Jenner & Block

Spotlight Newsletter Resource Center

Jenner & Block is excited to introduce “The Spotlight,” an electronic monthly newsletter from the Litigation Department Chair, Craig C. Martin, 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 Justin L. Portaz
at jportaz@jenner.com.

Topics Covered

  • To view Topics Covered, click HERE.

Arbitration

By: Howard S. Suskin

  • Questions of Arbitral Venue Are for the Arbitrator to Decide.

    The U.S. Court of Appeals for the Eleventh Circuit concluded that questions of arbitral venue, including those arising in international arbitration, are presumptively for the arbitrator to decide.  Bamberger Rosenheim, Ltd. V. OA Dev., Inc., 862 F.3d 1284 (11th Cir. July 17, 2017) (No. 16-16163).  Agreeing with at least four other circuits, the court held that disputes over interpretation of forum selection clauses in arbitration agreements raise presumptively arbitrable procedural questions, because such clauses determine where an arbitration is conducted, not whether there is a contractual duty to arbitrate at all.

    [Back to Top]

Class Actions

By: Michael T. Brody

  • Courts of Appeals Address Standing Under Spokeo.

    In Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), the Supreme Court held that to have standing to sue, a plaintiff must complain of injury that is both “particularized” and “concrete.”  In that case, plaintiff complained Spokeo violated the Fair Credit Reporting Act (FCRA) by incorrectly reporting facts as to plaintiff.  FCRA permits plaintiffs to recover liquidated damages without a showing of harm.  The Supreme Court remanded to determine whether, notwithstanding Congress’ determination that a false report may give rise to a claim, plaintiff suffered a concrete injury.  In recent decisions, three courts of appeals have addressed that question.

    The Ninth Circuit decided Robins v. Spokeo, Inc., 867 F.3d 1108 (9th Cir. 2017) (No. 11-56843), on remand.  It held the fact that Congress passed a law providing that a consumer may sue does not mean that plaintiff has standing.  Still, Congressional judgment plays a role in deciding standing.  Thus, the Ninth Circuit asked whether the statutory provision was established to protect a concrete interest, as opposed to a procedural right, and whether the alleged violation presented a material risk of harm to such interests.  Applying that standard, the court found FCRA was passed to protect concrete consumer interests.  The court relied on, among other things, legislative statements that consumers have an interest in eliminating the transmission of inaccurate information.  The court then examined the nature of the alleged inaccuracies to ensure they presented a real risk of harm to concrete interests.  It found that Robins alleged factual inaccuracies in the Spokeo report that could lead to actual harm.  The court thus concluded the allegations of harm were sufficient to establish concrete injury, and thereby standing.

    In Groshek v. Time Warner Cable, Inc., 865 F.3d 884 (7th Cir. 2017) (No. 16-3355), the Seventh Circuit addressed standing under a different FCRA provision.  In applying the Supreme Court’s Spokeo test, the court noted that history and Congress’ judgment are important: Congress is “well positioned to identify intangible harms that will give rise to concrete injuries,” for which prior remedies were “inadequate in law.”  In enacting FCRA, Congress identified a need to ensure accurate consumer reporting and to avoid improper invasions of privacy.  Groshek alleged he authorized the disclosure of some information but defendant disclosed additional extraneous information.  He claimed the disclosure went beyond his “standalone” authorization. The court held this disclosure may have been an informational injury, but did not create a concrete harm because FCRA does not protect individuals from the harm alleged.  Therefore, plaintiff lacked standing.

    The D.C. Circuit addressed standing in Attias v. CareFirst, Inc., 865 F.3d 620  (D.C. Cir. 2017) (No. 16-7108).  Plaintiffs brought a class action alleging defendant’s carelessness and negligence permitted a cyberattack in which customers’ personal information was stolen.  The district court dismissed the case, finding plaintiffs had failed to allege injury in fact.  The D.C. Circuit reversed.  To demonstrate standing, plaintiff must show an injury in fact fairly traceable to the defendant’s actions that is likely to be redressed.  Surveying the cases, the court concluded standing is proper based on allegations of a “substantial risk” of future harm.  Here, plaintiffs’ claims were based on the risk of future injury.  Identity theft, should it occur, would constitute a concrete and particularized injury.  The complaint plausibly alleged plaintiffs faced substantial risk of identity theft, thereby satisfying the Spokeo test.

    [Back to Top]

  • Seventh Circuit Rejects Another “Pick Off” Attempt.

    We have previously reported regarding defense efforts to forestall class actions by offering to pay the class representative the value of the representative’s individual claim.  Prior attempts have involved Rule 68 Offers of Judgment or Rule 67 payments to court registries.  In Laurens v. Volvo Cars of North America, LLC, 868 F.3d 622 (7th Cir. 2017) (No. 16-3829), the Seventh Circuit held that an unaccepted offer of relief before a putative plaintiff files a class action lawsuit does not deprive the plaintiff of standing.  Relying on contract principles, the court held that unaccepted offers are not binding.  Expressing frustration with efforts to moot class actions, the court held that “while the legal effect of every variation on the strategic-mooting theme has not yet been explored, we are satisfied that an unaccepted pre-litigation offer does not deprive a plaintiff of her day in court.”  Notwithstanding the unaccepted offer, plaintiff could allege an injury in fact.

    [Back to Top]

  • Ninth Circuit Affirms Finding that ADA Class Lacked Commonality.

    In Civil Rights Education and Enforcement Center v. Hospitality Properties Trust, 867 F.3d 1093 (9th Cir. 2017) (No. 16-16269), plaintiffs sued defendant, a real estate investment trust (REIT), alleging defendant had failed to offer accessible transportation services at the hotels it operates, as required by the Americans with Disabilities Act (ADA).  Plaintiffs moved to certify the class, which the district court denied because the practices of the 142 hotels managed by the REIT varied.  The Ninth Circuit affirmed.  It found the district court did not abuse its discretion in holding the class lacked commonality.  There was no evidence defendant had discouraged hotel operators from complying with the ADA.  In the absence of a policy or practice applicable to all hotels, the court found commonality lacking.  One judge dissented, finding that the panel’s ruling permitted defendant to evade the requirements of the ADA.

    [Back to Top]

  • Minimal Settlement Relief Does Not Justify Class Counsel Fee.

