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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.
Court Removes Arbitrator For Failure To Disclose Information About Business Pursuit.
By: Howard S. Suskin
The district court granted a motion to remove an arbitrator from presiding over an ongoing arbitration because of his failure timely to disclose a business pursuit that was likely to give rise to doubt regarding his impartiality. Sussex v. Turnberry/MGM Grand Towers, LLC,No. 08-cv-00773 (D. Nev. Dec. 31, 2013). Two years after his appointment, the arbitrator updated his LinkedIn profile to announce that he had recently refocused his practice to concentrate on the field of Litigation Finance and Funding. Defendants requested the arbitration administrator to review the arbitrator’s appointment based on his new disclosure, but the administrator denied the request to remove him. Defendants then filed a motion in the district court to disqualify the arbitrator. Granting the motion, the court found that it had equitable authority to intervene in extreme cases such as this, rather than have years of complicated proceedings in the underlying arbitration ensue and only then be subject to challenge. The court concluded that the goal of an expeditious and just arbitration would be furthered by the court’s intervention at the pre-award stage.
Court Rejects Post-Award Challenge To Arbitrator For Failure To Disclose Conflict.
By: Howard S. Suskin
The Second Circuit denied a motion to vacate an arbitration award that was based on the arbitrator’s failure to disclose that colleagues at his law firm were providing legal advice to clients in corporate transactions in which one of the arbitration parties was the opposing party. Ometto v. ASA Bioenergy Holding A.G.,Nos. 12-4022, 13-225 (2d Cir. Jan. 7, 2014). Agreeing with the district court’s finding, the Second Circuit concluded that the arbitrator lacked knowledge of the conflicts at issue at the time he authored the award and there was not any evident partiality. The Second Circuit also agreed that the arbitrator had no reason to believe that a nontrivial conflict might exist and thus had no further duty to investigate. Further, to the extent that the arbitrator was careless, his carelessness did not rise to the level of “willful blindness” and thus was insufficient to vacate the award.
Communications Without Counsel Not Protected By Common Interest Doctrine.
In Ducker v. Amin, No. 12-cv-01596 (S.D. Ind. Dec. 31, 2013), the court held that, although the parties shared a common legal interest, their communications in the absence of counsel were not protected by the common interest doctrine. In this case, Ducker and Worthy were involved in an internal investigation and a subsequent defamation action. Both had retained counsel and their counsel entered into a “Shared Work Product Agreement.” Defendant sought communications among Ducker, Worthy and their respective counsel. The court found that Ducker and Worthy shared a common legal interest as of the date they retained counsel, and held that communications after that date that involved the participation of counsel were protected by the common interest agreement. Conversely, communications between Ducker and Worthy that did not involve counsel were not protected.
Disclosure Of Work Product To Non-Adverse Third Party Did Not Waive Work Product.
In Skynet Electronic Co. v. Flextronics International, Ltd., No. 12-cv-06317 (N.D. Cal. Dec. 16, 2013), the court held that disclosure of work product to a third party patent agent did not waive otherwise applicable work product protections. In this case, plaintiff Skynet inadvertently produced to defendant an email addressed to Skynet’s founder and president that reflected preliminary legal opinions from Skynet’s U.S. counsel. Defendant argued that the inadvertent production waived privileged and, in the alternative, the email chain reflected that the document had previously been sent to a third party patent agent in Taiwan, which disclosure resulted in waiver. The court rejected both arguments. First, Skynet satisfied the requirements of Federal Rule of Evidence 502(b) by responding promptly (within two hours of learning of the inadvertent production) to rectify the error. Second, disclosure to the patent agent did not waive the work product protection. Disclosure of work product to a third party does not waive work product immunity unless the disclosure has substantially increased the opportunity for an adverse party to obtain the information. Because it was not likely that the patent agent would disclose the document to a litigation adversary, there was no waiver.
Disclosures To Public Relations Agents Were Not Privileged.
In McNamee v. Clemens, No. 09-cv-01647 (E.D.N.Y. Sept. 18, 2013), the court held that disclosures by Roger Clemens’ legal team to public relations agents were not protected by the attorney-client privilege. In this case, McNamee alleged that Clemens defamed McNamee by accusing him of lying and manufacturing evidence regarding Clemens’ alleged use of performance enhancing drugs. Following the release of the Mitchell Report a year earlier, which included statements attributed to McNamee, Clemens’ legal team engaged public relations agents to provide consulting services “with respect to media relations advice and counsel.” McNamee moved to compel production of communications with the PR agents, and Clemens asserted attorney-client privilege and work product. The court held that Clemens waived any applicable privilege by failing to submit a privilege log that sufficiently described the bases for the asserted privileges and protections. Moreover, even if the log had been sufficient, the communications would not have been protected. The court held that it is not sufficient that communications with a PR firm “prove important to an attorney’s legal advice to a client.” Instead, the “critical inquiry” is whether the communications with the person assisting the attorney were made in confidence for the purpose of obtaining legal advice, and the communications themselves were primarily or predominantly of a legal character. The court found that Clemens did not demonstrate that the communications with the PR agents involved anything other than standard public relations or agent services, or that the communications were necessary so that Clemens’ counsel could provide Clemens with legal advice.
