Jenner & Block

Spotlight Newsletter Resource Center

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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Supreme Court To Determine If Arbitration Provision Referencing State Law Is Preempted.

By: Howard S. Suskin

The U.S. Supreme Court has granted certiorari to address whether an arbitration clause that provides for application of state arbitration law was preempted by the Federal Arbitration Act.  DIRECTV, Inc. v. Imburgia, 135 S.Ct. 1547 (U.S. Mar. 23, 2015) (No. 14-462).  The case involved the denial of a motion to compel arbitration, which was affirmed by the California Court of Appeal.  Imburgia v. DIRECTV, Inc.,170 Cal. Rptr. 3d 190 (Cal. Ct. App. 2014).  The parties’ arbitration agreement stated that if “the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration clause] is unenforceable.”  The California Court of Appeal concluded that, under California law, the class action waiver was unenforceable, rendering the entire arbitration agreement unenforceable even though federal law would lead to a different result.  The question to be decided by the U.S. Supreme Court is:“Did the California Courtof Appeal err by holding, in direct conflict with the U.S. Court of Appeals for the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act?”

Procedural Arbitrability Is to be Determined By Arbitrators.

By: Howard S. Suskin

An employer’s objection that an employee failed to deliver a formally compliant certificate of earnout dispute, and therefore did not satisfy a prerequisite for initiating an arbitration, raised a procedural question that should be decided by the arbitrator, not the court.  Weiner v. Milliken Design, Inc., No. 9671-VCP (Del. Ch. Jan. 30, 2015).  The Court of Chancery found that the employer’s objection did not rise to the level of disputing substantive arbitrability, which concerns the threshold question of whether the parties agreed to arbitrate, and which is presumptively an issue for resolution by the court.  Procedural arbitrability questions, including whether conditions precedent to an obligation to arbitrate have been met, must be decided by the arbitrator.

Court Erred In Disqualifying Arbitrator Mid-Arbitration.

By: Howard S. Suskin

Issuing a writ of mandamus, an appellate court directed the district court to vacate its order granting a party’s motion to disqualify an arbitrator while the arbitration was ongoing.  In re Mary Ann Sussex, 776 F.3d 1092 (9th Cir. 2015) (No. 14–70158).  The Ninth Circuit found that the district court clearly erred in predicting that an arbitration award would likely be vacated because of the arbitrator’s alleged partiality.  The court of appeals concluded that even if the arbitrator had created a reasonable impression of partiality, the district court’s concern that delays and expenses would result if an arbitration were eventually vacated is inadequate to justify a mid-arbitration intervention, regardless of the size and early stage of the arbitration.

Arbitration Award Reviewed Under Federal, Not State, Law.

By: Howard S. Suskin

The Seventh Circuit concluded that an arbitration award was to be reviewed under the Federal Arbitration Act, rather than under a state arbitration act, where the parties’ agreement stated that the arbitration clause “is governed by and enforceable under the terms of the Federal Arbitration Act,” notwithstanding that the remainder of the parties’ agreement was governed by state lawRenard v. Ameriprise Fin. Services, Inc., 778 F.3d 563 (7th Cir.  2015) (No. 14-1730).  Although the franchise agreement in which the arbitration clause was contained expressly stated that it was governed generally by state law, the agreement specifically carved out arbitration from that blanket provision.  Accordingly, the federal court held that the award would be reviewed under federal law, not state law.

Class Action

Ninth Circuit Emphasizes Need For Factual Findings Regarding Settlement.

By: Michael T. Brody

In In re Groupon Marketing and Sales Practices Litigation, 593 F. App’x 699 (9th Cir. 2015) (Nos. 13-55118, 13-55128), the district court approved a settlement of a class action challenging Groupon’s marketing practices.  In an unpublished opinion, the Ninth Circuit vacated and remanded the case to the district court.  While not reaching the district court’s evaluation of the fairness of the settlement, the Ninth Circuit emphasized the need for district court judges to make detailed findings to quantify, or at least fairly estimate, the value of relief to the class and to permit a comparison of the benefit provided to the class to the fees made available to class counsel.  The court remanded the case so that these amounts could be calculated, or reliably bounded within ranges of expected values, because the Ninth Circuit was unable to evaluate the settlement on the current record.

Second Circuit: Comcast Permits Certification Despite No Classwide Damage Proof.