    In In Re Subway Footlong Sandwich Marketing and Sales Practices Litigation, 869 F.3d 551 (7th Cir. 2017) (No. 16-1662), plaintiff claimed he was deceived by a Subway sandwich marketed as a foot-long sandwich that was actually only 11 inches long.  Discovery showed that all Subway sandwiches were identical – the unbaked breadsticks were uniform, the meat, cheese, and other ingredients were standardized – and the variation in sandwich size was attributable to the baking process.  With no compensable injury, the parties reached an injunctive settlement and agreed to fees of $525,000.  Frequent objector Ted Frank objected, arguing the settlement enriched only the lawyers and provided no meaningful class benefit.  The district court approved the settlement and the Seventh Circuit reversed.  As a class member, Frank had standing to challenge class certification and the approval of the settlement, even though reversal only unwound the attorneys’ fees.  As to the merits, the court found the class representative was not adequate.  A settlement that results only in a benefit for class counsel and no meaningful relief for the class “is no better than a racket.”  The court found it was cynical to suggest the injunction – “a set of procedures designed to achieve better-bread length uniformity” – provided value.  The district court should have dismissed the case “out of hand.”

    [Back to Top]

  • Fourth Circuit Announces Standard for Pleading Facts Supporting Removal.

    In Scott v. Cricket Communications, LLC, 865 F.3d 189 (4th Cir. 2017) (No. 16-2300), plaintiff sued Cricket alleging breach of warranty and consumer fraud claims in connection with the sale of cellular telephones.  Cricket invoked CAFA to remove the case to federal court.  The district court remanded the case to state court, finding Cricket had not proved jurisdiction by a preponderance of the evidence.  The Fourth Circuit reversed.  The court stated that a removal petition must allege CAFA jurisdiction exists.  If the plaintiff challenges removal, as here, the defendant bears the burden of demonstrating removal jurisdiction is proper by a preponderance of the evidence.  If jurisdiction depends on contested claims of class member citizenship, as here, the removing defendant must do more than present “naked averments of citizenship.”  The district court erred in rejecting Cricket’s evidence simply because it included Maryland residents, not all of whom are Maryland citizens.  On remand, the district court was to consider all of the factors relevant to domicile and decide whether Cricket had presented enough facts to permit a court to determine by a preponderance of the evidence, not speculate, that it was more likely than not that jurisdiction existed.

    [Back to Top]

Complex Commercial Litigation

By: David P. Saunders

  • Chancery Court Examines Limits of Stock Revocation Provisions.

    In Henry v. Phixios Holdings, Inc., No. 12504-VCMR (Del. Ch. July 10, 2017), the plaintiff shareholder sought the defendant company’s books and records “for the purpose of investigating mismanagement of the company, communicating with other stockholders, and valuing his shares.”  This otherwise routine request was complicated by the fact that defendants argued that plaintiff was no longer a shareholder because his stock had been revoked by a majority vote of the other shareholders.  The key issue in Henry was whether plaintiff’s shares were encumbered with a revocation right contained in the company’s bylaws, but not printed on its stock certificates.  After a multi-day trial, the Henry court held that where stock restrictions are not “conspicuously” printed on a stock certificate, the restrictions are not binding unless a shareholder has “actual knowledge of the restrictions before he acquires the stock.”  After acquisition, the shareholder can become bound by the restrictions “only if he affirmatively assents to the restrictions.”  Because there was insufficient evidence to demonstrate plaintiff’s pre-purchase knowledge and no evidence of post-acquisition consent, the Court concluded that the attempt to revoke plaintiff’s shares was a nullity.  The Henry court thus granted plaintiff’s books and records request.

    [Back to Top]

  • Investors’ Records Request Denied as End-Run Around Privilege Claims.

    Plaintiffs in Salberg v. Genworth Financial, Inc., No. 2017-0018-JRS (Del. Ch. July 27, 2017) asserted derivative claims against Genworth’s officers and directors.  While the derivate action was pending, Genworth entered into a merger agreement through which it was to be acquired.  The Salberg plaintiffs, represented by the same counsel as in the derivative action, filed a new books and records action seeking information “they believed would reflect whether Genworth’s board of directors considered the value of the derivative claims in negotiating the merger.”  In response, Genworth produced hundreds of redacted documents, asserting attorney-client privilege over assessments of the legal claims in the derivative action.  Plaintiffs challenged the propriety of the redactions under the Garner fiduciary exception, which provides that “in certain instances, the attorney-client privilege will be unavailable to corporate fiduciaries who are defending claims brought against them by those to whom the fiduciary duty is owed.”  Despite finding that plaintiffs met nearly all of the Garner factors, the Chancery Court ultimately accepted defendants’ argument that plaintiffs should not be permitted to use a books and records request to obtain documents to which they would not have been entitled in the derivative action. Specifically, the Court held that there was “no basis under Section 220 or otherwise to compel the defendants in the Derivative Action to produce to their adversary the privileged communications they engaged in with their attorneys regarding the bona fides of the claims they are defending.”

    [Back to Top]

  • Claims of Bad Faith “Not Credible” in Shareholder Row.
    By: David P. Saunders

    After a nine-month on-again-off-again negotiation, and faced with a looming proxy battle against a dissident director slate put forward by an activist investor, the nine-person Board of MeadWestvaco agreed to a merger with another company.  The merger, which resulted in a 9.1% premium over MeadWestvaco’s stock price, was ultimately approved by 98% of the MeadWestvaco shareholders.  Nonetheless, the plaintiff shareholders in In re MeadWestvaco Stockholders Litigation, No. 10617-CB (Del. Ch. Aug. 17, 2017), alleged that the MeadWestvaco Board – which included eight independent and disinterested directors – acted in bad faith by agreeing to a merger that undervalued MeadWestvaco by $3 billion.  To succeed on their claim, the shareholders had to show “an extreme set of facts” to establish that the disinterested directors “intentionally” disregarded their fiduciary duties.  In reviewing the facts of the merger, the Chancery Court noted the duration of the negotiation; the fact that several, reputable advisors advised the MeadWestvaco Board to enter into the merger; and the support the merger received from shareholders.  The court then concluded that “[P]laintiffs’ theory that the concededly disinterested and independent directors” left between one-third and one-quarter of the derivative company’s valuation “on the negotiating table” was “simply not credible.”  The MeadWestvaco Court therefore dismissed the action in its entirety.

    [Back to Top]

Electronic Discovery

By: Daniel J. Weiss

  • Taylor Swift Permitted to Cross-Examine on Spoliation; No Adverse Inference Instruction.

