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Jenner & Block is excited to introduce “The Spotlight,” an electronic monthly newsletter from the Litigation Department Co-Chairs, Craig C. Martin and David J. Bradford, designed to highlight recent cases and legislative developments from across the United States. Additionally, The Spotlight recaps the high impact Litigation Department news, upcoming events and publications of interest.
If you would like to be added to the mailing list for The Spotlight, please send an email to Matthew F. Bradley at email@example.com.
Participation In Mediation Insufficient To Compel Non-Signatory To Arbitrate.
By: Howard S. Suskin
An insurer that was a non-signatory to an arbitration agreement between other insurers and the insured was not equitably bound to arbitrate when it agreed to mediate the dispute with the insured alongside the other insurers. Flintkote Co. v. Aviva PLC, 769 F.3d 215 (3rd Cir. 2014) (No. 13-4055). The court found that the mediation in which the insurer participated was not governed by the arbitration agreement. Further, the insurer was not equitably estopped from avoiding arbitration because the insured was on actual notice that the insurer had negotiated for and specifically reserved the right to resolve all disputed issues through litigation, and the insured’s reliance on the insurer’s participation in mediation as an unspoken waiver of its rights was unreasonable.
Arbitration Clause Was Insufficient Because No Notice Of Waiver Of Right To Sue.
By: Howard S. Suskin
The failure of an arbitration clause to notify a plaintiff consumer that, by entering into the agreement, she was surrendering her right to seek relief in a judicial forum, rendered the arbitration clause unenforceable. Atalese v. U.S. Legal Servs. Grp., L.P., 99 A.3d 306 (N.J. 2014). Here, the contract between the consumer and the debt-adjustment service provider contained an arbitration provision for the resolution of any dispute between the parties, but the provision made no mention that plaintiff waived her right to seek relief in court. The New Jersey Supreme Court found that the absence of any language in the arbitration provision that the plaintiff was waiving her statutory right to seek relief in court renders the provision unenforceable. The court concluded that an arbitration provision that provides for the surrendering of a constitutional or statutory right must be sufficiently clear to a reasonable consumer.
Use of Website Insufficient To Bind Consumer Class To Arbitration Clause.
By: Howard S. Suskin
Arbitration Clause Contained In Warranty Booklet Insufficient To Bind Consumers.
By: Howard S. Suskin
Inconspicuous placement of arbitration provisions in a cell phone’s warranty booklet was held insufficient to inform consumers about the proposal to require arbitration, and therefore barred a finding that a valid and enforceable contract to arbitrate was formed. Norcia v. Samsung Telecomm. Am., LLC, No. 14-cv-00582 (N.D. Cal. Sept. 18, 2014). The arbitration provision was contained in a 101-page warranty booklet; the procedure for resolving disputes first appeared on page 76. Moreover, the reference to arbitration was contained in a “Q&A” about the procedure for resolving disputes, which did not alert consumers that the arbitration term was a contract or agreement. Because this was too inconspicuous, the court found that no agreement to arbitrate was formed.
If No FRE 502(d) Order, Court Applies FRE 502(b) Analysis To Inadvertent Disclosure.
In Cormack v. United States, 117 Fed. Cl. 392 (2014) (Fed. Cl. No. 13-232C), the court applied the fact-based analysis required by Federal Rule of Evidence 502(b) to determine whether an inadvertently produced document resulted in waiver or if it could be clawed back. In this patent infringement case, plaintiff filed a brief that attached an email produced by defendant-intervenor Northrop Grumman Systems Corporation (“Systems”). Realizing that the email was privileged, counsel for Systems contacted plaintiff’s counsel the morning after receiving the filing and asked that the document be returned or destroyed. Plaintiff destroyed all but one copy, which plaintiff sequestered. Four days later, Systems filed a motion to strike the response by plaintiff that included the email as an exhibit. The court found that the email was protected work product and that plaintiff had not made a showing of substantial need for the document. In the absence of a FRE 502(d) order that would have governed the issue of claw backs, however, the court applied the fact-intensive analysis set forth in FRE 502(b) to determine whether Systems had waived the work product protection. The court stated that whether the production was “inadvertent” was tied to the question of whether the steps taken by Systems to prevent production had been “reasonable.” Systems submitted a detailed declaration describing the process by which documents were screened for privilege, and how the document nevertheless was produced among the more than one million pages of responsive material. The court noted that it is not sufficient for a party merely to “design” a reasonable procedure, it also had to “implement” that procedure. Here, the court found that “a reasonable plan of review was inadequately implemented.” The court found, however, that Systems promptly took reasonable steps to rectify the error. Thus, there was no waiver. Note: where the court enters a FRE 502(d) order at the outset of a matter that governs claw backs, the onerous evidentiary analysis conducted by the court in this case could have been obviated.
If FRE 502(d) Order, No Need To Prove Reasonable Steps Taken To Prevent Disclosure.
In East Coast Sheet Metal Fabricating Corp. v. Autodesk, Inc., No. 12-cv-517 (D.N.H. Sept. 16, 2014), the district court held that the terms of the protective order entered by the court at the outset of the litigation governed the process for clawing back inadvertently produced privileged documents, thus obviating the need to resort to the fact intensive exercise otherwise required by FRE 502(b). At the outset of this case, the court entered an order providing: “If documents…subject to a claim of attorney-client privilege…[are] inadvertently or unintentionally produced, such production shall in no way prejudice or otherwise constitute a waiver of, or estoppel as to, any such privilege….” The protective order contained no language requiring a party to take reasonable steps to avoid inadvertent disclosure. Plaintiff sought to claw back a privileged document, and defendant argued that plaintiff could not prove that the disclosure had been inadvertent without first proving that plaintiff had taken reasonable steps to prevent disclosure. Noting that some courts have “borrowed” the reasonableness language of FRE 502(b) in applying a FRE 502(d) order, the court rejected that approach, explaining that such an approach would defeat the express purpose of FRE 502(d): to allow parties to limit the costs associated with screening documents produced during discovery for privilege. Finding that plaintiff’s disclosure was “unintentional,” the court held that there had been no waiver.
Internal Corporate Antitrust Compliance Policy Not Privileged.
In In re Domestic Drywall Antitrust Litigation, No. 13-MD-2437 (E.D. Pa. Oct. 9, 2014), the district court held that a corporate antitrust policy that was regularly disseminated within a company for training purposes was not protected by the attorney-client privilege. In this antitrust case, plaintiffs requested defendant CertainTeed to produce its internal policies, practices and guidelines concerning United States antitrust laws. Defendant asserted that its internal compliance policies were privileged. Defendant’s antitrust compliance policy was drafted by outside and in-house counsel; it was distributed widely within the company for compliance training purposes; however, it was not distributed outside of the company. Defendant argued that the policy was a communication from company lawyers to company personnel with a need to know the legal advice provided in the document. The court disagreed, and held that the internal policy was not privileged. The court noted that “[n]o court has yet held that a corporate policy of lawfulness is protected from discovery as privileged. Moreover, there is no evidence that [Defendant] would have refrained from creating the policy absent privilege.” The court explained that, although the communications between counsel and company executives leading up to the adoption of the policy were privileged, the policy itself was not. Although the policy is based on legal advice, it is primarily a business instructional guide or reference that contains general advice, not advice specific to any set of actual facts.
Section 1782 Adverse Privilege Ruling Immediately Appealable; Rule 45 Ruling Is Not.
In In re Naranjo, 768 F.3d 332 (4th Cir. 2014) (Nos. 13-1382, 13-2028), the court held that it had subject matter jurisdiction to hear an immediate appeal from an adverse privilege ruling on an application made pursuant to 28 U.S.C. §1782, but that it did not have subject matter jurisdiction to hear an immediate appeal from an adverse discovery ruling regarding a Rule 45 subpoena relating to the same parties and the same requests for documents. This case was one of many in U.S. federal courts relating to a multi-billion dollar judgment entered against Chevron in Ecuador. Chevron initially filed applications for discovery pursuant to §1782 to assist it with pending litigation in Ecuador. Chevron later filed actions in the United States against the lead plaintiffs’ lawyer in the Ecuador matter, Steven Donziger, and others who Chevron alleged conspired with the Ecuador court-appointed expert and the Ecuador trial court to procure the judgment against Chevron. Chevron served third party subpoenas pursuant to FRCP 45 to obtain documents for the U.S. litigation. In the matter before the court, lawyers who had worked with Donziger were served with similar requests for documents pursuant to both §1782 and Rule 45. The lawyers and two of their Ecuadorian clients objected to both requests on grounds of privilege. The trial court held that privileges had been waived by Donziger’s conduct in a matter that had been litigated in the District Court for the Southern District of New York, and affirmed by the Second Circuit. Presented with appeals from both orders, the Fourth Circuit addressed the question of subject matter jurisdiction over immediate appeals of adverse privilege rulings in the two contexts. With respect to the §1782 action, the court noted that the Circuit Courts had consistently held that they have subject matter jurisdiction to hear an immediate appeal from an order on a §1782 application. The court explained that §1782 applications aid foreign proceedings, and they are not related to underlying proceedings in the United States in which the privilege ruling could be reviewed at a later time. The court held, however, that it did not have subject matter jurisdiction over the domestic subpoena, because immediate appeals generally are not allowed, unless: (1) a party refuses to comply with the court’s order and is held in contempt; or (2) the Perlman exception applies. Under Perlman, if a disinterested third party is subpoenaed for documents over which another person asserts privilege, and the third party does not have a sufficient interest to be willing to be held in contempt, the party asserting privilege may intervene to assert privilege, and may pursue an immediate appeal. The court held that the Perlman doctrine did not apply here, for among other reasons, the parties asserted their own, personal interest in the work product subpoenaed, and they were not otherwise sufficiently disinterested because they had already evidenced a willingness to face a contempt sanction.
