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Jenner & Block is excited to introduce “The Spotlight,” an electronic monthly newsletter from the Litigation Department Co-Chairs, Craig C. Martin and David J. Bradford, designed to highlight recent cases and legislative developments from across the United States. Additionally, The Spotlight recaps the high impact Litigation Department news, upcoming events and publications of interest.
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Court Finds Uber’s Arbitration Clauses With its Drivers Unenforceable.
By: Howard S. Suskin
A California federal district court denied Uber’s motion to compel arbitration of its drivers’ disputes concerning background checks, holding that the arbitration provisions in the drivers’ contracts were procedurally and substantively unconscionable. Mohamed v. Uber Technologies, Inc.,No. C-14-5200 (N.D. Cal. June 9, 2015). The court initially found that delegation clauses contained in the drivers’ contracts, which purported to reserve the adjudication of the validity and enforceability of the contracts’ arbitration provisions to an arbitrator, were unenforceable because they were not clear and unmistakable and conflicted with other language in the contracts. The court also found that the delegation clauses were unconscionable, as they were buried in the lengthy contract, had an onerous opt-out provision, and imposed substantial arbitration costs and fees on the driver. The court ultimately concluded that the arbitration provisions in the Uber contracts were procedurally and substantively unconscionable and therefore unenforceable under California law, and that contractual provisions purporting to waive private attorney general claims were void as a matter of California law.
Employer’s Delay in Enforcing Arbitration Agreement was a Waiver.
By: Howard S. Suskin
An employer’s delay in moving to compel arbitration waived its right to enforce an arbitration agreement and block a class action in court filed by its employees. Oregel v. PacPizza, LLC, 187 Cal. Rptr. 3d 436 (Cal. Ct. App. 1st 2015) (No. A141947). Prior to moving to compel arbitration, the employer answered plaintiff’s original and amended complaints without alleging the existence of an agreement to arbitrate, and engaged in discovery for over one year. The appellate court affirmed the trial court’s finding that the employer’s participation in litigation was inconsistent with its claimed right to arbitrate and that the employer had thus waived its right to compel arbitration.
Delay in Seeking Arbitration Waived Right to Arbitrate.
By: Howard S. Suskin
A defendant in a class action antitrust suit that did not move to compel arbitration until shortly before trial was set to begin was held to have waived its right to arbitrate. In re Cox Enter., Inc. Set-Top Cable Television Box Antitrust Litig., 790 F.3d 1112 (10th Cir. 2015) (No. 14-6158). Defendant’s motion to compel arbitration followed extensive discovery, class certification, and potentially dispositive motions. The court found that the defendant’s assertion of its right to arbitrate was too late and inconsistent with its conduct in litigating the case. The court rejected the defendant’s argument that it would have been futile to file its motion to compel arbitration before the class was certified, because absent class members were not parties prior to certification. The court found that the defendant could have asserted its right to arbitrate at any time during the course of the litigation, and it could have asserted its right to arbitrate against the absent class members as a possible defense against class certification.
Contract That Prohibits Challenge to Arbitration Award is Unenforceable.
By: Howard S. Suskin
A contract provision stating that the parties expressly agreed not to challenge the validity of their arbitration or an arbitration award was held to be contrary to public policy, and thus void and unenforceable. Atlanta Flooring Design Centers, Inc. v. R.G. Williams Constr., Inc., 773 S.E.2d 868 (Ga. Ct. App. 2015) (No. A15A0664). The contract stated: “The award rendered by the arbitrator(s) shall be final and binding on the parties and judgment upon the award may be entered in any court of competent jurisdiction. Contractor and Subcontractor hereby expressly agree not to challenge the validity of the arbitration or the award.” Applying Georgia law, and relying on cases decided under the Federal Arbitration Act, the court concluded that the statutory grounds for vacating an arbitration award may not be waived or eliminated by contract. The court reasoned that the statutory grounds for a court to review and vacate an award demonstrate Congressional intent to provide a minimum level of due process for parties to an arbitration.
Government Waived Privilege by Waiting 5 Months to Assert Privilege.
By: David M. Greenwald
In Baranski v. United States, No. 11-CV-123 (E.D. Mo. June 3, 2015), the district court held that the government had waived privilege over inadvertently produced documents because it failed to take steps to rectify the error until five months after some of the documents were used as exhibits by plaintiff in a deposition. The government produced 5784 pages of Bates stamped documents to plaintiff on a disk. The government intended to exclude 58 privileged documents from the production, but those documents, comprising 570 pages, were nonetheless included on the disk. More than a year later, plaintiff deposed an ATF employee, using two of the 58 documents as exhibits; the ATF employee testified about these documents without objection from government attorneys. Five months later, plaintiff attached several of the 58 documents to a sealed filing with the court. Six days later, government counsel sent a letter to plaintiff informing him that the government had inadvertently produced the documents. Applying the multi-factor “middle” approach, the court determined that the government had failed to demonstrate that it had the right to claw the documents back. Among other things, the court noted that the government knew or should have know at least as early as the date of the deposition that it had inadvertently produced privileged documents, yet it did nothing to seek to rectify the matter until five months later when it reviewed plaintiff’s sealed filing. The court held that, having failed to act promptly to rectify its error, the government waived privilege over the documents.
Communications with Public Relations Consultant Not Privileged.
By: David M. Greenwald
In Fine v. ESPN, Inc., No. 5:12-CV-0836 (N.D.N.Y. May 28, 2015), the district court affirmed a magistrate judge’s decision holding that communications between a client’s counsel and a public relations consultant were not privileged under New York law. In this defamation action, plaintiff subpoenaed records from a third party university, which had conducted an internal investigation into sexual abuse allegations made against plaintiff’s husband. The university asserted attorney-client privilege over communications with a PR firm, which had been engaged by the university’s counsel, on the grounds that the PR firm was assisting counsel to provide legal advice and was, therefore, an agent of counsel and within the privilege. The university argued that, due to the heightened media scrutiny surrounding the investigation, its attorneys required PR assistance in order to shape media coverage and to avoid prosecution of the university. The magistrate judge reviewed the documents in camera and determined that the PR firm communications were not privileged because they were “ordinary public relations advice” and were not necessary to enable counsel to provide legal advice. Under New York law, in order for a consultant to qualify for the “agency exception” to the general rule that disclosure to a third party waives privilege, a party must demonstrate that: (1) it had a reasonable expectation of confidentiality under the circumstances, and (2) disclosure to the third party was necessary for the client to obtain informed legal advice. The necessity element means more than “just useful and convenient,” but rather requires the involvement of the third party to be “nearly indispensable or serve some specialized purpose to facilitating the attorney-client communications.” The court held that the magistrate judge applied the proper legal standard and that communications that the magistrate judge found were not necessary to the provision of legal advice were properly deemed not privileged.