    In Mueller v. Swift, No. 15-cv-1974-WJM-KLM (D. Colo. July 19, 2017), a radio personality sued pop star Taylor Swift for allegedly getting him fired by accusing him of inappropriately touching her during a promotional event.  Swift countersued for assault and battery.  The plaintiff had secretly recorded a meeting in which he was fired, which included a discussion of Swift’s accusations and an allegedly “chang[ing] . . . story” by the plaintiff about what happened.  Long after first contacting an attorney regarding potential litigation, the plaintiff edited the audio recording and sent only “clips” of the audio file to his attorney because the conversation “was close to two hours long.” After sending the edited clips, the plaintiff failed to retain a full copy of the original recording.  The plaintiff never produced the full audio recording, and Swift moved for sanctions for spoliation including an adverse instruction to the jury at trial that “the entirety of the . . . audio recording would have been unfavorable” to the plaintiff.

    The court found that the plaintiff had a duty to preserve the recording, that the recording was relevant to the issues in the case, and that the loss of the recording had prejudiced Swift. The recording was “contemporaneously-created evidence regarding the central disputed events in this case,” and its production would have saved time and expense in the litigation, resolved factual discrepancies, and enabled Swift “to explore whether [the p]laintiff has or has not ‘changed his story’” or engaged in “‘cherry picking’ of only the favorable ‘clips’ of the conversation.”  Although the court found that the plaintiff’s “spoliation falls higher up on the ‘continuum of fault” than mere negligence, the court nevertheless declined to impose as harsh a sanction as an adverse inference instruction.  While the court “[took] a dim view of [the p]laintiff’s acts of spoliation,” it found that “the record does not establish—at least not clearly—that [the p]laintiff was acting with an intent to deprive [Swift] of relevant evidence,” as required under Rule 37(e) of the Federal Rules of Civil Procedure. Moreover, the court found that the “availability of testimony and other evidence” concerning the conversation mitigated the prejudice to Swift and that an adverse inference instruction could put “too heavy of a thumb on the scale against [the p]laintiff’s credibility,” thereby invading the fact-finding role of the jury. The court therefore held that it would permit Swift to cross-examine the plaintiff regarding the spoliation, but not provide an “adverse interest” instruction.

    [Back to Top]

  • New Jersey Supreme Court Holds that Public Records Metadata Are Themselves Public Records.

    In Paff v. Galloway Township, 162 A.3d 1046 (N.J. 2017) the Supreme Court of New Jersey unanimously held that electronic metadata, including email fields for “sender,” “recipient,” “date,” and “subject,” pertaining to electronically stored public records are themselves subject to disclosure under New Jersey’s Open Public Records Act (OPRA). The ruling overturned an intermediate appellate court holding that such metadata amounted to the creation of a new document, exceeding the requirements of the OPRA. The Supreme Court reasoned that the OPRA defined a “government record” to include “information stored or maintained electronically” by a New Jersey municipality, and that the metadata sought “was clearly defined and circumscribed; was stored electronically; and by the [defendant] Township’s own admission, could have been produced within minutes.” The court remanded the matter to the trial court to determine whether any statutory exemption in the OPRA would permit the defendant to deny the request at issue, noting the concerns for disruption of public investigations or agency operations and for citizen privacy. But as noted by plaintiff’s counsel, the ruling arguably “makes any [government] document or database fair game. . . . [I]f the government agency can run a report, they have to run it.”

    [Back to Top]

  • Court Orders Party to Bear Its Own Costs to “Double-Check” Opponent’s Review.

    In Nachurs Alpine Solutions Corp. v. Banks, No. 15-CV-4015-LTS (N.D. Iowa July 7, 2017), a trade secrets case, the defendants used court-ordered search terms to identify approximately 55,000 documents, which defendants then reviewed for privilege, duplication, and relevance.  Based on that review, the defendants withheld approximately 44,000 documents that they determined were not relevant to the issues in the case notwithstanding a search term “hit.”  The plaintiff subsequently argued that the defendants “culling” of the 55,000 documents was flawed because certain types of relevant documents had been excluded from the review.  The plaintiff moved to require the defendants to re-do their review of the original batch of 55,000 documents or to produce all of those documents to plaintiff and allow plaintiff to “cull” the documents at defendants’ expense.  The court found that there was “at least a colorable prima facie showing that the withheld documents fell within the broad scope of liberal discovery because they contained one of the terms to search for potentially relevant documents in defendants’ ESI.” While accepting that defense counsel acted in good faith in making its responsiveness determinations, the court acknowledged that there was “no way for the [c]ourt or plaintiff to double-check” the defendants’ work “without reviewing the documents themselves.” Ultimately, the court found that “it would be disproportional to require defendants to go back through the documents to identify those that fall within the four categories plaintiff believes are most likely to generate relevant documents.” Accordingly, the court ordered the defendants to produce all of the documents under an Attorneys Eyes Only designation without admission that the documents are relevant, but that the plaintiff must bear its own costs to review these documents for the categories it believed held relevant documents.

    [Back to Top]

Environmental Litigation

By: Steven M. Siros

  • Failure to Consider Downstream GHG Emissions Results in Remand of FERC Pipeline Approval.

    On August 22, 2017, a divided D.C. Circuit panel sided with the Sierra Club and other environmental groups by concluding that the Federal Energy Regulatory Commission ("FERC") didn't adequately analyze the impacts of greenhouse gas ("GHGs") emissions that may result from a $3.5 billion natural gas pipeline to be constructed through Florida. See Sierra Club v. FERC, 867 F.3d 1357 (D.C. Cir. 2017) (No. 16-1329).  The project in question is an approximately 500-mile long natural gas pipeline scheduled to be completed in 2021 and which is projected to carry over one billion cubic feet of natural gas per day.

    Section 7 of the Natural Gas Act vests jurisdiction to approve such a pipeline with FERC. Before such a pipeline can be approved, FERC must grant the developer a certificate of public convenience and necessity (often referred to as a Section 7 certificate). Prior to issuing the Section 7 certificate for this project, FERC prepared an environmental impact statement ("EIS") as required by the National Environmental Policy Act ("NEPA"). Sierra Club and other environmental groups challenged FERC's EIS and subsequent Section 7 certificate on the grounds that it failed to adequately consider the pipeline's contribution to GHG emissions and its impact on low-income and minority communities.

    After dealing with several jurisdictional issues (including standing), the court addressed the merits of plaintiffs' claims.  First, the court disagreed with plaintiffs' argument that the EIS failed to adequately consider the project's impact on low-income and minority communities, noting that the EIS acknowledged and considered all of the concerns that the plaintiffs now raised. The court stated that the EIS "gave the public and agency decision makers the qualitative and quantitative tools they needed to make an informed choice for themselves. NEPA requires nothing more."

