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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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Order Remanding A Case To Arbitration Panel For Clarification Is Not Appealable.
By: Howard S. Suskin
A district court’s order remanding a case to the arbitration panel for clarification of an arbitration award is not a final order and, therefore, not appealable. Murchison Capital Partners, L.P. v. Nuance Commc’ns, Inc., 760 F.3d 418 (5th Cir. 2014) (No. 13-10852). Following issuance of an arbitration award, the losing party filed a motion in court to vacate it. The district court remanded the case back to the arbitration panel for its failure to provide sufficient findings of fact and conclusions of law, making clear it was remanding the case for further consideration but was not vacating the award. The prevailing party appealed the district court’s remand order to the court of appeals, but the appeal was dismissed. The court of appeals found that, although orders vacating an award and remanding the case for an entirely new arbitration are appealable, orders remanding a case back to the arbitration panel for clarification of an existing award are not.
Forum Selection Clause Overrides Arbitration Clause.
By: Howard S. Suskin
A forum selection clause in the parties’ contract was held to supersede a pre-existing arbitration clause contained in the parties’ membership rules. Goldman, Sachs & Co. v. Golden Empire Sch. Fin. Auth., Nos. 13-797-cv, 13-2247-cv, (2d Cir. Aug. 21, 2014). The parties’ contract contained a forum selection clause providing that any disputes shall be brought in federal court. The contract also had a merger clause stating that it contained the entire agreement between the parties relating to the subject matter. After a dispute arose, one of the parties commenced a FINRA arbitration relying on the other party’s FINRA membership and FINRA rules, which state that a FINRA member must arbitrate a dispute if arbitration is requested by the customer. The court concluded that the forum selection clause in the parties’ contract requiring all actions and proceedings to be brought in federal court superseded an earlier agreement to arbitrate arising from one party’s FINRA membership.
Later-Added Defendant Held Not To Have Waived Right To Arbitration.
By: Howard S. Suskin
A defendant who was joined to ongoing litigation was held not to have waived its right to arbitration, notwithstanding the actions of its co-defendants. Al Rushaid v. Nat’l Oilwell Varco, Inc., 757 F.3d 416 (5th Cir. 2014) (No. 13-20159). The district court had found waiver because the co-defendants had substantially invoked the judicial process to the detriment of the plaintiffs by engaging in discovery and motion practice. Although the new defendant did not participate in those actions, the district court determined that they were attributable to the new defendant because all the defendants were jointly owned and controlled and the same counsel represented all of them. Reversing, the court of appeals concluded, in what it described as a question of first impression, that the actions of the other defendants could not be imputed to the new party. The court found that imputing to a party the actions of its codefendants merely on the ground that the entities are jointly owned or controlled or share representation would contravene the fundamental principle of corporate separateness.
Corporate Assignee May Enforce Arbitration Agreement.
By: Howard S. Suskin
Notwithstanding a corporate restructuring, a company was entitled to enforce an arbitration agreement. Herrera v. CarMax Auto Superstores Cal. LLC, No. CV-14-776-MWF (VBKx) (C.D. Cal. July 2, 2014). Employees sued their employer for alleged labor violations. The employees had signed their arbitration agreement with their employer at the time, and the agreement extended to “affiliate companies.” Following a corporate restructuring, one of the affiliates sought to enforce the agreement even though the affiliate was not a signatory to the arbitration agreement. The court concluded that the affiliate had the legal right to enforce the agreement, as it had been assigned the rights under the agreement.
Nevada Prohibits Former CEO From Using Company’s Privileged Documents.
In Las Vegas Sands Corp. v. Eighth Judicial District Court, 331 P.3d 905 (Nev. Aug. 7, 2014) (No. 63444), the Supreme Court of Nevada held that current corporate management controls a company’s privileges and a former officer may not use the company’s privileged documents even if he was a party to the privileged communications. Just prior to his termination as President and CEO of Sands, Jacobs gathered approximately 40 gigabytes of documents, including emails and other communications. Jacobs later brought a breach of contract action against Sands and disclosed that he had privileged materials that he took with him when he left the company. The documents ended up at a third party vendor and the issue was whether the vendor should return the documents to Jacobs or to the company. Jacobs argued, and the district court agreed, that under the “collective corporate client” doctrine, Sands could not deprive Jacobs of access to privileged information relevant to his breach of contract claim, particularly regarding communications in which he was a participant while a corporate officer. The Supreme Court of Nevada disagreed and issued a writ of prohibition ordering the district court to halt the return of the documents to Jacobs. The court rejected the “collective corporate client” approach, which the court acknowledged had been recognized under New York law, in favor of the approach adopted by the United States Supreme Court in Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985). The Court in Weintraub held that, for solvent corporations, the power to waive the attorney-client privilege rests with the corporation’s officers and directors; when control of the corporation passes to new management, so too does the authority to assert and waive the corporation’s privileges.
No Discovery From Non-Testifying Expert Absent Showing Of Exceptional Circumstances.
In Szulik v. State Street Bank & Trust Co., No. 12-10018-NMG (D. Mass. Aug. 11, 2014), the court held that a party could not subpoena from a non-testifying expert facts known or opinions held by the expert absent exceptional circumstances. Plaintiff engaged BDO as a non-testifying expert to provide professional consulting services and assistance in litigation. In this capacity, BDO obtained documents from third parties. Defendant subpoenaed BDO, seeking these third party documents. Citing Fed. R. Civ. P. 26(b)(4)(D), the court denied defendant’s motion to compel production. Rule 26(b(4)(B) provides protection for non-testifying experts that is distinct from the attorney-client privilege and the work product doctrine. In the absence of “exceptional circumstances,” the rule “protects both facts known and opinions held by a non-testifying expert.” The court noted, however, that the rule does not prevent a party from seeking “to obtain the same specific facts from other sources.”
No Subject Matter Waiver Unless Disclosures Were Selective, Manipulative, And Strategic.
In Freedman v. Weatherford International Ltd., No. 12 Civ. 2121 (S.D.N.Y. July 25, 2014), the district court held that disclosures of internal investigation materials to the SEC did not result in subject matter waiver. Defendant’s Audit Committee engaged an outside law firm to conduct an internal investigation regarding certain accounting issues. The law firm met with the SEC and presented information relating to its investigation. In a prior opinion, the court ruled that the law firm’s disclosures had waived privilege with respect to any material physically or orally disclosed to the SEC, as well as any underlying factual material explicitly referenced therein. After defendant produced that information, plaintiff sought all remaining investigation documents, with the exception of any opinion work product, on the grounds that the disclosures to the SEC resulted in subject matter waiver as to the investigation as a whole. The court held that there was no broad subject matter waiver. The court explained: Per Federal Rule of Evidence 502(a), subject matter waiver is reserved for the rare case where a party either places privileged information at issue, or attempts to use privileged information as both sword and shield. Whether fairness requires additional disclosure is decided on a case by case basis, and depends primarily on the specific context in which the privilege is asserted. Subject matter waiver is appropriate where a party has engaged in “selective, manipulative and strategic use of evidentiary privileges.” The court found that there was no indication that the company had sought to use the disclosure to its advantage in this or related litigation.
Review Of Privileged Information During Deposition Preparation Did Not Waive Privilege.
In Wells Fargo Bank, N.A. v. RLJ Lodging Trust, No. 13-cv-00758 (N.D. Ill. Aug. 4, 2014), the district court held that review of privileged information during deposition preparation did not waive privilege where the review did not appear to have influenced the deponent’s testimony. The document at issue was a report prepared by the deponent, Greenholtz, an employee of plaintiff. Plaintiff had produced the report to defendant with one sentence redacted on privilege grounds. Greenholtz reviewed the un-redacted report in preparation for his deposition and he testified at his deposition that his review of a number of documents, including the report, “somewhat” refreshed his recollection. Defendant sought production of an unredacted version of the report on the grounds that the sentence was not privileged and, even if it were, Federal Rule of Evidence 612 allowed defendants to discover the document, because it refreshed Greenholtz’s memory. The court rejected both arguments. First, the sentence was properly characterized as privileged because it reflected legal advice that Greenholtz had received from the company’s lawyers and he was communicating that advice to company employees who would need to be aware of the advice. Second, Rule 612 gives the court discretion to order production of a writing used by a witness to refresh his or her memory before testifying if the court determines that “justice requires” the adverse party to have the document for the purpose of more effectively examining the witness or deponent. The court explained that, although there are differing approaches to Rule 612, the better reasoned cases employ the “functional approach” to determining whether “justice requires” disclosure. Relevant factors include whether it can reasonably be said that review of the document influenced the witness’s testimony, that the production of the material would resolve a credibility issue, or that the production is necessary for fair cross-examination. Having reviewed the unredacted report in camera, the court found that there was nothing inconsistent with Greenholtz’s testimony. In addition, there was no indication that review of the privileged information influenced Greenholtz’s testimony.