By: Michael T. Brody

In Roach v. TL Cannon Corp., 778 F.3d 401 (2d Cir. 2015) (No. 13-3070), plaintiffs brought a collective action challenging an employer’s practices and moved to certify subclasses.  The district court denied certification, finding that the Supreme Court’s Comcast decision required the proponent of the class to offer a damages model that would permit classwide measurement of damages.  Reviewing the district court’s decision pursuant to Rule 23(f), the Second Circuit reversed.  Prior to Comcast, Second Circuit cases established that a class could be certified even if damages had to be assessed on an individualized basis.  Comcast, the Second Circuit ruled, did not overrule these decisions.  Instead, Comcast held that where a model for determining classwide damages is used to support certification, it must actually measure damages attributed to the class’s theory of liability.  The Second Circuit concluded Comcast did not hold proponents of class certification must advance a classwide damage model.  The possibility that damages must be decided on an individual basis may be relevant to whether common issues outweighed individual issues.  Still, Comcast did not foreclose certification in a case involving individualized damages.

Ninth Circuit Affirms Approval Of Cash/Gift Card Settlement.

By: Michael T. Brody

In In re Online DVD-Rental Antitrust Litigation, 779 F.3d 934 (9th Cir. 2015) (Nos. 12-15705, 12-15889, 12-15957, 12-15996, 12-16010, 12-16038), plaintiffs alleged Walmart and Netflix had divided the DVD rental market.  Plaintiffs settled their antitrust lawsuit for a fund of $27.25 million, consisting of: $6.8 million in attorneys’ fees; $1.7 million in expenses to class counsel; administration and notice costs of $4.5 million; and the remaining $14.1 million was made available to 1.2 million class members as gift cards or in cash.  The district court approved the settlement, and the Ninth Circuit affirmed the finding that the settlement was fair, reasonable, and adequate.  The Ninth Circuit found the incentive awards to class representatives did not create a conflict; the district court did not err in using a claim fund mechanism; and the notice was sufficient even though it failed to estimate how much each class member would recover.  Further, the reverter, which permitted defendants to recover funds if the settlement was rejected or to recover monies in excess of the amounts needed, did not undermine the settlement, and the district court adequately explained its reasons for approving the settlement.  Finally, the court’s approval of attorneys’ fees of 25% of the settlement was appropriate.  Had the settlement been a “coupon settlement,” the Class Action Fairness Act (“CAFA”) would require fees to be paid based on redeemed benefits or the lodestar method.  The court agreed that the gift cards were not coupons, and thus not covered by the CAFA provision, because they could be used on a large number of items from a large retailer, and claimants had the option of receiving cash rather than a gift card.

Seventh Circuit Reverses Preliminary Injunction In Preliminary Approval Order.

By: Michael T. Brody

In Adkins v. Nestle Purina PetCare Co., 779 F.3d 481 (7th Cir. 2015) (No. 14-3436), the district court preliminarily approved the settlement of a nationwide class action, and enjoined class members from prosecuting litigation about the same subject in any other forum.  This had the effect of enjoining the imminent trial of a state class action in Missouri.  The Missouri class plaintiff objected and, after being unsuccessful in the district court, appealed.  The settling parties argued on appeal that the injunction was necessary in aid of the district court’s jurisdiction.  The Seventh Circuit found no support for this position.  It held jurisdiction means “adjudicatory competence,”  and does not encompass procedural or substantive rules that decide how cases are to be resolved.  While the Missouri litigation could imperil the settlement, it would not deprive the district court of adjudicatory competence.  As a result, the Anti-Injunction Act precludes an injunction until the federal case reaches a final decision.  The court added that parallel state and federal litigation is common, and recognized that while the first case to reach final decision can affect the others, that potential effect does not justify a pre-judgment injunction.

Court Rejects Use Of Social Media For Class Notice.

By: Michael T. Brody

In Mark v. Gawker Media LLC, No. 13-cv-4347 (S.D.N.Y. Mar. 5, 2015), plaintiffs brought an opt-in collective action under the Fair Labor Standards Act.  The district court ordered notice, and plaintiffs requested the court to require additional notice to potential plaintiffs through social media.  The court rejected the request.  First, the court found that the proposal to post notices on particular websites lacked any “realistic notion of specifically targeting its notice to individuals” with the right to participate in the case.  Instead, the website notices would bring the lawsuit to the attention of individuals with no connection to the lawsuit.  Second, the court rejected the use of social media to provide notice of the lawsuit.  Court-authorized notice should contain private, personalized notification to potential plaintiffs who are not reachable through other means.   Public social media notices, such as those proposed in the social media campaign, provide only generalized notice, and thus it does not fulfill the goals of Rule 23 notice.


Attorney-Client Privilege

District Court Allows Discovery of Sworn Statements Obtained in Anticipation of Litigation.

