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Jenner & Block is excited to introduce “The Spotlight,” an electronic monthly newsletter from the Litigation Department Co-Chairs, Craig C. Martin and David J. Bradford, designed to highlight recent cases and legislative developments from across the United States. Additionally, The Spotlight recaps the high impact Litigation Department news, upcoming events and publications of interest.
If you would like to be added to the mailing list for The Spotlight, please send an email to Matthew F. Bradley at firstname.lastname@example.org.
Non-Appealability Clause In Arbitration Agreement Is Unenforceable.
By: Howard S. Suskin
A clause in an arbitration agreement that eliminates all federal court review of arbitration awards, including the statutory grounds for vacatur in the Federal Arbitration Act (FAA), was held to be unenforceable. In re Wal-Mart Wage and Hour Emp’t Practices Litig.,No. 11-17718 (9th Cir. Dec. 17, 2013). The court found that permitting parties to contractually eliminate all judicial review of arbitration awards would run counter to the text of the FAA and would frustrate Congress’ attempt to ensure a minimum level of due process for parties to an arbitration.
Preclusive Effect Of Prior Arbitration Award Is To Be Decided By Arbitrator, Not Court.
By: Howard S. Suskin
Rejecting a party’s request for a court injunction to stop an arbitration proceeding on grounds that the proceeding was precluded by a previous arbitration award, the court held that the preclusive effect, if any, of a prior arbitration award must be determined by an arbitrator, not the court. Citigroup, Inc. v. Abu Dhabi Inv. Auth.,No. 13-06073 (S.D.N.Y. Nov. 25, 2013). The court found that preclusion is a merits-based defense to be decided by the arbitrator under the parties’ broad arbitration clause governing any dispute arising out of their transaction documents.
Arbitration Clause Unconscionable - As Determined By Court, Not Arbitrator.
By: Howard S. Suskin
Applying Washington state law, the Ninth Circuit held that the court, rather than the arbitrator, should determine whether an arbitration clause in a consumer contract was unconscionable. Smith v. JEM Group, Inc.,737 F.3d 636(9th Cir. 2013). The court concluded that the question of arbitrability is for the court to decide so long as the plaintiff’s challenge to the validity of an arbitration clause is a distinct question from a challenge to the validity of the contract as a whole. In a separate holding, the Ninth Circuit affirmed that this arbitration clause, which was part of a legal services contract, was unconscionable. A Washington attorney may include an arbitration clause in a client agreement if the client receives information to make an informed decision. The district court found the client was not sufficiently informed, and the Ninth Circuit agreed. Addressing Concepcion, the court held the provision did not unduly burden arbitration because it was limited to the process that results in the formation of the agreement, and was not specifically aimed at arbitration clauses.
Whether Arbitration Was Waived Is To Be Determined By Court, Not Arbitrator.
By: Howard S. Suskin
The question of whether the right to arbitration was waived by litigation conduct is to be decided by the court, not the arbitrator. Hong v. CJ CGV America Holdings, Inc., 166 Cal. Rptr. 3d 100(Cal. Ct. App. 2013) (No. B246945). Defendants moved to compel plaintiffs to arbitrate pursuant to an arbitration clause. Plaintiffs opposed the motion, arguing that defendants had waived the right to arbitrate by litigating the dispute before moving for arbitration. The trial court rejected defendants’ argument that the “waiver by litigation conduct defense” should have been decided by an arbitrator and denied the motion to compel arbitration. The California Appellate Court affirmed, concluding that the court, rather than an arbitrator, should decide the merits of the waiver by litigation conduct defense to arbitration.
Work Product Provided To Testifying Expert Witness Is Discoverable.
