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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 email@example.com.
Arbitrator’s Decision To Permit Class Arbitration On Estoppel Grounds Upheld.
By: Howard S. Suskin
The district court upheld an arbitrator’s finding that employees seeking unpaid compensation could proceed in the arbitration as a class rather than on an individual basis. Hill v. Wackenhut Services Int’l, No. 11-2158 (D.D.C. Sept. 18, 2013). Describing the circumstances as “an ironic twist,” the court noted that defendants were challenging the arbitrator’s decision just one year after the court had granted their prior motion to compel plaintiffs to arbitrate. Once in arbitration, plaintiffs appeared to concede that, under prevailing law, the language of the arbitration clause did not support class arbitration, but they argued that the doctrines of collateral and judicial estoppel precluded defendants from refusing to permit class arbitration because defendants had accepted class arbitration in a related arbitration proceeding involving other employees. The arbitrator concluded that the estoppels doctrines were incorporated into the parties’ agreement through its choice-of-law clause and ordered class arbitration to proceed. In denying defendants’ motion to vacate, the court found that the case was controlled by the Supreme Court’s recent ruling in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) which requires a court to uphold the arbitrator’s interpretation of the parties’ arbitration clause even if the arbitrator’s analysis was erroneous, so long as the error does not rise to the level of a manifest disregard of the law.
Arbitration Agreement Unconscionable Due To Time, Damages And Fee Provisions.
By: Howard S. Suskin
The Supreme Court of Washington held that arbitration clauses in the reviewed employment agreements were void because they were permeated by several substantively unconscionable provisions, thus allowing the employees’ case to proceed in court as a class action. Hill v. Garda CL Northwest, Inc., 308 P.3d 635 (2013). The substantively unconscionable provisions included: requiring all disputes to be submitted to arbitration within 14 days from when the dispute arises with respect to a claim that is subject to a three-year statutory time limitation; limiting recovery of back pay damages to a time period less than what the relevant statute provides; and excessive fee-sharing provisions to cover the cost of the arbitration. The court distinguished the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which bars state courts from prohibiting, as a general rule, class action arbitration. In this case, the provisions in the arbitration clause were struck because they were deemed substantively unconscionable, not because they barred arbitrating as a class.
Right To Cross-Examine Does Not Make Administrative Hearing “Adversarial.”
In order to be protected by the work product doctrine, a document must be prepared “in anticipation of litigation or for trial.” “Litigation” has been defined broadly to include administrative hearings. However, the courts are split on which administrative hearings qualify for the protection. Some courts find that an administrative hearing satisfies the litigation element if the hearing allows for cross-examination. In Adair v. EQT Production Co., Nos. 10-cv-00037, 10-cv-00041, 11-cv-00031 (W.D. Va. Sept. 27, 2013), the court rejected this approach and held that a proceeding must not only allow for cross-examination, but the party asserting the work product protection must demonstrate that the proceeding involved a claim prosecuted by one party against another or claims made by multiple parties with opposing claims to a particular interest (e.g., a permit or licensing hearing). Proceedings where there is only a limited appearance by outside parties and the proceedings are not adversarial but mostly ex parte, do not constitute litigation for the purposes of the work product doctrine. Because defendant did not demonstrate that the hearings at issue were adversarial, rather than the types of proceedings required by regulations in the ordinary course of business for a company operating under the statute at issue, the work product doctrine did not apply.
Identities Of Individuals Interviewed In Investigation Are Protected Work Product.
In US Bank Nat’l Assoc. v. PHL Variable Ins. Co., Nos. 12 Civ. 6811, 13 Civ. 1580 (S.D.N.Y. Oct. 3, 2013), the court held that the identities of individuals interviewed during an internal investigation conducted by counsel were protected by the work product doctrine. In this case, plaintiffs learned during discovery that defendant had conducted an internal investigation during which current and former employees of defendant were interviewed. During depositions, counsel instructed defendant’s witnesses not to disclose the identities of those interviewed, and plaintiff moved to compel. The court held that the identities were protected from discovery. Although the work product doctrine typically applies to documents or tangible things, it also protects a witness from answering questions that reveal an attorney’s legal opinions, thought processes or strategy (the “intangible work product doctrine”). It is often asserted that the work product doctrine does not prevent the disclosure of facts, but the Second Circuit has noted that this is an overstatement: “we see no reason why work product cannot encompass facts as well. It is helpful to remember that the work product privilege applies to preparation not only by lawyers but also other types of party representatives including, for example, investigators seeking factual information. . . . we see no reason why a work product objection would not properly lie if the Government called the attorney or the investigator . . . and asked ‘What facts have you discovered in your investigation?’” In re Grand Jury Subpoena dated October 22, 2001, 282 F.3d 156 (2d Cir. 2002). The court noted that the courts are split on whether the work product immunity protects the identities of persons interviewed by an attorney or his agent in anticipation of litigation. Here, the court held that this information is protected work product because the disclosure could reveal counsel’s opinions, thought processes, or strategies.
