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Jenner & Block is excited to introduce “The Spotlight,” an electronic monthly newsletter from the Litigation Department Chair, Craig C. Martin, designed to highlight recent cases and legislative developments from across the United States. Additionally, The Spotlight recaps the high impact Litigation Department news, upcoming events and publications of interest.
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Court Rejects First Amendment Challenge to Arbitration Clause.
By: Howard S. Suskin
A district court rejected a claim by a putative class of wireless users, who argued that the First Amendment bars enforcement of their arbitration clause with their wireless provider. Roberts v. AT&T Mobility LLC, No. 15-cv-03418-EMC (N.D. Cal. Feb. 29, 2016). Plaintiffs did not dispute that their wireless service contracts contained an arbitration provision, but argued that the provision was unconstitutional on the theory that if the court were to compel arbitration, that would be state action violating their First Amendment rights to petition a court for redress of grievances. The court found no merit to plaintiffs’ assertion that the mere fact of judicial enforcement automatically establishes state action. The court noted that, in many private contracts, there are provisions that arguably affect access to the courts, such as choice of venue, choice of law, statutes of limitations, and limitations on damages provisions; although these provisions may be subject to restrictions imposed by statutory and/or common law, courts have not held that judicial enforcement of these provisions, particularly as found in contracts between private parties, amounts to state action or raises constitutional claims.
Federal Circuit Recognizes Patent-Agent Privilege.
By: David M. Greenwald
In In re Queen’s University at Kingston, No. 2015-145 (Fed. Cir. Mar. 7, 2016), the Federal Circuit recognized the patent-agent privilege. The appellate court noted that this was a matter of first impression for the Federal Circuit and the issue had split the district courts that had addressed it. The appellate court explained that the “unique roles of patent agents, the congressional recognition of their authority to act, the Supreme Court’s characterization of their activities as the practice of law, and the current realities of patent litigation counsel in favor of recognizing an independent patent-agent privilege.” Where a client chooses a patent agent to obtain legal advice on patentability and legal services in preparing a patent application, the client has a reasonable expectation that its communications will be kept privileged. Because patent agents are not attorneys, and are not authorized by the bar of any state to practice law, the patent-agent privilege applies only to communications that are within the scope of activities authorized by Congress. Communications that are not reasonably necessary and incident to the prosecution of a patent before the Patent Office fall outside the scope of the patent-agent privilege.
Untimely Proof of Privilege Too Late to Support Privilege Assertions.
By: David M. Greenwald
In Rowe v. Liberty Mutual Group, Inc., No. 15-1536 (1st Cir. Feb. 12, 2016), the First Circuit affirmed the trial court’s ruling that defendant’s privilege assertions were not sustained where defendant failed to provide detailed support for its privilege assertions until its reply brief. In this matter, the parties had entered into a protective order that allowed a party to designate as “confidential” documents that were protected by the attorney-client privilege or the work product doctrine, and for the opposing party to challenge such designations at any time. Defendant had designated as confidential various documents to which plaintiff, as an employee of defendant, had already been privy. Following defendant’s successful summary judgment motion, plaintiff objected to defendant’s designations of documents, including excerpts, referenced by either party in any pleading filed in the litigation, which comprised more than 2000 pages. The district court directed defendant to file a motion (1) listing the documents over which it wished to preserve confidentiality designations; (2) attaching each document, under seal; and (3) explaining the basis of each designation, with reference to additional evidentiary materials or legal authority, if necessary. Defendant filed “what essentially amounted to a bare bones privilege log, with a memorandum discussing various legal principles pertinent to general categories of confidentiality claims,” devoid of information such as which authors or recipients were lawyers, who was a proper client representative, and why the each communication was properly within the scope of privilege. Although defendant provided more detailed information in its reply memorandum, the district court held that defendant had waited too long to provide that information and could not rely on details provided for the first time in the reply. The appellate court affirmed, holding that the district court had not abused its discretion. The appellate court noted that the district court had spelled out in advance what defendant needed to establish in order to prevail on its motion, and defendant could not complain where it did not present sufficient evidence to carry its burden.
Former GC Must Sit for Deposition and Assert Privilege on Question-by-Question Basis.