Outside Counsel May Show Privileged Docs To Her Attorneys Re Wrongful Termination.
In Chubb & Son v. Superior Court, 176 Cal. Rptr. 3d 389 (Cal. Ct. App. 2014) (No. A140860), the court of appeal held that both the insurer and its outside counsel were allowed to disclose to their respective counsel allegedly privileged information relating to third-party insureds. Attorney Lemmon was employed by a law firm “captive” of Chubb. Lemmon filed a wrongful termination case against the captive law firm and against Chubb. The alleged basis for Lemmon’s termination was poor performance, of which Chubb was aware through privileged communications with Chubb’s insureds (Lemmon’s clients), which were in Chubb’s files and referenced in Chubb internal memoranda. Chubb argued that neither it nor Lemmon should be allowed to disclose this privileged information to their respective counsel on the grounds that such disclosure would violate the insureds’ privileges. The effect would be that Chubb would assert privilege without first showing the documents to its litigation counsel, and Lemmon would not be allowed to discuss the basis for her termination with her personal attorneys. The trial court rejected Chubb’s arguments, and the appellate court affirmed. The appellate court cited prior cases that established that in-house counsel has the right to bring wrongful termination actions, and in so doing has the right to use otherwise privileged information, so long as the plaintiff is careful to use only what is reasonably necessary, and the courts use case-specific mechanisms to prevent unnecessary public disclosure of privileged material. The appellate court held that the same rule applied to outside counsel. The appellate court also rejected the notion that the parties should be prohibited from showing third parties’ privileged materials to their respective counsel. As to Chubb, the court could find no basis for Chubb’s position that it could refuse to show its own documents to its litigation counsel, who was responsible for complying with discovery demands. The court held that Lemmon could show her own counsel the materials on three grounds: the disclosure to counsel would not be public disclosure; the disclosures would be limited to what was reasonably necessary for evaluation of the matter; and her counsel was prohibited by ethical duties from disclosing the privileged information to others without her consent.
Delaware Adopts Garner, Orders Wal-Mart To Produce Investigation Materials.
In Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d 1264(Del. 2014) (No. 614, 2013), the Delaware Supreme Court held that the fiduciary exception to the attorney-client privilege established in Garner v. Wolfenbarger applies in “plenary stockholder/corporation proceedings” and in 8 Del. C. § 220 proceedings involving shareholder requests to inspect a company’s books and records. As a result, Wal-Mart was required to produce otherwise privileged internal investigation materials to the major shareholder who requested them. In April 2012, the New York Times published an article regarding an alleged bribery scheme in Mexico in 2005 and an internal investigation that was allegedly thwarted by the company in 2006. In June 2012, a pension fund shareholder of the company sent a demand letter pursuant to Section 220, requesting inspection of broad categories of documents prepared from 2005 to the present, including internal investigation materials. The parties conducted a Section 220 trial; at the conclusion, the trial court entered an order requiring the company to provide to the stockholder internal investigation documents otherwise protected by the attorney-client privilege and by the work product doctrine. The Delaware Supreme Court affirmed. Although the court had previously tacitly endorsed the Garner doctrine, here the court clearly stated that it was adopting the Garner fiduciary exception for both derivative actions and Section 220 proceedings. The court explained that the Garner doctrine is “narrow, exacting, and intended to be very difficult to satisfy.” In this case, the stockholder met its burden of showing good cause by demonstrating, among other things, that the information was not available through other sources and that the request was targeted at specific documents and was not a fishing expedition. The court also affirmed the trial court’s order that the company produce otherwise protected work product. Although the Garner doctrine does not apply to work product, as required by Section 220, the stockholder demonstrated that the documents sought were “necessary and essential,” which also satisfied the requirement for overcoming the work product immunity.
Consultation With In-House Counsel During Contract Negotiations Is Privileged.
In Exxon Mobil Corp. v. Hill, 751 F.3d 379 (5th Cir. 2014) (No. 13-30830), the court held that communications between a company negotiator and company in-house counsel were legal in nature and therefore were privileged. As part of its due diligence relating to a potential contract with ITCO, Exxon Mobil commissioned an industrial hygienist to conduct certain tests. During negotiations, ITCO asked an Exxon non-attorney negotiator, Guidry, for the test results. Guidry spoke with in-house counsel to determine whether to provide the test results. In-house counsel advised Guidry to provide a portion of the results, and counsel drafted a suggested response to ITCO, including a disclaimer of any warranty as to the data’s accuracy (referred to in the case as the “Stein Memo”). The Stein Memo had been inadvertently produced and clawed back in previous litigation, and was introduced in the present case after Exxon had been dismissed as a party. Exxon was allowed to intervene as a third party to ask the court to strike the Stein Memo from the record and order plaintiff to return or destroy all copies of the memo. The trial court denied the motion, finding that the memo provided business rather than legal advice and was therefore not privileged. The appellate court reversed, finding the document was legal and not business in nature. The court explained that the context of the communication made it clear the purpose of the memo was to provide legal advice: “Disclosure of material facts is a universal concern in contract law. . . . it is no surprise that Exxon Mobil would seek advice from its attorney as to how to respond.”
Government’s Public Statements That Targeted Killing Was Legal Waived Privilege.
In New York Times Co. v. U.S. Dep’t of Justice, 756 F.3d 100 (2d Cir. 2014) (Nos. 13-422(L), 13-445 (CON)), the Second Circuit held that the government waived privilege over the legal analysis portion of a memorandum prepared by the Office of Legal Counsel (“OLC”) for the Department of Defense (“DOD”). Plaintiff made a FOIA request for legal opinions or memoranda prepared by the OLC since 2001 that addressed the legal status of targeted killing of people suspected of ties to terrorist groups. The government withheld many documents on grounds including secrecy, deliberative process, and attorney-client privilege. Among the withheld documents was a memorandum prepared by OLC for DOD (the “OLC-DOD Memorandum”), which contained both tactics and strategies for conducting killings, as well as legal analysis regarding the legality of the killings. The trial court sustained the government’s objections. While on appeal, however, a classified “DOJ White Paper” addressing these issues was leaked, and the government officially disclosed the document four days later. Government officials then testified in Congress and mounted a public relations campaign in which several officials, including the Attorney General of the United States, specifically stated that the boundaries of the program had been established by the OLC and the program was “entirely lawful” and complied with “four fundamental law of war principles.” The appellate court held that the public disclosure of the DOJ White Paper and the public statements of government officials waived privilege with respect to the legal analysis portions of the OLC-DOD Memorandum. The court explained that the OLC-DOD Memorandum’s legal analysis tracked the DOJ White Paper, and the Attorney General had testified in Congress the DOJ White Paper’s discussion would be “more clear if it is read in conjunction with the underlying OLC advice.” The court held that, under these circumstances, the government waived privilege over the legal portions of the OLC-DOD Memorandum. However, the court held that the government could withhold the other portions of the document.
Non-Lawyer Notes Re Communications With Counsel Were Privileged.
In Aland v. Mead, 327 P.3d 752 (Wyo. 2014) (No. S-13-0119), the Wyoming Supreme Court held that notes and memoranda prepared by non-lawyers are privileged if they reveal the substance of attorney-client communications. Here, a non-lawyer in the governor’s office, Ferrell, prepared two documents that related to communications he had on behalf of the governor’s office with the Wyoming Attorney General’s Office. The first document consisted of notes Ferrell took during a conversation he had with a deputy attorney general, reflecting the attorney’s legal advice. The second document was a memorandum that Ferrell sent to another non-attorney, the Governor’s policy advisor, in which he recounted legal advice Ferrell had received from the deputy attorney general. Plaintiff argued that neither document was privileged because one document consisted of notes of a non-lawyer, and the second document was a communication between two non-lawyers. In rejecting plaintiff’s argument, the court held that, although the documents were not themselves communications with counsel, the documents recounted the substance of communications with counsel, including counsel’s legal advice. Therefore, the documents were privileged.
Failure To Act Promptly Waived Privilege.