Intent To Offer Evidence That It Believed Its Conduct Was Lawful Waived Privilege.
In Barker v. Columbus Regional Healthcare System, Inc., No. 4:12-cv-108 (M.D. Ga. Aug. 29, 2014), the district court held the defendant’s mere intention to offer evidence that its conduct was lawful waived the attorney-client privilege, despite defendant’s clear statement to the court that it did not intend to assert an advice of counsel defense or rely on communications with its counsel in support of its defense. In this qui tam action, the Relator alleged that defendant had violated the False Claims Act. To prevail, the Relator has the burden to prove that defendant knowingly submitted false claims with the intent to violate the law. Defendant denied knowingly violating the law and indicated that it would introduce evidence to prove that it believed its conduct was lawful. Relator argued that this waived the attorney-client privilege, and the court agreed. The court held that Cox v. Admin. U.S. Steel & Carnegie, 17 F.3d 1386 (11th Cir. 1994), in which the appellate court found waiver, could not be distinguished from the present case. The court in Cox held that a defendant’s intent to prove its conduct was lawful “necessarily implicates all of the information at its disposal when it made the decision[.]” The court in Barker explained that, while a defendant could argue that plaintiff had failed to meet its burden of proving “knowing” violation of the law without waiver, once the defendant goes further and “intends to explain fully why its conduct was not knowingly and intentionally unlawful,” defendant waives the privilege.
NY Commercial Division Adopts Rule Encouraging Categorical Logging.
In order to reduce the time and cost associated with preparing privilege logs, the New York Commercial Division adopted new Rule 11(b)(N.Y. Comp. Codes R. & Regs. tit. 22, § 202.70(g), Rule 11(b)), which went into effect on September 2, 2014. Rule 11(b) provides that it is the “preference” in the Commercial Division for parties to log documents by category rather than document-by-document. Parties are to meet and confer and, where possible, agree to employ a categorical approach to privilege designations. Where categorical designations are used, the producing party must provide for each category of documents withheld a certification, signed by the Responsible Attorney, “setting forth with specificity those facts supporting the privileged or protected status of the information included within the category. The certification shall also describe the steps taken to identify documents so categorized, including whether each document was reviewed or some form of sampling was employed, and if the latter, how the sampling was conducted.” Where a requesting party refuses to permit a categorical approach, and instead insists on document-by-document logging, the producing party, upon a showing of good cause, may apply to the court for the allocation of costs incurred with respect to preparing the log. “Costs” include attorneys’ fees. Rule 11-b also provides detailed instructions regarding the logging of emails, and encourages parties in complex matters to hire a Special Master “to help the parties efficiently generate privilege logs, with costs to be shared.”
Discovery Of Non-Privileged Portions Of Special Litigation Committee Report Allowed.
In TP Orthodontics, Inc. v. Kesling, 15 N.E.3d 985 (Ind. 2014) (No. 46S03-1405-MI-337), the Indiana Supreme Court held that plaintiffs in a derivative action were entitled to the non-privileged portions of a report prepared for a Special Litigation Committee (SLC) that, in heavily redacted form, was submitted into evidence by the company, but that the use of the document did not waive privilege with respect to privileged portions of the report. In this case, minority shareholders of TP Orthodontics (TPO), a closely held corporation, brought a derivative suit on behalf of TPO against the majority shareholder. TPO’s board of directors formed an SLC, which hired counsel to conduct an investigation and to prepare a report. In support of its motion to dismiss, TPO submitted a version of the report in which 120 pages of the 140 page report were redacted. The minority shareholders argued that TPO’s use of a small portion of the report to demonstrate that there had been an investigation conducted in good faith required a finding of waiver over the entire report so that the shareholders could test whether the investigation had in fact been conducted in good faith. Noting that Indiana has adopted a deferential approach to the business judgment rule, the court acknowledged that the entire report was relevant and would provide shareholders with information that could either prove or disprove that there had been a good faith investigation. The shareholders’ interests did not, however, overcome the right of the SLC to assert privilege. First, the SLC’s mere assertion that the investigation was conducted in good faith did not waive privilege, as the SLC made this assertion to respond to claims raised by the shareholders, who “are trying to force TPO to waive privilege.” Second, to the extent that portions of the report are protected by the attorney-client privilege or by the work product doctrine, those privileges and protections were not waived by disclosure of non-privileged portions of the report. The court remanded the case, directing the trial court to review the report in camera and to order production of those portions that the court determined were not privileged. The court explained that, although in camera review should be rare, it was necessary for courts to conduct this review with respect to SLC reports so that trial courts can act as a “gatekeeper whose sole responsibility [at the motion to dismiss stage of the case] is to review the SLC report to determine what is or is not privileged[.]”
First Circuit Clarifies CAFA Removal Time Periods.
By: Michael T. Brody
In Romulus v. CVS Pharmacy, Inc., No. 14-1937 (1st Cir. Oct. 24, 2014), the district court remanded a putative class action to state court after finding the removal petition was untimely and that the removing party had not established the amount in controversy. The First Circuit reversed and held, as other Circuits have, that the time to remove commences when the “pleadings or plaintiffs’ other papers” provide the defendant with a clear statement of the damages sought, from which the amount in controversy can be calculated. A pleading or subsequent paper will trigger the deadline for removal if it includes a clear statement of the damages sought, or if it sets forth sufficient facts from which the amount in controversy can easily be ascertained by the defendant by simple calculation. Defendant has no independent duty to investigate or supply facts outside of those provided by plaintiff. In this wage and hour case, plaintiffs provided an estimate of the meal breaks for which they sought recovery, an important element of the damages calculation, in an email to counsel. Defendants removed within 30 days of that email, which was deemed timely by the First Circuit because the email provided the information needed to estimate damages and demonstrated a reasonable probability that the amount in controversy exceeded $5 million. On the merits of the removal question, the First Circuit found that $5 million was in controversy. There need only be a reasonable probability that the amount in controversy exceeds $5 million – the district court need not conduct a “mini-trial regarding the amount in controversy.”
In Settlement Involving Coupons, Court Awards Fees Based On Non-Coupon Relief.
By: Michael T. Brody
In In re HP Inkjet Printer Litigation, 716 F.3d 1173 (9th Cir. 2013) (No. 11-16097), a case on which we previously have reported, the Ninth Circuit held that CAFA § 1712 provides that if a court allows coupon and equitable relief, and sets attorneys’ fees based on the value of the entire settlement, the district court must use the value of coupons redeemed to determine the value of coupons used in the fee award calculation. The court thus reversed the approval of a $1.5 million fee award. On remand, plaintiffs renewed their request for fees. This time, plaintiffs sought fees based on the relief in the case other than the coupon relief. Under § 1712(b), where a settlement provides for coupon and non-coupon relief (such as equitable or injunctive relief), and the value of the coupons are not used to justify the fee, a fee may be awarded based on the lodestar method. Here, class counsel incurred fees of $7.4 million in litigating the case. The court had previously found the value of the coupons and the injunctive relief was $1.5 million. On remand, the court reduced the fees by 10%, to $1.35 million, to reflect an appropriate lodestar award for counsel’s work on the non-coupon portion of the litigation. In re HP Inkjet Printer Litig., No. 05-CV-3580 (N.D. Cal. Sept. 30, 2014). As reduced, the fee award did not exceed the overall value of the settlement to the class.
Seventh Circuit Rejects Settlement, Questions Settlement Valuation.