    Turning next to plaintiffs' argument that the EIS failed to adequately consider the effect of GHGs that would be emitted by power plants in Florida that would burn the natural gas transported by the pipeline, the court noted that NEPA requires that an agency consider not only the direct effects, but also the indirect environmental effects, of the project under consideration. The court concluded that the reasonably foreseeable effects of authorizing a pipeline that transports natural gas is that the natural gas will in fact be burned, which will in turn generate GHG emissions. As such, the court concluded that the EIS "should have either given a quantitative estimate of the downstream greenhouse gas emissions that will result from burning the natural gas the pipelines will transport or explained more specifically why it could not have done so." The EIS then needed to include a discussion as to the "significance" of these GHG emissions as well as the incremental impact of these emissions when added to other past, present, and reasonably foreseeable future actions. Notably, the court rejected FERC's "practical objection" that assessing GHG emissions in the EIS requires too much speculation because it cannot know exactly what quantity of GHGs may be emitted as a result of the pipeline approval, given uncertainty in how much gas may be consumed by the power plants. The court thus remanded the matter back to FERC for preparation of an EIS consistent with the court's opinion.

    In response to the court’s remand, FERC quickly issued a supplemental environmental impact statement (“SEIS”) which analyzed downstream GHG emissions from the three power plants that would be served by the pipeline and concluded that the emissions would not have a significant environmental impact.  FERC concluded that the GHG emissions from the pipeline would represent between 3.7% and 9.7% of Florida’s total GHG emissions but noted that it was unable to find a suitable method to evaluate the discrete environmental effects of these emissions.  The public comment period on the SEIS runs through November 20, 2017, and it is likely that the Sierra Club will challenge the SEIS as being inadequate and failing to adequately evaluate the impact of the project’s GHG emissions.

    The court's decision could have far-reaching impacts on EIS procedures for proposed pipeline projects generally, especially given the court's rejection of FERC’s long-held position that assessing GHG emissions beyond the operations of the pipeline itself is too speculative to be useful for NEPA purposes.  For example, will FERC need to evaluate potential GHG tailpipe emissions from automobiles that will burn gasoline that is ultimately produced from petroleum that flows through a pipeline?  Does the Department of Energy need to evaluate GHG emissions that might be generated by LNG exports?  These issues remain in flux following the D.C. Circuit’s opinion.

    [Back to Top]

Insurance and Reinsurance Litigation

  • Continued Split Over Coverage for Fraudulently-Induced Monetary Transfers.
    By: Jan A. Larson and Caroline L. Meneau

    A number of courts have considered the issue of whether fidelity and crime policies with “computer fraud” provisions provide coverage for events in which employees are fraudulently induced to respond to inquiries purporting to be from a valid source, and in response, wire money to a third-party perpetrator.  These courts are divided, however, as to whether coverage is available for these types of fraudulently-induced transfers under fidelity and crime policies.  The Fifth and Ninth Circuits have both held that typical computer fraud provisions do not extend to losses resulting from this type of fraud.  Apache Corp. v. Great Am. Ins. Co., 662 F. App’x 252 (5th Cir. 2016); Pestmaster Servs., Inc. v. Travelers Cas. & Sur. Co. of Am., 656 F. App'x 332 (9th Cir. 2016); Taylor & Lieberman v. Fed. Ins. Co., 681 F. App'x 627 (9th Cir. 2017).  Despite this appellate authority, some district judges in other circuits have held that policyholders are, in fact, entitled to coverage under similar circumstances.

    A set of recent decisions underscores the uncertainty about whether fidelity and crime insurance policies that provide coverage for “computer fraud” will apply in response to a fraudulently-induced transfer.  The cases have similar facts and similar policy provisions, however, the outcomes are different—highlighting the need for policyholders to consider obtaining specialized coverage to avoid potential coverage gaps.  In August 2016, a Georgia district court ruled that the computer fraud provision of a company’s commercial crime policy provided coverage for an incident in which an employee wired funds outside of the company after being induced to do so by receipt of an email later determined to be fraudulent.  Principle Sols. Grp., LLC v. Ironshore Indem., Inc., No. 1:15-CV-4130-RWS (N.D. Ga. Aug. 30, 2016),and in July 2017, a New York district court likewise ruled that the computer fraud provision of a company’s commercial crime policy provided coverage for an incident in which a perpetrator sent fraudulent emails to company employees, tricking them into wiring money overseas.  Medidata Sols., Inc. v. Fed. Ins. Co., No. 15-CV-907 (ALC) (S.D.N.Y. July 21, 2017).  Most recently, however, on August 1, 2017, a Michigan district court reached the opposite conclusion, holding that a company was not entitled to coverage under its commercial crime policy for an incident in which perpetrators posing as a vendor used fraudulent emails to induce company employees to wire money to a sham account.  Am. Tooling Ctr., Inc. v. Travelers Cas. & Sur. Co. of Am., No. 16-12108,  at *1 (E.D. Mich. Aug. 1, 2017).

    These cases underscore the growing uncertainty surrounding whether traditional fidelity and crime insurance policies will provide coverage for fraudulently-induced transfers.  Until the law develops further, policyholders should evaluate the necessity of separate coverage particular to these types of losses—such as a stand-alone cyber liability policy—or instead attempt to obtain broader coverage in their existing fidelity and crime policies.

    [Back to Top]

  • Precise Policy Terms and Provisions Result in Coverage for Power Generator’s Property Damage and Business Interruption Losses.
    By: Jan A. Larson and Alexander J. Bandza

    In a recent decision, the Appellate Division of the Supreme Court of New York held that coverage under an “all risks” policy extended to losses resulting from damage to a power-generating turbine and a subsequent outage, notwithstanding that the precipitating cause occurred prior to the policy period.  Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 28 N.Y.S.3d 800, 804 (Sup. Ct. 2016), aff’d, National Union Fire Insurance Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 2017 NY Slip Op 06513(App. Div. Sept. 19, 2017).  There, the property at issue was a power-generating turbine at TransCanada Energy USA Inc.’s (“TransCanada”) Ravenswood Generating Station in New York.  On September 12, 2008, Unit 30 was taken out of operation due to excessive vibrations.  A nine-inch crack in the rotor was discovered as the cause of the vibrations, though it appeared to have formed well-before that date.  Between September 12, 2008 and May 18, 2009, the turbine required repair and was not available to generate electricity.  As a result, TransCanada experienced significant property damage in excess of $7 million and business interruption losses for lost sales of capacity in excess of $48 million.

