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American Bar Association

Commercial & Business Litigation

Practice Points

August 28, 2016

Diversity Matters: Confronting Implicit Bias with Jury Diversity

One of the greatest challenges facing jury diversity is the way in which potential jurors are summoned. In most jurisdictions, potential jurors are selected from voter registration rolls, driver’s license lists, and state identification lists. Though marginalized groups are active in the civic process, choosing potential jurors based solely on these three factors hinders access because of systemic obstacles that block people of color from becoming registered to vote or obtaining identification. Communities of color are less likely to have the requisite identification to be included in jury pools. Felony convictions, which act as a significant barrier to voter registration, disproportionately impact Black and Latinx communities. Other groups, such as women and the poor, are systemically discouraged from participating in the judicial process. Impoverished citizens usually decline jury duty because of financial concerns. Caretaking and other familial responsibilities prohibit many women from responding to service. Thus, working class women are often doubly barred from participation, because they must balance both caretaking and employment, leaving little time for civic participation.


When the voices of those who have been historically marginalized and silenced are missing from juries, implicit biases are reinforced to the detriment of those outside of hegemonic expectations. Implicit biases are prejudices that a person may have based on race, gender, culture, religion, class, or other factors. These biases are shaped by one’s socially constructed perceptions of social normalcy. Even physical cues, such as body language and accents, act as heuristics to delineate who is “like us.” Attitudes like cultural norms may mean the difference between a conviction and acquittal, or a positive or negative civil judgment.


Having implicit biases does not necessarily make someone a bad person or a poor juror. While everyone has implicit biases to some extent, hegemonic perceptions are typically reified in courts and on juries. In the United States, the dominant cultural perceptions are shaped from a largely white, affluent, straight, cisgender male perspective. This narrow lens compounds upon other institutional hierarchies that marginalize communities of color, women, the LGBTQ community, and the poor. When juries are constructed from only that perspective, other voices continue to be suppressed, and the waters of justice are muddied with uncertainty regarding the legitimacy of the process.


Heterogeneous juries are important because they help ensure that the voice of the fact-finder encompasses different societal perspectives. Jury diversity is not solely about amplifying non-dominant perspectives. The very fabric of our court system is the belief in a jury of one’s peers. Jury diversity demands that we acknowledge that our peers hold different perceptions based on their own life experiences and places in society. Someone from a white, affluent neighborhood may not have the life experiences to completely understand the thought process and rationale of the actions of a person from a poor, non-white, and/or multilingual community. Diverse juries help to remediate that discrepancy and get closer to true, less biased justice.


There are several critical avenues available to increase participation for diverse citizens. First, using other measures to find potential jurors in marginalized communities would help increase participation. Instead of relying solely on traditional lists, communities should utilize supplemental lists and community-based services that have contact information for more individuals. Local tax rolls, community centers, churches, and even food pantries maintain lists of individuals who may fall outside of the traditional rolls. With time, this partnership would allow communities of color and the poor—two groups disproportionately subject to the criminal justice system—to see the courts as partners in seeking to justice, rather than as adversaries.


Second, raising compensation for jurors would increase participation while ensuring income will be available for the livelihood of poor jurors. Low compensation is a barrier for those forced to choose between service and relative financial security. Higher pay will allow people to take the time to serve, making the pool increasingly socioeconomically diverse.


Third, states must efficiently address post-felony voting rights restoration. In many states, felony convictions are not absolute bars to voting rights. The restoration process, however, is cumbersome. Many citizens are not even aware voter restoration is an option. States must be held accountable and outline the path to voting restoration to each former felon.


Increased participation will raise voices, awareness, and contributions to the judicial process. Justice should be a reflection of society as a whole, not just the voices of the privileged. Promoting jury diversity will redefine and enrich our concepts of justice with a point of view that is shaped by all societal perspectives.


Keywords: business and commercial, diversity, implicit bias, jurors, jury, litigation, trial


Nacente S. Seabury, Polsinelli, Kansas City, MO



June 21, 2016

New York Declines to Extend Common Interest Doctrine Beyond Pending or Anticipated Litigation

Ordinarily, communications between an attorney and client con­cern­ing legal advice are pro­tected by the attorney-client privilege. But if someone else besides the client is privy to the conversation, that may mean the communication isn’t confidential and the privilege doesn’t apply. There is an exception: if the non-client in the room shares a common legal interest in the matter being dis­cussed, the discussion is still privileged. Thus, under the common interest doctrine, the attorney-client privilege can cover communications between different, separately represented persons whose legal interests are aligned—that is, if they have a common legal interest.


This month, in Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2016 NY Slip Op 04439 (N.Y. Ct. App. June 9, 2016), New York’s highest court, the Court of Appeals, restricted the scope of the com­mon interest doctrine. The court held, by a 4–2 vote, that the common interest doctrine applies only if litigation is anticipated or pending. This decision overturned a December 2014 decision by the Appellate Division, First Department (an intermediate New York appellate court), which had held that the common interest doctrine could apply whether or not the communications related to pending or anticipated litigation. The ruling by the court of appeals means that New York privilege law is now definitively different from that of a number of federal circuits and a number of other states.


Ambac is a dispute arising from the merger of Countrywide Home Loans, Inc. with Bank of America. Countrywide had experienced severe difficulties in late 2007 and early 2008; the merger was announced in January 2008 and closed on July 1 of that year. Unsurprisingly, after the two companies signed the merger plan, they communicated extensively about a number of issues relating to its implementation, including regulatory filings, public disclosures, employment issues, and tax matters. The merger agreement specifically directed the two companies to share privileged information and purported to shield the information from disclosure under the “common interest” doctrine.


Ambac had insured payments on certain mortgage-backed securities Countrywide issued. Ambac later sued Countrywide and Bank of America, claiming that Countrywide had procured the insurance fraudulently and in breach of its contractual representations. In its discovery requests, Ambac demanded that Bank of America produce documents reflecting its communications with Countrywide before the merger closed, arguing that the documents would show that Bank of America was on notice of the fraud even before the closing.


The trial court refused to protect the documents from disclosure because the communi­ca­tions did not relate to litigation that was then either underway or in prospect. On appeal, though, the First Department held that the communications were protected by the attorney client privilege, even though they were between different entities, because the two companies had a common legal interest in implementing the merger. This decision put the First Department at odds with at least one other New York intermediate appellate court—the Second Department. So it was no surprise that the court of appeals decided to hear the case.


The court of appeals held that the communications were not privileged because the common interest doctrine did not apply. As a result, the communications between Bank of America and Countrywide were between different parties and cannot have been confidential.


The opinion appears to have been driven by several considerations. First, the attorney-client privilege exists to foster open communication between attorneys and clients for purposes of legal ad­vice. Companies that together are actual or potential litigants may need the assurance of confidentiality if they are to be comfortable planning legal strategy together. But in the court’s view, sharing an interest in completing a transaction does not raise such concerns, even in such a heavily regulated industry as finance. The court did not believe transactions would fail if communications between the parties were not privileged. As the court put it, the transacting parties’ “shared interest in the transaction’s completion is already an adequate incentive for exchanging information neces­sa­ry to achieve that end.”


The court also was concerned that extending the common interest doctrine out of the litigation context would lead to abuses. It would be difficult to separate out communications on common le­gal interests from those primarily on business matters. Given that privilege prevents potentially rele­vant evidence from coming to light, the court thought the risk of shielding potentially pertinent bu­siness evidence was too great—and it noted that in Ambac, the allegation was that the two companies had structured their deal in order to shield Countrywide’s wrongdoing from disclosure.


It is true that the attorney-client privilege exists when a client seeks legal advice, even if no litigation is pending or anticipated. But that does not mean the common interest doctrine must extend just as far. As the court explained, the common interest doctrine merely means that the privilege is not waived by communicating privileged information to another person who has a common legal interest. It is not itself a form of privilege.


Ambac places New York into the group of jurisdictions that take a narrow view of the common interest doctrine. Some other states and several federal circuits take a broader view (as did the dissent in Ambac, which cited a number of those authorities). Whether certain kinds of communications involving third parties are protected as privileged by the common interest doctrine may thus turn on the jurisdiction where a lawsuit is filed.


Key words: Ambac, attorney-client communication, attorney-client privilege, business and commercial, common interest, litigation


Stuart M. Riback, Wilk Auslander, LLP, New York, NY



June 20, 2016

Voluntary Payment Doctrine: A Useful Affirmative Defense or Instrument of Evil?

In a society increasingly focused on consumer protection, the Voluntary Payment Doctrine (VPD) has gotten a bad rap. An article in the Valparaiso University Law Review even called for its death, drawing comparisons to Bernie Madoff and citing its potential to “become a mighty instrument of evil.” John E. Campbell and Oliver Beatty, Huch v. Charter Communications, Inc.: Consumer Prey, Corporate Predators, and a Call for the Death of the Voluntary Payment Doctrine Defense, 46 Val. U. L. Rev. 501, 501, 504 (2012). Such an extreme reaction, however, ignores that the VPD is an important defense that can actually benefit the public.


The VPD is an affirmative defense available in specific situations in which a payment is voluntarily made under a mistake of law. It does not apply under contracts that impose a legally enforceable duty to pay. Essentially, absent “fraud, duress, compulsion or mistake of fact, money, voluntarily paid by one person to another on a claim of right to such payment, cannot be recovered merely because the person who made the payment mistook the law as to his liability to pay.” Salling v. Budget Rent-A-Car Systems, Inc., 672 F.3d 442, 444 (6th Cir. 2012) (internal quotation marks omitted). If a defendant can show that a payment was voluntary, the plaintiff must demonstrate that an exception—fraud, duress, or mistake of fact—precludes application of the VPD.


Simply, the VPD requires an engaged consumer: “The ‘voluntary’ in the voluntary payment doctrine does not entail the mere payment of the bill or fee. For example, some customers might not pay their cable television bills if their cable provider did not threaten termination of service due to non-payment. In this sense, payment of any bill or fee is not ‘voluntary.’ Rather, the voluntariness in the doctrine goes to the willingness of a person to pay a bill without protest as to its correctness or legality.” Putnam v. Time Warner Cable of Southeastern Wisconsin, Ltd. Partnership, 255 Wis. 2d 447, 459-60, 649 N.W.2d 626 (2002) (emphasis added).


Analogous to the criminal system, a mistake of law is not an excuse for action (or inaction). When circumstances provide consumers and/or commercial entities (potential plaintiffs) with a mechanism to avoid payment but such mechanism is disregarded, the VPD is appropriately used as a defense to a demand for repayment. For example, if a reasonable alternative to payment is available, the plaintiff cannot claim duress.


The distinction between situations where a reasonable alternative is or is not available can feel like a fine line, but it is an important one. The Nevada Supreme Court provided a useful discussion of this distinction in Nevada Ass’n Servs., Inc. v. Eighth Jud. Dist. Ct., 130 Nev. Adv. Op. 94, 338 P.3d 1250 (2014), reh’g denied (Mar. 23, 2015). There, the court noted that when a municipal power company threatened to terminate service to a business for failure to pay disputed charges, the power company was the sole electricity supplier available, and the business had no formal or statutory mechanisms to protest the charges, then no reasonable alternative was available and the VPD did not apply. Id. at 1255 (citing Ross v. City of Geneva, 43 Ill. App. 3d 976, 357 N.E.2d 829 (Ill. App.1976), aff'd, 71 Ill. 2d 27, 373 N.E.2d 1342 (1978)).


By comparison, the court observed that when the federal government threatened to remove an insurance company from a list of approved sureties for government contracts for failure to make an alleged overpayment, but federal law authorized the company to request a delay of payment, then a reasonable alternative was available to the voluntary payment and the VPD barred the claim. Id. (citing Employers Ins. of Wausau v. United States, 764 F.2d 1572 (Fed. Cir.1985)).


Vitriol toward the VPD often arises from decisions appearing to run counter to public policy, like consumer protection. See, e.g., Spivey v. Adaptive Marketing LLC, 622 F.3d 816, 823 (7th Cir. 2010) (VPD precludes consumer from recovering $500 in annual credit card payments to a telemarketing company over a span of 5 years, when the consumer did not realize he had agreed to the payments but “made no effort to discover the nature of the charge to his credit card and paid it in silence”); Dillon v. U-A Columbia Cablevision of Westchester, Inc., 100 N.Y.2d 525, 526, 790 N.E.2d 1155, 760 N.Y.S.2d 726 (2003) (VPD bars customer recovery of late fees paid to a cable television company, even though such fees were allegedly unlawful penalties, mischaracterized as administrative fees.)


Using such cases to call for an end of the VPD entirely, however, ignores the benefits the VPD imparts. By requiring an engaged consumer, the VPD bars litigation in situations that should have been addressed outside of the legal system. This saves significant taxpayer dollars and judicial resources. Such a doctrine should be applied with care in view of public policy objectives, but not eliminated.


Keywords: business and commercial, litigation, consumer protection, public policy, voluntary payment doctrine, VPD, reasonable alternative


James D. Abrams and Erica L. Cook, Taft, Stettinius & Hollister, LLP, Columbus, OH



May 26, 2016

Homestead Exemptions and Subdivisions

One question faced by creditors of a consumer debtor in bankruptcy is how to reach what is often their most valuable asset, their home. The Bankruptcy Code and state laws provide exemptions for property—or for up to a certain value in that property—often making it impossible for creditors, especially unsecured creditors, to reach that real estate. However, in Nealon v. Matthews (In re Nealon), an unsecured creditor attempted a creative way to reach parts of the debtor’s real estate, where the debtor had previously begun—but not completed—a subdivision of his property. BAP NO. MW 15–035 2016 WL 312409, at *1 (1st Cir. B.A.P. Jan. 20, 2016).


In the case before the Massachusetts Bankruptcy Court, the court had to determine whether the debtor’s attempted subdivision of the parcel on which his home was located was sufficient to re-characterize his homestead exemption as being only over the subdivided parcel which contained his family home. The debtor had attempted to subdivide the land into four parcels—one containing his then-home, one on which he would build his future home, and two which would be preserved as wetlands over which he would donate a Conservation Restriction. This plan was accepted by his local Planning Board, subject to, inter alia, the condition that he obtain a partial release of his mortgage as against the two parcels destined for conservation—failure to do this would invalidate the approval. The debtor executed a Conditional Approval Agreement reflecting those conditions, and recorded the Agreement and a Subdivision Plan reflecting the proposed new lots. However, the debtor learned that it would be too expensive to obtain the partial release of the mortgage, and abandoned the plan. Years later, he declared Chapter 7 bankruptcy, and declared his entire parcel as subject to his homestead exemption.


One of his unsecured creditors, however, made the argument that the recorded Conditional Approval Agreement and Subdivision Plan evidenced intent to cease using the additional parcels as part of his home, thus making three of the parcels available for unsecured creditors seeking to levy on them. In response, the debtor presented ample evidence of actual use of the entire parcel as part of his home, including affidavits and pictures of himself and his family engaged in sporting activities such as cross-country skiing and hiking, storing boats for winter, and otherwise using the entire, undivided parcel. The Massachusetts Bankruptcy Court, applying Mass. Gen. Laws ch. 188, § 3(a), found that the debtor had intended to subdivide the parcels, and did not believe testimony suggesting that this intent had been abandoned, rather than merely temporarily delayed. Therefore, it found that the extent of the debtor’s homestead exemption was only the subdivided parcel containing the debtor’s home, as a result of the debtor’s continued, if frustrated, intent to subdivide.


The First Circuit Bankruptcy Appellate Panel reversed, finding that actual use of an attached parcel as part of one’s homestead is sufficient for an otherwise valid homestead exemption to apply to that parcel. The panel considered what elements Chapter 188 § 3 lays out for a valid homestead exemption, and determined that there are two: actual or intended occupation of the property in question as a home, and a recorded declaration, either in the deed or as a separate declaration. While the panel did not hold that the bankruptcy court’s finding that the debtor was only temporarily delayed in his intent to subdivide the parcel was clearly erroneous, the panel nevertheless reversed because it found that the court erred as a matter of law, by focusing on the debtor’s intentions for the future to the exclusion of his actual use in the present. The panel held that, even if the unsecured creditor were correct that she rebutted the presumption in favor of a complete homestead exemption, the debtor still introduced sufficient evidence of his actual use of the parcel.


This case underscores the importance for both debtors’ and creditors’ counsel to pay attention to use as well as intention when dealing with individuals who may own multiple subdivided parcels, may have purchased neighboring parcels, or whose homesteads may otherwise include more than one parcel.


Keywords: commercial and business, litigation, bankruptcy, consumer bankruptcy, homestead, exemption


Santiago Posas, Partridge Snow & Hahn LLP, Providence, RI



May 26, 2016

Precision in Drafting Settlement Agreements is Key to Avoiding Later Challenges

Commercial litigators rarely get involved in the drafting of contracts, preferring instead to leave such tasks to their corporate/transactional colleagues. The distinct roles of litigator and transactional attorney blur, however, when a settlement agreement is drafted. Wading into the unfamiliar sea of contract drafting creates new risks and challenges, and requires corresponding vigilance, especially with respect to hidden (or not so hidden) tax issues. While the tax implications of a settlement are a critical factor for any attorney to consider, proper drafting of a settlement agreement often is the key to avoiding any misunderstanding later on. The Third Circuit made this point loud and clear in its recent non-precedential opinion in White and Williams LLP et al. v. Michelle T. Seidner, et al., C.A. No. 14-4606 (3d Cir. May 16, 2016).


In that case, a law firm partner died, owing the IRS over $800,000 in taxes. The law firm and its related pension funds, some of which were administered by Vanguard and Wilmington Trust, owed more than a million dollars to the law partner’s estate, subject to an IRS levy. The law firm then commenced an interpleader action with respect to those funds, naming the U.S. government, the decedent’s wife and ex-wife as defendants. The dispute was settled pursuant to an agreement which provided that the U.S. government would accept $775,000 “in full and final payment of all personal tax liabilities owed by Decedent to the United States,” and that “the excess sums” would be divided equally between the wife and ex-wife. Another paragraph of the settlement agreement contained caveats noting that the law firm would not be responsible for any tax liability relating to the funds, and the ex-wife did not acknowledge any such tax liability. At the time of distribution, Vanguard and Wilmington Trust set aside a significant percentage of the funds for federal tax withholding, thereby reducing the $229,000 remaining funds to only $44,000 available to be divided between the wife and ex-wife.


While the district court still retained jurisdiction over the underlying dispute, the ex-wife filed a motion contesting the distribution as contrary to the terms of the settlement agreement, or alternatively seeking to set aside the agreement as based on a mistake of fact. The district court found that the agreement was enforceable as written and had been substantially performed.


On appeal, the Third Circuit affirmed. The Third Circuit concluded that this was an issue of contract construction, as to which it could exercise plenary review, rather than contract interpretation, which would require deference to the lower court.


The court held that because the settlement agreement only fixed the payment of the decedent’s taxes, and not the tax liability of the fund recipients, the ex-wife could not challenge Vanguard and Wilmington Trust’s decision to withhold 20–30 percent of the funds distributed. Moreover, because the settlement agreement provided only that “excess sums” would be divided between the wife and ex-wife, without specifying the amounts of those sums, the ex-wife had no reasonable expectation to receive more than she got. The Third Circuit likewise adopted the reasoning of the district court that “an agreement between private parties cannot relieve a party to that agreement of tax liability, no matter how strongly that party believes they should not be taxed.”


While non-precedential, this opinion is a wake-up call that tax liability of all parties to a transaction must be considered when drafting a settlement agreement. Begin by consulting with a tax professional, but don’t stop there. Take a hard look at the language of the agreement itself and be sure it is as precise as it needs to be.


Keywords: commercial and business, litigation, contract construction, contract interpretation, interpleader, settlement, tax implications, tax liability, tax withholding.


Marc J. Zucker, Weir & Partners LLP, Philadelphia, PA



March 31, 2016

How to Avoid Sanctions and Suits for Filing Frivolous Trade Secrets Claims

Attorneys and law firms who file frivolous suits for misappropriation of trade secrets on behalf of their clients may end up paying the opposing party’s attorney’s fees as a result of court imposed sanctions or, worse yet, defending themselves in malicious prosecution cases.

In Homecare CRM, LLC v. Adam Group, Inc. of Middle Tenn., 952 F.Supp.2d 1373 (N.D. Ga. 2013), the court sanctioned a company and its counsel for filing a baseless trade secrets claim. Specifically, the court found that emails and other evidence in the plaintiff’s possession negated the factual bases for the claim, making it objectively frivolous when filed, and that the plaintiff’s counsel violated Fed.R.Civ.P.11 by signing the pleading containing the claim. Id.


The Latham & Watkins law firm found itself defending a malicious prosecution lawsuit after being defeated in a bench trial in a misappropriation of trade secrets case it filed on behalf of an employer against a group of former employees attempting to launch a competing business. The trial court not only ruled in the plaintiffs’ favor at trial, but also found the claim to have been brought in bad faith. The former employees later filed a malicious prosecution suit against Latham & Watkins alleging that the firm knew the legal theory for the suit (inevitable disclosure) had been discredited in the state of California and that the employer had an anticompetitive motive for suing them. The lower court held that the malicious prosecution claim was barred by the “interim adverse judgment rule” because the trial court in the original case had denied a motion for summary judgment filed by the former employees on the trade secrets claim even though it later ruled in their favor at the bench trial. The California Court of Appeal upheld the trial court’s ruling that the claim was barred. Parish v. Latham & Watkins, 238 Cal.App.4th 81 (2015). However, Latham & Watkins’ battle on this issue is far from over. The California Supreme Court announced that it will reconsider the appellate court’s decision. The matter is now pending before it.


What can we learn from these two cases to avoid being sanctioned or sued for filing frivolous trade secrets cases? We can learn the following:


  1. Don’t file a factually baseless claim. This may seem obvious but it’s not. Before filing a trade secrets claim (or any other claim for that matter), be sure to thoroughly vet the claim, the witnesses, and the documents to make sure there is actually a factual basis for it and no documents completely negating and/or contradicting the claim. A mere suspicion that there has been a misappropriation of trade secrets is not enough to provide a factual basis.
  2. Don’t file a legally baseless claim. Make sure that your legal basis for the claim is one that is viable in the jurisdiction in which you are bringing it. If the courts in that jurisdiction have consistently rejected, discredited, or failed to recognize the legal theory forming the basis of the claim, chances are the court will find the claim to be frivolous.
  3. Be mindful of your client’s motives. It’s one thing if your clients wish to protect genuine trade secrets. It’s another if their sole motive for bringing a trade secrets lawsuit is to stop their former employees from competing with them.
  4. If you later discover the claim to be frivolous, dismiss it. Fed.R.Civ.P. 11 requires us to dismiss any lawsuit we learn to be frivolous at any point in the litigation. It’s better to be safe than sorry.


Keywords: Commercial litigation; business litigation; trade secrets; malicious prosecution; sanctions


Candace R. Duff, Esq., City Attorney’s Office, Fort Lauderdale, FL



March 31, 2016

Self-Sabotaging: How Implicit Bias May Be Contributing to Your "Can't Find Any Women or Diverse Associates" Hiring Problem

Implicit bias is formed by the attitudes or stereotypes that affect our understanding, actions, and decisions in an unconscious manner. Unconscious in that you’re not sure why you have that attitude or stereotype but you do. To begin, in no way is this practice pointer suggesting the bar should be lower for women and diverse applicants. The purpose of this practice pointer is to provide conversation starters—to start an internal conversation of what might be getting in the way of supporting your diversity values.


Bigger pool. Did you know that changing the racial identify of “author” on a legal memo resulted in different evaluations and the finding of more errors? Perhaps the beliefs you might hold on which is a better law school or the minimum GPA you’d accept may not be the best predictor for someone’s actual performance as an attorney in your firm. Consider applicants from other law schools and perhaps lower GPA standards (because of implicit bias in grading). For example, if you were looking for someone to join a personal injury practice group, you might look more closely at his or her performance in torts & trial practice and advocacy. You may not care that he or she only earned a B in con law.


Redacting names and volunteer association names. Did you know that once orchestras started using blind preliminary auditions, a woman’s chance of moving forward in the process increased 50 percent? Before reviewing any resumes—consider having a friend redact anything that might suggest gender, race, or ethnicity. Studies have demonstrated that in evaluating members of a stereotyped group, individuals pay more attention to and actually seek and remember more information that is consistent with the stereotype. Ironically, when a decision maker “believes himself to be objective, such belief licenses him to act on his [implicit] bias.” Implicit Bias and the Legal Profession’s “Diversity Crisis”: A Call for Self- Reflection, Nichole E. Negowetti, Nevada Law Journal, Vol. 15:930, 2015. Redacting may actually provide you with more candidates to consider from the outset.


Balance an interview with practical demonstration. Did you know that interviews are poor predictors of job performance because we hire people we think are similar to us rather than those who are objectively going to do a good job? Id. You might consider creating a “test” for each applicant specific to the objective needs of the position. For instance, if you require strong research and writing skills, create a research and writing exercise (similar to what you would give a first year associate) that would demonstrate the person’s ability to research and write on your topic (not one that was already critiqued through a legal writing course). Alternatively, if you are looking for strong advocacy skills, consider having two candidates argue a different side of an issue (by assigning them different opposing pleadings). By doing more than just interviewing, you are giving yourself more opportunities to overcome any stereotype you may have.


Mentoring law students. Did you know student bar associations look for mentors and advisors to help build skills, gain experience, and navigate through the culture of our profession? Consider getting involved in one of these associations. It would give you a leg up on the competition and additional insight to the true qualities of student members.


For more information on implicit bias, please go to the Section’s Implicit Bias Initiative. Also, I’d like to hear your ideas and comments. I can be reached at laura.mclaughlin@logan.edu.


Keywords: commercial litigation, business litigation, diversity, associate hiring, hiring bias, implicit bias, recruitment


Laura McLaughlin, Esq., Logan University, Chesterfield, MO


February 18, 2016

Testing the Reliability of an Expert's Predictive Model

Expert opinions offered in relation to Federal Rule of Evidence 702 are often scrutinized, particularly as to whether the testimony is the product of reliable principles and methods. The court’s goal in scrutinizing the opinions is to ensure that testimony based on an unreliable damages model does not prejudice the trier of fact’s evaluation of the case. Accordingly, the court has discretion to exclude any opinion testimony that is based on unreliable principles and methods.


It appears that the United States District Court, Eastern District of Virginia, has broadly interpreted Federal Rule of Evidence 702 to now include testing the reliability of an expert’s predictive model by comparing the results of the model to the actual market values during an “unaffected” time period. A recent case heard by this court in which the court ruled that the Plaintiff’s expert’s testimony should have been excluded under Daubert illustrated this very concept. See United States of America v. Birkhart Globistics GmbH & Co., et al., Civil Action Nos. 1:02-cv-1168 (AJT/TRJ) and 1:07-cv-1198 (AJT/TRJ) (E.D. Va. Dec. 24, 2014).


In Birkhart Globistics, the jury found that the defendants knowingly caused false claims to be submitted and awarded the plaintiff $33.6 million in damages. The defendants moved for judgment as a matter of law and the district court granted defendants’ motion and vacated the damages award based on the following critique of the testimony provided by plaintiff’s expert.


The testimony of the plaintiff’s expert regarding damages was based on a regression model that sought to predict the prime rates for shipping goods overseas. During the trial, evidence was produced indicating the plaintiff’s expert’s regression model did not accurately predict the actual market prime rates during an “unaffected” period. For example, the expert’s regression model did not produce a predicted prime rate equal to the actual prime rate during a period of time that no wrongful actions were alleged.


The district court concluded that plaintiff’s expert failed to explain the inconsistencies between the actual market prime rates and the prime rates predicted using plaintiff’s expert’s regression model during an “unaffected” period. The court questioned the aspect of Federal Rule of Evidence 702 relating to whether the testimony was the product of reliable principles and methods. The court questioned not only why the predicted prime rates from the plaintiff’s expert’s regression model did not equate to the actual prime rates during an “unaffected” period but also why plaintiff’s expert was unable to explain why the inconsistencies occurred.


The court concluded that if the regression model cannot accurately predict the prime rates during the “unaffected” period, the regression model could not be reliable to predict the “but for” prime rates during the “affected” period. Because the plaintiff’s expert’s damage calculation was based on the predicted “but for” prime rates, the court concluded that the plaintiff’s expert’s testimony should have been excluded under Daubert and, ultimately, vacated the jury’s damages award.


Not only should experts be cognizant of the fact that expert testimony must be the product of reliable principles and methods, experts should also consider testing and comparing the results of any predictive model to actual market values during an “unaffected” period, when possible. If the expected results from the model are not consistent with the actual market values during the “unaffected” period the expert should be prepared to explain those inconsistencies.


Keywords: Birkhart Globistics, Daubert, commercial, business, litigation, expert, regression, model, predict, damages


Jason T. Wright and Richard M. Ruffing, Stout Risius Ross, Inc., Chicago, IL


February 16, 2016

Advice to Young Litigators: The Buck Stops Here

New litigators are at the low end of the totem pole, the food chain, and the other proverbial hierarchies. Sometimes it seems as though only the most mundane or insignificant tasks trickle down—basic research, cite-checking, proofreading, etc. Do not be fooled, though. Focusing solely on the individual assignments as they come and go is a rookie mistake. The junior litigator on a trial team should have an in-depth understanding of the entire case and know their role within the larger scheme. That role is not always explained by the senior associates or partners—but it is always expected that the associate be well versed in their matters. As a young litigator, I strive to live by the phrase memorialized in a plaque that sat upon President Truman’s desk in the oval office:“The buck stops here.” Indeed it does. The buck stops with me, with us, the junior associates, the lowest points on the totem pole, at the bottom of the food chain.


I have made it my mission to know everything I can about the cases to which I am assigned and, no matter how attenuated an assignment might be, I always complete it with an eye towards where it fits into the larger picture. Here is an example. Let’s imagine I receive the following email: “We are going to file a motion to dismiss, we need research on X, Y, and Z by the end of the week.” Sure, the email is detailed enough for me to hop on some legal research sites and return to the senior associate or partner a treatise containing all of the applicable law related to X, Y, and Z. But what good is that? Clearly, the assignment is meant to help shape a motion to dismiss. The research, then, should be completed with that goal in mind. Instead of returning a memorandum on everything the jurisdiction has said on the issue (after confirming first with the senior associate or partner), I send back draft brief sections for why our client should be granted a dismissal of the action. I carefully review the complaint and any other helpful case documents, conduct thorough research, draft sections with the senior associate’s/partner’s writing style in mind, and endeavor to be as persuasive as possible for the particular judge. I treat the seemingly minor research assignment as a large responsibility of crafting a meticulously researched, legally sound, persuasive argument for dismissal of the action against our client. I act as if it is up to me to convince the decision maker that dismissal is the correct decision. Admittedly, this may be a fantasy-type endeavor, as my “brief” will likely be changed and molded before submission (if it is even utilized). But, this fantasy, this imposed responsibility, the belief that the buck stops with me, drives my work and helps to create an immensely better and more helpful product. Further, it shows my superiors that I am pro-active, prepared to take on responsibility, and go beyond what is only minimally needed in the service of the client.


So, young litigators, I say to you, the buck stops here. The buck stops with you. Treat each case as your own and hold yourself to the highest standard. Your superiors and your future career will thank you.


Keywords: brief-writing, commercial and business, litigation, new lawyers, research, young lawyers


Selena E. Molina, Richards, Layton & Finger, P.A., Wilmington, DE


January 18, 2016

Campaign Ethics: A Reason to Forego Judicial Elections?

In this election season, the topic of judicial elections is once again the subject of heated debate. For those looking to strengthen their argument against popular election of judges, beyond the oft-raised concern of judges seeking campaign contributions from the very lawyers arguing before them, try this: the First Amendment protects judicial candidates’ right to mislead the public.


The American Bar Association’s Model Code of Judicial Conduct Rule 4.1(A)(11) and the corresponding rules adopted by almost half of the states have attempted to prohibit false or misleading statements by judicial candidates. Between 2000 and 2014, however, at least six different state or federal courts have declared such restrictions unconstitutional.


An incident from a Nevada judicial campaign illustrates this quandary. In Kishner v. Nevada Standing Committee on Judicial Ethics & Election Practices, 2010 U.S. Dist. LEXIS 120903, 2010 WL 4365951 (D. Nev. Oct. 28, 2010), then-judicial candidate Kishner appeared on a television program during the course of her campaign and commented on a past court case in which her opponent was sued by a trust beneficiary who alleged undue influence in drafting. Her purpose was to raise questions about her opponent’s judgment and compliance with ethical rules. She omitted, however, that her opponent had successfully rebutted the presumption of undue influence. She further stated that her opponent was not disciplined due to litigation, implying the possibility of discipline when, in fact, there had been no plan to impose discipline at all.


Kishner was censured by the Nevada Standing Committee on Judicial Ethics & Election Practices for violation of Rule 4.1(A)(11) of the Nevada Code of Judicial Conduct, but successfully sought a temporary restraining order to restrain publication of the censure. The U.S. District Court for the District of Nevada ordered that Rule 4.1(A)(11) was unconstitutionally vague as to the term “misleading” and unconstitutional as applied to Kishner.


The Nevada Rule in question has not been changed since the Kishner decision, and the language comes verbatim from the ABA’s Model Code: “Except as permitted by law . . . a judge or a judicial candidate shall not . . . knowingly, or with reckless disregard for the truth, make any false or misleading statement.” The court considered the rule vague because a candidate could not ascertain all of the facts necessary to include in a statement in order to avoid misleading the public.


Upon reflection, if a candidate is unable to make such a determination, it raises a question regarding the candidate’s qualifications for judicial office. Moreover, innocent misstatements would seemingly be protected by the rule’s condition that the statement be made knowingly or recklessly.


Other states have faced similar rule challenges. The Michigan Supreme Court used the case of In re Chmura, 608 N.W.2d 31 (Mich. 2000) to change a canon in the Michigan Code of Judicial Conduct from one that, in part, prohibited candidates from making misleading or deceptive communications, to one that only prohibits false communications. The Chmura court held the former rule unconstitutionally overbroad, noting its potentially chilling effect on candidates’ statements as they sought election.


Similar holdings (and amended rules) followed in Alabama (Butler v. Alabama Judicial Inquiry Com'n, 802 So.2d 207 (Ala. 2001), which held unconstitutional the portion of the canon prohibiting “true information about a judicial candidate or an opponent that would be deceiving or misleading to a reasonable person.”); Georgia (Weaver v. Bonner, 309 F.3d 1312 (11th Cir. 2002), which held unconstitutional the portion of the canon prohibiting a communication that is “fraudulent, misleading, deceptive, or which contains a material misrepresentation of fact or law or omits a fact necessary to make the communication considered as a whole not materially misleading.”); Kentucky (Winter v. Wolnitzek, 56 F. Supp. 3d 884 (E.D. Ky. 2014), questioning the constitutionality of the portion of the canon prohibiting “false or misleading statements” and Winter v. Wolnitzek, 2015 U.S. Dist. LEXIS 17849 (E.D. Ky. Feb. 12, 2015), certifying the question of what “constitutes a false statement” to the Supreme Court of Kentucky); and Ohio (In re Judicial Campaign Complaint Against O'Toole, 24 N.E.3d 1114 (Ohio 2014), which held unconstitutional the portion of the rule prohibiting communications “if true, that would be deceiving or misleading to a reasonable person.”).


In light of these decisions, how can a state prohibit judicial candidates’ misleading statements in a manner that will withstand strict scrutiny? Arguably, a prohibition on a misleading statement made “knowingly or with reckless disregard for the truth” would not chill the speech of a candidate with a good faith belief in its truth, yet the Nevada court held the rule with such phrasing unconstitutional.


The states have a compelling interest in promoting public confidence in the judiciary, yet their hands are tied when they attempt to protect this interest by restraining misleading campaign speech. If such prohibitions cannot comport with the Constitution, perhaps it is time to rethink judicial campaigns. Shouldn’t the goal of truthful communication be more than simply aspirational?


Keywords: commercial and business, litigation, ethics, judicial campaign, judicial elections, judicial ethics, Model Code of Judicial Conduct, unconstitutional


James D. Abrams and Erica L. Cook, Taft, Stettinius & Hollister, LLP, Columbus, OH


January 8, 2016

Forum-Selection Bylaws and Forum Non Conveniens

Many corporations have adopted forum-selection bylaws requiring shareholders to pursue derivative actions in specific jurisdictions. In 2013, the Delaware Court of Chancery held in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), that a forum-selection bylaw adopted by the board of directors of a Delaware corporation, which covers derivative actions was valid, binding, and enforceable. Earlier this year, the Delaware legislature effectively codified the Boilermakers decision by expressly allowing for forum-selection provisions governing “internal corporate claims” in the certificate of incorporation or bylaws of a Delaware corporation. See 8 Del. C. § 115.


A federal court faced with a forum-selection bylaw in a derivative case faces jurisdictional issues not shared by state courts. Recently, in In re CytRx Corp. Stockholder Derivative Litigation, the U.S. District Court for the Central District of California dismissed a suit that was required to be filed in the Delaware Court of Chancery under the corporation’s bylaw. C.A. 14-6414-GHK (PJWx), slip op. (C.D. Cal. Oct. 30, 2015). Unlike prior courts that addressed the enforceability of a forum-selection bylaw through a Federal Rule 12 motion, the Central District followed the forum non conveniens framework set forth by the United States Supreme Court in Atlantic Marine Const. Co. v. U.S. District Court W.D. Tex., 134 S.Ct. 568 (2013). In Atlantic Marine, the Supreme Courtheld that when a federal court is presented with a forum-selection contractual clause, it should apply a modified version of the doctrine of forum non conveniens—which affords a court the discretionary power to decline jurisdiction for the convenience of the parties, if justice would be served by the action being heard in another forum. The Supreme Court held that under this modified forum non conveniens doctrine, “forum-selection clauses should control except in unusual cases,” largely because the two parties to the contract agreed to the expectation of the forum to resolve a dispute. Id. at 581.


In In re CytRx Corp. Stockholder Derivative Litigation, the Central District of California held that the Atlantic Marine framework for forum non conveniens applies equally to forum-selection bylaws. The court agreed with Boilermakers regarding the enforceability of forum-selection bylaws, accepting that the bylaws are consistent with the contractual nature of the corporation-shareholder relationship. The court further determined that the public-interest factors at play in a forum non conveniens analysis did not present one of those “exceptional” or “extraordinary” cases where the forum-selection bylaw should not be enforced. Id. at 8–9.


Keywords: litigation, forum non conveniens, forum-selection, bylaw, derivative, commercial and business


Allen L. Lanstra, Skadden, Arps, Slate, Meager & Flom LLP, Los Angeles, CA


December 28, 2015

A Tightening Chokehold: The FTC and CFPB Continue to Take Aim at the Payments Industry

Beginning in earnest in 2013, the Federal Trade Commission (FTC) began to exert pressure on the payments industry—including payment card processors and independent sales organizations (ISOs)—to stamp out businesses engaged in consumer fraud. More recently, it has been joined in its effort, dubbed by some as “Operation Choke Point,” by the Consumer Financial Protection Bureau (CFPB). Together, these government agencies have pursued businesses perceived as serving as merchant “on-ramps” to the payments grid for allegedly facilitating the acceptance of credit and debit cards by businesses that inflict harm on consumers.


Initially, enforcement actions against players in the payments ecosystem were designed principally to capture “reserve funds” they might be holding to satisfy consumer-initiated chargebacks or to force a disgorgement of fees received from processing the transactions of “bad actors.” More recently, however, the FTC and the CFPB have become more aggressive. They have attempted to put payment processors and ISOs on what amounts to the same plane of culpability as the merchants deceiving consumers themselves, seeking joint and several liability for the entirety of the consumer injury allegedly perpetrated by third parties. See, e.g., CFPB v. Universal Debt & Payment Solutions, LLC, Civil Action No. 1:15-CV-00859-RWS (N.D. Ga. filed 2015); FTC v. CardFlex, Inc., Civil Action No. 3:14-cv-00397 (D. Nev. filed 2014). And following a recent decision by the United States District Court for the Northern District of Georgia, it appears that such liability is at least theoretically possible—at least where a payments defendant engaged in “severe recklessness” by engaging in “an extreme departure from the standards of ordinary care.” See CFPB v. Universal Debt & Payment Solutions, LLC, Civil Action No. 1:15-CV-00859-RWS (N.D. Ga. Sep. 1, 2015) (denying a motion to dismiss).


Critics have argued that pursuing such extreme relief against the payments industry is unwarranted and, at a minimum, disproportionate to the limited role the industry plays in authorizing and settling payment card transactions (without direct consumer contact). And, at least in part, that criticism stems from a lack of clear guidance about the standards by which culpability is to be measured. Forcing the rapid or reflexive exclusion of certain businesses from the payments ecosystem based on amorphous standards (and with the risk of being a complete insurer against merchant fraud if one makes the wrong call) presents a very real risk that even legitimate companies will be put out of business (without due process safeguards).


Clearer standards will not eliminate those concerns. But they may ameliorate them. And to that end, there are two emerging sources from which to draw.


First, the payments industry itself is working to provide guidance regarding “best practices” for underwriting and monitoring risk. The Electronic Transactions Association, for example, has published Guidelines on Merchant and ISO Underwriting and Risk Monitoring, which is continuing to evolve as a source of normative standards to protect against consumer injury.


Second, there are the enforcement actions initiated by the FTC and the CFPB. Surveying the allegations of these cases begins to paint a somewhat clearer picture of practices that regulators perceive as taking a payments company across the line from unwitting facilitator of consumer fraud to deserving (whether justifiably or not) equally harsh treatment as the perpetrators of fraud themselves. These practices, which internal underwriting and risk-monitoring should be sure to either prohibit or limit, include:


  1. 1. Ignoring dramatically high chargeback ratios, including double-digit ratios between transactions made and transactions charged back by disappointed consumers;
  2. 2. Failing to investigate disturbing chargeback narratives (e.g., consumer allegations that a merchant coerced payments of fictional debts by making unlawful threats), such as through calls to consumers who initiated the same;
  3. 3. Activity assisting merchants in avoiding card brand detection by purposeful lack of transparency and load balancing;
  4. 4. Relying on personal guaranties of merchant principals to bypass or disregard internal credit risk policies;
  5. 5. Accepting merchants that had previously been terminated or rejected by the processor or ISO based on unseemly business practices; and
  6. 6. Failing to follow up on obvious errors or discrepancies in merchant applications (including, e.g., merchant location, type of business, or principal identities).


Again, clearer standards alone will not address all the valid concerns being raised by critics of “Operation Choke Point.” But, so long as the government’s initiative continues, better understanding what perceived “red flags” exist in the mind of regulators can help industry players avoid the fallout of being made unwilling guarantors against merchant fraud.


Keywords: commercial & business, litigation, deceptive trade practices, electronic transactions, FTC enforcement, CFPB, ISOs, Operation Choke Point, payment processors, payment systems


Edward A. Marshall and Theresa Y. Kananen, Arnall Golden Gregory LLP, Atlanta, GA


December 21, 2015

Amending Electronic Discovery under the New Federal Rules of Civil Procedure

New amendments to the Federal Rules of Civil Procedure—which focus on early case management, proportionality, and preservation—took effect on December 1, 2015. Under the amendments, the most significant changes impacting electronic discovery occurred with respect to Rules 26(b)(1) and 37(e). These amended rules, which address proportionality and preservation, will impact the way practitioners and their clients think about and manage electronically stored information (ESI).


Proportionality under Rule 26(b)(1)
The scope of discovery under former Rule 26(b)(1) was extremely broad. And, as many practitioners know all too well, discovery has become increasingly burdensome and expensive given the high volume of potentially discoverable ESI. Accordingly, to address these problems, the Advisory Committee on Rules of Civil Procedure (Committee) revised the scope of discovery under Rule 26 by limiting discovery to information that is not only relevant, but “proportional to the needs of the case.” Fed. R. Civ. P. 26(b)(1). The Committee also clarified, and in a sense further limited, the scope of discovery by deleting the “reasonably calculated to lead to the discovery of admissible evidence” language. This language, according to the Committee, was incorrectly used to define and expand the scope of discovery. So, to prevent potential misuse and expansion of the rule, the often cited “reasonably calculated to lead to the discovery of admissible evidence” language was cut, and the rule now directly states that “[i]nformation within this scope of discovery need not be admissible in evidence to be discoverable.”


With the amendments to Rule 26(b)(1) in place, discovery should become more focused and less burdensome and expensive. Practitioners will be able to use proportionality to facilitate the discovery process and resolve discovery disputes. Practitioners, however, cannot use proportionality as grounds for refusing discovery simply by asserting a boilerplate objection that the discovery is not proportional. See Fed. R. Civ. P. 26(b)(1), advisory committee’s note to 2015 amendment.


In addition to its role in defining the scope of discovery, proportionality is also incorporated into the standard for determining whether ESI should be preserved.


Preservation under Rule 37(e)
The language of Rule 37(e) formerly provided that unless “exceptional circumstances” exist, a court may not impose sanctions “on a party for failing to provide [ESI] lost as a result of the routine, good-faith operation of an electronic information system.” According to the Committee, the rule did not address the problems resulting from the continued exponential growth in the volume of ESI. Therefore, to address this problem and to resolve the uncertainty surrounding the applicable standards that courts may employ when determining whether a party should be sanctioned for failing to preserve ESI, the Committee substantially amended Rule 37(e) and set forth a uniform standard for courts to apply. See Fed. R. Civ. P. 37(e).