Secured Creditor’s Lien May Not Be Extinguished If Creditor Does Not Participate In The Bankruptcy.
In Acceptance Loan Co., Inc. v. S. White Transportation, Inc. (In re S. White Transportation, Inc.), 725 F.3d 494 (5th Cir. 2013) (No. 12-60648), the Fifth Circuit reversed confirmation of the debtor’s plan of reorganization, which sought to extinguish a secured creditor’s lien on an office building. In confirming the plan, the bankruptcy court relied on Section 1141(c) of the Bankruptcy Code, which provides that, “after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors.” Prior Fifth Circuit precedent had held 1141(c) only voids liens held by a creditor that participates in the case. The bankruptcy court reasoned that the lien holder had sufficiently participated in the reorganization because the lien holder had received notice of the bankruptcy case. The Fifth Circuit rejected the bankruptcy court’s analysis, explaining that a lien holder’s participation must be active and cannot be “mere nonfeasance.” Because the lien holder did not file a proof of claim, appear in the case, or object to confirmation, the Fifth Circuit held that the plan could not extinguish the lien.
Rejected Contracts That Limit Remedies To Specific Performance May Leave Parties With No Remedy.
In In re TOUSA, Inc., 503 B.R. 499 (Bankr. S.D. Fla. 2014) (No. 08-10928), the Bankruptcy Court for the Southern District of Florida held that a claimant could not obtain either specific performance or money damages under a contract rejected under Section 365(g) of the Bankruptcy Code because the contract limited the claimant’s remedies to specific performance. In the contract, the claimant expressly waived its right to monetary damages, retaining only the right to (a) a return of deposits not applied to the purchase price or (b) equitable relief, including specific performance. The court first explained that the claimant was not entitled to specific performance because claimants are generally deprived of such a right when a debtor rejects a contract under Section 365. Therefore, the issue was whether the claimant was entitled to monetary damages notwithstanding the provision limiting remedies. The court noted that, although Section 502(c)(2) of the Code permits estimation of some equitable claims, it only does so where a right to payment exists in the first place. Accordingly, the court explained that the threshold question was whether applicable state law permits the claimant to recover monetary damages for breach of contract. The court concluded that Florida courts would enforce the provision limiting damages, thus eliminating the claimant’s ability to recover monetary damages. Because Section 365(g) did not allow for specific performance, the claimant was entitled only to a return of its deposit. In re TOUSA is therefore a reminder to contracting parties that a provision limiting remedies to specific performance might not actually create an enforceable remedy if the breaching party ends up filing for bankruptcy and rejecting the contract.
Third Circuit Protects Suppliers Who Receive Post-Petition Payments.
The Third Circuit held that a supplier may accept court-approved “critical vendor” payments post-petition from a debtor’s bankruptcy estate without fear that such payments will increase that supplier’s liability for payments received pre-petition. Friedman’s Liquidating Trust v. Roth Staffing Cos., 738 F.3d 547 (3d Cir. 2013) (No. 13-1712). A primary goal for a supplier of a company in bankruptcy is to obtain “critical vendor” status whereby the debtor pays the supplier not only for goods or services provided during the course of the bankruptcy proceeding but also additional amounts for unpaid goods and services provided prior to bankruptcy. In preference litigation, however, the “critical vendor” label has been a double-edged sword. When a supplier is sued for a preference (payments received from the debtor within 90 days prior to the bankruptcy), the supplier may offset its liability by the amount of unpaid goods or services provided to the debtor after receipt of the alleged preference (the so-called “new value” defense). Preference plaintiffs (particularly litigation trusts born out of a debtor’s bankruptcy) have found some success arguing that a “critical vendor” payment diminishes a preference defendant’s “new value” defense dollar-for-dollar. In Friedman’s, the Third Circuit held that for purposes of a preference analysis, a plaintiff’s claim and a defendant’s defenses are evaluated as of the day the debtor filed bankruptcy. In other words, payments made to preference defendants after the debtor’s bankruptcy filing are not considered in preference litigation. The decision effectively removes one of the few potential downsides to obtaining critical vendor status.
Bankruptcy Court Cannot Use Section 105(a) Of The Bankruptcy Code To Override Express Prohibition In Bankruptcy Code.
In Law v. Siegel, 571 U.S. ___ (2014), (Docket No. 12-5196), the United States Supreme Court held that a bankruptcy court may not use Section 105(a) of the Bankruptcy Code or any inherent general equitable powers it might have to surcharge a debtor’s exempt homestead property. Stephen Law filed a chapter 7 bankruptcy petition in 2004. His only significant asset was a house in California, which he valued at $363,348. Law claimed a $75,000 homestead exemption, and he listed two mortgages on the property that totaled approximately $304,000. The chapter 7 trustee, believing the second lien on the property was fraudulent, incurred over $500,000 in litigation expenses challenging the second lien. After successfully avoiding the second lien, the trustee then moved to “surcharge” the entirety of Law’s $75,000 homestead exemption, arguing that the trustee had incurred attorneys’ fees to overcome the debtor’s alleged misrepresentations about the lien. The bankruptcy court granted the surcharge motion, relying on Bankruptcy Code Section 105(a), which provides that a bankruptcy court may “issue any order . . . that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” The Bankruptcy Appellate Panel and Ninth Circuit affirmed.
