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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.
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Arbitration Clause Incorporated By Reference In Contract Is Enforceable.
By: Howard S. Suskin
Granting a motion to dismiss a putative class action in favor of arbitration in Wendrovsky v. Chase Paymentech,No. 12-Civ.-00704 (S.D.N.Y. Oct. 15, 2012) (mem. & order), the district court concluded that a contract effectively incorporated by reference another document containing an enforceable arbitration clause among other terms and conditions. Plaintiffs signed a “Merchant Application and Agreement” that did not itself contain an arbitration clause. However, a fax cover sheet accompanying that document contained an internet link and indicated that plaintiffs could visit that website “to assess our Terms and Conditions.” The Merchant Application and Agreement itself expressly referenced the Terms and Conditions and contained an acknowledgement that plaintiffs had received and read them. Despite plaintiffs’ argument that they never reviewed the Terms and Conditions, the court concluded that the references to “Terms and Conditions” sufficiently placed plaintiffs on notice that a separate document existed, and held that plaintiffs were bound by its provisions.
Continued Employment Is Not An Assent to Arbitration.
By: Howard S. Suskin
Denying an employer’s motion to compel arbitration against an employee (“Plaintiff”), the court rejected the employer’s argument that, although Plaintiff did not sign an arbitration agreement that had been tendered to her, she assented to it by her continued employment. Gorlach v. Sports Club Co.,209 Cal. App. 4th 1497 , (Cal. Ct. App. 2012)(No. B233672). The employer tendered a new arbitration agreement to the plaintiff, along with all her co-workers. In fact, the plaintiff was tasked with the responsibility of ensuring that all the other workers signed the new agreement. She obtained the other workers’ signed agreements, but she did not sign one herself. Subsequently, she sued the employer for a variety of employment-related claims, and the employer moved to compel arbitration. The employer contended that even though Plaintiff did not sign the arbitration agreement, she was bound by it as a matter of law because she continued to work for the employer after learning that the agreement was a condition of employment. Rejecting that argument, the court noted that the employer had asked Plaintiff to sign the agreement, but she had not done so, thus reflecting her intent not to be bound by it. The court distinguished cases in which an employer unilaterally imposes an arbitration requirement in an employee handbook as a condition of employment but does not require signatures; in those instances, arbitration may be compelled. However, where, as here, the employees are told that they must sign an arbitration agreement, that implies that the agreement is not effective until and unless they do so.
Email Link Insufficient To Form Assent To Arbitration Clause.
By: Howard S. Suskin
Affirming the denial of a motion to compel arbitration, the Second Circuit found that an email link to an arbitration agreement did not provide sufficient notice of the arbitration clause to a putative class of consumers. Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012) (No. 11-1311). The consumers enrolled in the vendor’s discount services program online. The court ruled that an unsolicited email from the vendor to the consumers after enrollment in the vendor’s program did not put the consumers on inquiry notice of the terms enclosed in that email. Moreover, a consumer’s failure to act affirmatively to cancel the membership would not, alone, constitute assent to the terms of the arbitration clause.
Arbitration Clause Trumps Vindication Of Statutory Rights Arising Under State Law.
By: Howard S. Suskin
Unlike vindication of federal statutory rights, vindication of rights arising under state statutory law is not a basis to refuse to enforce an arbitration agreement. Orman v. Citigroup, Inc., No. 11-07086 (S.D.N.Y. Sept. 12, 2012). Plaintiffs alleged that, if forced to arbitrate, they would not be able to vindicate their consumer rights arising under state law. Rejecting that argument, the court noted that, while arbitration terms that would prevent a plaintiff from vindicating federal statutory rights may not be enforced, the entire line of case law in which the vindication of statutory rights analysis was developed deals with federal, as opposed to state, statutory rights. The vindication of statutory rights doctrine derives from an inference that when Congress passed the Federal Arbitration Act, Congress did not intend to preempt rights it had created in other federal statutes. The court concluded there is no principled reason to apply the doctrine to bar arbitration of claims grounded in state laws that were not created by Congress.
SOX Privilege Protects Materials Prepared In Response to PCAOB Investigation.
In Bennett v. Sprint Nextel Corp., No. 11-9014 (W.D. Mo. Oct. 10, 2012), the court held that the privilege created by the Sarbanes Oxley Act (“SOX”) of 2002 protects not just documents and information submitted to the Public Company Accounting Oversight Board (“PCAOB”) during an inspection, but also internal communications of the respondent relating to the inspection. In 2006, the PCAOB began an annual inspection of KPMG, and included KPMG’s 2005 audit of Sprint in the scope of the inspection. KPMG provided information directly to the PCAOB, and also created internal materials, such as communications that discussed confidential questions or comments made by the PCAOB or reflected KPMG’s development of responses to those comments and questions. In this class action against Sprint, plaintiffs sought discovery from KPMG of documents relating to the PCAOB inspection. KPMG asserted privilege over both internal documents and documents communicated to the PCAOB based on 15 U.S.C. §7251(b)(5)(A) (a/k/a §105(b)(5)(A) of SOX), which provides that “all documents and information prepared or received by or specifically for the Board . . . shall be confidential and privileged as an evidentiary matter (and shall not be subject to civil discovery or other legal process ) in any proceeding in any Federal or State court or administrative agency[.]” Plaintiffs, citing an unpublished opinion (Silverman v. Motorola, No. 07-C-4507 (N.D. Ill. June 29, 2010)), argued that the statutory privilege does not apply to all documents and information relating to a PCAOB inspection, but only to documents “prepared specifically for the Board.” The court declined to follow the earlier opinion. “While this Court follows Silverman’s ultimate holding that the statute limits the protection to materials that are ‘specifically for’ the Board, this Court finds that internal KPMG communications that discuss confidential questions or comments made by the Board or reflect KPMG’s development of responses to Board inquiries are also protected.”
Court Fashions Redaction Process To Minimize Disputes While Expediting Production.
In Chevron Corp. v. Weinberg Group, Misc. Action No. 11-409 (D.D.C. Sept. 26, 2012), the court fashioned a process for the production of redacted work product designed to minimize the issues in dispute while expediting production and resolution of bona fide disputes. Chevron sought discovery of documents from Weinberg, an expert retained in an underlying action in Ecuador which resulted in a multi-billion judgment against Chevron. Chevron sought the documents for use in an action in New York that challenged the judgment on grounds of fraud. Weinberg asserted work product protection over thousands of pages of documents, and submitted a privilege log that the court found to be woefully inadequate. The court held that Chevron had demonstrated substantial need for the documents and there was no means to secure the information other than seeing the documents in Weinberg’s possession. Therefore, Weinberg was required to produce fact work product, but would be allowed to redact opinion work product prior to production. To streamline the process, minimize disputes, and expedite production, the court instructed Weinberg to: (1) make a rolling production of redacted documents at the rate of 100 documents per day until completed; and (2) at the time of each production, submit a document that explains, as to each redaction, why it qualifies for opinion work product protection. The court explained that it hoped that by its process: Weinberg would see the wisdom of abandoning any claim of privilege as to meaningless documents that might technically be privileged but which are insignificant (and offered to enter an order pursuant to Rule 502(d) of the Federal Rules of Evidence “that would alleviate any concern it has about such a disclosure constituting a waiver in any other state or federal proceeding”), while Chevron would see from the gist of the document that the redacted portion is insignificant, and conclude that further litigation is unnecessary.
Cannot Use Privileged Documents From Habeas Proceeding In Resentencing Hearing.
In Lambright v. Ryan, 698 F.3d 808 (9th Cir. 2012) (No. 10-99012), the Ninth Circuit held that the district court abused its discretion by modifying a protective order entered in an federal habeas proceeding to allow state prosecutors to use privileged materials disclosed in the habeas proceeding against petitioner at his resentencing hearing. First, under the Ninth Circuit standard decided in Bittaker v. Woodford, 331 F.3d 715 (9th Cir. 2003) (en banc), the court reaffirmed that although a petitioner impliedly waives his attorney-client privilege by alleging ineffective assistance of counsel, such waiver is narrow and does not extend beyond adjudication of the ineffectiveness claim in the federal habeas proceeding. To protect the petitioner’s right to limited waiver, a district court must enter a protective order prior to allowing commencement of discovery, and it was an error of law and thus an abuse of discretion when the district court failed to do so in Lambright’s case. Second, the court explained that the holding in Bittaker extends to the entire habeas litigation, not just to pre-trial discovery. The district court’s finding that Lambright forfeited protection over privileged materials introduced during the evidentiary hearing was an abuse of discretion.
Failure To Specifically Identify Opinion Letters On Privilege Log Results In Waiver.
In Nordock Inc. v. Systems Inc.,No. 11-C-118 (E.D. Wis. Oct. 5, 2012), the court held that a party’s failure to timely log counsel’s opinion letters waived otherwise applicable privileges. Federal Rule of Civil Procedure 26(b)(5) requires that when a party withholds information otherwise discoverable by asserting privilege, that party must expressly make the claim and describe the nature of the documents being withheld in a way that will allow other parties to assess the claim. When a party fails to comply with these requirements, the asserted privilege may be waived. Here, Systems’ “general, conclusory assertions” that some documents were privileged, without including specific reference to the opinion letters in the privilege log, were insufficient under Rule 26(b)(5) and resulted in waiver.