In In re Republic of Ecuador, 735 F.3d 1179 (10th Cir. 2013) (No. 12-1402), the Tenth Circuit held that the 2010 amendments to Federal Rule of Civil Procedure 26 relating to discovery of expert witness materials do not allow a party to withhold broad categories of documents provided to a testifying expert by the party’s attorneys. Instead, the amended Rule limits discovery of two categories of information: expert draft reports and communications between the expert and a party’s attorney to the extent that the communications do not provide facts that the expert is to consider in forming an opinion. In this matter, the Republic of Ecuador sought discovery from Chevron’s testifying expert witness, Bjorkman, pursuant to 28 U.S.C. §1782(a), which allows discovery in the United States for use in foreign proceedings. Bjorkman had provided testimony on Chevron’s behalf in a proceeding in Ecuador. Chevron withheld from production thousands of documents that its attorneys had created during the litigation in Ecuador, which they had provided to Bjorkman. Chevron argued that the 2010 amendments to Rule 26 created a “sea change” in discovery of expert witness materials, and had the effect of walling off discovery of work product created by a party’s attorneys that is provided to an expert. The magistrate judge and the district court rejected Chevron’s sweeping view of amended Rule 26, and the federal appellate court affirmed. The 2010 amendments changed Rule 26 in two ways: (1) draft expert reports are now protected work product, and (2) communications between testifying experts and a party’s attorneys are protected work product. Rule 26 still requires, however, a party to disclose all “facts or data” “considered” by an expert witness, including work product provided to the expert by counsel, and ‘facts or data’ are to be interpreted broadly to require disclosure of any material considered by the expert, even if provided by counsel.
Disclosure To S.E.C. Of Witness Interview Summaries Waived Privilege Over Notes.
In Gruss v. Zwirn, No. 09-6441 (S.D.N.Y. Nov. 20, 2013), the district court rejected a motion to clarify its July 2013 order, in which it had held that defendants waived the attorney-client privilege and work product protection as to attorney notes and summaries of interviews conducted during an internal investigation when defendants disclosed summaries of those interviews in PowerPoint presentations voluntarily provided to the S.E.C. following the internal investigation. Defendants argued that: (1) counsel had its own distinct privacy interest in “the firm’s preliminary, internal work product” that protected the notes from disclosure; and (2) the notes, in their entirety, constituted opinion work product. The court disagreed. First, the court rejected counsel’s assertion that counsel had a right to withhold the notes on the grounds that they were internal firm documents and, therefore, not within the custody and control of the defendant. The court held that the interview notes were not documents intended purely for internal law office review and use but, instead, were intended to assist the client relating to interviews for which the client had paid, and therefore were presumptively in the client’s custody and control and subject to discovery. The court also rejected counsel’s assertion, supported solely by an affidavit of one of counsel’s partners, that the notes in question in their entirety constituted opinion work product. The court concluded that the notes must contain at least some fact work product, and ordered an in camera review to allow the court, and not counsel, to determine what portions of the notes should be deemed opinion work product and redacted prior to production.
No Privilege For Dutch In-House Counsel Who Was Not Member Of Netherlands Bar.
InAnwar v. Fairfield Greenwich Ltd., No. 09-0118 (S.D.N.Y. Nov. 8, 2013), the district court rejected objections to the magistrate judge’s order which had held that the attorney-client privilege did not protect communications between defendants and their Dutch in-house attorney, who was not a member of the bar in the Netherlands. The court found that the “touch base” approach, which applies the law of the country with which the communications “touch base,” is the proper method for determining choice of law with respect to privilege. Here, either the law of the Netherlands or the United States could be applied but neither law protected the communications. It was undisputed that the Dutch in-house counsel was not a member of the bar in the Netherlands. Under U.S. law, in order to fall within the privilege, the attorney must be a member of a bar, or the client must have made a reasonable mistake in believing that the attorney was a member of the bar. Here, the attorney was not, and never had been, licensed in any jurisdiction and had neither held himself out to be a licensed attorney nor performed acts suggesting to his employer that he was admitted to the Netherlands bar. Thus, defendants could not credibly claim a reasonable mistake as to the attorney’s status. Defendant conceded that the communications would not be privileged under Dutch law. However, defendant argued that the court should apply principles of “comity” and bar discovery because, as a practical matter, the communications would not be discoverable in the Netherlands which, according to defendants, had no active document production culture which would allow discovery of the communications in a Dutch proceeding. The court disagreed with the premise of this argument, finding that Dutch law allows wide-ranging document disclosure and defendants’ own expert had previously stated in a published article that document production is an accepted part of litigation in the Netherlands. The court held that the magistrate judge did not clearly err by concluding that, under either Dutch or U.S. law, the communications were discoverable in a U.S. proceeding.
