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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.
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Class Action Waiver in Employment Arbitration Agreement Violated Federal Labor Law.
By: Howard S. Suskin
The Seventh Circuit held that a class action waiver in an employment agreement that prohibited collective arbitration or collective action in any other forum violated the National Labor Relations Act (NLRA) and was unenforceable under the Federal Arbitration Act (FAA). Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016) (No. 15-2997). The court found that the class action waiver in the arbitration clause impinged on employees’ rights to seek collective remedies in wage-and-hour disputes in violation of the NLRA. The court then rejected the employer’s argument that the FAA’s arbitration enforcement provisions should prevail over the NLRA’s provisions. The court noted that the FAA provides for enforcement of arbitration clauses “save upon such grounds as exist at law or in equity for the revocation of any contract.” Because the provision at issue was unlawful under the NLRA, it met the criteria of the FAA’s saving clause for non-enforcement. The court noted that the Fifth Circuit had reached the opposition conclusion on this issue, creating a circuit split.
Summary Judgment-Like Standard for Determining if Arbitration Agreement Exists.
By: Howard S. Suskin
The Eleventh Circuit held that a “summary judgment-like standard” is appropriate for considering whether a trial is necessary to determine the existence of an arbitration agreement pursuant to Section 4 of the Federal Arbitration Act (“FAA”). Bazemore v. Jefferson Capital Sys., LLC, 827 F.3d 1325 (11th Cir. 2016) (No. 15-12607). Section 4 of the FAA states that “if the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof.” In reviewing a dispute between a putative class of credit card holders and a bank over whether the holders had agreed to arbitrate their claims, the court of appeals ruled that a district court may conclude as a matter of law that parties did or did not enter an arbitration agreement only if “there is no genuine dispute as to any material fact” concerning the formation of such an agreement, the same standard as under Federal Rule of Civil Procedure 56(a) for motions for summary judgment. In so ruling, the Eleventh Circuit joined the Third and Tenth Circuits, which also recently adopted this standard of review. In this case, the evidence offered by the bank was deemed insufficient to raise a genuine issue of fact as to the existence of an arbitration agreement between itself and the class representative, because the bank provided no competent evidence that an arbitration agreement ever was sent to the plaintiff.
New York Reaffirms Common Interest Doctrine Applies Only if Pending/Anticipated Litigation.
By: David M. Greenwald
In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 57 N.E.3d 30 (N.Y. 2016) (No. 80), the Court of Appeals of New York reaffirmed that, under New York law, the common interest doctrine applies only to communications that relate to pending or anticipated litigation. This case involved attorney-client communications that Countrywide Financial and Bank of America (BofA) shared between the signing of a merger plan and the closing of the merger several months later. Although the companies were represented by separate counsel, the merger agreement directed the parties to share privileged information related to certain pre-closing legal issues and purported to protect the information from outside disclosure. Plaintiff, Ambac, a monoline insurer that guaranteed payments on certain residential mortgage backed securities (RMBS) issued by a subsidiary of Countrywide, alleged that Countrywide breached contractual obligations, misrepresented the quality of the loans underlying the RMBS, and fraudulently induced Ambac to guaranty them, and sued BofA after its merger with Countrywide. BofA withheld from production responsive communications that had occurred after the signing of the merger plan but before the merger closed. The communications related to a number of legal issues that the companies needed to resolve prior to closing, including filing disclosures, securing regulatory approvals, maintaining employee benefit plans, and obtaining legal advice on federal and state tax issues. BofA argued that the communications were protected by the common interest doctrine because BofA and Countrywide shared a common legal interest in closing the merger, and the companies had taken steps to maintain confidentiality from third parties. Ambac argued that the companies waived privilege by disclosing the communications to each other, unaffiliated entities that, at the time, did not share a common legal interest in litigation or anticipated litigation. Noting that the Restatement and some federal courts have expanded the common interest doctrine by eliminating the requirement that communications must relate to litigation, the court reaffirmed the narrow exception that has been applied by New York courts for two decades. “[W]e do not perceive a need to extend the common interest doctrine to communications made in the absence of pending or anticipated litigation, and any benefits . . . are outweighed by the substantial loss of relevant evidence, as well as the potential for abuse.”
Communications With Litigation Funder Were Privileged and Protected.
By: David M. Greenwald
In In re Int’l Oil Trading Co., LLC,548 B.R. 825 (Bankr. S.D. Fla. 2016) (No. 15-21596), the court held that, under both Florida and federal common law, communications between a creditor and a litigation funder were protected by the attorney-client privilege and the work product doctrine. In this case, Al-Selah, a citizen of Jordan, had obtained a judgment in Florida against the debtor IOTC, which had been upheld on appeal. Al-Saleh was unable to collect on the judgment, entered into a litigation funding agreement with Burford, engaged counsel, and filed an involuntary bankruptcy petition against IOTC. IOTC sought discovery of the funding agreement and any communications between Al-Saleh and Burford on the grounds that Burford was a third party outside the privilege who was not acting as Al-Saleh’s agent. The court, applying a broad common interest exception, held that the communications were privileged: (1) the disclosures by Al-Saleh, who did not have sufficient funds to pursue the litigation on his own, to Burford were necessary to obtain informed legal advice and might not have been made absent the attorney-client privilege; (2) Al-Saleh and Burford took steps to keep their communications confidential from third parties; and (3) the information exchanged was for the limited purpose of assisting in their common cause. The court also held that the materials were protected work product. The communications were made for the purpose of pursuing litigation against IOTC, and they reflected the mental impressions, conclusions, opinions or legal theories of the parties. “These are communications between a client, the client’s attorney, and a litigation funder whose participation depends on assessments of the merits of litigation. If they are work product at all, they are opinion work product.”
Misconduct By Private Investigators May Defeat Applicable Privileges And Protections.
By: David M. Greenwald
Two district courts issued opinions holding that misconduct by private investigators may prevent a party from asserting the attorney-client privilege and the work product protection. In Halley v. State of Oklahoma Dept. of Human Services,No. 14-CV-562 (E.D. Okla. June 8, 2016), a private investigator licensed in Texas traveled to Oklahoma to conduct interviews and explained to those he contacted that he had a “power of attorney” from plaintiff. The investigator prepared a report and provided it to plaintiff’s counsel. Plaintiff asserted that the report was protected work product. The court held that the work product protection never attached to the report because the investigator was not licensed to act as a private investigator in Oklahoma.