Parent & Sub Are Both Clients For Privilege; Ex-Officer Can’t Access Privileged Docs.
In Davis v. PMA Cos., No. 11-359 (W.D. Okla. Sept. 7, 2012), the court held that a parent and subsidiary should be treated as joint clients for purposes of the attorney-client privilege. At issue was whether communications between the general counsel and other in-house counsel of the parent, PMA, and outside counsel of the subsidiary, MCA, were privileged. Plaintiff argued that there was no attorney-client relationship between PMA’s in-house counsel and MCA, and that the communications and documents sought were not made for the purpose of seeking legal advice. The court noted that the Tenth Circuit has not yet decided whether members of a corporate group are joint clients for the purposes of privilege. Citing a number of cases in which the courts held that parent and subsidiary were joint clients, the court held that PMA and MCA were joint clients, giving PMA standing to assert MCA’s privilege. Also at issue was whether Plaintiff, a former officer and director of MCA, had the right to access privileged communications to which he had access while an officer of MCA. The court noted that there is a split of authority between an older line of cases adopting a “collective corporate client” approach, which prevents the corporation from asserting the attorney-client privilege against a former officer or director, and the “modern trend” of cases that adopt the “entity is the client” approach, which finds that the corporate entity is the sole client for the purposes of the privilege. The court adopted the “modern trend.” Therefore, plaintiff’s status as a former director and officer of PMA did not entitle him to production of otherwise privileged communications made during his tenure at MDA, including with respect to communications that plaintiff once “authorized, received, or otherwise participated in while president of MCA.”
For Privilege, In-House Counsel Must Show They Acted In A Legal Capacity.
In Dewitt v. Walgreen Co., No. 11-00263 (D. Idaho Sept. 4, 2012), the court rejected in-house counsel’s blanket assertion of attorney-client privilege and work product protection in an employment discrimination matter brought by a pharmacist, who refused to comply with a company Policy. During a 30(b)(6) deposition, plaintiff asked questions about the creation and revision of the Policy. Walgreens’ counsel objected, asserting that the drafting was done with the aid of in-house counsel, who was intimately involved in all aspects of drafting and revising the Policy, and therefore all communications concerning the drafting and revising were privileged. The court disagreed. Unlike communications with outside counsel, communications between in-house counsel and corporate representatives are not presumed to be made for the purpose of obtaining legal advice. In-house counsel must make a “clear showing” that the “speaker” made the communications for the purpose of obtaining or providing legal advice, rather than business advice. The court also found the work product protection inapplicable to drafts of the Policy. At best, Walgreens had a remote concern about possible litigation, and the drafts were not created “because of” litigation, that is, it could not be said that “but for” the fear of litigation the drafts would not have been created. Rather, the drafts would have been created in substantially similar form even without the prospect of litigation, and thus, they were not protected work product. However, a separate document-by-document analysis was necessary to determine whether the drafts were protected by the attorney-client privilege.
Plan Administrator’s Claims Analyst/In-House Counsel Memo Discoverable.
In Stephan v. Unum Life Insurance Co. of America, 697 F.3d 917 (9th Cir. 2012) (No. 10-16840), the Ninth Circuit held that the fiduciary exception to the attorney-client privilege applied to communications between a Plan administrator’s claims analyst and its in-house counsel. Here, the employer’s long-term disability insurance plan was underwritten and administered by Unum Life. An employee challenged the benefits calculation made by Unum and sought memoranda between Unum’s claim analyst and its in-house counsel to demonstrate that Unum operated under a conflict of interest. The memoranda, prepared after the employee’s attorney had contacted Unum, were notes of conversations between an Unum claims analyst and in-house counsel about how the insurance policy ought to be interpreted. In the ERISA context, the fiduciary exception provides that an employer acting in the capacity of ERISA fiduciary is disabled from asserting attorney-client privilege against plan beneficiaries on matters of plan administration. As a matter of first impression, the appellate court held that the fiduciary exception applies to insurance companies acting as Plan administrators. The trial court had ruled that the fiduciary exception did not apply to the memoranda, because the interests of the employee and the administrator had diverged prior to the creation of the memoranda. The appellate court disagreed, finding that the documents were prepared to advise the analyst about how best to interpret the Plan, and were communicated to the analyst before any final determination on the employee’s claim had been made. The content of the documents was thus about plan administration, which falls within the fiduciary exception.
Using Lawyer As Conduit To Suborn Perjury Not Within Attorney-Client Privilege.
In United States v. Williams, 698 F.3d 374 (7th Cir. 2012) (Nos. 11-1002, 11-1012), the Seventh Circuit held that a client was not soliciting legal advice for purposes of the attorney-client privilege when he asked his counsel to give his cousin a letter asking the cousin to provide a false alibi. At trial, the government called the defendant’s former attorney as a witness. The lawyer testified that the defendant had mailed him an envelope marked “legal mail” (so that it could not be opened by the jail) that contained a sealed letter addresses to the cousin and a note asking the lawyer to forward the letter. Suspicious, the lawyer opened and read the letter, which instructed the cousin to provide the false alibi. The lawyer did not forward the letter, but instead, with the trial court’s permission, withdrew as counsel, turned the letter over to the government, and agreed at the government’s request to testify at his former client’s trial. Following his conviction, the former client appealed, arguing among other things that his lawyer violated the attorney-client privilege. The court rejected the argument. In asking the lawyer to forward the letter, the client was not soliciting legal advice or providing information that the lawyer might use in crafting a defense. Also, when information is transmitted to an attorney with the intent that the information will be transmitted to a third party, such information is not confidential. The court also ruled that it was not unethical for the lawyer to turn his client in and testify against him under the circumstances, including the ethical rules in effect at the time of the conduct.
Approval Of Class Fee Precludes Later Malpractice Action Against Class Counsel.
By: Michael T. Brody
In 1998, plaintiffs sued Computer Associates alleging violations of the federal securities laws. After the parties settled the case in 2003, the district court conducted a fairness hearing, approved the settlement, and found that plaintiffs’ counsel were entitled to substantial fees. After the settlement, additional revelations concerning Computer Associates became public and a group of class members (“Wyly plaintiffs”) brought a Rule 60(b) motion to reopen the case. Class counsel declined to join the motion, which the district court denied, finding plaintiffs had failed to present any new evidence. The Wyly plaintiffs then brought a malpractice action against class counsel, who asked the district court to enjoin that state court action. The district court granted the injunction, and the Second Circuit affirmed. Wyly v. Weiss,697 F.3d 131 (2d Cir. 2012) (No. 10-4785). The Court of Appeals focused on whether it had jurisdiction to enter an injunction, and declined to exercise jurisdiction under the “in aid of jurisdiction exception” to the Anti-Injunction Act. The court found that this exception is generally reserved for state court actions in rem. While in limited circumstances it has been used to enter injunctive relief in personam, the court found the circumstances of this case did not justify exercise of that jurisdiction. The court found, however, that the injunction was appropriate under the Anti-Injunction Act’s re-litigation exception. In approving the settlement, the district court had necessarily found that class counsel’s conduct was reasonable and adequate. That prior finding precluded a determination in the malpractice case that counsel had behaved deficiently. As a result, the new allegations were an impermissible collateral attack on the prior district court’s findings that the counsel’s performance was adequate. The court also rejected the argument that the current objectors were not represented in the prior action. They were members of the settlement class, and thus bound by the final order and the Rule 60(b) order.
Request To Consolidate For Trial Triggers Mass Action Removal.
By: Michael T. Brody
CAFA permits federal removal of “mass actions,” defined as cases in which 100 or more plaintiffs propose to try their claims jointly. In In re Abbott Laboratories, Inc., 698 F.3d 568 (7th Cir. 2012) (Nos. 12-8020-8027), the court ruled on whether a pending request to transfer cases for consolidation created a mass action. Plaintiffs had filed ten lawsuits in Illinois concerning a particular drug, involving several hundred plaintiffs, and asked the Illinois Supreme Court to consolidate the matters “through trial” and “not solely for pretrial proceedings.” The plaintiffs argued that this consolidation would facilitate the efficient disposition of “universal and fundamental substantive questions applicable to all or most” of the cases without “the risk of inconsistent adjudication.” Defendants removed the various cases in which this motion was filed to federal court. One district court remanded; another district court declined remand. The Seventh Circuit concluded that removal was appropriate. The critical question is whether plaintiffs proposed to try their claims jointly; a proposal for a joint trial can be explicit or implicit, and can be satisfied by an anticipated procedure involving trials of exemplary cases, followed by the application of issue or claim preclusion without another trial. The court concluded that “[i]n short, a joint trial can take different forms as long as the plaintiffs’ claims are being determined jointly.” In this case, while the language in the motion was close to the line, the Seventh Circuit agreed that the motion anticipated a joint trial or an exemplar trial in which legal issues would be determined so that those determinations would be applied to the remaining cases. As a result, removal was appropriate and remand should not have been ordered.
Class Representative May Present Claims of Class With “Same Set of Concerns.”
