A Breach of Contract is Now an Element of Insurance Bad Faith Claims in Wisconsin

The Wisconsin Supreme Court held on June 14, 2011, in Brethorst v. Allstate, Case No. 2008AP2595, 2011 WI 41, that an insured can plead a bad faith claim against its insurer without pleading a separate breach of contract, as long as the breach of contract is alleged within the bad faith claim. Further, the Court specifically held an insurer’s “egregious” conduct alone towards its insured is insufficient to create coverage not otherwise existing under the policy.

Brethorst, the insured, suffered injuries from an auto accident and filed an insurance claim. After Allstate offered only a partial settlement of Brethorst’s claims and offered no factual grounds for its decision, Brethorst filed a bad faith claim. She did not, however, file an accompanying breach of contract claim seeking coverage. The lower court held an insured may maintain a bad faith claim without first proving a breach of contract claim as a condition precedent. The Supreme Court accepted the case for review.

The Court contrasted breach of contract claims from bad faith claims and held: (1) an insured may file a bad faith claim without also filing a breach of contract claim; (2) a breach of contract is a fundamental prerequisite to a bad faith claim against an insurer; and (3) an insured may not proceed with bad faith discovery without first satisfying the court that she has established such a breach or will be able to prove such a breach in the future.

Breach of Contract Claims versus Bad Faith Claims

The Court made clear that a breach of an insurance contract claim is merely the failure to pay the claim in accordance with the policy, while a bad faith claim constitutes, “a separate and intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract.” The Court held contract damages are not the result of bad faith acts, but of a breach of contract, and therefore should only be awarded in an improper denial of coverage. Second, allowing contract damages where no coverage is found would bind parties to conditions they did not contemplate or purchase, and therefore would be inconsistent with basic principles of contract law. Lastly, the Court recognized and warned that allowing bad faith claims completely separate from a prerequisite breach of contract, “would invite the filing of unmeritorious claims, focused on the insurer’s alleged misconduct.” Insurance claims, including bad faith, must be firmly anchored in contract law.

Pleadings versus Prerequisites

Importantly, the Court found that although a bad faith claim, “is a separate tort and may be brought without also bringing a breach of contract claim . . . bad faith cannot exist without some wrongful denial of benefit under the insurance contract.” An underlying breach of contract must be alleged, and the insured must plead that they were entitled to payment under the contract. The holding clarified that simply because a breach of contract need not be pleaded does not mean it need not exist, and concluded, “some breach of contract by an insurer is an fundamental prerequisite for a first-party bad faith claim against the insurer by the insured.”

Discovery on a bad faith claim

The Court limited the impact of its holdings by requiring an insured to plead breach of contract with her bad faith claim, and satisfy the court the breach can or will be proven in order to take discovery on bad faith claims. In essence, “an insured must plead, in part, that she was entitled to payment under the insurance contract and allege facts to show that her claim under the contract was not fairly debatable.” Only then may a plaintiff conduct discovery on bad faith topics such as claims handling procedures and internal coverage decision-making.

Implications of the Wisconsin Supreme Court’s Decision

The Court shifted away from its previous two-prong test for bad faith claims and adopted the three-prong test from Arnold Anderson’s treatise, Wisconsin Insurance Law. A bad faith claim in Wisconsin now must prove 1) the terms of the policy obligated the insurance company to pay the claim; 2) the insurer lacked a reasonable basis in law or fact for denying the claim; and 3) the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. An insurer can defend against this claim either by showing there was no coverage under the policy and therefore no breach of contract, or by showing a reasonable basis existed for denying the payment or processing of the claim.

Although insureds may now bring a bad faith claim without a separate cause of action for coverage, coverage still must be alleged. In addition, a concurring opinion in the case points out the majority may have raised the pleading standards by now requiring an insured to, “allege facts to show that her claim under the contract was not fairly debatable,” and “plead facts which, if proven, would demonstrate . . . that the insurer breached its contract.” The concurring judge concluded that notice pleading was no longer sufficient in insurance bad faith cases.

Don’t Gamble with My Money: When a Lawsuit Seeks Damages in Excess of Policy Limits, What Are the Insured’s Rights in Illinois?

In general, if a lawsuit is covered or potentially covered by a commercial general liability (CGL) insurance policy, the insurer has a duty to defend that claim. If the insurer provides that defense without reserving its rights to deny coverage, the insurer is entitled to select defense counsel and control the defense. But when the insurer defends under a reservation of rights, that reservation may create a conflict of interest between the insurer and the insured.

