Jenner & Block

Spotlight Newsletter Resource Center

Jenner & Block is excited to introduce “The Spotlight,” an electronic monthly newsletter from the Litigation Department Chair, Craig C. Martin, designed to highlight recent cases and legislative developments from across the United States.  Additionally, The Spotlight recaps the high impact Litigation Department news, upcoming events and publications of interest.

If you would like to be added to the mailing list for The Spotlight, please send an email to
Matthew F. Bradley at mbradley@jenner.com.

Arbitration

Arbitration Demand Determines Amount in Controversy for FAA Confirmation.
By: Howard S. Suskin

The Fifth Circuit held that the monetary amount sought in the underlying arbitration, not the amount of the arbitration award, determines the amount in controversy for purposes of diversity jurisdiction to confirm an award under the Federal Arbitration Act (FAA).  Pershing L.L.C. v. Kiebach, 819 F.3d 179 (5th Cir. 2016) (No. 15-30396).  Investors in an alleged Ponzi scheme brought an arbitration against their broker seeking $80 million in damages, but the arbitration panel awarded only $10,000.  The broker then moved to confirm the award under the FAA.  The investors moved to dismiss, arguing that the federal court lacked diversity jurisdiction because the amount of the award was below the $75,000 threshold for diversity jurisdiction.  The district court denied the motion to dismiss and the Fifth Circuit affirmed, concluding that measuring the amount in controversy by the amount of the arbitration demand recognizes the true scope of the dispute between the parties and measures the amount in controversy in the same way as if the dispute were being litigated.

Ambiguous Signature Line Potentially Voids Arbitration Clause.
By: Howard S. Suskin

An employment agreement contained an arbitration clause, and the employees signed it.  But the court sided with the employees, at least at the pleading stage, that they may not have agreed to arbitrate their claims because their signatures were directly under a bolded sentence that read, “I certify, by my signature below, that I have received a copy of the Mortgage Sales Commission Plan, which has been provided to me.”  Ranieri v. Banco Santander, S.A., No. 15-3740 (D.N.J. Apr. 4, 2016).  The employees argued that their signatures simply acknowledged receipt of the Mortgage Sales Commission Plan, not their intent to be bound by the terms of the arbitration clause contained in the document.  The court concluded that because the contract is susceptible to two logical constructions, the court could not find at the motion to dismiss stage that the employees had agreed to arbitration.  The court noted that because the employer had provided the employees with the agreement, any ambiguous language would be construed against the employer as the drafter of the contract.

Attorney-Client Privilege

No Immediate Appeal of Adverse Privilege Ruling Regarding Third Party Subpoena.
By: David M. Greenwald

In Drummond Co., Inc. v. Collingsworth, 816 F.3d 1319 (11th Cir. 2016) (No. 14-15722), the Eleventh Circuit held that neither the lawyer who received a third party subpoena, nor the lawyer who was a party to the underlying litigation, were able to take an immediate appeal of an adverse privilege ruling.  In this matter, plaintiff filed a defamation action against Collingsworth, an attorney who had sent letters to plaintiff’s customers and business partners alleging human rights violations in Columbia.  Plaintiff alleged that Collingsworth had paid witnesses in Columbia to obtain false testimony.  Plaintiff served a third party subpoena on attorney Scarola, seeking documents related to any payments made by Collingsworth to these witnesses.  Scarola obtained potentially responsive documents while serving as co-counsel with Collingsworth for plaintiffs in an unrelated matter.  Scarola moved to quash on the grounds that the subpoena sought Scarola’s protected work product, but the district denied the motion.  Collingsworth did not object to the subpoena in the district court.  Scarola filed an appeal of the ruling, as did Collingsworth, who asserted for the first time that the materials in Scarola’s possession were Collingsworth’s protected work product.  The appellate court held that, pursuant to the U.S. Supreme Court’s ruling in Mohawk Indus., Inc. v. Carpenter, 130 S. Ct. 599 (2009), neither Scarola nor Collingsworth had a right to an immediate appeal.  As to Scarola, the court held that, despite the fact that he was not a party to the underlying litigation, his only avenue to an immediate appeal would have been to refuse to comply with the order, be held in contempt, and then appeal the contempt order.  The court noted that the Court in Mohawk ruled that the class of collaterally appealable orders must remain narrow, and that, except in cases involving the assertion of governmental privilege, the Eleventh Circuit had ‘’never exercised jurisdiction under the collateral order doctrine to review any discovery order involving any privilege.’’  As to Collingsworth, the court held that, as a party, he would have the opportunity to appeal the ruling at the conclusion of the underlying matter.