By: Michael T. Brody
In NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012) (No. 11-2762), plaintiff union sued to assert class claims on behalf of purchasers of mortgage backed securities issued pursuant to a single shelf registration, but sold in separate offerings pursuant to 17 unique prospectuses. The district court held plaintiff lacked standing to sue on behalf of holders of securities issued by the 15 trusts from which it did not purchase securities inasmuch as each prospectus contained disclosures and information unique to the particular offering. On appeal, the Second Circuit reversed. The court held plaintiff had Article 3 standing to sue in its own right because it had plausibly suffered a loss as a result of the misleading statements concerning the securities it did purchase. Whether plaintiff had “class standing – that is, standing to sue on behalf of a class of purchasers of certificates from other offerings – was not a matter for a motion to dismiss, but was to be considered under Rule 23. The Second Circuit held that a plaintiff in a putative class action has class standing if the plaintiff plausibly alleges some actual injury as a result of the conduct of the defendant and the conduct implicates “the same set of concerns” as the conduct alleged to have caused injury to the other members of the class by the same defendants. In this case, the court concluded plaintiffs alleged nearly identical misrepresentations were made in all the offering documents. Thus, plaintiff had class standing to sue on behalf of all 17 offerings based on the same shelf registration, not simply the two it purchased.
Divided Ninth Circuit Upholds Facebook Cy Pres Settlement.
By: Michael T. Brody
In November 2007, Facebook launched its “Beacon” program, which automatically updated a member’s personal profile to reflect actions the member had taken on websites that had contracted with Facebook to participate in the program. For example, if a member purchased a product from a particular vendor, the vendor would transmit information about the purchase to Facebook, and Facebook would broadcast that information to the member’s on-line network. Various members sued, objecting that the Beacon program constituted an invasion of privacy. The parties reached a settlement whereby Facebook would terminate the Beacon program, and pay a total of $9.5 million. Of that sum, $3 million would be paid to plaintiffs’ attorneys and the remaining $6.5 million would fund a new charity to support programs concerning consumer privacy. The charity’s board of advisors included counsel for the plaintiff class and Facebook, and a Facebook employee was to be a director. The district court upheld the settlement, and the Ninth Circuit affirmed. Lane v. Facebook, Inc., 696 F.3d 811 (9th Cir. 2012) (No. 10-16380). The court found the settlement to be fair, reasonable, and free of collusion. As to the cy pres remedy, the court rejected the objection that a Facebook employee would serve on the charity’s board of directors, creating a conflict of interest. The Ninth Circuit found the cy pres recipient need not be ideal, only that the distribution bear a substantial nexus to the interests of class members. In this case, the proposed charity met the standard, and the presence of a Facebook employee on the board of directors reflected “the unremarkable result of the parties’ give and take negotiations,” which the district court declined to undermine. The court also rejected the objection that the settlement was insufficient. The court’s acceptance of the settlement amount was not an abuse of discretion in light of the risks plaintiffs faced.
Ninth Circuit Again Rejects Cy Pres Distribution Because Insufficiently Related.
By: Michael T. Brody
Earlier this year, in Dennis v. Kellogg Co., 687 F.3d 1149 (9th Cir. 2012), the Ninth Circuit rejected a settlement that provided for a cy pres distribution and an award of attorneys’ fees. On petition for rehearing, the court withdrew its prior opinion, and again rejected the settlement. Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012) (No. 11-55674). The court repeated its prior criticism of the cy pres award, and concluded the proposed charitable distribution was not sufficiently tied to the wrong alleged on behalf of the class. The lawsuit alleged false advertisements of foods. A cy pres award whereby food was to be donated to charity did not address the wrong alleged in the complaint. The court modified its opinion to remove its separate criticism of the district court’s award of attorneys’ fees.
Dismissal Of Derivative Suit Held Not Preclusive As To Other Shareholders.
By: C. John Koch
In South v. Baker, No. 7294 (Del. Ch. Sept. 25, 2012), the Delaware Chancery Court held that the dismissal with prejudice of a derivative suit because of the plaintiffs’ inadequate representation does not preclude other “more diligent stockholders” from bringing a similar suit on behalf of the same corporation. The case involved a Caremark-type derivative action against the directors of a mining company who allegedly had failed to exercise sufficient oversight to prevent safety violations. The court held that plaintiffs had not pleaded facts showing demand futility, nor had they sought to discover such facts by examining the company’s books and records under the Delaware inspection statute, Section 220. The court stressed that there is “an evidentiary presumption that a plaintiff who files a Caremark claim hastily and without using Section 220 or otherwise conducting a meaningful investigation has acted disloyally to the corporation and served instead the interests of the law firm who filed suit.” The court concluded that plaintiffs were not adequate representatives because they filed a hurried complaint when there was no reason to rush: A “deliberate and thorough pre-suit investigation, rather than haste, was required to further the interests of the corporation.”
Ohio Supreme Court Reverses Itself On Post-Merger Non-Competes.
Earlier this year, the Ohio Supreme Court, in a 4-3 opinion, held that a resulting, post-merger company could not enforce the employee noncompete agreements of the company it acquired in the merger. Upon a motion for reconsideration, the court determined, in a 6-1 opinion, that portions of its earlier opinion were “erroneous” and “require correction.” Acordia of Ohio, LLC v. Fishel, No. 2011-0163 (Ohio Oct. 11, 2012). The court found that it had misapplied earlier precedent when it reasoned in its initial opinion that the absorbed company ceased to exist following the merger and, therefore, its noncompete agreements with its employees were unenforceable absent express language in the contracts assigning the company’s rights to successors. In its modified opinion, the court held that the absorbed company is not completely erased from existence, but instead becomes part of the resulting post-merger company. Thus, the court concluded, the resulting company had stepped into the shoes of the absorbed company, and could enforce its noncompete agreements, notwithstanding the absence of any “successors and assigns” language in the contracts.
Court Affirms 5-to-1 Punitive Damages Award, Calls It “Too Small.”
In Neuros Co. v. KTurbo, Inc., 698 F.3d 514 (7th Cir. 2012) (No. 11-2260), the parties were competing manufacturers that bid on a contract to provide equipment to a waste water treatment plant in Utah. After Neuros won, KTurbo posted slides on its website and made presentations to engineering firms in the industry that (erroneously) accused Neuros of fraudulently representing that its products could achieve performance that was unattainable. Neuros sued KTurbo for, among other things, defamation. Following a bench trial, Neuros obtained a judgment for $10,000 in general damages and $50,000 in punitive damages. On appeal, KTurbo argued that a punitive damages award of 5 times the amount of general damages was improper. In rejecting that argument, the Seventh Circuit found that the punitive damages award was “too small,” and in light of KTurbo’s “reprehensible” conduct, it should have been ordered to pay “substantial punitive damages” rather than the “slap-on-the-wrist award” the district court ordered. The court dismissed concerns over the 5-1 ratio, stating that where “compensatory damages are slight, a single-digit ratio is likely to be insufficient.” The court concluded that KTurbo “should consider itself fortunate that Neuros hasn’t challenged the adequacy of the punitive-damages award.”
Controlling Shareholder Need Not Act “Altruistically” Towards Minority.
By: C. John Koch
In In re Synthes, Inc. Shareholder Litigation, 50 A.3d 1022 (Del. Ch. 2012) (No. 6452), the Delaware Chancery Court clarified the fiduciary duties of controlling shareholders, and held that a controlling shareholder did not breach his fiduciary duty by refusing to consider an acquisition offer that would have cashed out all of the minority stockholders, but required the controlling stockholder to remain as an investor in the company. The case involved the sale of Synthes, a medical device company headquartered in Switzerland. The controlling stockholder, after giving a consortium of private equity buyers a chance to make an all-cash, all-shares offer, ultimately accepted a bid by Johnson & Johnson for 65% stock and 35% cash. The controlling stockholder received the same treatment in the merger as the other stockholders. Dismissing a complaint by minority shareholders challenging the merger, the court held that the “controlling stockholder had more incentive than anyone to maximize the sale price of the company, and Delaware does not require a controlling stockholder to penalize itself and accept less than the minority, in order to afford the minority better terms.” The court stressed that although controlling shareholders are “not allowed to use their control over corporate property or processes to exploit the minority,” Delaware law “does not . . . go further than that and impose on controlling stockholders a duty to engage in self-sacrifice for the benefit of minority shareholders” or “to act altruistically towards them.”
Must Expressly Waive Judicial Forums In Contracts To Bar Title VII Suits.
In Ibarra v. United Parcel Service, 695 F.3d 354 (5th Cir. 2012) (No. 11-50714), the plaintiff brought a Title VII sex discrimination claim in federal court against her former employer (“UPS”). The district court granted summary judgment in favor of UPS, finding that the grievance procedures established in a collective bargaining agreement (“CBA”) provided the exclusive remedy for plaintiff’s Title VII claim. The CBA provided that UPS would not discriminate against its employees “in violation of any federal or state law,” and that “any grievance, complaint, or dispute” shall be handled according to the procedures set forth in the CBA, which included a hearing before a local grievance committee and, if necessary, submission to an arbitrator. The Fifth Circuit reversed, ruling that the CBA did not “clearly and unmistakably” waive plaintiff’s right to pursue her Title VII claim in a judicial forum. The court held that in order to be “clear and unmistakable, the CBA must, at the very least, identify the specific statutes the agreement purports to incorporate or include an arbitration clause that explicitly refers to statutory claims.” Finding that the CBA there did neither, and contained no express waiver of a judicial forum for Title VII claims, the court held that the CBA did not preclude union members from bringing Title VII claims in federal court.
