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May 22, 2012

Second Circuit Upholds New "Kosher" Labeling Law

In Commack Self-Service Kosher Meats, Inc. v. Hooker, No. 11-3517-cv (2d Cir. May 10, 2012), the Second Circuit upheld the State of New York’s Kosher Law Protection Act of 2004 over constitutional challenges raised under the First Amendment Religion Clauses and the Equal Protection and Due Process Clauses of the Fourteenth Amendment.

Keywords: litigation, commercial, business, Second Circuit, First Amendment, Fourteenth Amendment

—Christopher F. Girard, Robinson & Cole, LLP, Hartford, Connecticut

May 17, 2012

Compliance-Order Recipients Can Sue Before It Is Enforced

Dramatically expanding judicial review of early agency action, the U.S. Supreme Court recently held that, on receiving an agency compliance order, the recipient may immediately sue in federal court, even before the agency tries to enforce the order in a civil action.

In Sackett v. Environmental Protection Agency, 132 S. Ct. 1367 (Mar. 21, 2012), the Sacketts filled their half-acre lot in Idaho with dirt and rock—the first step in building their new home. Some months later, the Environmental Protection Agency (EPA) sent the Sacketts a compliance order stating that they violated the Clean Water Act because the fill material entered freshwater wetlands, which were (arguably) within the nation’s “navigable waters.” 33 U.S.C. §§ 1311, 1344. The order directed the Sacketts to restore the site and give the EPA access to the land. Contesting the agency’s definition of “navigable waters,” the Sacketts requested a hearing but were denied. The Sacketts then sued the EPA in federal court, claiming the order was a “final agency action” and its issuance was arbitrary and capricious under the Administrative Procedure Act (APA). 5 U.S.C. §§ 704, 706. The district court dismissed the suit for lack of subject-matter jurisdiction, and the Ninth Circuit affirmed. 622 F.3d 1139 (2010). In a unanimous decision, the Supreme Court reversed.

Keywords: litigation, commercial, business, Supreme Court, federal court, agency compliance order, Environmental Protection Agency

—Yvette Golan, The Golan Firm, Houston, Texas

April 23, 2012

Possibility of Theft Is Not Enough for Injury

In Katz v. Pershing, LLC, No. 11-1983 (1st Cir. Feb. 28, 2012), the First Circuit explored the limits imposed by Article III standing requirements on a private claim that alleges a failure to protect sensitive, nonpublic, personal information in the absence of an actual data-security breach.

Katz’s allegation that Pershing’s conduct increased the “risk that someone might access her data and that this unauthorized access (if it occurs) will increase the risk of identity theft and other inauspicious consequences” was, for the First Circuit, too remote to meet Article III’s requirement of actual or impending injury in fact. The court also rejected Katz’s argument that she had suffered injury in fact when she purchased identity theft insurance and a credit-monitoring service in response to the inadequacies of Pershing’s data security. The possibility that her nonpublic personal information “might someday be pilfered” was “remote at best,” the court decided, and it “simply did not rise to the level of a reasonably impending threat.” Without the threat of “actual or imminent, not speculative” injury, there was no injury for purposes of Article III standing.

Keywords: litigation, commercial, business, First Circuit, identity theft

—Paula Bagger, Cooke Clancy & Gruenthal LLP, Boston, Massachusetts

April 23, 2012

Discovery for Use in Foreign Litigations Gets a Boost

In Brandi-Dohrn v. IKB Deutsche Industriebank AG, No. 11-4851 (2d Cir. Mar. 6, 2012), the U.S. Court of Appeals for the Second Circuit held that a litigant in a foreign lawsuit can obtain discovery in the United States without having to show that the discovery would be admissible in the foreign action. With this ruling, the Second Circuit joins other circuits that have previously addressed the issue. This case also highlights that discovery in the United States can be a powerful tool that may be used in disputes in other countries.

Keywords: litigation, commercial, business, Second Circuit, Germany, discovery

—Stuart M. Riback, partner, Wilk Auslander LLP, New York, New York

April 23, 2012

Contra Proferentem Doesn't Apply if Drafter Is Unknown

In Shaw Hofstra & Associates v. Ladco Development, Inc.,No. 11-2368 (8th Cir. Mar. 12, 2012), the Eighth Circuit affirmed the district court’s refusal to give a contra proferentem instruction to the jury in a breach-of-contract case where there was insufficient evidence in the record as to which party drafted the contract language at issue.

Keywords: litigation, commercial, business, Eighth Circuit, contra proferentem, contracts

—Stephen R. Clark and Kristin E. Weinberg, Clark Law Firm, LLC

April 12, 2012

Second Circuit Doesn't Recognize Peruvian Arbitration Award

In Figueiredo Ferraz e Engenharia de Projeto Ltda. v. Republic of Peru, 665 F.3d 384 (2d Cir. 2011), the Second Circuit held that the district court should have refused recognition of an international arbitration award on the grounds of forum non conveniens (FNC), notwithstanding U.S. treaty obligations under the Inter-American Convention on International Commercial Arbitration and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Keywords: litigation, commercial, business, Second Circuit, forum non conveniens, Peru

—Matthew Kalinowski, senior associate, Morgan, Lewis & Bockius LLP, New York, New York

March 27, 2012

Debt Collector Failed to Establish Chain of Title on Debt

In CACH, LLC v. Askew, No. SC 91780, 2012 Mo. LEXIS 4 (Mo. Jan. 17, 2012) (en banc), CACH, LLC, sought to recover an amount it claimed was still owed on a credit-card account opened by John Askew in 1998 with Providian Bank. In its petition, CACH alleged that Providian Bank was acquired by Washington Mutual, which assigned Askew’s account to Worldwide Asset Purchasing II, LLC, which then assigned the account to CACH. In his answer, Askew asserted as an affirmative defense that CACH lacked standing to sue.

CACH offered several exhibits at trial regarding the credit-card account and sought to have the exhibits admitted as business records pursuant to Missouri’s business records evidentiary statute, offering testimony of the records custodian of Square Two Financial, which owns CACH. Specifically, CACH offered what was represented was a bill of sale transferring several unnamed accounts from Washington Mutual to Worldwide (Exhibit 7), a bill of sale transferring several unnamed accounts from Worldwide to CACH (Exhibit 8), and a redacted spreadsheet referencing Askew’s credit-card account (Exhibit 9). Exhibits 7 and 8 both refer to an attached account schedule. The records custodian testified that Exhibit 9 was the account schedule attached to Exhibit 8, but did not testify that Exhibit 9 was the attachment to Exhibit 7. The court admitted each exhibit over Askew’s objection of improper foundation, and judgment was entered in favor of CACH.

On appeal, Askew alleged the trial court erred in admitting Exhibit 7 because without this exhibit, CACH could not show it had standing to pursue the collection of the credit-card debt. Noting that standing cannot be waived, the Missouri Supreme Court reversed, finding that CACH failed to prove with admissible evidence standing to collect Askew’s debt. The court found that “proof of an assignment of the account is essential to a recovery,” that the “party must show clearly through a valid assignment it is the rightful owner of the account at issue,” and that in “cases that involve multiple assignments, there must be proof of the validity of assignment every time the rights to collect the debt are transferred,” concluding that “every link in the chain between the party to which the debt was originally owed and the party trying to collect the debt must be proven by competent evidence in order to demonstrate standing.”

The court noted that “a custodian of records cannot meet the requirements [of the business records evidentiary rule] by simply serving as ‘conduit to the flow of records’ and not testifying to the mode of preparation of the records in question.” The court found that the witness in question was not the records custodian for Washington Mutual or Worldwide, where she had never worked, and her failure to testify that she had any bank training with Providian, Washington Mutual, or Worldwide rendered her unqualified to lay the foundation for the business records exception. The court reiterated that “a document that is prepared by one business cannot qualify for the business records exception merely based on another business’s records custodian testifying that it appears in the files of the business that did not create the record.”

The judgment was reversed, with the court holding that “[w]ithout evidence of the validity of this assignment, CACH did not demonstrate it had standing to pursue the claim.”

Keywords: litigation, commercial, business, business records evidentiary statute, improper foundation

Christopher Zarda, associate with Foland, Wickens, Eisfelder, Roper & Hofer, P.C. in Kansas City, Missouri

March 27, 2012

Fifth Circuit Rejects In Pari Delicto Defense

The Fifth Circuit recently rejected the in pari delicto defense in Jones v. Wells Fargo Bank, N.A., No. 11-10320 (5th Cir. Jan. 31, 2012), an action brought by a receiver to recover assets for investors and creditors, drawing a distinction between a corporation in receivership and the offending officer of that corporation.

Keywords: litigation, commercial, business, Fifth Circuit, in pari delicto

—Harry Herzog, Herzog & Carp, Houston, Texas

March 27, 2012

Eighth Circuit Holds Party Responsible for Lawyer's Actions

In Ozeroglu v. Hershewe Law Firm, P.C., No. 11-1357 (8th Cir. Feb. 9, 2012), the Eighth Circuit affirmed the distribution of an award of sanctions between a client and its attorney, reminding litigators of the well-established principle that a party may be held responsible for the actions of its counsel.

Keywords: litigation, commercial, business, Eighth Circuit, sanctions

—Stephen R. Clark, founding principal, Kristin E. Weinberg, associate, Clark Law Firm, LLC, St. Louis, Missouri

March 27, 2012

Employees of Private Advisors Not Covered by Sarbanes-Oxley

In Lawson v. FMR LLC, No. 10-2240 (1st Cir. Feb. 3, 2012), an appellate decision of first impression, the First Circuit ruled that employees of private companies that act under contract as advisors to and managers of mutual funds are not entitled to protection from retaliation under the whistleblower provisions of the Sarbanes-Oxley Act. The court ruled that the language of the statute extends the protection of the whistleblower provisions only to employees of public companies.

Keywords: litigation, commercial, business, First Circuit, whistleblower provisions, Sarbanes-Oxley Act

—Paula Bagger, partner, Cooke Clancy & Gruenthal LLP, Boston, Massachusetts

March 27, 2012

Sixth Circuit Rejects Bank's "Mutual Mistake" Argument

In Salyersville Nat’l Bank v. Bailey (In re Bailey), 664 F.3d 1026 (6th Cir. 2011), the bank argued that there was no mutual mistake in the signing of the agreement because the bank was, in fact, a secured creditor and, even if it was an unsecured creditor, the reaffirmation agreement is nevertheless valid under Kentucky contract law. The Sixth Circuit rejected both of these arguments.

Keywords: litigation, commercial, business, Sixth Circuit, bankruptcy

—Ali Razzaghi, Frost Brown Todd LLC, Cincinnati, Ohio

March 27, 2012

Court Sets Aside Entry of Default in Infringement Case

In Dassault Systemes, SA v. Childress, 663 F.3d 832 (6th Cir. 2011), the plaintiff brought claims of copyright and trademark infringement, unfair competition, and Michigan Consumer Protection Act violations as a result of the defendant’s allegedly unauthorized use of the plaintiff’s name and software licenses to operate a for-profit training course. The district court entered default judgment and awarded damages and injunctive relief in favor of the plaintiff. On appeal, the defendant, a pro se litigant, challenged a number of the district court’s orders, including the denial of the defendant’s motion to set aside entry of default judgment.

Keywords: litigation, commercial, business, Sixth Circuit, trademark infringement, copyright infringement, unfair competition

—Ali Razzaghi, Frost Brown Todd LLC, Cincinnati, Ohio

March 27, 2012

Twombly/Iqbal Standard Doesn't Apply to Fraudulent Joinder

The Eleventh Circuit recently held in Stillwell v. Allstate Ins. Co., 663 F.3d 1329 (11th Cir. 2011), that fraudulent joinder must be determined with reference to the pleading requirements under state law and not the Twombly/Iqbal pleading standard that usually applies in federal court.

The Eleventh Circuit held that the district court erred in denying Stillwell’s motion to remand because Stillwell’s complaint in the fire-damage case met Georgia’s notice pleading standard, which requires only that the complaint give fair notice to the defendant(s) of the claim(s) asserted and state the elements of the claim plainly and succinctly. Accordingly, the circuit court vacated the district court’s order and remanded that case back to state court. The circuit court affirmed the district court’s grant of summary judgment in Stillwell’s water-damage case.

Keywords: litigation, commercial, business, Eleventh Circuit, Twombly, Iqbal, pleading standards

—Greg Michell, partner, and Geremy Gregory, Balch & Bingham LLP, Atlanta, Georgia

March 13, 2012

Second Circuit Explains Evident Partiality in Arbitration

In Scandinavian Reins. Co. Ltd. v. St. Paul Fire and Marine Ins. Co., No. 10-0910-cv (2d Cir. Feb. 3, 2012), the Second Circuit discussed at length the showing a party must make to obtain vacatur of an arbitrator’s decision for “evident partiality” under 9 U.S.C. § 10(a)(2). In a unanimous 37-page opinion, the court reversed the judgment of the district court, which had vacated the decision of a split three-arbitrator panel in a reinsurance dispute. The district court found evident partiality on the part of the two arbitrators in the majority because, at the same time as the Scandinavian arbitration was pending, the arbitrators served on a separate arbitration panel in another case with a common witness, similar legal issues, and a party with an historic and continuing relationship with St. Paul, which was never disclosed to the parties.

Keywords: litigation, commercial, business, Second Circuit, evident partiality, vacatur, arbitration

—Christopher F. Girard, Robinson & Cole, LLP, Hartford, Connecticut

February 14, 2012

Fifth Circuit Looks at Liability under the PACA

The Fifth Circuit recently affirmed the granting of summary judgment against Bryan Herr and Samuel Petro Jr., finding that, under the Perishable Agricultural Commodities Act (PACA), the defendants were shareholders in a position to control PACA trust assets and failed to do so. Ruby Robinson Co., Inc. v. Bryan Herr and Samuel Petro, Jr. v. NatureBest Pre-Cut & Produce, LLC, 2011 WL 6152959 (C.A.5 (Tex.).

In granting summary judgment, the district court relied solely on the agreement and the rights and obligations it imposed on the defendants. The defendants asserted that they never exercised their authority over business and financial matters, but the Fifth Circuit noted that precedent clearly established that “they remain liable for a breach of fiduciary duty so long as they were in a position to control the PACA trust assets, which are the agricultural commodities and the proceeds therefrom. 7 U.S.C. § 499e(c)(2). It is established that a shareholder may not avoid liability under PACA merely by failing to assume responsibilities that he is entitled to.” Robinson at 2, quoting from Golman-Hayden at 351.

Keywords: litigation, commercial, business, Perishable Agricultural Commodities Act, summary judgment, statutory trust

—Mitzi Turner Shannon, Kemp Smith, El Paso, Texas

February 10, 2012

Dealership Was Fraudulently Joined in Car Defect Case

In Block v. Brooklyn Park Motors, Inc., No. 11-1724 (8th Cir. Dec. 19, 2011), the Eighth Circuit concluded that Minnesota’s seller’s-exception statute, Minn. Stat. § 544.41(3), did not preclude a finding of fraudulent joinder and that there was no reasonable basis in fact and law to support the plaintiff’s claims of strict liability and negligence against the lone non-diverse defendant. The Eighth Circuit affirmed the U.S. District Court for the District of Minnesota’s denial of a motion to remand and its dismissal of claims with prejudice against the fraudulently joined party.

Keywords: litigation, commercial, business, joinder, seller’s exception statute, negligence

—Stephen R. Clark and Kristin E. Weinberg, Clark Law Firm, LLC, St. Louis, Missouri

February 10, 2012

Fifth Circuit Rejects Wells Fargo's In Pari Delicto Argument

In Jones v. Wells Fargo Bank, 2012 WL 34123, No. 11-10320 (5th Cir. Jan. 31, 2012), Wahab opened a bank account for W Financial Group, LLC, with Wells Fargo Bank. As one of three authorized signers, Wahab withdrew $1.7 million to purchase a Wells Fargo cashier’s check payable to four individuals. None of the four individuals ever possessed or endorsed the check. Wahab drove the cashier’s check to another Wells Fargo branch and deposited the cashier’s check into an account for another company Wahab managed, CA Houston Investment Center, LLC. A year later, the Securities and Exchange Commission (SEC) sued W Financial Group, Jones was appointed receiver, and Jones sued Wells Fargo for the $1.7 million.