By: David M. Greenwald

In Galloway v. Sunbelt Rentals, Inc., No. 14-cv-00040 (W.D. Va. Jan. 14, 2015), the district court ordered defendant to produce sworn witness statements that it had obtained prior to litigation.  The action related to a crash in 2012 that left plaintiff in a coma for two months.  In 2012, defendant obtained statements from two people who witnessed the crash.  The statements were sworn, taken in question and answer format, and transcribed by a court reporter.  In 2014, plaintiff moved to compel production of the statements.  Defendant asserted the work product protection and argued that plaintiff could obtain the same information by deposing the witnesses, who were available for deposition.  The court granted the motion to compel.  First, the court held that the statements were fact work product, notwithstanding that disclosure of the statements would reveal counsel’s questions, which defendant argued were opinion work product.  Second, the court explained that discovery of prior statements is particularly appropriate where the statements are contemporaneous with the events at issue in the litigation and there has been a lapse of time between the events and the opportunity to take depositions.  “A deposition based on two-year-old memories is not the substantial equivalent of a witness statement taken a week after the incident[.]”  Third, because the statements were sworn and transcribed, there was a significant possibility that the statements would be admitted as evidence at trial.

Insufficient Evidence Under FRE 502(b) to Support Clawback; Party Can Try Again.

By: David M. Greenwald

Gilson v. Pennsylvania State Police, No. 12-cv-00002 (W.D. Pa. Jan. 30, 2015) is an example of the time consuming and expensive process often required to claw-back inadvertently produced privileged materials in the absence of a Federal Rule of Evidence (“FRE”) 502(d) order.  In this case, the district court reviewed defendants’ motion to claw-back certain documents under the multi-factor test adopted by FRE 502(b), which requires a party to demonstrate that it inadvertently produced privileged materials; that it had taken reasonable steps to prevent the production of privileged materials; and that it acted promptly upon learning of the production of the privileged materials.  The court noted that a party seeking claw-back relief under FRE 502(b) bears the burden of proof for each of the three elements of the rule.  Here, the parties did not dispute that the notes at issue were privileged, and defendants averred that they had taken reasonable steps to prevent disclosure and that they had acted promptly upon learning of their production.  The court nonetheless found that defendants had not submitted sufficient evidence regarding either element.  The court concluded defendants had not provided enough detail regarding how and whether a privilege review was done, and by whom, and the circumstances relating to the disclosures, such as whether the defendant had taken reasonable steps to sequester the documents.  The court found that there were factors that both supported waiver, and that supported claw-back relief.  The court permitted defendants to try again – to supplement their submission “if they can do so consistent with Fed. R. Civ. P. 11” at the time they submitted their motion for summary judgment.

Liquidator of Bankrupt Debtor Could Not Waive Privilege of Debtor’s Audit Committee.

By: David M. Greenwald

In In re China Medical Technologies, Inc., 522 B.R. 28 (Bankr. S.D.N.Y. 2014) (No. 12-13736), the court held that, although a Liquidator has the authority to waive privileges held by the liquidating debtor, the Liquidator did not have authority to waive privileges that were held by the debtor’s Audit Committee.  As a foreign issuer of securities traded on NASDAQ, the debtor was required by NASDAQ rules to establish an Audit Committee that complied with independence requirements set forth under NASDAQ rules.  In 2009, debtor’s auditor received an anonymous letter alleging financial wrongdoing by the debtor.  As a  result of the letter, and at the auditor’s request, the Audit Committee retained outside counsel to conduct an investigation; counsel retained a financial consultant to provide forensic analysis to assist counsel in its investigation. Here, the Liquidator subpoenaed both the outside firm and the consultant for documents related to the investigation.  The firm and consultant asserted the attorney-client privilege on behalf of the Audit Committee.  The court denied the Liquidator’s motion to compel.  The court explained that, although the Liquidator had the authority to waive the debtor’s privileges, that authority did not extend to the privileges held by the debtor’s independent Audit Committee.  Although the Audit Committee was a committee of debtor’s board of director’s, under NASDAQ rules it was required to have sufficient independence to engage its own counsel and communicate confidentially, protected from scrutiny and interference from the debtor’s board.  The court found that granting the Liquidator’s motion would undermine the confidence of audit committees that their communications with counsel will remain privileged even after the debtor’s bankruptcy.

Communications with Litigation Funder Not Privileged.

