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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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Arbitrators, Not Court, To Determine Preclusive Effect Of Prior Arbitration.
By: Howard S. Suskin
The preclusive effect of a federal judgment that confirmed an arbitration award is to be determined by arbitrators in a subsequent arbitration, not by the federal court. Citigroup, Inc. v. Abu Dhabi Inv. Auth., 776 F.3d 126 (2d Cir. 2015) (No. 13-4825-cv). The arbitrators in the first arbitration issued an arbitration award, and the prevailing party obtained confirmation of the award pursuant to the Federal Arbitration Act in district court, without the district court considering the merits of the underlying claims at issue in the arbitration. Subsequently, the losing party filed a second arbitration claim, which arguably contested the rulings in the first arbitration. The prevailing party sought to enjoin the second arbitration under the All Writs Act, arguing that the court should determine that the second arbitration was precluded by the confirmed award in the first arbitration. The district court disagreed and the court of appeals affirmed, holding that the All Writs Act does not permit a district court to enjoin an arbitration based on whatever claim-preclusive effect may result from the court’s prior judgment when that judgment merely confirmed the results of the parties’ earlier arbitration without considering the merits of the underlying claims.
Low Probability Of Success Does Not Render An Arbitration Agreement Unconscionable.
By: Howard S. Suskin
The court rejected a plaintiff’s contention that the lack of success that other plaintiffs have had in arbitrating similar claims makes an arbitration clause unconscionable or ineffective. Harris v. TD Ameritrade, Inc., No. 14-CV-0046 (E.D. Tenn. Jan. 5, 2015). Plaintiff did not point to any particular language or provision of the arbitration agreement which was unfair or inequitable. Rather, he focused on the lack of success that other plaintiffs have had in arbitrating similar claims. The court found that simply because other plaintiffs have been unsuccessful in arbitrating similar claims with a particular defendant is not a ground for invalidating the arbitration agreement.
Dodd-Frank Act Claim May Be Arbitrated.
By: Howard S. Suskin
A claim alleging whistleblower retaliation under the Dodd-Frank Act was held to be subject to an arbitration agreement, thwarting an employee’s attempt to bring his claim in court. Khazin v. TD Ameritrade Holding Corp., 773 F.3d 488 (3d Cir. 2014) (No. 14-1689). The employee argued that an anti-arbitration provision in the Sarbanes-Oxley Act, which provides a cause of action for whistleblowers, bars mandatory arbitration for whistleblower claims brought under the Dodd-Frank Act. The court disagreed, observing that the two acts are substantively different and each has its own prohibited conduct, statute of limitations and remedies. In view of the differences between the two statutes, and the absence of an express anti-arbitration provision in Dodd-Franks, the court concluded that the anti-arbitration provision in SOX does not bar enforcement of arbitration agreements as to Dodd-Frank claims.
Delay In Pursing Arbitration Right Prevents Enforcement Of Arbitration Clause.
By: Howard S. Suskin
A plaintiff’s failure to timely assert its contractual right to arbitration resulted in its waiving that right. Joca-Roca Real Estate LLC v. Brennan, 772 F.3d 945 (1st Cir. 2014) (No. 14-1353). The plaintiff commenced a lawsuit, vigorously prosecuted it, and attempted after months of litigation to pursue arbitration. The First Circuit held that the plaintiff’s conduct waived its right to arbitrate. The court found that the defendant had been prejudiced by plaintiff’s conduct, including that defendant had incurred substantial fees in litigation and faced postponement of resolution of the underlying controversy if plaintiff was permitted to start over in a new forum.
Fact Work Product In Investigator’s Report Discoverable If Need And Hardship Shown.
In In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014), the D.C. Circuit granted a writ of mandamus, holding that internal investigation interviews and related materials are privileged where a primary purpose of the communications is to obtain or provide legal advice. On remand, in United States ex rel. Barko v. Halliburton Co., No. 05-cv-1276 (D.D.C. Dec. 17, 2014), the district court held that, although the interview statements made by employees to an investigator were protected by the attorney-client privilege, the reports themselves, to the extent that they did not reveal the substance of those communications, were protected only by the work product doctrine. According to the district court, the attorney-client privilege applies only where a communication involves both a client and an attorney. Communications from an attorney’s investigator to the attorney, therefore, are not within the privilege. The court then found that portions of the reports were fact work product, subject to discovery upon the showing of substantial need and hardship. Here, plaintiff Relator demonstrated substantial need because the reports reflected “raw factual” information and factual summaries of more than 200 interviews that were conducted more than ten years ago in Iraq with individuals, most of whom had left KBR’s employment, and some of whom are foreign citizens. Given the passage of time, and KBR’s failure to present a Rule 30(b)(6) witness with knowledge about the underlying facts, plaintiff demonstrated that he would suffer undue hardship if he did not obtain the fact work product contained in the reports, as he would not be able to obtain the same information through other means.
Conflicting Decisions Re: “Functional Equivalent” Doctrine.
When a party hires a third party marketing or public relations consultant, the party may later assert that the communications are within the attorney-client privilege because the third party personnel were the “functional equivalents” of employees.
In Schaeffer v. Gregory Village Partners, L.P., No. 13-cv-04358 (N.D. Cal. Jan. 26, 2015), the district court held that a public relations consultant, Craig, was the functional equivalent of an employee and therefore was within the privilege. Craig was hired to assist defendant regarding possible contamination from its property and potential remediation. Craig was directly involved in the project, conducting community research, meeting with defendant’s Board to develop strategy, developing talking points to be used with government officials, attending meetings with third party “stakeholders,” and, along with defendant’s outside counsel, participated in public meetings conducted by the local municipality. According to the court, the functional equivalence doctrine applies where a “consultant performs work that is substantially intertwined with the subject matter of a corporation’s legal concerns, and the consultant provided information to the corporation’s attorney to aid the attorney in advising the corporate client.” Craig, although retained for only a limited time and purpose, was “very much intertwined” with the company’s legal troubles, and Craig’s activities involved the collection of information for and at the direction of counsel.
The district court in Church & Dwight Co., Inc. v. SPD Swiss Precision Diagnostics, GmbH, No. 14-cv-585 (S.D.N.Y. Dec. 19, 2014), came to the opposite conclusion regarding a third party marketing firm that was hired to assist defendant with the launch of a product that was the subject of subsequent litigation. The defendant shared privileged legal advice and other communications with the marketing firm during the course of the engagement. The court held that defendant failed to satisfy the elements of the “functional equivalent” test. First, defendant argued only that its in-house marketing team was too small to do the job on its own, not that the outside marketing firm had primary responsibility for a key corporate job. Second, defendant did not establish that there was a “continuous and close working relationship between the consultant and the company’s principals on matters critical to the company’s position in litigation.” Third, defendant did not show that the consultant “is likely to possess information possessed by no one else at the company.” Finding that defendant was “no different than most companies who hire external advertising agencies,” the court explained that applying the functional equivalence doctrine here would “swallow the privilege waiver rule and would extend the attorney-client privilege to communications with any third party who was hired to assist the client with something the client could not do on its own.”
DOJ’s Federal Criminal Discovery Manual Held To Be Protected Work Product.
In National Ass’n of Criminal Defense Lawyers v. Executive Office for the U.S. Attorneys, No. 14-269 (D.D.C. Dec. 18, 2014), the district court held that the DOJ’s Federal Criminal Discovery Manual (the “Blue Book”) is attorney work product and is protected from disclosure pursuant to FOIA exemption 5. Plaintiffs filed suit under FOIA seeking the Blue Book, arguing that the document contains only statements of agency policy and general, neutral guidelines regarding prosecutors’ disclosure obligations. The DOJ argued that the manual contains legal advice, strategies, and arguments for defeating discovery claims. Following in camera review, the court held that the manual was protected work product. The court explained that the work product doctrine protects not only documents prepared by government lawyers in connection with active investigations of potential wrongdoing and where there is a specific claim supported by concrete facts which would likely lead to “litigation in mind,” but also if the documents “are prepared by an attorney ‘rendering legal advice in order to protect the client from future litigation about a particular transaction.” In such a situation, “no specific claim is needed.” The court held that, despite the fact that the manual was not prepared for any specific litigation, it satisfied the “anticipation of litigation” test because the document was prepared “in anticipation of foreseeable litigation against the agency.” The court acknowledged a recent decision by a federal district court in the District of Oregon (United States v. Pederson, Case No. 12-431-HA) that held that the Blue Book was not protected work product, but respectfully chose not to follow that court’s reasoning.
Assertion Of Good Faith Defense To Violation Of FLSA Waives Privilege.
In Scott v. Chipotle Mexican Grill, Inc., No. 12-cv-08333 (S.D.N.Y. Dec. 18, 2014), the court held that, by asserting a good faith defense to a FSLA violation, defendant put the advice of its counsel at issue and thereby waived the attorney-client privilege. Under Section 260 of the FSLA, an employer who has been found liable for past wages may allege a reasonable, good-faith belief that it was not violating FLSA to avoid liability for liquidated damages. The court explained that the burden of proving good faith under FLSA is “a difficult one, with double damages being the norm and single damages the exception.” As such, “[g]ood faith in this context requires more than ignorance of the prevailing law or uncertainty about its development. It requires that an employer first take active steps to ascertain the dictates of the FLSA and then move to comply with them.” It is not sufficient to show that the employer did not purposefully violate the statute. Here, plaintiffs demonstrated that the employer had received the advice of counsel. Under the test for good faith as applied under the statute, the court held that the employer could not define the affirmative defense in such a way as to remove its state of mind from being at issue. If it received legal advice on the issue, and asserted a good faith defense, plaintiffs had the right to discover what advice the employer had received prior to violating the FSLA.