Wells Fargo utilized the equitable affirmative defense of in pari delicto to argue that Wahab’s wrongful conduct precluded recovery by the receiver, citing numerous bankruptcy trustee cases in support. But the Fifth Circuit drew distinctions between Wahab and W Financial Group and also between bankruptcy trustees and receivers. Believing the distinction between Wahab, who was only one of three authorized signers, and the separate legal entity of W Financial Group was critical, the court viewed Wahab’s wrongful actions as an agent to be insufficient to bind his corporate principal for purposes of defeating a recovery. On public policy grounds, noting that the in pari delicto doctrine “would undermine one of the primary purposes of the receivership” and would thus “be inconsistent with the purposes” of the in pari delicto doctrine, the court rejected Wells Fargo’s in pari delicto defense.

Keywords: litigation, commercial, business, Fifth Circuit, in pari delicto, recovery

—Harry Herzog, Herzog & Carp, Katy, Texas

February 6, 2012

Eighth Circuit Affirms Ruling in Helicopter Case

In AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., 2011 U.S. App. LEXIS 24620 (8th Cir. Dec. 13, 2011), the Eighth Circuit decided that certain manuals prepared for helicopter repair were a protected trade secret. Rolls-Royce Corp. (RR) developed and produced the Model 250 engine used in civilian and military helicopters. AvidAir Helicopter Supply (AHS) is a Missouri company that focuses on the overhaul of compressor cases, one of three modules in the Model 250 engine.

Federal regulations require overhauled engines to be certified before they can be returned to service. To certify the return to service for a Model 250 engine, an overhaul shop must follow a procedure that has been approved by the Federal Aviation Administration. The approved procedure can be found in Distributor Overhaul Information Letters (DOILs) issued first by RR’s predecessor and then by RR itself. DOIL 24 related specifically to the compressor case and was periodically updated. Because RR’s predecessor did not restrict the redistribution of the earlier versions, AHS was able to acquire DOIL 24, revisions 1 through 7, sometime in the 1990s. Thereafter, RR’s predecessor began protecting the revisions to DOIL 24 by including a proprietary rights legend and requiring its Authorized Maintenance Centers (AMCs), to whom the DOIL revisions were exclusively distributed, to execute agreements specifying the proprietary nature of the information, a prohibition on distribution, and a requirement for all proprietary information to be returned at the end of the relationship.

Keywords: litigation, commercial, business, trade secrets, Eighth Circuit

—Mark M. Haddad, associate at Foland, Wickens, Eisfelder, Roper, & Hofer, P.C. in Kansas City, Missouri

January 26, 2012

FCRA Preempts Defamation Claims

In MacPherson v. JPMorgan Chase Bank, NA, No. 10-3722-cv (2d Cir. Dec. 23, 2011), the Second Circuit held that the Fair Credit Reporting Act (FCRA) preempted a Connecticut plaintiff’s state-law claims of defamation and intentional infliction of emotional distress. The plaintiff alleged that Chase willfully and maliciously provided false information about his finances to Equifax, which then reduced the plaintiff’s credit score. Chase removed the suit to federal court and moved to dismiss, arguing preemption under FCRA. The district court granted the motion.

Keywords: litigation, commercial, business, Fair Credit Reporting Act, Second Circuit, defamation

—Christopher F. Girard, Robinson & Cole, LLP, Hartford, Connecticut

January 5, 2012

Risk of Injury Insufficient Standing to Sue for Data Breach

In Reilly v. Ceridian Corp., 2011 U.S. App. LEXIS 24561 (3d Cir. Dec. 12, 2011), the U.S. Court of Appeals for the Third Circuit held that individuals whose personal and financial employee data had been breached by a hacker attack did not have standing under Article III of the U.S. Constitution to sue the outside payroll company maintaining that data because their claims were only for speculative future injury that was neither “impending” nor “imminent.”

In doing so, the Third Circuit followed Supreme Court jurisprudence that “dismissed cases for lack of standing when the alleged future harm is neither imminent nor certainly impending” (2011 U.S. App. LEXIS 24561 at *8), finding here that the plaintiffs’ “alleged increased risk of future injury is . . . attenuated because it is dependent on entirely speculative future actions of an unknown third-party.”

Keywords: litigation, commercial, business, Third Circuit, Article III, class actions, data-security breaches

—Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, New Jersey

January 4, 2012

Rhode Island Waives Immunity by Removing to Federal Court

In Bergemann v. Rhode Island Department of Environmental Management, et al., No. 11-1407 (1st Cir. Dec. 20, 2011), the First Circuit weighed in on a question that has divided the federal circuits: whether a state waives its sovereign immunity to a pleaded claim by removing that claim to federal court. The First Circuit joined the Fourth and District of Columbia Circuits in ruling that “a waiver occurs only if the removal confers an unfair advantage on the removing state.”

Keywords: litigation, commercial, business, sovereign immunity, First Circuit

—Paula M. Bagger, associate, Cooke, Clancy & Gruenthal, LLP, Boston, Massachusetts

January 4, 2012

Third Circuit Adopts the "Later-Served" Rule

Siding with a majority of the U.S. Courts of Appeals that have addressed the issue, the U.S. Court of Appeals for the Third Circuit recently ruled in Delalla v. Hanover Ins. et al., 660 F.3d 180, 2011 U.S. App. LEXIS 20651 (3d Cir. Oct. 12, 2011), that in state-filed cases with multiple defendants, each defendant has 30 days from the time it is served to remove the case to federal court under 28 U.S.C. § 1446(b), adopting the so-called “later-served” rule.

In doing so, the Third Circuit sided with the Sixth, Eighth, Ninth, and Eleventh Circuits that had previously adopted that rule, rejecting an interpretation of the statute applied by the Fourth and Fifth Circuits—the “first-served” rule—that provides that the 30-day period for removal for all defendants, including subsequently served defendants, starts to run as soon as the first defendant is served. Removal within the 30-day period provided by section 1446(b) is jurisdictional—failure to timely remove bars the case from federal court.

Keywords: litigation, commercial, business, Third Circuit, later-served rule, removal

—Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, New Jersey

December 28, 2011

Federal Circuit Looks at Willful Infringement, Royalties

In Powell v. The Home Depot U.S.A., Inc., 2011 U.S. App. LEXIS 22838 (Fed. Circ. 2011), the Federal Circuit dealt with the issue of whether the jury is the sole decider of the objective prong of the willful-infringement inquiry and the type of evidence that may be presented to the jury regarding willful infringement. Home Depot argued that it did not willfully infringe because its actions did not satisfy the objective prong of the willful-infringement inquiry.

The Federal Circuit’s decision in Powell is also notable because the court rejected Home Depot’s argument that a reasonable royalty cannot exceed lost profits. In doing so, the court noted that an infringer’s net profit margin is not the ceiling by which a reasonable royalty is capped, as either the infringer’s or the patentee’s profit expectations only amount to considerations in the range of applicable factors and are not an absolute limit of the reasonable royalty that may be awarded on a reasoned hypothetical negotiation under the Georgia-Pacific factors.

Keywords: litigation, commercial, business, damages, Federal Circuit, patents, reasonable royalty, willful infringement

—Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

December 21, 2011

Settlement Offer Before Certification Moots Class Action

In Damasco v. Clearwire Corp.,No. 10-3934, slip op. (7th Cir. November 18, 2011), the Seventh Circuit upheld the lower court’s ruling that a proposed class action was mooted by a settlement offered by the defendant company to the lead plaintiff before he moved for certification.

This case is a good reminder to both plaintiffs and defendants about the avenues available to protect or defeat a class action before a motion for class certification is even pending.

Keywords: litigation, commercial, business, Seventh Circuit, class certification, mootness

—Tracy A. Hannan, Edwards, Wildman, Palmer, LLP, Chicago, Illinois

December 21, 2011

Narrow Ability to Vacate Arbitration Awards Reconfirmed

In Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, et al.,No. 11-2070, slip op. (7th Cir. Oct. 3, 2011), the Seventh Circuit reversed the district court’s decision overturning a portion of an arbitration award and directing the arbitrators to reconsider the issue.

Through this decision, the Seventh Circuit reconfirmed the narrow grounds on which an arbitration award can be disturbed on judicial review. It remains to be seen whether this decision will curb post-arbitration award attacks on grounds other than those expressly defined in the Federal Arbitration Act.

Keywords: litigation, commercial, business, arbitration, Federal Arbitration Act, Seventh Circuit

—Tracy A. Hannan, Edwards Wildman Palmer, LLP, Chicago, Illinois

December 21, 2011

State of Incorporation is Not Dispositive in Venue Analysis

In In re Link_A_Media Devices Corp., 2011 U.S. App. LEXIS 23951 (Fed. Cir. 2011), the Federal Circuit granted a petition for writ of mandamus directing the U.S. District Court for the District of Delaware to vacate its order denying Link_A_Media Devices Corp.’s (LAMD) motion to transfer venue.

This decision is another in a line of similar decisions that should give plaintiff-patentees pause when selecting venue and defendant accused infringers pause when deciding whether or not to seek to transfer venue. Although this case dealt with substantive Third Circuit law on this issue in part, the Federal Circuit also made similar distinctions with regard to section 1404(a). Thus, it seems apparent then that the same result would likely occur in any other circuit that also does not include state of incorporation as a relevant venue transfer factor.

Keywords: litigation, commercial, business, Federal Circuit, writ of mandamus, state of incorporation, transfer of venue

—Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

December 2, 2011

Ninth Circuit Extends ECPA to Foreign Citizens

In Suzlon Energy v. Microsoft Corp., 2011 WL 4537843 (9th Cir. Oct. 3, 2011), the Ninth Circuit addressed the issue of whether the Electronic Communications Privacy Act (ECPA) applies to protect foreign citizens.

The Ninth Circuit examined the language of the ECPA and found that the references to “any person” were plain and unambiguous, and that they were not limited solely to U.S. citizens. The court also found that the legislative history of the ECPA supported the conclusion that the act was not limited to U.S. citizens. Accordingly, the Ninth Circuit held that the ECPA extends its protections to noncitizens such as Sridhar for electronic documents stored in the United States and affirmed the district court’s order denying production of the emails.

Keywords: litigation, commercial, business, Electronic Communications Privacy Act, Ninth Circuit

—Justin C. Jones, partner at Holland & Hart, LLP, Las Vegas, Nevada

December 2, 2011

Eighth Circuit Clarifies "Per Annum" in Promissory Note

In Kreisler & Kreisler, LLC v. PNC Bank Corp. as successor in interest to National City Bank, 2011 U.S. App. LEXIS 20207 (8th Cir. Oct. 6, 2011), the plaintiff brought a class action on behalf of commercial borrowers alleging the defendant-bank breached the terms of a promissory note by charging interest in excess of the agreed-upon rate.

In agreeing with a recent Appellate Court of Illinois decision, the court in Kreisler found that the provisions of the promissory note were not inconsistent and adequately disclosed that the interest is charged on a 360-day basis.

Keywords: litigation, commercial, business, class action, promissory note, per annum

—Mike Meyer, Foland, Wickens, Eisfelder, Roper & Hofer, PC, in Kansas City, Missouri

November 28, 2011

Courts Must Assess Arbitrable Nature of All Claims

In KPMG v. Cocchi, No. 10-1521, 565 U.S. ___, 2011 WL 5299457 (Nov. 7, 2011), the U.S. Supreme Court held that a court may not refuse to compel arbitration under the Federal Arbitration Act merely because some of the claims are not arbitrable.

Among other reasons, the 9–0 opinion is significant because it includes the vote of Justice Clarence Thomas, who, in past opinions, has dissented from opinions addressing the FAA on certiorari to state courts on the grounds that, in his view, the FAA does not apply to proceedings in state courts. See, e.g., Preston v. Ferrer, 552 U.S. 346, 363 (2008) (Thomas, J., dissenting); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449 (2006) (Thomas, J., dissenting); Allied-Bruce Terminix Cos. v. Dobson, 513 U. S. 265, 285–297 (1995) (Thomas, J., dissenting). No such dissent appears in KPMG, which, instead, emphasizes the “prominent role” of state courts “as enforcers of agreements to arbitrate.”

Keywords: litigation, commercial, business, Supreme Court, arbitration, Federal Arbitration Act

—Marc J. Zucker, Esq., partner, Weir & Partners, LLP, Philadelphia, Pennsylvania

November 22, 2011

Plain Language Prevails in Welch Foods Cases

In Welch Foods, Inc. v. National Union Fire Insurance Co., No. 10-2261 (1st Cir. 2011), the First Circuit reaffirmed the principle that the plain language of an insurance contract governs, ruling that an express exclusion from coverage deprived Welch Foods of defense and indemnity for two actions alleging unfair and deceptive marketing practices.

The First Circuit affirmed the judgment of the district court, stressing that the plain language of the exclusion, which excluded claims for “unfair competition” and “deceptive trade practices,” could not be overridden by the predominant antitrust “flavor” of the exclusion or the doctrine of noscitur a sociis (a word is known by the company it keeps).

Keywords: litigation, commercial, business, plain language, insurance contracts, unfair and deceptive marketing practices

—Paula M. Bagger, associate, Cooke, Clancy & Gruenthal, LLP, Boston, Massachusetts

November 17, 2011

Supreme Court Clarifies Securities Class Certification

The U.S. Supreme Court recently clarified the standard for certifying class actions in section 10(b) fraud-on-the-market cases. The Court’s June 6, 2011, decision, Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. ___ (2011), which resolved a circuit split over the issue, rejected a series of Fifth Circuit decisions requiring securities-fraud plaintiffs to show “loss causation” at the class-certification stage to proceed as a class under a fraud-on-the-market theory. Compare Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007) with Schleicher v. Wendt, 618 F.3d 679, 687 (7th Cir. 2010). According to the Court, “Loss causation has no logical connection to the facts necessary to establish the efficient market predicate to the fraud-on-the-market theory” and need not be demonstrated at the class-certification stage.

The Supreme Court’s second securities decision this term, the Halliburton decision resolves a circuit split over an important issue in securities-class-action litigation in a plaintiff-friendly way. Although the decision’s direct impact will be felt most strongly in the Fifth Circuit, the decision could apply more broadly to undercut efforts by defendants to require the resolution of merits issues at the class-certification stage. Also important was what the Court declined to decide: whether defendants can rebut the fraud-on-the-market presumption and defeat class certification on the issue of predominance by showing a lack of “price impact” at the class-certification stage. It will be interesting to see whether the Court’s silence will spur expansion of this theory, which has already gained traction in the Second and Third Circuits.

Keywords: litigation, commercial, business, class-action certification, securities, loss causation

—Sally K. Sears Coder, partner, and Paul Rietema, associate, of Jenner & Block, LLP, Chicago, Illinois.

November 10, 2011

First Circuit: An Action for Conversion Is Not "Proceeds"

Ruling on what it described as an issue of first impression in the First Circuit, in City Sanitation, LLC v. Allied Waste Management Services of Massachusetts, LLC (In re American Cartage, Inc.) (Aug. 31, 2011), the court affirmed a decision of the U.S. Bankruptcy Court for the District of Massachusetts that the right to pursue a commercial tort claim cannot be passed to a secured creditor as proceeds of original collateral.

Massachusetts law provides that commercial tort claims must be described with specificity in a security agreement to be considered governed by the agreement, and an after-acquired property clause in a security agreement, such as was present here, does not create a security interest in a commercial tort claim, which must already exist when the parties enter the security agreement. City Sanitation argued that it had acquired the tort claims as “proceeds” of the collateral that had been converted or damaged by Allied’s conduct. The First Circuit rejected this argument, ruling that, under the security agreement, the term “proceeds” refers only to the secured creditor’s right to value derived from the collateral and does not extend to the act of attempting to recover that value. “Viewed as a whole,” the First Circuit explained, “Article 9 teaches us that when a party has an interest in a commercial tort claim as proceeds, what the secured party has is a right to the recovery, not a right to the claim itself. An action for conversion is not proceeds; only the end product of that action—the settlement or award—constitutes proceeds.”

Keywords: litigation, commercial, business, First Circuit

—Paula M. Bagger, associate, Cooke, Clancy & Gruenthal, LLP, Boston, Massachusetts.

November 10, 2011

Sixth Circuit Looks at Manufactured Homes as Real Property

In re Dickson, 655 F.3d 585 (6th Cir. 2011), centered on the status of the debtor’s manufactured home under Kentucky law. In Kentucky, a manufactured home is considered personal property. As such, for a lien to be effective, it must be noted on the certificate of title. A manufactured home may be converted to real property, however, if the owner files an affidavit that states it is permanently affixed to real estate and then surrenders the title.