Ninth Circuit Holds Blogger Has Same First Amendment Rights As Institutional Media.
In Obsidian Finance Group, LLC v. Cox, Nos. 12-35238, 12-35319 (9th Cir. Jan. 17, 2014), the Ninth Circuit held that First Amendment protections under the Supreme Court’s landmark opinion in Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974), applied to a blogger, not just the institutional media. In Obsidian, a blogger accused a Chapter 11 bankruptcy trustee of fraud and other illegal activities in the bankruptcy case. The trustee sued for defamation for several of the blog posts. The district court allowed one of the trustee’s claims to go to trial on the grounds that the blog post at issue had made false factual assertions. The Ninth Circuit reversed, holding that the blog post was protected by the First Amendment under Gertz, in which the Supreme Court held that private defamation suits against the media require proof of negligence and actual damages. The Court refused to distinguish between the institutional media and private individuals, explaining that First Amendment protections for the media “do not turn on whether the defendant was a trained journalist, formally affiliated with traditional news entities, engaged in conflict-of-interest disclosure, went beyond just assembling others' writings, or tried to get both sides of a story.” The Court noted that the Supreme Court had not decided whether Gertz onlyapplied to matters which are of no public concern, but the Court said that made no difference in the instant case because the blog topic raised issues that were clearly of public interest, namely allegations of criminal activity and fraud in a bankruptcy case. Nonetheless, the Court did not adopt all of the blogger’s arguments; it notably rejected the defense that the bankruptcy trustee was a public official, highlighting that the trustee was not elected or appointed to a government position and was paid by the debtor’s estate, not the court.
Fourth Circuit Affirms Bankruptcy Court’s Conditional Recognition of Foreign Insolvency Proceeding to Protect Licensee Rights.
In Jaffé v. Samsung Electronics Co. (In re Qimonda AG), 737 F.3d 14 (4th Cir. 2013) (No. 12-1802), the Fourth Circuit affirmed a bankruptcy court’s ruling protecting licensees’ rights in connection with the recognition of a German insolvency proceeding. In Jaffe, the foreign debtor’s administrator petitioned the U.S. bankruptcy court for powers under Chapter 15 of the U.S. Bankruptcy Code that would allow him to administer the debtor’s assets in the U.S., including about 4,000 U.S. patents. The bankruptcy court granted the petition, but conditioned it on the application of § 365(n) of the U.S. Bankruptcy Code, which limits a debtor’s ability to unilaterally reject intellectual property licenses granted to other parties and permits licensees to elect to retain their rights under the licenses. This protection for licensees is contrary to German insolvency law which permits a debtor to reject license agreements without affording licensees the opportunity to retain their rights absent a renegotiated agreement. In balancing the rights of the debtor and its creditors (including the licensees), both the bankruptcy court and the Fourth Circuit found that maintaining the application of § 365(n) was appropriate in light of the licensees’ considerable sunk costs in reliance on the licenses and related U.S. public policy to promote technological innovation.
Fifth Circuit Reverses NLRB, Upholds Arbitration Agreement And Class Waiver.
By: Michael T. Brody
In D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013) (No. 12-60031), an employer required its employees to sign an arbitration agreement that prohibited collective or class actions. The NLRB found the agreement violated the NLRA, but the Fifth Circuit reversed. The Fifth Circuit found that although the labor laws reflected Congress’s intent to permit employees to band together to challenge conditions of their employment, requiring arbitration and eliminating class action procedures did not conflict with that intent. The Board’s interpretation, however, had the effect of disfavoring arbitration, which conflicted with the FAA’s policy favoring arbitration agreements. Because neither the text nor the legislative history of the NLRA contained a Congressional command against application of the FAA, nor was there an inherent conflict between the FAA and labor law, the Board erred in finding a NLRA violation.