In Meyer v. Kalanick, No. 15-Civ.-9796 (S.D.N.Y. June 7, 2016), the district court held that the crime-fraud exception may apply where a private investigator lies to third parties about the purpose of his inquiries. In this putative class action antitrust suit, third party Uber Technologies, Inc. made a motion for reconsideration of the court’s order directing Uber to produce certain documents for the court’s in camera review. According to defendant, Uber had hired a company, Ergo, to conduct an investigation of plaintiff and plaintiff’s counsel. According to plaintiff, an Ergo investigator, in order to obtain information, lied to third parties about the purpose of his questions, for example, by falsely stating that he was compiling a profile of up-and-coming labor lawyers in the United States. Plaintiff moved to compel Uber to produce investigatory materials withheld by Uber based on the crime-fraud exception, and the court ordered Uber to provide the documents for in camera review. On the motion for reconsideration, the court explained that applying the crime-fraud exception involves two steps: (1) the party asserting the exception must present evidence sufficient to support a reasonable belief that in camera review may yield evidence that establishes the exceptions applicability; and (2) the court then reviews the documents in camera to determine whether the exception applies to some or all of the documents. On the facts presented, the court found plaintiff had met his burden and that in camera review was appropriate.
Privilege Does Not Apply to Legal Advice Shared With a Customer.
By: David M. Greenwald
In Schilling v. Mid-America Apartment Communities, Inc., No. 14-CV-1049 (W.D. Tex. June 9, 2016), the district court held that communications in which a vendor’s employees shared legal advice with a customer were not privileged. In this landlord/tenant matter, defendant MAA was plaintiffs’ landlord, and MAA hired third party AUM to provide assistance with tenant billing and other matters. MAA withheld certain emails that passed between non-lawyer employees of MAA and non-lawyer employees of AUM, arguing that they were privileged because AUM agreed in its contract to provide “full legal support” and that it did so when AUM employees conveyed legal advice to MAA that the employees had first obtained from AUM’s general counsel. The court held that the communications between MAA and AUM were not privileged. Among other things, although MAA had its own in-house counsel, there was no evidence that MAA in-counsel spoke with either AUM employees or AUM’s in-house counsel. Nor was there evidence that AUM’s in-house counsel believed that there was an attorney-client relationship with MAA, or that AUM believed that it was providing legal advice to MAA. The court found that the customer/vendor relationship did not establish an attorney-client relationship and any communications between MAA and AUM employees were not privileged even if AUM employees shared their in-house counsel’s legal advice with MAA.
Taxpayer’s Request for an IRS Private Letter Ruling is Not Protected Work Product.
By: David M. Greenwald
In United States v. All Assets Held at Bank Julius Baer & Company, Ltd., 315 F.R.D. 103 (D.D.C. June 3, 2016) (No. 04-798), the district court held that a taxpayer’s request for an IRS Private Letter Ruling (PLR Request) was not protected work product because the IRS was the taxpayer’s potential litigation adversary. The production request was made in an in rem action in which the United States sought the forfeiture of more than $250 million deposited in over twenty bank accounts located in several tax haven countries. Claimant taxpayer informed the government that he had filed a PLR Request with the IRS, in which he sought a ruling on the matters at issue in the in rem action. Claimant asserted that the IRS Request, and any resulting PLR, were properly withheld because they were prepared because of anticipated tax litigation. The court held the protection did not apply. The court explained that the text of a PLR Request and any resulting PLR are usually made available for public inspection, with the exception of information that would directly identify the taxpayer. In addition, although the PLR Request may have been prepared in anticipation of litigation, the litigation anticipated would be against the IRS. The IRS was, therefore, a potential litigation adversary or, at a minimum, a recipient that substantially increased the chance that the PLR Request would be provided to a litigation adversary (other agencies of the U.S. government). Disclosing work product to a litigation adversary or to a conduit waives the protection, and disclosure of the PLR Request to the IRS did so here.
Communications Re Partnership Counsel’s Advice Privileged despite Individual Adversity.
By: David M. Greenwald
In Total Recall Techs. v. Luckey, No. 15-cv-02281 (N.D. Cal. May 17, 2016), the district court held that communications between individual partners about advice given by partnership counsel did not waive privilege, even where the partners were litigation adversaries in related litigation. Plaintiff TRT was a partnership formed by partners Igra and Seidl. In two separate actions in Hawaii, Igra and Seidl litigated against each other regarding alleged breaches of contract and fiduciary duties for failure by the other partner to disclose individual communications with Luckey. Igra caused TRT to file this action in California, with Quinn Emmanuel as counsel of record for TRT. Defendant Luckey sought discovery of communications between Igra and Seidl regarding Igra’s conversations with Quinn Emmanuel on the grounds that no privilege could apply where, at the time of the communications, Igra and Seidl were litigation adversaries in disputes directly related to Luckey. The court held that communications between Igra and Seidl regarding conversations with Quinn Emmanuel were privileged despite the Hawaii litigation. The law firm acted as counsel for the partnership, not as counsel for the individual partners; and the privilege belonged to TRT, not to the individual partners. As partners of TRT, both Igra and Seidl are considered clients of TRT’s counsel with respect to counsel’s litigation advice, and any communications between them, as agents of TRT, regarding TRT’s counsel’s advice did not waive the privilege.
New York Appellate Court Upholds Law Firm In-House Counsel Privilege.
By: David M. Greenwald
In Stock v. Schnader Harrison Segal & Lewis LLP, 35 N.Y.S.3d 31 (N.Y. App. Div. 2016) (No. 15597N), the New York appellate court upheld the law firm in-house counsel privilege as to communications between firm lawyers and the firm’s in-house general counsel regarding the lawyers’ ethical obligations relating to a then-current client, who subsequently sued the law firm for malpractice. The court rejected application of the fiduciary and the “current client” exceptions to the attorney-client privilege, which have been applied in other jurisdictions. Here, SHS&L represented plaintiff Stock in negotiation of his separation agreement from his former employer, MasterCard. Unbeknownst to plaintiff during the negotiations, his termination by MasterCard triggered acceleration of certain stock options purportedly worth more than $5 million, shrinking the exercise periods from 10 years to 90 to 120 days. Stock, represented by SHS&L, subsequently filed a federal lawsuit against MasterCard and an arbitration proceeding before the Financial Industry Regulation Authority. Shortly before thearbitration proceeding was to begin, MasterCard gave notice that it intended to call an SHL&S attorney, Carty, to testify as a fact witness, asserting that SHS&L’s mishandling of Stock’s contract negotiations were the cause of Stock’s problems. Carty and others representing Stock in the arbitration sought legal advice from SHS&L’s in-house general counsel, Kipnes, regarding the attorneys’ ethical obligations in light of MasterCard’s demand for Carty’s testimony, under the lawyer-as witness rule. The arbitral tribunal denied Stock’s claims and most of Stock’s claims in the federal action were dismissed. Stock sued SHS&L for malpractice, and sought discovery of the communications with Kipnes on two grounds: (1) the fiduciary exception, which would deem Stock the “real client” of the communications and the holder of any privilege; and (2) the “current client” exception, which would preclude a firm from asserting privilege over communications relating to an ongoing representation on the grounds that there is a conflict of interest between the client and the firm that waives any privilege. The appellate court noted repeatedly that Kipnes never worked on any matter for Stock, and Stock was not billed for any time Kipnes devoted to consulting SHS&L attorneys. Noting that the weight of recent authority has rejected the exceptions upon which Stock relied, the court upheld the firm in-house counsel privilege asserted by SHS&L.