Lawyer Who Continued to Use Inadvertently Produced Materials Properly Disqualified.
By: David M. Greenwald
In Burch & Cracchiolo, P.A. v. The Hon. Robert D. Myers, 351 P.3d 376 (Ariz. Ct. App. 2015) (No. 1 CA-SA 15-0013), the appellate court affirmed the trial court’s disqualification of a lawyer who continued to use materials after being informed by opposing counsel that the materials were privileged and had been inadvertently produced. The underlying litigation involved a dispute regarding whether a guardianship should be established for Bradford. Bradford was initially represented by the JS&S firm, but later changed counsel. Opposing counsel, B&C, served a subpoena on JS&S seeking production of all non-privileged documents. JS&S, mistakenly believing that B&C was taking over as Bradford’s counsel, delivered a copy of its entire file to B&C without first conducting a privilege review. When Bradford’s then-current counsel, Shumway, learned of JS&S’s disclosure less than a month later, he immediately emailed B&C informing B&C that the file contained at least two privileged documents, which Shumway requested be returned, and that he would review the remainder of the file to determine if it contained additional privileged documents. The B&C attorney responded that he had not “studied the materials with an eye toward privilege issues” and he would await word from Shumway. Three weeks later, having not heard from Shumway, the B&C attorney distributed the entire client file, including the documents Shumway had identified as privileged, to all parties to the action. Bradford moved to disqualify B&C. In preparation for defense against the motion, the B&C attorney reviewed, in detail, the entire client file. The trial court, after conducting an in camera review, found that B&C had violated Arizona Rule of Civil Procedure 26.1(f), which provides that “after being notified [of alleged inadvertent disclosure], a party must promptly return, sequester, or destroy the specified information and any copies it has made and may not use or disclose the information until the claim is resolved,” and that the documents had prejudiced Bradford by providing B&C a tactical advantage in the litigation. The appellate court affirmed, holding that a party need not prove actual prejudice to disqualify opposing counsel, but only that prejudice may occur. The appellate court noted that, if an attorney knows or has reason to know he has received privileged materials inadvertently, he must apply the procedures articulated in Rule 26.1(f). “If he does so, he cannot be disqualified for the mere receipt of inadvertently disclosed documents.”
Employee May Not Waive Company’s Privilege by Asserting Advice-Of-Counsel Defense.
By: David M. Greenwald
In United States v. Wells Fargo Bank, N.A., No. 12-cv-7527 (JMF) (S.D.N.Y. June 30, 2015), and in an Endorsed Letter, No. 12-cv-7527 (JMF) (S.D.N.Y. July 14, 2015), ECF 255, the court held that an employee who does not have the authority to waive his employer’s attorney-client privilege may not impliedly waive the privilege by asserting an advice-of-counsel defense. In this case, the government brought a civil fraud action against Wells Fargo and one of its employees, Lofrano. During his deposition, Lofrano testified that he consulted Wells Fargo’s counsel regarding the conduct at issue, and made it clear that he intended to pursue an advice-of-counsel defense. Wells Fargo objected to Lofrano testifying about his communications with Wells Fargo’s counsel on the grounds that the privilege was held by the company, not by Lofrano. The government argued that Lofrano’s assertion of advice-of-counsel waived Wells’ Fargo’s privilege. According to the court, this presented an unresolved question of law: whether an employee’s intention to pursue an advice-of-counsel defense, without more, constitutes an implied waiver of the corporation’s attorney-client privilege, even if the employee lacks the authority to waive the privilege on behalf of the corporation, and the corporation consistently asserts the privilege and almost no privileged information has yet been revealed. The court held that, where the employee does not have authority to waive the privilege on behalf of the corporation, the privilege is not waived by the employee’s mere invocation of the defense. The court noted that, should Wells Fargo continue to object to Lofrano’s assertion of an advice-of-counsel defense, “Lofrano’s right to present a defense could conceivably overcome Wells Fargo’s right to maintain its privilege.” The court directed the parties to meet and confer and submit a joint letter to the court proposing a procedure for resolving this issue. In a letter endorsement (Docket No. 255, filed 07/14/15), the court determined that a motion to sever Lofrano from the case – the solution proposed by Wells Fargo and Lofrano, but opposed by the government – would be premature and directed the parties to brief the issue of what, if any, discovery by the government of Wells Fargo’s privileged communications would be allowed.
Communications With PR Firm are Not Privileged, but are Protected Work Product
By: David M. Greenwald
In Pemberton v. Republic Services, Inc., 14-cv-01421 (E.D. Mo. June 23, 2015), the court held that where a PR firm was hired by defendants during the course of extensive litigation, communications with the PR firm were outside the attorney-client privilege, but the communications and materials prepared by the PR firm were protected by the work product doctrine. Here, defendants had been sued 38 times relating to a landfill, and the landfill had been the subject of “intense media scrutiny.” Counsel for defendants engaged a PR firm to serve as a local PR consultant for counsel and defendants. In response to plaintiffs’ subpoena, the PR firm withheld 81 documents and videos on grounds of privilege and work product. Following in camera review, the court found that the majority of the documents were internal communications among personnel at the PR firm, many of which reflected prior communications between the PR firm and defendants’ counsel. Noting that there is some precedent under federal law for expanding the attorney-client privilege to include communications between a party and a PR consultant, but that no Missouri cases addressing the issue had been presented to the court, the court held that the privilege did not include communications with the PR firm. However, because the materials at issue were prepared because of the prospect of litigation, and the communications may have helped counsel shape their legal strategy, the materials were protected work product.
