 13-6814 (4th Cir. May 7, 2014). In Janus, the Supreme Court held, in the context of a private shareholder suit, that in order for there to be liability under Rule 10b-5, a defendant must “make” an untrue statement of material fact. The Janus Court stated that “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether to communicate it. . . . One who prepares or publishes a statement on behalf of another is not its maker.” In this case, the petitioner plead guilty to preparing SEC filings associated with his client’s initial public offering. The SEC filings prepared by petitioner, yet signed and authorized by his client, failed to disclose the proper use of the IPO proceeds. After the Janus decision, the petitioner sought to overturn his prior guilty plea on the grounds that under Janus, the conduct he pleaded guilty to was not a crime, as he was not the “maker” of the false and misleading statements contained in the SEC filings. In rejecting the petitioner’s arguments, the Fourth Circuit limited Janus’s application to only those Rule 10b-5 cases where plaintiffs only have an implied legal right of action. The Fourth Circuit, unlike the Supreme Court in Janus, declined the petitioners’ invitation to engage in a textual analysis of Rule 10b-5, reasoning that to do so “would render the Supreme Court’s discussion of private right of action largely superfluous.”
Court Holds That “Lock-Up” Agreements With Company Insiders Do Not Form A Group With IPO Underwriters Under Section 16.
On May 2, 2014, the United States District Court for the Southern District of New York held that there is no liability under Section 16(b) of the Exchange Act of 1934 for underwriter transactions where the underwriters entered into “lock-up” agreements with company insiders limiting the ability of the shareholders to sell their stock during the underwriters’ promotion of an IPO. In re Facebook, Inc., IPO Sec. and Derivative Litig., No. 13-4016 (S.D.N.Y. May 2, 2014). The plaintiffs alleged that the underwriters entered into “lock-up” agreements with each selling shareholders that collectively owned more than 10% of the stock of Facebook. The “lock-up” agreements prohibited the selling shareholders from selling or otherwise disposing of their stock during the IPO. The plaintiffs further alleged that the “lock-up” agreements created a “common purpose” of controlling the market of Facebook stock. Thus, plaintiffs asserted, the underwriters and selling shareholders constituted a “group” for purposes of Section 16(b). Accordingly, the plaintiffs sought to disgorge over $100 million in profits from trading that the underwriters engaged in as part of the IPO. In dismissing the plaintiffs’ claims, the court noted that the underwriters were not alleged to own more than 10% of Facebook’s stock. The court found that it would not be appropriate to consider the underwriters and the selling shareholders to constitute a “group.” According to the court, the lock-up agreements did not create a common purpose between the selling shareholders and the underwriters. While the lock-up agreements did limit the selling shareholders’ ability to sell or dispose of Facebook stock, the underwriters did not have reciprocal obligations. The underwriters were permitted to act as distributors of Facebook stock that could both buy and sell Facebook stock during the IPO. Thus, the court concluded that there was no commonality of interested needed to form a “group” for purposes of Section 16(b) liability.
Court Finds That Statute Of Limitations Divests Court Of Jurisdiction To Hear SEC’s Untimely Filed Enforcement Action.
On May 12, 2014, the United Stated District Court for the Southern District of Florida held that the five year statute of limitations governing SEC enforcement actions divested the court of subject matter jurisdiction over an SEC enforcement action that was filed more than five years after the claims accrued. SEC v. Graham, No. 13-10011 (S.D. Fla. May 12, 2014). The SEC filed a civil enforcement action against the defendants concerning an alleged offering fraud relating to resort condominium investments. The SEC filed the action seven years after the last sale of an interest in the condominium investment. Faced with the statute of limitations issue, the SEC argued that the court could still hear the case and award equitable and declaratory relief to the SEC, such as an injunction and disgorgement of ill-gotten gains. The court rejected the SEC’s arguments and granted summary judgment against the SEC. The court found that 28 U.S.C. §2462 is not merely a claims processing form of a statute of limitations. The court reasoned that §2462’s clause that provides that an SEC action “shall not be entertained unless commenced within five years from the date when the claim first accrued” operates as a limitation on the court’s jurisdiction. In rejecting the SEC’s argument that the court still had the power to award declaratory and equitable relief, the court found that all the relief the SEC sought fell within the bounds of §2462 as they operated as “a civil fine, penalty, or forfeiture, pecuniary or otherwise.” According to the court, since the alleged misconduct was not ongoing at the time that the action was filed, the declaratory and injunctive relief the SEC sought acted as punishment, “pecuniary or otherwise,” branding the defendants as wrongdoers and seeking a lifetime ban on future violations of the securities laws despite no evidence of continuing harm. Likewise, the court found that disgorgement “can truly be regarded as nothing other than a forfeiture (both pecuniary or otherwise), which . . . is expressly covered by §2462.” Thus, the court found that it had no subject matter jurisdiction over the SEC’s civil enforcement action.
