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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.
If you would like to be added to the mailing list for The Spotlight, please send an email to Matthew F. Bradley at firstname.lastname@example.org.
Award Vacated because Arbitrator Applied the Wrong Rules.
By: Howard Suskin
The Fifth Circuit vacated an arbitration award on grounds that the arbitrator exceeded his authority under the Federal Arbitration Act where the arbitrator disregarded the express arbitrator and forum-selection clauses in an arbitration agreement. PoolRe Insurance Corp. v. Organizational Strategies, Inc.,783 F.3d 256 (5th Cir. 2015) (No. 14-20433). Some of the parties to the arbitration had agreements requiring arbitration in accordance with the International Chamber of Commerce rules, and other parties had agreements requiring application of American Arbitration Association (AAA) rules. The arbitrator joined all the parties for arbitration under the AAA rules. Because the arbitrator acted contrary to the express provisions of some of the arbitration agreements, he exceeded his authority and the entire arbitration award was vacated.
Arbitration Proceeding Counts as “First-Filed” Action.
By: Howard Suskin
Addressing an issue of first impression in Delaware, the Delaware Supreme Court concluded that there is no principled reason to distinguish an arbitration proceeding from other prior filed actions for purposes of dismissing or staying lawsuits in favor of first-filed actions. LG Electronics, Inc. v. InterDigital Communications, Inc., No. 475, 2014 (Del. Apr. 14, 2015). The court found that the prior filed arbitration was capable of doing prompt and complete justice, the dispute was arbitrable, the tribunal could provide appropriate relief, and the arbitration involved the same parties and the same issues as the subsequently-filed lawsuit. Accordingly, the subsequently filed lawsuit was dismissed in favor of the first filed arbitration.
Amended Federal Rules of Civil Procedure Direct Parties to Consider Using Federal Rules of Evidence 502(d) Orders.
By: David M. Greenwald
On April 29, 2015, the United States Supreme Court adopted amendments to the Federal Rules of Civil Procedure (“FRCP”). Unless Congress intervenes, the amendments become effective on December 1, 2015. Amended Rules 16 and 26 include significant new provisions that encourage parties to agree on ESI and privilege issues at the outset of the case, and to have their agreements entered by the court in orders under FRE 502(d).
Amended FRCP 16(b)(3)(B) provides: “The scheduling order may: . . . (iii) provide for disclosure, discovery, or preservation of electronically stored information; (iv) include any agreement the parties reach for asserting claims of privilege or of protection as trial-preparation material after information is produced, including agreements reached under Federal Rule of Evidence 502[.]”
Amended FRCP 26(f)(C-D) provides: “(3) A discovery plan must state the parties views and proposals on . . . (C) any issues about disclosure, discovery, or preservation of electronically stored information, including the form or forms in which it should be produced; (D) any issues about claims of privilege or of protection as trial-preparation material, including – if the parties agree on a procedure to assert these claims after production – whether to ask the court to include their agreement in an order under Federal Rule of evidence 502[.]” Note: “any issues” may include not just a procedure for clawing back privileged or protected information, but also how the parties will assert privilege, such as alternatives to document-by-document privilege logs, or how the parties will log email strings.
Special Master to Review Documents Relating to Drafts of Published Documents.
By: David M. Greenwald
In FTC v. Reckitt Benckiser Pharmaceuticals, Inc., No. 3:14mc5 (E.D. Va. Mar. 10, 2015), Reckitt, the recipient of a Civil Investigative Demand from the FTC, withheld on privilege grounds 28,000 documents falling into the following categories: (1) drafts of documents published or intended to be published; (2) attorney notes or edits relating to those drafts; (3) emails related to or accompanying the drafts; and (4) attorney advice provided based on the drafts, such as in emails and memoranda. The FTC sought an order compelling disclosure of these documents on the ground that “the Fourth Circuit has long held that the attorney-client privilege does not apply to communications in connection with a proposed public disclosure.” Reckitt argued that privilege is inapplicable only where an attorney acts as a mere conduit of information to be made public, and that communications, including drafts, underlying the published documents are privileged because they constitute legal advice. The court held that the Fourth Circuit applies narrow protection for materials relating to documents that a client intends to make public, “the Fourth Circuit has held that the attorney-client privilege does not extend to the published data and the details underlying it. That, of course, could include any of the documents that Reckitt has labeled ‘legal advice’, if the ‘legal advice’ qualifies as a detail underlying the published data.” Thecourt ordered Reckitt to apply its guidance to the documents currently withheld, and appointed a special master to review any documents Reckitt continued to argue were privileged.
Common Interest Doctrine Survived Indemnitee’s Cross-Claim Against Indemnitor.