By: Michael T. Brody
In Redman v. RadioShack Corp., 768 F.3d 622 (7th Cir. 2014) (No. 14-1470), the Seventh Circuit reversed the approval of a class action settlement in a FACTA case, which would have involved the issuance of coupons to class members and paid $1 million to counsel. Of the millions of class members, 83,000 claimed the $10 coupons. The Seventh Circuit rejected the settlement because, among other things, the district court had viewed the costs of notice and claims administration purely as a benefit to the class, whereas those costs also benefited class counsel and defendants. The Seventh Circuit also criticized valuing coupons at their nominal value. Recognizing the benefits to defendants from a coupon settlement, the Seventh Circuit directed courts to scrutinize the benefit of coupons to class members in assessing a settlement’s fairness as the court could not assume that a $10 coupon was worth $10 to every recipient. Further, agreeing with the Ninth Circuit’s ruling in In re Mercury Interactive Corp. Securities Litigation, 618 F.3d 988, 993-95 (9th Cir. 2010), the court held class counsel must file their attorneys’ fees motion before the deadline for objections to the settlement. While objectors knew the amount of the fee petition, they were handicapped in objecting to the fee petition because details of hours and expenses were submitted later.
Ninth Circuit Upholds Overtime Class, Permits Statistical Sampling To Prove Liability.
By: Michael T. Brody
In Jimenez v. Allstate Insurance Co., 765 F.3d 1161 (9th Cir. 2014) (No. 12-56112), plaintiffs claimed that Allstate had a practice or unofficial policy requiring claims adjustors to work unpaid overtime. The district court certified a class to decide whether class members worked overtime without compensation in violation of California law, whether defendants knew of the practice, and whether defendants permitted the practice. The court held that these liability issues could be determined on a class-wide basis, based on statistical sampling of class members, leaving potentially difficult issues of individualized damages for later proceedings. The Ninth Circuit affirmed. It found the certification order proper because the common questions recognized by the district court will drive the answer to liability issues. The court concluded that statistical sampling and representative testimony are acceptable ways to determine liability, so long as the defendant may raise any individual defenses it has at the damages phase of proceedings. By not permitting representative testimony and sampling at the damages phase, and bifurcating proceedings, the Ninth Circuit concluded the district court had preserved Allstate’s rights to prevent individualized defenses while permitting class-wide determination of common questions.
New York’s “Separate Entity Rule” Shields Foreign Branches of Banks.
In Motorola Credit Corp. v. Standard Chartered Bank, 2014 N.Y. Slip Op. 07199 (N.Y. Oct. 23, 2014), plaintiff Motorola obtained more than $3 billion in judgments against Turkish companies and their principals (the “Uzans”) for fraudulently diverting loan proceeds. After the Uzans refused to pay the judgments, a federal district court in New York froze their assets, entered an order restraining defendant, a foreign bank with a branch in New York, from transferring any of Uzans' deposits, regardless of where the assets were located, which was significant because all of the Uzans’ assets were located in foreign branches. On appeal, the Second Circuit certified the following question to the New York Court of Appeals: whether New York’s “separate entity rule” precludes a court from ordering a garnishee bank operating branches in New York to restrain a debtor's assets held in foreign branches of the bank. The New York Court of Appeals, in a divided opinion, answered the certified question in the affirmative. The court explained that the separate entity rule provides that even when a garnishee bank with a New York branch is subject to personal jurisdiction, its other branches are to be treated as separate entities for purposes of post-judgment proceedings. In other words, a restraining notice or turnover order served on a New York branch will be effective only for assets held in accounts at that branch, and will have no impact on assets in other branches. The court reasoned that the separate entity rule promoted policies of international comity, protected banks from being subject to competing international claims and the possibility of double liability, and would avoid placing an “intolerable burden” on banks of having to ascertain and monitor the status of bank accounts in numerous foreign branches.
7th Cir. Finds Confidentiality Agreement Unenforceable.
In nClosures Inc. v. Block & Co., Nos. 13-3906, 14-1097 (7th Cir. Oct 22, 2014), plaintiff entered into an agreement whereby plaintiff would design, and defendant would manufacture, cases for electronic tablets. At the outset of the relationship, the parties entered into a confidentiality agreement, and plaintiff then divulged its proprietary design to defendant. A few months later, defendant developed its own case design, terminated the agreement, and began selling its competing product. Plaintiff sued defendant for breach of the confidentiality agreement. The district court granted summary judgment in favor of defendant, finding that the parties’ agreement was unenforceable because plaintiff had failed to take reasonable steps to keep its proprietary information confidential. The Seventh Circuit affirmed, acknowledging that courts applying Illinois law will enforce confidentiality agreements only when the information sought is actually confidential and reasonable steps were taken to keep it confidential. Here, while the parties’ principals signed an initial confidentiality agreement, no additional confidentiality agreements were required to be signed by the individuals who actually accessed the design files, the designs were not marked confidential, and they were not stored under lock and key or on computers with limited access. The court concluded that these facts showed that plaintiff did not engage in reasonable steps to protect the confidentiality of its proprietary information and, therefore, its confidentiality agreement with defendant was unenforceable.
Chancery Court Upholds Forum Selection Clause Selecting Non-Delaware Forum.
In City of Providence v. First Citizens Bancshares, Inc., No. 9795 (Del. Ch. Sept. 8, 2014), the Chancery Court of Delaware answered in the affirmative the question of whether “the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes.” In First Citizens, the derivative plaintiff filed suit against the defendant, a Delaware company headquartered in North Carolina, and its Board for breach of fiduciary duties related to, among other things, the adoption of the forum selection clause at issue. In dismissing the plaintiff’s complaints, the Chancery Court held that the forum selection clause was valid, and its adoption was not a breach of the defendant Board’s fiduciary duties: “the fact that the Board selected the federal and state courts of North Carolina – the second most obviously reasonable forum given [defendant] is headquartered and has most of its operations there – rather than those of Delaware. . .does not in my view, call into question the  validity of the” forum selection clause. The Chancery Court left open, however, the possibility that had some other forum (e.g., Alaska) been chosen by the defendant, the outcome may have been different.
Chancery Court Grants Plaintiff Attorneys’ Fees Despite Losing On Merits.
In Delaware, a stockholder plaintiff is entitled to attorneys’ fees and expenses when “(i) meritorious litigation is filed, (ii) an action producing a benefit to the corporation or its stockholders is taken by the defendants before judicial resolution is achieved, and (iii) the resulting benefit is causally related to the litigation. . . .” Sutherland v. Sutherland, No. 2399 (Del. Ch. July 31, 2014). In Sutherland, at the end of “an acrimonious family dispute which ha[d] been actively litigated for ten years,” where the plaintiff ultimately lost on all of her claims, the plaintiff nonetheless sought fees from the nominal defendant companies. The Sutherland plaintiff asserted that even though her lawsuit was unsuccessful on the merits, it caused the nominal defendants to amend employment agreements with the plaintiffs’ brothers, which yielded in excess of $1.4 million in benefits to the nominal defendants. The plaintiff also sought fees on the basis that her lawsuit “achieved a change in corporate culture” by forcing the defendants to “hold annual meetings and more openly provide information” to stockholders. The court rejected the argument that the lawsuit created a “change in corporate culture,” finding those allegations “amorphous and  difficult to quantify,” but held that the amendments to the employment agreements were a “positive benefit for the companies.” As a consequence, it awarded plaintiff $275,000 in fees and costs notwithstanding that the plaintiff had lost on the merits on all of her claims.
9th Circuit Confirms Vicarious Liability Under TCPA.
In Gomez v. Campbell-Ewald Co., 768 F.3d 871 (9th Cir. 2014) (No. 13-55486), defendant, a marketing consultant who had entered into an advertising contract with the U.S. Navy, instructed a third-party vendor to send text messages containing ads for the Navy to certain cellular users who had consented to solicitation. The third-party vendor, however, also sent the messages to others, including plaintiff, who were outside of that target group and had not consented to receive such texts. Plaintiff sued defendant (but not the third-party vendor) alleging violations of the Telephone Consumer Protection Act (TCPA). The district court granted summary judgment in favor of defendant, but the Ninth Circuit reversed. The court rejected defendant’s argument that it could not be held liable under the TCPA because it did not actually send any of the offending messages, holding that defendants could be vicariously liable under the TCPA. Although the statute is silent as to such liability, the court reasoned that, absent clear intent to apply another standard, it must be presumed that Congress intended to incorporate ordinary tort liability rules, including vicarious liability. The court found further support for this interpretation in the fact that the Federal Communications Commission has likewise concluded that the TCPA provides for vicarious liability. The court also rejected defendant’s argument that any vicarious liability should extend only to merchants whose goods or services are being promoted, stating that the TCPA imposes liability on “any person,” not just “any merchant.
11th Circuit Affirms Sanctions On Attorney Despite Parties’ Settlement.