Keywords: litigation, commercial, business, Sixth Circuit, real property

—Ali Razzaghi, senior associate, Frost, Brown, Todd, LLC, Cincinnati, Ohio.

November 10, 2011

Discovery Rule Doesn't Apply under UCC

In Metz v. Unizan Bank, 649 F.3d 492 (6th Cir. 2011), the principal issue before the Sixth Circuit was whether the plaintiffs’ Uniform Commercial Code (UCC) and state-law securities-fraud claims were time-barred. Under Ohio law, the statute of limitations begins to run at the time the wrongful act giving rise to the cause of action is committed. Here, the plaintiffs waited at least four years after the fraudulent acts ended to bring their claims. The discovery rule, however, tolls the statute of limitations until a plaintiff discovers the harm.

Although the Supreme Court of Ohio had not addressed whether the discovery rule applies to causes of action under the UCC, other jurisdictions have held that it does not. Persuaded by these other jurisdictions, the Sixth Circuit held that the discovery rule did not apply to the plaintiffs’ UCC claims. Even if it did apply, the court held that the claims would still be time-barred because, under the discovery rule, a cause of action accrues when a reasonable person would be alerted to the possibility of wrongdoing. In this case, the plaintiffs stopped receiving interest payments from the fake promissory notes in 2001, which would have put a reasonable person on notice of the possibility of wrongdoing. Because the plaintiffs did not file their claims until 2005, the three-year statute of limitations had expired and their claims were time-barred.

Keywords: litigation, commercial, business, Sixth Circuit, Uniform Commercial Code

—Ali Razzaghi, senior associate, Frost, Brown, Todd, LLC, Cincinnati, Ohio.

November 10, 2011

Full Faith and Credit Clause Makes State Decision Preclusive

In Rick, et al. v. Wyeth, Inc., No. 10-3354 (8th Cir. Oct. 25, 2011), a diversity action filed in the District of Minnesota, where a six-year statute of limitations applied to the plaintiffs’ claims, the Eighth Circuit applied the Full Faith and Credit Clause to give preclusive effect to a New York state-court decision that dismissed the plaintiffs’ case as time-barred under New York’s three-year statute of limitations.

Keywords: litigation, commercial, business, Eighth Circuit, Full Faith and Credit Clause

—Kristin E. Weinberg, Clark Law Firm, LLC, in St. Louis, Missouri.

November 8, 2011

Eleventh Circuit Enforces Forum-Selection Clause

The issue in Rucker v. Oasis Legal Finance, LLC, 632 F.3d 1231 (11th Cir. 2011), was the enforceability of a forum-selection clause. Oasis Legal Finance provides “non-recourse funding” to plaintiffs involved in litigation. The plaintiffs and Oasis entered into purchase agreements whereby Oasis provided a fixed sum to finance the plaintiffs’ litigation in exchange for an interest in the proceeds of the plaintiffs’ claims. The purchase agreements contained a choice of law provision and a forum-selection clause that provided that Alabama law would apply, but it also stated that all disputes would be litigated in Cook County, Illinois.

The Eleventh Circuit considered three issues: the proper standard of review, whether state or federal law governed the enforceability of the forum-selection clause, and whether the forum-selection clause was valid. With respect to the first two issues, the court held that a de novo standard of review applied and that, because there was no conflict between federal law and Alabama law on the validity of forum-selection clauses, it did not have to determine whether state or federal law applied. With respect to the third issue, the court held that the plaintiffs failed to show that enforcing the forum-selection clause in the purchase agreement would be unfair or unreasonable under the four-factor analysis set forth in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). According to the court, the plaintiffs failed to show that the clause was induced by fraud or overreaching, that they would be deprived of their day in court because of inconvenience or unfairness, that Alabama law would deprive them of a remedy (the remedy would be determined under Alabama law regardless of where the case was heard), or that forum-selection clauses contravene public policy in Alabama.

Keywords: litigation, commercial, business, Eleventh Circuit, forum-selection clause

—Greg Michell, partner, and E. Righton Johnson, associate, at Balch & Bingham, LLP, in Atlanta, Georgia

November 3, 2011

Corporations Do Not Have the Right to Personal Privacy

The U.S. Supreme Court recently held that corporations are not entitled to “personal privacy” under Exemption 7(C) of the Freedom of Information Act (FOIA). In FCC v. AT&T Inc., 131 S. Ct. 1177, ___ U.S. ___ (2011), the Court rejected AT&T, Inc.’s argument that because Congress defined the term “person” to include corporations for purposes of FOIA, the phrase “personal privacy” in Exemption 7(C) also applies to corporations.

Following the Court’s decision in FCC v. AT&T, a corporation cannot invoke a right to personal privacy under FOIA Exemption 7(C) to prevent the government from publicly disclosing documents provided during the course of an investigation. The overall impact of the Court’s decision may be minimal, because corporations can continue to protect their documents from disclosure through FOIA Exemption 4 and other exemptions. Also, the Court expressly stated that this case did not call upon the Court to interpret the scope of a corporation’s privacy interests as a matter of constitutional law, and future cases may therefore expand on what rights a corporation is entitled to under the U.S. Constitution.

Keywords: litigation, commercial, business, FOIA, personal privacy, Exemption 7(c)

—Sally K. Sears Coder, partner, and Som P. Dalal, associate, at Jenner & Block, LLP, Chicago, Illinois.

October 24, 2011

The Presumption of Irreparable Harm Is Gone

In Bosch, LLC v. Pylon Mfg. Corp., 2011 U.S. App. LEXIS 20700 (Fed. Cir. Oct. 13, 2011), the Federal Circuit has taken an opportunity to put to rest and confirm that the Supreme Court in eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), jettisoned the presumption of irreparable harm as it applies to determining the appropriateness of injunctive relief.

In Bosch, the Federal Circuit has again chipped away at patentees seeking to enforce patent rights. As a result, patentees should definitely follow Bosch’s lead in establishing a strong factual basis for the irreparable harm element of the injunction analysis, as the good old days of just showing a likelihood of success on the merits and then relying on the presumption of irreparable harm that follows are gone.

Keywords: litigation, commercial, business, Federal Circuit, irreparable harm

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

October 24, 2011

Supreme Court Rejects Global Warming Lawsuit

The U.S. Supreme Court recently struck down two first-of-their-kind lawsuits in which several states, the City of New York, and three private land trusts sought to hold four private power companies and the Tennessee Valley Authority (a federally owned power plant) accountable for global warming based on a public-nuisance theory under federal common law. Specifically, in American Electric Power Co. v. Connecticut, No. 10-174, 131 S. Ct. 2527 (June 20, 2011), the Court held that the Clean Air Act, 42 U.S.C. § 7401 et seq., displaced federal tort claims against emitters of carbon dioxide.

In light of the growing controversy surrounding global warming, American Electric indicates that federal courts may not be the proper forum to address this complicated issue. The Court expressly left open the question of whether state law may be used to redress such complaints. Specifically, because the plaintiffs raised state-law claims that the Second Circuit chose not to reach, the plaintiffs will have an opportunity on remand to argue that state law entitles them to their requested injunctive relief. In determining whether the plaintiffs’ state-law claims are viable, the Second Circuit will have to consider whether Congress, in passing the Clear Air Act, demonstrated a “clear and manifest” intent to preempt the plaintiffs’ claims.

Notably, in the administrative realm, the EPA has indicated that it will take final action on a proposed rule to limit greenhouse gases by May 2012. See 75 Fed. Reg. 82392. Regardless of what action, if any, the EPA takes, environmental groups likely will challenge the EPA’s actions or inactions as insufficient to reduce emissions. In future litigation, we expect the EPA and its opponents to hotly contest the impact of the Court’s statements in American Electric concerning the proper role of courts and administrative agencies in the climate-change debate. Undoubtedly, the EPA will rely on the fact that the Court trumpeted the EPA’s expertise and ability to tackle the multifaceted issues involved with global warming, as well as the Court’s admonishment that courts should not decide the tough policy questions wrapped up in climate change. Unless environmental groups can overcome these obstacles, their only likely recourse will be to continue lobbying for change in the executive and legislative branches of government.

Keywords: litigation, commercial, business, global warming, Clean Air Act, federal common law, displacement

—Sally K. Sears Coder is a partner in the Chicago office and Damon Thayer is an associate in the Los Angeles office of Jenner & Block, LLP.

October 24, 2011

Fifth Circuit Overturns Arbitration Award Against Officers

The Fifth Circuit recently reversed the district court’s confirmation of an arbitration award against the chief executive officer and chief financial officer of several corporations and remanded the case for further proceedings based on the conclusion that the two officers had not agreed to be personally bound by the agreements that contained an arbitration provision. DK Joint Venture 1, et al. v. Richard W. Weyand, et al., 2011 WL 3342370 (C.A.5 (Tex.)).

In reversing the confirmation of the arbitration award, the Fifth Circuit first noted that the application of principles of contract and agency law may result in a nonsignatory to an arbitration agreement being bound by its terms. But, in a fact-specific analysis, the Fifth Circuit concluded that although Weyand and Thiessen were agents of the defendant corporations, the mere fact that the defendant corporations entered into the subscription agreements did not cause their agents, Weyand and Thiessen, “who acted only as officers on behalf of the corporations, to be personally bound by those agreements.” The court then distinguished between two lines of cases, noting that the important factual distinction in all of the cited cases was whether the party resisting arbitration was a signatory or not.

The next point addressed by the Fifth Circuit was the argument that it must defer to the arbitration panel’s determination that it had jurisdiction over Weyand and Thiessen because the arbitration language gave the arbitration panel the power to determine its own jurisdiction. The court also rejected this argument, noting that a dispute as to whether the parties entered into an arbitration agreement in the first place was an issue to be resolved by a court and not by an arbitrator.

Keywords: litigation, commercial, business, Fifth Circuit, arbitration awards, arbitration provisions

—Mitzi Turner Shannon, partner, Kemp Smith, LLP, El Paso, Texas

October 24, 2011

Fifth Circuit Looks at Commercial-Activity Exception to FSIA

The Fifth Circuit recently affirmed a district court’s finding of subject-matter jurisdiction in a dispute between two foreign corporations based on the commercial-activity exception to the Foreign Sovereign Immunities Act (FSIA). Transcor Astra Group, S.A. v. Petroleo Brasilerio S.A.—Petrobras, 2011 WL 386781 (C.A.5 (Tex.)).

In determining whether the commercial-activity exception applied, the Fifth Circuit concluded that the plaintiff’s breach-of-contract claim was based at least in part on the defendant’s commercial activities in the United States, because, “for purposes of the FSIA, a claim is based on the elements of the claim that, if proven, would entitle Plaintiff to relief under its theory of the case.” Transcor at *3.

One final factor that supported the decision of the Fifth Circuit was its conclusion that the finding by the district court that buyout negotiations took place in the U.S. regarding the ownership of a U.S. entity pursuant to the letter agreement was not clearly erroneous. This additional finding resulted in the Fifth Circuit concluding that the defendant’s letter agreement “with Transcor cause[d] a direct effect in the United States, for purposes of jurisdiction under the FSIA, in the sense that it prompted these further negotiations.” Id. at *4.

Keywords: litigation, commercial, business, Foreign Sovereign Immunities Act, subject-matter jurisdiction, commercial activity, international law, Fifth Circuit

—Mitzi Turner Shannon, partner, Kemp Smith, LLP, El Paso, Texas

October 6, 2011

Ninth Circuit Clarifies Jurisdiction Based on Web Contacts

In a pair of recent cases, Mavrix Photo, Inc. v. Brand Technologies, Inc., 2011 WL 3437047 (9th Cir. Aug. 8, 2011), and CollegeSource, Inc. v. AcademyOne, Inc., 2011 WL 3437040 (9th Cir. Aug. 8, 2011), the Ninth Circuit clarified when jurisdiction over a foreign corporation is appropriate based on Internet-related contacts with the forum state.

In Mavrix Photo, a Florida-based celebrity photo agency with operations in California sued a Pennsylvania-based gossip website company, Brand Technologies, alleging that Brand Technologies had infringed on Mavrix Photo’s copyright by posting copyrighted photos of celebrity couple Fergie and Josh Duhamel on its website. Mavrix alleged that general jurisdiction over Brand Technologies was proper based upon, among other contacts, its operation of an interactive website. The Ninth Circuit found that the gossip website’s interactive attributes, including the ability of users to post comments, receive email newsletters, vote in polls, and upload content, were insufficient to justify general jurisdiction over the foreign corporation in California.

In CollegeSource, a California education-related business sued a competing venture, AcademyOne, based in Pennsylvania, for misappropriating copyrighted material on its website. CollegeSource asserted that general jurisdiction over AcademyOne was proper because AcademyOne had 300 registered users in California and maintained a “highly interactive” website. The Ninth Circuit found that AcademyOne’s interactive website and related contacts were insufficient to approximate physical presence in California as is necessary to justify general jurisdiction.

Though the Ninth Circuit found that contacts based on interactive websites did not merit general jurisdiction over foreign corporations in Mavrix Photo and CollegeSource, the appellate court did find specific jurisdiction was warranted based on the same interactive websites and related contacts. In Mavrix Photo, the Ninth Circuit found that there was specific jurisdiction over the gossip website company because it had expressly aimed its tortious act of violating Mavrix Photo’s copyright at the state of California by focusing website content on California-based celebrities (e.g. Fergie and Josh Duhamel) and because it had a substantial California viewer base.

In CollegeSource, CollegeSource alleged that AcademyOne had posted copyrighted catalog content from CollegeSource on its website and that it has suffered economic loss to its business of assisting California students transfer schools. The Ninth Circuit surmised that AcademyOne should have known that CollegeSource was located in California because CollegeSource’s contact information was posted on its website and because AcademyOne had previously been in contact with CollegeSource’s CEO. The Ninth Circuit concluded that because AcademyOne’s misappropriation of copyrighted material on its website was directed at California and the injury was felt in California, specific jurisdiction over AcademyOne was appropriate.

Keywords: litigation, commercial, business, Ninth Circuit, jurisdiction, foreign corporations

—Justin C. Jones is a partner in the Commercial Litigation Group of Holland & Hart, LLP, in Las Vegas, Nevada.

September 20, 2011

Second Circuit Hears Case on Madoff Net Equity Calculations

In In re Bernard L. Madoff Inv. Sec., LLC, No. 10-2378-bk (2d Cir. Aug. 16, 2011), a panel of the Second Circuit approved the method chosen by Irving Picard, bankruptcy trustee, under the Securities Investor Protection Act (SIPA) to sort out decades of Bernard Madoff’s fraud. At stake was the determination of the Ponzi schemers’ victims’ pro rata shares of funds available from Madoff’s bankruptcy estate and other funds for victims made available by the Securities Investor Protection Corporation (SIPC), a nonprofit corporation consisting of registered broker-dealers and members of national securities exchanges that supports a fund used to advance money to a SIPA trustee.

The Second Circuit concluded that the language of SIPA does not require either the net investment method or the last statement method in all instances. “Differing fact patterns will inevitably call for differing approaches to ascertaining the fairest method for approximating ‘net equity,’ as defined by SIPA.” Where the broker actually purchased securities on the customers’ account, for example, the last statement method was ordinarily more appropriate because it recognizes losses and gains as a result of investment, as opposed to only the customers’ cash deposits and withdrawals. In this case, the court held that Picard’s use of the net investment method was “more consistent with the statutory definition of ‘net equity’ than any other method advanced by the parties or perceived by this Court.”

Keywords: litigation, commercial, business, Bernie Madoff, Ponzi scheme, Second Circuit

—Christopher F. Girard is an attorney at Robinson & Cole, LLP, in Hartford, Connecticut.

September 13, 2011

First Circuit Considers Lost-Opportunity Damages

In Gemini Investors, Inc. v. AmeriPark, Inc., No. 10-1312 (1st Cir. June 23, 2011), the First Circuit affirmed the trial court’s refusal to instruct the jury on lost-opportunity damages. Under applicable Massachusetts law, expectation damages for breach of contract are typically only awarded when it is proved that they were caused by the breach. Lost-opportunity damages have been awarded in Massachusetts cases in which a plaintiff had a contractual right to a benefit (albeit subject to conditions creating some uncertainty whether they would be enjoyed) and the defendant’s breach deprived the plaintiff of that contractual right, and the First Circuit found these cases distinguishable on their facts from the one before it, in which the plaintiff benefited only from the defendant’s undertaking not to deal with third parties. The court noted that a Massachusetts state court would need to decide whether the loss of a contractually guaranteed right to exclude others stands on the same footing as or different footing from the loss of a bargained-for benefit for purposes of assessing causation and damages in a breach of contract case.