By: David M. Greenwald
In Armada (Singapore) Pte. Ltd. v. Amcol International Corp., No. 13 C 3455 (N.D. Ill. Feb. 16, 2016), the district court held that there is no general prohibition against deposing a party’s former lawyer, and that defendant’s former General Counsel, Ashley, would have to sit for a deposition and assert privilege on a question by question basis. In this case, defendant moved to quash plaintiff’s subpoena of Ashley on the grounds that it is generally improper to depose counsel where the same information is available from other sources. The court observed that lawyers “are not automatically exempt from deposition,” and like other citizens are obligated to give evidence. The court found that defendant’s reliance on the Shelton doctrine was misplaced, because that doctrine, even if recognized by the court, applied only where a party attempted to depose opposing litigation counsel, and Ashley was not opposing litigation counsel. The court concluded that rather than foreclose examination of counsel, the more appropriate method is to allow the deposition to be taken and permit the attorney to claim privilege in response to particular questions, if necessary. This approach enables a district court to identify specific challenged questions, as opposed to merely kinds of questions, and it creates a record more suitable for the court’s legal analysis of issues identified by the parties in their briefs and at oral argument.
Distributing Communications to Insurers Through London Brokers Waived Privilege.
By: David M. Greenwald
In Certain Underwriters at Lloyd’s v. National Railroad Passenger Corp., No. 14-cv-4717 (E.D.N.Y. Feb. 19, 2016), the magistrate judge held that disclosure of privileged communications to London brokers for the purpose of distributing information among participating insurers in the London Market waived otherwise applicable privileges. In this declaratory judgment action brought by London Insurance Market insurers against Amtrak relating to environmental claims on more than three decades of liability policies, Amtrak sought to compel insurers to produce communications from insurers’ counsel that had been disclosed to third-party London brokers. Insurers argued that the unique structure and long-established custom and practice in the London Market should not be deemed to waive privilege. Insurance in the London Market is placed through a lead underwriter, who establishes the terms of the coverage, and other insurers then “subscribe” to a portion of the risk. When a claim arises, the insurers’ typically are jointly represented by the same counsel. Counsel communicates with the lead underwriter, who then relies on the broker to make the attorney reports available to all subscribing insurers. The court noted that in the 1980s and 1990s, the London Market retained U.S. law firms to advise insurers on environmental, asbestos and health hazard claims. The U.S. lawyers would send attorney reports to a servicing company for the London Market, which would then forward the attorney reports to the London brokers. The brokers put the reports in a claim file and walked them around the market to each of the individual insurers, who would review them, if they wished to. The file was then returned to the broker. Amtrak argued that disclosing the attorney reports to non-attorney third parties waived the privilege. The insurers responded that using brokers was “standard” and “necessary” in the London Market, and was understood not to waive privilege. The court rejected the insurers’ position and held that the disclosures waived privilege. The court explained that, although there are situations in which disclosure to agents of counsel or the client does not waive privilege, that exception is limited to situations in which the agent’s participation “improves the comprehension of the communications between attorney and client,” such as a third-party accountant or foreign-language translator hired to assist the lawyer provide legal advice. The court found that the brokers did not play an analogous role, but instead acted as nothing more than an intermediary or clearing house for the insurers. The court rejected insurers’ assertion that the brokers were “necessary,” and found that there was nothing in the record to suggest that using the brokers was the only way for counsel to communicate with the insurers. In addition, there was no evidence that the attorneys had retained the brokers, or that there was an agency relationship with the insurers. The court found that the lack of evidence was particularly troubling “given the dual agency of the London brokers, who represented Amtrak during the negotiation over and purchase of the Policies.” The court concluded that the insurers failed to establish that the attorney-client communications distributed through the brokers were intended to be, and were in fact, kept confidential.
Granting Quick Peek Without a Non-Waiver Agreement Resulted in Waiver.