Under the amended rule, a party must take “reasonable steps” to preserve ESI in the anticipation or conduct of litigation in order to avoid sanctions or curative measures. If a party fails to take “reasonable steps” to preserve ESI and the information cannot be restored or replaced through additional discovery, the new rule provides for appropriate action to be taken by the court. For example, “upon finding prejudice,” the court may order curative measures that are “no greater than necessary to cure the prejudice.” Fed. R. Civ. P. 37(e)(1). On the other hand, if the court finds that the party “acted with the intent” to deprive another party of ESI, the court may take more drastic measures to sanction the party, including presuming the lost ESI was unfavorable to the party, instructing the jury that it may or must presume the ESI was unfavorable, or dismissing the action or entering a default judgment. Fed. R. Civ. P. 37(e)(1)(A)−(C).


Although the new rule provides a more uniform standard for courts to apply when determining how to address lost ESI, the amendments do little to resolve the uncertainty surrounding what ESI actually requires preservation. However, the committee does advise that proportionality should be a factor. Thus, practitioners need to take advantage of early case assessment tools and engage in meaningful discussions with their clients and opposing counsel concerning the issues in the case, the potential amounts in controversy, and the types of ESI that may be available. By taking these steps early on, practitioners may be able to avoid the pitfalls of over or under preservation.


Keywords: commercial and business, litigation, e-discovery, Federal Rules of Civil Procedure, ESI, proportionality, preservation


Brisa Izaguirre Wolfe and Amy D. Fitts, Polsinelli PC, Kansas City, MO


November 30, 2015

Recent Federal Court Ruling on Admissibility of Online Evidence

“Don’t waste your time capturing online evidence,” does not mean that gathering online evidence is not extremely important. To the contrary, the majority of today’s law practice is centered around electronic evidence including online evidence. Instead, “don’t waste your time capturing online evidence” means that attorneys need to capture online evidence in a usable format to ensure that, if needed, their captures will be admissible evidence.


There are a number of nightmares associated with the practical aspects of capturing online evidence. Printing documents can leave off information that was displayed on the webpage. Screenshotting a webpage can be time consuming as it requires constant screenshotting and saving or printing as you scroll down a page. Additionally, both of those methods provide little or no metadata which is useful and sometimes required for admissibility.


There are also a number of evidentiary issues associated with websites. Authentication under Fed. R. Evid. 901 requires the proponent of the evidence to show that the capture offered is a picture of how the webpage appeared on the day they so claim. As one federal district court recently noted, generally, an affidavit of a witness who captured or printed the webpage, along with some circumstantial evidence of authenticity—such as the URL, date of printing, title of the website, author of the website, or other identifying information—will be enough to meet the authenticity requirement. United States Sec. & Exch. Comm'n v. Berrettini, 2015 WL 5159746 (N.D. Ill. Sept. 1, 2015). Courts have made clear that this requirement can be a hurdle.


Proponents of online evidence have faced difficulty with the personal knowledge requirement of Fed. R. Evid. 602. One federal court previously ruled that a person who has seen a printout of a webpage, but could not testify from personal knowledge that the printout accurately reflected the website, was insufficient to establish authenticity. See Cook v. J & J Snack Foods Corp., 2010 WL 3910478, at *5 (E.D. Cal. 2010). In September 2015, another federal court went a step further by excluding printouts of online news articles even with a witness who was able to say that the printout appeared as they did on the webpage. See Berrettini, 2015 WL 5159746. First, the court noted that printouts from Westlaw or other archives of articles that were previously published by separate newspapers or periodicals were not self-authenticating. Id. Additionally, it held that with regard to archive websites such as Westlaw, “any attempt by a user of the website to authenticate from memory must fail” because there needs to be personal knowledge of the reliability of the archive source. Id.


There are a number of technology vendor tools that may help attorneys cure some of the practical and evidentiary problems associated with online evidence. For example, the Wayback Machine is an internet archive source that helps attorneys capture webpages that have been deleted. Another helpful tool is the use of capturing software like Page Vault. Capturing software can help with practical aspects of capturing a webpage including allowing a one click capture of the whole page so that additional time is not wasted by scrolling and printing each screenshot. Additionally, they can capture metadata including the URL, date of printing, title of the website, and other identifying information that will likely be required for authenticity.


To confront the issues addressed in Berrettini, attorneys need to make sure that they will be able to acquire affidavits, if needed, from any archive sources they use. Thus, with the increase of online evidence, attorneys need to understand how to capture the evidence in a useful way.


Keywords: admissibility, authentication, commercial and business, evidence, Fed. R. Evid. 602, Fed. R. Evid. 901, online evidence, litigation


Madison Fischer, Spencer Fane LLP, Kansas City, MO


November 23, 2015

North Carolina Federal Court Holds Clickwrap Terms Defeat UDTP and Fraud Claims

In Solum v. CertainTeed Corporation, Case No. 7:15-CV-114-D, 2015 WL 6505195 (E.D.N.C. Oct.27, 2015), the federal court dismissed fraud and unfair and deceptive trade practices (UDTP) claims by buyers of construction services primarily because online contract clickwrap disclaimer terms vitiated the claims.


The plaintiffs sought to put new vinyl siding on their home. They hired an installer based on its listing as a certified Master Craftsman on the website of CertainTeed, a manufacturer of vinyl siding. The plaintiffs alleged that CertainTeed represented on its website that it “examines the credentials of service professionals . . . it endorses;” “Master Craftsmen successfully complete a program course to become certified;” and, “only advanced building professionals who demonstrate a high level of knowledge and ability to install CertainTeed building products earn this Master Craftsman status.” In actuality, all one had to do to become a Master Craftsman was download a 100-page workbook and pass a 25-question, 90-minute multiple-choice quiz. The plaintiffs claimed CertainTeed “purposely misleads consumers into believing that the Master Craftsman certification is more prestigious than in actuality” and that it does not examine credentials of service professionals that it lists as Master Craftsmen “in any meaningful way.” The truth or falsity of those allegations never made it past CertainTeed’s motion to dismiss.


To search the professionals listed on CertainTeed’s website by name or by product in which they are certified, the plaintiffs and anyone else visiting the website, had to “Accept” the search tool’s “Terms and Conditions,” in which CertainTeed made this disclaimer:


Although we take certain steps to examine the credentials of our listed service professionals, CertainTeed makes no guarantees or representations regarding the skills or representations of such service professional or the quality of the job that he or she may perform for you if you elect to retain their services. CertainTeed does not endorse or recommend the services of any particular service professional.


The plaintiffs retained Superior Home Improvement, listed on CertainTeed’s website, which proved not to be superior or masterful in installing the siding, and the plaintiffs had to hire a second installer to correct its mistakes.


The plaintiffs’ fraud and UDTP claims were entirely based on CertainTeed’s representations on its web pages. The court declined to consider the webpages CertainTeed attached to its motion to dismiss showing what was required to become a Master Craftsman because the plaintiffs did not review those pages until after hiring Superior Home Improvement.


The court noted that the plaintiffs had to prove detrimental reliance on their UDTP claim and, where the plaintiff could have discovered the truth upon inquiry to have alleged that it was denied the opportunity to investigate or that it could not have learned the true facts by exercise of reasonable diligence. Here the court held that the plaintiffs’ reliance on the Master Craftsman certification was not reasonable because: (1) the representations about the certification and how an installer became certified were mere puffery; and (2) the plaintiffs could have learned the truth—that CertainTeed made no guarantees, representations, endorsements, or recommendations—by reading the clickwrap terms more closely. One of the alleged misrepresentations upon which the plaintiffs claimed they relied was based on language from the Terms of Use—an admission that the plaintiffs had read the terms.


The court also held that “with minimal research, plaintiffs could have discovered the Master Craftsman course requirements on CertainTeed’s website” which means they “could have learned the truth about the Master Craftsman designation meant through reasonable diligence.” It is not clear how the court could reach that decision in light of its refusal to consider the webpages showing what was required to become a Master Craftsman. (However, “no harm, no foul” because the court could eventually have found for CertainTeed on summary judgment on that basis.)


The court rejected the fraud claim on the same basis that it dismissed the unfair and deceptive trade claim—reliance upon the alleged misrepresentation of the Master Craftsman certification was unreasonable as a matter of law.


Keywords: clickwrap, commercial and business, consumer, disclaimer, fraud, puffery, reliance, terms of use, unfair and deceptive trade, website, litigation

Gary Beaver, Nexsen Pruet, PLLC, Greensboro, NC


October 30, 2015

Eleventh Circuit Finds Users of Free Apps Not Protected under Video Privacy Protection Act

In Ellis v. The Cartoon Network, Inc., Case No. 14-15046, 2015 WL 5904760 (11th Cir. Oct. 9, 2015), the Eleventh Circuit found that a person who downloads and uses a free mobile application is not a “subscriber” within the meaning of the Video Privacy Protection Act, 18 U.S.C. § 2710 (VPPA), and thus not entitled to prohibit the application’s owner from sharing information about the user and the videos the user viewed through the application.


The VPPA was enacted in 1988 to protect a person’s right to privacy in the choice of movies and videos he or she views. The VPPA prohibits “video tape service providers” from disclosing to a third party “personally identifiable information concerning any consumer.” Consumers have a federal cause of action for violations including the right to recover actual or statutory damages of at least $2,500, punitive damages, attorney fees, and other equitable relief. The term “consumer” means any renter, purchaser, or “subscriber” of goods or services from a video tape service provider.


In this case, the plaintiff downloaded a free application from the Cartoon Network on his Android smartphone to watch video clips. The free app does not require the user to create a login account, and the user can view video clips without having to provide any information to Cartoon Network. But Cartoon Network can identify an Android user through the user’s Android ID, a 64 bit number, and can track that particular user’s viewing history. The Cartoon Network maintains records of each video watched by the user. Without his consent, Cartoon Network kept records of the videos that the plaintiff watched and shared those records with Bango, a company that specializes in tracking individual behaviors across the Internet and mobile applications. Bango uses Android IDs to track specific users’ activities and was able to identify the plaintiff from his Android ID and know which videos he watched.


The plaintiff sued Cartoon Network alleging that he was a “subscriber” and, therefore, a “consumer” under the VPPA, seeking relief for Cartoon Network’s violation of the VPPA through its disclosure to a third party of his personally identifiable information—his Android ID and his video viewing records. The U.S. District Court for the Northern District of Georgia agreed that the plaintiff was a “consumer” but ruled that his personally identifiable information had not been disclosed, and dismissed the case, determining that the complaint failed to state a cause of action. Ellis v. The Cartoon Network, Inc., Case No. 1:14-CV-484-TWT, 2014 WL 5023535 (N.D. Ga. 2014).


The Eleventh Circuit affirmed, but disagreed with the district court on the first issue, ruling that the plaintiff was not a “consumer” under the VPP because he was not a “subscriber.” The appellate court acknowledged that the VPPA does not include a definition of a “subscriber” and the federal appellate courts had yet to address what the term means under the VPPA. The court first looked to various dictionary definitions of the word “subscriber” to ascertain the “ordinary meaning” of the term. The court determined that a “subscriber” does not require a “payment” by the user, acknowledging that a person accessing services for free could qualify as a subscriber. But the court determined that the dictionary definitions have a common thread; that is, that the term “subscription” requires some kind of “commitment, relationship or association (financial or otherwise) between a person and an entity.” The court then determined that its interpretation was consistent with the trial court’s decision in Yershov v. Gannett Satellite Info. Network, Inc., Case No. 1:2014cv13112 , 2015 WL 2340752 (D. Mass. May 15, 2015), which held that a user of the free USA Today application was not a subscriber under the VPPA.


Because it determined that the plaintiff was not a “subscriber,” and thus not a “consumer,” the Eleventh Circuit affirmed the dismissal on that ground alone, without reaching the issue of whether the Android ID and video viewer history constituted “personally identifiable information.” The affirmance means that the plaintiff did not state a cause of action, and his claims were dismissed. In short, Cartoon Network’s disclosure of the plaintiff’s Android ID and his video viewing history were not covered by the VPPA, and not prohibited disclosures.


Keywords: consumer, commercial and business, internet litigation, personally identifiable information, privacy, subscriber, Video Privacy Protection Act


Mark Romance, Richman Greer, P.A., Miami, FL


September 30, 2015

Court Rules that the "Happy Birthday" Song Is Not Protected by Copyright

Chief Judge George H. King of the Central District of California recently ruled that the copyrights in the “Happy Birthday” song are not owned by Warner/Chappell Music, Inc., a decision that the plaintiffs’ attorneys say puts one of the most popular songs in history into the public domain. See Rupa Marya v. Warner/Chappell Music, Inc., No. 2:13-cv-04460-GHK-MRW (C.D. Cal. Sept. 22, 2015). The ruling is the latest development in a 2013 lawsuit brought by a group of filmmakers and artists against Warner/Chappell, which reportedly had been collecting millions of dollars in annual licensing fees from the song.


According to Chief Judge King, Warner/Chappell never had the right to charge for use of the song. Warner/Chappell had been enforcing a copyright since 1988, when it bought the successor company to the Clayton F. Summy Company (Summy Co.), which had purportedly acquired the rights from the song’s original authors. Rupa Marya, slip op. at 29. However, the court ruled that Summy Co. had only acquired the rights to the song’s melody and to piano arrangements based on the melody, which had long since passed into the public domain. Id. at 31–32.As for the lyrics, no evidence existed that Summy Co. had ever actually acquired the rights to them. The original authors never asserted a copyright claim for the lyrics, meaning Warner/Chappell never owned them either. The court explained, “[n]owhere . . . is there any suggestion that the [original authors] transferred their common law rights in the Happy Birthday lyrics to Summy Co. . . . Because Summy Co. never acquired the rights to the Happy Birthday lyrics, Defendants, as Summy Co.’s purported successors-in-interest, do not own a valid copyright in the Happy Birthday lyrics.” Id. at 36, 43.


Central to the ruling was an exhaustive historical analysis of contracts and other transactions related to the song. So, besides being a big win for those who want to use the song without paying for it, the ruling highlights a hot issue in the field of copyright law—that long copyright terms and complicated chains of title may make it difficult to locate the person or entity authorized to license a work (or deny a license, as the case may be). When works have no clear owner, incorporating them into new works becomes risky. This is particularly problematic for attorneys seeking to help their clients with risk management. The ruling thus serves as a reminder of how crucial it is to pay heed to the tedious yet indispensable task of due diligence as to the chain of title when handling copyright works.


Keywords: chain of title, commercial and business, copyright, Happy Birthday Song, license, licensing, litigation, public domain, intellectual property


Antonieta Pimienta, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, CA


September 30, 2015

Rethinking Commonality: Class Certification for Uber Drivers

In O’Connor et. al v. Uber Technologies, Inc., No. C-13-3826 EMC, 2015 U.S. Dist. LEXIS 116482 (N.D. Cal. Sept. 1, 2015), the United States District Court for the Northern District of California recently certified a class of current and former Uber drivers on the issue of their classification as employees or independent contractors. In doing so, the court rejected Uber’s argument that employment classification should not be adjudicated on a class-wide basis.


In O’Connor, the Uber drivers brought a class action (consisting of approximately 160,000 UberBlack, UberX, and UberSUV drivers) contending that the drivers are employees of Uber, not independent contractors. The plaintiffs argued that an employee is entitled to various protections under the California Labor Code, specifically reimbursement of necessary expenditures and losses incurred “in direct consequence of the discharge of his or her duties” and a right to the entire amount of any tip or gratuity. O’Connor, 2015 U.S. Dist. LEXIS 116482 at *6. In answering whether a Uber driver is an employee or independent contractor in the context of motion for class certification, the court focused on whether “questions of law or fact common to class members predominate over any questions affecting only individual members of the proposed class.” Id. at *7 (internal citations and quotations omitted). Uber argued that employment classification should not be adjudicated on a class-wide basis, as Uber’s control over drivers and the day-to-day reality of its relationship with drivers are not uniform across the proposed class. Id. at *7–8.


While noting that individualized inquiries may predominate for drivers who did not opt-out of Uber’s most recent arbitration clauses, the court disagreed with Uber and certified a class of current and former Uber drivers with respect to the issue of the class members’ proper employment classification. After setting forth the four prongs of the Rule 23(a) of the Federal Rules of Civil Procedure class certification standard, the court examined those requirements to determine whether the plaintiffs had met the standard. The court quickly found the ascertainability and numerosity requirements satisfied, and accordingly turned its focus to commonality. Id. at *21–25. The court concluded that there “are numerous legally significant questions in this litigation that will have answers common to each class member that are apt to drive the resolution of the litigation,” including “whether all class members should be classified as employees or independent contractors . . . .” Id. at *25. The court relied on Ninth Circuit authority that holds that “commonality is met when the proposed class of plaintiffs asserts that class members were improperly classified as independent contractors instead of employees.” Id. at *26–27 (internal citations and quotations omitted). Finally, for the typicality and adequacy prong, while Uber argued there was “no typical Uber driver,” the court found the differences highlighted by Uber as “legally irrelevant,” thus ruling that the plaintiffs had satisfied all four prongs of Rule 23(a). Id. at *34.


Lastly, the court concluded that the Rule 23(b)(2) requirement of predominance was also satisfied, explaining that when “evaluating predominance with respect to California’s common-law test of employment, the court must determine whether the elements necessary to establish liability [here, employee status,] are susceptible to common proof . . . .” Id. at *58 (internal citations and quotations omitted). So the question the court had to answer was whether there was “a common way to show that Uber possessed essentially the same legal right of control with respect to each of its drivers . . . .” Id. at *59 (internal brackets omitted). The court concluded there was predominance because Uber held the same level of control over driver schedules, routes, pay, training, driver rating, termination without cause, and the ability to work for third parties (along with all of the secondary factors described in S. G. Borello & Sons, Inc. v. Dept. of Indus. Rel., 769 P.2d 399 (Cal. 1989)). While on the merits some of the Borello factors could arguably support the plaintiffs’ position while others support Uber’s position, the court determined that “all [factors] favor certification.” Id. at *112. Accordingly, the court held that the employment classification issues could be adjudicated on a class-wide basis.


Keywords: commercial and business, class certification, classification, employment, Fed. R. Civ. P. 23, independent contractors, litigation, misclassification


Max Hirsch, Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, CA


August 28, 2015

Contractual Forum Selection Clause Enforced Against Non-party to Agreement

In a precedential decision earlier this year, the Third Circuit affirmed the enforcement of a contractual choice-of-forum clause against parties that didn’t sign the contract in question, at the behest of parties that didn’t sign the contract, ei­ther. The case is Carlyle Inv. Mgmt. LLC v. Moonmouth Co., SA, 779 F.3d 214 (3d Cir. 2015).


The case arose from a failed 2006 investment in a Carlyle-sponsored in­vest­ment vehicle, CCC. The investor was an overseas company called Moonmouth. The Subscription Agreement for Moonmouth’s investment provided that all disputes “with respect to” the Subscription Agreement must be heard exclusively in Delaware state courts.


CCC fell victim to the financial crisis and was placed in liquidation overseas. The financial crisis led as well to a fair number of other interactions, posturing and threats between the Carlyle par­ties and the parties affiliated with Moonmouth about, among other things, claimed breaches of fiduciary duty. Finally, in 2012, Carlyle and some of its affiliates sued Moonmouth and some related parties in Delaware state court. One of the defendants was Pla­za Investment Management Overseas SA (Plaza), which had been the director of Moonmouth and had signed the Subscription Agree­ment for Moonmouth.


At this point the procedural maneuvering started. Plaza removed the case to federal court in Delaware. The plaintiffs filed a motion to have the case sent back to state court. They relied on the forum selection clause in the Subscription Agreement, which specified that disputes should be heard in Delaware state court—not federal court. That motion was granted. Plaza and the other defend­ants appealed.


Plaza itself was not a party to the Sub­scription Agreement. It had signed the Sub­scription Agreement as a director of Moonmouth, not for itself. Plaza thus objected that it couldn’t be bound by the forum selection clause. It also objected that the plaintiffs hadn’t signed the Subscription Agreement either—that agreement was with CCC, which was in liquidation. CCC was not a plaintiff. So Plaza argued that the plaintiffs couldn’t rely on the Sub­scription Agreement to compel Plaza to litigate in Delaware state court.


The Third Circuit was unimpressed with these arguments. First, it held that Plaza was bound by the forum selection clause. The court’s analysis involved a three-part test, but it boiled down to a fairly simple issue. The court ruled that Plaza was bound because Plaza and Moonmouth were so closely re­lated in the context of the CCC investment that it was reasonably foreseeable Plaza would be sued in disputes about the CCC investment and the Subscription Agreement. Thus, because the relevant claims were “with respect to” the Subscrip­tion Agreement, the choice-of-forum clause applied.


Next, the Third Circuit held that the Carlyle parties—the plaintiffs—could rely on the fo­rum selection clause even though they had not signed the Subscription Agreement either (it had been signed by CCC, the Carlyle-sponsored investment vehicle). The court noted that the reasons the Carlyle plaintiffs could rely on the forum selection clause were very similar to the reasons Plaza was bound by it. The plaintiffs were closely related to CCC, so it was foreseeable that disputes relating to CCC might pull them in as well. Since the Subscription Agreement required a Delaware state forum for all claims “with respect to” the Subscription Agreement, this case was covered by the forum selection clause as to both sides. Accordingly, the Third Circuit affirmed the district court’s remand to the Delaware state court from which the case had originated.


Keywords: commercial and business, forum selection, litigation, non-parties, remand, removal


Stuart M. Riback, Wilk Auslander LLP, New York, NY


August 14, 2015

"Collusion" Defense Fails under Absolute and Unconditional Guaranty

New York’s highest court has rejected the argument that a guaranty was unenforceable due to plaintiff’s alleged “collusion” in obtaining a default judgment against the principal obligor. In Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 2015 NY Slip Op 04753, 2015 N.Y. LEXIS 2333 (June 9, 2015), the Court of Appeals held that the defense of the plaintiff’s collusion was barred by the express language of the defendant’s absolute and unconditional guaranty. Id. at *1.


The defendant guarantor was an officer and director of Agra USA and its parent, Agra Services of Canada (Agra Canada). Agra Canada’s operations were managed by Eduardo Guzman Solis (Solis), and it had a purchase agreement with the plaintiff whereby the plaintiff purchased and financed Agra Canada’s receivables. The defendant and Solis each gave the plaintiff their absolute and unconditional personal guaranty of the obligations of both Agra Canada and Agra USA. Two years later, after Solis died, the parties discovered that Solis had caused Agra Canada to submit fraudulent receivables to the plaintiff based on nonexistent transactions, resulting in overpayments by the plaintiff. Id. at *4.


Bankruptcy proceedings in Canada were initiated against Agra Canada and an accounting firm chosen by the plaintiff was appointed trustee, who later replaced the management of Agra USA. The plaintiff also brought an action in New York federal court against Agra USA and both guarantors, the defendant and Solis’ estate, to recover the overpayments and to enforce the guaranties. The plaintiff eventually entered a default judgment against Agra USA in federal court for over $41 million and voluntarily dismissed the defendant guarantors without prejudice. The plaintiff then commenced an action in New York against the defendant guarantor, claiming that he was liable under the guaranty for the money owed by Agra Canada under the purchase agreement and, alternatively, for the amount of the default judgment against Agra USA.


The defendant argued that his guaranty did not encompass fraudulent transactions of Agra Canada caused by Solis and that those transactions were not “accounts receivable” as defined in the purchase agreement. He also alleged that the plaintiff controlled Agra USA when the default judgment was entered against it and that the plaintiff’s “collusion” in obtaining that judgment did not give rise to an obligation enforceable under his guaranty. The court denied the plaintiff summary judgment because questions of fact existed both as to whether actual receivables existed and as to who controlled Agra USA when the default was entered against it. Id. at *7.


The Appellate Division, in a 3–2 decision, reversed the lower court and granted the plaintiff summary judgment, finding that the guaranty by its express terms precluded any defense as to the existence of an “enforceable” obligation, including that of collusion. 978 N.Y.S.2d 186 (1st Dep’t 2014). As noted by the Court of Appeals, the dissent disagreed, stating that if the default judgment was obtained by collusion, it would not constitute a “valid obligation” covered by the guaranty. 2015 N.Y. LEXIS 2333, at *8.


On further appeal, the defendant argued that the plaintiff had not met its burden by establishing an obligation was due and owing under his guaranty. The Court of Appeals, however, ruled that the plaintiff had established its prima facie entitlement to enforce the guaranty and that the appeal turned on whether the plaintiff’s demand for summary judgment was foreclosed by the guaranty. It affirmed the Appellate Division, holding that the defendant’s collusion defense was precluded by his agreement in the guaranty that his liability was “absolute and unconditional” irrespective of any defenses that may exist to its enforcement. Id. at *10.


Guaranties that by their express terms are absolute and unconditional “have been consistently upheld by New York courts.” Id. at *10–11 (citations omitted). In Citibank, N.A. v. Plapinger, 66 N.Y.2d 90 (1985), the court held that a guarantor’s defense of fraudulent inducement was precluded by the guaranty’s language. To find otherwise, the court there reasoned, would condone a guarantor’s own misrepresentation that the guaranty was enforceable notwithstanding any defenses that may exist. Here, “by its plain terms, in broad, sweeping and unequivocal language,” the defendant’s guaranty foreclosed any defense to the defendant’s liability as guarantor for the obligations of Agra USA and Agra Canada. 2015 N.Y. LEXIS 2333, at *13–14.


The court also found that the collusion defense as to the Agra USA default judgment “ultimately” amounted to one of fraud and was therefore waived by the defendant’s absolute and unconditional guaranty. Moreover, there was no contention that Agra Canada’s fraudulent transactions engineered by Solis “were caused, expedited or otherwise facilitated” by the plaintiff as part of a “collusive effort to cash in on” the defendant’s guaranty. Id. at *17.


Navarro illustrates the extremely high, if not insurmountable, burden faced by a guarantor in New York in defending against the enforcement of an absolute and unconditional guaranty. The court expressly left open the question, however, whether “certain conduct by a creditor and/or debtor may be of such character, and so impacts the guarantor’s position that the guarantor may challenge those acts notwithstanding our prior holding in Plapinger.” Id. at *18. Whether or not such circumstances exist in New York awaits further guidance from the Court of Appeals.


Keywords: commercial and business, litigation, guaranty, absolute and unconditional, collusion, fraud, waiver, guarantor


John P. McCahey, Hahn & Hessen LLP, New York, NY


July 20, 2015

Lender's Ability to Foreclose Survives Borrower's Bankruptcy Discharge

In Deutsche Bank Trust Co. Ams. v. Vitellas, No. 14695/12, slip op. (N.Y. App. Div. July 1, 2015), an intermediate New York appellate court ruled that a bank can proceed with foreclosure of a mortgage that was assigned to it even though the promissory note underlying the mortgage was discharged in the property owner’s personal bankruptcy proceeding. The court found that while the bankruptcy extinguished a personal action against the property owner on the underlying note, it did not extinguish a property action to foreclose the mortgage securing the note.


To have standing to bring a foreclosure action in New York, the plaintiff must be the holder or assignee of a note that a mortgage secures. Here, the defendant executed a promissory note for a loan in 2002 and executed a mortgage on his property to secure the loan. Both were executed with a predecessor lender. The defendant filed for personal bankruptcy in May 2004, listing the mortgage as a secured claim against the property, and was granted a discharge in bankruptcy in 2004. The defendant then failed to meet a payment obligation due under the note in 2010. The plaintiff had received a written assignment of the mortgage in 2011 and sought to foreclose on it in 2012 due to the defendant’s default on the note. The plaintiff contended that it had physically received delivery of both the note and the mortgage in March 2004, prior to the defendant’s bankruptcy. The plaintiff acknowledged that the bankruptcy discharge extinguished the defendant’s personal liability on the note, but that it still had the right to in rem relief based on the mortgage. The defendant argued that because the bankruptcy discharge extinguished personal liability on the note, the plaintiff did not hold a valid and legally operable note together with the mortgage, and thus lacked standing to foreclose. The appellate court disagreed.


The court observed that a plaintiff’s standing to foreclose generally can be shown by “[e]ither a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action,” id. at *3 (citation omitted), and that assignment of a mortgage alone, without assignment of the underlying note, is insufficient to convey standing to foreclose. Id. Here, the defendant submitted no evidence that the note was assigned or delivered to the plaintiff after the bankruptcy discharge. Rather, the plaintiff received physical delivery of the note prior to the bankruptcy discharge, as well as prior to commencement of the foreclosure action, sufficient to convey standing.


The court further found that “it is not necessary that an obligation involve personal liability in order for a mortgage to remain valid after a bankruptcy discharge.” Id. at *4–5. Citing Johnson v. Home State Bank, 501 U.S. 78, 82–84 (1991), for the proposition that “even after a debtor’s personal obligations have been extinguished, the mortgage holder still retains a right to repayment in the form of its right to the proceeds from the sale of the debtor’s property,” the court stated that the


[Defendant] obtained a personal discharge in bankruptcy; thus, his personal liability for the obligation was released . . . This did not affect the mortgage securing the note. Post-bankruptcy, the mortgage still secures an obligation; it is simply no longer personal, but in rem . . . . A discharge in bankruptcy is a discharge from personal liability only and, without more, does not affect a lien. . . . . Although a bankruptcy discharge extinguishes one mode of enforcing a note – namely, an action against the debtor in personam, it leaves intact another – namely, an action against the debtor in rem.


Deutsche Bank, No. 14695/12, at *4–5. The court observed that to rule otherwise would give a debtor broader relief than entitled under the Bankruptcy Code because it would preclude any mortgagee from foreclosing in rem after a bankruptcy discharge in which a personal obligation on a note is extinguished. Accordingly, the court held that since the plaintiff could establish that it was the holder or assignee of the note prior to commencement of the foreclosure action, it had standing. The court further noted that, based on the plaintiff’s pleading, the bank recognized the defendant’s defense of the bankruptcy discharge such that it would not seek a deficiency judgment against defendant personally after foreclosure on the mortgaged property.


Keywords:bankruptcy, commercial and business, litigation, discharge, foreclosure, mortgage, promissory note


Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York, NY


May 29, 2015

Texas Supreme Court Addresses Standard for Expert Opinion on Damages

Upon a finding of liability, courts and arbitral tribunals must make a determination with respect to damages. Claims related to events that have occurred in the past or that consist of a sum certain are straightforward and simple to calculate. Damages resulting from a breach of contract with benefits reaching into the future, or those that would have occurred in a hypothetical world, however, often include elements of uncertainty in their measurement. Such claims for damages may be challenging for claimants to establish and for a tier of fact to evaluate. The evidentiary threshold for establishing the existence and measure of damages is reasonable certainty.


In a recent decision, Gene E. Phillips, et al. v. Carlton Energy Group, LLC, No. 12-0255 (Tex. May 8, 2015), the Supreme Court of Texas determined that a jury’s award of $66.5 million in damages related to the fair market value of Carlton Energy Group, LLC’s lost investment opportunity was overly speculative, insofar as “[n]othing in the evidence supports the jury’s $66.5 million finding.” Accordingly, the court remanded the case to the appellate court for a determination of damages.


The court stated that “the law is well settled: lost profits can only be recovered when the amount is proved with reasonable certainty. Proof need not be exact, but neither can it be speculative.” Id. at 18 (emphasis added). In the decision, the court extended the requirement of reasonable certainty beyond lost profits to include the determination of fair market value based upon those profits: “[w]hile we have never spoken to whether this requirement of reasonable certainty of proof should apply when lost profits are not sought as damages themselves but are used to determine the market value of property for which recovery is sought, it clearly must.” Id. at 20 (emphasis added).


When applying this threshold, however, the court also explained that “when evidence of potential profits is used to prove the market value of an income-producing asset, the law should not require greater certainty in projecting those profits than the market itself would.” Id. at 21. The court further stated in the Phillips opinion that reasonable certainty “should not be used to deny a claimant damages equal to the value the market would have placed on lost property.” Id.


If a party cannot demonstrate that damages are reasonably certain, the trier of fact is likely to find that damages have not been proven and may even exclude an expert’s testimony. Without this testimony, even successful proof on liability may lead to an award of no damages.


Professional literature, court and arbitral opinions, rules of evidence, and treatises often use the phrase “reasonable certainty” when discussing damages. However, the definition of reasonable certainty remains ambiguous. Indeed, “most courts agree that reasonable certainty as to damages is a flexible, inexact concept.” Matthew Milikowsky, A Not Intractable Problem: Reasonable Certainty, Tractebel, and the Problem of Damages for Anticipatory Breach of a Long-Term Contract in a Thin Market, 108 Colum. L. Rev. 452, 467 (2008).


Courts will look toward several potential variables to determine whether or not an expert’s testimony is reasonably certain, including, but not limited to: (i) soundness of the opinion based upon; (ii) an acceptable methodology underpinned by; (iii) relevant data; and possibly judged against (iv) the intellectual rigor that could be expected of an industry expert, if applicable. Ultimately, as the Phillips decision reminds us, achieving reasonable certainty of expert opinions will provide greater opportunities for the opinions to be accepted and given the weight they deserve within the context of the evidence provided.


Keywords: commercial and business, damages, expert opinion, experts, reasonable certainty, litigation


Neil Steinkamp and Robert Levine, Stout Risius Ross, Inc., New York, NY


May 27, 2015

Sole Proprietor's Invocation of Fifth Amendment Privilege Rejected in Response to Grand Jury Subpoena

The U.S. Court of Appeals for the Third Circuit upheld a district court’s finding of civil contempt against a medical practice for refusing to comply with a grand jury subpoena, because the subpoenaed entity could not, as an incorporated entity, properly invoke the Fifth Amendment privilege against self-incrimination. In In Re: In The Matter Of The Grand Jury Empaneled on May 9, 2012, Slip Op. No. 15-1264 (3d Cir. May 15, 2015), the court found that the medical practice, identified as “ABC Entity,” could not invoke the Fifth Amendment because it was incorporated as a professional association under New Jersey law, notwithstanding that an individual doctor was the sole proprietor, employee and custodian of ABC Entity’s records. The court affirmed that the collective entity doctrine, which provides that an individual may not rely on the Fifth Amendment “to avoid producing the records of a collective entity which are in his possession in a representative capacity, even if those records might incriminate him personally,” applied. Id. at 7 (citation omitted).


Here, ABC Entity was subpoenaed to produce documents on its relationship with a blood-testing laboratory that had allegedly bribed doctors to refer patients for blood tests. The doctor who owned ABC Entity refused to comply with the subpoena on the grounds that, because he was the sole owner, employee, and custodian of records, a jury might conclude that he had produced the incriminating documents, and that his causing ABC Entity to turn over the requested documents would violate his Fifth Amendment privilege against self-incrimination. The Third Circuit rejected that argument, noting that “[t]here is no dispute that, ordinarily, corporations like [ABC Entity] are not entitled to invoke the Fifth Amendment’s privilege against self-incrimination,” and that “custodians of records for corporate entities are, typically, not entitled to invoke the privilege.” Id. at 6. Although ABC Entity cited United States Supreme Court authority for the proposition that the “[Fifth Amendment] privilege applies to the business records of a sole proprietor or sole practitioner . . . . ,” Bellis v. United States, 417 U.S. 85, 87–88 (1974), the Third Circuit distinguished that case, stating that Bellis “was referring to unincorporated solo practitioners and sole proprietors,” id. at 8 (emphasis in original), that Bellis had “[drawn] a line between incorporated and unincorporated persons, not between solo practitioners and multi-member corporations,” id., and that Bellis had affirmed adherence to the collective entity doctrine.


The court also rejected an argument that ABC Entity was merely an alter ego of the doctor, finding that “the size of the organization was immaterial,” noting that Bellis had “soundly rejected” such an argument in stating that “[i]t is well settled that no privilege can be claimed by the custodian of corporate records, regardless of how small the corporation may be.Id. at 8–9 (emphasis in original). The court added that “it is not the size or the type of corporation that matters,” but rather, “whether the entity in question is ‘an established institutional entity independent of its individual partners,’ and not merely a loose informal association or some temporary arrangement.” Id. at 9–10 (citation omitted). The court found that here, ABC Entity “possesses an institutional identity independent of [the doctor] and maintains business records that, in no way, constitute [the doctor’s] personal papers.” Id. at 10.

The court also rejected an argument that, because only the doctor had authority over ABC Entity’s business affairs, the “act-of-production doctrine” applied here. That doctrine provides that a person may invoke the Fifth Amendment privilege where the very act of producing documents contains testimonial features “regarding the existence and authenticity of the documents produced.” Id. at 11 (citation omitted). See Braswell v. United States, 487 U.S. 99, 109 (1988). The court observed that “the Fifth Amendment privilege against self-incrimination is unavailable to corporate custodians,” and that any act of production by the doctor would be as a representative of ABC Entity, not as an individual. Id. at 12–13.


The court concluded that “having taken advantage of the benefits of incorporation . . . [the doctor] may not discard the corporate form simply because he now finds it desirable to do so.” Id. at 13. As the court further noted, its ruling “comports with precedent from several other circuits . . . . all of which have agreed that a corporate custodian may not refuse to comply with a subpoena on Fifth Amendment grounds merely because he or she is also that corporation’s sole owner and employee.” Id. at 15. The Third Circuit thus joins others in finding this result to be, in the words of the Second Circuit, the “sensible” one. Id. at 16 (citation omitted).


Keywords:litigation, act-of-production doctrine, collective entity doctrine, commercial and business, Fifth Amendment privilege, self-incrimination, subpoena


Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York, NY


April 30, 2015

NY Federal Court Finds No Attorney-Client Privilege for Defunct Corporate Entities

Following the “weight of authority,” a New York federal magistrate judge has ruled that the attorney-client privilege cannot be asserted to shield documents of a company that is defunct. In Securities and Exchange Commission v. Carrillo Huettel LLP, et al., No. 13 Civ. 1735 (S.D.N.Y. Apr. 8, 2015), U.S. Magistrate Judge James Francis IV found, in the context of an SEC enforcement action, that documents sought from the attorneys for defunct corporate entities were not entitled to be withheld on the basis of attorney-client privilege because such “entities are incapable of asserting the privilege.”


In Carrillo Huettel, the SEC charged that the defendants engaged in a “pump and dump” scheme by promoting sales of unregistered securities in connection with two defunct corporate entities, Tradeshow Marketing Company Ltd. and Pacific Blue Energy Corporation. Among other things, the SEC alleged that two of the individual defendants were attorneys who, with their firm, Carrillo Huettel, also named as a defendant, assisted the promoters in their scheme. The SEC sought documents and testimony from the attorneys and their law firm relating to Tradeshow Marketing Pacific Blue, as well as other defunct entities that the attorneys had represented, but the attorneys resisted on grounds of attorney-client privilege. On the SEC’s motion to compel production of the withheld documents and the testimony from the attorneys, Judge Francis rejected the defendants’ assertion of attorney-client privilege.


The court noted that authorities finding that the “privilege survives the dissolution of a corporation generally do so on the basis of state law,” but determined that “where federal law supplies the rule of decision, as it does here, the question of whether the corporate attorney-client privilege survives the demise of the corporation is answered by reference to federal common law.” Judge Francis went on to conclude that because the corporate entities as to which documents and testimony were sought “are now defunct,” even though some courts consider it an ”unsettled legal question,” “the weight of authority . . . holds that a dissolved or defunct corporation retains no privilege.” Judge Francis noted several rationales for this conclusion: (1) the “interests that are furthered by the extension of privilege beyond the death of a natural person simply do not apply in the context of a corporate entity” (e.g., while a natural person may want to know their confidences will be preserved after their death so as not to affect their reputation or family, after a corporate dissolution there is no longer any “good will or reputation to maintain . . . nor are there tangible assets left to protect”); (2) “there is no one who can speak for a defunct corporation in order to assert the privilege”; and (3) “limiting the duration of the attorney-client privilege to the life of a corporation is consistent with the principle that the privilege is to be construed narrowly because it withholds relevant information from the judicial process.”


Judge Francis did recognize that state law may be relevant to, and dictate the determination of whether a corporation is, in fact, dissolved. That would obviously require a case-by-case analysis where privilege is asserted as to an allegedly defunct corporate entity. The ruling here, however, joins those in the majority that reject the assertion of privilege for a defunct business entity under federal common law.


Keywords: litigation, attorney-client privilege, business dissolution, commercial and business, corporate dissolution, defunct corporation, federal common law, privilege


Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York, NY


April 15, 2015

Fourth Circuit Revives Securities Fraud Claims Based on Pleading of Scienter

The Fourth Circuit recently revived securities fraud claims against a pharmaceutical company, holding that the allegations that the company acted with wrongful intent were sufficient to proceed even under the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA). 


In Zak v. Chelsea Therapeutics International, Ltd., No. 13-2370 (4th Cir. March 16, 2015), the plaintiffs brought securities fraud claims against Chelsea Therapeutics based on its statements and omissions concerning the likelihood of FDA approval for its new drug, Northera. According to the complaint, Chelsea made public statements about the success of one efficacy study of Northera and said that the FDA had agreed that it could submit its new drug application based on that one successful study. At the same time, Chelsea failed to disclose the FDA’s warnings that at least two successful efficacy studies would likely be expected before it would approve the drug and also failed to disclose the fact that an FDA briefing document recommended against approval of Northera. 


The district court, applying the heightened pleading standards for securities fraud claims under the PSLRA, concluded that the plaintiffs failed to allege facts sufficient to show that Chelsea acted with scienter—that is, intent to deceive. On appeal, the Fourth Circuit disagreed. First, the Fourth Circuit held that the district court erred in considering certain documents that were filed with the Securities and Exchange Commission (SEC) in deciding the motion to dismiss for failure to state a claim. The Fourth Circuit explained that on a motion to dismiss, documents outside the complaint may generally be considered only when those documents are integral to and explicitly relied upon in the complaint and the plaintiffs do not challenge their authenticity. In dismissing the plaintiffs’ claims, the district court relied on SEC filings that were not referenced in the complaint to conclude that none of the individual defendants sold Chelsea stock during the relevant period. The Fourth Circuit held that the district court had no basis to consider these SEC filings, since the filings were not referenced in the complaint and there were no allegations of unusual stock sales. 


Second, the Fourth Circuit held that the plaintiffs had sufficiently alleged that Chelsea acted with the requisite wrongful intent. Specifically, the court concluded that the plaintiffs had pled facts permitting a strong inference of scienter in alleging that Chelsea failed to disclose critical information about the weakness of its new drug application. In reaching this conclusion, the court considered the alleged omissions in the context of Chelsea’s public statements, reiterating that a company can control what information it must disclose based on the affirmative representations it makes. In other words, a company’s duty to disclose information depends on the context created by its other affirmative statements to the market. 


The Fourth Circuit’s decision in Zak identifies significant limitations on when a court may consider SEC filings on a motion to dismiss. Furthermore, according to the dissenting opinion, the case marks the first time since passage of the PSLRA that the Fourth Circuit has overturned a district court’s decision dismissing a case for failure to plead scienter. The case thus provides a rare and compelling example of the type of allegations that can survive the PSLRA’s heightened pleading standards for securities fraud claims.


Keywords: commercial and business, litigation, pleading, PSLRA, scienter, securities fraud


Donald H. Tucker, Clifton L. Brinson, and Isaac A. Linnartz, Smith Anderson, Raleigh, NC


March 30, 2015

Seventh Circuit Determines when Goods Are "Received" in Commercial Equipment Leases

In Wells Fargo Equip. Finance, Inc. v. Titan Leasing, Inc., 768 F.3d 741 (7th Cir. 2014), the U.S. Court of Appeals for the Seventh Circuit held that Titan Leasing, Inc. breached the warranties of a nonrecourse loan from Wells Fargo Equipment Finance, Inc., by falsely warranting that a railroad locomotive, which Titan leased to Gerdau Ameristeel and which Titan used as security for the loan, had been delivered and accepted by Gerdau and that Gerdau had acknowledged the locomotive’s receipt. The court looked to the parties’ security agreement and underlying lease agreement, and to Uniform Commercial Code (UCC) Article 2A, to determine the meaning of the warranty terms, finding that lack of acknowledgement of receipt breached the warranty of receipt in the security agreement.


Gerdau leased the locomotive from Titan in summer 2008. During shipment, the locomotive was damaged and sent to Knoxville for repairs. It ultimately arrived at Gerdau’s plant in summer 2009, at which time it was rejected by Gerdau on grounds that it needed further repairs. In March 2009, prior to the locomotive arriving at Gerdau’s plant, Titan obtained a nonrecourse loan from Wells Fargo and used the lease with Gerdau as security for the loan. The security agreement contained a number of warranties, which, if breached, entitled Wells Fargo to recover the money it loaned to Titan. In particular, Titan warranted that, as of the date of the security agreement (March 6, 2009), the locomotive had been (1) delivered and (2) accepted by Gerdau, and that Gerdau had acknowledged (3) receipt and (4) acceptance of the locomotive. When Gerdau refused to make any payments on the lease, Wells Fargo seized control of the locomotive and sued Titan for breach of warranty.


The U.S. District Court for the Northern District of Illinois granted summary judgment in favor of Titan. The district court looked to both the lease and the UCC to see whether the locomotive had been “accepted” (warranty 2) by March 6, 2009. The lease provided that shipment of the locomotive, which occurred in summer 2008, constituted formal acceptance. Under UCC § 2A-515(1), 810 ILCS 5/2A-515(1), acceptance occurs when the lessee fails to make an effective rejection after having reasonable opportunity to inspect the goods. Because Gerdau had an opportunity to inspect the locomotive at the time of shipment, the district court concluded that the locomotive had been “accepted” as of March 6, 2009, under both the lease and the UCC.