New York: Anticipated Litigation Not Required To Establish Common Interest Doctrine.
In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 998 N.Y.S.2d 329 (N.Y. App. Div. 2014) (No. 651612/10), the New York Appellate Division held that the common interest doctrine may apply even when privileged communications are shared with third parties in the absence of the anticipation of litigation. Here, Bank of America and Countrywide intended to enter into a merger agreement. The companies signed a common interest agreement just prior to signing the merger agreement. Thereafter, the companies shared legal advice regarding a number of pre-closing issues, including preparation of a joint proxy and registration statement. No litigation was anticipated at the time that the companies shared legal advice prior to the closing. Plaintiff sought pre-closing communications between the companies, arguing that, under New York law, the common interest doctrine does not apply in the absence of anticipated litigation. The court disagreed, holding that the common interest doctrine applies to protect waiver of attorney-client privilege where communications are shared with third parties for the purpose of furthering “nearly identical” legal interests. Acknowledging that a line of New York cases requires pending or reasonably anticipated litigation for the doctrine to apply, the court noted that neither the Restatement of the Law Governing Lawyers, nor the majority of federal courts, nor Delaware law imposed a litigation requirement for the doctrine to apply. The court decided to adopt this approach to enable parties, like those here, to share advice of counsel “in order to accurately navigate the complex legal and regulatory process involved in completing the transaction.”
Successor Corporation’s Management Controls Predecessor’s Privileges.
In Newspring Mezzanine Capital II, L.P. v. Hayes, No.14-1706 (E.D. Pa. Dec. 9, 2014), the district court held that, where counsel represented the predecessor entity and did not represent its owners, management of the surviving company in a merger controlled the attorney-client privilege. In this case, counsel created a corporate vehicle, Utilipath Holdings (UH), to transfer ownership to New Utilipath (NU). UH and its principals argued that they controlled the attorney-client privilege for communications that took place before the merger, either as managers of UH or as individual clients of counsel. They demanded that NU produce privileged documents that remained on NU’s servers after the merger. The court found no evidence that counsel represented anyone other than the predecessor company, and held that the control over privilege transferred to NU upon the merger. The court noted that the engagement letter stated that counsel represented UH, and the signature line identified the signer as “manager” of UH. No one separately signed as an individual. UH, therefore, was counsel’s sole client.
Loss Reserves Set By Insurer After Litigation Threat Are Protected Work Product.
In Schreib v. American Family Mutual Insurance Co., No. C14-0165JLR (W.D. Wash. Dec. 15, 2014), the district court held that individual case reserves set by the insurer after there was a threat of litigation by the policyholder were protected work product. Here, plaintiff gave the insurer formal notice that unless it paid plaintiff’s claim within 20 days, plaintiff would bring a suit against the insurer for bad faith refusal to pay the claim. In the subsequent litigation, plaintiff moved to compel discovery of the reserves that the insurer set on the claim after receiving this notice, arguing that setting the reserves was business in nature, because state law required the insurer to maintain reserves. The court denied the motion to compel. In circumstances where a document serves a dual purpose, that is, where it is not prepared exclusively for litigation, the Ninth Circuit applies the “because of” test. Under this test, dual purpose documents are deemed prepared because of litigation if “in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.” The circumstances in this case satisfied that test. Because state law requires an insurer to maintain reserves in the ordinary course of business, the loss reserves were not prepared exclusively for litigation. However, the setting of reserves after the threat of litigation goes beyond the ordinary course of investigating and handling claims and is a financial evaluation of the claim from the standpoint of pending or anticipated litigation. Individual loss reserve documents created once an insurer anticipates litigation are not “created in substantially similar form” to those created in the absence of impending litigation. Once litigation is anticipated, loss reserve documents “by definition reflect the mental impressions, thoughts, and conclusions of attorneys or employees evaluating the merits and risk of a legal claim.” The work product doctrine, therefore, protected loss reserve documents created after the insurer received notice of the policyholder’s intent to file suit.
No Privilege Waiver: Agency Produced Subpoenaed Documents To Congress Under Seal.
In Spears v. First American eAppraiseIT, No. 13-mc-1167 (D.D.C. Dec. 2, 2014), the district court held that the Office of the Comptroller of Currency (“OCC”) (the successor to the Office of Thrift Supervision (“OTS”)) did not waive the attorney-client privilege, the work product protection, or the deliberative process privilege when it produced documents under seal in response to a subpoena served by a Senate subcommittee. The Senate subcommittee cited the documents and summarized them in its 2011 report on the 2007-2008 financial crisis. Plaintiff argued that OTS had waived privilege by voluntarily producing the documents to the Senate, a third party, which then disclosed the information to the public. Plaintiff also argued that disclosure could not be deemed “involuntary” or “compelled” where OTS did not object to the subpoena on the basis of privilege. The court held that OTS had not waived the attorney-client privilege. OTS produced the documents to the Senate under seal pursuant to a subpoena. The Senate, not OTS, disclosed the information to the public. The court stated: “documents produced pursuant to subpoena are not voluntarily disclosed,” and the fact that they were produced under seal weakens the case for waiver. The court also held that OTS did not waive work product protection. Filing the documents under seal was not inconsistent with maintaining secrecy. The court concluded that finding no waiver under these circumstances was appropriate because OTS took steps to maintain confidentiality, and the policy interests underlying the attorney-client privilege and the deliberative process privilege – encouraging candid and open discussion amongst agency counsel and members in future deliberations and decisions – would be furthered by upholding the assertions of privilege in this case.
Government Generally May Not Discover Attorney-Expert Communications.
In U.S. Commodity Futures Trading Commission v. Newell, 301 F.R.D. 348 (N.D. Ill. 2014) (No. 12-6763), the court held that the CFTC generally could not discover attorney-expert communications, unless they fell into the narrow exceptions provided by FRCP 26(b)(4)(C), and could not discover drafts of expert reports. The CFTC propounded broad requests for production of all communications between defendants and their experts. Defendants turned over some drafts and notes related to the experts’ reports, including two draft reports and emails between defense counsel and one of the experts. During their depositions, the CFTC asked the experts about defense counsel’s contributions to their reports, and the experts testified that they exchanged drafts with counsel and accepted counsel’s recommended changes. The CFTC then moved to compel production of all drafts, and all communications. FRCP 26(b)(4)(B) and (C), effective beginning in 2010, provide that draft reports and most attorney-expert communications will be treated as protected work product. The rule includes three exceptions to the treatment of such communications, including allowing discovery “to the extent that the communications . . . (ii) identify facts or data that the party’s attorney provided and that the expert considered in forming the opinions to be expressed[.]” The CFTC argued that defendants could not invoke the rule because counsel “commandeered” the drafting of the expert reports, and because the communications included facts or data that the experts considered. The court denied the motion to compel. First, the 2010 amendments were adopted to prevent the inquiry requested by the government. The CFTC’s approach would require an analysis of the degree of counsel’s involvement in the drafting of the reports, which would necessarily require production of all of the drafts of the report for comparison, as well as production of all or virtually all attorney-expert communications. The court held that this is exactly the type of discovery that the 2010 amendments were intended to preclude. The court also explained that Rule 26(b)(4)(C) only requires disclosure of those parts of attorney-expert communications covered by the exceptions, and that the advisory committee comments make it clear that other portions of the communications remain protected from discovery. The court directed defendants to review specific documents that had been withheld and to produce “any portions” that contained materials covered by the rule’s exceptions.
California State Appellate Court Upholds Law Firm Attorney-Client Privilege.
In Palmer v. Superior Court, 180 Cal. Rptr. 3d 620 (Cal. Ct. App. 2014) (No. B255182), a California appellate court upheld the attorney-client privilege regarding intra-law firm communications concerning disputes with current clients, and rejected the “fiduciary” or “current client” exceptions to the privilege. Almost immediately after hiring defendant law firm, plaintiff sent two emails expressing dissatisfaction with the firm’s billing and representation. While continuing to represent plaintiff, the lawyers working on the matter consulted the firm’s: (1) General Counsel; and (2) Claims Counsel. Plaintiff moved to compel disclosure of these communications in the subsequent malpractice action, arguing that the attorney-client privilege does not apply to internal law firm communications that occur while the representation is ongoing. The court denied discovery of the communications. The court explained that an attorney who consults another attorney in the same firm for the purpose of securing legal advice may establish an attorney-client relationship. Although some courts have applied a “fiduciary” or “current client” exception to the privilege, the court noted that the Supreme Court of Massachusetts, Georgia, and Oregon have recently rejected application of these exceptions. The court held that the attorney-client privilege is a legislative creation and it was not at liberty to adopt these exceptions. The firm was required to demonstrate that there was a “genuine” intra-firm attorney-client relationship with regard to communications concerning a potential malpractice claim, by meeting four prerequisites: (1) the law firm must designate an attorney to act as in-house counsel; (2) in-house counsel must not have performed any work for the client who has threatened litigation; (3) the time spent on the in-house counsel communications may not be billed to the client; and (4) the communications must have been made and kept in confidence. The court held that the firm had established each of the prerequisites and denied plaintiff’s motion to compel.