In Oliva v. NBTY, Inc., No. 13-14254 (11th Cir. Sept 22, 2014), appellant Glick represented plaintiffs in their personal injury lawsuit against defendants. The district court granted summary judgment in favor of defendants, and sanctioned Glick personally, under 28 U.S.C. § 1927, finding that he had caused defendants to incur more than $60,000 in “excess” attorney’s fees by filing motions that unreasonably and vexatiously multiplied the proceedings. Plaintiffs and defendants ultimately entered into a settlement, whereby defendants agreed to forego their fee petition against plaintiffs (but not Glick) in exchange for the right to receive a portion of plaintiffs’ eventual recovery in another lawsuit. On appeal, Glick argued that the parties’ settlement should bar defendants from attempting to collect the attorney’s fees sanction against him. The court disagreed, noting that the Glick was not a party to the settlement agreement. The court also rejected Glick’s argument that the settlement mooted the sanctions against him because defendants’ settlement recovery might fully cover (and exceed) the total amount of fees defendants actually incurred. The court held that the parties’ settlement of their attorney’s fees claims did not negate the district court’s authority under § 1927 to punish Glick personally for his conduct. The court reasoned that the purpose of § 1927 is to penalize attorneys whose conduct is so egregious that it is tantamount to bad faith, and that purpose is not negated if defendants might also collect their fees from a settlement with plaintiffs.
Second Circuit Clarifies Standard For Civil Remedies Under Antiterrorism Act.
In Weiss v. National Westminster Bank PLC, 768 F.3d 202 (2d Cir. 2014) (No. 13-1618), plaintiffs sued defendant bank for civil remedies pursuant to the Antiterrorism Act, 18 U.S.C. §§ 2331, 2333 and 2339 (ATA), claiming that defendant provided material support and resources to a foreign terrorist organization by maintaining bank accounts and transferring funds for Interpal, a group which is alleged to have supported Hamas. The district court granted summary judgment in favor of defendant, ruling that plaintiffs failed to establish a triable issue of fact as to whether defendant had the requisite scienter. The Second Circuit reversed, holding that the district court had applied the wrong standard in its scienter analysis by focusing on whether defendant had knowledge that, or exhibited deliberate indifference to whether, Interpal funded terrorist activities. The Second Circuit concluded that the statute’s requirement is less exacting, and requires only a showing that defendant had knowledge that, or exhibited deliberate indifference to whether, Interpal provided material support to a terrorist organization, irrespective of whether that support actually aided terrorist activities. Because Hamas is designated as a foreign terrorist organization by the U.S. Secretary of State, plaintiff need only show that defendant actually knew that, or exhibited deliberate indifference to whether, Interpal provided material support to Hamas. The court concluded that on that issue, plaintiffs had raised a triable issue of fact.
Court Addresses Obligation To Organize Electronic Document Production.
By: Daniel J. Weiss
In Venture Corp. v. Barrett, No. 13-cv-3384 (N.D. Cal. Oct. 16, 2014), the district court addressed a party’s obligation to organize its electronic document production pursuant to Fed. R. Civ. P. 34(b)(2)(E). The plaintiff produced its documents in what the court characterized as a “document dump” of un-indexed PDF documents on a flash drive. The plaintiff argued that it was required to do nothing further because the parties had agreed upon a format for production pursuant to Rule 34(b)(2)(E)(ii). The defendant argued that the plaintiff was required to “organize and label” the documents to correspond to particular document requests, pursuant to Rule 34(b)(2)(E)(i). The court reviewed Rule 34 and held that both parties’ positions were incorrect. As the court explained, applying both sub-provisions of Rule 34(b)(2)(E) requires a producing party to: “(1) either organize and label each document it has produced or…provide custodial and other organizational information [metadata]…and (2) produce load files for its production containing searchable text and metadata.”
Court Denies Defendants’ Request For A Coordinating Discovery Attorney.
By: Daniel J. Weiss
In United States v. Hernandez, No. 14-cr-499 (S.D.N.Y. Sept. 12, 2014), nine individuals were indicted by a grand jury for their alleged participation in a narcotics conspiracy. The defense attorneys for eight of the defendants were appointed counsel; they moved to have the court appoint a Coordinating Discovery Attorney (“CDA”) to act on behalf of all nine defendants. CDAs are attorneys designated by multiple defendants to accept all ESI discovery produced by the government. Although the court noted that “[o]ver the past three years, an increasing number of courts have appointed attorneys to perform a variety of substantial discovery tasks as CDAs,” the court ultimately denied the defendants’ request. The court found that not all of the defendants shared the same legal interests and that appointing one CDA to represent all defendants could violate the principle that attorneys owe a duty of undivided loyalty to their clients. The court suggested that hiring a technology vendor, instead of appointing a CDA, was a better alternative.
Court Orders Sanctions For Failure To Preserve Data Held By Third Party.
By: Daniel J. Weiss
In Mazzei v. Money Store, No. 01-cv-5694 (S.D.N.Y. July 21, 2014), the district court granted a motion to sanction defendants that had failed to preserve data that was held by a third party for the defendants pursuant to a services contract. The court held that the defendants were required to preserve data on the third party’s computer system because the information was relevant to the plaintiff’s claims and the defendants had “the legal right and practical ability” to obtain the information from the third party’s computer system under their contracts with the third party. The court rejected the argument that the defendants did not have “possession, custody or control” of the data because, the court held, a party has control over information “when it has the right, authority, or practical ability to obtain the documents from a non-party to the action.” The court held that the defendants would be required to pay for the cost of attempting to restore the data from an alternate source.
Court Rejects Broad E-Discovery In Favor Of Traditional Discovery Methods.
By: Daniel J. Weiss
In United States v. University of Nebraska at Kearney, No. 11-cv-3209 (D. Neb. Aug. 25, 2014), the district court denied a motion to compel seeking a broad search of the defendants’ electronic systems to find all documents related to any complaint of discrimination. The court held that the requests sought non-relevant information (because they sought information outside of the type of conduct alleged in the case) and because the searches would impose a disproportionate burden that would outweigh their likely benefit pursuant to Fed. R. Civ. P. 26(b)(2)(C)(iii). Instead, the court held that traditional forms of discovery would be better suited to locating the information the plaintiff sought: “Searching for ESI is only one discovery tool. It should not be deemed a replacement for interrogatories, production requests, requests for admissions and depositions, and it should not be ordered solely as a method to confirm the opposing party’s discovery is complete.” The court placed special emphasis on the fact that there was no evidence “that the defendants hid or destroyed discovery [or] cannot be trusted to comply with written discovery requests.” The court thus reasoned that the plaintiff could ask questions in depositions and interrogatories that would identify relevant facts, rather than combing through all of the defendant’s computer systems. As the court explained, “the court is convinced ESI is neither the only nor the best and most economical discovery method for obtaining the information the government seeks. Standard document production requests, interrogatories, and depositions should suffice – and with far less cost and delay.”
New York State Court Limits Reach of Conduct and Government Agency Exclusions in Professional Liability Policy.
Interpreting Illinois law, a New York trial court rejected an insurer’s broad interpretation of two key exclusions in a professional liability policy and instead limited the reach of those exclusions such that the insurer had a duty to defend. Certain Underwriters at Lloyd’s London v. Huron Consulting Group, Inc., No. 650339-2001 (N.Y. Sup. Ct. May 16, 2014). At issue was defense costs coverage for a False Claims Act (“FCA”) lawsuit filed against the policyholder and alleging excessive Medicaid and Medicare billing. The insurer moved for summary judgment on two main grounds. First, the insurer argued that the FCA lawsuit alleged intentional conduct and thus was not covered. The insurer pointed to the insuring agreement that required a negligent act, error or omission while also arguing that the language of the conduct exclusion did not support coverage. The conduct exclusion precluded coverage for actions alleging criminal, dishonest, fraudulent or malicious conduct, but required that the insurer pay defense costs until such time as there was a final adjudication as to intentional wrongdoing. The insurer asked the court to disregard the conduct exclusion’s requirement of defense costs coverage prior to a final adjudication, on the grounds that an exclusion could not create coverage for intentional wrongdoing. The court was not persuaded by this argument, reasoning that the conduct exclusion “evinces an unambiguous intent to afford a defense (at least temporarily) for claims of intentional conduct.” Thus, the insurer was required to pay defense costs incurred in defending allegations of both negligent and intentional conduct. The court also ruled that the FCA lawsuit could be construed to have alleged negligent conduct. Second, the insurer argued that an exclusion for actions brought by or against government entities in their regulatory or official capacities applied. The court also was not persuaded by this argument, reasoning that the federal government had declined to participate in the FCA lawsuit. The FCA lawsuit had been pursued by private parties without government intervention, and the exclusion could not be read to apply simply because the FCA lawsuit would further the federal government’s regulatory and official objectives. Moreover, the court reasoned that even if the FCA lawsuit could be considered brought on behalf of the federal government, the exclusion still would not apply because the FCA lawsuit also was brought on behalf of a private plaintiff.
Federal Court Requires Insurer To Defend Restitution Claims.