Keywords: litigation, commercial, business, lost opportunity, damages

—Paula Bagger, a partner in Cooke Clancy & Gruenthal, LLP, Boston, Massachusetts

September 13, 2011

Working Group's Documents Are Privileged in Recall Case

In Mississippi Employees’ Retirement System v. Boston Scientific Corp., No. 10-1663 (August 4, 2011), at the end of a lengthy decision affirming the entry of summary judgment for the defendants in a securities fraud action, the First Circuit addressed the plaintiff’s additional appeal from the district court’s denial of a motion to compel the production of documents. The underlying action concerned the alleged inadequate disclosure of information about a medical-device recall, and the plaintiff argued that the documents generated by an internal “Recall Investigation Working Group” at defendant Boston Scientific Corp. were the product of a purely business “post-mortem” on the troubled recall and thus neither attorney-client-privileged information nor attorney work product.

Keywords: litigation, commercial, business, securities fraud, attorney-client privilege, work-product privilege

—Paula Bagger, a partner in Cooke Clancy & Gruenthal, LLP, Boston, Massachusetts

September 2, 2011

Federal Circuit Makes Invalidity Challenges Harder

The Federal Circuit’s decision in Star Scientific, Inc. v. R.J.Reynolds Tobacco Co., 2011 U.S. App. LEXIS 17826 (Fed. Cir. Aug. 26, 2011), likely makes invalidity attacks based on insufficient priority claims and indefiniteness—two areas where accused infringers often seek to base these attacks—more difficult to sustain.

In Star Scientific, the Federal Circuit likely makes invalidity challenges based on arguably insufficient priority claims or indefiniteness of claim terms a little more difficult to assert. But, like so many areas of patent law based on what one of ordinary skill in the art would or would not know, perhaps the real winners here are the experts and the parties who get the best experts on their side.

Keywords: litigation, commercial, business, Federal Circuit, invalidity challenges

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

September 2, 2011

Federal Circuit Provides Map for Applying Recapture Rule

In AIA Eng’g Ltd. v. Magotteaux Int’l S/A, 2011 U.S. App. LEXIS 18125 (Fed. Cir. Aug. 31, 2011), Magotteaux appealed from summary judgment that asserted claims of U.S. Patent RE39,998 (RE’998 patent) were invalid under 35 U.S.C. § 251 for impermissibly recapturing subject matter surrendered during reissue examination. However, as the Federal Circuit found that the district court erred in construing a dispositive claim term, and thus erred in determining that the reissued claims impermissibly recaptured surrendered subject matter, the Federal Circuit reversed the district court.

Although AIA did not prevail in its attempt to invalidate the RE’998 patent under section 251, AIA Eng’g will likely serve as a road map for future recapture challenges. Indeed, accused infringers of reissue patents would be well advised to remember this useful tool, especially since patentees often seek to assert their patents as broadly as possible—perhaps not realizing that doing so could back them into a clear case of impermissible recapture. Groundwork for application of section 251 should commence at the outset of a case when initial claim-construction positions are developed, as the challenge for accused infringers is winning on not one but two instances of claim construction, including that of the reissued claim language and of the original corresponding claim language to show the recaptured subject matter. The reward for a successful recapture challenge is invalidity of any affected claim. So, based on that, AIA Eng’g could lead to an increase of recapture challenges in the future.

Keywords: litigation, commercial, business, Federal Circuit, recapture rule, reissue patents

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

August 26, 2011

Exergen Is the Standard for Pleading Inequitable Conduct

In Delano Farms Co. v. The California Table Grape Commission, 2011 LEXIS 17685 (Fed. Cir. Aug. 24, 2011), the Federal Circuit clarified the pleading standard for inequitable conduct counterclaims in view of its prior decision in Therasense, Inc. v. Becton, Dickinson & Co., ___ F.3d ___, 2011 WL 2028255 (Fed. Cir. May 25, 2011) (en banc), which greatly increased the difficulty to establish inequitable conduct claims.

The Federal Circuit emphasized that a charge of inequitable conduct based on a failure to disclose will survive a motion to dismiss only if the plaintiff's complaint recites facts from which the court may reasonably infer that a specific individual both knew of invalidating information that was withheld from the PTO and withheld that information with a specific intent to deceive the PTO. Exergen v. Wal-Mart Stores, Inc., 575 F.3d 1312, 1318, 1330 (Fed. Cir. 2009); see generally Therasense, Inc. v. Becton, Dickinson & Co., F.3d , 2011 WL 2028255 (Fed. Cir. May 25, 2011) (en banc).

Keywords: litigation, commercial, business, inequitable conduct, Federal Circuit, pleading standard

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

August 26, 2011

When Can Errors in Patent Claims Be Corrected?

In CBT Flint Partners, LLC v. Return Path, Inc., 2011 LEXIS 16499 (Fed. Circ. 2011), CBT Flint Partners, LLC, appealed from a final judgment where the district court granted summary judgment of invalidity of claim 13 of U.S. patent 6,587,550, holding it indefinite under 35 U.S.C. § 112, ¶ 2. The district court granted summary judgment of invalidity on the basis that claim 13 contained a “drafting error” and that there were at least three reasonable and possible corrections to rectify that error. The court held that on consideration of the claim language and specification, the appropriate correction was subject to reasonable debate. Thus, the district court concluded that it was not authorized to correct the so-called drafting error in claim 13, thereby rendering it invalid for indefiniteness.

CBT clearly encourages accused infringers to argue varied scope and meaning of possible corrections to claims containing errors, as doing so successfully results in the golden ticket of patent invalidity for any such claim under 35 U.S.C. § 112, ¶ 2. For patentees whose patents unfortunately contain drafting errors, CBT suggests that a potentially invalid patent claim due to a drafting error can be rescued by successfully asserting that each proposed correction has the same scope and meaning within the affected claim. Clearly, expert testimony regarding how one of ordinary skill in the art may or may not view a drafting error and the scope and meaning of possible corrections will likely be instrumental in either rescuing or in attempting to invalidate the claim.

Keywords: litigation, commercial, business, Federal Circuit, patent errors

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

August 3, 2011

Attorney Fee Award under EAJA Requires Bad Faith

Griffin Industries, Inc. v. U.S. Environmental Protection Agency, No. 09-6422, 2011 U.S. App. LEXIS 9688 (6th Cir. May 12, 2011), involved awarding attorney fees under the Equal Access to Justice Act (EAJA).

On appeal, the Sixth Circuit explained that because of the rarity of an award of attorney fees under the EAJA for bad faith, a “stringent standard” must be met to justify the award. It requires a showing of the party’s “subjective bad faith.” To that end, the district court must find that the position advanced by a party is meritless, that the party had knowledge of the meritlessness, and that the position was advanced or maintained for an improper purpose.

The district court held that the EPA’s position regarding disclosure of the publicly available documents was meritlessness and that the EPA should have known it was meritless. It made no findings, however, of bad faith or improper purpose. Accordingly, the Sixth Circuit reversed the award of attorney fees, holding that the district court abused its discretion when it granted the motion for attorney fees without making an actual finding of subjective bad faith or improper purpose.

Keywords: litigation, commercial, business, attorney fees, Equal Access to Justice Act

— Ali Razzaghi, Frost Brown Todd, LLC, Cincinnati, Ohio

August 3, 2011

Sixth Circuit Looks to Supreme Court Case for Scienter Guidance

In Frank v. Dana Corp., No. 09-4233, 2011 U.S. App. LEXIS 10437 (6th Cir. May 25, 2011), the CEO and CFO of Dana Corp. were sued for violating sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for allegedly making false statements regarding the financial health of the company and being “controlling persons” regarding false statements made by the company and other employees.

The Sixth Circuit reversed the district court’s order granting dismissal, holding that the plaintiffs adequately pled a strong inference of scienter as part of their section 10(b) and section 20(a) claims.

Keywords: litigation, commercial, business, scienter, Securities Exchange Act

— Ali Razzaghi, Frost Brown Todd, LLC, Cincinnati, Ohio

August 3, 2011

Trebling of Damages under TCPA Not Considered Punitive

In Alea London Limited v. American Home Services, Inc. and A Fast Sign Co., Inc., 638 F.3d 768 (11th Cir. 2011), the Eleventh Circuit examined U.S. Supreme Court opinions that addressed whether treble damages under a given statute are punitive and concluded that the nature of statutory treble damages is an intensely fact-based inquiry that varies from statute to statute.

Here, the Eleventh Circuit relied on four points to determine that the treble damages at issue were compensatory. The court determined that the trebling of damages in the Telephone Consumer Protection Act of 1991 (TCPA) cannot be classified as punitive and reversed the district court’s ruling that the policy’s punitive damages exclusion applied to treble damages under the TCPA.

Keywords: litigation, commercial, business, Telephone Consumer Protection Act, punitive damages

— Greg Michell, partner, and Geremy Gregory, associate, Balch & Bingham, LLP, Atlanta, Georgia

July 22, 2011

PSLRA Bars RICO Claim Based on Predicate Acts of Fraud

In MLSMK Investment Co. v. JP Morgan Chase & Co., No. 10-3040-cv (2d Cir. July 7, 2011), a Second Circuit panel decided as a question of first impression for the circuit that section 107 of the Private Securities Litigation Reform Act (PSLRA)—the RICO amendment—precludes a RICO claim predicated on the defendants’ alleged aiding and abetting of another’s security fraud. The panel concluded that the lack of a cause of action for aiding and abetting securities fraud under federal securities laws does not place the plaintiff’s claim beyond the reach of the 1995 RICO amendment, even where, as here, the absence of a RICO claim leaves the plaintiff without a remedy.

Keywords: litigation, commercial, business, Second Circuit, RICO, securities fraud

— Christopher F. Girard is an attorney at Robinson & Cole, LLP in Hartford, Connecticut.

July 7, 2011

Advisors Not Liable for Statements in Fund Prospectuses

In Janus Capital Group, Inc. v. First Derivative Traders, the Supreme Court overturned a Fourth Circuit ruling that an investment fund’s advisors could be held liable for false statements in the fund’s prospectuses in Securities and Exchange Commission (SEC) Rule 10b-5 private actions.

In reaching this conclusion, the Court rejected the government’s amicus curiae contention that “make” should be defined as “create,” holding that the government’s construction would allow private plaintiffs to sue anyone who “provides the false or misleading information that another person then puts into the statement.” It remains the law, however, that the SEC—though not Rule 10b-5 private plaintiffs—can sue those who provide “substantial assistance” in the making of false statements.

Keywords: litigation, commercial, business, false statements, Securities and Exchange Commission, Supreme Court

— Will Stewart, Winston & Strawn, LLP, Charlotte, North Carolina, and Shelby Smith, a student at Wake Forest University

July 6, 2011

New York Clarifies Interest-on-Interest Law

The New York Court of Appeals answered three questions certified to it by the Second Circuit Court of Appeals in NML Capital v. Republic of Argentina, 2011 WL 2567294 (June 30, 2011), a case arising out of bonds issued by the Republic of Argentina. A controversy arose as to the appropriate interest to be awarded the bondholders. This issue arose out Argentina’s agreement in the bonds documents to make biannual interest payments at a floating rate on certain dates and “until the principal is paid in full.” On appeal, the Second Circuit found that the case involved unresolved issues of New York law as to the entitlement and calculation of prejudgment interest on interest. It thus certified questions to the New York Court of Appeals, asking if the bond provision was properly construed as an obligation to pay interest for as long as the principal is outstanding, including after the date of maturity or after acceleration, along with whether that obligation provided a valid basis on post-maturity or post-acceleration interest payments that came due but were never paid. The New York court answered in the affirmative for all questions.

Keywords: litigation, commercial, business, Second Circuit, New York Court of Appeals, bonds

— John McCahey is a partner at Hahn & Hessen, LLP, in New York, New York.

June 28, 2011

Whistleblower Provisions Don't Apply to Media Disclosures

In Tides v. The Boeing Company, 2011 WL 1651245 (May 3, 2011), the Ninth Circuit held that the whistleblower provisions of the Sarbanes-Oxley Act do not protect employees from retaliation when they disclose information concerning fraud or securities violations to the media.

According to the Ninth Circuit, the whistleblower provisions protect employees of publicly traded companies from discrimination and retaliation in their employment when they report conduct that they reasonably believe constitutes certain types of fraud or securities violations. These protections, however, apply only to disclosures to a federal regulatory or law-enforcement agency, a member or committee of Congress, or a supervisor or other individual who has the authority to investigate, discover, or terminate such misconduct. See 18 U.S.C. § 1514(A)(1). These protections do not extend to disclosures to members of the media.

Keywords: litigation, commercial, business, Ninth Circuit, whistleblower provisions

— Michael S. LeBoff is an attorney at Hodel Briggs Winter, LLP, in Irvine, California.

June 28, 2011

Counterclaim Defendants Cannot Remove to Federal Court

In Westwood Apex v. Contreras, 2011 WL 1744960 (May 2, 2011), the Ninth Circuit held as a matter of first impression that section 5 of the Class Action Fairness Act (CAFA) does not allow counterclaim defendants to remove a class action to federal court.

Section 5 of CAFA provides that an action may be removed by “any defendant.” The Ninth Circuit rejected the argument that “any defendant” includes additional counterclaim defendants. The court concluded that nothing in CAFA alters the longstanding rule that cross-defendants and/or third-party defendants cannot remove a case to federal court.

Keywords: litigation, commercial, business, Ninth Circuit, Class Action Fairness Act

— Michael S. LeBoff is an attorney at Hodel Briggs Winter, LLP, in Irvine, California.

June 23, 2011

Advice-of-Counsel Opinions Take on Renewed Importance

In Spectralytics, Inc. v. Cordis Corp., 2011 WL 2307402 (Fed.Cir. June 13, 2011), the Federal Circuit has clarified that the test for willful patent infringement is distinct and separate from the factors guiding a district court’s discretion regarding enhanced damages. In so doing, the court may have also reinvigorated what was previously a thriving cottage industry of advice-of-counsel opinion work.

At trial, the jury found that Cordis’ infringement was willful. However, the district court denied Spectralytics’ request for enhanced damages and attorney fees after applying In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007).

Thus, the Federal Circuit found that although the district court was correct in holding that a finding of willful infringement may not warrant the enhancement of damages, it was inappropriate to discount evidence relating to whether there was adequate investigation of adverse patent rights after willful infringement was found. The court indicated that Seagate did not hold that this factor from Read v. Portec should be ignored. Consequently, the Federal Circuit vacated the district court’s denial of enhanced damages and remanded for determination whether enhanced damages were warranted in view of the paramount determination in deciding to grant enhancement and the amount thereof being the egregiousness of the defendant’s conduct in view of all the facts and circumstances.

Keywords: litigation, commercial, business, advice-of-counsel opinions

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

June 23, 2011

General Employees May Owe Employer More than Loyalty

Western Blue Print Co., LLC v. Roberts, 2011 Mo. App. LEXIS 606 (Mo. App. Apr. 29, 2011), considered the extent to which a management employee owes his or her employer a fiduciary duty. The case involved a branch manager who had been entrusted with considerable control and responsibility for the employer’s affairs, even though she was not officially designated as a corporate officer. The manager breached that duty when she aided her husband in setting up a competing business, concealed her interest therein, disobeyed her employer’s instructions to divest herself of any interest therein, and failed to act with good faith and fidelity toward her employer’s interest.

The court in Western Blue held that Roberts did more than plan and prepare to compete and that a reasonable fact finder could conclude that she failed to follow instructions, failed to disclose material facts, misrepresented material facts, and otherwise failed to act with utmost good faith and fidelity toward Western Blue’s interests. Because these actions were taken while she was still employed by Western Blue, her actions were not confined to mere planning and preparation to compete.

Keywords: litigation, commercial, business, fiduciary duty, employees

— Mark M. Haddad, associate with Foland, Wickens, Eisfelder, Roper & Hofer, P.C., in Kansas City, Missouri.