On appeal, the Seventh Circuit noted that the district court failed to address the other three warranties in the security agreement. With respect to warranty 1 (that the locomotive had been “delivered” to Gerdau before March 6, 2009), the court observed that “delivery” was not defined in the security agreement, the lease, or the UCC. Even assuming, as Titan contended, that “delivery” was equivalent to “acceptance,” such that the locomotive was both delivered and accepted at the time of shipment, the court found that warranty 3 (that Gerdau had acknowledged receipt) was still unsatisfied. As the court explained, “[n]either the lease nor the UCC equates ‘delivery’ with ‘receipt,’ and these sound like different words—the locomotive may have been ‘delivered’ and ‘accepted’ when shipped, . . . but was not ‘received’ until it reached Gerdau’s plant. And until Gerdau acknowledged receipt, warranty 3 had not been fulfilled.” Wells Fargo, 768 F.3d at 743. The court found no evidence to suggest that Gerdau ever acknowledged receipt of the locomotive. As such, the judgment of the district court was reversed, and Titan was required to repay the loan to Wells Fargo.


In reaching its decision, the Seventh Circuit explained that the distinction between “delivery” and “acceptance” on the one hand, and “receipt” on the other, was not simply one of semantics. The warranties contained in the security agreement were intended to ensure that Gerdau was satisfied with the locomotive, since a satisfied Gerdau was more likely to pay. Although delivery and acceptance were important steps in ensuring Gerdau’s satisfaction, receipt followed by acceptance was more important. By acknowledging receipt and acceptance, Gerdau would have essentially been verifying that the locomotive conformed to the parties’ lease, which, in turn, would have allowed Wells Fargo to advance the money with greater confidence of being repaid. In reality, however, Gerdau rejected the locomotive upon arrival at its plant, months after Titan warranted that Gerdau had acknowledged the locomotive’s receipt and acceptance. The warranties in the security agreement were designed to protect Wells Fargo precisely from this scenario.


Keywords: acceptance, Article 2A, breach of warranty, commercial and business, delivery, equipment lease, receipt, security agreement, UCC, Uniform Commercial Code, litigation


Ali Razzaghi, Frost Brown Todd LLC, Cincinnati, OH


March 30, 2015

Pennsylvania Court Limits Attorney-Client Privilege for Defunct Business Entities

While “[i]t has been generally, if not universally, accepted, for well over a century, that the attorney-client privilege survives the death of the client[,]” Swidler & Berlin v. United States, 524 U.S. 399, 410 (1998), whether the privilege survives a business entity’s dissolution has been less clear. Courts have provided a range of different conclusions, and the Superior Court of Pennsylvania, an intermediate appellate court, recently considered the issue for the first time in that state. In Red Vision Systems, Inc. v. National Real Estate Information Services, L.P., the Superior Court held that “if a business is dissolved and/or has ceased to operate, and has neither a legal successor nor some remaining management with authority to handle the company’s post-dissolution windup, then there is no longer any ‘client’ to raise or waive the privilege.” 108 A.3d 54, 68 (Pa. Super. Ct. 2015).


In Red Vision, the appellate court wrestled with the question of whether a former in-house attorney of three related, defunct companies had to comply with a subpoena for documents related to his legal work for the entities. The plaintiffs had filed a complaint against the defendant companies, alleging that they had failed to pay for certain real estate services. It was only after the lawsuit was filed that the plaintiffs learned that all three companies had been dissolved. At that point, the plaintiffs served a third-party subpoena upon the defendants’ former in-house counsel, Thomas K. Lammert, Jr., in an effort to determine whether the companies had fraudulently transferred assets to other entities in order to avoid paying creditors like the plaintiffs. The subpoena also sought production of documents identifying the defendants’ management personnel, insurance coverage, and showing any transfer of assets. Lammert filed a motion to quash the subpoenas, asserting, inter alia, that the requested documents were protected by the attorney-client privilege. The Court of Common Pleas for Allegheny County denied the motion.


On appeal, the Superior Court of Pennsylvania considered whether the attorney-client privilege survived the companies’ dissolution. Because the issue presented a matter of first impression in Pennsylvania, the appellate court considered the general policies upon which the attorney-client privilege is based, as well as decisions from other jurisdictions. According to the Court, those cases all turned on the fact of whether the business entity was “dead,” as opposed to being in some other state of existence where there was still a person or entity with successive interests or authority to assert the privilege. In situations where the company was “dead,” no such person or entity existed, and the attorney-client privilege did not survive post-dissolution.


Rather than announce a blanket-rule regarding the assertion of the privilege after a business entity dissolves, the Red Vision Court explained that the continued existence of a defunct company’s attorney-client privilege will turn on whether there is anyone with continued authority to raise it. Thus, the Court held that “the communications between a corporation or other business entity and its attorney remain subject to the attorney-client privilege after the company dissolves and/or ceases normal business operations so long as the company retains some form of continued existence evidenced by having someone with the authority to speak for the ‘client.’” Red Vision, 108 A.3d at 68. Because Lammert, former in-house counsel for the defendants, did not claim to retain power to act on their behalf post-dissolution, the Court upheld the trial court’s finding that he could not assert the attorney-client privilege to avoid compliance with the plaintiffs’ third-party subpoena. While the Red Vision case is unlikely to be the last word on the issue, it provides a useful starting point for other attorneys who find themselves in a similar situation.


Keywords: litigation, attorney-client privilege, business dissolution, commercial and business, privilege


Marie-Theres DiFillippo, Dilworth Paxson LLP, Philadelphia, PA


February 26, 2015

Qualified Privilege Applies to Pre-Litigation Communication

New York’s highest court for the first time has addressed whether statements made by an attorney to a potential defendant prior to the commencement of litigation are privileged in the context of a later defamation claim. In Front, Inc. v. Khalil, No. 19, 2015 N.Y. LEXIS 299 (N.Y. Feb. 24, 2015), the New York Court of Appeals unanimously held that an attorney’s pre-litigation statements were protected by a qualified privilege that attaches to statements pertinent to a good-faith anticipated litigation. Id. at *1. As a result, the defendant could not sustain a libel claim against plaintiff’s attorney for statements made in demand letters sent prior to a litigation’s commencement. Id. at *10–11.


The defendant/third-party plaintiff, Philip Khalil, was a Director of Engineering for several years at the plaintiff, Front, Inc., an architectural and engineering firm. In March 2011, Khalil resigned from Front to take a position with one of Front’s competitors, Eckersley O’Callahan Structural Design (EOC). Prior to his departure, Front discovered that Khalil had downloaded Front’s entire network drive directory and intended to take that download with him. The downloaded information included all prospects Front worked on, client contacts, and other proprietary information. Front also learned that Khalil, while a Front employee, had worked on 40 side projects of its competitors, including EOC, and had diverted work away from Front to EOC. Id. at *1–3.


Front’s attorney then sent a letter to Khalil that listed his various wrongful acts and demanded, among other things, that he cease and desist from further wrongful conduct and return proprietary information he had taken. A letter (with a copy of the Khalil letter) was also sent to EOC and its principal stating they conspired with Khalil to injure Front and making “nearly identical” demands to those made in the letter to Khalil. Khalil and EOC failed to comply with Front’s demands. Id. at *2–4.


Front thereafter commenced litigation against Khalil, EOC, and its principals asserting various claims, including those of misappropriation of trade secrets, and common-law unfair competition. Khalil, in response, commenced a third-party action against Front’s attorney for libel per se based upon the statements made in the demand letter to Khalil. Id. at *4–5. The trial court granted the motion by Front’s attorney to dismiss the libel claim and that dismissal was affirmed on appeal to the Appellate Division on the basis that the attorney’s letters were “absolutely privileged”. Front, Inc. v. Khalil, 103 A.D.3d 481 (1st Dep’t 2013). The New York Court of Appeals granted leave to appeal, and affirmed that dismissal, but held the privilege was “qualified” rather than “absolute”. 2015 N.Y. LEXIS 299, *5–6, 10–11.


The court noted that “although it is well-settled that statements made in the course of litigation are entitled to absolute privilege, this Court has not addressed whether statements made by an attorney on behalf of his or her client in connection with prospective litigation are privileged.” Id. at *7. It found the same considerations that supported the application of privileged status to attorney communications during the course of litigation were relevant to pre-litigation communications. Communications in anticipation of litigation encourage negotiation between the parties to avoid costly and time-consuming litigation, and should be encouraged undeterred by the possibility of a later defamation claim. Id. at *8–9.


The court recognized, however, that providing privileged status to pre-litigation communications could potentially lead to abuses. As a result, the court held that the privilege should be “qualified” and “should only be applied to statements pertinent to a good-faith anticipated litigation”. Id. at *9. Limiting the privilege in that manner will properly exclude those attorneys who seek to “bully, harass, or intimidate their client’s adversaries by threatening baseless litigation or by asserting wholly unmeritorious claims, unsupported in law and fact, and in violation of counsel’s ethical standards.” Id. at *9–10. The court in a footnote added that “attorneys should exercise caution when corresponding with unrepresented potential parties who may be particularly susceptible to harassment and unequipped to respond properly even to appropriate communications from an attorney”.  Id. at *10 n.2. No further guidance was offered as to the “caution” to be exercised in those circumstances.


Turning to the letters sent by Front’s counsel, the court found both that a good-faith basis existed to anticipate litigation, and the statements contained in the letters were pertinent to that anticipated litigation. Those statements, therefore, fell within and were protected by a qualified privilege. Id. at *10–11.


Prior to sending a demand letter, attorneys in New York need satisfy themselves that both a good-faith basis exists for anticipated litigation and that they have avoided inflammatory or unnecessary verbiage. They should also consider the “caution” expected of them by Front even where the demand is “appropriate.”


Keywords: qualified privilege, absolute privilege, commercial and business, defamation, anticipated litigation, libel, pre-litigation communications, demand letter


John P. McCahey, Hahn & Hessen LLP, New York, NY


February 26, 2015

Improving Patient Care Does Not Justify a Merger Under the Antitrust Laws, Says the Ninth Circuit

Healthcare providers frequently consolidate to cut costs and improve patient care. These benefits result from sharing administrative costs such as billing and electronic recordkeeping, eliminating excess capacity, better coordinating care, and investing in new facilities and services that were unaffordable before the transaction.

Antitrust enforcers generally regard cost savings and quality improvements as procompetitive benefits relevant for determining the likely effects of a merger on consumers. But what if a merger improves patient care while also creating market power leading to higher prices? How (if at all) should courts balance better patient care against higher prices? In Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System Ltd., No. 14-35173 (9th Cir. Feb. 10, 2015), the Ninth Circuit answered that no such balancing is allowed and that if a merger creates market power that may lead to higher prices, it violates antitrust law regardless of the benefits to patients.

The St. Luke’s case focused on the market for adult primary care physician (PCP) services in Nampa, Idaho, a suburb of Boise with a population of 81,000. In 2012, St. Luke’s Health System, the largest health system in Idaho, purchased the Saltzer Medical Group, a multi-specialty physician group with offices across Idaho, including sixteen PCPs in Nampa. Because St. Luke’s already had nine PCPs there, the transaction gave St. Luke’s 80% of the PCPs in Nampa.

In November 2012, Saint Alphonsus, the only hospital in Nampa, sued to enjoin the merger. The FTC and State of Idaho joined the litigation, alleging that the acquisition gave St. Luke’s the ability to charge higher prices for PCP services in Nampa.

During a 19-day bench trial in 2014, St. Luke’s defended based on the transaction’s benefits to patients, arguing that the merger was necessary to allow Saltzer to upgrade its electronic recordkeeping system, to better integrate its providers and coordinate care, and to transition to capitation or value-based billing. Although the district court agreed that the merger would “improve the delivery of health care” in Nampa, it rejected this defense on the grounds these benefits were not “merger-specific,” meaning Saltzer could have achieved the same benefits without a merger. The district court concluded that “there are other ways to achieve the same effect that do not run afoul of the antitrust laws and do not run such a risk of increased costs.” Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System Ltd., No. 1-cv-00560, at 3 (D. Idaho Jan. 24, 2014). Largely on the basis of the 80% market share post-transaction, the district court held that the merger violated the Clayton Act and ordered divestiture.

On appeal, the Ninth Circuit affirmed, agreeing that the defendant’s claimed efficiencies were not merger-specific. Although the court could have resolved the case on this basis alone, it went further, noting that that even if the efficiencies proffered by St. Luke’s had been merger-specific, the efficiency defense would still fail: “[T]he Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.” Id. at 29. Indeed, “[i]t is not enough to show that the merger would allow St. Luke’s to better serve its patients.” Id. at 28.

The court based its skepticism of the efficiency defense on the difficulty of predicting and quantifying merger efficiencies, stating: “It is difficult enough … to predict whether a merger will have future anticompetitive effects without also adding to the judicial balance a prediction of future efficiencies.” Id. at 25.

Efficiencies are not to be totally disregarded, however. According to the Ninth Circuit, efficiencies would figure into the analysis if the efficiencies show that the transaction would not reduce competition in the first place. For example, “if two small firms were unable to match the prices of a larger competitor, but could do so after a merger because of decreased production costs, a court recognizing the efficiencies defense might reasonably conclude that the transaction likely would not lessen competition.” Id. at 26. Of course, there was no “larger competitor” in Nampa. The court’s example underscores its ruling: if a merger eliminates so much competition that prices will rise even as costs decline and outcomes improve, those efficiencies will not save the merger.

The case is an important reminder that despite the Affordable Care Act’s emphasis on integrating patient care to lower costs and improve quality, courts remain skeptical of transactions that achieve these goals through mergers that reduce competition. Because regulators and courts focus on pre- and post-merger market shares to predict anticompetitive effects, the outcome of many healthcare merger challenges will continue to hinge on market definition. While parties should remain diligent about documenting the cost reductions and quality improvements that will flow from a transaction, they must also be prepared to show that these benefits will lead to a lower total cost of care.

Keywords: litigation, antitrust, Clayton Act, commercial and business, healthcare, hospitals, market power, market share, merger

Mitchell D. Raup and Herbert F. Allen, Polsinelli, Washington, D.C., and Gregory M. Bentz, Polsinelli, Kansas City, MO


February 25, 2015

Hart-Scott Rodino Antitrust Reporting Threshold Increased to $76.3 Million

The Hart-Scott-Rodino Act (HSR) requires that transactions over a certain value be reported to the Federal Trade Commission (FTC) and U.S. Department of Justice Antitrust Division (the Agencies) at least 30 days prior to closing. See generally, 15 U.S.C. § 18a. That reporting threshold is adjusted annually. Effective February 20, 2015, the new threshold is $76.3 million (up from $75.9 million in 2014). Parties to transactions should consult with antitrust counsel if they are acquiring or selling voting securities, non-corporate interests in a business (such as interests in an LLC or partnership), or assets valued over $76.3 million.

When determining whether an HSR filing is necessary, the following questions usually must be addressed:

What is the value of the transaction?
The HSR rules are complex and many times whether the size-of-the-transaction threshold is met turns on the details of the transaction’s structure and whether any HSR exemptions apply.

If the transaction exceeds the $76.3 million threshold, are the parties large enough?
If the transaction is valued at or above $76.3 million but less than $305.1 million, then the size of the parties is considered. If one party to the deal (and all of that party’s parents, affiliates, and subsidiaries) has sales or assets over $152.5 million dollars, and if the other party has sales or assets over $15.3 million, then the transaction might be reportable. All non-exempt transactions valued over $305.1 million are reportable, regardless of the size of the parties.

Do any exemptions apply?
The HSR rules contain several exemptions which can reduce the transaction value, or eliminate the obligation to make a filing altogether. For instance, the HSR rules do not apply to certain acquisitions of non-U.S. entities or assets, acquisitions made solely for the purpose of investment, or certain real estate acquisitions.

What will the FTC or Antitrust Division do after the filing is made?
This is the last and perhaps most critical question. The filing triggers a 30-day waiting period during which the parties cannot close the transaction. The waiting period gives the Agencies an opportunity to review whether the transaction could harm or diminish competition in the market for any particular product or service. Upon request of the parties, the Agencies may terminate the waiting period earlier than 30 days, if the transaction has no risk of decreasing competition. Early termination is fairly common when the parties do not compete against one another. But if the parties do compete or operate in the same market or industry, antitrust counsel should be consulted early in the process to determine how the transaction might affect competition and the likelihood the Agencies will oppose or challenge the transaction.

Ignoring the HSR threshold can be costly. Failure to file a required HSR notification can draw penalties up to $16,000 for each day of noncompliance. Keep the number $76.3 million in mind as you negotiate and structure any transaction in 2015. Further questions on how the HRS threshold adjustment may affect transactions in 2015 should be directed to antitrust counsel.


Keywords: litigation, antitrust, commercial and business, Hart-Scott-Rodino, reporting threshold


Matthew C. Hans, Polsinelli, LLP, St. Louis, MO


January 29, 2015

New York Trial Court Rules in City Trading Fund v. Nye

In an opinion that could help remedy the problem of baseless merger litigation, a New York trial court recently refused to approve a class action settlement because the underlying lawsuit was without merit. 

The case, City Trading Fund, et al. v. Nye, et al., No. 651668/2014, NY Slip Op 50008(U) (N.Y. Sup. Ct. Jan. 7, 2015) (Kornreich, J.), arose out of the acquisition of Texas Industries by Martin Marietta Materials. As happens in almost every public company merger, a shareholder filed litigation challenging the transaction. The lawsuit alleged that Martin Marietta’s disclosures regarding the proposed merger were inadequate, thereby breaching the directors’ fiduciary duties to the shareholders.

The lawsuit was filed in New York, but, because Martin Marietta is a North Carolina corporation, the claims were governed by North Carolina law. North Carolina law is very similar to Delaware law with respect to the fiduciary duties of corporate directors.

To avoid the expense of litigation and any potential delay in closing the deal, the defendants ultimately agreed to a “disclosure only” settlement that required Martin Marietta to make some minimal additional disclosures in advance of the shareholder vote on the merger. Based on those disclosures, and in connection with their motion to approve the settlement, the shareholders’ lawyers sought an award of substantial attorney fees.  Such settlements are common in merger litigation and are generally approved by courts. 

In this case, however, the trial court refused to approve the proposed settlement. The court began by examining each of the ways in which Martin Marietta’s disclosures were allegedly lacking.  The court concluded in each instance that the omitted information was not material, and thus the omissions did not violate the directors’ fiduciary duties. Accordingly, the additional disclosures required by the proposed settlement did not create any real value for the shareholders. The court also discussed the shareholder who brought the lawsuit, a small partnership formed for the sole purpose of bringing shareholder lawsuits, and concluded that it was not an adequate representative for other shareholders because it is “essentially a fictitious entity.” More generally, the court lamented the current state of merger litigation, recognizing that it has effectively created a “merger tax.” The court concluded that it should not countenance “frivolous litigation,” and therefore rejected the settlement and ordered the defendants to respond to the complaint—presumably by way of a successful motion to dismiss the lawsuit.

The ruling generated substantial publicity, including an article on the front page of the New York Law Journal, for its thorough excoriation of the shareholder and law firm bringing the lawsuit. It comes on the heels of the rejection by another justice of the same court, for similar reasons, of a merger settlement in connection with the Verizon/Vodafone merger. See Gordon v. Verizon Communications, Inc., No. 653084/2013, 2014 NY Slip Op 33367(U) (N.Y. Sup. Ct. Dec. 19, 2014). 

The judicial scrutiny by the courts in City Trading Fund and Gordon potentially represents another approach to minimizing the unnecessary costs imposed on companies by merger litigation. In the past couple of years, efforts to control such costs have focused on litigation management provisions in a company’s bylaws or articles of incorporation, particularly provisions limiting shareholder litigation to a single forum. If, as in City Trading Fund and Gordon, courts scrutinize settlements more closely and refuse to reward meritless claims, shareholders (and the law firms representing them) will have less incentive to bring such litigation in the first place.

Keywords: commercial and business litigation, merger litigation, shareholder litigation, class actions, settlements

Clifton L. Brinson, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, NC



January 26, 2015

Daubert Challenges to Intellectual Property Damages Analyses

In the first half of 2014, it was reported that there were 103 challenges to financial experts, of which 42 percent resulted in the experts’ testimony being partially or totally excluded. In the area of intellectual property, 12 of the 23 challenges—more than half—resulted in the experts’ testimony being excluded or partially excluded. Several recent challenges in which the expert testimony was allowed in intellectual property disputes, however, diverge from that trend.

In EveryScape, Inc. v. Adobe Systems Incorporated, Adobe argued that EveryScape’s expert used the Entire Market Value (EMV) of Vanishing Point rather than apportioning the incremental value added to Photoshop by the accused Clone Brush. EveryScape responded that the Clone Brush is the unique component of Vanishing Point and that the other tools and features of the software are commonplace. The court ruled that Daubert is not intended to require an expert who proffers expert testimony to prove to the judge that their assessment of the situation is the correct one among competing theories. Rather it requires only that the conclusion has been reached in a scientifically sound and methodologically reliable fashion.

In Numatics Inc. v. Baluff, Inc. et al., the court denied defendant’s motion to exclude the report of Numatic’s damages expert on lost profits and reasonable royalties. The court opined that Numatic’s expert properly applied that Panduit test when calculating lost profits. In particular, defendants argued that the expert did not consider other market participants when calculating lost profits and that he did not appropriately allocate market share. However the court opined that the expert did consider non-infringing alternatives and had found them unsuitable. In addition to challenging plaintiff’s lost profit analysis, defendants also challenged plaintiff’s expert’s use of the entire market value of the infringing products as the royalty base. The court opined the expert appropriately supported his contention that the accused display was the primary feature driving sales, and that even if some customers might have purchased the product without the display, the expert was not required to negate all possibilities of alternative or foregone purchases.

In Ultratec, Inc. et al v. Sorenson Communications, Inc. et al. the court denied Sorenson’s motion to exclude the expert’s reliance on supply agreements rather than true patent licenses. Recent decisions have generally not favored using comparable license agreements unless it could be shown that the technology was very similar. In this case there were no bare patent licenses for the asserted patents and the court opined that the supply agreements the expert relied on “represented an actual agreement into which plaintiffs were willing to enter considering their attempts to maintain a monopoly (factor 4) and involved plaintiffs’ competitors, which are similar to defendants (factor 5).” In addition, the expert adjusted the royalty rate to account for differences between those agreements and a hypothetical license to which the parties would have agreed.

In Mobile Telecommunications Technologies LLC v. Sprint Nextel, et al., Apple filed a motion to strike the expert report of Mobile Telecommunications Technologies LLC(MTEL)’s expert for numerous reasons. The defendant alleged that the plaintiff’s expert failed to apportion the base to account for non-infringing features. In this case, however, the court noted that there is a factual contention that the apps, which are the basis of the royalty base, derive all their value from technology that is allegedly infringing and therefore apportionment would not be necessary. Apple also contends that comparable apps are available for free, and that the expert did not address that fact appropriately. The court noted that revenue and value can be had from apps which are able to be downloaded for free, which was acknowledged by the expert. In addition, Apple argued that the expert’s analysis that was based on data downloads over the life of a smartphone was improper because no cell phone provider ever charged for data based on the life of the phone and many cell providers do not charge for data downloads at all. The court found that the expert adequately addressed the first point and opined that the second point was “flatly incorrect.” The court noted that even if data downloads are not invoiced specifically, the cell carriers recover that cost from the consumer in some way. Apple had also filed a motion to prevent discussion of certain facts such as Apple’s size, wealth, overall revenues or the entire market value of the accused sales. The court granted Apple’s motion and stated that the expert was not to discuss overall sales of the accused products without leave of the court, to be obtained outside the presence of the jury.


Although numerous Daubert motions filed against experts analyzing intellectual property damages have been denied by the courts recently, none of the seminal decisions addressing EMV or apportionment have been overturned. Apportionment is still likely to be the prudent course for patent infringement matters involving multi-component products unless it is being claimed that the allegedly infringing technology drives sales.

Keywords: commercial and business, litigation, intellectual property, entire market value, EMT, royalty, Daubert, expert, royalty base, royalty rate

Jennifer Vanderhart, Ph.D., Managing Director, FTI Consulting, Washington, D.C.


January 20, 2015

Deference of U.S. Courts to Obtaining Discovery Held in a Foreign Country

The U.S. District Court for the Southern District of New York recently considered whether to defer to foreign countries’ secrecy and blocking statutes when parties seek discovery located in those foreign countries. In Motorola Credit Corp. v. Uzan, 2014 U.S. Dist. Lexis 176225 (S.D.N.Y. Dec. 22, 2014), the court phrased the question as “whether a New York judgment creditor, through subpoenas issued on New York offices of international banks, can obtain discovery regarding accounts held by judgment debtors or their agents in various foreign branches of these banks.” Id. at *8.


In the Motorola case, banks located in France, Switzerland, Jordan, and the United Arab Emirates (UAE) objected to subpoenas issued by judgment creditor Motorola based on foreign law, contending that the laws governing the banks’ non-U.S. branches prohibit production of the subpoenaed information. The court noted that “more often than not, such deference [to foreign laws] has not been accorded.” Id. at *9. The court used the framework articulated by the Supreme Court in Societe Nationale Industrielle Aerospatiale v. United States District Court for the Southern District of Iowa, 482 U.S. 522 (1987). Of the factors articulated in Aerospatiale, the court found determinative that (i) Motorola could not realistically seek attachment of funds in foreign lawsuits without first learning where the funds were located by the discovery sought and (ii) Motorola is unlikely to obtain the bank information through resort to the Hague Convention or proceedings with foreign countries because of blocking statutes prohibiting release of such information. But, most importantly, the court focused on international comity—“the extent to which non-compliance with the [discovery] request would undermine important interests of the United States, or compliance with the request would undermine important interests of the state where the information is located.” Id. at *15. The court reached different conclusions for each of the countries involved.


France. The court held that France’s “blocking statute,” which the banks said prohibits the production of the subpoenaed information, “is riddled with loopholes that make it substantially unenforceable. This was no accident . . . . [I]n practice, . . . it appears that when a foreign court orders production of French documents even though the producing party has raised the ‘excuse’ of the French blocking statute, the French authorities do not, in fact, prosecute or otherwise punish the producing party.” Id. at *19. The court therefore concluded that, under the comity analysis, France’s interests did not override the Unites States’ own interests in enforcing its judgments.


Switzerland. The court reached the opposite conclusion under Switzerland’s bank-secrecy regime, which, “[i]n contrast with the French situation, . . . constitutes, not just a seriously enforced national interest, but almost an element of that nation’s national identity.” Id. The court found that violations can be and actually are prosecuted ex officio, even if the injured party does not complain. The comity analysis thus weighed in favor of deferring to the Swiss bank-secrecy laws.

Jordan and UAE. The court also declined to defer to Jordan’s and the UAE’s statutes. The court concluded that the Jordanian statute “permits disclosure of bank account information if so-ordered by a ‘competent judicial authority,’ and there is no material indication that this is limited to courts of Jordan.” Id. at *22-23. The court also noted the “total paucity of published prosecutions of banks or their officers in Jordan and UAE for complying with discovery ordered by a foreign court.” Id. at *23.

Motorola thus provides a guidepost to litigants involved in international matters in seeking discovery offshore. Litigants will need to be conversant in the specific countries’ application of their laws.

Keywords: commercial and business, litigation, blocking statute, commercial and business, discovery, foreign bank, foreign country, international litigation, judgment creditor, judgment debtor, litigation, secrecy law, subpoena

Eric (Rick) S. Rein, Horwood, Marcus & Berk Chartered, Chicago, IL


December 23, 2014

Supreme Court Eases Pleading Burden in Removal of Class Actions to Federal Courts

In Dart Cherokee Basin Operating Co., LLC, et al. v. Owens, No. 13-719 (U.S. Dec. 15, 2014), the United States Supreme Court, in a 5–4 decision, eased the pleading burden required to remove class action lawsuits under applicable provisions of the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d), holding that the pleading of jurisdictional requirements is subject to the same liberalized standards applicable to other pleading matters under Fed. R. Civ. P. 8(a). While the Court’s ruling was in a CAFA context, the majority opinion would seem to apply to efforts to remove class actions in other contexts.


In Dart, plaintiff Brandon W. Owens commenced a putative class action in Kansas state court, alleging that defendants had underpaid royalties owed to the putative class members under certain oil and gas leases. Defendants removed to the federal district court, alleging federal question jurisdiction under CAFA and pleading in the notice of removal that the required jurisdictional amount in controversy ($5 million, per 28 U.S.C. § 1332(d)(2)) was met by alleging that “the purported underpayments to putative class members totaled more than $8.2 million.” Dart, slip op. at 2. Upon Owens’ motion to remand to the state court on grounds, inter alia, that the notice of removal “included ‘no evidence’ proving that the amount in controversy exceeded $5 million,” id., the defendants submitted a declaration by an officer with a detailed damages calculation. The district court, concluding that Tenth Circuit precedent contemplated a “presumption” against removal and required proof of the amount in controversy in the notice of removal itself, ruled that reference to factual allegations outside the notice of removal was insufficient and granted the motion to remand. The Tenth Circuit declined to hear an appeal of the remand order, which are not generally reviewable “on appeal or otherwise,” 28 U.S.C. § 1447(d), even though there is a discretionary exception for cases invoking CAFA. 28 U.S.C. § 1453(c)(1). Following the circuit court’s denial of en banc review, the Supreme Court granted certiorari to determine whether a defendant seeking to remove to federal court must “include evidence supporting federal jurisdiction in the notice of removal, or is alleging the required ‘short and plain statement of the grounds for removal’ enough?” Dart, slip op. at 4.


The Supreme Court addressed the statutory language and legislative history of the removal statute, noting that the statute “requires only that the grounds for removal be stated in ‘a short and plain statement’—terms borrowed from the pleading requirements set forth in Federal Rule of Civil Procedure 8(a),” and that in “borrowing the ‘short and plain statement’ standard …, [Congress] intended to ‘simplify the ‘pleading’ requirements for removal’ and to clarify that courts should ‘apply the same liberal rules [to removal allegations] that are applied to other matters of pleading.” Id. at 5 (internal citations omitted). The Court went on to note that [w]hen a plaintiff invokes federal court jurisdiction, the amount-in-controversy allegation is accepted if made in good faith,” and that “[s]imilarly, when a defendant seeks federal-court adjudication, the defendant’s amount-in-controversy allegations should be accepted when not contested by the plaintiff or questioned by the court.” Id. The Court also noted that a dispute about a defendant’s jurisdictional allegations “cannot arise until after the defendant files a notice of removal containing those allegations,” albeit that “[e]vidence establishing the amount is required . . . when the plaintiff contests, or the court questions, the defendant’s allegation.” Id. at 7. The Court thus rejected the concept, articulated in Tenth Circuit precedent, that there was a “presumption against removal” in cases under CAFA, id., holding that “a defendant’s notice of removal need include only a plausible allegation that the amount in controversy exceeds the jurisdictional threshold.” Id. The Court therefore vacated the Tenth Circuit’s denial of review and remanded for further proceedings consistent with its opinion.


Notably, in rejecting the view that there is a presumption against removal under CAFA, the Court reserved for another time whether such a presumption exists in diversity jurisdiction cases. Id. The key takeaway from Dart is that “short and plain statement” is the favored standard, and one that would likely be applied to notices of removal in other contexts, such as diversity jurisdiction. But it still leaves open the possibility that following removal a defendant may be required to submit evidence that jurisdictional requirements were met in the event a plaintiff challenges or a court questions the amount in controversy.

Keywords: commercial and business, litigation, amount in controversy, CAFA, class actions, pleading, removal

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ and New York, NY


December 23, 2014

Delaware: Subjective Intent Is Not Relevant to the Effectiveness of UCC Termination Statements Filed With Lender Approval

In response to a question of law certified by the United States Court of Appeals for the Second Circuit, the Delaware Supreme Court recently held in Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., 2014 WL 5305937 (Del. Oct. 17, 2014), that in order for a UCC termination statement to be effective on filing and the underlying financing statement to be terminated, it is enough under Article 9 of Delaware’s UCC that the secured party authorize the termination statement to be filed.

The dispute pending before the Second Circuit related to the effect of a UCC termination statement filed with the Delaware secretary of state on behalf of General Motors Corporation (GM). That termination statement, in addition to terminating the security interest relating to a “synthetic lease,” also purported to extinguish a $1.5 billion term loan security interest on the assets of GM held by a syndicate of lenders, including JPMorgan. After GM filed for Chapter 11 reorganization in the Southern District of New York, JPMorgan informed GM’s committee of unsecured creditors that the reference to the termination of the term loan was inadvertent. The creditors’ committee thereafter filed suit, seeking a determination that the filing of the termination statement was effective and that the lenders thus were unsecured creditors, on par with GM’s other unsecured creditors.

The creditors’ committee argued that since JPMorgan had authorized the filing of the termination statement, it was bound by its terms. JPMorgan argued (among other things) that authorization to file a termination statement does not necessarily result in termination of a lien, if errors in the termination statement result in the release of a security interest that a party did not subjectively intend to release.

The Second Circuit certified the following question of law to the Delaware Supreme Court: Under Delaware’s UCC Article 9, for a termination statement to extinguish the perfected nature of a financing statement, “is it enough that the secured lender review and knowingly approve for filing a [termination statement] purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular security interest that is listed on the [termination statement]?”

The Delaware Supreme Court reviewed the “unambiguous” terms of Article 9 of the Delaware UCC, and found that if a “secured party of record authorizes the filing [of a termination statement],” then the filing is “effective” “upon the filing of a termination statement with the filing office.”  The court concluded that the Delaware UCC contains no requirement that a secured party that authorizes a termination filing also subjectively intend or understand the effect of the plain terms of its own filing and held that it is enough for a secured party to authorize the filing of the termination for a termination statement to be effective. In so doing, the court noted that a key role of the UCC is to facilitate efficient commerce by “permitting parties to rely in good faith on the plain terms of authorized public filings,” and that a contrary holding “would disrupt and undermine the secured lending markets” because no creditor could be certain that a UCC termination statement was actually effective, even when authorized by the secured party, unless a court determined after litigation that the termination of the security interest also was subjectively intended.

While this decision on first blush renders the lenders’ $1.5 billion security interest unsecured, all is not—yet—lost. JPMorgan has argued in the New York federal courts that the law firm that filed the termination statement was authorized only to terminate the security interests relating to the synthetic lease and not the term loan, and that the termination of the term loan security interest therefore was ineffective. The questions of agency law implicated in these arguments were not certified to the Delaware Supreme Court, and their viability will have to be determined in the future by the Second Circuit Court of Appeals.

Keywords: commercial and business litigation, Article 9, banking, secured transactions, termination statement, UCC, Uniform Commercial Code

John A. Sensing, Potter Anderson & Corroon LLP, Wilmington, DE


December 23, 2014

Recent Third Circuit Guidance on Attorney Fees under the Lanham Act

In Fair Wind Sailing, Inc. v. Dempster, 764 F.3d 303 (3rd Cir. 2014), a decision affirming a judgment dismissing trade dress claims, the Third Circuit made two important rulings regarding attorney fees.

The defendants requested more than $40,000 in attorney fees for defending the case, which had included claims under both the Lanham Act and Virgin Islands law.  After subtracting about $5,000 for excessive billing and vague time entries, the district court awarded the defendants the balance—more than $35,000.  The district court did not attempt to segregate fees accrued defending the Lanham Act claim, nor did it discuss the Lanham Act as a basis for the fee award.

Fees Where Claims are Inextricably Intertwined 
The Ninth Circuit had previously held, in  Gracie v. Gracie, 217 F.3d 1060, 1069 (9th Cir. 2000), that where “the Lanham Act claims and non-Lanham Act claims are so intertwined that it is impossible to differentiate between work done on claims,” the prevailing party may recover all fees—even if fees were only independently recoverable under the non-Lanham Act claims.  The Third Circuit in Fair Winds court did not follow  the Ninth Circuit Gracie holding.  It initially noted that the district court did not hold that the defense of the Lanham Act and non-Lanham Act claims were “inextricably intertwined” and so there was no need to decide whether Gracie should be followed.  However, it then criticized Gracie on two separate grounds.  First, it held that Gracie “encourage[s] parties to obfuscate time entries.  Indeed, the fact that Defendants cite their own time entries as evidence that the claims were inextricably intertwined lends credence to that concern.”  Second, it held that Gracie seems particularly inequitable where, as here, “the majority of the parties’ energy was spent litigating the federal claim,” if fees were not recoverable under the federal claim.  

The Absence of a Culpability Finding in Exceptional Cases 
Although the Third Circuit had previously held, for over two decades, that there must be a finding of culpability before a prevailing party may recover attorney fees under the Lanham Act, the United States Supreme Court recently held that there is no culpability requirement in awarding attorney fees under the Patent Act, which contains the same language authorizing attorney fees as the Lanham Act, i.e., that the case be “exceptional.”  See Octane Fitness, LLC v. Icon Health & Fitness, Inc., ––– U.S. ––––, 134 S.Ct. 1749, 188 L.Ed.2d 816 (2014).  In Fair Wind, the Third Circuit held that the “exceptional” case language in the Lanham Act should be construed in the same manner as the Supreme Court in Octane Fitness interpreted the identical language in the Patent Act, so that a prevailing party no longer need prove culpability to obtain attorney fees.  


Keywords: commercial and business, litigation, intellectual property litigation subcommittee, Lanham Act, attorney fees, exceptional cases, Octane Fitness

Jeffrey K. Riffer, Elkins, Kalt, Weintraub, Reuben, Gartside LLP, Los Angeles, CA


December 19, 2014

Recent Trends in Merger Objection Class Action Lawsuits

Since 2009, merger objection litigation has become ubiquitous. Although each transaction is unique, the types of claims asserted in these merger lawsuits are largely the same: plaintiffs typically allege that a target company's board of directors breached its fiduciary duties by failing to follow a fair sale process, agreed to sell the company for inadequate consideration, or provided stockholders with inadequate disclosures in advance of the transaction. This past year has seen several high-profile decisions in which courts appear to be subjecting these routinely filed actions to intensified scrutiny, particularly those asserting disclosure claims.


This summer Vice Chancellor Parsons of the Delaware Chancery Court dismissed claims, alleging inter alia, that disclosures to stockholders were materially deficient because they failed to include certain projections used by the company's financial advisor in issuing its fairness opinion. Dent v. Ramtron Int'l Corp., 2014 Del. Ch. LEXIS 110 (Del. Ch. June 30, 2014). In dismissing these claims, the court held that stockholders are “[e]ntitled to a fair summary of a financial advisor’s work, not the data to make an independent determination of fair value.” Id. at *35. The court stressed that there is no one-size-fits-all rule for disclosures, as context matters: “[i]nformation that must be furnished to shareholders necessarily differs from merger to merger.” Id. at *30. In Ramtron, the stockholders were going to be cashed out regardless of their vote and were left with the decision to accept the merger consideration or seek appraisal pursuant to 8 Del. C. § 262. In that context, the court viewed projections as less valuable. However, when stockholders are asked to decide whether to tender their shares in return for a fixed sum of cash or remain stockholders in an ongoing business, the court observed that more detailed management projections might be necessary.


Delaware’s Vice Chancellor Laster separately addressed the adequacy of disclosures regarding financial projections and denied the defendants’ motion for summary judgment in Chen v. Howard-Anderson, 87 A.3d 648 (Del. Ch. 2014). Unlike Ramtron, the key issue for the stockholders in Chen was whether “the merger price is a good deal in comparison with remaining a stockholder and receiving the future expected returns of the company.” Id. at 687-88. The court found that a factual dispute existed as to: (1) whether reliable management disclosures were provided to stockholders in advance of the cash-out merger; (2) whether management accurately disclosed what information was provided to a third-party adviser; and (3) whether disclosures regarding the sale process were adequate.


Courts in and outside of Delaware are also carefully scrutinizing the amount of attorneys’ fee awards. Several courts have either reduced the fee award in cases challenging the adequacy of a company's disclosures where the plaintiffs obtained only supplemental information, or have held that plaintiffs are not entitled to any fees in such cases. See In re TPC Group S'holders Litig., 2014 Del. Ch. LEXIS 219 (Del. Ch. Oct. 29, 2014) (denying a $3.1 million fee request finding that the resulting increased merger price was not causally related to the merger objection lawsuit); Kaniecki v. O'Charley's Inc., 2014 Tenn. App. LEXIS 69 (Tenn. Ct. App. Feb. 11, 2014) (affirming the complete denial of the plaintiffs’ request for attorneys’ fees based only on supplemental disclosures made by the Company, which mooted plaintiffs' disclosure claims); Skabialka v. Dynamics Research Corp., No. 14-0445-BLS2 (Mass. Super. Ct. Sept. 8, 2014) (approving an award of $150,000 in connection with a disclosure-only settlement, finding that the supplemental disclosures were not “substantial” enough to justify a higher award requested by plaintiff, and also noting that the experience of plaintiffs' counsel pursuing merger litigation should lead to higher efficiency in prosecuting these cases). See also Kazman v. Frontier Oil Corp., 398 S.W.3d 377, 387 (Tex. App. Houston 14th Dist. 2013) (holding that Tex. R. Civ. P. 42(i)(2) does not allow attorneys’ fee awards in class settlements with non-cash benefits only).


While courts have made clear that they will continue to scrutinize the adequacy of disclosures, especially where stockholders are being asked to decide whether to maintain an investment in a company going forward, there is notable push-back on routine "tell-me-more-about-the-fairness opinion" claims, as well as the payment of large fee awards in connection with settlements of those claims. Given the large volume of merger objection class actions that are filed, and the high percentage that are settled on a disclosure-only basis, these trends likely reflect some concern by courts that these cases are being brought merely to generate attorneys' fees, rather than to protect the real interests of stockholders, and are worth watching in the coming year.


Keywords: litigation, commercial and business, class actions subcommittee, merger objections, M&A litigation, merger litigation

Shayne R. Clinton, Member, Bass, Berry & Sims PLC and Joseph B. Crace, Member, Bass, Berry & Sims PLC. (Joe Crace had personal involvement in the Kaniecki v. O'Charley's Inc. and Skabialka v. Dynamics Research Corp. cases.)


December 15, 2014

Common Interest Doctrine Protects Corporate Communications with Third Parties

In a unanimous precedential decision, a New York State intermediate appellate court ruled in Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2014 NY Slip Op 08510 (App. Div. 1st Dep’t Dec. 4, 2014), that communications by a corporation with third parties having a “common interest” can be protected as privileged, even though the communications did not stem from pending or reasonably anticipated litigation. This expansion of the common interest doctrine to protect such communications expressly rejected the rulings of two other New York appellate courts that were narrower because they required litigation to be pending or reasonably anticipated in order to invoke the doctrine, setting up possible treatment of this issue by the New York Court of Appeals.

Here, in a suit over insurance obtained to cover mortgage-backed securities allegedly fraudulently packaged and sold, the insurer sought pre-merger documents that the insured, a lender, had shared with a third party, its merger partner; the lender resisted production of those pre-merger communications on grounds of privilege, based on the common interest doctrine. In its decision, the New York Appellate Division, First Department, noted that the doctrine is a limited exception to waiver of the attorney-client privilege, requiring that a communication disclosed to a third party (i) qualify for attorney-client protection, and (ii) be made to further a common legal interest or strategy. Many authorities, including other New York appellate courts, also require that the communication must affect pending or reasonably anticipated litigation for the doctrine to apply.

The First Department reviewed New York jurisprudence on the attorney-client privilege generally and on the common interest doctrine, including the authorities that imposed the requirement of pending or reasonably anticipated litigation, as well as federal court authority that the common interest doctrine has also been applied “with respect to joint legal strategies in non-litigation settings” (citation omitted). Finding that the broader federal approach “extends logically from the attorney-client privilege” and is “better policy,” the court adopted the federal court jurisprudence that has rejected the requirement of pending or reasonably anticipated litigation, stating that “[s]o long as the primary or predominant purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties, and not to obtain advice of a predominately business nature, the communication will remain privileged.” The court wrote that “business entities often have important legal interests to protect even without the looming specter of litigation,” and that the broader rule “encourages parties with a shared legal interest to seek legal assistance in order to meet legal requirements and to plan their conduct accordingly,” and therefore “serves the public interest by advancing compliance with the law, facilitating the administration of justice and averting litigation.” The First Department’s adoption of a broader common interest standard will undoubtedly affect privilege issues in the commercial and business setting.  


Keywords: attorney-client privilege, commercial and business, common interest, litigation, privilege

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ and New York, NY


December 2, 2014

Implementation of Statewide Complex Business Litigation Program

In a November 13, 2014, Notice to the Bar and accompanying press release, the Supreme Court of New Jersey implemented a statewide Complex Business Litigation Program (the Program), effective January 1, 2015, and applicable to cases filed on or after that date that meet certain criteria. The Program is designed to handle complex business, commercial, and construction cases and develop a body of authoritative case law that can guide parties in business litigation. The Program designates one trial court justice in each of the state’s fifteen court vicinages (each vicinage is one or more counties) as the “Complex Litigation Judge” to whom such cases will be assigned. Each Complex Litigation Judge will be expected to issue at least two written opinions annually, to further develop case law relating to business litigation, and provide a “substantial legal resource for the business community.”


To be assigned to the Program, the amount in controversy in a case must be at least $200,000. Complex business and commercial cases include claims arising out of business or commercial transactions or involving complex factual or legal issues. Complex construction cases include claims by, against, and among owners, contractors, subcontractors, architects, engineers, and similar parties arising out of claimed design and construction defects, or construction claims arising out of complex factual or legal issues, but do not include billing and payment claims. In addition, it should be noted that certain cases are excluded from the Program, including matters handled in the general equity part of the trial court, and matters involving consumers, labor organizations, personal injury, condemnation proceedings, and matters in which the government is a party. While cases in the Program are not part of the court’s mandatory civil mediation and arbitration programs, the Complex Litigation Judges are expected to encourage the parties to participate in mediation.