Former General Counsel Ordered to Testify Over Objection Based on Shelton Doctrine.
By: David M. Greenwald
In Pain Center of SE Indiana, LLC v. Origin Healthcare Solutions, LLC, No. 13-cv-133 (S.D. Ind. June 10, 2015), defendant objected to plaintiffs deposing defendant’s former general counsel, Vandenberg, who submitted a declaration that he did not provide business or financial advice to defendant’s personnel and staff. Defendant argued that the Shelton doctrine precluded the deposition. The court overruled the objection and allowed the deposition to proceed. The court found that there was some basis in the record to support plaintiffs’ assertion that Vandenberg had provided non-legal advice to defendant. The court held inapplicable the Shelton doctrine, which provides that courts should be reluctant to allow discovery of an opponent’s litigation counsel where the information sought is available through other means. The court found that no Seventh Circuit decision has discussed or adopted the Shelton doctrine, and that the district courts in the Seventh Circuit are split on the issue. The court stated it found the line of decisions rejecting the doctrine as more persuasive, and held that plaintiffs could depose Vandenberg, and defendant would need to invoke any privileges or immunities to specific questions. The court cautioned, however, that it would be vigilant in utilizing available sanctions if it became apparent that Vandenberg had so little relevant, non-privileged information that the deposition was a waste of everyone’s time.
Using Privileged Documents to Defend Against Sanctions Motion Waived Privilege.
By: David M. Greenwald
In Apple Inc. v. Samsung Elec. Co. Ltd., No. 11-CV-01846 (N.D. Cal. June 19, 2015), the court denied a motion to set aside a magistrate judge’s order and decision that held that Samsung waived privilege when it and its counsel submitted privileged documents to the court in response to an order to show cause why sanctions were not warranted as a result of counsel’s disclosure to Samsung of an “insufficiently redacted” expert report, which revealed confidential terms of an Apple-Nokia license. The court found that 90 Samsung employees were given access to the document on an FTP site and thereafter more than 200 unauthorized individuals received the confidential license terms in violation of the court’s protective order. The court granted Apple’s and Nokia’s requests for additional discovery, and Samsung asserted privilege and work product protection as to numerous documents relating to the disclosures. The court ordered Samsung to provide unredacted documents to the court for in camera review. Following a review of the documents, the court determined that “an outline does emerge suggesting sanctions should issue,” based on protective order violations by Samsung and its counsel, and it ordered Samsung to file a brief to show cause why sanctions should not issue. The court also expressed doubt that Samsung had met its burden of demonstrating that a few of the documents produced for in camera review were privileged. Prior to responding to the show cause order, Samsung submitted an ex parte in camera brief in support of its claims that the disputed documents were privileged, supported by extensive declarations. Ultimately Apple moved to compel disclosure of some of the documents that Samsung had cited in defending against sanctions, and Nokia sought all documents submitted by Samsung for in camera review. The magistrate judge found that, by placing the contents of the documents at issue, distributing them and disclosing what they say and do not say in sanctions proceedings, Samsung waived privilege. On a motion to set aside the magistrate judge’s order, the district court found that the magistrate judge’s order was not clearly erroneous. Rather, by arguing that there was “no evidence” to suggest that the breach of the protective order was intentional, and by relying on privileged documents to support that claim, Samsung put the privileged documents at issue. Thus, the district court found that neither Nokia nor Apple could evaluate Samsung’s assertions without access to the documents, and thus there was a “vital need” to pierce the privilege in order to provide due process to Nokia and Apple.
Ninth Circuit Reverses and Remands Class Settlement for Procedural Review.
By: Michael T. Brody
In Allen v. Bedolla, 787 F.3d 1218(9th Cir. 2015) (No. 13-55106), plaintiffs brought a class action against an employment agency. After several mediations, the parties reached a settlement that created a $4.5 million cash fund. Up to 25% of the fund could be paid to class counsel, and the remainder to be claimed by class members, with unclaimed funds reverting to defendant. The Ninth Circuit reversed the approval of the settlement. Applying its Bluetooth decision, the court stated that settlements that present “subtle signs” that class counsel allowed their self-interest to “infect the negotiations” should receive more probing review. Warning signs that should provoke heightened scrutiny include: when counsel receives a disproportionate amount of the settlement; the parties negotiate an arrangement whereby defendant will not object to a certain fee request; and the settlement contains a reverter. This settlement had all three warning signs, and the district court did not explain the fairness of the settlement. Further, on the issue of attorneys’ fees, the court cautioned that the Ninth Circuit’s “benchmark,” that it is ordinarily appropriate to pay 25% of settlement value to class counsel, should not lead to a formulaic approach that would result in an unreasonable award. In this case, less than $400,000 was to be distributed to class members. Apparently, the parties anticipated this low amount when they settled. The district court failed to inquire as to why counsel had negotiated such disproportionate benefit for themselves.
Supreme Court May Decide Whether Differences in Individual Damages Preclude Certification.
By: Michael T. Brody
In Bouaphakeo v. Tyson Foods, Inc., 765 F.3d 791 (8th Cir. 2014) (No. 12-3753), the district court certified a class and awarded damages to a class of current and former employees who claimed defendants violated the Fair Labor Standards Act because their compensation did not include compensable pre- and post-production line activities, including donning and doffing required equipment and clothing. The Eighth Circuit affirmed. Plaintiffs relied on a time study and statistical proof regarding “typical” employees. The company argued that differences in equipment and clothing between positions and individual actions of employees and management precluded certification. While recognizing individual class members varied in their routines, the court concluded the case was not dominated by individual issues and such issues could be resolved through sampling and statistical techniques. The Supreme Court granted the defendant’s petition for a writ of certiorari which presents the following questions: “(1) May differences among individual class members be ignored and a class action certified under Fed. R. Civ. P. 23(b)(3), or a collective action certified under the Fair Labor Standards Act, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample? (2) May a class action be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the Fair Labor Standards Act, when the class contains hundreds of members who were not injured and have no legal right to any damages?”
Seventh Circuit Rejects Enhanced Ascertainability Review.
