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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.
If you would like to be added to the mailing list for The Spotlight, please send an email to Matthew F. Bradley at firstname.lastname@example.org.
Federal Common Law Determines The Definition Of “Arbitration.”
By: Howard S. Suskin
The Second Circuit held that the meaning of “arbitration” under the Federal Arbitration Act is governed by federal common law, not state law, thus sharpening the split among the circuit courts of appeals on this issue. Bakoss v. Certain Underwriters at Lloyds of London, 707 F.3d 140 (2d Cir. 2013) (No. 11-4371). The contract between the parties contained a dispute resolution clause, but the parties disagreed as to whether that clause was an arbitration agreement. One party contended that because the FAA does not supply a definition for “arbitration,” the courts should look to state law, rather than federal common law, to define that term. The Fifth and Ninth Circuits have applied state law to determine whether a dispute resolution process amounts to “arbitration,” but the Second Circuit disagreed. Relying on congressional intent to create a uniform national arbitration policy, the Second Circuit held that federal common law is to be applied in determining whether a contractual clause is an “arbitration” agreement under the FAA.
Insurance Disputes Held To Be Not Subject To Arbitration.
By: Howard S. Suskin
The Washington State Supreme Court upheld the lower court’s denial of a motion to compel arbitration of an insurance coverage dispute on grounds that such disputes are not arbitrable as a matter of state and federal law. State Dep’t of Transp. v. James River Ins. Co., 292 P.3d 118 (Wash. 2013) (No. 87644-4) (en banc). The court found that arbitration clauses are unenforceable under a Washington state law that prohibits insurance contracts from depriving state courts of jurisdiction over actions against an insurer. Further, the court found that the federal McCarren-Ferguson Act, which prohibits any act of Congress from superseding any state law enacted for the purpose of regulating the business of insurance, shields the Washington state statute from preemption by the Federal Arbitration Act.
Arbitrator’s Discovery Order Not Subject To Judicial Review Until After Award.
By: Howard S. Suskin
Addressing what it described as an issue of first impression nationally, the Illinois Appellate Court held that a dispute over an arbitrator’s discovery order remains unripe for judicial review until after the arbitrator issues a final award. Klehr v. Illinois Farmers Ins. Co.,No. 1-12-1843 (Ill. App. Ct. Jan. 22, 2013). Here, one of the parties to the arbitration sought to obtain judicial review of the arbitrator’s interlocutory ruling on a discovery issue by filing a declaratory judgment action in court. Dismissing the action, the court concluded that judges may not review an arbitrator’s interlocutory rulings until the arbitration process is complete. The court reasoned that allowing interlocutory orders of arbitrators to be reviewed prior to completion of the arbitration would reduce the efficiency and cost effectiveness of arbitration.
Competing Sections Of DOJ Are Single Party For Work Product Purposes.
In Menasha Corp. v. U.S. Department of Justice, 707 F.3d 846 (7th Cir. 2013) (No. 12-1720), the court held that, for the purposes of the work product doctrine, competing sections of the Department of Justice should be treated as a single party, and each may disclose work product to the other without waiving the work product protection. Plaintiffs (“Menasha”) are defendants in a CERCLA action brought against them by the United States on behalf of the EPA and the Department of the Interior. Shortly after filing the action, the DOJ presented to the district court a proposed consent decree that included a settlement on behalf of the EPA and the Corps of Engineers, agencies which may have contributed to the pollution at the site. The team of lawyers in the DOJ’s Natural Resources Division was drawn from two of the Division’s sections: the Environmental Enforcement Section, which represents the United States in suits to enforce environmental laws, and the Environmental Defense Section, which defends the United States from suits to enforce those laws. Suspicious of the bona fides of the negotiations within the DOJ, Menasha filed this FOIA action, seeking production of internal DOJ memoranda relating to the negotiations. In response to DOJ’s assertion of the work product protection with respect to 440 documents, Menasha argued that the DOJ had waived any protection by sharing the documents between the two sets of lawyers, which had adverse interests for the purposes of the negotiations. The trial court agreed with Menasha, but the federal appellate court reversed. The appellate court ruled that where, as here, the United States is a single party in litigation, it should be treated as a single party for the purposes of the work product protection. Just as a corporate general counsel may need to resolve competing interests within a corporation, the DOJ must resolve competing interests within the DOJ. In neither case is there disclosure to an “adversary” that results in waiver of the protection. The court noted that this was not a case in which independent federal agencies authorized to sue in their own names were opposing parties in litigation.
FRE 502(a) Disclosure Of Privileged Emails Did Not Result In Subject Matter Waiver.
In Lott v. Tradesmen International, Inc., No. 09-CV-183 (E.D. Ky. Jan. 25, 2013), the court held that plaintiff’s production of privileged emails did not result in waiver beyond the emails themselves. On the eve of trial, and long after discovery had closed, plaintiff produced email communications which disclosed plaintiff’s emails to counsel, but which redacted counsel’s emails to plaintiff. Defendant argued that plaintiff’s disclosures resulted in subject matter waiver, but the court disagreed. Federal Rule of Evidence 502(a) provides that disclosure of additional, undisclosed privileged material is required only where: (1) the disclosure was voluntary; (2) the undisclosed communications relate to the same subject matter; and (3) “fairness” requires additional disclosures. The court stated: “’[I]n fairness,’ nothing else should be considered, because the emails in question will not be admitted into evidence and will not be considered by the Court,” therefore there would be no “selective and misleading presentation of evidence to the disadvantage of the adversary.”