Attorneys or parties can designate their cases as complex business litigation at the time of commencement, may file motions to be included in the Program where cases do not meet the amount in controversy threshold, and may file motions to remove from the program cases that do not meet the eligibility criteria.


It is hoped that the Program will streamline litigation in complex business, commercial, and construction matters, and encourage litigants to consider the New Jersey courts as an efficient forum for the resolution of such complex cases.


Keywords: commercial and business, litigation, complex busines litigation, New Jersey

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York, NY


November 30, 2014

Bankruptcy Court Eschews Reliance on Multi-Factor Test

In In re Mt. Olive Hospitality, LLC, 2014 WL 2040769 (Bankr. D.N.J. May 16, 2014), the U.S. Bankruptcy Court for the District of New Jersey recently addressed the showing a claimant must make to demonstrate that a claim should be characterized as debt, not equity. VWI Properties, LLC (VWI), the prepetition purchaser of the secured debt associated with the hotel property owned by Mt. Olive Hospitality, LLC (debtor), filed several objections challenging the validity of certain unsecured claims totaling over $4 million and the characterization of those claims as debt.


The debtor had listed all of the challenged claims on its Schedule F (as amended), which “constitute[s] prima facie evidence of the validity and amount of the claims of creditors . . . .” Id. at *6. The burden therefore shifted to VWI to “produce sufficient evidence to negate the prima facie validity of the filed claim.” Id. The court ruled that VWI had done so, having come forward with evidence concerning the preparation of the promissory notes evidencing certain of the claims which impeached their value as substantiation for the claims. Id. But the court also noted that the claimants could still prevail (and avoid recharacterization) if they could establish, by a preponderance of the evidence, that their actual intent was for these advances to be loans and not equity. Id. at *9.


While a thirteen-factor test is commonly applied by courts evaluating whether an instrument is either debt or equity, the court in Mt. Olive elected not to apply a specific multi-factor test or “mechanistic scorecard.” Id. at *9-10 (citing In re SubMicron Systems Corp., 432 F.3d 448, 456 (3d Cir. 2006)). It instead decided to follow the Third Circuit’s decision in In re SubMicron Systems Corp. and engage in a fact-intensive inquiry into “what the parties actually intended and acted on in each case.” Id. at *9-10. The court explained that under this framework, the actual intent of the parties for each transaction “may be inferred from what the parties say in their contracts, from what they do through their actions, and from the economic reality of the surrounding circumstances.” Id. at *10. Looking at the evidence of intent (in conjunction with only some of the other traditional 13 factors), the court decided that only four of the thirteen claimants survived VWI’s challenge. Id. at *23.


While the court gave some consideration to a multi-factor test, it ultimately relied upon an inquiry into the intent of the parties to characterize the disputed claims. The successful claimants were able to demonstrate through competent evidence that, as to certain of their claims, they had intended to provide loans to the debtor, and this was found to satisfy the “overarching inquiry” into the parties’ intent with respect to the proper characterization of their claims. Id. at *9. Where the claimants were able to provide “clear and unequivocal statements” regarding their intent, the court sustained their claims and characterized approximately $1.5 million of the amount at issue as debt. Id. at *13-16, 19, 23.


Keywords: commercial and business, litigation, bankruptcy, burden of proof, characterization of debt or equity, commercial and business, debt, equity, litigation, promissory notes

Matthew D. Sobolewski, Seiger Gfeller Laurie LLP, New York, NY; Neil Steinkamp and Robert Levine, Stout Risius Ross, Inc., New York, NY


November 30, 2014

Law Firm Keeps Limited Liability Protection Despite Lack of Professional Liability Insurance

In a legal malpractice action, a New Jersey appellate court ruled on an issue of first impression that a law firm organized as a limited liability partnership (LLP) does not lose its limited liability protection merely because it failed to maintain professional liability insurance as required by New Jersey Supreme Court rules. Mortgage Grader, Inc. v. Ward & Olivo, L.L.P., 2014 N.J. Super. LEXIS 153 (N.J. Super. Ct. App. Div. Nov. 14, 2014). The court reversed a trial court ruling that the failure of an LLP that was dissolving to maintain a tail insurance policy did not cause it to revert to a general partnership, thereby losing its limited liability status and exposing its partners to vicarious liability for each other’s alleged malpractice.


The court noted that under the applicable provision of the Uniform Partnership Act (UPA), N.J.S.A. 42:1A-18c, “partners of an LLP are shielded from liability for a fellow partner’s act,” id., 2014 N.J. Super. LEXIS 153, at *7, and that without LLP status, under the statute “all partners are liable jointly and severally for all obligations of the partnership.” N.J.S.A. 42:1A-18a. The court further noted that NJ Supreme Court Rule 1:21-1C(a)(3) requires attorneys practicing law as an LLP to obtain professional liability insurance for the LLP. Other supreme court rules enumerate specific sanctions for failure to comply with Rule 1:21-1C(a)(3) and maintain insurance, such as terminating or suspending the LLP’s right to practice law, or to otherwise discipline it. Id., 2014 N.J. Super. LEXIS 153, at *10. However, as the court noted, such sanctions did not include the conversion of an LLP into a general partnership, upon which the law firm partners would lose the protection of LLP status. Indeed, the court further noted that the state legislature has been aware of the supreme court rule since 1996, but has not sought to amend the UPA to require that an LLP revert to general partnership status as a sanction for failing to maintain professional liability insurance. Id. at *10–11.


Accordingly, the court held that “when attorneys practice law as an LLP, and the LLP fails to obtain and maintain professional liability insurance as required by [the supreme court rule], the LLP does not revert to a general partnership . . . under the Uniform Partnership Act . . . .” Id. at *2. This decision may have implications for other forms of professional organizations in which attorneys practice, such as professional corporations or limited liability corporations, to the extent they may be required to maintain professional liability insurance as part of that form of organization.

Keywords: commercial and business, litigation, professional liability insurance, limited liability, litigation, LLP, Uniform Partnership Act, UPA, vicarious liability

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York, NY


November 24, 2014

District Court Adheres to Denial of Motion to Compel "Discovery on Discovery"

In a putative securities fraud class action alleging issuance of false earnings statements, the court declined to reconsider its denial of the plaintiffs’ motion to compel production of certain search efficiency reports. The reports compared electronic search results from discovery produced in this action by the corporate defendant, Weatherford, to electronic search results from two prior internal investigations by Weatherford. Freedman v. Weatherford Int’l, Inc, et al., 2014 U.S. Dist. LEXIS 133950, 2014 WL 4547039 (S.D.N.Y. Sept. 12, 2014). The court had denied such “discovery on discovery” because the plaintiffs had not provided an “adequate factual basis” for their assertion that Weatherford’s existing production was deficient. The plaintiffs’ motion to reconsider was predicated on newly discovered evidence purporting to show that certain documents of Weatherford custodians were produced by third parties—not by Weatherford. From that, the plaintiffs argued that Weatherford’s production was deficient and sought reconsideration to obtain the search efficiency reports comparing the different electronic search results.

The court acknowledged that where a party “makes some showing that a producing party’s production has been incomplete, a court may order discovery designed to test the sufficiency of that party’s discovery efforts in order to capture additional relevant material,” but that “such ‘meta-discovery’ should be closely scrutinized” to avoid extending time-consuming and costly discovery. Id., 2014 U.S. Dist. LEXIS,at *7.Here, the court noted that the crux of the plaintiffs’ motion was not to “probe the specifics of Weatherford’s discovery efforts,” but to identify documents believed missing from Weatherford’s production. Id. at *8. The court found, however, that what the plaintiffs sought, the reports containing the search terms used from the prior investigations, would not have identified a significant number of the allegedly missing documents. Noting that “the Federal Rules of Civil Procedure do not require perfection” (citation omitted), and that it was “unsurprising that some relevant documents may have fallen through the cracks,” the court found that the plaintiff’s request was not likely to remedy the alleged discovery deficiencies. Id. at *9. Accordingly, the court adhered to its earlier ruling, denying discovery of the search efficiency reports comparing electronic search results.

Keywords: commercial and business, litigation, discovery, e-discovery, electronic, ESI, litigation, search terms

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York, NY


October 21, 2014

Examining Fraudulent Transfers

In Noranda Aluminum, Inc. v. Golden Aluminum Extrusion, LLC, No. M2013-02274-COA-R3-CV, 2014 WL 4803149 (Tenn. Ct. App. Sept. 26, 2014), the Court of Appeals of Tennessee found that Golden Aluminum, Inc. and Golden Metals, Inc. could not be held liable, under an alter ego theory, for Golden Aluminum Extrusion’s allegedly fraudulent transfer of equipment. This was because the equipment sold was fully encumbered by a lien and thus, did not meet the definition of “asset” under the Uniform Fraudulent Transfer Act (UFTA). The Uniform Commercial Code was central to this holding, as it provided the timeline necessary to resolve an integral dispute—whether the lien against the equipment was still in place when the sale occurred.


The plaintiff in Noranda supplied aluminum billets to a manufacturing plant belonging to Golden Aluminum Extrusion (Extrusion), a limited liability company formed by Golden Aluminum, Inc. (Aluminum). When that plant was subsequently shut down, Extrusion ceased making payments to Noranda Aluminum Inc. (Noranda). After the closure, Extrusion sought to sell the plant’s real estate, which required the company to remove all equipment from the facility. Together with Wells Fargo, which held a security interest in all of Extrusion’s assets, Extrusion sold the equipment for $819,000 on June 4, 2008, to a company comprised mostly of Extrusion investors. On June 19, 2008, Wells Fargo filed an amended UCC financing statement removing its lien on the transferred equipment. The acquired equipment was later successfully sold for two million dollars.


Noranda sued Extrusion for breach of contract, which resulted in a default judgment against Extrusion. Noranda also sued Aluminum and its holding company, Golden Metals, Inc. (Metals), under a theory of alter ego liability, but the trial court declined to pierce the corporate veil and granted summary judgment in favor of the defendants.


On appeal, the court decided that, under the UCC, as codified in both Missouri and Ohio (the parties disagreed about what law applied), Wells Fargo still held a security interest in the transferred equipment at the time of the sale. Referencing the section of the UCC stating that a filed financing statement remains in effect when collateral is sold even when the secured party knows of the sale, the court decided that the UCC requires that a financing statement be formally amended or canceled in order to release a lien. Mo. Rev. Stat. § 400-009.507(a); Ohio Rev. Code § 1309.507(A). As the equipment was sold on June 4 and Wells Fargo did not file an amendment to release the lien until June 19, the equipment was still encumbered when it was transferred. Noranda argued that Wells Fargo acquiesced to the sale and therefore released the lien, citing a section of Missouri’s UCC which provides that “[a] security interest . . . continues in collateral notwithstanding sale . . . unless the secured party authorized in writing the disposition free of the security interest.” Mo. Rev. Stat. § 400-009.315(a)(1). However, the court found that Wells Fargo’s mere agreement was insufficient to release the lien absent the formalities provided in the UCC.


The resolution of this issue played a key part in the court’s analysis because the success of Noranda’s alter ego theory depended on Noranda’s ability to show that (1) Aluminum and Metal had control over Extrusion; (2) they had exerted that control to commit fraud, specifically transferring Extrusion’s assets to insiders without receiving reasonably equivalent value; and (3) the fraudulent transfer proximately caused Noranda’s damages by rendering Extrusion insolvent. As the parties agreed that the UFTA provided the applicable standard for fraudulent transfers, Noranda’s ability to maintain claims against Aluminum and Metals hinged on whether the equipment fit into that statute’s definition of “asset.” Under the UFTA, an asset is “property of a debtor” and does not include “property that is encumbered by a valid lien.” Mo. Rev. Stat. § 428.009(2)(a); Ohio Rev. Code Ann. § 1336.01(B)(1). Wells Fargo held a lien against the equipment in question that far surpassed the two million dollars for which it was eventually sold. Thus, because the UCC provides that a financing statement remains in effect after a sale, the equipment was not Extrusion’s asset at the time it was transferred, and Noranda could not establish fraud—the second element of the alter ego standard. Although Noranda tried to argue that, under certain circumstances, collateral should be included in the UFTA’s definition of “assets,” the court dismissed that contention out-of-hand, and Noranda failed in its attempt to pierce the corporate veil.

Keywords: commercial and business, litigation, alter ego, fraudulent transfer, UFTA, financing statement, security interest, corporate veil, equipment lien, UCC

Ali Razzaghi, Frost Brown Todd LLC, Cincinnati, OH


October 16, 2014

What is Required to Obtain Hypothetical-License Damages?

In a copyright infringement action, the Ninth Circuit decided both for and against Oracle, the copyright holder. Oracle’s hypothetical-license fee damages claims arose out of SAP’s illegal downloading of Oracle’s software. In favor of Oracle, the Ninth Circuit held that a copyright holder need not show that it would have licensed the infringing material in order to obtain damages in the form of hypothetical-license fees. Against Oracle, the Ninth Circuit held that the “jury awarded damages using an ‘undue’ amount of speculation.” Oracle Corp. v. SAP AG, 765 F.3d 1081, 2014 WL 4251570, at *5 (9th Cir. Aug. 29, 2014).


On the first issue, SAP argued that Oracle was not entitled to hypothetical-license damages since Oracle was unwilling to grant a license to SAP for the use of its software.


The Ninth Circuit disagreed, explaining that “hypothetical-license damages . . . constitute an acceptable form of ‘actual damages’ recoverable under [copyright law].” Id. at *3. A copyright holder has never been required, in an infringement case, to show that it would have licensed the infringed material, and the court “decline[d] to impose such a requirement now.” Id. at *4. “A copyright holder has the right to refuse to license its work and should not be penalized for exercising that right. . . . [Indeed,] [t]he very word ‘hypothetical’ indicates damages that may be awarded in the absence of an actual license.” Id. Therefore, unwillingness to negotiate an actual license would not preclude Oracle from recovering hypothetical-license damages.


Once Oracle cleared the hurdle of entitlement to hypothetical-license damages, it then argued that it presented sufficient evidence of a fair market value of a hypothetical-license fee to sustain the jury’s damages award. Oracle explained that it presented evidence both of SAP’s expected benefit and the cost of the infringement to Oracle. On the one hand, Oracle presented evidence that SAP’s infringement “occurred on a ‘massive’ scale” and evidence of SAP’s “own projected ‘benefits from its use of stolen materials’” in the forms of internal financial estimates and testimony from SAP executives. Id. at *5–6. To show its own expected costs, Oracle presented evidence of projected lost revenues through expert testimony, evidence of acquisition costs, and Oracle executive testimony.


On this second issue, the Ninth Circuit sided with SAP and agreed the jury’s verdict was unduly speculative. The Ninth Circuit found Oracle’s evidence insufficient. The scale of SAP’s infringement did very little to show the value of the data to SAP. SAP’s projections were just that—projections—showing only what SAP hoped it could achieve. And the expert’s testimony was based on similar, speculative assumptions.


The Ninth Circuit then reviewed prior hypothetical-license case law to provide guidance on a copyright plaintiff’s burden in proving damages. The Ninth Circuit explained that in Polar Bear Prods Inc. v. Timex Corp., 384 F.3d 700 (9th Cir. 2004), the plaintiff based its damages claim on a license price the plaintiff had offered before the infringement occurred. The Ninth Circuit said that in Wall Data Inc. v. L.A. City Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006), the damages award was based on the average price of similar licenses. Finally, in Jarvis v. K2 Inc., 486 F.3d 526 (9th Cir. 2007), fair market value was based on numerous pieces of evidence that the Ninth Circuit summarized, including prior licenses to defendant for similar works.


The Ninth Circuit explained that, unlike this precedent, Oracle’s evidence provided “a much more speculative basis for calculating hypothetical-license damages.” 2014 WL 4251570, at *10. Because Oracle had “no history of granting similar licenses, and [did] not present[] evidence of ‘benchmark’ licenses in the industry . . . Oracle faced an uphill battle” and failed to provide “sufficient objective evidence of the market value of the hypothetical license underpinning the jury’s damages award.” Id.


Going forward, the Ninth Circuit has made clear that a copyright holder is entitled to exercise its right to license—or not to license—its copyrighted works and that exercising such rights will not unfairly impede the copyright holder from recovering hypothetical-license damages. Copyright owners can rest easy that they will not have to license to would-be infringers just to ensure the owners can later recover reasonable royalties. However, the exact evidence needed to prove non-speculative license fees will continue to play out in the courts. Copyright owners need something more than expert testimony based on speculation and assumptions, but something less than an actual transaction with the infringer. Where the bar falls remains to be seen.

Keywords: commercial and business, litigation, hypothetical-license damages, reasonable royalty, Oracle, copyright

Jennifer L. Wagman Njathi, Jenner & Block LLP, Los Angeles, CA


October 16, 2014

Derailed: Plaintiffs Denied Class Certification Motion

In In re Paulsboro Derailment Cases, Civil Nos. 13-784 (RBK/KMW), 12-7586 (RBK/KMW), 12-7648 (RBK/KMW), 13-410 (RBK/KMW), 13-721 (RBK/KMW), 13-761 (RBK/KMW), 2014 U.S. Dist. LEXIS 115542 (D.N.J. August 20, 2014), Donald Wilson filed a putative class action against Consolidated Rail Corporation, Norfolk Southern Railway Company, and CSX Transportation in a case arising from a cargo train derailment in Paulsboro, New Jersey, which released vinyl chloride into the Mantua Creek and contaminated Paulsboro and West Deptford with airborne chemicals. Many individuals were directed to evacuate or to shelter in place. Plaintiff Wilson proposed two sub-classes. The first subclass would consist of individuals who incurred unreimbursed medical expenses as a result of the evacuation. The second proposed subclass was the “economic loss sub-class regarding income loss.” The Income Loss Subclass had two further divisions, one for individuals and one for businesses. The individual Income Loss Subclass, was defined in part as “all individuals . . . [that] had income loss as a result of the train derailment and chemical leak in Paulsboro on November 30, 2012.” The business Income Loss Subclass included businesses that had income loss as a result of the derailment and chemical leak.


The New Jersey District Court, applying a “rigorous analysis,” denied class certification. It found that the business subclass was not ascertainable and that the entire class failed to satisfy the numerosity requirement of Federal Rule of Civil Procedure 23(a). The court’s initial focus was on whether the class was ascertainable because “[c]lass certification presupposes the existence of an actual class.” The court found that the Evacuation and individual Income Loss Subclasses were ascertainable because a fact-finding was not necessary to determine the class. However, the court was not satisfied that the plaintiffs had defined an ascertainable class with regard to the business Income Loss Subclass. It reasoned that “significant individualized fact-finding would be required to show that a potential class member satisfies all of the elements of Plaintiff’s class definition” of the business sub-class.


The court next analyzed the requirements of Federal Rule of Civil Procedure 23(a). Taking the prerequisites in order, the court’s “rigorous analysis” determined that the putative class could not meet the test for numerosity and thus, the proposed class could not be certified. The Evacuation Subclass, which consisted of potentially 680 evacuees, was, through discovery, determined to consist of approximately 149 individuals. However, Wilson did not proffer evidence to sustain its burden of proving that any of those 149 individuals could have sustained unreimbursed, non-medical expenses. The court stated, “Plaintiffs have not pointed to anyone, including the named Plaintiffs, who has not had the vast majority of his or her evacuation expenses reimbursed by Defendants.” Likewise, the court found that the individual Income Loss Subclass failed to meet the numerosity requirement. Again, the Court reasoned that the “[p]laintiffs have set forth no evidence that even one resident of the shelter-in-place order has incurred unreimbursed economic losses.”


In failing to demonstrate numerosity in the business subclass, Wilson identified 381 businesses as potential class members. The plaintiff’s evidence, however, demonstrated that the pool of businesses included those companies suspected of being out of business. Wilson’s expert testimony revealed that almost ten percent of the business claims were resolved through defendants’ voluntary efforts. The court found that the plaintiffs offered only speculation about the potential class members, insufficient to survive rigorous analysis applicable to class certification.


The court went further and found that the plaintiffs could not satisfy the “predominance” requirement of Rule 23(b)(3). Wilson failed to demonstrate how “damages can be measured in a uniform manner across the entire sub-class of businesses.” The plaintiff’s proposed damage calculation did not take variables into account which would result in differences in income for some businesses, such as seasonal trends and decreased income due to Superstorm Sandy. Wilson fell “short of showing that damages can be proven at trial using methods common to the class.” Thus, the plaintiff also failed to meet the requirements of Federal Rule of Civil Procedure 23(b)(3).


The Wilson opinion provides practitioners with an in-depth analysis of the developing standards for class certification in an economic damage case and demonstrates the importance of meticulously defining a class that is identifiable and ascertainable. It also shows the importance of class discovery and the evidence necessary to satisfy the “rigorous analysis” employed by the federal courts.

Keywords: commercial and business, litigation, class action, certification, ascertainability, numerousity, sub-classes

Ronald J. Campione, Bressler, Amery & Ross, P.C., Florham Park, NJ


October 15, 2014

Say It Clear: Inexplicit Arbitration Clauses Are Not Enforceable

On September 23, 2014, the New Jersey Supreme Court issued its opinion in Atalese v. U.S. Legal Services Group L.P., A-64-12, No. 072314 (N.J. 9/24/14), vacating a decision of the New Jersey Appellate Division. The decision had compelled arbitration of a dispute between a consumer and a provider of debt-adjustment services on the ground that the arbitration clause at issue failed to give adequate notice that the parties were waiving their right to proceed in court.


The arbitration clause, on page 9 of the contract, provided as follows:

In the event of any claim or dispute between Client and the USLSG related to this Agreement or related to any performance of any services related to this Agreement, the claim or dispute shall be submitted to binding arbitration upon the request of either party upon the service of that request on the other party. The parties shall agree on a single arbitrator to resolve the dispute. The matter may be arbitrated either by the Judicial Arbitration Mediation Service or American Arbitration Association, as mutually agreed upon by the parties or selected by the party filing the claim. The arbitration shall be conducted in either the county in which Client resides, or the closest metropolitan county. Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction. The conduct of the arbitration shall be subject to the then current rules of the arbitration service. The costs of arbitration, excluding legal fees, will be split equally or be born by the losing party, as determined by the arbitrator. The parties shall bear their own legal fees.


The trial court granted the defendant’s motion to compel arbitration, finding that the applicable criteria were satisfied and that, based on the papers submitted, the arbitration clause was “minimally, barely. . . sufficient to put the [plaintiff] on notice that if [the parties] have any sort of dispute arising out of [the] agreement, it’s going to be heard in [a]rbitration.”  The Appellate Division affirmed, rejecting the consumer plaintiff’s argument that an explicit waiver of the right to sue was necessary, and concluding that (1) the arbitration clause gave the parties reasonable notice of the requirement to arbitrate, and (2) that a reasonable person would understand that arbitration was the sole means of resolving contractual disputes.


On review, Justice Albin, writing for a unanimous court, explained that the arbitration agreement failed to put the plaintiff/consumer on notice that she was waiving her right to pursue her statutory consumer fraud claims in court.  Recognizing that the Federal Arbitration Act precludes a state from applying a different standard to arbitration agreements than it applies to other contracts, the high court reasoned that its position was consistent with contract law generally:

The requirement that a contractual provision be sufficiently clear to place a consumer on notice that he or she is waiving a constitutional or statutory right is not specific to arbitration provisions. Rather, under New Jersey law, any contractual “waiver-of-rights provision must reflect that [the party] has agreed clearly and unambiguously” to its terms.

Id., citing cases.  Relying on the foregoing state precedent, as well as New Jersey’s plain language statute, which requires that consumer contracts must be written in “simple, clear, understandable and easily readable way,” the Court concluded that it was not imposing any additional burden on arbitration agreements that was not also imposed on New Jersey contracts generally.


The court found that, while no magic words were required to make an arbitration agreement enforceable, the clause in this case was inadequate in failing to explain what arbitration is and how arbitration is different from a proceeding in a court of law, and in failing to provide clear and unambiguous language that the plaintiff was “waiving her right to sue or go to court to secure relief.”  Id.

Keywords: litigation, arbitration, commercial and business, consumer contracts, New Jersey, waiver

Marc J. Zucker, Weir & Partners LLP, Philadelphia, PA


September 30, 2014

D.C. Circuit Rejects "But For" Standard in Determining Privilege in Internal Investigations

In In re Kellogg Brown & Root, Inc., 756 F.3d 754 (2014), the United States Court of Appeals for the District of Columbia Circuit has articulated the clear rule that the attorney-client privilege will apply to materials created in the course of a company’s internal investigation “if one of the significant purposes of the internal investigation was to obtain or provide legal advice, the privilege will apply.”

The plaintiff in this False Claims Act case alleged that Kellogg Brown & Root, Inc. (KBR), a defense contractor, defrauded the federal government by inflating costs and accepting kickbacks. The plaintiff sought documents relating to KBR’s internal investigation into the alleged fraud. KBR opposed the request, arguing that the documents were privileged because they were created for the purpose of obtaining legal advice. After conducting an in camera review of the documents, the district court concluded the documents were not privileged because KBR did not show “the communication would not have been made ‘but for’ the fact that legal advice was sought.” The district court further held that the internal investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice,” and ordered disclosure of the documents.

On appeal, the D.C. Circuit reversed, explaining that “[t]he District Court’s decision has generated substantial uncertainty about the scope of the attorney-client privilege in the business setting,” and “is irreconcilable with” Upjohn Co. v. United States, 449 U.S. 383 (1981),in which the Supreme Court held that the attorney-client privilege protects confidential employee communications made during a business’s internal investigation led by company lawyers. While the district court held that Upjohn was distinguishable for a number of reasons, the court of appeals held that “KBR’s assertion of the privilege in this case is materially indistinguishable from Upjohn’s assertion of the privilege in that case” and systematically rejected each of the grounds for the district court’s decision.  

First, the district court noted that the internal investigation did not involve outside counsel. The court of appeals, however, held that there was no basis for that distinction, explaining that the privilege does not depend upon the participation of outside counsel.  

Second, while the district court noted that the interviews were conducted by non-attorneys, the court of appeals explained that “communications made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege.”

Third, although the district court relied on the fact that the employees who were questioned were not expressly told that the purpose of the interview was to assist the company in obtaining legal advice, the court of appeals found that no “magic words” are necessary, and it was enough that the employees were told that there was an investigation, and that the information they provided would be protected.

More generally, the court of appeals held that the district court applied the wrong test to determine if the privilege existed. The district court found that the primary purpose of the investigation was to comply with regulations and governmentally–mandated compliance programs. The district court then found that the information is privileged “only if the communication would not have been made ‘but for’ the fact that legal advice was sought.” The court of appeals unequivocally rejected that formulation, holding instead that if legal advice is one of the primary purposes, that is sufficient to support a finding of privilege, even if the investigation also was conducted in accordance with a company compliance program or required by statute or regulation.

The court of appeals thus rejected the district court’s “but for” analysis, finding that it was contrary to both the holding of Upjohn and the policy considerations behind the attorney-client privilege. “The District Court's novel approach to the attorney-client privilege,” the court of appeals explained, “would eliminate the attorney-client privilege for numerous communications that are made for both legal and business purposes and that heretofore have been covered by the attorney-client privilege.” Moreover, rejecting the privilege in the context of an investigation that was made at least in part to comply with regulatory requirements “would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry.”  The result, the court of appeals explained, would be that “businesses would be less likely to disclose facts to their attorneys and to seek legal advice, which would ‘limit the valuable efforts of corporate counsel to ensure their client's compliance with the law.’”

Keywords: litigation, alternative dispute resolution, bylaws, forum selection, securities litigation, shareholder litigation

Gregory A. Blue, Dilworth Paxson LLP, New York, New York



September 30, 2014

Securities and Exchange Commission Issues Record Bounty

On September 22, 2014, the U.S. Securities and Exchange Commission announced the award of more than $30 million to a whistleblower who provided key information that led to a successful SEC enforcement proceeding. SEC Release No. 73174 (Sept. 22, 2014). That bounty dwarfs the previous record $14 million awarded to a whistleblower by the SEC, announced in October 2013. The SEC’s whistleblower program was authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), Pub. L. No. 111-203, §922, 124 Stat. 1841 (2010), to provide monetary awards to tipsters whose information leads to enforcement actions resulting in more than $1 million in sanctions. Whistleblower payments can range between 10 and 30 percent of funds collected by the SEC in such enforcement actions and are paid from an investor protection fund financed by monetary sanctions paid by securities law violators. Notably, whistleblower awards do not come from taxpayer funds or from monies designated to reimburse investors harmed by securities law violations.

Also notable about the recently announced whistleblower award is the fact that the unidentified whistleblower is an unnamed foreign national who had considered disclosing his information in other countries, but chose to disclose to the SEC because of the unique protections of anonymity afforded under its whistleblower program. The nature of the SEC’s whistleblower program, and the notoriety of its recent significant monetary awards to whistleblowers, is expected to enhance the SEC’s reputation as the place for tipsters to feel safe in disclosing information about securities law violations, where their identity will be protected, and to be handsomely rewarded for doing so. And where there is a sufficient U.S. territorial nexus, the program may also incentivize more foreign nationals to provide information to the SEC that may lead to successful enforcement actions and healthy bounties to the whistleblowers. Indeed, the SEC has indicated that nearly 12 percent of the tips it received in 2013 on potential securities law violations came from foreign tipsters. With many domestic public companies having extensive overseas operations involving numerous foreign employees, the SEC’s whistleblower program, as it has developed, significantly expands the risk of disclosures of such potential securities law violations. The record bounties recently awarded by the SEC will likely encourage more erstwhile whistleblowers to come forward, both domestic and foreign. Public company employers should take appropriate steps to have in place governance and compliance programs that properly uncover, respond to, and resolve employee concerns without employee fear of retaliation, and to encourage handling such concerns internally rather than having to later deal with a whistleblower situation.

Keywords: litigation, commercial and business, award, bounty, Securities and Exchange Commission, SEC, securities law, whistleblower

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York, NY



September 24, 2014

Delaware Court of Chancery Upholds North Carolina "Exclusive Forum" Bylaw

In a closely watched case with implications for corporations across the nation, Chancellor Andre Bouchard of the Delaware Court of Chancery has issued an opinion enforcing a forum-selection bylaw that requires intra-corporate disputes involving a Delaware corporation to be brought in the North Carolina courts. Both Delaware and North Carolina, which recently enacted legislation allowing North Carolina corporations to designate North Carolina as the exclusive forum or venue for intra-corporate disputes (N.C. Gen. Stat. §55-7-50), have now broadly sanctioned forum-selection bylaw provisions. 

The court’s September 8, 2014, opinion in City of Providence v. First Citizens BancShares, Inc., Consol C.A. No. 9795-CB (Del. Ch. Sept. 8, 2014), dismissed a shareholder’s challenge to a forum-selection bylaw enacted by the board of First Citizens BancShares, Inc. (FCB), a Delaware corporation, requiring intra-corporate disputes to be brought, to the fullest extent permitted by law, in the federal district court for the Eastern District of North Carolina or, if the federal court lacks jurisdiction, in the state courts of North Carolina.

First Citizens is the first occasion Delaware courts have had to address the validity of a forum-selection bylaw that specified the courts of a state other than Delaware as the exclusive forum for such litigation. The Delaware Court of Chancery previously upheld a bylaw that designated Delaware as the exclusive forum of intra-corporate disputes in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). In upholding FCB’s forum-selection bylaw, First Citizens confirmed that the logic and reasoning of Chevron applies equally to the validity of bylaws that specify non-Delaware forums. 

FCB, which is headquartered in Raleigh, announced in June 2014 that it had amended its bylaws to include the North Carolina forum-selection clause. At the same time, it announced that it had entered into an agreement to acquire First Citizens Bancorporation, Inc. (FC South), a South Carolina holding corporation with overlapping controlling shareholders with FCB. The shareholder plaintiff challenged both FCB’s forum-selection bylaw and the fairness of FCB’s proposed merger with FC South, arguing that the bylaw was invalid on its face and “as applied” to plaintiff’s merger-related claims. The Court rejected both arguments. 

Notably, with respect to the “as applied” challenges, the Court in First Citizens found that the bylaw was not unreasonable merely because it had been enacted in connection with the proposed acquisition of FC South: “That the Board adopted it on an allegedly ‘cloudy’ day when it entered into the merger agreement with FC South rather than on a ‘clear’ day is immaterial given the lack of any well-pled allegations . . . demonstrating any impropriety in timing.”  

The Court also rejected the plaintiff’s “as applied” challenge based on the existence of a controlling stockholder, which, as a practical matter, prevented the minority shareholders from repealing the forum-selection bylaw. First Citizens flatly states that the fact that a controlling shareholder may favor a forum-selection bylaw “does not make it per se unreasonable to enforce the bylaw,” and that to conclude otherwise would “be tantamount to rendering questionable all board adopted bylaws of controlled corporations.”

Chancellor Bouchard’s opinion in First Citizens should reassure Delaware corporations of their ability to choose forums other than Delaware for the litigation of intra-corporate disputes, as long as there is a logical connection to that other forum. Controlled corporations have the same rights in this regard as non-controlled corporations. Further, absent well-pleaded facts demonstrating some impropriety by the corporation’s board of directors, the fact that a bylaw is enacted in connection with a proposed transaction that may result in shareholder litigation is irrelevant.

With the decision in First Citizens, Delaware corporations with their headquarters in another state should consider whether they wish to adopt a forum-selection bylaw specifying their home state as their preferred forum for any shareholder litigation.

Keywords: litigation, alternative dispute resolution, bylaws, forum selection, securities litigation, shareholder litigation

Clifton L. Brinson, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, NC



September 3, 2014

Supreme Court Clarifies Gap in Bankruptcy Court Authority Created by Stern v. Marshall

On June 9, 2014, the United States Supreme Court decided Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agency, Inc., 134 S. Ct. 2165 (2014). In Executive Benefits, the Supreme Court clarified a procedural gap it created by its landmark decision in Stern v. Marshall, 131 S. Ct. 2594 (2011). To resolve the gap, the Court held that bankruptcy courts may issue proposed findings of fact and conclusions of law on “Stern claims” to be reviewed de novo by the district court.

Pursuant to 28 U.S.C. § 157, bankruptcy courts may enter appropriate orders and judgments on all “core proceedings” arising under or arising in a bankruptcy case. The Bankruptcy Code defines 16 types of core proceedings, including “counterclaims by the estate against persons filing claims against the estate” and “proceedings to determine, avoid, or recover fraudulent conveyances.” 28 U.S.C. § 157(b)(2). The district court has appellate jurisdiction over a bankruptcy court’s determination of core proceedings. 28 U.S.C. § 158.

If an issue is related to a bankruptcy case, but is not a core proceeding, the bankruptcy court may hear the proceeding and submit proposed findings of fact and conclusions of law to the district court. 28 U.S.C. § 157(c)(1). The district court must review the bankruptcy court’s proposals de novo and only the district court may enter a final order or judgment.

In Stern, the Supreme Court declared part of § 157 unconstitutional. Although § 157 granted bankruptcy courts the statutory authority to adjudicate core proceedings, the Court held that bankruptcy courts lacked constitutional authority to adjudicate certain core proceedings. Specifically, the Court found that the bankruptcy court lacked jurisdiction over the debtor’s counterclaim.

After debtor Vickie Lynn Marshall filed for bankruptcy, creditor Pierce Marshall filed a proof of claim for defamation. Vickie’s estate filed a counterclaim against Pierce for tortious interference with a gift obtained through her inheritance. The bankruptcy court ultimately issued a judgment in Vickie’s favor on her counterclaim.  

The Supreme Court held in Stern that the bankruptcy court violated Article III, § 1 of the Constitution by deciding a matter that should have been reserved for the district court. Even though § 157 defined the matter as core, the Court found that Vickie’s common law action did not involve a “public right” subject to decision by a bankruptcy judge. By virtue of its decision, the Supreme Court effectively created a class of matters now commonly known as “Stern claims.” Stern claims are technically defined as core by § 157, but bankruptcy courts may not constitutionally assert jurisdiction over these issues.

Stern thus created a statutory gap. Although Stern claims remained facially defined as core, the Supreme Court made it clear that bankruptcy courts could not issue final orders or decisions on them. Under 28 U.S.C. § 157(c)(1), a bankruptcy court may only submit proposed findings of fact and conclusions of law for non-core matters. Stern claims do not neatly fall within either category.

The Supreme Court resolved this ambiguity in Executive Benefits. There, the Chapter 7 trustee brought fraudulent transfer claims against Executive Benefits after the debtor improperly transferred assets to it. The bankruptcy court granted summary judgment for the trustee. After conducting a de novo review upon appeal, the district court upheld the bankruptcy court’s decision. Both the bankruptcy court and district court issued their rulings prior to the Supreme Court’s Stern decision.

Executive Benefits appealed to the Ninth Circuit and ultimately the Supreme Court. Executive Benefits asserted that because the trustee’s claims were “Stern claims,” the statutory gap created by Stern rendered the bankruptcy court powerless to act upon them. Executive Benefits additionally argued that the bankruptcy court failed to comply with non-core procedures because it issued a judgment as opposed to proposed findings.  

The Supreme Court rejected Executive Benefits’ arguments. The Court relied upon the Act’s severability provision to find that Stern claims should be practically treated as non-core within the meaning of § 157(c). The Court directed that, “when a bankruptcy court is presented with [a Stern claim], the proper course is to issue proposed findings of fact and conclusions of law.” The Court further held that although the bankruptcy court issued a judgment as opposed to proposed findings, the district court’s de novo review satisfied the constitutional requirements of Article III.

Executive Benefits thus clarified the proper procedure for addressing Stern claims and removed them from statutory limbo. 

Keywords: commercial and business litigation, bankruptcy, core proceedings, Executive Benefits v. Arkison, Stern v. Marshall, Supreme Court, non-core proceedings

Kevin J. McEleney, Esq., Updike, Kelly & Spellacy, P.C., Hartford, CT



September 3, 2014

Valuation Methods in Fraudulent Transfer Litigation

Adelphia Communications Corporation, once one of the largest cable operators in the United States, sought Chapter 11 protection in 2002, after authorities charged its founder, John Rigas, and his sons with the theft of hundreds of millions of dollars from the company. Post-confirmation, the Adelphia Recovery Trust (the plaintiff) sought to recover $150 million from FPL Group and certain of its affiliates  (FPL or the defendants) claiming that their sale of certain Adelphia stock back to the company in 1999 had been a fraudulent transfer. At trial, the court needed to “engage in a traditional fraudulent transfer analysis to determine the extent to which Adelphia was insolvent (or rendered insolvent), left with inadequate capital, or rendered equitably insolvent at the time it paid $150 million to repurchase certain Adelphia stock owned by FPL.” Adelphia Recovery Trust v. FPL Group, Inc., et al (In re Adelphia Comm. Corp.), 2014 Bankr. LEXIS 2011 (S.D.N.Y. May 6, 2014).

The primary issue in the case was the appropriate valuation methodology. Both experts concluded that any projections prepared by management or any third-party industry analysts were unreliable as they would have been based on fraudulent and inaccurate financial information prepared by the company. The plaintiff’s expert relied solely on the discounted cash flow (DCF) method and developed his own cash flow projections based on information compiled from contemporaneous industry analyst reports. The defendants’ expert rejected the DCF method altogether and relied on a combination of the guideline public company (GPC) method (based on analyzing multiples of comparable public companies) and the precedent transactions (PT) method (based on analyzing multiples paid for companies similar to the subject in the merger and acquisition market).

Ultimately, the plaintiff’s expert concluded that the total enterprise value of the company was approximately $2.8 billion—substantially lower than the company’s liabilities and thus that Adelphia was insolvent at the time of the alleged fraudulent transfers by over $1 billion. The defendants’ expert concluded that the total enterprise value of the company was approximately $6.7 billion and that the company was therefore solvent at the time of the transfers from a balance sheet perspective.

The court decided that the plaintiff’s reliance on the DCF method alone was not appropriate and that the assumptions underlying his DCF analysis were “arbitrary and speculative.” The court listed three conditions that typically must be present for the DCF method to be relevant and reliable: (1) a company must have accurate projections of future cash flows, (2) the projections must not be tainted by fraud, and (3) at least some of the cash flows are positive. The court noted that “this case is a poster child for deficiencies in that regard.” The court also found the plaintiff’s attempt to develop alternative projections to be fatally flawed and fraught with cherry picking data from third-party sources.

The court found the defendants’ valuation to be overstated from a sanity check perspective when compared to the actual value of Adelphia based on its market capitalization. The defendants’ valuation was 19 percent higher than the actual market capitalization of Adelphia at a time when Adelphia’s fraud was in existence but not known to market participants. The court found this to be unreasonable and made various adjustments to the defendants’ inputs. But ultimately, even after these adjustments, the court concluded that the company had assets with value in excess of its liabilities, and was, therefore, solvent from a balance sheet test perspective.

The plaintiff’s stated reason for not applying a form of the market approach, such as the GPC method or the PT method, was unpersuasive. As the court noted, in virtually any application of the GPC method (or in any valuation method for that matter), some level of judgment typically enters the picture, but it considered the relative level of judgment required to prepare projections in light of the fraud at Adelphia to exceed the level of judgment required to analyze and consider the value-per-subscriber multiples observed in the market. 

One interesting aspect of this case is that both experts (including the defendants’ expert, who rejected the DCF method in his valuation due to a lack of reliable projections) formulated cash flow projections for purposes of their capital adequacy analyses (another solvency test applied along with the balance sheet test in a solvency determination). Having concluded that projections were not reliable for the valuation required under the balance sheet test of solvency, the court noted that it remained troubled that the “projections made by each side were in significant respects speculative.” But it had no choice but to rely on the projections as well in considering the capital adequacy of Adelphia. 

Keywords: bankruptcy, fraudulent transfer, valuation, insolvency

Jeffrey M. Risius and Jesse A. Ultz, Stout Risius Ross, Detroit, MI



August 29, 2014

Start Me Up: Antitrust Compliance Programs Within Automotive Supplier Industry a Key Focus

This article summarizes a previously issued release on Law360 that discusses the history of the Department of Justice (DOJ) investigations into automotive supplier price-fixing, unique features of the industry that create risks for price-fixing activity, specific controls and monitoring activities to prevent and detect price-fixing, as well as a comparison between offenders who have exhibited strong commitments to antitrust compliance to those who have not. Summarized below are specific controls and monitoring activities to prevent and detect price-fixing.

Internal Controls to Prevent and Detect Price-Fixing
The 2011 U.S. Sentencing Guidelines suggest that an effective code of compliance and ethics, as well as self-reporting, cooperation, and acceptance, should mitigate punishment of law violations. See The United States Sentencing Commission, Chapter 8: Sentencing of Organizations, 2011 Federal Sentencing Guidelines Manual (Nov. 1, 2011). When assessing antitrust and price-fixing compliance programs and controls, the key is whether a company’s policies and procedures are reasonably designed to detect and prevent violations of the antitrust and price-fixing laws and regulations. Compliance programs need to be tailored to the specifics of each company; however, compliance programs addressing antitrust and price-fixing generally include the following elements:

  • 1. Sincere commitment from senior management to an ethical culture (“tone at the top”).

  • 2. A clearly articulated policy prohibiting misconduct, and development and promulgation of adequate internal controls, compliance standards, policies and procedures, and a code of conduct/ethics.

  • 3. Adequate oversight, autonomy, and resources for the program.

  • 4. A specific antitrust/price-fixing risk assessment.

  • 5. Record retention/record-keeping policies and procedures.

  • 6. Training and continuing advice.

  • 7. Incentives and disciplinary measures.

  • 8. Confidential reporting (whistleblower/helpline mechanism).

  • 9. Continuous improvement (monitoring, auditing, testing, and review).

Specific Activities to Ensure Effectiveness of Compliance Programs
Even the best intentioned and well written compliance programs may not be enough to ensure that a company is positioning itself to prevent and detect antitrust and price-fixing violations without independent evaluation and monitoring of the effectiveness of the program. Continuous monitoring includes activities designed to ensure that the policies and procedures of the company are relevant and effective to their stated mission. This will also take into account the risk the business faces in terms of compliance, the policies and procedures designed to mitigate the risk of not complying, and an assessment of the effectiveness of the policies and procedures to ensure compliance. A company should ensure that industry and regulatory best practices, including the nine elements of an effective compliance program listed above, are adequately implemented.

Specific compliance monitoring activities include the following:

  • 1. Reviews of documents and information relevant to the company’s compliance program.

  • 2. Interviews and discussions with the board of directors, audit committee, senior management, and company personnel.

  • 3. Site or location visits to observe company operations.

  • 4. Informal and formal reporting of the consultant’s evaluation, assessment, and recommendations for compliance program improvements.

  • 5. In the event of disciplinary action, the consultant (or an independent monitor) can assess the evaluation of the company’s remediation efforts, especially in relation to recommendations put forth by the consultant or monitor.

Similar to the requirement of an external audit of financial reporting for publically traded companies, an independent compliance consultant and/or monitor engaged to perform monitoring activities provides the maximum level of assurance that a company’s policies and procedures are effective and working properly.

The DOJ has been successful in uncovering improper behavior within the automotive supplier industry and has stated that its investigations into the industry will be ongoing. Compliance programs should contain policies and procedures that are constantly evaluated and monitored to ensure they are relevant and effective in accordance with their stated mission and the overall performance of the company. The tone at the top of an organization is critical in setting compliance as a priority of an organization. Companies that self-report violations and demonstrate a strong and competent compliance attitude have been rewarded with leniency in the form of reduced fines and prosecutions. When senior leadership is found to have a disregard for compliance, the government has intervened with costly penalties for companies.