Hewlett-Packard Resolves Claims of Bribery Scheme Involving Three Subsidiaries.
By: Jessi K. Liu
A wholly-owned international subsidiary of California-based Hewlett-Packard Co. (HP) pleaded guilty to four Foreign Corrupt Practices Act (FCPA) counts based on a scheme to bribe Russian officials. ZAO Hewlett-Packard A.O. (HP Russia) was charged with conspiracy to violate the FCPA as well as substantive violations of the anti-bribery, books-and-records, and internal control provisions as part of a scheme to win a large technology contract with the Prosecutor General of the Russian Federation. According to the guilty plea, HP Russia operated a complicated sale-and-buy-back deal through a questionable sales intermediary in order to inflate the prices of its goods and services. The excess funds were then allegedly maintained in off-book accounts in order to make illicit cash payments and to finance travel, cars, jewelry, and other luxury goods for Russian officials. See Plea Agreement,United States v. ZAO Hewlett-Packard A.O., No. CR 14-201 (N.D. Cal. Apr. 9, 2014). Two other wholly-owned HP subsidiaries resolved unrelated FCPA charges involving activity in Mexico and Poland. See Letter from Jeffrey H. Knox, Chief, Fraud Section, Dep’t of Justice, and Melinda Haag, U.S. Attorney, to F. Joseph Warin and John W.F. Chesley, Gibson, Dunn & Crutcher LLP (Apr. 9, 2014). In total, the three HP entities will pay $76.8 million in criminal penalties. And, in a related SEC action, HP has agreed to pay another $31.5 million in disgorgement and prejudgment interest. See Order Instituting Cease-and-Desist Proceedings, In re Hewlett-Packard Co., Exchange Act Release No. 71,916 (Apr. 9, 2014); See Deferred Prosecution Agreement, United States v. Hewlett-Packard Polska,SP.ZO.O, CR 14-202 (N.D. Cal. Apr. 9, 2014).
Execs Of U.S. Broker-Dealer Charged With Conspiring To Bribe Venezuelan Official.
By: Jessi K. Liu
The chief executive officer and a managing partner of New York-based U.S. broker-dealer Direct Access Partners (DAP) were arrested and charged with conspiring with others to pay and launder bribes to a senior official in Venezuela’s state-owned economic development bank, Banco de Desarollo Económico y Social de Venezuela (BANDES), in exchange for the official’s directing BANDES’s financial trading business to DAP. The chief executive officer was also charged with conspiring to obstruct an examination of DAP by the U.S. Securities and Exchange Commission (SEC) to conceal the true facts of the DAP’s relationship with BANDES. See Indictment, United States v. Chinea, 14-cr-240 (S.D.N.Y. Apr. 10, 2014). The SEC also brought civil charges against the chief executive officer and managing partner. See Second Am. Compl., SEC v. Bethancourt, 13-cv-3074 (S.D.N.Y. Apr. 14, 2014). Last year, other DAP executives were charged, and some pleaded guilty, to charges stemming from the same conduct. At that time, the SEC also brought civil charges against those executives.
Internal Investigation Finding Of Policy Breach Not Conclusive As To Legal Violation.
In drafting compliance policies, corporations are often careful to go above and beyond what the law requires, and to make their policies explicit in doing so, lest a violation of the policy be considered to be necessarily a violation of the law. This issue arose recently in Oliver v. Microsoft Corp., No. 12-0943 (N.D. Cal. Aug. 5, 2013). The plaintiff and four other employees filed an internal complaint against their supervisor for gender discrimination. The employer conducted an internal investigation and found that the supervisor had violated the company’s anti-discrimination and retaliation policies. The plaintiff’s prior good performance rating was restored, and she was asked to resume her full duties. Plaintiff declined to do so, contending she had been promised a fresh start elsewhere in the company, and the company ultimately deemed her to have resigned. Plaintiff brought a discrimination suit under the California Fair Employment and Housing Act, and the company moved for summary judgment. Plaintiff argued that that because the company had admitted a violation of its antidiscrimination policies, it had effectively conceded that a violation of the law occurred. The court rejected this argument, as the company had demonstrated – and plaintiff did not dispute – that the company’s policies set a standard that was higher than that set by the law. The court also rejected the plaintiff’s argument that she had suffered an adverse employment action, and granted summary judgment for the company.