Crime Fraud Exception Applies Where Clients Used Counsel to Cover Up Wrongful Conduct.
By: David M. Greenwald

In In re Grand Jury Subpoena, No. 15-4080 (4th Cir. Mar. 23, 2016), the Fourth Circuit held that the crime-fraud exception applied where there was evidence that clients had caused their attorney to submit a written report to a private regulator for the purpose of covering up their wrongful conduct.  Prior to the grand jury investigation, a private regulator investigated suspicious activity of two traders who worked for a bank executing futures trades for large investors.  The lawyer hired by the bank to represent the traders met with the traders individually and collectively and then participated in the regulator’s interviews of the traders.  The lawyer then followed up with a written submission to the regulator, in which he asserted factual and legal defenses of the suspect trades, including a flat denial of wrongful conduct.  Later, the government began investigating the trades and issued a subpoena to the traders’ lawyer, seeking documents relating to the lawyer’s representation of the traders, including the regulator’s interviews and the subsequent written submission.  Following an in camera review, the court denied the lawyer’s motion to quash, finding that there was sufficient evidence to indicate that the traders’ communications with the lawyer were made ‘’precisely to further the Traders’ criminal scheme’’ by covering up their wrongful conduct.  Applying an abuse of discretion standard, the appellate court held that the district court did not clearly err in finding that the government had submitted sufficient, unrebutted evidence to support application of the crime-fraud exception.

Citing Expert Report in Complaint Waived Protection over Report but Not Related Documents.
By: David M. Greenwald

In Financial Guaranty Ins. Co. v. The Putnam Advisory Co., LLC, 314 F.R.D 85 (S.D.N.Y. 2016) (No. 12-cv-07372), the district court held that plaintiff’s citation in its second amended complaint to an otherwise protected expert report, and use of those citations in its appeal of the district court’s order dismissing the case, waived the work product protection over the report.   Here, plaintiff alleged that defendant had made false representations about, or negligently mismanaged, a collateralized debt obligation (‘’CDO’’) insured by plaintiff.  The court dismissed plaintiff’s initial complaint and granted leave to amend.  In its second amendment complaint (‘’SAC’’), plaintiff alleged that it had engaged a firm of economic analysts, and included three bullet-pointed quotations from the analysts’ report.  These included one in which the expert concluded that the likelihood that the suspicious pattern of referenced securities could have occurred by chance across independent portfolio managers was less that ‘’1 in a billion.”  The district court dismissed the SAC, and plaintiff relied on these allegations in a successful appeal of the dismissal.  Upon remand, defendant sought discovery of the report and related documents on the grounds that plaintiff had put the report ‘’at issue’’ in the litigation, resulting in subject matter waiver.  In an attempt to rehabilitate the privilege over the report, plaintiff told the court that it would not use the analysis in the future, including at trial.  Noting that consulting expert reports prepared for litigation are protected by the work product doctrine, the court held that plaintiff waived that protection by referring to the report in the SAC, and by relying on the those allegations in its successful appeal.  However, the court held that waiver was limited to the report itself, and did not extend to other, related documents.  Applying the analysis of Federal Rule of Evidence 502(a), the court explained that waiver is limited to documents actually disclosed in litigation and does not extend to undisclosed privileged or protected information unless fairness requires broader disclosure to avoid selective, misleading use of privileged information.  The court found that there was no indication that plaintiff had made misleading use of the report, and concluded that waiver was properly limited to the report itself.

Disclosure to Trusted Business Confidante Waived Privilege.
By: David M. Greenwald

In Total Recall Technologies v. Luckey, No. C15-02281 (N.D. Cal. Apr. 4, 2016), the court held that disclosure of privileged information to a third party business confidante waived otherwise applicable privileges.  Plaintiff Total Recall is a partnership of Igra and Seidl.  In response to defendant’s discovery requests, Total Recall withheld 75 documents on privilege grounds, including communications between Igra and Hevrony, the CEO of a real estate company where Igra previously worked, and upon whom Igra relies as a business adviser, trusted friend and business confidante.  Hevrony was never employed by Total Recall, nor did he have a financial interest in the partnership.  The communications between Igra and Hevrony included disclosures of the substance of attorney-client communications between Igra and his counsel.  Applying California law, the court held that disclosure of otherwise privileged information to Hevrony waived the privilege, because Hevrony had no stake in Total Recall or in the litigation, and he lacked a ‘’need to know’’ the contents of any attorney-client communications between Igra and his counsel.  The court explained that Igra was free to seek business advice from Hevrony, but he could do so without revealing the counsel’s communications to ‘’a stranger to the attorney-client consultation.”