In In re Grand Jury Subpoena Dated March 20, 2013, No. 13-Mc-189 (Patt I) (S.D.N.Y. July 2, 2014), the district court held that waiting more than two weeks to take action to rectify the unauthorized disclosure of privileged information waived the privilege. In this grand jury proceeding, the lawyer for the Subject of the grand jury proceeding engaged an investigator to conduct interviews to further the lawyer’s representation of Subject. The court held that, although the Subject paid the investigator, the investigator was engaged and supervised by the lawyer and was, therefore, an agent of counsel and within the attorney-client privilege. Federal agents subpoenaed the investigator’s testimony, confronted the investigator in her home, and asked her questions regarding meetings during which the lawyer and Subject allegedly attempted to obtain false statements from a third party. The investigator told the agents about these meetings and she handed over her file relating to her work for Subject. The investigator later told the lawyer that she had given her file to the federal agents. Although the lawyer was “stunned” to learn of the disclosures, he waited over two weeks before contacting the government about the disclosures. The lawyer then withdrew from the representation and informed the government that new counsel would file a motion to quash. Prosecutors issued a second subpoena for the investigator, and then reached a tentative deal with Subject to narrow the scope of investigator’s testimony so that it would not elicit privileged information. The deal fell apart and Subject’s new attorney waited three weeks before filing a motion to quash the subpoena. The court held that the two and three week delays were not sufficiently prompt to save any privilege that might otherwise exist. “These delays are unacceptable given the perceived gravity of Investigator’s disclosures. Courts have held that twelve days, even six days, are too long to wait to avoid waiving privilege.”
Availability Of Classwide Arbitration Is “Gateway” Issue For Court To Decide.
By: Michael T. Brody
In Opalinski v. Robert Half International Inc., 761 F.3d 326 (3d Cir. 2014) (No. 12-4444), the Third Circuit determined that a court, rather than an arbitrator, should decide if an agreement to arbitrate authorizes classwide arbitration because it is a “gateway” question of arbitrability. The court concluded that absent clear evidence otherwise, such as a clause delegating that decision to the arbitrator, the availability of classwide arbitration is a “gateway” or substantive question of arbitrability, and as such, is to be decided by a court. The court noted that gateway issues of arbitrability are for the court is to decide, while procedural questions about the arbitration are for the arbitrator to decide. Gateway issues include whether the parties are bound by an arbitration clause or whether an arbitration clause in a binding contract applies to a particular type of controversy. Here, the court concluded that the differences between individual arbitration and class arbitration are so great that a choice between the two implicates the very type of controversy to be resolved. As a result, the availability of classwide arbitration is a gateway issue for the court. This presumption may only be overcome by proof that the parties “clearly and unmistakably” provided otherwise, such as by contractual language unambiguously delegating the question of arbitrability to the arbitrator.
Award Of Costs To Defense Counsel In Class Action Affirmed.
By: Michael T. Brody
In Myrick v. WellPoint, Inc., Nos. 12-3882, 13-2230 (7th Cir. Aug. 19, 2014), plaintiffs filed a class action challenging a health insurance merger. The district court declined to certify a class, and later entered judgment for defendants. Because the case was not been certified as class action, the judgment bound over only the named plaintiffs. The same law firm then filed a similar suit in state court, making the same allegations. After the case was removed, the district court declined to remand, ruled in defendants’ favor, and awarded costs. On appeal, the Seventh Circuit affirmed. While it was not clear whether the costs were to be borne by the class or their counsel, the Seventh Circuit stated in affirming the award of costs that “law firms representing would-be class representatives have portfolios of suits. Some will be settled for considerable sums, others will fail. Paying the costs of failure is part of being in this business.”
Denial Of Class Certification Reversed − Even True Statements Can Be Deceptive.
By: Michael T. Brody
In Suchanek v. Sturm Foods, Inc., No. 13-3843 (7th Cir. Aug. 22, 2014), plaintiffs claimed defendants’ marketing of instant coffee for use in single use coffee makers, such as the Keurig system, was deceptive. Defendant allegedly described instant coffee as “soluble and microground coffee” to conceal that the product different from the Keurig branded coffee system. The district court denied class certification and entered judgment for defendant based on its conclusion that the label was literally true. The Seventh Circuit reversed holding that the marketing materials could be deceptive, even if, in some regards, they were truthful. The court concluded class certification was proper despite the fact that some questions would require individual determination and not every question could be answered on a classwide basis. Otherwise, it would never be possible to certify a consumer class action “because some individual proof is always needed.”
Ascertainability Requires Readily Identifiable Class Members Per Objective Criteria.
By: Michael T. Brody
In recent years, federal appellate courts have emphasized the need for class members to be readily ascertainable. In EQT Production Co. v. Adair, Nos. 13-414, et al. (4th Cir. Aug. 19, 2014), the Fourth Circuit added its voice to the chorus of courts emphasizing the need that a class be ascertainable. Relying on its prior law that members of a proposed class must be “readily identifiable,” the court stated that class cannot be certified unless the court can readily identify the class members in reference to objective criteria. At class certification, plaintiffs need not be able to identify every class member. But, if class members cannot be identified without individualized fact-finding or mini-trials, a class is inappropriate. In EQT, the court faced claims arising out of mineral royalty escrow disputes. On appeal, the Fourth Circuit concluded that because the ownership of a mineral estate frequently changes, and the records reflecting those changes are not easily identifiable, the case presented issues concerning verifying ownership of those class members to receive royalties. The district court had failed to address this issue, and the Fourth Circuit remanded the case for further consideration of whether the class could be identified. The court also remanded for further consideration of commonality.
Denial Of Class Based On Unique Experiences With Product Reversed.
By: Michael T. Brody
In In re IKO Roofing Shingle Products Liability Litigation, 757 F.3d 599 (7th Cir. 2014) (No. 14-1532), plaintiffs alleged a roofing shingle manufacturer sold shingles that did not comply with the industry standard. The district court denied certification, finding the difficulty in applying a common remedy precluded certification. The district court had found the inevitable differences in consumers’ experiences with the product prevented class certification. The Seventh Circuit vacated the denial of certification, finding a class could be certified on each of plaintiffs’ theories of liability, as well as on the potential remedy under plaintiffs’ economic loss claim, i.e., that the failure to comply with the standard made the shingles less valuable at the point of purchase. Plaintiff’s alternate theory, i.e., that the shingles failed due to the fact that they did not meet the standard, would require buyer-specific hearings on causation and remedy. As to this claim, a class could be certified as to liability questions. Thus, under either theory, a class could be certified. The court therefore remanded the matter to the district court for further consideration.
Parties Reach Largest Class-Action TCPA Settlement.
By: Michael T. Brody
The Telephone Consumer Protection Act (“TCPA”) prohibits sending faxes without consent. It also applies to certain automated telephone calls made without prior consent. The TCPA is frequently the subject of class action litigation, as the liquidated damages permitted under the TCPA can be large. Capital One and other collection agencies have announced that they have agreed to settle claims brought under the TCPA, in which it was alleged that defendants had called individuals on their mobile phones without consent. Decl. of Jonathan D. Selbin, In re Capital One Tel. Consumer Prot. Act Litig., No. 12-CV-10064 (N.D. Ill. July 14, 2014) (ECF No. 131-1). The settlement is noteworthy for its amount: the total cash payments under the settlement exceed $75 million, the bulk of which is to be paid by Capital One. The settlement is awaiting preliminary approval.
Terminated Trust Lacks Standing To Intervene In Derivative Action.
In In re Jenzabar, Inc. Derivative Litigation, No. 4521 (Del. Ch. Aug 8, 2014), the Delaware Chancery Court, applying Massachusetts law, held that an expired trust that “still holds assets on behalf of its beneficiary” “can take only those actions related to preserving its assets for purposes of distribution and wind-up, together with those actions for which the trust instrument specifically provides.” According to the Chancery Court, such actions would include “defensive litigation,” but “not the maintenance of the derivative litigation contemplated” in Jenzabar. Specifically, in Jenzabar, a trust holding Jenzabar stock, but which terminated in 2002 by the terms of its trust instrument, sought to intervene during the approval of a derivative action settlement against Jenzabar and several of directors. The defendants subsequently challenged the standing of the trust to intervene. The Chancery Court granted the defendants’ motion to dismiss, holding that the terminated trust lacked standing to intervene because the intervention was not “necessary to preserve Trust assets” and because the trust instrument did not explicitly permit the trust to pursue derivative litigation.
Minnesota Rejects Federal “Plausibility” Pleading Standard.