Court Overturns “Severe” Sanction For Late-Filed Expert Report.
In World Wide Polymers, Inc. v. Shinkong Synthetic Fibers Corp., 694 F.3d 155 (2d. Cir. 2012) (No. 10-3476), plaintiff filed suit in the Southern District of New York, seeking damages and injunctive relief arising out of the failure of a joint venture between the parties. Plaintiff filed its expert disclosure in support of its damages claim seven weeks late. Defendant objected, and the district court struck plaintiff’s expert report and its claim for damages, reasoning that plaintiff had already received several discovery extensions and had been warned that no further extensions would be granted. The district court then granted summary judgment in favor of defendant on the remaining claims for injunctive relief, holding that the alleged harm was compensable only in monetary damages. On appeal, the Second Circuit reversed. The Court of Appeals reasoned that because the imposed sanctions were tantamount to dismissing the action altogether, the issue should be analyzed under the same standards as if the district court had dismissed the entire case as a sanction. The court concluded that the record below was bereft of any findings that would show that such a “severe” sanction was an appropriate response to plaintiff missing a single deadline, or that the district court had first considered any lesser sanctions. The Second Circuit further held that the district court’s warning of no further extensions was insufficient to put plaintiff on notice that a possible consequence of a late filing could be the striking of its report and claim. The Second Circuit decided that sanctions were warranted, but they should have been directed to the attorneys, given that their “sloppiness or negligence” caused the late filing.
Delaware Chancery Court Orders Use of Predictive Coding Sua Sponte.
By: Daniel J. Weiss
In EORHB, Inc. v. HOA Holdings LLC, No. 7409 (Del. Ch. Oct. 15, 2012), Vice Chancellor J. Travis Laster ordered the parties to implement predictive coding in their electronic discovery process or “show cause why this is not a case where predictive coding is the way to go.” It appears that this is the first instance of a court sua sponte ordering parties to use predictive coding in discovery. The case involved an indemnification dispute, which the court explained could “generate a huge amount of documents.” For that reason, the court held that the parties could “benefit from some new technology use” rather than “burning lots of hours with people reviewing” documents. The court further held that the parties should confer “about a single discovery provider that could be used to warehouse both sides’ documents,” or, if the parties could not agree, to “submit names to [the court] and I will pick one for you.”
Stipulation To “Model” E-Discovery Protocol Includes Predictive Coding.
By: Daniel J. Weiss
In In re Actos (Pioglitazone) Products Liability Litig., MDL No. 6:11-MD-2299 (W.D. La. July 30, 2012), (case management order) a pharmaceutical class action, the court entered a stipulated order concerning e-discovery that has been widely noted in e-discovery circles as a potential model for other cases. The order is extremely detailed; it lists 13 different electronic databases and 29 individual custodians that may possess relevant information. Under the order, the parties will work together to “train” a computer system to review electronic discovery materials. The order contemplates that the computer system will give each document a relevancy score and defendant’s attorneys will manually review only those documents that score above a certain cut-off. The order contains technical detail on statistical measurements that will be used to determine whether the computer system is performing properly.
Court Orders $600,000 In Discovery Sanctions For E-Discovery Spoliation.
By: Daniel J. Weiss
In Multifeeder Technology, Inc. v. British Confectionery Co., No. 09-1090 (D. Minn. Sept. 18, 2012), the court ordered the defendant to pay $600,000 in discovery sanctions under Rule 37 because of the defendant’s destruction of electronic evidence. Earlier in the case, the plaintiff had successfully moved for the appointment of an independent e-discovery expert to analyze the defendant’s computers. After the expert was appointed, but before the expert performed the analysis, certain of defendant’s executives erased files from their computers and one executive used “wiping” software to make his files unrecoverable. The executives claimed they had erased only “personal” or “embarrassing” files unrelated to the litigation. The court held that it could not “reasonably rely” on that explanation in the “face of ample circumstantial evidence” of spoliation, and ordered that the defendant pay $600,000 as a discovery sanction, of which approximately $490,000 represented the fees of the court-appointed expert and the remainder represented fees and costs of the plaintiff.
District Court Requires Party To Disclose Its E-Discovery Search Strategy.
By: Daniel J. Weiss
In S2 Automation LLC v. Micron Technology, Inc., No. 11-0884 (D.N.M. Aug. 9, 2012), the district court ordered the plaintiff to disclose to its opponent its electronic discovery “search strategy for identifying pertinent documents, including the procedures it used and how it interacted with its counsel to facilitate the production process.” The court ordered that relief in response to statements by the plaintiff’s counsel, made during a discovery conference, that counsel had “delegated the process of gathering documents to [his client] and that he was generally unaware of the manner in which [his client] had provided the documents.” The court held that Federal Rule of Civil Procedure 26(g)(1) requires a lawyer to make a “reasonable inquiry” before signing discovery responses, and that the details of the search strategy were required in order to assess whether plaintiff’s counsel had made such an inquiry.
Court Finds Privilege Waived Where 4.6% Of Production Was “Inadvertent.”
By: Daniel J. Weiss
In Inhalation Plastics, Inc. v. Medex Cardio-Pulmonary, Inc., No. 07-116 (S.D. Ohio Aug. 28, 2012), the district court held that a defendant waived privilege with respect to 347 pages of emails, attachments, and other material that it produced to the plaintiff but later claimed was privileged. The inadvertent production appeared to have occurred because of a breakdown in an e-discovery production process. The court applied a five-factor test, developed from Federal Rule of Evidence 502(b), to determine whether the documents could be “clawed-back” as inadvertently produced: (1) the reasonableness of the precautions taken in view of the extent of document production; (2) the number of inadvertent disclosures; (3) the magnitude of the disclosure; (4) any measures taken to mitigate the damage of the disclosures; and (5) the interests of justice. The court held that each factor weighed against the defendant’s claim of inadvertent production. Among other things, the court focused on the fact that the 347 pages were contained in a partial production of 7,500 pages, meaning that 4.6% of the pages were mistakenly produced. The court found that percentage “relatively high” and supportive of a finding of waiver. The court also faulted the defendant for failing to provide a privilege log or other detailed explanation for the claim of privilege over each specific document.
Facebook Messages Between Class Plaintiffs Subject To Work-Product Protection.
By: Daniel J. Weiss
In In re Penthouse Executive Club Compensation Litigation,No. 10-01145 (S.D.N.Y. May 10, 2012) (discovery order), the court considered a motion to compel the production of Facebook messages, some of which were sent privately between the named plaintiff and other plaintiffs who joined this class action, while others were sent by a plaintiff to non-parties. The messages concerned litigation strategy and conversations with plaintiff’s counsel, though counsel was not copied on the messages. The court held that the private Facebook messages were properly treated as written “correspondence” for purposes of Rule 26 and the work-product protection of Rule 26(b)(3) could apply. The court ultimately held that messages sent between plaintiffs were protected as work-product, but messages sent to non-parties were not.
Section 113 or 107? Supreme Court Declines to Clarify CERCLA Cost Recovery Options.
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) provides causes of action that allow parties who have incurred costs cleaning up a contaminated site to recover those costs from other parties alleged to have caused the contamination, commonly referred to as potentially responsible parties (“PRPs”). For private parties, the two main routes of recovery are (1) cost recovery under § 107(a) of CERCLA and (2) contribution under § 113(f) of CERCLA. Even if a party is a PRP itself, if that PRP has incurred costs to clean up a contaminated site, it can seek cost recovery or contribution from other PRPs. See, United States v. Atlantic Research Corp., 551 U.S. 128 (2007).
PRPs subject to a court order or consent decree requiring cleanup of a contaminated site routinely bring contribution claims under CERCLA to recover costs incurred pursuant to the order or decree. However, in Atlantic Research, the Supreme Court explicitly left open the question of whether a PRP can recover costs under § 107 if the PRP incurred those costs subject to a consent decree with the government. Id. at 139 n.6 (emphasis added) (“we recognize that a PRP may sustain expenses pursuant to a consent decree following a suit under § 106 or § 107(a)…In such a case, the PRP does not incur costs voluntarily but does not reimburse the costs of another party. We do not decide whether these compelled costs of response are recoverable under § 113(f), § 107(a), or both.”).
Ever since Atlantic Research, PRPs and courts have been struggling with a crucial question: Whether parties subject to a consent decree may file claims for cost recovery under § 107(a) of CERCLA, or whether their remedies are limited to contribution claims under § 113(f) of CERCLA. This distinction can be significant due to the more favorable statute of limitations for § 107 cost recovery claims. On October 9, 2012, the Supreme Court declined the opportunity to clarify that question when it denied cert in the appeal of Solutia Inc. v. McWane, Inc., 672 F.3d 1230 (11th Cir. 2012).