June 9, 2011

Article on Ohio Mayor Considered Protected Speech

In Bentkowski v. Scene Magazine, 637 F.3d 689 (6th Cir. 2011), an Ohio mayor sued various magazine and publishing companies for defamation as a result of an article published in a weekly publication. Specifically, the mayor took issue with portions of the article that suggested that he regularly acted inappropriately by “limiting residents’ feedback at meetings and barring government employees from running for office” and that he sent a letter seeking personal information concerning “young residents” for illicit purposes. The Sixth Circuit affirmed the district court’s grant of summary judgment in favor of the defendants on grounds that the article was protected opinion as a matter of law.

Keywords: litigation, commercial, business, Sixth Circuit, defamation

— Ali Razzaghi, senior associate at Frost Brown Todd, LLC, in Cincinnati, Ohio

June 9, 2011

Director Who Recused Himself Is Not Independent

In Booth Family Trust v. Jeffries, No. 09-3443, 2011 U.S. App. LEXIS 6814 (6th Cir. Apr. 5, 2011), the plaintiffs, shareholders of Abercrombie & Fitch Co., filed a derivative suit on behalf of the company against several officers and directors, claiming that those agents had made false and misleading statements, which, in addition to causing fluctuation in the stock price, also led to an investigation by the SEC and fraud charges. After the suit was filed, the company formed a special litigation committee to investigate the claims. Following the investigation, the committee recommended dismissal, and the company subsequently filed a motion to dismiss.

The Sixth Circuit found that, although a committee member who recused himself could have done so “for whatever reason or no reason at all,” the mere fact that he did so created the perception that he was not independent. In addition, although the committee member attempted to remedy the situation by recusing himself, it was ineffective. The named defendant was a key player in the alleged wrongdoing, and, as the claims were broadly based, indicating one director acted inappropriately would imply that the others had as well. Therefore, the committee member’s independence in considering the other claims would necessarily be tainted by his connection to the named defendant. Without a showing that the company’s special litigation committee was independent, the motion to dismiss based on the committee’s recommendation could not be granted. Accordingly, the district court’s dismissal was reversed.

Keywords: litigation, commercial, business, Sixth Circuit, recusal

— Ali Razzaghi, senior associate at Frost Brown Todd, LLC, in Cincinnati, Ohio

June 7, 2011

Case Cannot Proceed When Named Defendants Have No Claim

In Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762 (1st Cir. 2011), the First Circuit addressed whether, under the court’s precedents, a case could proceed against defendants against whom none of the named plaintiffs had a claim. As the court noted, “[t]he issue looks straightforward and one would expect it to be well settled; neither assumption is entirely true.”

The First Circuit noted that class-action named plaintiffs “regularly litigate not only their own claims but also claims of other class members based on transactions in which the named plaintiffs played no part.” What made this case problematic, however, was that in this case six of the eight trusts named as defendants were not liable to the named plaintiffs on any claims at all. The court noted that the Supreme Court’s guidance on the subject “has not been consistent,” and referred back to its 1977 decision in Barry v. St. Paul Fire & Marine Insurance Co., 555 F.2d 3 (1st Cir.1977), aff’d on other grounds, 438 U.S. 531 (1978), in which it had refused to allow a class action to proceed against defendants not implicated in any wrongs inflicted on the named plaintiffs. Concluding that it was “inclined (and perhaps required) to follow [Barry’s] lead,” the court ruled that the named plaintiffs in the case before it were without standing to sue the six trusts in which none had purchased certificates.

Keywords: litigation, commercial, business, First Circuit, putative securities class action

— Paula Bagger, a partner in Cooke Clancy & Gruenthal, LLP, Boston, Massachusetts

June 7, 2011

The Word "Of" Can Determine Jurisdiction

In New Jersey v. Merrill Lynch & Co., No. 09-4676, 2011 U.S. App. LEXIS 10020 (3d Cir. May 18, 2011), the Third Circuit answered a simple yet important question: Does a forum-selection clause restricting disputes to the courts “of” a certain state include that state’s federal district courts? According to the Third Circuit, the answer is no. Drafters, take note: One preposition can oust jurisdiction.

Merrill Lynch argued that the use of the plural—“courts”—in the forum-selection clause logically included the federal district court because the New Jersey Superior Court was a “unified” court properly designated by the use of the singular. The Third Circuit pointed out that the plural more plausibly referred to the 15 locations within the state where the Superior Court sits, its unity notwithstanding. The use of “of” rather than “in” further suggested that federal courts were excluded. According to Webster’s Third New International Dictionary, “of” indicates a “possessive relationship,” or “such relationships as ruler and subject” or “owner and property.” Following other circuits, the Third Circuit concluded that courts “in” a state are those within its borders, state and federal, whereas those “of” a state include only those courts within that state’s own court system. A case on which Merrill Lynch relied that potentially suggested otherwise had been decided under Pennsylvania’s Uniform Arbitration Act, which had been held to include federal courts; here, no statute affected the purely contractual interpretation of the clause in the share exchange agreement.

The court also rejected Merrill Lynch’s contention that the clause was ambiguous and should be construed against the drafter. It found nothing ambiguous about the waiver, and the court noted that, even if it had, the contra preferentem rule can be limited in accordance with the sophistication of the parties. The court affirmed the order of remand.

Keywords: litigation, commercial, business, Third Circuit, forum-selection clause

— Chad Shandler, a director of Richards, Layton & Finger, P.A., in Wilmington, Delaware, and Jason J. Rawnsley, an associate at Richards, Layton & Finger

June 7, 2011

Third Circuit Rules in Case on Transfer of Copyright

In Barefoot Architect, Inc. v. Bunge, 632 F.3d 822 (3d Cir. 2011), the Third Circuit held that a writing memorializing a transfer of copyright under section 204(a) of the Copyright Act need not be substantially contemporaneous with the transfer when the transferor and transferee do not dispute ownership of the copyright.

The court of appeals also stated that Barefoot was not deprived of the opportunity to make an evidentiary record on this issue (The counterclaim was dismissed on a 12(b)(6) motion, and Barefoot could not claim surprise because the defendants’ counterclaim sought damages for delay and expense.). The Third Circuit also rejected Barefoot’s statute-of-limitations defense because its review was limited on a 12(b)(6) to the face of the counterclaim, which did not indicate when the limitations period began to run. The Third Circuit also reversed the district court’s dismissal of the homeowners’ breach-of-contract and fiduciary-duty claims because complete diversity existed between the parties to those claims—the homeowners were California citizens, and their new Virgin Islands architectural firm, though a codefendant, was not a party to these counterclaims.

Keywords: litigation, commercial, business, Third Circuit, Copyright Act, transfer of copyright

— Chad Shandler, a director of Richards, Layton & Finger, P.A., in Wilmington, Delaware, and Jason J. Rawnsley, an associate at Richards, Layton & Finger

June 7, 2011

First Circuit Rules in "Chat Line" Case

In Farmers Insurance Exchange v. RNK, Inc., No. 09-2524 (1st Cir. Jan. 21, 2011), brought by the liability insurer for Ripple Communications, a company offering teleconferencing services, against RNK, Inc., a Massachusetts-based telephone company, the First Circuit ruled that an agreement by Ripple, in a contract to use RNK’s telecommunications facilities, to hold RNK harmless from claims arising from Ripple’s “content” did not extend to third-party conversations on a Ripple “chat line.”

The First Circuit affirmed the District Court’s ruling that the term “content” as used in the agreement referred only to material generated by Ripple, such as prompts, menus, and descriptions of various “chats,” and did not extend to the traffic (third-party conversations) that went through RNK’s network and Ripple’s chat lines. Ruling that the plain language of the indemnity provision evinces a purpose to protect RNK from possible unlawful conduct by Ripple—not third-party chat line participants—the court concluded that the term “content,” within the meaning of the agreement, related solely to Ripple-generated content. Although Ripple failed to comply with regulations mandating blockable chat lines, the court appears to have considered that conduct remote as compared with the misconduct of the third-party predators.

Keywords: litigation, commercial, business, First Circuit, contracts, liability insurance

— Paula Bagger, a partner in Cooke Clancy & Gruenthal, LLP, Boston, Massachusetts

May 31, 2011

Company's Outside Counsel Allowed to Testify Against Ex-CEO

In United States v. Norris, the U.S. Court of Appeals recently discussed what a corporate officer must prove to successfully assert the attorney-client privilege with respect to communications with corporate outside counsel. The defendant, the former CEO of a company charged with price fixing, was charged with, inter alia, conspiracy to persuade others to give false testimony to a grand jury. In a nonprecedential decision affirming his conviction on that charge, the Third Circuit upheld the trial court’s permission for the company’s outside counsel to testify against him. The defendant had sought to bar that testimony on the basis of attorney-client privilege, arguing that he believed that outside counsel was also representing him.

Affirming the trial court’s ruling, the Third Circuit in Norris found no error in allowing outside counsel to testify against the defendant, noting that “a party who asserts a privilege [here, the defendant] has the burden of proving its existence and applicability.” The opinion illustrates that a corporate officer’s belief on who is representing him will not, by itself, suffice to establish the protection of attorney-client privilege. Rather, a corporate officer must establish the factors described in In re Bevill, Bresler & Schulman to obtain the benefit of privilege in communications with outside corporate counsel.

Keywords: litigation, commercial, business, Third Circuit, attorney-client privilege

— Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, New Jersey

May 31, 2011

Eighth Circuit Refuses to Combine Suits to Meet CAFA Threshold

In Marple v. T-Mobile Central, LLC, Case No. 11-1490 (8th Cir. May 19, 2011), the Eighth Circuit declined to aggregate claims of class members who filed similar class-action lawsuits to meet the $5 million federal jurisdiction threshold of the Class Action Fairness Act of 2005 (CAFA), and it affirmed the district court’s order remanding the case to state court.

T-Mobile argued that the plaintiffs—like the plaintiffs in Freeman v. Blue Ridge Paper Products, Inc., 551 F.3d 405 (6th Cir. 2008)—had no legitimate justification for filing 10 class actions other than to avoid the CAFA threshold. While the plaintiffs’ lawsuits resembled those involved in Freeman to the extent they “both involve a cause of action broken into individual class actions covering distinct time periods,” the Eighth Circuit found the plaintiffs’ reason for filing separate actions to be “fundamentally different” because the Freeman plaintiffs initially filed one suit and divided it only after they became aware of the possibility of removal under CAFA, whereas the plaintiffs’ 10 separate suits “exactly mirror the underlying ten lawsuits brought by T-Mobile and are driven by T-Mobile’s litigation decisions.” Moreover, the court found no evidence that the plaintiffs filed 10 separate actions to avoid CAFA. Accordingly, the Eighth Circuit affirmed the district court’s order remanding the case to state court.

Keywords: litigation, commercial, business, Eighth Circuit, Class Actions Fairness Act

— Kristin E. Weinberg, Clark Law Firm, LLC, St. Louis, Missouri.

May 25, 2011

Supreme Court Limits Class-Actions Against Corporations

In AT&T Mobility, LLC v. Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) preempted a California judicial rule providing that arbitration provisions in consumer contracts of adhesion that prohibit class-action arbitration can be found to be unenforceable under the State’s unconscionability doctrine.

The Court’s decision has profound implications for consumers and businesses. Beyond the consumer arena, the ruling applies to any contract that has an arbitration provision, such as employment contracts. As a result, it will be substantially more difficult for individuals to aggregate their claims against corporations. Although the Court did not outright ban class arbitration, presumably allowing class arbitration to proceed in cases where the arbitration provision at issue does not contain a class-action waiver, it is expected that many businesses will revise their consumer and employment contracts to include class-action waivers. Absent revision of the FAA by Congress, the Court’s decision is expected to significantly reduce not only class-action litigation against corporations, but also individual claims for small amounts of damages. Without the ability to form a class, a single consumer or employee will have little incentive to incur attorney fees to recover minimal damages.

Key words: litigation, commercial, business, class action, arbitration

— Sally K. Sears Coder, partner, Jenner & Block, LLP, Chicago, Illinois, and Thomas Kim, associate, Jenner & Block, LLP, Washington, D.C.

May 20, 2011

Settlement Confidentiality Outweighs Right of Access

In LEAP Systems, Inc. v. Moneytrax, Inc., No. 10-2965, No. 10-3107, 31 I.E.R. Cas. (BNA) 1665 (3d Cir. 2011), the Third Circuit affirmed the district court’s ruling that the transcript of a settlement agreement reached in a court-supervised settlement conference and read into the record was a judicial record and that the plaintiff’s interest in keeping the terms of the settlement confidential defeated the public’s presumptive right of access to the judicial record.

None of the factors that usually establish a strong public interest—public health or safety, a matter of legitimate public concern, or a public official or entity’s receiving the benefit of secrecy—was at issue here. Thus, the court of appeals concluded that the district court did not abuse its discretion in finding that LEAP Systems’ interest in confidentiality rebutted the public’s presumptive right of access to judicial documents.

Keywords: litigation, commercial, business, right of public access

— Chad Shandler, director, and Jason J. Rawnsley, associate, Richards, Layton & Finger, P.A., in Wilmington, Delaware.

May 5, 2011

Supreme Court Declines to Preempt Tort Suit in Williamson

Under the 1989 version of Federal Motor Vehicle Safety Standard 208 promulgated under the National Traffic and Motor Vehicle Safety Act of 1966, auto manufacturers must equip seats adjacent to a vehicle’s door or frame with a lap-and-shoulder seatbelt but may choose between lap-only belts and lap-and-shoulder belts for rear-inner seats (i.e., middle seats or aisle-adjacent seats in a minivan). In Williamson v. Mazda Motor of America, Inc., 562 U.S. ___, 131 S. Ct. 1131 (Feb. 23, 2011), the U.S. Supreme Court held that the choice provided by Standard 208 does not preempt state tort suits based on a manufacturer’s decision to install lap-only belts. In doing so, the Court made a distinction from its earlier ruling in Geier v. American Honda Motor Co., 529 U.S. 861 (2000), which held that an older provision of Standard 208 that gave manufacturers a choice whether or not to install airbags preempted state-law suits seeking to impose tort liability for opting against airbag installation.

Keywords: litigation, commercial, business, Supreme Court, tort suits, Federal Motor Vehicle Safety Standards, National Traffic and Motor Vehicle Safety Act

— Sally K. Sears Coder, partner, Jenner & Block, LLP, Chicago, Illinois, and Michael W. Ross, associate, Jenner & Block, LLP, New York, New York.

May 5, 2011

Jury Instruction Requires Legal, Evidentiary Support

In Safety National Casualty Corp. v. Austin Resolutions, Inc., No. 10-1851 (8th Cir. Apr. 12, 2011), the Eighth Circuit reviewed a district court’s denial of a proposed jury instruction on a breach-of-contract claim and affirmed the district court after finding the proposed jury instruction lacked both legal and evidentiary support. The case is instructive concerning the treatment of rejected jury instructions on appeal as well as the law of contracts.

Keywords: litigation, commercial, business, Eighth Circuit, jury instruction

— Kristin E. Weinberg, Clark Law Firm, LLC, St. Louis, Missouri.

May 2, 2011

Chancellor Chandler to Leave Delaware Court of Chancery

After 22 years of service, Chancellor William B. Chandler of the Delaware Court of Chancery will be stepping down from the bench on June 17, 2011. Widely respected for his fair and thoughtful opinions, Chancellor Chandler presided over such prominent cases as In re Walt Disney Co. Derivative Litigation, Hewlett v. Hewlett-Packard Co., eBay Domestic Holdings, Inc. v. Newmark, and the recent poison-pill battle in Air Products & Chemicals, Inc. v. Airgas, Inc. He was reappointed to a second 12-year term as head of the court in 2009.

Chandler joined the court as vice chancellor in 1989 and was appointed chancellor in 1997. From 1985 to 1989 he served as a judge on the bench of the Superior Court of Delaware. He is expected to enter private practice, where he will remain involved in matters of corporate governance.

Before joining the judiciary, Chandler was an associate at Morris, Nichols, Arsht & Tunnell in Wilmington, Delaware; legal counsel to former Governor Pete DuPont; and a law professor at the University of Alabama.

Keywords: litigation, commercial, business, Delaware Court of Chancery

— C. Malcolm Cochran and Jason J. Rawnsley, Richards, Layton & Finger, P.A., Wilmington, Delaware.

April 29, 2011

Ninth Circuit Reverses Injunction in Keyword Case

In Network Automation, Inc. v. Advanced Systems Concepts, Inc., the Ninth Circuit clarified the standards for determining whether the use of another’s trademark as a search engine keyword is a violation of the Lanham Act.

