Jenner & Block

Spotlight Newsletter Resource Center

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 mbradley@jenner.com.

Arbitration

Defenses To Class Action Waivers Preempted, California Private AG Suits Are Not.

By: Howard S. Suskin

On June 23, the California Supreme Court held that the Federal Arbitration Act (FAA) preempts state law issues that restrict enforcement of class action waivers in arbitration agreements, such as public policy or unconscionability.  Iskanian v. CLS Transp. Los Angeles, LLC, 327 P.3d 129 (Cal. 2014) (No. S204032).  Here, an employee sought to bring a class action lawsuit against an employer.  The employee had entered into an arbitration agreement that waived the right to class proceedings.  The court ruled that a state’s refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA.  The court noted, however, that the employee also sought to bring a representative action under a California statute (PAGA) that authorizes an employee to file suit as a private attorney general on behalf of the state against an employer for labor code violations committed against the employee and fellow employees.  The court found that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring a PAGA action is contrary to public policy.   The court further found that the FAA’s goal of promoting arbitration as a means of private dispute resolution does not prohibit the state legislature from deputizing employees to prosecute labor code violations on the state’s behalf.   Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment agreement.

Delegation Clause In Arbitration Agreement Is Not Unconscionable.

By: Howard S. Suskin

On June 17, a California appellate court held that a delegation clause, providing that issues relating to the enforcement of the arbitration agreement are to be delegated to the arbitrator for resolution, is not unconscionable.  Malone v. Superior Court, 173 Cal. Rptr. 3d 241 (Cal. Ct. App. 2014) (No. B253891).  After an employee sued her employer for wage and hour violations, the employer moved to compel arbitration pursuant to a clause in the employee handbook.  The employee opposed the motion, arguing that the arbitration agreement was unconscionable.  The employer responded that the arbitration agreement contained a delegation clause, providing that issues relating to the enforceability of the arbitration agreement were themselves delegated to the arbitrator for resolution.  The dispute thus turned on the issue of whether the delegation clause itself was unconscionable.  The California Supreme Court held that the  delegation clause was not unconscionable: it was not inherently unfair, it was not unilateral, and it did not provide for a biased decision maker.  Further, the clause was clear and unmistakable and was not hidden in fine print.

Hyperlinked Arbitration Clauses Are Binding.

By: Howard S. Suskin

A consumer purchasing online is bound by an arbitration clause even if accessing the clause required clicks through a series of two hyperlinks.  Starke v. Gilt Groupe, Inc., No. 13 Civ. 5497 (S.D.N.Y. Apr. 24, 2014).  The court concluded that the consumer was informed of the consequences of his assenting click to the transaction by being told that “you agree to the Terms of Membership for all [seller’s] sites” and being directed where to click further to review those terms.  The consumer’s decision to click the “Shop Now” button represented his assent to those terms, regardless of whether he actually clicked further through several hyperlinks to read them.

Arbitration Clause Is Binding Despite Signer’s Illiteracy And Lack Of Knowledge.

By: Howard S. Suskin

An employee was held bound to an arbitration clause despite his contention that he does not understand English and did not know that the English-written document was an agreement to arbitrate.  Molina v. Scandinavian Designs, Inc., No. 13-cv-04256 (N.D. Cal. Apr. 21, 2014).  The court found that the employee’s signature on the arbitration contract manifests his assent to its terms, binding him to the contract, regardless of whether he understood it.  The employee’s inability to read English did not relieve him of the duty to learn the contents of the contract before signing.

Arbitration Clause In Attorney Retainer Agreement Held Unenforceable.

By: Howard S. Suskin

An arbitration clause in a debt adjusting service provider’s contract, which contained an attorney retainer agreement, was held unenforceable, because no attorney discussed the arbitration provisions with the debtors or advised the debtors regarding the consequences of relinquishing the legal protections provided by state law.  Gorden v. Lloyd Ward & Assoc., P.C., 323 P.3d 1074 (Wash. Ct. App. 2014).  The court found that, because an attorney-client relationship had been formed, the lawyer was required to explain to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.  In this instance, no attorney discussed the arbitration provisions or advised of the rights at stake.  Accordingly, the court concluded that the arbitration clause was procedurally unconscionable and void.

Attorney-Client Privilege

D.C. Circuit Grants Mandamus To Protect In-House Internal Investigation Materials.

By: David M. Greenwald

In In re Kellogg Brown & Root, Inc., No. 14-5055 (D.C. Cir. June 27, 2014), a panel of the D.C. Circuit granted a petition for a writ of mandamus, finding that the district court’s privilege ruling was clearly erroneous.  The district court had held that internal investigation materials were not privileged, but were instead prepared for a business purpose, where the investigation was conducted pursuant to the company’s compliance program.   In a qui tam case brought against defense contractor KBR, the Relator sought discovery of materials created during KBR’s internal fraud investigation.  The investigation was conducted pursuant to KBR’s Code of Business Conduct (CBC), which includes a compliance program required by federal regulations for defense contractors.  The investigation was conducted at the direction of the Law Department and employee interviews were conducted by non-lawyers at the direction of in-house counsel.  The trial court ruled that the investigation materials were not privileged because: (1) the investigation did not involve outside counsel; (2) the interviews were not conducted by lawyers; (3) employees were not informed expressly that the purpose of the interviews was for a legal purpose; and (4) the “primary purpose” of the investigation was business related, because the investigation would have been conducted pursuant to the CBC whether or not KBR sought legal advice.  Citing Upjohn Co. v. United States, 449 U.S. 383 (1981), the appellate court granted KBR’s petition for a writ of mandamus, broadly holding that internal investigations conducted at the direction of in-house or outside counsel are within the privilege.  First, the general rule established by Upjohn is that a lawyer’s status as in-house counsel does not “dilute” the privilege so long as counsel is acting in a legal capacity.  Second, non-lawyers who conduct interviews at the direction of counsel act as the agents of counsel and such interviews are “routinely protected by the attorney-client privilege.”  Third, the Upjohn decision does not require “ a company to use magic words to its employees in order to gain the benefit of the privilege for an internal investigation.”  Fourth, the trial court erred in applying a “but for” analysis to determine whether the “primary purpose” of the investigation was legal in nature rather than for a business purpose.  Under the trial court’s approach, privilege would apply only where the “sole purpose” of an investigation was to obtain legal advice, thereby “eradicating” the attorney-client privilege for internal investigation conducted by businesses that are required by law to maintain compliance programs, “which is now the case in a significant swath of American industry.”  The appellate court articulated the proper “primary purpose” test:  “Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?”  (emphasis in original)  “In the context of an organization’s internal investigation, if one of the significant purposes . . . was to obtain or provide legal advice, the privilege will apply.”

No Common Interest Doctrine For Borrower/Bank Consortium Communications.