    TransCanada had in place a combined first-party property and business interruption insurance policy, by which its property was insured against all risks of physical loss or damage, as well as against losses of “gross earnings” arising from the interruption of business activities, including mechanical breakdown.  TransCanada sought coverage for the incident and subsequent outage under that policy, which the insurers denied, and litigation resulted.

    Although the incident giving rise to the damage or loss (i.e., the crack) may have occurred prior to the policy period, the trial court held that the property damage loss was covered because “there is no provision in the policy that excludes physical loss or damage originating before the commencement of the policy period, or any requirement that the cause of the loss or damage occur during the policy period, or even any provision linking coverage to the cause of the loss or damage.”

    The trial court further held that the “period of liability” provision did not limit TransCanada’s business interruption loss to May 18, 2009, the date Unit 30 returned to service.  In the policy, “period of liability” was defined as the period beginning from the time of physical loss or damage until the time of repair or replacement.  It was undisputed that the majority of TransCanada’s claimed lost sales of capacity were not realized until capacity auctions held after Unit 30 has been returned to service.  TransCanada explained, however, that because capacity revenues are calculated and paid at later auctions, its loss includes decreased capacity revenues sustained and earned during the “period of liability,” even if not calculated and paid until the later auction.  The trial court again agreed, noting that that the lost sales of capacity were “neither speculative nor incapable of being linked directly to the period of liability at issue.”  

    The appellate court later affirmed the trial court’s decision on both points.  This case underscores that the specific wording of the terms and provisions of an insurance policy can be outcome-determinative as applied to the facts and circumstances of the loss and a policyholder’s ability to obtain insurance coverage.

    [Back to Top]

  • In Determining No Coverage, New York Federal Court Finds SEC Investigation and Subpoena Are Claims.
    By: Brian S. Scarbrough

    The United States District Court for the Southern District of New York has found that an SEC investigation and subpoena were a “Claim” under a directors’ and officers’ liability insurance policy such that they triggered an exclusion from coverage for pending and prior claims.  Patriarch Partners, LLC v. Axis Insurance Co., No. 16-CV-2277 (VEC) (S.D.N.Y. Sept. 22, 2017).  Axis had issued an excess directors’ and officers’ liability insurance policy to Patriarch incorporating the “Claim” definition from an underlying policy.  The Axis policy also included an exclusion for pending and prior claims as of the inception date of the policy, August 11, 2011.  The SEC began investigating Patriarch in 2009, first through an informal inquiry, then in May 2011 as an informal investigation, then on July 1, 2011 through a document subpoena of a former Patriarch executive.  The SEC issued that document subpoena pursuant to an SEC formal order dated June 3, 2011 authorizing an investigation of Patriarch.  The Court determined that the July 1, 2011 document subpoena to a former Patriarch executive and the June 3, 2011 SEC formal order of investigation of Patriarch both constituted a “Claim” for purposes of triggering the Axis policy’s pending and prior claim exclusion.  The Court reasoned that the subpoena met the Claim definition of a demand for non-monetary relief and that compliance with the subpoena was not optional.  The Court also reasoned that the Axis policy’s definition of Claim as a demand for non-monetary relief did not also require an allegation of a wrongful act.  On the other hand, the Axis policy’s alternative definition of Claim as an investigation did require an allegation of a wrongful act.  The Court then found that the SEC’s formal order of investigation also met that Claim definition and alleged a wrongful act.

    [Back to Top]

Investigations, Compliance and Defense

  • Alleged Mischaracterizations About Internal Investigation Support 10b-5 Scienter.
    By: Robert R. Stauffer and Ana R. Bugan

    In Wert v. Cohn, No. 17-C-219 (N.D. Ill. Sept. 1, 2017), shareholders of Ditto Holdings (“Ditto”) sued Ditto’s general counsel and members of Ditto’s board of directors.  Plaintiffs alleged mismanagement and fraud, including fraud under Rule 10b-5 of the securities laws.  Some of plaintiffs’ allegations concerned an investigative report prepared by Ditto’s outside counsel.  Ditto had hired the law firm to investigate a former director’s allegations of corporate mismanagement.  In its final report, outside counsel concluded that Ditto’s operations lacked discipline and transparency and made several recommendations to assist Ditto to improve its corporate practices.  In the complaint, plaintiffs alleged that defendants made misrepresentations about the investigative findings and the extent to which Ditto had implemented outside counsel’s recommendations for improvement.  With respect specifically to defendant Cohn, who plaintiffs alleged was Ditto’s general counsel (an allegation Cohn disputed but that the court accepted as true for purposes of the motion to dismiss), plaintiff James Myers claimed that he decided to invest in Ditto after Cohn and a board member led him to believe that outside counsel’s investigative report did not support the former director’s allegations of mismanagement.  Cohn moved to dismiss Myers’s Rule 10b-5 claim against him, arguing that Myers did not allege fraud – especially Rule 10b-5’s scienter requirement – with particularity.  The court concluded that Myers alleged facts giving rise to a strong inference of scienter:  Cohn responded to Myers’s questions about the former director’s allegations by referring to outside counsel’s investigative report.  And it was reasonable to infer that Cohn, as Ditto’s general counsel, was familiar with the contents of the report.  The court also concluded that it was reasonable to infer that Cohn understood that any assurances to the effect that the investigative report did not contain support for the former director’s allegations and that the report’s recommendations had been implemented were false or at least misleading.  Consequently, the court denied Cohn’s motion to dismiss Myers’s Rule 10b-5 securities fraud claim.

    [Back to Top]

  • Telecom Giant Telia Resolves Bribery Scheme with $965 Million Global Settlement.
    By: Erin R. Schrantz

    On September 21, 2017, the Department of Justice announced that Swedish-based Telia Company entered into the third largest ever global FCPA resolution with $965 million in combined disgorgement and criminal penalties.  The settlement concluded investigations conducted by the U.S. Department of Justice, the U.S. Securities and Exchange Commission, and Swedish and Dutch authorities.  Telia is a multinational telecommunications company and the dominant telephone and mobile network company in Sweden, Finland, and the Baltic region.  Telia was charged in a one-count Information with conspiracy to violate the anti-bribery provisions of the FCPA, and in its deferred prosecution agreement, agreed that it participated in a conspiracy with its Uzbek subsidiary, Coscom LLC.  For its part, Coscom was charged with, and pled guilty to, one count of conspiring to violate the anti-bribery provisions of the FCPA.