By: Michael T. Brody
In Mullins v. Direct Digital, LLC, No. 15-1776 (7th Cir. July 28, 2015), the Seventh Circuit declined to follow the Third Circuit’s recent ascertainability decisions and clarified the scope of the ascertainability doctrine in the Seventh Circuit. Plaintiffs alleged consumer fraud by the seller of a dietary supplement. The district court certified a class and the Seventh Circuit affirmed. The court recognized that existing law required that a class be defined clearly by objective criteria rather than, for example, a class member’s state of mind, vague or subjective criteria, or in terms of success on the merits (the “fail safe” class). The Seventh Circuit rejected the additional requirement that there be a “reliable and administratively feasible way” to identify those who fall within the class definition. The court found that this additional ascertainability requirement had the effective of skewing the balance that district courts must strike when deciding to certify classes, with the effect of barring class actions where class treatment is most often needed – cases involving relatively low-cost goods, small damage claims, or where plaintiffs are unlikely to have documentary proof of class membership – and concluded that issues relating to the appropriateness of the class can better be dealt with under the superiority doctrine or in the context of fashioning notice. The court recognized that its ruling disagreed with several recent rulings, notably those of the Third Circuit.
Court Recognizes Standing for Class Representatives Asserting Privacy Claim.
By: Michael T. Brody
In Remijas v. Neiman Marcus Group, LLC, No. 14-3122 (7th Cir. July 20, 2015), plaintiffs brought a purported class action against Neiman Marcus for claims arising out of the disclosure of consumer information as a result of an attack by computer hackers. The district court dismissed the claim and the Seventh Circuit reversed. The court found the plaintiffs possessed standing to bring their action on two grounds. First, the court recognized that allegations of future harm can establish Article III standing if that harm is impending. The court held that it was impending inasmuch as class members faced identifiable costs associated with the process of resolving the data breach. This, it was plausible to infer that plaintiffs had shown a substantial risk of future harm. Second, the court recognized that plaintiffs had already lost time and money protecting themselves against future identity theft and fraudulent charges resulting from the prior breach. While mitigation expenses do not qualify as actual injuries where the harm is not imminent, in this case plaintiffs had alleged sufficient imminent harm. While not deciding two other standing arguments, the court stated that it was “dubious” that standing could be based on the allegation that plaintiffs had overpaid for their products or that the data breach infringed plaintiffs’ right to personal information.
9th Cir.: Google Earth Image and Digital Marker Not Hearsay.
By: Matthew J. Thomas
In United States v. Lizarraga-Tirado, 789 F.3d 1107 (9th Cir. 2015) (No. 13-10530), the Ninth Circuit decided “a question born of  newfound technological prowess,” ruling that a Google Earth satellite image and a digital “tack” labeled with GPS coordinates are not hearsay. In this case, a dispute arose over which side of the U.S.-Mexico border defendant was on when he was arrested. At trial, the government introduced a Google Earth satellite image with a digital tack showing where the agents testified they were on the night of defendant’s arrest. Defense counsel objected to the exhibit on hearsay grounds, but the district court overruled the objection and admitted the image into evidence. On appeal, the Ninth Circuit affirmed, holding that a Google satellite image, like a photograph, is not hearsay because it makes no “assertion.” The court acknowledged that the digital tack (or marker) presented a more difficult question, inasmuch as that did make an assertion, but nonetheless ruled that it, too, was not hearsay. The court reasoned that the hearsay rule under FRE 801(a) applies only to “a person’s” assertions; because the tack had been automatically generated by the Google Earth program by typing in GPS coordinates recorded by the agents on the night of the arrest, the assertion was not made by a person, but by a computer program, and therefore was not hearsay under the Rule.
Bankruptcy Counsel Not Entitled to Fees for Defending Fee Applications.
By: Matthew J. Thomas
In Baker Botts L.L.P. v. Asarco LLC, 135 S. Ct. 2158 (2015) (No. 14-103), the U.S. Supreme Court held that the Bankruptcy Code does not permit bankruptcy courts to award attorneys’ fees to counsel or other professionals employed by the bankruptcy estate for work performed in defending a fee application in court. In this case, the defendant hired law firms to assist it in carrying out its duties as a Chapter 11 debtor in possession. When defendant emerged from bankruptcy, the law firms filed fee applications under Section 330(a)(1) of the Code, which defendant challenged. The bankruptcy court rejected defendant’s objections and awarded the law firms their fees for time spent defending the fee petitions. The district court affirmed, but the Fifth Circuit reversed, holding that the Code did not authorize fee awards for defending fee applications. The U.S. Supreme Court affirmed, holding that the Bankruptcy Code did not depart from the American Rule for fee-defense litigation. Section 330(a)(1) allows for “reasonable compensation for actual, necessary services rendered”; the Court stated that “services” ordinarily refers to labor performed for another, and time spent litigating a fee application against the bankruptcy estate’s administrator cannot be fairly described as labor performed for another. Thus, the Court concluded that to allow such fees in light of the statutory text would require an unnatural interpretation of the word “services” and would require a particularly unusual deviation from the American Rule.
Illinois Supreme Court: Internet Provider Must Disclose Identity of User.
By: Matthew J. Thomas
In Hadley v. Doe, 34 N.E.3d 549 (Ill. 2015) (No. 118000), plaintiff alleged that defendant, an unidentified internet user, had posted defamatory statements on a newspaper internet message board. Plaintiff requested that the court order defendant’s internet service provider to disclose defendant’s identity; the court granted the request and the appellate court affirmed. The Illinois Supreme Court also affirmed. The court noted that under Illinois rules, a plaintiff may obtain discovery for purposes of discovering the identity of an unidentified individual who may be liable to him, provided that plaintiff can demonstrate that discovery of the individual’s identity is “necessary.” The court ruled that to demonstrate necessity, the plaintiff must present sufficient allegations to survive a motion to dismiss, reasoning that this standard struck the right balance of protecting a plaintiff’s right to redress for defamatory statements and protecting against a disclosure standard that is so low that it effectively chills the right to speak anonymously. The court concluded that a more stringent standard was not required because, once a plaintiff establishes a prima facie case for defamation, there are no first amendment concerns because a potential defendant has no first amendment right to defame.