The leading Illinois Supreme Court case on this subject is Maryland Casualty v. Peppers, decided in 1976. According to Peppers, when an insurer defends an insured, but reserves the right to deny coverage based on an exclusion in the insurance policy (the applicability of which could be established during the course of defending the insured), there is a conflict of interest that gives the insured the right to select independent counsel to defend it at the insurer’s expense. But the Illinois Supreme Court did not say that this is the only conflict of interest that could give rise to the insured’s right to select independent defense counsel.

In R.C. Wegman Construction Company v. Admiral Insurance Company, decided in 2011, the United States Court of Appeals for the Seventh Circuit answered a question that has vexed Illinois insureds for a long time. Although the case involves a relatively uncommon set of facts, the court’s ruling in Wegman recognizes the conflicting interests that can arise between insureds and insurers when an insured faces a claim in which there is a “non-trivial probability” that there could be a judgment in excess of policy limits.

The Nuts and Bolts of Wegman

R.C. Wegman Construction Company was the manager of a construction site at which another contractor’s employee was seriously injured. Wegman was an additional insured under a policy issued by Admiral Insurance to the other contractor. When the worker sued Wegman, Admiral acknowledged its duty to defend, apparently without reserving any rights, and undertook the control of Wegman’s defense. The Admiral policy provided $1 million in per-occurrence limits of liability. Although it soon became clear that there was a “realistic possibility” that the underlying lawsuit would result in a settlement or judgment in excess of the policy limits, Admiral never provided this information to Wegman.

Shortly before trial, a Wegman executive was chatting about the case with a relative who happened to be an attorney. That relative pointed out the risk of liability in excess of policy limits, and mentioned that it was important for Wegman to notify its excess insurers. But by then it was too late, and the excess insurer denied coverage because notice was untimely. A judgment was entered against Wegman for more than $2 million. Wegman sued Admiral for failing to give sufficient warning of the possibility of an excess judgment so that Wegman could give timely notice to its excess insurer. According to the Seventh Circuit, the key issue was whether this situation—in which there was a risk of judgment in excess of the limit of liability, and where the insurer was paying for and controlling the defense—gave rise to a conflict of interest.

Admiral’s explanation for failing to inform Wegman was ultimately part of its downfall. Because there were other defendants in the underlying lawsuit, there was a good chance that Wegman would not be held jointly liable and that if a jury determined that Wegman was no more than 25% responsible for the worker’s injury, Wegman’s liability would have been capped at 25% of the judgment. Admiral’s trial strategy was not to deny liability, but to downplay Wegman’s responsibility. Admiral, however, never mentioned this litigation gambit to Wegman!

In the Seventh Circuit’s view, this was a textbook example of “gambling with an insured’s money.” And that is a breach of an insurer’s fiduciary duty to its insured.

When a potential conflict of interest arises, the insurer has a duty to notify the insured, regardless of whether the potential conflict relates to a basis for denying coverage, a reservation of rights, or a disconnect between the available limits of coverage and the insured’s potential liability. Once the insured has been informed of the conflict of interest, the insured has the option of hiring a new lawyer whose loyalty will be exclusively to the insured. In reaching its Wegman conclusion, the Seventh Circuit cited the conflict-of-interest rule established by the Illinois Supreme Court’s Peppersdecision. Thus, a potential conflict of interest between an insured and an insurer concerning the conduct of defense is not limited to situations in which the insurer has reserved its rights.

In rejecting Admiral’s arguments, the Seventh Circuit explained that a conflict of interest (1) can arise in any number of situations and (2) does not necessarily mean that the conflicted party—the insurer—has engaged in actual harmful conduct. A conflict of interest that permits an insured to select independent counsel occurs whenever the interests of the insured and the insurer are divergent, which creates a potential for harmful conduct.

The conflict between Admiral and Wegman arose when Admiral learned that a judgment in excess of policy limits was a “non-trivial probability.” When confronted with a conflict of this type, the insurer must inform the insured as soon as possible in order to allow the insured to give timely notice to excess insurers, and to allow the insured to make an informed decision as to whether to select its own counsel or to continue with the defense provided by the insurer.

Looking Beyond Wegman

The fact pattern discussed in Wegman, however, is not the only situation in which there may be a conflict of interest between an insurer and an insured concerning the control of the defense. Under the supplemental duty to defend in a CGL policy, an insured is entitled to be defended until settlements or judgments have been paid out in an amount that equals or exceeds the limits of liability. The cost of defense does not erode the limits of liability, which means that the supplemental duty to defend is of significant economic value to an insured.