Forensic Review Cited In Complaint Not Discoverable If No Intent To Rely On At Trial.
In Massachusetts Mutual Life Insurance Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 11-30285 (D. Mass. Sept. 23, 2013), the court held that, although plaintiff repeatedly cited the results of a forensic review conducted by an outside consultant in its complaint, the undisclosed portions of the review and related materials were protected from disclosure because plaintiff told the court that it did not intend to rely on the review as evidence at trial. In this case, which involved the sale of mortgage backed securities, prior to filing its complaint plaintiff conducted a detailed forensic review of the collateral underlying the securitizations at issue. The review analyzed information from public sources as well as proprietary sources, and determined that the underlying collateral did not satisfy various representations made by defendant in its offering materials. Plaintiff cited the results of the review throughout its complaint and, in an ancillary proceeding, asserted that the review demonstrated that the complaint satisfied the Twombly and Iqbal standard that the complaint “stated a claim to relief that was plausible on its face.” Defendant argued that plaintiff’s reference to the review put the review at issue and waived any privilege or protection. The court disagreed. Applying Federal Rule of Evidence 502(a), the court held that, while plaintiff waived the information actually disclosed in the complaint, “fairness” did not require the disclosure of any additional non-disclosed information relating to the same subject matter. Under FRE 502(a), disclosure of privileged information in a federal proceeding waives undisclosed privileged information only if the disclosure is voluntary, the undisclosed material relates to the same subject matter, and fairness requires additional disclosure. Here fairness did not require further disclosure because plaintiff made it clear that it did not intend to introduce the review into evidence or otherwise rely on it in the case. This distinguished this case from those in which reference to a privileged review or investigation waived the entirety of the review by putting the review “at issue”, because those disclosing parties intended to rely on the disclosed information as evidence in the case. The court explained that this result makes practical sense, because it enables a plaintiff to meet its pre-filing due diligence duties, and to demonstrate that its complaint satisfies the Twombly and Iqbal standard, without fear of waiving privilege with respect to the entirety of the pre-filing investigation.
Two Courts Address Scope Of Privileges Applicable To FOIA Requests.
The courts in Shapiro v. U.S. Dep’t of Justice, No. 12-1883 (D.D.C. Sept. 18, 2013), and Judicial Watch, Inc. v. CFPB, No. 12-0931 (D.D.C. Sept. 30, 2013), addressed the scope of the attorney-client privilege and work product protection exemptions to the government’s obligations to produce information requested pursuant to FOIA.
In Shapiro, the plaintiff sought all documents in a “brief bank” created by the Department of Justice for its lawyers’ reference in FOIA cases. The brief bank included actual briefs or excerpts of briefs that had been filed by the government in prior FOIA cases across the country, as well as objective summaries of the briefs, and some subjective information about the importance of the various briefs, which had been prepared by one or more attorneys in the DOJ. The court rejected the government’s assertions that the documents were intra-agency or inter-agency memoranda or that they were protected work product. The briefs themselves were already a matter of public record, so placing them into an intranet platform did not transform the documents into intra-agency or inter-agency documents. The contents of the brief bank were not work product, because (1) the brief bank was prepared not for any particular anticipated litigation, but because the DOJ had an on-going general concern regarding future FOIA litigation; and (2) neither the objective description of public documents or case law nor the selection of briefs for the bank revealed the mental impressions or opinions of counsel.
In Judicial Watch, the court held that communications prepared by the CFPB surrounding the President’s recess appointment of Richard Corday as director of the CFPB were protected work product. The CFPB reasonably anticipated that specific litigation would be brought to challenge the appointment, and therefore the emails satisfied the requirement of the work product doctrine that materials be prepared in anticipation of “some articulable claim that is likely to lead to litigation.”
Court Applies “Functional Equivalent” Of Employee Doctrine To Consultants.