In Lislewood Corp. v. AT&T Corp.,No. 13 CV 1418 (N.D. Ill. Mar. 31, 2015), the district court found that a lessee and its sublessee shared a common legal interest to defeat claims by the lessor, and that the lessee’s filing of a contingent cross-claim against the sublessee for indemnification did not waive the common interest protection. Here, Lislewood signed a long-term Lease with AT&T, which required AT&T to maintain the premises. AT&T entered into a Sublease with Marriott, which required Marriott to indemnify AT&T for damages arising from Marriott’s use of the premises or breach of the Sublease. In anticipation of and following the termination of the Lease and Sublease, AT&T and Marriott entered into a “Common Interest Privilege/Joint Defense Agreement” in response to Lislewood’s allegations regarding liability for failure to maintain the premises. Lislewood subsequently sued AT&T, and AT&T filed a cross-claim against Marriott for breach of contract “only to the extent that Lislewood’s claim against AT&T is successful.” In discovery, AT&T and Marriott withheld communications between their legal teams based on their common interest agreement. Lislewood argued that they did not share a common legal interest and that, even if they did at one time, that interest was negated once the parties became adverse in the action through AT&T’s cross-claim. The court held that the common interest doctrine applied, even after the filing of the cross-claim. First, the court found that the parties shared a common legal interest in minimizing liability to Lislewood, and that they had coordinated their legal strategy. Second, AT&T’s contingent cross-claim did not change this common legal interest. Third, although it is well-established that parties to a common interest agreement may not assert privilege against each other in a subsequent dispute, AT&T and Marriott were not asserting privilege against each other as to the documents sought by Lislewood.
Disclosing Legal Advice to Employees with a Need to Know Does not Waive Privilege.
By: David M. Greenwald
In Scott v. Chipotle Mexican Grill, Inc.,No. 12-CV-08333 (S.D.N.Y. Mar. 27, 2015), the district court held that disclosing legal advice to corporate employees who can act on and implement the advice does not waive the privilege, even when the advice is being discussed among non-legal personnel. Here, plaintiff argued that withheld emails that did not include a lawyer among the authors or recipients should be reviewed in camera because they may not be legal in nature. After in camera review, the court found that the email communications, although among non-legal personnel, referred or discussed legal advice received by the company and were related to implementing that advice. The court held that, “to the extent that it is correct that all recipients were able to act upon or implement the information or advice they received . . . the e-mails and the attachments are privileged. To hold otherwise would disable corporations from implementing legal advice, exactly what Upjohn seeks to avoid.”
Supreme Court Holds that Parties May Consent to Bankruptcy Courts Adjudications.
By: Landon Raiford
On May 26, 2015, the United States Supreme Court ruled that Article III of the U.S. Constitution is not violated when bankruptcy courts decide matters with the knowing and voluntary consent of the litigants. Wellness Int’l Network, Ltd. v. Sharif, No. 13-935 (U.S. May 26, 2015). The Supreme Court’s ruling in Wellness is its third decision in four years addressing the powers of bankruptcy court judges. The Seventh Circuit had held in the case that under the Supreme Court’s 2011 decision in Stern v. Marshall, the bankruptcy court, as a non-Article III court, lacked the constitutional authority to enter a final order on state law claims, and that the bankruptcy court could not rule, even if the parties consented to proceed in bankruptcy court. A majority of the Court rejected the argument that parties may not consent to bankruptcy court adjudications, holding that “Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.” Further, the Court went on to hold that litigant consent need not be express but may be implied through a litigant’s conduct; the only test for consent is whether it “knowing and voluntary.” Wellness not only confirms the broad powers of the bankruptcy courts but also confirms the authority of magistrate judges to enter final orders with litigant consent as well, whose power to enter final orders is even more dependent on notions of consent than is the power of bankruptcy courts. Jenner & Block represented the prevailing petitioner Wellness International. Bankruptcy partner Catherine Steege argued the case before the Supreme Court, assisted by partners Barry Levenstam, Matthew Hellman, and Melissa Root and associates Landon Raiford and Ishan Bhabha.
Expert Testimony on Class Certification Must Satisfy Daubert Requirements.
By: Michael Brody
In In re Blood Reagents Antitrust Litigation, 783 F.3d 183 (3d Cir. 2015) (No. 12-4067), the district court certified a class in plaintiffs’ suit alleging defendants violated the antitrust laws by conspiring to fix the prices of blood reagent products. On appeal pursuant to Rule 23(f), the Third Circuit held plaintiffs must show on class certification, based on all relevant evidence, that the requirements of Rule 23 have been satisfied, not simply provide an assurance that the requirements will be met. In making that factual determination, the district court may rely on expert proof. Where it does so, the expert testimony must satisfy the Daubert requirements.
Securities Exception to CAFA Precludes CAFA Jurisdiction.