Objectors’ Appeal Bond Reduced: May Only Cover Costs Recoverable Per FRAP 7.
By: Michael T. Brody
In Tennille v. Western Union Co., 774 F.3d 1249 (10th Cir. 2014) (No. 13-1378), the parties settled a class action. Two objectors appealed the order approving the settlement, and the district court directed them to post a bond in excess of $1 million as a condition of pursuing the appeal. The district court determined this amount would provide security for the costs of notifying the class of the appeal and the delay in settlement administration. On review, the Tenth Circuit held that an appeal bond entered pursuant to Federal Rule of Appellate Procedure 7 may only cover appellate costs provided for by rule or statute. The cost of notifying class members of the objectors’ appeal, and the cost of maintaining the settlement pending appeal, were not recoverable. While these costs may be addressed in a supersedeas bond entered to stay execution of a judgment, which was not at issue here, a bond entered under Appellate Rule 7 may not address such issues. The court affirmed the district court’s decision to impose a bond for the costs of printing, copying, and preparing the appellate record. It reduced that bond from $25,000 to $5,000, based on the expected costs of such tasks.
Eighth Circuit Announces Rules Limiting Cy Pres Of Unclaimed Settlement Amounts.
By: Michael T. Brody
In In re BankAmerica Corp. Securities Litigation, 775 F.3d 1060 (8th Cir. 2015) (No. 13-2620), the Eighth Circuit addressed the use of cy pres to allocate undistributed funds from a class action settlement. The parties agreed to, and the court approved, a $490 million settlement. After two distribution efforts, approximately $2.5 million remained undistributed. The parties requested the court to distribute the surplus funds by a cy pres award, and the court dispersed the funds to a local legal services charity. The Eighth Circuit reversed the cy pres distribution, and established five principles to govern cy pres distributions: (1) a cy pres distribution of unclaimed funds is permissible only when it is not feasible to make further distributions to class members, except where the distribution would provide a windfall to class members whose liquidated damages claims have already been 100% satisfied; (2) a cy pres distribution is not supported by a court declaring that all claims have been paid in full; (3) in considering a further distribution, the district court is not bound by language in a settlement agreement authorizing a cy pres distribution; (4) unless the amount of funds to be distributed is de minimus, the district court should make its cy pres proposal publicly available and allow class members to suggest alternatives; and (5) when a cy pres distribution is made, it should be for the next best use for indirect class benefit. In this case, further distributions were feasible, it was speculative to conclude that the claims of class members had been fully satisfied by the settlement, and the legal services charity selected by the court was not the next best recipient of settlement funds in a nationwide class action concerning violations of securities laws.
Supreme Court Holds Evidence Not Required In Petition For Removal.
By: Michael T. Brody
In Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct. 547 (2014) (No. 13-719), the United States Supreme Court addressed the pleading requirements for removal of a class action. Plaintiffs’ state court action did not allege the amount in controversy. Defendant removed the action to federal court, alleging the amount in controversy exceeded the jurisdictional amount. The district court remanded the action to state court, relying on Tenth Circuit decisions requiring a removing party to present evidence supporting the amount in controversy. The Tenth Circuit declined review. The Supreme Court reversed, holding that a defendant need only allege plausibly the amount in controversy, it is not required to submit evidence supporting jurisdiction. As in the case of a plaintiff’s allegation of jurisdiction, the amount alleged in the notice of removal is accepted if made in good faith. If a party opposes an allegation of the amount in controversy alleged by the plaintiff in the complaint or a defendant in a removal petition, the court will consider the evidence submitted by the parties and decide jurisdiction by a preponderance of the evidence. The party asserting jurisdiction need not prove to a legal certainty the amount in controversy.
Third Circuit Clarifies Standards For Challenging Removal.
By: Michael T. Brody
In Judon v. Travelers Property Casualty Co. of America, 773 F.3d 495 (3d Cir. 2014) (No. 14-3406), the defendant removed a state court putative class action to federal court. The district court remanded the case to state court, and defendant appealed. The Third Circuit analyzed the standards applicable to jurisdictional disputes and held that where a challenge to jurisdiction has been raised but no evidence or findings in the trial court addressed the issue, the party alleging jurisdiction, such as with respect to the amount in controversy, must support jurisdiction by a preponderance of the evidence. Where the jurisdictional facts are not contested, and jurisdiction is determined in whole or in part by applicable law, the court must determine whether it is clear to a legal certainty that jurisdiction is improper. The court applied this standard to the determination of the number of class members. The complaint alleged that the class contained hundreds of members. There was no contesting evidence, and the Third Circuit found that it had not been shown to a legal certainty that jurisdiction was lacking.
Delaware Supreme Court Clarifies Revlon Standard, Reverses Chancery Court.
The Chancery Court had granted an injunction against a stockholder vote for a proposed merger between C&J Energy Services and a third party, and ordered the C&J board to shop C&J to other potential suitors. The Chancery Court found that in not shopping itself to other potential suitors, the C&J board violated its duties under Revlon, which requires a board that engages in a “change of control transaction” to “not take actions inconsistent with achieving the highest immediate value reasonably attainable.” The Delaware Supreme Court reversed. C&J Energy Servs., Inc. v. City of Miami Gen. Emps’. & Sanitation Emps’. Ret. Trust, No. 655/657, 2014, (Del. Dec. 19, 2014). The court stated that “[t]here is no single blueprint that a board must follow to fulfill its duties” under Revlon. Rather, Revlon requires an analysis of whether “the directors made a reasonable decision, not a perfect decision.” Thus, Revlon does not necessarily require “an active solicitation” of a company “so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility. . .to accept” that higher-value deal, and thus the Chancery Court erred by holding the defendant directors to “legally prescribed steps that directors must follow to satisfy the Revlon duties.” Such an approach was too rigid and “ignore[d] the Court of Chancery’s own well-reasoned precedent and that of [the Supreme] Court,” which required a more flexible analysis.
Supreme Court: Dismissal Of One Case In MDL Is Final, Appealable Order.
A multidistrict litigation (MDL) was establish to consolidate for pretrial proceedings approximately 60 cases in which plaintiffs alleged that defendant banks conspired to artificially suppress the daily interest rate benchmark LIBOR. In one such case, Gelboim v. Bank of America Corp., 135 S. Ct. 897 (2015) (No. 13-1174), the district court dismissed the complaint in its entirety. Plaintiffs in that case appealed, and the Second Circuit, on its own motion, dismissed the appeal for want of appellate jurisdiction, ruling that because other of the consolidated cases had survived motions to dismiss, the order appealed from did not dispose of all claims in the MDL action. The Supreme Court reversed, holding that cases consolidated for MDL pretrial proceedings ordinarily retain their separate identities and, therefore, an order disposing of one of the discrete cases in its entirety is an appealable final decision under 28 U.S.C. § 1291. The Court, however, limited its holding to cases consolidated for only pretrial proceedings, stating that it expressed no opinion on whether an order dismissing one of multiple cases combined in an all-purpose consolidation qualifies under § 1291 as a final decision appealable as of right.
Supreme Court: Juries Should Decide Trademark Tacking Cases.
Recognizing that trademark users make modifications to their marks over time, courts have held that a party may clothe a new mark with the priority position of an older, legally equivalent mark when the two marks create the same, continuing commercial impression from the perspective of an ordinary purchaser or consumer. This doctrine is called “tacking,” and appellate courts have split as to whether a party’s entitlement to trademark tacking is an issue of fact or law. In Hana Financial, Inc. v. Hana Bank, 135 S. Ct. 907 (2015) (No. 13-1211), the Supreme Court resolved that split, holding that the question of whether tacking is warranted is a fact-intensive one that must be decided by a jury. The Court rejected the argument that leaving tacking determinations to judges would create consistent rules that will guide future tacking disputes and create the predictability required for a functioning trademark system. The Court held that it has long been recognized across a variety of contexts, including in tort cases and contract disputes, that when the relevant question is how an ordinary person would make an assessment, the jury is generally the decision-maker which ought to provide the answer.
Supreme Court: TILA Statute Of Limitations For Rescission Satisfied By Notice.
The Truth in Lending Act (TILA) gives borrowers the right to rescind certain loans for up to three years after the transaction is consummated. In Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015) (No. 13-684), plaintiffs sent defendant lender a notice of their intent to rescind their home mortgage within three years of borrowing the money, but did not actually file suit against defendant until after the three-year period expired. The district court granted judgment on the pleadings in favor of defendant, ruling that TILA requires borrowers to file suit within three years, and the Eighth Circuit affirmed. The Supreme Court reversed. The Court determined that TILA explains in unequivocal terms that a borrower may exercise his right to rescind by “notifying the creditor … of his intention to do so.” The Court concluded that this language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. The statute does not also require the borrow to sue within three years. Because the borrowers in this case provided notice within three years, their rescission was timely.