The Ninth Circuit reversed the district court’s injunction, finding the evidence of initial interest confusion was insufficient to support it. The Ninth Circuit held that the “troika” of Sleekcraft factors traditionally used for initial interest confusion—the similarity of the marks, the relatedness of goods and services; and the simultaneous use of the Web as a marking channel—were a “particularly poor fit for the question presented here.”

Keywords: litigation, commercial, business, Ninth Circuit, Lanham Act, keywords

— Michael S. LeBoff is an attorney at Hodel Briggs Winter, LLP, in Irvine, California.

April 28, 2011

The Discover Bank Rule is Preempted by the FAA

On April 27, 2011, the Supreme Court handed down a landmark decision addressing the arbitrability of consumer class actions. In AT&T Mobility, LLC v. Concepcion, No. 09-893 (U.S.), a 5–4 majority held that an unconscionability defense based on the presence of language waiving the right to participate in a class arbitration is preempted by the Federal Arbitration Act (FAA).

The plaintiff-respondents, Vincent and Liza Concepcion, had sued in the Southern District of California on behalf of a putative class of customers, challenging as fraudulent an advertisement by AT&T Mobility that a certain cell phone was free when in fact the payment of sales tax was required. The district court consolidated the case with a similar putative class action. AT&T moved to compel arbitration on an individual basis, relying on class waiver language in the parties’ agreement requiring that any claim be brought in their “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” Both the district court and Ninth Circuit Court of Appeals found that the arbitration agreement containing the class waiver was unconscionable under two California state statutes, despite the presence of numerous provisions that could fully vindicate the Concepcions’ rights, and rejected AT&T’s position that applying the state statutes to an arbitration agreement was preempted by the FAA.

The Supreme Court had already held last spring in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. ___, 130 S. Ct. 1758 (2010), that a party may not be compelled to submit to a class arbitration unless there is a contractual basis for concluding that the party agreed to do so. Thus, where the arbitration clause is silent as to class arbitration, the parties’ dispute may not be arbitrated on a class basis. Until now, however, the Court had not definitively decided how that principle would apply to a situation in which the agreement expressly prohibited participation in class arbitration and in which the plaintiffs challenged the validity of that class waiver as unconscionable under applicable state law. That issue has now been put to rest.

In this week’s opinion written by Justice Antonin Scalia and joined in by Chief Justice Roberts and Justices Kennedy, Alito, and Thomas (who also wrote a concurring opinion), the Court invalidated what has come to be known as the “Discover Bank rule.” That rule derives from the California Supreme Court decision in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), and its progeny, which held that a class waiver in a consumer arbitration agreement could be deemed unconscionable if the agreement was in an adhesion contract, disputes between the parties were likely to involve small amounts of damages, and the party with inferior bargaining power alleged a deliberate scheme to defraud. Justice Scalia’s majority opinion found that such a principle was at odds with the FAA because it effectively disfavored arbitration and created a disincentive for businesses to include arbitration agreements. The Court acknowledged a qualitative difference between bilateral arbitration and class arbitration and held that “class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA.” The majority disagreed with the premise that there was no incentive for a consumer to bring this dispute as a bilateral arbitration and held that, in any event, “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”

In a concurring opinion, Justice Thomas applied a textual interpretation of the language of Section 2 of the FAA, which provides that a “written provision in . . . a contract . . . to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Justice Thomas concluded that the last clause of that sentence only permitted state-law challenges based upon the making of the arbitration agreement, not to its alleged unconscionability, and that the Discover Bank rule did not challenge the making of the agreement. Justices Breyer, Ginsburg, Sotomayor, and Kagan dissented on the grounds that the Discover Bank rule applies equally to class waivers in arbitration agreements and in agreements prohibiting class litigation and that it merely sought to put agreements to arbitrate “on the same footing” as agreements to litigate.

Keywords: litigation, commercial, business, Supreme Court, Discover Bank rule, Federal Arbitration Act

— Marc J. Zucker, Weir & Partners, LLP, Philadelphia, Pennsylvania, chair of the ADR subcommittee

April 25, 2011

Second Circuit Determines Standard for "Timely Adjudication"

In In re: Parmalat Securities Litigation, a panel of the Second Circuit announced the standard for determining what constitutes “timely adjudication” in state court under 28 U.S.C. § 1334(c)(2), which prescribes mandatory abstention by the district court in removed state court actions “related to” bankruptcy cases. See 28 U.S.C. § 1334(c)(2) (where a party asserts state-law claims related to, but not arising in, bankruptcy, “the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.”).

The Second Circuit announced that four factors should be considered in evaluating timeliness under section 1334(c)(2): the state court’s backlog of cases compared to that of the federal court, the complexity of the issues and expertise of the forum, the status of the Title 11 bankruptcy proceeding to which the state law claims are related, and whether the state court proceeding would prolong the administration or liquidation of the estate.

Keywords: litigation, commercial, business, Second Circuit, timely adjudication

— Christopher F. Girard is an attorney at Robinson & Cole, LLP, in Hartford, Connecticut.

April 25, 2011

Federal Circuit Sets Guidelines for Propriety of a Contempt Proceeding

In Tivo Inc. v. Echostar Corp., EchoStar appealed the district court’s decision finding EchoStar in contempt of the court’s permanent injunction order related to its infringement of Tivo’s DVR-related patents. Although a Federal Circuit panel previously affirmed the district court’s decision concluding that EchoStar had in fact violated the infringement provision of the permanent injunction under KSM Fastening Systems v. H.A. Jones Co., 776 F.2d 1522, 1532 (Fed. Cir. 1985), the Federal Circuit granted Echostar’s petition for rehearing en banc.

In its en banc decision, the majority explained that the Federal Circuit has previously required district courts to make a two-part inquiry in finding a defendant in contempt of an injunction in patent infringement cases pursuant to KSM. That required the court to first determine whether a contempt hearing was an appropriate setting in which to adjudge infringement by the redesigned product. To do that, the court had to compare the accused product with the adjudged infringing product to determine if there is “more than a colorable difference” between the accused product and the adjudged infringing product such that there are “substantial open issues with respect to infringement.” Under this approach, only in cases where the court was satisfied on the threshold inquiry of the appropriateness of a contempt proceeding could the court inquire whether the redesigned product continued to infringe the claims as previously construed.

Keywords: litigation, commercial, business, Federal Circuit, propriety, contempt proceeding

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

April 8, 2011

Court Affirms Dismissal in Brazil Accident Litigation

In Tazoe v. Airbus, the Eleventh Circuit considered whether the district court abused its discretion when it dismissed the complaints of family members who were citizens or residents of Brazil, the family of the lone victim who was a U.S. citizen, and one plaintiff before she served the defendants.

The court held that the district court did not abuse its discretion with respect to the first two, but that it did with respect to the plaintiff who did not have a chance to serve the defendants. Accordingly, the court reversed the dismissal of that complaint and remanded it back to the district court.

Keywords: litigation, commercial, business, forum non conveniens, Eleventh Circuit

— Greg Michell is a partner in Balch & Bingham, LLP, Atlanta, Georgia. Righton Johnson is an associate in Balch & Bingham, LLP, Atlanta, Georgia.

April 8, 2011

Eleventh Circuit Shoots Down Collections Agency in PayPal Case

In Oppenheim v. I.C. Systems, Inc., the Eleventh Circuit considered whether the trial court erred in classifying the plaintiff’s obligation to PayPal as a debt under the terms of the Fair Debt Collection Practices Act (FDCPA) and its Florida analogue.

The court held that the plaintiff was a consumer in its transaction with PayPal; therefore, the FDCPA applied. It also held that the plaintiff utilized PayPal’s services in a transaction and, under the terms of that transaction, was under a contractual obligation to repay the money. The court also found that the laptop was personal, the funds were deposited into the plaintiff’s personal bank account, and the PayPal account in question was registered as a personal account, so the transaction did not serve a “commercial purpose.”

Keywords: litigation, commercial, business, FDCPA, Eleventh Circuit

— Greg Michell is a partner in Balch & Bingham, LLP, Atlanta, Georgia. Righton Johnson is an associate in Balch & Bingham, LLP, Atlanta, Georgia.

April 4, 2011

Federal Regulations Don't Preempt State Regulations in Drug Case

Lefaivre v. KV Pharm. Co. considered whether federal law impliedly preempts a state-law claim based entirely on violations of federal regulations.

In reversing and remanding back to the district court, the Eighth Circuit, citing Wyeth, held that “the FDA [has] traditionally regarded state law as a complementary form of drug regulation” and has “long maintained that state law offers an additional, and important, layer of consumer protection that compliments FDA regulation.” The Eighth Circuit also distinguished Buckman Co. v. Plaintiffs’ Legal Committee, 531 U.S. 241 (2001), stating in part, “Lefaivre’s state-law claims are not fraud-on-the-FDA claims, as they focus on harm that is allegedly perpetrated against consumers rather than the FDA. In Buckman, the misrepresentation at issue was not made to the plaintiff—or consumers at large—but to the FDA itself.”

Keywords: litigation, commercial, business, Eighth Circuit, FDCA

— Mark M. Haddad, Foland, Wickens, Eisfelder, Roper & Hofer, P.C., Kansas City, Missouri.

April 4, 2011

Eighth Circuit Denies Motion to Compel Arbitration

In Simmons Foods, Inc. v. H. Mahmood J. Al-Bunnia & Sons, Co. et al., Case No. 10-1223 (8th Cir. March 10, 2011), the Eighth Circuit rejected an attempt to enforce an arbitration clause in a promissory note against a third party on the asserted grounds of agency, third-party beneficiary, ratification, and equitable estoppel under Arkansas law. In so doing, the Eighth Circuit affirmed the U.S. District Court for the Western District of Arkansas’ order partially denying a motion to stay proceedings and compel arbitration between multiple parties.

Keywords: litigation, commercial, business, Eighth Circuit, arbitration

— Kristin E. Weinberg, Clark Law Firm, LLC, St. Louis, Missouri.

March 25, 2011

Price-Fixing Suit Allowed to Continue Without Direct Evidence

In In re Text Messaging Antitrust Litigation, the Seventh Circuit upheld the lower court’s denial of the defendants’ motion to dismiss a class-action antitrust complaint against them, finding that allegations amounting to circumstantial evidence of price-fixing were sufficient under the Twombly standard to survive a motion to dismiss.

This case is important because it enables plaintiffs to plead an antitrust case even if they lack direct evidence of price-fixing. Future cases will likely flesh out what level of circumstantial evidence must be met to survive the pleading stage. Though binding only on the Seventh Circuit, because the decision was authored by Judge Richard Posner, it is likely to carry weight in other jurisdictions.

Keywords: litigation, commercial, business, price-fixing, Seventh Circuit, antitrust

—Tracy A. Hannan, Wildman Harrold, Chicago, Illinois

March 24, 2011

Levi Allowed to Sue Abercrombie for Pocket Design

In Levi Strauss & Co. v. Abercrombie & Fitch Trading Co., the Ninth Circuit held that, under the Trademark Dilution Revision Act of 2006 (TDRA), a plaintiff is not required to prove that a junior mark is “identical or nearly identical” to a senior mark to prevail on a dilution by blurring claim. A plaintiff is required to show only that a junior mark “is likely to impair the distinctiveness of the famous mark.” The degree of similarity is just one consideration in a multifactor list.

The Ninth Circuit decided for the first time that the “identical or nearly identical” standard did not survive adoption of the TDRA. The TDRA defines “dilution by blurring” as the “association arising from the similarity between a mark and a trade name and a famous mark that impairs the distinctiveness of the famous mark.” Thus, the Ninth Circuit concluded that Congress did not require “identity” or “near identity” of the two marks. Instead, the word Congress chose, “similarity,” sets forth a less demanding standard.

Keywords: litigation, commercial, business, Ninth Circuit, Trademark Dilution Revision Act

— Michael S. LeBoff is an attorney at Hodel Briggs Winter, LLP, in Irvine, California.

March 24, 2011

ZIP Code Request Deemed a Violation of Credit Card Act

In Pineda v. Williams-Sonoma Stores, Inc., the California Supreme Court issued a ruling that could result in billions of dollars of liability for California retailers. Under the state’s Song-Beverly Credit Card Act of 1971, businesses are prohibited from requesting that credit-card users provide “personal identification information” during credit-card transactions and then recording that information. Any business that violates the Credit Card Act is subject to civil penalties not to exceed $250 for the first violation and $1,000 for each subsequent violation.

Williams-Sonoma and other retailers commonly ask customers for their ZIP code when making purchases. In Pineda, the California Supreme Court concluded that a ZIP code constitutes “personal identification information,” and, therefore, requesting and recording a cardholder’s ZIP code violates the Credit Card Act.

Not surprisingly, there has been a substantial proliferation of lawsuits brought under the Credit Card Act since the Supreme Court announced its decision.

Keywords: litigation, commercial, business, California, Song-Beverly Credit Card Act

— Michael S. LeBoff is an attorney at Hodel Briggs Winter, LLP, in Irvine, California.

March 24, 2011

Denials of Summary Judgment Can't Be Appealed after Trial

In Ortiz v. Jordan, 131 S. Ct. 884, 562 U.S. ___ (2011), the U.S. Supreme Court resolved a circuit split by holding that a denial of summary judgment may not be appealed after a full trial on the merits. The Court explained that although the defenses presented at summary judgment do not vanish once the trial is conducted, those defenses must be pursued through the proper procedural channels, beginning with trial motions, pursuant to Fed. R. Civ. P. 50(a) and (b).

This decision underscores that procedural issues must be carefully considered when deciding how to challenge a denial of summary judgment. If the denial turns on a purely legal issue, immediate appeal may be appropriate; if trial evidence must be considered in such an appeal, then a motion for judgment as a matter of law should be made under Rule 50(a), and renewed under Rule 50(b), to preserve the issue. Although the opinion and concurrence imply that a summary judgment denial based on purely legal grounds must be appealed immediately, the Court refrained from deciding this specific question because the denial in Ortiz was based on material facts at issue.

Keywords: litigation, commercial, business, Supreme Court, denial of summary judgment

— Sean J. Hartigan, Jenner & Block, LLP, Washington, D.C.

March 10, 2011

False Advertising Action Against Software Company is Revived

The Fifth Circuit recently reversed a district court’s ruling that four real-estate appraisers lacked standing under the Lanham Act to assert class-action claims for false advertising against a software developer, FNC, Inc. Harold H. Huggins Realty, Inc. v. FNC, Inc., 2011 U.S. App. LEXIS 3595 (5th Cir., Feb. 24, 2011).

On appeal, the Fifth Circuit reversed the district court’s ruling and remanded the case for further proceedings. It found that the plaintiffs sued as competitors of FNC, not consumers, and they alleged the two kinds of injuries the Lanham Act was intended to redress: that their commercial interests had been harmed by FNC’s false advertising and that the false advertising had led to lost profits. The circuit court also held that the plaintiffs had met four of the five factors in determining whether they had prudential standing under the Lanham Act, and the one factor they did not meet—the directness or indirectness of the asserted injury—was outweighed by the other four factors.

The Fifth Circuit concluded that “[a]lthough FNC’s false statements about AppraisalPort were only an indirect cause of the plaintiffs’ injuries, no one suffered greater harm because of these false statements than the plaintiffs.” The court went on to hold that “[t]his case presents unique facts, and we view it as falling just within the outer limits of the zone of interests protected by the Lanham Act. On balance, the five factors relevant to our inquiry indicate that the plaintiffs have prudential standing to sue under § 43(a) of the Lanham Act.”

Keywords: litigation, commercial, business, Lanham Act, false advertising, prudential standing

— Katherine B. Bandy is a senior associate at Klemchuk Kubasta, LLP, in Dallas, Texas.

March 10, 2011

Eight Circuit Reverses Breach of Contract Claim Dismissal

The Eighth Circuit recently decided Dingxi Longhai Dairy, Ltd. v. Becwood Technology Group, LLC, a case involving the U.N. Convention on Contracts for the International Sale of Goods (CISG) and standards for pleading under the Federal Rules of Civil Procedure.

