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Practice Points

July 28, 2016

New York Court of Appeals Rules in Case Involving Common Interest Doctrine


Under the so-called common interest doctrine, communications between the lawyers for two separate parties may be shielded by the attorney-client privilege if the communications are made in connection with a matter of common interest. (The doctrine is more complicated than that, but this description should suffice for purposes of this piece.) The lines of the doctrine are not always easy to draw, but certain state statutes make clear that the doctrine extends to all communications whether made in connection with litigation or not, at least as long as the other elements are satisfied.


In Ambac Assurance Corporation v. Countrywide Home Loans, Inc., the New York Court of Appeals recently reached a very different result, reaffirming its long-standing rule that the common interest doctrine was unavailable unless the communications were in furtherance of a common legal interest in pending or reasonably anticipated litigation.


This should interest all commercial litigators for a number of reasons.


First, from time to time many of us either do business that touches on New York or choose New York law to govern agreements (including, perhaps, common interest agreements). Keep the Ambac decision in mind when doing so.


Second, although the majority in Ambac conceded that its position was inconsistent with many jurisdictions, it did assemble citations to a number of other courts that also confine the common interest doctrine to the litigation context.  It is not correct, therefore, to view this as solely a “New York problem.”


Third, although it is possible that all the communications at issue in Ambac took place within the state of New York, it seems unlikely. Yet the New York Court of Appeals did not even bother to engage in a choice of law analysis. The lesson: If you find yourself in a court outside of your home forum, the local rule of privilege could apply regardless of where the communication took place.


There are other potential impediments to cloaking communications between attorneys for different parties that go beyond the scope of this piece. Suffice it to say that you should not rely on the future availability of the doctrine without undertaking a thoughtful analysis.


Keywords: litigation, business torts, common intrest doctrine, New York Court of Appeals


Michael Apfeld, Godfrey & Kahn, S.C., Milwaukee, WI


 

July 26, 2016

Non-Compete Agreements: What Every Company and Employee Should Know


Many people believe that a non-compete agreement can be freely broken without consequence. In actuality, however, whether a non-compete agreement is enforceable depends on the law of the state that governs the agreement. Some states strictly enforce non-compete agreements while others only enforce them if reasonable in scope and term. This article discusses how various states construe non-compete agreements, highlights the current trends in how states deal with non-competes, and discusses how to determine when a court will enforce such an agreement.


How Different States Deal With Non-Compete Agreements
A non-compete agreement is a contract usually between an employer and employee in which the employee agrees not to enter into or start a similar profession in competition with his or her employer for a certain period of time and/or within a certain geographic scope. Most states like New Jersey, New York, Pennsylvania and Texas disfavor non-competes and construe them in favor of the employee because the employee has a weaker bargaining position and courts do not want to take away an employee’s livelihood. That being said, these states will enforce non-compete agreements under certain conditions. For example, these states require that a non-compete protect an employer’s legitimate business interest, such as their confidential information or customer goodwill. In addition, these states require non-competes to be reasonably limited in time and geography, with terms no more restrictive than necessary. Courts in these states have held that non-compete agreements for one or two years are reasonable. In addition, courts in these states have held that a reasonable geography is, for example, a former employee’s territory during her employment, the employer’s operating area or the company’s current clients within a geographic area. Certain states have upheld a worldwide or national geographic restriction because of an employer’s broad market area.


Massachusetts. Massachusetts goes further in how it deals with non-compete agreements. Certain professions in Massachusetts are protected from non-competition agreements by state statute or regulation. Specifically, attorneys, physicians, nurses, social workers, and broadcasters cannot be restricted by non-compete agreements.


In an effort to protect certain professions, including Massachusetts’s emerging tech sector, Bay State lawmakers went further in March 2016 by proposing even stricter non-compete laws, including (1) limiting the duration of non-competes; (2) banning non-competes for low-wage workers, interns, employees under the age of 18, and employees terminated without cause; (3) requiring employers to provide prospective employees with notice that a non-compete is required for a position and time to seek legal counsel; and (4) requiring employers to pay a former employee’s pay when the employee is not working because of his or her non-compete. The Massachusetts legislature is currently debating this bill and is expected to vote on it in its next session.


California. California is the most restrictive state regarding non-compete agreements. Non-competes in California are void for employees and independent contractors. Thus employers cannot restrict (1) where an employee works after leaving his or her employment; (2) whether an employee may solicit customers of his or her former employer; and (3) whether an employee may solicit employees that work at his or her former employer. Despite these restrictions on employees and independent contractors, California law allows for a narrow exception. In California, the seller of a business or withdrawing partner of a partnership or member of an LLC can be restricted from starting a similar business in a particular geographic area and soliciting customers of the former business. Thus, California law allows non-competes to protect the goodwill and value of the business the buyer is purchasing or the business the withdrawing partner or member is leaving.


Conclusion
Many states will only enforce non-compete agreements if reasonable but some states—like Massachusetts and California—are more restrictive. Employers and employees should understand the restrictive covenant laws of the state they do business in because the “conventional wisdom” that non-competes can be freely broken is largely false.


Keywords: litigation, business torts, unfair competition, non-compete agreements


Catherine Pastrikos Kelly, Meyner and Landis LLP, New York City, NY


 

March 31, 2016

What You Should Know about the Implied Duty of Good Faith and Fair Dealing


Imagine you’re a franchisee of a large chain and, according to your franchise agreement, you owe a monthly franchise fee. To make enough money to pay that fee, you ask the franchisor for help with marketing or to speak to your potential investors. The franchisor, however, refuses to help. As a result, you are unable to pay your franchise fee.


In this situation, the franchisor may be liable to you for breach of the duty of good faith and fair dealing—even though you didn’t perform your end of the bargain. This is because every contract contains an implied duty of good faith and fair dealing in the performance and enforcement of the contract. Most executives and companies—and even attorneys—however, do not realize that this duty may require that parties not interfere with or fail to cooperate in the other party’s performance. This is important because even if your contract does not explicitly require you to cooperate or if your contract does not explicitly state that you must not interfere, the duty of good faith and fair dealing may require you to do so or else you risk breaching the agreement.


This post will explain what the duty of good faith and fair dealing is and how a party can breach that duty by interfering with or failing to cooperate in the other party’s performance.


The Duty of Good Faith and Fair Dealing
In general, every contract contains an implied duty of good faith and fair dealing. This duty requires that neither party will do anything that will destroy or injure the right of the other party to receive the benefits of the contract. There is no specific definition, however, of this duty and courts have discretion to determine its scope. When deciding whether the duty of good faith and fair dealing was breached, courts analyze the facts and determine what is fair under the circumstances.


“Good faith” has generally been defined as honesty in a person’s conduct during the agreement. The obligation to perform in good faith exists even in contracts that expressly allow either party to terminate the contract for any reason. “Fair dealing” usually requires more than just honesty. It generally requires that a party cannot act contrary to the “spirit” of the contract, even if you give the opposing party notice that you intend to do so.


In general, the duty of good faith and fair dealing means, for example, that parties cannot evade the spirit of the bargain, lack diligence or slack off, perform incorrectly on purpose, abuse their power when specifying the terms of a contract, or interfere with or fail to cooperate in the other party’s performance. Let’s further analyze this last example because, as stated above, most executives and attorneys do not realize that some jurisdictions include it in the duty of good faith and fair dealing.


Interfering with or Failing to Cooperate in the Other Party’s Performance
As stated above, each party to a contract has a duty to do everything that the contract assumes he or she will do to accomplish its purpose. This means that your performance under a contract is excused—or does not need to happen—if your performance is prevented or hindered by the other party to the contract. In other words, your performance in a contract does not need to be completed—and you won’t be considered to have breached the contract—if the other party is interfering with or fails to cooperate with your performance. The theory behind this principle is that a party cannot interfere with or fail to cooperate with your performance and then complain about it.


Thus, in the example above, when the franchisor failed to help you with marketing or refused to meet with your investors, the franchisor may have breached the duty of good faith and fair dealing and you may be excused from paying the franchise fees.


Final Thoughts
It is important that you and your business understand what your obligations are under a contract—not just the actual contract terms, however, but also the implicit terms, like the duty of good faith and fair dealing. This is because, during the course of a contract, if the other party asks you for help and you do not provide it because the contract terms do not require you to do so, you may have unintentionally breached the agreement.


Whether you are about to enter into a contract or are already a party to numerous agreements, talk to an attorney to understand what the duty of good faith and fair dealing requires of you and your company.


Keywords: litigation, business torts, unfair competition, contracts, duty of good faith, duty of fair dealing, breach of contract, franchise law


Catherine Pastrikos Kelly, Meyner and Landis LLP, New York City, NY


 

February 2, 2016

How to Distinguish Lay and Expert Witness Testimony


When testimony is “expert” in nature, it must comport with the stringent standards articulated by the U.S. Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). However, the distinction between lay opinions and expert testimony is not a bright line. Courts throughout the country have come to different conclusions about the scope of permissible lay opinions and what constitutes expert testimony. This article discusses the distinctions between lay witness testimony and expert testimony.


Why Does the Distinction Matter?
As an initial matter, one critical issue lawyers must consider when assessing whether reliance on lay or expert opinions will be necessary is the disclosure requirements in Federal Rule of Civil Procedure 26(a)(2) that apply to expert testimony. Rule 26(a)(2) requires expert reports from retained experts. Conversely, lay witness opinions typically need not be disclosed in advance of trial or supported by formal reports. However, given the fine line some courts draw between lay witness opinions and expert testimony, lawyers must review the authority in their particular jurisdiction early in the case.


To avoid any uncertainty, attorneys should consider either disclosing lay witness opinions or pursuing an agreement with opposing counsel as to the exact nature of the disclosures required for specific testimony to be elicited in the case. Such disclosures or agreements will ensure that important testimony that counsel hopes to rely on is not excluded on the eve of trial.


The Applicable Federal Rules
The Federal Rules of Evidence governing lay opinions and expert testimony—rules 701 and 702 respectively—set forth the standards for admissibility of both categories of evidence.


Under rule 701, a lay witness may provide an opinion that is (1) rationally based on the witness’s perception; (2) helpful to clearly understanding the witness’s testimony or to determining a fact in issue; and (3) not based on scientific, technical, or other specialized knowledge within the scope of rule 702.


Expert testimony, in contrast, is only permissible if a witness is “qualified as an expert by knowledge, skill, experience, training, or education” and the proffered testimony meets four requirements: (1) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (2) the testimony is based on sufficient facts or data; (3) the testimony is the product of reliable principles and methods; and (4) the expert has reliably applied the principles and methods to the facts of the case. Experts may testify “in the form of an opinion or otherwise”—it is entirely appropriate for an expert to testify generally about principles, methods, or other information and leave the ultimate inference or “opinion” to the finder of fact.


Treatment by the Federal Circuit Courts
Federal circuit courts have come to different conclusions regarding the scope of permissible lay opinion testimony. Some courts take a broad view of lay witness opinions. For example, in U.S. v. Jayyousi, 657 F.3d 1085 (11th Cir. 2011), the Eleventh Circuit permitted an FBI agent to testify as to the meaning of alleged code words used between codefendants, even though the calls were predominantly in Arabic and the agent did not speak the language. Id. at 1101–1104. Taking a narrower view of rule 701, the Sixth Circuit reached a different result in a case involving similar facts. In U.S. v. Freeman, 730 F.3d 590 (6th Cir. 2013), the Sixth Circuit reversed and remanded a trial court’s decision to permit an FBI agent’s lay witness testimony interpreting phone calls between codefendants. The agent had provided voice identifications and substantive interpretations of the meaning of various statements contained in the calls. Id. at 594. The court focused on the fact that the agent lacked first-hand knowledge sufficient to lay a foundation for a lay witness opinion under rule 701(a).


Need for Early Assessment
Given the nuance between lay and expert testimony, an early assessment of what, if any, opinions witnesses may offer at trial is critical. Similarly, an understanding of how your particular court interprets the scope and requirements for lay opinions and expert witness testimony is essential when developing your case strategy.


Keywords: litigation, business torts, unfair competition, lay witness, expert witness, witness testimony,


Maria L. Kreiter, Godfrey Kahn, Milwaukee, WI


 

January 21, 2016

Seventh Circuit Rules in In re Sentinel Management Group, Inc.


On January 8, 2016, the Seventh Circuit ruled that the Bank of New York Mellon Corporation  forfeited its first position secured creditor status as to the assets of Sentinel Management Group, a now-defunct investment management firm, because the bank was on “inquiry notice” of Sentinel’s fraudulent pledge of collateral. In re Sentinel Management Group, Inc., No. 15-1039, 2016 WL 98601 (7th Cir. Jan. 8, 2016). In this decision, the Seventh Circuit reversed the district court’s ruling in favor of the bank and held that the bank should be treated as an unsecured creditor with respect to Sentinel’s $312 million debt. The bank was on inquiry notice of Sentinel’s fraudulent conduct as a result of an email sent by a senior bank employee questioning how Sentinel could be in a position to pledge the amount of collateral it presented and other evidence that the bank should have looked further into whether Sentinel had the right to pledge securities as collateral for its loan. Because the bank failed to follow up on that inquiry notice, the court ruled that it could not assert a “good faith” defense to Sentinel’s fraudulent transfers.  This ruling, authored by Judge Posner, has potentially broad-reaching implications for all lenders.


The Sentinel Decision
Sentinel was a cash-management firm—it invested cash, which had been lent to it by persons or firms, for investment in liquid, low-risk securities. The firm also traded on its own account, using money borrowed from the bank to finance its trading. Sentinel improperly pledged securities that it had bought for its customers with their money as security for its loans.


As the economy began to falter in August 2007, Sentinel experienced trading losses that left it unable to simultaneously maintain its collateral with the bank and meet the demands of its customers for redemption of their securities. Sentinel filed Chapter 11 and the bank sought to liquidate the collateral pledged as security for Sentinel’s loan, which included accounts that held Sentinel’s customers’ assets. The bankruptcy trustee refused to recognize the bank as a senior secured creditor and deemed Sentinel’s transfer of customer assets to accounts that Sentinel used to collateralize its loans to be “fraudulent transfers” in violation of 11 U.S.C. § 548(a)(1)(A). 


The bankruptcy statute on fraudulent transfers, 11 U.S.C. § 548(a)(1)(A), allows a bankruptcy trustee to avoid any transfer of an interest in the debtor’s property if the debtor transferred the property “with actual intent to hinder, delay, or defraud” another creditor (granting a security interest constitutes a “transfer”). However, the recipient of the transfer (the bank) may prevent avoidance if it can establish that it acted in good faith as to the debtor’s transfer. As discussed by the Seventh Circuit, when a recipient is on inquiry notice—i.e., notice that a transfer is potentially fraudulent—and fails to act on that notice, it cannot establish the good faith defense. 


The bank argued that it remained entitled to its senior secured creditor status because it accepted Sentinel’s pledge of assets “in good faith.” The Seventh Circuit disagreed, holding that, because the bank was on inquiry notice that Sentinel was improperly using its customers’ assets as security, the bank could not establish that it acted with the requisite good faith. “Inquiry notice” refers to an awareness of suspicious facts that would lead a reasonable firm, acting diligently, to investigate further to discover wrongful conduct. 


The Seventh Circuit held that inquiry notice “is not knowledge of fraud or other wrongdoing but merely knowledge that would lead a reasonable, law-abiding person to inquire further—would make him in other words suspicious enough to conduct a diligent search for possible dirt.” 


Critical to the court’s finding that the bank was on inquiry notice was a single email from a bank’s managing director of financial institutions credit to other bank employees servicing Sentinel’s account in which the managing director questioned how Sentinel could have so much collateral and stated the he assumed most of the collateral is for “somebody else’s” benefit. The Seventh Circuit found that the “somebody else” was an “obvious reference to Sentinel’s customers whose money was being used to secure the bank’s loans. Accordingly, the court found the bank was on inquiry notice, triggering an obligation to investigate what assets Sentinel used to secure its $312 million debt. 


The Seventh Circuit found it suspicious that Sentinel’s loans surpassed $300 million while the company only had capital equal to 1/150th of that amount. The court also held that the bank knew or should have known that the security for Sentinel’s loans came from the customer accounts and that the failure to follow up on the “obvious lead” created by the managing director’s email was a failure to act on inquiry notice. Because the bank had failed to act on inquiry notice, the court eliminated its security interest. The court further held that even if the bank’s “obtuseness” failed to actually trigger suspicion, the “obvious lead” still created inquiry notice because it would cause a reasonable person to be suspicious enough to investigate. 


How Does Sentinel Impact Lenders?
The Sentinel decision highlights the need for lenders to actively supervise the conduct of their customers. While this case arose in the bankruptcy context, its ruling has significance for all claims under the Uniform Fraudulent Transfer Act. Because this ruling could potentially be used to justify removal of a bank’s secured position in a variety of scenarios, lenders should carefully review their policies and practices regarding the administration of customer accounts. When suspicion arises as to a customer’s potentially fraudulent conduct, a lender must conduct due diligence and thoroughly investigate—or risk losing its secured position.


Keywords: litigation, business torts, unfair competition, security interest, inquiry notice, fraudulent conveyance


Maria L. Kreiter, John Kirtley, Godfrey Kahn, Milwaukee, WI, and Kerry Gabrielson, Godfrey Kahn, Madison, WI


 

July 30, 2015

Delaware Rapid Arbitration Act Rules Now Effective


The Delaware Rapid Arbitration Act (DRAA) now has rules. Enacted earlier this year, the intent of the DRAA is to serve as an alternative, confidential, and cost-effective forum for binding arbitrations involving Delaware corporations, LLCs, and other business entities. 10 Del. C. § 5801. Key provisions include limited discovery, default confidentiality rules, a 90-day time frame for a hearing, and, perhaps most notably, docking of the arbitrator’s fee if a decision is not rendered within 120 days of appointment. (There is a provision allowing for a single 60-day extension if all parties agree, however).


For businesses to take advantage of the DRAA program for commercial (not consumer) disputes, at least one of the parties to the arbitration agreement must be organized under Delaware law. In addition, the arbitration agreement enabling the arbitration of disputes must specifically reference the DRAA. The arbitration agreement must also provide that the arbitrator has the power to issue subpoenas and/or award commissions for depositions; otherwise, no third-party discovery will be conducted. Arbitrators have authority to determine questions of substantive and procedural arbitrability as well as to grant either legal or equitable relief (including interim relief). The arbitration may take place anywhere and using a wide variety of methods (in-person, videoconference, or telephone).


The parties may agree to modify the rules, but they may not agree to extend any of the time frames set forth under the DRAA. The parties may choose an arbitrator or may petition the court of chancery for one. The DRAA’s deadlines commence at the service on all parties of written notice that the arbitrator has accepted his or her appointment. The rules contemplate a preliminary telephonic conference, a preliminary telephonic hearing, a scheduling order, and a one-day arbitration hearing. Respondents in DRAA arbitrations should not expect that failing to respond to the claimants’ notice of arbitration will delay the proceeding.


Although the DRAA program may not be appropriate for all kinds of commercial disputes, the benefits it offers—efficiency, confidentiality, speed, and arbitrators with knowledge of Delaware commercial law—will be of great interest to many businesses incorporated or formed in Delaware.


Keywords: litigation, business torts, unfair competition, DRAA, arbitration


Elizabeth S. Fenton, Saul Ewing LLP, Wilmington, DE


 

June 3, 2015

MA Superior Court Rules in TIBCO Software v. Zephyr Health, Inc.


A recent decision from the Business Litigation Session of the Massachusetts Superior Court has broad implications for non-compete cases involving arbitration clauses. In TIBCO Software, Inc. v. Zephyr Health, Inc. and Kevin Willoe, the court denied an employer’s motion for a temporary restraining order enforcing a non-compete, finding the employer’s own arbitration provision required it to pursue its restrictive covenant claims before the American Arbitration Association (AAA) in California.


Plaintiff TIBCO had sued a former employee for violating a non-compete clause contained within his employment agreement and sued the employee’s new employer, Zephyr, for tortious interference with that agreement. TIBCO also filed a motion for a temporary restraining order to enforce the terms of the non-compete. The defendants responded with a motion to compel arbitration based on an arbitration clause also in the employment agreement. In denying the injunctive relief and granting the motion to compel, the court held that although Zephyr was not a signatory to the employment agreement, it could enforce the arbitration clause against TIBCO because the claims that TIBCO was asserting against Zephyr arose directly out of the restrictions imposed on the employee under his employment contract with TIBCO.


The judge noted that the arbitrator would be authorized to issue preliminary injunctive relief but that if there was any delay in arbitration, then TIBCO could request an emergency hearing on its motion for a preliminary injunction. However, TIBCO first would have to take its case to the AAA. Although it was not entirely clear from the decision, presumably the employment contract at issue did not contain a typical arbitration carve-out clause permitting the employer to seek emergency injunctive relief in court. This decision thus serves as an important reminder to businesses to carefully draft non-competes and to understand the full implications of the growing use of arbitration clauses. Here, TIBCO presumably included the arbitration clause in its employment agreement to require its employees to enter arbitration with respect to employee-asserted claims in an effort to reduce costs—without contemplating the ramifications on enforcing the restrictive covenant in another part of the agreement. Given the urgent need to obtain injunctive relief in a non-compete case, and the often tortured path to selecting an arbitrator or panel, employers will want to avoid any such delay associated with arbitration.


Keywords: litigation, business torts, unfair competition, employer arbitration clauses


Christopher Lindstrom and Robin Morse, Nutter McClennen & Fish, Boston, MA


 

March 10, 2015

Third Circuit Makes It Easier for Unregistered Foreign Businesses to Enforce Arbitration Awards in PA


On February 19, 2015, the Third Circuit Court of Appeals ruled a party could seek to enforce an arbitration award in federal court in Pennsylvania, despite a Pennsylvania state statute that, if applied, would preclude enforcement. While the decision is not surprising, it is important for two reasons: (1) It makes it easier for businesses not registered in Pennsylvania to enforce arbitration awards against parties that have assets in Pennsylvania; and (2) every other state has a similar state statute and so other courts may extend the decision’s reasoning to apply to every state.


In Generational Equity LLC v. Schomaker, 2015 WL 708481, (3d Cir. Feb. 19, 2015), Generational Equity LLC (GE), a foreign limited partnership not registered to do business in Pennsylvania, sought to enforce an arbitration award in the United States District Court for the Western District of Pennsylvania. Shomaker challenged, arguing that, under a Pennsylvania statute, GE’s status as an unregistered foreign limited partnership meant GE could not “maintain any action or proceeding in any court of this Commonwealth” without first registering. The Third Circuit found the Federal Arbitration Act (FAA) preempted the state statute and rejected Shomaker’s argument, affirming judgment in favor of GE. 


The court acknowledged the purpose behind the FAA is “to promote arbitration.” The court also explained that “[i]t is well established that the FAA ‘pre-empts application of state laws which render arbitration agreements unenforceable.’” Armed with these twin weapons of federal statutory purpose and bedrock precedent, the court reasoned that the FAA also precludes state statutes that would frustrate enforcement of arbitration awards that stem from arbitration agreements. While the court recognized well-settled FAA law had been applied more to motions to enforce arbitration agreements than to motions to enforce an arbitration award like the motion before the court, it critically found “that is a distinction without a difference.” The court also held that while the state statute did not expressly address the enforceability of arbitration awards, the statute “nevertheless stands as an obstacle to the accomplishment of the intended objectives of the FAA” and therefore the FAA preempts it.


The decision comes as no surprise to those following recent trends in arbitration law. The federal courts have, in increasing frequency, found the FAA preempts state law that acts as an obstacle to arbitration, as the state law did here. 


The decision, however, has important practical consequences. Arbitration awards must be enforced through the courts. A prevailing party will want to enforce such an award in a court that has jurisdiction over the assets of the losing party to ensure payment. Under state law, to get such relief in Pennsylvania, an unregistered foreign limited partnership would have had to first register to do business in Pennsylvania—and thus take on all the legal obligations associated with that step. The Third Circuit’s decision now removes this requirement as an obstacle to enforcing an otherwise valid arbitration award.