The Supreme Court reversed. In a unanimous opinion written by Justice Scalia, the Court held that the bankruptcy court’s actions were expressly prohibited by Section 522(k) of the Bankruptcy Code, which provides that exempt property is “not liable for payment of any administrative expense.” Although the Court acknowledged that Section 105(a) allows bankruptcy courts to enter orders necessary to carry out the provisions of the Bankruptcy Code, that provision does not authorize bankruptcy courts to enter orders that the Bankruptcy Code prohibits. The Court also rejected the argument that a bankruptcy court’s inherent equitable powers to sanction misconduct authorized the surcharge. The Court stopped short of holding that bankruptcy courts lack inherent equitable powers, concluding that even if the bankruptcy courts possess such inherent powers, they cannot be used to override specific provisions of the Bankruptcy Code. The decision has attracted widespread attention among bankruptcy judges and practitioners because it imposes express limits on the general equitable powers of bankruptcy courts and has suggested that the Court has not yet decided whether bankruptcy courts possess equitable power to sanction abusive litigation practices.
Mr. Law was represented by Jenner & Block, which became involved at the cert petition stage in the Supreme Court. Partner Matthew S. Hellman presented oral argument and led Jenner’s team, which included Partners Catherine L. Steege and Jessica Ring Amunson and Associates Caroline M. DeCell, Matthew S. McKenzie, Adam G. Unikowsky, and Carl N. Wedoff.
Supreme Court: State Attorney General Action Does Not Constitute Mass Action.
By: Michael T. Brody
We previously reported to you concerning whether a state attorney general could invoke CAFA jurisdiction for parens patriae actions. In Mississippi ex rel. Hood v. AU Optronics Corp., 134 S. Ct. 736 (2014) (No. 12-1036), the U.S. Supreme Court reversed the decision on which we previously reported and held that when a State is the only named plaintiff, the suit does not constitute a mass action under CAFA. The Court held the term “plaintiff” does not include both named and unnamed plaintiffs. Based on the statute’s text and context, CAFA’s “100 or more persons” standard does not include unnamed persons who are real parties in interest to claims brought by the named plaintiff.
Seventh Circuit Permits New Appeal Of Material Alteration Of Certification Order.
By: Michael T. Brody
In Driver v. AppleIllinois, LLC, 739 F.3d 1073 (7th Cir. 2014) (No. 13-8029), the district court granted class certification, and the Seventh Circuit refused to review that decision. Defendant renewed its challenge to certification, which the district court denied. Although declining to permit review, the Seventh Circuit clarified when a second appeal from an order granting or denying class certification may be permitted. The court held that where the trial court has “materially altered a previous order granting or denying class certification,” the ruling of the district court may be a proper subject of a renewed Rule 23(f) appeal. The alteration must be material – the slightest change in class definition does not create a right to appeal. Here, although the trial court materially altered the class definition, the appeal nevertheless was improper because the defendant did not seek to challenge the alteration, but sought to challenge other orders in the case.
Tenth Circuit Upholds Appeal Bond Requirement In Settlement.
By: Michael T. Brody
In Hershey v. ExxonMobil Oil Corp., Nos. 12-3309, 13-3029 (10th Cir. Dec. 16, 2013), a class action settlement provided, among other things, that because an appeal by an objecting class member would “delay the payment” to the settlement class, each objecting class member who appealed settlement approval was required to put up a cash bond sufficient to “reimburse Class Counsel’s appellate fees, Class Counsel’s expenses, and the lost interest to the Class caused by the delay.” Objecting class members did not post the bond and argued the bond requirement was inappropriate. The Tenth Circuit disagreed, finding the argument had been waived because the objectors did not object to the specific portion of the settlement. Moreover, the Tenth Circuit rejected the argument that the bond provision would discourage objections, concluding that the bond provision applied to appeals, not objections. Finally, the court concluded that the rules permit the posting of a bond to secure a judgment of a trial court. While the proposed bond provided security for more than the consequence of the delay, Fed. R. App. P. 7 does not foreclose parties from providing broader security.
Former Director Not Entitled To Books and Records From His Time As Director.
In King v. DAG SPE Managing Member, Inc., No. 7770 (Del. Ch. Dec. 23, 2013), the Delaware Chancery Court dismissed a former director’s demand for books and records under 8 Decl. C. § 220(d). The plaintiff alleged that, without his knowledge, he had been named as an independent director of the defendant, DAG for at least a three-year period in the early 2000s. In an effort to investigate actions taken by DAG during that period, the plaintiff made a request to inspect the defendant’s books and records. DAG refused the request for inspection, and this action followed. In dismissing the plaintiff’s complaint, the court held that Delaware common law did not granted plaintiff a right to request the defendant’s books and records, and under Delaware’s statute, “only current directors have inspection rights.” Thus, “once a director of Delaware corporation properly is removed from office, that individual’s right to inspect books and records of the corporation involved under Section 220(d) ends.”