Keywords: commercial and business litigation, antitrust, compliance, sentencing guidelines, automotive suppliers

Ryan C. Pisarik, Stout Risius Ross, Chicago, IL, and Raymond A. Roth, Stout Risius Ross, Detroit, MI



August 8, 2014

Pennsylvania Supreme Court Adopts Attorney-Expert Privilege

On July 10, 2014, the Pennsylvania Supreme Court adopted an amendment to Pennsylvania Rule of Civil Procedure 4003.5 that creates a bright line rule prohibiting discovery of attorney-expert communications. The amendment provides that a “party may not discover the communications between another party’s attorney and any expert who is to be identified . . . regardless of the form of the communications.” The amendment resolves a tension between two Pennsylvania Rules of Civil Procedure and clarifies the law in the wake of a ruling by an evenly-divided Pennsylvania Supreme Court earlier this year.

Pennsylvania Rule of Civil Procedure 4003.3 governs discovery of trial materials and provides that “[s]ubject to the provisions of Rules 4003.4 and 4003.5, a party may obtain discovery of any matter discoverable under Rule 4003.1 even though prepared in anticipation of litigation or trial[, but t]he discovery shall not include disclosure of the mental impressions of a party’s attorney or his or her conclusions, opinions, memoranda, notes or summaries, legal research or legal theories.” Pa. R. Civ. P. 4003.3. Rule 4003.5 permits “[d]iscovery of facts known and opinions held by an expert, otherwise discoverable … and acquired or developed in anticipation of litigation or for trial.” Pa. R. Civ.P. 4003.5. These provisions create a potential tension, in that an expert’s communication with counsel might be discoverable under Rule 4003.5, even though those communications reflect the attorney’s conclusions or opinions. The amendment resolves that question in favor of protecting the attorney’s work product, even at the expense of disclosure. The amendment to Rule 4003.5 is similar to Federal Rule of Civil Procedure 26(b)(4)(C), but unlike the federal rules, the Pennsylvania rules do not include any exceptions to the prohibition on discovery.

The court’s adoption of the amendment follows a decision in April 2014 in which an evenly divided Pennsylvania Supreme Court affirmed an order of the Pennsylvania Superior Court that adopted the same bright line rule. See Barrick v. Holy Spirit Hospital of the Sisters of Christian Charity, 91 A.3d 680 (Pa. 2014). The Barrick case arose when a defendant served a subpoena on a physician who was both a treating physician and an expert witness. The physician offered to produce all of his treatment records but proposed to exclude from production those records pertaining to the plaintiff that were not created for treatment purposes. Sitting en banc, the Pennsylvania Superior Court held that an attorney’s communications with an expert fall within the scope of Pennsylvania’s work product protection.

On appeal, the Pennsylvania Supreme Court sought to resolve the tension between Rules 4003.3 and 4003.5 but split 3–3, with three justices voting to affirm the Superior Court’s decision and three voting to reverse. Justice Thomas Saylor authored the opinion voting to reverse the Superior Court. Justice Saylor also dissented from the court’s adoption of the amendment to Rule 4003.5.

As a practical matter, the rule change will enable attorneys to speak much more freely with experts, including through written media such as email, without fear that those communications will be disclosed. At the same time, the rule also enhances the ability of attorneys to control the testimony that experts give, potentially in a way that undermines the value of expert testimony. In particular, attorneys can now disclose to experts, in writing, the opinion that the attorney wants the expert to render and the way that the opinion will aid the attorney’s presentation of the case.

Keywords: privilege, experts, work product, discovery

Joshua D. Wolson, Dilworth Paxson LLP, Philadelphia, PA


August 8, 2014

A Harsh Lesson from Unilateral Use of Predictive Coding

As technological developments have greatly expanded the world of available information, the cost of harvesting electronically stored information (ESI) has risen exponentially. In recent years however, technology has also begun to offer new tools, such as keyword searches and predictive coding, to reduce e-discovery costs. As the parties learned in Progressive Casualty Insurance Co. v. Delaney, No. 2:11-cv-00678-LRH, 2014 WL 2112927 (D. Nev. May 20, 2014), however, when used unilaterally and without assent of opposing counsel or prior approval of the court, these tools can lead to disputes, motion practice, and costs that could have otherwise been avoided.

Delaney was a declaratory relief action filed by Progressive arising out of the Federal Deposit Insurance Corporation’s (FDIC) takeover of a failed bank. In Delaney, the FDIC sought production of ESI. Progressive retained an e-discovery vendor that identified 1.8 million electronic documents. After months of negotiations, the FDIC and Progressive agreed on search terms to run on the ESI, which the court entered in an ESI protocol order. Using the search terms, Progressive identified 565,000 potentially responsive “hit” documents and began manually reviewing them for privilege and relevance. Progressive halted the manual review after a month, however, upon determining that such review was too time-consuming and expensive. Although Progressive then represented to the FDIC that it anticipated making an initial production by the end of September 2013, Progressive missed this deadline and failed to produce any ESI over the next three months. Progressive also rebuffed the FDIC’s request for detailed information as to how Progressive intended to produce ESI if not in line with the ESI protocol. Having received neither documents nor information from Progressive as to its alternative proposal for producing ESI, the FDIC moved to compel at the end of December 2013.

In its opposition to the motion to compel, Progressive revealed for the first time that, because of the exorbitant cost of a manual review of the 565,000 “hit” documents, Progressive had used predictive coding to review them. Progressive had not discussed predictive coding with the FDIC, nor obtained an amendment to the court-approved ESI protocol to permit predictive coding. Predictive coding, however, had reduced the number of potentially relevant responsive documents from 565,000 to 90,575. Progressive proposed to manually review these 90,575 documents for privilege and produce all non-privileged, relevant, responsive documents. Review of this much smaller subset of documents would significantly reduce costs. The FDIC opposed the proposal and asked the court to order Progressive to turn over the initial 565,000 “hit” documents immediately, subject to the clawback provisions in Rule 26 and the ESI protocol.

The court granted the FDIC’s motion to compel. The court noted that, although predictive coding is emerging “as a far more accurate means of producing responsive ESI,” the cases “which have approved technology assisted review of ESI have required an unprecedented degree of transparency and cooperation among counsel in the review and production of ESI responsive to discovery.” Delaney, 2014 WL 2112927 at *8, 10. The court then chastised Progressive for utilizing predictive coding without (1) consulting the FDIC, (2) seeking to amend the ESI protocol that Progressive had agreed to, or (3) adhering to the advice/best practices of its e-discovery expert and vendor on predictive coding methodology. Delaney, 2014 WL 2112927 at *10–11. The court ordered Progressive to produce all 565,000 “hit” documents subject to the clawback provisions of Rule 26 and the current ESI protocol, but allowed Progressive to apply electronic privilege filters to the “hit” documents and withhold documents identified as “more likely privileged.” Progressive would then need to provide a privilege log for a third of the withheld/redacted documents each month for the next three months.

Delaney reinforces the need for transparency and open communication between counsel regarding discovery in the world of ESI—especially where technology-assisted review is undertaken.

Keywords: electronic discovery, electronically stored information, ESI, predictive coding, technology-assisted review

Paul M. Kessimian and Christopher M. Wildenhain, Partridge, Snow & Hahn LLP, Providence, RI


July 30, 2014

No Preemption of Lanham Act Food and Beverage False Advertising Claims

Since the passage of the Lanham Act in 1946, there has been some confusion regarding whether claims of false advertisement under the Lanham Act were precluded by the Federal Food, Drug, and Cosmetic Act (FDCA). Because the United States and its agencies have exclusive enforcement authority over provisions contained in the FDCA, and the FDCA requirements are more stringent, it was thought that compliance with the FDCA provisions governing misleading advertisement and labeling were all that was required, and any claims under the Lanham Act were precluded by the FDCA.

On June 12, 2014, the U.S. Supreme Court in POM Wonderful LLC v. Coca-Cola Co. overturned a Ninth Circuit decision that held that Lanham Act claims were precluded by the FDCA. In POM, the plaintiff brought suit under section 43 of the Lanham Act against the defendant, a direct competitor, alleging “that the use of [its] label [was] deceptive and misleading.” POM at 146. More specifically, the plaintiff alleged “that [defendant’s] label tricks and deceives consumers, all to [plaintiff’s] injury as a competitor.” POM at 149. The Court of Appeals for the Ninth Circuit held that “a Lanham Act claim like [plaintiff’s] is precluded by . . . the Federal Food, Drug, and Cosmetic Act.” POM at 146.

As the Court of Appeals reasoned, a cause of action under the Lanham Act “imposes civil liability on any person who ‘uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading representation of fact.’” POM at 148 (internal citation omitted). The Lanham Act “relies in substantial part for its enforcement on private suits brought by injured competitors.” POM at 148. The FDCA differs from the Lanham Act because it “is designed to protect the health and safety of the public at large,” not just private parties who may have been injured as a result of misleading advertising. POM at 148. Furthermore, “the FDCA and its regulations provide the United States with nearly exclusive enforcement authority, including the authority to seek criminal sanctions in some circumstances. Private parties may not bring enforcement suits.” POM at 148. Thus, the defendant argued, and the Court of Appeals agreed, that the plaintiff’s Lanham Act claim was precluded by the FDCA, and that compliance with FDCA regulations should be enough to prevent a company from being sued under the Lanham Act.

The Supreme Court disagreed. It interpreted the language of both the FDCA and the Lanham Act, and found “neither the Lanham Act nor the FDCA, in express terms, forbids or limits Lanham Act claims challenging labels that are regulated by the FDCA.” POM at 151. The Court also noted that both the Lanham Act and the FDCA have coexisted since the inception of the Lanham Act. The Court found this significant because “[i]f Congress had concluded . . . that Lanham Act suits could interfere with the FDCA, it might well have enacted a provision addressing the issue during these 70 years.” POM at 151. Additionally, the Court noted that “[t]he two statutes complement each other,” because “competitors . . . have detailed knowledge regarding how consumers rely upon certain sales and marketing strategies,” and “[competitors’] awareness of unfair competition practices may be far more immediate and accurate than that of agency rulemakers and regulators.” POM at 152. Moreover, “[a] holding that the FDCA precludes Lanham Act claims challenging food and beverage labels would not only ignore the distinct functional aspects of the FDCA and the Lanham Act but also would lead to a result that Congress likely did not intend.” POM at 153.

In conclusion, the Supreme Court determined that the Lanham Act and the FDCA are not mutually exclusive. Competitors can now take advantage of the Lanham Act in the context of mislabeled food products normally governed by the FDCA. Private parties now have a way for redress when their direct competitors’ products are in violation of the Lanham Act, thereby causing injury. One question still at issue is whether consumers will eventually be able to prevail in their false advertisement suits, or if their state law claims will continue to be preempted by the FDCA. But, from now on, when you see an advertisement that looks too good to be true, you can have a bit more faith in it, because if it is inaccurate, that company will likely bear the cost of future litigation brought on by its competitors.

Keywords: commercial and business litigation, intellectual property, Lanham Act, FDCA, mislabeled food products

Daniel D. Quick, Dickinson Wright PLC, Troy, Michigan


July 10, 2014

2nd Cir. Affirms Strict Enforcement of Class Action Opt-Out Reqs

On June 11, 2014, the Court of Appeals for the Second Circuit affirmed by summary order a lower-court decision denying a member of a shareholder class more time to comply with the requirements for opting out of the settlement in a high-profile securities class-action lawsuit. See Shumsker v. Citigroup Global Markets, Inc.,No. 13-4581-cv (2d Cir. June 11, 2014). The decision was brought about when the class member, who had filed her opt-out request nearly 30 days after the deadline, instituted a separate district-court action to pursue her individual claims. The defendants in the class action promptly moved to dismiss the individual litigation as improperly filed given the shareholder’s failure to opt out. The district court granted the motion and denied the shareholder additional time to exclude herself from the settlement.

Applying an abuse-of-discretion standard, the Second Circuit affirmed. In reaching its decision, the court applied Federal Rule of Civil Procedure 6(b), which provides that a “court may, for good cause, extend the time” for taking action “if the party failed to act because of excusable neglect.” Citing the Supreme Court’s decision in Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380 (1993), the Second Circuit examined the four factors that are to be considered when the equitable doctrine of excusable neglect is invoked: (1) the danger of prejudice; (2) the length of the delay and its potential impact on judicial proceedings; (3) the reason for the delay, including whether it was within the moving party’s “reasonable control”; and (4) whether the moving party acted in good faith. In this instance, the Second Circuit found that the dispute hinged on the facts relevant to the third Pioneer factor—the reason for the delay.

The shareholder offered two justifications in support of her request for more time. First, she argued that she “failed to understand” that she was required to opt out of the class-action settlement to maintain her individual claims. Second, she claimed that she and her counsel each “genuinely believed the other was responsible for” sending the opt-out notice. The Second Circuit rejected both of these justifications as “unsatisfactory” and “contradictory.”

With regard to the claim that the shareholder “failed to understand” the need to opt out, the court observed that the notice of class settlement explained in “plain English” that a failure to file a timely request for exclusion from the settlement would extinguish all claims, including any individual claims. The court also noted that the shareholder’s understanding was less relevant here, given that she was represented by counsel who had received actual notice of the opt-out requirements. With regard to the shareholder’s second argument—that there was some alleged confusion over who was responsible for filing the opt-out—the court concluded that it was inconsistent with her claim that she “failed to understand” the need to opt out as well her as counsel’s claim that she “mistakenly believed” an opt-out had been timely filed. The Second Circuit also took into consideration the fact that the shareholder’s request for more time to file her opt-out had not been made for several months after the opt-out deadline had run. According to the court, to allow the shareholder more time after such a lengthy delay would prejudice the defendants. Taking all of this into consideration, the court concluded that the district court’s decision both to dismiss the shareholder’s individual lawsuit and to deny her request for more time did not constitute an abuse of discretion.

This decision by a federal appellate court should provide settling defendants in federal class actions with some additional assurance that courts will enforce the opt-out requirements of these settlements and give settling defendants the benefit of their bargain. It highlights for plaintiffs and their counsel the need to remain vigilant and to ensure that any request for exclusion from a certified class action is submitted within the time provided for in the notice of settlement. Given that the opt-out requirements of most notices are indeed written in “plain English,” courts are not likely to accept the claim that a class member “failed to understand” what he or she had to to opt out and pursue individual action, especially where the class member is represented by counsel.

Keywords: commercial and business litigation, securities litigation, class actions, settlement, opt-out, excusable neglect, Federal Rule of Civil Procedure 6(b)

Joe Crace and Brant Phillips, Bass Berry & Sims, PLC, Nashville, TN


July 7, 2014

3rd Cir. Guidance on Important Open Issues in Preference Litigation

The concept is simple: If a creditor gives “new value” after it received a preference, the creditor has a defense. The wording of the statute is not simple: The creditor has a defense to avoidance of the transfer if “after such transfer, such creditor gave new value . . . on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.” 11 U.S.C. § 547(c)(4).

Notwithstanding the tortured wording, the subsequent-new-value defense is a powerful tool in fending off a preference action. The problem is that the case law interpreting new value has been, quite frankly, all over the place.

These open issues were resolved, at least in the Third Circuit, by the December 2013 opinion in Friedman’s Liquidating Trust v. Roth Staffing Companies LP. The situation before the court in Friedman’s was narrow and unusual: A staffing company that had been paid pursuant to a first-day wage order claimed new value in a preference action. The Third Circuit’s opinion broadly held that: (1) any post-petition event should be ignored in subsequent new value, and (2) the purported “remains unpaid” requirement in a past Third Circuit opinion was dicta.

“Remains Unpaid” Requirement Is Dead in the Third Circuit
In New York City Shoes, Inc. v. Bentley Int’l Inc., the Third Circuit remarked that new value must “remain unpaid.” In the 25 years since, these two little words—“remain unpaid”—have dogged creditors, with trustees arguing (and some courts holding) that a preference defendant can assert the subsequent-new-value defense only if the new value is not paid during the preference period.

In the 2009 case In re Pillowtex Corp., generally considered the most complete discussion of the paid/unpaid issue, Judge Kevin Carey held that the “remains unpaid” language in New York City Shoes was dicta, and that the Delaware bankruptcy court was not bound by such language. Though Friedman’s did not reference Pillowtex, it did confirm explicitly that the “remains unpaid” language in New York City Shoes was dicta.

Critical Vendor Treatment Does Not Affect New-Value Defense
Trustees have often taken the position that critical vendor payments to the creditor post-petition reduce the new-value defense. Bankruptcy courts have ruled differently on this issue, but Friedman’s provided clear guidance. The court’s holding that the new-value analysis closes as of the petition date means that critical vendor payments, which by definition occur post-petition, do not affect the creditor’s new value. Another win for creditors.

503(b)(9) Goods Can Serve as Subsequent New Value
And now for the biggest issue resolved by Friedman’s: Nestled in footnote 2 of the opinion was an early holiday present to creditors (the opinion was filed on December 24): Section 503(b)(9) goods can serve as subsequent new value, even though, as administrative-expense claims, they must be paid in full in cash in a Chapter 11 case. (Before the Friedman’s decision, there had been no circuit-level law on this issue, with lower courts coming out on both sides.) Thus, Friedman’s confirmed that, at least in the Third Circuit, 503(b)(9) goods can serve as new value. Yet another win for creditors.

What Happens Next?
With three significant issues resolved in favor of creditors, Friedman’s sent trustees and other preference plaintiffs reeling. In general, plaintiffs’ counsel argue that Friedman’s should be read narrowly—in particular, plaintiffs’ counsel often contend that the entire discussion of section 503(b)(9) is dicta. While the authors believe that Friedman’s can only plausibly be read to mean that any post-bankruptcy payment of new value is irrelevant (including payment as a 503(b)(9) claim), this opinion may need to settle in before it becomes fully accepted in settlement negotiations. For now, attorneys representing creditor-defendants can rest easier in the Third Circuit.

Keywords: commercial and business litigation, bankruptcy, preferences, new value, creditors

Luke Murley, Saul Ewing LLP, Wilmington, DE; Olufunke Fagbami, student at Widener University School of Law, assisted in preparing this article.


July 7, 2014

Advising Clients When Federal and State Marijuana Laws Conflict

On October 19, 2009, the Department of Justice (DOJ) advised that it generally would not enforce the federal Controlled Substances Act (CSA) where state statutes have authorized the use of medical marijuana, noting that the DOJ reserved the right to prosecute. On June 29, 2011, with the advance of medical marijuana and larger-scale marijuana industrial-cultivation operations, the DOJ clarified that, due to limited resources, it generally would not pursue prosecutions against individuals using medical marijuana or their caregivers. After Colorado and Washington authorized the sale of marijuana for recreational (nonmedical) use, the DOJ issued on August 29, 2013, a memorandum reiterating its prerogative to enforce the CSA but reaffirming its general plan to defer to state and local authorities on drug control and enforcement initiatives unless certain federal priorities under the CSA are implicated.

The recurring question is whether a lawyer may ethically advise and assist a client on compliance with permissive state laws—while the CSA precludes the use or sale of marijuana—insofar as lawyers may not “counsel a client to engage, or assist a client, in conduct that the lawyers knows is criminal or fraudulent. . . .” ABA Model Rule of Professional Conduct 1.2(d). See also Arizona’s Rule of Professional Conduct 1.2(d); Colorado Rule of Professional Conduct 1.2(d). By and large, legal advice on compliance with state marijuana laws has been approved by amendments to ethical rules or by state bar-issued ethics opinions as long as the lawyer also advises on federal law and its still-existing prohibition of the same conduct. A few examples are discussed below.

The Arizona State Bar’s Ethics Committee reached the following conclusion in its February 2011 Opinion No. 11-01:

  • If a client or potential client requests an Arizona lawyer’s assistance to undertake the specific actions that the [Arizona Medical Marijuana Act (the Act)] expressly permits; and
  • The lawyer advised the client with respect to the potential federal law implications and consequences thereof or, if the lawyer is not qualified to do so, advises the client to seek other legal counsel regarding those issues and limits the scope of his or her representation; and
  • The client, having received full disclosure of the risks of proceeding under the state law, wishes to proceed with a course of action specifically authorized by the Act; then
  • The lawyer ethically may perform such legal acts as are necessary to assist the client to engage in the conduct that is expressly permissible under the Act.

The Arizona opinion warily noted that “[a]ny judicial determination regarding the law, a change in the Act or in the federal government’s enforcement policies could affect this conclusion.”

Not inconsistent with Arizona’s Opinion No. 11-01, the Colorado Supreme Court approved Comment No. 14 to Colorado Rule of Professional Conduct 1.2 on March 24, 2014, which generally allows lawyers to counsel clients on “conduct that the lawyer reasonably believes is permitted by” applicable state law, but provides that the lawyer “shall also advise the client regarding related federal law and policy.” The Nevada Supreme Court then issued an order authorizing an identical comment to its Rule 1.2 on May 7, 2014.

While the majority view apparently permits legal advice on compliance with state and local marijuana laws, there is no clear safe harbor for attorneys in the necessarily fact-sensitive universe of ethical inquiries. See Preamble to Model Rules of Professional Conduct at 19 (“The Rules presuppose that disciplinary assessment of a lawyer’s conduct will be made on the basis of the facts and circumstances as they existed at the time of the conduct in question. . . .”). In addition, the majority view mandates that clients be given advice on federal laws and policies relating to marijuana, and this majority view could change at any time for any number of reasons such as: (1) shifts in the priorities and/or prosecutorial discretion of the DOJ, (2) changes in federal law, (3) changes in state law, and/or (4) other facts or circumstances putting the DOJ in a position where it feels compelled to enforce federal law.

Keywords: commercial and business litigation, ethics, marijuana, Controlled Substances Act, professional responsibility, federalism

Rick Herold, Snell & Wilmer, Phoenix, AZ


June 30, 2014

Fourth Circuit Affirms Dismissal of Securities Claim Alleging Accounting Fraud

In Yates v. Municipal Mortgage & Equity, LLC, No. 12-2496, 744 F.3d 874 (4th Cir. Mar. 7, 2014), the Fourth Circuit affirmed a trial court’s dismissal of securities fraud claims arising out of a company’s restatement of its financial results. The dismissal was based on the plaintiffs’ inadequate pleading of scienter (i.e., fraudulent intent) in their complaint. The case underscores the difficulties faced by plaintiffs in bringing fraud claims under the federal securities laws.

The corporate defendant, Municipal Mortgage & Equity (“MuniMae”), organized and managed investment partnerships. MuniMae historically treated these partnerships as off balance sheet entities. In 2003, new accounting guidance required MuniMae to include the assets and liabilities of the investment partnerships on its own financial statements. MuniMae, however, left many of the partnerships off of its balance sheet until 2008, necessitating a substantial restatement that cost $54.1 million to complete. News of the restatement and the associated costs were followed by a significant drop in MuniMae’s stock price.

Various MuniMae shareholders brought securities fraud claims under Section 10(b) of Exchange Act and Rule 10b-5. The shareholders contended that the company, along with its officers and directors, misled investors: (i) by issuing financial statements that did not comply with accounting principles, and (ii) by concealing the costs to the company of compliance with those principles.

The trial court dismissed the complaint for failure adequately to plead scienter, and the Fourth Circuit affirmed. The Fourth Circuit explained that the Private Securities Litigation Reform Act imposes a heightened pleading standard on fraud allegations in private securities complaints. The complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). Plaintiff sought to establish scienter based on, among other things: (a) three confidential witness statements, (b) high turnover in MuniMae’s CFO position, (c) MuniMae’s firing of its auditor in 2006, and (d) alleged insider trading by company management. The Fourth Circuit carefully evaluated each of these allegations, and concluded that while many of the allegations would reasonably support an inference of scienter, they could just as reasonably support an inference that the defendants acted innocently or merely negligently. Accordingly, Plaintiffs failed to meet their pleading burden and the case was properly dismissed.

The case highlights the challenges associated with a claim under Section 10(b) or Rule 10b-5. In this case, the company had restated its financial statements, which was effectively an admission both that the company had made a misstatement and that the misstatement was material – two core elements of a securities fraud claim. Furthermore, the plaintiffs alleged the existence of multiple “red flags” that should have alerted management to the accounting problems, red flags that the Fourth Circuit acknowledged were “not insubstantial.” The Fourth Circuit nevertheless held that the plaintiffs’ complaint was insufficient to establish the “strong inference of scienter” required to state a claim under Section 10(b) or Rule 10b-5.

Keywords: litigation, Rule 10b-5, Private Securities Litigation Reform Act, securities fraud

Clifton L. Brinson, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, NC


June 30, 2014

Payment Processor's "In-House" PCI Compliance Program under Attack

In the wake of recent and highly publicized data breaches involving payment card information, businesses accepting payment cards (or “merchants”) are becoming increasingly sensitive to ensuring compliance with applicable data security guidelines, known as the Payment Card Industry Data Security Standard or PCI DSS. After all, if a merchant suffers a data breach due to its failure to adhere to PCI standards, it can face staggeringly large liability assessments from card brands, such as Visa and MasterCard, associated with resultant payment card fraud.

For years, PCI compliance service vendors, which receive certification by the PCI Council—a body originally formed by American Express, Discover, JCB, MasterCard, and Visa—have assisted merchants with ensuring their fidelity to PCI DSS. To gain access to these merchants, such service vendors frequently collaborate with payment card processors and acquirers, i.e., the entities that contract with individual merchants and/or independent sales organizations (ISOs) and facilitate the authorization and payment of card transactions.

More recently, however, certain processors have developed their own “in-house” PCI compliance programs, which they provide to certain merchants for a fee. One such program offered by First Data recently came under attack in litigation involving a service vendor with which First Data had historically contracted to provide PCI compliance services.

Specifically, in First Data Merchant Services Corp. v. SecurityMetrics, Inc., Civil Action No. RDB-12-2568 (D. Md. 2012), First Data brought suit against its former service vendor, SecurityMetrics, claiming that SecurityMetrics had engaged in a campaign of false advertising and unfair business practices against First Data following the termination of the parties’ contractual relationship. SecurityMetrics counterclaimed, contending that First Data’s recently introduced and competitive PCI compliance service solution, “PCI Rapid Comply,” was unlawful for a host of reasons. In a November 2013 ruling, the District Court rejected First Data’s arguments that several of these counterclaims should be dismissed for failure to state a claim—a decision that may give other processors pause as they seek to implement similar in-house PCI compliance solutions.

Among other things, SecurityMetrics alleged that First Data’s use of the phrase “PCI” in the title of its program was likely to cause merchants to incorrectly perceive First Data’s program as one explicitly endorsed by the PCI Council, when that was not the case. According to SecurityMetrics, this “false endorsement” violated Section 43 of the Lanham Act.

First Data argued that the claim should be dismissed because SecurityMetrics owned no mark confusingly similar to First Data’s “PCI Rapid Comply” mark, and thus, from First Data’s perspective, SecurityMetrics lacked standing to pursue a Lanham Act claim. The court disagreed. Rather, it held that persons with standing under Section 43 of the Lanham Act extended beyond holders of similar marks. According to the court, because Section 43(a)(1) of the Lanham Act defines a potential plaintiff as “any person who believes that he or she is or is likely to be damaged by [the defendant’s] act[,]” SecurityMetrics—which had alleged “damage[ ] to its commercial interests and its ability to stay competitive in the marketplace”—pled facts sufficient to support its standing.

What is more, the court declined to dismiss counterclaims brought by SecurityMetrics alleging an unlawful restraint on trade in violation of Section 1 of the Sherman Act and attempted monopolization in violation of Section 2 of the Sherman Act.

According to SecurityMetrics, First Data had contracts with ISOs, i.e., third-party sales organizations that market, open, and manage merchant processing accounts for acquirers and payment processors, that imposed billing minimums on the ISOs. Fees paid to First Data for use of its PCI Rapid Comply program would count towards those billing minimums, while fees paid to other service vendors would not. From SecurityMetrics’ perspective, this constituted an unlawful “tying” arrangement in violation of Section 1 of the Sherman Act, which proscribes certain anticompetitive restraints on trade. Holding that SecurityMetrics had adequately stated such a claim, the court rejected First Data’s argument that SecurityMetrics had failed to allege a necessary element of the tying claim, i.e., “an agreement conditioning purchase of the tying product upon purchase of the tied product (or at least upon an agreement not to purchase the tied product from another party).” According to the court, the allegations describing the aforementioned billing structure—under which fees paid for the PCI Rapid Comply would count towards billing minimums, but fees paid to other service vendors would not—sufficed to describe an unlawful “tying arrangement,” at least at the pleadings stage. The court also declined to dismiss the Section 1 Sherman Act claim on grounds that SecurityMetrics had purportedly failed to allege an actionable agreement to restrain trade or market-wide anticompetitive effect.

Likewise, the court permitted the Section 2 Sherman Act claim to survive a pleadings-stage attack. Although finding SecurityMetrics’ allegations insufficient to show the monopoly power needed to sustain an outright monopolization claim, the court held that SecurityMetrics had alleged enough to state an attempted monopolization claim, which requires only a showing that the defendant used anticompetitive conduct with the specific intent to monopolize and a dangerous probability of success. In reaching this conclusion, the court focused on SecurityMetrics’ allegations of “exclusionary conduct” by First Data, including allegations of tying, predatory pricing, and false statements purportedly designed to mislead SecurityMetrics’ customers.

At this stage of the case, the ultimate success or failure of SecurityMetrics’ counterclaims is impossible to predict. Nevertheless, the Maryland court’s decision will likely give processors and acquirers understandable unease as they attempt to implement their own PCI compliance solutions. At a minimum, the outcome of the case could have significant impacts on the marketing and fee structures associated with such “in-house” PCI compliance services.

Keywords: litigation, PCI, Payment Systems, Sherman Act, Lanham Act, antitrust, false advertising, compliance

Edward A. Marshall, Arnall Golden Gregory LLP, Atlanta, GA


June 30, 2014

"Boilerplate" Forum Selection Clause May Have You Out of Court

Pay attention to the terms at the back of your agreement – the ones often referred to as “boilerplate.” Contracts often contain choice of law or choice of forum clauses, sometimes both. How these are read and applied can affect whether you win or lose in a later litigation. A case decided earlier this year by the United States Court of Appeals for the Second Circuit drives this point home. The case is Martinez v. Bloomberg L.P., 740 F.3d 211 (2d Cir. Jan. 14, 2014).

Martinez was a high-ranking television producer at Bloomberg. In 2005, while stationed in London, he signed an employment agreement that described London as his primary workplace. The agreement provided that it was governed by English law and fixed “exclusive jurisdiction” in the English courts for “any dispute arising hereunder.”

Bloomberg terminated Martinez’s employment in July 2011. Three months later he sued in federal court in New York, challenging his termination under the Americans with Disabilities Act (ADA) and the New York Human Rights Law. He also challenged his dismissal in the London Employment Tribunal, but later discontinued that proceeding, preferring to litigate in New York.

Unsurprisingly, Bloomberg moved to dismiss the case in New York, on grounds that it could only be litigated in London, which had “exclusive jurisdiction” under the terms of the employment agreement. The trial court granted that motion, and Martinez appealed. He argued (among other things) that the dispute didn't “arise under” the employment agreement because he would have statutory rights against improper discrimination even without the employment agreement, and that the English choice of forum was unfair to him and thus unenforceable.

The appeal is interesting because of the English choice of law clause. Where the contract chooses English law, how is an American court supposed to decide whether a choice of forum clause applies – by looking to English law or by looking to federal law? And if the choice of forum clause does apply, how does the American court decide whether to enforce it – by looking to English law or federal law?

The short answer is this: the parties chose English law, so English law decides what the contract means. So whether the discrimination claims “arise []under” the employment agreement gets decided by English law. But whether the choice of forum is enforceable – that is, whether there are any good reasons not to enforce it – is a matter of federal law and policy, so that question is decided by federal law.

The analysis is actually straightforward. Under federal law, a choice of forum clause will be enforced if four conditions are met: (1) was the clause reasonably communicated to the party challenging it? (2) does the clause require submitting the dispute to the foreign forum, or does it just permit the parties to submit it to the foreign forum? (3) does the forum selection clause apply to the parties’ dispute – that is, is the dispute within the scope of the clause? And (4) is there some good reason not to enforce the clause – for example, fraud, overreaching, injustice or violation of public policy?

The Second Circuit noted that the second and third questions are issues of what the contract means. The forum selection clause has to be interpreted in order to figure out whether it is “mandatory” or “permissive.” Likewise, the court has to interpret the clause in order to see whether its scope is broad enough to cover the parties' dispute. Because the parties had chosen to have the meaning of their agreement governed by English law, the Second Circuit held that that choice must be respected. So English law controlled both these issues.

That meant Martinez’s main challenge to the forum selection clause – whether it covered his discrimination claims – had to be decided under English law. As it happens, under English law, a dispute “arises under” an employment contract if it stems from the employment relationship, even if the particular claims are not for breach of the employment contract. So even statutory claims for disability discrimination are covered by the choice of forum claim.

But is there a good reason under federal law not to enforce the forum selection clause? Federal courts will refuse to enforce an otherwise valid choice-of-forum clause based on four considerations: (1) was it procured by fraud or overreaching? (2) is the law in the selected forum unfair? (3) is there a strong public policy that counsels against enforcing the clause? and (4) is the selected forum so burdensome that the challenging party will effectively be deprived of his day in court?

Martinez did not argue the first factor, and the Court held that he hadn’t established the fourth. The main arena for decision instead centered on Martinez’s position that the ADA demonstrated a strong federal interest in combatting disability discrimination that English law did not protect adequately. He pointed to the longer statute of limitations under the ADA and the ADA’s provision for awarding attorneys’ fees to a prevailing plaintiff.

But the Second Circuit was unimpressed. English law does protect against disability discrimination. Vindicating the federal interest in protecting the rights of disabled persons did not require invalidating a choice of English forum. Just because English law is less favorable to plaintiffs does not mean it is unfair.

The result is that Martinez was out of luck, because the statute of limitations had already run in England. His claims were time-barred.

Martinez’s fate underscores the high stakes that sometimes can be at issue when a contract contains both a choice-of-forum and choice of law clause. Depending on the terms of your deal, you should pay attention not just to which jurisdiction's law should apply to it, and where any disputes about it should be heard, but also to how the two kinds of clause (choice-of-forum and choice-of-law) interact.

Keywords: litigation, choice of law, choice of forum, public policy, ADA

Stuart M. Riback, Wilk Auslander LLP, New York, NY


June 30, 2014

Broader Fee-Shifting Provisions in Delaware Corporate Bylaws

Through a recent en banc opinion, the Delaware Supreme Court apparently has cleared the way for Delaware corporations to impose a significant new obstacle to shareholder suits. In ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013 (Del. May 8, 2014), the court responded affirmatively to a set of certified questions from the U.S. District Court for the District of Delaware regarding the validity of a fee-shifting provision in the bylaws of a Delaware non-stock corporation. The relevant facts and procedural history are as follows.

The corporate charter of ATP Tour, Inc. (“ATP”) authorized its board of directors unilaterally to amend the corporate bylaws. In 2006, the board did just that, adding a provision that requires a member asserting claims against ATP to pay ATP’s attorneys’ fees and expenses unless the member “substantially achieves, in substance and amount, the full remedy sought.” The following year, a member filed suit against ATP in the U.S. District Court for the District of Delaware alleging various antitrust and breach-of-fiduciary-duty claims. None of the claims were successful. Thereafter, ATP sought to collect its fees and expenses under the bylaw.

The district court initially denied the fee request on federal preemption grounds, based on the presence of the antitrust claims, but the U.S. Court of Appeals for the Third Circuit vacated that order and remanded for an initial determination whether the fee-shifting provision was enforceable as a matter of state law. The district court then certified that issue, in four variations, to the Delaware Supreme Court. Essentially, the district court asked whether the provision was: 1) enforceable as written; 2) enforceable in a narrower form; 3) enforceable even if enacted in bad faith; and 4) enforceable against a member whose membership predated the enactment of the provision.

In responding to the certified questions, the Delaware Supreme Court noted that “allocat[ing] risk among parties in intra-corporate litigation” was a proper subject for a bylaw. The court also stated that “a fee-shifting provision contained in a non-stock corporation’s validly-enacted bylaw would fall within the contractual exception to the American Rule.” Consequently, the court held that the provision was facially valid under the Delaware General Corporation Law. Because ATP’s board was authorized unilaterally to amend the bylaws and the suing member had “agreed to be bound by the corporation’s rules ‘that may be adopted and/or amended from time to time,’” the court further held that the provision could be applied against a member whose membership predated the enactment of the provision.

The court emphasized, however, that “the enforceability of a facially valid bylaw may turn on the circumstances surrounding its adoption and use.” The court contrasted three cases, Schnell v. Chris-Craft Industries, 285 A.2d 437 (Del. 1971), Hollinger International, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004), and Frantz Manufacturing Co. v. EAC Industries, 501 A.2d 401 (Del. 1985), to demonstrate that bylaw amendments are scrutinized under Delaware law and that “[l]egally permissible bylaws adopted for an improper purpose are unenforceable in equity.” The court expressed no opinion whether the provision enacted by ATP was enacted for an improper purpose, but reiterated that “[t]he intent to deter litigation . . . is not invariably an improper purpose.” The court also recognized that other circumstances, such as conflict with a statute, might render such a provision unenforceable as-applied.

The ATP decision, while made in the context of a non-stock corporation, does not appear to depend on any feature unique to such entities. Rather, it may pave the way for the adoption of similar fee-shifting provisions by traditional stock corporations, both privately and publicly held. Numerous commentators have expressed concern over the potential deterrent effect of such provisions, if enacted, on shareholder litigation involving Delaware corporations. That effect could be particularly pronounced in the context of shareholder class actions.

Moreover, the court’s emphasis on contract law as the basis for validating fee-shifting provisions suggests that the decision may have implications for other types of entities—particularly limited liability companies and limited partnerships—whose internal governance typically rely heavily on contractual relations. “Losing party pays” provisions are nothing new in the agreements governing such entities. But the fee-shifting provision declared facially valid in ATP Tour is one-sided, applying only to actions initiated by a member and putting only the member at risk for fees. In addition, it sets the threshold for avoiding fees at complete victory, given that the member must “substantially achieve[], in substance and amount, the full remedy sought.” Thus, the court’s holding that such provisions are facially valid may lead to their inclusion in LLC agreements and LP agreements going forward, and thus generate a similar deterrent effect in litigation involving those types of entities.

Keywords: litigation, commercial, business, private equity litigation, Delaware, ATP, Deutscher, bylaws, fee shifting

Roger P. Meyers, Honigman Miller Schwartz and Cohn LLP, Detroit, MI


May 28, 2014

D.C. Circuit Upholds Broad Federal Reserve Regulatory Authority


In NACS v. Bd. of Governors of the Fed. Reserve Sys., 746 F.3d 474 (D.C. Cir. 2014), the U.S. Court of Appeals for the District of Columbia ruled that the Board of Governors of the Federal Reserve System had reasonably interpreted § 920(a)(4)(B) of the Durbin Amendment to the Dodd-Frank Act to include a cap on “per-transaction” fees that banks can charge for use of debit cards and that the board reasonably interpreted the act to require at least two networks, owned and operated by different companies, to be able to process transactions.

In a hollow victory for banks, the board’s broad interpretation of appropriate caps on debit card fees was found to be reasonable. Although a win, because the court did not employ the narrower interpretation proposed by merchant groups, and thus allowed higher fees, banks might nevertheless have taken a big step back in the war over fees because this decision enhances the board’s authority to regulate the banking industry and interpret the Dodd-Frank Act broadly.

The court used most of the opinion to address the first issue, in which the court agreed with the board’s interpretation of which fees the Durbin Amendment permitted banks to recoup. The applicable portion of the statute states that fees should be distinguished “between . . . the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular debit transaction, which cost shall be considered . . ., [and] other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered.” 15 U.S.C. 1693o-2(a)(4)(B).

Thus, the debate really raged over whether a fee must directly relate to each individual transaction to be charged or whether a fee could relate to many transactions. For instance, transactions cannot be completed without the machines which process the transactions, but banks do not bear costs each time such a machine is used.  Banks must pay for their development, installation, upkeep, and replacement, but none of these charges directly relate to John Smith’s grocery purchase last Monday.

The court agreed with the board that banks are permitted to recover fees that relate to transaction costs but are not incurred by banks for the authorization, clearing, and settlement of a particular transaction. The court gave customer service as an example of such costs. Banks must provide customer service and customer service is associated with particular transactions. Customer service, however, is not incurred as a result of authorization, clearing, and settlement of the transaction.  Ultimately, because the court found the statute ambiguous, and relying heavily on the placement of a comma, the court determined that the board’s decision to include these costs in permissible fees was an appropriate interpretation of the Durbin Amendment.

For the second issue, the court considered whether the Board had correctly interpreted the statute’s anti-exclusivity rule. Debit cards are processed by networks, like Visa and MasterCard, and each network uses two different methods of authorization, PIN authorization and signature authorization. The statute requires the board to promulgate a rule that prevents a card issuer, a bank, from restricting the number of networks on which debit transactions can be made. In other words, the board is supposed to insure that banks use at least two unaffiliated networks to process transactions. A bank cannot just use Visa or just use MasterCard, but it could allow either one to be used.

The problem arose in how this was accomplished. The merchants and the board fought over two different plans. The first option, adopted by the board, required banks to permit debit transactions to take place on either of at least two unaffiliated networks for each transaction. The second option, for which the merchants advocated, required banks to accept transactions over two unaffiliated networks for either PIN or signature authorization. Under the board’s plan, a bank would be in compliance if it restricted PIN authorizations to the Visa network as long as signature authorizations were done on the MasterCard network. The merchants’ plan would require banks to accept transactions from either Visa or MasterCard, or some other network, for both types of authorization. The court found that the board’s plan satisfied the language of the statute and also satisfied its purpose of promoting competition between debit card transaction networks.

In summary, the court found that the board had reasonably interpreted the Durbin Amendment for both issues, and upheld the board’s regulations. In doing so, the court granted the board increasing authority to inject its opinions into the statutory scheme.

Keywords: litigation, commercial, business, banking, debit cards, Dodd-Frank, Durbin Amendment, exclusivity, Federal Reserve, fees

James H. Maggard, Foland, Wickens, Eisfelder, Roper & Hofer, P.C., Kansas City, MO


May 27, 2014

Fact Witness Compensation and the Potential for a Witness Bias Charge


New York’s highest court has addressed whether the testimony in a civil action of a subpoenaed fact witness, who received a fee alleged to be disproportionately in excess of the minimum statutory fee requirement for attendance at trial, was inadmissible as a matter of law.  In Caldwell v. Cablevision Sys. Corp., 960 N.Y.S.2d 711 (N.Y. 2013), the New York Court of Appeals held that such testimony is generally admissible but that the trial court should in a proper case charge the jury as to the witness’s potential bias in light of the fee’s perceived excessiveness.  It went on to find that where the party that subpoenaed the witness offers no explanation for a fee that is seemingly in excess of reasonable compensation for the witness’s lost time and incidental expenses, the trial court, upon a timely request by an objecting party, must charge the jury as to the witness’s potential bias.  Id. at 712.  The trial court’s failure to give a potential witness bias charge in Caldwell was held under the circumstances of that case to constitute harmless error.  Id. at 715.

The plaintiff tripped and fell while crossing a street at night with her dog. At the time of that incident, Cablevision Systems Corp. (CSC) had completed its installation of cable under the street where plaintiff fell, but had not yet repaved the street. The plaintiff and her husband later brought a negligence suit against CSC and others for her injuries from the fall. CSC at trial subpoenaed the doctor who had treated the plaintiff in the emergency room the morning after her fall. The doctor was not called as an expert and gave no professional opinion. Rather, he testified for one hour as a fact witness to verify his consultation note with plaintiff and the entry therein that plaintiff “tripped over a dog while walking last night in the rain.”  During cross-examination, the doctor testified that CSC paid him a $10,000 fee for appearing and testifying at trial.  Id. at 713.

New York’s Civil Practice Law and Rules provides that a witness compelled to testify at trial is entitled at a minimum to a $15 daily attendance fee and (except for travel within a city) $0.23 per mile in mileage fees for travelling to and from the court to testify.  N.Y. C.P.L.R. 8001(a) (2014).  The maximum witness fee a subpoenaed witness may be entitled to receive is not specified by statute and courts in New York recognize that a subpoenaed witness may be “reasonably” compensated for time lost in complying with a subpoena.  960 N.Y.S.2d at 714.  Neither CSC nor the doctor sought at trial to justify the $10,000 fee as reasonable compensation for the doctor’s one-hour testimony.  Id. at 714.

The trial court denied the plaintiff’s request to strike the doctor’s testimony or, in the alternative, issue a jury charge as to the doctor’s potential bias and the $10,000 fee.  It instead permitted the parties to address the fee and potential bias in their summations to the jury, and gave the jury a general witness bias charge without any reference to the doctor or the $10,000 payment.  The jury ultimately found that CSC was negligent but that its negligence was not a substantial factor in causing the plaintiff’s accident.  The Appellate Division later affirmed.  It did find, however, that the trial court erred in not giving the jury a potential bias charge specifically addressed to the doctor’s testimony, but that error was held to be harmless. Appeal was then taken to the court of appeals. Id. at 713-14.  New York’s highest court was “troubled by what appears to be a substantial payment to a fact witness in exchange for minimal testimony.”  Id. at 714.  It agreed with the lower courts, however, that the doctor’s fee was not a basis to exclude or strike his testimony.  The defendant’s payment to the doctor was not contingent upon the outcome of the case and a witness is permitted to be compensated in excess of the statutory minimum fee for the witness’s actual expenses in attending court and a reasonable compensation for the loss of his or her time in testifying.  Id. at 715.