By: David M. Greenwald
In Montanans for Community Development v. Motl, No. CV 14-55-H-DLC (D. Mont. Mar. 10, 2016), the district court held that defendant’s disclosure of documents to plaintiff, MCD, for a preliminary review waived otherwise applicable privileges. The case involved a constitutional challenge to Montana’s election disclosure laws and the manner in which they have been enforced. MCD sought production of “watch files,” “phone logs,” and “investigative reports” prepared by employees of the Commissioner of Political Practices (“COPP”) in response to complaints alleging violations of Montana’s disclosure laws. In response to the document requests, COPP objected to producing the documents on attorney-client privilege and work product grounds. Without waiving its objections, COPP further stated that it would allow counsel for MCD to review the materials for a “modified in camera inspection,” during which MCD could inspect and identify what it wanted copied, and COPP would thereafter provide copies after redacting information that it deemed confidential, personal, or protected by the attorney-client privilege or the work product doctrine. Counsel for MCD made four trips to inspect the documents. During the inspections, although counsel was not allowed to take notes, counsel was never required to sign a non-disclosure or confidentiality agreement. When COPP produced the documents in redacted form, MCD moved to compel production in unredacted form, arguing that COPP had waived any privilege by disclosing the documents to MCD’s counsel. COPP responded that because it had made its objections clear in its written responses to discovery requests and at the time of the inspections, and MCD had not objected, MCD had entered into an informal confidentiality and privilege agreement. The court disagreed and held that, although COPP did not intend to waive privilege by allowing MCD to review the documents, the act of allowing the inspections to take place resulted in waiver by voluntary disclosure.
Communications with Litigation Funders Are Protected Work Product.
By: David M. Greenwald
In United States ex rel. Fisher v. Ocwen Loan Servicing, LLC, No. 12-CV-543 (E.D. Tex. Mar. 15, 2016), the district court held that communications between qui tam Relators and funding investors were protected by the work product doctrine. In this action brought under the Truth in Lending Act, defendant moved to compel the Relators to identify the names of any actual or potential litigation funders, to produce documents relating to the Relators’ litigation-investing efforts, to provide a privilege log for all documents as to which a claim of privilege was asserted, and to provide all withheld or redacted documents to the court for in camera review. The court rejected the request for in camera review, finding that requiring the court to review potentially hundreds of communications “would constitute a great and unnecessary expenditure of judicial resources.” Instead the court ordered the Relators to provide a detailed privilege log. The court further ordered the Relators to provide the names of any litigation funders. However, the court denied defendant’s motion to compel production of communications between the Relators and litigation funders, finding that the litigation funding information was protected by the work product doctrine. The information exchanged between the Relators and the funders was used to possibly aid in future or ongoing litigation, and as such, the documents were prepared in the anticipation of litigation and constituted work product. Additionally, the court found that disclosure to the funders did not waive the protection because the funders “have an inherent interest in maintaining the confidentiality of potential clients’ information, therefore, Relators had an expectation that the information disclosed to the litigation funders would be treated as confidential.” In addition, no information was disclosed to the funders prior to the funders entering into non-disclosure agreements. Under these circumstances, disclosure to the funders did not substantially increase the likelihood that an adversary would come into possession of the materials.
New York State Bar Association Ethics Opinion Finds Privilege Survives Death of Client.
By: David M. Greenwald
The New York State Bar Association Committee on Professional Ethics recently issued Ethics Opinion 1084. NYSBA Comm. on Prof’l Ethics, Op. 1084 (2016). The opinion states that where a defense attorney obtained information from a client that appears to exonerate a co-defendant, that information continues to be protected as confidential after the client’s death. However, authorization to disclose confidential information may have been expressed by the client or may be implied when the disclosure is consistent with the client’s best interests and is reasonable under the circumstances.
U.S. Supreme Court Upholds Certification Based Upon Representative Proof.
By: Michael T. Brody
In Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016) (No. 14-1146), the U.S. Supreme Court upheld a class verdict despite the claim that certification was improper. Tyson argued that the district court should not have certified a class because members of the putative class incurred different damages and some might not have been damaged at all. In Tyson, employees alleged they should have received overtime pay for the time they spent “donning and doffing” their protective gear. The district court ruled for plaintiffs, and calculated a remedy based on an analysis of the time spent by sampled employees. The employer asserted that the amount of time actually spent donning and doffing varied among the class members, and thus “person-specific inquiries into individual work time” predominated over common questions. The Supreme Court rejected that argument and affirmed, recognizing that a representative sample may be the only practicable way to prove such a case. The Court acknowledged that although it would be improper to rely on a representative sample in a class case if such a sample could not be used to prove an individual case; in such an instance, the class action device would violate the Rules Enabling Act’s instruction that the use of a class device cannot abridge “any substantive right.” The Supreme Court held, however, that it was permissible to prove a case based upon representative employees, particularly where the employer violate its duty to keep records and the employees had no other way to establish their claims. The Supreme Court clarified that it had not held in Wal-Mart Stores v. Dukes, 564 U.S. 338 (2011), that a sample is impermissible to establish classwide liability. Instead, it held only that the sample in that case was insufficient because the Walmart plaintiffs were not similarly situated. It also distinguished Walmart, observing that unlike in Tyson, had the Walmart employees brought individual suits, there would have been no role for representative evidence.