Class Action

Hacked Plaintiffs Without Losses Have Standing to Pursue Breach of Privacy Class Action.
By: Michael T. Brody

In Lewert v. P.F. Chang’s China Bistro, Inc., 819 F.3d 963 (7th Cir. 2016) (No. 14-3700), plaintiffs, who had dined at P.F. Chang’s restaurants, brought data breach claims after P.F. Chang’s announced its computer operations had been hacked.  One plaintiff experienced fraudulent transactions on the credit card he used at the restaurant, which he immediately cancelled.  The other plaintiff did not experience fraudulent charges on his card.  The district court dismissed the lawsuit for lack of standing and the Seventh Circuit reversed.  Applying its earlier decision in Remijas v. Nieman Marcus Group, LLC, 794 F.3d 688 (7th Cir. 2015) (see July 2015 EWS: Litigation Update), the Seventh Circuit stated that increased risk of fraudulent credit or debit card charges and the increased risk of identity theft were sufficiently “impending injuries” to fit within the categories of harm delineated in Remijas and give rise to standing.  Although P.F. Chang’s denied that plaintiffs’ data was stolen, plaintiffs had made plausible allegations that their information had been compromised, which was sufficient to establish standing at the pleading stage.

Ninth Circuit Rejects “Pick Off” Through Tender of Full Demand into Escrow.
By: Michael T. Brody

In Chen v. Allstate Ins. Co., 819 F.3d 1136 (9th Cir. 2016) (No. 13-16816), plaintiff brought a TCPA action against an insurance company.  The defendant deposited $20,000 in an escrow account in full settlement of plaintiff’s individual claim.  The money was to be held in escrow pending entry of a final judgment directing the payment to plaintiff.  Defendant argued the tender of the amount in controversy mooted the individual claim and required dismissal of plaintiff’s class action.  The district court denied the motion to dismiss, and the Ninth Circuit affirmed.  First, the Ninth Circuit reaffirmed its prior decision that affording complete relief to a plaintiff on individual claims for damages and injunctive relief did not prevent that plaintiff from seeking class certification and from pursuing claims on behalf of a class.  The Ninth Circuit rejected the argument that its prior decision was no longer good law in light of Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016), and held that the class representative would still be able to seek certification.  Second, the court held that the payment into escrow of the amount in controversy did not moot the individual claim.  A claim becomes moot only when the plaintiff “actually receives all of the relief to which he or she is entitled on the claim.”  Under the common law of tender, the payment of funds into escrow was insufficient to constitute actual receipt by the plaintiff.  The court held “a district court should decline to enter a judgment affording complete relief on a named plaintiff’s individual claims, over the plaintiff’s objection, before the plaintiff has had a fair opportunity to move for class certification.”  A live controversy persists until class certification is decided.

CAFA Removal Provision Trumps Federal Rules.
By: Michael T. Brody

A defendant may remove a state case to federal court by filing a notice of removal within 30 days after receipt of the initial pleading.  CAFA contains a second removal provision, which permits removal “within 30 days after receipt by the defendant” of a pleading “or other paper from which it may first be ascertained that the case is one which is or has become removable.”  In Graiser v. Visionworks of America, Inc., 819 F.3d 277 (6th Cir. 2016) (No. 16-3167), plaintiff brought a consumer fraud claim.  Defendant removed the case unsuccessfully.  On remand, plaintiff amended the complaint to seek class relief.  Six months later, defendant removed the case a second time.  The district court found the second removal untimely.  The Sixth Circuit reversed.  Focusing on the CAFA removal provision, the Sixth Circuit held that information establishing the basis for removal must come from a source outside of defendant’s control.  Thus, even though it could be argued that defendant knew the case presented a sufficient amount in controversy to justify CAFA removal, the date triggering CAFA removability is the date the defendant receives information from the plaintiff asserting that fact.  Any other rule would involve guesswork and ambiguity.  Agreeing with other circuits to have addressed the issue, the court ruled that CAFA’s removal provision contains a bright-line rule that limits inquiry to information provided to the defendant by the plaintiff.  Applying this standard, the 30-day window never began to run because plaintiffs had not provided the required notification.  The court further held that even if the case was originally removable under general removal provisions and that time had lapsed, defendant could still remove the action under CAFA.  The expiration of the other 30-day requirement did not eliminate defendant’s removal rights under CAFA.