The court of appeals, however, did agree with the plaintiff that the trial court should have issued a potential bias charge to the jury that specifically addressed the $10,000 payment CSC made to the doctor where there was no attempt by CSC at trial to justify the payment’s amount.  “The distinction between paying a fact witness for testimony and paying a fact witness for time and reasonable expenses can easily become blurred,” and it is for the jury to draw the line between the two.  Id. at 715.  The Caldwell jury, therefore, should have been instructed that a fact witness may be compensated for the loss of time and reasonable expenses and that it is for the jury to assess whether that compensation was disproportionately more than what was reasonable for the loss of that witness’s time from work or business.

 If it concludes that the fee paid was disproportionate, the jury need then consider whether that payment influenced the witness’s testimony.  A potential bias charge must be requested in a timely fashion and it is within the trial court’s discretion to determine whether such a charge is warranted in the context of a payment to a particular witness.  The trial court will control how much testimony at trial should be permitted relative to lost time and other expenses for which the witness is being compensated.  Id. at 715.

While the trial court erred in not providing the jury a potential bias charge specific to the doctor’s testimony, the court of appeals determined that error was harmless. There was no contention that the doctor fabricated the content of the consultation note that was the focus of his testimony, and thus the substance of his testimony was only “tangentially” related to his credibility.  Id. at 715.  Nevertheless, the decision is instructive on circumstances in which compensation paid to a subpoenaed witness may give rise to a potential bias charge.

Keywords: litigation, commercial, business, fact witness, witness compensation, witness potential bias charge, witness lost time, witness bias, Caldwell

John P. McCahey, Hahn & Hessen LLP, New York, NY


May 19, 2014

Disclosure of Trade Secrets in Trade-Secret Litigation: A Frequent Catch-22


Your client comes to you (usually late on a Friday afternoon) with a problem.  A competitor is using your client’s trade secrets. How did the competitor learn the secrets, if they are in fact secret, and if in fact your client has taken commercially reasonable precautions (as all clients must) to protect those trade secrets, you ask.  The usual answers are either that a former employee joined the competitor and brought a thumb drive with him or her, or the competitor received the trade secrets under a confidentiality agreement and is now violating that agreement.  In the “olden days,” employees could only take paper copies of documents with them when leaving one employer for another.  Not only did this limit the amount of information they could take, it was obvious if an employee was trying to leave with ten boxes of paper.  Today, a lifetime’s work product can fit on a thumb drive the size of a car key.  It is not practical to try and “frisk” departing employees to see if they are carrying thumb drives.  It is also not practical to prevent employees from downloading (or emailing) information.  After all, that is how business is done today.  It may, however, be practical to lock down what are really a company’s “crown jewels,” and keep them from being copied or emailed.

 The answer to your client’s Friday afternoon problem, you think, is simple.  You can sue for  misappropriation of the trade secrets.  If you can get into federal court, you can take advantage of notice pleading.  That way you don’t have to describe the trade secret in detail on the public record.  While some courts will agree to seal at least those portions of a complaint describing trade secrets, others will not. You need to know the local rules and practices of the jurisdiction you are in.

 But even that may not be sufficient.  At a minimum, the court will likely require you to provide discovery responses specifically identifying the trade secrets your client contends were misappropriated.  See, e.g., Synygy, Inc. v. ZS Associates, Inc., 2013 U.S. Dist. Lexis 98656, at *2 (E.D. Pa. July 15, 2013).  This is because

as part of its case in chief, a trade secret plaintiff must identify its trade secrets with a reasonable degree of precision and specificity that is particular enough as to separate the trade secret from matters of general knowledge in the trade or of special knowledge of persons skilled in the trade.

Synygy, 2013 U.S. Dist. Lexis 98656 at *4–*5 (citations omitted).  Indeed, some courts will require a plaintiff to identify the trade secrets “up front” so that the court can evaluate the reasonableness of discovery requests.  Synygy, 2013 U.S. Dist. Lexis 98656 at *5. 

 As a result, while confidentiality stipulations and protective orders may be available, you should prepare your client for the virtual certainty that it will have to disclose to its competitor the very trade secrets your client is trying to protect.  If your client honestly believes that its competitor already has the trade secrets, doing so will not add “insult to injury.”  If, on the other hand, your client is unsure of exactly what trade secrets the competitor has, or perhaps if the competitor has them at all, your client might want to stop and think before asking you to run to court. Which might not be a bad idea in any event.

Keywords: litigation, commercial, business, trade secrets, pleading, discovery

Aaron Krauss is a member of Cozen O’Connor in its office in Philadelphia, Pennsylvania.

The views expressed are those of the author, do not necessarily constitute those of the firm, and do not constitute legal advice.


May 5, 2014

D.C. Circuit Grants Interlocutory Review, Vacates Class Certification in Major Antitrust Case


In In re Rail Freight Fuel Surcharge Antitrust Litig., 725 F.3d 244 (D.C. Cir. 2013), the U.S. Court of Appeals for the D.C. Circuit issued a decision in an interlocutory appeal that vacated the district court’s class certification in a putative antitrust class action challenging fuel surcharges imposed by the major freight railroads beginning in 2003.  This decision provides significant guidance for class action practitioners on certification issues and also illustrates the hurdles that must be overcome to obtain interlocutory review of a district court decision that certifies a class.

This case arose out of a consolidated class action complaint filed in April 2008 on behalf of shippers who paid a percentage-based fuel surcharge for contract service from the four major U.S. railroads— BNSF, CSXT, Union Pacific Railroad, and Norfolk Southern Railway.  The complaint alleges that the defendant railroads violated antitrust provisions of the Sherman Act by colluding to impose those surcharges. On June 21, 2012, the district court issued a class certification decision, finding that there was common evidence applicable to class members and that use of the class action mechanism was appropriate in this case. The defendants timely filed an interlocutory appeal of the class certification decision in the Court of Appeals. 

Before addressing the merits of the defendants’ appeal of the class certification decision, the court of appeals first had to decide if an interlocutory appeal was an appropriate exercise of appellate discretion. Based on the combined weight of three separate factors, the court determined that this case was one of those “rare instances in which interlocutory review of a certification decision is warranted.”  725 F.3d at 247.

First, the court stated that the amount of potential damages at stake might put undue pressure on the defendant railroads to settle an unmeritorious claim (referred to as a death knell). Second, the court found that the class certification decision was questionable, given that the damages model offered by the plaintiffs’ expert showed that damages were suffered equally by shippers within the class and also shippers that operated under legacy contracts (and were, therefore, outside the class).  Third, the court stated that the district court should have evaluated the merits of the plaintiffs’ claims, including the reliability of the plaintiffs’ expert’s regression models, more closely during the class certification phase.  The court of appeals noted that scrutiny during the class certification phase was emphasized by the U.S. Supreme Court in Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013), a decision that was issued after the district court’s certification of the shipper class. Id. at 253.

After deciding that interlocutory review was warranted, the court of appeals addressed the merits of the appeal.  The court’s decision centered on the predominance requirement of Rule 23.  Specifically, class certification is only warranted if the plaintiff can show, “through common evidence, that all class members were in fact injured by the alleged conspiracy.”  While plaintiffs need not show at the certification stage the precise amount of damages each class member suffered, common evidence must show that “all class members suffered some injury.”  Id. at 252.

The court of appeals found that predominance was “questionable” on the record with respect to how damages would be calculated for the members of the class. The court focused primarily on the plaintiffs’ expert’s regression models. Although the district court found the expert’s damages models plausible and workable, the court of appeals disagreed, especially in light of the “false positives” generated by the model.  The court of appeals noted that the damages model showed similar damages for both class members and legacy shippers who were not in the proposed class (those who, during the class period, “were bound by rates negotiated before any conspiratorial behavior was alleged to have occurred”).  Id. at 252.  This flaw was sufficient to vacate the class certification decision due to a lack of predominance.  “Common questions of fact cannot predominate where there exists no reliable means of proving classwide injury in fact.”  Id. at 252–53.  See also id. at 254 (“we have no way of knowing the overcharges the damages model calculates for class members is any more accurate than the obviously false estimates it produces for legacy shippers”).

The court of appeals’ decision was substantially influenced by Behrend, which also addressed an antitrust class certification based on regression modeling.  The court of appeals noted that “[b]efore Behrend, the case law was far more accommodating to class certification,” and that Behrend mandates that a district court “scrutinize the evidence before granting certification, even when doing so ‘requires inquiry into the merits of the claim.’”  Id. at 253 (citation omitted).  The court of appeals found that such scrutiny revealed serious flaws in the plaintiffs’ damages model, and that it necessarily followed that the plaintiffs failed to prove that common evidence could  be used to show injury to all class members.

This decision is the continuation of a trend requiring a rigorous analysis of the merits of the claims of class members for class certification.  It also provides a roadmap for those seeking the unusual step of obtaining interlocutory review of a class certification decision.

Keywords: litigation, commercial, business, antitrust, class action, class certification, damages models, interlocutory appeal, predominance

David A. Wilson, Thompson Hine, LLP, Washington, D.C.


April 29, 2014

Rule 26 Amendments Only Go So Far in Limiting Discovery


On December 1, 2010, several amendments to Federal Rule of Civil Procedure 26 took effect.  The Advisory Committee Notes state that the primary thrust of the 2010 amendments was to address the “undesirable effects” of the prior, 1993 amendments to Rule 26, which had provided for “routine discovery into attorney-expert communications and draft reports.” However, the 2010 amendments have hardly proven a panacea for those looking to protect expert materials and communications from discovery.  To the contrary, courts have consistently given a narrow reading to the amendments extending work-product protection to draft expert reports and (with certain exceptions) to attorney-expert communications.

A key question is whether Rule 26 now protects an expert’s notes from discovery.  [Although beyond the scope of this article, another key question is whether Rule 26 now protects communications that are not strictly “attorney-expert”; for example, communications between experts.  As with expert notes, court have tended to give the 2010 amendments a circumscribed reading in this area.] The 2010 amendments narrowed Rule 26(a)(2)(B)(ii) “to provide that disclosure include all ‘facts or data considered by the witness in forming’ the opinions to be offered, rather than the ‘data or other information’ disclosure prescribed in 1993.”  2010 Amendments Adv. Comm. Notes. This amendment, together with the new protections for draft expert reports and attorney-expert communications (under subsections (b)(4)(B) and (b)(4)(C)), could fairly be read to create a broad protection for expert materials and communications that would extend to an expert’s notes. One could argue that the notes might reflect protected attorney-expert communications that, like a draft report, are arguably in the nature of work product (albeit at a more elemental level than the report itself), and that they would tend to consist of more than the raw “facts or data considered by the witness.”

The courts, however, largely disagree. In an April 2011 opinion, one court found (arguably in dicta)that expert notes would be protected under the new Rule 26.  D.G. ex rel. G. v. Henry, 2011 U.S. Dist. LEXIS 38709, at 8 (N.D. Okla. Apr. 8, 2011) ( Henry). But very recently, another court described Henry (accurately, to all appearances) as an outlier. Wenk v. O’Reilly, 2014 U.S. Dist. LEXIS 36735, 12-13 (S.D. Ohio Mar. 20, 2014).  As the Wenk court noted, other courts have found that expert notes do indeed constitute “facts or data considered by” the expert, and do not constitute draft reports or attorney-expert communications.  See, e.g., Dongguk Univ. v. Yale Univ., 2011 U.S. Dist 157690 (D. Conn. May 19, 2011); In re Asbestos Prods. Liab. Litig. (No. VI), 2011 U.S. Dist. LEXIS 143009 (E.D. Pa. Dec. 13, 2011). While the Wenk court declined to draw a “bright-line standard,” instead ordering an in camera inspection to make a “fact-dependent” determination, it was clear the court was skeptical.  Wenk, 2014 U.S. Dist. LEXIS 36735, at 20 (stating that defendants “face a difficult road ahead of them in persuading the Court that notes which are almost presumptively not ‘drafts’ might be viewed as such here”).

In recent months, these district court cases have been joined by ones from the Ninth and Eleventh Circuits, both of which issued pro-expert discovery opinions in disputes arising from the long-running, multibillion-dollar environmental pollution litigation brought against Chevron by the Republic of Ecuador. In Republic of Ecuador v. Hinchee, 741 F.3d 1185, 1186 (11th Cir. 2013), the Eleventh Circuit held that the general work-product doctrine of Rule 26(b)(3)(A) did not cover a testifying expert, that the 2010 Amendments were intended to protect the opinion work product of attorneys—not testifying experts—and that expert notes were therefore not protected. The Ninth Circuit in Republic of Ecuador v. Mackay, 742 F.3d 860, 870 (9th Cir. 2014), similarly found that “the driving purpose of the 2010 amendments was to protect opinion work product” of attorneys, and that this solicitude for an “attorney’s zone of privacy” did not evidence an intent “to expand Rule 26(b)(3)'s protection for trial preparation materials to encompass all materials furnished to or provided by testifying experts.” Id. at 871. Although several circuits have yet to weigh in on the matter, the consistency of opinions to date does not bode well for those hoping to find broad protections against expert discovery in the new Rule 26.

Keywords: litigation, commercial, business, work product, expert discovery, privilege, Rule 26

Louis E. Kempinsky and John C. Keith, Valensi Rose LLP, Los Angeles, CA


April 21, 2014

Former In-House Counsel Can't Use Confidential Information to Sue Former Client


In a recent decision, the U.S. Court of Appeals for the Second Circuit addressed the applicability of state ethical rules governing a lawyer’s obligation to protect client confidences in the context of a qui tamaction brought pursuant to the federal False Claims Act.  In Fair Laboratory Practices Associates v. Quest Diagnostics Inc., et al., 734 F.3d 154 (2d Cir. 2013), the court of appeals affirmed the dismissal of a qui tam action brought by two former executives and the former general counsel of a clinical laboratory company on the basis that the company’s former in-house counsel violated his ethical obligations by disclosing and using the company’s confidential information as a relator in the action.

Mark Bibi was general counsel for Unilab Corporation, a clinical laboratory company that provided medical diagnostic testing services for managed care services (MCOs) and independent practice associations (IPAs) in California. From 1993 to approximately March 2000, Bibi served as Unilab’s only in-house counsel and handled all of the company’s legal and compliance affairs.  His tenure at Unilab came to an end shortly after he raised concerns about Unilab’s pricing structure as potentially violating the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b.

In 2003, Quest Diagnostics, a national laboratory testing company, acquired Unilab. In 2005, Bibi and two other former Unilab executives formed Fair Laboratory Practices Associates (FLPA), a general partnership organized for the sole purpose of bringing a qui tam action against Unilab and Quest. The lawsuit alleged that from 1996 through at least 2005 Unilab and Quest violated the Anti-Kickback Statute by operating a “pull-through” pricing scheme in which they charged commercially unreasonable discounted prices to MCOs and IPAs for nonfederal business in order to induce referrals of Medicaid and Medicare business for which Unilab and Quest then charged to the Government at dramatically higher prices. 

The defendants moved to dismiss the action, arguing that Bibi disclosed and used Unilab’s confidential information in the lawsuit in violation of his ethical obligations under the New York Rules of Professional Conduct. Specifically, the defendants argued that Bibi’s participation in the lawsuit violated New York’s “side-switching” rule, which prohibits a lawyer from representing another person against a former client in a substantially related matter as the former representation without the written consent of the former client (Rule 1.9(a)), and the rule that generally prohibits a lawyer from using a former client’s confidential information to the disadvantage of the former client (Rule 1.9(c)). FLPA claimed that the disclosure and use of Unilab’s confidential information was appropriate under an exception to the general rule of non-disclosure that permits a lawyer to reveal or use confidential information to the extent that the lawyer  reasonably believes necessary to prevent the client from committing an crime (Rule 1.6(b)(2)). The district court rejected FLPA’s arguments and dismissed the lawsuit and disqualified FLPA, its partners, and its counsel from acting as relators in any qui tamaction against the defendants based on similar facts. 

On appeal, FLPA argued that the dismissal should be reversed because: (1) the Federal Claims Act required Bibi to make “written disclosure of substantially all material evidence and information [he] possesses” to the government and therefore preempted Rule 1.6(b)(2), which permits disclosure of confidential information only to the extent necessary to prevent a crime; and, alternatively, and (2) Bibi’s disclosure and use of confidential information complied with Rule 1.6(b)(2) because the disclosure was necessary to prevent defendants from committing an ongoing crime. The Second Circuit rejected both arguments and affirmed the district court’s dismissal.

As an initial matter, the court of appeals held that the False Claims Act did not preempt state ethical rules because nothing in the act showed a clear legislative intent to preempt state rules governing an attorney’s disclosure of client confidences. However, the court did acknowledge that rules obligating an attorney to protect client confidences could be inconsistent or even antithetical to the federal interests under the False Claims Act, which are to encourage individuals who are aware of a fraud being perpetrated against the government to come forward.  Therefore, the court had to interpret the NY Rules in a way that balanced the federal interests at stake. 

The crux of the analysis centered on the second element of the Rule 1.6(b) exception—whether Bibi’s disclosures of confidential information were necessary to prevent the defendants from committing a crime. 

The Second Circuit rejected FLPA’s argument that the requirement under §3730(b)(2) of the False Claims Act that he fully disclose all material evidence to the government overrode the more limited disclosure permitted under Rule 1.6(b). The court reasoned that the full-disclosure provision in the federal act was not inconsistent with Rule 1.6(b)(2) because the state rule implicitly balanced the federal interests at stake under the False Claims Act.  Rule 1.6(b)(2) expressly permits disclosure of confidential information to the extent necessary to prevent the ongoing commission of a crime, and the record demonstrated that the qui tam action would not have been undermined by the absence of Bibi’s disclosure of confidential information.   

FLPA’s alternative arguments fared no better. The Second Circuit rejected that notion that Bibi complied with Rule 1.6(b) by “tempering” his disclosures until he was deposed in the case. It also concluded that there was no basis for concluding that Bibi’s broad disclosure of confidential information was necessary because of the ongoing nature of the alleged crime. The appellate court agreed with the district court that Bibi’s disclosure of confidential communications dating back to 1996 was beyond what was reasonably necessary to prevent any alleged ongoing crime at the time the suit was filed in 2005. It also noted that the other two former executives had knowledge of sufficient information, making it unnecessary for Bibi to have participated in the qui tam action at all. 

The Second Circuit also found that the district court did not abuse its discretion fashioning a remedy for the violation of New York’s ethical rules. It found the district court was well within its authority to disqualify FLPA, its individual relators, and FLPA’s counsel from any future qui tamaction against the defendants based on similar circumstances in order to avoid prejudice to the party whose confidential information was revealed.

The Takeaway
The Second Circuit’s decision does not eliminate the possibility that an in-house attorney might be able to participate and use confidential information as a plaintiff in a whistleblower action against a former client without violating state ethics rules. However, it does provide persuasive authority for the proposition that any such disclosure must be limited to no more than what is reasonably necessary to prevent the former client from committing a crime. The question the lawyer then faces is how to determine what constitutes a “reasonably necessary” disclosure.  In this case, Bibi testified that he examined the New York Rules of Professional Conduct and the ABA Model Rules, to determine whether he could participate in the lawsuit and still comply with his ethical obligations.  However, he did not seek advice from the New York State Bar.  Unfortunately for Bibi, he was wrong.

Keywords: litigation, commercial, business, confidentiality, False Claims Act, ethics, qui tam

Michael Brockland, Haar & Woods, LLP, St. Louis, MO


April 10, 2014

The Lingering Question after Oxford Health: Determination of Class Arbitrability


In the wake of the Supreme Court’s 2013 decision in Oxford Health, courts are grappling with who decides whether class arbitration is available in a dispute.

One area of class arbitration that has yet to be resolved by the Supreme Court is whether the court or the arbitrator determines if class arbitration is available to parties involved in a dispute.  In other words, is it a question of arbitrability for the court to decide?  Or, is it a procedural question that the arbitrator decides once the claim is in arbitration?  

In a 2013 decision, the Supreme Court specifically recognized that this is an open question.  Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 n.2 (2013) (citing Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 680 (2010)).  The issue in Oxford Health was whether the arbitrator exceeded his powers under Section 10(a)(4) of the FAA in determining that the parties’ contract did authorize class arbitration. The Court explained that because the parties agreed that the arbitrator would decide whether their contract allowed class arbitration, the Court would address only whether the arbitrator did in fact construe the contract in making the determination. If the petitioner had instead argued that the class arbitration decision was a “question of arbitrability,” the Court acknowledged that it would have had the opportunity to address the question of who determines if class arbitration is available to the parties.  Id. at n.2.  Similarly, in the 2010 Stolt-Nielsen opinion, the Court did not reach the issue because the parties had agreed that the arbitrators would decide the class arbitration issue.

In a handful of cases decided since Oxford Health, lower courts have addressed this open question where the parties did not agree as who determined the class arbitration issue, including the Sixth Circuit’s opinion in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013).  In Reed Elsevier, the district court found that class arbitration was not authorized, and on appeal, the Sixth Circuit was presented with the issue of determining who has the authority to decide whether class arbitration was available. The Sixth Circuit noted that while the Supreme Court had addressed the issue in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003), only a plurality of the Court decided that it was a decision for the arbitrator, leaving the issue open.  The Sixth Circuit declined to follow the plurality opinion in Bazzle and instead held that whether class arbitration is available is a question of arbitrability that is presumptively for the court to decide. The Sixth Circuit explained that the decision turned on whether it is a “gateway” issue, which includes “whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy,” or a “subsidiary” issue, one that “grow[s] out of the dispute and bear[s] on its final disposition.” Reed Elsevier, 734 F.3d at 597. Noting the Supreme Court’s prior opinions addressing the fundamental differences between bilateral and class arbitration, as well as its due-process concerns with class arbitration, the court reasoned that the Supreme Court “has given every indication, short of an outright holding, that classwide arbitrability is a gateway question rather than a subsidiary one” that should be decided by a court.  Id. at 598. 

Several district courts also have addressed the issue in the wake of Oxford Health, one of which came to the same conclusion as the Sixth Circuit. Chassen v. Fidelity, No. 09-cv-291(PGS), 2014 U.S. Dist. LEXIS 6227, at *18 (D.N.J. Jan. 17, 2014).  In the absence of a majority decision by the Supreme Court, other district courts considering the issue have found that the issue of class arbitration is a matter for an arbitrator to decide.  See Jackson v. Home Team Pest Defense, Inc., No. 6:13-cv-916-Orl-22TBS, 2013 U.S. Dist. LEXIS 163068 (M.D. Fla. Nov. 15, 2013); Lee v. JPMorgan Chase & Co., No. SACV 13-511-JLS(JPRx), 2013 U.S. Dist. LEXIS 165959 (C.D. Cal. Nov. 14, 2013); Sullivan v. PJ United, Inc., No. 7:13-cv-1275-LSC, 2013 U.S. Dist. LEXIS 128698 (N.D. Ala. Sept. 10. 2013); Kovachev v. Pizza Hut, Inc., 2013 U.S. Dist. LEXIS 115284 (N.D. Ill. Aug. 15, 2013).  In most of these cases, the courts reasoned that when the parties have agreed to arbitrate their claims, the availability of class arbitration is a procedural question because it concerns the type of arbitration proceeding or how the arbitration proceeds through the arbitration forum.  In Jackson, however, the district court reasoned that the subtle distinction of whether the dispute involved the validity of such a provision (a classic gateway issue) as opposed to the existence of a class arbitration provision was crucial in making its decision.  Because the dispute in that case involved the existence of such a provision and not the validity, the district court found that it was a matter of contractual interpretation that was for the arbitrator to decide.

On January 31, 2014, the defendants in Reed Elsevier filed their petition for writ of certiorari with the Supreme Court.  See Reed Elsevier, 734 F.3d 594, petition for cert. filed (No. 13-928).  If granted, the Supreme Court may finally have its opportunity to resolve the open question of class arbitrability.

Keywords: litigation, commercial, business, class arbitration, class actions, arbitration, arbitrability, Supreme Court

Amy C. Worrell and Virginia M. Yetter, Bass Berry & Sims PLC, TN


April 10, 2014

Nash Bargaining Solution—A Need to Educate the Courts


The Nash Bargaining Solution (NBS) is a mathematical model that purports to define the most mutually beneficial outcome of a two-party bargaining scenario. In a recent patent-infringement case involving the NBS, Robocast Inc .v. Microsoft Corporation, No. 10-1 055-RGA (Dist. Del. Jan. 29, 2014), the court excluded the opinion of a damages expert, holding that “while the Nash Bargaining Solution of a 50/50 split has a more prestigious academic pedigree than the 25% rule of thumb, both are non-starters in a world where damages must be tied to the facts of the case.  [The expert] did not tie his reasonable royalty analysis to the facts of the case, and it is therefore excluded.”  The court made this statement despite admitting earlier in its decision that the expert’s “report never mentioned the Nash Bargaining Solution or game theory.”

Including Robocast, there have been at least eight court opinions over the past three years involving the NBS. The courts are mixed in their decisions, but in certain instances seem to be incorrectly interpreting the NBS as a 50/50 split of incremental profits.  In Oracle America Inc. v. Google Inc. No., C 10-03561 WHA (N.D. Cal 2011), the court struck the portion of the damages expert’s report that addressed the NBS, stating that the NBS “has never been approved by a judge to calculate reasonable royalties in litigation, at least in the face of objection and would invite a miscarriage of justice by clothing a fifty-percent assumption in an impenetrable façade of mathematics.” Id. at 13.  In Suffolk Technologies, LLC v. AOL, Inc., 1-12-CV-00625 (E.D. VA 2013), the court also excluded testimony that employed the NBS, stating that “it is unclear how the NBS was tied to the facts of this particular case . . . . [the expert] does not explain why these parties would have accepted a 50/50 split. Thus, the ‘50/50 split’ is plainly not tied to the facts of this case and is essentially no different from the 25% rule of thumb rejected in Uniloc.”

The interpretation of a 50/50 split is mistaken for at least two reasons. First, the amount that is divided among the parties in a correctly-executed NBS analysis is not typically the incremental profits of the product, or even of the smallest saleable unit.  Rather, for each party, the alternative that would be employed in the absence of a bargain is deducted from incremental profits to arrive at a potential bargaining range. The “pie” being split, then, is often smaller than the “pie” being split in a standard Georgia-Pacific analysis. Second, NBS allows for the bargaining power of the parties to vary. Only in the case of equal bargaining power would the ultimate result lie precisely in the middle of the bargaining range—the so-called 50/50 split.  Differences in relative bargaining power would be reason to alter this ratio.

The Uniloc decision, 632 F.3d 1292, 1315 (Fed. Cir. 2011), decisively condemned the use of the 25 percent rule and solidified the need to tie a reasonable royalty to the facts of the case.  The NBS allows for this to be done in a sound analytical framework.  While use of the NBS may require some additional effort insofar as educating the courts, the NBS is a methodology that is consistent with the need to bring increased economic and scientific rigor to reasonable royalty analyses.

Keywords: litigation, commercial, business, Intellectual Property Subcommittee, Nash, Bargaining, game theory, NBS, patent apportionment, profit split, royalty

Jennifer Vanderhart, PhD., FTI Consulting, Washington, D.C.


April 2, 2014

Sixth Circuit Provides Guidance on Perfection of Security Interests


In 1st Source Bank v. Wilson Bank & Trust, et al., 735 F.3d 500 (6th Cir. 2013), on a question of first impression under Tennessee law, the U.S. Court of Appeals for the Sixth Circuit recently held that a lender did not perfect its security interest in a debtor’s accounts receivable by using the phrase “and all proceeds thereof” in its financing statements.

Beginning in 2004, the plaintiff bank entered into several secured transactions with two trucking companies for the sale or lease of various tractors and trailers. The parties executed security agreements that granted the plaintiff a security interest in the debtors’ tractors and/or trailers, accounts, and the proceeds from the agreed-upon collateral. Thereafter, the plaintiff filed financing statements with the relevant Tennessee authorities. The financing statements identified the collateral as the specified tractors or trailers, and “all proceeds thereof, including rental or lease receipts;” however, the financing statements did not include the terms “accounts” or “accounts receivable.”

After those financing statements were filed, several defendant banks also entered into certain secured transactions with the debtor trucking companies.  The defendants also filed financing statements with the state of Tennessee, which provided that the defendants had a security interest in “all accounts receivable now outstanding or hereafter arising.” Following the debtors’ 2009 default on their various loans, the defendants took possession of the debtors’ accounts receivable, after which plaintiff filed suit, arguing that the term “and all proceeds thereof” in its financing statements included debtors’ accounts receivable.  The district court disagreed and granted defendants summary judgment.

On appeal, the Sixth Circuit affirmed. The court first noted that there was no dispute that the financing agreements between the plaintiff and the debtors granted plaintiff a security interest in the debtors’ accounts receivable—rather, the sole issue presented was whether plaintiff’s financing statements properly perfected its security interest in those accounts. The court found that because the plaintiff’s financing statements did not specifically reference “accounts” or “accounts receivable,” defendants had no reason to know that the plaintiff also claimed a security interest in those accounts.

The plaintiff argued that it did not need to specifically include the words “accounts” or “accounts receivable” in its financing statements, because its use of the phrase “all proceeds thereof” in its financing statements necessarily included the debtors’ accounts receivable.  The court disagreed, finding that while Article 9 of the Tennessee UCC defined “proceeds” broadly, plaintiff’s proposed interpretation would render the term “accounts”—defined elsewhere in Article 9— superfluous. Moreover, case law from other jurisdictions and commentary in the UCC regarding the definition of “proceeds” supported the proposition that “proceeds” does not refer to “income generated from the debtor’s own use and possession of goods” or to “revenues earned through the use of collateral.”

The Sixth Circuit concluded that the plaintiff’s financing statements were insufficient to put the defendants on notice of the plaintiff’s security interest in the debtors’ accounts receivable.  Accordingly, the court held that the plaintiff’s unperfected security interests in the debtors’ accounts receivable were subordinate to the defendants’ perfected security interest in those same accounts, and affirmed the district court’s grant of summary judgment to defendants.

Keywords: litigation, commercial, business, Uniform Commercial Code, secured transactions, financing statement, perfection, priority, security interest

John A. Sensing, Potter Anderson & Corroon LLP, Wilmington, DE


March 25, 2014

Successor Liability in Environmental Cases


Anadarko shares plunged 9.3 percent in after-hours trading on December 12, 2013, cutting its market value from approximately $42 to $38 billion after a judge ruled money can be recovered from a successor to a polluting company even after bankruptcy has seemingly cleansed the slate of obligations.  Tronox, Inc. v. Kerr McGee Corp. (In re Tronox, Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. Dec. 12, 2013). The case stems from Kerr-McGee’s spin off of its chemicals business along with its old environmental liabilities as a new company, Tronox, on March 30, 2006, three months before Anadarko made an offer to purchase Kerr-McGee.

“This is a very interesting and chilling development,” said Robert Moore, managing director of Stout Risius Ross. “It points to the dangers of acquiring the stock in a public company (the Anadarko/Kerr-McGee deal), transactions in which there are typically few representations and warranties or remedies for the acquirer. In these situations, such elements must be vetted and quantified by the acquirer.” Contingent assets and liabilities exist in many forms and generally maintain significantly different risks, payout streams, and timing requirements. As a result, the unique facts and circumstances of each particular situation warrant consideration by the parties in any transaction. What we have seen from the Tronox situation is that these liabilities can follow a successor, and as a result must be considered by executives and advisors during corporate restructures and spin-offs. Due diligence of recent transactions is critical whether it is an internal restructuring of asset ownership or an external transaction with a third party.

As the judge moves this case into the damages stage, and the appellate process begins, it is worth exploring questions for executives and business advisors to consider:

How do you value environmental or other contingent liabilities when evaluating a transaction?

Consideration of contingent assets and liabilities represents one of the more unique and difficult issues encountered by companies and their advisors. Nevertheless, such assets and liabilities can be valued using multiple valuation methodologies, including discounted cash flow, binomial option pricing method, and the Monte Carlo method. In addition, consideration should be given to insurance coverage and anticipated costs.

How should contingent future liabilities be considered in your analysis of adequacy of capital?

To address these risks, companies and their directors often choose to engage a financial advisor to prepare a solvency opinion, which is an analysis of whether a company will remain solvent in consideration of, and taking into account, the amount of debt in the new entity. Most solvency opinions apply three financial tests to assess a subject company’s solvency: 1) the balance sheet test, 2) the cash flow test, and 3) the reasonable capital test.

When acquiring another entity, how do you perform due diligence on transactions that have been recently completed that would transfer assets, environmental liability, or other contingencies?

Every recent transaction, regardless of its apparent size, should be carefully evaluated to determine what was actually transferred.

Keywords: litigation, commercial, business, Tronox, bankruptcy, Bankruptcy Litigation Subcommittee, successor liability, contingent liabilities

Loretta R. Cross and Robert L. Moore, Jr., Stout Risius Ross, Houston, TX, and Marcus A. Ewald, Stout Risius Ross, Chicago, IL


March 3, 2014

Supreme Court Defines General Jurisdiction Narrowly


The Supreme Court, going back at least as far as Pennoyer v. Neff, 95 U.S. 714 (1878) (a case you may remember from law school), has recognized that there are territorial limits to a court’s jurisdiction. In other words, for a defendant to be subject to a lawsuit in a particular state’s courts, the defendant must have some connection to that state. Over time, the courts have defined the necessary connection as being either “specific” or “general.” Specific jurisdiction exists if the lawsuit relates to the defendant’s contacts with the state—for example, the plaintiff is suing for an injury that happened in the state. General jurisdiction, in contrast, is unrelated to the facts of the particular lawsuit but instead is based on a defendant’s general relationship to a particular state. 

The Daimler AG v. Bauman opinion highlights the limits of general jurisdiction, explaining that it applies only to a corporation’s “home” state. A corporation will always be at home in its state of incorporation and in the state where it has its principal place of business. It will be at home in any other state, however, only in “exceptional” cases. In particular, a corporation is not at home in a state simply because it has continuous and systematic contacts with that state.   

The significance of this holding is seen in the facts of the case. The plaintiff sought to sue Daimler AG in California based on the California contacts of a subsidiary, Mercedes-Benz USA.  The Court assumed for purposes of the opinion that the contacts of Mercedes-Benz USA to California were attributable to the parent company. Those contacts are substantial: Mercedes-Benz USA has multiple California offices, including a regional headquarters in the state, and more than 10 percent of the company’s sales are in California.  The Court held that these contacts were nevertheless insufficient to subject Daimler AG to general jurisdiction in California, given that Mercedes-Benz USA is neither incorporated in California nor has its principal place of business there.

There are a couple of practical takeaways from this opinion. First, for litigators, assume that a corporation is subject to general jurisdiction only in its state of incorporation or its principal place of business. There may be exceptions, but your case probably isn’t one of them. Second, for corporate lawyers, think carefully about your client’s state of incorporation. It is likely to be one of (at most) only two states where the client is subject to general jurisdiction. So choose wisely.

Keywords: litigation, commercial, business, jurisdiction, Supreme Court, Daimler, Mercedes-Benz

Clifton L. Brinson, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, NC


February 24, 2014

Unable to Enforce a Contractual Noncompete?


Courthouse wisdom is that judges generally dislike noncompetes.  After all, everyone should be entitled to earn a living, right?  As a result, judges often look for a reason to find that a noncompete is inapplicable, or should not be applied in the particular situation facing the court (for example, because it is overly broad). The former was the case in Gingrich v. Midkiff, 120332-U (Ill. App. 5th 2014), in which a court refused to enforce a noncompete between two doctors because the shareholders’ agreement provided that the noncompete was only triggered if one of the doctors either withdrew or was expelled from the practice. That isn’t what happened in Gingrich. On the contrary, after the doctors started suing each other, one doctor bought out the other under an Illinois “deadlock” statute.  As a result, the “departing” doctor didn’t “withdraw” and wasn’t “expelled.”  Instead, she was statutorily bought out.

Although the purchasing doctor was not able to take advantage of the noncompete, she might have been able to take advantage of the protections accorded to trade secrets. Leaving aside whether a medical practice has any “business secrets” (although the practice of medicine isn’t a secret, more and more of what doctors do is business related, and better procedures or processes to fill out forms may certainly give a medical practice a competitive advantage), patient records can certainly constitute trade secrets. Indeed, the contents of patient records are confidential and protected by HIPAA.  And, even though the shareholders’ agreement here referred to patient records in the noncompete clause, trade- secret protection doesn’t have to rest on a contractual provision.  On the contrary, it arises out of either statutory or common law and does not depend on the contractual language chosen by the parties.

The purchasing doctor could, therefore have included a fallback position—a claim that her adversary had improperly misappropriated trade secrets.  Although such claims can be difficult to prove, they often present factual issues.  Which would have been of comfort to the purchasing doctor, who had her claims dismissed on summary judgment.  A wise lawyer, therefore, always includes a plan B.

Keywords: litigation, commercial, business, noncompete, trade secrets,

Aaron Krauss, Cozen O’Connor, Philadelphia, PA


February 18, 2014

The Missing-Witness Charge and Cumulative Evidence

In the context of a civil trial, the New York Court of Appeals has addressed the interplay between a missing-witness charge and cumulative evidence. DeVito v. Feliciano, 978 N.Y.S.2d 717 (N.Y. 2013).  It held that the trial court committed reversible error when it denied a missing- witness charge as to the defendants’ uncalled medical specialists on the ground that their testimony would have been cumulative of the trial testimony of the plaintiff’s medical specialists. When a missing-witness charge is requested in a civil case, the uncalled witness’s testimony may properly be considered cumulative only when it is cumulative of testimony or other evidence favoring the party controlling the witness. Testimony of an uncalled witness may not be considered cumulative simply because it would repeat or be consistent with an opposing party’s evidence. 

In DeVito, the elderly plaintiff was a passenger in a car driven by her daughter and alleged she suffered serious injuries when that car was “rear-ended” by a van operated and owned by the defendants. The plaintiff’s evidence at trial included the testimony of the plaintiff, her daughter, and specialists who had either treated plaintiff or examined her medical records. The specialists’ testimony went to the extent and seriousness of plaintiff’s injuries and the probability that those injuries were the result of the accident. Cross-examination of the plaintiff’s witnesses revealed, among other things, that plaintiff had not earlier disclosed that she was seriously injured in a fall four months before the accident, that the plaintiff’s physical condition when she left the hospital after the accident was inconsistent with her now-claimed physical condition, and that the hospital records did not reflect some of the injuries the plaintiff asserted resulted from the accident. 

Prior to trial, the defendants had four specialists examine the plaintiff on their behalf but declined to call any of them as a trial witness. (While not discussed in the court of appeals’ opinion, it appears that the defendants declined to call their specialists at trial because they, at least in part, reached conclusions similar to those of the plaintiff’s specialists as to the seriousness of the plaintiff’s injuries.) The trial court denied the plaintiff’s subsequent request for a missing-witness charge as to the defendants’ specialists, finding that their testimony would have been cumulative of the testimony of the plaintiff’s specialists. The plaintiff, however, was permitted to argue during summation that the jury should draw an adverse inference against defendants from their failure to call their specialists to the stand.

The jury ultimately decided for the defendants, finding that the accident was not a factor in bringing about the plaintiff’s injuries. That verdict and the ruling denying a missing-witness charge was later affirmed by the Appellate Division, after which the plaintiff was granted leave to appeal to the court of appeals. The court of appeals found that the trial court’s denial of the plaintiff’s request for a missing-witness charge to constitute reversible error, and a new trial was ordered. 

The court of appeals described the “uncalled-” or “missing-” witness charge as permitting (but not requiring) a jury to draw an adverse inference based upon a party’s failure, without reasonable explanation, “to call a witness who would normally be expected to support that party’s version of events.” It found that in the case before it three of the four “preconditions” to a missing-witness charge were not in dispute. The defendants’ uncalled specialists (1) had knowledge that was “material” to the trial; (2) were under the defendants’ control and would be expected to testify at trial in their favor; and (3) were available to defendants. Turning to the disputed fourth precondition—that the uncalled-witness’s testimony be expected to give noncumulative testimony—the court rejected as a matter of law the defendants’ position (and that of the courts below) that a missing-witness charge was properly denied because the testimony of the defendants’ specialists would have been cumulative of that given at trial by plaintiff’s specialists.

Rather, the court concluded that an absent witness’s testimony may not be ruled cumulative simply on the ground that it would be cumulative of the testimony of witnesses called by an opposing party.  It would be “anomalous” to hold otherwise, the court found, and observed that “if the testimony of a defense physician who had examined a plaintiff and confirmed the plaintiff’s assertion of a serious injury was deemed to be cumulative to the evidence offered by the plaintiff, thereby precluding the missing-witness charge, there would never be an occasion to invoke such charge.”  Id. at 722 (quoting Leahy v. Allen, 644 N.Y.S.2d 388 (N.Y. App. Div. 1996)).

In reversing the jury verdict and ordering a new trial, the court explained that the trial court’s refusal to provide the jury with the requested missing-witness charge could not be deemed a “harmless error.” While the trial court did permit plaintiff to argue to the jury in summation that it should draw an adverse inference against the defendants from its failure to call its specialists, a party’s summation “is not ordinarily a substitute for the appropriate jury charge by the court; the error here was not cured by the summation.” Id. at 722.

In light of its facts and the breadth of the holding in DeVito, attorneys in New York may seek a missing-witness charge with greater frequency in cases where an adversary declines at trial to produce a potential fact witness or designated expert. Courts in New York may then have the opportunity to decide what, if any, limits or exceptions there are to DeVito.

Keywords: litigation, commercial, business, missing witness, uncalled witness, missing-witness charge, uncalled-witness charge, adverse inference, cumulative evidence, DeVito

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


January 27, 2014

The Supreme Court and Class Action Litigation in 2013

The Supreme Court had an active docket of class action cases during the previous year and issued opinions addressing four important topics in the law governing class actions. The Court’s opinions involved:  (1) the Class Action Fairness Act of 2005 (CAFA); (2) when a district court may consider the merits of a dispute at the class-certification stage; (3) the application of the predominance requirement of Federal Rule of Civil Procedure 23(b)(3); and (4) the enforceability of arbitration agreements allowing or prohibiting class arbitration. The Court will take up a number of class action issues during its current term, as well. 

In Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345 (2013), the Supreme Court resolved an outstanding ambiguity regarding CAFA.  In a unanimous decision written by Justice Breyer, the Court held that a plaintiff may not avoid removal under CAFA by stipulating to less than $5 million in damages on behalf of the putative class. The Court explained that “a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.”    

During the upcoming term, the Court will address another important issue under CAFA in Mississippi ex rel. Hood v. AU Optronics, No. 12-1036, and determine whether consumer class action suits brought by state attorneys general must be litigated in federal court.

In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013), the Court held that plaintiffs in a Rule 10b-5 securities class action who invoke the fraud-on-the-market theory of reliance need not prove the materiality of an alleged misrepresentation or omission as a prerequisite to obtaining class certification.  In a 6-3 decision written by Justice Ginsburg, the Court held that the materiality of an alleged misrepresentation or omission is a “merits” question, and thus, inappropriate for determination at the class-certification stage. 

While the Court’s holding in Amgen is significant for practitioners, it is also worth noting that four justices appeared to question the continuing viability of the fraud-on-the-market theory itself.  The Court recently granted certiorari in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, and apparently intends to revisit this issue.

In Comcast Corp. v. Behrend, 133 S. Ct. 24 (2013), the Court examined the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) and the obligation of a plaintiff to show harm on a class-wide basis.  The plaintiffs asserted four theories of class-wide injury to support their antitrust claims and offered expert testimony purporting to show price increases attributable to anticompetitive conduct. 

In a 5-4 decision written by Justice Scalia, the Court held that class certification was improperly granted because the plaintiffs’ damages model failed to demonstrate that damages would be capable of measurement on a class-wide basis.  Class issues, therefore, did not predominate over individual issues.  Reiterating the Court’s opinion in Wal-mart v. Dukes, 131 S. Ct. 2541, 2545 (2011), the Court noted that a district court is free to address the merits of the underlying suit at the class-certification stage when the merits generally overlap with issues of class certification.

Finally, the Court decided a pair of highly anticipated cases related to class arbitration. Both decisions interpreted and applied the Federal Arbitration Act (FAA), and both cases continued the trend of strictly enforcing the terms of arbitration agreements.

In Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013), the Court affirmed the Third Circuit’s decision confirming an arbitrator’s authority to interpret an arbitration agreement as authorizing class arbitration. In a unanimous decision written by Justice Kagan, the Court reasoned that when an arbitrator determines that parties to an agreement intended to allow class-wide arbitration, that decision survives judicial review under the FAA as long as the arbitrator was arguably construing the contract. Under §10(a)(4) of the FAA, courts may vacate an arbitral decision only when the arbitrator strayed from the delegated task of interpreting a contract. 

In American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 1236 (2013), the Court held that the FAA does not permit courts to invalidate a waiver of class arbitration simply because the plaintiff’s cost of individually arbitrating a federal statutory claim would exceed any potential recovery. In a 5-3 decision written by Justice Scalia, the Court held that a waiver of class arbitration was enforceable under the FAA. Absent any valid reason that the contract itself might be invalid, or absent any legislative action establishing an entitlement to a class action proceeding, such provisions will be enforced.

Keywords: litigation, commercial, business, Supreme Court, class actions, class arbitration, certification, Class Action Fairness Act of 2005

Joseph B. Crace & Angela L. Bergman, Bass Berry and Sims PLC, Nashville, TN


January 24, 2014

Godzilla Attack: U.S. Brewery Faces Major Risks in "Mechahopzilla" Lawsuit

His name is Mechahopzilla. A giant robot lizard resembling some of Japan’s most famous movie monsters, Mechahopzilla’s name and likeness appear on cans of craft beer manufactured by the New Orleans Lager & Ale Brewing Company, LLC (NOLA). But how will NOLA’s beast fare when hauled into federal court by the king of monsters and his counsel? History shows that NOLA’s decision to use Mechahopzilla is risky business.