In Solutia, the 11th Circuit held that a PRP who has incurred cleanup costs pursuant to a consent decree cannot obtain cost recovery under § 107, and is instead left with only a contribution claim under § 113. 672 F.3d at 1237. As the 11th Circuit explained in its opinion, the majority of courts that have addressed this issue have held that § 113 provides the exclusive remedy for a PRP compelled to incur response costs pursuant to a consent decree. See, e.g., Morrison Enter., LLC v. Dravo Corp., 638 F.3d 594, 603 (8th Cir. 2011); Agere Sys., Inc. v. Advanced Envtl. Tech. Corp., 602 F.3d 204, 229 (3d Cir. 2010); Niagara Mohawk Power Corp. v. Chevron U.S.A., Inc., 596 F.3d 112, 128 (2d Cir. 2010).
While there is no circuit split, uncertainty remains, however, due to inconsistent rulings on this issue, primarily at the district court level. For example, district courts in Illinois and Michigan have allowed § 107 claims to proceed despite the presence of a consent decree compelling cleanup. See, e.g., United States v. Pharmacia Corp., 713 F. Supp. 2d 785, 791 (S.D. Ill. 2010); Ford Motor Co. v. Michigan Consol. Gas. Co., No. 08-CV-13503 (E.D. Mich. Sept. 29, 2009). PRPs who have entered into a consent decree and then seek recovery of their cleanup costs are still left with the decision of what type of CERCLA claim to pursue. Without clarification of these issues from the Supreme Court, PRPs will likely initially continue to pursue claims under both § 107 and § 113, leaving it to each individual court to decide the validity of the cost recovery and contribution claims.
In W Holding Co. v. Chartis Insurance Co. - Puerto Rico, No. 11-2271 (D.P.R. Oct. 23, 2012), the United States District Court for the District of Puerto Rico determined that an Insured v. Insured (“IvI”) exclusion in several directors and officers (“D&Os”) insurance policies did not preclude coverage for claims brought by the FDIC against D&Os of Westernbank. After the FDIC assumed receivership of Westernbank, it alleged Westernbank’s D&Os violated federal and Puerto Rico law regarding various loan approvals and transactions. The D&Os sought coverage from their insurers for the FDIC’s allegations, eventually bringing suit to enforce coverage. The FDIC intervened in that suit, and the insurers moved to dismiss the FDIC’s claims as well as the claims of the D&Os based on the IvI exclusion present in the policies. The IvI exclusion was applicable when a claim was brought against an insured by another insured, including Westernbank. The court denied such motions to dismiss, reasoning that the applicability of the IvI exclusion was ambiguous when claims were brought by the FDIC as a regulatory agency on behalf of both the regulated entity (an insured) and third-party interests. The court recognized a split of authority on the applicability of an IvI exclusion in such context but determined that a majority of the better-reasoned decisions hold that such exclusion is inapplicable. The court considered it important that the purpose of an IvI exclusion is to prevent collusive suits amongst insureds – a concern that is not present when the FDIC brings suit. The court went further, holding that even though the IvI exclusion here stated it applied whether or not there was collusion, the exclusion did not apply because the FDIC brought claims on behalf of non-insureds, namely depositors, account holders, and a depleted insurance fund.
In Scottsdale Insurance Co. v. Morrow Land Valley Co., No. 11-905 (Ark. May 31, 2012), the Arkansas Supreme Court held that an insurance policy’s pollution exclusion was fairly susceptible to more than one reasonable interpretation, and thus was ambiguous under Arkansas law. The presence of the ambiguity in determining whether certain activities were excluded raised the possibility of coverage and triggered the insurer’s duty to defend. Defendant in the underlying litigation owned and operated a concentrated animal-feeding operation (“CAFO”). A group of plaintiffs brought suit against defendant alleging that the CAFO constituted a public and private nuisance, specifically that its operation generated “noxious gases, smoke, dust, fumes, odors and particulate in great quantities, which migrate off the property and are disseminated in great quantities through the surrounding environment.” Plaintiffs claimed to have suffered harm in the form of nausea, sleep disturbance, and diminished use and enjoyment of their property as a result of defendant’s operations. Defendant sought defense costs and indemnity for its insurer, and the insurer, Scottsdale, denied both based in part on the policy’s pollution exclusion. Defendant filed a declaratory judgment action against its insurer and moved for summary judgment. The circuit court granted partial summary judgment in favor of defendant on the duty to defend and found the pollution exclusion ambiguous, but denied summary judgment with respect to the duty to indemnify due to the presence of genuine issues of material fact. The insurer appealed. Relying on three of its prior decisions, the Arkansas Supreme Court affirmed, holding the pollution exclusion at issue to be ambiguous. The exclusion precluded coverage for “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” The term “pollutants” was further defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.” The court ruled that this ambiguous language created the possibility that the injuries and damages alleged in the underlying lawsuit fall within the policy’s coverage, therefore, the insurer had a duty to defend its policyholder.
In State Automobile Insurance Co. v. DMY Realty Co., LLP,977 N.E.2d 411 (Ind. Ct. App. Oct. 23, 2012) (No. 49A05-1109-PL-486), the Indiana Court of Appeals relied on a number of other recent Indiana Supreme Court cases in finding an absolute pollution exclusion overbroad and ambiguous such that it did not bar coverage for an environmental contamination and remediation claim. The policyholder, DMY Realty, owned a shopping center in Indiana, which included two retail spaces formerly occupied by dry cleaning facilities. Several environmental site assessments were conducted in connection with the potential purchase of the shopping center. These site assessments uncovered the presence of PCE and TCE, chlorinated solvents commonly used as part of the dry cleaning process, at levels requiring remediation. DMY Realty sought coverage for the contamination and related remediation costs from its insurers. Following the insurers’ coverage denials based on the pollution exclusion, DMY Realty filed a declaratory judgment action. The policies contained an absolute pollution exclusion precluding coverage for “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” Id. at *1. The term “pollutants” was further defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.” Id. Many of the policies also contained an Indiana-specific endorsement providing that the pollution exclusion “applies whether or not the irritant or contaminant has any function in your business, operations, premises, site or location.” Id. at *2. The trial court granted summary judgment for DMY Realty, finding the language of the pollution exclusion overbroad and ambiguous such that it did not bar coverage, as well as noting that the endorsement failed to cure the ambiguity and only took effect once the exclusion had been applied. On State Auto’s appeal, the Indiana Court of Appeals affirmed, relying on several recent decisions by the Indiana Supreme Court that found identical or substantially similar pollution exclusions ambiguous. Id. at *7-9 (citing State Auto Mut. Ins. Co. v. Flexdar, Inc., 964 N.E.2d 845 (Ind. 2012); Freidline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002); Am. States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996); Seymour Mfg. Co. v. Commercial Union Ins. Co., 665 N.E.2d 891 (Ind. 1996)). According to the court, “this clause cannot be read literally as it would negate virtually all coverage because practically every substance would qualify as a ‘pollutant’ under this definition, rendering the exclusion meaningless.” Id. at *8 (quoting Kiger, 662 N.E.2d at 948). The court further reasoned under Indiana law, “the insurer can (and should) specify what falls within its pollution exclusion.” Id. at *9.
The Federal Circuit Throws Out The Divided Infringement Defense In Favor Of Induced Infringement Liability.
By: Christopher B. Lay
In Akamai Techs. Inc. v. Limelight Networks, Inc., 692 F.3d 1301 (Fed. Cir. 2012) (No. 2009-1372), the Federal Circuit decided the appeals of Akamai Techs. Inc. v. Limelight Networks, Inc. and McKesson Techs., Inc. v. Epic Systems Corp, which the Federal Circuit previously consolidated for rehearing en banc. The per curiam decision, decided by a single vote, explicitly overrules the Federal Circuit’s 2007 BMC Resources, Inc. v. Paymentech, L.P. decision holding that liability for induced infringement could only be found if a single entity performed every step of a method claim. Here, instead of focusing on whether direct infringement can be found when no single entity performs all of the claimed steps of the patent, the Federal Circuit applied the doctrine of induced infringement.
Factually, the cases present two extremes on the inducement spectrum, in Akamai only the last step was induced while in McKesson every step was induced.
Akamai owns a patent covering a method for the efficient delivery of web content. As claimed in the patent, Limelight maintains a network of servers and enables efficient content delivery by placing some content elements on its servers. Limelight argued, however, that because it did not perform the last step, modification of the content providers’ web pages, it could not infringe. Akamai argued that Limelight instructs its customers on the steps needed to do that modification and knew that the modification would be performed. Therefore, Akamai argued that Limelight should not be allowed to avoid infringement by carefully splitting steps in the method patent among different parties.
Similarly, McKesson owns a patent covering a method of electronic communication between healthcare providers and their patients. Epic argued that because it does not perform any of the patent’s claimed steps, it could not infringe. McKesson argued that Epic was still responsible for the activities of its customers, the healthcare providers, because of their contractual relationship. The only step not performed by Epic’s customers, initiating the communications, was performed by the patients of the healthcare providers. Epic argued that neither it, nor the healthcare providers, control or direct the patient to initiate communications with the healthcare provider. McKesson argued that Epic knew that patients would perform that step, and that the lack of a contractual relationship should not allow Epic to facilitate activities that would otherwise infringe the patent.
