Jenner & Block

Spotlight Newsletter Resource Center

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

If you would like to be added to the mailing list for The Spotlight, please send an email to Justin L. Portaz
at jportaz@jenner.com.

Topics Covered

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Arbitration

By: Howard S. Suskin

  • Court Rejects Bright-Line Test for Determining Waiver of Right to Arbitrate.

    The US Court of Appeals for the Tenth Circuit declined to adopt a bright-line rule of waiver of the right to arbitrate just because a party has filed a lawsuit. BOSC, Inc. v. Board of County Commissioners of the County of Bernalillo, 853 F.3d 1165 (10th Cir. 2017) (No. 16-2031). A county board sued its securities broker in state court, but refrained from serving process while it determined whether arbitration was available. The securities broker removed the case to federal court and moved to dismiss. After the motion to dismiss was fully briefed, but prior to the district court’s ruling, the board voluntarily dismissed the case and filed for arbitration. The district court granted the board’s motion to compel arbitration, and the appellate court affirmed. The Tenth Circuit rejected the broker’s argument that filing a lawsuit created a bright line rule of waiver of the right to arbitrate. Instead, the court held that waiver had not occurred, because the board had refrained from serving the broker and did not voluntarily submit its claims to a court for decision; instead, even though the board had initiated the lawsuit, the board attempted to prevent a court from deciding the claims while it determined whether arbitration was available.

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  • Failure to Advance Arbitration Fees Waives Right to Arbitrate.

    The New Jersey Supreme Court held that the defendants’ failure to advance the required fees for arbitration before the American Arbitration Association constituted a material breach of the parties’ agreement, thereby precluding the defendants from enforcing the agreement to arbitrate. Roach v. BM Motoring, LLC, 155 A.3d 985 (N.J. 2017) (No. 077125). The court found that the failure to advance arbitration fees as the arbitral forum requires constitutes a material breach of the arbitration agreement. It also violated standards of good faith and fair dealing, and constituted a breach of the implied covenant of good faith and fair dealing. Accordingly, defendants were barred from compelling arbitration, and the plaintiff was entitled to pursue

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Class Actions

By: Michael T. Brody

  • Court Rejects Large Follow-On Fee in VW Litigation.

    We recently reported to you regarding the court’s award of attorneys’ fees in the amount of $167 million to the class lawyers who prosecuted the VW Diesel Emission class action. Many of the same lawyers also represented a class of auto dealers who sued Volkswagen in connection with the same controversy. The VW Dealers also settled, and the settlement created a settlement fund of approximately $1.6 billion. Under the settlement, counsel agreed not to seek a fee in excess of $36 million. The class lawyers requested a $29 million fee. Calculated on the percentage basis, this was equivalent to 2.4% of the common fund; using the lodestar and multiplier method, it would have resulted in a multiplier approaching 10. The district court reduced the fee demand. In re Volkswagen “Clean Diesel” Marketing Sales Practices, and Products Liability Litig., MDL No. 2672 (N.D. Cal. Apr. 12, 2017). First, the court analyzed the lodestar and reduced the requested lodestar to $1.48 million. The court eliminated time also spent on the consumer case, reserve time for settlement implementation, and certain time that was not appropriately documented. The requested $29 million fee would result in a multiplier of 19 times the lodestar, which the court concluded was not appropriate. Ultimately, the court awarded a multiplier of 2, resulting in a fee award of $3 million. While substantial and reflective of the speed in resolving the case, the court’s award was substantially less than demanded and reflects a very small percentage of the common fund.

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Complex Commercial Litigation

  • Supreme Court: Causal Link Required for Fee-Award Sanctions.
    By: Matthew J. Thomas

    In Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178 (2017) (No. 15-1406), plaintiffs brought a products liability action, alleging that defendant’s defective tires caused plaintiffs’ motorhome to flip over on the highway. During lengthy discovery, plaintiffs repeatedly requested that defendant produce all testing data related to the relevant tires, which defendant claimed to produce. The parties settled on the eve of trial. Thereafter, plaintiffs learned that defendant had withheld certain test results from its discovery production, and moved for sanctions. The district court found that defendant had knowingly concealed crucial test records and engaged in a years-long course of bad-faith behavior; the court awarded plaintiffs $2.7 million in attorneys’ fees, which the court calculated was the amount incurred since defendant made its first dishonest discovery response. The district court held that, because of the egregious nature of the misconduct, it did not need to find a causal link between those fees and the sanctionable conduct. The Ninth Circuit affirmed, but the Supreme Court reversed, holding that when a federal court exercises its inherent authority to sanction bad-faith conduct by ordering an award of fees, the award must be limited to the fees the innocent party incurred solely because of the misconduct, i.e., the fees that the party would not have incurred but for the bad faith. The Court ruled that attorneys’ fees sanctions must be compensatory, rather than punitive, when imposed pursuant to civil procedures, and a sanction is compensatory only if it is calibrated to the damages caused by the bad-faith acts on which it is based. Thus, a court must establish a causal link between the litigant’s misbehavior and the legal fees paid by the opposing party.