The decision, while it is unpublished and comes from one circuit, may have a far-reaching effect.  The court noted that “every state in the country has a statute similar to Pennsylvania’s.”  Nevertheless, it concluded those state laws should suffer the same fate: “[s]uch laws, including Pennsylvania’s, are inconsistent with the enforcement mechanism established under the FAA and cannot be read to preclude a federal district court from exercising the authority Congress clearly intended under the FAA.” Litigants in other jurisdictions can take advantage of the Third Circuit’s well-reasoned opinion to support the argument the FAA preempts other similarly situated state statutes.


Keywords: litigation, business torts, unfair competition, foreign businesses, arbitration, FAA


Brian Berkley, Pepper Hamilton, Philadelphia, PA


 

March 10, 2015

Fabricated Evidence Forces Plaintiff to Walk Away from $1.3 Billion Lawsuit


With a revelation that could come from the pages of the latest legal thriller, Moncrief Oil International consented to the dismissal, with prejudice, of its $1.37 billion lawsuit against Russian oil & gas producer Gazprom when Gazprom discovered that a key piece of Moncrief’s evidence had been falsified. Moncrief had sued Gazprom in state court in Fort Worth, Texas, for allegedly backing out of a deal to jointly develop natural gas fields in Siberia and for stealing Moncrief’s trade secrets. Moncrief Oil International, Inc. v. OAO Gazprom, Case No. 017-229664-08, was filed in the District Court for Tarrant County, Texas, in 2008, and finally went to trial in February. 

 

Four weeks into the trial, Moncrief sought to introduce a document containing an economic analysis allegedly proving that Gazprom had misappropriated Moncrief’s trade secrets.  In reviewing that proposed exhibit, Gazprom’s lawyers spotted a footnote labeled “Figure 11, Revision 6, December 2004.” Upon investigation, they discovered that the referenced Figure 11 was from an article that was not published until 2012. Gazprom asked the court to sanction Moncrief for falsifying the document, and Moncrief agreed to drop its case.  It is unclear whether Moncrief will suffer any further sanction for submitting the tainted evidence.    

 

Moncrief’s counsel was apparently unaware of the doctored document and described it as a “tragic mistake” by one of Moncrief’s senior executives. But as soon as either side’s lawyer became aware of the fabricated document, he or she was required to disclose it to the court. ABA Model Rule of Professional Conduct Rule 3.3(a)(3) prohibits a lawyer from “offer[ing] evidence that the lawyer knows to be false. If a lawyer, the lawyer's client, or a witness called by the lawyer, has offered material evidence and the lawyer comes to know of its falsity, the lawyer shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal.” Although disclosure of the doctored evidence was mandated, Moncrief’s counsel took the further action of falling on the sword, and consenting to the dismissal of the case. 

 

Although it should go without saying, there is no harm in a lawyer telling his or her clients not to falsify or doctor any evidence. When big money is at stake in litigation, there are those who will go to any lengths—including the fabrication or manipulation of evidence—to prevail. Lawyers should take reasonable measures to satisfy themselves that all of the evidence submitted by all parties to a case is proper and legitimate. Successfully exposing falsified evidence can dramatically change the landscape of a case, and failure to guard against it can result in years of wasted effort.


Keywords: litigation, business torts, unfair competition, fabricated evidence, Gazprom, ABA Model Rules of Professional Conduct


Daniel Elms, Bell Nunnally & Martin, Dallas, TX


 

 

October 9, 2014

Aftershock: New Expert Considerations Post-Cooper v. Schoffstall


Expert testimony is a necessity in personal injury and professional liability claims. The standard for whether an individual may testify at trial as an expert is generally set forth in the Pennsylvania Rules of Evidence 702. Some individuals advertise or otherwise hold themselves out as an expert for hire. Individuals with a unique knowledge set may also be approached to engage in expert work. Regardless of how an individual becomes an “expert witness,” it is important to be fully cognizant of what an “expert” may be required to disclose about work experience and related finances.


In the context of personal injury actions, the demands of an expert witness were relatively minor. The expert might be asked to review some medical records or perform an independent medical examination (IME). The expert may be asked to prepare an expert report outlining his or her objective opinions. Occasionally, an expert will be deposed. In rare instances, an expert will need to testify at trial.

The boundaries of expert discovery are somewhat limited. As a matter of course, a party may discover through interrogatories (e.g., written questions) the facts known and opinions held by the expert witness. Pa. R. Civ. P. 4003.5(a)(1). Parties routinely exchange expert reports and supplemental expert reports as well as the expert’s curriculum vitae and fee schedule. Only if a party took the rather extraordinary step of filing a motion and successfully “showing cause” would the court order additional discovery as the court deems appropriate.  Pa. R. Civ. P. 4003.5(a)(2)(A).


Along came Cooper v. Schoffstall
In 2006, the Pennsylvania Supreme Court determined that, if an expert can be categorized as a “professional expert witness,” that expert could be compelled to respond to supplemental discovery to flesh out potential bias. In Cooper, plaintiff’s counsel was able to establish that the expert, Perry A. Eagle, M.D., performed between 200 and 400 medical examinations and regularly testified on behalf of the defense. Accordingly, the court found no abuse of discretion with respect to the trial court’s position that Dr. Eagle was a “professional expert witness.” However, this did not mean that the floodgates were opened. The Pennsylvania Supreme Court expressly acknowledged that supplemental expert discovery “should be of the least burdensome and intrusive kind possible.” The court outlined specific, limited written interrogatories that may be served upon a showing of cause. Trial courts are expected to serve an important “gate-keeping” function, ensuring that any further discovery is narrowly tailored to balance the interests of the expert and the party seeking discovery.


Questions Following Cooper
The implications of Cooper were not immediately understood. Some suggested that attorneys would routinely offer Cooper discovery without requiring any showing of cause. Not only does this position ignore the expert’s interests, but it is also a potentially dangerous position with implications far beyond the scope of the present lawsuit. An attorney may be perfectly at ease with disclosing an expert’s compensation and income from expert services and justifying that information at trial. (There is a real question whether juries find cross-examination regarding expert fees persuasive.) The expert, however, may not share the attorney’s sense of ease. The expert may not want his or her finances to become a matter of record or circulated among counsel.


An attorney’s failure to consistently assert objections to Cooper discovery (i.e., challenge whether the expert has entered the professional witness category and boundaries of any discovery ordered) may have adverse implications in the case at bar as well as future lawsuits. See e.g., Guffey v. Kyriazis, PICS Case No. 14-0192 (CCP, Lackawanna Cty. Feb. 3, 2014). One would expect a court to similarly frown upon an expert selectively producing Cooper discovery.


An expert may be comfortable responding to Cooper discovery for a variety of reasons. Perhaps the expert does not derive a substantial income from expert work. Perhaps the expert testifies equally for plaintiffs and defendants. Perhaps the expert has such a highly specialized knowledge base justifying high fees. Whatever the rationale, experts should be aware that, absent a court order, Cooper discovery responses will become a matter of record and may be disseminated among attorneys. Future efforts to avoid Cooper discovery could be severely undercut.

There is also an outstanding question regarding the extent to which any attorney will aggressively fight Cooper discovery. Never lose sight of the fact that the attorney retaining the expert does not represent the expert. The bottom line is that purse strings of the individual or entity footing the costs of litigation may impact efforts to shield an expert from Cooper discovery.


Should I Still Engage in Expert Work? And Who Pays for All of This?
It depends. As noted in the first line of this article, expert testimony is a necessity in many types of litigation. It is important to have highly qualified experts on both sides of the table to assist the trier of fact. That said, experts need to be fully informed of current Pennsylvania precedent and practice.


Before engaging in expert work, you should review Cooper and decide whether you are comfortable providing the information that may be requested. Cooper discovery is becoming increasingly prevalent and is being served before any effort to establish that the expert has entered the “professional expert witness” category. Some attorneys have even taken to serving subpoenas to completely sidestep the court’s “gate-keeping” function.


Before entering into any agreement, the expert should have a candid discussion with counsel about Cooper discovery. What position(s) have they previously taken? If served, how will they respond? Will counsel supply copies of any relevant discovery requests and/or proposed responses before serving same? Who pays for the additional costs of responding to Cooper discovery? The ground rules need to be established before the expert is engaged.


Finally, experts should consider hiring experienced counsel well-versed in expert discovery to protect their interests. Personal counsel can advocate on the expert’s behalf to ensure appropriate objections to Cooper discovery are asserted. Personal counsel can file legal papers challenging cause or seeking a protective order. Personal counsel can advocate for narrowly tailored Cooper discovery that adequately addresses the expert’s privacy interests. Personal counsel can seek appropriate fees to pay the costs of responding to Cooper discovery.


Maraleen D. Shields, Fitzpatrick Lentz & Bubba, Central Valley, PA


 

September 8, 2014

Non-Compete Legislation Fails in Massachusetts


After an eventful legislative session, non-competes remain alive and well in Massachusetts—at least for the time being. 

Over the past few years, a number of Bay State business leaders and legislators have called for legislation banning non-competes, largely without gaining momentum. Leading these efforts have been technology industry startups, emerging companies, and venture capital firms, many of which argue that non-competes hamper the ability of Massachusetts to compete with the technology community in California, where non-competes are not enforced. More established Massachusetts companies generally have countered that non-competes are necessary to protect their substantial long-term investments in proprietary information and employee talent. Over the course of the legislative session that just drew to a close, proponents of restricting non-competes in Massachusetts appeared to gain substantially greater traction and garner more attention than past efforts. This occurred primarily because, for the first time, Governor Deval Patrick came out publicly in support of non-compete reform.

In April 2014, Governor Patrick introduced a bill banning non-competes in Massachusetts. The bill contained several limited exceptions and was contingent on Massachusetts adopting a form of the Uniform Trade Secrets Act (UTSA) to prevent employees from bringing proprietary information to new employers. However, the House ignored the governor’s call and passed a version of an economic-development bill in June that did not include any language on non-competes. In July, the Senate attempted a compromise approach, passing its own version of an economic-development bill that would have placed significant restrictions on non-competes but not an outright ban. Of significance, the Senate version of the bill essentially limited the length of non-competes to six months and prohibited employers from using them with hourly employees.      

On July 31, 2014, the final day of formal sessions for the 2013–2014 legislative session, a conference committee of members of the Senate and House worked out the final legislation. The conference committee offered no statutory language on non-competes and declined to adopt a version of the UTSA. The final version of the economic-development bill maintains the status quo with respect to non-competes and trade secrets. The legislature’s bill is now on the governor’s desk, and it appears that it will pass without any changes to non-compete laws.  

Despite a high level of activity on non-compete legislation, the legal landscape governing non-competes in Massachusetts remains intact for now. Although courts will continue to carefully scrutinize non-competes, they will generally enforce narrowly crafted agreements that are necessary to protect a legitimate business interest and are reasonable in duration and geographic scope. However, legislation imposing restrictions on non-competes progressed further than ever before this year, and it appears likely that there will be another push for a non-compete ban or non-compete reform during the next legislative session. Employers and counsel should be aware that non-competes are expected to remain under fire in Massachusetts in the upcoming legislative session. 


Keywords: litigation, business torts, non-competes, Massachusetts


Robin Morse, Nutter McClennen & Fish, Boston, MA


 

 

August 25, 2014

PA District Court Rules in Employee Mass Resignation Suit

In a recent decision involving a mass resignation of employees to go work for a new competitor, the United States District Court for the Eastern District of Pennsylvania held such action fails to constitute a breach of duty of loyalty because the duty does not preclude an employee from seeking other employment, even when it is alleged the employees (1) knew it would cripple the previous employer’s ability to serve clients; (2) conveyed information to another employee regarding the new employment opportunity; (3) violated workplace code of conduct by refusing to identify the new employer; and (4) divulged confidential client contact information.    


Alex G. Gross, Reed Smith, Coral Gables, FL



 

 

July 21, 2014

Eleventh Circuit: Withholding Information About Merger Negotiations In Violation of Securities Exchange Act of 1934

Plaintiff Timothy Finnerty brought suit against his former employer Stiefel Laboratories, Inc. (SLI) and its CEO Charles Stiefel, claiming that the defendants withheld material information about merger negotiations that they had a duty to disclose. SLI was a privately held firm that evidence showed took pride in being privately held and controlled by the Stiefel family and in fact communicated to its employees that SLI would "continue to be privately held." Finnerty, who was vested in SLI's employee stock bonus plan (ESBP) and as part of that plan had a "put" option for SLI stock distributed to him, was terminated in 2008 in a reduction of force.  Afterwards, he elected to defer his distribution but later received letters from SLI announcing major changes to the ESBP and encouraging him to take a distribution. Concerned, he did so in January 2009. Unbeknownst to him, SLI was at the time in negotiations to merge which would have resulted in him receiving more than four times the value he received when he exercised his put.


Ben Coulter, Burr & Forman LLP, Birmingham, AL



 

 

July 16, 2014

No Place for a Layperson: When Expert Testimony Is Required to Prove a Tort Claim

Arias v. DynCorp., __F.3d __, 2014 WL 2219109 (D.C. Cir. May 30, 2014), a D.C. Circuit decision handed down in late May of this year, offers helpful guidance on which tort claims require expert testimony to prove and which do not. This lawsuit arose from a cooperative program between the United States and Colombia in the late 1990s known as “Plan Colombia.”  The plan covered a range of policies to combat Colombian drug cartels, one of which was the aerial spraying of herbicide designed to target illegal cocaine crops. 

In late 2001, a group of Ecuadorian farmers (and others) brought a lawsuit against DynCorp, an American private military contractor, alleging that the glyphosate-based herbicide that the contractor used drifted across the border from Colombia and that some planes actually crossed the border and sprayed in Ecuador. The farmers brought a variety of tort claims against DynCorp for alleged injuries to their health and farmlands. After years of litigation, the district court ultimately dismissed the farmers’ claims because, among other reasons, they failed to provide expert testimony regarding the effects of glyphosate.


Charles E. Harris, II, Mayer Brown LLP, Chicago, IL, and Sean P. McDonnell, Mayer Brown LLP, Washington, D.C.



 

July 14, 2014

California Court Gives Guidance on When Anti-SLAPP Applies


In a recent case, the California Court of Appeals gave greater clarity to when the strategic lawsuit against public participation (the “anti-SLAPP”) statute applies. Old Republic Construction Program Group v. Boccardo Law Firm, __ Cal. Rptr. 3d __, 2014 WL 2900932 (Cal. Ct. App., 6th Dist. June 27, 2014). Old Republic Construction Program Group sued the Boccardo Law Firm and one of its partners for allegedly wrongfully withdrawing settlement funds. Thedefendants represented the injured driver. Old Republic was the worker’s compensation insurer. The parties signed a settlement agreement whereby the defendants deposited the settlement funds into a trust account, and Old Republic’s consent was required to withdraw the funds. After further litigation, the case involving the settlement proceeds was dismissed. A partner at Boccardo then wrote to Old Republic stating that he would distribute the funds, and reiterating that Old Republic had forfeited its right to seek reimbursement. Old Republic did not respond, and the defendants disbursed the funds to their client.


Sarah R. Anchors, Quarles & Brady, Phoenix, AZ



 

 

June 30, 2014

Seventh Circuit Rules in Google's Android Case


In Specht, et al. v. Google Inc., No. 11-3317, 747 F.3d 929 (Apr. 4, 2014), the United States Court of Appeals for the Seventh Circuit affirmed the district court and held that the owner of the “Android Data” trademark abandoned the mark after 2002 and did not resume use of the mark before Google acquired a superior right to the “Android” mark in 2007.


Plaintiff Eric Specht formed Android Data Corporation (ADC) in 1998, a software development, computer consulting, and website design and hosting business. In 2002, the United States Patent and Trademark Office granted ADC’s application to register the Android Data mark. In 2007, Google released a beta version of its Android operating system. In November 2007, Google tried to register “Android” as its own trademark, but the Patent and Trademark Office denied the application, citing the likelihood of confusion with ADC’s Android Data mark. Specht, ADC and a successor to ADC subsequently sued Google over Google’s use of the Android mark, bringing claims for trademark infringement and unfair competition under the Lanham Act and Illinois law. Google counterclaimed, seeking a declaratory judgment that plaintiffs had abandoned the Android Data mark, and requesting cancellation of the mark. The district court granted Google’s motion for summary judgment, and, on appeal, the Seventh Circuit affirmed.     


Ryan M. Billings, Kohner, Mann and Kailas, S.C., Milwaukee, WI



 

 

June 16, 2014

Parody, Profanity, and Politics Collide in Quirky D.C. Circuit Case


The D.C. Circuit has been the talk of the political world this year, with a slew of new appointees joining the bench after changes to the Senate’s filibuster rule.  But a different D.C. Circuit foray into politics has captured our attention: the case Farah v. Esquire Magazine, 736 F.3d 528 (D.C. Cir. 2013) is “principally a defamation action based on the publication of an article by journalist Mark Warren on Esquire Magazine’s Politics Blog.”  It is also a fascinating study in tort law, partisan politics, and the First Amendment.


Farah emerged from the so-called birther movement, the fringe-conservative belief that President Obama was born outside of the United States.  Two of the foremost figures in this movement, author Jerome Corsi and publisher Joseph Farah, collaborated on a book entitled Where’s the Birth Certificate? The Case that Barack Obama is not Eligible to Be President. Unfortunately for them, the question posed in the title was answered just three weeks before the book’s release, when President Obama released his long-form birth certificate showing that he was born in Hawaii.


Warren’s blog post for Esquire intended to poke fun at the timing of these events.  Its headline read “Breaking: Jerome Corsi’s Birther Book Pulled from Shelves!” and the post stated in part:


In a stunning development one day after the release of [the Corsi book], [Farah] has announced plans to recall and pulp the entire 200,000 first printing run of the book, as well as announcing an offer to refund the purchase price to anyone who has already bought a hard copy or electronic download of the book.


(Id. at 531). Littered throughout Warren’s blog post was a considerable amount of “salty language” that the D.C. Circuit described euphemistically as “highly unorthodox for a real news story” (Id. at 538). For example, an unnamed source close to Farah was quoted as saying, “I mean, we’ll do anything to hurt Obama, and erase his memory, but we don’t want to look like fucking idiots, you know.”


The Warren post was entirely false and intended to be satirical; Corsi and Farah had no actual intention of pulling the book from shelves or refunding any sales.  Indeed, anyone on social media has read stories that seem factual but are really hoaxes.  As one example, after Coca-Cola aired a multilingual Super Bowl XLVIII commercial featuring “America the Beautiful” sung in seven languages, a story went viral that ultra-conservative congresswoman Michele Bachmann said in a Fox News appearance that “[i]f English was good enough for Jesus when he wrote the Bible it should be good enough for Coke.”


But can these deliberately false stories give rise to tort liability?  Corsi and Farah argued that Warren’s blog post did. They sued Esquire for defamation, false light, interference with business relations, invasion of privacy, and violation of the Lanham Act, claiming that Warren had intentionally published false information with the intention of confusing readers and hurting book sales. Esquire argued that the Warren post was pure satire, which is protected by the First Amendment. Corsi and Farah responded that the post did not qualify as satire because readers took the fictitious post literally. In support, they indicated that, immediately after the blog posting, purchasers of the Corsi book began requesting refunds and bookstores began pulling the book from their shelves. They also relied on an “update”—posted by Esquire approximately 90 minutes after the initial Warren blog post—that stated: “for those who didn’t figure it out yet, and the many on Twitter for whom it took a while . . . [w]e committed satire this morning. . . .”


The D.C. Circuit explained that satirical speech is protected under the First Amendment if, when read in context, it “cannot reasonably be interpreted as stating actual facts about the individual.”  It said that “[w]ithout First Amendment protection, there is a risk that public debate would ‘suffer for lack of imaginative expression’ and ‘the rhetorical hyperbole which has traditionally added much to the discourse of our Nation.’” The court further explained that in light of the “special characteristics” of satire, “‘what a reasonable reader would have understood’ is more informed by an assessment of her well-considered view than by her immediate yet transitory reaction.” (Id. at 536).


After discussing the traditional characteristics of satire from the ancient Greeks to Jonathan Swift’s “A Modest Proposal,” the D.C. Circuit concluded that a reasonable reader should have recognized that the Esquire blog post was satirical.  The court said that it did not matter that so many actual readers had missed the joke; “it is the nature of satire that not everyone ‘gets it’ immediately” (Id. at 536–37). What mattered was that readers with a “baseline of knowledge” regarding the birth certificate controversy would, after time for reflection, recognize the prominent indicia of satire in the Warren post. The court explained, “The essence of the fictitious story was that Farah, a self-described leader (along with Corsi) of the movement to challenge President Obama’s eligibility to serve, had suddenly and without any warning decided to recall and ‘pulp’ the Corsi book the very day after it was released.”  Those familiar with the birther movement would have recognized these actions were fundamentally inconsistent with Farah’s and Corsi’s well-publicized views, and could not reasonably have taken the story literally, the court said. On the basis of this reasoning, the court dismissed all of Corsi’s and Farah’s claims against Esquire.


Farah will certainly be cited in the future for clearly elucidating the principles for identifying satirical political speech. But we’ll remember it as one of our favorite times the ongoing political culture war spilled over into a humorous legal skirmish.


Keywords: litigation, business torts, birtherism, Barack Obama, Jerome Corsi, defamation


Charles E. Harris, II, Mayer Brown LLP, Chicago, IL, and Sean P. McDonnell, Mayer Brown, Washington, D.C.


 

May 12, 2014

Fifth Circuit Makes Erie Guess on New Anti-SLAPP Statute's Commercial Speech Exemption


In March 2014, the Fifth Circuit took an Erie guess on the application of the Texas Citizen’s Participation Act’s (TCPA) commercial speech exemption, which is also referred to as the Texas anti-SLAPP statute in the action, Kool Smiles v. Mauzé & Bagby, P.L.L.C. et al. Enacted in 2011, the TCPA was established to “protect the little guy, promote judicial economy, provide for tort reform and advance First Amendment rights for all Texas citizens.” After analyzing intermediate Texas courts analysis of the TCPA and precedent from the California Supreme Court regarding its similar anti-SLAPP statute, the Fifth Circuit held that the TCPA did not protect the law firm from Kool Smiles’ defamation and business disparagement related claims.  


In Kool Smiles, a national dental services provider, Kool Smiles, was the subject of an alleged government investigation into the dentists’ Medicaid practices. A personal injury law firm, Mauzé & Bagby, P.L.L.C. (M&B), initiated a marketing campaign directed at the public—in particular, former Kool Smiles patients—and specifically referenced Kool Smiles’ recent legal woes and advised individuals to contact the law firm for legal advice regarding any claims it may have against Kool Smiles. In fact, the blanketed marketing campaign consisting of television, radio, and Internet advertisements, and a new website alleged that Kool Smiles routinely performed unnecessary and possibly harmful dental work on children who receive Medicaid.  


Keywords: litigation, business torts, Texas Citizens Participation Act, Erie guess, Anti-SLAPP, SLAPP, commercial speech exception


Amy Stewart, White & Wiggins, LLP, Dallas, TX



 

April 25, 2014

New Hampshire Court Rules in Counterfeit Handbags Case


In Coach, Inc. v. Sapatis, the United States District Court for the District of New Hampshire (Barbadoro, J.) held that a former owner of a flea market exercised sufficient control over vendors such that a reasonable jury could find him liable for contributory trademark infringement and other claims arising from the vendors’ sale of counterfeit goods. The defendant, Peter Sapatis, owned a large field and adjacent residence and operated the Londonderry Flea Market there until February 2008. He then retired and sold the business to his daughter, Alaina Paul, and they executed a five-year lease of the land. However, Sapatis remained actively involved in the flea market’s operations, keeping the books and paying himself rent out of the proceeds. In June 2011, two private investigators working for Coach visited the flea market and informed Sapatis that counterfeit Coach products were being sold there. After further witnessed violations and several additional communications with Sapatis, Coach sued Sapatis and others, seeking injunctive relief and damages based on violations of federal and state law relating to trademarks, copyrights, and unfair business practices.