TCPA Class Upheld Even Though Representative Outside Of Class’s Geographic Zone.
By: Michael T. Brody
In Bridgeview Health Care Center, Ltd. v. Clark, Nos. 14-3728, 15-1793 (7th Cir. Mar. 21, 2016), plaintiffs brought an action for violation of the TCPA. Defendant Clark had authorized a vendor to send 100 faxes to local businesses within a 20-mile radius. In fact, the vendor sent nearly 5,000 faxes to businesses in a four state region. The defendant was only liable for those faxes sent “on its behalf.” The court concluded Clark had not authorized the vendor to send faxes outside the 20-mile zone. Thus, the claim was properly limited to those faxes sent within that area. Clark argued the district court should have created a subclass of plaintiffs within the 20-mile zone, and inasmuch as the named plaintiff was from outside that zone and, it could not adequately represent the 24 businesses who received the 32 faxes sent within the 20 mile radius. The Seventh Circuit rejected this argument. Despite not being entitled to recover, the named plaintiff was not distracted from its representation by advocating arguments unique to it. Instead, plaintiff was in the same position as the majority of fax recipients and the fact that it did not ultimately recover did not prevent the district court from finding it adequately represented plaintiffs who did. The court declined to decertify, holding decertification would not affect Clark’s liability to any plaintiff, and the judgment was appropriately limited to recipients within the 20-mile zone.
Certification Reversed In Washer Mildew Case As Causation Not On Class Basis.
By: Michael T. Brody
There has been a surge of litigation against manufacturers of front-loading washing machines alleging the rubber seal on the machine retains water, allowing mildew to grow. The Sixth and Seventh Circuits have upheld class certification. See, e.g., March 2014 EWS: Litigation Update. In Brown v. Electrolux Home Products, Inc., No. 15-11455 (11th Cir. Mar. 21, 2016), the Eleventh Circuit, applying state law, reached a different conclusion than the Sixth and Seventh Circuits. It reversed the grant of certification of a similar class, finding the State consumer claims did not satisfy the predominance requirement because plaintiffs could not prove causation on a classwide basis. The California claim required plaintiffs to show that Electrolux acquired the class members’ money “by means of” its improper disclosures about the mildew problems of the machines. Plaintiff failed to prove that he, or other class members, were exposed to a uniform misrepresentation or omission that caused a loss. Likewise, the Texas claim required plaintiff to prove he relied upon a statement or omission, not simply that the defendant intended purchasers to rely. Thus, plaintiffs failed to show reliance on a classwide basis. The court also held the district court erred in certifying breach of warranty claims without addressing state law requirements of pre-suit notice, an opportunity to cure, and manifestation of the defect. The Eleventh Circuit rejected Electrolux’s argument that the class was improper because proof of damage required individual proof. This issue, and the defense of product misuse, were insufficient to preclude class certification and were to be addressed on remand.
“Costs” Differ From “Expenses” Under FCA And Federal Rules.
By: Matthew J. Thomas
In United States ex rel. Associates Against Outlier Fraud v. Huron Consulting Grp, Inc., No. 15-425-cv, (2d Cir. Mar. 23, 2016), plaintiff brought an action under the False Claims Act (FCA), alleging that defendants facilitated excessive Medicare and Medicaid payments to a medical center. The district court granted summary judgment in favor of defendants, and subsequently granted defendants’ petition for costs, which consisted primarily of costs of deposition transcripts used in resolving the summary judgment motions. Plaintiff appealed the award of costs, arguing that the costs for deposition transcripts were precluded by 31 U.S.C. § 3730(d)(4), which provides that a court may award “reasonable attorneys’ fees and expenses” under the FCA only where the suit was clearly frivolous, vexatious or brought for the purposes of harassment – a standard that was not met here. The Second Circuit affirmed, holding that “costs” and “expenses” had distinct meanings under the FCA and Federal Rules of Civil Procedure and, therefore, the FCA’s provision for the limited shifting of “fees and expenses” (§ 3730(d)(4)) did not apply to defendants’ “costs” of deposition transcripts. Instead, such costs are governed by FRCP 54(d)(1) and 28 U.S.C. § 1920, which provide for the award of certain costs, including transcript costs, to the prevailing party, without requiring a showing that the suit was frivolous. In so holding, the Second Circuit joined the Eighth, Ninth and Tenth Circuits on this issue.