Complex Commercial Litigation

Bankruptcy Rules, not FRCP, Set Post-Trial Deadlines for All Chapter 11 Claims.
By: Matthew J. Thomas

In Rosenberg v. DVI Receivables XIV, LLC, 818 F.3d 1283 (11th Cir. 2016) (No. 14-14620), plaintiff filed an adversary complaint against defendants under the section of the Bankruptcy Code, 11 U.S.C. § 303(1), that provides a debtor remedies when a creditor files an improper involuntary petition against it.  The case was initially filed in the bankruptcy court, but was moved to the district court after the court granted a motion to withdraw the reference.  Following a trial in the district court, the jury awarded plaintiff more than $6 million in damages.  Twenty-eight (28) days later, defendants filed a post-judgment motion under Fed. R. Civ. P. 50(b), which the district court granted and reduced the judgment to $360,000.  On appeal, plaintiff argued that defendants’ Rule 50(b) motion was untimely because, although FRCP 50 states that such motion shall be filed no later than 28 days after entry of judgment, the Federal Bankruptcy Rules require that any post-trial motion be filed within 14 days after the entry of judgment.  The Eleventh Circuit agreed and reversed.  The court held that the Bankruptcy Rule’s 14-day deadline for post-trial motions, and not the 28-day deadline under the Federal Rules of Civil Procedure, governed all proceedings arising under Title 11, even those for which the reference was withdrawn and which were tried in a district court.  The court reasoned that the plain language of Bankruptcy Rule 1001 and its advisory committee notes make clear that the Bankruptcy Rules apply to all Title 11 actions brought in any court; and Fed. R. Civ. P. 81(a)(2) – providing that the Federal Rules of Civil Procedure apply to bankruptcy proceedings to the extent provided by the Bankruptcy Rules – confirms the primacy of the Bankruptcy Rules.  Thus, defendants’ Rule 50 post-judgment motion was untimely and should have been denied.

Obesity, by Itself, is not a Disability Protected by ADA.
By: Matthew J. Thomas

In Morriss v. BNSF Railway Co., 817 F.3d 1104 (8th Cir. 2016) (No. 14-3858), plaintiff applied for a machinist job with defendant, and defendant extended him an offer of employment contingent on a satisfactory medical review.  After defendant’s doctors conducted a physical exam, defendant revoked the offer because the plaintiff was obese.  Plaintiff brought suit under the Americans with Disabilities Act (ADA), claiming that his obesity was a disability protected by the statute.  The district court granted summary judgment in favor of defendant, and the Eighth Circuit affirmed.  The court held that obesity – even morbid obesity – is not a disability under the ADA unless it results from an underlying physiological disorder or condition.  The ADA defines a disability as an actual or perceived “physical impairment,” but does not define that term.  The EEOC regulations regarding the ADA, however, define a physical impairment, and under that definition, a physical characteristic qualifies as a physical impairment only if it both falls outside the normal range and occurs as the result of a physiological disorder.  The court joined the Second and Sixth Circuits in holding that this definition applies to ADA claims brought in federal court.  The court then concluded that plaintiff’s claim was properly dismissed because plaintiff admitted that he did not suffer from any medical condition or impairment, his weight caused no physical limitations, and he was not aware of any underlying condition that contributed to his obesity.

No Abuse of Discretion in Excluding EEOC Determination Letter from Title VII Trial.
By: Matthew J. Thomas

In Tuffa v. Flight Services & Systems Inc., No. 15-1163 (10th Cir. Apr. 5, 2016), plaintiffs brought an action against defendant employer under Title VII, alleging disparate treatment based on race or national origin.  At trial, the district court applied Fed. R. Evid. 403 to exclude from evidence a letter from the EEOC, which found reasonable cause to believe that defendant had violated Title VII.  After the jury returned a verdict in favor of defendant, plaintiffs appealed, arguing, among other things, that the EEOC letter had been improperly excluded.  The Tenth Circuit affirmed.  The court first held that the abuse-of-discretion standard applied to this evidentiary ruling, rejecting plaintiffs’ argument that the admissibility of agency findings of discrimination should be subject to a heightened standard of review.  The court then held that the district court did not abuse its discretion when it determined that the EEOC letter posed too great a risk of unfair prejudice and juror confusion because (1) the jury may have been “overly influenced” by the EEOC letter, and (2) the EEOC applied a different standard than the standard of proof to be applied by the jury.