Canadian Supreme Court Defines Class Certification Standard.
By: Michael T. Brody
In AIC Ltd. v. Fischer, 2013 SCC 69 (Can. 2013) (No. 34738), the Supreme Court of Canada addressed the standards for class certification under a statute providing that “a class proceeding would be the preferable procedure for the resolution of the common issues.” The court analyzed this “preferability” requirement in light of the principal goals of class actions: judicial economy, behavior modification of defendants, and access to justice. To analyze the access to justice issue, the court instructed that the courts should determine what barriers to justice exist, the potential for class proceedings to address those barriers, alternatives to class proceedings, the extent to which the alternatives address barriers to access to justice, and how the two proceedings compare. Applying those standards, the court concluded a class was the appropriate means to resolve this dispute.
Supreme Court Clarifies Scope of Younger Abstention Doctrine.
In Sprint Communications, Inc. v. Jacobs, 134 S. Ct. 584 (U.S. 2013) (No. 12-815), Sprint filed a complaint with the Iowa Utilities Board (the “IUB”), contesting access fees that a local telecommunications carrier was charging Sprint for calls made via the internet. After the IUB ruled that such fees were permissible, Sprint filed two lawsuits, one in state court and one in federal court, seeking to overturn the IUB’s ruling. At the urging of the IUB, the federal district court abstained from hearing the matter, holding that the Younger abstention doctrine announced by the Supreme Court in Younger v. Harris, 401 U.S. 37 (1971), required abstention in light of the ongoing state judicial proceeding. The Eighth Circuit agreed that abstention was required, but vacated the dismissal of the complaint and instead entered a stay during the pendency of the state court action. The Supreme Court reversed, holding that abstention was not warranted. The Court reiterated that the general rule is that abstention is disfavored, and is not in order simply because a pending state court proceeding involves the same subject matter – even if it implicates important state interests. The Court clarified that the exception it recognized in Younger and its progeny is a narrow one and is limited to “three exceptional categories” of proceedings: state criminal prosecutions, civil enforcement proceedings, and civil proceedings involving certain orders that are uniquely in furtherance of the state courts’ ability to perform their judicial functions. Because this matter did not fall within any of those categories, the district court was required to hear and decide the case.
Rule 6(d) Does Not Extend Deadline For Filing Rule 59(e) Motions.
In Williams v. Illinois, 737 F.3d 473 (7th Cir. 2013) (No. 13-2652), the Seventh Circuit affirmed the district court’s dismissal of a suit for failure to prosecute, after the plaintiff failed to serve his complaint on defendants for more than a year. Plaintiff received notice of the dismissal in the mail. Twenty-nine days after the dismissal order, plaintiff filed a motion for reconsideration. The district court held that, under FRCP 59(e), the deadline for such a motion was 28 days, which had passed, and thus it treated plaintiff’s motion as a motion to vacate the judgment under FRCP 60(b). Finding that plaintiff had failed to show any of the specific grounds justifying relief under Rule 60(b), the court denied the motion. On appeal, the Seventh Circuit held that there is a “bright-line rule” that any motion for reconsideration filed after the deadline must be construed as a motion to vacate. As a matter of first impression in the Circuit, the court further held that plaintiff did not receive, pursuant to FRCP 6(d), an additional three days to ask for reconsideration because he received the dismissal by mail. Rather, Rule 6(d) enlarges the filing time only when the period for acting runs from the service of a notice, not when the time begins after the entry of judgment, as it did here.
No Cause Of Action For Contributory Cybersquatting.