The Eighth Circuit determined that Dingxi’s complaint stated a breach of contract claim: “performance of its contractual duty to deliver and the buyer’s refusal to pay.” The court found that a “fact outside the pleading became part of the Rule 12 record, apparently without objection—that Dingxi recalled shipments three and four before they reached the buyer,” and while “[t]hat fact will likely preclude recovery of the full contract price . . . if Dingxi proves that Becwood breached the contract as to shipments three and four, it is almost certain to be entitled to some monetary relief.” (emphasis in original). On these grounds, the Eighth Circuit concluded the district court erred in granting the Rule 12(b)(6) motion to dismiss and reversed the order dismissing Dingxi’s breach of contract claims relating to the recalled shipments.

Keywords: litigation, commercial, business, Eight District, breach of contract, CISG

— Kristin E. Weinberg, Clark Law Firm, LLC, St. Louis, Missouri.

March 10, 2011

Court Refuses to Void Mortgages Based on Acknowledgement

In Hardesty v. CitiFinancial, Inc., the Sixth Circuit affirmed the Bankruptcy Court’s denial of the trustee’s request to void the debtors’ mortgages with the creditor based on allegedly defective certificates of acknowledgement in the mortgage documents under Ohio law.

The court found that the phrase “before me” indicated that the debtors physically appeared before the person taking the acknowledgement. Moreover, under Ohio law, a person who signs a document in the presence of another acknowledges his signature to the latter. The court also found that additional language in the certificate established that the debtors had examined and read the mortgage and signed “the foregoing instrument.” As such, the debtors executed the mortgage for the purposes stated therein. The court also found that the certificate not only referred to the debtors by their individual names but also referred to them as “the individuals who . . . executed the foregoing instrument.” Based on this double reference, the court held that the notary public’s certification was based upon satisfactory evidence of the debtors’ identities. Therefore, the court concluded that the trustee did not carry his burden of proving the avoidability of the mortgage.

Keywords: litigation, commercial, business, mortgage, certificate of acknowledgement, Ohio, Sixth District

—Ali Razzaghi is a senior associate at Frost Brown Todd, LLC, in Cincinnati, Ohio.

March 10, 2011

Bankruptcy Court Awards Attorney Fees to Debtors

In connection with the administration of a debtors’ bankruptcy case, the trustee in Badovick v. Greenspan (In re Greenspan) sought to set aside a pre-petition transfer of property by the debtors on grounds of fraudulent conveyance. The trustee and the debtors ultimately compromised the trustee’s claim, which the Bankruptcy Court approved, and the debtors eventually received their discharge.

Following the discharge, one of the debtors’ unsecured creditors, an attorney, filed a civil lawsuit against the debtors and the recipients of the debtors’ property, asserting claims related to the pre-petition fraudulent conveyance of the property. As a result, the debtors filed a motion to reopen their bankruptcy case and sought civil contempt charges against the attorney for violating the injunction against the commencement of an action to collect a debt discharged in bankruptcy, pursuant to 11 U.S.C. § 524(a)(2).

The bankruptcy appellate panel held that the cases cited by the attorney in support of his argument were inapposite because they concerned the imposition of an award of attorney fees as a sanction against an attorney who has violated his obligations under Federal Rule of Bankruptcy Procedure 9011. The court noted that the Bankruptcy Court’s imposition of sanctions in this case was based on the attorney’s violation of the discharge injunction as a credit of the debtors, not as a result of his actions as an attorney under Rule 9011. To that end, the court explained that a Bankruptcy Court has broad discretion in selecting an appropriate sanction for the violation of a discharge injunction, and that reasonable attorney fees are an appropriate sanction. Because the attorney failed to demonstrate that the fees were excessive, the court found no abuse of discretion in the Bankruptcy Court’s award of the debtors’ actual attorney fees and expenses incurred as a sanction against the attorney for his violation of the discharge injunction. Accordingly, the Bankruptcy Court’s order was affirmed.

Keywords: litigation, commercial, business, bankruptcy, attorney fees, Sixth District

—Ali Razzaghi is a senior associate at Frost Brown Todd, LLC, in Cincinnati, Ohio.

February 25, 2011

Federal Circuit: "Use" Occurs When an Invention is "Put Into Service"

Centillion Data Systems, LLC, filed an action against Qwest Communications International, Inc., alleging infringement of its patent, which discloses a system for collecting, processing, and delivering information from a service provider, such as a telephone company, to a customer.

The Federal Circuit found that Qwest’s operations constituted “use” under § 271(a) as a matter of law because it was the user who initiated demand for the service, which caused Qwest’s back-end system to generate the requisite reports as a result. The Federal Circuit explained that this was “use” because “but for the customer’s actions, the entire system would never have been put into service.”

Historically, patents whose claims could not possibly be performed by any one party were largely considered to merely be poorly drafted patents and essentially unassertable. But, with the recent line of authorities from the Federal Circuit that have endorsed the joint-infringement theory of direct infringement liability and now with Centillion and its holding regarding “use” under § 271(a), patentees will once again likely be in the attic searching for old patents to dust off to assert under these en vogue infringement theories.

Keywords: litigation, commercial, business, Federal Circuit, patents, infringement, use

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

February 17, 2011

Second Circuit Revives Blackstone IPO Suit

In Litwin v. Blackstone Group, L.P., a panel of the Second Circuit reversed the dismissal of a putative securities class action for failure to state a claim under the “plausibility” standard announced in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007), perhaps signaling that it had found the edge of Twombly’s shift toward tougher pleading standards. In a 31-page opinion announced on February 10, 2011, the court found that the plaintiffs had adequately alleged misstatements and omissions by the defendants in an IPO registration statement and prospectus. Noting that this was an ordinary “notice pleading” case under Rule 8(a), the court reversed the district court’s dismissal and remanded the case for further proceedings.

Keywords: litigation, commercial, business, Second Circuit, IPO, Blackstone, Twombly

— Christopher F. Girard is an attorney at Robinson & Cole, LLP, in Hartford, Connecticut.

February 11, 2011

Eighth Circuit Considers Case on Subsidiary Liability

The Weitz Co. v. MH Washington considered whether a parent corporation could be liable for the acts of a subsidiary under Missouri law. The case arose from the construction of an 18-unit town home development in Kansas City, Missouri. MacKenzie House, LLC, a Colorado real-estate company, was the developer and managing member of MH Washington, LLC. The Weitz Co., LLC, was the general contractor until it was terminated in September 2006.

Ultimately, the Eighth Circuit refused to make a decision on whether to pierce the corporate veil because there was little evidence presented as to when MH Washington was created, the extent of its initial capitalization, or whether it was the title owner of the project property. Nevertheless, the court did affirm the district court’s decision under a theory of principal-agent. The court agreed that MH Washington was only a business conduit for MacKenzie House and that control of MH Washington was “actual, participatory and total,” meeting the requirements of Sedalia Mercantile Bank and Trust Co. v. Loges Farms, Inc., 740 S.W. 2d 188 (Mo. App. 1987).

Keywords: litigation, commercial, business, Eighth Circuit, liability, subsidiary

— Mark M. Haddad, Foland, Wickens, Eisfelder, Roper & Hofer, P.C., Kansas City, Missouri.

February 11, 2011

Federal Circuit Submits "Opening Brief" in i4i Case via Tokai Case

In Tokai Corp. v. Easton Enterprises, Inc., ___ F.3d ___, 2011 WL 308370 (Fed. Cir. Jan. 31, 2011), the Federal Circuit sent its first (and probably not its last) signal to the U.S. Supreme Court as to how at least the Federal Circuit believes the Supreme Court should rule in Microsoft v. i4i Ltd. Partnership. The issue before the Supreme Court in Microsoft is whether or not the statutory presumption that a patent is valid can only be overcome upon a showing of clear and convincing evidence or whether instances exist whereby a lower preponderance of the evidence standard can suffice, such as when the bases of patent invalidity are those that were not considered by the U.S. Patent and Trademark Office (USPTO) during the patent examination process.

While the Federal Circuit might agree with Microsoft that there should be two different burdens for patent invalidity with respect to prior art considered by the USPTO and prior art not considered by the USPTO, the Federal Circuit clearly disagrees with Microsoft’s argument that the lower burden for art not considered by the USPTO should be only by a preponderance of the evidence. And, it appears that the Federal Circuit has decided to take proactive steps through its Tokai decision in an attempt to persuade the Supreme Court from overruling almost 30 years of Federal Circuit precedent. It will be interesting to see whether this effort and similar efforts likely to come in other decisions due out from the Federal Circuit will successfully persuade the Supreme Court to preserve the clear and convincing evidentiary standard for patent invalidity. We will have our answer by this summer.

Keywords: litigation, commercial, business, Federal Circuit, U.S. Supreme Court, USPTO

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

January 31, 2011

Ninth Circuit: Grand Jury Subpoenas Eclipse Civil Protective Orders

In In re Grand Jury Subpoenas, the Ninth Circuit reversed an order quashing a grand jury subpoena requiring law firms to turn over non-privileged documents obtained through discovery in a civil antitrust lawsuit.

As part of a criminal investigation, the United States subpoenaed documents that law firms obtained through discovery in a civil lawsuit. The documents were previously out of the country, and therefore outside the subpoena power of the United States. Nevertheless, through discovery in the civil lawsuit, the documents came into possession of four U.S. law firms.

The district court granted the law firms’ motion to quash, noting that the case presented a novel issue with potentially far-reaching implications about the power of the grand jury and the relationship between grand jury proceedings and civil discovery of unindicted foreign defendants.

Keywords: litigation, commercial, business, grand jury subpoena, civil protective order, Ninth Circuit

—Michael S. LeBoff is an attorney at Hodel Briggs Winter, LLP in Irvine, California.

January 31, 2011

Stolen Info Without Injury Sufficient to Confer Standing under Article III

In Krottner v. Starbucks Corp., the Ninth Circuit concluded that the plaintiffs whose personal information had been stolen but not misused had suffered an injury in fact sufficient to confer standing under Article III of the Constitution.

Following the lead of the Seventh Circuit in Piscotta v. Old National Bancorp, 499 F.3d 629 (7th Cir. 2007), the Ninth Circuit concluded that the plaintiffs had alleged a “credible threat of real and immediate harm stemming from the theft of a laptop containing their unencrypted personal data.”

Keywords: litigation, commercial, business, Article III, Ninth Circuit

—Michael S. LeBoff is an attorney at Hodel Briggs Winter, LLP in Irvine, California.

January 31, 2011

Delaware Supreme Court Clarifies Application of McWane

In Ingres Corp. v. CA, Inc., the Delaware Supreme Court reaffirmed the holding of an important precedent addressing stays in favor of first-filed actions but clarified the limits of that holding when the contract in dispute contains a forum selection clause.

The Delaware Supreme Court reaffirmed the holding of McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281 (Del. 1970). There, the court had held that judges should freely exercise their discretion to grant a stay when an action elsewhere between the parties involving the same issues has been first filed in a court capable of doing prompt and complete justice.

Drawing support from the analogous federal ruling in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), the court held that “where contracting parties have expressly agreed upon a legally enforceable forum selection clause, a court should honor the parties’ contract and enforce the clause, even if, absent any forum selection clause, the McWane principle might otherwise require a different result.” Without a showing that enforcement will be unreasonable or that the clause is invalid, the contract defeats the common-law first-filed rule.

Keywords: litigation, commercial, business, McWane, Delaware Supreme Court, first-filed actions

— Chad Shandler is a director of Richards, Layton & Finger, P.A., in Wilmington, Delaware. Jason J. Rawnsley is an associate in Richards, Layton & Finger’s general litigation department.

January 25, 2011

Expert Testimony Need Not Be Based on "Complicated" Calculations

The Eighth Circuit recently decided a case, WWP, Inc. v. Wounded Warriors Family Support, Inc., which involved interesting evidentiary issues. On appeal from, among other things, the denial of motions in limine relating to expert witness testimony and evidence of a pretrial preliminary injunction, the Eighth Circuit reiterated that Federal Rule of Evidence 702 contains no implicit requirement for an expert witness to use complicated mathematical equations and held that although the district court should have excluded express evidence of the preliminary injunction at trial, the appellant’s claim of prejudice was too speculative to warrant reversal.

The Eight Circuit found that references to the preliminary injunction during the trial were isolated and that “[c]ritically, the district court issued a cautionary instruction immediately prior to the submission of the case to the jury,” and also included a statement in the final jury instructions. Because a “jury is presumed to follow its instructions,” and because the Eighth Circuit did “not detect ‘“an overwhelming probability” that [the jury] was unable’” to follow the district court’s cautionary instruction,” the Eight Circuit affirmed the district court. (quoting United States v. Uphoff, 232 F.3d 624, 626 (8th Cir. 2000)).

— Kristin E. Weinberg is an associate attorney with Clark Law Firm, LLC, in St. Louis, Missouri.

January 20, 2011

Top Massacusetts Court Deals Blow to Banks' Mortgage Foreclosures

The Massachusetts Supreme Judicial Court’s decision in U.S. Bank National Association v. Ibanez, No. SJC 10694 (Mass. Jan. 7, 2011), highlights the importance of a mortgage lender’s ability to prove its status as a valid assignee of mortgage rights and title on the day of foreclosure, even in these days of securitization of home loans by the financial industry, and the case may have implications for the troubled housing industry, at least in title theory states like Massachusetts that allow nonjudicial foreclosure.

The Supreme Judicial Court affirmed the decision of the Land Court that, because the securitization documents failed to demonstrate that the trustee held the mortgage, the foreclosure sale was void and U.S. Bank had failed to acquire fee simple title to the properties. The court ruled that its decision applied retrospectively to previously concluded foreclosures by sale because prospective application is limited to cases in which a significant change in common law is announced. In this case, all relevant legal principles were well-settled and “[a]ll that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-back securities.” The court did not address the impact of its decision on bona fide third-party purchasers of foreclosed property in reliance on the foreclosure title of a bank that may not have been assigned title to the foreclosed property prior to foreclosure proceedings.

—Paula M. Bagger, a partner at Cooke Clancy & Gruenthal, LLP, Boston, Massachusetts

January 14, 2011

Court Enjoins Lawsuits Against Sears Following Denial of Class Certification

The Seventh Circuit issued an injunction under the All Writs Act enjoining similar lawsuits against Sears following the denial of class certification and judgment for Sears in the original action brought in the Northern District of Illinois. the Seventh Circuit reversed the lower court and entered an injunction enjoining copycat lawsuits in both federal and state courts. The court found that the defenses of res judicata or collateral estoppel did not adequately protect Sears. It will be interesting to see whether this decision leads more successful defendants to move for relief under the All Writs Act in lieu of the more traditional defenses of res judicata and collateral estoppel to prevent duplicative class-action lawsuits.

—Tracy A. Hannan, Wildman Harrold, Chicago, Illinois

January 14, 2011

First Circuit Holds That Anti-SLAPP Legislation Will Be Enforced in Federal Court

In Godin v. Schencks, No. 09-2324 (1st Cir. 2010), the First Circuit joined the Fifth and Ninth Circuits in holding that anti-SLAPP legislation will be enforced in federal court. As a preliminary matter, the court also confirmed that it had interlocutory appellate jurisdiction to hear an appeal from an order deciding that relief under the anti-SLAPP statute was unavailable to the individual defendants. It expressly deferred ruling on the question whether an order addressed to the merits of a ruling under an anti-SLAPP statute would be immediately appealable.

—Paula M. Bagger, a partner at Cooke Clancy & Gruenthal, LLP, Boston, Massachusetts

January 14, 2011

Tenth Circuit: Balancing Test Necessary in Aviation Case

In US Airways, Inc. v. O’Donnell, the Tenth Circuit considered whether federal aviation laws preempt New Mexico’s Liquor Control Act (NMLCA) for the purpose of regulating the alcoholic beverage service provided by airlines on interstate flights. Reversing the district court’s conclusion that federal aviation laws did not preempt the NMLCA, the Tenth Circuit remanded the case back for the district court to “conduct a Twenty-first Amendment balancing” test. The key inquiry is whether a state’s regulatory interests are “so closely related to the powers reserved by the Twenty-first Amendment” that the state law may prevail even if its requirements “directly conflict with express federal policies.”

—Steven Lovett, John D. Wheeler & Associates, P.C., Alamogordo, New Mexico

December 1, 2010

Fourth Circuit Decides in WaMu’s Favor in Debt-Collection Case

In Ross v. Federal Deposit Insurance Corp., the court decided that the plaintiff’s state law claims against Washington Mutual Bank (WaMu) alleging the false reporting of credit information were preempted by the federal Fair Credit Reporting Act (FCRA). Applying the FCRA, the court affirmed the district court’s holdings that the plaintiff had failed to meet her burden of proof by failing to show that WaMu acted with “malice or willful intent to injure” and that she failed to show proximate cause in her claim of unfair debt-collection practices.