Ex-Governor may not Assert Privilege Over Communications with Government Attorneys.
By: David M. Greenwald
In In re Grand Jury Subpoena, JK-15-029, 828 F.3d 1083 (9th Cir. 2016) (No. 15-35434), the Ninth Circuit held that the former governor of Oregon could not assert a personal attorney-client privilege over his communications with attorneys for the State of Oregon, because any privilege was held by the State and not personally by the public official. In this matter, the federal government was investigating the activities of former Oregon Governor, John Kitzhaber. In response to a grand jury subpoena, Kitzhaber asserted privilege over communications with his personal attorneys and with attorneys for the State of Oregon, with whom he had consulted regarding potential conflicts of interest and ethical obligations, the violation of which could result in personal liability to Kitzhaber. Email communications with his personal attorneys through his personal email account had been archived by the State without Kitzhaber’s authorization and were in the possession of the State; his communications with attorneys for the State were archived along with other emails in his official email account. The court held that communications with his personal attorneys were privileged, and that the subpoena as drafted was overbroad and could not be enforced because it was not tailored to relevant material. The court, however, rejected Kitzhaber’s assertion of privilege over communications with State attorneys. Although Kitzhaber faced potential personal liability regarding the matters he discussed with the State attorneys, any privilege was held by the State because the attorneys represented Kitzhaber only in his official capacity and not personally.
Failure to Meet Claw Back Order Deadlines Waived Party’s Right to Contest Privilege.
By David M. Greenwald
In Global Fleet Sales, LLC v. Delunas, No. 12-1571 (E.D. Mich. June 17, 2016), the court held that plaintiffs waived their ability to contest defendants’ assertion of privilege by failing to object within the deadlines set out in the protective order entered by the court at the outset of the proceeding. Plaintiffs filed a motion for partial summary judgment to enforce a settlement agreement with defendants that was purportedly reached during a meeting in 2011. Plaintiffs included as an exhibit an email with 100 pages of attachments that had been produced by defendants in discovery. Buried within the attachments was a “briefing paper” that had been prepared by one of the defendants for his counsel. Plaintiffs relied heavily on the briefing paper, which stated that the purpose of the 2011 meeting was to reach an amicable settlement, and characterized the result of the meeting as a “settlement.” Defendants moved to strike the exhibit and the court granted the motion. During a July 2015 deposition, plaintiffs attempted to mark the briefing paper as an exhibit. Defendants objectedimmediately on the record, stating that the document was protected work product and explaining the basis for the asserted protection. Defendants instructed the deponent not to answer questions relating to the document, but defendants did not expressly ask plaintiffs to return or destroy the document. The protective order provided specific steps for the parties to take in the event of inadvertent production. It required a producing party to provide written notice to the receiving party, unless written notice was unfeasible, such as when the Producing Party first becomes aware of the inadvertent production when the receiving party attempts to use the document at a deposition. The order provided that the receiving party could object to the claw back notice and the assertion of privilege, by motion, filed within 30 days from receipt of notice. Here, plaintiffs failed to file a motion, but instead attached the document to its summary judgment motion eight months later. Plaintiffs argued there that the document was not protected work product, and the court noted that plaintiffs’ argument was not unreasonable. However, the court held that plaintiffs’ failure to meet the 30-day deadline waived plaintiffs’ ability to contest defendants’ assertion of work product protection.
Failure to Object During Deposition Waived Privilege.
By: David M. Greenwald
In Hologram USA, Inc. v. Pulse Evolution Corp., No. 14-cv-00772 (D. Nev. July 5, 2016), the district court held that defendants waived privilege when they failed to object immediately to plaintiffs’ use of privileged documents as exhibits during a deposition. Here, plaintiffs used five documents as exhibits during a deposition, and defendants allowed the deponent to testify about those documents and to read portions of the documents into the record. Eleven days later, defendants’ counsel wrote plaintiffs’ counsel informing him that defendants wanted to claw back the documents pursuant to the protective order in the case. The court held that the terms of the protective order applied only to inadvertent production, not to what the court found to be voluntary disclosure when defendants failed to object immediately and allowed the deponent to testify about privileged matters.
Tender of Cash Relief Does Not Moot Class Action.
By: Michael T. Brody
We recently reported on the decision of the Supreme Court in Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (S. Ct. 2016) (No. 14-857), in which the Court ruled that rejected Rule 68 Offers of Judgment do not moot a class representative’s claim, and thus the plaintiff’s class action could continue. The Supreme Court did not rule on whether an actual payment, rather than an offer of judgment, also would moot a class action. Last month, in Chen v. Allstate Ins. Co., No. 13-16816, we reported on the Ninth Circuit’s decision that the actual acceptance and receipt of money, not merely its offer, can moot an action. Applying these principles, the lower courts are now ruling on attempts by various defendants to moot actions through payment. InCampbell-Ewald Co. v. Gomez, on remand from the Supreme Court, the defendant sent plaintiff and his counsel an unsolicited check in full payment of the claim, labeling the payment “unconditional” and “irrevocable.” The district court found this payment did not moot the action where the class representative did not accept the payment and had not yet had a chance to seek certification. Gomez v. Campbell-Ewald Co., No. 10-2007 (C.D. Cal. June 3, 2016). Likewise, in Ung v. Universal Acceptance Corp., No. 15-127 (D. Minn. June 3, 2016), the district court ruled that the tender of a certified check for the plaintiff’s maximum damages did not moot the plaintiff’s class claim.
Sealed Trial Documents Result in Reversal of Class Action Settlement.