In Petroliam Nasional Berhad v. GoDaddy.Com, 737 F.3d 546 (9th Cir. 2013) (No. 12-15584), a third party registered several domain names that included the trademarked name of plaintiff Petronas, a large oil and gas company. The third party used GoDaddy’s domain-forwarding service to direct the disputed domain names to an adult web site. Petronas sued GoDaddy, alleging contributory cybersquatting under the federal Anti-Cybersquatting Consumer Protection Act (ACPA). The district court granted summary judgment in favor of GoDaddy. The Ninth Circuit affirmed, holding as a matter of first impression that the ACPA does not include a cause of action for contributory cybersquatting. The court ruled that the plain language of the Act limited liability to those who register or use a domain name with a bad faith intent to profit from a protected mark; it makes no express provision for secondary liability. The court rejected Petronas’ argument that Congress intended to implicitly include within the ACPA common-law doctrines applicable to trademark infringement, such as contributory infringement, concluding instead that the ACPA created a new cause of action distinct from traditional trademark remedies. The court further held that extending liability to registrars who may have aided the cybersquatting but are not themselves cybersquatters would impose on such parties the “nearly impossible task” of having to analyze their customers’ subjective intent with respect to each domain name they service.
Federal Court Declines To Require Disclosure Of “Seed Set” For Predictive Coding.
By: Daniel J. Weiss
In In re Biomet M2a Magnum Hip Implant Products Liability Litigation, No. 12-MD-2391 (N.D. Ind. Aug. 21, 2013), the defendant used predictive coding to locate and produce responsive documents from a “universe” of 2.9 million documents. The court rejected the plaintiffs’ motion to compel the defendant to produce the “seed set” of documents used to “train” the predictive coding software to identify relevant documents. The defendant produced all of the documents used in the seed set that were determined to be relevant, but did not specifically identify them for the plaintiff, and did not produce any of the seed documents determined to be irrelevant. As to the latter category, the court held that “irrelevant or privileged documents used to tell the algorithm what not to find” were “self-evident[ly]” not discoverable. As to the relevant documents used in the seed set, the court held that “Rule 26(b)(1) doesn’t make such information discoverable,” primarily because “[the plaintiffs] want to know, not whether a document exists or where it is, but rather how [defendant] used [them] before disclosing them.” The court nonetheless held that the defendant should “re-think its refusal” to identify the relevant documents in the seed set because “[a]n unexplained lack of cooperation in discovery can lead a court to question why the uncooperative party is hiding something[.]”
Illinois Appellate Court Prevents Policy Rescission as to Innocent Insured.
The Illinois Appellate Court recently reinstated insurance coverage for an insured who had no knowledge of material misrepresentations made by another insured during policy renewal. Illinois State Bar Ass’n Mut. Ins. Co. v. Law Office of Tuzzolino & Terpinas, No. 1-12-2660 (1st Dist. Nov. 22, 2013). Will Terpinas, Jr. was an insured along was his law partner Sam Tuzzolino under a malpractice insurance policy. As part of the renewal of that policy, Tuzzolino, unbeknownst to Terpinas, made misrepresentations on the renewal application as to circumstances that might give rise to a malpractice claim. When Terpinas subsequently sought coverage under the policy for a malpractice suit, the insurer sought to rescind the policy as to all insureds based on Tuzzolino’s material misrepresentations as to such claim in the renewal application. The trial court granted such policy rescission. On appeal, the appellate court reversed the policy rescission as to Terpinas. The court first reasoned that an “innocent insured” provision of the policy did not apply because its language was explicitly limited to circumstances where coverage would be lost due to failure to provide timely notice under a renewal policy; it did not apply to nondisclosure on a renewal application. However, the court then held that the Illinois common law innocent insured doctrine protected Terpinas. The doctrine “applies in a situation where two or more insureds have an insurance policy and one of the insureds commits acts that would normally void the insurer’s contractual obligations,” so long as “a reasonable person would not understand that the wrongdoing of a co-insured would prevent recovery under the policy.” The court reasoned that this doctrine applied to material misrepresentations made during the formation of the policy, and that Illinois law favors innocent insureds and protects them from insurance companies seeking to void their policies. The court also found that the severability clause in the policy created separate and distinct contracts as between Terpinas and Tuzzolino, allowing rescission as to the latter but not the former.