By: David M. Greenwald

In Schaeffler v. United States, No. 13 Civ. 4864 (S.D.N.Y. May 28, 2014), the district court held that a taxpayer, Schaeffler, waived the attorney-client privilege when privileged legal advice was disclosed to a Bank Consortium that had provided refinancing to entities controlled by the taxpayer (the Schaeffler Group).  In this case, the Schaeffler Group hired Ernst & Young (E&Y) and a law firm to provide advice regarding the complex tax issues presented by the acquisition of a company and the associated refinancing and restructuring involved in the acquisition.  The Schaeffler Group entered into an “Attorney-Client Privilege Agreement” (ACP) with the Bank Consortium.  The ACP articulated that there was a common legal interest among the parties, and that the parties would keep confidential otherwise privileged documents shared between the Schaeffler Group and the Bank Consortium.  The IRS subpoenaed E&Y for documents that had been provided to parties outside the Schaeffler Group, including documents disclosed to the Bank Consortium.  Schaeffler asserted that documents disclosed to the Bank Consortium remained privileged pursuant to the ACP, because there was a common legal interest in understanding the tax implications of the transaction, which could affect both the Schaeffler Group and the value of the collateral on which the refinancing was based.  The court rejected application of the common interest doctrine on the grounds that, while the parties shared a common business interest in favorable tax treatment, they did not share a common legal interest or common legal strategy.  “To be sure, this common economic interest depended on the resolution of legal issues regarding tax treatment.  But this does not equate to a common ‘legal’ interest as that term is used in case law.”

Mediation Settlement Involved Federal & State Claims, So Federal Privilege Applies.

By: David M. Greenwald

On June 2, in Wilcox v. Arpaio, 753 F.3d 872 (9th Cir. 2014) (No. 12-16418), the Ninth Circuit held that federal and not state privilege law applied to the enforcement of a settlement that involved both federal and state law claims.  In this Section 1983 action, plaintiffs alleged that County officials violated both federal and state law by retaliating against plaintiffs for their opposition to actions of the County Sheriff.  The County adopted a resolution directing the County Manager to establish an alternative resolution program to resolve the claims, including entering into binding arbitration/mediation agreements with plaintiffs.  A retired judge, who was appointed to conduct mediations, settled multiple claims.  Plaintiffs sought to enforce a settlement based on an email from the judge to plaintiffs’ counsel that confirmed settlement.  The County argued that the email, and similar emails with other plaintiffs, were inadmissible under Arizona’s mediation privilege.  The trial court, applying federal privilege law, admitted the emails into evidence, and the appellate court affirmed.  The appellate court acknowledged that state contract law governed whether the parties reached an enforceable agreement settling the federal and state law claims alleged in the complaint.  However, Federal Rule of Evidence 501 required application of federal privilege law in this case.  “Where, as here, the same evidence relates to both federal and state law claims, ‘we are not bound by Arizona law’ on privilege.”  (citations omitted)

Video Surveillance Tape Preserved After Slip And Fall Not Protected Work Product.

By: David M. Greenwald

In Sowell v. Target Corp., No. 14-cv-93 (N.D. Fla. May 28, 2014), the district court held that a video of plaintiff’s slip and fall was not protected by the work product doctrine, and ordered the video produced prior to the plaintiff’s deposition.   Defendant routinely operated video surveillance cameras in its store, and those videos were typically erased in the ordinary course of business.  Here, defendant’s claims department directed defendant to preserve the video after learning of the slip and fall.  Plaintiff sought production of the video and defendant objected on two grounds: (1) the act of preserving the video after learning of the slip and fall transformed the video into protected work product; and (2) in the alternative, defendant should not be required to produce the video until plaintiff gave her deposition so that plaintiff could not tailor her testimony based on the video.  The court rejected both arguments.  First, a document or thing is subject to the work product protection only when the proponent of the privilege demonstrates that at the time the document or thing was prepared the entity anticipated litigation.  Here, the video was created in the ordinary course of business.  The act of preserving the video does not transform the video into protected work product.  “Indeed, if that was the law literally every piece of electronically stored information (“ESI”) preserved by a defendant as part of a defendant’s duty of preservation would be off limits in discovery[.]”  Second, the court ordered immediate production because defendant did not point to any basis for delaying disclosure other than unsupported speculation that the plaintiff’s testimony may be altered in some way to reflect the events on the surveillance tape.

Company’s Reasonable Belief That GC Was An Attorney Established Privilege.

By: David M. Greenwald

In In re Freeway Foods of Greensboro, Inc., Bankr. No. 10-11282, Adversary No. 10-02057, (Bankr. M.D.N.C. Apr. 24, 2014), the court held that communications between company personnel, the CEO and the Chairman, and the company’s general counsel, Waller, were privileged, despite the fact that Waller did not hold an active license to practice law.  In North Carolina, when a “client” reasonably believes that he is dealing with an attorney, the attorney-client privilege should apply, even if the client is mistaken.  The court held that privilege applied in this case.  The court found that both the CEO and the Chairman reasonably believed that Waller was an attorney and both viewed their conversations with Waller to be privileged.  In addition, outside counsel understood Waller to be an attorney, and Waller displayed a law school diploma and bar certificate in his office.  The court explained that the attorney has the primary obligation to ensure that he is properly practicing law, and failure to do so will not be held against the client where the client reasonably believes its counsel is, in fact, an attorney.

Assertion Of Advice Of Counsel Defense Broadly Waives Privilege.

By: David M. Greenwald

In In re Fresh & Process Potatoes Antitrust Litigation, No. 10-md-02186 (D. Idaho Apr. 11, 2014), the court held that asserting an advice of counsel defense led to broad waiver.  In this antitrust matter, two sets of defendants asserted as an affirmative defense the “good faith belief that their conduct was permissible.” The first group of defendants asserted that their good faith was based on the advice of counsel.  This group entered into what the group characterized as a “narrow” waiver agreement with plaintiffs, and argued that waiver applied only to information that counsel had provided to defendants, and that it did not apply to information in counsel’s files that had not been transmitted to defendants.  The court rejected defendants’ argument and found that the waiver extended to all communications with counsel and information in counsel’s possession that may have been considered by counsel in rendering the opinions relied upon, so that plaintiffs could fully question defendants and their counsel.  The second group of defendants raised a good faith defense, but expressly stated to the court that the defense was based solely on public statements, and that the defendants would not rely on communications with counsel to prove the defense.  The court rejected plaintiffs’ argument that the second group had put the advice of counsel “at issue.”  So long as the second group of defendants did not refer to or attempt to put into evidence any suggestion that the defendants sought, obtained, or relied upon counsel’s advice, defendants would not put counsel’s advice “at issue,” and could continue to assert privilege.

Immediate Appeal By Defense Allowed Regarding Discovery Served On Government.

By: David M. Greenwald

On April 18, in Doe No. 1 v. United States, 746 F.3d 999 (11th Cir. 2014) (No. 13-12923), the Eleventh Circuit held that it had jurisdiction over an interlocutory appeal by criminal defense attorneys regarding an adverse privilege ruling relating to documents held by the government.  This matter is an action brought against the United States by victims who alleged that rights afforded to them by the Crime Victims’ Rights Act had been violated when the government entered into a non-prosecution agreement with the perpetrator, Epstein, without first conferring with the plaintiffs.  Plaintiffs sought discovery from the government of correspondence sent to the government by Epstein’s lawyers during plea negotiations.  The trial court allowed Epstein’s defense counsel to intervene for the limited purpose of challenging the disclosure and use of the correspondence.  In support of a motion for protective order, Epstein’s defense counsel argued that the correspondence was protected as work product and as privileged plea negotiations.  The government argued that the court should consider the material privileged, but informed the court that the government would produce the documents if ordered to do.  The trial court denied the motions and allowed the discovery, and Epstein’s defense counsel brought an interlocutory appeal.  The appellate court held that it had jurisdiction pursuant to the Perlman doctrine, which allows immediate appeal of an adverse privilege ruling where  documents are in the possession of a disinterested third party who would be reluctant to risk a contempt citation, and where the purported privilege holder is not a party to the case, thereby depriving the holder of an opportunity to raise the issue on direct appeal.  Here, Epstein’s defense counsel would not be able to appeal a final judgment against the government, which would leave them “without an avenue to appeal the denial of their claims of privilege.”