Government Must Disclose Facts Learned From Interviews Of Immunized Witnesses.
In SEC v. Sells,No. 11-cv-04941 (N.D. Cal. Feb. 4, 2013), the Northern District of California held that the SEC must answer interrogatories that requested factual information provided during interviews conducted by the SEC of immunized witnesses. The SEC had based its allegations against defendant on information learned during the interviews of three immunized witnesses. The interviews were not recorded. Defendant propounded interrogatories that asked the SEC to disclose the dates of the interviews and to describe the information provided by the witnesses. The SEC asserted the work product protection. The court held that defendant had presented more than adequate reasons to justify production, and “injustice would be caused by a denial of the discovery.” The court found that the SEC had attempted to thwart any inquiry into the factual information that had been provided by the witnesses, who were potential witnesses at trial, and defendant could not replicate the information obtained by the SEC by deposing the witnesses due to the passage of time since the interviews.
Communications Between Patent Owner/Inventors Not Privileged Without Attorneys.
In Prowess, Inc. v. Raysearch Laboratories AB, No. 11-1357 (D. Md. Feb. 11, 2013), the District Court of Maryland held that the owner of patents could not assert attorney-client privilege over communications with the patent inventors where there was no evidence that an attorney was involved in the communications or that the communications occurred at the request of counsel. In this patent infringement case, defendants deposed the third party inventors and the CEO of the plaintiff. Asserting attorney-client privilege, work product protection, and the common interest privilege, plaintiff’s counsel broadly instructed the witnesses not to answer questions relating to communications between the inventors and plaintiff or among the inventors, or to plaintiff’s and the inventor’s investigations of and opinions relating to validity and infringement. The court rejected plaintiff’s assertions of privilege. The court found that plaintiff failed to establish the key elements of privilege: plaintiff failed to establish that counsel was involved in the communications, or at the very least that the communications were conducted for the purpose of providing information to counsel. In fact, plaintiff failed to provide any evidence that the conversations were ever transmitted to counsel. Plaintiff also failed to demonstrate that the communications with the inventors were needed to facilitate communications between plaintiff and its attorneys. The inventors, therefore, could not be pulled into the privileged circle as agents of counsel or as agents of the plaintiff for the purposes of the attorney-client privilege. Plaintiff’s argument that the common interest doctrine protected the communications also failed. A common interest agreement was not signed until after the communications occurred, and the agreement apparently did not state when the common interest arrangement began. Plaintiff also failed to demonstrate that the inventors and plaintiff had common legal, rather than business, interests.
Law Firm Representing Debtor Could Not Assert Privilege On Behalf Of D&O’s.
In In re Cardinal Fastener & Specialty Co., No. 11-15719 (Bankr. N.D. Ohio Feb. 4, 2013), the Bankruptcy Court for the Northern District of Ohio held that a law firm hired to represent the debtor could not assert privilege on behalf of the debtor’s individual directors and officers. In response to the Unsecured Creditors’ Committee’s demand that the debtor pay unsecured claims and notify its Directors and Officers insurance carrier of claims being asserted by the Committee, the debtor engaged counsel. When the matter was converted to a chapter 7 proceeding, the trustee asked the firm to turn over documents that belonged to the debtor. The firm refused, asserting attorney-client privilege based on the firm’s alleged separate representation of the debtor’s officers and directors. The court granted the trustee’s motion to compel. The court rejected the firm’s argument that it had a separate attorney-client relationship with the individual directors and officers. The court noted that the firm’s position contradicted the firm’s application to act as special counsel for the debtor and the court’s order granting the application. In addition, the firm’s billing statements did not identify the individuals as clients, and the firm did not identify any documents that it had prepared on behalf of the individuals. Even if the firm simultaneously represented both the debtor and the individuals, the outcome would be no different. Joint clients who have employed an attorney as their common agent with respect to a matter may not assert the privilege in later litigation between the joint clients. “Among joint clients, however, the privilege may not be used either to restrict access to, or to preclude use of communications between the attorney and the clients that relate to those matters in which they had a common interest and about which they collectively consulted the attorney.”
Supreme Court: Proof Of Materiality Not Required To Certify Securities Class Action.
By: Michael T. Brody
In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013) (No. 11-1085), the Supreme Court held that proof that misstatements were material was not a prerequisite for certification in a securities class action. Rule 23(b)(3) requires “a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.” Materiality is judged by an objective standard and thus, is a question common to the class. Likewise, the class’s “inability to prove materiality would not result in individual questions predominating;” it would simply mean the class would lose on the merits. Requiring proof of materiality at the certification stage would require the class to establish it will win, but the merits may be considered only to the extent relevant to determining whether the prerequisites for class certification are satisfied. The Court rejected defendant’s policy argument that precertification proof of materiality was necessary to avoid the risk that certification would impose pressure on a defendant to settle. The Court noted that Congress had addressed settlement pressures associated with securities class actions through the enactment of the Private Securities Litigation Reform Act in 1995, but rejected calls at that time to undo the fraud on the market presumption. The Supreme Court concluded it had no basis to “encumber” class action litigation “by adopting an atextual requirement.”