By: Michael T. Brody
In Shane Group Inc. v. Blue Cross Blue Shield of Michigan, 825 F.3d 299 (6th Cir. 2016) (No. 15-1551), plaintiffs brought a price-fixing antitrust class action against a health insurer. In the course of the litigation, the district court sealed most of the substantive filings from public view, including exhibits and an expert report on which the parties later based the ultimate settlement in the case. The district court preliminarily approved the settlement and authorized notice to the class. Class members who objected to the settlement were unable to review the sealed documents. One group of objectors sought to intervene so that they could review the sealed materials. The district court denied the motion to intervene and approved the settlement. The Sixth Circuit reversed, finding the district court abused its discretion when it sealed documents in the litigation. It found the district court’s order upholding the sealing were “brief, perfunctory, and patently inadequate,” and failed to meet the requirements for a protective order under Rule 26, let alone the obligations for sealing court documents. The Sixth Circuit explained that the error was the most acute in connection with sealing plaintiffs’ expert’s report. Review of that report was necessary before the court and the objectors could assess the reasonableness of the settlement. On remand, the district court was to review the settlement in light of the value of the claims given up, shown in large part by the expert report. The court also questioned the fee award and the incentive awards to class representatives.
Class Rep/Counsel Conflicted by Representing Monetary and Injunctive Settlement Classes.
By: Michael T. Brody
In In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 827 F.3d 223 (2d Cir. June 30, 2016) (No. 12-4671), a plaintiff class consisting of 12 million merchants claimed VISA and MasterCard had violated the antitrust laws. After extensive litigation, the parties agreed to a complex settlement, which the trial court approved. A class of merchants who participated in the program from 2004 through November 28, 2012 was certified under Rule 23(b)(3); they would share in a $7.25 billion settlement pool. A second class of merchants who participated in programs after November 28, 2012 was certified under Rule 23(b)(2); those merchants would not share in the monetary relief. Rather, they would benefit solely from certain program changes made a part of a final injunction. The Second Circuit reversed the approval of the settlement. First, the court found the class representatives were inadequate because they had interests antagonistic to some of the class members they purported to represent. The same counsel represented both classes even though the conflict was evident between merchants pursuing only monetary relief and merchants who received only injunctive relief. The class thus “manifest[ed] tension on ‘an essential allocation decision.’” Class counsel and class representatives were in a position to trade benefits for one class for benefits to the other. Moreover, class counsel stood to gain enormously from the deal as the district court had granted counsel over $544 million in fees, which were calculated based solely on the monetary relief. In fact, class counsel did not even ask to be compensated based on the injunctive relief. The court explained “[p]roblems arise when (b)(2) and (b)(3) classes do not have independent counsel, seek distinct relief, have non-overlapping membership, and (importantly) are certified as settlement only.” Second, the court’s suspicions about the deal were confirmed by the substance of the settlement: the court rejected the settlement because portions of the class were bound to the release without receiving any meaningful value.
District Court May Decertify a Class Post-Trial Taking Jury Fact Findings into Account.
By: Michael T. Brody
In Mazzei v. Money Store, 829 F.3d 260 (2d Cir. 2016) (No. 15-2054), plaintiff alleged defendants had assessed improper late fees on mortgages. The district court certified a class of borrowers whose loans were owned or serviced by defendant. The case went to trial and plaintiffs were awarded $32 million plus prejudgment interest. Post-judgment, defendant moved to decertify the class due to plaintiff’s failure to prove classwide privity of contract between the defendant and those class members whose loans it serviced but did not own. The district court agreed that plaintiff had failed to prove privity with respect to those absent class members, which defeated class certification on grounds of typicality and predominance and decertified the class. The Second Circuit affirmed. It held a district court may decertify a class post-verdict without running afoul of the Seventh Amendment. The class’s right to adjudication by jury was unimpaired as their individual claims survive by virtue of American Pipe tolling; any member of the decertified class who wished to file a lawsuit was free to do so. The court held, however, that in deciding whether to decertify post-trial, the district court must credit the jury’s factual findings. While the district court generally resolves factual issues related to class certification based on its own evaluation of the preponderance of the evidence, the district court must defer to any factual findings the jury necessarily made unless those findings were “‘seriously erroneous,’ a ‘miscarriage of justice,’ or ‘egregious,’” which is the same standard to be used on a Rule 59 motion. Here, the district court found, contrary to the jury’s factual finding, that privity was lacking. The Second Circuit concluded the district court did not abuse its discretion in making that determination and, in the absence of privity between defendant and those borrowers whose loans were simply serviced by defendant, the district court’s decertification of the class was not an abuse of discretion.
Supreme Court: Judge Can Recall Jury in Limited Circumstances.
By: Matthew J. Thomas
In Dietz v. Bouldin, 136 S. Ct. 1885 (2016) (No. 15-458), plaintiff sued defendant for negligence for injuries suffered in an automobile accident. The case proceeded to a jury trial, during which defendant admitted liability and stipulated to damages in the amount of plaintiff’s medical expenses (approximately $10,000); the only issue remaining was whether plaintiff was entitled to additional damages. During deliberations, the jury sent a note asking whether plaintiff’s medical expenses had been paid. Although the judge was concerned that the jury did not understand that a verdict of less than the stipulated amount would require a mistrial, the judge, with the parties’ consent, responded only that the information being sought was not relevant. The jury returned a verdict in favor of plaintiff, but awarded $0 in damages. Moments after the jury was discharged, the judge realized the error in the $0 verdict and ordered the clerk to bring back the jurors. Over defendant’s objection, the court questioned the jury and, satisfied they had not spoken to anyone about the case since being discharged, recalled them, gave clarifying instructions and ordered them to conduct further deliberations. Thereafter, the jury returned a verdict awarding $15,000 in damages. The Supreme Court upheld the verdict, holding that a federal district court has limited inherent power to rescind a jury discharge order and recall a jury in a civil case for further deliberations after identifying an error in the jury’s verdict. The Court reasoned that there were no rules or statutes prohibiting a court from rescinding its discharge order and reassembling the jury, and doing so, in certain circumstances, can be a reasonable response to correcting an error in the verdict, similar to giving a curative instruction under FRCP 51(b)(3). The Court cautioned, however, that this inherent power must be carefully circumscribed, and any suggestion of prejudice should counsel a district court not to exercise this inherent power. Thus, before doing so, a court should consider: the length of the delay between discharge and recall; whether the jurors have spoken to anyone about the case after discharge; any emotional reactions to the verdict witnessed by the jurors; and to what extent just-dismissed jurors accessed their smartphones or the internet.
Supreme Court: Private Civil RICO Claims Require Domestic Injuries.
By: Matthew J. Thomas
In RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 ( 2016) (No. 15-138), the European Community, acting on behalf of its member nations, brought a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO) in a New York federal court, alleging that defendant RJR Nabisco had participated in a global money-laundering scheme whereby drug traffickers smuggled narcotics into Europe and sold them for euros that were used to pay for large shipments of defendant’s cigarette products into Europe. The district court dismissed the suit on the ground that RICO does not apply to racketeering activity occurring outside U.S. territory or to foreign enterprises. The Second Circuit reinstated the claims, holding that RICO’s civil action provision does not require a domestic injury and permits recovery of a foreign injury caused by predicate acts that violate an underlying statute that applies extraterritorially. The Supreme Court reversed, holding that a plaintiff bringing a private RICO claim under § 1964(c) must allege and prove a domestic injury to its business or property. The Court distinguished private RICO actions from those RICO actions brought by the U.S. government seeking criminal and/or civil penalties, which may have an extraterritorial application. The Court reasoned that allowing recovery for foreign injuries in a private civil RICO action creates a potential for international friction beyond that presented by merely applying U.S. substantive law to foreign conduct.