Oregon Upholds Law Firm In-House Privilege.

By: David M. Greenwald

On May 30, in Crimson Trace Corp. v. Davis Wright Tremaine LLP, 326 P.3d 1181 (Or. 2014) (No. CC110810810, SC S061086) (en banc), an en banc decision by the Oregon Supreme Court upheld the law firm in-house privilege and rejected a “fiduciary exception” not found in the Oregon privilege statute.  In an underlying patent infringement matter, defendant DWT represented Crimson Trace.  During the course of that matter, trial counsel consulted with attorneys on DWT’s “Quality Assurance Committee” (QAC), a small group of DWT lawyers who had been designated by the firm as in-house counsel, regarding potential conflicts of interest with respect to DWT’s representation of Crimson Trace. Consultations occurred when Crimson Trace’s litigation opponent, LaserMax, asserted a counterclaim based on DWT’s alleged deceptive omission of information from the patent application submitted to the PTO, and when DWT disclosed the confidential terms of a settlement agreement, which the court found was intentional and damaging to LaserMax.  In this subsequent malpractice action, Crimson Trace sought discovery of communications between the DWT attorneys who represented Crimson Trace and DWT’s QAC attorneys.  The trial court found that the communications with firm counsel satisfied the statutory requirements for privilege, but held that a “fiduciary exception” to the privilege required DWT to disclose communications made while DWT’s representation of Crimson Trace was ongoing.  The Oregon Supreme Court reversed.  First, the court held that the communications with in-house counsel met the three elements for privilege established by Oregon statute: (1) the communications were between a client (the firm) and the client’s lawyer (firm in-house counsel); (2) the communications were intended to be kept confidential; and (3) the communications were made for the purpose of facilitating the rendition of professional legal services to the client.  Second, the court rejected the trial court’s application of a “fiduciary exception” not found in the Oregon statute.  Some courts outside of Oregon have held that, because lawyers owe fiduciary duties to their clients, a firm may not invoke privilege to protect communications between firm lawyers and firm in-house counsel that occur while representation of the client is ongoing.  The Oregon court rejected the “fiduciary exception” as unavailable under Oregon’s statutory framework.  The statute provides for five specific exceptions, which do not include the fiduciary exception.  The court explained that it would be an error to conflate ethical considerations with the separate issue of the scope of the privilege.

Class Action

Supreme Court: Enhanced Substantive Review At Class Certification Stage.

By: Michael T. Brody

On June 23, in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (No. 13-317), the United States Supreme Court re-evaluated, but declined to overrule, its prior ruling in Basic Inc. v. Levinson, 485 U.S. 224 (1988), that plaintiffs could prevail on a Securities Act claim under Section 10(b) and Rule 10(b)(5) based on the “fraud on the market” theory.  In addition, as is relevant to class certification, the Court held that while plaintiffs may try to rely on the fraud on the market presumption to prove reliance, defendants may attempt to defeat the presumption at the class certification stage by presenting evidence that the alleged misrepresentation did not affect the stock price.  As applied to securities cases, the rigorous analysis undertaken at the class certification stage permits parties opposing the fraud on the market theory to submit evidence undermining the claim of price impact.  While Basic permits the presumption, it does not require district courts to ignore direct evidence showing that the alleged misrepresentation did not affect the stock price, such that the presumption is rebutted.

Seventh Circuit Rejects “Scandalous” Class Action Settlement.

By: Michael T. Brody

In Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014) (Nos. 13-2091, 13-2133, 13-2136, 13-2162, 13-2202), the parties settled a class action alleging defects in manufactured windows.  The Seventh Circuit had previously affirmed the certification of two separate classes in the case.  Under the settlement, the parties agreed to a single settlement class, which the Seventh Circuit stated ignored the adversity between the two subgroups.  The Seventh Circuit found the settlement to be grossly inequitable, “even scandalous.”  The opinion catalogs numerous defects the court found with the settlement:  lead counsel was the son-in-law of the lead plaintiff, presenting conflicts; named plaintiffs who had opposed the settlement had been removed by class counsel and replaced with class representatives in favor of the settlement; plaintiffs’ counsel was facing professional and financial challenges which the court stated suggested the settlement was inappropriate; the settlement provided $11 million in cash to class counsel and uncertain relief to class members; the settlement allowed defendants to prepay a portion of the class fee before notice was sent; the settlement procedure “strews obstacles in the path” of claimants; the claims process was difficult to understand and navigate; the trial court failed to value the overall settlement; and the notice to the class did not reveal the substantial problems with the settlement.  The court concluded that “almost every danger sign in a class action settlement that our court and other courts have warned district court judges to be on the lookout for was present in this case.”

Divided Ninth Circuit Upholds Settlement With Below-Lodestar Fee.

By: Michael T. Brody

In Laguna v. Coverall North America, Inc., 753 F.3d 918 (9th Cir. 2014) (No. 12-55479), plaintiffs challenged defendant’s franchise practices.  After two years of “significant litigation,” the parties agreed to a settlement in which current franchisees would receive pledges of certain customer accounts upon payment of their franchise fees, and former franchise owners would receive cash and a credit towards the purchase of a new franchise.  Class counsel were to receive approximately $1 million in fees.  The district court approved the settlement, and the Ninth Circuit affirmed.  The court first analyzed the fee request, which it found reasonable.  The fees amounted to one-third of the lodestar, which the court cross-checked by reference to a percentage of the fund recovery.  As to the fairness of the settlement, the Ninth Circuit deferred to the district court.  While the court did not explicitly value the injunctive remedy, it found the settlement terms sufficient.  Particularly because the attorneys’ fee was less than the full lodestar, the court found the opportunity for collusion to be minimal.  One judge dissented, criticizing the majority for not insisting upon proof of the value of the monetary benefit of the settlement, which was conditional upon class members making payments to the defendant, or the value of the monetary relief for the class.

Third Circuit Declines To Rehear “Ascertainability” Decision.

By: Michael T. Brody

In Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013), the Third Circuit applied its prior decisions requiring that a class certified under Rule 23(b)(3) be “ascertainable.”  The Carrera court found a class could not be certified where the purchasers of the defendants’ products could not be ascertained in an administratively feasible manner.  Plaintiffs moved for rehearing en banc, which the Third Circuit denied.  Carrera v. Bayer Corp., No. 12-2621 (3d Cir. May 2, 2014).  Four judges dissented from the denial of rehearing en banc, including the author of Marcus v. BMW of North America, LLC, 687 F.3d 583 (3rd Cir. 2012), a leading Third Circuit ascertainability opinion.  The dissenting judges stated that Carrera went too far, threatening the viability of consumer class actions.  They opined that the ascertainability requirement, which is judicially created, should be flexible in its application, especially where the defendant’s conduct and business practices make the class difficult to ascertain.

No Certification Of Class Of Cosmetics Purchasers Due To Lack Of Commonality.