By: David M. Greenwald

In Cohen v. Cohen, No. 09 Civ. 10230 (S.D.N.Y. Jan. 30, 2015), applying New York law, the district court held that communications between plaintiff and her litigation funder were not privileged.  In this matter, plaintiff alleged that her former husband fraudulently concealed marital assets during their divorce. Plaintiff asserted the attorney-client privilege over several hundred emails exchanged with Napp, who was funding plaintiff’s litigation.  The emails included discussions of legal strategy, court filings, discovery, and funding for the litigation.  Plaintiff had engaged Napp, a non-practicing attorney, “to provide litigation support,” through two consulting agreements, which stated that Napp is “not an agent, employee, servant of representative of” plaintiff.  The court held that Napp was not within the attorney-client privilege because she was neither an agent of counsel nor did she share a common legal interest with plaintiff.  Under the Kovel line of cases, communications with a third party may be privileged if the involvement of the third party is “indispensible or serve[s] some specialized purpose in facilitating the attorney client communications.”  Here, the consulting agreement expressly stated that Napp was not acting as an agent of plaintiff, and the court found that Napp did not provide an indispensible role in providing legal advice.  The court also held that the communications were not protected by the common interest doctrine as articulated in New York, which protects communications otherwise privileged that are shared with a third party who shares identical or nearly identical legal interests for the purpose of furthering a common legal interest or strategy.  The court found that the relationship between plaintiff and Napp was financial, not legal: “The ‘Joint Interest’ agreement between Ms. Napp and Plaintiff cannot change the substance of their relationship, which is inherently financial and in no way within the mold of a common legal interest.”

Investigation Materials Remain Privileged Though Report Was Intended To Be Disclosed.

By: David M. Greenwald

In DeAngelis v. Corzine, No. 11 Civ. 7866 (S.D.N.Y. Feb. 9, 2015), the district court held that investigation materials were protected by the attorney-client privilege and as work product even though the investigation report was intended to be made public from the outset of the investigation.  In this case, the liquidating Trustee for MF Global, Inc. engaged Ernst & Young (“EY”) to perform forensic accounting to assist the Trustee in conducting his statutorily mandated investigation and search for assets pursuant to the Securities Investor Protection Act (“SIPA”).  In accordance with the statutory directive, the investigation culminated in a report submitted to the bankruptcy court, which then became publicly available. Individual defendants sought discovery of EY’s investigation material relating to the reported investigation arguing: (1) the materials were not privileged where the report was intended to be made public; (2) the investigation was for a dual business and legal purpose and therefore not protected by the work product doctrine; and (3) the Trustee’s reliance on the facts in the report waived privilege.  The court rejected all three arguments.  First, the court held that undisclosed EY investigation materials were protected by the attorney-client privilege. Citing the U.S. Supreme Court’s decision in Upjohn-I, the court held that the communications with counsel underlying the report remained privileged even though the facts learned and reflected in the report were not. The fact that the information learned would ultimately be disclosed did not deprive the communications of protection.  Second, the court held that the materials were protected work product.  Applying the “because of” litigation test, the court stated that it was “flummoxed” by defendants’ argument that the investigation materials were not work product, as they were created only because of the SIPA proceeding, and in the absence of the proceeding would never have been created.  Third, the court held that the Trustee’s use of the facts disclosed in the report did not waive privilege.  The court noted that a complaint, which relied on facts developed from the investigation, did not selectively quote or identifiably paraphrase any privileged documents prepared by EY.  Instead, it identified facts that EY had extracted from underlying non-privileged documents, to which defendants had access.

Communications With Functional Equivalents Of Employees Were Privileged.

By: David M. Greenwald

In Smith v. Unilife Corp.,No. 13-5101 (E.D. Pa. Feb. 13, 2015), the district court held that communications between the company and non-lawyer consultants regarding drafts of SEC Form 10-K reports were privileged under the functional equivalent doctrine.  In this case, the CEO and in-house counsel of Unilife conferred with two third-party non-lawyer consultants concerning the contents, style and “wordsmithing” of draft SEC filings.  Applying the more lenient standard for the functional equivalent doctrine adopted in In re Flonase Antitrust Litigation, 879 F.Supp.2d 454 (E.D. Pa. 2012) (Nos. 08-CV-3149, 08-CV-3301), the court found that the consultants were the functional equivalents of company employees where they had been hired by the company for the purpose of assisting the corporation in securing legal advice or making legal decisions, noting that the court would not second-guess a corporate decision to rely on an independent consultant to accomplish a specific task or make recommendations to the CEO or general counsel.  The court also held that drafts of the Form 10-K’s were privileged and not discoverable because a review of the drafts would call for disclosure of communications with counsel, thus invading the privilege.  The court cited with approval Roth v. Aon, 254 F.R.D. 538 (N.D. Ill. 2009), in which the court concluded that an email from Aon’s CFO to its CEO and general counsel regarding a draft 10-K was privileged because “Form 10-K requires extremely detailed financial, legal and structural information” and that the “determination of what information should be disclosed for compliance is not merely a business operation, but a legal concern.”

Product Liability

Need for Expert Testimony Under Indiana Products Liability Act.