Fourth Circuit Enforces Consent Requirement in Voluntary Payments Clause As Written.
The Fourth Circuit recently continued a growing trend in enforcing voluntary payment clauses as written against policyholders who fail to obtain their insurers' consent before entering into an underlying settlement. Perini/Tompkins Joint Venture v. ACE American Ins. Co., 738 F.3d 95 (4th Cir. 2013) (No. 12-2415). Perini/Tompkins Joint Venture (PTJV), one of the entities involved in constructing the Gaylord National Resort and Conference Center at the Nation Harbor complex in Washington, DC, failed to obtain the consent of its insurer, ACE, prior to settling a construction defect claim with another entity. Affirming the district court's decision, the Fourth Circuit held that the requirement in Maryland Code Sec. 19-110 that the insurer show prejudice before denying coverage for an insured's failure to comply with either notice or cooperation clauses did not apply to the voluntary payment clause, as the duties imposed by such clauses are separate and distinct. Even if Sec. 19-110 were to apply, the court found that ACE had been prejudiced by PTJV's failure to inform ACE of the settlement. The court further held that because compliance with the voluntary payment clause is a condition-precedent to coverage, the policy's no-action clause barred PTJV from suing ACE on the basis of its coverage denial. This case serves as a cautionary tale for policyholders to carefully review voluntary payment clause language in their insurance policies and negotiate changes to such language if necessary.
Proof Insufficient To Instruct On Sophisticated Intermediary Defense.
In Caronia v. Philip Morris USA, Inc., No. 227 (N.Y. Dec. 17, 2013), the New York Court of Appeals addressed the viability of medical monitoring claims under New York law. Plaintiffs, cigarette smokers who had not been diagnosed with lung cancer and were not suspected of having cancer, brought an equitable cause of action in federal court seeking a medical monitoring program that would provide CT scans for early detection of lung cancer. The district court dismissed the claim, but observed that New York would likely recognize the medical monitoring claim. Before ruling on the appeal, the Second Circuit certified two questions to the New York Court of Appeals: (1) whether a smoker, like the plaintiffs, may pursue an independent cause of action for medical monitoring for an undiagnosed, unsuspected disease; and (2) if so, what are the elements of the cause of action, what is the statute of limitations, and when does the cause of action accrue. The New York Court of Appeals answered that New York law does not permit an independent cause of action for medical monitoring and reiterated the State’s longstanding requirement of present physical harm or property damage before a plaintiff may recover costs associated with medical monitoring. The court noted a plaintiff who presently has a physical injury could still recover for medical monitoring as consequential damages, as long as the plaintiff establishes an entitlement to damages as part of another tort cause of action. In light of its answer to the first question, the court declined to answer the second question about the particulars of the cause of action. Based upon those responses, the Second Circuit affirmed the dismissal of the case.
Component Parts Doctrine Requires Defective Part Or Design Participation.
In Romans v. Texas Instruments, Inc., No. CA2013-04-012 (Ohio Ct. App. Nov. 18, 2013), the Ohio Court of Appeals reviewed an order granting summary judgment to the defendant manufacturer of a component part of a Ford truck that caught fire, resulting in the death of plaintiff’s family. The court held that under Ohio law, the component parts doctrine requires a plaintiff suing a component part manufacturer to establish either that (a) the component part itself was defective or (b) the component part manufacturer participated in the design integrating the component part into the completed product. The court ruled that plaintiff had not shown that the component at issue was itself defective, nor had it shown that the defendant component part manufacturer had participated in designing how its switch was to be integrated into the truck. As a consequence, the court affirmed the summary judgment for the defendant component parts manufacturer.
New York City Bar Offers Guidance On Ethical Risks Of “Leaping Into The Cloud.”