By: Michael T. Brody

In Algarin v. Maybelline, LLC, No. 12-cv-3000 (S.D. Cal. May 12, 2014), plaintiffs brought suit challenging Maybelline’s advertising of certain cosmetic products, and moved for class certification.  Defendant, relying on Carrera and other recent cases, argued the class was not ascertainable.  The district court concluded the class definition was sufficient to identify class members, but found there would be challenges in managing the class because the class members would be difficult to identify in an administratively feasible manner.  The court did not, however, deny class certification on this ground.  Instead, it denied class certification because there was a lack of commonality.  Relying on defendant’s survey evidence, the court found objective evidence demonstrated that a substantial number of class members were not misled by Maybelline’s advertising.  In addition, whether the conduct was false, misleading, or likely to deceive was not subject to common proof.  The court further found economic injury was not a common question as many class members were satisfied with the products, and a determination of a proper remedy also could not be made on a class-wide basis.

Negotiation Of Improper Settlement Does Not Require Disqualification Of Counsel.

By: Michael T. Brody

We previously reported to you the case of Radcliffe v. Experian Information Solutions, Inc., 715 F.3d 1157 (9th Cir. 2013), in which the Ninth Circuit held that incentive awards in a settlement rendered the class representatives inadequate.  The incentive awards were conditional – they would only be granted to those class representatives who supported the settlement.  On remand, a group of class members moved to disqualify class counsel.  They asserted there was a conflict between the named representative who sought the conditional incentive awards and the unnamed members of the class.  The district court applied California law and concluded that automatic disqualification was not necessary.  White v. Experian Info. Solutions, No. SACV 05-01070 (C.D. Cal. May 1, 2014).  The conflict was brief, was caused by a provision in a settlement that was no longer applicable, and it arose not from the underlying interests of the plaintiffs, but rather the faulty settlement terms.  Balancing the interests of parties, counsel, and the court, the court declined to disqualify counsel and refused to appoint substitute counsel for the class.

Complex Commercial Litigation

Supreme Court Allows Post-Judgment Discovery Of Foreign Sovereign Assets.

By: Matthew J. Thomas

In Republic of Argentina v. NML Capital, Ltd.,134 S. Ct. 2250 (2014) (No. 12-842), plaintiff had filed actions in the Southern District of New York to collect on defaulted bonds issued by the defendant, the Republic of Argentina.  After plaintiff secured a judgment, it issued subpoenas to two non-party banks, seeking information concerning defendant’s assets located outside of the United States.  The district court granted plaintiff’s motion to compel in connection with the subpoenas, and the Second Circuit affirmed the order.  The Supreme Court also affirmed, rejecting defendant Argentina’s argument that such discovery would violate the Foreign Sovereign Immunities Act.  The Court ruled that because the Act does not expressly grant foreign-sovereigns immunity from post-judgment discovery concerning their extraterritorial assets, the Federal Rules of Civil Procedure govern.  Inasmuch as FRCP 69(a)(2) generally permits discovery of judgment debtors for purposes of aiding in the execution of a judgment, the Court concluded that, assuming the district court properly exercised its discretion to order such discovery under FRCP 69(a)(2), there was no basis to quash the discovery at issue.

Supreme Court: Lanham Act Suits May Challenge Federally-Regulated Labels.

By: Matthew J. Thomas

In POM Wonderful LLC v. The Coca-Cola Co.,134 S. Ct. 2228 (2014) (No. 12-761), the Supreme Court held that a private party may bring Lanham Act claims against its competitor challenging food and beverage labels that are regulated by the Food, Drug, and Cosmetic Act (FDCA).  Plaintiff POM Wonderful sued Coca-Cola, alleging that the name, label, marketing and advertising of Coca-Cola’s juice-blend drink misled customers into believing that the product consisted predominantly of real juice.  The district court granted summary judgment in favor of defendant, holding that the FDCA and its regulations precluded private Lanham Act suits, and the Ninth Circuit affirmed.  The Supreme Court reversed, finding that nothing in the text, history or structure of the FDCA or the Lanham Act shows that Congress intended to forbid such suits.  Rather, the absence of such express textual provisions, coupled with the fact that the FDCA and the Lanham Act have coexisted for over 70 years, is “powerful evidence” that Congress did not intend FDA oversight to be the exclusive means of ensuing proper food and beverage labeling.

Website Operator Not Liable For Anonymous User’s Defamatory Posts.

By: Matthew J. Thomas

In Jones v. Dirty World Entertainment Recordings LLC, No. 13-5946 (6th Cir. June 16, 2014), plaintiff was the subject of several posts that were anonymously uploaded to a website that publishes user-generated comments generally targeted at nonpublic figures.  In response, plaintiff sued the website and its operator for defamation, prevailing in a jury trial, and obtaining a judgment in her favor for compensatory and punitive damages.  On appeal, the Sixth Circuit vacated the judgment and held, as a matter of first impression in that circuit, that plaintiff’s state-law defamation claims were barred by the federal Communications Decency Act of 1996 (CDA).  The CDA provides that no provider of an interactive computer service shall be treated as the publisher or speaker of any information provided by another user.  The Sixth Circuit followed several other circuits in holding that the CDA thus grants broad immunity to providers of interactive computer services against any liability arising from content created by third parties.  The court noted, however, that such immunity is not available if the website operator is responsible, in whole or in part, for the “creation or development” of the content at issue.  The court explained that a provider “develops” content for purposes of the CDA if it makes a “material contribution” to the content’s alleged unlawfulness.

Cannot Require No-Trading Agreement In Exchange For Sharing Books & Records.

By: David P. Saunders

In Ravenswood Investment Co. v. Winmill & Co., No. 7048 (Del. Ch. May 30, 2014), the Delaware Chancery Court held that a corporation cannot “require [a shareholder] to agree not to trade in [the company’s] stock as a condition to inspect its nonpublic financial statements.”  In Ravenswood, the plaintiff, a stockholder of the over-the-counter traded defendant, made a request pursuant to 8 Del. C. 220 to view, among other things, certain nonpublic financial statements of the defendant in an effort to value the plaintiff’s holdings.  In response, and due to the defendant’s concern about “’tipper’ liability under federal securities laws,” the defendant requested that the plaintiff agree to a “restriction forbidding” the plaintiff from trading the defendant’s stock after receiving the nonpublic financial statements.  In holding that the defendant could not restrict the plaintiff’s trading, the Chancery Court observed that “Delaware has long recognized that valuing stock is a proper purpose to support a stockholder’s request for financial information” and “the whole point of valuing stock is so that stockholder can determine what to do with it: to buy, to sell or to use the value for some other appropriate purpose.”  Therefore, a restriction forbidding the plaintiff from trading stock after receiving nonpublic financial statements would “frustrate this fundamental stockholder right.”  The Chancery Court did warn, however, that its holding did not “exempt” either party from liability under federal securities laws based on the provision or trading off of material, nonpublic information.

Chancery Court’s First Application Of Delaware Code §§ 204 And 205.

By: David P. Saunders

Enacted on April 1, 2014, new Delaware Code Sections 204 and 205 allow corporations to petition the Delaware Court of Chancery to validate or invalidate certain corporate acts that may have otherwise been of questionable validity.  For example, in the first application of these new sections, in In re Trupanion, Inc., No. 9496 (Del. Ch. Apr. 28, 2014), Trupanion, its CEO, Board of Directors, and a stockholder requested that the Chancery Court validate a written consent of shareholders that did not technically comply with Delaware’s General Corporation Laws and also involved a reincorporation which was not authorized by the Board of Directors.  It took less than one month for the Chancery Court to evaluate and validate the requested acts.

Delaware Supreme Court Holds Attorney-Fee Shifting Bylaws Permissible.