Keywords: litigation, business torts, trademarks, trademark infringement, intellectual property, counterfeit goods


Christopher Lindstrom and Robin Morse, Nutter McClennen & Fish, Boston, MA



 

 

April 22, 2014

Fifth Circuit Rules in Electricity Provider Case


In a previous case, the City of Alexandria, the defendant in the instant case, filed suit against its electricity provider in Louisiana state court alleging that it was overcharged for electricity. The case was removed to the U.S. District Court for the Western District of Louisiana. The parties reached a settlement agreement and, in light of the settlement, the district court dismissed the case with prejudice. However, the district court retained jurisdiction over the settlement for the purpose of resolving disputes over attorney fees expended during the litigation and to enforce its protective orders governing confidentiality.


In anticipation of its suit, the defendant hired the plaintiff, a Louisiana-based utility auditing and consulting firm, to conduct an audit of its electricity payments. The instant parties signed an agreement that provided, inter alia, that the plaintiff’s fee was 20 percent of any recovery, damages, or other credits the defendant received as a result of its litigation. The agreement also provided that the plaintiff could review all settlement documents in order to assess its fee. 


Keywords: litigation, business torts, attorney fees, utilities


Sofia Adrogué, Gray Reed & McGraw, P.C., Houston, TX



 

 

April 17, 2014

Fifth Circuit Considers a Plaintiff's Failure to Cross-Appeal Jury Finding


The case had a complicated 15-year history and arose out of a failed real estate transaction. The plaintiff brought suit alleging that the defendant defrauded it and sought a declaratory judgment that it “properly terminated” the deal. The defendant countersued, alleging that the plaintiff breached the agreement by purporting to terminate the deal. A jury found that the plaintiff properly terminated the deal, but that the defendant did not commit fraud. A series of appeals followed.


The district court found that it was undisputed that the jury found against the plaintiff on its independent fraud claims, which neither party appealed and, thus, remained decided against the plaintiff. The district court concluded that the plaintiff waived the issue by failing to cross-appeal the jury’s rejection of such claims. The plaintiff argued to the circuit court that there was no need to appeal its affirmative defense of fraud because it won as to the breach of contract claims.


Keywords: litigation, business torts, real estate, fraud, cross-appeal


Sofia Adrogué, Gray Reed & McGraw, P.C., Houston, TX



 

April 15, 2014

No Federal Preemption of State Law Claims


The Ninth Circuit issued a pithy opinion that the Food and Drug Administration regulations did not preempt the putative class’s state law claims for unfair competition, false advertising and the California Consumer Legal Remedies Act.  Lilly v. ConAgra Foods, Inc., No. 12-55921, 743 F.3d 662 (9th Cir. Feb. 20, 2014). Judge Barry G. Silverman’s first paragraph is well worth quoting: “Some days we are called upon to consider such profound issues as eleventh-hour death penalty appeals, catastrophic threats to the environment,  intense and existential questions of civil and human rights, and the most complicated, controversial problems in civil, criminal and administrative law. Today we consider the coating on sunflower seeds.”


Keywords: litigation, business torts, Food and Drug Administration


Sarah R. Anchors, Quarles & Brady LLP, Phoenix, AZ



 

 

April 15, 2014

"Gist of the Action" Doctrine Applicable in the Virgin Islands


In a recent decision involving the botched sale of an island in the Virgin Islands to former National Football League star linebacker Jason Taylor, the Court of Appeals for the Third Circuit confirmed that the “gist of the action” doctrine is applicable in the Virgin Islands, and held that the doctrine barred all tort claims arising out of the breach of contract.


In Addie v. Kjaer, Robert Addie, Jorge Perez, and Jason Taylor (the buyers) entered into a contract with Christian Kjaer and his relatives (the sellers) to purchase a small island in the U.S. Virgin Islands and an accompanying launching point on St. Thomas.  737 F.3d 854, 857 (3d Cir. 2013).  In connection with the sale, the buyers entered into an escrow agreement with Premier Title Company. Id. A few months after signing the contract of sale, the buyers deposited $500,000 into the escrow account to extend the closing date.


Keywords: litigation, business torts, unfair competition, gist of the action, U.S. Virgin Islands, breach of contract


Alex G. Gross, Reed Smith, Houston, TX



 

March 25, 2014

Seventh Circuit Rules in Disability Discrimination Case


In Brumfield v. City of Chicago, Nos. 11-2265 & 11-3836, ___ F.3d ___ (Nov. 6, 2013) (Sykes, J.), a matter of first impression, the United States Court of Appeals for the Seventh Circuit held that Title II of the Americans with Disabilities Act (ADA)—which provides that state and local governments may not exclude eligible persons from participation in or the benefits of governmental "services, programs, or activities," or otherwise discriminate against disabled individuals in the provision of those programs, services, or activities—does not cover employment-related disability discrimination claims brought by public-sector employees. Such claims can only be brought under Title I of the ADA. The Seventh Circuit also held that employers have a duty to provide reasonable accommodations to disabled employees only if such accommodations are necessary for the employees to perform the essential functions of their jobs.


Keywords: litigation, business torts, unfair competition, Americans with Disabilities Act, Rehabilitation Act


Ryan M. Billings, Kohner, Mann & Kailas, S.C., Milwaukee, WI



 

March 18, 2014

Business Judgment Rule Now Available for Going-Private Mergers


In a landmark decision, the Delaware Supreme Court affirmed the Court of Chancery’s holding that a controlling stockholder attempting to take a company private may be able to enjoy the protection of the business judgment rule and avoid “entire fairness” scrutiny if dual safeguards are employed. Kahn, et al. v. M&F Worldwide Corp. et al., No. 334, 2013, 2014 Del. LEXIS 115 (Del. March 14, 2014).


The case involved an attempt by MacAndrews & Forbes (owned solely by Ronald Perelman) to purchase the outstanding shares of one of its subsidiaries. From the outset, MacAndrews & Forbes conditioned the transaction on the approval of both (1) an independent special committee, and (2) a vote of the majority of the shareholders unaffiliated with MacAndrews & Forbes. After the deal went through, some shareholders sued MacAndrews & Forbes, Perelman, and the other directors for breach of fiduciary duty.


The Court of Chancery and Delaware Supreme Court each held that because both procedural safeguards were employed upfront, the transaction would be reviewed under the business judgment rule. In the past, going-private mergers received the more stringent entire fairness review: “[a] controlling or dominating shareholder standing on both sides of a transaction, as in a parent-subsidiary context, bears the burden of proving its entire fairness.” Kahn v. Lynch Commc’n Sys., 638 A.2d 1110, 1115 (Del. 1994).


This ruling is important because as the Delaware Supreme Court has recognized, in lawsuits that challenge board action, “[t]he choice of the applicable ‘test’ to judge director action often determines the outcome of the case.” Stroud v. Grace, 606 A.2d 75, 90 (Del. 1992). When the entire fairness standard applies, “the board must present evidence of the cumulative manner by which it discharged all of its fiduciary duties. An entire fairness analysis then requires the [court] to consider carefully how the board of directors discharged all of its fiduciary duties with regard to each aspect of the non-bifurcated components of entire fairness: fair dealing and fair price.” Emerald Partners v. Berlin, 787 A.2d 85, 97 (Del. 2001). On the other hand, the business judgment rule creates “a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The practical difference between these two standards is that when the entire fairness standard applies, a company can expect expensive and lengthy litigation to defend a transaction. But when the business judgment rule applies, a company could dismiss a lawsuit early on. This decision by the Delaware Supreme Court is therefore a great relief to companies entertaining going-private mergers.


The Delaware Supreme Court articulated exactly what a company should do to avail itself of the business judgment rule: “in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority shareholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” 


Keywords: litigation, business torts, business judgment rule, entire fairness, going-private merger, breach of fiduciary duty, Delaware, special committee, majority of the minority


William Travis Patterson, Shannon, Gracey, Ratliff & Miller, LLP, Fort Worth, TX


 

 

March 5, 2014

Eighth Circuit Rules in Wal-Mart Shareholder Derivative Suits


In Cottrell v. Duke, the Eighth Circuit, joining the Second, Seventh, and Ninth Circuits, held that a federal court may not use the Colorado River abstention doctrine to dismiss or stay a federal proceeding when a party asserts an exclusively federal claim.


The case involved parallel proceedings in Delaware state court and federal court in Arkansas. Both were shareholder derivative suits aimed at Wal-Mart management’s response to an alleged bribery scheme involving Wal-Mart’s Mexican subsidiary.  The claims in the two cases were nearly identical, except that the federal case contained two claims brought pursuant to the Securities Exchange Act of 1934, which could not be brought in the Delaware action because federal courts have exclusive jurisdiction over Securities Act claims. The defendants moved to stay the federal action pending resolution of the Delaware case, and the federal district court granted the stay relying on the Colorado River abstention doctrine, which generally allows a federal court to issue a stay when there are parallel state and federal proceedings. It alternatively justified its stay based on its inherent power to stay proceedings in the interest of controlling its docket.


Keywords: litigation, business torts, unfair competition, Securities Exchange Act of 1934, abstention doctrine


Robert L. Duckels and Ryan J. Yager, Greensfelder, Hemker & Gale, P.C., Saint Louis, MO



 

February 19, 2014

The Viability of Tort Claims Between Parties to a Contract


A recent unreported decision from the Sixth Circuit Court of Appeals is a reminder of the murky space between tort and contract liability for business litigators. In Ram International, Inc. v. ADT Security Services, Inc., No. 12-2023, 2014 WL 446824 (6th Cir. Feb. 4, 2014), the 6th Circuit affirmed the trial court’s dismissal of a negligence claim asserted by Ram against ADT. Ram and ADT entered into a contract under which ADT provided security services for a jewelry store owned by Ram. The store was burglarized, and while the security system had been activated, the phone lines had been cut and ADT did not respond or contact the police. When Ram learned that a problem with the system’s installation may have been to blame, Ram sued ADT for breach of contract, negligence, fraud, and false advertising.


Keywords: litigation, business torts, unfair competition


R. Mark Donnell and Lindsey Schenk, Frost Brown Todd LLC, Nashville, TN



 

February 5, 2014

Fifth Circuit Provides Review of Corporate Liability and Procedures for Piercing the Corporate Veil


With a panel comprising Chief Judge Carl E. Stewart, and Circuit Judges Patrick E. Higginbotham and Edith H. Jones, the Fifth Circuit Court of Appeals provided practitioners with a review of corporate liability and the procedure for piercing the corporate veil. The details of the case, Spring Street Partners-IV, L.P. v. Lam, were very specific, and not of interest here. What is of interest is the court’s explanation of the applicable law.


The court first analyzed the determination of liability under the Texas Uniform Fraudulent Transfer Act (TUFTA). The determination is a two-step process: (1) a finding that the debtor committed an actual, fraudulent transfer, or a constructive, fraudulent transfer; and (2) recovery of that fraudulent transfer, or its value, from the transferee. The circuit court stated that the actual fraud prong provides a transfer made or obligation incurred by the debtor if the transfer was made or obligation was incurred with “actual intent to hinder, delay, or defraud” a creditor. The court noted TUFTA also supplies a non-exclusive list of factors, referred to as “badges of fraud” that courts can consider in making this determination. The constructive fraud prong provides that that the transfer or obligation was made without receiving a reasonable value in exchange, and the debtor was involved in a transaction for which its remaining assets were unreasonably small in relation to the transaction, or the debtor intended to incur debts beyond its ability to pay as they became due. Among the remedies available to a creditor under the statute is avoidance of the transfer or obligation. The creditor may recover the value of the asset transferred. The circuit court did note that there is a good-faith defense provided by the statute. The transfer or obligation is not voidable against a debtor who took the actions at issue in good faith.


Keywords: litigation, business torts, unfair competition


Sofia Adrogué, Gray Reed & McGraw, P.C., Houston, TX



 

January 31, 2014

Third Circuit Splits with Other Circuits in Securities Act Case


Faced with an issue of first impression in the circuit, the Third Circuit Court of Appeals has split with the First, Eighth, and Tenth Circuits in concluding that plaintiffs pursuing actions under the Securities Act of 1933 need not plead compliance with the one-year statute of limitations set forth in Section 13 of that act.


In Pension Trust Fund for Operating Eng'rs v. Mortgage Asset Securitization Transactions, Inc., the court reviewed two orders from the District Court for the District of New Jersey dismissing lead plaintiff Pension Trust Fund for Operating Engineers’ amended and second amended class action complaints against multiple defendant mortgage lenders. 730 F.3d 263, 264 (3d Cir. 2013). Operating Engineers’ complaints alleged that the defendants had violated the Securities Act in connection with the issuance of mortgage-backed securities. Id. at 266-68. The district court dismissed the amended complaint without prejudice for failure to state a claim because Operating Engineers’ had failed to plead compliance with Section 13 of the Securities Act. Id. at 268. After Operating Engineers’ amended the complaint alleging compliance with the statute of limitations, the district court, applying the inquiry notice standard, found that the claims were untimely and dismissed the second amended complaint with prejudice. Id.


Keywords: litigation, business torts, unfair competition


Alex G. Gross, Reed Smith, Philadelphia, PA



 

January 30, 2014

Fifth Circuit Rules in Home Builder Case


With a panel comprising Circuit Judges Carolyn Dineen King, Leslie H. Southwick and James E. Graves, Jr., the Fifth Circuit Court of Appeals considered a petition for review of a decision by the National Labor Relations Board (NLRB). The petitioner was a home builder with offices in over 20 states. The petitioner required employees to sign an arbitration agreement as a condition of employment. Three provisions were at issue before the court of appeals, which, read together, meant that the employees could not pursue class or collective claims in an arbitral or judicial forum. Employment-related claims were, instead, required to be resolved through individual arbitration.


An employee of the petitioner, who signed the agreement at issue, and a nationwide class of similarly situated employees, sought to initiate arbitration of their claim that the petitioner had violated the Fair Labor Standards Act. The petitioner responded that the agreement barred collective claims but invited the claimants to initiate individual arbitration proceedings. The employee filed an unfair labor practice charge, claiming that the class action waiver violated the National Labor Relations Act (NLRA). An administrative law judge held that the arbitration agreement did, in fact, violate the NLRA, because its language could lead employees to believe they could not file unfair labor practice charges with the NLRB. A two-member panel of the NLRB upheld the administrative law judge’s determination and further found that the agreement violated the NLRA because it required employees to waive their right to maintain collective employment-related actions in any forum. The panel ordered the petitioner to rescind or revise its arbitration agreement. The petition for review followed.


Keywords: litigation, business torts, unfair competition


Sofia Adrogué, Gray Reed & McGraw, P.C., Houston, TX



 

January 23, 2014

Supreme Court Considers Forum Selection Clause Applicability


In Atlantic Marine Constr. Co., Inc. v. United States District Court for the Western District of Texas, et al., No. 12-929 (Dec. 3, 2013) (slip opinion), the United States Supreme Court considered the applicability of a forum selection clause and the procedure for which to enforce it. The petitioner, a Virginia-based business, entered into a subcontract with the respondent, a Texas corporation. The subcontract contained a forum selection clause requiring that all disputes be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division. A dispute arose, and the respondent filed suit in the Western District of Texas under diversity jurisdiction. The petitioner moved to dismiss, asserting that the forum selection clause rendered the venue in the Western District of Texas “wrong” under §1406(a) and “improper” under Federal Rule of Civil Procedure §12(b)(3). Alternatively, the petitioner moved to transfer to the Eastern District of Virginia under §14014(a).


The Western District of Texas denied both motions. It concluded that §1404(a) is the exclusive mechanism to enforce a forum selection clause that points to another federal forum. The district court then held that the petitioner bore the burden of establishing a transfer under the section would be appropriate, and stated it would consider other public and private interest factors, of which the forum selection clause was only one.


Keywords: litigation, business torts, unfair competition, forum selection clause


Sofia Adrogué, Gray Reed & McGraw, P.C., Houston, TX



 

January 16, 2014

VA Court Curtails Ability of Defendants to Win Dismissal of Non-Compete Agreement Claims


Following Home Paramount Pest Control Cos., Inc. v. Shaffer, 718 S.E.2d 762 (Va. 2011), Virginia has been regardedby many practitioners as particularly hostile to restrictive covenants that limit an individual’s ability to engage in competitive activity. While establishing the enforceability of a restrictive covenant in Virginia remains challenging, a new decision of the Virginia Supreme Court should provide employers with additional leverage to settle disputes with former employees who may be in violation of a non-compete agreement. In Assurance Data, Inc. v. Malyevac, 286 Va. 137 (Va. 2013) the Virginia Supreme Court was called on to review a trial court’s determination, on demurrer, that the plaintiff’s non-compete agreement was unenforceable. In reversing the dismissal, the court held that it was improper to evaluate the merits of the plaintiff’s claim on demurrer, explaining that the lower court should have limited its inquiry to a determination of whether the plaintiff had sufficiently pled each element of the claim that it asserted. The court went on to find that the employer was entitled to present evidence as to the reasonability of the restraints contained in a non-compete agreement, noting that “[a]n employer may prove a seemingly overbroad restraint to be reasonable under the particular circumstances of the case.”


Keywords: litigation, business torts, unfair competition, demurrer, non-compete agreements


Robert B. Fitzpatrick, Robert B. Fitzpatrick, PLLC, Washington, D.C.



 

January 14, 2014

Fifth Circuit Affirms Summary Judgment in Medical Malpractice Case


With a panel comprising circuit judges Jerry E. Smith, James L. Dennis, and Stephen A. Higginson, the Fifth Circuit Court of Appeals considered the grant of summary judgment for the government in a medical malpractice case. The decedent received care from a Department of Veterans Affairs hospital, and subsequently died. The estate filed a malpractice suit against the health care providers under the Federal Tort Claims Act (FTCA). The district court granted summary judgment for the United States, finding that the estate’s expert report neither established the relevant standard of care nor created a question of fact as to the remaining elements of the malpractice claim under Mississippi law.


The circuit court began by explaining that the FTCA permits suits against the United States for personal injury and death due to negligence by a government employee, under the same circumstances where a private person would be liable under relevant state law. Liability is controlled by state law. In the instant case, the court of appeals looked to Mississippi law to determine the elements of the malpractice claim. Under Mississippi law, a prima facie medical malpractice case requires proof of the following: (1) existence of a duty by the defendant to conform to a specific standard of care; (2) failure to conform to the required standard; and (3) injury to the plaintiff proximately caused by the defendant’s breach.


Keywords: litigation, business torts, medical malpractice


Sofia Adrogué, Gray Reed & McGraw, P.C., Houston, TX



 

January 7, 2014

Eleventh Circuit Rules in CCB v. BankTrust


In CCB, LLC v. BankTrust, — F’ App’x —, 2013 WL 6244737 (11th Cir. December 4, 2013), the Eleventh Circuit found that a summary judgment in a state court foreclosure action was non-final pending appeal, and as such, the District Court erred by dismissing with prejudice a complaint involving similar parties and claims on the basis of res judicata.


When CCB defaulted on a loan from BankTrust, which had been guaranteed by Charles and Cynthia Barniv and Gary Witkind, BankTrust filed a complaint in Florida state court seeking to foreclose on property purchased by CCB and for judgments against the limited liability company and the individual guarantors. In response to the state court foreclosure action, CCB, the Barnivs, and Witkind alleged that they had been fraudulently induced to obtain the loan. They also filed a separate lawsuit in the district court, reiterating their fraud allegations against BankTrust.


Keywords: litigation, business torts, unfair competition, foreclosures


Erin C. Hantman, Billbrough & Marks, P.A., Coral Gables, FL



 

December 23, 2013

Eleventh Circuit: Freezing Account Not Tortious Interference


The appellant, MKT Reps S.A. DE C.V. (MKT), sued the appellee, Standard Chartered Bank International (Americas) Limited (Standard), alleging that Standard improperly froze MKT's accounts with Standard in March 2009. MKT, an international tourism and marketing company, contended that the "account was opened specifically for international transactions or international funds transfers" and that the freeze prevented it from wiring funds to its international vendors. MKT brought suit against Standard, alleging claims of breach of contract, tortious interference with business or contractual relationships, and conversion. Standard subsequently moved for and was granted summary judgment on its breach of contract and conversion claims.


Keywords: litigation, business torts, unfair competition, tortious interference, contracts,


Benjamin Coulter, Burr Forman, Birmingham, AL



 

December 20, 2013

MA Supreme Court Clarifies Interstate Commerce Arbitration Rules


In McInnes v. LPL Financial, LLC, the Massachusetts Supreme Judicial Court (SJC) clarified that where a contract that includes an arbitration agreement involves interstate commerce, the Federal Arbitration Act (FAA) overrides Massachusetts precedent holding that a consumer bringing a claim under the state’s Consumer Protection Act may not be compelled to arbitrate claims.


The plaintiff filed an action against a financial services company and its employee, alleging that she had been induced to purchase an unsuitable life insurance policy, and asserting claims that included fraud, breach of fiduciary duty, and violation of the Consumer Protection Act.  The defendants filed two motions to stay the proceedings and compel arbitration of the plaintiff’s claims based on an arbitration agreement in the parties’ account agreement, and both motions were denied. The first order cited Massachusetts case law holding that a consumer could not be compelled to arbitrate a claim alleging violation of the Consumer Protection Act. The second order, in response to the defendants’ argument that the FAA preempted any such Massachusetts precedent, found material issues of fact as to the existence and enforceability of the arbitration agreement. The defendants pursued an interlocutory appeal of both orders.


Keywords: litigation, business torts, unfair competition, interstate commerce, arbitration, Consumer Protection Act, Federal Arbitration Act


Christopher Lindstrom and Robin Morse, Nutter, McClennen & Fish, Boston, MA



 

November 21, 2013

Eighth Circuit Rules in Painting Contractor Case


In Dannix Painting, LLC v. Sherwin-Williams Company, the Eighth Circuit, in deciding a
novel issue of Missouri law and anticipating how the Missouri Supreme Court would rule
on the issue, held that the economic loss doctrine precluded a claim for negligent
misrepresentation.


Dannix, a commercial painting contractor, used a painting product manufactured by Sherwin-Williams. When the finish proved defective, Dannix sought a recommendation from Sherwin-Williams for an alternative product. The second product was also unacceptable, so Sherwin-Williams recommended a third product, which was applied and also failed. Dannix was forced to remove the third product and redo the work. As a result, Dannix sued Sherwin-Williams in Missouri state court for negligent misrepresentation based on the third recommendation. Sherwin-Williams removed the case based on diversity jurisdiction, and the district court subsequently granted Sherwin-Williams’ motion to dismiss based on Missouri’s economic loss doctrine.


Keywords: litigation, business torts, unfair competition, economic loss doctrine, negligent misrepresentation


Robert L. Duckels and Ryan J. Yager, Greensfelder, Hemker & Gale, P.C.,
Saint Louis, Missouri



 

November 15, 2013

Court Explores Prototype Causes of Action in Breach of Contract Case


With a panel featuring Circuit Judges Carolyn Dineen King and Stephen A. Higginson and District Judge Elizabeth Foote sitting by designation, the Fifth Circuit Court of Appeals considered the sufficiency of the evidence in a breach of contract and civil conspiracy action.  The plaintiff sold check and debit/credit processing services to merchants, and the defendant was a sales agent for the plaintiff. The defendant stopped selling the plaintiff’s products and started selling for a third party. The plaintiff brought suit against the third party and the defendant, alleging that the third party tortiously interfered with the contract between the plaintiff and the defendant, and conspired to breach the defendant’s fiduciary duty to the plaintiff. After a jury trial and special verdict, the district court entered judgment against both the third party and the defendant. On appeal, the third party challenged the sufficiency of the evidence supporting the jury’s finding on the interference with contract claim and the trial court’s decision to allow the conspiracy to breach fiduciary duty claim to go to the jury.