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  • Seventh Circuit Holds, En Banc, that Title VII Bars Sexual Orientation Discrimination.
    By: Matthew J. Thomas

    In Hively v. Ivy Tech Community College of Indiana, 853 F.3d 339 (7th Cir. 2017), plaintiff, a part-time adjunct professor, brought a Title VII action against defendant, alleging she was denied full-time employment and promotions based on her sexual orientation. The district court dismissed the claim, ruling that sexual orientation is not a protected class under Title VII, which prohibits discrimination on the basis of a person’s “race, color, religion, sex, or national origin,” 42  USC. § 2000e-2(a). A Seventh Circuit panel affirmed, holding that discrimination based on sexual orientation was distinct from sex discrimination, and that Congress had nothing more than the traditional notion of “sex” in mind when it voted to outlaw sex discrimination. After a rehearing en banc, a divided Seventh Circuit reversed, holding that discrimination on the basis of sexual orientation is a form of sex discrimination prohibited by Title VII. The court noted that the vast majority of other circuits have held that sexual orientation discrimination is excluded from Title VII, but the court rejected those holdings and reasoned that the better guide was the Supreme Court’s decision in the “closely related” case Oncale v. Sundowner Offshore Services, Inc., 523 US 75 (1998), in which the Court held that Title VII covers same-sex harassment claims. In Oncale, the Supreme Court explained that although Congress may not have anticipated a particular circumstance when it enacted Title VII in 1964, statutory prohibitions go beyond the principal evil considered to cover all reasonably comparable evils that meet the statutory requirements. The Seventh Circuit ruled that this maxim applies equally here, where the plaintiff alleged she was discriminated against because she is a lesbian, and that had she been a man in a relationship with a woman, defendant would not have refused to promote her. The court concluded that this describes paradigmatic sex discrimination, adding that it is “the common-sense reality that it is actually impossible to discriminate on the basis of sexual orientation without discriminating on the basis of sex.”

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  • Second Circuit Holds that Profane Facebook Rant Was Not Enough to Fire Employee.
    By: Matthew J. Thomas

    In National Labor Relations Board v. Pier Sixty, LLC, 855 F.3d 115 (2d Cir. 2017), plaintiff was an employee of defendant. Two days before he and his co-employees were to vote on whether to unionize, plaintiff, while at work, posted a profanity-laced tirade on his publicly accessible Facebook page, insulting his supervisor and his supervisor’s family, before ending the post with the phrase “vote YES for the union.” The post was quickly discovered and plaintiff was fired. Plaintiff filed a complaint with the NLRB, alleging that he had been terminated in retaliation for protected concerted activities in violation of the National Labor Relations Act (NLRA). An Administrative Law Judge ruled that defendant had violated the NLRA, and defendant appealed. The Second Circuit affirmed. The court noted that while the NLRA generally prohibits an employer from discharging employees for participating in protected, union-related activity, an employee can lose the protection of the NLRA if he acts in an “abusive” manner or engages in “opprobrious conduct.” The court ruled that plaintiff’s use of obscenities and personal insults in the workplace were not so egregious as to deny plaintiff protection under the NLRA. Looking at the totality of the circumstances, the court determined that there was sufficient evidence to support that conclusion, including the facts that: defendant consistently tolerated profanity among its workers; the “location” of plaintiff’s comments was an online forum that is a key medium of communication among coworkers and a tool for organization in the modern era; and because plaintiff’s post protested mistreatment by management and exhorted employees to vote for unionization, it reasonably could be determined that the outburst was merely part of a tense debate in the period before the representation election.

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  • Shareholder Approval of Incentive Plan Dooms Challenge to Specific Incentive Awards.
    By: David P. Saunders