Where a non-employee consultant to a corporation communicates with the company’s counsel, a question arises whether the consultant, a third party, may be treated as the “functional equivalent” of a company employee so that the communications are brought within the attorney-client privilege. In King Drug Co. of Florence v. Cephalon, Inc., Nos. 06-cv-1797, 08-cv-2141 (E.D. Pa. Sept. 11, 2013), the court held that defendant’s consultants were the functional equivalents of company employees, and that their communications with company counsel were within the privilege. Here, defendant hired Clarion as a consultant to prepare business and marketing plans, not to perform a function necessary in the context of actual or anticipated litigation. Clarion personnel, who had dedicated office space within the company and were subject to confidentiality agreements, worked closely with company employees to provide managerial support and strategic advice, and they participated in making presentations to senior management. The court noted that there are two approaches to the “functional equivalent” doctrine: (1) the narrow approach, which applies the doctrine only to situations in which consultants are hired to perform a function necessary in the context of litigation; and (2) the broader approach, which focuses on whether the non-employee, by virtue of his or her role as a consultant, possesses or has access to confidential information that is necessary for the provision of legal advice to the company, holds that communications with company counsel are privileged so long as they were kept confidential and were made for the purpose of obtaining or providing legal advice. The court adopted the broader approach, stating: “It makes little sense to impose additional requirements for extending the privilege to independent contractors merely because they are not on the corporate payroll. The difference is only one of formality, and does not in itself diminish the need for the attorney and non-lawyer to collaborate to ensure that the corporation is complying with the law.”
Sixth Circuit Identifies Issues A Court Must Resolve Before Barring Third Party Claims Against Settling Defendants.
In In re Greektown Holdings, LLC, 728 F.3d 567 (6th Cir. 2013) (No. 12-2434), the Sixth Circuit addressed questions of first impression in that Circuit concerning when a district court can enter an order barring third party claims against settling defendants. The Sixth Circuit vacated the district court’s order which, as a condition to a proposed settlement, enjoined any person or entity from pursuing any claim against settling defendants relating to the underlying suit. The district court had analyzed whether the order would bar any viable claims, and, after finding that it would not, entered the injunction. The Sixth Circuit disagreed with this approach, explaining that, if there are no claims to bar, there is no need for such an order, and that the district court’s approach would be time-consuming and unwieldy.
Instead, the Sixth Circuit identified three issues for lower courts to resolve before deciding to enter such a bar order. First, the court should determine if it has jurisdiction to enter the bar order by examining whether the actions subject to the bar order are “related to” the bankruptcy case. In particular, the court should assess whether the outcome of the actions enjoined by the bar order would affect the bankruptcy estate. If not, then there is not “related to” jurisdiction. Second, the court must decide whether it has the power to enter the bar order under Section 105 of the Bankruptcy Code. The Sixth Circuit guided the district court to the Sixth Circuit’s holding in In re Dow Corning that Section 524 of the Bankruptcy Code does not prohibit a court from releasing a non-debtor from liability. Third, the court should closely scrutinize the scope of the bar order to ensure that the only claims that are extinguished are claims where the non-settling defendant’s injury arises from its liability to the plaintiff. The Sixth Circuit further explained that a “bar order that enjoins independent claims and provides no compensation is problematic to say the least.”
Chapter 11 Debtor Can Assign Previously Assumed Lease Despite Anti-Assignment Clause.
In In re Eastman Kodak Co., 495 B.R. 618 (Bankr. S.D.N.Y. 2013) (No. 12-10202), the Bankruptcy Court for the Southern District of New York permitted a Chapter 11 debtor-in-possession (Kodak) to assign a previously assumed real estate lease despite the lease’s anti-assignment clause. Kodak had assumed the lease within the deadline set forth in Section 365(d)(4) of the Bankruptcy Code for unexpired leases of nonresidential real property but did not seek to assign the lease until almost a year later. Analyzing the plain meaning of the Bankruptcy Code, the Court held that assumption and assignment are independent concepts and can take place at different times – nothing in Section 365(d)(4) imposes a deadline for assigning such a commercial lease. Assignment is conditioned on (1) the assumption of the lease in accordance with Bankruptcy Code requirements, and (2) adequate assurance of future performance by the assignee. Moreover, in this case, the order approving assumption of the lease specifically reserved the debtor’s right to assign the lease at a later point in time, and the landlord had not objected to the assumption order. Finally, the Court rejected the landlord’s argument that the anti-assignment clause had to be respected because, when the debtor assumed the lease, the debtor assumed it subject to all of its terms, including the anti-assignment clause. The Court reasoned that “the power to assign and override an anti-assignment clause is an important right that carries out one of the main purposes of Section 365 of the Bankruptcy Code—to allow debtors to maximize value for the benefit of their creditors.”