— Bobby Mowell, associate at Tydings and Rosenberg, LLP, in Baltimore, Maryland

November 5, 2010

Supreme Court to Hear Case on University Ownership of Inventions

This term, the U.S. Supreme Court will consider a significant patent case involving a university’s ownership of inventions.

The case, Stanford University v. Roche Molecular Systems, centers on an invention that measures the effectiveness of HIV treatments. The inventor conducted the research at Stanford under a grant from the National Institutes of Health (NIH) while employed by a company later acquired by Roche Molecular Systems. After the inventor assigned his rights to the company, Stanford sued pursuant to the Bayh-Dole Act of 1980 for patent infringement. The circuit court ruled against Stanford on the grounds that Roche held an ownership interest in the invention.

The Justice Department, as well as high-profile research universities, supported the petition for certiorari.

— Bradford S. Babbitt, Robinson & Cole, LLP

September 30, 2010

Industry Standard Compliance Can Constitute Direct Patent Infringement

In Fujitsu Ltd. v. Netgear, Inc., co-plaintiff/appellant Philips Corp. asserted claims of contributory patent infringement against Netgear, Inc. Phillips claimed that its patent covers industry standards for wireless communications technologies and was infringed by Netgear’s products that implement wireless networking protocols for sending and receiving messages between a base station, such as a wireless router, and a mobile station, such as a laptop.

Philips moved for summary judgment and argued that by simply complying with the applicable standard, Netgear necessarily infringed the patent. However, the district court denied the motion, holding instead that Philips had to show evidence of infringement for each accused product and could not merely rely on Netgear’s standard compliance to satisfy the direct infringement component of the contributory infringement analysis.

In its decision, the Federal Circuit held that if the reach of a patent’s claims includes any device that practices an industry standard, then this is sufficient for a finding of infringement. The court explained that comparing the claims to the applicable standard is the same as comparing the claims to the accused product if the accused product operates in accordance with the applicable standard. The court reasoned that it would be a waste of judicial resources to separately analyze every accused product that undisputedly practices the standard if all implementations of a standard infringe the claims of a patent.

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

September 30, 2010

Construction Loan Commitment Deemed Not to Be a Condition Subsequent

In Pointe Dev., the Missouri Western District Court of Appeals considered whether language in a construction loan commitment was considered a condition subsequent that relieved the bank of its obligation to extend the construction loan.

The court affirmed the trial court’s ruling, holding the language in the loan commitment did not constitute an express or implied “condition subsequent.” Enterprise argued that the condition subsequent should have been implied from the circumstances. The Missouri Court of Appeals disagreed, holding that there was no evidence presented that an increase in the cost of construction would result in the townhomes having a value (once constructed) that was less than the amount of the construction loan. The court recognized the dilemma faced by Enterprise—a bank may not desire to fund a secured loan to construct property unless it can assure a satisfactory ratio between the amount of its loan and the value of the property once constructed. However, the court noted the loan commitment in this case did not address this concern and failed to incorporate provisions that would clearly condition Enterprise’s obligation to fund the construction loan.

— Mark M. Haddad is an associate attorney with Foland, Wickens, Eisfelder, Roper & Hofer, P. C., in Kansas City, Missouri. David W. White also contributed.

September 20, 2010

Bankruptcy Court Can Consider Changes in Income/Expenses from Before Filing

The Sixth Circuit recently held that, when calculating a Chapter 13 debtor’s projected disposable income and deciding whether to confirm the debtor’s proposed bankruptcy plan, a bankruptcy court may account for changes in the debtor’s income or expenses in the period leading up to the bankruptcy filing if the changed circumstances were known or virtually certain at the time of confirmation.

In In re Darrohn, the debtors were required to file a Chapter 13 bankruptcy plan because their income fell above the median income for a family of four in Tennessee. Section 1325 of the Bankruptcy Code specifies that a proposed plan may only be approved by the bankruptcy court if the plan commits all of a debtor’s “projected disposable income” to the repayment of unsecured claims.

The trustee in In re Darrohn appealed the bankruptcy court’s confirmation of the debtor’s plan on the grounds that the court miscalculated the debtor’s income and expenses under the “projected disposable income” formulation. The Sixth Circuit reversed the bankruptcy court’s confirmation of the debtor’s plan, relying on a Supreme Court case, Hamilton v. Lanning, 130 S. Ct. 2464, 2478 (2010), which held that “when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.”

— Ali Razzaghi, Frost Brown Todd, LLC, Cincinnati, Ohio

September 20, 2010

Sixth Circuit Holds that Wife Only Gets Half of Foreclosure Proceeds

In United States v. Barr, the government filed an action under 26 U.S.C. § 7403 to foreclose a federal income tax debt owed by a taxpayer against the home that the taxpayer and his wife owned as tenants by the entirety in Michigan. The wife argued that she was entitled to the vast majority of the foreclosure sale proceeds and that foreclosure was not appropriate based on her dominant interest in the home and other equitable factors. The district court held that foreclosure was appropriate and that the wife was entitled to only half of the proceeds of the sale, because she and her husband had identical rights to their marital home under Michigan law. The Sixth Circuit affirmed.

— Ali Razzaghi, Frost Brown Todd, LLC, Cincinnati, Ohio

September 10, 2010

Federal Circuit Remands Stauffer v. Brooks Brothers to District Court

Raymond Stauffer appealed the decision of the U.S. District Court for the Southern District of New York dismissing Stauffer’s false marking qui tam action for lack of standing. The Federal Circuit reversed the district court’s decision, concluding that Stauffer did not have standing and remanding the case back to the district court to determine whether Stauffer failed to allege in the complaint Brooks Brothers’ intent to deceive the public with sufficient specificity to meet the heightened pleading requirements for claims of fraud.

The Federal Circuit found that a qui tam plaintiff can establish standing based on the United States’ implicit partial assignment of its damages claim to “any person,” as § 292 states. The court found that Stauffer has standing because a qui tam provision operates as a statutory assignment of the United States’ rights, and the assignee of a claim has standing to assert the injury in fact suffered by the assignor. In passing § 292, which prohibits deceptive patent mismarking, the court indicated that Congress determined that such conduct is harmful and should be prohibited. The court further found that because the government would have standing to enforce its own law, Stauffer, as the government’s assignee, also has standing to enforce § 292.

— Andrew Crain, a partner at Thomas, Kayden, Horstemeyer & Risley, LLP

September 10, 2010

Second Circuit Sends Baker vs. Simpson Back to Bankruptcy Court

In Baker v. Simpson, the Second Circuit joined several other circuit courts of appeals in holding that claims of professional malpractice against attorneys for their conduct in a Title 11 bankruptcy petition fall within the bankruptcy court’s “original but not exclusive jurisdiction.” 28 U.S.C. § 1334(b).

The Second Circuit held that the bankruptcy court’s exercise of its “arising in” jurisdiction as set forth in 28 U.S.C. § 1334(b) was proper, and affirmed. Notwithstanding the apparent state law nature of the claims, the court reasoned that the determinative issue was “whether claims that appear to be based in state law are really an extension of the proceedings already before the bankruptcy court.” The court found that Baker’s malpractice claims, having arisen in a bankruptcy proceeding, were inseparable from the bankruptcy context. Accordingly, the bankruptcy court had jurisdiction.

The court next turned its attention to the abstention doctrine in considering the proper exercise of that jurisdiction. Mandatory abstention applies when a proceeding based on a state law claim is “related to” a case under Title 11 but does not “arise under” or “arise in” a case under Title 11. 28 U.S.C. § 1334(c)(2). Mandatory abstention was inapplicable. The adjudication of Baker’s malpractice claims was “an essential part of administering the estate,” and therefore implicated the bankruptcy court’s “core” jurisdiction. Included in the bankruptcy court’s powers is the power to review the conduct of attorneys appointed to aid those in need of counsel.

— Christopher F. Girard, an attorney at Robinson & Cole, LLP in Hartford, Connecticut

September 10, 2010

Former Bank of America Employees Can't Force Arbitration

In Bank of America, NA v. UMB Fin. Servs., Inc., the Eighth Circuit considered whether five former employees of Bank of America (BOA) could force BOA to arbitrate its claims against them pursuant to the Financial Services Regulatory Authority (FINRA) Code of Arbitration. Because BOA is not a FINRA-registered firm, the court refused to compel arbitration.

The Eighth Circuit held that BOA did not directly agree to subject itself to arbitration under FINRA’s terms. UMB argued that BOA should be compelled to arbitrate under the principle of estoppel and because it was a third-party beneficiary of the FINRA membership agreement due to Bank of America Investment Services’ (BOAIS) participation in that agreement. The Eighth Circuit disagreed, holding that BOA’s contractual claims against its former employees were not “inextricably intertwined” with the FINRA arbitration agreements. The Eighth Circuit further held that BOA, which was not mentioned in and did not derive any benefit from the FINRA membership agreement, was not a third-party beneficiary to the BOAIS contract such that it could be compelled to arbitrate based on the arbitration requirement imposed on all FINRA members.

— Philip Sumner is an associate attorney with Foland, Wickens, Eisfelder, Roper & Hofer, P.C., in Kansas City, Missouri. David W. White of Foland, Wickens, Eisfelder, Roper & Hofer, P.C. also contributed.

September 10, 2010

Second Circuit Looks Beyond Complaint to Determine if SLUSA Applies

In Romano v. Kazacos, the Second Circuit considered the preclusion from filing certain securities class actions in state court under the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Under SLUSA, plaintiffs are precluded from filing class actions in state court that allege fraud in connection with the purchase or sale of nationally traded securities. Congress enacted SLUSA to close a perceived loophole in the Private Securities Litigation Reform Act of 1995 (PSLRA) that permitted plaintiffs to file federal securities fraud class actions in state court by asserting state law causes of action.

On appeal to the Second Circuit, the plaintiffs contended that the district court erred by looking beyond the face of the complaints, as plaintiffs are “masters of the complaint.” The Second Circuit rejected this argument, noting the corollary to the well-pled complaint rule, the “artful pleading” rule. It states that courts can look beyond the face of an artfully pled complaint and uphold removal where a complaint clothes federal claims in “state garb.” Artful pleading applies when Congress preempts or substitutes a federal cause of action for a state cause or when it allows for removal even though no federal question appears on the face of the complaint. SLUSA is a statute of preclusion; accordingly, the Second Circuit agreed with the district court.

The Second Circuit also addressed the plaintiffs’ argument that the district court should have limited its review to the complaints in determining whether the plaintiffs’ claims concern “covered securities.” The defendants’ removal filings demonstrated that the plaintiffs purchased covered securities through their Morgan Stanley IRA accounts. The Second Circuit concluded that it was proper for the district court to consider these documents, which were not annexed to or incorporated in the complaints, because the court’s subject matter jurisdiction was in issue.

Finally, the Second Circuit considered the more difficult question of whether the complaint alleged misrepresentations and omissions in connection with the purchase or sale of covered securities. Ultimately, the court concluded that the plaintiffs’ claims involved the alleged inducement to purchase covered securities, thereby making the necessary connection. The Second Circuit explained that the plaintiffs’ claims were, in essence, that they were “fraudulently induced to invest in securities with the expectation of achieving future returns that were not realized.” The damages the plaintiffs were seeking amounted to the loss in value to the covered securities they purchased. Accordingly, the judgments were affirmed.

— Christopher F. Girard, an attorney at Robinson & Cole, LLP in Hartford, Connecticut

September 10, 2010

Eighth Circuit Addresses Control-Person Liability under the Securities Exchange Act

In Lustgraaf v. Behrens, the Eighth Circuit addressed control-person liability under the Securities Exchange Act and, in so doing, refused to join other circuits that require culpable participation by the control person in the primary violation.

As to the claims of federal control-person liability under § 20(a) of the Securities Exchange Act, the Eighth Circuit reversed the dismissal as to Sunset but affirmed as to KCL. The court found that, although Behrens’s fraud did not take place through Sunset, it was Sunset that effectively provided Behrens with access to the markets, and, thus, Sunset had the duty to monitor his activities as a registered representative.

In contrast, however, the court affirmed the dismissal of the federal control-person claim against KCL because the appellants’ allegation that KCL wholly owned Sunset and thereby indirectly controlled Behrens did not show that KCL actually exercised control over Behrens’s general operations.

The court further affirmed the dismissal of state control liability claims under Nebraska, Iowa, and Arizona law as to KCL but reversed as to Sunset. The court then held that the appellants had sufficiently alleged that Sunset was a control person with respect to Behrens, but that KCL was simply too far removed from the transaction to have directly or indirectly controlled Behrens with regard to the underlying fraud.

The court next affirmed the district court’s dismissal of the common-law claims of liability based on apparent authority as to both Sunset and KCL. As to Sunset, the court found that the complaints failed to allege facts showing that Sunset affirmatively, intentionally, or negligently caused appellants to act upon the apparent agency. Similarly, the court affirmed the dismissal of the apparent authority claim against KCL because, although Behrens was authorized by KCL to act as an insurance agent, the appellants did not allege that Behrens had the authority to engage in securities dealings on behalf of KCL or that KCL had done anything to lead appellants to believe Behrens had such authority.

Finally, the court reversed the district court’s dismissal of appellants’ claims of liability based on respondeat superior as to Sunset but affirmed the dismissal as to KCL. The court found that, while the original complaints failed to allege facts in regard to whether the fraud took place “within the authorized time and space limits” of Sunset or was committed with some intent to benefit Sunset, the proposed second amended complaints cured these deficiencies. As to KCL, however, the court found the appellants’ allegations insufficient because they failed to allege how Behrens’s fraud related to his position as general agent of an insurance company or that it took place within the authorized time and space limits of KCL with the purpose of benefiting KCL.

— Barbara Farley is an associate attorney with Clark Law Firm, LLC, in St. Louis, Missouri. Stephen R. Clark of Clark Law Firm, LLC, also contributed.

Fourth Circuit Affirms District Court's Dismissal of FCA Claims

In Owens v. First Kuwaiti Gen’l Trading & Contracting Co., No. 09-1899 (4th Cir., July 16, 2010), the Fourth Circuit considered whether allegations made by a former First Kuwaiti employee that the contractor was overbilling, prebilling, billing for unauthorized work, and otherwise violating terms of its construction contract with the U.S. State Department stated a cause of action for deceiving the government of funds under the federal False Claims Act (FCA).

The Fourth Circuit panel, in an opinion written by Circuit Judge J. Harvie Wilkinson III, unanimously affirmed the district court’s summary judgment in favor of First Kuwaiti, stating its unwillingness to allow a plaintiff with an unsuccessful contract claim to use the FCA to refashion and revive his otherwise precluded allegations of contract improprieties.

Fourth Circuit Rules Against Former E&Y Consulting Partners in Challenge to Treatment of Stock

In United States v. Bergbauer, Slip Op., No. 08-2054 (4th Cir. April 16, 2010), the Fourth Circuit held that, generally, a taxpayer who has agreed to incur tax liability in a particular way under contract may not later disavow that tax formulation with an argument that the form of taxation did not reflect the substance of the transaction. The Fourth Circuit disagreed with the taxpayers, distinguishing the sections of the Internal Revenue Code (IRC) upon which they relied as inapplicable to the case.

Second Circuit Holds that State Law Claim Is Preempted by Federal Securities Law

In Romano v. Kazacos, the Second Circuit considered the preclusion from filing certain securities class actions in state court under the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78bb(f)(1). Under SLUSA, plaintiffs are precluded from filing class actions in state court that allege fraud in connection with the purchase or sale of nationally traded securities. Congress enacted SLUSA to close a perceived loophole in the Private Securities Litigation Reform Act of 1995 (PSLRA) that permitted plaintiffs to file federal securities fraud class actions in state court by asserting state law causes of action.

Federal Circuit Holds That Intent to Deceive Is Necessary for False Marking

In Pequignot v. Solo Cup Co., the Federal Circuit has put the lid on false marking litigation. In 2010 alone, more than 200 new false marking cases have been filed in district courts across the country, but after Solo Cup, the burden for plaintiffs in those cases is much more difficult.

As most false marking cases are based on products marked with expired patent numbers, many cases were clearly brought with the intention of simply relying on a presumption of intent inferred from a defendant’s knowledge of the false marking. Now, however, all that does is create a weak presumption that defendants may not have great difficulty in overcoming.