    Continuing a recent trend in the Delaware Chancery Court, the court in In re Investors Bancorp, Inc., C.A. No. 12327-VCS (Del. Ch. Apr. 5, 2017), dismissed a derivative complaint because the shareholders of the company had previously ratified certain prospective acts by the company. Specifically, in In re Investors, plaintiff derivative shareholders claimed that the company’s officers and directors breached their fiduciary duties by awarding themselves incentives that represented, in some instances, a twenty-fold increase from the prior year’s incentives. Defendants moved to dismiss, arguing that the executive incentive plan had been ratified by an informed shareholder vote, and the awarded incentives complied with the terms of that plan. Thus, defendants argued, the incentives could only be attacked as corporate waste – a claim not asserted by the plaintiffs. The court granted the defendants’ motion, rejecting plaintiffs’ arguments that shareholder ratification was only valid where (i) shareholders approved specific incentive amounts, or (ii) the shareholder-approved incentive plan was self-executing. The court noted, however, that shareholder approval of incentive plans with no or excessively high compensation limits may not be sufficient to ratify specific incentive awards. However, the plan at issue set “meaningful” limits to incentives, within which limits the awards adhered. As a result, in this case, the award of incentives was subject to the business judgment rule (as opposed to entire fairness), which led to the dismissal of the complaint.

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Electronic Discovery

By: Daniel J. Weiss

  • Court Holds that Rule 37(e) Does Not Protect Party that Intentionally Deleted ESI.

    In Hsueh v. New York State Department of Financial Services, No. 15 Civ. 3401 (S.D.N.Y. Mar. 31, 2017), the court held that Federal Rule of Civil Procedure 37(e) does not limit the power of district courts to impose sanctions for spoliation where a party intentionally deletes its ESI. In this Title VII employment discrimination suit, plaintiff disclosed that she had made an audio recording of a conversation with her former employer’s HR representative but then later deleted the recording as not “worth keeping” because the recording “was not very clear.” The defendant sought spoliation sanctions and the reopening of discovery. After discovery was reopened, but before the sanctions motion was decided, plaintiff recovered and produced 10 minutes of recorded conversation from a 45-minute meeting with the HR representative with the help of her husband, who worked in the information technology field.Plaintiff contended that Rule 37(e) did not permit sanctions against her because she did not act “with the intent to deprive another party of the [ESI’s] use in the litigation” when she deleted the recording. The court disagreed: Rule 37(e) “is meant to address ‘the serious problems resulting from the continued exponential growth in the volume of’ ESI as well as ‘excessive effort and money’ that litigants have had to expend to avoid potential sanctions for failure to preserve ESI.” But plaintiff’s recording was lost due to her “specific actions to delete it” – not because she had improper systems in place to prevent the loss of the recording from her computer. The court did not find plaintiff’s explanations about how and why the recording was deleted credible, and it cited several facts in support of its conclusion that the produced recording was incomplete. Therefore, the court ordered an adverse inference instruction under its inherent sanctions power and awarded defendant its costs incurred in bringing its motion and reopening discovery.

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  • Party Compelled to Write New Software to Query Existing Databases.


    In Meredith v. United Collection Bureau, Inc., No. 16 CV 1102 (N.D. Ohio Apr. 13, 2017), a putative class action, plaintiff sought to represent a class of individuals who had received wrong-number calls to their cell phones from defendant, a debt collector, in violation of the Telephone Consumer Protection Act. The court had previously denied plaintiff’s motion to compel production of class information for wrong-number calls from defendant’s database of over 278,000 accounts after defendant asserted that manual review of the database would be unduly burdensome. Later, defendant’s chief technology officer conceded during his deposition that a computer program could be written to query defendant’s database to identify the class information plaintiff sought. Plaintiff asked defendant to write such a computer program and produce the relevant portions of its database, or alternatively to forego production of the class information until after certification but to stipulate to numerosity under Federal Rule of Civil Procedure 23. When defendant declined all of plaintiff’s proposals, plaintiff filed a motion to compel, and defendant filed a competing motion for protective order. Defendant asserted that it was not obligated to write the software program plaintiff proposed because, under Rule 34, production of ESI is limited to the manner in which the ESI is “kept in the usual order of business.” Furthermore, defendant contended that writing and testing such a software program would take a few days and harm its ability to conduct business during business hours.

    The court ordered defendant to produce the relevant information, reasoning that defendant was not being compelled “to create completely new documents” but only “to query an existing dynamic database for relevant information.” The court left the parties the option of having defendant write the program at plaintiff’s expense, or having plaintiff’s expert write the program with access to representatives of defendant with knowledge of the database for information to understand the database and for possible deposition. Finally, the court ordered that the program would be run on defendant’s database during non-business hours to minimize the burden to defendant.

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  • Spoliation Sanctions Warranted Even Where Cloud and USB Drive May Provide Back-Up.