In each case, there was no single entity that performed all the steps recited by the claims. That is, there was no single entity that would be liable for direct infringement. Therefore, in both cases, the district courts granted summary judgment of non-infringement applying the rule that indirect infringement required proof of direct infringement by some single entity.
The Federal Circuit analyzed the problem as one of induced infringement under 35 U.S.C. § 271 (b), which extends liability to a party who advises, encourages, or otherwise induces others to engage in infringing conduct. The Federal Circuit determined that an accused inducer must knowingly induce infringement and possess specific intent to encourage another’s infringement in order to be liable under § 271 (b). Contrary to earlier decisions, the Federal Circuit ruled that inducement does not require that the induced party or parties be an agent of the inducer or be acting under the inducer’s direction or control. Moreover, the majority held that inducement can give rise to liability only if the inducement leads to infringement, that is all of the claimed steps are performed. So long as all of the steps in the claimed method are performed, proof is not required that a single party would be liable as a direct infringer for performing those steps.
The Federal Circuit reviewed the 1952 Patent Act and found it to be consistent with this analysis. Prior to 1952, inducement and contributory infringement were both referred to under the rubric of contributory infringement. The 1952 Patent Act split these concepts between §§ 271 (b) and 271 (c), and, in the legislative history, Congress described the inducement section as “recit[ing] in broad terms that one who aids and abets an infringement is likewise an infringer.” The Federal Circuit found inducement to be similar to both aiding and abetting in the Federal Criminal Code and tort law. Both recognize fault or liability for inducing innocent actors to carry out harmful acts.
In the majority opinion, the Federal Circuit cautioned that this decision should not be read to define direct infringement differently for the purposes of establishing liability under §§ 271 (a) and (b), responding to the concerns expressed in Judge Linn’s dissenting opinion. The majority indicated that neither section defines infringement, but, rather, that the subparts of § 271 each set forth types of conduct that qualify as infringing activities. There is no requirement that the sections overlap. Nor is there a requirement that what is required to be induced in § 271 (b) be the same as that required to be liable under § 271 (a). The other subparts of § 271 support this analysis, each defining conduct that makes one liable as an infringer (e.g. § 271(e)(1) makes it an act of infringement to submit an application to the FDA for a drug, or the use of a drug, claimed in a patent). Prior to BMC, a single entity was never required to perform all the steps of a method claim for the patent to be infringed. This proposition seems to have arisen from the Supreme Court’s decision in ARO Mfg. Co. v. Convertible Top Replacement Co. ARO, however, was a product patent case—not a case involving method claims—and when the last component was combined direct infringement resulted regardless of the prior separate acts.
Applying the clarifications to the law set forth in the majority opinion, the Federal Circuit held that “Epic can be held liable for inducing infringement if it can be shown that (1) it knew of McKesson’s patent, (2) it induced the performance of the steps of the method claim in the patent, and (3) those steps were performed.” Similarly, “Limelight would be liable for inducing infringement if the patentee could show that (1) Limelight knew of Akamai’s patent, (2) it performed all but one of the steps of the method claimed in the patent, (3) it induced the content providers to perform the final step of the claimed method, and (4) the content providers in fact performed that final step.” The Federal Circuit then reversed the trial court judgments, each of which had relied on the now overruled BMC, and remanded the cases for further proceedings on the theory of induced infringement.
In his dissenting opinion, Judge Linn, joined by Judges Dyk, Prost, and O’Malley, said that the majority was “assum[ing] the mantle of policy maker,” while promoting the single entity rule of BMC. Judge Linn argued that the majority was redefining “infringement” to have different meanings within the statute, which was not Congress’s intent. Judge Linn criticized the majority for ignoring Congress’s removal of joint-actor patent infringement, which he argued was not provided for in 35 U.S.C. § 271 because Congress wanted to “clear away the morass of multi-actor infringement theories that were the unpredictable creature of common law.” Judge Linn also criticized the majority for ignoring Supreme Court precedent interpreting Congress’s laws, in particular ARO, which the majority distinguished as a case involving a product, and not a method patent. Judge Linn also took issue with Judge Newman’s dissenting opinion, calling it a reversion back to the common law that would “eviscerate” the statutory scheme provided by Congress.
Judge Linn indicated that the legislative history and Supreme Court precedent, namely ARO, clearly supported application of a single entity rule. Thus, because Akamai’s claims were drafted so as to require the activities of both Limelight and its customers for a finding of infringement, Akamai put itself in a position of having to show that the activities of Limelight’s customers were attributable to Limelight. Infringement was not found because Akamai did not meet the burden of showing that Limelight’s customers were agents or otherwise contractually obligated to Limelight, or that they were acting in a joint enterprise when performing steps in the method claim. Likewise, there was no infringement of McKesson’s patent because the healthcare providers, who are customers of Epic, are not in any joint enterprise with their patients, nor are the patients in any agency contractual relationship with the healthcare providers to perform any steps in the patented method.
Judge Newman authored a separate dissent, stating that neither the “scant majority” nor Judge Linn’s dissenting opinion resolved the issues of divided infringement that were presented to the Court. Instead the majority adopted a new “inducement-only rule,” which would apparently provide liability for merely advising or encouraging acts that may not themselves constitute direct infringement. In contrast, a significant minority dissent supported the single entity rule, where divided infringement would not be actionable absent a contract or agency relationship that is directed and controlled by a single “mastermind.” The majority avoids addressing direct infringement, apparently on the theory that the inducement-only rule makes the point moot. Judge Newman commented that, the single entity rule wasn’t in accord with the infringement statute, but neither is the majority’s inducement-only rule.
In Judge Newman’s view, the majority’s new inducement only rule creates more problems than it solves. For example, if the direct infringers are not liable for infringement, may they still be subject to damages or an injunction? In response to the single-entity rule supported by Judge Linn’s dissenting opinion, Judge Newman notes that cleverness or luck in claim drafting should not determine the presence or absence of infringement. The proper outcome would be to throw out both rules and restore infringement to its status as occurring when all the claimed steps are performed, whether by a single entity or more than one entity, whether by direction or control, or jointly, or in collaboration or interaction.
Statute of Repose Under General Aviation Revitalization Act.
By: Barry Levenstam
In U.S. Aviation Underwriters Inc. v. Nabtesco Corp., 697 F.3d 1092 (9th Cir. 2012) (No. 11-35440), the Ninth Circuit addressed the question whether a statute of repose shields manufacturers of component parts that are installed on successive aircraft or whether the statute of repose only applies when the part in question has remained on its original airplane. The court concluded that the statutory language was ambiguous and turned to the legislative history of the statute. The legislative history, according to the court, made clear that the statute of repose was to apply to protect manufacturers even when their parts were re-used. Hence, the fact that the part in question had been manufactured more than 18 years before this suit was filed was held to invoke repose under the Act even though the part was incorporated into the airplane on which it failed much more recently, and well within the 18-year statutory repose period.
Plaintiff’s Verdict Reversed Based On Statute Of Limitations Defense.
By: Barry Levenstam
In Solis v. BASF Corp., No. 1-11-0875 (Ill. App. Ct. Oct. 4, 2012), the Illinois Appellate Court reversed a jury’s verdict for plaintiff in the amount of $30.4 million in a “popcorn lung” case arising from injuries suffered by the plaintiff while working at a factory with diacetyl. The trial court had directed a verdict for plaintiff on defendant’s statute of limitations defense because the plaintiff had not received a medical diagnosis of his lung disease more than two years before he filed suit. The appellate court, however, pointed out evidence in the record indicating that plaintiff had at least some knowledge of his respiratory health problems long before the two-year limitation period expired and, further, that plaintiff also had access to information about the wrongful cause of his condition. Based on this evidence of knowledge, the court reversed the directed verdict and remanded for a new trial, ruling that the statute of limitations defense should have been submitted to the jury for decision.
Preemption and The National Childhood Vaccine Injury Act.
By: Barry Levenstam
In Holmes v. Merck & Co., 697 F.3d 1080(9th Cir. 2012) (No. 08-16557), the Ninth Circuit addressed the appeal of a summary judgment ruling for the defendant vaccine manufacturer on claims brought by the parents of their child, who died after receiving a vaccine. The trial court held that the parents’ state law negligence and strict liability design-defect and failure-to-warn claims were preempted by the Vaccine Act, and the Ninth Circuit agreed. The Vaccine Act creates a no-fault compensation system administered by a “Vaccine Court,” which limits vaccine manufacturers’ tort liability. The Vaccine Act requires the claims of individuals who received the vaccine to go to the Vaccine Court. Plaintiffs argued that since they did not receive the vaccine, the preemptive sections of the Vaccine Act did not apply to their state law claims. The Ninth Circuit held that the Vaccine Act expressly preempts all state law design-defect and failure-to-warn claims seeking compensation for injury or death caused by a vaccine’s unavoidable side effects, including claims brought by parties who did not receive the vaccine.
Alabama Rejects Relation Back Doctrine Due to Plaintiff’s Delay.