Chancery Court Outlines Expected Role Of Delaware Counsel.
In James v. National Financial LLC, No. 8931-VCL (Del. Ch. Dec. 5, 2014), the Chancery Court of Delaware granted discovery sanctions against the defendant, and in the process, outlined its view as to the proper role of Delaware counsel. In James, although “Delaware counsel [did] not appear to have participated in the discovery violations,” the Chancery Court imposed sanctions, observing that “Delaware counsel saw itself as a mail drop.” and “[h]ad Delaware counsel been more involved,” the discovery sanctions may have been avoided. The court continued: “The Court of Chancery does not recognize the role of purely ‘local counsel.’’ Thus, even in cases in which an attorney from another state is granted pro hac vice, “Delaware counsel are expected to police the behavior of their out-of-state colleagues and ensure that out-of-state counsel understand the standards expected by Delaware courts.” This includes playing an active role in the discovery process, “including in the collection, review and production of documents” and “at a minimum Delaware counsel should discuss with co-counsel the court’s expectations.”
Statutory Damages/Attorney’s Fees Awards Mandatory For TILA Violations.
In Harris v. Schonbrun, 773 F.3d 1180 (11th Cir. 2014) (No. 13-15505), plaintiff borrower alleged that defendant mortgage lender violated the Truth in Lending Act (“TILA”) by failing to notify her of her right to rescind the loan within three business days. Plaintiff sought to rescind her loan, plus an award of statutory damages, attorney’s fees and costs. The district court ordered rescission of the loan, but denied plaintiff’s request for damages, fees and costs. On appeal, the Eleventh Circuit affirmed the rescission order, but reversed the portion of the ruling denying plaintiff additional relief. The court held that an award of statutory damages, attorney’s fees and costs is mandatory after rescission of a loan transaction, and the trial court’s decision not to award such relief was inconsistent with the text of TILA and was based on an incorrect reading of precedents. The statute plainly states that any lender who fails to comply with TILA “is liable” for an amount equal to the sum of actual damages, statutory damages not less than $400 or greater than $4,000, and the costs of the action, including reasonable attorney’s fees. Thus, the district court must award statutory damages, fees and costs, even if no actual damages resulted or the violation was de minimis.
Supreme Court: No Pay Required For Workers’ Security-Screening Time.
In Integrity Staffing Solutions, Inc. v. Busk, 135 S. Ct. 513 (2014) (No. 13-433), former employees brought an action alleging that their former employer violated the Fair Labor Standards Act (“FLSA”). The employer required its employees, warehouse workers who retrieved inventory and packaged it for shipment, to undergo an anti-theft security screening before leaving the warehouse each day. In reversing a Ninth Circuit decision, the U.S. Supreme Court held that the employees’ time spent waiting to undergo those security screenings is not compensable under the FLSA. The Act, the Department of Labor’s regulations, and the Court’s prior decisions all provide that employers need not compensate employees for activities which are preliminary or postliminary to their principal activities. The Court thus reasoned that the key issue was whether the employee’s screenings were an “integral and indispensable” part of the principal activities the employees were employed to perform. The Court found that they were not, because the screenings were not “an intrinsic element” of retrieving products from the warehouse or packing them for shipment; the employer could have eliminated the screenings without impairing the employees’ ability to complete their work. Therefore, the screenings were merely postliminary activities for which no compensation was required under the FLSA.
2d Cir. Finds 4-to-1 Ratio Of Punitive To Compensatory Damages Excessive.
In Turley v. ISG Lackawanna, Inc., 774 F.3d 140 (2d Cir. 2014) (No. 13-561), plaintiff employee brought a Title VII action against his employer, after he endured an extraordinary and steadily intensifying drumbeat of racial insults, intimidation and degradation over a period of more than three years, which was condoned and participated in by his supervisors. The jury awarded plaintiff $1.32 million in compensatory damages and $24 million in punitive damages. The district court subsequently granted a motion for remittitur, reducing the punitive damages award to $5 million, which was accepted by the plaintiff. On appeal, the Second Circuit held that the reduced punitive damages award was still excessive, and remanded for further remittitur proceedings. The court ruled that while the record was sufficient to support a finding that the conduct was egregious in the extreme, the 4-to-1 ratio of punitive to compensatory damages was excessive given that the compensatory damages were for emotional damages, which are inherently intangible, immeasurable and therefore imprecise. The court reasoned that its commitment to reducing arbitrariness in damages awards, reining in excessiveness, and ensuring some degree of proportionality weighed in favor of enforcing a tighter relationship between the harm suffered and the punishment imposed. Thus, the court concluded that a 2-to-1 ratio of punitive damages constitutes the maximum allowable in these circumstances.
Court Finds Preservation Burdensome Post-judgment; Permits Disposal Of Computers.
By: Daniel J. Weiss
In Lord Abbett Municipal Income Fund, Inc. v. Asami, No. C-12-03694 (N.D. Cal. Oct. 29, 2014), the parties were sharing the cost of preserving 159 computers that potentially contained relevant data. After certain defendants were granted summary judgment, they refused to continue to pay their share of the cost to maintain the computers, but refused to consent to the plaintiff’s disposal of the computers because, they contended, the computers might be needed if the summary judgment was reversed on appeal. The court first held that it had jurisdiction to consider the issue notwithstanding that a notice of appeal had been filed because, the court held, the discovery matter was only “collateral” to the judgment. The court then considered whether the plaintiff would be required to preserve the computers under Rule 26(b)(2)’s “proportionality principle.” The court found that the burden of maintaining the computers outweighed any potential benefit the computers might provide because discovery in the case had long been closed, there was no indication the computers contained relevant information, and the plaintiff offered the defendants an opportunity to examine the computers but the defendants had declined to do so.
Sanctions Ordered As Document Collection Procedure No Substitute For Litigation Hold.
By: Daniel J. Weiss
In Fidelity National Title Insurance Co. v. Captiva Lake Investments, LLC, No. 10-cv-1890 (E.D. Mo. Jan. 7, 2015), the defendant moved for sanctions after a court-appointed e-discovery specialist found that the plaintiff failed to institute a litigation hold. The plaintiff argued that a litigation hold was unnecessary because it had implemented a “document collection procedure” by which it retained hard copy and electronic documents related to the each claim. The court found that the procedure did not satisfy the plaintiff’s obligation under the Federal Rules because it did not preserve all relevant evidence, including emails that were older than 180 days. The court held that a party’s “failure to implement a litigation hold establishes the necessary intent to support the imposition of sanctions.” The court further held that the defendant established prejudice because the plaintiff was unable to ascertain the volume or contents of the deleted email. The court held that a permissive adverse inference instruction regarding the missing emails was warranted. The court further noted that, in the Eighth Circuit, a permissive spoliation instruction is permitted without a finding of “bad faith” intent.
Plaintiff To Advance Half Of Defendant’s Costs To Produce Back-Up Tapes With Final Allocation To Be Determined Post-Production.
By: Daniel J. Weiss
In SCR-Tech LLC v. Evonik Energy Services LLC, No. 08 CVS 16632 (N.C. Super. Ct. Dec. 31, 2014), the defendants argued that the plaintiff should bear half of the estimated $140,545 cost of producing backup tapes. The court applied the state law equivalent of Fed. R. Civ. P. 26, which tracks the federal rule. After noting that cost shifting should only be considered when electronic discovery imposes an undue burden on the responding party, the court articulated three factors to determine whether cost shifting is appropriate: (a) whether the discovery sought is cumulative or duplicative; (b) whether the seeking party has had an opportunity to obtain the information by other means; and (c) whether the cost is unduly expensive, considering the amount in controversy, the limitations on the parties’ resources, and the importance of the issues at stake in the litigation. The court found that it would be in a better position to evaluate those factors after defendants’ production. Accordingly, the court held that the plaintiff would be required to advance half of the estimated cost if it wanted the defendants to produce the tapes, but the court would determine the final cost allocation “upon presentation as to the utility of the search measured by the degree of non-duplicative potentially relevant information produced.”
Court Adopts Protocol Limiting E-Discovery Burden.
By: Daniel J. Weiss
In Design Basics, LLC v. Carhart Lumber Co., No. 13-cv-125 (D. Neb. Nov. 24, 2014), the court adopted portions of an e-discovery protocol previously developed by Judge Grimm of the U.S. District Court for the District of Maryland. The protocol is “intended to implement the balancing process required in ESI cases under the federal rules.” The court adopted Judge Grimm’s e-discovery limitation of ten “key custodians” per side, a “relevant period” of no more than five years preceding the lawsuit, and an overall cap of 160 hours of time spent on reviewing documents. In adopting the protocol, the court rejected the plaintiff’s position that the defendant should be required to search “every computer or data storage location owned or used by the defendant,” which the court held was “not consistent with the balancing required under Rule 26(b)(2)(C).”
Court Imposes Own E-Discovery Search Terms Sua Sponte.