By: Jan A. Larson
In denying an insurer’s motion for reconsideration, the U.S. District Court for the Western District of Pennsylvania affirmed its earlier ruling requiring the insurer to defend restitutionary claims where such claims are offset by a benefit provided, or services rendered, by the policyholder using the funds at issue. In Peerless Insurance Co. v. Pennsylvania Cyber Charter School, No. 12-cv-1700 (W.D. Pa. Aug. 29, 2014), the insurer, Peerless Insurance Company (“Peerless”), sought a declaratory judgment that it had no duty to defend or indemnify its policyholder, Pennsylvania Cyber Charter School (“PA Cyber”), against an underlying lawsuit brought by several county school districts alleging that they were entitled to the return of certain funds pursuant to a recent ruling by the Pennsylvania Supreme Court in another case. On cross motions for summary judgment, the court granted PA Cyber’s motion seeking to enforce the insurer’s duty to defend and denied the insurer’s motion seeking to avoid a defense and indemnity. The insurer later filed a motion for reconsideration as to its duty to defend. In denying that motion as well, the court first held that the return of funds sought in the underlying claims constituted a “loss” to PA Cyber in satisfaction of the policy’s insuring agreement because PA Cyber had used the funds, as intended, to educate children in the school districts. The court noted that other jurisdictions have not uniformly excluded restitutionary claims from the definition of “loss” where the restitutionary funds are offset by a benefit provided, or services rendered, by the policyholder. Moreover, during the time period alleged in the underlying complaint, PA Cyber was legally entitled to collect and use the funds as it did because the Pennsylvania Supreme Court had not yet issued its ruling in Slippery Rock Area School District v. Pennsylvania Cyber Charter School, 31 A.3d 657 (Pa. 2011), which changed the law regarding the collection and use of such funds. As a result, the court held that PA Cyber did not receive a profit or advantage to which it was not entitled at the relevant time and rejected the insurer’s remaining defenses based on the Illegal Profit or Advantage Exclusion and Pennsylvania public policy.
Appellate Court Rules Excess Policy Attaches Even Though Underlying Insurers Did Not Pay Out Full Limits.
A Texas Appellate Court recently decided that an excess insurance policy attached even though underlying insurers paid out less than their full policy limits in settlement. Plantation Pipe Line Co. v. Highlands Ins. Co., No. 11-12-0029 (Tex. Ct. App. Aug. 29, 2014). The policyholder incurred close to $12 million in environmental cleanup costs and then sought coverage from its liability insurers. After the policyholder settled coverage with it three underlying insurers for $4.55 million, the policyholder then sought coverage from Highlands. Highlands provided coverage excess of $8 million in underlying limits. The policyholder sought coverage only excess of $8 million, arguing that it could fill the gap with its own money between the $4.55 million paid by its underlying insurers and the $8 million attachment point of the Highlands policy. On Highland’s motion for summary judgment, the trial court denied coverage by ruling that the Highland’s policy only attached after the underlying insurers had paid or been held liable to pay the full $8 million. On appeal, the Texas Appellate Court revered. The court reasoned that the language used in the Highlands policy did not require the underlying insurers to have paid their full policy limits prior to the Highlands policy attaching. Instead, the language unambiguously required only that the underlying insurers, the policyholder or some combination of both had paid or been held liable to pay the $8 million in underlying limits. According to the Court, this interpretation of the language also prevented a conflict between other policy provisions.
Federal Court Finds That Payments Required By Law Do Not Violate The Voluntary Payments Provision.
By: Jan A. Larson
In a recent decision by the U.S. District Court for the Western District of Pennsylvania, the court held that a policyholder had not violated the “voluntary payments” clause in its insurance policy where the payments it made prior to requesting the insurer’s consent were required by state law. First Commonwealth Bank v. St. Paul Mercury Ins. Co., (W. Pa. Oct. 6, 2014). On or about August 31, 2012, a customer of First Commonwealth Bank (“First Commonwealth”) was the victim of malware that allowed an unknown third party to access the customer’s computer system and obtain the online banking username and password for the customer’s accounts at First Commonwealth. Following the breach, the unknown third party initiated three unauthorized wire transfers from the customer’s accounts between August 31, 2012 and September 4, 2012, totaling more than $3.5 million. Once discovered, First Commonwealth was able to recover only $76,520 of the stolen funds and had to reimburse the remainder using its own funds. First Commonwealth subsequently tendered the claim to its insurer, St. Paul Mercury Insurance Company (“St. Paul”). St. Paul denied coverage, arguing that by reimbursing the funds to the customer without St. Paul’s consent First Commonwealth violated the “voluntary payments” clause in the insurance policy, which provided that “[t]he Insureds agree not to settle or offer to settle any Claim . . . [or] voluntarily make any payment . . . without the Insurer’s written consent.” The district court rejected St. Paul’s argument, noting that First Commonwealth was obligated to promptly reimburse the funds to its customer under Pennsylvania law—13 Pa. C.S.A. § 4A204. As a result, the district court held that First Commonwealth’s payments were not “voluntary” for purposes of applying the “voluntary payments” clause to exclude coverage.
Delaware Court Preserves Coverage in Recent “Related Claims” Decision.
By: Jan A. Larson
In a recent pro-coverage ruling, the Delaware Superior Court rejected an insurer’s argument that the policyholder’s claim fell outside the current policy period based on its alleged relationship to several prior claims. RSUI Indemnity Co. v. Sempris, LLC, No. N13C-10-096 (Del. Sup. Sept. 3, 2014) (“Sempris”). The policyholder, Sempris, LLC (“Sempris”), had been named in an underlying putative class action in which it was alleged that Sempris and its telemarketing company violated the Telephone Consumer Protection Act (“TCPA”) in making unsolicited telemarketing phone calls – Sarah Toney, et al. v. Quality Resources, Inc. et al., No. 13-cv-42 (N.D. Ill.) (the “Toney Action”). Sempris tendered the Toney Action to its directors and officers insurer—RSUI Indemnity Company (“RSUI”)—which denied any duty to defend or indemnify and filed a declaratory judgment action. On cross-motions for summary judgment, RSUI argued that the Toney Action was related to certain prior actions that had been filed against Sempris and therefore was not a claim first made during its policy period. Rejecting RSUI’s arguments, the court held that the Toney Action was not related to the Prior Actions. In each of the prior actions, the plaintiffs alleged that they contacted a third-party product vendor to purchase various consumer products and were enrolled in Sempris’ membership program as part of the same transaction, which they were later billed for. The later claims against Sempris were fraud-based, alleging that the plaintiffs had not consented to enrollment in the membership program as part of their purchase. By contrast, the plaintiff in the Toney Action alleged that she placed an online order with a third-party product vendor and was subsequently contacted by a third-party telemarketer about enrollment, notwithstanding that the plaintiff’s telephone number allegedly was listed on the National Do Not Call Registry. Indeed, it was the alleged initiation of the autodialer contact to the plaintiff’s telephone number that gave rise to the TCPA claims in the Toney Action. None of the allegations in the prior actions formed the basis of a claim under the TCPA. Likewise, none of the fraud-based allegations at issue in the prior actions are present in the Toney Action because the plaintiff there was never enrolled in, or billed for, the Sempris membership program. According to the court, these factual differences were critical against a backdrop of strong Delaware precedent supporting a broad interpretation of common “relatedness” policy language.
Verdict Against Tobacco Company Reversed On Causation Grounds.
By: Barry Levenstam
In Aycock v. R.J. Reynolds Tobacco Co., 769 F.3d 1063 (11th Cir. 2014) (No. 13-14060), the Eleventh Circuit addressed a tobacco company’s challenge to a $6 million verdict against it in a wrongful death negligence case. Plaintiff alleged that her decedent died from lung cancer caused by smoking. Defendant attempted to defend on the ground that decedent’s death resulted from other causes, including alcohol abuse, and noted that the decedent’s family’s decision not to permit a pulmonary biopsy left the matter in some doubt. The Eleventh Circuit deemed error the trial court’s decisions: (i) to impose the same standard of proof on defendant’s proposed alternative causes of death that it imposed on plaintiff’s proof of cause of death, and (ii) to reject defendant’s evidence of alcohol abuse on the issue of causation based upon Federal Rule of Evidence 403’s balancing test. As to (i), the Eleventh Circuit held that Florida law requires plaintiff to prove by a preponderance of the evidence the cause of death in order to establish negligence, and permits defendants to advance other possible causes of death without requiring defendants to prove any one of those causes as the actual cause of death by a preponderance of the evidence. As to (ii), the court ruled that the rejection of evidence that alcohol abuse caused decedent’s death improperly restricted defendant’s defense and failed to ameliorate prejudice because the trial court had admitted the alcohol abuse evidence for the purpose of assessing compensatory damages. Thus, the Eleventh Circuit reversed the judgment for plaintiff and remanded for a new trial.
Montana Supreme Court Rejects “Safe As Used” Defense.