By: David P. Saunders

In ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) (No. 534, 2013), the Delaware Supreme Court ruled that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.”    The dispute in ATP Tour arose out of ATP’s successful defense of an antitrust and breach of fiduciary duty suit in federal district court in Delaware brought by one of its member federations, Deutsche Tennis Bund.   Following its victory, ATP moved to recover its legal costs and fees from Deutsche Tennis Bund pursuant to the ATP’s bylaws, which allowed for fee-shifting.  The district court found that there was an open question of Delaware law as to whether such bylaws were enforceable, and certified several questions related to the enforceability of ATP’s bylaws to the Delaware Supreme Court.  In response to the certified questions, the Delaware Court held that “fee-shifting bylaws [are] not invalid per se, and the fact that [they] were adopted after entities became members will not affect [their] enforceability.”  Moreover, “an intent to deter litigation . . . would not necessarily render the bylaw unenforceable” if the bylaws were “adopted by the appropriate corporate procedures and for a proper corporate purpose.”  The Delaware Supreme Court thus upheld the validity of fee-shifting bylaws, but left the Delaware federal court to resolve whether ATP’s bylaws had been properly adopted.

Supreme Court:  Laches Does Not Bar Otherwise Timely Copyright Claim.

By: Matthew J. Thomas

In Petrella v. Metro-Goldwyn-Mayer, Inc., 134 S. Ct. 1962 (2014) (No. 12-1315), plaintiff filed a copyright infringement suit against defendant MGM in connection with the 1980 film Raging Bull, which is still marketed today.  The Copyright Act has a three-year statute of limitations, but provides that each successive violation starts a new limitations period.  In January 2009, plaintiff filed her action, seeking damages and injunctive relief only for alleged infringement occurring in or after January 2006.  MGM asserted the defense of laches, claiming that plaintiff’s lengthy delay in bringing the action barred the suit in its entirety.  The district court agreed and entered summary judgment for MGM, and the Ninth Circuit affirmed.  The Supreme Court reversed, holding that the equitable doctrine of laches cannot be invoked to bar a claim for damages that is timely under the Act’s three-year statute of limitations.  The Court reasoned that the Act already accounts for potential delays by permitting a plaintiff to obtain retrospective relief only three years back from the time of suit.  The Court further stated that laches is a defense developed by courts of equity and its principle application was, and remains, to claims of an equitable cast for which the Legislature has provided no fixed time limitation.

Massachusetts Court Awards Attorneys’ Fees For Work Done By In-House Counsel.

By: Matthew J. Thomas

In Holland v. Jachmann, 9 N.E. 3d 340 (Mass. App. Ct. 2014) (No. 13-P-0280), plaintiff prevailed on a claim against defendant under a Massachusetts unfair trade practices statute that, among other things, authorizes the award of attorneys’ fees “incurred in connection with [the] action.”  In awarding plaintiff its attorneys’ fees, the trial court included fees for legal work performed by plaintiff’s in-house counsel.  A Massachusetts appellate court affirmed the award.  Noting that the case presented a novel issue, the court rejected defendant’s argument that fees attributable to in-house counsel were not “incurred,” and therefore not recoverable, because the in-house attorney was a salaried employee who did not bill plaintiff for his services.  The court instead held that every hour in-house counsel had spent on the litigation was an hour directed away from other of plaintiff’s legal matters and, in that respect, plaintiff had “incurred” a concrete cost.  The court stated that its holding was further supported by the fact that in-house counsel had actively participated in all stages of the case, including trial.

5th Circuit Affirms Striking Of Defendant’s Pleadings As Discovery Sanction.

By: Matthew J. Thomas

In Southern U.S. Trade Association v. Guddh, No. 13-31086 (5th Cir. Apr. 22, 2014), plaintiff, a nonprofit company, brought a defamation suit alleging that defendant had made offensive and actionable comments about plaintiff on several websites.  In discovery, defendant was sanctioned for failing to respond to discovery requests, and then subsequently failed to appear for an in-person deposition, as ordered by the court.  The court also ordered defendant to appear in person at a scheduled pre-trial conference, and warned that his failure to do so could result in further sanctions, including dismissal of the suit.  When defendant nonetheless failed to appear, the court sanctioned defendant by striking all of his pleadings and awarding summary judgment in favor of plaintiff for the full amount of damages claimed.  On appeal, the Fifth Circuit affirmed, holding that the district court did not abuse its discretion in imposing the sanctions.  The court reasoned that, although the striking of all pleadings is a serious sanction, defendant’s repeated conduct in the face of lesser sanctions, coupled with the court’s explicit warning of severe sanctions, provided sufficient factual basis for the ruling.

Electronic Discovery

Court Finds No Waiver Where Party Believed It Had Erased Privileged Files.

By: Daniel J. Weiss

In Kyko Global Inc. v. Prithvi Information Solutions, Ltd., No. C13-1034 (W.D. Wash. June 13, 2014), the district court considered whether a defendant had waived the attorney-client privilege where the defendant’s computer was seized by a county sheriff for auction.  The defendant attempted to “format” the hard drive of the computer before it was seized.  The plaintiff, however, purchased the computer at auction and recovered deleted files containing privileged information.  The court examined the issue under a state-law “balancing test” similar to the inadvertent-production rules of Federal Rule of Evidence 502(b).  The court held that the “closest analogy” was found in cases in which a party discovered an opponent’s privileged materials in the trash.  The court held that, in cases where privileged material was discarded in a manner that left it “fully legible,” courts have tended to find waiver.  On the other hand, where a party took steps to prevent another party from reading the discarded material, such as “[w]hen a privileged memo was discarded but torn into pieces,” at least one court found no waiver.  Here, because the defendant attempted to delete the privileged files before the computer was seized, the court held that the facts “bear a closer resemblance to the memo torn into [many] piece than a document simply placed in a trash can.”  The court also expressed concern about the plaintiff’s “investigative activities outside of the discovery process.”

Court Precludes Deposition Of Electronic Discovery Consultant.

By: Daniel J. Weiss

In Koninklijke Philips N.V. v. Hunt Control Systems, Inc., No. 11-3684 (D.N.J. Apr. 16, 2014), the district court granted a protective order precluding a noticed deposition of the plaintiff’s e-discovery consultant.  The defendant contended that deficiencies in the plaintiff’s production required a new e-discovery search using different tools and processes to be explored in a deposition.  The court rejected those arguments, holding that “[plaintiff] has made adequate representations to this Court that its [ESI] approach . . . is reasonable” and several of the alleged deficiencies were “speculative and suggestive in nature.”  The court further held that “[defendant’s] alleged dissatisfaction with the result of [plaintiff’s] search is not enough to reopen the door to the collection of ESI discovery under a completely different method.”  The court also noted that, although the requested deposition itself would not cause a substantial discovery burden, the deposition would likely lead to “opening the door to more (and likely unproductive) discovery with no apparent end in sight,” causing “tremendous burden” to the plaintiff.

Court Requires Party To Reactivate Deleted Facebook Account.

By: Daniel J. Weiss

In Chapman v. Hiland Operating, LLC, No. 13-cv-052 (D.N.D. May 29, 2014), the defendant moved to compel the plaintiff to reactive her Facebook account, which the plaintiff had deactivated about a year earlier “on the advice of counsel.”  It appears that the defendant contended that postings on the Facebook account could be relevant to personal injuries at issue in the case.  The district court held that it was “skeptical that [plaintiff’s] Facebook account will contain any relevant, noncumulative information,” but nonetheless ordered the plaintiff to “make a reasonable, good faith attempt to reactivate [her] Facebook account.”