By: Barry Levenstam
In Patterson v. Consolidated Aluminum Corp., No. 1110633 (Ala. Aug. 17, 2012), the Alabama Supreme Court reviewed an order dismissing plaintiffs’ actions against the defendant as being barred by the statute of limitations. The plaintiffs argued on appeal that the statute of limitations did not apply because the amendment to their complaint adding the defendants at issue related back to the original filing date of the complaint. The Alabama Supreme Court rejected this argument, ruling that plaintiffs did not get the benefit of the “relation back” doctrine because they did not move promptly to add defendants after discovering their identity from social security records that plaintiffs themselves had supplied to the court.
Statute of Repose Must Be Applied To Punitive Damages Award.
By: Barry Levenstam
In Philip Morris USA Inc. v. Cohen, Nos. 4D10-3534, 4D10-4065 (Fla. Dist. Ct. App. Sept. 12, 2012), the Florida appellate court addressed the question of whether the trial court had erred by refusing to instruct the jury based on the statute of repose. The jury ultimately awarded the plaintiff $10 million in non-economic compensatory damages and $10 million punitive damages. The court upheld the $10 million compensatory award as not excessive and supported by findings that defendants were negligent in selling defective cigarettes. The court also found that although the punitive award was not excessive, the trial judge should have given an instruction based on the statute of repose, limiting the jury in its deliberations about the fraudulent concealment claim to statements made by defendants after 1982. Consequently, the court remanded the matter for a new trial directed solely to the question whether plaintiff is entitled to receive punitive damages based on statements made by defendants after the specified repose date in 1982.
Experts’ Testimony Properly Excluded: Failed To Account For Alternatives.
By: Barry Levenstam
In Graves v. CAS Medical Systems, Inc., No. 27168 (S.C. Aug. 29, 2012), the South Carolina Supreme Court reviewed a trial court’s decision to exclude the testimony of three computer experts offered by plaintiffs to prove that a baby alarm had failed to go off, leading to a baby’s death from Sudden Infant Death Syndrome. All three experts used a “reasoning to the best inference” form of analysis rather than conducting testing of the alarm software. The alarm’s monitor indicated that it had gone off, but plaintiffs stated that they would have heard the alarm and awakened if it had gone off. Accepting that testimony, all three experts reasoned that they had to eliminate “complaint error” – in other words, the possibility that the decedent’s parents actually had missed hearing the alarm – and settled upon software failure as the most likely cause of product failure. The South Carolina Supreme Court affirmed the trial court, concluding that the testimony was unreliable and therefore inadmissible because it did not properly account for the possibility that the child’s parents did in fact sleep through the alarm, and the problem was complaint error rather than software error. Because plaintiffs had no other expert testimony, the court also affirmed the trial court’s grant of summary judgment for defendant.
California’s Expanded Whistleblower Law Paves The Way For More Suits.
A California measure signed into law in September expands who can bring whistleblower claims alleging companies submitted false claims to the State and adds new financial incentives for qui tam relators. Assem. B. 2492, 2011-2012 Gen. Assem. (Cal. 2012) (amending Cal. Gov’t. Code §§ 12650, 12651, 12652, and 12654, to add § 12654.5, and to repeal and add § 12653, relating to the False Claims Act). California is the first state to update its false claims statute with stronger whistleblower protections and stiffer penalties to align with the federal False Claims Act. The new law broadens whistleblower protections covering employees to include contractors and agents, allows for awards of legal fees and costs, and raises civil penalties for violations of the state law from $5,000 to $10,000 per false claim to $5,500 and $11,000. While the California Attorney General and a qui tam relator who is an original source of the information can already bring a false claims action, the new law extends that right to include individuals who are not the original source of the information and may have heard it from a third source. This new group can pursue an action as long as the Attorney General opposes dismissal of the case. The new law also limits the prevailing defendant’s ability to receive attorneys’ fees in cases in which the government has declined to participate, while allowing qui tam relators to potentially share in a minimum guaranteed award even if they participated in the fraud. In addition, the new law expends protections under the anti-retaliation provisions to include not just employees subjected to an adverse employment action because of specific acts in furtherance of a false claims action, but also to anyone who engages in “other efforts to stop one or more violations.”
ERISA Whistleblower Protections Cover Informal Communications.
The Seventh Circuit held that an Employee Retirement Income Security Act (“ERISA”) provision preventing employers from retaliating against workers who protest issues with their pensions includes informal communications as well as formal legal action. George v. Junior Achievement of Cent. Indiana, Inc.,694 F.3d 812 (7th Cir. 2012). An Indiana federal court initially held that Victor George’s complaints to employer Junior Achievement of Central Indiana Inc. about its alleged failure to deposit his withheld pay in his retirement account did not constitute an “inquiry” under ERISA. The Seventh Circuit vacated the lower court’s ruling and held that such informal proceedings do trigger the statute’s protections. The Seventh Circuit found that Section 510 of ERISA, which prohibits retaliation “against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to” the statute, covered George’s complaints to his employer, for which he alleges he was fired. The Seventh Circuit highlighted the provision’s coverage of a worker who has “given information,” as protecting those who brought complaints outside a formal proceeding.
Dodd-Frank Whistleblower Suit Continues Although Initial Report Pre-dates Act.
A New York federal court refused to dismiss a whistleblower claims in a putative class action accusing a company (“FAM”) and its president of illegally restricting trade in health care stocks and firing her in retaliation for exposing the policy. Ott v. Fred Alger Mgmt. Inc., No 11-04418 (S.D.N.Y. Sept. 27, 2012). Although the court dismissed breach of contract, breach of fiduciary duty, unjust enrichment, and other claims from the suit, it ruled that the plaintiff had adequately alleged violations of the Dodd-Frank Act against FAM and its president. FAM argued that plaintiff had not engaged in protected activity under the Dodd-Frank Act because her initial report to the SEC had been made before the statute’s effective date. The court ruled that because the information was provided to the agency after the effective date as well, her actions were protected under the statute.
Department Of Labor Dismisses SOX Claims Brought By Ex-Sprint Attorney.
The United States Department of Labor’s (“DOL”) administrative review board (the “Board”) has dismissed two Sarbanes-Oxley Act whistleblower complaints against Sprint Nextel Corp. brought by a former in-house lawyer. In the Matter of: Jordan v. Sprint Nextel Corp., Nos. 10-113, 11-020 (Dep’t of Labor ARB Aug. 6, 2012). The Board held that the attorney can pursue the allegations when he brings a related complaint in federal court. The attorney worked in Sprint’s Kansas-based corporate governance group from January 2003 to April 2005, where he provided legal advice to ensure compliance with securities laws and regulations and helped administer the telecom’s own ethics policies. The attorney filed his initial complaint with the DOL’s Occupational Safety and Health Administration (“OSHA”) in April 2005, claiming Sprint retaliated against him in violation of the whistleblower protection provisions in the Sarbanes-Oxley Act by threatening to fire him and denying him a raise and a promotion after he opposed the supervisor’s efforts to give a “senior officer” a waiver to the company’s ethics policies. In March 2006, the attorney filed a second OSHA complaint, claiming Sprint violated whistleblower protections by making false allegations about him in its response to his initial complaint. In January 2010, the attorney filed a third OSHA complaint, claiming Sprint and others made false statements related to the first two complaints in a letter to the SEC. An administrative law judge dismissed the attorney’s second and third OSHA complaints in 2010. His initial OSHA complaint was dismissed in May 2011, after the attorney provided notice of his intent to proceed with his claims in federal court. The attorney appealed the dismissal of his second and third OSHA complaints, arguing that he should not be compelled to pursue those complaints in court. The Board rejected that argument, noting that the three complaints derived from the same or overlapping facts, and that it was the attorney’s own decision to remove the principal, original complaint to federal court.
Judge Approves Broad Whistleblower Definition Under Dodd-Frank Act.
In Kramer v. Trans-Lux Corp., No. 11-1424 (D. Conn. Sept. 25, 2012), the district court refused to dismiss a Dodd-Frank whistleblower claim brought by former Trans-Lux employee Kramer, who was fired after advising the company’s board of directors and the Securities and Exchange Commission (“SEC”) that his supervisors were violating the company’s pension plan. Trans-Lux argued that Kramer, a former vice president of human resources and administration, was not a whistleblower under the Act, which defines a whistleblower as one who reports to the SEC. The Act also includes a retaliation provision that protects certain disclosures that do not require reporting to the SEC. Trans-Lux argued that Kramer needed to meet the criteria in the statutory definition as well as have engaged in protected activity listed in the retaliation provision in order to maintain his claim. It asserted that Kramer had failed to “provide  information to the SEC in the manner required by the SEC” relating to a violation of the securities laws” because Kramer informed the SEC of the alleged violations by emails and a letter mailed to the SEC. The court disagreed, noting that Trans-Lux’s interpretation was inconsistent with the goals of the law, which sought to increase transparency and accountability in the financial system and create new incentives and protections for whistleblowers. The court held that the requirement that whistleblowers provide information “in a manner established, by rule or regulation, to the commission” did not apply to the Act’s anti-retaliation section. The court concluded that, in keeping with the applicable SEC rule, individuals only have to allege that a reasonable belief that the information they provide relates to a possible securities law violation, and they provide the information in a manner described in the anti-retaliation provision.