By: Daniel J. Weiss
In Armstrong Pump, Inc. v. Hartman, No. 10-cv-446 (W.D.N.Y. Dec. 9, 2014), the court considered discovery disputes in a case that was more than four years old and for which “discovery [was] far from complete.” The court faulted the parties for “piecemeal discovery and excessive delay.” In response, the court announced that it would “fashion a new and simpler approach to discovery,” which consisted of 13 key-word terms that the plaintiff would be required to search for on “all corporate documents, files, communications and recordings.” The plaintiff would be required to “maintain a list of every server, computer, file room, or other place searched, and a list of all positive search results.” “When the search is complete, a representative of [plaintiff] and all of [plaintiff’s] counsel of record will file a sworn statement confirming that [plaintiff] made a good faith effort to identify sources of documents; that a complete search of those sources for each of the above phrases occurred; and that the search results have been furnished to [defendant].” The court required that the plaintiff complete this search within four months “with absolutely no exceptions or extensions.”
Showing Burden Trumps Demand For Production Of Native Format Documents.
By: Daniel J. Weiss
In Peterson v. Matlock, No. 11-2594 (D.N.J. Oct. 29, 2014), the court denied plaintiff’s motion to compel prison officials to produce electronic medical records in native format from a specialized computer system. The court held that, under Rule 34, documents must be produced in native format if so requested unless the producing party can demonstrate “undue hardship or expense.” The defendant established such a hardship by showing that it could not produce records in native format from the records system without “an inordinate drain of time and manpower” because of limitations in the computer system. The court acknowledged that a non-native “PDF record provided may be less convenient for Plaintiff,” but requiring a native production would impose a “substantial hardship and/or expense, which outweighs Plaintiff's interests in receiving the records in their native format.” The court nonetheless ordered the defendant to produce certain “audit trail metadata” that the plaintiff had requested.
Insured’s Request for Independent Counsel Does Not Breach Policy’s Cooperation Clause.
A federal district court in California recently dismissed an insurer’s breach of contract action based on an insured’s request for independent defense counsel. St. Paul Fire & Marine Ins. Co. v. Centex Homes, No. 14-01216 (C.D. Cal. Dec. 19, 2014). Premised upon conflict of interest grounds, the insured raised concerns about the counsel appointed by the insurer to defend the insured in an underlying construction defect action. The insured then requested defense by independent counsel and also expressed is willingness to work out an allocation of defense costs between the insurer and other insurers that may provide coverage. And the insured conceded the insurer could appoint its own co-counsel to participate in the defense of the underlying action, subject to the insured looking to the insurer to pay all expert and vendor bills as well as the fees generated by the insurer’s co-counsel. The insurer then sued for breach of contract, alleging that the insured had breached the general liability insurance policies’ cooperation clause. On the insured’s motion to dismiss, the court determined that the mere request for independent counsel did not constitute a breach of the insured’s duty to cooperate. The court also held that the insured’s reservation of rights to possibly seek reimbursement for the services of the insured’s counsel of choice also was not a breach of the cooperation clause, nor was the insured’s demand that the insurer pay all expert and vendor bills. Nothing in the policies’ cooperation clause suggested that the insured had an obligation to tender a defense to other insurers. Rather, the insurer had a right to seek contribution from other insurers who may have insured the loss at issue. The court did not reach the question of whether a breach of a policy’s cooperation clause gives rise to an independent cause of action for breach of contract under California law rather than merely an affirmative defense to coverage.
Extrinsic Evidence of Written Agreement Used to Grant Additional Insured Status.
By: Jan A. Larson
Reversing an earlier summary judgment ruling, the Arizona Court of Appeals recently ruled in favor of a general contractor’s status as an additional insured entitled to coverage under its subcontractor’s general liability policies. KB Home Tucson, Inc. v. Charter Oak Fire Insurance Company, No. 12-0681 (Ariz. Ct. App. Nov. 25, 2014). KB Home Tucson, Inc. (“KB”) contracted with GRG Construction Co. (“GRG”) to perform construction work at a residential subdivision in Tucson. As part of the contract with KB, GRG was required to “comply with all rules, regulations and requirements of [KB].” Thereafter, KB sent annual letters to GRG detailing KB’s minimum insurance requirements and requesting that KB be named as an additional insured on GRG’s general liability policies. In response, GRG’s brokers issued certificates of insurance to KB. After later being sued by the City of Tucson and various homeowners, who alleged property damage as a result of construction defects, KB tendered the defense of these claims to GRG’s insurers. Both insurers disclaimed coverage, asserting that KB did not qualify as an additional insured in the absence of a written contract requiring that GRG add KB as an additional insured. KB filed suit against both insurers for declaratory relief, breach of contract, and bad faith, and against GRG’s brokers for negligence, negligent misrepresentation, and fraud. After KB reached a settlement with one insurer, the trial court granted summary judgment in favor of the remaining defendants. Reversing judgment as to the remaining insurer, the appellate court held that the language of the relevant insurance policy permitted additional insured status to be conveyed by the existence of either a “written contract or written agreement.” In this case, the written documents prepared by or at the direction of KB and GRG, taken as a whole, establish such an agreement and entitle KB to coverage as an additional insured. In addition, GRG never disputed that it was required to add KB as an additional insured on its general liability policies. As to GRG’s brokers, however, the appellate court affirmed, holding that KB could not maintain its claims of negligence and negligent misrepresentation in the absence of a duty owed to KB as a non-client of the brokers. The court also held that because KB was entitled to coverage as an additional insured, the certificates of insurance had not contained any false statements or misrepresentations in order to support KB’s fraud claim.
Federal Court Extends Final Adjudication Requirement to Exclusion for Matters Uninsurable By Law.
By: Jan A. Larson
A federal district court recently applied a final adjudication requirement to a policy provision excluding coverage for matters uninsurable by law and held that a settlement does not constitute a final adjudication. U.S. Bank National Ass’n and U.S. Bancorp v. Indian Harbor Insurance Co., No. 12-cv-3175 (D. Minn. Dec. 16, 2014). U.S. Bank National Association and U.S. Bancorp (collectively “U.S. Bank”) settled a number of class actions alleging the overcharging of overdraft fees to its customers and sought coverage for the settlement and associated defense costs from its insurers. The insurers denied coverage, arguing that the settlement was restitutionary in nature and therefore did not constitute a “Loss” under the relevant policies, the definition of which excluded: (i) matters uninsurable under the law pursuant to which the policy is construed (the “Uninsurable Provision”); (ii) monies paid as a result of any extension of credit by U.S. Bank (the “Extension of Credit Provision”); and (iii) any profit or remuneration gained by U.S. Bank to which it is not legally entitled as determined by a final adjudication (the “Illegal Profit Provision”). Ruling in favor of the insured, the court held that to interpret the first and third policy provisions consistently, it must read the final adjudication requirement into both. The court further held that a settlement does not constitute a final adjudication where it excludes an admission of liability and fail to establish that the underlying allegations are either true or false. Because no final adjudication had determined U.S. Bank’s settlement to be restitutionary in nature, neither the Uninsurable Provision nor the Illegal Profit Provision applied to exclude coverage. The court likewise refused to apply the remaining Extension of Credit Provision to exclude coverage because the settlement involved only the assessment of overdraft fees and not the provision of overdraft protection. Only the provision of overdraft protection has been held to constitute an extension of credit for purposes of such an exclusion.
Insurer’s Duty to Defend Triggered By District Court’s Broad Interpretation Of “Arising Out Of.”
In a recent decision from the U.S. District Court for the Northern District of Texas, the Court applied a broad interpretation of the phrase “arising out of” in an insurance policy’s insuring agreement—as opposed to an exclusion—to an insured’s benefit in order to trigger the insurer’s duty to defend. Shamoun & Norman, LLP v. Ironshore Indemnity, Inc., No. 14-CV-01340 (N.D. Tex. Oct. 28, 2014). The insured law firm, Shamoun & Norman, LLP, sought coverage for cross-claims filed against it as part of an underlying dispute with a former client over the alleged breach of a performance incentive bonus agreement. The professional liability policy at issue required the insurer, Ironshore Indemnity, Inc., to defend the firm against claims “arising out of the rendering or failure to render Professional Legal Services.” Upon receipt of the claim, Ironshore initially agreed to defend pursuant to a reservation of rights, then later retracted its defense arguing that under Texas law, fee disputes and billing collections do not constitute the rendering of or failure to render professional legal services. On cross-motions for summary judgment, the Court agreed that fee disputes and billing collections have not been held to constitute professional legal services under Texas law, but clarified that the appropriate question is instead whether such acts or omissions “arise out of” professional legal services as required in order to trigger Ironshore’s duty to defend under the relevant policy. The Court noted that Texas law broadly interprets the phrase “arise of out” to require only a causal connection between the act and the alleged injury, through not necessarily direct or proximate causation. Citing the allegations of the underlying complaint, which asserted that the firm had breached its fiduciary duties to its former client, the Court held that “[b]ut for the plaintiff’s attorney-client relationship with [its former client], there would be no claim for breach of fiduciary duty.” “Therefore, the claim has a ‘causal connection or relation’ to the [firm’s] provision of professional legal services” and arises out of those services. As a result, the court concluded that Ironshore had a duty to defend the firm against the cross-claims in the underlying action and breached that duty in refusing to do so.