In Walsh v. U.S. Bank, N.A., 851 N.W. 2d 598 (Minn. 2014) (No. A13-0742), the Supreme Court of Minnesota held that the plausibility pleading standard announced in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009) did not apply to civil pleadings in Minnesota state court. In this case, plaintiff sued defendant mortgagor, seeking to vacate a foreclosure sale because of ineffective service of foreclosure-related documents. Applying the Twombly pleading standard, the trial court dismissed the complaint, ruling that it failed to plead facts giving rise to a “plausible” claim for relief. The court of appeals reversed, and the Minnesota Supreme Court affirmed the appellate court’s ruling. The court held that although the language of Minn. R. Civ. P. 8.01 was identical to its federal counterpart, FRCP 8(a)(2), the U.S. Supreme Court’s rulings in Twombly and Iqbal were merely instructive, not binding. Determining that it had the power to regulate pleading, practice and procedure in Minnesota state courts, the court examined the plain language of Minnesota’s Rule 8 and concluded that it unambiguously means that a claim is sufficient if it is possible, on any evidence which might be produced, to grant the relief demanded. The court reasoned that the rule did not contain the word “plausible” or any variation of it, and to read such a requirement into the rule would violate a basic rule of statutory interpretation.
2d Cir. Adopts Consumer-Reliance Presumption In FTC Contempt Actions.
In FTC v. BlueHippo Funding, LLC, No. 11-374-cv (2d Cir. Aug. 12, 2014), the Federal Trade Commission brought a contempt motion seeking more than $14 million in damages, on behalf of more than 55,000 customers, for defendant’s alleged violation of a Consent Order by failing to disclose to customers material details concerning its store credit policy. The district court granted the FTC’s motion, but awarded only approximately $600,000 in damages, which it calculated based upon record evidence of actual consumer reliance. On appeal, the FTC argued that the damages were too low because the district court had erroneously failed to apply a presumption of customer reliance. The Second Circuit agreed, vacated the award and remanded for re-calculation of damages. Joining the Eighth, Ninth, Tenth and Eleventh Circuits, the Second Circuit held that the FTC was entitled to a presumption of consumer reliance that attaches to potential consumers at the instant of the initial misrepresentation. Thus, the FTC need only show that (i) the defendant made material misrepresentations or omissions that were of a kind usually relied upon by reasonably prudent persons, (ii) the misrepresentations or omissions were widely disseminated, and (iii) consumers actually purchased the defendant’s products. The court reasoned that to require proof of each individual customer’s reliance would be an onerous task with the potential to frustrate the purpose of the FTC’s statutory mandate to protect consumers.
Delinquent Corporation Can Bring Lanham Act Claim In Federal Court.
In Southern California Darts Ass’n v. Zaffina, No. 13-55780 (9th Cir. Aug. 11, 2014), plaintiff (SoCal) promoted the competitive play of the game of darts and coordinated league play for its members for more than 40 years. SoCal was originally formed as a California corporation, but its corporate powers were suspended for failure to pay certain taxes. Defendant, a former member of SoCal, formed his own corporation by the same name (SoCal, Inc), and used the SoCal name and mark to promote his business. Plaintiff brought a Lanham Act claim against defendant in federal court. The district court entered summary judgment in favor of plaintiff and entered a permanent injunction prohibiting defendant from using the SoCal mark. On appeal, defendant argued that plaintiff lacked the capacity to sue because it was a delinquent corporation whose powers had been suspended. The Ninth Circuit rejected that argument and affirmed. The court held that while California law prevents delinquent corporations from bringing a legal action, that law is not dispositive because FRCP 17(b) governs the capacity to sue in federal court. Because FRCP 17(b)(3)(A) provides that an “unincorporated association” that lacks capacity under state law may still sue “in its common name to enforce a substantive right existing under the United States Constitution or laws,” plaintiff had the capacity to bring its Lanham Act claim, at least in federal court.
Court Orders Sanctions For “Train Wreck Of A Deposition.”
In MAG Aerospace Industries, Inc. v. B/E Aerospace, Inc., No. CV-13-6089 (C.D. Cal. Aug. 22, 2014), a federal Magistrate Judge imposed sanctions on defendant and its counsel in connection with what the court described as a “train wreck of a deposition” that “was essentially a filibuster of an entire day of ‘testimony.’” The court found that the witness had been highly evasive and unwilling to simply answer a question, claiming not to understand the meaning of such common terms as “what,” “which,” “does,” “have,” “use,” and “educational background.” Rather than testify to what he did know, the witness kept telling plaintiff’s counsel to ask someone who might know more. The court further found that counsel for the witness “soon hopped on the bandwagon and began interposing inappropriate objections [to] perfectly clear (albeit broad) questions,” and wasted time by trying to engage plaintiff’s counsel in banter. Both the witness and his counsel seemed to confuse a broad question with one that need not be answered. Consequently, the court ordered defendant to reimburse plaintiff’s attorney’s fees incurred during the deposition and in preparation of the motion. The court also ordered defendant to produce a 30(b)(6) witness who is prepared to testify to the issues to which the witness was suppose to testify, and ordered that during that deposition, defense counsel was precluded from making any objection other than for privilege, assumption of disputed facts, or mischaracterization of the record.
Delaware Confirms Director May Orally Tender Resignation But Silence Is Not Enough.
In Biolase, Inc. v. Oracle Partners, L.P., No. 270, 2014 (Del. June 12, 2014), the Delaware Supreme Court affirmed the Delaware Court of Chancery’s ruling that “a director may resign by an oral statement, and there is no requirement that a resignation be in writing.” In Biolase, during a telephonic board meeting, a discussion occurred regarding the resignation of two current board members, Arrow and Low, and the appointment of two new independent board members. In response to the discussion, Arrow stated “[o]kay, I agree, I go along with that.” Arrow later testified that he believed that statement meant the he had resigned from the Biolase board. Low did not speak during any part of the board meeting. Following the meeting, the new board sought the resignation of Biolase’s Chairman and CEO, Pignatelli. In an attempt to deprive the board of the power to remove him, Pignatelli declared both Arrow’s and Low’s resignations ineffective because they were not in writing. In an action filed by Biolase’s largest shareholder, Oracle Partners, the Court of Chancery held that Arrow’s resignation was effective due to his oral statement at the board meeting, but that Low’s was not. According to the Chancery Court, Low’s “silent consent…was not sufficient to establish his resignation.”
Failure To Object To Sleeping Juror Dooms Party’s Post-Trial Motion.
By: Matthew J. Thomas)
In Cummings v. Department of Corrections, 757 F.3d 1228 (11th Cir. 2014) (No. 11-13507), plaintiff’s claims were tried to a jury and, during the trial, one of the jurors fell asleep. The judge questioned the juror in camera, outside the presence of the parties, and concluded that the juror could remain on the jury. Neither party objected to that decision. Following a defense verdict, plaintiff moved for a new trial, arguing that the sleeping juror should have been removed. The trial judge denied the motion, and the Eleventh Circuit affirmed. The court concluded that plaintiff, having been aware that the juror was sleeping but having chosen not to object, had waived this post-trial argument. The court held that a motion for a new trial based upon juror misconduct must be supported by proof that the evidence of misconduct was not discovered until after the verdict was returned. The court further admonished that “a motion for a new trial is not a vehicle for sandbagging an opposing party after the jury returns an unfavorable verdict.”
Court Affirms Dismissal Of Rambling Complaint As A Sanction.
In McNamara v. Brauchler, 570 F. App’x 741 (10th Cir. 2014) (No. 13-1534), plaintiff sued several Colorado state officials over attorney-disciplinary proceedings brought against him. Plaintiff’s 169-page complaint covered a wide variety of unrelated subjects, including an alleged conspiracy among Colorado judges and district attorneys, and the prosecution of his traffic tickets. The court dismissed the complaint, finding that it failed to comply with FRCP 8’s pleading requirements because it contained numerous irrelevant and inappropriate statements, launched ad hominem attacks on defendants and others, and failed to precisely articulate plaintiff’s claims. The court ordered plaintiff to submit an amended complaint, instructing him to state each claim separately, to identify the defendant(s) against whom each claim was brought, and to avoid conclusory and irrelevant allegations and attacks. Plaintiff responded by filing a 132-page amended complaint that was riddled with the same problems as the initial complaint. The court concluded that plaintiff had failed to comply with its order, and dismissed the action as a sanction. The Tenth Circuit affirmed. The court found that plaintiff’s failure to comply with Rule 8 – requiring a “short and plain statement” of the claims – actually prejudiced defendants because it would force them to comb through more than a hundred pages of distracting and irrelevant detail to determine which allegations warranted a response. The court concluded that the remaining requirements for sanctions were met, particularly given that the court had tried to help plaintiff by telling him what his complaint must (and must not) include, and had warned him that failure to comply might result in dismissal.