The following hypothetical situations (involving an insured covered by a CGL policy with $1 million in per-occurrence and aggregate limits of liability and a supplemental duty to defend) illustrate the economic value of the duty to defend:

• The insured is sued 25 times in one policy year. In each instance, the insurer acknowledges coverage and undertakes to defend the lawsuits. Each lawsuit is dismissed without the insured becoming liable for any settlements or judgments. The total cost of defending these 25 lawsuits is $1.5 million. The limits of liability are completely unimpaired with $1 million in limits of coverage remaining available.
• The insured is a defendant in dozens of lawsuits alleging that one of the products it sells has a defect that has caused bodily injury. The insurer agrees to defend. The lawsuits are consolidated, and the costs of defense accumulate to more than $2.5 million. Eventually, there is a global settlement of the lawsuits for $1 million. Thus, a total of $3.5 million has been paid out on an insurance policy with a $1 million limit of liability.
• The insured is involved in a catastrophic accident for which he was solely responsible and in which four other people were permanently disabled. Each of the victims files a lawsuit and the realistic projected liability exposure to each victim is $1.5 million—or $6 million collectively. Shortly after the complaints are filed (and before there has been any significant discovery or investigation), three of the plaintiffs make a joint offer to settle their claims for a collective $1 million. The insurer and the insured both believe that this is an outstanding settlement opportunity, but the fourth plaintiff wants her day in court. If the insured agrees to this promising settlement opportunity, the limits of liability will be exhausted, the duty to defend will be extinguished, and the insured will be forced to pay for his own defense or rely on his excess insurance to reimburse him for defense costs.

Any insured who has been in the position of defending against either a serious claim or a multitude of smaller claims will understand that the supplemental duty to defend under a CGL policy may have much greater economic value than the limit of liability alone.

In these kinds of situations—when either the potential liability exceeds policy limits or there are multiple claims against the insured such that the economic value of the defense is worth more than the limit of liability—who should be allowed to control the defense of claims against the insured? In prior cases (Conway v. County Casualty Insurance Company [1992] and American Service Insurance Company v. China Ocean Shipping Co. [2010]), Illinois courts concluded that an insurer cannot be excused of any further duty to defend by paying out its remaining limits to the plaintiffs or by depositing its policy limits into court. But this rule does not address the conflict of interest when (1) it is in the insurer’s financial interest to avoid the potentially unlimited expense of defending its insured but (2) it is in the insured’s interest to continue receiving a defense that may have greater financial value than the limits of liability of a primary CGL policy.

Thanks to the Wegman decision, there is now some authority acknowledging that the insured’s right to select independent counsel may exist even if the insurer defends without a reservation of rights. The court recognized that the insurer-insured relationship and the right to control the defense is fraught with potential conflicts. Therefore, it is more important than ever for insureds to protect their interests.

Federal Courts Block Key Provisions of Restrictive Immigration Laws in Georgia and Indiana

Today, a federal judge in Georgia granted a preliminary injunction against key provisions of the state’s immigration law, HB 87, which was slated to take effect Friday. Today’s decision follows another federal court decision handed down last week in Indiana which also blocked key provisions of the state’s new immigration law, SB 590. And these restrictive immigration laws aren’t the only ones caught up in legal battles. Several restrictive immigration laws are being challenged in court with more likely to follow. This week, the Department of Justice (DOJ) requested a meeting with Alabama law enforcement officials to determine whether or not to file suit against their immigration law while civil rights groups threatened to sue South Carolina if Gov. Nikki Haley signs their restrictive bill, S 20, into law.

U.S. District Judge Thomas Thrash, Jr. granted a preliminary injunction today temporarily enjoining two key provisions of the state’s restrictive immigration law, HB 87. In his decision, Judge Thrash argued that Georgia’s law “unlawfully interferes with federal power and authority over immigration matters.”

One provision of Georgia’s law would have made it a crime to “knowingly and willingly transport or harbor illegal immigrants while committing another crime.” The other provision would have authorized “Georgia law enforcement officers to investigate the immigration status of criminal suspects where the officer has probable cause to believe the suspect committed another criminal offense.” The section of Georgia’s law that requires businesses to check the immigration status of new hires, however, remains intact and is expected to be implemented July 1, 2011.

Georgia’s farming industry, meanwhile, is taking a hit as a result of HB 87 with reports of thousands of undocumented farm laborers fleeing the state. One survey estimates that there are already 11,080 vacant farm positions in Georgia that need to be filled. Georgia’s Agribusiness Council said farms have lost $300 million to date and could lose up to $1 billion if they can’t find reliable farm workers.