HR Director Could Be Individually Liable Under Family Leave Act.
By: Matthew J. Thomas
In Graziadio v. Culinary Institute of America, No. 15-888 (2d Cir. Mar. 17, 2016), plaintiff was fired after she took a leave to provide medical care for her sons, and her employer disputed the validity of her leave. Plaintiff brought suit under the Family and Medical Leave Act (FMLA), alleging, among other things, claims against her former company/employer, as well as the company’s Director of Human Resources. The district court granted summary judgment in favor of all defendants, holding, among other things, that the claims against the HR Director should be dismissed because she was not an “employer” subject to liability under the FMLA. The Second Circuit reversed. The court acknowledged that an individual may be held liable under the FMLA only if she is an “employer,” which is defined in the Act to include “any person who acts, directly or indirectly, in the interest of an employer to any of the employees of such employer.” As a matter of first impression in the Second Circuit, the court held that in deciding the issue, courts should apply the “economic reality” test that courts have applied to determine whether one is an employer under the Fair Labor Standards Act. Specifically, courts should look to the economic reality presented by the facts of each case to consider whether the person had the power to hire and fire employees, supervised and controlled employee schedules or conditions of employment, determined rate and method of payment, and maintained employment records. The court emphasized that the alleged employer need not have final authority on these issues, but could be deemed to satisfy these factors if she played an “important role” in those decisions. Here, although termination authority formally rested with another, there was evidence that the HR Director appeared to have played an important role in the decision to fire plaintiff. That, coupled with other evidence regarding her job duties, presented sufficient evidence for a rational jury to find that the HR Director exercised sufficient control over plaintiff’s employment to be subject to liability under the FMLA.
Spoliation Claims Analyzed Differently for Electronic Versus Hard-Copy Documents.
By: Daniel J. Weiss
In Best Payphones, Inc. v. City of New York, No. 01-cv-08506 (E.D.N.Y. Feb. 26, 2016), the district court considered defendant’s motion for spoliation sanctions related to plaintiff’s alleged failure to retain both electronic and hard-copy documents. The court held that the adoption of the new Fed. R. Civ. P. 37(e) regarding electronic evidence required a separate analysis of the “culpable state of mind” requirement for spoliation with respect to the electronic and non-electronic forms of documents. Pursuant to Second Circuit precedent, the court applied a “gross negligence” standard to the alleged spoliation of “tangible evidence,” such as hard-copy records. With respect to electronic evidence, however, the court held that the “Advisory Committee . . . specifically rejected the giving of adverse inference instructions on a finding of gross negligence or negligence, as the Second Circuit had permitted” in prior cases. Instead, for an adverse inference instruction, Rule 37(e) requires a finding that a party “acted with the intent to deprive another party of the information’s use in the litigation.” The court concluded that sanctions were unwarranted under either approach because the plaintiff’s conduct “amounted to mere negligence.” The court, however, awarded defendant attorney’s fees associated with its motion due to plaintiff’s negligence and because plaintiff produced additional documents in response to the motion.
Redaction Of Irrelevant Info/Withholding Of Irrelevant Parent Documents Permitted.