Expert Fees Not Recoverable Under FLSA Fee-Shifting Provision.
By: Matthew J. Thomas
In Gortat v. Capala Bros., Inc., No. 14-3304-cv (2d Cir. July 29, 2015), after plaintiffs prevailed at trial on their claims that defendants had violated the Fair Labor Standards Act (FLSA), the court awarded plaintiffs their attorneys’ fees and costs, including costs plaintiffs incurred in retaining an expert witness. The fees and costs were awarded under the FLSA’s fee shifting provision, 29 U.S.C. § 216(b), which allows a prevailing plaintiff to recover “a reasonable attorney’s fee . . . and costs of the action.” On appeal, the Second Circuit reversed in part, holding as a matter of first impression in that Circuit that the FLSA’s fee shifting provision does not authorize district courts to award costs for expert witnesses. The court ruled that expert costs are not recoverable absent “explicit statutory authorization,” which the court found was absent from the FLSA because, unlike other statutes, the FLSA did not expressly mention expert fees. The court concluded that the FLSA’s reference to “costs” was not sufficient because costs is a term of art that generally does not include expert fees.
Fed. Cir. Sets New Standard for Use of U.S. Discovery in Foreign Actions.
By: Matthew J. Thomas
In In re Posco, No. 2015-112 (Fed. Cir. July 22, 2015), plaintiff filed suit in the District of New Jersey, alleging that defendant had infringed its patent and engaged in unfair competition. After the court entered a protective order stating that discovery materials shall be used solely for purposes of this action, defendant produced several million pages of documents. The parties were also parties to related litigations pending in Japan and Korea, where discovery is generally more restricted. Plaintiff requested that the protective order in this case be modified to allow the produced documents to be used in the foreign actions, and the court, over defendant’s objection, agreed. Defendant filed a petition for writ of mandamus, arguing that 28 U.S.C. § 1782, which governs the production of materials for use in a foreign tribunal, was the exclusive means to obtain discovery for use in foreign proceedings. The Supreme Court has articulated specific factors to consider when analyzing a request under § 1782, see Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) – factors that the district court here did not consider. The Federal Circuit rejected the argument that § 1782 was the exclusive avenue for obtaining such discovery, noting that it does not directly govern requests to modify a protective order to make materials available in a foreign proceeding. Nonetheless, the court granted mandamus, holding that § 1782 “still has a role to play when a party seeks to modify a protective order.” The court ruled that the considerations for modifying a protective order to allow use of discovered materials in a foreign proceeding should be the same as those applicable to § 1782, and that the Supreme Court’s Intel factors should guide both determinations. It thus remanded the issue back to the district court to resolve plaintiff’s request to modify the protective order by giving due consideration to the Intel factors.
3rd Circuit: Burden on Debt Collectors to Prove FDCPA Exceptions.
By: Matthew J. Thomas
Under the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, et seq., a debt collector is liable to a consumer for contacting third parties in pursuit of that consumer’s debt unless the communication falls under a statutory exception. One of those exceptions covers communication with a third party “for the purpose of acquiring location information about the consumer.” In Evankavitch v. Green Tree Servicing, LLC, 793 F.3d 355 (3d Cir. 2015) (No. 14-1114), the Third Circuit held, as a matter of first impression, that the burden is on the debt collector to prove that the challenged third-party communications fit within § 1692’s exception for acquisition of location information. Although the FDCPA is silent on the allocation of burden, the court held that the defense at issue was an exception to a statute’s general prohibition, and noted that courts routinely put the burden of proving a statutory exception on the party who claims its benefit. The court also observed that the language concerning the exception for acquisition of location information closely tracked other provisions of the FDCPA that have widely been recognized as affirmative defenses. Moreover, the court concluded that fairness and policy considerations further supported this result, given that the legislative history indicates that Congress considered the general prohibition on third-party communications to be extremely important, and the debt collector is most likely to be the party with particularized knowledge of the facts relevant to whether an exception to this general prohibition has been met.
Court Holds Spouse Responsible for E-Discovery Misconduct of Husband.
By: Daniel J. Weiss
In Malibu Media, LLC v. Tashiro, No. 13-CV-00205 (S.D. Ind. May 18, 2015), the magistrate judge recommended entry of a default judgment in favor of the plaintiff on its copyright infringement claim against a married couple after finding that the defendants “spoiled evidence, committed perjury, and failed to fulfill their discovery obligations.” The court found that the husband intentionally deleted files before handing over hard drives to the plaintiff’s expert. The court further found that the wife was also liable for the husband’s conduct because she failed to investigate whether her answers to plaintiff’s discovery requests were truthful and she turned over to her husband the responsibility for producing responsive information. The court also rejected the defendants’ argument that sanctions were inappropriate because the deleted files could be recovered. The court held that “even if Plaintiff in this case had been able to recover all files that [the husband] deleted, sanctions would still be appropriate,” including that sanctions are appropriate for “mere attempts to destroy or withhold evidence” and because the recovery of deleted files may alter the “metadata associated with those files.”
Court Authorizes Deposition of Court-Appointed Neutral ESI Expert.
By: Daniel J. Weiss
In Procaps, S.A. v. Patheon Inc., No. 12-24356-CIV (S.D. Fla. Apr. 24, 2015), the district court appointed a neutral e-discovery expert to assist the court in analyzing allegations that the plaintiff had failed to preserve electronic evidence. After the expert produced a report, the defendant sought to take the expert’s deposition, but plaintiff objected. The court ordered the taking of the deposition, noting that Federal Rule of Evidence 706(b)(2), which provides that a court-appointed expert “may be deposed by any party,” authorized the taking of the deposition, and that other federal courts “have authorized parties to take the deposition of neutral, court-appointed forensic experts in several instances involving deleted files reports.” The court further ordered that a court-appointed special master for discovery and ESI matters attend the deposition and ask questions, which would “promote the goal of providing assistance to the Court.”
Court Holds that Spoliation Sanctions are Premature Before Close of Discovery.