Extra-Contractual Damages May Be Available Where Insurer Unreasonably Delays In Paying Policy Limits.
By: Jan A. Larson
The U.S. District Court for the Middle District of Louisiana recently ruled that an insurer may be liable for extra-contractual damages where it engages in an unreasonable delay in satisfying an obligation to pay its policy limits. Shaw Group, Inc. v. Zurich American Insurance Co., No. 12-257 (M.D. La. Nov. 20, 2014). The insured, Shaw Group, sought coverage in connection with an underlying action filed in 2009 in which Shaw Group had been sued for property damage that allegedly resulted from defective pipe spools manufactured by Shaw Group. After tendering the claim to its insurer, Zurich American Insurance Co., a period of 14-months expired before Zurich agreed to defend Shaw Group against the underlying action under a full reservation of rights. During that time, Shaw Group retained its own defense counsel and paid the full cost of its defense. The underlying action later settled and Zurich American paid its full policy limits toward that settlement. Shaw Group initiated a coverage action against Zurich American, asserting that Zurich American breached its duty to defend by failing to promptly pay defense costs, among other claims, and seeking extra-contractual damages. On cross-motions for summary judgment, the Court held that genuine issues of material fact remained as to the alleged breach of the duty to defend and precluded summary judgment. As part of its ruling, however, the Court rejected Zurich American’s claim that because it ultimately paid its full policy limits, Shaw Group suffered no damages. “[T]he Court finds Zurich’s argument—that an insurer could fail to defend for fourteen months and then not be liable for any damages because the insurer paid costs later—illogical.” The Court noted that the “time value of money” is compensable and sufficient to constitute damages should Shaw ultimately prove its duty to defend case.
Supreme Court: New Standard Of Review For Patent Claim Construction.
In Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., 135 S. Ct. 831 (2015) (No. 13-854), the Supreme Court addressed the standard of review the Court of Appeals should apply when reviewing patent claim constructions that involve a district court’s resolution of an underlying factual dispute. The Court abrogated prior Federal Circuit precedent and held that in such cases, the appellate court must apply a “clear error,” not a de novo, standard of review to factual determinations. The Court reasoned that the “clear command” of FRCP 52(a)(6) – stating that a court of appeals must not set aside a district court’s factual findings unless they are clearly erroneous – must apply to reviews of a district court’s resolution of subsidiary factual matters made in the course of its construction of a patent claim. The Court concluded that its prior patent rulings, including Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996), did not create or imply any exception to Rule 52(a), and even if exceptions to the rule were permitted, the Court found no convincing ground for creating such an exception here. The Court clarified that the appellate courts can still review a district court’s ultimate claim construction de novo, as that ultimate interpretation is a legal conclusion; but, to overturn a judge’s resolution of an underlying factual dispute, a Court of Appeals must find that the judge, in respect to those factual findings, has made a clear error.
No Medical Device Act Preemption For Inadequate Product Warnings Claims.
By: Barry Levenstam
In McClellan v. I-Flow Corp., 776 F.3d 1035 (9th Cir. 2015) (No. 11-35109), the Ninth Circuit reviewed the decision of a district court to exclude from the jury charge certain state law tort instructions on the ground that state law was preempted by the Medical Device Amendment. Plaintiff sued for personal injury resulting from use of defendant’s continuous infusion pump device, asserting two claims, one for negligence based on inadequate product warnings, and the other for strict liability alleging that the product was unusually dangerous due to inadequate warnings. Defendants argued below that state law jury instructions should not be given to the jury because they were preempted by the federal Food Drug & Cosmetics Act, relying on the Supreme Court preemption decision in Buckman Co. v. Plaintiffs’ Legal Comm., 531 U.S. 341 (2001). The district court agreed, but the Ninth Circuit reversed, distinguishing the Buckman decision as addressing state law “fraud-on-the-FDA” claims. In Buckman, the Supreme Court had held that the state law claims that rested upon allegations of fraud on federal agencies were preempted by federal law. Here, however, the court reasoned, plaintiff’s claims did not rest upon allegations of fraud against federal agencies and, therefore, the state law instructions were not preempted. Consequently, the court concluded that the jury charge was erroneous as a matter of law and remanded the case to the district court for a new trial.
No Preemption For Locomotive’s Alleged Violations Of Federal Standards.
By: Barry Levenstam
In Delaware & Hudson Railway Co. v. Knoedler Manufacturers, Inc., No. 13-3678 (3d Cir. Jan. 9, 2015), the Third Circuit addressed the question of the scope of federal preemption under the Locomotive Inspection Act (“LIA”). The plaintiff railroad, which previously had settled a lawsuit brought against it by employees who had suffered injuries as a result of allegedly defective train seats, sued the companies that had manufactured and repaired the chairs. The defendants moved for and obtained dismissal of this lawsuit based on the preemptive effect of the LIA. The Third Circuit ruled that, while the LIA preempts state law standards being imposed upon locomotives and their component parts, it does not preempt state law actions based on allegations that locomotive components violate federal standards. Consequently, the court reversed the dismissal of the case below and remanded for further proceedings on plaintiff’s claims that defendants had violated federal standards.
Virginia Requires “Sole” Rather Than “Substantial” Cause To Prove Liability.
By: Barry Levenstam
In Wannall v. Honeywell, Inc., 775 F.3d 425 (D.C. Cir. 2014) (No. 13-7185), the District of Columbia Circuit Court of Appeals addressed the dismissal of an asbestos lawsuit based on a change in the Virginia state law standard for proving liability. Initially, plaintiff had defeated defendant’s summary judgment motion at the close of discovery by submitting expert testimony that plaintiff’s exposure to defendant’s asbestos product was “a substantial cause” of his illness. Subsequent to that decision, but before trial, the Supreme Court of Virginia issued a decision rejecting the “substantial cause” standard in favor of a standard requiring plaintiffs to demonstrate that “exposure to the defendant’s product alone must have been sufficient to have caused plaintiff’s harm.” The defendant renewed its summary judgment motion under this new standard; the plaintiff responded by standing on the prior expert submissions and arguing that the new Virginia decision did not make a substantive change in Virginia law. The district court disagreed and held the prior expert submissions were insufficient under the new standard, and the D.C. appellate court affirmed that decision.
Nevada OKs Claim For Medical Monitoring Absent Present Physical Injury.
By: Barry Levenstam
In Sadler v. Pacificare of Nevada, Inc., 340 P.3d 1264 (Nev. 2014) (No. 62111), in a case of first impression in Nevada, the Nevada Supreme Court addressed a lower court decision holding that claims for medical monitoring in a proposed class action could not proceed absent a present physical injury. The underlying suit alleged that the defendant was negligent in failing to oversee the medical providers in its network, leading to an outbreak of Hepatitis C among their patients. The class plaintiffs sought medical monitoring as a remedy, even for individuals who had not yet been diagnosed with Hepatitis C. The trial court held that a present physical injury was required, but the Nevada Supreme Court reversed, holding that the action could be maintained for a medical monitoring remedy so long as some injury, though not necessarily a physical injury, was alleged. The court held that such an injury could include “unwillingly enduring an unsafe injection practice and the resulting increase in risk of contracting a latent disease and need to undergo medical testing that would not otherwise be required.”
Summary Judgment Ends 25 Year Old Unintended Acceleration Lawsuit.
By: Barry Levenstam
In Perona v. Volkswagen of America, Inc., No. 13-0748 (Ill. App. Ct. Dec. 8, 2014), the Illinois Appellate Court affirmed rulings granting summary judgment for defendants and denying summary judgment for plaintiff, thus finally ending a class action based on unintended acceleration allegations against the car manufacturer commenced a quarter century ago. Carefully examining and comparing plaintiffs’ sixth amended complaint and the cross-motions for summary judgment together with plaintiffs’ supporting expert affidavits, the appellate court concluded that plaintiffs were attempting – again – to shift their theory of liability. The appellate court held that plaintiffs could not seek summary judgment based upon a theory of liability not expressed in their most current complaint. Further, the trial court had not abused its discretion by denying plaintiffs leave to file a seventh amended complaint after 25 years of litigation. In addition, the appellate court held that plaintiffs’ expert’s affidavit was not supported by facts admissible in evidence and thus, the trial court had properly had stricken that affidavit. The appellate court also held that the trial court’s grant of summary judgment for defendants was proper where no evidence in the record raised a question of liability based upon the theories advanced in the sixth amended complaint.
District Court May Decide Rule 11 Motion Re Statements In Remand Motion.