Monster v. Monster: The Case for Infringement

On September 6, 2013, Toho Co., Ltd. (Toho), the owner of Godzilla, filed suit against NOLA, claiming that Mechahopzilla infringed on Toho’s trademarks and copyrights to “Mechagodzilla,” Godzilla’s robotic twin. Instead of settling immediately, NOLA filed a counterclaim, asserting its right to Mechahopzilla.

At a high level, Toho can credibly argue that Mechahopzilla infringes Toho’s trademarks to Mechagodzilla and, if Toho later chooses, to Godzilla.Trademarks are logos, words, or other things that people associate with a specific source of goods or services. “Disney,” for example, evokes thoughts of the entertainment company. A trademark’s strength depends on its use within U.S. commerce. E.g, 11 U.S.C. § 1127.  Infringement occurs when the infringer uses a mark—essentially a brand—that is confusingly similar to an existing U.S. trademark. Elvis Presley Enters., Inc. v. Capece, 141 F.3d 188, 193–94 (5th Cir. 1998)(seven factor “confusion” test). Although born in Japan, Mechagodzilla and Godzilla are famous U.S. trademarks, with huge commercial footprints that include movies, toys, and other goods. Mechahopzilla looks and sounds similar to Toho’s characters, and NOLA may be hard-pressed to explain why its brand and associated artwork so closely resemble Toho’s skyscraper-sized enfants terribles.

That visual similarity also gives teeth to Toho’s copyright claim. Copyrights confer ownership and distribution rights over original works of authorship that are fixed in tangible form. Artwork, such as the design of Toho’s monsters, is one such example. Copyright infringement occurs when an infringer reproduces a protected work in “substantially similar” form. Peel & Co. v. Rug Mkt., 238 F.3d 391, 394-95 (5th Cir. 2001). Visually, the resemblance between NOLA’s character and Toho’s mechanical marvel is striking. The two are substantially similar.

NOLA is not without counterarguments to Toho’s infringement claims. But assuming NOLA seeks a finding of noninfringement at summary judgment, those counterarguments do not appear strong enough to compel an early victory for NOLA. For example, NOLA argues that “zilla” and “lizard-like” images are commonly used. It is not clear whether NOLA is raising a parody defense—that NOLA is deliberately poking fun at Mechahopzilla—or simply arguing that zilla and lizard images are commonly used in many contexts. There is a distinction between the two, primarily relating to an alleged infringer’s intent in copying another’s intellectual property. If the former, the Ninth Circuit has held that “Bagzilla” trash bags depicting a “humorous caricature” of Godzilla did not infringe on Toho’s trademarks. Toho Co. v. Sears, Roebuck & Co., 645 F.2d 788, 790 (9th Cir. 1981). And the Fifth Circuit, where NOLA resides, considers parody in trademark and copyright infringement suits. Lyons Pshp. v. Giannoulas, 179 F.3d 384, 387-88 (5th Cir. 1999). But parody is often more gray area than safe haven, particularly in this case. First, the Bagzilla case is only persuasive authority outside of the Ninth Circuit. More importantly, Mechahopzilla more closely resembles Toho’s trademarks and copyrights than did Bagzilla, which increases the possibility of infringement. NOLA next argues that its goods and services are distinct from those offered by Toho and its licensees. Toho, however, also asserted a state-law claim for trademark dilution—a cause of action that exists even where the parties operate in different markets. La. R.S. 51:223.1. This statute prohibits infringers from using another’s trademark in a manner that would likely diminish its distinctiveness. NOLA remains at risk.

Balancing Costs with Benefits
Legal assessment is only one of several factors that an alleged infringer should consider in deciding whether a brand is worth fighting for. Business and financial considerations also play a role. In 2011, the median cost for taking a trademark infringement dispute worth between $1 million to $25 million to trial was $750,000. NOLA’s costs could be higher. For example, Toho’s reputation for aggressive litigation may motivate NOLA, which retained a law firm comprising nearly 400 attorneys, to respond in kind. If NOLA prevails at the district court, Toho could appeal. In contrast, Mechahopzilla was launched in September 2012, only one year prior to the lawsuit. It is unclear whether such a young brand generates enough revenue to justify a legal price tag that could exceed one million dollars and consume years of NOLA’s attention with no certainty of success.

NOLA’s decision to forego early settlement may be based on several factors. NOLA may be unwilling to destroy its existing stock of Mechahopzilla without a fight. NOLA, along with others, may believe that the name of a pop culture character from Asia is less protected under U.S. trademark law than American-born characters. If so, a Korean drama’s 2008 trademark victory previews one possible outcome of taking this path.

In June 2007, Munhwa Broadcasting Corporation (MBC), a Korean media company, sued a U.S. noodle company, Solafide Inc., for selling “Dae Jang Gum” noodles, a brand virtually identical to MBC’s “Dae Jang Geum,” the name of one of the most popular Korean dramas broadcasted in the United States. Having $100,000 of inventory to protect, Solafide declined to settle early. More significantly, Solafide believed that the name of MBC’s Korean drama should not be protected under U.S. law as a trademark. In fact, MBC’s U.S. trademarks for Dae Jang Geum are strong and protected. Munhwa Broad. Corp. v. Solafide Inc., No. SACV 07-699 DOC (ANx), 2007 U.S. Dist. LEXIS 68727, at *2, *6, *10-*15, *30 (C.D. Cal. July 13, 2007).

Solafide did not settle the case until August 2008, over a year later, and only after its personnel and graphic designer admitted during discovery that Solafide staff discussed MBC’s show during sales meetings; that Solafide loaned DVDs of the show within the company; and that Solafide had instructed its graphic designer to model its noodle brand after MBC’s drama. These admissions increased Solafide’s risk exposure. If a jury found Solafide liable for willful infringement, MBC could seek disgorgement of Solafide’s profits; MBC’s damages; and the costs of a corrective advertising campaign designed to eliminate market confusion created by Solafide’s use of the infringing brand. MBC could also demand its attorney fees, discretionary damages and a trebling of the entire award. 15 U.S.C. § 1117(a); Adray v. Adray-Mark, Inc., 76 F.3d 984, 988-89 (9th Cir. 1995).  Solafide’s total risk exposure exceeded $3 million.

Solafide settled the case for $850,000. Combined with nearly one million dollars in legal fees and costs incurred while defending its position, Solafide’s total pretrial litigation exposure exceeded $1.7 million dollars. Had Solafide acknowledged MBC’s rights early, it might have avoided a year of litigation and settled the case at a fraction of this amount. Solafide might have negotiated a trademark license from MBC. Instead, Solafide is now bankrupt. Munhwa Broad. Corp. v. Solafide, Inc., No. SACV 08-618 DOC, 2008 U.S. Dist. LEXIS 74851, at *1-*3 (C.D. Cal. Sept. 22, 2008).

Applying Lessons Learned
Companies in NOLA’s position face risks similar to Solafide’s when sued for using brands that resemble, or may be based on, famous imported characters. In deciding whether to litigate or settle, these companies should assess the strength of their legal case and anticipate the evidence that could come out during litigation. These factors should be considered along with the value of the allegedly infringing mark and the costs of maintaining suit. Finally, companies should take a long-term view in deciding whether litigation or settlement best fits their business goals. Solafide, for example, had $100,000 in inventory at risk. But absorbing that loss early would have been less expensive than the $1.7 million that Solafide ultimately incurred. 

Finally, the Mechahopzilla and Dae Jang Geum cases may guide companies that have not yet launched their brands. Developing brands that resemble foreign pop culture characters like Godzilla or Mechagodzilla may seem like a clever way to attract consumer attention. But the characters’ overseas origins do not make them public property. Altering the character’s name and image to invoke parody may work, but still risks a lawsuit. Recognizing these risks early may help companies develop strong brands that do not invite scrutiny from the king of monsters, Korean drama owners or their counsel.


Editor’s Note: Updated on June 22, 2014

The District Court dismissed the case on June 4, 2014, following a settlement agreement favoring Toho. The settlement was likely based on several gaps in NOLA’s parody defense.

NOLA’s CEO and brewmaster both
testified at deposition that Mechahopzilla was based on Toho’s characters. The brewmaster also testified that NOLA did not intend for Mechahopzilla to act as a commentary on Toho's giant monsters. Since parody is supposed to act as a social, comedic, or other type of commentary on the original work, this admission hurt NOLA. See Dr. Seuss Enters., 109 F.3d 1394, 1400-06 (9th Cir. 1997). Finally, NOLA introduced parody late into the case, suggesting it was a post-lawsuit justification and not the original purpose behind Mechahopzilla.

Aaron Moss of Greenberg Glusker, counsel for Toho, explained the terms of the settlement. NOLA will rename its brand “Mecha,” and will remove the visual elements from its character that Toho found objectionable. The news media correctly report this settlement as a Toho victory.

This update consolidates an earlier substantive update to the article and ongoing commentary charting the case’s progress.

Keywords: litigation, commercial, business, copyright, Mechahopzilla, Mechagodzilla, Toho, trademark, infringement, monsters, Godzilla

Robert J. Kang, lecturer, intellectual property and cybersecurity, CA

This article is for informational purposes and does not constitute legal advice. Third party content used pursuant to the Fair Use Doctrine. 15 U.S.C. § 1125(c)(3)(B); 17 U.S.C. § 107. Click here for more information about the Dae Jang Geum case.

Dedicated to Jim and Sharen Eskridge. You two are wonderful.


January 23, 2014

When Brady and the Attorney-Client Privilege Collide

Suppose a group of individuals entrust their life savings to a company that, rather than investing the money as promised, distributes the funds among its board members. The government, upon discovering the company’s duplicity, investigates anyone that may have been involved, including bankers, accountants, and attorneys, and decides to prosecute some or all of the above parties. Toward the investigation’s close, government agents seize electronic and paper files, some of which they know will likely contain attorney-client communications.

The attorneys prosecuting the matter cannot review the seized files because they are prohibited from considering privileged information. Thus, the Department of Justice assembles a discrete team of attorneys to review the files for privilege. This privilege-review team has only one job: screen the privileged information from the attorneys who will be prosecuting the case.

But in solving one problem the government has created another. Under the doctrine established in Brady v. Maryland, the government must disclose all exculpatory or impeachment information it knows or should know exists. See, e.g., Brady v. Maryland, 373 U.S. 83, 87 (1963) (holding that the prosecution’s failure to disclose exculpatory evidence violated the defendant’s due process rights). This constitutionally imposed duty encompasses even privileged information. See, e.g., United States v. Rainone, 32 F.3d 1203, 1206 (7th Cir. 1994) (Posner J.). Here, however, the prosecution cannot review the privileged files; so how can it determine whether the files contain any exculpatory or impeachment information?

One solution would be to permit the government to disclose the privileged files to all defendants without reviewing them. But while this proposal solves the government’s Brady dilemma, it ignores the privilege holder’s rights. Indeed, if the government could freely disclose a defendant’s privileged information, the attorney-client privilege’s efficacy would evaporate since future litigants would know their communications would be unprotected once the government seized them. See Upjohn Co. v. U.S., 449 U.S. 383, 389 (1981) (the attorney-client privilege exists to “foster full and frank communication between attorneys and their clients.”).   

Another solution is for all defendants to enter into a joint-defense agreement. This way, the government could disclose the files to all parties without rupturing the parties’ respective privileges. But a joint-defense agreement sometimes is infeasible and other times, unwanted.

Instead, to best balance a party’s right to shield privileged, non-exculpatory information against the government’s duty to disclose, a court should require the government’s privilege-review team to also review seized files for Brady material. Under this approach, the prosecution would educate the privilege-review team about the case, and the privilege-review team would disclose only those files that it determined contained Brady materials. Because the privileged materials would be disclosed only if they contained Brady information, the privilege protecting the undisclosed files would remain intact. And subordinating the privilege protecting the files that would be disclosed is appropriate because the Constitution-based Brady doctrine supersedes the common-law doctrine of the attorney-client privilege. See, Rainone, 32 F.3d at 1206 (holding that “[e]ven the attorney-client privilege . . . hallowed as it is, yet not found in the Constitution,” may be trumped by constitutional rights).

This approach is also consistent with the attorney-client privilege’s purpose. In most instances, an individual’s communication with his or her attorney, made for the purpose of obtaining informed legal counsel, will not contain Brady material and therefore would not be disclosed. For a privileged communication to be disclosed under this proposed solution, it must be seized lawfully, must be material to the case, and must contain Brady material that is not otherwise available to a defendant. Permitting the prosecution to disclose privileged materials that contain Brady information, therefore, is a narrow excision into an individual’s expected attorney-client protection, and is unlikely to chill attorney-client communications.

Keywords: litigation, commercial, business, Brady, attorney-client privilege, prosecutors, exculpatory evidence

Eli Granek, Swartz Campbell, Philadelphia, PA, and Corey S.D. Norcross, Dilworth Paxson, Philadelphia, PA


January 8, 2014

Which Side Prevails When Both Win Jury Verdicts?

Resisting the temptation to create a single test for determining which litigant is a prevailing party for purposes of attorney fees provisions under Missouri law, in DocMagic, Inc. v. Mortgage Partnership of America, LLC,  No. 12-1506 (8th Cir. Sept. 4, 2013), the Eighth Circuit affirmed the district court’s designation of a defendant/counterclaimant as the prevailing party where both parties obtained jury awards on various claims, even though the jury awarded the “prevailing party” less than one-quarter as much as it awarded to the non-prevailing party.

DocMagic, Inc. (DocMagic) and Mortgage Partnership of America, LLC (Lenders One) executed an agreement containing the following fee award provision: “In the event of any dispute with respect to or relating to this Agreement in any way, the prevailing [p]arty shall be entitled to reasonable legal fees and other costs and expenses incurred in resolving such dispute . . . .”  The relationship soured, and DocMagic sued Lenders One asserting six claims; Lenders One asserted two counterclaims. Both parties sought a declaratory judgment as to whether DocMagic owed Lenders One a marketing fee per the terms of the contract.

The district court entered the declaratory judgment sought by Lender One, requiring DocMagic to pay the marketing fee. The jury found in favor of DocMagic on two of its seven claims and awarded it $243,000 in damages.  It found in favor of Lenders One on both of its counterclaims but awarded it only $52,500.  Both parties sought an award of attorney fees and costs as the prevailing party. Reasoning that Lenders One had defeated five of DocMagic’s seven claims, recovered more than half of its claimed damages, and prevailed on both its counterclaims, whereas DocMagic  had lost both of the claims against it, won on two of its counterclaims, and only recovered seven percent of its claimed damages, the district court bestowed prevailing party status on Lenders One. 

The Eighth Circuit reviewed de novo the legal question of which litigant was the prevailing party.  It noted that Missouri courts currently employ two different analytical approaches to determine prevailing party status.  The first approach, a “main issue” analysis, depends on which party is “the party prevailing on the main issue in dispute, even though not necessarily to the extent of its original contention.”  The second approach, the “net-prevailing-party analysis,” requires an assessment of which party received “the most points,” although case law does not expressly limit “points” to or equate it with dollars awarded. 

Reviewing the district court’s decision, the Eighth Circuit concluded that the district court employed a “main issue” analysis that considered the relative amounts of damages awarded plus the number of claims successfully prosecuted or defended.  Not finding it necessary “to resolve the tension in Missouri cases between the main-issue and net-prevailing-party approaches,” it held the district court did not err in concluding that Lenders One was the prevailing party because the “court considered the totality of the case and reasonably determined [the] prevailing party for purposes of the parties’ contract.”

Judge Bye dissented, describing himself as “deeply troubled” by an award of contractual attorney fees to a party which had itself breached the agreement and had been found by a jury to have inflicted almost five times as much damage as its opponent.

Keywords: litigation, commercial, business, DocMagic, Eighth Circuit, attorney fees, contracts

Stephen R. Clark and Kristin E. Weinberg, Clark & Sauer, LLC, St. Louis, MO


December 30, 2013

Bankers' Bond Insurers Beware

In Seaway Community Bank v. Progressive Cas. Ins. Co., 531 Fed. Appx. 648 (6th Cir., Aug. 8, 2013), the U.S. Court of Appeals for the Sixth Circuit held that the terms of a banker’s blanket bond agreement—a type of insurance contract—required Progressive to indemnify Seaway for fraudulent checks redeemed by the bank, even though the agreement was ambiguous as to whether such a scenario was excluded from coverage. The court read the exclusionary language in the bond in favor of the insured and applied Article 4 of Michigan’s Uniform Commercial Code to define the meaning of the phrase “not finally paid” that was at the heart of parties’ dispute.

The plaintiff in Seaway deposited three checks for its customer, unaware that the checks had been fraudulently altered. The Canadian bank on which the checks were drawn refused to pay Seaway, so the bank sought reimbursement from its bond insurer, Progressive. Progressive denied coverage, and Seaway sued, ultimately prevailing in the district court.

On appeal, the Sixth Circuit decided, without much discussion, that in this diversity action Article 4 of Michigan’s UCC applied to define the meaning of the phrase “not finally paid.”  This was so even though it was unclear under the bond whether the UCC applied to the Canadian bank. The court examined the language in the bond, stating that checks “not finally paid” were excluded from coverage, concluding that it was ambiguous as to whether Canadian banks were exempted from the UCC’s definition of “not finally paid.”  In deciding that the UCC applied, the court was influenced by Michigan case law holding that ambiguous exclusionary clauses in insurance contracts were to be construed strictly against an insurer.

The court construed the meaning of the phrase “not finally paid” to mean when the midnight-deadline rule applies under Michigan’s UCC. This rule, defined under Mich. Comp. Laws. Ann § 440.4104(j), provides that a bank must pay or dishonor a check before midnight on the next banking day following the banking day on which it receives a check. If a bank decides not to pay a check, then the bank that originally deposited the check (i.e., Seaway) bears the loss.

The court concluded that the Canadian bank acted timely under the midnight-deadline rule and that, accordingly, the checks were “finally paid.”  Yet the court provided very few facts to show that the Canadian bank had in fact acted timely. The court was also unswayed by Progressive’s contention that, because the checks from the Canadian bank were subject to reversal, they were “not finally paid.” One judge dissented on the additional ground that because the checks originated from a Canadian bank, they were not subject to the Michigan UCC, because Michigan law makes the UCC applicable only to members of the Federal Reserve System. In the end, it seems that the court’s majority was most influenced by Michigan case law favoring the insured by strictly construing exclusionary clauses that are at issue in insurance contracts. Consequently, Progressive, not Seaway, was the party that bore the loss.

Keywords: litigation, commercial, business, Uniform Commercial Code, banks, insurance contracts, bankers blanket bond, fraudulent checks

Ali Razzaghi, Frost Brown Todd LLC, Cincinnati, OH


November 26, 2013

Seventh Circuit Sets Stage for Largest Web Privacy Class Action


In comScore, Inc. v. Dunstan, No. 13-8007 (7th Cir. June 11, 2013),the Seventh Circuit, without opinion, declined to hear an appeal from a class-certification order in one of the largest-ever web privacy class actions, Harris v. comScore, Inc., No. 11 C 5807, 2013 WL 1339262 (N.D. Ill. Apr. 2, 2013), moving that case one step closer to trial. 

Plaintiffs alleged that the  defendant, comScore, Inc., improperly collected data about the activities of consumers on the Internet, which it analyzed and sold it to its clients—such as the Wall Street Journal, the New York Times, and Fox News. In particular, plaintiffs alleged that, since 2005, comScore had collected the following information from consumers’ computers:  the names of every file on the computer, information entered into a web browser, including passwords and other confidential information, and the contents of PDF files.  

Because the plaintiff consumers typically downloaded the allegedly offending software on their own initiative, the case turns on whether comScore exceeded the scope of the plaintiffs’ consent to comScore’s monitoring of their computer usage in the parties’ click-wrap contract.

The class-action complaint includes four causes of action based on these facts:  common law unjust enrichment and federal statutory claims under the Stored Communications Act, the Electronic Communications Privacy Act, and the Computer Fraud and Abuse Act. 

The defendant opposed class certification by arguing that common questions of fact or law did not predominate. The crux of its argument was that the scope of consent for each class member would be based on his or her own understanding of the form contract clicked on before downloading the offending software. comScore also argued that common questions of law did not predominate on the unjust enrichment claim because “the law of unjust enrichment varies too much from state to state to be amenable to national or even to multistate class treatment.”

The plaintiffs argued that whether class members “provided consent is an entirely objective inquiry” because “contractual intent is derived from the language of the agreement, not from the subjective mindset of the contracting parties.”  In response to comScore’s unjust enrichment argument, plaintiffs proposed subclasses made up of consumers from certain representative states.

The district court rejected comScore’s consent argument, agreeing with defendants that what a plaintiff subjectively understood is not relevant “where a party manifested consent through the adoption of a form contract.”  Thus, because “each Class member engaged in a substantively identical process to download [the offending software] . . . the scope of the plaintiffs’ consent here is determined by that identical process.” Accordingly, whether comScore exceeded the scope of the parties’ consent is a common question of law across the class, and the district court certified a class and one sub-class for the three statutory claims.  The court rejected the plaintiff’s class certification on the unjust enrichment claim, holding that “unjust enrichment claims are generally unsuitable for class actions because they pose insurmountable choice-of-law problems.” 

The Seventh Circuit’s decision not to hear comScore’s appeal may lead to a big-ticket settlement. In its amicus brief urging the Seventh Circuit to take comScore’s appeal, the chamber of commerce argued that once even the most frivolous class action is certified, companies face tremendous pressure to settle. comScore similarly argued in its Seventh Circuit brief that the district court’s class certification decision “has transformed this litigation into a single high-stakes roll of the dice.” 

The plaintiffs agree. In the words of the plaintiffs, this is “the largest privacy case ever certified on an adversarial basis.”  They are seeking hundreds of millions of dollars in damages on behalf of a class potentially comprising millions of members. In addition to watching whether comScore decides to settle or roll the dice, it will be interesting to see whether the district court’s opinion leads to more “scope of consent” privacy class actions.    

Keywords: litigation, commercial, business, privacy, class actions, Internet, class certification, Stored Communications Act, Electronic Communications Privacy Act, Computer Fraud and Abuse Act, comScore

Michael H. Margolis, Jenner & Block LLP, Chicago, IL


November 25, 2013

No Jury Trial Right When Promissory Estoppel Pled to Avoid Statute of Frauds


In InCompass IT, Inc. v. XO Communications Services, Inc., 719 F.3d 891 (8th Cir. June 26, 2013), the Eighth Circuit rejected a plaintiff’s attempt to assert a promissory estoppel claim as a legal remedy for breach of an oral agreement and claim a jury trial while at the same time contending that promissory estoppel applied equitably to remove the same contract from the statute of frauds.

The plaintiff’s complaint asserted a single claim for promissory estoppel based on an alleged oral promise that defendant would enter into a 25-year lease with plaintiff if plaintiff purchased a larger office building.  It also included a jury trial demand. The defendant moved to strike the jury demand, arguing that the plaintiff framed its claim as one for promissory estoppel to avoid the statute of frauds. The claim therefore sounded in equity and a right to jury trial did not attach. After striking the jury trial demand, the district court tried the case and entered judgment in the defendant’s favor. The plaintiff appealed, and the Eighth Circuit affirmed.

Keywords: litigation, commercial, business, Seventh Amendment, promissory estoppel, statute of frauds, equity, IncompassIT

Stephen R. Clark and Kristin E. Weinberg, Clark & Sauer, LLC, St. Louis, MO


November 22, 2013

First Circuit Addresses "Loss Causation" Pleading Requirements


In Massachusetts Retirement Systems, et al. v. CVS Caremark Corp., et al., the First Circuit revived a securities fraud class action against CVS Caremark Corporation which the U.S. District Court in Rhode Island had dismissed for failure to state a claim. Its opinion provided the circuit’s first substantive discussion of what a plaintiff needs to plead to establish “loss causation”—the causal connection between a misrepresentation and a later drop in stock price—in a securities fraud class action.

Keywords: litigation, commercial, business, securities, loss causation, 10b-5, class actions, CVS Caremark

Paula M. Bagger, Cooke Clancy & Gruenthal LLP, Boston, MA


November 19, 2013

FAA Preempts State Law Barring Arbitration of Consumer Claims


In McInnes v. LPL Financial LLC, 466 Mass. 256, 994 N.E.2d 790 (Aug. 12, 2013), the Massachusetts Supreme Judicial Court decided that a claim brought under the Commonwealth’s unfair trade practices act, Mass. Gen. L. c. 93A, must go to arbitration when the parties’ otherwise enforceable agreement to arbitrate involves interstate commerce and thus is governed by the Federal Arbitration Act.

Thirty years ago, in Hannon v. Gunnite Aquatech Pools, Inc., 385 Mass. 813 (1982), the Supreme Judicial Court held, as a matter of public policy, that a plaintiff could not be compelled to arbitrate a consumer claim brought under Chapter 93A, even in the face of an enforceable agreement to arbitrate. When Jane McInnes filed a complaint against her investment advisor in Massachusetts state court, alleging common law tort claims and violations of the Massachusetts Uniform Securities Act and Chapter 93A, the financial advisor moved to stay the litigation and compel arbitration. Its motion was denied on the grounds that Hannon barred arbitration of the Chapter 93A claim, with which McInnes’s other claims were “inexorably intertwined.”

Keywords: litigation, commercial, business, arbitration, ADR, securities, consumer protection, MacInnes

Paula M. Bagger, Cooke Clancy & Gruenthal LLP, Boston, MA


November 11, 2013

Remote Purchaser of Bad Bank Assets Enjoys FIRREA Protections


In Dittmer Properties, L.P. v. FDIC as Receiver for Premier Bank, et al., 708 F.3d 1011 (8th Cir. Feb. 27, 2013), the U.S. Court of Appeals for the Eighth Circuit held that the powers granted by 12 U.S.C. §1821(j) to the Federal Deposit Insurance Corporation (FDIC) when serving as receiver for a failed bank extend to a remote third-party-purchaser of the failed bank’s asset from the FDIC.

Barkley Center General Partnership (Barkley) had two equal partners, John Peters and Joe Dittmer.  In a series of transactions in 2006, Peters, on behalf of Barkley, obtained a loan totaling approximately $2.5 million from Premier Bank, using Barkley property as collateral for the loan.  Dittmer and Peters died in October 2007 and February 2008, respectively, and Barkley subsequently defaulted on the 2006 loan transaction. Representatives of Dittmer filed two lawsuits against Premier Bank seeking to avoid the loan and enjoin Premier Bank from selling Barkley’s encumbered property. Dittmer alleged Peters did not have authority to mortgage Barkley property and the Bank should not have dispersed the loan proceeds.

Keywords: litigation, commercial, business, FDIC, FIRREA, special powers, banks, banking, lending, lender liability, injunction, creditor rights, Dittmer

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


October 15, 2013

One Artist's Fair (?) Use of Another Artist's Work


The Ninth Circuit held that the band Green Day and its creative team’s use of street artist Dereck Seltzer’s copyrighted work, a “Scream Icon” image, in a music video, as the backdrop at 70 concerts, and at the band’s performance at the MTV Video Music Awards, was fair use and therefore not copyright infringement. In analyzing the four fair use factors—(1) the purpose and character of the use, (2) the nature of the copyrighted work, (3) the amount of the work used, and (4) the effect of the use on the potential market for or value of the copyrighted work—the Ninth Circuit held two factors weighed in Green Day’s favor, one slightly in Seltzer’s favor, and one was neutral.

Keywords: litigation, commercial, business, copyright infringement, fair use, Green Day, Scream Icon

Jennifer L. Wagman, Jenner & Block LLP, Los Angeles, CA


October 11, 2013

Tenth Circuit Clarifies Personal Jurisdiction over Foreign Defendant


In Newsome v. Gallacher, the court addressed several novel questions arising in the context of suits alleging claims for breach of fiduciary duty. As a matter of first impression, the court held that in determining whether personal jurisdiction could be exercised over nonresident defendants, it was proper to consider the harm suffered by those to whom the fiduciary duty was owed. In the course of reaching this conclusion, the court clarified Tenth Circuit and Oklahoma law regarding a number of additional issues holding particular relevance for commercial and business litigation.

Keywords: litigation, commercial, business, personal jurisdiction, breach of fiduciary duty, fiduciary shield doctrine

Jason R. Odeshoo, Jenner & Block LLP, Chicago, IL


October 10, 2013

Eleventh Circuit Has Jurisdiction to Hear Breach-of-Contract Claims


In a matter of first impression, the Eleventh Circuit recently held that the Federal Circuit does not have exclusive jurisdiction to hear an appeal of a breach-of-contract claim that requires the resolution of a patent-infringement claim for the complainant to succeed.

Rad Source Technologies, Inc., an irradiation technology company, developed X-ray technology used in the RS 3000 blood irradiation device, for which it obtained three patents.  Rad Source also obtained two patents related to “long tube” X-ray blood irradiation technology, which was not used in the RS 3000.  In 2003, Rad Source signed a License Agreement with Nordion that permitted Nordion to sell the RS 3000.  Four years later, Nordion attempted to assign the License Agreement to Best Medical International, Inc.  Rad Source refused to consent to the assignment, and Nordion then purported to grant Best all of its rights under the License Agreement through a sublicense agreement.

Keywords: litigation, commercial, business, breach-of-contract claim, patent infringement, Federal Circuit, jurisdiction

Harold "Hank" M. Greenberg, Jenner & Block LLP, New York, NY


October 8, 2013

Taxing E-Discovery Costs: The Fourth Circuit Puts the Brakes on Cost Recovery


The Fourth Circuit Court of Appeals narrowly defined the scope of e-discovery costs that are recoverable by the prevailing party under the federal taxation-of-costs statute, 28 U.S.C. § 1920(4). The Fourth Circuit determined that E. & J. Gallo Winery, Inc. (Gallo), the prevailing party in a suit brought by North Carolina wine wholesaler The Country Vintner, was entitled to recover only the costs directly associated with making of copies of electronically stored information (ESI) and not the costs associated with processing ESI. 

Keywords: litigation, commercial, business, ESI, e-discovery, costs recovery, taxation-of-costs statute

Francisco Benzoni, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan LLP, Raleigh, NC


September 30, 2013

Doctrine of Commercial Frustration Does Not Excuse Defendant's Performance


In BancorpSouth Bank v. Hazelwood Logistics Center, LLC, 706 F.3d 888 (8th Cir. Feb. 14, 2013), the Eighth Circuit suggested the Missouri Supreme Court would recognize the doctrine of commercial frustration, which excuses parties to a contract from further performance if an unforeseen event neither caused nor controlled by a party destroys or practically destroys the value of the performance or the object or purpose of the contract.

The bank, BancorpSouth, and the developer, Hazelwood Logistics Center, LLC, executed a loan agreement. The developer planned to develop property that included an environmental remediation site, and remediation efforts caused methane gas to spread to previously uncontaminated areas of the property, requiring more extensive remediation.  Unable to commercially develop the land as planned, the developer failed to pay the loan. 

Keywords: litigation, commercial, business, doctrine of commercial frustration, contractual obligations, unforeseen event

Stephen R. Clark and Kristin E. Weinberg, Clark & Sauer, LLC, St. Louis, MO


September 30, 2013

Plaintiffs' Securities Class-Action Firm May Face Sanctions


The Seventh Circuit affirmed dismissal of a shareholder class action against Boeing over alleged misleading statements during the Dreamliner aircraft’s development and remanded with instructions for the district court to decide whether the plaintiffs’ lawyers should be sanctioned for their conduct during the case.

The plaintiffs alleged that Boeing and its executives made false statements with scienter when they stated that the structural testing needed for the Dreamliner’s important first flight was complete. 

Keywords: litigation, commercial, business, PSLRA, sanctions, confidential sources, Rule 11, scienter, Boeing

Michael H. Margolis, Jenner & Block LLP, Chicago, IL


July 16, 2013

Class-Action Waivers in Arbitration Agreements Are Enforceable


The Fourth Circuit held that class-action waivers in otherwise valid arbitration agreements are enforceable under the Federal Arbitration Act (FAA). The court held that the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), “plainly prohibited” the courts from invalidating an otherwise valid arbitration agreement due to a class-action waiver.  As a result, it is error to hold that a class-action waiver in an arbitration agreement is unconscionable. 

Keywords: litigation, commercial, business, arbitration, class action, waiver

Toby Coleman, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, NC


July 5, 2013

Customer Must Show Willing Competitor to Have Standing under Federal Antitrust Laws


In a matter of first impression, the Eleventh Circuit recently held that to have standing to sue under federal antitrust laws, a private plaintiff who is the customer of the defendant must show that a competitor is willing and able to enter the defendant’s market. 

Sunbeam Television Corp. operates WSVN, a Fox-affiliated broadcast television station in Miami, Florida. For over 30 years, Sunbeam purchased television ratings data from Nielsen Media Research, which is the only provider of such data for the Miami-Fort Lauderdale market.  Sunbeam sued Nielsen after Nielsen changed its methodology for calculating television ratings, which resulted in a drop in Sunbeam’s advertising revenue and enterprise value.

Keywords: litigation, commercial, business, antitrust, Clayton Act, standing, customer

Harold "Hank" M. Greenberg, Jenner & Block LLP, New York, NY


July 1, 2013

Standard Fire Ins. Co. v. Knowles: SCOTUS Finally Interprets CAFA


On March 19, the U.S. Supreme Court unanimously held that class-action plaintiffs cannot stipulate to limit damages in an effort to remain below the $5 million federal jurisdictional prerequisite required by the Class Action Fairness Act (CAFA). Standard Fire Ins. Co. v. Knowles, 11-1450, 2013 WL 1104735 (U.S. Mar. 19, 2013).

Under CAFA, federal district courts have original jurisdiction over class actions in which, among other things, the matter in controversy exceeds $5 million. Some class-action plaintiffs had successfully skirted CAFA removal by stipulating that they will seek less than $5 million on behalf of the entire putative class. The named plaintiff, Knowles, employed this strategy in an attempt to keep his case against Standard Fire Insurance Company in Arkansas state court.  Standard Fire removed the case to Arkansas federal court, citing CAFA. The district court remanded, reasoning that the amount in controversy fell below $5 million in light of Knowles’s stipulation; however, the court also determined that the amount would have exceeded the jurisdictional threshold absent the stipulation. The Eighth Circuit denied an appeal.

Keywords: litigation, commercial, business, CAFA, nonbinding stipulation, amount in controversy, federal jurisdiction, burden of proof

Matthew Kalinowski, Morgan, Lewis & Bockius LLP, New York, NY


June 26, 2013

Courts, Not Arbitrators, Decide Challenges to Arbitration Clauses


In this case, the court granted the defendants’ motion to compel arbitration, holding that the court, rather than an arbitrator, must determine whether a valid and enforceable arbitration agreement exists, and that plaintiffs’ allegations were insufficient to overcome the presumption of validity to be accorded to arbitration agreements.

The plaintiffs, who were employed by defendant Wackenhut Services LLC as firefighters in Afghanistan and Iraq, alleged that they were denied a variety of employment benefits and compensation. The terms of their employment were governed by annual employment agreements that contained arbitration clauses. Plaintiffs argued that those clauses were invalid because they were unconscionable, were not the product of a meeting of the minds, and were induced by personal and economic duress. Defendants argued first that the arbitrator, rather than the court, should decide the validity of the arbitration agreement, and that in any event the arbitration clauses were reasonable and fully agreed to by the plaintiffs.

Keywords: litigation, commercial, business, arbitration agreements, validity, enforceability

David A. Wilson, Thompson Hine LLP, Washington, D.C.


June 20, 2013

Tenth Circuit Limits Mortgage Loan Servicers' Liability


In Berneike v. CitiMortgage, Inc., the court faced two questions of first impression in the Tenth Circuit: (1) whether a mortgage loan servicer’s duties under the Real Estate Settlement Procedures Act (RESPA) are triggered when a consumer sends putative qualified written requests (QWRs) to an address other than the one exclusively designated by a mortgage loan servicer; and (2) whether claims against mortgage loan servicers are cognizable under Utah’s consumer protection statute. In answering both questions in the negative, the court clarified mortgage loan servicers’ exposure to liability under key federal and state statutes.

Keywords: litigation, commercial, business, RESPA, QWR, UCSPA, mortgage loans, liability

Jason R. Odeshoo, Jenner & Block LLP, Chicago, IL


June 19, 2013

Third Circuit Defines "Evident Partiality" Standard under the FAA


In this opinion, the Third Circuit ruled that it may vacate an arbitration award for “evident partiality” under the Federal Arbitration Act only if a reasonable person would have to conclude that the arbitrator was partial to one side.

James Freeman brought an Age Discrimination in Employment Act claim against PPG Auto Glass, his former employer. During a settlement conference in district court, the parties entered into a binding arbitration agreement, and the court marked the case as closed.

The parties chose Maureen Lally-Green, a former judge, as arbitrator. During a campaign for a spot on the Pennsylvania Supreme Court, Lally-Green received contributions from PPG Industries, a then-owner of PPG Auto Glass and now of PGW Auto Glass and Pittsburgh Glass Works (collectively, PGW), the entities currently responsible for the liabilities of the former PPG Auto Glass. (She had also received about $26,000 in contributions from the firm representing Freeman.) Though Lally-Green did not disclose these contributions during the arbitration, she had informed the parties that she knew people at PPG Industries. (The parties disputed whether she disclosed that she taught a law school seminar with counsel from PPG Industries.) At the conclusion of the arbitration, Lally-Green ruled against Freeman.

Keywords: litigation, commercial, business, arbitration, waiver, FAA, evident partiality, bias

Chad M. Shandler and Jason J. Rawnsley, Richards, Layton & Finger, P.A., Wilmington, DE


June 19, 2013

Court Clarifies Standard for Dismissal as a Sanction in Post-Trial Context


In Knoll v. City of Allentown, [PDF], 707 F.3d 406 (3d Cir. 2013), the U.S. Court of Appeals for the Third Circuit recently clarified the standard to be used when a district court considers dismissal as a sanction for noncompliance with procedural rules or court orders in post-trial proceedings. The court held that while dismissal may be used as a sanction, the district court need not engage in the six-factor analysis required by Poulis v. State Farm Fire & Cas. Co., 747 F.2d 863 (3d Cir. 1984).

Keywords: litigation, commercial, business, post-trial dismissal, sanction, noncompliance, Poulis

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York City, NY


June 6, 2013

Supreme Court Rules Stipulation Does Not Bind Class


Resolving a circuit split, the Supreme Court rejected a putative class action plaintiff’s attempt to defeat federal jurisdiction by stipulating to seek less than $5 million, holding that a pre-certification stipulation does not bind the class and thus cannot take a class action out of the Class Action Fairness Act (CAFA).

In Standard Fire Insurance Co. v. Knowles, the plaintiff brought a class-action against an insurance company for failing to pay the amount due. Hoping to keep his case in state court, the plaintiff stipulated that he and the class would seek less than $5 million in aggregate damages.  The insurance company sought to remove the action to federal court under CAFA, 28 U.S.C. § 1332(d), which grants federal courts original jurisdiction over class actions when, among other things, the aggregate sum or value in controversy exceeds $5 million. The district court remanded to state court, reasoning that the plaintiff’s stipulation would govern the case’s value.  The Eighth Circuit declined to hear the discretionary appeal.

Keywords: litigation, commercial, business, stipulations, CAFA, amount in controversy, legally binding, jurisdiction

Yvette Golan, The Golan Firm, Houston, TX


June 6, 2013

Prevailing Defendants Can Recover Costs in FDCPA Cases

Resolving a circuit split, the Supreme Court held that a prevailing defendant in a Fair Debt Collection Practices Act suit may be awarded costs, even if it is not entitled to attorney fees, which are recoverable under the statute if the plaintiff brought suit in bad faith.

Olivea Marx sued a debt collector, alleging it violated the Fair Debt Collection Practices Act (FDCPA) by harassing her and threatening to garnish her wages and seize her bank funds to collect on a student loan. Following a one-day bench trial, the district court found in the debt collector’s favor. The court also awarded the debt collector $4,543.03 in costs under Federal Rule of Civil Procedure 54(d), which allows a court to award costs to the prevailing party “unless a federal statute . . .  provides otherwise.” Marx argued that the FDCPA, 15 U.S.C. § 1692k(a)(3) “provides otherwise.” The statute states that a defendant may recover “attorney fees . . . and costs” only upon a finding that the suit was brought in bad faith. Marx argued that because there was no finding of bad faith, costs could not be awarded. The district court disagreed, and the Tenth Circuit affirmed.

Keywords: litigation, commercial, business, Fair Debt Collection Practices Act, prevailing defendant, attorney fees, recover costs, bad faith

Yvette Golan, The Golan Firm, Houston, TX


May 22, 2013

Securities Class Action Plaintiffs Need Not Prove Materiality of Misstatement

Resolving a circuit split, the Supreme Court held that at the class-certification stage, securities class-action plaintiffs need not establish the materiality of a misstatement, even if they invoke the “fraud-on-the-market” theory to presume reliance on material statements on a class-wide basis.  Moreover, before certifying the class, the district court need not consider defendants’ evidence that the alleged misstatements are immaterial. Signaling perhaps the twilight of the mini-trial at class-certification hearings, the Court in Amgen v. Connecticut Retirement Plans and Trust Funds held that it is enough that the putative class representative show that the question of materiality is common to the class; he need not also show that he “will win the fray.” 

Keywords: litigation, commercial, business, fraud-on-the-market, securities, materiality, class certification

Yvette Golan, The Golan Firm, Houston, TX


May 22, 2013

Claim Dismissed Against Broker-Dealers under Section 1 of the Sherman Act

The Second Circuit held that putative classes of investors and issuers of auction rate securities (ARS) failed to state a claim under Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, against broker-dealers for allegedly conspiring to cease buying ARS for their own proprietary accounts.

The market for ARS collapsed in February 2008, after a series of auction failures in which there were more sellers than buyers of ARS. In such a case, no ARS would change hands and default interest rates would be triggered. The defendant broker-dealers previously had made support bids in which, with knowledge of a likely failed auction, the financial institutions purchased the ARS themselves, causing the auctions to succeed, allegedly propping up the market and hiding from issuers and investors how poor demand actually was for ARS.

Keywords: litigation, commercial, business, Sherman Act, auction rate securities, conspiracy

Christopher F. Girard, Robinson & Cole, LLP, Hartford, CT


May 10, 2013

U.S. District Judge Enforces Advance Conflict Waiver

In Galderma Laboratories, LP v. Actavis Mid Atlantic LLC, U.S. District Judge Ed Kinkeade enforced an advance conflict waiver and denied a client’s motion to disqualify Vinson & Elkins (V&E) from representing its adversary in an ongoing patent-infringement action. The client, Galderma, retained V&E in 2003 to give legal advice concerning its benefit plans and other employment issues. In 2012, while the employment engagement was still ongoing, Galderma filed a patent-infringement case against Actavis Mid Atlantic. It was represented by different lawyers (Munck Wilson Mandala and DLA Piper) in the patent litigation. V&E had already been representing various Actavis entities in intellectual property matters, and Actavis hired V&E to defend it in the Galderma matter. When Galderma learned of V&E’s representation, it filed a motion to disqualify the firm.

Keywords: litigation, commercial, business, advance conflict waiver, patent infringement, client, conflicts, ABA Model Rules of Professional Conduct, Texas Disciplinary Rules of Professional Conduct, state standards, motion to disqualify

Kelli Hinson, partner, Carrington Coleman Sloman & Blumenthal, LLP, Dallas, TX


May 8, 2013

Mortgage Foreclosure Is Debt Collection under FDCPA

In Glazer, the Sixth Circuit held that the filing of a mortgage foreclosure action constitutes “debt collection” within the meaning of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, and that lawyers who meet the general definition of “debt collector” must, therefore, comply with the FDCPA when bringing a mortgage foreclosure action.

The plaintiff in Glazer brought claims against a law firm under the FDCPA when the law firm initiated a foreclosure action on the plaintiff’s property on behalf of its client, a mortgage servicing company. To be liable under the FDCPA, a debt collector must have been engaged in conduct that qualifies as debt collection. The law firm argued, and the district court agreed, that the plaintiff’s FDCPA claims failed because the firm’s actions in bringing a mortgage foreclosure action were not debt collection under the act.

Keywords: litigation, commercial, business, debt collection, mortgage foreclosure, Fair Debt Collection Practices Act, Sixth Circuit

Ali Razzaghi, Frost Brown Todd LLC, in Cincinnati, OH


May 8, 2013

Eighth Circuit Addresses Adverse Inference Jury Instruction

In Hallmark Cards, Inc. v. Murley, a matter of first impression, the Eighth Circuit examined the district court’s adverse inference instruction regarding noncompete/nondisclosure claims against a former employee, ultimately finding that they were not erroneous. 

From 1999 to 2002, Murley was Hallmark’s group vice president of marketing. In such role, Murley became privy to certain confidential information, including financials, business plans, and market research. When her position was terminated in 2002, Murley and Hallmark entered into a separation agreement that included provisions for nondisclosure and noncompete. Following the expiration of the noncompete term, Murley accepted a position as a consultant with a Hallmark competitor. This competitor was later vetted for sale by a third party. In the course of its investigation, the third party discovered that Murley had verbally disclosed confidential information to her new employer. Upon being notified, Hallmark filed suit. During discovery, Hallmark also learned that, two days prior to the third-party review, Murley destroyed 67 documents, eight of which were in a folder entitled “Hallmark.”  The jury found for Hallmark on its breach of contract claims and awarded Hallmark $860,000 in damages.