Follow On Lawsuit Against Insurance Carrier Subject To CAFA Jurisdiction.
By: Michael T. Brody
Plaintiff filed a class action claiming defendant sent thousands of junk faxes in violation of the Telephone Consumer Protection Act. The parties negotiated a settlement under which defendant consented to a substantial judgment. Plaintiff agreed not to attempt to recover the judgment from the defendant, but instead would seek recovery under defendant’s insurance policy, which defendant assigned to the class as part of the settlement. Plaintiff then filed a new state court action against the insurer, seeking a declaration that the insurer was liable for the judgment. Plaintiff sued individually and as a representative of a certified class. The insurance company defendant removed the case to federal court. Plaintiff dismissed its complaint, filed a new complaint seeking relief as an individual, and sought to remand. The district court remanded the action, and the Seventh Circuit reversed. Addison Automatics, Inc. v. Hartford Cas. Ins. Co., 731 F.3d 740 (7th Cir. 2013) (No. 13-2729). The Seventh Circuit found that the action was in substance a class action and was removable. First, plaintiff had standing to pursue relief only as a class representative. Second, plaintiff owed continuing fiduciary obligations to the class it represented. Thus, filing an amended complaint as an individual action did not change the reality that the plaintiff was pursuing claims on behalf of the class. Because the plaintiff remained the representative of a certified class, removal was proper under CAFA.
District Court Reduces Fees Due To Duplication And Lack Of Proof.
By: Michael T. Brody
In Wolph v. Acer America Corp., No. 09-01314 (N.D. Cal. Oct. 21, 2013), plaintiff alleged that defendant’s notebook computers were marketed in a deceptive manner. The court certified a class, and the parties reached a settlement. Pursuant to the settlement, class counsel sought $2.5 million in attorneys’ fees and $5,000 incentive awards to each plaintiff. The court reduced the fees, finding plaintiffs’ three law firms inefficiently duplicated work. The court engaged in a detailed analysis of the fee petitions, identifying instances in which attorneys from the three plaintiffs’ firms had overlapping responsibilities. In addition, the court found plaintiffs failed to prove their rates were in line with the relevant community. The court found a multiplier was not justified in light of the value of the benefits conferred upon the class. To support the incentive awards, the class representatives submitted declarations in which they explained they each spent over 100 hours on the case, identified their out-of-pocket expenses, their involvement in the lawsuit, and the injuries they suffered. The court found an incentive award appropriate, but awarded $2,000 to each claimant, rather than the $5,000 requested.
In Denying Certiorari, Chief Justice Roberts Raises Questions Regarding Cy Pres Relief.
By: Michael T. Brody
We have previously reported on cases addressing cy pres relief, in which some or all of the benefits of a class action are paid to a charity or other organization designed to serve the interests of the class. The United States Supreme Court recently denied a petition for writ of certiorari in the Facebook Beacon class action, Marek v. Lane, No. 13-136 (U.S. Nov. 4, 2013). Chief Justice Roberts wrote separately regarding the denial of certiorari. After describing the case and some of the unusual aspects of its cy pres relief, the Chief Justice stated it was appropriate to deny the petition because the case “might not have afforded the Court an opportunity to address more fundamental concerns” regarding the cy pres remedy. “In a suitable case, this Court may need to clarify the limits on the use of such remedies.” The “fundamental concerns” the Court might need to address include “when, if ever,” cy pres relief may be considered; “how to assess its fairness”; whether a newly formed entity can receive cy pres relief; if not, how entities should be selected; the “roles of the judge and parties” in shaping the remedy; and “how closely the goals of any enlisted entity must correspond to the interests of the class.” Inasmuch as these issues have been addressed in recent decisions of the courts of appeals, the Supreme Court may be signaling its interest in reviewing cy pres relief.
Minority Shareholders Need Not Approve Sale Of Controlling Stake.