Keywords: litigation, business torts, unfair competition, breach of contract, sufficiency of evidence, causes of action


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

November 8, 2013

Fifth Circuit Upholds District Court Ruling in Software Developer Case


With a panel comprising Circuit Judges Harold R. DeMoss, Jr., Leslie H. Southwick, and Stephen A. Higginson, the Fifth Circuit Court of Appeals considered whether there was sufficient evidence to support a jury verdict. The plaintiff was a software developer and the defendant was a consulting and marketing firm. The parties entered into a contract for the defendant to help the plaintiff with its marketing efforts. The defendant was also working with another software developer and allegedly accessed some of the plaintiff's technology in assisting the other party. The plaintiff alleged that the defendant had stolen and misappropriated its trade secrets. The suit proceeded to trial, where the jury returned a verdict for the plaintiff. The defendant renewed its motion for judgment as a matter of law and filed a motion for a new trial, which were denied. The defendant appealed.


Keywords: litigation, business torts, procedure, trade secrets


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

November 1, 2013

Fifth Circuit Rules in US Air Force Weapons-Testing Contract Case


With a panel comprising Circuit Judges Edith Brown Clement, Carolyn Dineen King, and Patrick E. Higginbotham, the Fifth Circuit Court of Appeals heard an appeal from a breach of contract judgment. The plaintiff entered into a contract with the defendant whereby the plaintiff was permitted to share some of the defendant’s research and development work in a bid the plaintiff was making to win a contract for developing a weapons-testing system for the United States Air Force. Specifically, the agreement said that the plaintiff would submit the defendant’s workshare as part of the proposal as a response to requests for information from the Air Force regarding the bid. Further, the contract provided that the defendant would not team up with any other company for solicitation of the bid. The plaintiff’s bid was rejected by the Air Force, and the defendant teamed up with another firm and offered a bid that was ultimately accepted by the Air Force. The plaintiff sued alleging breach of contract. The case was submitted to a jury, which found for the plaintiff, and the defendant appealed.


Keywords: litigation, business torts, contracts, breach of contract


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

October 29, 2013

Seventh Circuit Says Lower Court Erred in Excluding Expert


In Manpower, Inc. v. Insurance Co. of Pennsylvania, No. 12-2688, ___ F.3d ___ (Oct. 16, 2013), the United States Court of Appeals for the Seventh Circuit held that the district court erred in excluding, under Rule 702 of the Federal Rules of Evidence and the standard articulated in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), the testimony of an accounting expert. In that case, a building collapse left a Manpower subsidiary unable to access its office space for more than a year. Manpower sued its insurer, claiming business interruption losses. Manpower presented an accountant’s opinion calculating its lost revenue, but the district court concluded that the data used by the accountant in reaching his opinions was faulty, and therefore the opinion failed to meet the standard for expert testimony. Because Manpower, without the accountant’s opinion, could not prove its business losses, the district court granted summary judgment to the insurer on Manpower’s business interruption claim. The Seventh Circuit reversed, holding that the district court abused its discretion in barring the accountant’s opinion.


Keywords: litigation, business torts, expert witnesses, Rule 702, accounting


Ryan M. Billings, Kohner, Mann & Kailas, S.C., Milwaukee, WI



 

October 29, 2013

Fifth Circuit Rules in Breach of Contract Case


With a panel comprising Circuit Judges Jerry E. Smith, Catharina Haynes and James E. Graves, Jr., the Fifth Circuit Court of Appeals reviewed the district court’s grant of summary judgment on a breach of contract claim. The dispute arose between the plaintiff, a producer of crude oil, and the defendant, a refinery. The parties entered into purchase agreements under which the plaintiff agreed to sell oil to the defendant. The first agreement expired pursuant to its own terms. The plaintiff terminated the second pursuant to a termination agreement. Under the agreements, the parties tied the contract price for the oil to several factors, including an independent quality assessment performed by a bank. According to the court in this case, the bank is a “zero sum” operation, whereby shippers of lower quality oil pay into the bank, while shippers of higher quality oil receive payments.


Keywords: litigation, business torts, breach of contract


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

October 29, 2013

NC Court Adopts Hybrid Level of Judicial Review of Non-Compete Provisions


In Outdoor Lighting Perspectives Franchising, Inc. v. Harders, 747 S.E.2d 256 (N.C. App. 2013), the franchisor sought to enforce a provision in its franchise agreement that would have prohibited a former franchisee from involvement in a "competing business" for two years following the termination of the franchise agreement. The agreement defined a "competing business” as any business "operating in competition with an outdoor lighting business" or "any business similar to" the franchisee's business. The North Carolina Court of Appeals, with Judge Ervin writing for a unanimous court, created a "hybrid" level of scrutiny of non-compete provisions in franchise agreements. In so holding, the court noted other sorts of agreements that, in its view, might be appropriate for resolution under this “hybrid” level of scrutiny, including the dissolution of a professional partnership (citing Beam v. Ruthledge, 9 S.E.2d 476 (N.C. 1940)), a venture capitalist’s purchase of a franchise (citing Keith v. Day, 343 S.E.2d 562 (N.C. App. 1986)), and restrictive covenants in independent contractor agreements (citing Starkings Ct. Reporting Servs., Inc. v. Collins, 313 S.E.2d 614 (N.C. App. 1984)).


Keywords: litigation, business torts, non-compete provisions, judicial review


Robert B. Fitzpatrick, Robert B. Fitzpatrick, PLLC, Washington, D.C.



 

August 19, 2013

Arizona UTSA Preempts Tort Claims Based on Misappropriation of Information


The U.S. District Court, District of Arizona, found that the Arizona Uniform Trade Secrets Act (Ariz. Rev. Stat. (A.R.S.) §§ 44-401–407) (the AUTSA) preempts claims based on misappropriation of information, even if that information does not meet the statutory definition of "trade secret." Unisource Worldwide, Inc. v. Swope, No. CV-12-02036-PHX-NVW, 2013 WL 4029170 (D. Ariz. Aug. 8, 2013). Arizona courts had not ruled on the issue, and courts around the country and in the District of Arizona had conflicting rulings. Some narrowly held that tort claims are only preempted if they allege misappropriation of a trade secret, that fits the definition of "trade secret" under the AUTSA. Others apply preemption more broadly, to bar claims that allege misappropriation of information that does not qualify as a "trade secret" and to claims that hinge on misappropriation but that also assert other wrongful conduct. Unisource opted for the broader approach based on the language of the preemption clause and the purposes of preemption.


Keywords: litigation, business torts, trade secrets, UTSA, tortious interference


Sarah R. Anchors, Quarles & Brady LLP, Phoenix, AZ



 

July 31, 2013

Fifth Circuit Addresses Securities Class Action Case


With a panel comprising Circuit Judges W. Eugene Davis, James E. Graves Jr., and Stephen A. Higginson, the Fifth Circuit Court of Appeals considered an appeal concerning a securities class action. The appellees were a putative class of plaintiffs seeking to recover damages from the defendants for securities fraud. The litigation arose out of alleged misrepresentations by the defendants. The plaintiffs represented were a putative class of shareholders who alleged they suffered material losses as a result of such fraudulent misrepresentations. Over this pertinent period of time, the plaintiffs contend that the defendants made misrepresentations that temporarily and artificially inflated the price of the company’s stock, and, the truth, when revealed, caused the stock price to fall.


Keywords: litigation, business torts, securities, class actions


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

July 31, 2013

Fifth Circuit Rules in Tricon Energy v. Vinmar International


With a panel comprising Chief Judge Carl E. Stewart and Circuit Judges Jerry E. Smith and Jacques L. Weiner Jr., the Fifth Circuit Court of Appeals heard an appeal regarding an arbitration award.  The parties were involved in a contract for the purchase and sale of chemicals.  Several versions of a contract were circulated between the parties via email and fax, the chemical industry standard practice. The versions contained an arbitration clause. The buyers never actually signed the contract, but again, it was asserted that is industry standard.


Keywords: litigation, business torts, arbitration award, fraudulent inducement


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

July 31, 2013

Circuit Court Addresses Denial of a Motion to Compel Arbitration


With a panel comprising Circuit Judges Edith Jones, Emilio M. Garza, and Edward C. Prado, the Fifth Circuit Court of Appeals reviewed a district court denial of a motion to compel arbitration.  The plaintiff worked for the defendant, and, as a condition of employment, was asked to sign an agreement to resolve disputes through a dispute resolution program.  The agreement provided that the program was not a contract for employment and nothing in it was “intended to violate or restrict any rights of employees guaranteed by state or federal laws.” It required that the plaintiff adhere to the requirement for submission of disputes to a process that could involve “mediation and/or arbitration.” The plaintiff signed the agreement. The defendant later fired the plaintiff.


Keywords: litigation, business torts, arbitration award, fraudulent inducement


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

July 25, 2013

Fifth Circuit Rules in Video Game Publisher Case


With a panel comprising Chief Judge Carl E. Steward and circuit judges W. Eugene Davis and Edith Brown Clement, the Fifth Circuit Court of Appeals determined whether an arbitration award was consistent with the essence of the underlying contract. The dispute arose out of an agreement between a video game publisher and a video game developer. With regard to the intellectual property at issue, the agreement granted the publisher, inter alia, a non-exclusive right and license to use the game’s trademarks in connection with the marketing and sale of the game and any add-ons or sequels. The agreement made clear that the developer remained the “exclusive owner” of the intellectual property and that publisher’s use of such property was limited. Finally, the agreement specifically prohibited the publisher from preparing derivative works or otherwise exploiting any of the game’s subject matter, except as provided by the contract.


Keywords: litigation, business torts, arbitration award, fraudulent inducement


Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

July 23, 2013

Defendants Are Not Required to Provide Formula for Calculating Potential Damages


In Raskas v. Johnson & Johnson, the Eighth Circuit reversed the district court’s remand order and held that each defendant in the consolidated remand motion sufficiently established the requisite amount in controversy under the Class Action Fairness Act (CAFA) conferring subject matter jurisdiction in the federal district court.


Three plaintiffs filed separate class action lawsuits in Missouri state court against separate pharmaceutical companies alleging that the defendants violated the Missouri Merchandising Practices Act and conspired with third parties to deceive consumers into throwing away medication upon or after the labeled expiration date with knowledge that the medications were safe and effective beyond such date.  The defendants each removed the cases to the United States District Court under CAFA, after which each plaintiff sought to remand its respective case by arguing that the defendants had failed to establish CAFA’s $5 million amount in controversy requirement.


Keywords: litigation, business torts, Class Action Fairness Act


Robert L. Duckels and Ryan J. Yager, Greensfelder, Hemker & Gale, P.C., Saint Louis, MO



 

July 10, 2013

Colorado Supreme Court Rules in Insolvency Case

 

A creditor of a Colorado limited liability company (LLC) sued the LLC’s managers for breach of fiduciary duties related to authorization of distributions to members rendering the LLC insolvent. The creditor also sued the LLC members under the Colorado statute for receiving an unlawful distribution. The Colorado Supreme Court held that, absent express statutory authority, an LLC manager of an insolvent LLC does not owe the LLC’s creditors a fiduciary duty and that an LLC creditor’s creditor may not assert a claim against the LLC members for unlawful distribution. In so holding, the Colorado Supreme Court distinguished the Colorado Limited Liability Act from the Colorado Business Corporation Act and declined to apply to LLCs the common law rule that the legislature is presumed to adopt a previous judicial construction when re-enacting or amending a statute. The Court reasoned that the LLC Act expressly extends the corporation common law to a claim for piercing the LLC entity veil and does not extend it to any other instance.


Keywords: litigation, business torts, insolvency, fiduciary duty, Weinstein v. Colborne Foodbotics, LLC


Elizabeth J. Hyatt, Ogborn Mihm, LLP, Denver, CO

 


 

July 9, 2013

Kansas Supreme Court Rules in Tortious Interference Case

 

A Kansas LLC and corporation were owned by the defendant, and two other owners.  The defendant sold his ownership interests in the corporation to the other two owners.  He also sold his membership interest in the LLC to the LLC and received from the LLC cash and a promissory note secured by a first-priority security interest in the defendant’s LLC membership interest. When the defendant learned that the trustee was selling all the LLC membership interests (including the defendant’s security interest) and the corporate assets to a nonparty and the trustee refused the defendant’s request to know the purchase price and other details, he filed suit for breaches of fiduciary duties. The defendant sued the LLC, the corporation, and its owners four days before the sale to the nonparty was supposed to close and faxed to the nonparty’s general counsel a copy of the lawsuit.  The nonparty refused to close the transaction without alteration of the sale agreements, including a demand for a supplemental indemnification agreement from the LLC and its owners as well as an amount to be placed in escrow. After incurring substantial fees, the demands were met and the sale closed.


Keywords: litigation, business torts, tortious interference, Kansas Supreme Court


Elizabeth J. Hyatt, Ogborn Mihm, LLP, Denver, CO

 


 

June 27, 2013

Delaware Supreme Court Approves Expectation Damages in Bad Faith Negotiations Litigation

 

The Delaware Supreme Court recently held that when parties would have reached an agreement but for the defendant negotiating in bad faith, the plaintiff can recover expectation damages for breach of the contract that never existed. In 2004, SIGA acquired the rights to an antiviral drug for the treatment of smallpox but needed capital to complete the development process. SIGA and PharmAthene executed a license agreement term sheet (LATS) obligating them to negotiate the terms of a license to PharmAthene in exchange for an upfront payment, deferred license fees, and other consideration. The parties later decided that they wanted to negotiate a merger of the two companies. PharmAthene agreed to do so on the condition that, if the merger discussions fell through, SIGA would nevertheless negotiate a license consistent with the terms of the existing LATS. SIGA agreed, and a copy of the LATS was appended to the merger agreement term sheet.


Keywords: litigation, business torts, bad faith negotiation, license agreement, expectation damages


Daniel P. Elms, Bell Nunnally & Martin, Dallas, TX

 


 

June 18, 2013

Delaware Supreme Court Denies Attorney Fees in Breach of Contract Case

 

The Honorable Mary M. Johnston of the Delaware Superior Court denied the motion of defendant Medtronic Vascular, Inc. for attorney fees after Medtronic received summary judgment on breach of contract claims asserted by plaintiff E.I. du Pont De Nemours and Company (DuPont). The court granted certain costs.


When DuPont filed suit against Medtronic in 2010, it asserted both breach of contract claims and business tort claims for fraudulent and negligent misrepresentation. The parties engaged in extensive discovery. In late 2012, the parties agreed to the dismissal of the business tort claims. Op. at 1.


Subsequently, the parties filed summary judgment motions, including one in which Medtronic argued that the breach of contract claims were barred by the statute of limitations. In an extensive opinion, the court addressed that question (as well as a number of others) and concluded that the claims were in fact time-barred. However, the court observed in that opinion how difficult the issues were and praised the written and oral advocacy of counsel for both sides.


Keywords: litigation, business torts, attorney fees, fraudulent misrepresentation, negligent misrepresentation


Elizabeth Fenton, Chamberlain Hrdlicka, West Conshohocken, PA

 


 

June 17, 2013

South Carolina Supreme Court Rules in Breach of Fiduciary Duty Case

 

This action stems from a merger between two companies, Safety Components International (SCI) and former International Textile Group (FITG), both of which were controlled by WL Ross & Company, LLC (the respondents) at the time of the merger. In addition to owning more than 75 percent of SCI and FITG, the respondents also controlled both companies’ boards, holding four of the five seats on the SCI board and five of six seats on the FITG board. From 1999 until 2006, the petitioner in this case served as the CFO and interim CEO of SCI, a publically traded Delaware Company. Following his termination in June of 2006, the petitioner exercised his stock option and became an SCI shareholder. Additionally, he sued SCI alleging breach of contract and violation of the South Carolina Payment of Wages Act. On August 29, 2006, SCI’s board approved the merger with FITG and publically announced the merger’s terms the following day. However, the merger was not officially complete until October 20, 2006. Meanwhile, in the interim, the petitioner resolved his suit with SCI, executing a settlement agreement and release dated September 28, 2006, extinguishing all claims against SCI. Specifically, the release barred the petitioner from bringing any claims as an owner of any stock or interest arising prior to the execution of the release.


Keywords: litigation, business torts, mergers, South Carolina Payment of Wages Act


C. Pierce Campbell, Turner Padgett, Florence, SC

 


 

June 13, 2013

Fourth Circuit Holds That Supervisor's "Warning" Constitutes Adverse Action

 

In Maron v. Va. Polytechnic Inst. & State Univ., No. 12-1146, 2013 U.S. App. LEXIS 2333 (4th Cir. Jan. 31, 2013), the Fourth Circuit found that a supervisor's verbal warning, coupled with other facts, could constitute an adverse action under Title VII's anti-retaliation provisions, 42 U.S.C. § 2000e-3(a). In so holding, the Fourth Circuit reversed the trial court's grant of judgment as a matter of law in favor of the employer following a jury verdict of $61,000.00 in plaintiff's favor on her retaliation claim. In so holding, the court found that the warnings given to the plaintiff, coupled with other actions taken by the employer, rose above the level of "petty slights [and] minor annoyances" to constitute a materially adverse action.


Keywords: litigation, business torts, adverse action, Title VII, anti-retaliation provisions


Robert B. Fitzpatrick, Robert B. Fitzpatrick, PLLC, Washington, D.C.

 


 

June 3, 2013

Misstatements and Omissions in IPO Registration Statement and Prospectus Not Material

 

The appellants, purchasers of stock in Vitacost.com, sued the appellees, underwriters of Vitacost's initial public offering along with several of Vitacost's officers and directors, alleging that the appellants violated §§ 11, 12(a)(2), and 15 of the Securities Act of 1933. The appellants argued that the appellees made a number of material misrepresentations and omissions in the September 24, 2009, prospectus for Vitacost. The appellees moved to dismiss the complaint. On June 25, 2012, the United States District Court for the Southern District of Florida granted the appellees' motion to dismiss, finding that the appellants had failed to plausibly allege that the statements made in the prospectus were false when made or that the facts not disclosed were material to a reasonable investor.


Keywords: litigation, business torts, Securities Act of 1933, FDA


Benjamin B. Coulter, Burr Forman, Birmingham, AL

 


 

June 3, 2013

First Circuit Rules in Fair-Use Case

 

This case involves a trademark dispute between Swarovski, a high-end crystal manufacturer and holder of several registered federal trademarks, and Building #19, an off-price retail chain that acquires merchandise through secondary channels and resells it at discount prices. Building #19 acquired a number of Swarovski crystal figurines from a salvage sale and prepared an advertisement with the Swarovski mark at the top and a smaller disclaimer at the bottom clarifying that Building #19 had no affiliation with Swarovski. Swarovski filed a complaint alleging various claims for trademark infringement and unfair competition under the Lanham Act and state law. Swarovski also filed a motion for a preliminary injunction to forbid Building #19 from using the Swarovski mark in the proposed advertisements. The district court issued an oral decision finding that Building #19’s use of the mark was more than was necessary and entered an injunction ordering that the mark at the top of the advertisement could be no larger than the font used in the disclaimer. Building #19 appealed, arguing that the district court failed to make two findings required for a preliminary injunction to issue: likelihood of success on the merits and irreparable harm. The First Circuit agreed.


Keywords: litigation, business torts, fair-use doctrine, trademarks


Christopher H. Lindstrom, Nutter McClennen & Fish LLP, Boston, Massachusetts

 


 

April 23, 2013

Arizona Court Refuses to Apply the Economic Loss Rule to a Statutory Fraud Act Claim

 

The Arizona Court of Appeals held in a case of first impression that the economic loss rule does not apply to bar claims under the state's consumer fraud act.  Shaw v. CTVT Motors, Inc., __ P.3d__, 657 Ariz. Adv. Rep. 11, 2013 WL 1289392 (Ariz. Ct. App. Mar. 29, 2013), as amended.   The economic-loss rule (ELR) is a doctrine that bars certain tort claims when the parties have a contract. At first, Arizona applied the ELR in a strict-liability product-defect claim. Salt River Project Agricultural Improvement & Power Dist. v. Westinghouse Elec. Corp., 694 P.2d 198 (Ariz. 1984). In that case, the court held that "[w]here economic loss, in the form of repair costs, diminished value, or lost profits, is the plaintiff's only loss, the policies of the law generally will be best served by leaving the parties to their commercial remedies." Id. at 209.  The court then expanded the ELR's reach to claims based on construction defects resulting from professional negligence. Flagstaff Affordable Housing Ltd. P’ship v. Design Alliance, Inc., 223 P.3d 664, 665 (2010). The ELR's application was further expanded in Cook v. Orkin Exterminating Co., 258 P.3d 149 (App. 2011) to bar a claims for fraud, negligent and intentional misrepresentation and negligence. The Cooks' fraud claim was based on Orkin's "alleged failure to adequately perform its promises under the Agreement." Id. at 153.


Keywords: litigation, business torts, economic-loss doctrine, Ninth Circuit, Consumer Fraud Act


Sarah R. Anchors, Quarles & Brady LLP, Phoenix, AZ

 


 

April 12, 2013

ADEA Is Not the Exclusive Remedy for Age Discrimination Claims Against State Employers

 

In Levin v. Madigan, 692 F.3d 607 (Apr. 3, 2012), the Seventh Circuit broke with six other Circuit Courts of Appeal and held that the Age Discrimination in Employment Act of 1967 (ADEA) is not the exclusive remedy in federal courts for age discrimination claims against state employers. In addition to the ADEA, claims may be brought under the Equal Protection Clause pursuant to 42 U.S.C. § 1983 (authorizing suits to enforce individual rights under federal statutes and the Constitution).


Keywords: litigation, business torts, age discrimination, ADEA


Ryan M. Billings, Weiss Berzowski Brady LLP, Milwaukee, WI

 


 

April 11, 2013

Eighth Circuit Holds that District Court Must Make Explicit Findings of Bad Faith on the Record Prior to Litigation

 

In Hallmark Cards, Inc. v. Murley, the Eighth Circuit, as a matter of first impression, held that a district court must make explicit findings of bad faith and prejudice before giving an adverse inference jury instruction as a sanction for spoliation of evidence occurring prior to litigation. The court also reversed a portion of a damages award against a prior employee found to violate a noncompete agreement, clarifying the calculus that renders an employer whole.


Keywords: litigation, business torts, evidence, discovery, damages, spoliation


Robert L. Duckels and Ryan J. Yager, Greensfelder, Hemker & Gale, P.C., Saint Louis, MO

 


 

March 27, 2013

Fifth Circuit Interpreted Damages Provision in Maritime Contract

 

Although the provisions at issue were contained in a maritime contract, the Circuit Court used the Restatement to interpret them. The parties entered into a contract wherein the plaintiff purchased tugboats from the defendant. Included in the contract were both a noncompetition clause and a liquidated-damages clause. Upon discovering that the noncompetition clause was breached, the defendant in the instant suit filed suit in Texas state court. The contract at issue had a forum-selection clause mandating that disputes be resolved in the United States District Court for the Eastern District of Louisiana. Thus, the plaintiff filed the instant suit seeking a declaratory judgment that it had not breached the agreement and that the liquidated damages provision was an unenforceable penalty as a matter of law. The defendant counterclaimed for breach of contract, seeking enforcement of the liquidated damages provision. The district court granted the defendant’s motion for summary judgment in part and denied the plaintiff’s motion, finding the liquidated damages provision enforceable. This appeal ensued.

 

Keywords: litigation, business torts, damages, maritime contracts, Restatement

Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX

 


 

March 27, 2013

In Per Curiam Opinion, Fifth Circuit Considered Negligent Misrepresentation Claim Against Bank by a Mortgagee

 

The defendant bank held a mortgage on the plaintiff’s property. The plaintiff fell behind on payments, and the defendant sent several letters regarding the acceleration of the mortgage and foreclosure. The plaintiff contacted the bank, asking about loan modification. Several letters were sent back and forth, indicating that if the plaintiff qualified, outstanding payments would be reviewed for loan modification. The plaintiff alleged that he was informed that the review process would go faster if payments were not made on the mortgage; the plaintiff thus stopped paying. The bank then initiated foreclosure proceedings.