Keywords: litigation, commercial, business, adverse inference, instruction, explicit finding

Mike Meyer, Foland, Wickens, Eisfelder, Roper & Hofer, P.C., Kansas City, MO


May 1, 2013

Customer Confusion Necessary for Issuance of Preliminary Injunction

In Swarovski Aktiengesellschaft, et al. v. Building #19, Inc., 704 F.3d 44 (1st Cir. 2013), the First Circuit reversed a district order which allowed in part a motion for preliminary injunction sought by world-famous crystal manufacturer Swarovski. In so doing, it issued a reminder about the primacy of consumer confusion in any trademark infringement analysis.

The defendant, Building #19, Inc., runs a chain of off-price retail stores which sell insurance salvage, overstocks, and discontinued merchandise. It is well known in New England for its full-page newspaper advertisements featuring cartoon figures, boldly lettered descriptions of merchandise, and the store motto: “Good Stuff Cheap.” In late 2011, Building #19 acquired a shipment of Swarovski crystal figurines from an insurance salvor. The figurines were undamaged, in their original packaging, and sold to Building #19 without restriction on its ability to use the “Swarovski” name. 

Keywords: litigation, commercial, business, trademark infringement, consumer confusion, advertisement, Swarovski, luxury goods

Paula M. Bagger, Cooke Clancy & Gruenthal LLP, Boston, MA


May 1, 2013

Fifth Circuit Upholds East River's Economic Loss Rule

The Fifth Circuit recently affirmed granting a motion for summary judgment against counter-claimant Associated Gas & Oil Company, Limited (Associated), holding that the economic loss rule decided in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986) (hereinafter, East River) precludes Associated's recovery of any economic losses from Tram Shipyards, Inc. for damages sustained to a lift boat allegedly as a result of faulty welding of the boom to the boat.

Keywords: litigation, commercial, business, economic loss rule, commercial transaction, maritime law

Mitzi Turner Shannon and Rachel Elizabeth Carver, Kemp Smith LLP, El Paso, TX


April 9, 2013

Eleventh Circuit Invalidates Law under Dormant Commerce Clause

The Eleventh Circuit recently held that Miami-Dade County, Florida, violated the dormant Commerce Clause by denying permits to Florida Transportation Services, Inc., (FTS) to provide stevedore services at the Port of Miami. Although the court concluded that the county’s application of the county’s stevedore permitting ordinance did not discriminate against interstate commerce, the court held that the county’s application of the ordinance nonetheless unduly burdened interstate commerce, in violation of the dormant Commerce Clause.

Keywords: litigation, commercial, business, dormant Commerce Clause, stevedore, interstate commerce, Pike, undue-burden

Hank M. Greenberg, Jenner & Block LLP, New York, NY


April 9, 2013

Court Clarifies Standard for Crime-Fraud Exception

n In Re: Grand Jury, 2012 U.S. App. LEXIS 25318 (Dec. 11, 2012), the U.S. Court of Appeals for the Third Circuit recently clarified that it would apply the “reasonable basis” standard in determining whether the crime-fraud exception to the attorney-client privilege should override that privilege and the attorney work product doctrine. 

It is well settled that attorney-client communications and attorney work product are generally considered protected from disclosure outside the attorney-client relationship. One exception to that protection is the “crime-fraud exception,” which posits that attorney-client communications and attorney work product may be subject to disclosure where that exception is established.  To overcome the attorney-client privilege and work product doctrine under the crime-fraud exception, “the party seeking to overcome the privilege—in this case, the government—‘must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud’” Id., 2012 U.S. App. LEXIS 25318, at *43 (citation omitted).

Recognizing that other Circuit Courts have applied different standards in applying the crime-fraud exception, the Third Circuit ruled that “[w]here there is a reasonable basis to suspect that the privilege holder was committing or intending to commit a crime or fraud and that the attorney-client communications or attorney work product were used in furtherance of the alleged crime or fraud, this is enough to break the privilege.”

Keywords: litigation, commercial, business, crime-fraud exception, attorney-client privilege, reasonable basis, attorney work product doctrine

Charles W. Stotter, Bressler, Amery & Ross, P.C., Florham Park, NJ, and New York City, NY


April 2, 2013

Of Bratz Dolls and Trade Secrets

The Ninth Circuit ruled both for and against defendant/appellee MGA Entertainment, Inc. in a post-jury verdict appeal of Mattel’s copyright infringement and trade-secret misappropriation case regarding MGA’s line of Bratz dolls. For MGA, the Ninth Circuit upheld the district court’s award of attorneys’ fees and costs under the Copyright Act. Against MGA, the Ninth Circuit dismissed MGA’s misappropriation of trade secrets counterclaim as not compulsory and therefore untimely. 

With respect to the fee award, Mattel argued MGA was not entitled to recover its fees because Mattel’s copyright claims were “objectively reasonable.” In other words, because Mattel brought legitimate copyright-infringement claims, MGA should not have recovered fees and costs under the Copyright Act for its successful defense. MGA argued in response that the district court properly exercised its discretion in granting a fee award that would advance faithfulness to the purpose of the Copyright Act, namely, to stimulate artistic creativity for the general public good.  By advancing a variety of meritorious copyright defenses to Mattel’s claims, MGA furthered the purpose of the Copyright Act. 

Keywords: litigation, commercial, business, Bratz dolls, Mattel, compulsory counterclaim, attorney fees

Jennifer L. Wagman, Jenner & Block LLP, Los Angeles, CA


April 2, 2013

Fourth Circuit Defines "Customer"

The Fourth Circuit has, for the first time, defined who is a “customer” for purposes of FINRA [Financial Industry Regulatory Authority] rules that entitle customers of a securities firm to demand arbitration. The court held that a “customer” is “one, not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities insofar as those activities are regulated by FINRA—namely investment banking and securities business activities.” The court then applied that definition in two cases, with opposite results.

Keywords: litigation, commercial, business, arbitration, securities, FINRA

Clifton L. Brinson, partner, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, NC


March 25, 2013

USDA Recall Notices Satisfy Public Records Hearsay Exception

Invoking Federal Rule of Evidence 803(8)’s public records hearsay exception, the Eighth Circuit held recall notices admissible evidence supporting a plaintiff’s breach of contract claim in General Mills Operations, LLC v. Five Star Custom Foods, Ltd., No. 12-1731 (8th Cir. Jan. 7, 2013).

The plaintiff, General Mills Operations, LLC (General Mills), purchased meatballs from defendant Five Star Custom Foods, Ltd. (Five Star) for use in General Mills products, such as its Progresso line of soups. In February 2008, Five Star’s beef supplier, Westland Meat Co., Inc. voluntarily recalled 143,000,000 pounds of beef due to video showing its employees improperly handling animals designated for slaughter. After discussions with the United States Department of Agriculture (USDA) and the Food Safety Inspection Service (FSIS), the supplier issued a voluntary recall of the beef. The USDA issued a product recall recommendation and recall release to the public. Per USDA instructions, Five Star notified its customers and provided instructions for destroying the recalled product. The voluntary recall affected two orders of meatballs General Mills received in September and October of 2007, and General Mills destroyed its products containing the recalled meatballs. 

Keywords: litigation, commercial, business, recall notices, breach of contract, public records hearsay exception, admissible evidence, USDA

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


March 25, 2013

Experts' Bills and Timesheets Ruled Discoverable

A federal magistrate ordered both Chicago Board of Options Exchange, Inc. (CBOE) and International Securities Exchange, LLC (ISE) to produce their experts’ bills and timesheets despite the parties’ agreement limiting the scope of expert discovery in Chicago Board of Options Exchange Inc. v. International Securities Exchange, LLC, 07-CV-00623 (N.D. Ill.).  

The $400 million patent infringement case was scheduled to begin trial this month. The long- running dispute began in 2006, and stems from ISE’s allegation that CBOE’s trading platform infringes on ISE’s trading platform. In 2011, an Illinois federal judge entered final judgment finding that CBOE’s trading system did not infringe U.S. Patent Number 6,618,707.  Chi. Bd. of Options Exch., Inc. v. Int’l Sec. Exch., LLC, 776 F. Supp. 2d 606 (N.D. Ill. 2011).  In May of last year, however, the Federal Circuit vacated that decision and remanded the case for trial.  Chi. Bd. of Options Exch., Inc. v. Int’l Sec. Exch., LLC, 677 F.3d 1361 (Fed. Cir. 2012).

Keywords: litigation, commercial, business, experts, discovery, bias, credibility

Michael H. Margolis, Jenner & Block LLP, Chicago, IL


March 15, 2013

Court Upholds "Clickwrap" Agreements

In Hancock v. American Tel. & Tel. Co., Inc., plaintiffs brought a putative class action against AT&T and several of its regional affiliates, including Southwestern Bell and BellSouth, alleging that the digital television, Internet, and Voice over Internet Protocol (VoIP) telephone components of AT&T’s U-verse telecommunications service were defective. The complaint asserted a RICO claim, along with a number of state-law claims.

Based on a forum-selection clause in the U-verse agreement’s terms of service, AT&T moved to dismiss the claims for improper venue. Additionally, based on an arbitration clause included within the terms and conditions specific to its Internet service, AT&T moved to dismiss and compel arbitration of the claims alleging defects of its Internet service. 

The plaintiffs argued that the forum-selection and arbitration clauses were unenforceable for lack of disclosure. Both clauses were included in “clickwrap” (or click-through) agreements, which require consumers to accept contractual terms by clicking on a dialog box displayed on a computer screen. The plaintiffs maintained that the process of accepting the terms and conditions was so “byzantine and confusing” that they could not have knowingly accepted the clauses.

Keywords: litigation, commercial, business, forum selection clause, arbitration clause, click-through agreements, AT&T, Voice over Internet Protocol

Jason Odeshoo, Jenner & Block, LLP, Chicago, Illinois


March 14, 2013

Third Circuit Finds Waiver of Contractual Arbitration Provision

The Third Circuit concluded that a party may waive its right to arbitrate even if no discovery has taken place by the time that it moves to compel arbitration, as long as other factors support a finding of waiver.

The plaintiffs, retail pharmacy businesses, sued AdvancePCS, a prescription benefits manager for antitrust violations. AdvancePCS moved to dismiss on the merits. After the district court denied the motion, AdvancePCS moved for reconsideration, which was also denied.

At issue in the suit were Pharmacy Provider Agreements that included an arbitration clause.  Though AdvancePCS answered the complaint and raised a number of affirmative defenses, it never mentioned this clause until 10 months after the start of the case, when it moved to compel arbitration. The district court granted the motion and stayed the case.

No arbitration took place. Many years, two judges, and a number of procedural twists later, the plaintiffs successfully moved to dismiss their own case so as to take an immediate appeal of the order compelling arbitration. The plaintiffs, now appellants, argued that AdvancePCS had waived its ability to assert the clause by waiting too long before moving to compel arbitration, all the while actively litigating the case.

The Third Circuit, after a thorough comparison of the facts of this case to its precedents in this area, agreed with the appellants and reversed.

Keywords: litigation, commercial, business, arbitration, Hoxworth, waiver, prejudice, discovery, motion to dismiss, motion to compel

Chad M. Shandler and Jason J. Rawnsley, Richards, Layton & Finger, P.A., Wilmington, Delaware


March 13, 2013

Supreme Court Narrows Liability in Rule 10b-5 Cases

In a ruling with potentially broad implications under the federal securities laws, the United States Supreme Court recently held that an adviser to a mutual fund could not be held liable in a private cause of action for false and misleading statements made in a prospectus issued by the mutual fund even if the adviser participated in writing and disseminating the false and misleading statements. See Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296  (June 13, 2011).

Keywords: litigation, commercial, business, Rule 10b-5, federal securities laws, fraud, mutual fund, misleading statements, prospectus, SEC

Sally K. Sears Coder and Marc D. Sokol, Jenner & Block LLP, Chicago, Illinois


February 7, 2013

Connecticut Court Has Personal Jurisdiction over Canadian Defendant

In MacDermid, Inc. v. Deiter, the Second Circuit held that the district court had personal jurisdiction over a Canadian former employee of the plaintiff who, shortly before her termination, allegedly accessed the plaintiff’s computer servers in Connecticut to misappropriate the plaintiff’s confidential information and e-mail it from her work e-mail address to her personal e-mail address. In reversing the district court’s dismissal of the action, the Second Circuit held that both the Connecticut long-arm statute and constitutional due process were satisfied in spite of the fact that the defendant only physically interacted with computers in Canada and never came to Connecticut.

Keywords: litigation, commercial, business, personal jurisdiction, computers, misappropriation

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


February 7, 2013

The Bare Meaning of Actual Damages in Copyright Infringement

Everyone is a journalist. And today, more than ever before, the camera truly is always watching. At the expense of her own job, Ohio newscaster Catherine Balsley (also known as Catherine Bosley) learned this lesson the hard way. While on her vacation in Florida during the spring of 2003, she entered a wet T-shirt contest and danced nude at a bar. As she bore all for the stage, an amateur photographer captured the entire show and posted the goods to his website. This career-threatening ordeal led to Balsley’s firing. But she was later able to acquire all rights to the photos and register the copyrights with the U.S. Copyright Office in August of 2004.

For a deeper analysis of this case, see our Sixth Circuit Notes Page.

About a year later, once Balsley was working at a different news station and attempting to reestablish her public image, a Hustler magazine reader thrust her back into the public light. LFP, Inc. [Larry Flynt Publications] publishes Hustler magazine. “Hot News Babes” is a recurring feature in the magazine. The reader nominated Balsley as a “hot news babe” in August of 2005, merely telling Hustler that it could find the wet t-shirt photos of Balsley on the Internet. Hustler’s editors perused the Internet and selected one of the photos which Balsley owned the copyright to. After consulting its attorney, Hustler determined that it could publish the photo as fair use and used it in the February 2006 issue. To her dismay, Balsley again discovered that her bare-chested mishap was plastered for the world to see. She subsequently filed suit for copyright infringement (among a host of other claims) against LFP in February 2008. Direct copyright infringement was the only claim to survive for trial. Ultimately, the jury awarded Balsley $135,000 in damages and the district court awarded $133,812.51 in attorney’s fees to Balsley as the prevailing party. On appeal, the Sixth Circuit affirmed the district court’s ruling.

Keywords: litigation, commercial, business, copyright, actual damages, fair use, gross revenue, burden of proof

Daniel D. Quick and Jerome Crawford, Dickinson Wright PLC, Troy, Michigan


January 16, 2013

No Liability for Attorneys Under Kentucky Securities Act

The issue in this case was whether the Kentucky Securities Act imposes liability on an attorney who performs traditional legal services in connection with a company’s offering of its securities for sale to the public.

The act states that any person who offers or sells a security by untrue statement or omission is liable to the person buying the instrument.  The act also makes “[e]very person who directly or indirectly controls a seller or purchaser . . . every partner, officer, or director (or other person occupying a similar status or performing similar functions) or employee of a seller or purchaser who materially aids in the sale or purchase, and every broker-dealer or agent who materially aids in the sale or purchase” jointly and severally liable to the same extent as the seller or purchaser.

The plaintiffs in this case made purchases of stock in certain oil-and-gas exploration companies.  When the companies did poorly, the individuals sued the companies and their officers for actions related to the sale of the securities.  They also filed suit against the attorney who represented the companies in connection with the issuance and sale of the securities.  The plaintiffs’ separate cases were either dismissed or disposed of on summary judgment, and the Sixth Circuit consolidated them on review.

Keywords: litigation, commercial, business, Kentucky Securities Act, liability, Sixth Circuit, sale of securities

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


January 16, 2013

Lack of Trust Precludes Breach of Fiduciary Duty Claim

New York's highest court dismissed a claim for breach of fiduciary duty asserted by two members of a limited liability company against the third member. Pappas v. Tzolis, —N.E.—, 2012 WL 5906685 (N.Y. Nov. 27, 2012). In reaching that conclusion, the New York Court of Appeals pointed to the lack of trust between the plaintiffs and the defendant, and enforced an earlier written representation by the plaintiffs that no fiduciary duty was owed to them by the defendant.

Keywords: litigation, commercial, business, breach of fiduciary duty, New York Court of Appeals

—John P. McCahey, Partner, Hahn & Hessen LLP, New York, New York.


December 19, 2012

Firm Must Show Conflict with Insurance Carrier Before Choosing Own Malpractice Counsel

When a law firm has agreed to policy provisions providing its malpractice carrier the right to select defense counsel, it will have to demonstrate more than a merely theoretical conflict of interest in order to force the carrier to pay for the law firm’s chosen counsel. In Coats, Rose, Yale, Ryman & Lee, P.C. v. Navigators Specialty Ins. Co., No. 12-10055, 2012 U.S. App. LEXIS 21350 (5th Cir. Oct. 15, 2012), the Fifth Circuit affirmed summary judgment in favor of a malpractice carrier against its insured. The court agreed with the trial court that the insurance carrier had no duty to pay for independent counsel for the insured in a legal malpractice action despite the allegation of a conflict of interest between the carrier and the insured.

Keywords: litigation, commercial, business, malpractice counsel, insurance carrier

—Kelli Hinson, litigation partner, Carrington, Coleman, Sloman & Blumenthal LLP, Dallas, Texas.


November 13, 2012

Arbitration Fee Not Enough for Preliminary Injunction

The plaintiff was an officer of an asset management company controlled by the defendant and was subject to an LLC agreement containing an arbitration clause that required members of the LLC to submit disputes to arbitration. After his termination, the plaintiff sued in Superior Court for the Washington D.C. alleging wrongful termination and breach of the LLC agreement. After removing the case to federal court, the defendant moved to compel arbitration and initiated an arbitration with the International Chamber of Commerce. The plaintiff then moved for a preliminary injunction to stay the beginning of the arbitration.

Keywords: litigation, commercial, business, United States Court of Appeals, D.C. Circuit, arbitration, preliminary injunction, International Chamber of Commerce

David A. Wilson, Thompson Hine, Washington, D.C.


November 13, 2012

Statutory Damages Under Copyright Act Held Constitutional

In Capital Records, Inc., et al. v. Thomas-Rasset [PDF] (No. 11-2820), the 8th Circuit held that awarding statutory damages for copyright infringement does not violate an individual’s due process rights. Perhaps more importantly, however, the court left the door open for copyright owners to argue that merely making copyrighted works available constitutes distribution in violation of the copyright owner’s exclusive rights.

Keywords: litigation, commercial, business, Eighth Circuit, copyright infringement, MediaSentry, KaZaA, United States Constitution Due Process Clause, Jammie Thomas-Rasset, Copyright Act

Mike Meyer, Foland, Wickens, Eisfelder, Roper & Hofer, P.C., Kansas City, Missouri


November 13, 2012

CA Resident Subject to Nationwide Service of Process, Venue

The Securities and Exchange Commission brought this action in Washington, D.C. against four companies and five individuals alleging numerous violations of securities laws arising out of the sale of unregistered securities. One of the individual defendants, California resident Robert Rowen, moved to dismiss the claims against him for lack of personal jurisdiction and improper venue. Rowen argued that the case could not—or at least should not, in the case of the venue challenge—be brought in D.C. because none of the violations pled against him had anything to do with the forum and because he was a resident of California.

Keywords: litigation, commercial, business, U.S. Court of Appeals, D.C. Circuit, Securities and Exchange Commission, SEC, pendent-venue doctrine, Securities Act, Exchange Act

David A. Wilson, Thompson Hine, Washington, D.C.


October 31, 2012

Knop Decision Holds Objectively Reasonable Basis for Removal

The Knop, individually and derivatively on behalf of Avenir Corp. v. Mackall [PDF] decision concerned: 1) the propriety of the removal of a derivative case to federal court where the nominal defendant corporation was the only defendant that was a citizen of the District of Columbia; and 2) the standard for awarding attorneys’ fees for improper removal.

The plaintiff was a shareholder in Avenir, a Washington, D.C.-based investment company, who alleged that Avenir’s three principal officers had engaged in financial misconduct. He named those three officers as defendants and the company as a nominal defendant. The defendants removed the case on diversity grounds, but the district court found removal to be improper and remanded on the grounds that both the plaintiff and Avenir were citizens of Washington, D.C., and therefore complete diversity did not exist. The district court also awarded the plaintiff attorneys’ fees incurred as a result of the removal and remand proceedings.

The defendants appealed the award of attorneys’ fees only, since the remand decision was unreviewable under 28 U.S.C. § 1447(d). The Court of Appeals overturned the awarding of fees, citing U.S. Supreme Court precedent for the proposition that fees could be awarded in a removal and remand situation only where “the removing party lacked an objectively reasonable basis for seeking removal.” Here, the defendants argued that they believed because the corporation in a derivative action is only a nominal defendant that would not be liable on any judgment, it does not count for the purposes of measuring the diversity of the parties under 28 U.S.C. § 1441(b). The court held that fees should not have been awarded because while the defendants’ argument was not correct, it had some logical force and therefore the defendants did not lack an objectively reasonable basis for seeking removal.

Keywords: litigation, commercial, business, District of Columbia Circuit, Avenir

David A. Wilson, Thompson Hine, Washington, D.C.


October 31, 2012

D.C. Circuit Rules No Subject Matter Jurisdiction

The In re Lorazepam & Clorazepate Antitrust Litigation [PDF] decision illustrates the proposition that the parties or the court can, at any time, raise the issue of subject matter jurisdiction. It also shows that courts have the ability to tailor a remedy to a lack of subject matter jurisdiction so as to avoid negating years of litigation and a jury verdict.

Keywords: litigation, commercial, business, District of Columbia Circuit, subject matter jurisdiction

David A. Wilson, Thompson Hine, Washington, D.C.


October 31, 2012

Appeals Court Sets High Bar for Inducement Fraud

In this case, the parties executed a letter of agreement under which the plaintiff was to be paid to locate a purchaser and facilitate the purchase of a building. The agreement contemplated that the parties would later negotiate an asset management agreement (AMA) and specified many of the AMA’s essential terms. The final AMA executed by the parties appointed the plaintiff as manager of the property and provided for monthly management fees as well as other fees to be paid if the plaintiff arranged new leases or the subsequent sale of the building. The AMA also specified that the defendant could terminate the arrangement should the plaintiff fail to perform certain services or if the executives in charge of the plaintiff left the company. Upon termination, no further fees were payable. The AMA contained an integration clause and specifically terminated the agreement.

Keywords: litigation, commercial, business, District of Columbia Circuit, letter of agreement, asset management agreement, fraud, inducement

David A. Wilson, Thompson Hine, Washington, D.C.


October 30, 2012

Third Circuit Limits Relation Back in Amended Pleading

In Glover v. F.D.I.C. [PDF], --- F.3d ---, No. 11-3382, 2012 WL 3834666 (3d Cir. Sept. 5, 2012), the United States Court of Appeals for the Third Circuit limited the situations in which a proposed amended pleading can relate back to the original pleading if the statute of limitations has run on the proposed amendment. Specifically, the Third Circuit ruled that “[w]here the original pleading does not give a defendant ‘fair notice of what the plaintiff’s [amended] claim is and the grounds upon which it rests,’ the purpose of the statute of limitations has not been satisfied and it is ‘not an original pleading that [can] be rehabilitated by invoking [Fed. R. Civ. P.] Rule 15(c).’”

Keywords: litigation, commercial, business, Third Circuit, Fair Debt Collection Practices Act, FDCPA, relation back

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


October 15, 2012

'Magic Language' Needed to Enforce Perpetual Franchise Agreements

In H&R Block Tax Services LLC v. Franklin, 691 F.3d 941 (8th Cir. Sept. 7, 2012), the Eighth Circuit held that two franchise agreements that were silent as to their duration did not unequivocally express the parties’ intent for the contracts to last forever.

Keywords: litigation, commercial, business, Eighth Circuit

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


October 11, 2012

Google Under Fire for Trademark Infringement

In Rosetta Stone Ltd. v. Google, Inc. [PDF], the United States Court of Appeals for the Fourth Circuit recently addressed the question of whether Google is entitled to use trademarked terms in its search results and advertising. The case arose from Rosetta Stone's claim that Google had infringed Rosetta Stone's trademarks by using them as keywords in its AdWord program and in the text of advertisements. Rosetta Stone asserted claims against Google that included direct and contributory trademark infringement under the Lanham Act, vicarious trademark infringement, trademark dilution, and others.

At the trial court level, the Eastern District of Virginia granted Google's motion for summary judgment. As to the trademark claims, the district court held that there was no genuine issue of material fact that Google's use of Rosetta Stone's trademark did not create a likelihood of confusion. In arriving at its holding, the district court analyzed three of the nine "likelihood of confusion" factors, including Google's intent, actual confusion, and the consuming public's sophistication. Weighing those factors, the district court held that all three favored Google, and as a result, "Google's use of the Rosetta Stone Marks d[id] not amount to direct trademark infringement." The district court also held that the "functionality doctrine" shielded Google from liability.

On appeal, the only question at issue regarding Rosetta Stone's trademark claim was "whether there is sufficient evidence for a finder of fact to conclude that Google's use of the mark in its AdWords program is likely to produce confusion in the minds of consumers about the origin of the goods or services in question." Addressing that question, Rosetta Stone argued that the district court erred because there was sufficient evidence to create a genuine issue of material fact as to the three likelihood of confusion factors. It also argued that the district court "failed to consider the effect of the other [six] 'undisputed' confusion factors," claiming that those factors all favored Rosetta Stone.

Under the first confusion factor (intent), the Fourth Circuit found that "a reasonable trier of fact could find that Google intended to cause confusion in that it acted with the knowledge that confusion was very likely to result from its use of the marks." The court based its finding on the fact that Google's own internal studies "suggested that there was significant source confusion among Internet searchers when trademarks were included in the body of the advertisements." The court also relied on the fact that Google fully expected an increase in litigation from trademark holders resulting from its use of trademarks in its AdWord program and in the text of advertisements.

Under the second confusion factor (actual confusion), the Fourth Circuit found "evidence of actual confusion in connection with Google's use of trademarks in its AdWords program." In particular, the court relied on evidence from the deposition testimony of five separate customers who purchased bogus Rosetta Stone products from a sponsored link they mistakenly believed to be either affiliated with Rosetta Stone or authorized by Rosetta Stone. In addition, the court pointed to Google's own in-house studies that showed "'the likelihood of confusion remains high' when trademark terms are used in the title or body of a sponsored link appearing on a search results page." The court also noted that two of Google's in-house attorneys were shown Google search results pages in their depositions and "were unable to determine without more research which sponsored links were authorized resellers of Rosetta Stone products."

Under the third factor (sophistication of consuming public), the Fourth Circuit found that there was sufficient evidence in the record to create a question of fact as to consumer sophistication such that it cannot be resolved on summary judgment. In particular, the court pointed to the deposition testimony of actual Rosetta Stone consumers who were confused by Google's "sponsored links," as well as evidence that "an internal Google study reflect[ed] that even well-educated, seasoned Internet consumers are confused by the nature of Google's sponsored links and are sometimes even unaware that sponsored links are, in actuality, advertisements."

Finally, the Fourth Circuit held that the functionality doctrine did not shield Google's conduct. The functionality doctrine is a common law rule that prohibits trade dress or trademark protection for the functional features of a product or its packaging. The court found that the words "Rosetta Stone" were not essential to the functioning of Rosetta Stone's language-learning products. As a result, the court held that the "functionality doctrine has no application, and it is irrelevant whether Google's computer program functions better by use of Rosetta Stone's nonfunctional mark."

The Court's holding regarding Rosetta Stone's trademark claim is important because it leaves open the possibility that Google may be found liable as direct infringer on remand, a possibility that has potentially far-reaching implications for the way Internet search engines sell and display Internet advertising.

In addition to the trademark infringement claim, the Fourth Circuit also reversed the district court's holding on Rosetta Stone's direct and contributory infringement claims.

Keywords: litigation, commercial business, Fourth Circuit, Google, Lanham Act, trademark infringement, dilution, functionality doctrine, Internet, Rosetta Stone, advertising

Shane D. Gosdis, Vantus Law Group, Salt Lake City, Utah


October 1, 2012

How Methods of Service May Limit E-Discovery Fees

In Race Tires America, Inc., et al. v. Hoosier Racing Tire Corp., et al. [PDF], 674 F.3d 158 (3d Cir. 2012), the Third Circuit held that the only costs taxable against a losing party for services performed by electronic discovery vendors are those for scanning documents and file format conversion. The statute at issue in this case, 28 U.S.C. § 1920(4), authorizes “[a] judge or clerk of the United States [to] tax as costs . . . [f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” It’s a decision that will lead many attorneys to take a closer look at the invoices they receive.

Keywords: litigation, commercial, business, Third Circuit, electronic discovery, Section 1920(4), Fee Act of 1853

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


September 17, 2012

Liability Insurers Question Need to Defend Class Action

In Travelers Property Casualty v. Good [PDF],No. 11-2790, 2012 WL 3059297 (7th Cir. July 27, 2012), two liability insurers (“Travelers,” collectively) brought suit in the Northern District of Illinois, on the basis of diversity jurisdiction, seeking a declaratory judgment that they had no duty to defend their insured in a class action suit brought against the insured in state court for violations of the federal Fair and Accurate Credit Transactions Act. Prior to the filing of the declaratory judgment action, the insured had settled the state court class action for $16 million with each class member receiving a pro rata (per receipt) share of the $16 million recovery with a maximum award of $1,000 per member. The insured agreed, per the terms of the settlement, to assign to the class plaintiffs all of its “claims against and rights to payments from Travelers” under the policies to satisfy the settlement amount. Following approval of the settlement, the class plaintiffs filed a supplementary action in state court to discover Travelers’ assets. Travelers then filed the federal court action seeking a declaration that the insured’s policies did not cover certain of the class plaintiffs’ claims. The district court dismissed the action on the basis of abstention because of the pending supplementary proceedings in state court.

Keywords: litigation, commercial, business, Seventh Circuit, Fair and Accurate Credit Transactions Act, Class Action Fairness Act

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


August 31, 2012

Second Circuit Defines Securities Fraud Aiding, Abetting

In SEC v. Apuzzo [PDF], No. 11-696-cv (2d Cir. Aug. 8, 2012), the Second Circuit held that the Securities and Exchange Commission met its burden of pleading “substantial assistance” in an aiding and abetting securities fraud enforcement action by alleging facts showing that the defendant “in some sort associated himself with the venture, that he participated in it as in something that he wished to bring about, and that he sought by his action to make it succeed.” In so holding, the court rejected the district court’s use of a “proximate cause” test in determining whether the complaint properly alleged “substantial assistance.”

Keywords: litigation, commercial, business, Second Circuit, Securities and Exchange Commission, SEC, securities fraud

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


August 31, 2012

State Courts Open to Hearing Antitrust Malpractice Claims

In In re Haynes and Boone LLP, No. 01-12-00341-cv, 2012 Tex. App. LEXIS 6078 (Tex. App.—Houston [1st Dist.] July 26, 2012; concurring opinion), a Houston, Texas appeals court recently added another signpost to the developing landscape of competing federal and state jurisdiction over legal malpractice cases involving the application or interpretation of federal law.

Keywords: litigation, commercial, business, Texas Appeals Court, Fifth Circuit, antitrust, exclusive jurisdiction

Kelli Hinson, litigation partner, Carrington, Coleman, Sloman & Blumenthal LLP, Dallas, Texas.


August 31, 2012

Dissolved and Suspended Entities Unable to Maintain Suit

In Superior Seafoods, Inc. v. Hanft Fride [PDF], P.A., No. 11-2459 (8th Cir. July 16, 2012), the Eighth Circuit concluded that an administratively dissolved corporation was not a real party in interest to the action, and that a suspended limited liability company lacked the capacity to maintain the appeal. Relying primarily on the appellants’ corporate status, the Eighth Circuit dismissed the appeal.

Keywords: litigation, commercial, business, Eighth Circuit

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


August 13, 2012

First Circuit Applies PSLRA's Heightened Pleading Standards

Stressing the importance of pleading particular facts to support an allegation of scienter, the First Circuit affirmed the Rule 12(b)(6) dismissal of a securities-fraud class action against Textron Inc. and several senior officers in Automotive Industries Pension Trust Fund v. Textron Inc. [PDF], 682 F.3d 34 (1st Cir. June 7, 2012). The class-action complaint targeted public statements made by Textron, before and in the early days of the financial crisis, about the strength and depth of the order backlog at its Cessna Aircraft subsidiary, which Textron represented would help carry it through difficult economic times. In early 2009, Textron reported substantial cuts to Cessna production levels, decreased orders, and numerous cancellations and delivery deferrals in the fourth quarter of 2008. The company’s share price declined, and this action was commenced, the plaintiff alleging that Textron had, over the course of 18 months, fraudulently misstated the strength of the Cessna backlog.

Keywords: litigation, commercial, business, Private Securities Litigation Reform Act, First Circuit, class actions

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


August 13, 2012

Federal Circuit Flips on Willful Infringement Determination

In Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc. [PDF], 682 F.3d 1003 (Fed. Cir. June 14, 2012), the Federal Circuit vacated a portion of its earlier decision in the case and established a new and different approach to the determination of willful patent infringement. In its earlier decision, 670 F.3d 1171, the court articulated that the ultimate determination of willful patent infringement, as set out in In re Seagate Technology, LLC,497 F.3d 1360 (Fed. Cir. 2007), is a matter of fact. However, on reconsideration, the Federal Circuit has now announced that at least the threshold objective prong of the Seagate willfulness standard is a question of law based on underlying mixed questions of law and fact subject to de novo review.

Keywords: litigation, commercial, business, Federal Circuit, willful infringement, intellectual property

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


August 13, 2012

Christensen Brothers Win Appeal Against USA Network

In Forest Park Pictures v. Universal Television Network, Inc. [PDF], 683 F.3d 424, No. 11-2011-cv (2d Cir. June 26, 2012), the Second Circuit held that a state-law claim for breach of a contract that included the promise to pay for the use of copyrighted work is not preempted by the Copyright Act.

Keywords: litigation, commercial, business, Second Circuit, Copyright Act, breach of contract

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


August 13, 2012

Circuit Rejects Rule on Availability of Arbitration

In Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), the U.S. Supreme Court decided, as a matter of law, that no class or collective arbitration may proceed under the authority of the Federal Arbitration Act (FAA) unless the arbitration agreement authorizes those forms of proceedings. The First Circuit, in Fantastic Sams Franchise Corp. v. FSRO Association, Ltd. et al. [PDF], 683 F.3d 18 (1st Cir. June 27, 2012), distinguished Stolt-Nelson when it declined to rule as a matter of law that an arbitration clause that made no mention of class or collective arbitration did not authorize the members of a franchisee association from proceeding collectively to arbitrate claims against the franchisor. Rather, it held, the question of contractual intent must be decided by the arbitrator.

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

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


July 24, 2012

First Circuit Addresses "Plausibility Standard"

The First Circuit addressed the “plausibility threshold” that a complaint must cross to survive a motion to dismiss in Grajales v. Puerto Rico Ports Authority [PDF], No. 11-1404 (1st Cir. June 13, 2012), an appeal from the granting of a Fed. R. Civ. P. 12(c) motion for judgment on the pleadings.

Keywords: litigation, commercial, business, First Circuit, plausibility, Iqbal

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


July 24, 2012

Maker's Mark Wax Seal Is an Enforceable Trademark

In Maker’s Mark Distillery, Inc. v. Diageo N. Am. [PDF], No. 10-5508, 2012 U.S. App. LEXIS 9403, at *1 (6th Cir. May 9, 2012), the well-known Kentucky distillery brought state and federal claims for trademark infringement and a federal claim for trademark dilution against Diageo North America, Inc., and Casa Cuervo S.A., the producer of Jose Cuervo tequila. Maker’s Mark alleged, and the district court agreed, that Cuervo’s use of a red dripping-wax seal on certain of its tequila bottles violated Maker’s Mark’s trademark. The court enjoined Cuervo’s use of the red dripping-wax seal but denied an award of damages to Maker’s Mark. On appeal, Cuervo challenged the validity of the bourbon distillery’s trademark and contested the district court’s conclusion that it had infringed. The Sixth Circuit rejected Cuervo’s arguments and affirmed the district court’s judgment.

Keywords: litigation, commercial, business, Sixth Circuit, trademark infringement, trademark dilution

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


July 24, 2012

Promise to Postpone Foreclosure Is a Forbearance Agreement

In Brisbin v. Aurora Loan Services, LLC [PDF],679 F.3d 748 (8th Cir. May 21, 2012), the Eighth Circuit affirmed that an oral promise to postpone a foreclosure sale is a forbearance agreement and subject to Minnesota’s Credit Agreement Statute of Frauds (MCAS).

Keywords: litigation, commercial, business, Eighth Circuit, foreclosure, forbearance agreements

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


July 24, 2012

Trial Court Failed to Issue Proper Jury Instructions

Fencorp, Co. v. Ohio Kentucky Oil Corp. [PDF], 675 F.3d 933 (6th Cir. 2012), centered on allegations of misrepresentation and fraud stemming from Ohio Kentucky Oil Corporation’s (OKO) issuance of securities to Fencorp, a family-investment corporation. OKO was in the business of drilling exploratory oil wells, and it issued securities in relation to those exploratory oil interests. Between 2000 and 2003, Fencorp, through then-president Frederick E. Nonneman, invested heavily in OKO.

Keywords: litigation, commercial, business, Sixth Circuit, misrepresentation, fraud, securities

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


July 24, 2012

Charging Unearned Fees Is OK if Fees Aren't Shared

The Supreme Court recently held that the Real Estate Settlement Procedures Act (RESPA) does not prohibit charging and keeping fees for services that were not performed, but prohibits only sharing those fees, as in the classic kickback situation. Freeman v. Quicken Loans, Inc. [PDF], 566 U.S. ___, 132 S. Ct. 2034 (May 24, 2012).

Weeks after the Freeman decision, the Court dismissed as improvidently granted its grant of certiorari in another highly anticipated RESPA case that was to address whether the plaintiff must also show that the kickback affected the price or quality of the settlement service. First Am. Fin. Corp. v. Edwards [PDF], 567 U.S. ___ (Jun. 28, 2012).

The Freeman decision is notable as a reminder to all litigants: Deference can sometimes be an all-or-nothing affair. When relying on an agency’s policy announcement to interpret a statute, be prepared to support the entirepolicy.

Keywords: litigation, commercial, business, Supreme Court, Real Estate Settlement Procedures Act, Department of Housing and Urban Development

Yvette Golan, The Golan Firm, Houston, Texas


July 24, 2012

No Fiduciary Duty Owed in Structured Investment Vehicle Case

The New York Court of Appeals has held that a plaintiff who purchased notes from Barclays Bank PLC issued by special investment vehicles and favorably rated by Standard & Poor’s (S&P) could not recover its loss under those notes from either Barclays or S&P. Oddo Asset Mgmt. v. Barclays Bank PLC [PDF], 2012 WL 2399815 (N.Y., June 27, 2012). New York’s highest court agreed with two lower courts that the plaintiff’s complaint failed to state a claim that Barclays or S&P aided and abetted a breach of fiduciary duty owed to the plaintiff or that Barclays tortiously interfered with the plaintiff’s contract.

In 2005 and 2006, Barclays sold mezzanine notes totaling $50 million to the plaintiff, a French investment company, that were favorably rated by S&P. Those notes were issued by Golden Key Ltd. and Mainsail II. Both of those entities were SIV Lites, a structured investment vehicle that borrows money to purchase and invest in asset-backed securities. The business models of both Golden Key and Mainsail depended on their ability to generate higher returns on the asset-backed securities in which they invested (primarily residential and commercial mortgage-backed securities) than the interest paid on their borrowings. Those borrowings included capital notes issued to investors, which reflected an equity interest in the issuer by the note holder, and mezzanine notes, which reflected a debt owed by the issuer to the note holder. Barclays had arranged for the incorporation of both Golden Key and Mainsail as Cayman Island limited-liability entities, prepared the materials that solicited investments in them, and warehoused asset-backed securities for their purchase. It also selected the collateral managers for both entities who oversaw the purchase and management of investments. As a result of the financial crisis, Golden Key and Mainsail were placed into receivership in 2008, and the plaintiff suffered a $43 million loss on the mezzanine notes it held.

The plaintiff brought suit in New York against both Barclays and S&P to recoup its loss, alleging that they aided and abetted a breach of fiduciary duty owed to it by the collateral managers. The plaintiff also alleged that Barclays tortiously interfered with the plaintiff’s contracts with Golden Key and Mainsail. Those claims rose from Golden Key and Mainsail’s alleged purchase at par of more than $1 billion in “toxic” mortgage-backed securities from Barclays (the price Barclays paid for them) that Golden Key and Mainsail shortly thereafter wrote down to their fair value, which was substantially less. The New York Court of Appeals observed that, “[i]n hindsight, it is apparent that a greater degree of vigilance was necessary from all concerned before soliciting funds for, committing funds to, and rating esoteric entities with little understood risks . . . .” Nevertheless, the court agreed with the courts below that the plaintiff failed to state a claim against either Barclays or S&P.

The claim that Barclays and S&P aided and abetted a breach of fiduciary duty by the collateral managers failed as a matter of law because those managers did not owe any fiduciary duty to the plaintiff. The mezzanine notes held by the plaintiff were a form of debt, and the existence of a debtor-creditor relationship by itself under applicable New York law was insufficient to give rise to a fiduciary relationship or duties. The absence of any fiduciary relationship was further demonstrated by the lack of any direct communications between the plaintiff and the collateral managers. The court did note, however, that the receivers of Golden Key and Mainsail would be entitled to pursue any claims that existed for a breach of fiduciary duties owed to those entities by Barclays, S&P, and the collateral managers.

The court also agreed with the lower courts that the plaintiff failed to state a claim that Barclays tortiously interfered with the plaintiff’s contracts with Golden Key and Mainsail. Neither of those entities breached any agreement when it purchased mortgage securities from Barclays. Rather, those acquisitions were done in a manner consistent with the terms of the applicable agreements, including the requirement therein that assets must be acquired from Barclays at par, and none of the acquisitions were in breach of the express terms of the plaintiff’s agreements with Golden Key or Mainsail.

Keywords: litigation, commercial, business, breach of fiduciary duty, structured investment vehicles, mortgage securities

—John P. McCahey, Partner, Hahn & Hessen LLP, New York, New York


July 10, 2012

Ninth Circuit: CFAA Doesn't Apply to Usage Restrictions

In U.S. v. Nosal,676 F.3d 854 (9th Cir. 2012), the Ninth Circuit, in an en banc decision, limited the scope of the Computer Fraud and Abuse Act (CFAA), an anti-hacking statute. In a 9–2 decision, the Ninth Circuit held that the provision of the CFAA that prohibits a person from “exceed[ing] authorized access” to information on a computer does not extend to violations of usage restrictions, such as an employer’s computer-use policy or a website’s terms of service.

Keywords: litigation, commercial, business, Ninth Circuit, Computer Fraud and Abuse Act, usage restrictions

—Nicole E. Lovelock, Holland & Hart, LLP, Las Vegas, Nevada


June 22, 2012

Ninth Circuit Clarifies Jurisdiction in Internet Cases

In a pair of recent cases, Mavrix Photo, Inc. v. Brand Technologies, Inc. [PDF], 647 F.3d 1218 (9th Cir. 2011) and CollegeSource, Inc. v. AcademyOne, Inc. [PDF], 653 F.3d 1066 (9th Cir. 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 on, 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 a 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 such as 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, Internet, jurisdiction

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


June 22, 2012

Federal Court Has Jurisdiction over State Legal Malpractice

In reversing a decision by the Fort Worth Court of Appeals, the Texas Supreme Court recently dismissed a state-court, legal-malpractice claim on the grounds that the federal courts possess exclusive subject-matter jurisdiction over malpractice claims requiring the application of federal patent law. Minton v. Gunn [PDF], 355 S.W.3d 634 (Tex. 2011) (see also the dissenting opinion [PDF]).

Keywords: litigation, commercial, business, Texas, legal malpractice, subject-matter jurisdiction, federal patent law

—Kelli Hinson, partner, Carrington Coleman Sloman & Blumenthal, LLP, Dallas, Texas.


June 22, 2012

Ninth Circuit Overrules Long-Standing Copyright Rule

In Perfect 10, Inc. v. Google, Inc. [PDF], 653 F.3d 976 (9th Cir. 2011), the Ninth Circuit overruled the long-standing rule that showing a likelihood of success on the merits in a copyright-infringement action creates a presumption of irreparable harm sufficient to support the issuance of a preliminary injunction.

Keywords: litigation, commercial, business, copyright infringement, intellectual property, Ninth Circuit

—Michael S. LeBoff, Callahan & Blaine, Santa Ana, California


June 22, 2012

Insured's Assignee Is Real Party in Interest

In Cascades Development of Minnesota, LLC v. National Specialty Insurance, et al., Case No. 11-1429 (8th Cir. April 4, 2012), the Eighth Circuit held that a valid assignee was a real party in interest, not a nominal party, and his presence destroyed diversity jurisdiction. On this determination, the Eighth Circuit vacated the district court’s judgment and remanded the case to the district court with instructions to remand to state court.

Keywords: litigation, commercial, business, Eighth Circuit, insurance, diversity jurisdiction

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


June 22, 2012

Take All Your Shots Before the Magistrate Judge

In Ridenour v. Boehringer Ingelheim Pharmaceuticals, Inc. et al. [PDF],No. 11-2606 at *8 (8th Cir. May 31, 2012), the Eighth Circuit reminded litigants appearing before magistrate judges that they must take “not only [their] best shot but all their shots” and that failure to do so will result in the waiver of those “shots” not presented to the magistrate judge prior to his or her entry of a report and recommendation to a district-court judge.

Keywords: litigation, commercial, business, Eighth Circuit, magistrate judges, statute of limitations, objections

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


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 WaMuís 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 Geníl 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 courtís 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. ß 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 defendantís knowledge of the false marking. Now, however, all that does is create a weak presumption that defendants may not have great difficulty in overcoming.