    According to the DOJ, between approximately 2007 and 2012, Telia and Coscom paid more than $331 million in bribes to illegally obtain telecommunications business in Uzbekistan.  DOJ alleged:  “The bribes were paid to an Uzbek government official who was a close relative of a high-ranking government official and who exercised influence over Uzbek telecommunications industry regulators.  Telia and Coscom structured and concealed the bribes through various payments to a shell company that certain Telia and Coscom management knew was beneficially owned by the foreign official.  The bribes were paid on multiple occasions over a period of approximately five years so that Telia could enter the Uzbek market and Coscom could gain valuable telecom assets and continue operating in Uzbekistan.” The DOJ described a scheme where “under the direction and control of the Uzbek government official, more than $331 million in bribery proceeds were laundered through accounts held in various countries around the world.”

    In total, Telia agreed to pay criminal penalties totaling approximately $548.6 million and to disgorge approximately $457 million in profits and prejudgment interest, making it one of the most expensive FCPA settlements in history.  In addition, three former Telia executives, including the former CEO, have been charged by the Swedish Prosecution Authority with bribery offenses.

    [Back to Top]

  • Uber Faces Inquiry into Asian Bribery.
    By: Erin R. Schrantz

    Uber Technologies confirmed that it is cooperating with a Department of Justice investigation into potential violations of the FCPA, including whether Uber paid bribes in Indonesia and Malaysia.  The investigation of conduct in Indonesia involves an employee who allegedly paid Indonesian police to continue operating an Uber office in Jakarta after local authorities found it violated local zoning laws.  The employee allegedly included the payments on his expense reports as payments to local authorities.  The government is also investigating Uber’s investment in a Malaysian government-backed program for entrepreneurs at the same time that a Malaysian pension fund made a large investment in Uber and less than a year before Malaysia passed laws favorable to Uber.

    [Back to Top]

Privilege Issues

By: David M. Greenwald

  • Disclosure to Government to Urge Prosecution Waived Work Product Protections.

    In Dresser-Rand Co. v. Schutte & Koerting Acquisition Co., 242 F. Supp. 3d 576  (S.D. Tex. 2017) (No. H-12-184), the court held that plaintiff’s voluntary disclosure of an expert report to the government to encourage the government to initiate a criminal prosecution waived otherwise applicable work product protections.  Plaintiff brought this action against a competitor and two of plaintiff’s former employees alleging that the employees had misappropriated trade secrets and other confidential information.  After filing the lawsuit, plaintiff approached the U.S. Attorney’s Office in an attempt to encourage criminal prosecution of the former employees.  Plaintiff voluntarily turned over a forensic expert’s report to the federal prosecutors.  In the civil litigation, Plaintiff withheld from discovery the expert report and related correspondence between plaintiff and the prosecutors on grounds of the joint prosecution privilege and work product protections.  The court held that the disclosure waived work product protections.  The court explained that some courts have applied a joint prosecution privilege in the context of False Claims Act litigation, where a relator brings a qui tam action on behalf of the government, and where it could be said that the government and the relator shared a common legal interest.  However, the court found that there was no common interest between the civil action before the court and a criminal prosecution.  “[Plaintiff] made a calculated disclosure to further the government’s inclination to prosecute the two former employees.  In the context of a criminal prosecution, there is no joint prosecution privilege between [Plaintiff] and the United States.”

    [Back to Top]

  • Privileged Waived by Publishing Investigation Report, but Work Product Remained Intact.

    In Doe v. Baylor University, No. 16-CV-00173-RP (W.D. Tex. Aug. 11, 2017), the court held that defendant, Baylor University, waived the attorney-client privilege with respect to outside counsel’s investigation materials, but that work product protections remained intact with respect to undisclosed investigation work product.  In this matter, Baylor hired outside counsel to conduct an “independent and external review” of the university’s response to Title IX and related compliance issues.  Following completion of the investigation, Baylor released two documents that summarized in detail the factual findings by outside counsel, and counsel’s recommendations to Baylor.  In addition, in a filing made by Baylor in related litigation, Baylor quoted text messages and paraphrased conversations among Baylor personnel regarding alleged sexual criminal conduct by football players reported to athletic staff.  Baylor explained in the filing that all facts and evidence discussed in the filing had been revealed by counsel’s investigation.  Plaintiffs sought discovery of investigation related work product, arguing: (1) the investigation was not privileged in the first instance; and (2) Baylor waived the attorney-client privilege through its repeated public disclosures.  The court found that Baylor was seeking legal advice when it engaged outside counsel, therefore investigation materials were privileged in the first instance.  The court noted that, although the engagement letter did not refer to “legal advice,” “there is no magic phrase that must be included in an engagement letter to invoke the attorney-client privilege.”  The court explained that the letter indicated that Baylor engaged counsel to review its compliance with federal law, which was a request for legal advice.  The court also credited declarations submitted by Baylor’s in-house and outside counsel that supported the legal nature of the investigation.  The court then held that Baylor’s repeated and detailed disclosures of the results of the investigation, including through affirmative use in litigation, went beyond merely disclosing non-privileged facts and waived the attorney-client privilege over undisclosed investigation materials prepared by counsel.  However, the court held that the work product doctrine continued to protect those very same materials.  The court found that the work product protection applied, because Baylor engaged counsel in response to the threat of litigation.  In addition, the court held that Baylor had not waived protection over undisclosed work product, because the scope of waiver of the work product doctrine generally applies only to the work product disclosed and not to undisclosed work product.  However, the court noted that Baylor would risk waiving work product protections if it later asserted advice of counsel as an affirmative defense in the case.

    [Back to Top]

  • Communications With PR Consultant Not Privileged.

    In Bousamra v. Excela Health, 167 A.3d 728 (Pa. Super. Ct. 2017) (No. 1637 WDA 2015), the court considered whether, under Pennsylvania law, the attorney-client privilege applied to communications with a public relations consultant.   Two cardiologists brought this action against their former employer, Excela, alleging that Excela acted tortiously by conducting peer review of their work in bad faith and engaging in a campaign to prevent them from competing at a rival hospital by publicly announcing at a press conference that the doctors had performed medically unnecessary procedures.  Prior to the press conference, Excela engaged an outside public relations consultant, Cate.  Excela told Cate that legal issues prevented public disclosure of the names of the doctors.  The next day, outside counsel provided advice to Excela’s General Counsel in an email, which the GC forwarded to Cate and to Excela management level employees.  Four days later, Excela announced the doctors’ names at the press conference.  Plaintiffs sought discovery of outside counsel’s email, arguing that Excela waived privilege by disclosing it to Cate.  The trial court agreed, and the appellate court affirmed, identifying several factors indicating that Cate did not provide or assist counsel to provide legal advice and, therefore, Cate was not a privileged agent of counsel.  Among other things, Cate had been providing business-related media advice to Excela for years; the communication from the GC to Cate did not solicit advice that would assist counsel to provide legal advice to Excela; Cate in fact did not provide such advice to Excela; Cate testified that her sole concern was Excela’s reputation; and the GC did not indicate that he consulted Cate about the legal implications of identifying the doctors’ names.  Under these circumstances, the court held that Cate’s work was not legal in nature, and disclosure to Cate waived the attorney-client privilege.