Failure to Make Pre-Suit Demand Not Fatal In Insider-Trading Derivative Action.
In Silverberg ex rel. Dendreon Corp. v. Gold, No. 7646 (Del. Ch. Dec 31, 2013), a derivative plaintiff was allowed to proceed with his insider-trading, or Brophy, action against the directors of Dendreon Corp. even though the plaintiff failed to make a pre-suit demand on the board. Central to the court’s holding was the conclusion that at least 6 of the 11 directors were “interested” as a result of the potential for personal liability from insider trading and, therefore, those six likely would have refused a demand from the plaintiff if it had been made. The court noted that these six directors had sold large quantities of their stock in the company immediately after the FDA approved a new drug produced by the company. Although there were “entirely legitimate reasons that corporate insiders would sell large amounts of their stock after a major public announcement,” plaintiff alleged that the directors – but not the public – were also aware of a reluctance of physicians to prescribe the new drug because of its cost. The court reasoned that with this non-public knowledge, these directors sold their stock at what they believed was the “high water mark.” Thus, the court found that the plaintiff’s allegations were sufficient to render more than half the board “interested,” which excused the need to make a demand on the Dendreon board before filing suit.
Supreme Court: Pending Fees Motion Does Not Stay Time To Appeal.
In Ray Haluch Gravel Co. v. Central Pension Fund of the International Union of Operating Engineers & Participating Employers,134 S. Ct. 773 (2014) (No. 12-922), plaintiffs brought claims against defendant employer under a collective bargaining agreement and the Employee Retirement Income Security Act (ERISA), seeking to recover unpaid contributions to certain benefit funds, plus attorney’s fees and costs. The district court entered judgment in favor of plaintiffs on their unpaid contributions claims, but for an amount that was less than what they sought. More than month later, the court awarded plaintiffs some of their attorney’s fees and costs, but again it was less than what they had requested. After plaintiffs appealed both rulings within 30 days of the court’s attorney’s-fees order, defendant argued that the appeal with respect to the first merits decision was untimely. Plaintiffs responded that there had been no final decision until the court rendered a decision on their requested attorney’s fees, and thus their appeal was timely as to all issues in the case. The First Circuit agreed with plaintiffs, but the Supreme Court reversed, holding that the pendency of a ruling on an award for fees, whether based in statute or contract, does not prevent the merits judgment from becoming “final” for purposes of appeal. Because the notice of appeal was filed more than 30 days after final judgment was entered on plaintiff’s underlying contribution claims, the appeal as to those claims was untimely.
Supreme Court: U.S. Sales Don’t Subject Foreign Corporation To General Jurisdiction.
In Daimler AG v. Bauman,134 S. Ct. 746 (2014) (No. 11-965), plaintiffs, twenty-two residents of Argentina, sued defendant Daimler, a German corporation, in the Northern District of California, alleging that Daimler’s Argentinean subsidiary had engaged in wrongful conduct in Argentina. Daimler moved to dismiss for lack of personal jurisdiction. The district court granted the motion, but the Ninth Circuit reversed, ruling that, under agency principles, the fact that Daimler’s U.S. subsidiary sold Daimler-manufactured vehicles in California was sufficient to subject Daimler to general jurisdiction in that forum. The Supreme Court reversed, rejecting the notion that general, as opposed to specific, jurisdiction exists whenever a company engages in a continuous and systematic course of business. Rather, the proper test is whether a company’s affiliations with the forum are “so continuous and systematic as to render it essentially at home in the forum State.” The Court ruled that the fact of substantial sales in a State are, alone, insufficient to meet that general jurisdiction test, reasoning that to hold otherwise would result in sweeping and exorbitant exercises of all-purpose jurisdiction that would deprive global companies of “some minimum assurance as to where [their] conduct will and will not render them liable to suit.” Accordingly, even if its U.S. subsidiary’s contacts are imputed to Daimler, there still is no basis to subject Daimler to general jurisdiction in California.
Supreme Court To Consider Post-Judgment Discovery Of Foreign Sovereign Assets.
The Supreme Court granted certiorari in EM Ltd. v. Republic of Argentina,695 F.3d 201 (2d. Cir. 2013), cert. granted, 134 S. Ct. 895 (U.S. Jan. 10, 2014) (No. 12-842), to address the scope of discovery available to a plaintiff in possession of a valid money judgment against a foreign sovereign. 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 Second Circuit rejected defendant Argentina’s argument that the subpoenas violated the Foreign Sovereign Immunities Act, holding that Argentina’s sovereign immunity was not infringed because the order at issued involved discovery, not the attachment of sovereign property, and because it was directed at third-party banks, not at Argentina itself. The Supreme Court will address the following question: Can post-judgment discovery in aid of enforcing a judgment against a foreign state be ordered with respect to all assets of a foreign state regardless of their location or use, or is discovery limited to assets located in the United States that are potentially subject to execution under the Foreign Sovereign Immunities Act?