By: Barry Levenstam

In Piltch v. Ford Motor Co., 778 F.3d 628 (7th Cir. 2015) (No. 14-1965), the Seventh Circuit affirmed summary judgment granted for the defendant auto manufacturer in a case alleging that the injuries plaintiffs suffered in a crash were enhanced by a design defect that caused the vehicle’s airbags to not deploy.  The crash at issue was the second crash plaintiffs had in which the airbags did not deploy and, although they had repairs done to their automobile after the first crash, they never confirmed whether the airbag control module was repaired.  Plaintiffs did not offer any expert witness in opposition to the summary judgment motion.  The Seventh Circuit held that plaintiffs could not establish a design defect under the Indiana Products Liability Act without an expert witness because they needed to establish both that another design for the airbags could have prevented the enhanced injuries and that the other design was cost effective.  Further, the judgment was upheld based on the doctrine of res ipsa loquitur because, without the support of an expert witness, plaintiffs could not negate possible causes other than the alleged defect, particularly where the repair could have been inadequate and caused the failure of the airbags to deploy in the second accident.  The court also held that plaintiffs’ lack of an expert witness negated their efforts to establish that their injuries were enhanced by the failure of the airbags to deploy and would not have been suffered absent the airbag failure.

Expert Testimony Unreliable Under Daubert as Based on General Experience.

By: Barry Levenstam

In Rupert v. Ford Motor Co., No. 12-331 (W.D. Pa. Feb. 23, 2015), the district court granted defendant’s motion for summary judgment in which defendant argued that plaintiff’s proffered expert witness was not qualified as an expert in auto safety because he lacked an engineering license and his proffered opinions were not sufficiently reliable to merit admission into evidence under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).  The court held that the proffered expert’s forty years of work with automobile safety design qualified him as an expert even though he was not a licensed engineer. Nevertheless, the court held his opinions concerning the alleged design defect lacked sufficient reliability to satisfy Daubert, as they were based on his general observations and experience in the industry, rather than testing or specific detailed information.  Without expert support, the court held the plaintiff could not survive summary judgment, and entered judgment in favor of the defendant.

Court Rejects Preemption Raised to Defend Challenge to Withdrawn Drug.

By: Barry Levenstam

In Guvenoz v. Target Corp., No. 13-3940 (Ill. App. Ct. Mar. 27, 2015), the Appellate Court of Illinois addressed certified questions in an interlocutory appeal concerning whether preemption is a valid defense to negligence, strict liability, fraudulent misrepresentation, and fraudulent concealment claims with respect to a drug taken off the market because it was deemed unsafe shortly after plaintiff sustained his injuries.  In this case, the drug at issue had been taken off the markets in Great Britain and Europe, and the FDA (which had approved the drug many years before), had ordered new safety tests in light of multiple injuries resulting from use of the drug.  Plaintiff had taken the drug pursuant to a prescription and suffered his injury in the time between the FDA-ordered testing and the time the test results led to the withdrawal of the drug from the market.  Reviewing existing United States Supreme Court precedent on point, the Illinois appellate court concluded that although preemption applied to bar against State law claims brought where the plaintiff had suffered injury from using a drug that was proven safe and effective for the vast majority of users, preemption did not apply to bar suits relating to a drug that was not safe and effective for most users, and whose benefits were outweighed by its risk for all users.  In short, the court held that there is no “safe harbor” under federal law for drugs so dangerous that the only safe course of action is to withdraw them from the market.

Professional Responsibility and Ethical Developments

The SOX Anti-Shredding Provision Does Not Apply to All Physical Evidence.

By: Gregory M. Boyle and John R. Storino

The United States Supreme Court overturned the conviction of a fisherman under the anti-shredding provision of the Sarbanes-Oxley Act (“SOX”).  Yates v. United States, 135 S. Ct. 1074 (2015) (No. 13-7451). The appellant caught undersized fish in federal waters and to prevent federal authorities from confirming this, appellant ordered that the undersized fish be thrown overboard.  As a result, he was charged and convicted under the anti-shredding provision of SOX, which prohibits the alteration, destruction, mutilation, concealment, or falsification of any record, document, or “tangible object” with the intent to impede or obstruct any federal investigation. The Supreme Court reversed, holding that while a fish is a tangible object, “it would cut the [anti-shredding provision] loose from its financial-fraud mooring to hold that it encompasses any and all objects, whatever their size or significance, destroyed with obstructive intent.” A tangible object under SOA “must be one used to record or preserve information.”

Emotional Distress Damages Available Under Anti-Retaliation Provision Of SOX.

By: Gregory M. Boyle and John R. Storino

The Fourth Circuit affirmed an award of emotional distress damages to a woman who was fired after raising concerns about a misstatement on one of her employer’s SEC filings, in violation of the anti-retaliation provision of the Sarbanes-Oxley Act.  Jones v. SouthPeak Interactive Corp. of Delaware, 777 F.3d 658 (4th Cir. 2015) (No. 14-1765).  The SOX remedies provision contains two parts: first, a section stating that a successful claimant shall be entitled to “all relief necessary to make the employee whole”; and second, a section providing that compensatory damages “shall include” reinstatement, back pay, and compensation for special damages such as litigation costs, expert witness fees, and attorneys’ fees.  The Fourth Circuit rejected defendant’s argument that “shall include” is the equivalent of “limited to,” and joined the Fifth Circuit and the Tenth Circuit in holding that emotional distress damages are available under the SOX anti-retaliation provision.