By: Daniel J. Weiss
In In re Takata Airbag Products Liability Litigation, MDL No.2599 (S.D. Fla. Mar. 1, 2016), the parties disagreed about the appropriate protocol to govern redactions of responsive electronically stored documents and the withholding of irrelevant “parent” documents from responsive document families. A court-appointed special master recommended permitting the defendant to withhold irrelevant parent documents and to redact seven categories of information deemed irrelevant. Plaintiffs argued that the recommended procedure could allow redaction of relevant information, would impair discovery efforts, and would lead to unnecessary litigation over the redactions. The district court largely affirmed the special master’s suggested protocol, relying on Chief Justice Robert’s comments in his 2015 year-end report that the recent amendments to Rule 26 of the Federal Rules of Civil Procedure “crystalize the concept of reasonable limits on discovery through increased reliance on the common-sense concept of proportionality.” The court found, under revised Rule 26, that “a party is not entitled to receive every piece of relevant information. It is only logical, then that a party is similarly not entitled to receive every piece of irrelevant information in responsive documents if the producing party has a persuasive reason for why such information should be withheld.” The court also held that defendant could withhold irrelevant parent documents in full, reasoning that “it would make little difference if the producing party provides a fully redacted document or does not provide the document at all.”
British Chancery Court Decision Approves Use Of Predictive Coding In Discovery.
By: Daniel J. Weiss
Pyrrho Invs. Ltd. v. MWB Property Ltd.  EWHC 256 (Ch.) is reported to be the first instance of an English court approving the use of predictive coding in aid of discovery. Citing Moore v. Publicis Groupe, 287 F.R.D. 182 (S.D.N.Y. 2012) (No. 11-1279), the British Chancery Court approved the use of predictive coding after noting the “enormous” expense of manually reviewing over three million electronic documents in the case. The Chancery Court stressed that the purpose of predictive coding and computer-assisted review was not to “replac[e] humans,” but was “the review method to result in higher recall and higher precision than another review method, at cost proportionate to the value of the case.” The court held other jurisdictions’ positive experiences with predictive coding, the consistency with which a computer would apply criteria, the cost of computer-assisted as compared to a manual review, the value of the claims at issue, the long interval available to the parties to address any unsatisfactory results from predictive coding before the scheduled trial date, and both parties’ consent to use predictive coding supported its decision.
Federal Court Finds Sufficient Causal Nexus for Additional Insured Coverage.
By: Brian S. Scarbrough
The U.S. District Court for the Western District of North Carolina recently ruled on the scope of additional insured coverage for a general contractor (“GC”). See Rodgers Builders, Inc. v. Lexington Ins. Co., No. 15-cv-00110 (W.D.N.C. Mar. 10, 2016). After water damage to a building, the GC sought coverage from Lexington as an additional insured under a subcontractor’s (“SC”) insurance policy. The additional insured provision of the Lexington policy issued to the SC provided coverage where required by written contract and to include an organization but only with respect to liability arising out of the SC’s ongoing operations performed for that organization. The subcontract between the GC and the SC required the SC to provide additional insured coverage to the GC for ongoing and completed operations and made specific reference to the particular form additional insured endorsement contained in the SC’s policy. On cross motions for summary judgment, the court reasoned that the language of the additional insured endorsement required a causal nexus such that the GC’s liability was a natural and reasonable consequence of the SC’s operations. The court held the GC was an additional insured because the court found a sufficient causal nexus between the SC’s work and the resulting water damage for which the GC was liable. The court also found that the GC as an additional insured was required to comply with the notice obligations under the SC’s policy.
Federal Court Examines Possible Implications of Delays in Investigating Cyber Insurance Claims.