Third Circuit Remands Cy Pres Settlement.
By: Michael T. Brody
The Third Circuit recently approved the limited use of cy pres distributions in class action settlements. In re Baby Prods. Antitrust Litig., 708 F.3d 163 (3d Cir. 2013) (No. 12-1165). Cy pres distributions can be proper where direct distributions are infeasible. In evaluating class settlements with cy pres awards, district courts should analyze the degree of direct benefit to the class. In this settlement, defendants paid over $35 million to a settlement fund. Over one-third went to class counsel. Of the remainder, only a small portion would go to class members. The rest was to be distributed to cy pres recipients. Because the district court was unaware of the amount of the fund that would be distributed to the cy pres recipients when it approved the settlement, the Third Circuit reversed the approval of the settlement and remanded the case to the district court to consider whether the settlement provided sufficient direct benefit to the class. The court also addressed whether a cy pres award can justify class counsel’s fee, or whether the benefit of that payment must be discounted. The court concluded it was unwise to require a discount of attorneys’ fees where a portion of the settlement is used to fund a cy pres distribution. The court noted that cy pres distributions present potential conflict between class counsel and their clients because the inclusion of a cy pres distribution may increase the fund, and thereby attorneys’ fees, without increasing benefit to the class. It directed the district court to consider whether counsel had met its responsibility to obtain a result that “adequately prioritizes direct benefit to the class.” That approach must be conducted on a case by case basis.
Third Circuit Upholds Class Action Release And Injunction.
By: Michael T. Brody
In 1999, defendants settled a nationwide class action involving certain diet drugs. With limited exceptions, the settlement contained an injunction against members of the class suing defendants for injuries related to those drugs. In re Diet Drugs Product Liability Litigation, 706 F.3d 217 (3d Cir. 2013) (No. 12-1180), addresses the scope of this injunction. New plaintiffs filed an action for injuries resulting from the diet drugs. Defendants moved to enjoin the lawsuit for failure to fall within the limited category of lawsuits the settlement did not enjoin. The district court agreed with defendants, and enjoined the lawsuit. On appeal, the court of appeals affirmed and held the district court was correct in its interpretation of the settlement agreement and in finding that plaintiffs did not satisfy its exception. The court also declined to reform the settlement agreement to reflect developments in scientific knowledge, finding this argument had been waived – it was not sufficiently raised below – and a complete factual record on the relevant scientific changes in technology and procedures was essential to this argument.
Objectors Cannot Finance Settlement Amount To Take Over Derivative Case.
By: C. John Koch
In Forsythe v. ESC Fund Management Co., No. 1091 (Del. Ch. Feb. 6, 2013), the Delaware Chancery Court refused to allow objectors to the settlement of a derivative suit to take over the litigation by guaranteeing the amount of the settlement and then taking a chance at obtaining a greater recovery at trial. The court found that although the objectors’ “Competing Proposal is superior to the Settlement in the important sense that it offers the [nominal defendant] Fund the potential for a greater recovery, the objectors have not carried their burden of demonstrating that the terms on which they would proceed are reasonable from the standpoint of the Fund.” The court stressed that there were conflicting interests among the objectors, their counsel, and the Fund regarding the “reasonableness of the splits” of any additional recovery: “It is clear that if the Competing Proposal were approved, it would contemplate a percentage recovery for the Fund, net of litigation freight, ranking among the lowest net recoveries ever approved by this Court.”
Inspection Demands And Fiduciary Claims Must Be In Separate Complaints.
By: C. John Koch
In Ravenswood Investment Co. v. Winmill & Co., No. 7048 (Del. Ch. Jan. 31, 2013), the Delaware Chancery Court held that a fiduciary duty claim and a demand for inspection of company books and records under Section 220 cannot be combined in a single proceeding. The court reasoned that the two types of claims are distinct and proceed at a different pace: “Books and records actions are supposed to proceed summarily. The companion fiduciary duty claims would slow the pace. The Section 220 and fiduciary duty claim should not have been brought together.”
Supreme Court Holds That Prevailing Debt Collectors Can Recoup Costs.