    [Back to Top]

  • Court Applies and Explains Contours of Federal Mediation Privilege.

    In ACQIS, LLC v. EMC Corp., No. 14-cv-13560 (D. Mass. June 29, 2017), the court applied and described the contours of the federal mediation privilege.  In this patent infringement matter, defendant EMC sought discovery of certain settlement communications between plaintiff and third parties; plaintiff objected, asserting the federal mediation privilege.  The court noted that neither the First Circuit nor any court in the District of Massachusetts had addressed the mediation privilege, but that several district courts in other Circuits have recognized the mediation privilege under federal common law.  The court explained that the precise scope of the privilege remains unclear.  The court held that the federal mediation privilege protects only communications made in direct connection with a formal mediation, specifically, “communications to which a mediator was personally privy, communications that were directly made at a mediator’s explicit behest, or communications undertaken with the specific intent to present them to a mediator.”  The court explained that the privilege does not apply to settlement negotiations in which a mediator is not actively and directly involved, such as negotiations that follow formal mediation, even when the negotiations involve information learned during the mediation or where they occurred in light of the mediation.

    [Back to Top]

  • Failure to Provide Privilege Log in Absence of Agreement Waives Privilege.

    In Fidelity and Deposit Co. of Maryland v. Travelers Casualty and Surety Co. of America, No. 2:13-cv-00380-JAD-GWF (D. Nev. May 31, 2017), the parties had worked cooperatively on discovery for several years, exchanging more than 800,000 pages, and obtaining more than 1.5 million pages of documents through third party subpoenas.  Between May 2013 and September 2016, the parties filed eight agreed motions to extend discovery deadlines.  During that time, defendant Travelers had responded to discovery with what the court later determined were deficient objections.  Travelers had agreed to produce all non-privileged responsive documents and objected generally that certain document requests sought documents that “may be privileged and confidential under either the work product and/or attorney-client privileges.”   Travelers did not provide a privilege log or otherwise provide any information regarding documents that had been withheld, and plaintiff’s only complaint about the absence of a log was in a single letter sent to Travelers in January 2015.  In February 2017, the parties engaged in an unsuccessful mediation.  In March 2017, plaintiff changed firms.  Following that change, “the parties’ relationship [became] substantially more contentious.”  Travelers produced a partial privilege log less than a month after receiving a demand for one from plaintiff’s new counsel, but Plaintiff nevertheless moved to compel production of withheld documents based on Travelers’ failure to assert proper objections or timely serve a log.  The court noted that the Ninth Circuit has rejected a per se waiver rule that deems privilege waived if a log is not provided within Rule 34’s 30-day time limit, and instead applies a multi-factor analysis to determine whether waiver is appropriate.  Here, the time between Travelers’ log and its production in response to three sets of document requests was 3 years 3 months, just under 2 years, and 4 months, respectively.  In addition, there was no evidence that Travelers had made any effort to prepare a log prior to March 2017 or that it had an agreement with plaintiff respecting the time for production of a log.  The court found that, although Travelers may have been lulled into complacency by plaintiff’s prior counsel, that “is not a legitimate excuse for not producing a privilege log,” so Travelers’ failure to submit a log waived otherwise applicable privileges.

    [Back to Top]

  • Court Applies Selective Waiver Where Non-Waiver Agreement in Place with Government.

    In In re Ex parte Application of financialright GmbH, No. 17-mc-105 (DAB) (S.D.N.Y. June 22, 2017), the court held that disclosure of privileged investigation information to the Department of Justice did not waive privilege as to third party civil litigants where the disclosing party had a non-waiver agreement with the government.  This matter relates to an application by individual owners of Volkswagen and Audi cars in Germany for an order pursuant to 28 U.S.C. § 1782 granting leave to obtain discovery for use in proceedings in the German Courts.  Movants sought very broad discovery of materials (“practically a universe of documents”) prepared during or relating to Jones Day’s extensive investigation of emissions issues, which involved review of millions of documents and interviews of hundreds of VW employees summarized and analyzed in “innumerable” internal memoranda.  The court addressed the question whether disclosure of privileged investigation information to the DOJ waived privilege as to third parties.  Jones Day stated that it had never submitted its interview notes to VW or to the DOJ.  However, in the course of cooperating with the DOJ’s criminal investigation, Jones Day entered into an agreement with the DOJ to preserve VW’s claims of attorney-client privilege and work product protection for information disclosed to the DOJ in the course of that cooperation.  The agreement stated that VW, through Jones Day, intended to provide the DOJ oral briefings regarding its investigation, and that VW may furnish additional information in connection with the oral briefings; to the extent that VW provided privileged materials to the DOJ, VW did not intend to waive privilege as to those materials; and the DOJ would keep privileged materials confidential “except to the extent [the DOJ determined] in its sole discretion” that disclosure would further the discharge of its duties and responsibilities or was otherwise required by law.  The court noted that the Second Circuit has not established a rigid rule regarding waiver where the disclosing party has entered into an explicit non-waiver agreement with the government.  The court also cited decisions by sister courts in the Southern District of New York that had held that disclosure to the government did not waive privilege where the government had entered into a non-waiver agreement.  “The Court here is swayed by the cases holding that disclosures made pursuant to non-waiver agreements do not waive the protections of the work product doctrine or attorney-client privilege, recognizing . . . the ‘strong public interest in encouraging disclosure and cooperation’“ with law enforcement agencies.  The court held that the DOJ’s discretion to disclose the materials to third parties did not require a different result, because “that discretion is cabined” by the requirement that disclosure be in furtherance of its duties or otherwise required by law.

    [Back to Top]

Professional Responsibility and Ethical Developments

By: Gregory M. Boyle and John R. Storino

  • Potential Conflict for In-House Attorneys Representing Multiple Entities in Corporate Family.