By: Michael Brody
A bondholder brought suit in state court alleging that defendants breached fiduciary duties and acted with gross negligence in administering certain bonds. The defendant removed the case to federal court. Although the causes of action arose under various state laws, the district court in California found that all of the defendant’s duties stemmed from the relationship between the defendant and the class with respect to the bond issue, and remanded the case to state court. On appeal, the Ninth Circuit interpreted the securities exception of the Class Action Fairness Act (28 U.S.C. §§ 1332, 1453, and 1711-1715) (“CAFA”), which provides CAFA removal does not apply to any class action that solely involves a claim concerning “the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security.” Eminence Investors, L.L.L.P. v. Bank of New York Mellon, 782 F.3d 504(9th Cir. 2015) (No. 15-15237). The Ninth Circuit concluded plaintiff asserted rights as a holder of the bonds. As a result, the underlying causes of action are covered by the CAFA security exception under any plausible reading of that exception’s text, and the district court’s remand was proper.
CAFA Removal Timely if Made Within Thirty Days of Learning Action Removable.
By: Michael Brody
The Ninth Circuit decided two cases permitting removal after learning, albeit relatively late in the cases, of the bases for removal. In Jordon v. Nationstar Mortgage LLC, 781 F.3d 1178 (9th Cir. 2015) (No. 14-35943), plaintiff sued under the Fair Debt Collection Practices Act (15 U.S.C. § 1692, et seq.). Defendants did not remove. In response to interrogatories served two years after the case was filed, however, plaintiff disclosed the amount of monetary damages was expected to exceed $25 million. Defendant then filed a notice of removal under CAFA, which the district court in Washington found untimely. On appeal, the Ninth Circuit disagreed. It found that defendants should be permitted to remove based on the newly-disclosed information. Because defendant timely removed the case when the CAFA basis for removal became known, jurisdiction in the federal courts was proper even though there may have been an opportunity to remover earlier in the case. In assessing whether a case is “removable,” the Ninth Circuit stated that it is proper to look at each ground for removal separately. A case becomes removable when a particular basis on which removal is sought becomes apparent.
In Reyes v. Dollar Tree Stores, Inc., 781 F.3d 1185 (9th Cir. 2015) (No. 15-55176), Dollar Tree removed a case from state court, invoking CAFA jurisdiction. The district court in California remanded the case to state court because the amount in controversy requirement was not satisfied. Two years later, the state court certified a class which presented more than $5 million in controversy. Defendant again removed, and the district court found the second removal untimely. The Ninth Circuit reversed. The second removal petition was timely because there was a change of circumstances, as the subsequent pleadings or events revealed a new or different ground for removal than had previously been rejected, and the petition was filed within 30 days after receipt of the order from which it could be ascertained that the case was now removable.
Because Class Ascertainable, Court Reverses Denial of Certification.
By: Michael Brody
In Byrd v. Aaron’s Inc.,784 F.3d 154 (3d Cir. 2015) (No. 14-3050), plaintiffs complained that defendant, a computer lessor, had invaded their privacy by activating spyware that kept track of websites visited, keystrokes, and webcam images from the leased computers. The district court in Pennsylvania denied certification, finding that it would be difficult to ascertain whose computers had improperly been the subject of eavesdropping. The Third Circuit reversed. The court concluded that the ascertainability inquiry is twofold, requiring plaintiff to show (1) that the class can be defined by objective criteria, and (2) there is a reliable, feasible mechanism for determining who falls within the class. The Third Circuit found the class was ascertainable because the individuals who leased computers could be determined from the defendants’ records. In an important concurring opinion, Judge Rendell suggested the Third Circuit modify its ascertainability standards. Judge Rendell stated the second criteria – whether there is a reliable and feasible mechanism for determining whether putative class members fall within the class definition – should not be a question for class certification, but should be left to the discretion of the district court in administering the case or a class action settlement.
Supreme Court: EEOC Conciliation Efforts Subject to Judicial Review.
By: Matthew J. Thomas
Before suing an employer for employment discrimination under Title VII, the EEOC must first “endeavor to eliminate [the] alleged unlawful employment practice by informal methods of conference, conciliation, and persuasion.” 42 U.S.C. § 2000e-5(b). In Mach Mining, LLC v. EEOC, 135 S. Ct. 1645 (2015) (No. 13-1019), the EEOC brought a Title VII action against defendant employer, which the defendant answered by asserting, among other things, a defense that the EEOC had failed to attempt to conciliate in good faith before suing. The EEOC moved for partial summary judgment on that defense, arguing that conciliation efforts are not subject to judicial review; the district court disagreed, but authorized an immediate appeal of its ruling. The Seventh Circuit held to the contrary, ruling that the statutory directive to attempt conciliation is not subject to judicial review. The Supreme Court reversed, holding that courts do have authority to review whether the EEOC has fulfilled its Title VII duty to attempt conciliation. The review, however, is narrow, i.e., it is limited to whether the EEOC has informed the employer about the specific discrimination allegation (including what the employer allegedly did and which employees have suffered), and attempted to engage the employer in a discussion in order to give the employer a chance to remedy the allegedly discriminatory practice.