SEC Announces First Whistleblower Award to Former Corporate Officer.

By: Gregory M. Boyle and John R. Storino

The SEC recently announced its fifteenth whistleblower award since the program began three years ago, and the first to a former corporate officer.  See Press Release , SEC, Former Company Officer Earns Half-Million Dollar Whistleblower Award for Reporting Fraud Case to SEC, Release No. 2015-14 (Mar. 2, 2015). The award is in the range of $475,000 to $575,000, to a former company officer who provided “original, high-quality” information about a securities fraud.  The former officer’s information led to an SEC enforcement action that resulted in sanctions exceeding $1 million.  Officers who learn about a fraud through other employees generally are not eligible for an award under the SEC’s whistleblower program.  However, an officer becomes eligible if he or she reports information to the SEC more than 120 days after other responsible compliance personnel learned of the information and failed to adequately address the matter.  This is the SEC’s first whistleblower award to an officer under these circumstances.

OSHA Issues Final Rule On SOX Retaliation Complaints.

By: Gregory M. Boyle and John R. Storino

OSHA recently issued final regulations governing employee retaliation and whistleblower claims under SOX.  Procedures for the Handling of Retaliation Complaints Under Section 806 of the Sarbanes-Oxley Act of 2002, as Amended, 80 Fed. Reg. 11,865, 11,874 (Mar. 5, 2015).  Certain of these regulations were made in response to comments to the interim final rule, which was published in November 2011.  OSHA removed a pro-employee statement, that reinstatement of a whistleblower is inappropriate if the company determines that the complainant is a security risk, but declined to make any changes in response to criticisms that allowing whistleblowers to make oral complaints resulted in frivolous complaints.

White Collar Defense & Investigations

Internal Investigation Materials Provided to Outside Counsel Not Privileged.

By: Robert R. Stauffer

Wultz v. Bank of China Ltd., 304 F.R.D. 384 (S.D.N.Y. 2015) (No. 11 Civ. 1266), provides an example of a privilege ruling that might have come out differently if a party had better documented its intentions and the involvement of its counsel at the time it conducted an internal investigation.  Plaintiffs sued Bank of China Ltd. (“BOC”) for claims arising out of a 2006 suicide bombing in Israel, alleging that a BOC customer was responsible for the bombing and that BOC assisted the customer by executing significant wire transfers on his behalf.  Before the suit was filed, the plaintiffs’ lawyer informed BOC that he intended to file a lawsuit.  BOC then initiated an internal investigation.  The investigation was handled by non-legal personnel.  Outside counsel was contacted and was in continuous contact with BOC, but there was no evidence outside counsel participated in or directed the internal investigation.  The record did not include any evidence that the purpose of retaining outside counsel was to obtain legal advice, although there was evidence that BOC’s expectation was that outside counsel would use and analyze the findings in order to assess the merits of the allegations.  BOC’s legal department searched a database as part of the investigation but there was no evidence it otherwise participated in the investigation.  After outside counsel was provided information resulting from the internal investigation, he prepared a 9-page letter to BOC reflecting his legal advice.  The court found the attorney-client privilege did not apply to the materials generated during the internal investigation, given the lack of evidence that the investigation was directed by counsel.  The court pointed out that otherwise non-privileged materials do not become privileged simply because they are later conveyed to counsel.  The court further found the work product protection did not apply.  Although the court noted that the protection can apply to materials prepared by non-legal personnel, it found that BOC had failed to establish that the materials would not have been prepared in essentially similar form irrespective of the anticipated litigation.

Counsel’s Representation Of Corporation And Individual Officers Not Unethical.