The Fair Debt Collection Practices Act (FDCPA) provides that a court may award a defendant its attorney’s fees and costs if an action is brought against it under the statute “in bad faith and for the purposes of harassment.” In Marx v. General Revenue Corp., 133 S. Ct. 1166 (2013) (No. 11-1175), the Supreme Court held that a court may also award costs to prevailing defendants in FDCPA actions pursuant to FRCP 54(d), without finding that the plaintiff brought the action in bad faith and for the purposes of harassment. In this case, plaintiff Marx defaulted on a student loan, and the defendant (GRC) was hired to collect the debt. Marx sued GRC, alleging that GRC violated the FDCPA by harassing her with multiple phone calls and false threats. GRC made an offer of judgment of $1,500 plus fees and costs. Marx did not accept, and after a bench trial in which the court found in favor GRC, the court ordered that Marx pay more than $4,500 in costs pursuant to FRCP 54(d)(1). On appeal, Marx argued that the FDCPA displaced Rule 54 and did not provide for the payment of costs absent a finding of bad faith. Both the Tenth Circuit and the Supreme Court rejected that argument, holding that there was nothing in the text, history or purpose of the FDCPA that indicated it was meant to displace Rule 54(d)(1). Recognizing that Rule 54 provides that a court may award costs unless a federal statute “provides otherwise,” the Court concluded that the FDCPA fee-shifting provisions were not contrary to Rule 54(d)(1), and thus did not “provide otherwise” with respect to a court’s authority to award costs. Rather, the FDCPA was merely silent on costs in actions where there was no bad faith, “and silence does not displace the background rule that a court has discretion to award costs.”
Only California Corporations Are Subject To California Survival Statute.
In Greb v. Diamond International Corp., 295 P.3d 353 (Cal. 2013) (No. S18 3365), the California Supreme Court held that California Corporations Code § 2010, which governs the winding-up and survival of dissolved corporations, does not apply to corporations formed in states other than California, resolving a conflict among that state’s courts of appeals. In this case, plaintiffs sued the defendant, a Delaware corporation that had been dissolved for several years, alleging injuries from exposure to asbestos. Defendant moved to dismiss, arguing that because it was dissolved more than three years before the lawsuit was filed, the suit was barred by Delaware’s three-year survival statute for dissolved corporations. Plaintiffs, on the other hand, argued that California’s corporate survival statute, which provides no time limitation for suing a dissolved corporation, applied to all foreign corporations that, like defendant, were qualified to do business in California. The trial court declined to apply § 2010 to defendant and dismissed the case. In affirming, the California Supreme Court addressed the conflicting appellate court opinions on the issue and concluded that the better-reasoned interpretation of § 2010 was that it applied only to corporations organized under California law. The court found that if it applied § 2010 to all foreign corporations qualified to do business in California, then it would similarly have to apply other provisions of the California Corporate Code to foreign corporations. The court concluded that such an outcome would be unworkable, given that the California Code provisions often differ from the requirements of other states, including the states of formation of many corporations operating in California, and therefore would invite “treacherous conflicts of law that the corporation would find impossible to navigate.”
Circuit Split: Liquidated Damages For FLSA Retaliation Claims Are Discretionary.
In Moore v. Appliance Direct, Inc., 708 F.3d 1233 (11th Cir. 2013) (No. 11-15227), plaintiffs sued their former employer, alleging that it had violated the Fair Labor Standards Act (FLSA) by terminating plaintiffs in retaliation for filing an earlier lawsuit for unpaid overtime. After a jury returned a verdict in their favor, the plaintiffs filed a post-trial motion seeking an additur of liquidated damages to the jury’s award of economic damages. The district court denied the motion and, on appeal, the Eleventh Circuit affirmed. The court held, as a matter of first impression in that Circuit, that the imposition of liquidated damages under the FLSA, after a finding of liability for retaliation, is discretionary, not mandatory. Recognizing a Circuit split on the issue, the court joined the Sixth and Eighth Circuits (and split from the Fifth and the Seventh Circuit) in concluding that the plain language and legislative history of the FLSA demonstrate that the district court has discretion to award, or not award, liquidated damages for retaliation claims. In so holding, the court distinguished FLSA retaliation claims from FLSA claims for unpaid minimum wages and overtime; the FLSA provides for the mandatory imposition of liquidated damages for only the latter types of claims, not the former.
Sanctions For “False” Rule 26(g) Certification And “Unusable” E-Discovery Format.
By: Daniel J. Weiss
In Branhaven v. Beeftek, Inc., No. 11-2334 (D. Md. Jan. 4, 2013), the District Court of Maryland sanctioned the plaintiff for two failures related to a late and voluminous production of e-discovery material. First, the court held that plaintiff’s counsel had provided a false discovery certification pursuant to Fed. R. Civ. P. 26(g) when he signed discovery responses stating that the plaintiff would “make the responsive documents available for inspection and copying at a mutually convenient time.” The court found that, at the time counsel signed the statement, he had not made any effort to locate responsive documents. It was not until several months later that plaintiff’s counsel started the document search. The court thus held that the plaintiff “essentially misled defendants and their counsel, in its affirmative statement that responsive documents would be ‘available for inspection’ . . . while in fact not knowing what if any responsive documents there might be and when if ever they would be identified and produced.” Second, the court held that the plaintiff’s voluminous production of emails in “.pdf” format was not a “reasonably usable form” as required by Fed. R. Civ. P. 34(b)(2)(E)(ii). The court faulted the plaintiff for not using the more commonly accepted “.tiff” format and also for not specifying in advance the format it would use. The court required the plaintiff and plaintiff’s attorney to pay attorneys’ fees and costs of defendants that were caused by the discovery failures.
Court Rejects Vendor-Led Search For Documents As Insufficient.