By: Ashley Van Zelst
A recent federal court decision examined the importance of an insurer’s timely claims handling procedures in the context of cyber insurance policies. Travelers Property Casualty Co. of America v. Federal Recovery Services, Inc., No. 14-CV-170 (D. Utah Jan. 12, 2016). In one of the first written opinions addressing whether a claim implicating electronic data misuse is covered by a type of “cyber” insurance policy, the U.S. District Court for the District of Utah revealed that courts may be inclined to apply a heightened standard of care to an insurer’s delay in investigating cyber insurance claims – even when the insurer is found to not owe coverage under the policy. The insured, in the business of providing services for electronic data, purchased a cyber insurance policy that covered losses caused by “any error, omission or negligent act.” After being sued by one of its clients for allegedly retaining possession of member data and knowingly interfering with its business dealings, the insured sought coverage under the cyber policy. While the court found that the insurer did not owe its insured a duty to defend under the policy, and thereafter dismissed the insured’s breach of contract and breach of fiduciary duty claims, the court denied the insurer’s motion for summary judgment on the insured’s claim for breach of implied covenant of good faith and faith dealing. In denying, the court focused on the inherent covenant that exists in every contractual relationship. The court reasoned that “[a]t the very least, the covenant contemplates that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.” The court also reasoned that while an insurer cannot be held to have breached this covenant by denying a claim for coverage that is debatable but later is found to be proper, an insurer may still breach its covenant for separate reasons, such as the mishandling of a claim. The court cited to the insured’s allegations that the insurer required copies of the underlying filings and pleadings before it would initiate an investigation into the insured’s claim and also failed to “diligently investigate, fairly evaluate, and promptly and reasonably communicate with” the insured. These allegations of improper claims handling, the court found, raised issues of material fact to be determined by a jury. In allowing the insured’s claim for breach of the implied covenant of good faith and fair dealing to stand despite finding no coverage under the cyber policy, the court may have been inclined to apply a heightened standard of care to an insurer’s delay in investigating cyber insurance claims. Depending on the circumstances and the type of cyber coverage at issue, such claims could be extremely time-sensitive, and any delays could have a significant negative impact on an insured’s losses. Thus, the decision reflects the importance of an insurer’s diligent claims investigation when its insured submits a cyber insurance claim, even when coverage ultimately may not be due.
Can Computer Crime and Fraud Insurance Policies Extend Coverage to Sophisticated Phishing Scams?
By: Mark P. Gaber
Several companies around the country are engaged in litigation with insurers that have denied coverage under Computer Crime and Fraud policies for sophisticated phishing schemes. The insurers have generally argued that the policies do not reach situations in which company employees are deceived into transferring funds, but are instead limited to more traditional hacking schemes where computer files are unknowingly accessed. One such case is Medidata Solutions Inc. v. Federal Insurance Co., No. 15-cv-907 (S.D.N.Y. filed Feb. 6, 2015), in which a Medidata employee was duped into transferring $4.8 million to a Chinese bank account when a fraudster posed as a company executive in an email and convinced the employee to transfer the funds. The fraud was discovered too late to stop the transfer, and Federal Insurance Co. has denied the claim. The dispute turns on several definitions in the policy, including whether the fraudulent email constitutes “fraudulent entry of data” or whether that phrase is limited to involuntary transfers of funds without involvement of company employees. The district court has denied both parties’ summary judgment motions and has ordered discovery about how the phishing attack occurred.
Evidence of “Reasonable Probability” of Lead Paint Exposure Raises Fact Question.
By: Barry Levenstam
In Rowhouses, Inc. v. Smith, No. 24-C-11-006715 (Md. Mar. 25, 2016), the Court of Appeals of Maryland addressed a trial court decision granting summary judgment for the defendant property owner in a case alleging plaintiff had been injured by exposure to lead paint as a child while living in defendant’s house. Because defendant’s house had been destroyed before the lawsuit was filed without being tested for lead, there was no direct evidence that plaintiff had been exposed to lead in that house. Nevertheless, the plaintiff’s mother submitted an affidavit noting that the paint in that house was chipped and degrading, a condition not present at houses in which plaintiff’s family had lived before or after. Plaintiff also adduced the testimony of an expert who opined that the house in question had contained lead paint based on the age of the house and limited information concerning the exterior paint of the house. The Court of Appeals held that this evidence, though circumstantial, was sufficient to survive a motion for summary judgment and raised a question of fact for resolution at trial. To survive summary judgment, plaintiff needed only show that defendant’s property was “a reasonable probable source of [plaintiff’s] lead exposure,” i.e., that it was “more than a mere ‘possibility’” but “less than ‘more likely than not’” that the house in question had been the source of plaintiff’s exposure to lead. Consequently, the court of appeals reversed the trial court’s ruling and remanded for further proceedings.
Louisiana Med Mal Statute Requires Claims to First Go to Medical Review Panel.