Court Orders Forensic Examination And Client’s Search-Term Input For ESI Failures.

By: Daniel J. Weiss

In a pair of decisions in the case Procaps S.A. v. Patheon Inc., No. 12-24356 (S.D. Fla. Feb. 28, 2014) (order granting motion for electronic media analysis) and No. 12-24356 (S.D. Fla. Mar. 18, 2014) (order on motion for adequate search terms), the district court granted motions compelling the plaintiff to undertake remedial efforts to locate and collect relevant ESI.  In the first decision, the court faulted the plaintiff’s counsel for permitting “its client to self-collect ESI and documents” without the participation of counsel.  Among other failures, the court held that plaintiff’s counsel permitted its client representatives to design their own search terms without the input of counsel and failed to advise its client as to what documents the defendant had requested.  As a remedy, the court ordered a forensic examination of plaintiff’s computer systems by a court-appointed expert.  In the second order, issued after plaintiff’s counsel began attempting to design a new ESI protocol, the court held that plaintiff’s lawyers could not develop the protocol on their own, but must take into consideration “input from the ESI[] custodians [themselves] as to the words and abbreviations they use.”  The court further faulted plaintiff’s counsel for failing to communicate in a clear manner with defendant’s counsel, which the court suggested may have avoided the discovery motion.  The court held:  “[t]he ‘Sounds of  Silence’ may be a catchy title for a Simon and Garfunkel song and album, but it is a problematic, risky, and usually unworkable approach when engaging in a conference designed to eliminate the need for a discovery motion.”  In both decisions, the court ordered fee-shifting to the defendant pursuant to Rule 37 and required that plaintiff’s counsel pay a portion of the fee-shifting.

Court Orders Production Of ESI In Usable Format.

By: Daniel J. Weiss

In EEOC v. SVT, LLC, No. 13-CV-245 (N.D. Ind. Apr. 10, 2014), the district court held that the defendant must produce employee time-keeping data in a “fully searchable and manipulable” format.  The plaintiff requested that the data be produced in a specific native or “near-native” electronic format.  The defendant did not object to that format request, but later produced the data in non-native formats and without “load files” containing metadata.  The court held that the plaintiff was “entitled to have [defendant] produce the data in the format specified” pursuant to Fed. R. Civ. P. 34(b)(1)(C), including with metadata and “load files.”  The court also rejected the defendant’s argument that the data requested was not within its “custody or control” because the data was hosted in a third-party vendor’s electronic time-keeping platform.  The court held that because the defendant had a legal right to obtain the data from the third-party, the data was within the defendant’s custody for purposes of discovery.  In addition, the court rejected the defendant’s argument that it should not be required to re-produce the data at issue because it had already incurred significant cost in producing the data in the non-native format.  The court cited the advisory committee notes to Rule 34, which provide “A party that responds to a discovery request by simply producing electronically stored information in a form of its choice, without identifying that form in advance of the production in the [written] response  . . . runs a risk that the requesting party can show that the produced form is not reasonably usable and that it is entitled to production of some or all of the information in an additional form.”

Product Liability

Summary Judgment Based On Insufficient Expert Testimony Reversed.

By: Barry Levenstam

In Johnson v. Mead Johnson & Co., 754 F.3d 557 (8th Cir. 2014) (Nos. 13-1681, 13-1685), the Eighth Circuit reversed a summary judgment entered for the defendant baby formula manufacturer.  The plaintiff infant alleged that the formula was contaminated with bacteria, but the district court found that the plaintiffs’ experts’ proffered causation opinions were inadequate.  The Eighth Circuit reviewed the opinions in question and reversed, holding that the challenged experts’ differential diagnosis analysis that found the defendant’s product to be a possible cause of plaintiff’s injury satisfied the Daubert standard for trustworthiness.  The court found there was independent evidence that the product had been tainted by bacteria, and thus, the claim presented a question for the jury to decide, rather than the court.

Observation Prong Of Emotional Distress Claim Liberally Construed In New Jersey.

By: Barry Levenstam

In Litwin v. Whirlpool Corp., 91 A.3d 1214 (N.J. Super. Ct. App. Div. 2014) (No. A-0186-13T1), the Appellate Division of the New Jersey Superior Court reviewed a summary judgment entered for the defendant dishwashing machine manufacturer in a case alleging negligent infliction of emotional distress by a father whose son was burned severely in a house fire allegedly caused by a defect in the dishwashing machine.  Although the plaintiff had been in the house with his son at the time of the fire, they were separated and the father did not see the son actually suffer the burns; he did see his son being brought out of the house by the firemen.  The trial court had ruled that the father could not satisfy the element of his claim that required observing the injuries being suffered.  The Appellate Division reversed, holding that the father’s presence with the son in the house when the fire started and his observation of the son being brought out of the house suffering from the burns was sufficient to present a question of fact for the jury on the observation element of the claim.

Implied Breach Of Warranty Of Merchantability For Used Goods In Texas.

By: Barry Levenstam

In MAN Engines & Components, Inc. v. Shows, No. 12-0490 (Tex. June 6, 2014), plaintiff sued the manufacturer of the failed engine on a yacht plaintiff had purchased used, alleging that the defendant had breached its implied warranty of merchantability.  After the jury found for the plaintiff, the trial court granted defendant judgment notwithstanding the verdict, ruling that the defendant could not be held liable on the implied warranty theory by a subsequent purchaser, and that the defendant had expressly disclaimed that implied warranty.  The court of appeals reversed on both grounds, holding that the defendant had waived the express disclaimer ground by failing to plead it as an affirmative defense and that the implied warranty may pass to the subsequent purchaser.  The Texas Supreme Court affirmed, holding that a merchant that disclaims implied warranties at the first sale cannot be held liable for a breach of those warranties by a subsequent purchaser, but where an implied warranty is not disclaimed at the first sale, the legal duty to make and sell merchantable goods does not end with the first purchaser, and may be asserted by a subsequent purchaser.

Daubert Permits Expert Medical Testimony Based On Clinical Experience.

By: Barry Levenstam

In Messick v. Novartis Pharmaceuticals Corp., 747 F.3d 1193 (9th Cir. 2014), the district court had held that the expert medical testimony proffered in support of the plaintiff’s case was not sufficiently reliable under Daubert because it rested in large measure on the expert’s clinical experience.  Thus, it granted summary judgment in defendant’s favor.  The Ninth Circuit disagreed, reversed the judgment and remanded the case for further proceedings.  The appellate court observed that the plaintiff’s expert opinion rested on a differential diagnosis he made based on substantial clinical experience.  Noting that although “medicine partakes of art as well as science,” the court held “there is nothing wrong with a doctor relying on extensive clinical experience when making a differential diagnosis.”  As a consequence, the testimony was admissible, and thus, summary judgment in favor of the defendant could not be sustained.

Professional Responsibility & Ethical Developments

SEC Hands Out First Whistleblower Award Of 2014.

By: Gregory M. Boyle and John R. Storino

On June 3, 2014, the SEC announced a whistleblower award of $875,000 to be split evenly between two individuals who provided information to the SEC that led to an enforcement action.  Although the SEC cannot reveal information that might directly or indirectly reveal a whistleblower’s identity, Sean McKessy, chief of the SEC’s Office of the Whistleblower, stated that the two individuals sharing the award provided “original information and assistance that enabled [the SEC] to investigate and bring a successful enforcement action in a complex area of the securities market.”  Press Release, SEC, “SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation,” SEC Press Release No. 2014‑113(June 3, 2014).