Sixth Circuit Weighs In Regarding Recoverable Costs Under FRCP 68.
In Hescott v. City of Saginaw, 757 F.3d 518 (6th Cir. 2014) (Nos. 13-2103, 13-2153), plaintiffs brought a Section 1983 action against defendants in federal court. Before trial, defendants submitted an offer of judgment under FRCP 68, in which they proposed to settle the case for $15,000. Plaintiffs rejected the offer, proceeded to trial, and received a jury award of $5,000. Because the verdict was less than defendants’ Rule 68 offer, defendants requested an award of its post-offer costs, which they contended included their attorney’s fees. The trial court declined to enter such an award. On appeal, the Sixth Circuit addressed the issue of whether attorney’s fees were recoverable as post-offer “costs” under Rule 68, which the court acknowledged was a question of first impression in that circuit. The court joined the First, Third, Fifth, Seventh, Eighth, and Ninth Circuits in holding that attorney’s fees are not recoverable costs for purposes of Rule 68. The court also held, however, that plaintiff’s attorney’s fees were relevant insofar as any attorney’s fees awarded must be added to the amount of the verdict to determine whether the outcome at trial was more or less favorable than the settlement offer. The court held that plaintiffs were statutorily entitled to recover their attorney’s fees as the prevailing party, and remanded the case to the district court for a determination of those fees. Only then could it be determined whether plaintiffs’ total recovery at trial was more or less than defendants’ Rule 68 offer.
Expired Email Address No Excuse For Counsel’s Unawareness Of ECF Filings.
In Salata v. Weyerhaeuser Co., 757 F.3d 695 (7th Cir. 2014) (No. 13-3136), defendants filed a motion, via ECF, to compel plaintiff to produce certain discovery. The court entered an order granting the motion to compel, ordering plaintiff to produce all outstanding discovery by a certain date, and setting a status hearing. Plaintiff’s counsel failed to produce the discovery, and failed to appear at the status hearing. Defendant moved to dismiss the case as a discovery sanction under FRCP 37 and/or for failure to prosecute under FRCP 41(b), which the court set for a hearing. Plaintiff’s counsel again failed to show at the hearing, and the court dismissed the case. Plaintiff’s counsel subsequently filed a motion to reinstate, attempting to excuse her failure to respond to the motions and appear at the hearings by claiming she never received the email notifications of those events. Plaintiff, however, refused to produce the outstanding discovery, and the court denied the motion to reinstate. The Seventh Circuit affirmed the dismissal of the action, holding that by registering with the court’s ECF system, plaintiff’s counsel had consented to electronic service of all documents, and it was counsel’s responsibility to maintain a current and active email address to which such service could be sent. The court concluded that if counsel was unaware of hearings and motions because the email address she had on file with the court was no longer current, her ignorance of the docket was “nothing but negligence” and does not constitute “excusable neglect.”
Denial Of Sanctions Affirmed Despite Negligence/Lack Of Document Retention Policy.
By: Daniel J. Weiss
In Automated Solutions Corp. v. Paragon Data Systems, Inc., 756 F.3d 504 (6th Cir. 2014) (Nos. 13-3025, 13-3058), the Sixth Circuit held that sanctions were not warranted for defendant’s negligent destruction of a hard drive and its failure to preserve its daily back-up tapes. Although the appellate court found that the defendant had a duty to preserve the hard drive, and was negligent in failing to do so, it held that the district court did not clearly err in determining that a reasonable jury could not find the missing hard drive would support the plaintiff’s claims. The plaintiff argued that relevance could be inferred because the defendant’s failure to institute a litigation hold constituted gross negligence per se. The Sixth Circuit disagreed, explaining that “we have declined to impose bright-line rules” with respect to culpability determinations and whether sanctions are appropriate. As for the back-up tapes, the court also held that the defendant did not have a duty to preserve them, as the back-up tapes were maintained solely for the purpose of disaster recovery.
Tardy Request Denied For Document Retention Policies And Litigation Hold Notices.
By: Daniel J. Weiss
In PersonalWeb Technologies, LLC v. Google Inc., No. C13-01317 (N.D. Cal. Aug. 19, 2014), the district court denied the plaintiff’s request for an order compelling the defendant to produce its document retention policies and the litigation hold notices issued in the case. The court reasoned the request was made too late – over a year and a half after the plaintiff’s interrogatories originally requesting the information were made, and well after the fact-discovery cutoff date. The district court also found that the plaintiff’s failure to explain the eighteen-month gap, coupled with the court’s recent finding that the plaintiff committed spoliation by failing to institute its own litigation hold, suggested that the plaintiff was merely trying to retaliate against the defendant with its request. The court also held that the litigation hold notice itself was protected attorney-client communications and/or work product.
District Court Quashes Third-Party Subpoena Served On Defendant’s New Employer.
By: Daniel J. Weiss
In Boston Scientific Corp. v. Lee, No. 14-mc-80188 (N.D. Cal. Aug. 4, 2014), the plaintiff, Boston Scientific Corp. (“BSC”), sued its former employee for allegedly breaching his confidentially agreement with BSC while working for one of BSC’s direct competitors, Nevro. BSC served a subpoena on Nevro requesting a complete forensic image of two laptops used by the defendant. Nevro moved to quash the subpoena, because the second laptop was used by other Nevro employees before the defendant used the laptop, and it contained confidential information and trade secrets. Although the district court agreed that the computers contained discoverable information, it held that “by demanding nothing less than a complete forensic image of not just one but two laptops belonging to a direct competitor, [BSC] demands too much.” The court found that compliance with the subpoena would necessarily disclose material protected by Federal Rule of Civil Procedure 45, such as unrelated trade secrets and confidential information, and quashed the subpoena.
Discovery Order Too Vague To Support Sanctions Despite ESI Failures.
By: Daniel J. Weiss
In HM Electronics, Inc. v. R.F. Technologies, Inc., No. 12 cv 2884-BAS (JLB) (S.D. Cal. July 3, 2014), the plaintiff moved to sanction the defendant for failing to comply with an order entered by a Magistrate Judge, requiring the defendant to produce certain categories of documents. After the Magistrate’s order was entered, the parties agreed that the defendant would conduct “broad-based ESI searches using twenty-two agreed upon search terms.” Although the district court agreed that the defendant violated the Magistrate’s order by failing to produce many of the documents, and granted the plaintiff’s motion for sanctions in part, the court denied the plaintiff’s request for sanctions arising from the defendant’s failure to search its ESI using the agreed upon terms. The court held that “[w]hile the parties may have agreed that this was the best way to put the outstanding document production to rest, the Court is not persuaded on the record before it that its failure to perform the agreed upon searches would violate the [Magistrate’s] order.” The court reasoned that the order did not explicitly require the defendant to use the search terms, and also noted that the parties had not worked out all of the details regarding the defendant’s ESI search. For example, the parties had not agreed on “details such as cost sharing, the custodians to be searched, or whether a third party vendor should be utilized.”
Texas Clarifies Standards For When Trial Courts May Issue A Spoliation Instruction.
By: Daniel J. Weiss
In Brookshire Brothers, Ltd. v. Aldridge, No. 10-0846 (Tex. July 3, 2014), the Texas Supreme Court held that a spoliation instruction may not be given to a jury absent a finding that the spoliation was intentional. At issue in this premises-liability case was whether the trial court erred in providing the jury with a spoliation instruction where the defendant retained a portion of a surveillance video that recorded the plaintiff’s fall, but allowed additional footage to be automatically erased. The court explained that “the harsh remedy of a spoliation instruction is warranted only when the trial court finds that the spoliating party acted with the specific intent of concealing discoverable evidence, and that a less severe remedy would be insufficient to reduce the prejudice caused by the spoliation.” The court held that the trial court abused its discretion by issuing a permissive adverse inference instruction and allowing the jury to hear evidence regarding the spoliation because there was no evidence that the defendant allowed the additional footage to be erased “with the requisite intent to conceal or destroy relevant evidence or that [the plaintiff] was irreparably deprived of any meaningful ability to present his claim.”
Attorneys Failed To Investigate Client Reps’ Credibility Regarding Document Production.