By: Daniel J. Weiss
In Scott v. Moniz, No. 14-CV-5684-RJB (W.D. Wash. June 19, 2015), the district court held that a defendant “failed in its duty to preserve evidence” when it did not implement a document hold at the time the plaintiff filed an administrative claim for discrimination. The court held, however, that it would be “premature to issue the requested sanctions” because discovery was ongoing and the court would not have a complete “picture of the prejudice” to the plaintiff until the completion of “additional discovery and depositions.” The court continued the motion for sanctions until “discovery is complete,” at which time “Plaintiff can make further showing of prejudice, if any.”
Court Denies Motion to Quash Deposition Regarding Defendant’s E-Discovery Effort.
By: Daniel J. Weiss
In Burd v. Ford Motor Co.,No. 13-cv-20976 (S.D. W. Va. July 8, 2015), the court refused to quash Rule 30(b)(6) deposition topics directed at the defendant’s efforts to preserve and gather responsive electronic documents. The defendant had largely refused to provide the plaintiff with lists of search terms or detailed explanations for how certain custodians gathered documents, arguing that “it should be permitted to conduct the searches as it sees fit, so long as the searches are reasonable.” The defendant also argued that the court should preclude “discovery on discovery” absent a showing a spoliation or other misconduct. The court rejected those arguments in a long discussion of the “spirit and purposes” of the federal discovery rules. The court held that the rules seek to reduce “gamesmanship” and insure “forthright sharing of all parties to a case with the aim of expediting case progress, minimizing burden and expense, and removing contentiousness as much as practicable.” The court held that Rule 26 “anticipates a sharing of facts and, if necessary, discovery about the sources to be searched for ESI.” Therefore, “generic objections to ‘discovery on discovery’ and ‘non-merits’ discovery are outmoded and unpersuasive.” Moreover, the court held that the defendant had “cloaked the circumstances surrounding its document search and retrieval in secrecy, leading to skepticism about the thoroughness and accuracy of that process,” which the court held “violates the principles of an open, transparent discovery process.”
Court Rejects Proportionality Objection Due to Lack of Evidence about Burden.
By: Daniel J. Weiss
In Cargill Meat Solutions Corp. v. Premium Beef Feeders, LLC, No. 13-cv-1168 (D. Kan. June 26, 2015), the court considered the defendants’ motion to compel and the plaintiff’s objection that the cost of producing the requested materials was unduly burdensome and outweighed the benefit of the discovery. The court held that to prevail on its proportionality objection, a party must “provide sufficient detail in terms of time, money and procedure required to produce the requested documents.” The court held that the plaintiff failed to meet that burden because the only evidence the plaintiff provided was an “estimate” that complying with the defendants’ request would cost between $4,000 to $5,000 per custodian. The plaintiff did not identify the custodians or explain how many custodians would be involved and failed to explain why this cost would be disproportionate to the amount in controversy, which was in excess of $2 million.
Property Damage Resulting from Faulty Workmanship Constitutes a Covered Occurrence not Barred by a Contractual Liability Exclusion
By: Brian Scarbrough
The United State Court of Appeals for the Eleventh Circuit recently interpreted Alabama law to permit insurance coverage for property damage resulting from faulty workmanship. Pennsylvania Nat’l Mut Cas. Ins. Co. v. St. Catherine of Siena Parish, 790 F.3d 1173 (11th Cir. 2015) (No. 14-12151). Penn National issued a general liability insurance policy to a Kiker. Kiker had replaced shingles on a church roof. Subsequent to those repairs, the roof leaked and caused water damage to a ceiling and roof decking. The church obtained a $350,000 judgment against Kiker for breach of the implied warranty that Kiker complete the project using reasonable skill. Penn National then filed a declaratory judgment action against both Kiker and the church. As the district court held, Penn National did not need to indemnify Kiker for the underlying judgment because of the insurance policy’s contractual liability exclusion. On appeal, the circuit court reversed and found coverage for the underlying judgment. The policy required an occurrence, meaning an accident. According to the circuit court, “[w]hen a contractor performs faulty work … there is no accident or occurrence, but, when the contractor’s faulty work creates a condition that in turn damages property, under Alabama law, that damage results from an accident.” Penn National’s argument that Kiker’s breach of contract was intentional and thus not covered was simply another way of saying that repairs to Kiker’s faulty work itself were not covered. The underlying judgment was covered because it was a judgment not for the repairs of the faulty roof work itself but instead for repairs of the ceiling and roof decking water damage caused by leaks resulting from Kiker’s faulty work in replacing the roof shingles. Moreover, the policy’s contractual liability exclusion did not apply. That exclusion precluded coverage for property damage for which the insured was obligated to pay by reason of the assumption of liability in a contract or agreement. A breach of contract claim based on an implied warranty to use reasonable skill in performing work was not an assumption of liability triggering the exclusion; instead, the exclusion would apply where an insured agreed to indemnify another party.
New York Supreme Court Releases Pro-Policyholder Relatedness Opinion
By: Jan A. Larson
In American Cas. Co. of Reading, P.A., v. Morris Gelb, 11 N.Y.S.3d 39 (N.Y. App. Div. 2015) (No. ), the individual insureds, former directors and officers of Lyondell Chemical Company, sought coverage for their defense of an adversary proceeding brought by the creditors committee in Lyondell’s bankruptcy proceeding. While the primary insurer accepted the duty to defend the individual insureds and provided a defense until the exhaustion of its policy limit, the excess insurers denied any duty to defend and filed a declaratory judgment action. On cross motions for summary judgment, the excess insurers argued that the adversary proceeding (commenced in 2009) and a prior merger proceeding (commenced in 2007) were a related, single claim that fell within an earlier 2006-2007 policy period. Because the 2006-2007 policy contained a version of the Insured v. Insured Exclusion that had not yet been amended to carve-back coverage for bankruptcy actions, the excess insurers argued that they had no duty to defend the individual insureds in the adversary proceeding. Rejecting each of these coverage defenses, the court denied the excess insurers’ motion for summary judgment and granted the individual insureds’ motion. The court held that while both proceedings arose out of the Lyondell merger, each involved different parties, difference causes of action, and different allegations, and were thus, unrelated. Specifically, the earlier merger proceeding was premised on allegation that the price per share set by the individual insureds was too low, while the later adversary proceeding was premised on allegations that the price was too high and supported by unsustainable revenue projections and excessive leverage to finance the transaction. As a result, the adversary proceeding was a separate claim first made in 2009, after the Insured v. Insured Exclusion had been amended to carve-back coverage for bankruptcy actions like the adversary proceeding. The court therefore further held that the Exclusion did not apply to negate the excess insurers’ duty to defend the individual insureds against the adversary proceeding.