Electronic Discovery

Court Denies Spoliation Sanctions for Defendant’s Automatic Text Message Deletion.
By: Daniel J. Weiss

In Living Color Enterprises, Inc. v. New Era Aquaculture, Ltd., No. 14-CV-62216 (S.D. Fla. Mar. 22, 2016), the district court applied recently amended Federal Rule of Civil Procedure 37(e) and denied the plaintiff’s motion for sanctions against the defendant for alleged spoliation of text messages.  The defendant was not able to produce all text messages requested because the defendant activated, prior to the litigation, a setting on his phone to automatically delete text messages after 30 days and did not deactivate that feature when the litigation began.  The court held that, under the amended Rule 37(e), a court must answer three preliminary questions in considering a motion for sanctions:  (1) “[w]as the allegedly spoliated ESI evidence that should have been preserved?”; (2) “[w]as the allegedly spoliated ESI lost because a party failed to take reasonable steps to preserve it?”; and (3) “[i]s the allegedly spoliated ESI evidence that cannot be restored or replaced through additional discovery?”  The court held that if the answer to any of those questions is “no,” then the motion should be denied.  If the answer to each question is “yes,” then a court must go on to consider whether the moving party suffered prejudice and whether the non-moving party acted with an “intent to deprive” the other party of evidence.  The court answered each preliminary question in the affirmative, but found that there was no evidence of prejudice or an improper intent.  With respect to intent, the court held that the defendant had acted negligently and “the amended Rule 37(e) does not permit an adverse inference instruction or other severe sanctions for negligence.”  The court further held that “it is a common practice amongst many cell phone users to delete text messages as a they are received” and “there is nothing nefarious about such a routine practice under the facts presented here.”

Fourth Circuit Upholds Order Shifting E-Discovery Expenses for Subpoena Response.
By: Daniel J. Weiss

In In re American Nurses Ass’n., Nos. 15-1481, 15-1803 (4th Cir. Apr. 7, 2016), the Fourth Circuit affirmed a district court’s order requiring a party that issued a subpoena to pay for the costs of “e-discovery expenses” incurred by a non-party in responding to the subpoena.  The district court’s order was based Federal Rule of Civil Procedure 45(d)(2)(B)(ii), which requires a court to protect non-parties from “significant expense resulting from compliance” with a subpoena.  The district court held that cost-shifting was appropriate because the non-party “advised [the requesting party] that producing the requested discovery would entail significant expense” and that the requesting party “changed the scope of the requested discovery,” which increased the expenses.  The Fourth Circuit affirmed the award on that basis.  The Fourth Circuit additionally held that “attorney’s fees incurred by the non-party that are necessary to a discovery proceeding are expenses that may be shifted to the discovery-seeking party,” and affirmed an award of attorneys’ fees to the non-party on that basis.

Environmental and Workplace Health & Safety Law

U.S. Supreme Court Affirms Judicial Review of Wetlands Determinations
By: Allison A. Torrence and Matthew D. Ampleman

On May 31, 2016, the Supreme Court ruled in favor of landowners seeking the right to challenge the U.S. Army Corps of Engineers’ (the Corps) wetlands determinations in federal courts. In U.S. Army Corps of Engineers v. Hawkes Co., Inc., 136 S. Ct. 1807 (2016) (No. 15-290), the owner of a peat mining company in North Dakota, Hawkes, sought to expand its operations to wetlands in northwest Minnesota and sell the peat for golf courses, sports turf, landscaping, and gardening. The Corps issued a “jurisdictional determination” (JD), which stated that the wetlands on the Hawkes property were “waters of the U.S.” under the Clean Water Act (CWA) and thus would be subject to costly CWA Section 404 permitting requirements. The Corps argued that its determination could not be challenged in federal courts because it was not a final agency action. The Supreme Court disagreed, upholding the Eighth Circuit ruling that the JD, as issued by the Corps, constituted a final agency action and could be challenged in federal court.