By: Barry Levenstam
In Flagg v. Stryker Corp., No. 14-31169 (5th Cir. Mar. 24, 2016) (en banc), the Fifth Circuit, acting en banc, addressed the impact of Louisiana’s Medical Malpractice Act on the propriety of the removal from state court to federal court of a combined medical malpractice/product liability lawsuit. Plaintiff sued both the medical professionals who performed joint implant surgery on her and the manufacturers responsible for the joint that was implanted. The defendant manufacturers were diverse from the plaintiff; the defendant medical professionals were not. The defendant manufacturers removed plaintiff’s case from state to federal court. They then opposed the plaintiff’s motion to remand by arguing that the non-diverse defendant medical professionals were not properly sued because plaintiff had failed to comply with the Louisiana Medical Malpractice Act’s requirements that plaintiffs suing medical professionals in Louisiana must present their claims first to a medical review panel. Louisiana law requires the dismissal of a plaintiff’s claims where the plaintiff has not satisfied that requirement before filing suit. The district court agreed with the defendant manufacturers that plaintiff’s failure to meet this requirement meant that plaintiff had failed to state valid claims against the non-diverse defendants, and denied plaintiff’s motion for remand. On appeal, a panel of the Fifth Circuit reversed, holding that the Louisiana statute was not jurisdictional in nature, that the statutory requirement to present results only in an expert opinion that is admissible in the subsequent lawsuit but is not binding, and that consequently the failure to comply should not defeat plaintiff’s remand motion. The en banc Court, however, ruled that the Louisiana statute required dismissal of the plaintiff’s claims against the non-diverse defendant medical professionals, and that therefore removal had been proper.
The Federal Circuit affirmed the dismissal of Plaintiff’s appeal of a final decision of the Merit Systems Protection Board, declining to retroactively apply Whistleblower Protection Enhancement Act (WPEA) of 2012. Hicks v. Merit Systems Protection Board, No. 16-1091 (Fed. Cir. Mar. 22, 2016), ECF No. 28. Plaintiff, a former Air Force secretary, claims she was fired in 1990 in retaliation for filing a previous appeal with the board. At the time of her termination, filing an appeal with the board was not a protected disclosure. When the WPEA was expanded in 2012, however, it significantly increased whistleblower protections available, including protections for filing board appeals. Nonetheless, due to a lack of clear evidence from Congress to the contrary, the Federal Circuit declined to retroactively apply the expanded protections, and thus affirmed the dismissal of Plaintiff’s claim.
In 2011, a respiratory account manager for Novartis Pharmaceuticals brought a False Claims Act lawsuit against his employer, alleging Novartis participated in kickback arrangements with pharmacies in connection with the sale of one of its drugs. The parties recently settled the lawsuit, with Novartis agreeing to pay $390 million. Stipulation and Order of Settlement and Release, United States ex rel. Kester v. Novartis Pharms. Corp., No. 11-cv-8196 (CM) (S.D.N.Y. Mar. 22, 2016), ECF No. 522. For his role in revealing the patient referral kickback scheme, the account manager was awarded $66.4 million.
Investigation Costs Appropriate Subject for Restitution if Properly Documented.
By: Robert R. Stauffer
In United States v. Pu, 814 F.3d 818 (7th Cir. 2016) (No. 15-1180), the defendant was convicted of secretly downloading and using proprietary high-speed trading software from two successive employers. There was no evidence that the defendant profited in any way from the theft; he used the software for personal trading activities on which he ended up suffering losses. He pled guilty and was sentenced to 36 months’ incarceration plus payment of restitution in the amount of $759,649.55, representing the amount one of the employers incurred for engaging attorneys and forensic analysts to investigate the theft. Relying on its earlier opinion in U.S. v. Hosking, 567 F.3d 329, 331 (7th Cir. 2009), the Seventh Circuit found the amount incurred to investigate the misconduct to be a proper subject for restitution. The defendant argued that the restitution award was nonetheless improper because it lacked sufficient evidentiary support. The award was based on a letter by an in-house lawyer for the employer stating that the $759,649.55 represented $151,500.50 for counsel to conduct an internal investigation, amounting to 323.7 hours billed by nine lawyers, paralegals and legal assistants with billable rates ranging from $115.50 to $630 per hour, plus $608,149.05 paid to the forensic analysis firm, representing 1818.8 hours of work by 16 analysts with rates ranging from $171 to $567 per hour. The Court of Appeals agreed that this letter was insufficient to support the restitution award. The court noted that the letter did not explain how any attorney’s or analyst’s time was spent, and did not demonstrate that the hours spent were reasonable. The court found that the government must “provide an explanation, supported by evidence, of how each professional’s time was spent investigating the date breach,” and must support the reasonableness of the time spent. Accordingly, the court vacated the restitution order.