Last week, U.S. District Judge Sarah Evans Barker blocked two provisions of Indiana’s immigration law, SB 590. Describing the law as “seriously flawed,” Judge Evans found that the law violated the Constitution’s due process, search and seizure provisions and other protections. One provision would have allowed law enforcement to make warrantless arrests of those who have questionable immigration status—including those for whom DHS has issued a detainer or notice of action, which doesn’t necessarily mean they are unlawfully present. The other provision barred the use of consular identification cards as a valid form of ID. The ACLU and National Immigration Law Center (NILC) sued Indiana in May.

In Alabama this week, the DOJ is scheduled to meet with state law enforcement officials to determine whether not Alabama’s immigration law, HB 56, interferes with the federal government’s enforcement of immigration law. Alabama’s law requires local law enforcement to verify the immigration status of those stopped for traffic violations, public schools to determine the immigration status of students, employers to use E-Verify and makes it a crime to knowingly rent to, transport or harbor undocumented immigrants.

Despite the large costs and uphill legal battles in nearly every state that has passed Arizona-inspired immigration laws, some states, like South Carolina, continue attempts to put restrictive immigration laws on the books. Just this week, the ACLU and NILC announced plans to sue South Carolina if Governor Nikki Haley signs S 20, an immigration law which passed last week.

Sadly, the costs of these lawsuits is only one aspect of the numerous costs borne by states where SB 1070-style laws have passed. One can only hope that lawmakers’ appetites for restrictive immigration lawmaking will decrease as fallout continues.

Photo by zimmytws.

NLRB Rules Inflatable Rats May No Longer Constitute Signal Pickets

The Obama National Labor Relations Board continues its movement left by reversing years of cases with regard to the use of giant inflatable rats in picketing situations. For years since unions popularized the use of rats as an emblem of non-union “scab” employers, unions have actively used this symbol in leaflets, in costumes on picket lines, and most popularly, in the form of giant 16-foot tall inflatable balloons meant to advise the public of the presence of a labor dispute. Employers and their attorneys, including those from this law firm, have argued successfully that these inflatable rats constitute “signal” pickets which are subject to the same secondary boycott rules as live pickets. The advantage of such a position is that the inflatable rats therefore have to conform to secondary boycott rules, including a requirement that they be placed in front of or near gates reserved for the picketed company, as well as a requirement that they can only appear when the picketed company is present at the jobsite. All this was recently changed by the Board in the Sheet Metal Workers Local 15, 356 NLRB No. 162 (2011).

In the Sheet Metal Workers Local 15 case, the Board dismissed an unfair labor practice complaint against a union which had stationed an inflatable rat in front of a hospital rather than at a reserved gate in order to discourage the hospital from doing business with non-union contractors. The recent Obama appointees to the Board joined NLRB Chair Liebman in ruling that the inflatable rat did not constitute a signal picket, but instead, constituted symbolic speech which is not subject to secondary boycott rules. NLRB member Brian Hayes dissented from the ruling and stated that the inflatable rat was “unmistakably confrontational and coercive” and was designed to “intimidate by conduct, not to persuade by communication.” The Board made the ruling despite an admission by the union organizer that the union was “picketing.”

The Board determined that the inflatable rat, like the bannering recently found lawful in the 2010 decision of Eliason & Kanuth of Arizona, Inc., did not involve confrontation, was stationery, did not block entrances, and did not result in threats to the public going into the hospital.

The Board’s holding allows the union not only to place the inflatable rats at neutral entrances, but also to place them at locations where the picketed company is absent. Like bannering cases, employers who find themselves the subject of this type of campaign should carefully monitor union actions accompanying the inflatable rat, such as blocking, the use of confrontational activities, as well as traditional patrolling. If and when those activities occur, the use of the rat will not be proscribed, but it may be treated as a signal “picket” and therefore need to conform to the secondary boycott restrictions under federal labor law.

U.S. Supreme Court Upholds Government Ethics Law Over First Amendment Challenge

The Supreme Court of the United States has given much needed guidance on the question of how the First Amendment applies to state ethics laws. The Court’s 8-1 opinion in Nevada Commission on Ethics v. Carrigan held that the First Amendment did not prohibit the enforcement of a Nevada statute requiring members of legislative bodies – including a city or town council – to recuse themselves when voting on a matter where the legislator’s independence could be questioned by a reasonable observer.

In Carrigan, the state ethics commission applied the statute to hold that a member of a town council should have recused himself from voting on a hotel project because a close friend and campaign manager worked as a consultant on the project. The Nevada Supreme Court struck down the statute by finding it to be an overbroad restriction on the council member’s core political speech. The U.S. Supreme Court disagreed, holding that a state could place restrictions on local legislative bodies that prevent members from voting on issues in which they have a personal stake. Relying on historical evidence showing that many states and Congress had imposed such restrictions since the founding, the Court held that this type of ethics statute did not restrict the legislator’s personal speech but instead protected the public position the legislator held. The Court also suggested that restrictions on speech during city or town council meetings would be subject to review only under the less stringent standard for “time, place and manner” restrictions.