By: Barry Levenstam
In Barlow v. Colgate Palmolive Co., 772 F.3d 1001 (4th Cir. 2014) (Nos. 13-1839, 13-1840), the Fourth Circuit, sitting en banc, reversed a panel decision which had affirmed two district courts’ decisions denying Rule 11 sanctions after remand of asbestos cases to state court. Two plaintiffs originally filed actions in state court against the defendant, both alleging liability based on asbestos exposure from the defendant’s facial makeup product. Defendant removed both actions to federal court. Plaintiffs moved to remand, telling the federal courts that the plaintiffs in the two cases had asbestos claims to bring against non-diverse defendants regarding other asbestos-containing products, and the district courts remanded the cases. In state court, the plaintiffs moved to consolidate their cases with two other cases against different, non-diverse defendants concerning different asbestos-containing products. Defendant opposed consolidation, arguing that its product was too different from the non-diverse defendants’ products and consolidation might cause unfair confusion. In reply, the plaintiff’s asserted that there was “absolutely no evidence to indicate or even suggest that the plaintiffs were exposed to the asbestos in any form other than [the makeup product]” of defendant. Because this statement directly contradicted the assertions plaintiffs made in district court to obtain the remand orders, defendant filed motions in the federal district courts for Rule 11 sanctions, including orders vacating the remands. Although the district courts denied these requests for sanctions, and the panel that initially heard the consolidated appeals affirmed, the en banc court reversed. The en banc court concluded that the district courts’ denials were based on a perceived lack of jurisdiction; in fact, the district courts had jurisdiction over the collateral matter of Rule 11 sanctions. Further, an order vacating the prior remand orders based on attorney misconduct did not constitute review of the remand orders on the merits and, consequently, did not violate 28 U.S.C. §1447(d).
SOX Claim Dismissed For Failing To Name Individual Defendants In OSHA Complaint.
Because a whistleblower failed to exhaust her administrative remedies, a federal district court dismissed her Sarbanes-Oxley Act claim. Newman v. Metro. Life Ins. Co., No. 12-CV-10078 (D. Mass. Jan. 21, 2015). Prior to initiating a federal lawsuit under SOX, a whistleblower must file a complaint with OSHA and afford OSHA the opportunity to resolve the allegations administratively. The whistleblower omitted from her OSHA complaint the names of all but one of the individual defendants named in her SOX action. While district courts disagree as to whether a whistleblower must name each defendant as a respondent in the OSHA complaint or whether merely identifying each defendant as an actor within the body of the complaint is sufficient, here the whistleblower failed to identify all but one of the defendants at all. As a result, she failed to exhaust her administrative remedies against all but one of the defendants.
Whistleblower Argues Fraud Convictions Prove False Claims Act Violations.
A whistleblower has moved for partial summary judgment on two False Claims Act claims, arguing that defendants’ related convictions for conspiracy to commit healthcare fraud prohibit them from denying the essential elements of an FCA violation. Relator’s Motion for Partial Summary Judgment, United States ex rel. Le v. Thaw, No. 09-CV-02482 (N.D. Tex. Jan. 22, 2015), ECF No. 41. The whistleblower alleged that defendants defrauded Medicare through double-billing for therapy sessions and billing treatments using the provider number of a physician who did not conduct the treatments. The whistleblower argues that as a result of her lawsuit, the federal government initiated a criminal investigation of defendants related to the claims she made, and both defendants pleaded guilty; each specifically admitted to double-billing and billing treatments using an improper provider number. Thus, the whistleblower argues that defendants cannot now deny those allegations.
In SDNY, Whistleblower Must Allege Communication Of Complaint To SEC.
In Berman v. Neo@Ogilvy LLC., No. 14-CV-00523 (S.D.N.Y. Dec. 5, 2014), the former Finance Director of a subsidiary of a publicly-traded foreign corporation alleged that his termination violated the whistleblower retaliation provision of the Dodd-Frank Act, 15 U.S.C. §78u-6(h)(1)(A). He asserted that he was terminated for complaining internally about several improper accounting practices but did not allege that he had communicated his concerns to the SEC. The court found that omission to be fatal, disagreeing with a number of recent district court opinions but agreeing with the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013). The Act defines a “whistleblower” as “any individual who provides…information relating to a violation of the securities laws to the Commission in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. §78u-6(a). The plaintiff argued that another provision of the Act provides that no employer may retaliate against a whistleblower “because of any lawful act done by the whistleblower…in making disclosures that are required or protected under the Sarbanes Oxley Act of 2002….” As that clause includes disclosures to people with supervisory authority within the organization, plaintiff argued that it creates an ambiguity on the issue of to whom the disclosure must be made, and the court must therefore defer to the interpretation provided by the SEC, which in a 2011 regulation interpreted the term “whistleblower” to include people who reported only internally. The court rejected this argument, finding that the Act’s plain language in the definition of “whistleblower” protects only plaintiffs who have provided information to the SEC.
Does Patriot Act Violation Or Money Laundering State SOX Whistleblower Claim?
A trial court granted JP Morgan summary judgment on Plaintiff’s Sarbanes-Oxley Act (SOX) complaint because she failed to show her complaint “definitively and specifically” related to one of the six categories of misconduct covered by SOX. The Second Circuit reversed, rejecting the “definitively and specifically” standard as too strict and held that a plaintiff need only show she “reasonably believed” the reported conduct amounted to a violation enumerated under SOX. Sharkey v. J.P. Morgan Chase & Co.,580 F. App’x 28 (2d Cir. 2014) (No. 13-4741). Following remand, JP Morgan filed a renewed motion for summary judgment, arguing that regardless of which standard applies, Sharkey’s claim fails under SOX. Defs.’ Mem. of Law in Supp. of Renewed Mot. for Summ. J., Sharkey v. J.P. Morgan Chase & Co., No. 10-CV-03824 (S.D.N.Y. Dec. 22, 2014), ECF No. 90. JP Morgan argues that Sharkey could not have reasonably believed the reported conduct, which related to the Patriot Act and an anti-money laundering statute, violated a statute enumerated under SOX because neither statute is explicitly enumerated under SOX.
Russian Indicted For Allegedly Funneling Bribes To Multilateral Development Bank.
By: Jessie K. Liu
A Russian national living in the United States was indicted for Foreign Corrupt Practice Act, Travel Act, and money laundering offenses in connection with bribes he allegedly paid through his consulting firms to an official of the European Bank for Reconstruction and Development (“EBRD”), a multilateral development bank owned by more than 60 sovereign nations, headquartered in London. See Indictment, United States v. Harder, No. 15-cr-00001 (E.D. Pa. Jan. 6, 2015), ECF No. 1. According to the indictment, the Russian was the owner of two Pennsylvania-based consulting firms that purportedly advised companies seeking financing from multilateral development banks. Between 2007 and 2009, these firms were paid approximately $8 million in “success fees” from Russian companies seeking financing for gas development projects, and the Russian allegedly directed $3.5 million to bank accounts owned by a sister of an EBRD official to induce the official to favor the companies’ financing applications and to direct business to these firms. Each of the two Russian companies won EBRD financing packages consisting of an $85 million investment and a €90 loan, and a $40 million investment and a $60 million convertible loan, respectively. This appears to be the same case reported in In re Grand Jury Subpoena, No. 13-1237 (3d Cir. Feb. 12, 2014), in which the Third Circuit ruled that the crime-fraud exception applied to an attorney’s FCPA-related advice to an unnamed “consulting firm headquartered in Pennsylvania” and its “President and Managing Director” under investigation for their “business transactions with a financial institution…headquartered in the United Kingdom and owned by a number of foreign countries.”
SEC Penalties Even Though “Bribe” Not Paid And Firm Lost Bid For One Affected Project.
By: Jessie K. Liu
To resolve FCPA charges, a Florida-based engineering and construction firm, then known as The PBSJ Corporation (“PBSJ”), entered into a two-year deferred prosecution agreement with the SEC in which PBSJ agreed to pay $3.4 million in disgorgement, interest, and penalties. See Deferred Prosecution Agreementbetween SEC and PBSJ Corporation (Nov. 21, 2014). A former officer of PBSJ settled related charges on a neither-admit-nor-deny basis and agreed to pay a $50,000 civil money penalty. See Order Instituting Cease-and-Desist Proceedings, Hatoum, Exchange Act Release No. 74112 (Jan. 22, 2015). According to the SEC, the former officer authorized approximately $1.4 million in bribes, disguised as “consulting fees,” to a company owned by an official of Qatari Diar, a real estate company established by the Qatari sovereign wealth fund, to induce the official to provide confidential bid information that enabled a PBSJ subsidiary to bid for a hotel development project in Morocco and a light rail project in Qatar. The former officer also allegedly offered employment to another foreign official in exchange for assistance after PBSJ lost the bid for the hotel project. No payments actually were made before the scheme was discovered and PBSJ voluntarily disclosed it to U.S. authorities, but PBSJ earned approximately $2.9 million in profits because it was allowed to continue to work on the light rail project until a replacement could be found.
No Expectation Of Privacy In Data Searched By Foreign Government.
The Eleventh Circuit has held that a defendant is not entitled to the exclusion of evidence that was seized and searched by foreign government officials before being reviewed by U.S. prosecutors and introduced in a U.S. proceeding. In United States v. Odoni, No. 13-13528 (11th Cir. Jan. 13, 2015), the defendant was convicted of participating in an international investment fraud scheme. The scheme was the subject of an investigation by the United Kingdom’s Serious Fraud Office (SFO), which found the defendant’s name while reviewing documents found in Barcelona by a Spanish task force. The defendant was then arrested at Gatwick Airport in England. Upon his arrest, the police seized a laptop computer, a thumb drive, and other materials. Data recovered from these items was reviewed by the SFO and was also provided to federal agents in the U.S. At trial, the defendant moved to suppress the data. He did not challenge the seizure of his belongings by British authorities, as the Fourth Amendment exclusionary rule does not apply to searches and seizure conducted by foreign officials on foreign soil, but he challenged the search of his data by U.S. officials. Citing United States v. Jacobsen, 466 U.S. 109 (1984), the court noted that an individual does not have a reasonable expectation of privacy in an object to the extent that the object has already been searched by a private party. The Eleventh Circuit found that the same principle applies to searches initially conducted by foreign government officials; “in both cases, an entity other than a U.S. state or federal agent or official has already examined the object and its contents and therefore eliminated the individual’s reasonable expectation of privacy in the contents.” Accordingly, the court affirmed the denial of the defendant’s motion to suppress.