By: Daniel J. Weiss
In Peerless Industries, Inc. v. Crimson AV, LLC, No. 11-cv-1768 (N.D. Ill. Jan. 8, 2013), the Northern District of Illinois granted a sanctions motion related to defendant’s failure to ensure that an affiliated company made an adequate response to document requests. One of the defendant’s witnesses testified at deposition that documents had been collected from the affiliated company according to a process outlined “I guess by the [e-discovery] vendor.” The court found that the defendant “took a back seat approach and instead let the [e-discovery] process proceed through a vendor.” The court held that the defendants thus “had no part in the process of obtaining the requested discovery or of determining how the [affiliated party] managed their documents and what might be relevant to plaintiff’s requests.” The court concluded that “[s]uch a hands-off approach is insufficient,” and ordered the defendants to “show that they in fact searched for the requested documents” and to verify the results of that search.
Insurer’s Payment Of Defense Fees Did Not Create Joint Client Relationship.
In CAMICO Mutual Insurance Co. v. Heffler, Radetich & Saitta, LLP,No. 11-4753, (E.D. Pa. Jan. 28, 2013), the Eastern District of Pennsylvania held that an insured properly asserted attorney-client privilege against its insurer with respect to communications between the insured and defense counsel whose fees had been paid by the insurer. The insurer, which had paid defense counsel’s fees under a reservation of rights, sought otherwise privileged communications, arguing that it had a common interest with the insured. The court noted that the common interest doctrine applies only where there are separate lawyers for separate clients. Where there is one lawyer, only the joint client privilege might apply. Predicting how the Pennsylvania Supreme Court would rule, the court held that there was no joint client relationship between defense counsel and the insurer. First, rejecting the “absolute rule” applied in some jurisdictions and by other federal district courts applying Pennsylvania law, the court held that merely paying defense counsel’s fees does not create a joint attorney-client relationship. Second, the facts of the case demonstrated that no such relationship existed. The insured independently retained defense counsel; defense counsel stated that it did not consider the insurer to be its client; and the insurer had referred to defense counsel as “independent counsel” in correspondence with the insured.
Superintendent Of Insurance May Assert Privilege On Behalf Of Liquidating Insurer.
In Wallis v. Centennial Insurance Co., No. 08-cv-2558 (E.D. Cal. Feb. 1, 2013), Magistrate Judge Allison Claire of the Eastern District of California held that the New York Superintendent of Insurance had the authority to assert the attorney-client privilege on behalf of an insurer that was in the process of being liquidated by the Superintendent. In this insurance coverage matter, plaintiff sought coverage for defense costs incurred in underlying litigation, and sought discovery from the insolvent insurers’ former law firm. The Superintendent objected, asserting privilege. Plaintiff argued that, because the insurers had been dissolved, the entities no longer existed and no longer were able to assert privilege. Citing CFTC v. Weintraub, 471 U.S. 343 (1986), the Superintendent argued that he should be treated like a liquidation trustee in bankruptcy, who is deemed to control the debtor’s privileges as the successor to the debtor’s management. The court agreed, holding that entities in liquidation proceedings are “neither formally dissolved nor so completely non-functioning that their attorney-client privilege is extinguished.”
No Risk Assumed Re Specific Design Even If Risk Assumed Re General Circumstances.
By: Barry Levenstam
In Wilson Sporting Goods Co. v. Hickox, 59 A.3d 1267 (D.C. 2013) (No. 11-cv-0445), the District of Columbia Court of Appeals affirmed the trial court’s decision to admit plaintiff’s expert testimony that defendant’s facemask and throat guard were designed defectively and caused the plaintiff, a baseball umpire, injury. Defendant’s facemask adopted a new design with a throat guard that angled forward. Defendant’s biomechanical engineer expert testified that a foul tip struck the bottom of the throat guard, and the angle of the throat guard transmitted the energy up into the jaw and forced the jaw up into the ear, causing permanent hearing loss. The court rejected the argument that plaintiff’s expert had to conduct his own tests as the expert had relied up published data provided by other experts in the field. The court also rejected the argument that plaintiff had assumed the risk, holding that the relevant risk was the risk presented by this design, rather than knowledge of the general risk associated with serving as an umpire. It concluded that plaintiff had to have greater knowledge of the specific risks presented by this design, and thus affirmed the jury verdict for plaintiff.
Eighth Circuit Affirms Admission Of Fire Investigator’s Expert Testimony.
By: Barry Levenstam
In Russell v. Whirlpool Corp., 702 F.3d 450 (8th Cir. 2012) (No. 12-1451), the Eighth Circuit addressed defendant’s challenge to the jury verdict for the plaintiffs on their claim that defendant’s dryer was defective and caused the fire that burned their house. Defendant argued that the admission of plaintiffs’ fire investigator expert’s testimony was error. Defendant’s primary argument was that plaintiff’s expert merely “eyeballed” the burned-out home and the three destroyed appliances therein before ascribing blame to the dryer, instead of following NFPA 921, the National Fire Protection Association’s guide for fire and explosion investigations. Although plaintiff’s expert acknowledged the importance of NFPA 921 in certain fire investigations, he explained that he could not follow certain procedures recommended by NFPA 921 because the total burnout had destroyed much of the evidence required by NFPA 921. The appellate court held that the district court did not err in allowing plaintiffs to present this testimony to the jury, and the jury did not err in crediting this testimony. The court held that the investigation plaintiffs’ expert performed was sufficient because he had observed the fire scene and applied his specialized knowledge and experience to reach an opinion concerning the cause of the fire. Thus, the court affirmed the jury’s verdict for the plaintiff.