    In TLS Management & Marketing Services LLC v. Rodriguez-Toledo, No. 15-2121 (D.P.R. Mar. 27, 2017), plaintiff moved for spoliation sanctions under Federal Rule of Civil Procedure 37 after ESI stored on defendants’ laptop, external hard drive, and iPhone was lost. One month after filing suit, plaintiff specifically informed defendants that they should preserve ESI on cell phones, hard drives, and computers because the data were “important” to the litigation. Nevertheless, defendants discarded a malfunctioning laptop three months later and deleted the contents of an external hard drive after transferring the hard drive’s contents to a USB flash drive provided to defendants’ attorney. Noting that the “fact that a personal computer stops functioning is by no means a death knell for the data it contains,” the court ordered an adverse inference sanction for the loss of the laptop because defendants discarded the computer “without making any attempt whatsoever to preserve all the potential ESI within, including potential metadata or files not copied or transferred elsewhere.” The court also ordered an adverse inference instruction for lost data from the hard drive, and further granted plaintiff’s request for a forensic examination of the hard drive at defendants’ expense. Defendants opposed these sanctions on the grounds that the data on the laptop and the hard drive were copied to a cloud-computing service and a USB flash drive, respectively, but the court found that defendants failed to bear their “heavy burden” to show a lack of prejudice to plaintiff where they had not proffered clear and convincing evidence that all information stored on the laptop and the hard drive, including metadata, was still discoverable from the preserved information. The court denied sanctions for lost ESI stored on the defendants’ iPhone, however, because defendants asserted that the iPhone had been lost, and plaintiff had failed to satisfy its burden to show that the iPhone was not inadvertently lost or to show the approximate time when the iPhone was lost.

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  • FLSA Defendant Compelled to Produce Its Vendor’s ESI.

    In Williams v. Angie’s List, Inc., No. 1:16-cv-00878 (S.D. Ind. Apr. 10, 2017), 48 individual plaintiffs sought transactions data from defendant’s sales platform vendor, SalesForce, to support their claim that defendant had instructed them to underreport their overtime hours on their usual computerized time records, a violation of the Fair Labor Standards Act (FLSA). After producing one year’s worth of SalesForce ESI, defendant refused to produce data from an additional two years. The court found that the SalesForce ESI was relevant to plaintiffs’ claims of unreported hours because at least some SalesForce transactions data could be identified as manually entered outside plaintiffs’ regular work hours, indicating that plaintiffs had been working despite no entries in their usual computerized time records. Furthermore, the court held over defendant’s objection that defendant controlled the ESI because it was recorded in the course of defendant’s contractual relationship with SalesForce and defendant had a legal right to obtain the ESI. The court further refused to shift the cost of the ESI production to plaintiffs, reasoning that defendant had already negotiated with SalesForce to reduce its asking price for one year’s worth of transactions data from $90,000 to $15,000, and SalesForce’s asking price of $30,000 for the additional two years’ worth of data was “easily outstripped by the amount in controversy” in a claim brought by 48 plaintiffs for three years’ worth of back pay.

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Insurance and Reinsurance Litigation

  • Continuous Trigger Rule Applied to Construction Defect Claims by Oregon Supreme Court.
    By: Caroline L. Meneau, Brian. S. Scarbrough and Jan A. Larson

    Determining the date on which a potentially insured injury occurred is central to the question of which insurance policy or policies may apply to provide coverage for the resulting loss. This is often referred to as the “trigger” of coverage—the date the injury or damage is deemed to have taken place. Analyzing the “trigger” of coverage can be complex for insurance claims involving injury or damage resulting in a loss that is cumulative and occurs over a period of time, and courts have built up a body of jurisprudence applying a “continuous trigger” rule to long-tail liability claims involving bodily injury or property damage in the environmental context. In FountainCourt Homeowners’ Association v. FountainCourt Development, LLC, 380 P.3d 916 (Or. 2016), a construction defect case, the Oregon Supreme Court issued a ruling that supports an extension of the “continuous trigger” rule to certain construction defect claims. During the relevant period, the policyholder had been insured by two different insurers under three different non co-extensive policies. Both insurers accepted the policyholder’s tender of defense subject to a full reservation of rights, arguing that the water damage at issue was cumulative, and that it was not possible to determine how much water damage had occurred during each of the three separate policy periods. The policyholder argued, and the trial court agreed, that the policyholder had satisfied its prima facie burden of proving coverage under the policy, and that the insurers had failed to meet their burden of proving what portions, if any, of the judgment and damages were excluded by the policy. The appellate court later affirmed the trial court’s finding on the merits. The Oregon Supreme Court likewise affirmed the lower courts’ decisions, applying the continuous trigger rule to the construction defect context. The Court found that the water damage was “continuous damage . . . over the course of multiple policy periods” and governed by the “continuous trigger” rule. It explained that “although the damage at issue . . . had begun to occur before the policies were in effect, and continued to occur after the policies were no longer in effect, coverage under those policies was nonetheless “triggered” because the damage was ongoing during the policy periods.”