Texas Supreme Court Rules EPA CERCLA Enforcement Proceedings are a “Suit” Insurers Must Defend
By: Jan A. Larson
Answering a certified question from the United States Court of Appeals for the Fifth Circuit in the affirmative, the Texas Supreme Court recently ruled that the term “suit” in standard-form CGL policies includes CERCLA enforcement proceedings by the EPA for purposes of an insurers’ duty to defend. McGinnes Industrial Maintenance Corp. v. Phoenix Insurance Co., No. 14-0465 (Tex. June 26, 2015). The insured, McGinnes Industrial Waste Corporation (“McGinnes”), sought coverage from its insurers for a CERCLA enforcement proceeding brought by the EPA in 2009 based on McGinnes’ dumping of pulp and paper mill waste sludge into disposal pits near the San Jacinto River in Pasadena, Texas in the 1960s. McGinnes’ standard-form CGL policies from that time period each provided that the insurer “will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages” and that the insurer “shall have the right and duty to defend any suit against insured seeking damages.” Upon receipt of McGinnes’ claim, however, its insurers denied coverage on grounds that the EPA-initiated proceeding was not a “suit” within its duty to defend. McGinnes filed suit in federal district court, and the court granted partial summary judgment in favor of the insurers, resulting in an interlocutory appeal to the Fifth Circuit and the certified question before the Texas Supreme Court: “Whether the EPA’s PRP letters and/or unilateral administrative order, issued pursuant to CERCLA, constitute a ‘suit’ within the meaning of the CGL policies, triggering a duty to defend.” Answering the certified question in the affirmative, the court provided three reasons. First, the court held that CERCLA effectively redefined a “suit” on environmental cleanup claims to include proceedings conducted by the EPA because of the enforcement authority the statute bestowed on the EPA. Second, the court noted that a majority of courts (and even the insurers in this case) agree that CERCLA-imposed cleanup costs are “damages” covered by standard-form CGL policies, and as such, those policies cannot be interpreted in a way that fails to give the insurer a corresponding right and duty to defend those proceedings. And third, the court relied upon the fact that thirteen of the sixteen state high courts to have considered the same issue have rejected the insurers’ interpretation of “suit” and instead held that it includes EPA enforcement proceedings under CERCLA and triggers an insurer’s duty to defend.
In ePlus Inc. v. Lawson Software, Inc.,790 F.3d 1307 (Fed. Cir. 2015) (Nos. 2013-1506, 2013-1587), the Federal Circuit, after briefing on a petition for rehearing and rehearing en banc, declined to take the case en banc and concluded that a PTO reexamination decision that the claims of ePlus’s patent were invalid voided both the injunction and contempt sanctions against Lawson Software. The injunction and sanctions were awarded on remand after a 2012 Federal Circuit opinion that affirmed a district court judgment that Lawson infringed claim 26 of ePlus’s patent and that the claim had not been proven invalid. However, the Federal Circuit reversed the judgment as to other patent claims and remanded the case for the district court to reconsider the injunction. The district court reentered an injunction on remand and awarded ePlus contempt sanctions in excess of $18 million. In parallel, in 2013, the Federal Circuit affirmed the PTO’s determination on reexamination that claim 26 was invalid. The panel held that, once claim 26 was cancelled, the injunction should be terminated. However, the panel was split as to the question of whether the sanctions award, which resulted from sales made in violation of the injunction and prior to the cancellation of claim 26, should also be vacated. The majority vacated the contempt sanctions, finding that because the injunction determination was not sufficiently final, the contempt sanctions were similarly not final relying on Worden v. Searls, 121 U.S. 14 (1887), and Fresenius USA, Inc. v. Baxter Int’l, Inc., 721 F.3d 1330 (Fed. Cir. 2014).
Judge O’Malley dissented and would have upheld the contempt sanctions. Judge O’Malley reasoned that the Court’s 2012 opinion affirmed liability and merely remanded for reconsideration of the scope of the injunction. The dissent noted that Lawson appreciated that the injunction had not been overturned and had sought relief under Rule 60. The dissent would have found that Fresenius did not apply because Lawson could not challenge invalidity after the 2012 decision and Fresenius never held that cancellation of claims in reexamination could impact a final judgment. The dissent likewise found Worden distinguishable because the appeal deciding the validity of the claims and the contempt sanctions were part of the same appeal. In dissents from the denial of the petition for rehearing en banc, four other judges agreed with Judge O’Malley’s reasoning.
Punitive Award Reversed: No Evidence of Defendant’s Financial Condition.
By: Barry Levenstam
In Soto v. BorgWarner Morse TEC Inc., No. B252995 (Cal. Ct. App. July 15, 2015), the California Court of Appeal addressed an appeal from a plaintiff’s verdict in an asbestos matter. After finding liability at trial in this asbestos exposure action, the jury assessed a $32.5 million punitive damages award against the defendant. The Court of Appeal noted that punitive damages are intended to punish the defendant for the conduct that caused the plaintiff harm and to deter future wrongful acts. The court noted that to accomplish these goals, punitive damages should be set in “an amount not so low that defendants can absorb it with little or no discomfort, nor so high that it destroys, annihilates, or cripples the defendant.” Given this standard, the plaintiff bears the burden of providing “meaningful evidence of the defendant’s financial condition.” Here, the plaintiff adduced testimony concerning the defendant’s revenues but provided no evidence of the defendant’s liabilities or expenses. Noting that “revenue alone provides little information about a defendant’s ability to pay punitive damages,” the court concluded that plaintiff adduced insufficient evidence of defendant’s financial condition to enable the jury to assess intelligently the defendant’s ability to pay a punitive award. The Court reversed that award and stated that no retrial would be had.