9th Circuit Affirms Dismissal Of Contract Action As Spoliation Sanction.
In Volcan Group, Inc. v. Omnipoint Communications, Inc., No. 12-35217 (9th Cir. Jan. 9, 2014), the district court dismissed plaintiff’s breach of contract action as a sanction for what the court described as widespread spoliation of evidence. Among other things, plaintiff’s former vice president admitted to destroying and altering his own notes related to the parties’ dealings, and further detailed how other of plaintiff’s employees knowingly destroyed engineering notebooks containing potentially relevant evidence. The court also found that plaintiff had failed to preserve a copy of its web-based database – which it used to track the progress of its projects with defendant – as it existed at the time of the termination of the relevant contract. The court concluded that dismissal was warranted because these discovery violations made it “impossible to be confident that the parties would ever have access to the true facts.” The Ninth Circuit affirmed, holding that the record supported a finding of willful spoliation and showed that the district court did not abuse its discretion. Although it acknowledged that the dismissal was “harsh,” the appellate court reasoned that it would not disturb the district court’s choice of sanction because it had no “definite and firm conviction that the district court committed a clear error of judgment in the conclusion it reached.”
Court Orders Party To Identify Sources Of ESI And Search With Plaintiff’s Terms.
By: Daniel J. Weiss
In Viteri-Butler v. University of California, No. 12-cv-02651 (N.D. Cal. Jan. 7, 2014), the court granted the plaintiff’s motion to compel the defendant to broaden its search for electronically stored information in two respects. First, the defendant had limited its search for ESI to its centralized e-mail server, which the court rejected as inadequate. The court explained that its own ESI checklist requires parties to discuss the “systems in which potentially discoverable information is stored.” The court held that limiting a search to the centralized email server without consideration of other electronic sources was inconsistent with the checklist because “documents may be stored on a number of different devices or media” such as “an employee’s laptop” or on a “shared drive.” The court thus held that the defendant would be required to “provide Plaintiff with a list of the various computer systems and electronic devices the decision-makers use for business purposes,” including “tablets, smart phones, shared drives, etc.” Second, the court held that the defendant would be required to search electronic sources using search terms proposed by the plaintiff. The defendant had previously searched some electronic sources using its own search terms, but before the plaintiff had submitted its proposed terms. The court held that although the plaintiff had failed to provide search terms at that time, “the court disagrees that [defendant] should have construed that as permission to conduct a search on its own terms,” especially in light of the court’s ESI checklist that requires cooperation on search methodology. The court ordered the defendant to perform a new search of its electronic systems with “20 individual strings of combined search terms” submitted by plaintiff.
Court Orders Fine But No Adverse Instruction For Spoliation Of Non-Material ESI.
By: Daniel J. Weiss
In Cognex Corp. v. Microscan Systems, Inc., No. 13-cv-02027 (S.D.N.Y. Dec. 31, 2013), the district court considered a spoliation sanctions motion against the plaintiff related to the loss of a CD with software that defendants had requested in discovery. The CD was damaged when the plaintiff shipped the only copy of the CD to its expert witness “without making any copy of the CD’s contents.” As a result, when the CD was damaged in shipment, the requested software was lost. The defendants sought an adverse instruction at trial, but the court refused. The court held that the plaintiff’s failure to copy the CD after it was requested in discovery “is sufficient to infer a culpable state of mind.” The court held, however, that defendants had not established how the CD “would be material to their claims or defenses.” “This lack of materiality does not excuse plaintiff’s misconduct, but it is highly pertinent to determining what sanction is appropriate.” In particular, “the absence of materiality suggests that the severe punishment of an adverse inference instruction would here be excessive.” The court therefore ordered a lesser sanction of a $25,000 fine, payable to the court, and payment of defendants’ fees and costs in bringing their motion.
Party Must Disclose Details Of Search/Provide Electronic Documents With Metadata.
By: Daniel J. Weiss
In Home Instead, Inc. v. Florance, No. 12-cv-00264 (D. Neb. Nov. 8, 2013), the district court granted the plaintiff’s motion to compel arising from defendants’ allegedly deficient e-discovery production, including requiring a detailed affidavit form the defendants outlining their e-discovery efforts. In depositions, representatives of the defendants testified that they did not review several categories of documents in response to the plaintiff’s document requests. The court held that “the defendants’ effort to respond to discovery was inadequate” and ordered the defendants to provide an affidavit “outlining whether a litigation hold was put in place, the people to whom a litigation hold letter was sent, the directions for preservation, the sources identified for search, the terms used for the search, Defendants’ continued efforts to ensure compliance, and any other information relevant to the scope and depth of the preservation or search for documents.” The court further held that the defendants’ production of electronic files in scanned PDF form was improper under Fed. R. Civ. P. 34(b)(2)(e), and required the defendants to reproduce the documents in electronic form with metadata.