Eleventh Circuit Reverses Decision To Exclude Plaintiff’s Experts.
By: Barry Levenstam
In United Fire & Casualty Co. v. Whirlpool Corp., 704 F.3d 1338 (11th Cir. 2013) (No. 11-15011), the plaintiff insurer brought this appeal from the decision of the district court that its proffered expert on the issue of whether defendant’s dryer started a fire that burned down the insureds’ house failed to satisfy the Daubert standard. The Eleventh Circuit held that although plaintiff’s fire investigator did not provide a strong theory of how the fire started (and, as a result, his opinion as to that issue was properly excluded), the trial court erred by excluding that expert’s opinion concerning where the first started. Where the fire started was the result of an investigation conducted in accordance with the National Fire Protection Association guidelines, and therefore, testimony concerning that investigation satisfied Daubert. Consequently, the appellate court reversed the summary judgment the district court had entered for defendant, and remanded the case for further proceedings at which the expert’s testimony would be admitted.
First Amendment Bars Court Review Of Whether Product Was Kosher.
By: Barry Levenstam
In Wallace v. ConAgra Foods, Inc., No. 12-1354 (D. Minn. Jan. 31, 2013), the District Court of Minnesota granted defendant’s motion to dismiss plaintiffs’ lawsuit alleging that defendant misrepresented certain of its meat products as being kosher. Plaintiffs alleged that defendant, working through its contractor, Triangle K, an organization responsible for supervising the kosher processing activities at beef processing facilities, obtained false certifications that the meat was slaughtered in compliance with kosher requirements. The court dismissed the case, noting in part that plaintiff had not sued Triangle K, which actually did the certifying. Further, the court held that the determination of whether defendant’s products in fact satisfy kosher requirements is intrinsically religious in nature and that, as a consequence, the First Amendment bars courts from passing judgment concerning the adequacy or propriety of such determinations.
Recent Developments Regarding Nonlawyer Investment In Law Firms.
In the past, we have reported on nonlawyer investment in law firms and there are two recent developments to report under the professional conduct rules.
First, the New York State Bar Association (“NYSBA”) reaffirmed its opposition to allowing nonlawyers to own an interest in law firms. At the same time, the NYSBA endorsed the concept of allowing fee sharing among lawyers in different firms even when one of the firms is located in a jurisdiction that permits nonlawyer ownership. NYSBA, Report of the Task Force on Nonlawyer Ownership (2012). In December 2011, the ABA Ethics 20/20 Commission published for comment a tentative proposal for a modest change in the ABA Model Rules of Professional Conduct to allow nonlawyers to have a partial stake in law firms. The Commission also presented initial proposals to permit “intrafirm” fee-sharing among offices of a law firm, as well as “interfirm” fee-sharing among different firms, when jurisdictions have conflicting rules on nonlawyer ownership. After those proposals came out, the NYSBA launched a task force to reexamine the issue of nonlawyer ownership under New York’s ethics rules. The core of the NYSBA’s resolution states that the NYSBA “reaffirms its opposition at this time to any form of nonlawyer ownership of law firms in the absence of a sufficient demonstration that change is in the best interest of clients and society, and does not undermine or dilute the integrity of the legal profession.” The NYSBA task force also recommended recognition of interfirm sharing of fees so long as the new provision (rule or comment) makes explicit that fee sharing is prohibited where a lawyer knows that a nonlawyer owner is directing or controlling the other lawyer’s professional judgment.
Second, in November 2012, the Second Circuit gave the Jacoby & Meyers law firm a second chance to challenge the constitutionality of New York’s rules of professional conduct that prohibit private equity investment in law firms, vacating a district court decision that dismissed the lawsuit on procedural grounds. Jacoby & Meyers, LLP v. Presiding Justices, 488 F. App’x 526 (2d Cir. 2012) (No. 12-1377). The Second Circuit held that Jacoby & Meyers may amend its complaint to challenge all New York laws – not just the ethics rule – that stop law firms from accepting nonlawyer equity investors. Jacoby & Meyers had alleged that New York Rule of Professional Conduct 5.4(d)(1), which forbids lawyers to practice in a for-profit law firm if a nonlawyer owns any interest in the firm, cannot survive constitutional scrutiny because it (i) exceeds the judiciary’s rule-making power, (ii) violates state separation of powers, (iii) is void for vagueness, and (iv) violates the federal Constitution’s dormant commerce clause, due process clause, equal protection clause, takings clause, and guarantees of freedom of speech and association. The district court dismissed the complaint because other, unchallenged provisions of New York law would prevent private equity investment even if Rule 5.4 were struck down. The Second Circuit decided that Jacoby & Meyers may expand its complaint to challenge those laws too and the district court may address the merits of the constitutional challenge. Jacoby & Meyers also filed nearly identical complaints in federal district court in New Jersey and Connecticut, challenging those states’ rules against nonlawyer owners.