Insurer Sues Law Firm Over FCA Sanctions Coverage.
Westfield Insurance Co. launched a lawsuit against Plews Shadley Racher & Braun LLP in Indiana federal court claiming its policies do not cover the firm in its fight against sanctions imposed in a False Claims Act suit. Westfield Ins. Co. v. Plews Shadley Racher & Braun LLP, No. 12-1217 (S.D. Ind. filed Aug. 29, 2012). In March 2012, the court imposed almost $400,000 in attorneys’ fees and sanctions against Plews Shadley and two other law firms that represented a former ITT Educational Services Inc. employee who claimed the for-profit technical institute defrauded the federal government by giving illegal bonuses to staff who pushed federal financial aid on students. In April, the law firm sought coverage from Westfield for defense and indemnification against the sanctions, which Westfield denied. Plews Shadley then sued Westfield in Indiana state court to obtain coverage, which was later removed to federal court. The underlying suit was dismissed in August 2011 because the relator, a former ITT financial aid administrator, based her suit on publicly available information, not her actual knowledge. In dismissing the suit, the court noted that the employee had not been interested in pursuing an FCA case until after she was approached by a lawyer and researched other cases for herself.
Factors To Determine Whether A Royal Family Member Is A “Foreign Official.”
By: Iris E. Bennett
The U.S. Department of Justice has issued an opinion release addressing whether a member of a royal family is a foreign official. Royal family members are not listed within the FCPA as a type of foreign official. It has been understood by practitioners that royal family membership does not per se render an individual a government official within the meaning of the FCPA unless the country in question is governed by a monarchy. At the same time, it has been understood that royal family members may wield influence that would render them government actors even in a non-monarchical society, and therefore that payments to royals should not be made without a careful analysis of the specific facts of the royal’s role. The issue underlying the DOJ opinion was whether it was permissible for a company to engage a consulting firm to assist in obtaining business with a foreign company’s embassy where one of the consulting firm partners was a member of a royal family in the country at issue. U.S. Dep’t of Justice, Criminal Division, FCPA Opinion Procedure Release No. 12-01 (Sept. 18, 2012). The DOJ concluded that the proposed engagement was permissible, and identified the following factors for determining whether a royal constitutes a government official: (1) how much control or influence the individual has over the levers of governmental power, execution, administration, and finances; (2) whether a foreign government characterizes an individual or entity as having governmental power; and (3) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government. The DOJ concluded that the proposed engagement of a royal’s consulting company was permissible because the royal had no official or unofficial governmental title or role; no official or unofficial power over any aspect of governmental decision-making, including direct or indirect power to award business to the company seeking to engage his company’s services; no ability to gain a government position simply by virtue of his membership in a royal family, no benefits or privileges because of his royal status; and no personal, professional, or familial relationship with the foreign government’s decision-makers responsible for deciding whether to award business to the company.
United Kingdom Fraud Office Hardens Stance On Self-Reporting Rules.
By: Iris E. Bennett
Following a reworking of policies in relation to the United Kingdom’s Bribery Act, the country’s Serious Fraud Office (“SFO”), which handles offenses such as corporate and investment fraud, announced that companies that self-report illegal activity will not necessarily be shielded from prosecution. Press Release, Serious Fraud Office, Revised policies on facilitation payment, business expenditure and Corporate Self-Reporting (Oct. 9, 2012). According to the SFO, the decision of whether to go after a company’s wrongdoing after it self-reports potential offenses will be made based on the Full Code Test in the prosecutorial code and relevant joint prosecution guidance from the SFO and the Crown Prosecution Service, with no assurance that a company will avoid prosecution just because it self-reported. According to the SFO’s revised guidance, if there is a realistic chance of conviction, the SFO will prosecute the action if it is considered to be in the public interest. For a company’s self-report to be taken into account as a public interest factor weighing against prosecution, it has to be part of a “genuinely proactive approach” adopted by top management after the illicit conduct was brought to their notice. The agency further stated that in instances in which it does not prosecute a self-reporting company, it still reserves the right to bring legal actions over any unreported violations of law and to share information on the reported violation to other bodies, such as foreign police services.
Retention By Special Committee Created Client-Relationship With Company.
An appellate court in Pennsylvania has resurrected a lawsuit by the Trustee of insolvent Le-Nature's, Inc. against the law firm that conducted an allegedly inadequate internal investigation. Kirschner v. K&L Gates LLP, 46 A.3d 737 (Pa. Super. Ct. 2012). The case arises out of the 2006 insolvency of Le-Nature’s and the indictment of several of its officers (including its founder and CEO, who was convicted of fraud and received a 20-year sentence). In 2003, during a routine audit, several of the company’s officers expressed concerns about the accuracy of the company’s sales figures, and three of those officers resigned. The company’s Board formed a Special Committee to investigate possible wrongdoing, and the Special Committee engaged a law firm. The law firm conducted an investigation that found no wrongdoing. Three years later, a separate investigation by another firm uncovered a massive fraud and the company was forced into bankruptcy. The trustee filed a complaint on the company’s behalf against the first law firm, alleging that firm should have uncovered the fraud in 2003. The trial court dismissed the complaint for a variety of reasons, including a lack of an attorney-client relationship between the law firm and the company. The trial court noted among other things that the retention agreement provided, “We [the law firm] understand that we are being engaged to act as counsel for the special committee and for no other individual or entity, including the Company or any affiliated entity, shareholder, director, officer or employee of the Company not specifically identified herein.” On appeal, the Superior Court reversed. The Superior Court focused on language in other documents – including the Board resolution authorizing the retention of the law firm and an engagement letter between the law firm and a financial expert – that the investigation was conducted on behalf of the company. The Superior court also found that in retaining the law firm, the Special Committee was acting on behalf of the Board, which in turn was acting on behalf of the company. Accordingly, the court found there was an attorney-client relationship between the law firm and the company. The law firm has appealed the decision to the Pennsylvania Supreme Court, arguing that the Superior Court’s ruling creates uncertainty in attorney-client relationships and makes it difficult to structure an attorney-client relationship that avoids a later finding that the firm represented a third party.
FCPA Charges Against Parent Based On Overlapping Officers With Subsidiary.
By: Iris E. Bennett
Swiss-based Tyco International has agreed to pay more than $26 million to settle DOJ and SEC charges that it and its foreign subsidiaries used “fake” commissions and third-party agents to funnel improper payments to government officials in a dozen countries in order to win business worth more than $10 million. Notably, the SEC alleged that Tyco’s wholly-owned Turkish subsidiary acted as the parent company’s “agent,” in part because four Tyco officers also served as officers of the subsidiary. SEC found no evidence that any of these individuals was actually aware of the potentially improper payments, but nevertheless alleged that, based on the officers’ dual roles, Tyco “controlled” the subsidiary and was therefore vicariously liable. Both DOJ and SEC asserted in public statements that Tyco was given credit for voluntarily disclosing the alleged violations and for the company’s extensive remedial action. Nevertheless, Tyco will pay over $13.7 million in criminal penalties. In addition, while the SEC imposed no civil fines, Tyco will pay over $13 million to the SEC in disgorgement of contract profits and pre-judgment interest. In the criminal matter, a Tyco subsidiary – Tyco Valves and Controls Middle East – pleaded guilty to conspiracy to violate the FCPA, while the parent company was given a non-prosecution agreement. See SEC Litigation Release No. 22491, SEC Charges Tyco for Illicit Payments to Foreign Officials (Sept. 24, 2012), SEC v. Tyco Int’l Ltd., No. 1:12-CV-01583 (D.D.C. filed Sept. 24, 2012); Press Release, Dep’t of Justice, Subsidiary of Tyco International Ltd. Pleads Guilty, Is Sentenced for Conspiracy to Violate Foreign Corrupt Practices Act (Sept. 24, 2012).
Study Finds Voluntary Disclosures Of FCPA Violations Bring No Benefit.
A study performed by two New York University law professors examined cases resolved under the Foreign Corrupt Practices Act to identify the effects of various factors on the ultimate penalties imposed. Stephen J. Choi & Kevin E. Davis, Foreign Affairs and Enforcement of the Foreign Corrupt Practices Act, N.Y.U., Law & Economics Research Paper Series, Working Paper No. 12-15 (July 2012). The study found that penalties were affected by a variety of factors, including the size of the bribes, the amount of profit resulting from the bribes, the number of countries in which violations occurred, the involvement of foreign regulators, the occurrence of violations in countries with lower gross national per capita incomes, and the occurrence of violations in countries with weaker anti-bribery institutions. The researchers did not find a correlation between the extent of the penalties and companies’ efforts to voluntarily disclose the violations, to remediate the problems, or to cooperate with government investigators. These results echo the views of many practitioners who find the benefits of disclosure to be dubious, but are in contrast with the public views of the Department of Justice, which states that it will take voluntary disclosure, cooperation and remediation into account. The study has significant limitations derived from the uniqueness of each FCPA violation and, as a result, the difficulty of comparing penalties in two different cases that have differing variables. However, the study illustrates the complexities of the decision that companies face when trying to determine whether to make voluntary disclosures of FCPA violations that are discovered.