By: Daniel J. Weiss
In Brown v. Tellermate Holdings Ltd., No. 11-cv-1122 (S.D. Ohio July 1, 2014), the district court found that the defendants’ attorneys “fell far short of their obligation to examine critically the information which [their clients] gave them about the existence and availability of documents requested by [the plaintiff].” For example, in this age-discrimination case, the defendants’ attorneys repeatedly represented to the plaintiff and the court that none of the defendants or their representatives could access any of the plaintiff’s sales history or information. This turned out to be incorrect. The court also described several other inaccurate statements the defendants’ attorneys made to the court, and criticized the defendants’ designation of over 100 documents as “attorneys’ eyes only” without a proper basis. The court emphasized that Rule 26(g) of the Federal Rules of Civil Procedure require attorneys to perform “a reasonable inquiry” before certifying that the information contained in every disclosure, discovery response, or objection is correct and conforms to the Federal Rules. The court explained that, as a result, “counsel cannot simply take a client’s representations…at face value.” The court suggested that an attorney’s responsibilities may be particularly important where ESI is involved because “[a]s discoverable information becomes increasingly digital, e-discovery…plays a larger, more crucial role in litigation.”
Federal Court Rules Restitution is Not Uninsurable Under Delaware Law.
In July, the United States District Court for the District of Minnesota issued a pro-policyholder decision rejecting an oft-made insurer argument regarding the supposed uninsurability of restitution. U.S. Bank Nat’l Assoc. v. Indian Harbor Ins. Co., No. 12-cv-3175 (D. Minn. July 3, 2014)(ECF No. 105), reconsideration denied No. 12-cv-3175(D. Minn July 24, 2014)(ECF No. 108). U.S. Bank sought professional liability insurance coverage for a $55 million settlement and associated defense costs as to three class actions brought by U.S. Bank customers alleging overcharging of overdraft fees and seeking the return of such fees. The insurers denied coverage and brought a motion for judgment on the pleadings, claiming that the settlement entered into by U.S. Bank was excluded from the definition of “Loss” in the insurance policies. That definition precluded coverage for “[m]atters which are uninsurable under the law pursuant to which this Policy is construed,” which in this case was Delaware law. The court ruled that the settlement was not uninsurable under Delaware law because no Delaware statute or case law precluded insurance coverage for settlements constituting restitution. Further supporting its decision, the court pointed to an exclusion in the policies that precluded coverage for ill gotten gains (such as restitution), but only as determined by a final adjudication in an underlying action. The court reasoned that this meant the policies excluded restitution only in the event of a final adjudication and by implication provided coverage for restitution stemming from a settlement. The court also held that an extension of credit exclusion did not apply because the insurers’ interpretation was overbroad and untenable and because the class actions alleged fees were charged when there were still positive balances in customer accounts.
Insurer’s Duty to Defend Triggered by “Publication” of Private Information Through Online Disclosure.
By: Jan A. Larson
In a recent case from the U.S. District Court for the Eastern District of Virginia, the inadvertent online disclosure of confidential medical records was held to constitute a “publication” giving “unreasonable publicity to,” or “disclos[ing] information about,” a person’s private life and trigger the insurer’s duty to defend. Travelers Indemnity Co. of America v. Portal Healthcare Solutions, LLC, No. 13-cv-917 (E.D. Va. Aug. 7, 2014) (ECF No. 33). The insured, Portal Healthcare Solutions (“Portal”), sought coverage for an underlying class action alleging that Portal failed to safeguard the confidential medical records of patients at a Northern Virginia hospital following the inadvertent online disclosure of certain records. These records were allegedly accessible, viewable, downloadable and printable by the general public, without any security restrictions, for approximately four months before being discovered. After its insurer denied any duty to defend or indemnify the underlying action, both Portal and the insurer filed cross-motions for summary judgment on the duty to defend. The insurance policies at issue contained two relevant prerequisites to coverage: first, an electronic “publication” of material, and second, that the publication give “unreasonable publicity to,” or “disclos[e] information about,” a person’s private life. The policies did not, however, define any of these key terms. Looking to common dictionary definitions and resolving ambiguous terms in favor of the insured, the court held that the alleged online disclosure easily fell within the relevant policy language, thus triggering the insurer’s duty to defend. In doing so, the court rejected each of the insurer’s two defenses—that the disclosure had been inadvertent and that no third-party was alleged to have viewed the confidential records. According to the court, the definition of “publication” does not depend upon the would-be publisher’s intent, but rather on whether the information was, in fact, placed before the public. Likewise, the court found that “publication” does not require actual access by a third-party because it occurs at the moment the information is made available. In closing the court noted that were it to follow the insurer’s logic, a book that is bound and placed on the shelves of a book store would not be deemed “published” until a customer takes it off the shelf and reads it.
District Court Limits Reach of Internet Services Exclusion.
By: Ravi S. Shankar
The U.S. District Court for the District of Rhode Island recently ruled that an Internet Services Exclusion found in a Directors and Officers (“D&O”) insurance policy excluded coverage for only a small portion of an underlying judgment. Bank of Rhode Island v. Progressive Casualty Insurance Co., No. 13-164 (D.R.I. May 15, 2014). The insured bank sought coverage for an underlying judgment arising from negligence and other claims. The claimants, a corporate customer who had a checking account and line of credit with the insured and its principal, alleged that the insured mismanaged their accounts, enabling one of the claimant’s employees to embezzle funds. After a jury awarded damages, the insured sought to recover its defense and judgment costs from its D&O insurer. The insurer argued that the Internet Services Exclusion completely barred coverage. It excluded coverage for losses involving the insured providing “services through the transmission of data to or from an Internet website … owned, operated or controlled by the Company.” The court determined that the claimants’ allegations did involve providing “services through the transmission of data” over the Internet, such as the claimants’ employee transferring funds through the insured’s online banking system. However, on the whole, those allegations did not form a significant part of the claimants’ negligence claim. The court did not determine the exact allocation between covered and uncovered claims, as the policy included an arbitration provision for allocation disputes.
No Apportionment Of Wrongful Death Damages; Death Is Indivisible Injury.
By: Barry Levenstam
In Carter v. Wallace & Gale Asbestos Settlement Trust, 96 A.3d 147 (Md. 2014) (No. 84), the Maryland Court of Appeals (Maryland’s highest court) rejected an argument that damages should be apportioned among parties responsible for contributing to the underlying injury of plaintiff’s decedent in a wrongful death case. Plaintiff sued the manufacturer of asbestos to which he’d been exposed at work for injuries resulting from lung cancer. The plaintiff died while the lawsuit was pending, and his family members added a claim for wrongful death to the lawsuit. Because plaintiff was a lifelong smoker, the asbestos defendant blamed tobacco manufacturers for a substantial portion of the wrongful death damages and urged apportionment of those damages. The Maryland Court of Appeals rejected the argument, holding that Maryland’s common law allowed the plaintiff to sue one defendant for the full amount of damages where that defendant was a substantial factor in causing plaintiff’s injury, even if another party wrongfully contributed to the harm, unless the record reflects a factual basis for apportionment. Because Maryland law views death as an indivisible injury, wrongful death damages cannot be apportioned. Consequently, the court affirmed the trial court’s entry of judgment against the defendant for the entire amount of plaintiff’s wrongful death damages.
Constitutional Challenge To Wisconsin Risk-Contribution Theory Rejected.
By: Barry Levenstam
In Gibson v. American Cyanamid Co., 760 F.3d 600 (7th Cir. 2014) (No. 10-3814), the Seventh Circuit addressed a constitutional challenge to Wisconsin’s common law Risk-Contribution Theory. The Risk-Contribution Theory, adopted by the Wisconsin Supreme Court in Thomas v. Mallet, 701 N.W. 2d 523 (Wis. 2005), provides that a plaintiff suing for damages based on exposure to lead paint who cannot ascertain the manufacturer of the specific paint used may sue all of the industry leaders. Where a plaintiff establishes that his or her injuries result from exposure to lead paint, the burden shifts to the defendant-manufacturers to prove that they did not manufacture the paint to which the plaintiff was exposed. Those who fail to establish that defense become liable. The Seventh Circuit concluded that the Risk-Contribution Theory comports with due process requirements because its relaxed causation standard effectuates a rational state goal of having the lead paint manufacturers share the costs of injuries caused by their product rather than leaving innocent injured plaintiffs uncompensated. The court also held that a recently-enacted Wisconsin statute that eliminates the Risk-Contribution Theory in pending and future court cases violated due process in this case, which already was pending when the legislature enacted this statute, because the plaintiff had a vested right in his claims under the Theory.