Supreme Court Holds that FTCA Time Limits May Be Equitably Tolled.
The Federal Tort Claims Act (“FTCA”) provides that a tort claim against the United States is “forever barred” unless two deadlines are met: (1) a claim must be presented to the appropriate federal agency for administrative review within two years after the claim accrues, and (2) if the agency denies the claim, suit must be filed in federal court within six months of the denial. 28 U.S.C. § 2401(b). In U.S. v. Wong, 135 S. Ct. 1625 (2015) (No. 13-1074), the Supreme Court held that the time limitations under the FTCA were not jurisdictional and were subject to equitable tolling. The Court reasoned that statutory time bars, even if mandatory and emphatic, are not jurisdictional unless Congress provides a clear statement to that effect. The Court concluded that Congress did not do so in the FTCA, which speaks only of a claim’s timeliness but does not refer to the jurisdiction of the district courts or address those courts’ authority to hear untimely suits. Thus, the FTCA deadline provisions read like “ordinary, run-of-the-mill statute of limitations,” which are subject to equitable tolling.
Supreme Court To Review FCRA Standing Decision.
The Supreme Court granted certiorari to review a Ninth Circuit decision concerning standing to bring a claim under the Fair Credit Reporting Act (15 U.S.C. § 1681 et seq.)(“FCRA”). In Robins v. Spokeo, Inc., 742 F.3d 409 (9th Cir. 2014), cert. granted sub nom. Spokeo, Inc. v. Robins, 135 S. Ct. 1892 (U.S. Apr. 27, 2015) (No. 13-1339), a plaintiff alleged that a website operator violated the FCRA by publishing inaccurate information about him, which plaintiff claimed harmed his employment prospects. The district court in California dismissed the action, ruling that plaintiff lacked standing to sue because he had failed to plead an injury in fact and that any injuries were traceable to defendant’s alleged violations. The Ninth Circuit reversed. The court noted that the FCRA does not require a showing of actual harm where, as here, a plaintiff sues for willful violations. Thus, plaintiff’s alleged violations of his statutory rights were sufficient to satisfy the injury-in-fact requirement of Article III standing. The court further concluded that, where the injury in fact is the violation of a statutory right, the causation and redressability requirements for standing are also satisfied.
Sanctions Vacated: Defendant not Required to Retain All Documents Post-Notice of Suit.
By: Daniel J. Weiss
In Blue Sky Travel & Tours, LLC v. Al Tayyar, No. 13-2500 (4th Cir. Mar. 31, 2015), the Fourth Circuit vacated an order imposing sanctions on the defendants after finding the magistrate judge applied an incorrect legal standard to conclude the defendants spoliated certain documents. The magistrate judge held that once the defendant received notice of litigation, it was required “to stop [its] normal document retention policies and to preserve all documents because you don’t know what may or may not be relevant.” The Fourth Circuit held the magistrate judge erred because “a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute.” The circuit court remanded the case to determine whether the defendants knew or should have known the documents at issue were relevant to the plaintiff’s case when the invoices were discarded.
Federal Court Interprets Policy Provision as Exclusion and Rules Insurer Must Defend Against Unproven Allegations.
By: Brian Scarbrough
A Pennsylvania federal court recently ruled that a professional liability insurer must defend its insured even in the face of allegations that if proven would preclude coverage. Navigators Ins. Co. v. Resnick Amsterdam Leshner, P.C.,No. 14-5158 (E.D. Pa. May 18, 2015). The insurance policy in question contained a provision precluding coverage for a claim arising from any act or omission the insured had a basis to believe, prior to policy inception, might reasonably be expected to be the basis of a claim against it. The policy also required the insurer to defend its insureds, even if allegations were groundless, false, or fraudulent. The insureds had been sued in a suit alleging they emailed confidential information of a client to third parties prior to the policy period. The insurer initially defended the insureds but then filed a declaratory judgment action. All parties filed cross motions for summary judgment. The court ruled that that prior knowledge provision operated as an exclusion, even though it did not appear in the exclusions section of the policy. As such, the insurer had the burden to prove the policy precluded coverage based on the insureds’ prior knowledge. This the insurer was unable to do, as it merely pointed to allegations in the underlying action – allegations that were unproven and which the insureds vehemently denied. The court ruled the insurer must defend the insureds, and must defend the entire underlying suit, even if there were other uncovered claims in the suit. The court also pointed to a policy exclusion for intentional conduct as supporting the insurer’s duty to defend, given the exclusion could not apply until there was a final adjudication in the underlying suit.