By: Robert R. Stauffer

Faced with a government investigation, counsel representing a corporate entity often face the question of whether they may ethically represent officers and employees as well.  In In re Conduct of  Ellis, 344 P.3d 425 (Or. 2015) (OSB No. 09-54), the Oregon State Bar determined that two law firm partners had violated ethical rules governing conflicts of interest by engaging in such a joint representation, and a trial panel for the Disciplinary Board agreed.  The Oregon Supreme Court, however, reversed.  The case arose out of a public corporation’s discovery that improper application of revenue recognition principles had led to errors in financial statements, leading it to restate those financial statements.  Class action litigation by shareholders ensued, followed by an SEC investigation and later a DOJ investigation.  The law firm partners represented the corporation in the class action litigation, and they also represented certain individual officers.  One of the officers declined to be jointly represented, and another retained separate counsel but was also represented by the partners as co-counsel.  The jointly represented officers signed engagement letters consenting to the joint representation – letters that encouraged the individuals to consult with independent counsel before consenting.  When the SEC opened an investigation, the partners continued to represent various officers along with the corporation, and new engagement and consent letters were signed.  The SEC later issued Wells Notices to the corporation and certain of the individuals, indicating an intent to bring civil enforcement actions against them.  At that point the partners advised those individuals who did not have separate counsel to retain separate counsel, which they did.  But, the partners continued to represent the individuals as well, in a supporting co-counsel role.  When the DOJ later opened an investigation, the partners took a more limited role on behalf of the corporation, which retained new counsel to take the lead in that matter.  Although none of the individuals or their separate lawyers complained to the Bar about the partners’ conduct, the Bar filed complaints alleging conflicts of interest in various aspects of the representation.  The Oregon Supreme Court analyzed the history of the representation in detail and concluded that the partners had not violated applicable ethical rules because the clients did not have actual conflicts of interest.  The partners’ approach on behalf of the corporation was to emphasize the remedial actions taken in the wake of the discovery of the accounting errors, and counsel consistently referred to the accounting problems as “errors,” not as “fraud,” thus not suggesting intentional conduct by the individual clients.  The court found these positions were not in conflict with the interests of the individuals.

Pre-Dodd Frank Whistleblower Tips To SEC Did Not Qualify For Bounty.

By: Robert R. Stauffer

In Stryker v. SEC, 780 F.3d 163 (2d Cir. 2015) (No. 13-4404-AG), a whistleblower had provided information between 2004 and July 2009 to the SEC’s Enforcement Division regarding alleged wrongdoing by a corporation and an individual.  The SEC opened an investigation in March 2009 and subsequently charged the corporation and the individual with violations of the securities laws.  The action resulted in a $19 million settlement.  In 2011, the whistleblower submitted an application for an award under Section 21F of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  The SEC denied the application on the basis that the information provided was not “original information” within the meaning of the statute and the implementing rules.  The Dodd-Frank Act called for rules to be passed implementing its whistleblower reward provisions, but created a safe harbor for information provided after the effective date of the statute and before the promulgation of rules.  The statute did not expressly address its applicability to information provided before the effective date.  The SEC gave effect to the safe harbor in Rule 21F-9(d), which allows for a reward based on original information provided after the July 21, 2010 enactment of Dodd-Frank but before the effective date of the rules.  The SEC subsequently adopted Rule 21F-4(b)(1)(iv), expressly limiting whistleblower awards to information provided for the first time after July 21, 2010.  The whistle-blower contended that this rule was inconsistent with the statute.  The court disagreed, finding that even if the statute was ambiguous, the SEC’s interpretation was entitled to deference.

Electronic Discovery

No Sanctions For Text Messages Lost In Good Faith Operation Of Mobile Phones.

By: Daniel J. Weiss

In Federico v. Lincoln Military Housing, LLC, No. 12-cv-80 (E.D. Va. Dec. 31, 2014), the defendants moved for sanctions due to the plaintiffs’ failure to produce text messages from their mobile phones.  The district court held that no sanctions were warranted because the loss of the plaintiffs’ text messages “was the result of the routine, good-faith operation of their phones” and was thus shielded from sanctions pursuant to Fed. R. Civ. P. 37(e), which provides that a court should not normally impose sanctions for the loss of information “as a result of the routine, good-faith operation of an electronic information system.”   The court took notice of several studies, publications, and judicial decisions, and concluded that text messages are deleted automatically in the ordinary course of using a mobile phone or the cellular network.  The court held that the “the complex, automatic, and robust operation of cellular services constitutes an ‘electronic information system’” under Rule 37(e).

Court Rejects Sanctions For Party’s Insistence On Broad Search Terms.

By: Daniel J. Weiss

In Leach Farms, Inc. v. Ryder Integrated Logistics, Inc., No. 14-C-0001 (E.D. Wis. Jan. 26, 2015), the district court rejected plaintiff’s request for discovery sanctions based upon defendant’s insistence on an allegedly overbroad electronic search.  Defendant demanded that plaintiff use broad search terms to locate electronic documents for production.  Plaintiff objected on the grounds that the broad terms would “generate thousands of irrelevant and duplicative documents,” but eventually agreed to run the broad terms while reserving its objection.  Approximately 16,000 documents “hit” on the search terms and plaintiff made those documents available to defendant via an electronic database.  After defendant then reviewed those documents using additional search terms and other methods, plaintiff’s counsel “went back in[to] [the database] and took a peek at the results” of defendant’s review, revealing that defendant “had opened only 4,107 of the 16,102 documents,” and moved for sanctions, arguing that “if [defendant’s] lawyers were able to use search terms to winnow their search of the documents down to only 25% of those produced, they should have agreed to allow [plaintiff] to use those same terms when making its expanded production.”  The court rejected this argument, crediting defendant’s argument that it properly used “multiple, evolving searches” to review the broader production, which would not have been practicable until the broader universe of documents was gathered.