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  • Pro-Policyholder Talc-Related Asbestos Exposure Case Endorses Favorable Allocation Rule and Rejects Pollution Exclusion.
    By: Alexander J. Bandza, Brian. S. Scarbrough and Jan A. Larson

    A recent opinion from the Connecticut Appellate Court, R.T. VanderbiltCo. v. Hartford Accident & Indemnity Co., 156 A.3d 539 (Conn. App. Ct. 2017), aides policyholders seeking coverage for asbestos-related long-tail liability claims under Commercial General Liability policies when responding to certain coverage defenses, including the allocation of risk for uninsured policy periods and the application of the pollution exclusion. In Vanderbilt, the court ruled on two significant issues—first, it endorsed the “unavailability of insurance” exception to the pro rata allocation method to allocate uninsured policy periods to the insurer, and second, it rejected the application of the pollution exclusion to talc-related asbestos exposure. As to the first, the court confronted a novel question under Connecticut law regarding whether the policyholder or the insurer should bear the risk for periods during which insurance coverage was commercial unavailable—commonly known as the “unavailability of insurance” exception to the pro rata allocation method. The court affirmed the existence of the exception, holding that the insurer should bear this risk. As to the second, the court rejected that the pollution exclusion applied, reasoning that the exclusions at issue barred coverage only when the exposure arose from “traditional environmental pollution” migrating through property or into the environment, but did not extend to “inhalation or ingestion of asbestos dust released in small quantities in an indoor environment during everyday activities.”

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Investigations, Compliance and Defense

  • Two Courts Address Liability for Pronouncements About Compliance.
    By: Robert R. Stauffer and Ana R. Bugan

    Recent years have seen a number of lawsuits in which corporations or their officers are sued for public statements about the strength of their compliance efforts prior to developments involving non-compliant behavior. Such efforts have met with mixed results, with the outcome often depending on the specificity of the representations that were made. Two recent cases illustrate this trend. In In re Plains All American Pipeline, L.P. Securities Litigation, No. H:15-02404 (S.D. Tex. Mar. 29, 2017), a putative class of investors sued an oil and gas pipeline company and various officers and directors in the wake of a significant oil spill emanating from a company pipeline off the coast of California. The complaint focused on a number of representations the company had made prior to the spill in securities filings and other public statements, including that the company’s “primary operational emphasis” was “pipeline integrity management,” that its pipelines were in “substantial compliance” with applicable regulations, that “safety is a core value,” and that the company “foster[s] a culture that emphasizes operational excellence, asset integrity, & safety.” The court found many of the statements to be “corporate cheerleading” that a reasonable investor would not rely on in making an investment decision. The court found other, more specific statements, like a statement that the company performs needed maintenance on all parts of its pipeline network, to be potentially actionable, but found that the plaintiffs had not adequately pled scienter on the part of the defendants. Accordingly, the court dismissed the complaint without prejudice.

    In In re Braskem S.A. Securities Litigation, No. 15 Civ. 5132 (S.D.N.Y. Mar. 30, 2017), a putative class of investors sued a Brazilian petrochemical company, two former officers, and a former shareholder for damages allegedly suffered from the reduction in share price when media exposed a significant bribery scheme. The plaintiffs alleged that the company had bribed government officials in order to buy naphtha, a crucial raw material, at below-market prices. The complaint further alleged that prior to the exposure of the scheme, the company’s share price was artificially inflated as the result of public statements that created the false impression that the price the company paid for naphtha was based on market forces. The statements were made in press releases, SEC filings and other materials, and included such statements as that the company had a policy of transparency and good corporate governance; the company had ethical integrity permeating all systems of governance; the company adhered to regulatory and legal guidelines; and the price paid by the company for naphtha was based on a variety of factors including market prices, the exchange rate, and the composition of the naphtha. The court found that most of these statements were inactionable “puffery.” However, it found the statements regarding the price of naphtha to be actionable. The statements were not literally false, but the complaint alleged they were misleading because they failed to disclose that the favorable purchase price was secured substantially due to bribery of officials. Disclosure of the bribery scheme was necessary to make the incomplete statements non-misleading. Moreover, the complaint alleged facts supporting a strong inference that the individual defendants were directly involved in the bribery scheme and thus had actual knowledge that the pricing statements were false or misleading. Accordingly, the court granted the defendants’ motion to dismiss in part and denied it in part.