Suspension For Failure To Protect Prospective Clients’ Confidential Information.
The Supreme Court of Ohio issued a one-year suspension to a lawyer who revealed confidential information he received from a prospective client – doubling the sanction recommended by the disciplinary board. Disciplinary Counsel v. Cicero, 982 N.E. 2d 650 (Ohio 2012). The ruling came in a proceeding that gave the court its first opportunity to apply Ohio Rule of Professional Conduct 1.18, which identifies the duties, including the duty of confidentiality, that lawyers owe to potential clients who consult with, but do not retain, the lawyer. The court concluded that the attorney violated that rule when he told an Ohio State University football coach that some of his players might be associated with an individual who had been targeted by federal authorities investigating drug trafficking. The attorney obtained the information from a potential client who had met with him after agents raided the potential client’s home and seized football memorabilia that Ohio State players allegedly gave him in exchange for tattoos. The potential client testified that he and a former business partner met with the attorney to discuss the criminal case. Later that same day, the attorney sent an email to the then-coach of the Ohio State football team, and alerted him about “a possible association” between the potential client and several players on the football team’s roster. The potential client had another meeting with the attorney a few weeks later, and provided the attorney with additional details about his case, which the attorney relayed to the coach in two emails the next day. The disciplinary panel found clear and convincing evidence that the attorney violated Rule 1.18, and also contravened Rule 8.4(h), which prohibits conduct that reflects adversely on the lawyer’s fitness to practice law. The panel recommended a six-month suspension from the practice of law, and the disciplinary board concurred with that suggestion. The court affirmed the panel’s findings, but imposed a one-year suspension rather than the recommended six months.
The Supreme Court Holds SEC Must Bring Civil Penalty Actions Within Five Years Of Violation.
On February 27, 2013, the United States Supreme Court held that in SEC enforcement actions, the five year statute of limitations governing civil penalties begins to run at the time that the violation occurs, not when the SEC discovers to violation. Gabelli v. SEC, 133 S. Ct. 1216 (2013) (No. 11-1274). In 2008, the government brought an action seeking civil penalties against Bruce Alpert and Marc Gabelli, alleging that from 1999-2002, they aided and abetted a market timing fraud. SEC actions seeking civil penalties are governed by 28 U.S.C. § 2462, which gives the government five years “from the date when the claim first accrued” to bring suit. The defendants argued that the five year statute of limitations began running when the fraud was complete in 2002, and thus the SEC’s civil penalty claim was time barred. The district court agreed and dismissed the claim. The Second Circuit reversed, accepting this SEC’s argument that because the violations sounded in fraud, the “discovery rule” applied. The discovery rule states that a claim does not accrue until the claim is discovered, or could have been discovered with reasonable diligence, by the plaintiff. The Supreme Court reversed, holding that the most natural reading of the statute is that a claim accrues, and the statute begins to run, when the fraud is complete and the right to bring suit comes into existence. The Court held that such a reading sets a fixed date when risk of government enforcement ends, which advances the basic purposes of limitations provisions: “repose, elimination of stale claims, and certainty about a plaintiff’s opportunity for recovery and a defendant’s potential liabilities.”
SEC Lacked Jurisdiction Over Foreign Securities Transaction.
On February 15, 2013, the Northern District of Illinois ruled against the SEC in one of the first decisions implementing the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 131 S. Ct. 2869 (2010) (No. 08-1191). SEC v. Benger, No. 90-c-676 (N.D. Ill. Feb. 15, 2013). In Morrison, the Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 does not reach extraterritorial reach, rather only applying to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” In Benger, the SEC broughtan enforcement action against an international boiler room operation. The defendants moved for summary judgment, arguing that the transactions were extraterritorial and outside the SEC’s reach, despite the fact that much of the fraudulent activity at issue took place in the United States. The court held that, since the stocks at issue were not listed on a domestic exchange, under Morrison, the question was whether the securities transactions themselves were domestic, and that a transaction is domestic if the “purchaser incurred irrevocable liability within the United States to take and pay for a security,” “the seller incurred irrevocable liability within the United States to deliver a security,” or “if title to the shares was transferred within the United States.” In Benger, however, the court found that the evidence showed that the investors became irrevocably bound upon submission, in their foreign countries, of the offer to purchase, notwithstanding that they were submitting those offers to escrow agents in the United States. Furthermore, the issuer became irrevocably bound in Brazil, when the issuer accepted the offer to purchase. Finally, the court held that title passed either in Brazil, where the sale was consummated, or in the foreign countries where the investors received their stock certificates, notwithstanding the fact that the domestic escrow agents acted as a middlemen in mailing the certificates between issuer and investor.
SEC Charges Chinese Company and Its Officers in Connection with Accounting Fraud and Maintaining Off-Balance Sheet Fund to Pay Bribes.