Court Limits Reach of Horizontal Exhaustion of Primary Policies for Long Tails Claims.
The District Court of Maryland recently held that under Maryland law horizontal exhaustion of primary policies applies to continuous loss (long tail claims) prior to triggering excess policies but importantly limited which primary policies must be exhausted prior to triggering excess policies. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa, v. Porter Hayden Co., Nos. 03-3414, 03-3408 (D. Md. Jan. 2, 2014). The policyholder had sought insurance coverage for long tail asbestos liabilities. The insurers took the position that all primary policies issued to the policyholder and covering the loss at issue first had to be exhausted before any excess policies would be triggered. Under Maryland law, any policy providing coverage from the date of initial exposure to asbestos to the date of manifestation of asbestos-related disease is triggered for potential coverage. Coverage is allocated amongst such policies pro rata by time on the risk such that each policy is responsible (up to policy limits) only for the portion of loss during the period of time it was on the risk. The court recognized the Maryland law provided that in undertaking such pro rata allocation, primary policies on the risk must be exhausted prior to any excess policy responding unless the particular policy language provides otherwise. However, the court interpreted such horizontal exhaustion in a limited way, namely that in allocating damages pro rata, certain years of primary coverage may prove to be exhausted, while others years may not be; if the primary coverage as to a particular year on the risk is exhausted, then an excess policy applicable to that year must pay its pro rata share regardless whether primary policies in other years have been exhausted. The court reasoned this accorded with Maryland law recognizing that certain primary policies may be exhausted sooner than others, and as a result, certain excess policies may respond sooner than others.
Courts Issue Conflicting Opinions As To Whether Subpoenas Constitute Claims.
Two different courts recently reached opposite conclusions in determining whether a subpoena constitutes a “written demand for non-monetary relief,” and therefore a “Claim,” as commonly defined by many insurance policies. In Employers’ Fire Insurance Co. v. ProMedica Health Systems, Inc., 524 F. App’x 241 (6th Cir. 2013) (No. 12-3104), the Sixth Circuit interpreted the term “relief” according to its dictionary definition to mean “the redress or benefit . . . that a party asks of a court.” 524 F. App’x at 251. Applying this definition to a subpoena issued by the Federal Trade Commission (FTC), the Sixth Circuit concluded that a subpoena does not seek relief or redress from a court, and therefore cannot form the basis of a “Claim.” Id. at 251-52. The New York state courts, however, reached a contrary result using the same definition of “relief” in Syracuse University v. National Union Fire Insurance Co. of Pittsburgh, Pa., 975 N.Y.S.2d 370 (N.Y. Sup. Ct.) (No. 2012EF63) (table), aff’d, 976 N.Y.S.2d 921 (N.Y. App. Div. 2013), concluding that federal and state issued grand jury subpoenas are, in fact, “Claims.” Relying on the full dictionary definition of “relief,” which includes “redress or benefit . . . that a party asks of a court – also termed remedy,” the court noted the inclusion of the word “remedy,” which is itself broadly defined as a “means of enforcing a right or preventing or redressing a wrong.” Subpoenas, the court held, seek to enforce the investigating entity’s rights and redress a potential wrong. In addition, the court held that the relief sought by a subpoena is the provision of information or the production of documents. These recent decisions reveal that the availability of coverage for a particular investigation or subpoena may be jurisdiction-specific, as well as dependent on which definition of “Claim” appears in the policy at issue.
New York Supreme Court Interprets Flood Deductible in Favor of Policyholder.
Applying general principles of policy interpretation, the New York Supreme Court recently read a flood deductible provision to provide maximum coverage to a policyholder’s Superstorm Sandy-related flood loss. Castle Oil Corp. v. ACE Am. Ins. Co., No. 55812/13 (N.Y. Sup. Ct. Jan. 2, 2014). The commercial property policy issued to Castle Oil, the operator of a petroleum fuel terminal in the Bronx, contained “all risk” coverage, including a specific endorsement extending coverage to loss caused by flood. A $2,500,000.00 sublimit applied to the flood coverage for locations, like Castle Oil’s fuel terminal, designated as special flood hazard areas by FEMA. The deductible applicable to such locations was to be “2% of the total insurable values at risk per location, subject to a minimum of $250,000.00.” Id. slip op. at 2. Castle Oil’s property damage as a result of Superstorm Sandy totaled $2,284,293.95. The insurer argued that the deductible provision should be read as two percent of the value of all property at the terminal, with the value determined according to the statement of values attached to the policy in the amount of $124,701,000.00. Id. slip op. at 3. Under this interpretation, the deductible was calculated to be $2,494,020.00 – more than the amount of Castle Oil’s loss and nearly the amount of the flood sublimit. Castle Oil, by contrast, argued that the deductible provision should be read as two percent of the value of the property “at risk” at the terminal, with the value equal to the $2,500,000.00 sublimit. Id. slip op. at 4. The deductible under that calculation would be $250,000.00. Ruling in favor of Castle Oil, the court found the phrase “values at risk” ambiguous and construed it liberally in favor of coverage for the policyholder. Id. slip op. at 7-11. According to the court, the insurer’s interpretation rendered the phrase “at risk” without meaning. Id. slip op. at 9. Moreover, the statement of values the insurer relied upon for its interpretation included an express disclaimer stating that the values therein were set forth “for premium purposes only.” Id. slip op. at 8. Ultimately, the insurer’s desired result – a deductible calculated to be only a few thousand dollars less than the applicable sublimit – was inconsistent with the reasonable expectations of the policyholder. Indeed, the court noted that such a construction would render the purchased flood coverage illusory. Id. slip op. at 9.