Idaho Supreme Court Defines “Defective.”
By: Barry Levenstam
In Massey v. Conagra Foods, Inc., 328 P.3d 456 (Idaho 2014) (No. 40504), the Supreme Court of Idaho reviewed a summary judgment for defendant in a case in which the plaintiff alleged that defendant’s poultry pot pies were defective because they contained salmonella. Based upon expert testimony from an Idaho state deputy epidemiologist, the trial court concluded that salmonella was not an “adulterant” for uncooked food products and consequently, the fact that the defendant’s pot pies contained salmonella did not make them “defective” under Idaho law. The appellate court observed that the terms “adulterant” and “adulterated” are not terms of art used in Idaho law, but derive from a federal statute addressing the inspection of poultry and poultry products, and deemed it error to equate those terms with the term “defective” under Idaho state law. The court then held that a product may be “defective” under Idaho law if it is “unreasonably dangerous,” which it defined as “dangerous to an extent beyond that which would be contemplated by the ordinary consumer who purchases it, with the ordinary knowledge common to the community as to is characteristics.” Thus, whether the pot pies at issue were “defective” under Idaho law remained an open question of fact for trial. Consequently, the court vacated the summary judgment and remanded the case for further proceedings in the trial court.”
Tax Court Declines Jurisdiction Over Whistleblower’s Appeal From Non-Final Action.
A whistleblower was cooperating with the Department of Justice and the IRS in connection with an ongoing investigation of two Swiss bankers. When the investigation led to incriminating information about a substantial penalty paid by a taxpayer, the whistleblower filed a claim with the IRS Whistleblower Office. When counsel for the whistleblower inquired as to the status of the claim, an Office representative responded that the claim was still open but also sent along an IRS memorandum showing that the type of penalty paid by the taxpayer could not be the basis of an award. The U.S. Tax Court rejected the whistleblower’s argument that this constituted a final determination from which he could appeal to the court. Thus, the court dismissed the whistleblower’s appeal for lack of jurisdiction. Whistleblower 22231-12W v. Comm’r, T.C. Memo. 2014-157 (U.S. Tax Ct. Aug. 4, 2014).
Dodd-Frank Act Does Not Protect Overseas Whistleblowers.
Because legislation is presumed to apply only domestically unless Congressional intent indicates otherwise, the provision of the Dodd-Frank Act granting protection to whistleblowers does not apply extraterritorially, as there is no evidence of Congressional intent otherwise. Liu Meng-Lin v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014). Here, the whistleblower lived in Taiwan and was employed by the Chinese subsidiary of a German company. The corrupt activities took place in China, North Korea, and Hong Kong, and the whistleblower reported the misconduct to superiors in China and Germany. The fact that Siemens AG was listed on the New York Stock Exchange did not change the extraterritorial nature of the individuals, entities, and misconduct at issue.
Securities-Swap Agreements Based On Foreign Exchanges Not Subject To U.S. Laws.
The Second Circuit affirmed the dismissal of plaintiffs’ securities fraud claims because the securities-based swap agreements at issue referenced foreign shares and would thus lead to an impermissible extraterritorial application of the United States securities laws. Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, No. 11-397-cv (2d Cir. Aug. 15, 2014). In so holding, the Second Circuit rejected plaintiffs’ argument that, because the swap at issue was transacted within the United States, U.S. securities laws would apply. Absent a clear expression of Congressional intent otherwise, courts will assume that Congress intended for Section 10(b) to apply only to swap agreements that reference U.S.-traded securities.
Default Post-Judgment Interest Rate Applied To Back Wages Awarded Under SOX.
The Ninth Circuit held that post-judgment interest rate in a Sarbanes-Oxley whistleblower case is determined by 28 U.S.C. § 1961, which determines the rate that applies to all civil cases in federal district courts. Asdale v. Int’l Game Tech., No. 11-16538 (9th Cir. Aug. 15, 2014). The district court had awarded prejudgment interest pursuant to 26 U.S.C. § 6621, which applies to the underpayment of federal taxes. The court held that the higher interest rate under § 6621 does not apply to post-judgment interest, and rejected appellees’ argument that the interest rate set forth in §6621 must apply to all cases commenced before the Department of Labor.
Court Certifies Interpretation Of “Whistleblower” For Interlocutory Appeal.
A Nebraska federal district court, which previously held that a former executive qualified as a “whistleblower” under the Dodd-Frank Act despite having never provided information to the SEC, certified for interlocutory appeal the question of whether, for purposes of the anti-retaliation provision, “whistleblower” should be read in the ordinary sense of the word. Bussing v. COR Clearing, LLC, No. 12-cv-238 (D. Neb. July 17, 2014). According to the court, the interpretation of “whistleblower” is a controlling question of law that will materially advance the termination of the litigation because: (1) the federal court’s subject matter jurisdiction is premised on the plaintiff’s Dodd-Frank claim; (2) the plaintiff’s state law claim relies on Dodd-Frank as the source of public policy, which is an element of her state law claim; and (3) appellate review will clarify the damages potentially available to the plaintiff. The district court refused, however, to stay the proceedings during the pendency of the appeal.
Attorney “Lightly” Sanctioned For Unethical Conduct, Including Ghostwriting Briefs.
Plaintiffs’ attorney was sanctioned by a Pennsylvania federal district court for unprofessional behavior and violation of her duty of candor to the court, and was ordered to complete five hours of ethics-based Continuing Legal Education. Order, Ely v. Cabot Oil & Gas Corp., No. 09-cv-02284 (M.D. Penn. July 21, 2014) (ECF No. 546). The sanctions were ordered because, according to the court, the attorney routinely abused and harassed opposing counsel with profanity and interfered with court-ordered site inspections of plaintiffs’ properties; she also failed to timely respond to discovery requests. Further, her admission to practice before the Middle District of Pennsylvania was revoked after it was learned that she was not a member of the Pennsylvania bar. Thereafter, the attorney ghost-wrote many of plaintiffs’ submissions while at the same time misled the court by stating that the plaintiffs were proceeding pro se. As the ethical rules on ghostwriting are currently evolving, the court was “loathe to hang an order of sanctions on the peg of ghostwritten submissions,” but nonetheless sanctioned the attorney for violating her duty of candor.
Esquenazi Defendants Ask Supreme Court to Define “Instrumentality” Under FCPA.
By: Jessi K. Liu
Joel Esquenazi and Carlos Rodriguez, former telecommunications executives convicted of FCPA violations for paying kickbacks to employees of the Haitian state telecommunications company, Telecommunications D’Haiti S.A. (“Haiti Telco”), filed a petition for certiorari. United States v. Esquenazi, 752 F.3d 912 (11th Cir.),petition for writ of cert. filed by Defendant-Appellant, No. 14-189 (U.S. Aug. 14, 2014). They urged the Supreme Court to review the Eleventh Circuit’s holdings that Haiti Telco is an “instrumentality” of the Haitian government for purposes of the FCPA, and that its employees are foreign officials. The FCPA-related “questions presented” are whether the Eleventh Circuit’s definition of “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own”: (1) fails to satisfy the constitutional requirement of adequate notice of what specific conduct violates the FCPA; and (2) is erroneously derived from commentary to an unrelated treaty (the Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public officials in International Business Transactions) that post-dates the FCPA’s enactment.
Texas Supreme Court Grants Review In FCPA Defamation Case.
By: Jessi K. Liu
The Texas Supreme Court granted review of the decision of the Texas Court of Appeals in Shell Oil Co. v. Writt, in which the appellate court held that Shell Oil Co. (“Shell”) did not enjoy absolute immunity from civil lawsuits alleging defamation on the basis of communications made to the DOJ in the course of a DOJ investigation. Order Granting Petition for Reviewin No. 13-0552 (Tex. Aug. 22, 2014). The plaintiff, Robert Writt, is a former Shell employee who alleged that Shell voluntarily submitted a report to the DOJ in which it falsely stated that he had engaged in unethical conduct in connection with paying bribes to foreign officials and that he had made inconsistent statements in the course of Shell’s internal investigation. The trial court granted Shell’s motion for summary judgment, finding that Shell enjoyed absolute immunity from suit in these circumstances. The court of appeals reversed, holding that Shell’s communications to DOJ were protected only by a conditional privilege for statements made in the public interest. The Texas Supreme Court will hear oral argument on November 6, 2014.