SEC Brings Its First Whistleblower Retaliation Case.

By: Gregory M. Boyle and John R. Storino

In its first whistleblower retaliation case, the SEC ordered respondents to pay a total of $2,181,771, and to cease and desist from violating the Securities and Exchange Act.  Paradigm Capital Mgmt., Inc., Exchange Act Release No. 72,393,(June 16, 2014).  Ms. Weir controlled both Paradigm Capital Management and C.L. King, and thus Weir violated the Investment Advisers Act by not providing written disclosure and consent from a hedge fund client for transactions between the two entities she controlled.  Upon learning that a whistleblower reported the securities law violations to the SEC, Paradigm Capital Management engaged in numerous retaliatory actions that led to the whistleblower’s resignation.

Whistleblower Lawsuit By Former Associate General Counsel May Proceed.

By: Gregory M. Boyle and John R. Storino

On interlocutory appeal, a Texas appellate court affirmed the trial court’s denial of two Cheniere Energy, Inc. executives’ motion to dismiss a whistleblower lawsuit by the company’s former associate general counsel.  Cheniere Energy, Inc. v. Lotfi, No. 13-00515 (Tex. App. June 10, 2014).  The executives had argued that the whistleblower lawsuit violates their First Amendment right to freedom of association under the Texas Citizens Participation Act, an anti-SLAPP statute.  Because the executives failed to meet their burden of showing how the lawsuit, which claims the executives fired the former associate general counsel in retaliation for raising ethical violations, interferes with their exercise of First Amendment rights, the Texas appellate court rejected this argument.

Former Exec Opposes Interim Appeal On Whether She Qualifies As Whistleblower.

By: Gregory M. Boyle and John R. Storino

After a Nebraska federal district court determined that a former COR Clearing LLC executive qualifies as a whistleblower under the Dodd-Frank Act, COR Clearing moved to certify for interlocutory appeal the question of whether an individual who fails to communicate or report any perceived securities violation to the SEC can nonetheless qualify as a whistleblower.  The former executive opposed COR Clearing’s motion, arguing that whether she qualifies as a whistleblower is not a controlling question of law because she has made claims against COR Clearing that are not impacted by her status as a whistleblower.  Brief for Plaintiff, Bussing v. COR Clearing LLC, No. 12-CV-238 (D. Neb. June 16, 2014) (ECF No. 97).  She also argued that lack of controlling Eighth Circuit precedent is not sufficient grounds to allow an interlocutory appeal.

CFTC Issues First Whistleblower Award.

By: Gregory M. Boyle and John R. Storino

On May 20, 2014, the CFTC announced that it will make its first award under the Commission’s Whistleblower Program, created in 2010.  The whistleblower will receive $240,000 in exchange for “providing specific, timely, and credible information that lead to the Commission bringing important enforcement actions.”  Press Release, U.S. Commodity Futures Trading Commission, CFTC Issues First Whistleblower Award (May 20, 2014).  The CFTC did not name the whistleblower being rewarded nor did it reveal the nature of the valuable information the individual provided.  The Director of the Whistleblower Office emphasized that the number of high quality tips continues to increase and expressed hope that this award would send a strong message to the community that the CFTC will pay for valuable information.

Supreme Court Grants Cert To Determine Scope Of “Tangible Object” Under SOX.

By: Gregory M. Boyle and John R. Storino

On April 28, 2014, the United States Supreme Court agreed to hear John Yates’s appeal of his conviction for records destruction under the anti-shredding provision of SOX.  Yates, a commercial fisherman, was charged and convicted under SOX for destroying allegedly undersized fish after a federal officer issued him a civil citation and ordered him to bring the fish back to the port.  SOX criminalizes the alteration, destruction, or falsification of any record, document, or “tangible object.”  The Eleventh Circuit affirmed Yates’s conviction for records destruction.  United States v. Yates, 733 F.3d 1059 (11th Cir. 2013), cert. granted, 82 U.S.L.W. 3625 (U.S. Apr. 28, 2014) (No. 13-7451).  In granting certiorari, the Supreme Court will consider whether SOX covers any item that fits within the dictionary definition of a “tangible object,” or whether instead the term is limited to the destruction of tangible objects related to record-keeping.

Tenth Circuit Denies Whistleblower’s Motion To Compel Arbitration.

By: Gregory M. Boyle and John R. Storino

The Tenth Circuit affirmed a Colorado district court’s decision to deny a former Ceragenix Pharmaceutical executive’s motion to compel arbitration of his claims of retaliation.  Genberg v. Porter, No. 13-1140 (10th Cir. May 12, 2014).  The executive alleged he was terminated after his employer discovered he anonymously sent in a letter alleging that Ceragenix broke the law by failing to hold required shareholder meetings. The executive moved to compel arbitration of his claim pursuant to the terms of his employment agreement.  The district court held, and the Tenth Circuit agreed, that the individual defendants, former board members of the now-defunct Ceragenix, were not parties to the employment agreement and thus not bound by its arbitration clause.

White Collar Defense & Investigations

British Jury Convicts Former Innospec Executives For Bribing Indonesian Officials.

By: Jessi K. Liu

The lengthy corruption investigation of specialty chemical company Innospec, which spanned many years and two continents, finally came to an end on June 18, 2014, when a British jury convicted Innospec’s former CEO and former Regional Sales Director for the Asia Pacific Region in connection with payments to Indonesian officials in exchange for contracts with the Indonesian government.  See Press Release, Serious Fraud Office, Two More Guilty in Innospec Conspiracy Trial (June 18, 2014).  Two other former Innospec executives previously had pleaded guilty in the United Kingdom to bribery charges stemming from the same scheme. Innospec’s British unit also pleaded guilty to corruption charges in the United Kingdom in 2010. That same year, in the United States, Innospec pleaded guilty to FCPA violations and agreed to pay a $27.5 million penalty.  See  Plea Offer, Innospec, Inc., No. 10-cr-00061 (Mar. 18, 2010) (ECF No. 4).  Furthermore, Innospec’s former agent, Ousama Namaan, pleaded guilty to FCPA offenses in the United States and was sentenced to 30 months in prison, while Paul Jennings, another former Innospec CEO, entered into a civil settlement with the SEC. Jennings was one of the Innospec executives who pleaded guilty to criminal corruption charges in Britain.

Internal Investigation Expenses Recoverable As Restitution.

By: Robert R. Stauffer

A federal district court, faced with conflicting Circuit Court precedents, determined in United States v. Nosal, No. CR-08-0237 (N.D. Cal. May 20, 2014), that a corporate victim was entitled to restitution from a former employee for costs incurred to investigate the employee’s conduct and cooperate with the prosecution.   The former employee was convicted of violations of the Computer Fraud and Abuse Act and the Economic Espionage Act in connection with  the unauthorized downloading and duplicating of trade secrets.  The employer sought restitution under the Mandatory Victim’s Restitution Act, 18 U.S.C. § 3663A(a)(1), which has been held to require restitution for losses for which the defendant’s conduct was an “actual and proximate cause.”  The court found that $27,400 in costs incurred to internally investigate the defendant’s conduct qualified for restitution, following the Ninth Circuit’s adoption of a “broad view” of the restitution authorization, United States v. Gordon, 393 F.3d 1044 (9th Cir. 2004); see also United States v. Amato, 540 F.3d 153 (2d Cir. 2008) (affirming restitution award for internal investigation costs).  The court recognized that the D.C. Circuit had ruled to the contrary in United States v. Papagno, 639 F.3d 1093 (D.C. Cir. 2011) (internal investigation costs not required or requested by criminal investigators or prosecutors were not recoverable).  The court also awarded as restitution the value of the company employees’ time and the fees spent on outside counsel in aid of the government’s investigation and prosecution of the defense.