Supreme Court Upholds “Implied False Certification Theory” for FCA Claims.
By: Matthew J. Thomas
In Universal Health Services, Inc. v. U.S. ex rel.Escobar, 136 S. Ct. 1989 (2016) (No. 15-7), plaintiffs brought a qui tam suit alleging that the defendant healthcare provider violated the False Claims Act (FCA) by submitting reimbursement claims under a state Medicaid program without disclosing that the staff rendering the services failed to meet Medicaid regulations pertaining to staff qualifications and licensing. This is known as an “implied false certification theory” of liability under the FCA. The district court dismissed the case, holding that plaintiff failed to state a claim because none of the regulations that defendant allegedly violated was a condition of payment. The First Circuit reversed, concluding that every submission of a claim implicitly represents compliance with relevant regulations. The Supreme Court rejected both views, and held that the implied false certification theory can be a basis for FCA liability when a defendant submitting a claim makes specific representations about the goods or services provided, but fails to disclose noncompliance with a statutory, regulatory or contractual requirement that that is “material” to the Government’s payment decision. The Court rejected the First Circuit’s expansive view that any statutory, regulatory or contractual violation is material so long as the Government would be entitled to refuse payment were it aware of the violation. Moreover, the Court held that the Government’s decision to expressly designate a provision as a condition of payment is not, itself, sufficient for a finding of materiality and, therefore, is relevant but not dispositive. The Court concluded that the FCA’s materiality requirement is demanding, and a fact is material if, for instance, “no one can say with reason that the plaintiff would have signed this contract if informed of the likelihood” of the undisclosed fact.
Ninth Circuit: FDCPA Notice Requirements Apply to all Debt Collectors.
By: Matthew J. Thomas
The Fair Debt Collection Practices Act (FDCPA) requires that, within 5 days of “the initial communication” with a consumer about the collection of a debt, a debt collector must send the consumer a notice containing specified disclosures. 15 U.S.C. § 1692g(a). In Hernandez v. Williams, Zinman & Parham PC, No. 14-15672 (9th Cir. July 20, 2016), the Ninth Circuit held, as a matter of first impression, that the phrase “the initial communication” refers to the first communication made by each and every debt collector that contacts the debtor, including successive collectors that contact the debtor after another collector already did. Thus, the court concluded that, where there are multiple debt collectors that try to collect a debt, each one must send the required notice after its first communication with the alleged debtor about the debt. The court reasoned that, although the sentence in § 1692g(a) containing the phrase “the initial communication” is ambiguous when read in isolation, when the sentence is read in the context of the FDCPA as a whole and in light of the statute’s remedial purpose, it is clear that the notice requirement applies to each debt collector that attempts to collect a debt. The court determined that Congress had made clear that the FDCPA was generally intended to have a broad reach by imposing civil liability on “any debt collector who fails to comply with any provision” of the Act, 15 U.S.C. § 1692k(a); had Congress intended to distinguish between the obligations that attach to initial and subsequent debt collectors, it would have said so explicitly. Likewise, the fact that in another provision of the FDCPA, § 1692e(11), Congress distinguished between “the initial written communication” and “subsequent communications” further demonstrates that Congress knew how to distinguish between initial and subsequent debt collectors, but chose not to do so with respect to § 1692g(a)’s notice requirements.
Fourth Circuit: Attorney’s Fees may be Recoverable Under FRCP 41 in Limited Cases.
By: Matthew J. Thomas
In Andrews v. America’s Living Centers, LLC, 827 F.3d 306 (4th Cir. 2016) (No. 15-1658), plaintiff brought suit under the Fair Labor Standards Act (FLSA). After defendant moved to dismiss, plaintiff voluntarily dismissed her complaint, only to later file a second FLSA action against the defendant. The district court awarded defendant its attorney’s fees and expenses incurred in defending the first action pursuant to FRCP 41(d), which provides that if a plaintiff who previously dismissed an action later files a second action based on the same claim against the same defendant, a court may order plaintiff to pay the “costs” of the previous action. On appeal, defendant argued that attorney’s fees were not “costs” recoverable under FRCP 41(d). The Fourth Circuit noted that this was an open issue in that Circuit, and there was a split of authority on the issue among the other Circuits. The Eighth and Tenth Circuits have upheld, with little explanation, attorney’s fees awards under Rule 41(d); the Sixth Circuit, by contrast, has held that attorney’s fees are not costs recoverable under Rule 41(d); and the Seventh Circuit has adopted a middle ground position, holding that Rule 41(d) permits recovery of attorney’s fees only if the substantive statute which formed the basis for the original suit allows for such recovery, or if such fees are specifically ordered by the court. The Fourth Circuit found the Seventh’s Circuit’s reasoning to be persuasive, finding that this test strikes the right balance between upholding the American Rule and furthering Rule 41(d)’s goal of deterring forum shopping and vexatious litigation. Noting that a district court has the inherent authority to award attorney’s fees if it finds that plaintiff has acted “in bad faith, vexatiously, wantonly or for oppressive reasons,” the court held that while Rule 41(d) does not provide for an award of attorney’s fees as a matter of right, a district court may award such fees under Rule 41(d) if the underlying statute provides for it, or if the court finds that the plaintiff’s conduct was vexatious. Here, because the FLSA did not provide for an award of attorney’s fees where the defendant prevails, and because the record did not support a finding that plaintiff had acted vexatiously, the court reversed the attorney’s fee award.
Damages Cap for Expedited Cases in Texas Refers to Recovery Limit, not Amount of Claim.