By: Barry Levenstam
In Kenser v. Premium Nail Concepts, Inc., No. 13-0499 (Mont. Oct. 21, 2014), the Montana Supreme Court heard an appeal by plaintiff from defendant’s verdict in a case alleging that the plaintiff suffered injury by being exposed to defendant’s liquid acrylic nail product. Despite granting plaintiff’s motion for partial summary judgment on the ground that her use of the product was not unreasonable or unforeseeable, the trial court allowed the defendant to offer evidence at trial over plaintiff’s objection that its product was “safe as used,” and refused to permit plaintiff to cross-examine defendant’s witnesses on the issue whether defendant and the nail care industry knew of the prevalence of skin contact among users of this product. The trial court had instructed the jury that the plaintiff did not misuse the product, but then defined the phrase “safe as used” for the jury as addressing the use of a specific ingredient in a product and not addressing how the consumer uses the product, thus confusing the jury as to the issue at hand. The Montana Supreme Court held that the trial court committed multiple errors, first, in permitting the defendant to adduce evidence of, and argue, its “safe as used” defense ground where the trial court already had determined there was no misuse; second, in prohibiting cross-examination by plaintiff on that very ground; and third, in providing a definition of “safe as used” that was unsupported by Montana law. For these reasons the court reversed and remanded for a new trial.
Fifth Circuit Affirms Defense Judgment In Airbag Failure Case.
By: Barry Levenstam
In Casey v. Toyota Motor Engineering & Manufacturing North America, Inc., No. 13-11119 (5th Cir. Oct. 20, 2014), the Fifth Circuit addressed an appeal by plaintiff of a jury verdict for defendant in a case alleging that plaintiff’s decedent died as a result of a defect in the airbag in her car. The Fifth Circuit held that plaintiff successfully adduced evidence that the airbag was supposed to remain inflated for five seconds but deflated after two seconds. The court held, however, that plaintiff failed to establish a design defect because he failed to present evidence that a safer alternative design existed. Although plaintiff had adduced some evidence of an alternative design, he failed to provide evidence that the alternative design would satisfy a risk-utility analysis and that the design was technologically and economically feasible. As a result of the plaintiff’s failure of proof, the Fifth Circuit affirmed the jury verdict for defendant.
Punitive Award Upheld Despite Reduction In Compensatory Damages.
By: Barry Levenstam
In Izell v. Union Carbide Corp., No. B245085 (Cal. Ct. App. Oct. 22, 2014), the California Court of Appeal addressed a challenge to an $18 million punitive damage award as excessive in an asbestos exposure case. The jury had awarded plaintiffs $30 million in compensatory damages, but the trial court had remitted the compensatory award to $6 million without reducing the jury’s $18 million punitive award. After first rejecting the defendant’s challenge to the sufficiency of the evidence of defendant’s liability, the Court of Appeal addressed the question whether the $18 million punitive award is unconstitutional compared to the remitted $6 million compensatory damage award. The court noted that its “constitutional mission” is to determine a maximum above which the punitive award may not go, not to find the “right” level for a punitive award in the court’s own view. Observing that the ratio of punitive damages to compensatory damages after the remittitur was less than 5 to 1, the Court of Appeal concluded that this ratio is not presumptively invalid. The court then addressed the degree of reprehensibility of the conduct at issue under the U.S. Supreme Court’s decisions in Gore, 517 U.S. 559 (1996) and State Farm Mutual, 538 U.S. 408 (2003). Noting that the harm caused was physical and that the trial evidence showed defendant to have acted with indifference to the safety of others by continuing sales of asbestos products for more than a decade after learning of the danger of its product, the court concluded that defendant’s conduct qualified as reprehensible. The court also noted that defendant stipulated to a present net worth of $4.2 billion. These factors led the Court of Appeal to affirm the punitive award without reduction.
No Need For Expert Where Consumers Familiar With Function Of Product.
By: Barry Levenstam
In Nance v. Toyota Motor Sales USA, Inc., No. 13-cv-8011 (D. Ariz. Sept. 22, 2014), the defendant moved for summary judgment, arguing that plaintiff’s proof was insufficient as she did not retain a qualified expert to testify in support of her claim that defendant’s seat belt was defective and caused the decedent to be ejected from a car during a rollover accident. The court denied the motion, noting that Arizona permits proof of a strict liability or negligence under one of two tests, the “Consumer Expectation Test” or the “Risk/Benefit Analysis Test.” To satisfy the former test, a plaintiff must show that the product failed to perform as safely as an ordinary consumer would expect when it is used in a reasonable, intended manner. Arizona permits the Consumer Expectation Test to be applied to claims targeting products with which consumers have a great deal of familiarity. It held that seatbelts are a familiar product whose basic function is well known and understood by the general population. Consequently, the Consumer Expectation Test is appropriate in this case. Further, because of ordinary consumers’ familiarity with seatbelt design and function, a jury could reasonably resolve the case without the benefit of an expert testifying on behalf of plaintiff, so that the absence of an expert was not fatal to plaintiff’s claim.
Defense Evidence Concerning Fault Attributable To Non-Parties Discoverable.
By: Barry Levenstam
In Dover v. R.J. Reynolds Tobacco Co., No. 09-cv-11531 (M.D. Fla. Sept. 22, 2014), the district court addressed a motion in limine filed by plaintiff seeking to bar defendants from introducing evidence to show that plaintiff had smoked a non-party’s cigarettes for an extended period of time. Defendants planned to introduce this evidence to rebut plaintiff’s causation evidence and to refute plaintiff’s claim that the specific design of defendant’s cigarettes stopped plaintiff from quitting smoking. The court held that defendants could adduce evidence of plaintiff’s use of another company’s cigarettes for these purposes.
Second Circuit Revives JP Morgan Whistleblower Suit Under New Standard.
The Second Circuit issued a non-precedential summary order directing Judge Sweet of the Southern District of New York to reassess a former JP Morgan vice president’s Sarbanes-Oxley whistleblower suit against the bank in light of another recent Second Circuit opinion. Sharkey v. J.P. Morgan Chase & Co.,580 F. App’x 28 (2d Cir. 2014) (No. 13-4741). The district court granted JP Morgan summary judgment on the whistleblower’s lawsuit under an old standard requiring the whistleblower to show that her complaints “definitively and specifically” related to one of the six enumerated categories of misconduct identified by the Sarbanes-Oxley Act and therefore constituted protected activity. Subsequent to that decision, the Second Circuit adopted a new, more lenient standard: whether the whistleblower reasonably believed that the client she reported for potential fraudulent activities was violating federal law. Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 221–22 (2d Cir. 2014). The Second Circuit observed that if the district court determines that the whistleblower engaged in protected activity under the more lenient Nielsen standard, the district court would need to analyze whether the identified protected activity “was a contributing factor in the unfavorable action,” and if so, whether JP Morgan could demonstrate “with clear and convincing evidence that [they] would have taken the same unfavorable personnel action in the absence of [that] protected behavior.”
Attorney General Urges Focus On Individuals In Corporate Crime.
Attorney General Eric Holder recently gave a speech on financial fraud as an enforcement priority. Eric Holder, Attorney Gen., Remarks on Financial Fraud Prosecutions at NYU School of Law(Sept. 17, 2014). Holder highlighted the value of bringing enforcement actions against individual executives in addition to the companies that employ them. Holder said that these individual actions enhance accountability, promote fairness by punishing the bad actor as opposed to innocent employees and shareholders, and increase deterrence. Holder proposed that the government create better incentives for witnesses to come forward, and suggested that the government remove or increase the $1.6 million cap on whistleblower payments under the whistleblower provision of the Financial Institutions Reform, Recovery, and Enforcement Act.
Worker-Friendly Whistleblower Standard For What Constitutes Protected Activity.
An alleged whistleblower seeking redress for a retaliatory employment termination need not show that his protected activity related “definitively and specifically” to one of six enumerated categories under the Sarbanes-Oxley Act. Rather, to demonstrate he engaged in SOX-protected activity, an alleged whistleblower must only show that he reasonably believed the conduct he reported violated one of the six enumerated categories. Taylor v. Fannie Mae, No. 11‑cv‑01189 (D.D.C. Aug. 25, 2014). “Reasonable belief” in this context means the alleged whistleblower must show he had both a subjective belief and an objectively reasonable belief that the conduct he complained of constituted a violation of relevant law. In so holding, the federal district court gave the Administrative Review Board of the Department of Labor’s rejection of the “definitive and specific” requirement Chevron deference, as Congress did not directly address the precise question at issue.
Largest Ever Whistleblower Award Announced By SEC.
On September 22, 2014, the SEC issued a press release announcing an expected award of over $30 million to a whistleblower who provided original information about an ongoing fraud, which led to a successful SEC enforcement action. Press Release, SEC, SEC Announces Largest-Ever Whistleblower Award, Release No. 2014-206 (Sept. 22, 2014). According to the SEC, the ongoing fraud would have been difficult to detect without the information provided by the whistleblower, who is a foreign national. The Chief of the SEC’s Office of the Whistleblower also emphasized that this award “shows the international breadth of our whistleblower program” and encouraged “anyone, anywhere” to come forward.
6th Cir. Adopts New Corporate Scienter Standard For Securities Cases.