 

Keywords: litigation, business torts, contracts, per curiam, negligent misrepresentation

Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX

 


 

March 27, 2013

Virginia Federal District Court Approves a Choice-of-Law Clause That Provides for Blue-Penciling

 

Virginia does not permit blue-penciling in noncompete agreements governed by Virginia law.  Lanmark Tech., Inc. v. Canales, 454 F. Supp. 2d 524 (E.D. Va. 2006); Strategic Enter. Solutions, Inc. v. Ikuma, 77 Va. Cir. 179 (Va. Cir. Ct. 2008); Better Living Components, Inc. v. Coleman, 67 Va. Cir. 221 (Va. Cir. Ct. 2005).


In Edwards Moving & Rigging, Inc. v. W.O. Grubb Steel Erection, Inc., 2012 U.S. Dist. LEXIS 56818 (E.D. Va. April 23, 2012), plaintiff, a Kentucky-based company, entered into a noncompete with its then-employee, defendant White, who then resided in Kentucky. The noncompete prohibited defendant White from working for, either directly or indirectly, any of the plaintiff’s competitors within the company’s “market area” for a period of two years after the termination of his employment. The plaintiff alleged that the “market area” included Virginia.

 

Keywords: litigation, business torts, noncompete agreements, blue-penciling

Robert B. Fitzpatrick, Robert B. Fitzpatrick, PLLC, Washington, D.C.

 


 

March 26, 2013

Third Circuit Reaffirms PA Federal Courts Should Apply Economic-Loss Doctrine to Bar Common Law Fraud Claims

 

The United States Court of Appeals for the Third Circuit has reaffirmed its conclusion that federal courts in Pennsylvania should apply the economic-loss doctrine to bar common law fraud claims and claims under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL), where only economic losses are claimed. 

 

Keywords: litigation, business torts, economic-loss doctrine, fraud claims

Alex G. Gross, Reed Smith, Philadelphia, PA

 


 

 

March 25, 2013

Fifth Circuit Court of Appeals Considers Issue of First Impression

 

The plaintiff entered into shipbuilding contracts with an entity that was wholly owned by the People’s Republic of China. A dispute arose and, pursuant to the contractual arbitration clause, the plaintiff gave notice of arbitration to the defendant corporation. Each party appointed an arbitrator, and those two elected the third. When the arbitration concluded, the arbitrators drafted an award in favor of the plaintiff. Two of the arbitrators signed off on the award, but the Chinese arbitrator, who dissented, was imprisoned in China before he was able to sign.

 

Keywords: litigation, business torts, arbitration, first impression, China

Sofia Adrogué, Looper Reed & McGraw, P.C., Houston, TX



 

 

February 13, 2013

Nonparty Cannot Enforce Purchase and Assumption Agreement

 

In Interface Kanner, LLC v. JPMorgan Chase Bank, N.A., ___ F.3d ___, 2013 WL 104984 (11th Cir. 2013), the Eleventh Circuit found that a nonparty was not a third-party beneficiary to a purchase and assumption agreement between the FDIC and the successor to a failed bank. As a result, the Eleventh Circuit held that the nonparty lacked standing to assert a claim against the successor bank based on the failed bank’s alleged breach of a prior contract.


Keywords: litigation, business torts, contracts, third-party beneficiaries, purchase and assumption agreement


Aaron S. Weiss, Carlton Fields, P.A, Miami, FL



 

February 13, 2013

Massachusetts Decision Reduces Statute of Limitations

 

The United States District Court for the District of Massachusetts certified a question to the Massachusetts Supreme Judicial Court: “In a franchise agreement which is governed by Massachusetts law, is a limitations period in the contract shortening the time within which claims must be brought valid and enforceable under Massachusetts law?”


Keywords: litigation, business torts, contracts, limitations period, breach of contract


Christopher H. Lindstrom and Robin Morse, Nutter McClennen & Fish LLP, Boston, MA



 

February 13, 2013

Judge Awards Damages to Baristas in Starbucks Tips-Pooling Dispute

 

A group of baristas filed a putative class action alleging that Starbucks’s tip-pooling policy violated the Massachusetts Tips Act. Under the policy, tips were shared by baristas and their shift supervisors. However, the Tips Act provides that an employer cannot require waitstaff employees to share tips with anyone who is not a waitstaff employee, and it defines a waitstaff employee as one who, among other things, has no managerial responsibility. The district court held that the policy violated the act because the tips were shared with supervisors, certified a class of baristas, and awarded over $14 million in damages. Starbucks challenged the district court’s interpretation of the Tips Act and the class certification order, and both parties challenged aspects of the district court’s determination regarding damages.


Keywords: litigation, business torts, class action, Tips Act, treble damages, Wage Act


Christopher H. Lindstrom and Robin Morse, Nutter McClennen & Fish LLP, Boston, MA



 

January 30, 2013

Court Finds Federal Medical Device Law Doesn't Preempt State-Law Claims

 

Richard and Mary Lou Stengel brought an Arizona tort claim against Medronic Inc. for violating its duty of care by failing to warn about the risks of a medical device. The U.S. District Court, District of Arizona, granted Medtronic’s motion to dismiss and denied leave to amend because it held the Medical Device Amendments to the Food, Drug, and Cosmetic Act, 21 U.S.C. § 360c (MDA), preempted the state-law claims.  No. CV 10-318-TUC-RCC, 2010 WL 4483970 (D. Ariz. Nov. 9, 2010).  The MDA requires manufacturers to report risks of certain medical devices to the Food and Drug Administration (FDA), but it does not provide a remedy for damages to injured persons. In April 2012, the Ninth Circuit affirmed.  676 F.3d 1159 (9th Canir. 2012) (Wallace, J.).   But, Judge John Noonan dissented, stating it was “astonishing” to interpret Congress’s passage of the MDA to create “such freedom from liability for the manufacturers of such sensitive devices” to leave injured persons without remedy against manufacturers.  In its en banc opinion, drafted by Judge William Fletcher, the Ninth Circuit unanimously agreed with the dissent.


Keywords: litigation, business torts, duty of care, preemption, medical devices, risk, FDA, state-law claims, en banc, Medical Device Amendments, negligence, causation


Sarah R. Anchors, Quarles & Brady LLP, Phoenix, AZ



 

January 30, 2013

Tenth Circuit Rules Trademark Infringement Case Insufficient to Establish Personal Jurisdiction

 

The Colorado long-arm jurisdiction does not extend to nonresident competitor’s trademark infringement and other business torts where no well-pled facts showing torts expressly aimed at Colorado and that Colorado was the focal point of the actions.


The United States District Court, District of Colorado recently held that a barbershop’s out-of-state competitor’s tortious actions were not sufficiently aimed at Colorado to allow the court to exercise personal jurisdiction. In Floyd’s 99 Holdings, LLC v. Jude’s Barbershop, Inc., the plaintiff, a Colorado barbershop owner and franchisor, brought statutory and common law claims of trademark infringement and unfair competition against the defendants, a Michigan barbershop chain and its Michigan-resident owner. The plaintiff alleged the defendant owner traveled to Colorado, entered one of the plaintiff’s barbershops, was photographed sitting in a barbershop chair, and the photograph captured some aspects of the plaintiff’s Trade Dress that were later used by the defendants. The plaintiff alleged that the defendants thereafter infringed on its trademark and used the photograph in one of defendants’ advertisements.


Keywords: litigation, business torts, unfair competition, trademark infringement, personal jurisdiction


Elizabeth J. Hyatt, Ogborn Mihm, LLP, Denver, CO



 

January 7, 2013

Fifth Circuit Reviews District Court Decision on Appointment of Arbitrators

 

An offshore drilling contractor, Noble, entered into an agreement, the Drilling Services Agreement, with Exxon, to provide drilling services to Exxon in waters off of Libya. Subsequently, Exxon and BP entered into an assignment agreement in which Exxon agreed to assign, and BP agreed to assume, the Drilling Agreement. Noble consented to the assignment. A dispute arose between the parties. Both agreements contained arbitration provisions. The relevant part of the agreements provided for the appointment of three arbitrators, each party appointing one and the two appointing a third.


In the underlying dispute, Exxon took the position that BP was responsible for paying Noble under the terms of the assignment agreement, but BP disagreed. Noble was left unpaid, and as a party to a dispute arising out of the assignment agreement, served an arbitration demand on BP and Exxon, asserting that one or both were responsible for payment. BP and Exxon, as co-respondents, realized the arbitrator appointment procedure appeared unworkable for a dispute between three parties. BP and Exxon resisted any suggestion of a joint appointment of a second arbitrator, and began negotiating with Noble to reach an agreement on an alternative selection procedure.  Eventually negotiations irretrievably broke down, and BP filed suit in federal district court in Texas, under the FAA, seeking judicial intervention in the arbitrator appointment process pursuant to 9 U.S.C. § 5.


After determining that it had jurisdiction to hear the appeal, the Fifth Circuit reviewed the district court’s interpretation of the FAA. The court noted that the FAA favors the selection of arbitrators by parties over the courts. A part of the limited jurisdiction given to the courts under the FAA, § 5 authorizes a court to intervene to select an arbitrator in three instances. The Fifth Circuit Court of Appeal held, in sum, that there was a lapse in the naming of the arbitrators under the arbitration agreement, and, thus, the district court properly exercised its authority under § 5 to intervene in the appointment process.  However, the lower court did violate the language of the statute, which limits the number of arbitrators a court can appoint to the number otherwise provided by the parties in the agreement.  Thus, in ordering the parties to arbitrate before a panel of five, the district court exceeded its authority under the statute.  Therefore, the district court’s order was affirmed in part, vacated in part, and on remand, the court was directed to enter an order appointing three arbitrators.


Keywords: litigation, business torts, arbitrator appointment process, FAA, Exxon, BP, Fifth Circuit


Sofia Adrogue, Looper Reed & McGraw, P.C., Houston, TX



 

January 7, 2013

Court Affirms Finding Regarding Role of Expert Testimony in Proving Causation

 

In a per curiam opinion, the Fifth Circuit Court of Appeals reviewed the district court’s exclusion of expert testimony in a toxic tort case.


The plaintiff worked in a bottling plant using a machine manufactured and installed by the defendant. The plaintiff filed a personal injury suit in state court in Texas, claiming that the defendant proximately caused his severe lung disease. The defendant removed to federal district court and  filed motions to exclude the testimony of the plaintiff’s experts under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharm., Inc., as well as a motion for summary judgment. Regarding the defendant’s Daubert motion, the magistrate judge recommended excluding the expert opinions as unreliable and irrelevant. The district court adopted the report and recommendations, and granted the defendant’s motion for summary judgment.


On appeal, The Fifth Circuit first considered the lower court’s rulings under Rule 702 and Daubert. The court noted that under both, a court had broad discretion to determine whether evidence relied upon by an expert is sufficient to support the expert’s opinion. The circuit court reminded practitioners that the admissibility of expert testimony is governed by Rule 702.


The reliability element requires the expert opinion “be grounded in the methods and procedures of science and … be more than unsupported speculation or subjective belief.” The relevance element requires that the expert’s  “reasoning or methodology can be properly applied to the facts in issue.” Additionally, courts consider the following list of four nonexclusive factors when conducting a reliability inquiry. The proponent need not show that the expert’s testimony is correct but must prove by a preponderance of the evidence that the testimony is reliable.


The Fifth Circuit reviewed Supreme Court and Fifth Circuit case law, and confirmed that “in forming a reliable opinion regarding the effects of exposure to a particular chemical, an expert may extrapolate data from studies of similar chemicals.”  However, the court explained that to support a conclusion based on that reasoning, the extrapolation must be reasonable and scientifically valid, and, courts are free to reject a theory based on extrapolation when there is too great an analytical gap between the data and the opinion. After reviewing the specifics of the expert opinion regarding chemical exposure, the circuit court concluded that the district court did not abuse its discretion in dismissing the causation expert testimony as unreliable under Daubert after finding the theory presented too great an analytical gap between the data and the proffered opinion.


The plaintiff also alleged that the district court erred in granting the defendant’s motion for summary judgment because the plaintiff, without the expert testimony, could not prove the causation necessary to support the claim under Texas law. Under Texas law, “lay testimony establishing a sequence of events which provides a strong, logically traceable connection between the event and the condition is sufficient proof of causation.” The court of appeals reviewed the record, and concluded that there was a significant gap in time between the plaintiff’s exposure and the onset of symptoms, and such a gap rendered the fact finder unable to determine the cause of the plaintiff’s disease based solely on its common sense and general experience. Thus, the Fifth Circuit Court of Appeals affirmed the district court’s finding that the plaintiff needed the expert testimony to prove causation.


Keywords: litigation, business torts, expert testimony, Rule 702, causation, personal injury


Sofia Adrogue, Looper Reed & McGraw, P.C., Houston, TX



 

January 4, 2013

Seventh Circuit Adopts Standard for Reassigning Employees with Disabilities

 

In EEOC v. United Airlines, Inc., Case No. 11-1774 (Sept. 7, 2012), the Seventh Circuit adopted the standard introduced in U.S. Airways, Inc. v. Barnett, 535 U.S. 391 (2002) for reassigning employees losing current positions because of disability under the Americans with Disabilities Act, 42 U.S.C. §§ 12101 et seq.; namely that the plaintiff need only show that an accommodation seems reasonable on its face given the “run of cases,” at which point the burden shifts to the employer to show undue hardship. EEOC, at p. 6. This decision is significant because the court explicitly overruled the prior standard espoused in EEOC v. Humiston-Keeling, 227 F.3d 1024 (7th Cir. 2000).


Illinois
On August 1, 2012, Illinois Governor Pat Quinn signed into law changes to 820 ILCS 55/10, effective January 1, 2013, which prevent employers from requesting or requiring job applicants to provide social-media passwords.


Wisconsin
Effective for all cases filed after February 1, 2011, Wisconsin has changed to a Daubert standard for expert opinions. While the contours of the standard have not been tested in reported cases, numerous courts have confirmed that in Wisconsin the requirement going forward is the Daubert standard.  See, e.g., County of Marathon v. DeBuhr, Case No. 2011 AP 2959, 2012 WL 4490784, at *1 n.2.


Keywords: litigation, business torts, Americans with Disabilities Act, standards, employees, Seventh Circuit, Illinois, Wisconsin


Ryan M. Billings, Weiss Berzowski Brady LLP, Milwaukee, WI



 

January 2, 2013

Court Rules There Can be Individual Liability in Public-Policy Wrongful-Termination Cases


In VanBuren v. Grubb, No. 120348, 2012 Va. LEXIS 193 (Va. Nov. 1, 2012), the Virginia Supreme Court held, in a 4-3 decision, that there can be individual liability in public policy wrongful termination cases.


The state courts are deeply divided on this issue.  Some Courts have reached conclusions consistent with those of the Virginia Supreme Court.  See, e.g., Myers v. Alutiiq Int'l Solutions, LLC, 811 F. Supp. 2d 261, 269 (D.D.C. 2011) (predicting that the “D.C. Court of Appeals would allow claims against individual supervisors for wrongful discharge” where it was shown that their conduct was sufficiently wrongful because “individuals are liable for their own torts, even as agents acting on behalf of their employers”); Higgins v. Assmann Elecs., Inc., 217 Ariz. 289, 173 P.3d 453, 458 (Ariz. Ct. App. 2007) (holding that, under the Arizona Employment Protection Act “[c]orporate officers are liable to those harmed by such officer[s]” when their “acts constitut[e] the wrongful termination” of an employee); Jasper v. H. Nizam, Inc., 764 N.W.2d 751, 776 (Iowa 2009) (holding that an individual corporate officer can be held liable for wrongful discharge because the tort “does not impose liability for the discharge from employment, but the wrongful reasons motivating the discharge”); Ballinger v. Delaware River Port Auth., 172 N.J. 586, 800 A.2d 97, 110 (N.J. 2002) (holding that “an individual who personally participates in the tort of wrongful discharge may be held individually liable” because “[a]n agent who does an act otherwise a tort is not relieved from liability by the fact that he acted at the command of the principal or on account of the principal”) (alteration in original) (internal quotation marks and citation omitted); Kamensky v. Roemer Inc., 1 Pa. D. & C. 4th 497, 499 (Pa. 1988) (holding that “an officer of the corporation who takes part in the commission of the tort by the corporation is personally liable therefor[]”) (internal quotation marks and citation omitted); Harless v. First Nat'l Bank in Fairmont, 169 W. Va. 673, 289 S.E.2d 692, 698, 699 (W. Va. 1982) (holding that liability on the part of the employer “does not mean that another employee who has been the principal protagonist in obtaining the employee's discharge would not also be liable,” because “an agent or employee can be held personally liable for his own torts against third parties”).


Other courts, however, have held, contrary to the Virginia Supreme Court and the decisions cited above, that there is no individual liability for the tort of wrongful discharge.


Keywords: litigation, business torts, liability, wrongful-termination cases, noncompete covenants, tortious interference, defamation, Virginia Supreme Court, public policy


Robert B. Fitzpatrick, Robert B. Fitzpatrick, PLLC, Washington, D.C.



 

December 05, 2012

Litigation Article Offers Nuanced Look at Tortious Interference

 

Robert Shapiro's article "The Rise and Possible Fall of Tortious Interference," featured in the current issue of the ABA's Litigation (page 55), is a tongue-in-cheek look at the never-ending (and clever) attempts by "contract lawyers" to try to blur the line between contracts and torts to open the door to broader (and more punitive) remedies for their clients, as well as the reluctance of courts to take the bait. Through his discussion of the 7th Circuit's grant if summary judgment in the recent case Nation v. American Capital Ltd., 2012 U.S. App. LEXIS 11214 (7th Cir., June 4, 2012), Shapiro explores the merits and problems attendant with the privilege exception which recognizes that some third parties are so close to a contract that interference with it is justified.


Keywords: litigation, business torts, contratcs, tortious interference, Litigation journal, 7th Circuit, privilige


Anne M. Talcott, Schwabe, Williamsom & Wyatt


 

December 4, 2012

Court Declines to Compel Arbitration of Tort Claim

 

Among the basic principles in arbitration law are: (1) courts should favor and defer where possible to a valid arbitration clause and (2) an arbitration clause that intends to arbitrate “any dispute” “arising out of or in connection with” the underlying agreement should be construed broadly to include any claims relating to the agreement, including tort claims.

On October 23, 2012, the Pennsylvania Superior Court chose not to follow these principles. Instead, in a 2-1 decision, it affirmed a trial court’s order dismissing the defendant’s petition to compel arbitration in Setlock v. Pinebrook Personal Care And Retirement Center, ruling that negligence claims filed by a deceased nursing home resident need not be arbitrated notwithstanding the existence of a broad arbitration clause. While the court’s opinion appears to be the product of bad facts, it is not clear how confined the ruling will be to those facts. Pending clarification by future cases, there are present steps parties can take to avoid the same fate.


In Setlock, the appellee was a wheelchair-bound nursing home resident. According to the amended complaint, an employee of the appellant negligently used a wheelchair to transport the appellee from the nursing home to her treating physician for an appointment. Due to the appellant employee’s negligence, the appellee fell out of the wheelchair during the trip, causing injuries that allegedly led to her death. Her estate filed a wrongful death and right of survivorship action seeking punitive damages and pain and suffering. The appellant sought to compel arbitration based on an arbitration clause that existed in the resident agreement signed by both parties. The trial court denied the request.


On appeal, the Superior Court recognized the arbitration clause was valid. It also recognized it was broad, since the clause stated “[a]ny dispute controversy arising out of or in connection with under or pursuant to this agreement shall be determined by arbitration  … ”  Nevertheless, the court ruled the clause did not cover the appellee’s causes of action. In reaching this result, the Superior Court relied on two prior decisions, but in a curious way. First, it referred to a 1999 Superior Court decision, Midomo Co. v. Presbyterian Housing Development Co. There, the court declined to order arbitration based on an arbitration clause that was completely different from the clause currently before the court in Setlock. The clause in Midomo expressly limited arbitration to five specifically enumerated instances, which is quite different from the broad “any dispute” language employed in the Setlock Resident Agreement. The second case referenced by the Setlock Court, Smay v. E.R. Stuebner, Inc., did have a similar arbitration clause and, contrary to Midomo, the court ruled that, based on such “broad” language, the tort claim asserted there was subject to arbitration.


Despite the obvious distinction between Setlock and Midomo and the obvious similarity with Smay, the Setlock Court nevertheless reached the same conclusion as in Midomo and not Smay. The court concluded the various obligations set forth in the resident agreement, which included the appellant’s obligation to provide “routine personal care services,” “visits to a physician,” and “transportation,” did not encompass the appellee’s wrongful death action arising from appellant’s allegedly negligent transportation services. The court instead characterized the resident agreement as governing “the financial options and obligations of the residents and their representatives” and ruled that it was “far too attenuated” to conclude this encompassed tort liability for the appellee’s wrongful death action. The majority emphasized that nowhere in the resident agreement did there exist a clause “governing the standard of medical care to be provided” by the appellant.


In dissent, Judge Gantman argued the wrongful death action was “not a distinctly different cause of action from anything contemplated by the terms of the resident agreement,” especially because the agreement included the same services that gave rise to the wrongful death action.  Calling the arbitration clause “unlimited,” Judge Gantman wrote that the majority minimized the importance of this broad provision “and, instead, applies and extends Midomoas if Midomo were the general rule (while at the same time calling that case into question), and not the exception to the general rule of enforcing arbitration agreements (emphasis in original).” Judge Gantman also opined that it is irrelevant whether or not the agreement referenced the standard of medical care because the amended complaint did not address medical care. Instead, the facts in the amended complaint all related to the precise services contemplated in the resident agreement and thus should be subject to that agreement’s arbitration clause.


The majority may have been troubled by the disparate bargaining power and relative positions of the parties. That said, the majority went out of its way to clarify its holding.  The court expressly stated “our holding does not preclude all contracts which include an arbitration clause from encompassing tort liability.” Instead, the court clarified “we hold that where a contract in no way discusses liability for a cause of action, the arbitration clause in the unrelated contract between the parties cannot be read so broadly as to encompass any and all disputes that arise between the parties.”


As a consequence, an arbitration clause that says it applies to “any dispute,” “arising out of” an agreement appears not to apply to all disputes between the parties to that agreement (at least in Pennsylvania). Instead, Pennsylvania courts will limit such clauses to the scope of the agreement, and will strictly scrutinize the contours of that scope. As a result, if Pennsylvania litigants want to avoid this scrutiny, they should include language in the clause which extends the scope of the clause to any claims, including tort claims, arising between the parties.  Based on the majority’s reasoning in Setlock, such a clause would have likely led to arbitration of the appellee’s claims.


Keywords: litigation, business torts, arbitration clause, claims, Pennsylvania Superior Court, wrongful death


Matthew H. Adler and Brian A. Berkley, Pepper Hamilton LLP


 

November 20, 2012

Third Circuit Court Reaffirms Third Restatement of Torts

 

The United States Court of Appeals for the Third Circuit provided clear direction to federal trial courts in Pennsylvania that they should apply the Restatement (Third) of Torts, not the Restatement (Second) of Torts, in products liability cases. On October 17, 2012, the Honorable Joseph F. Weiss, Jr. issued an order in Sikkelee v. Precision Airmotive Corp., 2012 WL 5077571 (3d Cir. October 17, 2012) declining to accept an interlocutory appeal limited to the issue of whether the Pennsylvania Supreme Court would adopt the Third Restatement or continue to apply the Second Restatement. However, the court did provide guidance, stating that because the “Pennsylvania Supreme Court has not issued a definitive opinion on whether the Restatement (Third) of Torts or the Restatements (sic)(Second) of Torts and applies to strict liability and product defect cases. Accordingly, we will follow the precedent set out in Covell [v. Bell Sports, Inc., 651 F.3d 357 (3d Cir. 2011)] and Berrier [v. Simplicity Mfg., Inc., 563 F.3d 38 (3d Cir. 2009)].” Sikkelee, 2012 WL 5077571, at *1.