By: Matthew J. Thomas
Rule 169 of the Texas Rules of Civil Procedure allows a claimant to fast-track a civil case through an “expedited actions process,” which provides for an accelerated case schedule and limits, among other things, the parties’ discovery, challenges to expert testimony, and the time for presentation of evidence at trial. In exchange, a claimant in such an expedited proceeding cannot recover a judgment in excess of $100,000. In Cross v. Wagner, No. 08-14-00200-CV (Tex. Ct. App. July 6, 2016), plaintiff brought a Rule 169 expedited action arising out of an automobile accident and, at trial, asked the jury to award him damages totaling more than $100,000. The jury found that plaintiff had suffered approximately $170,000 in damages, but that defendant was only 51% responsible. The trial court entered judgment in favor of plaintiff in the amount of $92,000, which represented 51% of the jury’s damages award plus prejudgment interest. On appeal, defendant argued that the court erred in allowing plaintiff to seek more than $100,000 in damages at trial, and that the award should be reduced to 51% of the $100,000 cap, plus interest. The appellate court rejected that argument, holding that Rule 169 does not mandate that a court must cap a jury award at $100,000; instead, it merely caps a plaintiff’s ultimate recovery at $100,000. Moreover, nothing in Rule 169 prevents a plaintiff from asking a jury for more than $100,000, even if the plaintiff cannot ultimately recover any amounts in excess of $100,000. Because the final judgment here was less than $100,000, the appellate court found no error and affirmed.
Defendant Must Perform Complex Database Analyses to Produce Requested Data.
By: Daniel J. Weiss
In Labrier v. State Farm Fire & Casualty Co., 314 F.R.D. 637 (W.D. Mo. 2016) (No. 15-cv-04093), a putative class action, the court affirmed a special master’s order requiring the defendant to answer an interrogatory that directed the defendant to make “complex inquiries in multiple databases” and sort and match data on a claim-by-claim basis. The defendant argued that the cost of performing this work would be disproportionate, but the court found “incredible the suggestion that there is no cost-effective way to match up information in one database with the information in another.” The court further opined that “data sorting is what computers do in much higher levels in very short amounts of time.” The court recognized that its order “might require computer programming that [defendant] does not have or does not normally use for this purpose.” However, the court justified its order, in part, on the basis that the defendant had refused to permit plaintiff to inspect the computer system or learn more about the data contained in it. “In light of [defendant’s] interest in keeping its computer system secret, it should bear the cost of doing any additional programming to pull out the information required by the interrogatories.”
Court Orders Plaintiff to Provide a “Download Your Info” Report from Facebook.
By: Daniel J. Weiss
In Rhone v. Schneider National Carriers, Inc., No. 15-cv-01096 (E.D. Mo. Apr. 21, 2016), the district court granted a defendant’s motion to compel a personal-injury plaintiff to download a report from Facebook entitled “Download Your Info,” which shows all of a user’s activity on the website. The court acknowledged that “such a broad disclosure might not be appropriate in all circumstances,” but held that it was warranted in this case because the defendant established that plaintiff had posted relevant material to Facebook and failed to produce it upon request. The court further ordered that plaintiff “disclose a complete list of [p]laintiff’s social media accounts” so that the defendant could also request documents from those accounts. The court did not require the plaintiff to provide “passwords or user names” for any account.
U.S. Tax Court: Documents Produced by Predictive Coding Method was Complete.
By: Daniel J. Weiss
In Dynamo Holdings LP v. Commissioner, No. 2685-11, 8393-12 (T.C. July 13, 2016), the U.S. Tax Court ruled that the petitioner’s production of documents using predictive coding complied with the discovery rules in the Tax Court. The Commissioner of the IRS had moved to compel additional document production, contending that the predictive coding process had failed to produce certain documents that were “highly likely to be relevant.” The court reviewed the predictive coding process used by the petitioner and found there was “no question that petitioners satisfied our Rules when they responded using predictive coding,” focusing on the “recall rate” and “precision” in some detail. In rejecting the Commissioner’s criticisms of the predictive coding protocol, the court further held that predictive coding need not be perfect because “human review is far from perfect” and because the Tax Court Rules and the Federal Rules of Civil Procedure onlyrequire a party “to make a ‘reasonable inquiry’ when making discovery responses” and “do not require perfection.”
Court Grants Motion to Compel Search of Defendants’ Personal ESI.
By: Daniel J. Weiss
In Sunderland v. Suffolk County, New York, No. CV 13-4838 (E.D.N.Y. June 14, 2016), a civil rights lawsuit, the court granted the plaintiff’s motion to compel the individual defendants to search their personal computers and personal email accounts for agreed-upon search terms. The individual defendants, who were sued in their individual capacities, agreed to search only their emails and electronic documents at their place of employment, the Suffolk County Correctional Facility. The court held that was not sufficient, as emails and other correspondence created or saved on the defendants’ personal computers or email accounts discussing the plaintiff or issues related to the case fall “within the broad scope of relevant discovery under Federal Rule of Civil Procedure 26(b).” The court further ruled that “[s]imply handing over the search terms to the Individual Defendants to run on their own is not sufficient,” and directed the individual defendants’ counsel to “supervise and oversee the search for and production of electronically stored information and documents.”
Overbroad Request to Search Plaintiff’s Personal Devices/Social Media Accounts Denied.
By: Daniel J. Weiss
In Gordon v. City of New York, No. 14-Civ-6115 (S.D.N.Y. July 13, 2016), an employment discrimination case, the court denied the defendants’ request for an order compelling the plaintiff to search electronically stored information from his personal computers, cell phones, other electronic devices, and social media accounts. The court agreed that “a party is entitled to discovery of relevant information from an adversary, even if it is stored on personal devices or contained in person social media accounts.” The court held, however, that the defendants’ discovery requests here were “not sufficiently targeted at eliciting relevant information” and could “return a mass of information unrelated to any claim or defense.” The court found that the defendants’ proposed search terms included generic terms that would generate hits for “wholly irrelevant communications” and communications that were “in no way pertinent to the plaintiff’s claims of discrimination.”
D.C. Circuit Rejects Government’s “Double Recovery” Claims in CERCLA Case.
By: Steven M. Siros
The U.S. Court of Appeals for the District of Columbia has rejected arguments by the federal government that allowing an aerospace contractor to pass-through certain CERCLA remediation costs back to the government under its existing government contracts constituted an impermissible double recovery under CERCLA. Lockheed Martin Corp. v. United States, No. 14-5302 (D.C. Cir. Aug. 19, 2016). Lockheed had incurred in excess of $287 million to remediate several contaminated sites where it had manufactured solid-propellant rockets pursuant to government contracts. Lockheed sued the government under CERCLA to recover a portion of its costs incurred to remediate these sites, alleging that the government was directly responsible under CERCLA for a portion of these costs due to the government’s acquiescence in certain of Lockheed’s disposal activities. At the same time, however, the government and Lockheed had entered into an agreement pursuant to which the government agreed that Lockheed was entitled to recover a portion of its remedial costs as indirect costs charged through its current government contracts (the “Billing Agreement”).
The district court engaged in a thorough analysis of the typical CERCLA equitable contribution factors and allocated a specific percentage of liability to Lockheed and a specific percentage of liability to the government (the percentages varied across the sites). On appeal, the government pointed to the fact that Lockheed was already recovering a significant portion of its remedial costs from the government through the Billing Agreement and argued that any further obligation on the part of the government to reimburse Lockheed for additional remedial costs was inconsistent with CERCLA’s broad equitable principles and constituted an impermissible double recovery under CERCLA Section 114.