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  • Failure to Investigate Red Flags Raises Fact Issue as to FCA Scienter.
    By: Robert R. Stauffer and Ana R. Bugan

    In Graves v. Plaza Medical Centers, Corp., No. 10-23382-CIV (S.D. Fla. Feb. 27, 2017), defendant Humana, Inc. was not able to rely on the extent of its compliance program to refute allegations that it had acted with “reckless disregard” under the federal False Claims Act (FCA). In this qui tam case, the relator alleged that Humana submitted false claims to the Centers for Medicare and Medicaid Services when it certified the accuracy of certain data based on false diagnosis codes from Humana providers, defendants Dr. Cavanaugh and Plaza Medical Centers, Corp. The relator admitted that Humana did not know the codes were false but alleged that Humana nonetheless satisfied the FCA’s “knowledge” requirement by acting with reckless disregard. Federal regulations require Medicare Advantage Organizations, like Humana, to implement effective compliance programs that include measures to detect and prevent fraud such as “upcoding.” On Humana’s motion for summary judgment, the court analyzed the question of scienter based on whether there was evidence that Humana had failed to make a “good faith effort” to make accurate certifications to CMS and to maintain an effective compliance plan. Relator argued that Humana’s compliance program was not reasonably designed or utilized to uncover fraud because it did not provide for proactive fraud detection measures. Rather, relator argued, Humana would investigate fraud only reactively, after someone brought an area of concern to the company’s attention. Humana argued that, even though it had not investigated the fraudulent conduct at issue, there could be no finding that Humana acted with reckless disregard because its compliance program met or exceeded CMS requirements. Humana contended that its compliance program was robust as it included, among other things, an experienced Chief Compliance Officer, policies regarding ethics and fraud, annual ethics training, a fraud reporting hotline, and dedicated investigative resources to investigate allegations of wrongdoing that might surface. The court rejected the argument that the mere existence of a compliance program is sufficient to refute a claim of reckless disregard. Rather, the court relied on evidence of certain shortcomings in the design and application of Humana’s compliance program as raising a genuine fact issue as to whether the program met CMS’s requirements and thus whether Humana acted with “reckless disregard.” Specifically, the Court relied on Humana’s failure to conduct an investigation into the conduct of Dr. Cavanaugh and Plaza Medical Centers despite numerous red flags, including repeated instances where patients’ medical records lacked support for their diagnoses. The court also relied on evidence that Humana neither trained its employees to detect fraud nor instructed them that fraud detection was one of the purposes of reviewing patient records to assess whether diagnoses had adequate support. Accordingly, the court denied Humana’s motion for summary judgment.

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  • Email About Internal Investigation Actionable as Defamation.
    By: Robert R. Stauffer and Ana R. Bugan

    In Yeatts v. Zimmer Biomet Holdings, Inc., No. 16-CV-706 (N.D. Ind. Apr. 17, 2017), plaintiff sued Zimmer Biomet for defamation based on an email about sanctions following an internal investigation. In 2012, defendant had entered into a deferred prosecution agreement (DPA) based on violations of the Foreign Corrupt Practices Act (FCPA) arising from payments made by defendant’s distributor, Prosintese, to government-employed doctors in Argentina who used Biomet products. According to the complaint, defendant violated the DPA by maintaining a relationship with Prosintese and, when defendant became aware that Yeatts knew about the DPA breach, a company attorney accused him of continuing to deal with Prosintese and concealing that from his superiors, even though Yeatts explained to the attorney that he had been acting with his superiors’ knowledge and approval. Yeatts was suspended and later terminated. Yeatts alleged that during his suspension, defendant’s Chief Compliance Officer and General Counsel (GC) sent an email to certain personnel stating that defendant had “identified several entities that pose significant and unacceptable compliance risks,” and included Yeatts’s name on an attached “Restricted Parties List,” which also stated Yeatts had been “suspended in connection with a corruption-related investigation.” Defendant moved to dismiss Yeatts’s defamation claim on the basis that the GC’s statements were neither defamatory nor false, as they merely expressed the GC’s opinion. The court considered the circumstances surrounding the GC’s statement because opinions are only shielded from liability if a reasonable recipient of the statement would understand it to be an opinion, not a statement of fact. Here, the court found that Yeatts sufficiently plead the statement’s falsity because defendant had implicitly implicated Yeatts in FCPA violations by identifying him as posing significant and unacceptable compliance risk. Therefore a reasonable recipient of the email would connect Yeatts to defendant’s criminal activities, especially if, as alleged, the recipients had knowledge of the FCPA investigation and DPA. The court also found that Yeatts successfully alleged that the statement was made with malice, as he plead that defendant was aware that Yeatts had acted with defendant’s approval and thus knew the email was false. Accordingly, the court denied defendant’s motion to dismiss Yeatts’s defamation claim.[Back to Top]
     
  • Attorney General Sessions and Top Official Stress DOJ’s Continued Emphasis on FCPA Enforcement.
    By: Erin R. Schrantz

    In a series of late April speeches, Jeff Sessionsand Acting Principal Deputy Assistant Attorney General Trevor McFaddenanswered questions about whether the Department of Justice would stay the course on active FCPA enforcement. Both Sessions and McFadden underscored DOJ’s continued priority on individual criminal accountability for FCPA violations, cooperation with corporations in preventing, identifying, and remediating FCPA violations, and transparency about FCPA charging decisions.