Cert Granted: May Lanham Act Challenge Be Pursued If Label Regulated?
By: Barry Levenstam
The U.S. Supreme Court granted certiorari in POM Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170 (9th Cir. 2012) (No. 10-55861), cert. granted, 134 S. Ct. 895 (U.S. Jan. 10, 2014) (No. 12-761), to review a Ninth Circuit decision holding that the Food, Drug, and Cosmetic Act and its regulations bar private plaintiffs from bringing Lanham Act false advertising claims that challenge as misleading the labels of juice products sold to consumers. In the underlying suit, POM Wonderful had sued Coca-Cola alleging that its juice product labels mislead consumers as to the contents of Coca-Cola’s juice products. The district court dismissed and the Ninth Circuit affirmed in pertinent part.
California: State Consumer Class Action Preempted By Federal Labeling Law.
By: Barry Levenstam
In Quesada v. Herb Thyme Farms, Inc., 166 Cal. Rptr. 3d 346 (Cal. Ct. App. 2013), the California Court of Appeal affirmed the dismissal of the state law action, holding that the federal Organic Foods Production Act of 1990, which governs the labeling of agricultural products as “Organic” and “USDA Organic,” preempts state consumer lawsuits alleging violations of that Act or violations of California’s federally approved State Organic Program. The court ruled that Congress fully intended in enacting the Organic Foods Productions Act to preclude private enforcement of that Act through state consumer lawsuits so the Act would create a national standard for use of the terms “Organic” and “USDA Organic” in labeling agricultural products.
“Frequency, Regularity, And Proximity” Test Inapplicable In JNOV Analysis.
By: Barry Levenstam
In Smith v. Union Carbide Corp., 130 So. 3d 66 (Miss. 2013) (No. 2010-CA-00455), the Mississippi Supreme Court reviewed a trial court ruling granting defendants’ motion for judgment nov based on the so-called “frequency, regularity, and proximity” test. This test requires a court to determine whether the plaintiff has submitted evidence sufficient to establish that it was “exposed to a particular asbestos-contained product made by [defendant]” with “sufficient frequency and regularity” and “in proximity to where [plaintiff] actually worked” that it is probable that the exposure caused the injuries. The Mississippi Supreme Court held that the “frequency, regularity and proximity” test is properly used for evaluating whether plaintiff has made a prima facie case of liability, and thus is to be applied only in determining whether to grant a summary judgment or a directed verdict for defendant. Once the jury reviews the evidence and reaches a verdict, however, the decision whether to grant or deny a motion for JNOV must be based on whether the plaintiff submitted evidence to support the jury’s finding in its favor on each of the elements set forth in the Mississippi Products Liability Act for product liability claims. Consequently, the court reversed the grant of JNOV for defendants and remanded the case to the trial court to reconsider the defendants’ motion for JNOV under the proper standard.
Appellate Court May Review Record For Daubert If Trial Court Fails To Do So.
By: Barry Levenstam
In Estate of Barabin v. AstenJohnson, Inc., 740 F.3d 457 (9th Cir. 2014) (Nos. 10-36142, 11-35020) (en banc), the Ninth Circuit reviewed en banc a district court’s decision to admit expert testimony from two asbestos experts tendered by plaintiff, who espoused the controversial “every asbestos fiber is causative” theory of liability. The court ruled that, in doing so, the district court had failed to fulfill its gatekeeper function under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), by admitting testimony without making the required Daubert findings as to relevance and reliability, and had erred by allowing the jury to make those determinations. Inasmuch as evidence was improperly admitted, the appellate court proceeded to conduct a harmless error review, which begins with a presumption of prejudice that can be rebutted by the party that offered the evidence showing that it is more probable than not that the jury would have reached the same verdict even if the improper evidence had not been admitted. Further, where, as here, the district court failed to exercise its gatekeeper function, the appellate court may review the record and determine for itself whether expert testimony satisfies the Daubert standard for relevance and reliability, if the record contains sufficient evidence to enable the court to make that determination. In this case, however, the Ninth Circuit concluded that the district court had not built a sufficient record for the Ninth Circuit to make this determination and thus remanded the case for a new trial. This holding reversed an earlier ruling to the contrary in Mukhtar v. California State University, 299 F.3d 1053 (9th Cir. 2002), amended by 319 F.3d 1073 (9th Cir. 2003).