On February 28, 2013, the SEC charged Keyuan Petrochemicals, Inc., a China-based issuer, with violations of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. The SEC further charged Aichun Li, Keyuan’s former Chief Financial Officer, with aiding and abetting Keyuan’s reporting and books and records violations and for failing to implement internal accounting controls. SEC v. Keyuan Petrochemicals, Inc., No. 13-cv-00263 (D.D.C. Feb. 28, 2013). According to the SEC’s complaint, between May 2010 and January 2011, Keyuan failed to disclose in its SEC filings numerous material related party transactions required under U.S. Generally Accepted Accounting Principles, as well as SEC rules and regulations. The related parties included the company’s controlling shareholders, including its current CEO, and entities controlled by Keyuan’s management or their family. The SEC also alleged that Keyuan maintained an off-balance sheet cash account for the purpose paying for various items, including cash bonuses for senior officers, the CEO’s business expenses, and to fund bribes for Chinese government officials. The SEC charges that by failing to properly record these transactions on the company’s books and records, the company misstated its financial statements filed with the SEC. Without admitting or denying the claims against them, Keyuan and its CFO consented to the entry of a judgment permanently enjoining them from violations of the Securities Act and Exchange Act. Further, Keyuan paid a $1 million civil penalty and its CFO agreed to pay a $25,000 civil penalty, as well as a suspension from practicing before the SEC for two years.
Foreign Executive Can Be Liable Under FCPA For Affecting False SEC Filings.
By: Iris E. Bennett
In SEC v. Straub, No. 11-9645 (S.D.N.Y. Feb. 8, 2013), the SEC alleged that executives of a Hungarian telecommunications company Magyar Telekom, Plc., had bribed Macedonian officials to limit proposed legislation that would have opened the telecommunications market in Macedonia to competition. At the time, both Magyar and its parent company, Deutsche Telekom AG, were publicly traded on U.S. stock exchanges. The SEC alleged that the defendants signed numerous management and sub-management representation letters to Magyar’s auditors falsely asserting that they had disclosed all relevant financial information and were unaware of any unlawful activity, and that this resulted in false financial statements when the Company made its annual SEC filings. The defendants were charged with violating the FCPA’s anti-bribery provision and with aiding and abetting Magyar’s violations of the FCPA’s requirement that public companies maintain accurate books and records. They moved to dismiss on multiple grounds, including, for lack of personal jurisdiction. The court rejected this argument, holding that the “minimum contacts” test for personal jurisdiction was satisfied because the defendants made false statements to the company’s foreign auditors knowing that those statements would likely affect Magyar’s financial filings in the United States.
FCPA Charges Dismissed Against Foreign Executive For Lack Of Personal Jurisdiction.
By: Iris E. Bennett
In SEC v. Sharef, No. 11-9073 (S.D.N.Y. Feb. 19, 2013), the SEC alleged that seven former executives at Siemens AG and its subsidiaries had participated in an extensive scheme to bribe government officials in Argentina. One defendant, Herbert Steffen, is a German national who had served as CEO of Siemens’ Argentinean subsidiary prior to the events alleged in the complaint. The SEC charged Steffen with violating the FCPA’s anti-bribery provision and with aiding and abetting violations by Siemens of the FCPA provision requiring public companies to maintain accurate books and records. According to the SEC, Steffen pressured the CFO of Siemens Argentina to authorize bribes to Argentinean officials. The CFO of Siemens Argentina allegedly authorized bribes, but only after seeking guidance from superiors at Siemens. The Siemens Argentina CFO allegedly also signed quarterly and annual certifications of the company’s financials that were false because of the bribes, which were concealed), which were presented to the company’s auditors and resulted in the parent corporation, Siemens AG, making false SEC filings. The court granted a motion to dismiss for lack of personal jurisdiction as to Steffen, however, reasoning that his role was too attenuated from the SEC filings because he did not authorize the bribes and was neither involved in the alleged cover up nor had any awareness of it.
Court Rejects Claim That Internal Investigations Were Discriminatory.
Garcia v. Hartford Police Department, 706 F.3d 120 (2d Cir. 2013) (No. 11-4618), provides an example of an internal investigation giving rise to a claim asserted by the subject of the investigation. The plaintiff sued his former employer for civil rights violations, arguing that he was passed over for promotion and investigated for several incidents of misconduct on the basis of race. The district court granted summary judgment for the defendants, and the Court of Appeals affirmed. The defendants had submitted evidence that the investigations were prompted by actual allegations of misconduct; that plaintiff was formally charged in connection with two incidents; and that those charges were fully litigated and substantiated. Thus, the court found that assertions by an expert retained by the plaintiff that the investigations were improperly race-based did not create a triable issue.
Investigator Sentenced to Prison In HP Pretexting Case.
In 2006, news media reported that Hewlett-Packard’s chairwoman and its general counsel had retained independent experts to investigate board members and journalists in an effort to identify sources of leaks of confidential information. The resulting scandal led to substantial adverse publicity, criminal charges against the chairwoman that were later dropped, and federal, state and congressional inquiries, and it raised issues concerning the boundaries of legitimate investigative techniques. In the latest chapter, private investigator Bryan Wagner was sentenced to three months in prison and six months of home monitoring after pleading guilty to identity theft. Wagner, who had been retained by the outside investigative firm, had posed as a reporter to gain access to the reporter’s telephone records, after being given the reporter’s social security number. United States v. Wagner, No. 07-cr-00016 (N.D. Cal. Dec. 13, 2012).