    Sessions’ speech largely stuck to broad strokes, heralding that under his leadership, DOJ “will continue to strongly enforce the FCPA and other anti-corruption laws.” Session also made it known that DOJ would be guided in its prosecutorial discretion determinations by the same factors that had been salient for the prior administration: whether the company has a good corporate compliance program in place, the steps it took to cooperate with the government and self-disclose the violation, and the steps it took to remediate the violation.

    McFadden’s more detailed speech emphasized two additional points. First, “compliance requires more than good intentions” and companies which operate in “high-risk environments” or expand quickly into “new markets or through acquisition of foreign companies” must ensure that their compliance programs are up to the task. Importantly, McFadden stressed that corporate compliance must be more than merely “ink on paper.” Instead, it must be part of the company’s culture itself, echoing the Fraud Section’s most recent guidance on corporate compliance programs. Second, McFadden noted a “concerted effort” to speed up FCPA investigations so that they could be “measured in months, not years.” A quicker investigative process would facilitate charges against individuals before the limitations period had run or evidence was lost, but would also lead to a quicker resolution for the company to the concerns that invariably accompany a government investigation.

    All in, these speeches broke little new ground. But for a DOJ which has spent the first few months advertising a renewed focus on violent crime and immigration, the speeches served as notice it would carry-over active FCPA enforcement from the last administration. (See also The Winds of Change They Aren’t a Blowin': DOJ Affirms Commitment to Maintain White-Collar and FCPA Enforcement and Emphasizes the Importance of Corporate Compliance, Katya Jestinand Nicholas R. Barnaby).

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Privilege Issues

By: David M. Greenwald

  • Fifth Circuit Puts Burden on In-House Counsel to Establish Privilege.

    In Equal Employment Opportunity Commission v. BDO USA, L.L.P., 856 F.3d 356 (5th Cir. 2017) (No. 16-20314), the Fifth Circuit ruled that the magistrate judge and the district court erred by placing the burden on the requesting party to demonstrate that in-house counsel was not acting in a legal capacity rather than the proper legal standard, which requires in-house counsel to demonstrate that they acted in a legal capacity with regard to withheld communications. In this case, the EEOC conducted an employment discrimination investigation in response to complaints made by a former BDO employee who had acted as a discrimination investigator for the company. In response to an EEOC subpoena, BDO withheld 248 documents, and provided a privilege log. The EEOC challenged the sufficiency of the log with respect to, among other things, communications between BDO in-house counsel and other BDO employees. In denying the EEOC’s motion to compel and for an in camera review, the Magistrate Judge found the log sufficient on the grounds, among others, that “anything that comes out of [BDO’s] lawyer’s mouth is legal advice,” and that the EEOC had failed to make a “sufficient showing” that the log reflected “an improperly claimed privilege”. The district court affirmed. The appellate court vacated and remanded. The appellate court held that the lower courts had applied the wrong legal standard. The initial burden to establish the elements of privilege is borne by the party asserting privilege, and only after the initial burden is met does the burden shift to the requesting party to demonstrate inadequate assertion of privilege. The lower courts also erred by applying a legal assumption that any communication with in-house counsel is per se privileged. The appellate court held that, where communications with in-house counsel are at issue, there is no presumption that the communications are privileged. The appellate court found that BDO did not meet its burden to establish privilege and remanded the matter with direction to apply the proper legal standards. The appellate court noted that in camera review would likely be necessary given the facts of the case.

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  • Employee Emails with Personal Attorney on Company Email System Were Not Privileged.

    In United States v. Finazzo, Nos. 14-3213-cr(L), 14-3330-cr(Con) (2d Cir. Mar. 7, 2017), the Second Circuit held that defendant waived any privilege over emails sent by defendant on his employer’s email system. In this case, defendant was convicted of a kickback scheme in which he caused his employer, Aéropostale, to purchase product from South Bay, while defendant secretly received a portion of South Bay’s profits. Aéropostale initiated its investigation based on an email between defendant and his personal attorney regarding defendant’s will, in which the attorney listed assets including several South Bay entities. The government used the email at trial. Defendant argued that the government improperly used an email that was protected by defendant’s attorney-client privilege. The appellate court held that any privilege had been waived, because defendant did not have a reasonable expectation of confidentiality regarding emails sent on the company’s email system. The policy governing employee computer usage specifically stated that employees “should have no expectation of privacy when using Company Systems”. In addition, employees were notified that the company could “monitor, access, delete, or disclose” all use of company systems without permission. Defendant signed forms acknowledging that he had read the Employee Handbook, which made these disclosures. The court found that there was no evidence that defendant took any steps to preserve confidentiality. Based on these facts, the appellate court held that it was not an abuse of discretion for the district court to rule that defendant had not met his burden to show that he had kept the email confidential.