Whistleblower Fails To Show Prima Facie Case Of Retaliation.

By: Robert R. Stauffer

In Feldman v. Law Enforcement Associates Corp., 752 F.3d 339 (4th Cir. 2014), a corporation’s president and CEO had a number of disputes with the corporation’s outside directors and with the company’s founder, who apparently remained close to the outside directors.  The founder, who was a major shareholder of the company, had pled guilty to unrelated criminal export violations.  One of the disputes involved the relationship between the corporation and one of its customers, half of the shares of which the founder owned.  The president became concerned about the legality of overseas shipments by the customer, as the founder was banned from making exports as a result of his guilty plea.  The issue was discussed at a board meeting, with disputes later arising as to what was said at the meeting and whether the minutes were falsified.  The president informed the Department of Commerce of the exports, resulting in a federal investigation and a raid on the customer’s headquarters.  Other disputes between the president and the outside directors included the amount of his pay and the relocation of the company’s headquarters without board authorization.  Eventually the president was terminated, and he brought suit alleging that his termination was in retaliation for protected activity under the Sarbanes-Oxley Act, 18 U.S.C. § 1514A.  The district court granted summary judgment for the defendants and the Court of Appeals affirmed, finding that the president had failed to provide sufficient evidence that protected activity was a “contributing factor” to the termination – he “failed to satisfy his rather light burden of showing by a preponderance of evidence that the activities tended to affect his termination in at least some way.”  The court noted that the termination occurred about 20 months after his report to the Department of Commerce, that there were other conflicts with the outside directors that immediately preceded his termination, and that another officer who joined him in the protected activity was not terminated.

FCPA Covers Bribes To Employees Of State-Owned Enterprises.

By: Jessi K. Liu

In United States v. Esquenazi, 752 F.3d 912 (11th Cir. 2014) (No. 11-15331), the Eleventh Circuit became the first federal appellate court to hold that the Foreign Corrupt Practices Act (“FCPA”) covers bribes to employees of state-owned enterprises that provide commercial services as part of a public function.  Although the FCPA is directed at corrupt payments to foreign government officials rather than bribery of private individuals, it expressly reaches officials of an “instrumentality” of a foreign government.  The Eleventh Circuit held that an “instrumentality” is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”  Relying heavily on the United States’ international treaty obligations under the Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in interpreting the FCPA, the court held that there are two critical components to an “instrumentality”:  government control and public function.  Assessing control is a fact-bound inquiry.  The court set forth a non-exhaustive set of factors to guide the analysis:  (1) the foreign government’s formal designation of the entity; (2) whether the government has a majority ownership interest; (3) the government’s authority to appoint and remove the entity’s principals; (4) the extent to which the entity’s profits are returned to the public fisc; (5) whether the government supports an entity that is otherwise performing at a loss; and (6) the length of time these indicia have existed.  The Eleventh Circuit also provided a list of factors weighing on whether a state-owned enterprise performs a public function:  (1) whether the entity has a monopoly over its functions; (2) whether the government subsidizes the entity; (3) whether the entity performs services for the public at large; and (4) whether the public and the government generally perceive the entity to be performing a governmental function.  It should be noted that these factors substantially overlap with – and are often identical to – factors cited in the DOJ and SEC’s joint Resource Guide to the U.S. Foreign Corrupt Practices Act.

Whistleblower Need Not Show Employer Knew Intent To Facilitate FCA Suit.

By: Robert R. Stauffer

In Jones-McNamara v. Holzer Health Systems, Inc., No. 13-cv-00616 (S.D. Ohio Apr. 28, 2014), the plaintiff had been employed as the defendant’s Vice President of Corporate Compliance.  According to her complaint, in May 2010, she began an internal investigation into allegations that employees were disproportionately using the services of an ambulance company in exchange for gifts and luncheons that it provided.  She contended that this conduct violated the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), and by certifying on Medicaid claim forms that it was in compliance with that statute, the defendant was in violation of the False Claims Act, 31 U.S.C. § 3729 et seq.  She advised the company to prohibit the conduct and to reimburse the government.  In response, she was instructed not to speak with her informant again, not to reduce her findings and analyses to writing, and not to work on her investigations with anyone other than outside counsel, in order to create the appearance that any materials were covered by the attorney-client privilege. Eventually she was terminated.  Plaintiff contended that she was also conducting six other investigations into compliance issues at the time of her termination, and she brought suit under the whistleblower provision of the FCA.  The defendant moved for summary judgment on the ground that plaintiff had not alleged that she was acting in furtherance of filing a whistleblower (qui tam) action under the FCA while defendant was on notice of her investigations.  Rather, relying on Yuhasz v. Brush Wellman, Inc., 341 F.3d 559 (6th Cir. 2003), the defendant contended Plaintiff was simply performing her normal duties as a compliance officer.  Yuhasz had held that performing the ordinary employment duties of informing an employer that certifications were illegal and might incur FCA liability failed to provide notice of protected activity; in order to have a cause of action, such plaintiffs must show that they had made clear their intentions of bringing or assisting in an FCA action.  That holding was based, however, on the version of the whistleblower provision in effect prior to 2009, which applied to retaliation “because of lawful acts done . . . in furtherance of an action under this section.”  In 2009, that provision was amended to apply to retaliation “because of lawful acts done . . . in furtherance of other efforts to stop 1 or more violations of this subchapter.”  The court found that this amendment required a result different from that reached in Yuhasz, and held that the employer need only have known that the employee was engaged in efforts to stop an FCA violation, not that the employee was contributing to an FCA lawsuit.  Accordingly, the court denied the defendant’s motion for summary judgment.

Internal Investigation Can Constitute Actionable Retaliation.

By: Robert R. Stauffer

In Eldridge v. Rochester City School District, 968 F. Supp. 2d 546 (W.D.N.Y. 2013), a schoolteacher brought an action against the school district for employment discrimination and for retaliation under 42 U.S.C. § 1983 for having complained about discrimination.  The plaintiff alleged that in September 2011, when she returned to school after the summer break, her name had been removed from her mailbox and she was not issued a key to her classroom, and that Caucasian employees were not subject to the same treatment.  She also alleged she began to receive “harassing emails” from the principal concerning her non-attendance at meetings.  She further alleged that in December 2011, the principal told her another teacher had accused her of harassment, and in February 2012, he informed her she was being investigated for racial harassment by an experienced investigator with the county sheriff’s office.  The principal then threatened her that they would not be working in the same school together the following year, but if she would agree to a transfer to another school, the harassment investigation would  cease.  On a motion to dismiss, the district court dismissed plaintiff’s equal protection claims on the basis that the internal investigation and alleged threats did not amount to an adverse employment action for equal protection purposes, but denied the motion to dismiss the retaliation claim.  Accepting the complaint’s allegations as true, including the condensed time period in which the events occurred, the court found that the plaintiff became the subject of an internal investigation shortly after she complained about discrimination and that “the pressure of an internal investigation, coupled with a veiled threat of an involuntary transfer, could dissuade a reasonable employee from engaging in protected activity.”  The court thus found that the plaintiff had sufficiently alleged an adverse employment action for purposes of the Section 1983 retaliation claim.