Divergent Results On Scope Of E-Discovery Costs Recoverable Under 28 U.S.C. § 1920.

By: Daniel J. Weiss

Two recent decisions highlight continuing variances in how district courts handle requests for e-discovery costs pursuant to 28 U.S.C. § 1920.

In Bagwe v. Sedgwick Claims Management Services, No. 11-cv-2450 (N.D. Ill. Jan. 27, 2015), the district court denied recovery of all but $7,000 of $57,000 in submitted e-discovery costs.  The court held that the only recoverable e-discovery costs are those “akin to providing photocopies of responsive documents,” such as “converting the data obtained into readable form.”  The court held that costs associated with the “gathering, preserving, processing, searching, culling, and extracting of ESI” are not recoverable.

In contrast, in Comprehensive Addiction Treatment Center v. Leslea, No. 11-cv-03417 (D. Colo. Feb. 13, 2015), the district court awarded the prevailing defendant $55,000 in e-discovery costs pursuant to 28 U.S.C. § 1920, including the cost of a third-party vendor to “retrieve and restore” electronic data.  The court emphasized that “[the non-prevailing] Plaintiff’s own litigation choices and aggressive course of discovery necessarily resulted in heightened defense costs.”

Court Finds That Computer-Assisted Review Is Now Widely Accepted.

By: Daniel J. Weiss

In Rio Tinto PLC v. Vale S.A., No. 14 Civ. 3042 (S.D.N.Y. Mar. 2, 2015), Magistrate Judge Peck, who has previously authored widely-cited opinions on computer-assisted document review, issued a new opinion on that subject.  Judge Peck wrote that “it is now black letter law that where the producing party wants to utilize TAR [technology assisted review] for document review, courts will permit it.”  Judge Peck collected several examples of recent federal cases approving various forms of TAR.  Judge Peck noted that one “issue that remains open” in this area is “how transparent and cooperative the parties need to be with respect to the seed or training set(s),” which are used to “teach” a computer system which documents are relevant.  Judge Peck suggested that this issue can be handled in different ways, depending on the nature of the case and the type of review protocol used.  Judge Peck stressed, however, that “it is inappropriate to hold TAR to a higher standard than keywords or manual review” because “doing so discourages parties from using TAR for fear of spending more in motion practice than the savings from using TAR for review.”

Broad Interpretation Of 28 U.S.C. § 1920 With Respect To Some E-Discovery Costs.

By: Daniel J. Weiss

In Colosi v. Jones Lang LaSalle Americas, Inc., 781 F.3d 293 (6th Cir. 2015) (No. 14-3710), the Sixth Circuit held that 28 U.S.C. § 1920 authorizes a broader recovery of e-discovery costs than the Third Circuit previously found in an influential opinion, Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012).  In Race Tires, the Third Circuit held that most e-discovery costs are not recoverable under § 1920 because they are not akin to “making copies” or the other types of costs that are specified in the statute.  In Colosi, the Sixth Circuit held that the Race Tires interpretation was “overly restrictive” and inconsistent with a 2008 amendment to § 1920, which changed the phrase “making copies of papers” to “making copies of any materials.”  In particular, the Sixth Circuit held that making an electronic image of a hard drive is a recoverable cost under § 1920 because it “falls squarely within the definition of ‘copy.’”  The Sixth Circuit stressed that “courts have long understood that the phrase ‘making copies’ fairly includes the production of imitations in a medium or format different than the original.”

No Preservation Obligation As Foreign Company Did Not Anticipate U.S. Litigation.

By: Daniel J. Weiss

In Lunkenheimer Co. v. Tyco Flow Control Party Ltd., No. 11-cv-824 (S.D. Ohio Feb. 12, 2015), the parties disputed the date the defendant’s duty to preserve documents first arose.  The defendant was an Australian company that did not operate in the United States.  There was some evidence of email correspondence with the defendant suggesting potential litigation in 2002, but no lawsuit was initiated until 2011 when the plaintiff filed a complaint in the United States District Court.  The court held that the defendant was “not excused from an obligation to preserve evidence simply because it is a foreign company.”  Nonetheless, the court held that “the only place litigation might at some point have been anticipated [by defendant] was in New South Wales, Australia—not Ohio or anywhere else in the United States.”  The court held that the defendant’s obligation to preserve documents under federal discovery rules did not arise until the defendant “reasonably anticipated litigation in the United States,” which the court held occurred when the defendant was served with the U.S. complaint in 2011.

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