By: C. John Koch
In a rare ruling from the bench after oral argument, the Delaware Supreme Court reversed a preliminary injunction blocking an $8.2 billion transaction in which Vivendi had agreed to sell a large portion of its shares in Activision back to that company. Activision Blizzard, Inc. v. Hayes, No. 497, 2013 (Del. Oct. 10, 2013) (table). Activision had been operating as a majority-owned subsidiary of Vivendi and is the publisher of the “Call of Duty” video game franchise. After seeking other buyers for its Activision stake, Vivendi agreed to sell a substantial portion of the shares back to Activision and its officers. The Court of Chancery enjoined the transaction, holding that Activision had not obtained the required approval of its minority shareholders. Hayes v. Activision Blizzard, Inc., No. 8885 (Del. Ch. Sept. 18, 2013). In an expedited appeal, the Delaware Supreme Court reversed, holding that “there is no reasonable possibility of success on the merits.” That court concluded that the stock purchase transaction was “not a merger, business combination or similar transaction” for which the approval of minority shareholders was necessary
NCAA Asks Court To Decide First Amendment Defense to “Right-of-Publicity” Claims.
The National Collegiate Athletic Association (“NCAA”), has asked the U.S. Supreme Court to permit it to intervene so it may file a cert petition seeking review the Ninth Circuit’s decision in In re NCAA Student-Athlete Name & Likeness Licensing Litig., 724 F.3d 1268 (9th Cir.), petition for cert. filed, 82 U.S.L.W. 3137 (U.S. Sept. 23, 2013)(No. 13-377) (petition filed by Electronic Arts (“EA”)). Prior to that filing, only EA had participated in the appeals process, even though this litigation was brought against EA, the NCAA, and the College Licensing Company. The NCAA had been relying on EA to pursue the appeals process, but that changed in late September, when EA reached a proposed settlement with the plaintiffs. The question presented in the NCAA’s petition seeks to clarify the extent to which the First Amendment freedom of expression precludes right-of-publicity tort claims. In this case, the claims of plaintiffs, former NCAA college football players, centered on the production of NCAA college football video games. Plaintiffs allege that the defendants violated, and conspired to violate, their right-of-publicity under California law. The Ninth Circuit affirmed the district court’s denial of defendants’ motion to dismiss on First Amendment grounds. NCAA’s motion and petition urge that the Ninth Circuit’s application of the “transformative-use” defense—which is essentially a balancing test that affords First Amendment protection where a likeness is sufficiently transformed—was inconsistent with the First Amendment and thus improper. Repeatedly characterizing the balancing of the First Amendment against right-of-publicity claims as “splintered” among the federal courts, NCAA asks the Supreme Court to endorse the test set forth in Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989), under which the First Amendment protects use of name or likeness unless it amounts to an unauthorized use that is unrelated to the expression at issue.
Remittitur Of Damages Award From Bench Trial Ordered.
In Delahoussaye v. Performance Energy Services, L.L.C., No. 12-31222 (5th Cir. Oct. 24, 2013), plaintiff sued Performance Energy Services, LLC (“Performance”) and others for damages stemming from injuries he suffered during an accident while working a fixed platform in the Gulf of Mexico. The other defendants settled prior to trial. After a bench trial, the trial court held total damages were $800,000, found that Performance was 15% at fault, and assessed $200,000 in damages against Performance. On appeal, plaintiff argued that the district court mixed-up the allocation of liability and Performance should have been liable for 85%, and Performance crossappealed, arguing that it should not have been held liable. The Fifth Circuit rejected both arguments, but then went on to conclude that the trial court’s $200,000 damages award was excessive as a matter of law. Although that award was determined by the court, and not a jury, and although the issue was not raised by either the appeal or crossappeal, the appellate court compared that award to the general damages award of $65,000 in a similar case (with similarity determined by the nature of the respective plaintiffs’ injuries due to the same accident), and ordered a remittitur of the award to $65,000.
Economic Loss Doctrine Precluded Negligent Misrepresentation Claim.
The Eighth Circuit affirmed the district court’s holding in Dannix Painting, LLC v. Sherwin-Williams Co., 732 F.3d 902 (8th Cir. 2013) (No. 13-1025), that Missouri law precluded plaintiff’s negligent misrepresentation claim. Plaintiff, a commercial painting contractor, alleged that defendant negligently misrepresented a substitute paint product which delaminated (i.e., didn’t stick) after plaintiff used it, which caused plaintiff to suffer financial loss when it repaired the work. The Eighth Circuit concluded that Missouri’s economic loss doctrine limits a seller’s tort liability based on repair costs, lost profits, etc., because it is essentially an issue of the buyer’s expectation interest and, as a result, a matter of contract law.
Federal Courts Increasingly Assessing Details Of E-Discovery Efforts.
By: Daniel J. Weiss
Several recent federal cases illustrate an apparent trend of federal courts becoming increasing engaged in assessing the details of parties’ e-discovery efforts, such as whether the correct search terms or custodians have been identified.