In Berrier, the Third Circuit held “[if] the Pennsylvania Supreme Court were confronted with [the] issue, it would adopt the Restatement (Third) of Torts.” Id. at *1 (quoting Berrier, 563 F.3d at 40). Thereafter, the Third Circuit reaffirmed its position in Covell, holding, “After examining the contentions of the parties and the recent decisions of Pennsylvania's highest court, we conclude that the state of the law is no different now than it was when we decided Berrier. Rather than exhume the arguments and considerations we laid to rest there, we will apply stare decisis.”  651 F.3d at 363.  Based on the foregoing, the Sikkelee Court held the “precedential holding in Berrier … represents the court’s view of Pennsylvania’s product liability law.”  2012 WL 5077571, at *1. Accordingly, based on Sikkelee, “federal courts sitting in diversity and applying Pennsylvania law to products liability cases should look to sections 1 and 2 of the Restatement (Third) of Torts.”  Id.


Keywords: litigation, business torts, Third Circuit, Third Restatement, Pennsylvania Supreme Court, product liability, federal court


Alex G. Gross, Reed Smith, Philadelphia, PA


 

November 20, 2012

Ruling May Raise Bar for Trade-Secret Misappropriation

 

In Contour Design, Inc. v. Chance Mold Steel Co., Ltd, —F.3d—, 2012 WL 3793131 (September 4, 2012), the First Circuit issued a decision that may raise the bar for a plaintiff attempting to prove trade-secret misappropriation through circumstantial evidence. Contour Design, a company selling ergonomic computer mice, entered into a contract with Chance Mold Steel, whereby Chance would manufacture computer mice for Contour. The parties executed a 20-year nondisclosure agreement (NDA) in connection with the contract. Fourteen years into the contract, Chance began to sell a number of its own competitive products, including a mouse version materially identical to the Contour product as well as a new mouse version called the ErgoRoller. Contour sued for trade-secret misappropriation and breach of contract. The First Circuit affirmed a $7.7 million damages award and an injunction as to the materially identical mice, but reversed an injunction as to the ErgoRoller. The court found that the record did not support a finding that Chance derived its new mouse from the Contour products. Even though Chance admitted to selling identical products to Contour, and Chance could use information gathered from its manufacturing of Contour's products to create its "workaround" ErgoRoller, this was not sufficient to enjoin production of the new product. The court wrote of Chance: "the fact that some of its conduct was unlawful does not mean all of its conduct was unlawful."


Keywords: litigation, business torts, First Circuit, trade secrets, circumstancial evidence


Christopher H. Lindstrom and Robin Morse, Nutter McClennen & Fish LLP


 

November 19, 2012

First Circuit Issues Important Opinion on Trademark Infringement

 

In Oriental Financial Group, Inc. v. Cooperativa De Ahorro Y Credito Oriental, —F.3d—, 2012 WL 5073529 (Oct. 18, 2012), the First Circuit joined several other circuits in holding that the doctrine of progressive encroachment may bar the defense of laches in trademark infringement actions. Under progressive encroachment, a plaintiff does not have to act on de minimis infringement where the litigation costs may outweigh the infringement concern. Instead, a plaintiff can wait to bring suit until the likelihood of confusion "looms large." A plaintiff's delay in bringing suit may be excused if three requirements are met: (1) during the period of delay plaintiff could reasonably conclude that it should not bring suit against the infringing activity; (2) defendant materially altered its infringing activity; and (3) plaintiff sued promptly after the alteration in infringing activity. The First Circuit held that Oriental met these three requirements of progressive encroachment and thus Cooperativa's defense of laches was barred. Furthermore, the court held that the district court erred when it rejected Oriental's request for a broader injunction on the ground that Oriental had not presented evidence of actual confusion prior to 2009. The court reaffirmed the well-established principle that evidence of actual confusion is not necessary to establish a likelihood of confusion, and remanded the case for the district court to determine whether Cooperativa's use of the "ORIENTAL" mark created a likelihood of confusion that would entitle Oriental to a broader injunction.


Keywords: litigation, business torts, First Circuit, trademark infringement, opinion, encroachment


Christopher H. Lindstrom, Nutter McClennen & Fish LLP


 

November 5, 2012

Smartphones in the Workplace: No LOL Matter


Smartphones, Androids, iPhones … no matter what you call them, almost every employee has one and they are dominating the workplace. With the rise in smartphone usage in the workplace, it is important that employers implement sound smartphone and text-messaging policies. Employers who fail to have such policies in place are subject to various risks and liabilities. Recently, there has been a rise in claims of “textual harassment” against employers, which is based on claims asserted by employees who allege receiving harassing or unwanted text messages from coworkers or managers. Many of these claims are based on state and federal antidiscrimination and harassment statutes. For example, an employee claiming to receive sexually charged messages from a coworker or supervisor could foreseeably have a claim of sexual harassment. Likewise, an employee who receives racially derogatory remarks via text message could have a valid claim of racial harassment or discrimination. In addition, this new line of case law suggests that certain business tort claims can also be premised on harassing or improper text messages.

 

Case Studies
In a recent sexual-harassment lawsuit, a former employee claimed that a player on Oakland, California’s basketball team, the Golden State Warriors, sent her 61 text messages over a number of months stating “Hey Sexy” and “I want to be with you.” The former employee also alleged the player sent her pictures of his penis over text message. The case settled for an undisclosed amount.Two former employees of an electronic retailer in Renton, Washington, received a $2.3 million settlement in a sexual-harassment lawsuit filed by the Equal Employment Opportunity Commission against their former employer. The suit was based, in part, on allegations by one former employee that her store manager frequently sent her sexually charged text messages. In addition to the large settlement, the retailer was instructed to conduct sexual-harassment training and work to improve reporting procedures.

 

An African-American employee in Pennsylvania filed claims of racial harassment against his former employer based on racially derogatory text messages sent to him by his former supervisor. The text messages also included jokes about African-Americans. The court concluded that it was clear the conduct would not have occurred but for the employee’s race, and was sufficiently severe to qualify as harassment. See Griffin v. Harrisburg Prop. Servs., 2009 U.S. Dist. LEXIS 109097 (M.D. Pa. 2009).

 

Employer liability due to inappropriate or unwanted text messaging is not limited to claims of harassment or discrimination. Like emails, letters, or other forms of traditional communications in the workplace, text messages may also subject employers to various tort claims such as defamation and even potential claims of negligence.

 

False or defamatory text messages sent by employees about other employees may subject an employer—or the employee—to a defamation claim, especially if the message results in the loss of employment or loss of business. It has already happened in one recent New York state court case, Indy 3000 v. Cirillo, 2011 NY Misc. LEXIS 3332 (S. Ct. NY 2011). In Indy, the former employee asserted a claim of defamation against his employer based on a text message sent by another employee suggesting the defamed employee was engaging in illegal conduct. The court refused to dismiss the claim, finding that the statement imputed dishonesty, misconduct and unfitness of the employee in conduct related to his profession.

An employer who does not have in place a sound antiharassment policy may be subject to claims of negligence due to harassing text messages sent amongst employees. Some courts have found that the absence of effective preventative measures will suffice as evidence of an employer’s negligence. Conversely, a well-publicized grievance procedure that is available to and known by the victim and which eradicates the employer from liability, is likely to undermine a claim of negligence.

 

Proactive Policies
As we start to see an increase in employment claims based on inappropriate text messages, employers should review and update their policies to make sure they address text messaging in the workplace and the limited use of a smartphone. An employer may be liable for text messages sent by employees over personal devices, and will certainly be liable for such messages sent over employer-issued devices. Though an employer can never be insulated from the threat of employment litigation, there are a number of steps that can be taken to limit such liability.

 

Smartphone Policy
An employer should have in place a smartphone policy which makes clear that any activity that takes over employer-issued devices and, at times, over employees’ personal devices are subject to the company’s antiharassment policies, including policies against sexual harassment.

 

Limited Use of Smartphones
Employers should clarify that employer-issued smartphones, cell phones, or PDA devices are to be used for work purposes only, and that employees who deviate from this standard are subject to disciplinary action. If the employer wishes to permit limited, personal use of the devices, the policy should clearly define what types of personal use shall be acceptable. The policy should also include examples of impermissible uses of the device, but state that such list is not intended to be all-inclusive.

 

­Address Text Messaging in Antiharassment Policies
Employers should review their current policies against harassment in the workplace and ensure that harassment includes unwelcome or harassing text messages, pictures, or any other activity that is facilitated by a smartphone, cell phone, or PDA device. The policy should warn all employees that any violation will subject an employee to disciplinary action, including termination. Employees should be required to sign and return a form acknowledging that they read and promise to comply with the policy.

 

Reporting Procedures
Employers should include clear details instructing employees how and where to report complaints of harassment. The policy should promise that any complaints will be dealt with promptly and effectively, and ensure that employees who raise such complaints will not be subject to retaliation or any other adverse employment act.

 

Policies that contain these key provisions should help to limit employer liability against textual- harassment suits and provide employees with clear direction as to the proper and improper use of their smartphones in the workplace.


Keywords: litigation, business torts, liability, harassment claims, textual harassment, smartphone policies


Kristin A. LaRosa, Pepper Hamilton LLP



 

August 30, 2012

Court Finds for Defendant in Age Discrimination Case


In Woodward v. Emulex Corp. [PDF], No. 10-11382-RGS, ___ F. Supp.2d ___, 2012 WL 1245586 (D. Mass. April 13, 2012), the U.S. District Court for the District of Massachusetts (Stearns, J.) granted summary judgment against the plaintiff’s claims of age discrimination and breach of express and implied contract against his former employer, as well as a claim of tortious interference against a former supervisor.


In the first instance, the court assumed that the plaintiff had made a prima facie showing sufficient to raise a reasonable inference of age discrimination but then accepted the plausibility of the employer’s lawful explanation for the plaintiff’s termination in the second step of the analysis. In the third step of the analysis, the court found that the plaintiff was unable to provide sufficient evidence that discrimination was the basis of his termination, finding instead that the action had been an exercise of business judgment. Among other things, the court also found that the defendant’s “positive and encouraging remarks” regarding the plaintiff’s continued employment did not contain a specific promise sufficient to create an implied contract or create a reasonable expectation of permanent employment. The court also found that the plaintiff failed to present sufficient evidence to demonstrate malice, which is required to prove his claim of tortious interference against his former supervisor.


—Jonah M. Fecteau, Nutter McClennen & Fish LLP


Keywords: litigation, business torts, age discrimination, breach of contract



 

August 30, 2012

Referral List Plus Business Conduct Shows Implied Contract


In Vita v. Berman, DeValerio & Pease, LLP, 81 Mass. App. Ct. 748 (2012), the appeals court (Hanlon, J.) upheld a jury’s breach-of-contract finding and damages award, as well as the trial court’s finding of a Chapter 93A violation and double damages award in connection with a law firm’s breach-of-client referral agreement with an attorney. In the agreement, the attorney would refer potential plaintiffs to the law firm for securities class-action litigation.


—Jonah M. Fecteau, Nutter McClennen & Fish LLP


Keywords: litigation, business torts, implied contract, breach of contract



 

June 19, 2012

Title Insurers Owe No Independent Duty of Due Care


Negligence claims cannot be asserted against title-insurance companies, where the terms of the title-insurance contract dictate the scope of the obligations, according to the Maryland Court of Special Appeals in Columbia Town Center Title Co. v. 100 Investment Ltd. Partnership, 203 Md.App. 61, 36 A.3d 985 (Feb. 2, 2012). Similarly, the court found that a title insurer cannot be liable under a theory of vicarious liability because the terms of the policy control.


In Columbia Town Center Title Co., the Maryland intermediate appellate court reversed a circuit-court judgment, holding that two title-insurance companies and a title insurer, Chicago Title Insurance Co., were not liable to the insured under negligence and vicarious-liability theories. The title companies had overlooked a record conveyance of the subject property to a third party prior to the sale to the plaintiff partnership of a larger tract that included the subject parcel. The partnership later sold the property, remaining unaware of the prior conveyance, until the true owner conveyed the property. Forced to buy the property back to clear the chain of title for its purchaser, the partnership, after years of litigation over the terms of the policies, asserted negligence theories against the title companies and the title insurer.


The court of special appeals held that a simple negligence claim will not lie against a title company where the terms of a contract control the scope of the obligations. In so holding, the court distinguished title companies from areas of professional skill and judgment such as attorneys, physicians, architects, and accountants. The court further held that the title insurer, Chicago Title, could not be liable under a theory of vicarious liability and that the terms of the policy must control. A dissenting opinion by Judge Meredith agreed with the majority on the vicarious-liability bar but would have kept the negligence theory intact.


Keywords: litigation, business torts, insurance, liability


—Jeffrey S. Tibbals, Nexsen Pruet LLC, Charleston, South Carolina


 

May 16, 2012

Fifth Circuit Looks at Claims Handling vs. Procurement


In Grissom v. Liberty Mutual, No. 11-60260 (April 23, 2012), Grissom claimed that his insurer, Liberty Mutual, failed to inform him that he was eligible for a richer insurance policy and that the failure constituted “claims handling” and was therefore preempted under the National Flood Insurance Act. Both parties relied on the 2009 decision, Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir. 2009), which stands for the proposition that if the interaction between the insured and the insurer is characterized as “claims handling” and not “insurance procurement,” then the insured’s claim is subject to federal preemption pursuant to the National Flood Insurance Act.


After reviewing the district court’s legal findings de novo, the Fifth Circuit Court of Appeals found that Grissom retained his insurance coverage during the time period when he was renewing his policy with Liberty Mutual. Thus, the interaction between Grissom and Liberty Mutual was considered “claims handling” and not “insurance procurement” because there was no lapse of time when Grissom did not have insurance coverage, thereby prompting him to procure new insurance. Therefore, the Fifth Circuit concluded that Campo did not control in this case and that Grissom’s state action was preempted by the National Flood Insurance Act. As a result, the Fifth Circuit reversed the district court’s rulings and dismissed Grissom’s claim.


Keywords: litigation, business torts, insurance, National Flood Insurance Act, Fifth Circuit


Amy M. Stewart, Cox Smith, Dallas, Texas



 

May 2, 2012

Quilloin May Limit Companies' Risk of Class Actions


The U.S. Court of Appeals for the Third Circuit continues to follow the Supreme Court’s “bold and clear” lead in favoring arbitration clauses over state laws prohibiting class-action waivers. In T Mobility v. Concepcion, the Supreme Court held that the Federal Arbitration Act’s (FAA) broad mandate favoring arbitration agreements, which are typically construed to not permit class actions, trumped a California state law that prohibited class-action waivers in consumer agreements. In 2011, the Third Circuit followed Concepcion and struck down a similar New Jersey prohibition on class-action waivers in Litman v. Cellco P’ship. On March 14, 2012, the Third Circuit struck down another, similar law, this time in Pennsylvania, in Quilloin v. Tenet HealthSystem Philadelphia, Inc. [PDF], Case No. 11-1393 (3d Cir., Mar. 14, 2012). This trend proves valuable to companies seeking to avoid the expense of class-action litigation and adds a premium to arbitration clauses.


Keywords: litigation, business torts, class actions, class-action waivers, arbitration


—Brian A. Berkley, Benjamin J. Eichel, Matthew H. Adler, Kali T. Wellington-James, and Tracey E. Diamond, Pepper Hamilton, LLP



 

March 30, 2012

Appeals Court Sides with Plaintiff in Settlement Dispute


In Greenleaf Arms Realty Trust I, LLC v. New Boston Fund, Inc., No. 10-P-2192, 81 Mass. App. Ct. 282, 2012 WL 472919 (Mass. App. Ct. Feb. 16, 2012), the appeals court reversed the superior court’s dismissal of the plaintiff’s claims against a real estate investment fund, finding that the plaintiffs had adequately pleaded fraud and breach of fiduciary duty.


Keywords: litigation, business torts, fiduciary duty, fraud


—Jonah M. Fecteau, Nutter McClennen & Fish LLP, Boston, Massachusetts



 

February 24, 2012

Golf Course Visitors Considered Interstate Commerce


With a panel composed of Circuit Judges Jacques L. Weiner, Jr., Edith Brown Clement, and Jennifer Elrod, the Fifth Circuit Court of Appeals considered an appeal concerning the interstate commerce element of a valid claim under the Sherman Act. Gulf Coast Hotel-Motel Assoc. v. Mississippi Gulf Coast Golf Course, No. 10-60844, 2011 WL 4446002 (5th Cir. (Miss.) Sept. 27, 2011).


Ultimately, the Fifth Circuit Court of Appeals concluded that the plaintiff’s complaint sufficiently stated a claim under the Sherman Act to confer federal subject-matter jurisdiction and that the alleged misconduct by the defendants could not be said to have an insignificant impact on interstate commerce. Therefore, the Fifth Circuit found the district court erred in dismissing the case and reversed and remanded for further proceedings.


Keywords: litigation, business torts, Fifth Circuit, subject-matter jurisdiction, interstate commerce


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

February 24, 2012

Appeal of Denial of Motion to Compel Isn't an Automatic Stay


With a panel composed of Circuit Judges W. Eugene Davis, Jerry E. Smith, and Edward C. Prado, the Fifth Circuit Court of Appeals considered the district court’s denial of a motion to compel arbitration and held that appeal does not result in an automatic stay. Weingarten Realty Investors v. Miller, No. 11-20676, 2011 WL 5142183 (5th Cir. (Tex.) Nov. 1, 2011). The plaintiff realty firm and the defendant’s company created a joint venture in which the plaintiff loaned the joint venture money under a loan agreement between the plaintiff and the joint venture. The loan agreement contained an arbitration clause. The defendant did not sign the loan agreement individually, but did sign the third-party guarantee in which he and his company guaranteed half of the loan. There was no arbitration clause in the guarantee.


Keywords: litigation, business torts, Fifth Circuit, arbitration


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

February 24, 2012

Fifth Circuit Hears Purchase-and-Sale Agreement Case


With a panel composed of Circuit Judges W. Eugene Davis, Edward C. Prado, and Priscilla Owen, the Fifth Circuit Court of Appeals heard an appeal concerning a purchase-and-sale agreement and asserted claims for breach of contract, promissory estoppel, and negligent and fraudulent misrepresentation. LHC Nashua Partnership, Ltd. v. PDNED Sagamore Nashua, LLC et al., No. 10-20331, 2011 WL 4471133 (5th Cir. (Tex.) Sept. 28, 2011) The litigation arose out of a contract between the parties in which the defendant agreed to transfer its rights to buy a shopping mall property from a third party to the plaintiff. The plaintiff alleged that, based on representations made by the defendant, the plaintiff expected to be able to lease the property to a specific home-improvement store. The store then refused to enter into a lease, and instead purchased the property from the defendant.


Keywords: litigation, business torts, purchase-and-sale agreements, Fifth Circuit


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

February 24, 2012

Nonsignatory Officers Not Bound by Arbitration Agreement


With a panel composed of Chief Judge Edith Jones and Circuit Judges James L. Dennis and Edith Brown Clement, the Fifth Circuit Court of Appeals reversed a district court decision holding the nonsignatory officers of a company were bound by an arbitration agreement in a contract between a company and the defendant. Covington v. Alban Offshore Ltd., 650 F.3d 566 (5th Cir. (Tex.) 2011). The plaintiffs were the president and vice president of a company that agreed to perform a service for the defendant company. The plaintiff vice president executed the contract, which contained an arbitration clause, on behalf of the company. A dispute arose and the defendant initiated arbitration proceedings against the company, but also against the plaintiffs in their individual capacities.


Keywords: litigation, business torts, arbitration agreement, Fifth Circuit


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

February 13, 2012

Copying Text in Patent Application Led to Rejection


In Cold Spring Harbor Laboratory v. Ropes & Gray, LLP [PDF], No. 11-101128-RGS, 2012 WL 112642 (D. Mass. Jan. 13, 2012), the district court denied the defendants’ motions to dismiss the plaintiff’s claims of malpractice, breach of fiduciary duty, fraud, and negligence arising from the defendants’ representation of the plaintiff in certain patent-prosecution matters. In particular, the district court found that the plaintiff had adequately pled a causal link between the defendants’ alleged malpractice in copying portions of text from a prior patent application and the ensuing rejection of the plaintiff’s patent claims.


Keywords: litigation, business torts, fiduciary duty, malpractice, negligence


—Dawn Curry and Jonah Fecteau at Nutter McClennen & Fish LLP



 

January 20, 2012

Court Can Preserve Status Quo in Arbitration Dispute


With a panel composed of Circuit Judges Carl E. Stewart, Edward C. Prado, and Jennifer Elrod, the Fifth Circuit Court of Appeals considered whether a district court, in an arbitration dispute, may preserve the status quo by issuing a preliminary injunction pending its resolution of the motion to compel arbitration, not pending the arbitration itself. Janvey v. Alguire, et al., No. 10-10617, 2011 WL 2937949 (5th Cir. (Tex.) July 22, 2011).


Keywords: litigation, business torts, Ponzi schemes, Fifth Circuit, arbitration


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

January 20, 2012

"Best-Efforts" Provision Without a Goal Is Unenforceable


With a panel composed of Circuit Judges E. Grady Jolly and Catharina Haynes and District Judge Xavier Rodriguez, the Fifth Circuit Court of Appeals analyzed the term “best efforts” in a contract under Texas law. Kevin M. Ehrlinger Entrprs., Inc. v. McData Srvcs. Corp., 646 F.3d 321 (5th Cir. (Tex.) 2011).


The Fifth Circuit reviewed the best-efforts provision and determined that it did not provide a goal or guideline and, thus, was not enforceable under Texas law. Thus, the fraudulent-inducement claim could not rest on an alleged breach of this clause, and, accordingly, the issue should not have been submitted to the jury. Therefore, the Fifth Circuit Court of Appeals reversed and remanded to the district court to render judgment in favor of the defendant.


Keywords: litigation, business torts, Fifth Circuit, contracts


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

January 17, 2012

Supreme Court Resolves Circuit Split on Loss Causation


In Erica P. John Fund, Inc. v. Halliburton Co., et al., 131 S. Ct. 2179 (2011), in an opinion authored by Chief Justice Roberts, the U.S. Supreme Court addressed whether securities-fraud plaintiffs need to prove loss causation to obtain class certification. The petitioner was lead plaintiff in a putative-securities-fraud class action. The petitioner alleged that the defendant made several misrepresentations designed to deflate its stock price. The petitioner sought to have its class certified pursuant to Federal Rule of Civil Procedure 23. The parties agreed that the petitioner satisfied the requirements set out in Rule 23(a). However, the district court found a problem under Rule 23(b)—circuit precedent required securities-fraud plaintiffs to prove loss causation to obtain class certification. After reviewing the pleadings, the district court concluded it could not certify the class because the petitioner failed to establish loss causation. The appellate court affirmed the denial of the class certification, also concluding proof of loss causation was required at the class-certification stage. The U.S. Supreme Court granted certiorari to “resolve a conflict among the Circuits as to whether securities fraud plaintiffs must prove loss causation in order to obtain class certification.”


Keywords: litigation, business torts, securities fraud, Supreme Court, loss causation, class actions, class certification


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

January 13, 2012

Fifth Circuit Looks at Arbitration Agreement Case


In DK Joint Venture v. Weyland, No. 09-11000, 2011 WL 3342370 (5th Cir. (Tex.) Aug. 4, 2011), with a panel composed of Circuit Judges W. Eugene Davis, Jacques L. Wiener Jr., and James L. Dennis, the Fifth Circuit Court of Appeals heard an appeal from the confirmation of an arbitration award. The plaintiffs were business entities that filed arbitration demands with the American Arbitration Association. The defendants were two individuals and the companies that they controlled. The plaintiffs alleged the defendants committed fraud, breach of contract and fiduciary duty, and “other wrongs” to induce the plaintiffs to invest in a purported oil and gas venture. The individual defendants were the only defendants party to the instant appeal. In seeking arbitration, the plaintiffs relied on a provision contained in the contracts between the plaintiffs and some of the defendant corporations.


Keywords: litigation, business torts, Fifth Circuit, arbitration, non-signatories


—Sofia Adrogué, P.C., Looper, Reed & McGraw, P.C., Houston, Texas



 

January 9, 2011

First Circuit Dismisses Most Claims in Security Breach Case


In Anderson v. Hannaford Bros. Co. [PDF], 659 F.3d 151 (1st Cir. 2011), the First Circuit affirmed the District Court for the District of Maine’s dismissal of certain of the plaintiffs’ claims arising under Maine law from unauthorized use of their credit- and debit-card data following a hackers’ security breach of the grocery store chain’s electronic payment processing system.