New York Federal Court Rules Insurer Cannot Recoup Defense Costs.
By: Ashley Van Zelst
Earlier this year, the U.S. District Court for the Eastern District of New York predicted that New York state courts – which have yet to address the issue – would preclude recoupment of defense costs paid for claims that are later deemed to be outside of coverage where policy language did not provide for recoupment and where a policyholder had resisted recoupment requests by its insurer. General Star Indemnity. Co. v. Driven Sports, Inc.,No. 14-CV-3579 (E.D.N.Y. Jan. 23, 2015). Sued by multiple claimants for false advertising and misrepresentation, the insured Driven Sports sought coverage by insurer General Star, who agreed to defend these actions, but proposed that Driven Sports sign a “non-waiver and defense funding agreement” that would have required Driven Sports to repay any defense costs for claims that were determined to be outside of coverage. Driven Sports rejected General Star’s offer. On summary judgment filed by both parties on General Star’s obligations to defend, the court held that the claims against Driven Sports clearly fell under a policy exclusion, such that General Star was not required to defend Driven Sports. Accordingly, General Star argued that it should be entitled to recoup its costs in defending Driven Sports in the underlying – and now uncovered – actions. The court ruled that recoupment was not permitted for two main reasons: (1) the insurance policy did not provide for recoupment and (2) the policyholder was not unjustly enriched. On both grounds, the court explained that General Star could have contracted for recoupment rights during policy negotiations.
Insurer’s Duty to Defend Additional Insured Triggered by Scope of Named Insured’s Work.
By: Jan A. Larson
Interpreting an additional insured endorsement, the U.S. District Court for the Northern District of Illinois recently held that the it is the scope of the named insured’s work—not the additional insured’s work—that governs the availability of coverage under the policy. Old Republic Ins. Co. v. Leopardo Companies, Inc.,No. 14 C 02421 (N.D. Ill. Mar. 11, 2015). As part of the underlying action, Leopardo Companies, Inc. (“Leopardo”) was hired as the general contractor to perform renovation work on the Millennium Knickerbocker Hotel in Chicago. Leopardo then entered into a subcontractor agreement with Edwards Engineering (“Edwards”), under which Edwards would perform discrete fan coil unit work. Pursuant to the subcontractor agreement, Leopardo was included as an additional insured on a commercial general liability (“CGL”) policy issued by Old Republic to Edwards as the named insured. The property owner later sued Leopardo in a breach of contract action, alleging that defectively designed fan coil units had leaked and caused damage to the guestroom ceilings, walls, fit, and finishes. Using its additional insured status, Leopardo sought coverage from Old Republic under the policy issued to Edwards. Old Republic agreed to defend subject to a reservation of rights, but filed a two-count declaratory judgment action seeking (i) a declaration that it had no duty to defend or indemnify and (ii) recoupment of defense costs incurred. On cross motions for summary judgment, the parties sought a ruling as to whether the underlying action alleges ‘property damage’ caused by an ‘occurrence’ required to trigger Old Republic’s duty to defend. Applying Illinois law, the court first held that a covered ‘occurrence’ in this context requires that a construction defect damage work other than that furnished by the insured. Old Republic argued that it had no duty to defend or indemnify because the underlying complaint alleged no damage to anything other than Leopardo’s own renovation work. Directing the party’s attention to the plain language of the insurance policy, the court held that it is in fact Edwards’ work—not Leopardo’s—that determines whether there is a covered ‘occurrence.’ While the endorsement that added Leopardo as an additional insured provides coverage for property damage “caused in whole or in part by your acts or omissions,” the policy separately defined the term “your” as referring only to the named insured (i.e., Edwards). The certificate of insurance issued to Leopardo likewise confirmed that Leopardo was included as an additional insured “as respects work performed by Edwards.” Because the underlying complaint plainly alleged damage to work other that performed by Edwards, the court held that it alleged an ‘occurrence’ sufficient to trigger Old Republic’s duty to defend Leopardo in the underlying action.
Court Rules No Duty to Defend Under Cyber Policy.