Whistleblower’s Indictment For Taking Confidential Documents Affirmed
In State v. Saavedra, 81 A.3d 693 (N.J. Super. Ct. App. Div. 2013) (No. A-1449-12T4), the appellate court affirmed an indictment for official misconduct and theft against a former employee of the North Bergen Board of Education. Prior to the indictment, the employee had filed a lawsuit against the Board of Education alleging gender, ethnic and sex discrimination as well retaliatory discharge. The complaint was filed under, among other statutes, New Jersey’s whistleblower law and New Jersey’s Law Against Discrimination (“LAD”). During discovery, it was discovered that the employee took over 350 documents, including some original documents, before she left the Board of Education. The Board of Education alerted the local prosecutor, and the prosecutor convened a grand jury, which indicted the employee. In challenging her indictment, the employee argued that a New Jersey Supreme Court decision Quinlan v. Curtiss-Wright Corp., 204 N.J. 239 (2010) granted workers with employment discrimination lawsuits an “absolute right” to take possibly incriminating documents from their employers. In affirming the indictment, the appellate court first held that Quinlan did not establish a bright-line rule that allowed an employee to take the employer’s confidential documents. Rather, Quinlan outlined a multi-factor balancing test and made clear that employees who engaged in self-help were subject to significant risks if their conduct was not protected. Here, the appellate court held that the employee could not satisfy that test, including among other things, that she failed to demonstrate how the documents she took were related to her case, and thus Quinlan did not protect her actions.
Guilty Plea For “Conscious Disregard”; SEC Disgorgement Includes IRS Forfeiture.
By: Jessi K. Liu
On January 9, 2014, Alcoa Inc.’s majority-owned and controlled subsidiary, Alcoa World Alumina LLC, pleaded guilty to one count of violating the anti-bribery provision of the FCPA, Information, United States v. Alcoa World Alumina LLC, No. 14-cr-0007 (W.D. Pa. Jan. 9, 2014), and Alcoa Inc. settled a parallel SEC action. In re Alcoa, Inc., Exchange Act Release No. 71,261 (Jan. 9, 2014) (cease and desist orders). The companies admitted that Alcoa World Alumina paid at least $110 million in bribes through a middleman to government officials in Bahrain to obtain $175 million in sales. To resolve both the DOJ and SEC matters, the companies agreed to pay $384 million, comprising a criminal fine of $209 million and an SEC disgorgement judgment for $175 million, against which a $14 million forfeiture to the IRS would be credited. Three features of this enforcement action are particularly noteworthy: (1) the criminal information to which Alcoa World Alumina pleaded guilty did not allege that its employees actually knew that the middleman was paying bribes, but only that they consciously disregarded the fact that the markups were facilitating corrupt payments; (2) the SEC order “makes no findings that any officer, director or employee of Alcoa [Inc.] knowingly engaged in bribery,” but rests Alcoa Inc.’s liability on the theory that its subsidiaries acted as its agents; and (3) the forfeiture to the IRS appears to be a new feature of FCPA settlements.
Inadequate Compliance Program Leads To Monitorship.
United States v. Apple Inc., Nos. 12-cv-02826, 12-cv-03394 (S.D.N.Y. Jan. 16, 2014), represents the latest chapter in the saga of Apple Inc.’s efforts to avoid the burdens of corporate monitorship. Those efforts began with a verdict against Apple after a bench trial in an antitrust action by the United States and individual states. As part of the relief, the court issued a proposed injunction which created a corporate monitor position. Apple objected, arguing that a monitorship would be costly and burdensome and would have few benefits. At a hearing on the proposed objection, the court stated that it had hoped Apple would submit evidence of antitrust compliance reform that would render the appointment of a monitor unnecessary. In the court’s view, however, Apple submitted only “a very cryptic reference to the fact that it enhanced some compliance program it adopted at some point during this litigation.” After hearing these comments, Apple explained in a brief supporting its proposed revisions to the injunction that it had hired two seasoned antitrust lawyers, improved its compliance programs, intended to establish an annual antitrust compliance training program, would publish a revised compliance guide, and would institute regular auditing. The court found that this was still insufficient evidence of a robust internal antitrust compliance program, particularly in light of the egregiousness of the underlying conduct at the highest levels of the company. However, the court narrowed the monitor’s functions to two: to evaluate Apple’s internal antitrust compliance policies and to evaluate Apple’s antitrust training program. Once the monitor was appointed, disputes quickly arose, particularly over the monitor’s fees and its desire to interview executives and board members and the timing of those interviews. When those disputes came to a head, Apple sought a stay of the injunction pending the outcome of its appeal from the verdict and sentence. Apple principally argued that the monitor had “taken an adversarial, not judicial, stance towards Apple” and that it should be disqualified. The court rejected Apple’s arguments and denied the stay. According to the court’s opinion, if Apple had been able to make a persuasive and detailed presentation as to its adoption of a thorough and robust antitrust compliance program, it would have been able to avoid the cost and burdens of the court-imposed monitorship. Apple has since filed an Emergency Motion with the Second Circuit, seeking a stay pending appeal.