Relying in large part on the Billing Agreement, the D.C. Circuit noted that “the government agreed to [Lockheed’s recovery of its response costs] by entering into a settlement that allowed Lockheed in its new contracts to charge the government for the company’s own CERCLA liability at the discontinued sites.” Notwithstanding that the D.C. Circuit appeared sympathetic to the government’s claim that CERCLA was not designed to provide for a government-funded cleanup program but instead intended to shift remediation costs to the polluting party, here the government voluntarily agreed to the complained of funding mechanism when it entered into the Billing Agreement. In response to the government’s argument that allowing Lockheed to continue to pass these remedial costs through the Billing Agreement constituted an impermissible “double recovery”, the D.C. Circuit noted that the district court found that crediting mechanism agreed to by the parties would preclude any perceived “double recovery” and the D.C. Circuit found no reason to disturb that finding. Interestingly, the D.C. Circuit specifically stated that nothing in the Federal Acquisition Regulations or the Defense Contract Audit Agency Manual mandated the crediting mechanism agreed to by the parties but the D.C. Circuit declined to opine on the interplay of federal contracting law and CERCLA Section 114, leaving that to be resolved at a later time.
Admission of Lay Opinion Testimony was not Abuse of Discretion.
By: Barry Levenstam
In Hetzer-Young v. Elano Corp., No. 2015-CA-38 (Ohio Ct. App. June 10, 2016), the Court of Appeals of Ohio addressed plaintiff’s appeal from a jury verdict entered for the defendant manufacturer of an allegedly defective airplane muffler in a wrongful death/products liability action arising out of the crash of a small airplane. Plaintiff challenged a number of evidentiary rulings made by the trial court, including its decision to admit opinion evidence from four lay witnesses under Ohio Evidence Rule 701, which requires lay opinion testimony to be “rationally based on the perception of the witness.” Two of these witnesses were not pilots but were familiar with the local airport where the crash occurred as they had witnessed “hundreds” of take-offs and landings there over many years. Both were allowed to testify not only to what they observed with respect to the ill-fated plane’s flight just before the crash but also with how that compared to the many take-offs and landings they had observed at the same airport on prior occasions. The third lay witness was a pilot who testified similarly without having been qualified as an expert. The fourth lay witness was a pilot and flight instructor who did not observe the flight of the plane before the crash but observed the wreckage after, and was permitted to testify to his lay opinion of whether the propeller was under power at the time of the crash. The court of appeals concluded that the district court did not abuse its discretion in admitting this evidence because plaintiff was permitted to cross examine these witnesses.
Oregon Upholds Constitutionality of Limits on State Employee Tort Liability.
By: Barry Levenstam
In Horton v. Oregon Health & Science University, 376 P.3d 998 (Or. 2016), the Oregon Supreme Court entertained challenges to a state statute limiting a state employee’s tort liability based on the remedies clause and two jury trial clauses of the Oregon State Constitution, Art. I, §7; Art. I, §17; and Art. VII (amended), §3. The challenge was brought by the parents of a six month old son who suffered severe injuries requiring multiple surgeries and lifetime monitoring as a result of medical malpractice by a doctor employed at a state hospital. The jury awarded a total of economic and non-economic damages in excess of $12 million and the defendant filed a motion to reduce the verdict to the $3 million cap in the Oregon Tort Claims Act. After an in-depth review, the court rejected the plaintiff’s argument that the Oregon remedies clause permanently enshrined the common law at the time of the constitution’s adoption in 1857 and thereby barred the state legislature from altering available common law remedies. The court noted that the legislature was entitled to modify common law and the limits of sovereign immunity to strike a balance of limited recovery for those injured by state employees. Furthermore, the court held that the constitutional provisions protecting the right to jury trial protected only the procedure of trial by jury and not any right to recover the full sum that a jury might determine appropriate where the law sets more limited parameters for recovery. Consequently, the court upheld the statutory damages cap set forth in the Oregon Tort Claims Act.
No Causation Where Any of Three Defendants Could Have Provided Asbestos Exposure.
By: Barry Levenstam
In Mannahan v. Eaton Corp., No. 2013-CA-002005 (Ky. Ct. App. July 15, 2016), the Court of Appeals of Kentucky addressed a ruling granting summary judgment in an asbestos case against the plaintiff and in favor of the three defendant producers of asbestos-related products. Plaintiff was able to prove that her deceased husband died as a result of asbestos-related disease and that he had worked for Peabody Coal as a mechanic performing brake repairs and replacements on Peabody’s trucks and heavy equipment from the late 60s to the mid-80s. Plaintiff was also able to identify the three defendants as among the manufacturers of asbestos-based brake products used on Peabody’s equipment. The trial court had ruled, however, that plaintiff was not able to satisfy the summary judgment standard with respect to exposure to any one of the defendants specifically. On appeal, the court held that while plaintiff had provided sufficient evidence to indicate that her husband possibly had been exposed to a product from each of the three defendants, she had been unsuccessful in satisfying the standard summary judgment required by Kentucky law, that is, presenting evidence to create a genuine issue of material fact that it was probable—as opposed to possible—that he was exposed to a product from a specific defendant. Because plaintiff had failed to create a genuine issue of material fact that it was probable that her husband had been exposed to a product from any one of the defendants, summary judgment was affirmed for all of the defendants.
The Eighth Circuit has held that, to obtain relief under the Sarbanes-Oxley Act, an employee must simply prove that a reasonable person in the same factual circumstances, with the same training and experience, would believe that the employer violated securities laws. Beacom v. Oracle America, Inc., 825 F.3d 376 (8th Cir. 2016) (No. 15-1729). In so ruling, the Eighth Circuit joined the Second, Third, and Sixth Circuits in adopting this standard. However, the court ultimately determined that here, the former employee’s belief that his company was defrauding its investors, was objectively unreasonable and affirmed the district court’s grant of summary judgment in favor of the defendant.
The Eleventh Circuit held that district courts cannot hear challenges to the SEC’s administrative review process brought by individuals facing ongoing SEC proceedings. Hill v. SEC, 825 F.3d 1236(11th Cir. 2016) (Nos. 15-12831, 15-13738). In so holding, the Eleventh Circuit overturned the district court’s rulings that had allowed an investment firm and a real estate professional to sue the SEC in federal court, challenging the SEC’s review process, alleging that the SEC’s administrative law judges are unconstitutionally appointed. The court explained that defendants do not have the right to bypass the administrative process, and that having to endure this process, though potentially expensive, does not amount to an irreparable injury.