In its analysis, the Court considered two factors to determine whether the JD was a final agency action: (1) whether the action was the consummation of agency decision making and (2) whether the action was one by which rights or obligations had been determined, or from which legal consequences would follow. In applying these factors from Bennett v. Spear, 520 U.S. 154, (1997), the Court focused on a memorandum of agreement (MOA) between EPA and the Corps, which stated that the Corps would treat JDs as binding on the government and that JDs will “represent the Government’s position in any subsequent Federal action or litigation concerning the final determination.” The Court held that, per this language, the JD in this case was a clear consummation of agency action. Additionally, the size of the potential enforcement penalty – up to $37,500 per day – would have legal consequences, because it would significantly impact any business decision to comply with or challenge a JD’s assessment of wetlands. Thus, both factors – consummation of agency decision making and legal consequences – were satisfied in the Court’s opinion. However, the narrow factual grounds on which this determination was made – specifically the provision in the MOA – provide room for doubt about the long-term significance of this opinion. For example, it is unclear if the MOA could be changed such that JDs would not constitute a final agency action at a future date. Accordingly, the Court’s ruling in Hawkes was a narrower victory for challengers than it might seem at first glance. Nevertheless, until such time as the Corp revises its MOA, landowners challenging JDs will enjoy greater access to courts and be able to challenge wetlands determinations earlier in the development process.

Insurance and Reinsurance Litigation

Ninth Circuit Holds an EPA Information Request Is a Suit Triggering an Insurance Company’s Duty to Defend.
By: Brian S. Scarbrough

The Ninth Circuit held that an information request issued to a policyholder by the EPA under section 104(e) of CERCLA constitutes a suit requiring a insurance company to defend its policyholder.  Ash Grove Cement Co. v. Liberty Mut. Ins. Co., No. 13-35900 (9th Cir. May 11, 2016).  Affirming the district court’s declaratory judgment for the policyholder, the court reasoned that a 104(e) letter is a “coercive information demand” and “an attempt to gain an end through legal process” and thus a suit under Oregon law.  The court further rejected insurance company arguments that the policy’s distinction between a claim and a suit evidenced an intent to not treat a 104(e) letter as a suit.  Nor more compelling was the insurance company’s argument of the lack of allegations of property damage necessary to trigger coverage.  The court also held that the insurance company’s duty to defend did not end when the policyholder responded to the 104(e) letter but rather continued until the EPA had issued a Record of Decision for the unit at issue.  Finally, the insurance company’s duty to defend was triggered by the policyholder’s notice of the 104(e) letter and did not require a formal tender of defense.

Exposing Customer Data on the Internet Is a “Publication” Covered by Traditional CGL Policies.
By: Caroline A. Lindsey

In Travelers Indemnity Co. of Am. v. Portal Healthcare Solutions, L.L.C., No. 14-1944 (4th Cir. Apr. 11, 2016) the Fourth Circuit affirmed a ruling that an insurance company had an obligation to defend a policyholder against allegations that the policyholder negligently allowed private individual medical records to be viewed publicly on the internet for more than four months.  The policyholder argued that it was entitled to insurance coverage under two CGL policies issued by Travelers, which provided coverage for sums that Portal became legally obligated to pay as damages for the “electronic publication of material that ... gives unreasonable publicity to a person’s private life” and the “electronic publication of material that ... discloses information about a person’s private life.”  Despite arguments by the insurance company that exposing customer data on the internet was not a covered “publication,” the Fourth Circuit held that the exposure was at least arguably a publication under the plain language of the contract, and there was a duty to defend.  Importantly, the policy at issue did not include any of the recent restrictions on coverage adopted through the Insurance Services Office purporting to bar coverage for data breaches.

Federal Court Considers Insurance Coverage for Breach of an IP License Agreement.
By: Jan A. Larson and Daniel A. Johnson