    A recent Illinois State Bar Association ethics opinion (non-binding) advised that although an in-house lawyer at one subsidiary may also do work for another subsidiary, attorneys need to be mindful of the possibility for conflicts of interest and confidentiality issues to arise, and take steps to deal with them if they do.  See ISBA Professional Conduct Advisory Opinion, No. 17-05 (May 2017).  In the opinion, the committee said it was acceptable for an attorney at one subsidiary to perform work for another subsidiary within the corporate family.  But the committee noted that its opinion was limited to the factual situation the in-house lawyer identified, which did not involve “conflict or adversity” between the subsidiaries, and there was no suggestion that confidential information would be shared.  The Bar Association also noted that current authority supports the position that an in-house lawyer may represent a corporate parent along with multiple subsidiaries of that parent.  As part of the opinion, the committee explained that although intra-family representation presents many “problematic” issues, the Illinois Rules of Professional Conduct do not specifically address that type of representation.  The Bar Association suggested that the issues of biggest concern are client identity, conflicts of interest, and preserving client confidences, and observed that “there is no one size fits all test for identifying the client” when in-house counsel works on behalf of multiple entities within a corporate family.  Therefore, in-house attorneys should consider obtaining advance conflict waivers from the entities they are performing work for, and if they have not, if interests of different entities the attorney is performing work appear to conflict, an in-house lawyer should get consent to the representation from all entities at that time.

    [Back to Top]

  • $2.5 Million Awarded to Government Employee Whistleblower.

    On July 25, 2017, the SEC announced that it had awarded $2.5 million to a government worker who uncovered and reported misconduct at a company.  See SEC Order Determining Whistleblower Award Claim, Exchange Act Release No. 81,200, File No. 2017-12 (July 25, 2017).  The SEC did not release the name of the investigated company, or what percentage of the final recovery was awarded to the tipster.  The agency that employs the whistleblower is not named; law enforcement agency employees are not eligible for whistleblower awards, but this awardee worked outside of his agency’s sub-group that was responsible for law enforcement functions.

    [Back to Top]

  • $1.7 Million Awarded to Company Insider Despite Delay and Some Culpability.

    On July 27, 2017, the SEC announced it was awarding $1.7 million to a whistleblower despite the whistleblower’s limited culpability in the reported fraud and delay in reporting.  See SEC Order Determining Whistleblower Award Claim, Exchange Act Release No. 81,227, File No. 2017-13 (July 27, 2017).  The SEC said that waiving the noncompliance in this instance was appropriate because without the company insider’s assistance the serious fraud would otherwise have been difficult to detect.

    [Back to Top]

  • Corporate Counsel Charged with Criminal Securities Fraud for False Filings.

    On July 19, 2017, former corporate counsel to Entertainment Art, Inc. (“EA”) was criminally charged with conspiracy to unlawfully sell registered securities and was barred by the SEC from appearing before the agency.  See In the Matter of Lubin, Exchange Act Release No. 81,172, File No. 3-18070 (July 19, 2017).  The former counsel was a large shareholder in EA, and arranged the sale of all of EA’s stock to an acquaintance.  As part of that transfer, stock that used to trade freely became subject to a requirement to register the stock prior to resale.  But after the transfer, the former counsel made several SEC filings that falsely suggested his acquaintance had purchased only a portion of the company’s shares, and that the stock could still be traded freely.  Later, others did re-sell that stock to the public in contravention of the SEC’s registration requirement, causing the SEC to freeze $34 million in sale assets.  If convicted, the former counsel faces up to five years in prison and a $250,000 fine.

    [Back to Top]

UK Developments

By: Kelly Hagedorn

  • UK S. Ct. Clarifies When Wealth of Owner Can Be Considered for Conditions on Appeal.

    In Goldtrail Travel Ltd (in liquidation) v. Onur Air Taşimacilik AŞ[2017] UKSC 57, the UK Supreme Court has allowed the appeal of a Turkish airline against a Court of Appeal ruling regarding the circumstances in which a court will require an appellant to meet certain conditions when granting the appellant permission to appeal.

    As a matter of English law, the court will only exercise its power to impose conditions on bringing an appeal where there is a compelling reason for doing so.  The starting principle being that an appellant should not be prevented from pursuing an appeal which the court has found to be legitimately brought by the imposition of onerous conditions.  To do so would not only breach common law, but also breach a party’s right to a fair trial, as guarded by Article 6 of the European Convention on Human Rights.

    In this case, the airline (the Appellant) was granted permission to appeal a first instance judgment made against it to the Court of Appeal.  Continuation of that appeal was later made conditional on the Appellant paying the judgment sum (amounting to £3.64 million) into court on the basis that, as a Turkish company, it was unlikely to have any assets within the jurisdiction.  The Court of Appeal therefore found it was necessary for the judgment sum to be held securely pending the outcome of the appeal. When Appellant failed to make the payment, the Respondent applied for the appeal to be dismissed.  The Appellant cross-applied for an order that the condition be discharged because it could not comply and the requirement would stifle the appeal.

    The Supreme Court found that the Court of Appeal had applied the wrong test when considering whether the condition would stifle the appeal. The Court of Appeal had taken into consideration whether the Appellant’s owner would be able to make payment, rather than reaching a decision by reference to the Appellant’s own financial position.

    Patten LJ in the Court of Appeal found, when applying the criteria set down by Anthony Clarke LJ in Hammond Suddard Solicitors v. Agrichem International Holdings Ltd. [2001] EWCA Civ 2065, that the fact that the Appellant company had an “extremely wealthy” owner who could provide the funds meant that the appeal would not be stifled by a condition requiring payment of the judgment sum into court. On appeal however, the Supreme Court found that the Court of Appeal had applied the wrong test, in that it had considered whether the third party “could” provide the money rather than whether there was any evidence that they “would” do so.

    Given that companies are separate legal entities, parties need to be wary of assuming that the existence of a wealthy owner or affiliated company will automatically satisfy the court that funds will be available to allow an appellant to satisfy a condition requiring payment into court.  By the same token, an appellant with no realisable assets of its own may not be able to satisfy the court that a condition requiring payment would stifle its appeal if it could, in fact, raise the sum by some other means, but the court will always look to the appellant itself rather than the wider corporate group.  The burden will fall to the appellant to show “on the balance of probabilities” that no such funds would be made available to it either by its owner or by some other closely associated person by reference to their relationship or control with that third party.

    The case has been remitted to Patten LJ for consideration under the correct test.

    [Back to Top]

Click here to read about Jenner & Block's litigation work