In In re Omnicare, Inc. Securities Litigation, 769 F.3d 455 (6th Cir. 2014) (No. 13-5597), plaintiff shareholder alleged that the individual and corporate defendants committed securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934. The district court dismissed the action, holding, among other things, that plaintiff had failed to plead sufficient facts to establish the scienter element with respect to the corporate defendant. On appeal, the Sixth Circuit addressed the corporate scienter doctrine, noting that several of its sister circuits had adopted different standards. Finding none of those approaches ideal, the court adopted its own standard, stating that a plaintiff can establish that a corporation has the requisite scienter under § 10(b) by showing that any of the following individuals acted with scienter: (1) the individual who made the misrepresentation; (2) any agent who authorized, requested, prepared, furnished information for, reviewed, or approved the statement in which the misrepresentation was made; or (3) any high managerial agent or member of the board of directors who ratified, recklessly disregarded, or tolerated the misrepresentation after its issuance. The court stated that this approach went a long way toward solving the flaws of the other circuits’ approaches, and struck an appropriate balance between preventing companies from evading liability through tacit encouragement and willful ignorance, while still protecting companies from strike suits based upon the knowledge of low-level employees unconnected to the preparation or issuance of the relevant statements. Applying this new standard, the court affirmed the district court’s dismissal, holding that the persons alleged to have acted with scienter were not within any of the above categories.
U.S. Wire Transfer Not A “Domestic Transaction” Under Securities Laws.
In Loginovskaya v. Batratchenko, 764 F.3d 266 (2d Cir. 2014) (No. 13-1624), plaintiff, a Russian citizen, brought claims under the Commodities Exchange Act (CEA), 7 U.S.C. § 1, et seq., alleging that while in Russia, defendants fraudulently induced her into investing in a New York corporation. The district court dismissed the case, and the Second Circuit affirmed. The court first noted that the CEA was silent on its extraterritorial effect and, drawing upon decisions relating to § 10(b) of the Securities Exchange Act of 1934, held that the CEA applied only to domestic commodities transactions. The court then rejected plaintiff’s argument that she had sufficiently alleged a domestic transaction because she wire-transferred her funds to defendant’s bank account in New York. The court ruled that the wire transfer was merely the action needed to carry out the transaction, and not the transaction itself, and thus was insufficient to demonstrate a domestic transaction. The court found that because the parties undisputedly negotiated, reached a meeting of the minds, and executed the contracts in Russia, plaintiff could not establish a domestic commodities transaction and, therefore, could not state a claim under the CEA.
Foreign Official Relinquishes $30 Million In U.S. Assets Purchased Through Corruption.
By: Jessie K. Liu
The DOJ has announced that Teodoro Nguema Obiang Mangue (“Obiang”), the Second Vice President of the Republic of Equatorial Guinea and the son of that nation’s President, has agreed to relinquish more than $30 million in assets allegedly purchased with the proceeds of corruption. Stipulation and Settlement Agreement, United States v. One Michael Jackson Signed Thriller Jacket and Other Memorabilia, No. 13-9169 (C.D. Cal. Oct. 10, 2014). The agreement requires Obiang to sell a $30 million mansion in Malibu, California, a Ferrari automobile, and various pieces of Michael Jackson memorabilia. Twenty million will be given to a charitable organization to benefit the people of Equatorial Guinea, while $10 million will be forfeited to the United States and used to benefit the people of Equatorial Guinea to the extent lawfully permitted. The matter was prosecuted by the DOJ Criminal Division’s Asset Forfeiture and Money Laundering Section under its Kleptocracy Asset Recovery Initiative.
Supreme Court Denies Certiorari In Case Challenging “Instrumentality” Finding.
By: Jessie K. Liu
The Supreme Court denied the petition for certiorari filed by Joel Esquenazi and Carlos Rodriguez, former telecommunications executives convicted of FCPA violations for paying kickbacks to employees of the Haitian state telecommunications company, Telecommunications D’Haiti S.A. (“Haiti Telco”). Esquenazi v. United States, 135 S. Ct. 293 (2014) (No. 14-189) (mem.). Esquenazi and Rodriguez had urged the Court to review the Eleventh Circuit’s holdings that Haiti Telco is an “instrumentality” of the Haitian government for purposes of the FCPA and that its employees are foreign officials.
SEC Settlement After Self-Reporting FCPA Violations And Cooperating In Investigation.
By: Jessie K. Liu
The SEC issued an order instituting settled administrative proceedings against Layne Christensen Company (“Layne Christensen”), a water management, construction, and drilling concern based in Texas. The SEC charged the Company with violating the anti-bribery, books and records, and internal controls provisions of the FCPA by making improper payments to foreign officials in several African countries, typically through subsidiaries in Africa and Australia, in exchange for reducing its tax and customs liabilities and to obtain border entry for its equipment and employees. Layne Christensen Co., Exchange Act Release No. 73,437(Oct. 27, 2014). Layne Christensen self-reported its misconduct and cooperated extensively with the SEC’s investigation, including providing the SEC with real-time reports of its internal investigation, producing English translations of foreign-language documents, and making foreign witnesses available for interviews. Layne Christensen settled the charges for more than $5 million without admitting or denying the SEC’s findings, which included the conclusion that it had received approximately $3.9 million in improper benefits. The settlement also requires Layne Christensen to report to the SEC on the status of its remediation and compliance efforts for a period of two years.
SEC Alleges Compliance Officer Altered Document.
(Author: Robert R. Stauffer)
The SEC recently announced an enforcement action against a former compliance officer who allegedly altered a document before it was produced to the SEC during an investigation. Judy K. Wolf, Exchange Act Release No. 73,350(Oct. 15, 2014). According to the SEC’s order initiating the administrative proceeding, the former compliance officer for Wells Fargo Advisors was responsible for identifying potentially suspicious trading by firm personnel, customers or clients, and for analyzing whether identified trades may have been based on material nonpublic information. In September 2010, the officer created a document to summarize her review of trading by a particular broker and closed the review with no findings. The SEC subsequently charged the broker with insider trading. In 2012, the SEC requested documents from Wells Fargo. In December 2012, the officer allegedly altered the document to make it appear that she had performed a more thorough review than she actually had, and Wells Fargo then provided the document to the SEC. SEC staff discovered the alteration and asked the officer about it. The officer initially denied altering the document but later testified that she had done so. The SEC is charging the officer with aiding and abetting and causing Wells Fargo to violate provisions of the securities laws related to recordkeeping and records production.
Courts Examine Liability For Corporate Compliance Statements.
(Author: Robert R. Stauffer)
Public corporations find themselves increasingly defending shareholder lawsuits alleging that they misled investors by making general public statements about their compliance programs. Courts analyzing these claims have provided mixed results, and this month we examine two recent illustrative decisions.
In City of Brockton Retirement System v. Avon Products, Inc., No. 11 Civ. 4665 (S.D.N.Y. Sept. 29, 2014), shareholders accused Avon Products, Inc. and two of its officers of issuing materially false and misleading statements concerning Avon’s compliance with the Foreign Corrupt Practices Act. Avon announced on October 20, 2008 that it had received credible allegations of FCPA violations in connection with its Chinese operations, it was conducting an internal investigation, and it had voluntarily alerted the Department of Justice and the Securities and Exchange Commission. Subsequent announcements followed, leading to an announcement on October 27, 2011 that the SEC had opened a formal investigation. Plaintiffs alleged that beginning in 2006, Avon had made false and misleading statements and omissions about compliance with the FCPA and its international operations – including that the company was committed to high legal and ethical standards and that its success in developing markets was due to legitimate business strategies. It also allegedly made statements about its legal compliance and its internal FCPA investigation without disclosing that its actual compliance efforts were inadequate or nonexistent. The court found that a reasonable investor would not rely on the company’s general statements of its commitment to compliance, as investors do not rely on puffery or generalizations about integrity. Other statements, however, went beyond mere generalizations and addressed concrete steps the company had taken to ensure the integrity of its financial reporting, such as a statement that the company had a “comprehensive and well-documented set of internal controls that provides reasonable assurance that [its] financial transactions are recorded accurately and completely . . . .” The court found those statements to be material. The court found, however, that plaintiffs’ allegations failed to state a claim because they did not adequately plead facts sufficient to give rise to a strong inference of scienter under the Private Securities Litigation Reform Act. In particular, plaintiffs had not pled specific facts showing that specific officers were aware of the alleged bribery scheme at the time the public statements were made, and thus granted defendants’ motion to dismiss.