In American Home Assurance Co. v. Greater Omaha Packing Co., No. 11-cv-270 (D. Neb. Sept. 11, 2013), the court ordered a party that had produced very few e-mails to “disclose the sources it has searched or intends to search and, for each source, the search terms used.”
In Swanson v. ALZA Corp., No. 12-cv-04579 (N.D. Cal. Oct. 7, 2013), the court granted in part a motion to compel a party to apply several search terms (including Boolean operators) to a database of collected electronic information and produce the results to the requesting party. The court reviewed the requested search terms in detail and found that about half of the terms should be applied, despite the fact that the producing party had already produced over 600,000 pages of electronic documents.
In Banas v. Volcano Corp., No. 12-cv-01535 (N.D. Cal. Oct. 4, 2013), the court reviewed a party’s e-discovery effort and faulted the party for not searching the e-mail of several custodians. The court held that the party’s approach “might have been a reasonable way to gather the relevant documents,” but the court was troubled by the fact that the approach “was not discussed in advance with the plaintiffs, let alone agreed to.”
Federal Judge Enters Standing Order Aimed At Ensuring Proportional Discovery.
By: Daniel J. Weiss
Earlier this year, Judge Grimm of the U.S. District Court for the District of Maryland entered a standing order regarding discovery with several novel features aimed at ensuring that discovery is proportional to the matters at issue and balances the likely costs and benefits, as required under Fed. R. Civ. P. 26(b)(2)(C) and 26(g)(1)(B)(iii). Discovery Order (D. Md. Jan. 29, 2013) (Grimm, J.). The order divides discovery into two phases, with the first phase focused on “the facts that are most important to resolving the case.” Discovery in the first phase is limited to facts that “are likely to be admissible” and that are “material to proof of claims and defenses raised in the pleadings.” A broader second phase of discovery is permitted only upon “a showing of good cause.” In that phase, parties may seek discovery of facts that are “relevant to the claims and defenses pleaded or more generally to the subject matter of the litigation.” The order contains several limits on electronic discovery, including that, without a showing of good cause, a party may not be required to search for electronic materials from more than 10 custodians or from more than 5 years before the filing of the lawsuit. In addition, the order imposes a cap of 160 attorney hours for the amount of time any party may be required to work on collecting and producing e-discovery materials, absent good cause. The 160 hours includes time spent “identifying potentially responsive ESI, collecting that ESI, searching that ESI . . . and reviewing that ESI for responsiveness, confidentiality, and for privilege or work product protection.” All of the forgoing rules may be modified by stipulation.
Court Upholds, But Reduces, Punitive Damages Award.
By: Barry Levenstam
In Davids v. Novartis Pharmaceuticals Corp., No. 06-CV-431 (E.D.N.Y. Oct. 9, 2013), the district court addressed the propriety of a jury’s award of $10 million in punitive damages in connection with a compensatory damages of $450,000 for an inadequate failure to warn of the risk of osteonecrosis of the jaw caused by defendant’s drug. The district court held that the record contained sufficient evidence that defendant had notice that osteonecrosis was a possible result of the use of its product so that a reasonable jury could conclude that its failure to warn was reprehensible. An award of punitive damages was therefore appropriate. Nevertheless the court held that, given the substantial size of the compensatory award, even the 5:1 ratio permitted by the applicable New Jersey Punitive Damages Act led to a punitive award that exceeded due process bounds. The court concluded that a 2:1 ratio was appropriate and ordered plaintiff to accept a remittitur to a $900,000 or retry the issue of punitive damages.
Court Rejects Pre-Emption Defense For Oral Representation.
By: Barry Levenstam
In Medtronics, Inc. v. Malander, No. 49A02-1211-CT-925 (Ind. Ct. App. Oct. 11, 2013), the Court of Appeals of Indiana reviewed a decision denying defendant, a medical device manufacturer, summary judgment on preemption grounds. Plaintiffs sued defendant for alleged misrepresentations made orally by defendant’s “clinical specialist” sales representative to plaintiff’s surgeon during surgery. The trial court denied summary judgment on that claim and the court of appeals affirmed. The court of appeals held that a claim alleging wrongful oral advice was not preempted because the FDA does not regulate such advice.
New York Lawyer Group Opines That Attorneys Cannot Seek Whistleblower Awards.