In a recent decision from the U.S. District Court for the District of Utah, Judge Ted Stewart held that a cyber risk insurance policy did not afford a duty to defend against several claims made against the policyholder for intentional torts, including conversion and tortuous interference. Travelers Prop. Cas. Co. of Am. v. Fed. Recovery Services, Inc.,No. 14-cv-170 (D. Utah May 11, 2015). The decision pitted Travelers against two data processing companies, Federal Recovery Services (FRS) and Federal Recovery Acceptance, Inc. (FRA), which had purchased Travelers’ cyber risk policy, called CyberFirst®, which included coverage for “any error, or omission or negligent act.” The underlying suit for which FRA and FRS were seeking coverage involved Global Fitness, a company owning a chain of fitness stores in several states. Global Fitness provided FRA with customer information, including credit card and bank account information. FRA would then process the information, transferring the members’ fees to Global Fitness. Global Fitness subsequently entered into an Asset Purchase Agreement (APA) with L.A. Global Fitness informed FRA of the APA, and, according to the decision, FRA willingly agreed to transfer the member information back to Global Fitness. While FRA apparently produced some of the data, however, it withheld critical pieces of information, including “credit card, checking account, and savings account information.” Instead, FRA sought “’demands for significant compensation’” in exchange for transferring the remaining customer data. Global Fitness subsequently filed claims against FRA for “conversion, tortious interference, and breach of contract” and requesting “injunctive relief, punitive damages, and attorney fees.” Ultimately, Travelers refused to defend FRA and FRS on the grounds that neither the original nor the amended complaints alleged damages from an “error, omission or negligent act.” In ruling for Travelers, the court applied black letter insurance law: “an insurer’s duty to defend is determined by comparing the language of the insurance policy with the allegations in the complaint.” The court held that Global Fitness’s complaint alleged not that FRA erred or was negligent in handling customer information; rather, Global Fitness argued FRA acted with “knowledge, willfulness, and malice” in withholding the information, reducing the value of the APA. Finding no potential for coverage in these allegations, the court ruled against the policyholder.
“Next Friend” Cannot Sue in Texas Under Forum Non Conveniens Statute.
By: Barry Levenstam
In In re Bridgestone Americas Tire Operations, LLC,No. 12-0946 (Tex. Apr. 24, 2015), the Texas Supreme Court addressed the applicability of a state statute on forum non conveniens to a lawsuit brought by a Texas resident as “next friend” of his sister and brother-in-law’s children, who had survived an automobile accident in Mexico that killed their parents. The accident occurred in Mexico and the deceased and their children were Mexican citizens, but the uncle was a resident of Texas. The statute stated that the forum non conveniens doctrine cannot be used to dismiss a case brought by a Texas resident as plaintiff. The Texas Supreme Court held that the uncle, acting as “next friend” to the surviving children, does not qualify as a “plaintiff” who could take advantage of the Texas resident exception to this statute.
“Reasonable Time” in FRCP 60(b) is Measured Between Notice and Filing.
By: Barry Levenstam
In Bouret-Echevarría v. Caribbean Aviation Maintenance Corp.,784 F.3d 37 (1st Cir. 2015) (No. 13-2549), the First Circuit addressed the question of what constitutes reasonable time for a post judgment motion under FRCP 60(b). Eighteen months after a defense verdict in a wrongful death arising out of a helicopter crash, plaintiff learned that the jury’s verdict may have been influenced by jurors who improperly received information that plaintiff had declined a confidential $3.5 million settlement offer. The district court rejected the motion, ruling that eighteen months was too long after the verdict to reopen the matter. The First Circuit reversed, holding that the relevant time was the time between when the plaintiff learned of the fact that they argue undermined the verdict and when the plaintiff brought the motion. Here, that was 3 1/2 months, which the appellate court held was reasonable. Thus, it reversed the district court and remanded the matter for an evidentiary hearing into the allegations of juror impropriety.
Texas Says its Medical Liability Act Covers Pharmacists.
By: Barry Levenstam
In Randol Mill Pharmacy v. Miller,No. 13-1014 (Tex. Apr. 24, 2015), plaintiff sued a pharmacy and several of its licensed pharmacist-employees for injury she suffered after taking a drug that defendants had compounded. Taking the position that her claims against these defendants were not subject to the requirements of the Texas Medical Liability Act, plaintiff failed to serve those defendants with an expert report as required by the Act within 120 days of filing suit. Defendant moved to dismiss the claims under the Act. The trial court denied that motion and the appellate court affirmed. On review, the Texas Supreme Court held that the Texas Medical Liability Act was enacted to provide a comprehensive statutory framework concerning healthcare liability claims. After a careful review of the statutory language, the court ruled that pharmacists acting in the capacity of compounding drugs are “healthcare providers” and that the plaintiff’s claims against these defendants in relation to that conduct are “healthcare liability claims” under the Act. As a consequence, the court ordered plaintiff’s case dismissed for failure to comply with the Act’s requirement of providing defendants with an expert report within 120 days of filing suit.
Preemption of Claims Found Based on Off-Label Uses of Medical Devices.