In City of Pontiac General Employees’ Retirement System v. Wal-Mart Stores, Inc., No. 12-CV-5162 (W.D. Ark. Sept. 26, 2014), shareholders sued Wal-Mart Stores, Inc. and its CEO in connection with alleged FCPA violations. Plaintiffs alleged that the defendants deceived the public by filing an SEC form on December 8, 2011, stating that it was conducting a voluntary review of its anti-corruption compliance program and an internal investigation into whether certain matters were in compliance with the FCPA. The filing also stated that the company had voluntarily disclosed its investigation to the DOJ and SEC. Plaintiffs alleged that the statement omitted the fact that the company had learned of the suspected corruption in 2005 and conducted an investigation in 2006. The court denied Wal-Mart’s motion to dismiss, finding that plaintiff had adequately pled that the statement was materially misleading to a reasonable investor, which could have been left with the impression that the defendants first learned of the suspected corruption in 2012, prompting their investigation and self-reporting. The court also found plaintiffs to have adequately met the PSLRA standard for pleading scienter, citing the allegation that in 2005, a top Wal-Mart attorney had given a detailed description of the suspected corruption allegations to the CEO (who at the time was Vice Chairman and head of Walmart International), who rejected calls for a legitimate independent investigation and instead assigned the investigation to the office that was implicated in the scheme. As part of its analysis, the court provided an attempt to bridge competing courts of appeals decisions on the standard for corporate scienter, and held that the states of mind of any of the following persons are probative for purposes of determining whether misrepresentations were made by the corporation with the requisite scienter: (1) the individual agent who uttered or issued the misrepresentation; (2) any individual agent who authorized, requested, commanded, furnished information for, prepared, reviewed or approved the statement in which the misrepresentation was made before its utterance or issuance; or (3) any high managerial agent or board member who ratified, recklessly disregarded, or tolerated the misrepresentation after its utterance or issuance.
Allegations Of Board Inaction On Compliance Sufficed To Excuse Demand.
(Author: Robert R. Stauffer)
In Rosenbloom, v. Pyott., 765 F.3d 1137 (9th Cir. 2014) (No. 12-55516), shareholders brought a derivative action against directors of Allergan, Inc., alleging breach of fiduciary duties and other violations in connection with alleged off-label marketing by Allergan of its product Botox. The allegations arose out of a 2007 qui tam allegation and a 2010 criminal information, to which Allergan pled guilty. The defendants moved to dismiss the derivative complaint for failure to demand that the board of directors bring a derivative action and failure to sufficiently allege that demand was excused. The court noted that demand is excused if particularized allegations create a reasonable doubt as to whether a majority of the board faces a substantial likelihood of personal liability for breaching the duty of loyalty. Here, plaintiffs alleged with particularity facts showing that the Board closely and regularly monitored off-label Botox sales; it took a specific interest in certain off-label sales programs; it determined that off-label sales were critical to achieving desired profit margins; it received data directly linking sales programs to fluctuations in off-label sales; it received FDA warnings about illegal promotion of Botox; it was informed that an employee resigned after filing an ethics complaint charging the sales division with improper off-label promotions; and the illegal conduct was widespread and enduring. Taking all of these “red flags” together, the court found they created a reasonable inference of conscious inaction by the Board, and determined that demand should be excused. Accordingly, it found the district court abused its discretion in dismissing the complaint.
Russian Subsidiary Pleads Guilty To FCPA Violation-$58.8 Million Fine Imposed.
By: Jessie K. Liu
ZAO Hewlett-Packard A.O. (“HP Russia”), a Russian subsidiary of Hewlett-Packard Company (“HP”), pleaded guilty to a four-count criminal information charging it with conspiracy to violate the Foreign Corrupt Practices Act (“FCPA”) and substantive violations of the FCPA’s anti-bribery, internal controls, and books-and-records provisions. See Plea Agreement, United States v. Zao Hewlett-Packard A.O, No. 14-CR-201 (N.D. Cal. Apr. 9, 2014). HP Russia was required to pay a fine of $58,772,250. According to the statement of facts filed with the plea agreement, HP Russia used a buy-back scheme to finance a slush fund that was used to bribe Russian government officials who awarded the company a contract with Russia’s Office of the Prosecutor General valued at more than €35 million. Specifically, HP Russia sold products to a Russian partner, bought the same products back through an intermediary at a markup, and then sold them to the Office of the Prosecutor General at the inflated price. The payments to the intermediary were transferred through various shell companies to government officials. HP Russia also maintained two sets of books to conceal the bribery. Earlier this year, HP’s Polish and Mexican subsidiaries entered into a deferred prosecution agreement and a non-prosecution agreement, respectively, related to FCPA violations. HP itself agreed with the SEC to pay $31,472,250 in disgorgement, prejudgment interest, and civil penalties.
Compliance Officer Allowed To Proceed With Whistleblower Retaliation Claims.
In Stein v. Tri-City Healthcare District, No. 3:12-CV-2524 (S.D. Cal. Aug. 27, 2014), defendant moved for summary judgment with respect to plaintiff’s anti-retaliation complaint. Plaintiff had been employed as the defendant’s Senior Vice President of Legal Affairs and Chief Compliance Officer. He allegedly raised concerns that proposed transactions would lead to violations of the False Claims Act. He communicated his concerns to the Chief Executive Officer, the Chief Operating Officer, and outside counsel, and raised them again during an executive meeting. He also sought a meeting with certain board members to discuss the issue, but that request was denied. He was subsequently terminated and brought suit under the anti-retaliation provision of the False Claims Act and under state law. Defendant sought summary judgment on the basis that the plaintiff’s reports were part of his normal day-to-day duties as a compliance officer and thus he could not show that the employer knew about his protected activities. Noting that the Ninth Circuit has not yet weighed in on this issue, the court followed other courts of appeals which have held that compliance officers must prove they went beyond their normal job duties in order to show employer notice that they were engaged in protective conduct. The court found that plaintiff satisfied this standard because he made multiple reports outside of his usual chain of command. The employer thus failed to meet its burden of showing that plaintiff could not prove the employer knew of plaintiff’s protected activity, and denied defendant’s motion for summary judgment.
Corporate Compliance Documents Exempt From FOIA Disclosure.
In Public Citizen v. U.S. Department of Health & Human Services, No. 11-1681 (D.D.C. Sept. 5, 2014), a public interest group challenged the decision of HHS to withhold from a FOIA production various compliance materials submitted by Pfizer Inc. and Purdue Pharma L.P., which intervened and submitted affidavits in support of HHS’ position. Plaintiff had requested all annual reports submitted by the companies to HHS pursuant to Corporate Integrity Agreements that resolved government allegations of off-label promotion of pharmaceutical products. HHS withheld several categories of materials pursuant to Exemption 4, which covers “trade secrets and commercial or financial information obtained from a person and privileged or confidential.” The withheld materials consisted of reportable events summaries, disclosure log summaries, information regarding actions taken in response to screening and removal obligations for ineligible persons, and documents reflecting the content of detailing sessions between sales reps and health care providers. The court had little trouble finding that the materials were “commercial,” in that materials described basic business operations and thus served “a commercial function” or were “of a commercial nature.” Plaintiff argued that the materials could not satisfy the “confidential” prong of Exemption 4 because some of the materials may pertain to illegal activity. The court found that even if the activities described in the materials might be deemed illegal, the activities retained their commercial and confidential nature. The court accepted the companies’ arguments that they had invested considerable resources in developing business practices that allowed them to stay within the bounds of the law in a complex regulatory environment where it is not always easy to determine whether a given practice is legal or illegal. Public disclosure of this information, the court agreed, would provide a free roadmap to competitors who would not have to invest the same resources. The court also noted that the companies maintain tight internal controls on the materials. Accordingly, the court denied plaintiff’s motion for summary judgment and granted summary judgment to HHS.
Whether “Vice President” Was An Officer Entitled To Indemnification Is Ambiguous.
In Aleynikov v. Goldman Sachs Group, Inc., 765 F.3d 350 (3d Cir. 2014) (No. 13-4237), the plaintiff had been employed by Goldman Sachs as a computer programmer with a title of Vice President. Before departing Goldman to work at a competitor, he downloaded source code into computer files and transmitted the files outside of Goldman. Goldman discovered the transfer and notified law enforcement authorities. Plaintiff was arrested and charged with federal offenses. He was convicted, but his conviction was overturned by the Second Circuit, which concluded that his conduct did not violate federal law. He was then charged by the State of New York with violations of state law. In the meantime, he initiated a separate action to compel Goldman to indemnify him for attorneys’ fees he had incurred in his defense and to advance future attorneys’ fees. He relied on Goldman by-laws which provided for indemnification and advancement to any “officer” or, for non-corporate subsidiaries such as the one where plaintiff worked, “any person serving in a similar capacity or as the manager of such entity.” The Third Circuit found that the term “officer” was ambiguous, and resort to dictionary definitions did not help. It found somewhat helpful, but not determinative, extrinsic evidence submitted by Goldman concerning course of dealing and trade usage, including evidence that “title inflation” in the investment banking industry had rendered the term “vice-president” nearly meaningless. It rejected the notion that the term should be construed against the drafter – Goldman – because it was not established that plaintiff was even a party to or a beneficiary of the contract. Accordingly, the court determined that the meaning of officer was a question of fact and that summary judgment for neither party was appropriate.