Plaintiff Failed To State Retaliation Claim Based On Violation Of Compliance Policy.
In drafting a corporate compliance policy, one concern is the extent to which a corporation’s policy will be assumed to set a legal standard for corporate conduct. In Hitesman v. Bridgeway, Inc., 93 A.3d 306 (N.J. 2014), the plaintiff was a nurse employed by a nursing home. He was terminated after raising concerns internally, to regulatory agencies and to the media about infection control at the facility. He filed suit under New Jersey’s Conscientious Employee Protection Act, which bars retaliation against a health professional who reports on activity reasonably believed to constitute “improper quality of patient care” or to be “incompatible with a clear mandate of public policy concerning the public health.” N.J.S.A. 34:19-3. Plaintiff prevailed after a jury trial, but the appellate court reversed, and the New Jersey Supreme Court affirmed the reversal. Under either prong of the statute, plaintiff needed to identify a source of law or other authority constituting an expression of public policy that set a governing standard for the employer’s conduct about which the plaintiff had complained. Among other things, plaintiff relied on the employer’s Employee Handbook Code of Conduct and on the employer’s Statement of Resident Rights. Neither document, however, had any governing standard regarding infection control, and plaintiff thus failed to establish a source of public policy to support his claim. The court did not, however, expressly consider whether an employer’s internal codes could constitute expressions of public policy that could support the plaintiff’s claim; rather, it implicitly assumed the answer to that question to be yes, and instead examined whether the contents of those codes matched up with the conduct to which the plaintiff objected resulting in his termination.
Consultant’s Evaluation Of Employee’s Conduct Protected As Work Product.
In Lindon v. Kakavand, No. 13-026 (E.D. Ky. Aug. 15, 2014), a plaintiff sued a physician for malpractice and sought discovery from the medical center where the allegedly negligent procedure had been performed. The requested discovery included a report prepared by an outside consultant hired to investigate the procedure. The medical center contended that the report was prepared in anticipation of litigation and thus protected as work product. The plaintiff argued that investigating the procedure was a business requirement of the medical center and thus not in anticipation of litigation. It pointed to a number of state hospital licensure rules, administrative regulations, and accreditation standards. The court found that none of the cited authorities contained any specific provision obligating the medical center to conduct the review. The court also noted that the medical center’s letter retaining the consultant expressly referenced anticipated litigation. Under these circumstances, the court found the report to be protected as work product.
DOJ Secures More Guilty Pleas From Executives In Enforcement Actions.
By: Jessi K. Liu
A former executive of the U.S. subsidiary of French power company Alstom SA and the former chief executive officer of Lufthansa subsidiary Bizjet International Sales and Support Inc. pleaded guilty to FCPA charges.
o The former vice president of regional sales at Alstom Power Inc., a Connecticut-based Alstom subsidiary, pleaded guilty to conspiring to violate the FCPA in connection with the award of a power project in Indonesia. See Press Release, U.S. Dep’t of Justice, Office of Public Affairs, Former Executive of French Power Company Subsidiary Pleads Guilty in Connection with Foreign Bribery Scheme, Release No. 14-752(July 17, 2014). Three other defendants previously pleaded guilty to FCPA charges stemming from the same scheme, as did Marubeni Corporation, Alstom’s consortium partner on the Indonesian project.
o The former Bizjet CEO pleaded guilty to conspiracy to violate the FCPA and a substantive FCPA violation in connection with a scheme to bribe Mexican and Panamanian officials in exchange for their help in obtaining contracts for Bizjet to perform aircraft maintenance and repair services. See Press Release, U.S. Dep’t of Justice, Former Chief Executive Officer of Lufthansa Subsidiary BizJet Pleads Guilty to Foreign Bribery Charges, Release No. 14-778(July 24, 2014). Two other former Bizjet executives previously pleaded guilty to similar charges. The company itself entered into a deferred prosecution agreement with DOJ that included a $11.8 million penalty.
Second Circuit Affirms Dismissal Of FCPA-Based RICO Suit Against Siemens.
By: Jessi K. Liu
The Second Circuit affirmed the dismissal of a civil Racketeer Influenced and Corrupt Organizations Act suit brought by Mexico’s national oil company, Petróleos Mexicanos, and its subsidiary Pemex-Refinanción (collectively “PEMEX”) against Siemens and SK Engineering & Construction Company, Ltd. Petroleos Mexicanos v. SK Eng’g & Constr. Co., No. 13-3175-cv (2d Cir. July 16, 2014). The suit alleged that the defendants violated RICO by bribing PEMEX officials. The court observed that the extraterritorial application of RICO is “coextensive with the extraterritorial application of the relevant predicate statutes.” PEMEX relied on the wire fraud statute to plead predicate acts, even though the court previously had held that the wire fraud statute cannot serve as such a predicate. The Second Circuit also concluded that the domestic activity alleged (that the financing was obtained in the United States, that the invoices were sent to a bank in the United States for payment, and that the bank issued payment from the United States) was “simply insufficient to sustain RICO jurisdiction.” All of the activities in the alleged scheme, the court observed, took placed outside the United States.
Noble Executives Resolve FCPA Charges With Injunctive Relief Only.
By: Jessi K. Liu
The district court for the Southern District of Texas entered a final judgment in a civil action brought by the SEC against former Noble Corporation CEO Mark A. Jackson and current Noble employee, as well as former Director and Division Manager of Noble’s Nigerian subsidiary, James J. Ruehlen. See SEC Settles Pending Civil Action Against Noble Executives, Litig. Release No. 23038(July 7, 2014). The complaint alleged that Jackson and Ruehlen had authorized bribes to Nigerian customs officials to process paperwork falsely showing that certain oil rigs had been exported from Nigeria and re-imported, as required under Nigerian law, although in reality the rigs never left Nigeria. According to the SEC, the false paperwork saved Noble the additional customs duties associated with export and re-import. The settlement, entered only six days before the case was to have gone to trial, did not require a financial penalty, but only injunctive relief. Previously, Noble had settled FCPA charges brought by the SEC and entered into a non-prosecution agreement with DOJ based on the same conduct.
Smith & Wesson Settlement A “Wake-Up Call” For Businesses Entering High-Risk Markets.
By: Jessi K. Liu
Smith & Wesson Holding Corporation (“Smith & Wesson”) settled charges brought by the Securities Exchange Commission alleging violations of the Foreign Corrupt Practices Act (“FCPA”). See Smith & Wesson Holding Corp., Exchange Act Release No. 72,678(July 28, 2014). The SEC found that in 2008, Smith & Wesson retained a Pakistani agent to assist it in obtaining a contract with a Pakistani police department, and in connection with that effort, Smith & Wesson authorized the agent to provide more than $11,000 worth of guns as gifts to Pakistani police officials and to make additional cash payments. Smith & Wesson ultimately obtained a contract to sell approximately 500 pistols to the police department, for which it received a profit of about $107,000. The SEC also found that Smith & Wesson authorized third‑party agents to make improper payments in Bangladesh, Indonesia, Nepal, Turkey, but the company either failed to win or to consummate contracts in those countries. Smith & Wesson agreed to pay $107,852 in disgorgement, $21,040 in prejudgment interest, and a $1.906 million penalty. Notably, the company was allowed to settle the charges without admitting or denying the SEC’s findings; the Commission publicly stated that it intended the matter to serve as a “wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales.”
Internal Investigation Report Not Discoverable In Suit By Terminated Employee.
In Mendez v. Saint Alphonsus Regional Medical Center, Inc., No. 12-cv-26-EJL-CWD (D. Idaho July 10, 2014), an employee had made employment-related complaints through his employer’s Organizational Integrity Program. The company, under the direction of in-house counsel, conducted an internal investigation and prepared an investigative report reflecting the conclusions reached. In his subsequent employment suit, the employee sought production of the investigative report and the investigative file. The court denied the request. The court first found that the investigation was privileged because it was conducted at the direction of counsel for the purpose of preparing for potential litigation. The court also found the materials to be subject to the work-product protection because the investigation was performed in anticipation of litigation. The employee asserted that the corporation had waived any applicable protections because the corporation had asserted its investigation as a defense to the employee’s hostile work environment claim. The employer argued that it had exercised reasonable case to prevent and correct harassing behavior. The court noted that, as a general matter, an employer cannot use either an investigation or the action it took in reliance on the investigation to support such a defense without waiving the privilege. The court held that the corporation here had not relied on the internal investigation itself to support this defense, and thus found there was no waiver.