By: Barry Levenstam
In both Caplinger v. Medtronic, Inc.,784 F.3d 1335 (10th Cir. 2015) (No. 13-6061) and Angeles v. Medtronic, Inc.,No. A14-1149 (Minn. Ct. App. Apr. 20, 2015), the courts addressed preemption-based dismissal orders of claims alleging breaches of express and implied warranties, negligence, and failure-to-warn, all relating to the off-label use of defendant’s medical device. The FDA had approved this device as safe and effective for use in a particular surgical technique. In these cases, plaintiffs had elected and received different surgeries, in which the device was used in an off-label manner, allegedly based upon assurances by the defendant that the device was also safe and effective for use in those surgeries. Plaintiffs challenged the dismissal rulings below on the ground that preemption should not extend to off-label uses because the FDA’s approval as safe and effective applied only to the specified use. Both courts rejected this argument, ruling that governing Supreme Court precedent makes clear that FDA approval is device-specific, not use-specific. Further, in Caplinger,the Tenth Circuit affirmed the preemption-based dismissal on additional grounds, noting that the plaintiff had not succeeded in identifying any federal law that her state law claims paralleled. Consequently, those state law claims necessarily were preempted. In contrast, in Angeles, the Minnesota Court of Appeals affirmed in part and reversed in part, accepting plaintiffs’ argument that they had identified federal law that certain of their state law claims allegedly paralleled, thus avoiding preemption of those parallel state claims. The state court plaintiffs also alleged that defendant negligently failed to fulfill its duty under state law to monitor the product after FDA approval and to warn of complaints about the product’s performance and adverse health consequences attributable to the product. Because this state law duty parallels a federal law to monitor for and report problems to the FDA after FDA approval, with respect to these claims only, the court remanded for further proceedings.
SEC Grants Compliance Officer Million-Dollar Whistleblower Award.
The Securities and Exchange Commission recently announced its second ever whistleblower award to an employee with internal audit or compliance responsibilities. See Press Release, SEC,SEC Announces Million-Dollar Whistleblower Award to Compliance Officer, Release No. 2015-73 (Apr. 22, 2015). This whistleblower, a compliance officer who had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm, will receive between $1.4 and $1.6 million. This compliance officer reported the misconduct at issue after company management knew of the potentially impending harm to investors but failed to take steps to prevent it. When investors could suffer substantial harm, SEC rules permit compliance officers to receive awards as a result of reporting misconduct to the SEC.
Wrongful Termination Suit Filed Based on Raising Concerns Re Corporate Governance.
Former managing director Adam Levine sued TPG Capital, Inc., his former employer, for whistleblower retaliation, as well as wrongful termination and defamation, on April 2, 2015. Levine v. TPG Capital, L.P., No. 15-CV-01508 (N.D. Cal. Apr. 2, 2015). Levine has alleged that TPG focused its efforts on billing as much work as possible to portfolio companies and funds regardless if whether work was being done for the benefit of those companies, and that TPG gave investors inaccurate and misleading information about the track record of its investment team leaders. Levine further alleged that he informed TPG senior partners, executives, and compliance officers about his concerns, and as a result, was terminated. Levine is seeking reinstatement and twice the amount of back pay, among other damages.
SEC Takes Aim at Confidentiality Provisions in Separation Agreements.
The SEC has been warning that it is concerned about employee separation agreements that contain confidentiality provisions that could inhibit whistleblowers from communicating with the SEC. On April 1, the SEC announced its first enforcement action against a company for using what it believed to be improperly restrictive language in such a confidentiality agreement. Press Release, SEC,SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements, Release 2015-54(Apr. 1, 2015); In re KBR, Inc., Exchange Act Release No. 74,619 (Apr. 1, 2015) (Order Instituting Cease-And-Desist Proceedings). The SEC charged Houston-based global technology and engineering firm KBR, Inc. with violating whistleblower protection Rule 21F-17 promulgated under the Dodd-Frank Act, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC. KBR had required witnesses in certain internal investigation interviews to sign confidentiality statements with language warning that they could face discipline, including possible termination, if they discussed the matters with outside parties without the prior approval of KBR’s legal department. Without admitting any violation, KBR agreed to pay a $130,000 civil penalty to settle the SEC’s charges. The company also voluntarily amended its confidentiality statement by adding language explicitly stating that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation. The SEC recognized that there are no apparent instances in which KBR actually prevented employees from communicating with the SEC about securities law violations. But the SEC found that the potential chilling effect of the language on whistleblowers’ willingness to report illegal conduct to the SEC was all that was necessary for the company’s conduct to violate SEC Rule 21F-17. In the release, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, warned that “other employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”
Study Shows Positive Outcomes from Effective Compliance Programs.
The Ethics Research Center has released a Research Report concerning the impacts of an Effective Ethics and Compliance Program. See Ethics Research Center, The State of Ethics in Large Companies(2015). The Center surveyed employees of companies that have and do not have effective programs, with an effective program defined as one that has written standards of ethical workplace conduct, training on the standards, company resources that provide advice about ethics issues, a means to report potential violations confidentially or anonymously, performance evaluations of ethical conduct, and systems to discipline violators. The study found that in large companies with effective programs, 3 percent of employees felt pressure to compromise standards, compared to 23 percent in companies without effective programs. 33 percent of those in companies with effect programs said they observed misconduct, compared to 62 percent in companies without effective programs who reported observing such conduct. Of those who observed misconduct, 87 percent reported it in companies with effective programs, compared to 32 percent in companies without. And in companies with effective programs, 4 percent of those who reported wrongdoing said they experienced retaliation, compared to 59 percent in companies without effective programs.