Failure to Disclose Internal Investigation Results Supports Securities Fraud Claim.
By: Robert R. Stauffer
In Indiana Public Retirement System v. SAIC, Inc., 818 F.3d 85 (2d Cir. 2016) (No. 14-4140), a class of shareholders sued a corporation and certain of its officers for securities fraud. According to the complaint, an employee of the defendant, who was in charge of managing a contract with New York City, received significant kickbacks from a subcontractor, and the subcontractor inflated costs that were passed on to the City. The company failed to investigate an anonymous internal complaint about the relationship between the manager and the subcontractor. The scheme later began to unravel, and in 2010 the company enlisted an outside law firm to work with an internal audit team to conduct an internal investigation. The City also announced it was reviewing the possibility of seeking recovery of payments made to the company. The findings of that investigation were reported to the company on March 9, 2011. On March 25, 2011, the company filed a Form 10-K, which did not disclose the company’s potential liability; indeed, in an Annual Report issued the same month, the company touted its commitment to high standards of “ethical performance and integrity.” By May 2011, several individuals were charged with federal crimes, and the company offered to repay $2.5 million to the City. On June 2, 2011, the company disclosed the criminal investigation and potential civil liabilities in a Form 8-K. The stock price began to fall, and in March 2012 the company entered into a deferred prosecution agreement and agreed to reimburse the City approximately $500 million and forfeit $40 million in unpaid receivables. The Second Circuit found that plaintiffs stated a claim under Section 10(b) of the Exchange Act and Rule 10b-5. Rejecting the district court’s application of a standard in which the company was required to disclose a loss contingency only when a claim was “probable,” the court found that a disclosure had to be made if a loss was a “reasonable possibility,” meaning “more than remote but less than likely.” The court of appeals found this standard was met by the time the results of the internal investigation were reported.
U.S. Chamber of Commerce Criticizes Yates Memo.
By: Robert R. Stauffer
We previously have discussed the “Yates Memo,” in which Deputy Attorney General Sally Quillian Yates described a renewed emphasis on criminal prosecution of culpable employees in the context of corporate wrongdoing, including incentives for corporations to provide the Department of Justice with evidence of wrongdoing by employees. The U.S. Chamber of Commerce recently issued a lengthy paper, “DOJ’s New Threshold for ‘Cooperation’: Challenges Posed by the Yates Memo and USAM Revisions,” expressing significant concerns about the Yates Memo. The Chamber argues that the Yates Memo is likely to have unintended consequences, including the alienation of personnel who might otherwise cooperate with an internal investigation and thus make corporations’ compliance efforts more difficult, and expresses concerns about potential pressure to waive the attorney-client privilege.
Criminal Sentence Affirmed for Failure to Prevent Salmonella Outbreak.
By: Robert R. Stauffer
In United States v. DeCoster, 828 F.3d 626 (8th Cir. 2016) (No. 15-1890), the owner and the chief operating officer of an egg production company had been convicted of misdemeanor violations of 21 U.S.C. § 331(a) for introducing eggs adulterated with salmonella enteritidis into interstate commerce. The convictions arose out of a salmonella outbreak that caused illness in over 56,000 people, originating in one of defendant’s facilities. FDA investigators discovered that records had been falsified, auditors were lied to, written compliance plans were not fulfilled, rodents were in laying and feed areas, rodent traps were broken, manure was piled high, and employees were not wearing or changing into protective clothing or cleaning or sanitizing equipment. The defendants pled guilty as responsible corporate officers under the Food Drug & Cosmetic Act, stipulating that they were in positions of authority to detect, prevent and correct the sale of contaminated eggs but denying any knowledge that eggs were contaminated at the time of shipment. They were each sentenced to three months imprisonment and fined $100,000. On appeal, they argued that the prison sentences were unconstitutional because they violated substantive due process and were not proportional to the crimes as required by the Eighth Amendment. As to substantive due process, the Court of Appeals found that the elimination of a mens rea requirement did not violate due process where, as here, the penalty is relatively small, the conviction does not gravely damage the defendant’s reputation, and congressional intent supports the imposition of the penalty. The court also found the three-month sentence not to be “grossly disproportionate” to the offenses, and upheld the convictions.
Wal-Mart Derivative Action Arising from Mexican Bribery Scandal Dismissed.
By: Robert R. Stauffer
Cottrell v. Duke, No. 15-1869 (8th Cir. July 22, 2016), addressed shareholder derivative claims arising from the well-publicized Mexican bribery scandal involving Wal-Mart Stores, Inc. According to the complaint, an executive of Wal-Mart’s Mexican subsidiary, “Wal-Mex,” told the general counsel of Wal-Mart’s international division in 2005 that he had information about systematic bribery of Mexican officials orchestrated by top Wal-Mex executives. The GC informed Wal-Mart senior management, which retained an outside law firm to investigate. However, when the firm proposed questioning anyone who might have known about the payments, including “implicated members” of Wal-Mex’s board, and tracing all money that Wal-Mex had paid for help getting permits over the past five years, Wal-Mart decided to have its internal Corporate Investigations unit review the allegations instead. The investigators quickly found evidence supporting the whistleblower’s claims, and they prepared a draft report in which they concluded there was reasonable suspicion to believe Mexican and U.S. laws had been violated. The investigators urged Wal-Mart to authorize a full in-house investigation. Instead, control over the matter was transferred from the Corporate Investigations unit to Wal-Mex itself, which quickly issued a 6-page report that cleared Wal-Mex officers based on their denials and the absence of direct evidence. Wal-Mart’s senior executives then closed the matter based on that report. The whistleblower subsequently took his concerns to the New York Times, which conducted its own investigation. When it learned of that investigation, Wal-Mart resurrected its own investigation, notified the Department of Justice and the Securities Exchange Commission, and disclosed those notifications to investors. This derivative lawsuit was then filed, alleging various directors and executives breached their fiduciary duties by allowing the bribery, covering it up, and letting the internal investigation be watered down to nothing. Wal-Mart moved to dismiss on the basis that the shareholders did not make a demand on the board to pursue the claims. The investors argued that demand was excused because directors would have faced a substantial likelihood of personal liability based on awareness of the misconduct when they allegedly acquiesced in the cover-up. The claim of director awareness of the misconduct was based on three alternative theories: that during the initial in-house investigation, Wal-Mart’s investigators reported their preliminary findings to the audit committee, which alerted the full board; that senior officers told the board; and that the bribery was so enormous and egregious, and the threat posed to Wal-Mart was so massive, that the board much have known about it. The Eighth Circuit found that all three arguments were based on speculation and inference and were not supported by particular factual allegations. Accordingly, it affirmed the district court’s dismissal of the complaint.