The New York County Lawyers’ Association (“NYCLA”) opined that, under the New York Rules of Professional Conduct, lawyers cannot ethically collect Dodd-Frank Act whistleblower awards for providing confidential client information to the SEC. NYCLA Comm. on Prof’l Ethics, Formal Op. 746, Ethical Conflicts Caused by Lawyers as Whistleblowers under the Dodd-Frank Wall Street Reform Act of 2010 (Oct. 7, 2013). The NYCLA stated that the prospect of receiving a whistleblower award “might tend to cloud a lawyer’s professional judgment.” Under Dodd-Frank, individuals who provide original information to the SEC leading to an enforcement action may receive between 10-30 percent of any sanctions collected (over $1 million). SEC rules allow attorneys, as a last resort, to disclose confidential client information in rare instances to prevent or remedy securities fraud. Instead of disclosing confidential information, lawyers are encouraged to report potential securities law violations up the corporate ladder. The NYCLA concluded that lawyers cannot ethically disclose confidential information in order to collect a monetary whistleblower award because its represents a conflict of interest. The NYCLA opined that the same rationale applied to a lawyer reporting former clients as well.
Court Holds That Dodd-Frank Whistleblowers Are Not Entitled To A Jury Trial.
In Pruett v. BlueLinx Holdings, Inc., No. 13-02607 (N.D. Ga. Nov. 12, 2013), Jeffrey Pruett filed suit against BlueLinx Holdings, Inc., contending that he was terminated from his job in retaliation for his reporting certain alleged violations to the Public Company Accounting Oversight Board and the Security and Exchange Commission, a violation of the whistleblower protections of Dodd-Frank. Plaintiff demanded a jury trial. Dodd-Frank is silent as to whether a jury trial is available to whistleblowers, so the court conducted a Seventh Amendment analysis. Although it originally only preserved the right to a jury trial for common law actions existing at the time of the Seventh Amendment’s adoption, Courts have extended the Seventh Amendment to all suits where legal rights are involved. The right to a jury trial may exist where the nature of the issues to be resolved are analogous to actions brought in English courts prior to the merger of law and equity and where the remedy sought is legal in nature. The BlueLinx court found that the remedies being sought—reinstatement, hiring, and back pay—are generally considered equitable. Plaintiff argued that because Dodd-Frank provides for doubling of back pay, it turned the remedy into a legal one. The court held that automatic doubling is a calculation lacking the discretion associated with monetary jury damages, and thus the back pay remained equitable. Thus, the plaintiff was not entitled to a jury trial.
Dodd Frank Whistleblower Protections Do Not Apply Extraterritorially.
Meng-Lin Liu brought suit under the Anti-Retaliation Provision of Dodd-Frank in Liu v. Siemens A.G., No. 13-0317 (S.D.N.Y. Oct. 21. 2013). Liu, a resident of Taiwan, was Division Compliance Officer for Siemens China, a subsidiary of Siemens A.G., a German corporation. Liu raised concerns about a deal he believed circumvented internal compliance procedures put in place after Siemens pled guilty to FCPA charges. He was allegedly stripped of his duties and eventually let go. He then reported the possible FCPA violations to the SEC and brought suit under Dodd-Frank’s whistleblower protections. Under Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010), “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.” Dodd-Frank does have some extraterritorial application, but the Anti-Retaliation provision does not, reinforcing the idea that that provision is purely domestic. The Liu court held that there is no indication that Congress intended the whisteblower protections to apply extraterritorially. The case was “brought by a Taiwanese resident against a German corporation for acts concerning its Chinese subsidiary relating to alleged corruption in China and North Korea. The only connection to the United States is the fact that Siemens has [American depository receipts] that are traded on an American exchange, just as in Morrison.” The court dismissed the complaint with prejudice.
Corporate Anti-Corruption Policies Not Sufficiently Implemented At Subsidiaries.
By: Iris E. Bennett
Stryker Corporation (Stryker), a Michigan-based medical technology company, has settled an FCPA matter with the Securities and Exchange Commission (SEC), in which the SEC alleged that Stryker made $2.2 million in unlawful cash payments, gifts, hospitality, and charitable donations for the benefit of foreign government officials while describing the payments as legitimate expenses in the company’s books and records. Stryker’s subsidiaries in Mexico, Poland, Romania, Argentina, and Greece allegedly were involved in the conduct, and the SEC faulted Stryker for not adequately implementing its corporate anti-corruption policies at its foreign subsidiaries. The gifts and hospitality that the SEC found problematic included paying for officials’ vacations and, in at least one instance, paying lodging for a foreign official to attend a conference abroad where the officials were viewed as key to Stryker obtaining business. The SEC also found a charitable donation to fund a public university research lab to be corrupt, where the lab was the ‘pet project’ of a research physician viewed as key to obtaining business from the university. Stryker settled with the SEC for a total of $13M, comprised of $7.5M in disgorgement, plus a civil penalty and pre-judgment interest. See Order Instituting Cease-and-Desist Proceedings in re Stryker Corp., Exchange Act Release No. 70,751 (Oct. 24, 2013).