Repeat Offender Faulted For Weak Compliance/Lack Of Cooperation.
By: Jessi K. Liu
On March 19, 2014, Japan-based Marubeni Corporation pleaded guilty and agreed to pay an $88 million fine to settle charges that it bribed high-level Indonesian officials in an effort to secure a contract to provide power and energy services. According to the criminal information, Marubeni engaged in a seven-year scheme to pay and conceal bribes to an Indonesian member of parliament and other government officials in order to win a $118 million contract for power-related services. See Information, United States v. Marubeni Corp., No. 14-cr-00052 (D. Conn. Mar. 19, 2014). The plea agreement specifically cites Marubeni’s previous lack of an effective compliance program, its failure to remediate the alleged conduct, the lack of a voluntary disclosure, and the company’s initial refusal to cooperate with government investigators. See Plea Agreement, United States v. Marubeni Corp., No. 14-cr-00052 (D. Conn. Mar. 19, 2014). This is the second FCPA matter for Marubeni. In 2012, the company resolved bribery charges related to a Nigerian natural gas project and agreed to pay $54.6 million as part of a deferred prosecution agreement (“DPA”). The Indonesian scheme pre-dates the settlement of the Nigeria charges.
No Action For Buyout Of Shareholder Who Was Senior Foreign Official.
By: Jessi K. Liu
The Department of Justice issued its first FCPA opinion release of the year, declining to take enforcement action against a U.S. financial services company and investment bank that is the majority shareholder of a foreign financial services company. See U.S. Dep’t of Justice, FCPA Opinion Procedure Release No. 14-01(Mar. 17, 2014). Here, a minority shareholder in the foreign financial services company was appointed to a senior position in his country’s central monetary and banking agency. The U.S. financial services company proposed to buy his shares, at a value determined by a third-party global accounting firm, and the foreign official agreed to strict recusal rules prohibiting him from participating in or influencing his agency’s decisions regarding the financial company of which he formerly was a shareholder until after the completion of the buyout. He also agreed to recuse himself from any matter between his agency and his former company that was under negotiation, proposed, or anticipated at the time of, or prior to, the buyout. The DOJ determined that under these circumstances, there was no corrupt intent.
Investigation Conducted By Non-Lawyers Per Defense Regulations Not Privileged.
In United States ex rel. Barko v. Halliburton Co., No. 05-CV-1276 (D.D.C. Mar. 6, 2014) and United States ex rel. Barko, No. 05-CV-1276 (D.D.C. Mar. 11, 2014) (denying motion for leave to file interlocutory appeal from the March 6, 2014 decision), the court held that an internal investigation into alleged breaches of the company’s Code of Business Conduct (COBC) was not privileged, but was instead a business exercise conducted pursuant to Department of Defense regulations that require contractors to have internal controls in place to facilitate timely discovery and disclosure of improper conduct. This matter, as described in the two opinions, presents a number of circumstances that distinguish it from other opinions addressing the privileged nature of investigatory materials. First, although a lawyer apparently commissioned the investigation in response to a hotline tip, the investigation was conducted entirely by non-lawyers who prepared a final written report, which according to the court did not indicate that the report was prepared for a legal purpose. Second, witnesses interviewed by the non-lawyers were not given Upjohn warnings or informed that the purpose of the interview was to assist the company in obtaining legal advice. Third, the court’s in camera review of the privileged documents revealed that “neither the [company’s recently filed] motion for summary judgment nor the statement of undisputed material facts fairly reflect the evidence produced or the findings of [the company’s] own internal investigation.” In rejecting defendant’s motion for leave to file an interlocutory appeal, the court explained that, even if the investigation had been privileged, that privilege was waived by defendant’s putting the report at issue by suggesting that, because no report of wrongdoing was made to the government, the report must have concluded that there were no “reasonable grounds to believe” that there had been violations of the law.