Record Penalty In Settlement With Alstom/Subs For Wide-Ranging FCPA Charges.
By: Jessie K. Liu
French power and transportation company Alstom S.A. (Alstom) and three subsidiaries agreed to pay a $772 million criminal penalty to resolve wide-ranging FCPA charges. Alstom pleaded guilty to violations of the FCPA’s books-and-records and internal controls provisions, and a Swiss subsidiary, Alstom Network Schweiz AG (Alstom Prom), pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA violations. See Plea Agreement, United States v. Alstom S.A., No. 14-cr-246 (D. Conn. Dec. 22, 2014), ECF No. 5, Plea Agreement, United States v. Alstom Network Schweiz AG, No. 14-cr-245 (D. Conn. Dec. 22, 2014), ECF No. 5. In addition, two U.S.-based Alstom subsidiaries, Alstom Power Inc. (Alstom Power) and Alstom Grid Inc. (Alstom Grid), entered into three-year deferred prosecution agreements. See Deferred Prosecution Agreement, United States v. Alstom Power, Inc., No. 14-cr-248 (D. Conn. Dec. 22, 2014), ECF No. 4, Deferred Prosecution Agreement, United States v. Alstom Grid, Inc., No. 14-cr-247 (D. Conn. Dec. 22, 2014), ECF No. 4. The Alstom entities admitted that they bribed government officials and falsified books and records in connection with projects for state-owned entities around the world, including in Indonesia, Egypt, Saudi Arabia, the Bahamas and Taiwan. They were assessed the largest criminal penalty ever in an FCPA case, substantially larger than the $450 million in criminal fines in the Siemens matter in 2008 (Siemens also paid $350 million in disgorgement in a related SEC action, so that, overall, it continues to be the costliest FCPA resolution to date.) A dual U.S. and Egyptian citizen, Asem M. Elgawhary, also pleaded guilty to accepting kickbacks in exchange for steering contracts with the Egyptian state-owned power company to Alstom and others. Docket Sheet, United States v. Elgawhary, No. 8:14-cr-68 (D. Md.).
Avon: Deferred Prosecution Agreement, Outside Monitor, Penalty And Disgorgement.
By: Jessie K. Liu
Avon Products, Inc. (Avon) and its Chinese subsidiary, Avon Products (China) Co., Ltd. (Avon China), resolved an FCPA inquiry that had been ongoing since 2008. Avon entered into a three-year-and-seven-day deferred prosecution agreement, pursuant to which it agreed to engage an outside monitor for at least 18 months, and also agreed to pay a criminal penalty of $67.65 million, which will be satisfied by Avon China’s payment of its penalty in the same amount. See Deferred Prosecution Agreement between U.S. Dep’t of Justice and Avon Products, Inc., re: United States v. Avon Products, Inc. (Dec. 15, 2014). Avon also settled a related SEC enforcement action and agreed to pay more than $67.36 million in disgorgement and prejudgment interest. See Complaint, SEC v. Avon Products, Inc., No. 14-cv-09956 (S.D.N.Y. Dec. 17, 2014), ECF No. 1. Avon China pleaded guilty to one count of conspiracy to violate the books and records provision of the FCPA and to pay a criminal penalty of $67.65 million. See Plea Agreement between U.S. Dep’t of Justice and Avon Products (China) Co. Ltd., re: United States v. Avon Products (China) Co. (Dec. 15, 2014). Together, Avon and Avon China will pay $135 million to settle these matters. As the agreement states, Avon entities acknowledged that between at least 2004 through the third quarter of 2008, Avon China gave cash and other things of value, including meals, gifts, travel, and entertainment, to Chinese government officials, including officials responsible for awarding a test license, and subsequently a direct sales business license, that would allow Avon to conduct door-to-door sales in China. The agreement also states that Avon China failed to record these expenses accurately and completely in its books and records, which were consolidated into Avon’s books and records.
FCPA Charges Settled Without Admission; Receives Credit For Real-Time Cooperation.
By: Jessie K. Liu
Bruker Corporation (Bruker), a Massachusetts-based life sciences company, settled FCPA books-and-records charges with the SEC on a neither admit nor deny basis. See Order Instituting Cease-and-Desist Proceedings, Bruker Corp., Exchange Act Release No. 73835 (Dec. 15, 2014). According to the SEC’s allegations, from 2005 through 2011, Bruker’s Chinese operations paid a series of bribes to officials of a Chinese state-owned corporation. Bruker’s alleged improper payments fell into two categories: (1) a series of non-business-related travel and side trips during business-related travel provided to Chinese officials at state-owned enterprises; and (2) a series of “collaboration agreements” with Chinese officials at state-owned enterprises that did not specify what work the officials were to perform. In both instances, the Chinese officials were in the position to approve, and did approve, contracts between the Chinese state-owned entities and Bruker’s China operations. The SEC stated that Bruker received credit for its “extensive, thorough, and real-time cooperation,” including promptly self-reporting the potential misconduct, hiring independent counsel to conduct an internal investigation, implementing new remedial measures, providing real time reports of its investigative findings, sharing its witness interview summaries as well as its analysis of important documents, and expanding its investigation based on the SEC’s request.
Another MRO Company Resolves Charges With Deferred Prosecution Agreement/Fine.
By: Jessie K. Liu
Dallas Airmotive, Inc. (Dallas Airmotive), a Texas-based provider of aircraft engine maintenance, repair, and overhaul (MRO) services, entered into a deferred prosecution agreement with respect to one count each of conspiracy to violate the FCPA and a substantive violation of the FCPA’s anti-bribery provisions, and agreed to pay a $14 million criminal penalty. See Deferred Prosecution Agreement, United States v. Dallas Airmotive, Inc., No. 14-CR-483 (N.D. Tex. Dec. 10, 2014) (not filed with court). According to the statement of facts, from 2008 to 2012, Dallas Airmotive funneled payments to foreign officials in Argentina, Brazil, and Peru who could influence the award of MRO business through third-party agents and front companies that were secretly associated with the officials. Dallas Airmotive also paid for a vacation for a Brazilian Air Force official and his wife. Dallas Airmotive is the third aircraft MRO company to resolve FCPA charges in the past three years. In 2012, BizJet International Sales and Support, Inc., paid a $11.8 million criminal fine, and its parent company, Lufthansa Technik AG, entered into a three-year deferred prosecution agreement with DOJ. Several former BizJet employees also were charged with or pleaded guilty to FCPA violations. Also in 2012, Nordam Group Inc. paid a $2 million criminal fine to resolve allegations that it bribed Chinese officials in exchange for government MRO business.
Former Direct Access Partners Executives Plead Guilty.
By: Jessie K. Liu
The former CEO of U.S. broker-dealer Direct Access Partners (DAP), Benito Chinea, and a former DAP managing director, Joseph Demeneses, each pleaded guilty one count of conspiracy to violate the FCPA and the Travel Act in connection with a scheme to bribe an official at a Venezuelan development bank, Banco de Desarollo Económico y Social de Venezuela (BANDES), in exchange for the official’s directing BANDES’ trading business to DAP. Sentencing for both Chinea and Demeneses currently is set for March 27, 2015. Docket Sheet, United States v. Chinea, No. 14-cr-240 (S.D.N.Y. filed on Apr. 10, 2014) (noting change of plea and sentencing date). Three other DAP employees and the BANDES official pleaded guilty last year for their participation in the same scheme. The SEC also has brought related civil charges against a number of former DAP executives. DAP itself has not been charged either civilly or criminally and has filed for bankruptcy.
CMS Rejects Plan To Increase Whistleblower Awards From $1,000 To $10 Million.
The Centers for Medicare and Medicaid Services (“CMS”), in a final rule published December 5, 2014, has elected not to proceed with a proposal to increase its whistleblower reward incentive from $1,000 to $10 million. Medicare Program; Requirements for the Medicare Incentive Reward Program and Provider Enrollment, 79 Fed. Reg. 72,500 (Dec. 5, 2014) (to be codified at 42 C.F.R. pt. 405) (effective Feb. 3, 2015). The proposal was inspired by the Internal Revenue Service’s success with its whistleblower program. However, the agency determined that increasing the incentives in the health care context could create problems for providers trying to deal with baseless allegations. The agency noted that the False Claims Act already provides a substantial financial incentive for whistleblowers who are willing to proceed with lawsuits, and creating a significant incentive for whistleblowers who simply report fraud to the agency could encourage whistleblowers to bring claims that are unwarranted and burdensome. It also expressed concern that a plan to limit eligibility to the first person to report a fraud would encourage a “shoot first, ask questions later” mentality.