Plaintiff Held to His Counsel’s Word that He had Accepted Share of Fault.
By: Barry Levenstam
In Philip Morris USA, Inc. v. Green, No. 5D13-3758 (Fla. Dist. Ct. App. July 31, 2015), the Florida Court of Appeal addressed the question whether the trial court erred by rejecting defendant’s request for the application of the doctrine of comparative fault. At trial, plaintiff’s counsel argued to the jury that plaintiff had accepted his share of responsibility for his illness. Indeed, the jury had apportioned the fault for plaintiff’s illness in part between the two defendants and in part to the plaintiff. The trial court, however, refused to apportion damages based upon the jury’s determination of fault and entered judgment in the full amount of damages against the defendants. The Court of Appeal reversed, holding that plaintiff’s counsel’s frequent reference to plaintiff’s acceptance of some shared responsibility misled the jury into believing that its apportionment of fault would be followed by the trial court. The appellate court further held that the plaintiff’s tactics in seeking to have the full amount of damages imposed upon defendants after arguing to the jury that plaintiff accepted responsibility for a share of those damages was improper and could not be harmless error. Accordingly, the court reversed and remanded with instruction to enter a new judgment based upon the jury’s apportionment of fault.
The Sixth Circuit has rejected the requirement that an employee’s communications “definitively and specifically” relate to a category of fraud or securities violations under the Sarbanes-Oxley Act in order to constitute protected conduct. Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797 (6th Cir. 2015) (No. 13-6641). In doing so, the court affirmed the district court judgment that the plaintiff had engaged in activity protected under the Sarbanes-Oxley Act when he emailed his superior alerting him to unsuitable and fraudulent trades made by a coworker, as a result of which plaintiff was terminated. According to the Sixth Circuit, the text of the Sarbanes-Oxley Act “does not suggest any heightened showing of a factual basis for suspected fraud. . . . The well-established intent of Congress supports a broad reading of the statute’s protections.” Thus, “an interpretation [of the statute] demanding a rigidly segmented factual showing justifying the employee’s suspicion …conflicts with the statutory design, which turns on employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.”
In United States ex rel. Holmes v. Northrop Grumman Corp., a Mississippi federal district court disqualified an attorney whistleblower who sued his client’s adversary for violating the False Claims Act. No. 13-cv-00085 (S.D. Miss. June 3, 2015). Attorney Holmes had been representing an insurance company in an arbitration proceeding opposite Northrop Grumman regarding insurance coverage. During the proceeding, Holmes obtained documents from the U.S. Navy that were subject to a protective order, which he then used as the basis of his FCA claim against Northrop Grumman. In disqualifying Holmes as a whistleblower, the court found that he had breached his ethical duty to act with candor because he intended to violate the protective order by using documents from the U.S. Navy to support his FCA action. The court rejected Holmes’s argument that the FCA preempts any ethical rules that may have prohibited his actions.
Second Circuit Refuses to Disqualify Apple Monitor.
By: Robert R. Stauffer
In United States v. Apple Inc.,787 F.3d 131 (2nd Cir. 2015) (Nos. 14-60, 14-61), Apple was found liable by the district court, after a bench trial, of violating Section 1 of the Sherman Antitrust Act, 15 U.SC. § 1. The district court entered a judgment that included (1) a requirement that Apple adopt policies and training to promote compliance with the antitrust laws; and (2) the appointment of an external monitor to review and evaluate Apple’s adoption of the required policies and training. The appointment of the monitor was unusual in that the appointment was without consent, and resulted from a judgment in an adversarial proceeding rather than from a consent decree. Since the appointment, a series of disputes between Apple and the monitor have arisen. In this appeal, the principal issue was whether the monitor should be disqualified for having engaged in ex parte communications with the plaintiffs and collaborated with the plaintiffs in connection with the filing of brief by plaintiffs and the submission of a report in connection with that brief. The court noted that it was “remarkable that an arm of the court would litigate on the side of a party in connection with an application to the court he serves.” However, the appellate court found that it could not say the district court abused its discretion when it concluded that the monitor’s disqualification was not required.
Court Delineates Which Compliance Materials Exempt from FOIA Disclosure.
By: Robert R. Stauffer
In 2013, in Public Citizen v. United States Dep’t of Health & Human Servs., 66 F. Supp. 3d 196 (D.D.C. 2014) (Pfizer II), the court considered plaintiff’s efforts to obtain, pursuant to a FOIA request, various materials two pharmaceutical companies had submitted to the Office of Inspector General (OIG) of the Department of Health and Human Services. The submissions were made in accordance with corporate integrity agreements executed to resolve allegations of illegal off-label promotion of drugs. The court found certain types of records exempt from disclosure, but left open other types of records as to which it sought more briefing. The court has now ruled on those other types of records. Public Citizen v. United States Dep’t of Health & Human Servs., 66 F. Supp. 3d 196 (D.D.C. 2014) (Pfizer II). In Pfizer II, the court found the additional records to be exempt. Those records which were found to be exempt include: Reportable Event summaries, which describe basic business operations and techniques, including internal training exercises and promotional activities; Disclosure Log summaries, which describe interactions with customers, compensation and discipline of employees, and details about internal investigations and the conduct of the company’s compliance program; documents relating to detailing sessions with customers; and documents relating to screening for ineligible persons. The court found that these materials fell within FOIA’s Exemption 4, 5 U.S.C. § 552(b)(4), protecting records that are “commercial” and “confidential.” The court found that these documents would provide “a free roadmap as to what works in pharmaceutical marketing without violating the legal framework of regulatory enforcement and laws that govern the industry, and what activities to avoid, and release of this roadmap would allow competitors to avoid incurring the experiential or monitoring costs Pfizer and Purdue did in gaining the information.” The court rejected arguments by plaintiff that Exemption 4 cannot apply where the records may pertain to illegal activity and that there is no “competitive market for information about suspected or confirmed unlawful policies and practices.” The court noted the highly regulated and nuanced environment in which the companies operate, and reiterated its holding in Pfizer I, that “the overall commercial nature of an undertaking is not altered when some aspect of that activity is suspected to constitute, or actually results in, a violation of a rule, regulation or statutory requirement.”