Securities Lawyers are not Obligated to be SEC Informants.
In Hays v. Page Perry, LLC, No. 13-CV-3925 (N.D. Ga. Mar. 17, 2015), the receiver of an investment services firm sued the firm’s prior law firm for malpractice arising from mock SEC audits the law firm had performed for its client. At the time of the representation, the investment firm’s principal had been misappropriating client funds for years and making misrepresentations to federal and state regulators. The law firm had found inadequacies in the investment firm’s business practices and advised that they should be corrected, including returning certain funds. The receiver argued that the law firm should have gone further, including informing regulators of its client’s misconduct. The court dismissed the receiver’s complaint and then denied a motion for reconsideration. The court found no authority for imposing any duty on the law firm to report wrongdoing to authorities. The court rejected the receiver’s arguments that Georgia Bar Rule 1.13(b), which requires a lawyer to report certain legal violations to the highest internal authority in the organization, required reporting to the SEC because the SEC could appoint a receiver to take over and liquidate the investment firm. The court also rejected the argument that external reporting would not have violated the law firm’s duty of confidentiality. The court expressed concern about the implications, including the chilling effect on attorney-client relationships, of imposing an obligation to report violations of law to external authorities, and concluded by observing that “Securities lawyers are not informants for the SEC.”
HHS OIG Issues Guidance for Board Governance.
The Office of Inspector General of the U.S. Department of Health and Human Services, teaming up with the Association of Healthcare Internal Auditors, the American Health Lawyers Association, and the Health Care Compliance Association, recently released its Practical Guidance for Health Care Governing Boards on Compliance Oversight(Apr. 20, 2015). The Guidance sets out expectations for what boards should do to ensure that companies have effective compliance programs, including developing a formal plan to stay abreast of the changing regulatory landscape and operating environment; periodically evaluating the adequacy, independence and performance of different organizational functions, such as legal, compliance and audit; evaluating how to work with management to address risk, including roles for identifying compliance risks and investigate risks; ensuring there are strong processes for identifying risk areas; enforcing expectations for receiving certain types of compliance-related information; and ensuring that management consistently reviews and audits risk areas.
Corporate Governance Efforts not Evidence of Scienter.
In re Discover Financial Services Derivative Litigation, No. 12 C 6436 (N.D. Ill. Mar. 23, 2015), involved a shareholder derivative action arising out of regulatory actions that resulted in a consent order, a $14 million civil penalty, and $200 million in restitution to customers. The plaintiffs alleged that the defendant directors made a “conscious decision to operate Discover with unlawful sales, marketing and billing practices, despite being put on notice of the illegality of such practices . . . .” The court dismissed the complaint, finding in part that the plaintiffs had not pled sufficient facts to support their allegation that the directors knew about any wrongdoing. In support of that allegation, the plaintiffs argued that “[a]ssuming that [Discover’s] corporate governance structure worked (which defendants do not dispute), it is entirely reasonable to infer that each Discover director was aware of” ongoing wrongdoing. The court disagreed, rejecting the “suggestion that Discover’s internal controls themselves establish that the Board must have had knowledge of continuing wrongful conduct.”
Prison Sentences Imposed Upon Executives Under Responsible Corporate Officer Doctrine.
In limited circumstances, compliance carelessness by corporate executives who lack criminal intent can result in prison terms. In U.S. v. Quality Egg, LLC, No. 14-3024 (N.D. Iowa Apr. 14, 2015), the defendants were two individuals who exercised significant control over the operations of an egg production company. After a significant Salmonella outbreak was traced to conditions at a company facility, the individuals pled guilty to selling misbranded and adulterated food. As sentencing approached, the individuals argued that they were guilty only under the “responsible corporate officer” doctrine and they had no personal knowledge of the conduct that constituted the violation, and that under those circumstances they could not constitutionally be sentenced to a term of imprisonment. Although there were factual disagreements about whether the defendants in fact had such knowledge, the court assumed for purposes of its analysis that the defendants lacked culpable knowledge. The court rejected the defendants’ argument under the cruel and unusual punishment provision of the Eighth Amendment, noting among other things that the violations harmed thousands of consumers and that one of the purposes of a sentence would be to deter other corporate officers. The court also rejected the defendants’ argument that a prison sentence would deprive them of their liberty without due process of law, and sentenced each defendant to three months in prison.