Among other things, the court of appeals agreed with the district court’s finding that the plaintiffs failed to adequately plead a confidential relationship that gave rise to a breach of fiduciary duty by the grocery chain or a claim under Maine’s unfair trade practices act. On the other hand, the court of appeals reversed the district court’s dismissal of the plaintiffs’ negligence and breach-of-implied-contract claims, finding that the plaintiffs adequately alleged recoverable damages arising from the data breach, including reasonable mitigation costs, such as card replacement and credit insurance, but not including unforeseeable damages arising from loss of credit-card reward points or points-earning opportunities resulting from card cancellation.


Keywords: litigation, business torts, unfair trade practices, security breach, First Circuit


—Dawn M. Curry, Nutter, McClennen & Fish, LLP, Boston, Massachusetts


 

January 9, 2011

Claim that FDIC Acted in Bad Faith Proceeds


In Pearson v. United States [PDF], Civ. A. No. 10-11410-EFH, 2011 WL 6426161 (D. Mass. Dec. 22, 2011), the district court granted in part and denied in part the United States’ motion to dismiss the claims of a plaintiff real-estate developer under the Federal Tort Claims Act. While most of the plaintiff’s claims were dismissed, the court allowed a sole surviving claim of breach of fiduciary duty to survive dismissal. The plaintiff argued that the Federal Deposit Insurance Corporation (FDIC), as a lender, had breached a fiduciary duty to the plaintiff, as a borrower, by acting in bad faith. The United States argued that the plaintiff merely alleged negligent breach of a duty to the plaintiff and failed to allege the existence of a fiduciary duty.


Citing decisions of the District of Massachusetts and the Massachusetts Supreme Judicial Court, the court held that negligence claims encompass claims for breach of fiduciary duty, even where no fiduciary duty is specifically set forth. The court further stated that while a lender does not generally owe a fiduciary duty to a borrower, a fiduciary duty may arise where the borrower reposes its trust and confidence in the lender and the lender knows of and accepts the borrower’s trust, such as in the case of a foreclosure sale, where a lender owes the borrower a fiduciary duty to refrain from committing fraud, committing bad faith, or failing to use reasonable diligence. The court found that the plaintiff adequately alleged bad faith by an agent of the FDIC during a foreclosure, and the claim was allowed to proceed.


Keywords: litigation, business torts, Federal Tort Claims Act, FDIC, fiduciary duty, bad faith


—Dawn M. Curry and Jonah M. Fecteau, Nutter, McClennen & Fish, LLP, Boston, Massachusetts


 

January 9, 2011

Finding of Liability Upheld Despite No Misappropriation


Despite a jury’s contrary finding of no misappropriation on the plaintiff’s common-law misappropriation claim, the appeals court upheld the trial court’s finding of liability under Mass. Gen. Laws Chapter 93A for trade secret misappropriation in Specialized Tech. Resources, Inc. v. JPS Elastomerics Corp., No. 11-P-776, 2011 WL 5843018 (Mass. App. Ct. Nov. 23, 2011).


Among other things, the defendant argued that the jury’s finding that no misappropriation had occurred precluded the trial judge’s finding that misappropriation had occurred for purposes of Chapter 93A liability. However, the appeals court rejected the defendant’s argument by citing to extensive Massachusetts precedent that a jury’s finding on common-law claims does not bind a trial court’s determination of Chapter 93A liability and that the trial court is authorized to make independent findings of fact under the statute. The appeals court also upheld injunctive relief preventing the defendant from using the particular misappropriated manufacturing process for a period of five years, reasoning that evidence supported a finding that the process was not susceptible to reverse engineering and that such a method would not be independently developed.


Keywords: litigation, business torts, misappropriation, injunctive relief


—Dawn M. Curry and Jonah M. Fecteau, Nutter, McClennen & Fish, LLP, Boston, Massachusetts


 

December 20, 2011

Defendant Pays Legal Fees, Sanctions for Not Saving ESI


The Western District of Tennessee has issued an order sanctioning a defendant for failing to preserve electronically stored information (ESI). The court also ordered the defendant to pay the plaintiff’s legal fees associated with filing the motion for sanctions. For more information regarding the discovery violations and associated sanctions, check out Nacco Materials Handling Group, Inc., D/B/A Yale Materials Handling Corp.v. The Lilly Company, ___ F.R.D. ___, 2011 WL 5986649 (W.D. Tenn.).


Keywords: litigation, business torts, Western District of Tennessee, sanctions, legal fees


Daniel Kaufmann, partner, Bradley, Arant, Boult, Cummings


 

November 23, 2011

Eighth Circuit Clarifies "Literal Falsity"


In Buetow v. ALS Enterprises, Inc., No. 10-2415, ___ F.3d ___, 2011 WL 3611488 (8th Cir. August 18, 2011), the U.S. Court of Appeals for the Eighth Circuit vacated an injunction, holding that it had been issued based on errors of law that included misinterpreting the Lanham Act, 15 U.S.C. § 1125(a)(1)(B).


The Eighth Circuit found that the district court erred in its “literal falsity” determinations. The district court did not sufficiently consider the context of the advertisement in finding that the term “odor eliminating” was only subject to one interpretation—that there would be complete elimination of odors. The Eighth Circuit doubted that many consumers would be misled and actually believe that any product could eliminate every molecule of human odor. Thus, the proper test for literal falsity under the Lanham Act was whether the ad was “unambiguously false and misleading.”


Keywords: litigation, business torts, Lanham Act, injunctions


—Erwin O. Switzer and Elizabeth T. Nguyen, Greensfelder, Hemker & Gale, PC, Saint Louis, Missouri



 

November 17, 2011

National Law Firms Invade Texas


Mark Curriden, senior legal affairs writer for the new website serving Texas business lawyers, www.texaslawbook.net, published an interesting piece regarding the recent invasion of the Texas legal market by out-of-state firms. A reason for this influx of prominent national law firms is that Texas-based corporations continue to spend large amounts on mergers, acquisitions, joint ventures, and complex commercial litigation, resulting in more billable hours for high-priced business lawyers. Further, thanks in part to large, Texas-based firms significantly increasing their hourly rates over the past decade, national law firms have become more competitive in regard to the billable rate.


Keywords: litigation, business torts, Texas, attorney fees


Amy M. Stewart, Cox, Smith, Matthews, Dallas, Texas


 

November 16, 2011

Architects' Contractual Duty Doesn't Extend to Third Parties


In Black + Vernooy Architects v. Smith, 346 S.W.3d 877 (Tex. App.—Austin, 2011, pet. filed) [PDF], the Austin, Texas, court of appeals held that the contractual duty arising between an architect and his homeowner client to identify and guard against construction defects did not extend to third parties who sustained injuries from a balcony collapse at the residence. Additionally, the court was unwilling to impose a new common-law duty of care on architects because, under the facts in this case, the architect did not have the power to control the actual construction work that was performed.


The court reversed the judgment in the district court and rendered a take nothing judgment against the architects. The guests have filed their petition for review, so the Supreme Court of Texas will have an opportunity to weigh in on whether architects working in Texas should be held to a higher standard of care that extends to third parties.


Keywords: litigation, business torts, contractual duty, Texas


Amy M. Stewart, Cox, Smith, Matthews, Dallas, Texas



 

November 8, 2011

Contracts: Are You Smarter Than a First-Year Law Student?


Even veteran lawyers can forget to apply the basic elements of contract law, including the importance of offer and acceptance.


In Baseball at Trotwood, LLC, et al. v. Dayton Pro’f Baseball, et al., 2003 U.S. Dist. LEXIS 27460, at *150 (S.D. Ohio September 2, 2003), a lawsuit followed a failed effort to bring a minor-league baseball team to Dayton, Ohio. Baseball at Trotwood (BAT); Rock Newman, Inc. (RNI); and Sports Spectrum, Inc. (SSI) sued various parties, claiming that their efforts to establish the team were hindered by the actions of the defendants. Id. at *5. The litigation was complex to say the least. The district court itself noted that the case was “a distressing window” into the business of minor-league baseball “far removed from the field of dreams, where the cackling of children in oversized ball caps munching on Cracker Jack, while their parents sway to the tune of Take Me Out to the Ball Game, is all but forgotten.”


Among the claims asserted in the case, SSI sued the Cincinnati Reds for breach of contract, arguing that the Reds offered to waive its protective territory rights to the Dayton area, but then pulled back its offer. Id. at *150. The district court disagreed, granting the Reds’ motion for summary judgment on the grounds that SSI’s breach-of-contract claim failed because SSI did not establish that the parties actually entered into an enforceable agreement. On examination of the facts, the district court found that the Reds never offered to contract with SSI. Instead, the discussions between the two parties were “merely an invitation to future dickering” and that “it should also be obvious to a first year law student that an offer to discuss terms of a potential agreement is not an offer to contract itself.”


In today’s contract issue-laden world (for example, see the NBA lockout, the Simpsons voice actors’ demands, Kim Kardashian’s prenup, etc.), if the topic is contracts, how would you fare? Are you smarter than a first-year law student?


  1. What is the Statute of Frauds and when does it apply?
  2. What is the Parol Evidence Rule?
  3. May anyone other than the promisor or promisee enforce a contract?
  4. Hypothetical question: If you save a person from drowning and he or she promises you money after you have performed the deed, was there sufficient consideration to form a contract?
  5. Is a contract entered into with a minor void?

 

Answers:

  1. The Statute of Frauds mandates that certain oral contracts will be void and unenforceable unless they appear in writing. This includes contracts for the sale of real property, sales of goods for more than $500, and contracts that cannot be performed within a year, such as a commercial lease for five years. See Groff v. Dempsey, 2009 U.S. Dist. LEXIS 10276, at *9–10 (N.D. Ill. February 11, 2009) (discussing the Illinois Statute of Frauds and noting that Illinois has codified the universal “Statute of Frauds”).
  2. A court will not allow any testimony to change the clear and unambiguous terms of a contract, but if the court finds the contract term to be unclear, such testimony can come in, along with any prior drafts of the contract. See Dakota, Minn. & E.R.R. Corp. v. Wis. & S.R.R. Corp., 2011 U.S. App. LEXIS 19282, at *11 (7th Cir. September 20, 2011).
  3. Generally, no. The doctrine of privity dictates that only those involved in striking a bargain have standing to enforce it. However, in recent years, the rule of privity has eroded somewhat, and third-party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. See Ayers Oil Co. v. Am. Bus. Brokers, Inc., 2010 U.S. Dist. LEXIS 130958, at *48–9 (E.D. Mo. July 27, 2010).
  4. No. This is a basic example of past consideration, and past consideration is not valid consideration for the formation of a contract. Pershall v. Elliott, 163 N.E. 554, 556 (1928).
  5. No. A contract entered into with a minor is voidable at the minor’s option, but not void (But note—a minor cannot void a contract that is for “necessaries,” such as food, shelter, etc.) Aetna Casualty & Surety Co. v. Duncan, 972 F.2d 523, 526 (3rd Cir. 1992).

 

Keywords: litigation, business torts, contracts, young lawyers


—Aubrey Colvard at Cox Smith in Dallas, Texas


 

November 3, 2011

Accusation of Stolen Trade Secrets Is Defamatory Per Se


Practitioners should advise their clients to think long and hard before making what may later prove to be unsubstantiated accusations of wrongdoing by his or her former employees that could potentially affect the possibility of those former employees gaining or retaining future employment opportunities. In Downing v. Burns, 2011 Tex. App. LEXIS 5752 (Tex. App.—Houston 2011), docket number 14-09-00718-CV (July 28, 2011), a former employee, Downing, brought an action against her former employer, Burns, for tortious interference of contract and defamation. Downing asserted that after she resigned from Burns’ realty company, Burns made threatening statements to Downing’s two new employers. Specifically, Burns threatened that if Downing did not return pages from a policy manual she stole from him, he would sue any employer that hired her. Afraid that Burns would file a lawsuit, the two employers terminated Downing’s employment.


Downing sued Burns for tortious interference with a contract and defamation. Burns filed a counterclaim of theft of trade secrets, which served more as an affirmative defense because Burns said he made those statements because Downing stole his company’s proprietary information. After a trial, the jury unanimously found in favor of Downing on all three claims. Burns filed a motion for judgment notwithstanding verdict (JNOV) on the defamation claim alleging the evidence was legally sufficient to support the jury’s finding. The trial court entered judgment in Downing’s favor only on the tortious-interference and theft claims and granted Burns’ motion for JNOV.


Both parties appealed. After review, the court of appeals held that the trial court erred in granting Burns’ motion for JNOV on the defamation claim and that the record did not support the full amount of the damages the jury awarded on Downing’s tortious-interference claim. Thus, the tortious-interference claim was remanded. However, the court of appeals held that it was necessary to remand the entire case for new trial because the evidence to support and/or refute the parties’ claims and defenses were so interwoven that to try one claim without the others would be unfair to the parties.


Keywords: litigation, business torts, defamation per se, tortious interference with contract, trade secrets


Amy M. Stewart, Cox, Smith, Matthews, Dallas, Texas



 

October 25, 2011

Standard Merger Clause Does Not Preclude Misrepresentation


Lawyers relying on standard merger clauses to protect their clients from later claims of fraudulent and negligent misrepresentation under Texas law should be aware of the rapid evolution of the law in this area in the wake of the Texas Supreme Court’s decision in Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am. and the Fifth Circuit decision in LHC Nashua Partnership, Ltd. v. PDNED Sagamore Nashua, No. 10-20331, 2011 WL 4471133, 2011 U.S. App. LEXIS 19759 (5th Cir. (Tex.) 2011).


Relying on the recent Texas Supreme Court case of Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 334 (Tex. 2011), the Fifth Circuit concluded that PDNED failed to demonstrate that the merger clause barred LHC’s misrepresentation claims. Under Italian Cowboy, standard merger clauses that do not express an unequivocal intent to disclaim reliance or waive claims for fraudulent inducement do not preclude misrepresentation claims. Because the Fifth Circuit found the P&S agreement’s merger clause was a standard merger clause, the court affirmed judgment on the fraudulent misrepresentation claim. Moreover, because PDNED failed to cite to authorities establishing that a standard merger clause bars negligent misrepresentation claims, the Fifth Circuit affirmed the judgment on the negligent misrepresentation claim.


It will be interesting to see if this case, in conjunction with the holding in Italian Cowboy, leads to the insertion of more “disclaimer-of-reliance” merger clauses into commercial contracts. Accordingly, litigators should keep an eye out for which type of merger clause is included in contracts construed under Texas law to determine what effect, if any, the merger clause will have on any misrepresentation claims also alleged in the lawsuit.


Keywords: litigation, business torts, merger clauses, Fifth Circuit, fraudulent misrepresentation, negligent misrepresentation


Amy M. Stewart, Cox, Smith, Matthews, Dallas, Texas



 

October 19, 2011

Blog Discusses Recent Fifth Circuit Decisions


Aptly named after the street address of the John Minor Wisdom federal courthouse in New Orleans and the home of the U.S. Court of Appeals for the Fifth Circuit, 600camp.com provides updates and discussion about recent Fifth Circuit opinions in the general area of commercial litigation.


Keywords: litigation, business torts, Fifth Circuit, opinions


Amy M. Stewart, Cox Smith Matthews, Inc., Dallas, Texas


 

October 5, 2011

First Circuit: Noncompetition Period Begins with Merger


So far in 2011, the business community has witnessed a flurry of mergers and acquisitions—arguably the most in more than a decade. One issue related to this activity is what an acquiring company must do to ensure that the noncompetition agreements the employees of the acquired company entered into can be enforced by the acquiring company when those employees’ services are terminated. The First Circuit recently faced this issue in OfficeMax, Inc. v. Levesque, No. 10-2423, 2011 WL 4015654 (1st Cir. 2011), and reached a decision that some may find surprising.


The First Circuit vacated a preliminary injunction granted in favor of OfficeMax to enforce noncompetition agreements involving sales employees who OfficeMax acquired as a result of a corporate merger. The appellants were sales employees of Loring, Short, and Harmon (LS&H), and they all signed noncompetition agreements when they were employed there. The noncompetition agreements stated that a one-year, noncompetition period would commence on the termination of employment with LS&H. Further, in the preamble of the noncompetition agreements, the parties acknowledged the impending sale of LS&H to Boise Cascade Office Products Corporation (BCOP). BCOP subsequently merged with OfficeMax, and the salesmen began selling products for OfficeMax. Due to reorganization, the salesmen left their employment at OfficeMax and began working for a direct competitor. As a result, OfficeMax moved for a preliminary injunction to enforce the terms of the noncompetition agreements that the salesmen signed when they were employed with LS&H, the predecessor in interest. The district court granted OfficeMax’s request for a preliminary injunction.


On appeal, the key issue was whether the salesmen’s termination of employment at OfficeMax in 2009 and 2010 triggered the running of the one-year, noncompetition period or whether the period was triggered earlier in 1996 when BCOP purchased LS&H. On appeal, OfficeMax argued that the triggering event for the one-year, noncompetition agreement was when the salesmen left their positions at OfficeMax because BCOP assigned the agreements to OfficeMax pursuant to the corporate merger. In contrast, the salesmen argued that the running of the one year, noncompetition period began when the salesmen’s employment at LS&H was terminated when BCOP’s purchased LS&H. The First Circuit rejected OfficeMax’s argument, instead siding with the salesmen by stating that “the language of the agreements, read as a whole, unambiguously compels the appellants’ interpretation.”


This is an interesting decision because the First Circuit held that the noncompete period began to run simply by virtue of an acquisition that occurred at the corporate level, rather than when the employee actually left the successor company to go work for a competitor. Further, the successor company, here OfficeMax, did not get the benefit of the noncompete agreements, even though, under the facts in this case, both BCOP and OfficeMax intended to transfer that benefit to OfficeMax.


Thus, the court focused on a strict, literal reading of the covenant rather than on the obvious intent of the parties. Even though the preamble clearly mentioned the imminence of the share sale to BCOP, the First Circuit held that BCOP’s purchase of LS&H was the triggering event for the running of the noncompetition agreements. This result could have been avoided if the language of the agreement referred instead to termination of employment with the company or any of its successors or assigns as the triggering event for the running of the noncompetition period.


Keywords: litigation, business torts, First Circuit, noncompetition agreements


—Dawn M. Curry, Nutter, McClennen & Fish, LLP, Boston, Massachusetts


 

September 21, 2011

With Expired Period of Restraint, Relief Is Inappropriate


In EMC Corp. v. Arturi [PDF], docket number 11-001 (Aug. 26, 2011 Souter, J.), the First Circuit affirmed the decision of the district court to decline granting EMC a preliminary injunction preventing a former employee from competing with EMC or soliciting its customers and remaining employees on the ground that the contractual restrictions on these activities limited the employee’s efforts for one year only. This period had passed before any injunction could be issued. The court indicated that EMC could have contracted for tolling the term of the restriction during litigation or for a period of restriction to commence upon preliminary finding of breach, but it did not.


Keywords: litigation, business torts, First Circuit, preliminary injunctions


—Dawn M. Curry, Nutter, McClennen & Fish, LLP, Boston, Massachusetts


 

September 8, 2011

A Shift in Jurisdiction Based on Internet Presence?


A federal court decision in Massachusetts may signal a change in personal jurisdiction analysis based on Internet contacts. Since 1997, courts have analyzed this issue using a test developed in Zippo Manuf. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997), which held that the likelihood of personal jurisdiction is “directly proportionate” to the level of interactivity of the defendant’s website—the more interactive the site, the more likely a party will be considered to be doing business in the jurisdiction. Under a Zippo analysis, a site that allowed emails to the site’s owner was held sufficient to establish personal jurisdiction. See, e.g., Hasbro, Inc. v. Clue Computing, Inc., 994 F. Supp. 34, 35 (D. Mass. 1997).


Recognizing technological advances since Zippo, the District Court of Massachusetts recently found the “interactivity” test obsolete. In Sportschannel New England LP d/b/a/ Comcast SportsNet New England v. Fancaster, Inc., 2010 U.S. Dist. LEXIS 106272 (D. Mass. October 1, 2010), Judge Nancy Gertner refused to accept that personal jurisdiction arises simply because a website allows emails to the site’s owner. Instead, the court held that “[s]omething more is required.” While not defining “something more,” the court provided some guidance, suggesting that directing sales toward forum residents may be enough.


However, 12 days after the Sportschannel decision, Federal Magistrate Judge Judith Dein relied on the Zippo test to find a defendant subject to jurisdiction in Massachusetts based, at least in part, on its nationwide “Contact Us” feature on its website. See Edvisors Network, Inc. v. Educational Advisors, Inc., 755 F. Supp. 3d 272 (D. Mass. October 12, 2010).


Keywords: litigation, business torts, personal jurisdiction, Internet, Massachusetts


—Rory Pheiffer, Nutter McClennen & Fish, LLP, Boston, Massachusetts


 

August 18, 2011

Ninth Circuit Expands Use of "Agency Theory"


On May 18, 2011, the Ninth Circuit issued its decision in Bauman v. DaimlerChrysler Corp., ___F.3d ___, No. 07-15386, D.C. No. CV-04-00194-RMW (9th Cir. May 18, 2011), a potentially transformative case that expands the use of “agency theory” to impose general jurisdiction over foreign corporations that do business in the United States solely through their U.S. subsidiaries.


The Ninth Circuit held that personal jurisdiction existed over DaimlerChrysler Aktiengellschaft (DCAG), a German company, because DCAG maintained the right to control its wholly owned U.S. subsidiary, Mercedes-Benz USA, LLC (MBUSA). This meant that DCAG could be haled into court in California due to MBUSA’s contacts with that state. Notably, the Bauman decision subjected DCAG to California’s jurisdiction despite the fact that the events giving rise to the lawsuit did not take place in the United States or involve the contacts relied on by the court in exercising general jurisdiction over DCAG in the first place.


Keywords: litigation, business torts, agency theory, jurisdiction, civil procedure, Ninth Circuit


— Mildred Segura and Nabil Bisharat, Reed Smith, LLP, Los Angeles



 

August 9, 2011

Information in Patent Applications Can Be a Trade Secret


With a panel composed of Circuit Judges Rhesa H. Barksdale, Edith Brown Clement, and Edward C. Prado, the Fifth Circuit Court of Appeals was asked to determine whether a patent application prevented the information in the application from being a trade secret in Tewari De-Ox Systems, Inc. v. Mountain States/Rosen, LLC [PDF], No. 10-50137, (5th Cir. (Tex) Apr. 5, 2011). The plaintiff allegedly owned trade secrets related to a meat-packing method. After attempting to sell its services to the defendant, the plaintiff came to believe that the defendant misappropriated its trade secrets and filed suit alleging breach of contract, misappropriation of trade secrets, violation of the Texas Theft Liability Act, breach of fiduciary duty, and fraud and fraudulent inducement.


The Fifth Circuit has held that “a trade secret can exist in a combination of characteristics and components each of which, by itself, is in the public domain, but the unified process, design and operation of which in unique combination, affords a competitive advantage and is a protectable secret.” The Fifth Circuit found that the plaintiff had raised a genuine issue of material fact regarding some of the combined information disclosed to the defendant and, thus, held that the district court’s holding to the contrary was an error.


Keywords: litigation, business torts, Fifth Circuit, trade secret, patent application


— Sofia Adrogué, P.C., Looper Reed & McGraw, P.C., Houston, Texas



 

August 9, 2011

Fifth Circuit Denies Homeowners Special Damages


With a panel composed of Circuit Judges Carl E. Stewart, Edward C. Prado, and Jenifer Walker Elrod, the Fifth Circuit Court of Appeals considered the district court’s exclusion of expert testimony and denial of special damages in French v. Allstate Indemnity Co., No. 09-30209, (5th Cir. (La.) Apr. 4, 2011), an insurance case stemming from the damage caused by Hurricane Katrina. The plaintiffs were homeowners whose homes were damaged by the hurricane. They sued the defendant, the insurance company that provided their homeowners’ policies, to recover additional payments for the damages to their homes. The plaintiffs also sought statutory penalties and costs under Louisiana law. After a bench trial, the district court awarded the plaintiffs additional payments and some statutory penalties. The plaintiffs appealed, contending, inter alia, that the lower court improperly excluded expert testimony.