Gifts To Private Customers Of Foreign Banks Alleged To Violate FCPA.
By: Iris E. Bennett
Diebold, Inc., an Ohio-based manufacturer of ATMs and bank security systems, has settled an FCPA matter with the SEC and the Department of Justice (DOJ) for a combined total of $48.1 million. The SEC and DOJ alleged that, between 2005 and 2010, employees of Diebold’s subsidiaries in Indonesia and China provided gifts, entertainment, and trips to influence employees of state-owned banks to purchase Diebold products. The SEC and DOJ also alleged that employees of Diebold’s Russian subsidiary paid $1.2 million through a distributor to employees of private banking customers to obtain business from those banks. While not a violation of the FCPA anti-bribery provision, because these payments did not involve government officials, DOJ and SEC alleged that Diebold employees knowingly recorded these payments to individuals at private banks inaccurately as legitimate business expenses, and thus that Diebold committed both criminal and civil violations of the FCPA’s books and records provisions. Diebold agreed to pay $22.9 million in disgorgement and prejudgment interest to the SEC, and a fine of $25.2 million to DOJ. See Complaint, SEC v. Diebold, Inc., No. 13-1609 (D.D.C. Oct. 22, 2013), Information, United States v. Diebold, Inc., No. 13-cr-464 (N.D. Ohio Oct. 22, 2013).
Non-Prosecution Agreement Assists Plaintiff In Derivative Litigation.
A derivative suit against Google, Inc. officers and defendants survived a motion to dismiss aided by company admissions in a non-prosecution agreement (NPA). In City of Orlando Police Pension Fund v. Page, No. 13-2038 (N.D. Cal. Sept. 26, 2013), Google had entered into an NPA with the Department of Justice relating to advertisements placed with Google’s search engines by Canadian pharmacies seeking to sell prescription drugs to be imported into in the U.S. Among other things, the NPA contained an admission of wrongdoing by the company, an admission that the company was on notice that Canadian advertisers targeted U.S. customers and imported drugs into the U.S. in violation of federal law, and an agreement to forfeit $500 million to the U.S. government. Plaintiff made a demand on the company’s board to investigate and hold directors and senior executives responsible. The company formed a committee which investigated the conduct but refused the demand. The investigation resulted in a 149-page report, the conclusions of which were reflected in a six-page demand refusal letter (“DRL”). Plaintiff then brought a derivative action, and defendants moved to dismiss, arguing that plaintiff had not adequately alleged that the refusal of its demand was wrongful, relying on the conclusions of the investigation. The court denied the motion to dismiss. It initially noted that the defendants’ refusal to release the entire report, while not demonstrating itself that the refusal of the demand was wrongful, unreasonably insulated the investigation from scrutiny. The court then stated that on the record before it (which conspicuously did not include the full report), it could not conclude that the investigation was conducted reasonably and in good faith, given the inconsistencies between its conclusions and the admissions of wrongdoing in the NPA. Finally, the court credited the plaintiff’s argument that any reasonable investigation would have included an interview of the DOJ’s lead investigator or someone knowledgeable about the DOJ’s investigation.
Confidentiality Agreements May Provide Basis For Counterclaim In FCA Case.
In U.S. ex rel. Wildhirt v. AARS Forever, Inc., No. 09-1215 (N.D. Ill. Sept. 19, 2013), whistleblowers brought a qui tam suit alleging that the defendants had violated the False Claims Act and its Illinois analogue by falsely billing Medicare and Medicaid for patients in the Veterans Administration hospital system and by terminating their employment in retaliation for calling attention to the false claims. In connection with the filing of the lawsuit, the relators allegedly disclosed confidential documents and verbal communications to their lawyer, to the government, and to the public. The defendants filed counterclaims for breach of the relators’ employment agreement, in which they agreed not to disclose confidential information without authorization, not to receive monetary reimbursement for involvement in a whistleblower action against the company, and to notify the company in writing immediately if they suspected practices that may be of concern. The court denied a motion to dismiss the counterclaims, rejecting the plaintiffs’ argument that the confidentiality agreements were contrary to public policy.