A New York City Bar report on cloud computing outlines the problems experienced by Puckett & Faraj, a Virginia law firm, as a “chilling example” of the risks of remote-data-storage technology. N.Y. City Bar Ass’n Report (Nov. 2103). The law firm was targeted by a hacker group, which stole the firm’s Google passwords and gained access to three gigabytes of e-mails containing several years’ worth of confidential client information. While the Bar report does not discourage lawyers’ use of cloud computing, it outlines potential problems with cloud computing and the precautions that should be taken before storing sensitive information on remote servers. The Report notes that the risks of cloud computing pertain “to two critically important functions”:  “storing client data where it might be accessed by the wrong parties or might be inaccessible by the attorney when needed; and  exclusive reliance on software or other critical functions not housed under a lawyer’s direct control” (emphasis original). With respect to the data security risk, the Report observes that “cloud computing implicates [Rule] 1.6 [of the Rules of Professional Conduct] in two distinct, but related ways: first, with respect to the delivery of confidential information to the vendor itself; and second, with respect to the potential disclosure to third parties once the information is outside the attorney’s control.” The Report look to a 2010 New York ethics opinion for guidance on the application of that rule, which “concludes that lawyers may ethically use online ‘cloud’ storage systems provided they take ‘reasonable care to ensure that the system is secure and that client confidentiality is maintained.’” N.Y. State Ethics Op. 842 (Sept. 10, 2010). That opinion lists four steps that a lawyer may take in exercising reasonable care: (i) ensuring that the online data storage provider has an enforceable obligation to preserve confidentiality and security, and will notify the lawyer if served with process requiring the production of client information; (ii) investigating the online data storage provider’s security measures, policies, recoverability methods, and other procedures to determine if they are adequate under the circumstances; (iii) employing available technology to guard against reasonably foreseeable attempts to infiltrate the data that is stored; and/or (iv) investigating the storage provider’s ability to purge any copies of the data, and to move the data to a different host, if the lawyer wants to change storage providers. With respect to the access to data risk, the Report advises lawyers to seek providers whose Service Level Agreement provides the lawyer with reasonable assurance that their data will be accessible, either through the service provider’s primary servers, or back-up servers. According to the Report, selectivity in the selection of a cloud provider is an ethical obligation under Rule 1.1 (competence).
Eight Circuit Reverses Application Of Colorado River Abstention To Exclusively Federal Securitis Act Claims.
The Eight Circuit in Cottrell v. Duke, 737 F.3d 1238 (8th Cir. 2013) (No. 12-3871), found that a district court had abused its discretion in applying Colorado River abstention to stay a federal shareholder derivative proceeding asserting an exclusively federal claim. The Supreme Court’s decision in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), permits a federal court to refrain from hearing a case and defer to a parallel state court proceeding, but only under exceptional circumstances. In Cottrell, the Eighth Circuit found that the state and federal cases were not parallel, as the state court had no jurisdiction to address the Securities Act claims in the federal action. The Eight Circuit noted that courts have held that Colorado River does not apply when an exclusively federal claim, like a Securities Act claim, is before the court. The Eight Circuit reasoned that abstention in such situations would “abdicate [the court’s] general grant of jurisdiction” and also ignore “Congress’s desire to have federal courts adjudicate Securities Act claims.” The Eight Circuit also rejected the district court’s backup holding that it could stay the case based on its inherent power to control its docket. The court held that to do so would allow it to bypass the rigorous Colorado River test set forth by the Supreme Court.
SEC Ordered To Produce Brady And Giglio Materials Due To Joint Investigation With U.S. Attorney’s Office.
A district court ordered the SEC to produce material solely in its possession to a defendant in a parallel criminal prosecution by the U.S. Attorney. United States v. Martoma, No. 12-CR-973 (S.D.N.Y. Jan. 6, 2014). A defendant is owed Brady and Giglio material in sole possession of the SEC if the SEC and USAO conducted a joint investigation. The court found that the SEC and USAO conferred regarding their parallel investigation, beginning shortly after the USAO commenced its investigation of insider trading in Elan and Wyeth securities at SAC Capital. The two agencies jointly conducted twenty interviews of twelve witnesses. The SEC provided the USAO with documents unearthed during its investigation, including all documents it received from SAC. The SEC also coordinated efforts in deposing SAC Capital and its employees. The court held this sufficient to find that the offices were conducting a joint investigation, and that material solely in possession of the SEC needed to be turned over to the defendant.