The circuit court noted that under Louisiana law, where an insured shows that the insurer breached its duty of good faith, the insured is entitled to general or special damages. To justify such an award, the insured must produce sufficient proof, including causation, of the alleged damages. Therefore, although damages for mental anguish may be allowed by a statute, a plaintiff is not entitled to those damages absent a showing of sufficient proof of mental anguish.


Keywords: litigation, business torts, Fifth Circuit, expert testimony, special damages


— Sofia Adrogué, P.C., Looper Reed & McGraw, P.C., Houston, Texas



 

August 9, 2011

Fifth Circuit Considers Damages in Hacked Software Case


With a panel composed of Circuit Judges Rhesa H. Barksdale, Emilio M. Garza and Edward C. Prado, the Fifth Circuit Court of Appeals heard an appeal regarding calculation of damages. In MGE UPS Systems, Inc. v. GE Consumer & Industrial, Inc., 622 F.3d 361 (5th Cir. (Tex.) 2010), the plaintiff manufactured electrical generator machines, some of which required the use of its own copyrighted software during servicing. Hackers published information on how to service the machines without the plaintiff’s software. The defendant serviced such machines, including those manufactured by the plaintiff. A group of the defendant’s employees obtained a copy of the plaintiff’s security software from an unknown source. The plaintiff filed suit, alleging, inter alia, copyright infringement, misappropriation of trade secrets, unfair competition, and violation of digital copyright laws.


Keywords: litigation, business torts, Fifth Circuit, calculation of damages, copyright infringement, trade secrets


Sofia Adrogué, P.C., Looper Reed & McGraw, P.C., Houston, Texas



 

July 8, 2011

General Employees May Owe Employer More than Loyalty


In Western Blue Print Co. v. Roberts, the plaintiff was a document management company that had employed the defendant to run a branch office. During the defendant’s employment, the defendant and her husband created a document services company that competed against the plaintiff for a contract with a university. The plaintiff brought suit against the defendant, alleging breach of fiduciary duty, tortious interference, and computer tampering. The jury’s verdict was in favor of the plaintiff on all of the claims asserted.


Keywords: litigation, business torts, fiduciary duty, employees


— Dawn M. Johnson and Elizabeth T. Nguyen, Greensfelder, Hemker & Gale, P.C., Saint Louis, Missouri



 

June 27, 2011

No Shield-Law Protection for Self-Described Web Journalist


In Too Much Media, LLC v, Hale, (A-7-10)(066074), 2011 WL 2305620 (N.J. June 7, 2010), the New Jersey Supreme Court held that the statutory privilege provided by New Jersey’s shield law does not protect the author of posts on an Internet message board, even though the author in this case considered herself to be a journalist who was posting the results of an investigation for purposes of exposing wrongdoing to the public at large.


After some discussion of Internet blogging and message boards, the court found that these things did not constitute news media as defined by the shield law. The court noted that to hold otherwise would be to automatically extend the broad protection of the shield-law privilege to “millions of bloggers who have no connection to traditional media . . . as well as anyone with a Facebook Account.”


Keywords: litigation, business torts, defamation, shield law, blogger, Internet


— Peter J. Boyer, Hyland Levin, LLP, Marlton, New Jersey



 

June 14, 2011

Defendants Bind Themselves to Venue Provisions


In Fi-Med Management Inc. v. Clemco Medical Inc. et al., Docket Number 11-CV-00155 (May 27, 2011, Clevert, J.), a recent decision on the individual defendants’ motion to dismiss for lack of personal jurisdiction, the court held that by agreeing to be bound by the noncompete provisions of an asset-purchase agreement, the individual defendants bound themselves to a venue provision contained elsewhere in the agreement, thereby consenting to personal jurisdiction.


The court denied the individual defendants’ motion to dismiss, holding that the individual defendants consented to suit in Wisconsin. While acknowledging that the individual defendants did not sign the agreement with respect to the venue provision, the court held that viewing the noncompete and nonsolicitation agreements in isolation would render them “devoid” of “substantive meaning.” The court pointed out, for instance, that the noncompetes used terms defined elsewhere in the asset-purchase agreement. If the court were not permitted to read those definitions into the noncompetes, “[t]here could be no meeting of the minds with respect to how those terms are used, and what effect should be given to such terms throughout the Agreement.” In addition, the court held that the “tunneled analysis” proposed by defendants would violate the principle that the meaning of particular provisions in a contract are to be determined with reference to the contract as a whole. Accordingly, the court held that the individual defendants were bound by the venue provision of the agreement. Because parties who agree to a clear, unambiguous, mandatory venue provision consent to the exercise of personal jurisdiction by the court in question, the individual defendants consented to suit in Wisconsin.


Keywords: litigation, business torts, asset-purchase agreement, noncompete agreement


— Ryan M. Billings, Weiss Berzowski Brady, LLP, Milwaukee, Wisconsin



 

April 6, 2011

Defamation Case Dismissed for Scientist Who Challenged Findings


In Chandok v. Klessig, an opinion delivered by Circuit Judge Kearse, the Second Circuit held that the common-law privilege from defamation claims for communications on which a party has a duty to speak applied to a scientist’s public challenge and criticism of a fellow scientist’s alleged findings that were unable to be replicated by the scientist and his staff.


As for Klessig’s anti-SLAPP counterclaim, the court noted that it was “aware of no case that has held the New York anti-SLAPP statute applicable to a person who is entitled to engage in her proposed course of conduct without government permission or to a person who merely sought government funding for a project that could be privately financed.” Because Chandok’s research did not require government permission, the court affirmed the district court’s dismissal of the anti-SLAPP counterclaim.


Keywords: litigation, business torts, defamation, anti-SLAPP


— Zachary G. Newman and Anthony P. Ellis, Hahn & Hessen, LLP, New York, New York



 

April 6, 2011

Tax-Prep Companies May Fall under Credit Service Regulations


Tax-preparation companies may now face lawsuits in Missouri for violations alleged under the statutes that regulate credit service organizations. In Fugate v. Jackson Hewitt, Inc., the Missouri Court of Appeals (Western District) held that credit service regulatory statutes (Mo. Rev. Stat. §§ 407.635, et seq.) would apply to tax-preparation companies engaging in the conduct described in the plaintiffs’ petition.


The dissenting judge noted that the majority’s interpretation of the term “credit services organizations” would include a class of persons broader than a class of persons subject to the restrictions set forth in the prohibited activities section of the statutes applicable to credit services organizations.


Keywords: litigation, business torts, unfair trade practices, tax preparation, credit services


Erwin O. Switzer and Elizabeth T. Nguyen, Greensfelder, Hemker & Gale, P.C., Saint Louis, Missouri.



 

March 31, 2011

FCRA Ruling Upheld in Favor of Mortgage Company


In Anderson v. EMC Mortgage Corp., the U.S. Court of Appeals for the Eighth Circuit affirmed a grant of summary judgment to a furnisher of adverse credit information that the court held satisfied its duties under the Fair Credit Reporting Act (FCRA).


The Eighth Circuit held that the mortgage company did not violate the FCRA when it did not investigate and correct a discrepancy as to which months in the plaintiff’s account were 30 days past due, which the court held was immaterial. The court noted that under § 1681s-2(b), a furnisher’s obligation to conduct a reasonable investigation is triggered when it receives notice of a dispute from a credit-reporting agency, not from the consumer. The mortgage company met the reasonable investigation standard when it investigated only what it learned about the nature of the dispute from the credit-reporting agency’s notice.


Keywords: litigation, business torts, unfair trade practices, FCRA


Erwin O. Switzer and Elizabeth T. Nguyen, Greensfelder, Hemker & Gale, P.C., Saint Louis, Missouri.



 

March 14, 2011

Fifth Circuit Considers Appeal on Personal Jurisdiction


With a panel composed of Circuit Judges W. Eugene Davis, Jerry E. Smith, and Catharina Haynes, the Fifth Circuit Court of Appeals considered Choice HealthCare, Inc. v. Kaiser Foundation Health Plan of Colorado, an appeal regarding personal jurisdiction. The plaintiffs argued that under the Fifth Circuit’s stream-of-commerce jurisprudence, the defendants should be subject to jurisdiction in a Louisiana court because it issued a policy that triggered its obligation to pay policy benefits to the plaintiffs in Louisiana on behalf of its insureds.


The Fifth Circuit explained that the facts of the instant case “simply do not fit the stream of commerce model described by Justice Brennan.” The court noted that independent action of the insureds in traveling to the forum state seeking treatment outside their coverage area is “arguable analogous” to the driver in World-Wide Volkswagen. This independent action is inconsistent with the notion that the defendants made purposeful commercial contact with Louisiana. Therefore, the Fifth Circuit Court of Appeals concluded that the stream-of-commerce theory did not apply, and, thus, the plaintiffs failed to establish personal jurisdiction over the defendants.


Keywords: litigation, business torts, Fifth Circuit, personal jurisdiction, stream of commerce


— Sofia Adrogué, P.C., Looper Reed & McGraw, P.C., Houston, Texas



 

March 14, 2011

Fifth Circuit Hears Second Appeal on Price Restraints


With a panel composed of Circuit Judges Jerry E. Smith, Emilio M. Garza, and Edith Brown Clement, the Fifth Circuit Court of Appeals heard PSKS, Inc. v. Leegin Creative Leather Products, Inc., which considered for the second time an appeal concerning alleged violations of section 1 of the Sherman Act.


The court of appeals noted that to state an antitrust claim for anticompetitive RPMs, a complaint must “plausibly define the relevant product and geographical markets.” “A proposed product market must include all ‘commodities reasonably interchangeable by customers for the same purposes.’” The plaintiff in the instant case alleged two alternative markets, neither of which, the Fifth Circuit opined, included the available interchangeable substitute products. The court of appeals held that the district court had properly rejected both of the proposed markets.


Further, the circuit court held that the trial court correctly rejected the plaintiff’s claim that the products at issue constituted their own market. Although the plaintiff’s claim failed for lack of market definition, the circuit court analyzed the alleged anticompetitive harm and found that even if the plaintiff’s factual allegations were accepted as true, nothing in the complaint plausibly alleged harm to competition.


Finally, the plaintiff argued that the lower court erred in holding that its horizontal-restraint claims were barred by the mandate rule. The plaintiff in the present case first attempted to plead horizontal-restraint claims in its second amended complaint after its original claims were rejected by the Supreme Court. The Fifth Circuit Court of Appeals affirmed the district court’s dismissal of the plaintiff’s claims on remand.


Keywords: litigation, business torts, Fifth Circuit, Sherman Act


— Sofia Adrogué, P.C., Looper Reed & McGraw, P.C., Houston, Texas



 

March 14, 2011

Fifth Circuit Hears Case on Arbitration


A panel composed of Chief Judge Edith H. Jones and Circuit Judges Jerry E. Smith and Jennifer W. Elrod, the Fifth Circuit Court of Appeals heard MC Asset Recovery, LLC v. Castex Energy, Inc. (In re Mirant), an appeal regarding the alleged breach of a purchase and sale agreement.


The Fifth Circuit first assessed whether the defendant substantially invoked the judicial process. The defendant in the instant case argued that it did not attempt to obtain a decision on the merits because it only filed what it referred to as “perfunctory motions to dismiss.” The Fifth Circuit disagreed, explaining that the defendant based its second motion to dismiss on the affirmative defenses of waiver and release. The court of appeals noted that by seeking to prove its own allegations, the defendant did more than merely file a motion to dismiss.


Additionally, the Fifth Circuit noted that the defendant moved to compel arbitration only after its third motion to dismiss had been partially denied. The court of appeals was not convinced that the defendant, knowing that the district court was not receptive to its arguments, “‘should be allowed a second bite at the apple through arbitration.’” Thus, the Fifth Circuit agreed that the defendant substantially invoked the judicial process.


The Fifth Circuit then explained that the party opposed to arbitration must show prejudice. Prejudice in this context refers to “delay, expense, and damage to a party’s legal position.” The circuit court disagreed with the defendant’s argument that it made a timely demand for arbitration by asserting the right to compel arbitration as an affirmative defense in its answer, as well as reserving that right in footnotes in its motions to dismiss.


Keywords: litigation, business torts, Fifth Circuit, purchase and sale agreement, arbitration


— Sofia Adrogué, P.C., Looper Reed & McGraw, P.C., Houston, Texas



 

March 7, 2011

Violation of Federal Law Can Give Rise to State Claim


In Lefaivre v. KV Pharmaceutical Co., the U.S. Court of Appeals for the Eighth Circuit held that a claim brought under a state consumer-protection law based on a violation of federal law was not preempted by federal law.


The court of appeals reversed the district court’s ruling, holding that there was no preemption because “the federal statutory or regulatory scheme in the present case is not so pervasive in scope that it occupies the field.” The state law supplemented the Food and Drug Administration’s current good manufacturing practice requirements by offering another layer of consumer protection.


Keywords: litigation, business torts, unfair trade practices


Erwin O. Switzer and Elizabeth T. Nguyen, Greensfelder, Hemker & Gale, P.C., Saint Louis, Missouri.



 

February 3, 2011

North Dakota Allows Third-Party, Handwritten Note as Hearsay Exception


The North Dakota Supreme Court recently held that a district court did not abuse its discretion when it admitted into evidence a bill of lading with a handwritten notation from a third party as an exception to the hearsay rule. In Pizza Corner, Inc. v. C.F.L. Transport, Inc., a pizza producer asserted claims against a shipping company alleging that frozen pizzas shipped by the producer were improperly stored and damaged by the shipping company. The court stated that the handwritten notation on the bill of lading was hearsay because it was offered to show that the pizzas were damaged by the shipping company. There is a hearsay exception for records of regularly conducted business activity in North Dakota Rule of Evidence (N.D. R. Evid.) 803(6), which is based on Federal Rule of Evidence 803(6). The handwritten notation met the initial requirements of N.D. R. Evid. 803(6) because it was timely created in the regular course of business by a person with knowledge for the purpose of maintaining the accuracy of information on the bill of lading.


Keywords: litigation, business torts, North Dakota, hearsay rule


Erwin O. Switzer and Elizabeth T. Nguyen, Greensfelder, Hemker & Gale, P.C.



 

January 24, 2011

Court Enters Default Judgment for Spoliation of ESI


In Victor Stanley, Inc. v. Creative Pipe, Inc. et al., District of Maryland, Civil No. MJG-06-2662 (Sept. 9, 2010), the court entered a default judgment against the defendants, held the defendants in contempt for spoliation and ordered the defendant president to serve up to two years in jail unless and until he paid all of the attorney fees and costs incurred by the plaintiff as a result of his spoliation.


In all, the court found that the plaintiff “proved grave misconduct that was undertaken for the purpose of thwarting Plaintiff's ability to prove its case and for the express purpose of hamstringing this Court's ability to effect a just, speedy, and inexpensive resolution of a serious commercial tort.”


As a result of the defendants’ extreme discovery violations, the court ordered that the defendant Mark Pappas’s acts of spoliation be treated as contempt, that he be imprisoned for up to two years, unless and until he pays the plaintiff its attorney fees and costs. Moreover, the court entered a default judgment against Creative Pipe, Inc., and Mark Pappas on the plaintiff’s primary copyright infringement claim.


— Jonathan M. Shapiro, Shapiro Law Offices, LLC, Middletown, Connecticut



 

January 24, 2011

Washington Supreme Court Abandons Economic Loss Rule


Like appellate courts in many jurisdictions, the Washington Supreme Court has struggled to consistently apply the Economic Loss Rule. Having confounded both practitioners and trial courts with its extremely broad 2007 interpretation of the rule in Alejandre v. Bull, 159 Wn.2d 674, 153 P.3d 864, which held that the rule barred tort claims between contracting parties because they did or could have allocated risks in their agreement, the Washington court has now abandoned the doctrine entirely. The opinion can be summarized by the holding that a breach of lease can simultaneously be a breach of a tort duty that arises independently of the lease’s terms because an independent tort duty can overlap with a contractual obligation.


Although the court’s lead opinion in Eastwood declines to acknowledge the death of the Economic Loss Rule in Washington, asserting that only the name has been relegated to the dustbin, its holding that tort claims between contracting parties must be evaluated only under the “independent duty doctrine” of traditional tort law effectively ends application of the rule in Washington.


— Mark S. Davidson and Michael I. White, Williams Kastner, Seattle, Washington



 

November 29, 2010

Fifth Circuit Affirms Denial of Class Certification in Fiduciary Duty Case


In Casa Orlando Apartments, Ltd. v. Federal National Mortgage Ass’n, the Fifth Circuit affirmed the denial of class certification in a multi-state class action alleging that Fannie Mae had breached fiduciary duties to low-income class member mortgagors. The plaintiff mortgagors had been required by a federally mandated regulatory agreement to make deposits into certain funds allegedly held by Fannie Mae in trust for the mortgagors. The mortgagors alleged that Fannie Mae was in a fiduciary relationship with the mortgagors and had breached its fiduciary duty by engaging in self-dealing with the mortgagors’ uninvested funds.


— David Dodds, Haynes and Boone, LLP, Dallas, Texas



 

November 29, 2010

Federal Courts Can Adjudicate the Ownership of a Trademark in Infringement Claims


In Federal Treasury Enterprise Sojuzplodoimport v. Spirits International N.V., an opinion delivered by Circuit Judge Barrington D. Parker, the Second Circuit held that an alleged assignee of trademark rights seeking to dismiss claims brought against it under the Lanham Act on the grounds that the trademark is incontestable under 15 U.S.C. § 1065 must establish as a matter of law both that the trademark satisfies the criteria for incontestability set forth in the statute and the alleged assignment was valid as a matter of law. The court further held that federal courts have subject matter to adjudicate the ownership of a trademark as part of a trademark infringement claim because a necessary element of establishing a trademark infringement claim is proving ownership of the trademark at issue.


— Zachary G. Newman, Anthony P. Ellis, Hahn & Hessen, LLP, New York, New York



 

Fifth Circuit Hears Case on Jurisdiction in Mexico


In Saqui v. Pride Central America, LLC, the Fifth Circuit Court of Appeals heard an appeal involving the death of a Mexican citizen. A Mexican oil company leased a vessel owned by the appellee, an American company. The appellant, a representative of the decedent’s estate, filed suit in federal district court in Texas, alleging the appellee failed to provide a safe workplace. The appellee filed a motion to dismiss on forum non conveniens grounds. The appellee stated in its motion that it would agree to submit to jurisdiction in Mexico and make available there any witnesses under its control. The appellant filed a response, arguing that Mexico did not provide an available forum.


The district court denied the appellee’s motion to dismiss, and the appellee filed a renewed motion to dismiss on forum non conveniens grounds, asserting that the appellant’s incorporated expert was accused of committing fraud in the case on which his opinion relied. The district court in the instant case referred the renewed motion to dismiss to a magistrate judge. The magistrate determined that Fifth Circuit law consistently held that when a defendant submits to jurisdiction in an alternate forum, it renders the forum available for purposes of forum non conveniens analysis. The magistrate recommended that the district court grant the renewed motion to dismiss if the appellee submitted to jurisdiction in Mexico. The district court accepted the recommendation in its entirety, and this appeal ensued.


—Sofia Adrogué, P.C., Looper Reed & McGraw, Houston, Texas



 

File-Sharing Defendant Argues She Was an "Innocent Infringer"


In Maverick Recording Co. et al v. Harper, the Fifth Circuit Court of Appeals heard a case regarding the online file sharing of music. The plaintiffs were record companies and owners of copyrighted music. The defendant was an individual who was identified as sharing hundreds of digital audio files, including the plaintiffs' copyrighted material, with others over the Internet. The plaintiffs filed suit, claiming copyright infringement.


The district court granted the plaintiffs' motion for summary judgment on the copyright claims and denied the plaintiffs' request for statutory damages. The plaintiffs requested damages of $750 per song as provided by 17 U.S.C. 504(c)(1). The defendant argued that she was an "innocent infringer" under 504(c)(2), which provides that the court may reduce the damages to $200. The defendant asserted that she thought "her actions were the equivalent of listening to an Internet radio station." The district court concluded that the innocent infringer issue was a question of material fact.


—Sofia Adrogué, P.C., Looper Reed & McGraw, Houston, Texas



 

Fifth Circuit Addresses Shareholder's Breach of Fiduciary Duty Suit


In D&J Tire Inc. v. Hercules Tire & Rubber Co., the Fifth Circuit Court of Appeals reviewed a grant of summary judgment on a fiduciary duty claim. The appellant was a retailer for the appellee's goods and a stockholder. The appellee conducted a business valuation, found that there were several interested buyers, and reported the valuation results. Simultaneously, the appellant made a request to redeem its stock and apply the proceeds to an outstanding debt it owed the appellee. The appellee's CFO said that to complete the request, the appellant needed to execute a stock power of attorney to him and reported that the appellee would honor redemption at 80 percent of the book value because the appellant's redemption was a "hardship withdrawal."


In the interim, the board of directors voted to move forward with the sale of the company. The merger was approved by shareholder vote and the shareholders received more than $60,000 per share-significantly more than the redemption amount the appellant received. The appellant accused the appellee's CFO of securities violations, fraud, and breach of fiduciary duty by failing to inform him of the possible upcoming merger.


—Sofia Adrogué, P.C., Looper Reed & McGraw, Houston, Texas



 

Supreme Court Rejects Immediate Appeal under Collateral-Order Doctrine


In Mohawk Indus., Inc. v. Carpenter, the Supreme Court, in the first opinion by Justice Sotomayor, rejected immediate appeal under the collateral-order doctrine of disclosure orders requiring production of information allegedly protected from disclosure by the attorney-client privilege.


Plaintiff Norman Carpenter brought an unlawful-termination claim against Mohawk Industries, Inc. alleging that Mohawk fired him in retaliation for his refusal to ignore evidence he uncovered that Mohawk was knowingly hiring undocumented workers and to recant his statements concerning those practices. At the time of Carpenter's alleged discovery, Mohawk had been named as a defendant in a suit alleging that Mohawk knowingly hired undocumented workers to drive down the wages of lawful employees. Carpenter claimed that Mohawk instructed him to meet with the company's counsel in that litigation and that during this meeting counsel pressured Carpenter to recant his prior statements concerning Mohawk's employment practices.


In discovery, Carpenter sought all documents concerning his alleged meeting with company counsel, and Mohawk refused to produce the documents on the grounds that the information was protected by the attorney-client privilege. Carpenter filed a motion to compel production. The district court agreed the information was privileged, but required Mohawk to produce the material on the grounds that it had implicitly waived the privilege in its disclosures in the other litigation.


Mohawk sought certification for an interlocutory appeal from the district court, which was denied, and Mohawk appealed to the Eleventh Circuit. The Eleventh Circuit dismissed the appeal on the grounds that the appellate court did not have jurisdiction, holding that the district court's decision was not a final order under 28 U.S.C. § 1291 and did not qualify as immediately appealable under the collateral-order exception set forth in Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541 (1949).


The Supreme Court granted certiorari to resolve a circuit split over whether discovery orders concerning the attorney-client privilege were immediately appealable under the collateral-order doctrine.


In finding that such orders did not qualify as final orders and were not immediately appealable, the Supreme Court held that the class of collaterally appealable orders must remain "narrow and selective" and limited to only those decisions "that are . . . effectively unreviewable on appeal from the final judgment in the underlying action." The Supreme Court held that with respect to discovery orders there were means available to review the order other than an immediate appeal, including post-judgment review of the decision, vacatur of any judgment entered in error, and remand for a new trial. Such practices, the Supreme Court noted, have been sufficient for other discovery errors. Moreover, the Supreme Court stated that other options existed for a litigant facing an order to produce purportedly privileged documents, including, for example, being able to seek certification for review from the district court and, in extraordinary circumstances, to petition the court of appeals for a writ of mandamus.


Zachary G. Newman and Anthony P. Ellis, Hahn & Hessen, LLP, New York, New York