A recent decision by the U.S. District Court for the Northern District of California created a significant precedent for policyholders pursuing coverage for alleged breaches of an intellectual property (IP) license agreement.  In St. Paul Mercury Insurance Co. v. Tessera, Inc., Case No. 5:12-cv-01827 (N.D. Cal.), the court addressed the following issues:  first, whether a breach-of-contract suit can also be interpreted as triggering coverage for “libel” or “slander” under a CGL policy’s “Personal Injury Liability” coverage, and second, the scope of the policy’s intellectual property exclusion (IP Exclusion).  The underlying dispute arose from a license agreement between the policyholder, Tessera, Inc. (Tessera), and its licensee, Powertech Technology, Inc. (PTI), and was later tendered to Tessera’s insurer, St. Paul Mercury Insurance Company (St. Paul), for a defense and indemnity.  The relevant policy covered certain categories of “Personal Injury Liability,” including “libel” and “slander” in connection with another company’s products, but also contained an “Intellectual Property” exclusion for “injury or damage . . . that result from any actual or alleged infringement or violation of” a specified set of “rights or laws,” including “Copyright,” “Patent,” “Trade dress,” “Trade name,” “Trade secret,” “Trademark,” or “[o]ther intellectual property rights or laws.”  On summary judgment, Tessera argued that it was alleged to have falsely represented PTI-packaged products as unlicensed, and these allegations constituted “libel” or “slander” within the policy’s “Personal Injury Liability” coverages.  The District Court disagreed and ruled that the coverage was not triggered.  St. Paul Mercury Ins. Co. v. Tessera, Inc., 908 F. Supp. 2d 1054, 1062 (N.D. Cal. 2012).  On appeal, however, the Ninth Circuit reversed and remanded, holding that the District Court had impermissibly considered the merits of the unasserted “libel” or “slander” claim when deciding whether the insurer had a duty to defend.  St. Paul Mercury Ins. Co. v. Tessera, Inc., 624 F. App’x 535, 536 (9th Cir. 2015).  On remand, Tessera brought another motion for summary judgment, arguing that the IP Exclusion does not apply because the alleged “breach” arises under state contract law, not intellectual property law, whether the breach is construed as (i) the breach of the licensor’s promise not to sue, or (ii) the breach of the licensee’s promise to satisfy certain conditions for avoiding a suit.  See Tessera, No. 5:12-cv-01827, Dkt. 78, at pp. 6-9.  Tessera further argued that the alleged “patent misuse” is focused on the patent holder’s alleged anticompetitive conduct—not a violation of patent law—and thus, does not trigger the IP Exclusion.  Id. at pp. 9–10.  On June 21, 2016, the District Court ruled in favor of Tessera, holding that the license agreement did not “convey[] an intellectual property right,” and thus a suit for breach of that claim did not trigger the IP exclusion.  Tessera, No. 5:12-cv-01827, Dkt. 89, at pp. 6–9.  Moreover, the District Court held that PTI’s claim for patent misuse did not trigger the IP exclusion because it was predicated on alleged anticompetitive conduct.  Id. at 9–10.  Finally, PTI’s allegations did not otherwise trigger the IP exclusion because they focused on Tessera’s purported false representations, not the violation of IP rights.  Id. at 10–12.

Product Liability

Connecticut Adopts Modified Consumer Expectation Test for Most Strict Liability Cases.
By: Barry Levenstam

In Izzarelli v. R.J. Reynolds Tobacco Co., 321 Conn. 172 (Conn. 2016) (No. 19232), the Connecticut Supreme Court accepted certification of the following question from the Second Circuit in a smoker’s strict liability suit:  “Does [comment (i) to §402A] preclude a suit premised on strict product liability against a cigarette manufacturer based on evidence that the defendant purposefully manipulated cigarettes to increase daily consumption without regard to the resultant increase in exposure to carcinogens, but in the absence of evidence of adulteration or contamination?”  In the course of answering the question “No,” the court made sweeping changes to Connecticut’s strict liability law.  Specifically, the court adopted as the primary test for strict product liability cases the “modified consumer expectation test,” which incorporates an analysis of risk and utility such that liability can be based even upon open and obvious danger where that danger could have been avoided by a feasible alternative design that is reasonable in terms of cost and utility.  The court rejected the argument that the modified consumer expectation test should be limited to products too complex for the “ordinary consumer to understand, and reserved the ordinary consumer expectation test” only for “cases in which the product failed to meet the “ordinary consumer’s minimum safety expectations such as res ispa type cases.”  Further, the court held that the Restatement (Second) §402A comment (i)’s reference to “good tobacco” is not a per se bar to the plaintiff’s recovery under the modified consumer expectation test.

No Federal Preemption for Design of Aircraft Parts.
By: Barry Levenstam

In Sikkelee v. Precision Airmotive Corp., No. 14-4193 (3d Cir. Apr. 19, 2016), the Third Circuit addressed the question whether the Federal Aviation Act, the General Aviation Revitalization Act, and the Federal Aviation Administration’s regulations promulgated under those statutes extend to preempt state law product liability claims pertaining to the design and manufacture of aircraft or aircraft parts based on the doctrine of field preemption.  The Third Circuit previously had held that federal law preempts the field of aviation safety, and thus preempted state law claims challenging an airline’s failure to make a loudspeaker announcement warning passengers to fasten seatbelts after turning on the seatbelt safety lights, where a federal regulation merely required the safety light to be turned on.  Based on that ruling, the district court in this case issued summary judgment in favor of the defendant aircraft parts manufacturer on preemption grounds in a product liability case alleging defective design of aircraft parts.  After careful evaluation of the statutes and regulations at issue, the Third Circuit reversed, holding that federal law does not preempt the field of aviation safety insofar as it applies to the design of aircraft parts.  Rather, state product liability law still applies to such claims, subject to traditional principles of conflict preemption.