SEC Charges Former Officers Of A Subsidiary Of A Public Company With Circumvention of Internal Controls and Falsifying Records.
On January 14, 2014, the SEC filed a settled civil enforcement action charging two former senior officers of a subsidiary of public company with falsifying books, records, and accounts and circumventing internal controls. Complaint, SEC v. Hohol, No. 14-CV-00041 (E.D. Wis. filed Jan. 14, 2014). The SEC alleged that between 2008 and 2011 the defendants made and caused others to make false accounting entries in the subsidiary’s general ledger. These false entries included fictitious revenue accruals, the improper reclassification of expenses as inventory and the improper reclassification of prepaid assets as expenses. The SEC alleged that the defendants generated false invoices and forged other documents to support these entries. The SEC further alleged that the purpose of the false entries was to artificially increase the subsidiary’s monthly earnings before taxes (“EBT”) to meet internal financial performance projections and to make it appear that the subsidiary was profitable throughout the relevant period. The alleged actions inflated the subsidiary’s EBT by $64 million. Ultimately, the overstated EBT was consolidated into the parent company’s financial statements filed with the SEC. Based on these allegations, the defendants settled, on a neither admit nor deny basis, to charges of Section 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”), SEC Rule 13b2-1, and aiding and abetting the parent company’s violations of Section 13(b)(2)(A) of the Exchange Act. The defendants consented to permanent injunctions, the disgorgement of their performance bonuses awarded during the period in question and prejudgment interest. Penalties were not imposed due the defendants’ current financial conditions.
DOJ OKs Payment Of Medical Expenses For Foreign Official’s Daughter.
By: Jessi K. Liu
In United States v. Quest Diagnostics Inc., 734 F.3d 154 (2d Cir. 2013) (No. 11-1565), a qui tam whistleblower suit was brought by a partnership, one partner of which was the former general counsel (“GC”) for the defendant. In connection with the lawsuit, the former GC divulged confidential communications between the defendant and its counsel relating to the allegedly fraudulent conduct. The defendant moved to dismiss based on a breach of ethical duties by the former GC. The district court granted the motion, and the Second Circuit affirmed. The Court of Appeals first found that the former GC had breached N.Y. Rule 1.9(c) by disclosing confidential information. The former GC argued that the disclosure was subject to the exception in N.Y. Rule 1.6(b)(2), which authorizes a lawyer to reveal confidential information to the extent the lawyer reasonably believes necessary to prevent the client from committing a crime. The court found that the former GC could have reasonably believed the defendant had the intent to commit a crime, but that he could not have reasonably believed the disclosure was necessary to prevent a crime; the matter could have been brought to the government’s attention, and a qui tam lawsuit could have been filed, without revealing the confidential information. The court further found that the taint extended to the former GC’s partners and the law firm that represented them. In light of the taint, including the potential for prejudice at trial, the court found dismissal of the complaint to be an appropriate remedy. Finally, the court noted that the government itself – the real party in interest – was not affected by the dismissal and could still file a new case.
Retaliation Claim Succeeds Per Statements In Internal Investigation Interview.
In Sayger v. Riceland Foods, Inc., 735 F.3d 1025 (8th Cir. 2013) (Nos. 12-3301, 12-3395), the plaintiff (who was Caucasian) alleged that he was laid off in retaliation for disclosing during an internal investigation interview by his employer’s human resources director possible racist statements made by a Caucasian supervisor against others. A jury returned a verdict in the plaintiff’s favor on his retaliation claim under 42 U.S.C. § 1981. The employer appealed, arguing that the plaintiff was not seeking to vindicate the rights of minorities and failed to present evidence of causality or pretext. After reviewing the trial record, the court of appeals found plaintiff had introduced sufficient evidence on these issues and affirmed the judgment.