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Professional Responsibility and Ethical Developments

By: Gregory M. Boyle and John R. Storino

  • Cert Petition Filed on Retaliation Protections for Tips to Non-SEC Regulators.

    In April 2017, a defendant company, Digital Realty Trust, asked the Supreme Court to review a March decision by the Ninth Circuit holding that Dodd-Frank’s anti-retaliation employment protections apply to whistleblowers who report alleged wrongdoing to agencies or persons other than the SEC. See Petition for Writ of Certiorari, Digital Realty Trust, Inc. v. Somers, 16-1276 (US Apr. 25, 2017). The decision widened a circuit split on that question: the Fifth Circuit held in 2013 that whistleblowers must report to the SEC for the anti-retaliation provisions to apply, while the Second Circuit held in 2015 that because the anti-retaliation provisions are ambiguous, courts must defer to the SEC’s guidance as to how widely they apply. The circuit split is set to widen even further, as the Third Circuit currently has before it a whistleblower case raising the same question. In Somers, the majority held that the district court correctly denied Digital Realty’s motion to dismiss a lawsuit by one of its former Vice Presidents, who alleges he was fired in retaliation for complaining to senior management that his supervisor eliminated internal controls required by Sarbanes-Oxley.

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  • Ninth Circuit Rejects Attempt to Share in Settlement of Government Action.

    On April 28, 2017, the Ninth Circuit affirmed a judgment denying a former federal prosecutor’s motion to intervene in a False Claims Act suit brought against Sprint, which led to a settlement of $15.5 million. See United States v. Sprint Commc’ns, Inc., 855 F.3d 985 (9th Cir. 2017) (No. 14-17434). The former prosecutor argued that a False Claims Act suit he brought against Sprint in 2009 entitled him to intervene as of right in the instant suit and share in the award as if his own action had been successful. However, the Ninth Circuit held that because the court concluded in 2009 that the former prosecutor could not bring his lawsuit, he had no rights to protect that allowed him to intervene in the government’s successful suit.

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  • Whistleblower Suit Dismissed for Deceptive Conduct by Counsel.

    On April 28, 2017, a federal court in Massachusetts sanctioned a whistleblower’s attorneys by dismissing a case that the judge ruled only survived dismissal because of information the attorneys sourced in an unethical manner. See Leysock v. Forest Laboratories, Inc., No. 12-11354-FDS (D. Mass. Apr. 28, 2017), appeal docketed, No. 17-1538 (1st Cir. May 25, 2017). The whistleblower alleged that the pharmaceutical company Forest Pharmaceuticals Inc. improperly promoted the drug Namenda for off-label use. The court found that the whistleblower’s counsel hired a medical researcher to interview doctors about issues related to that off-label use without disclosing that the interviews were for a lawsuit rather than for medical research.

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  • SEC Awards $500,000 to Company Insider Who Reported “Hard-to-Detect” Violations.

    On May 2, 2017, the SEC awarded $500,000 to a company insider for reporting “hard-to-detect” violations of securities laws that prompted an SEC investigation and led to a successful enforcement action. See SEC Release No. 80,571, File No. 2017-9 (May 2, 2017). The order redacts information as to what percent of the total collection amount was awarded to the whistleblower. The total amount awarded under the whistleblower program now stands at $154 million.

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  • SEC Denies Whistleblower Award For Information Provided To Different Agency.

    On May 4, 2017, the SEC denied a whistleblower claim on the basis that the tipster had given information to other federal agencies which had not been passed on to the SEC. See SEC Release No. 80,596, File No. 2017-10 (May 4, 2017). The tipster claimed to have information about misconduct by a particular individual. After the tipster said he had shared that information with another federal agency, SEC staff searched for the tip but did not find anything, and staff for the other agency said they did not share the information with the SEC. In a footnote, the SEC notes that even if the other agency had shared information, the tipster would likely not qualify for an award because the rules state that information must be provided directly to the SEC. (Although in past instances, the SEC has considered awards where information has actually been used in investigations.) The tipster did eventually submit a written tip to the SEC with the information, but by that point the SEC had completed its investigation, and was only determining the amount of sanctions to be paid. The SEC stated that the tipster’s information did not affect the final settlement amount.

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