Professional Responsibility & Ethical Developments

SEC Orders Whistleblower to Use Award to Pay Judgment.
By: Gregory M. Boyle and John R. Storino

The SEC recently granted a whistleblower $275,000 as a result of monetary sanctions collected in a related criminal action.  Order Determining Whistleblower Award Claim, Exchange Act Release No. 77,530, File No. 2016-7 (April 5, 2016).  However, the SEC ordered that the award be “subject to an offset for any monetary obligations,” including disgorgement, prejudgment interest, and penalty amounts that the whistleblower has yet to pay towards a judgment entered against whistleblower.  In so ordering this relief, the SEC noted that the whistleblower had previously been advised of the potential offset and did not object.

Whistleblower Suit Dismissed Due to Attorney Misconduct.
By: Gregory M. Boyle and John R. Storino

The Fifth Circuit affirmed the dismissal of a qui tam action against Northrop Grumman and the disqualification of the attorney from serving as the relator in the False Claims Act lawsuit due to the attorney’s misconduct.  U.S. ex rel. Holmes v. Northrup Grumman Corp., No. 15-60414 (5th Cir. Mar. 23, 2016).  The attorney represented Munich Re in an arbitration against Northrop Grumman.  During that arbitration, the attorney received documents relating to Northrop Grumman from the United States Navy, pursuant to a protective order preventing the disclosure or use of the documents outside of the arbitration.  The attorney, while the arbitration was pending, filed the qui tam lawsuit against Northrop Grumman, alleging Northrop Grumman defrauded the Navy by using government funds allocated for expenses related to Hurricane Katrina on unrelated costs.  The district court determined, and the Fifth Circuit affirmed, that the attorney, in filing the lawsuit, violated his duty of candor by violating the protective order, and also violated his duty of loyalty to his client, Munich Re, by taking a position adverse to his client in the qui tam litigation.

White Collar Defense & Investigations

D.C. Circuit Limits Judicial Oversight of Deferred Prosecution Agreements.
By: Robert R. Stauffer

In United States v. Fokker Services B.V., 818 F.3d 733 (D.C. Cir. 2016) (No. 15-3016), the D.C. Circuit found that there are significant limitations on the ability of a district court to reject a deferred prosecution agreement (DPA) agreed to by prosecutors and a defendant.  The case arose out of a corporation’s voluntary disclosure to the U.S. Departments of Treasury and Commerce of conduct that potentially violated federal sanctions and export control laws relating to Iran, Sudan and Burma.  After investigating the matter for four years, prosecutors reached an agreement with the corporation in which charges would be filed against the corporation but would be dismissed after 18 months if the corporation continued to cooperate and implemented a substantial compliance program.  Upon the filing of the charges, the parties moved in the district court for an order suspending the running of time under the Speedy Trial Act, pursuant to that Act’s exclusion of any period during which the government defers prosecution for the purpose of allowing the defendant to demonstrate good conduct.  The district court denied that motion, expressing concern that the government had failed to prosecute any individuals and that approval of an agreement in which the defendant had been “prosecuted so anemically for engaging in such egregious conduct” would “promote disrespect for the law.”  The court also noted that certain employees had been permitted to remain with the company, that the DPA did not require an independent monitor, and that the agreed fine did not exceed the revenues the corporation gained from the transactions.  The court concluded that the DPA was an “[in]appropriate exercise of prosecutorial discretion.”  Both the United States and the defendant appealed that order, and the Court of Appeals appointed amicus curiae counsel to represent the position of the district court.  The Court of Appeals found the denial of the motion to be improper, holding that the Speedy Trial Act gives a court no authority to withhold exclusion of time based on concerns that the government should bring different charges or should charge different defendants.  The court found that the Act was passed against a backdrop of long-settled understandings about the independence of the Executive with regard to charging decisions and that nothing in the Act suggests any intention to subvert those principles and enable the Judiciary to second-guess the Executive’s exercise of discretion over the initiation and dismissal of criminal charges.  Accordingly, the Court of Appeals granted the government’s petition for a writ of mandamus.

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