The opinion can be found at: http://www.supremecourt.gov/opinions/10pdf/10-568.pdf

European Court of Justice Holds That Disclosure of Leniency Documents to Cartel Victims Seeking Civil Damages Is Subject to National Law

The European Commission (EC) and many other competition authorities around the world have long promoted confidentiality as an essential feature of their highly successful cartel leniency programs.The authorities seek to encourage companies to self-report antitrust violations by promising that the contents of their leniency submissions will be protected from disclosure to civil damages claimants. Absent such guarantees of confidentiality, the authorities have cautioned, at least some companies will not seek leniency or will “hedge” their leniency applications to the detriment of antitrust enforcement efforts.

The Court of Justice of the European Union (ECJ) recently had an opportunity to confront the policy issues surrounding the confidentiality of cartel leniency submissions in Case C-360/09, Pfleiderer v. Bundeskartellamt. The ECJ there held that EU competition law does not preclude Member State competition authorities from disclosing documents received though a leniency program to cartel victims pursuing damages claims if such disclosure would otherwise be required under national law. The ECJ recognized that the potential for such disclosures to undermine the effectiveness of leniency programs was a legitimate concern that must be taken into account when deciding whether to order the disclosure of such documents. However, it held that national courts must, on a case-by-case basis, balance this concern against the need to ensure that national rules do not make it unduly difficult for private parties to recover damages for breaches of EU competition law. The ECJ noted that disclosing documents received from leniency applicants could “make a significant contribution to the maintenance of effective competition in the European Union” by promoting civil damages litigation in Europe.

The decision creates uncertainty for companies considering a leniency application to the EC and/or Member State competition authorities. Presented with an opportunity to issue a definitive decision prohibiting discovery of leniency materials, the ECJ instead opted for a more complicated and context-specific balancing test. Although it remains to be seen how the courts of the Member States (and the ECJ itself) will apply this test, companies considering making a leniency submission in Europe need to consider the risk that their submission will ultimately be made available to civil damages claimants.

The essential facts of the case are as follows: The German Bundeskartellamt (Federal Cartel Office) issued a decision fining three companies and five individuals for participating in a cartel. The Bundeskartellamt received voluntary submissions from some of the defendants under its leniency program. Pfleiderer AG, a customer of the cartel, sought to compel the Bundeskartellamt to disclose its complete case file, including leniency materials, relying on Paragraph 406e of the German Code of Criminal Procedure, which allows the lawyer of “an aggrieved person” (i.e., the victim of a crime or administrative offense) to inspect “documents which may have been submitted to a court or, if a public prosecution were commenced, would have to be submitted,” unless “overriding interests worthy of protection . . . constitute an obstacle thereto.” The Bonn Amtsgericht (District Court) ordered the Bundeskartellamt to disclose documents made available to the Bundeskartellamt under its leniency program and other incriminating materials and evidence in the Bundeskartellamt’s case file, but not confidential business information or internal documents, such as notes on legal discussions or communications within the European Competition Network framework.[1]

However, the Bonn Amtsgericht was concerned that the order could conflict with EU competition rules, and stayed the order pending a request to the ECJ for a preliminary ruling under Art. 267 TFEU (ex 234 EC) on whether EU law would preclude the disclosure order. Under this procedure, national courts may request the ECJ to issue an opinion on the construction of EU law in national court proceedings. Preliminary rulings do not, however, reach the merits of the case.

The ECJ found that nothing in either the EU Treaties or Regulation 1/2003, which sets out the framework for the enforcement of Arts. 101 and 102 TFEU, sets out rules governing the right of access of third parties to documents that were voluntarily submitted to a national competition authority under a national leniency program.

National law governs in the absence of binding EU regulation on a subject, but the Member States must ensure that national laws do not jeopardize the effective application of the EU competition rules. The ECJ acknowledged the important role played by leniency programs in ensuring effective enforcement of EU competition rules and the potential for disclosure of materials provided under such programs to undermine their effectiveness. However, the ECJ found that this concern must be balanced against the need to ensure that individuals harmed by breaches of EU law can obtain effective redress through national legal systems, which could also make a significant contribution to EU competition law enforcement. The ECJ therefore held that national rules affecting the disclosure of leniency materials be no less favorable than those governing similar domestic claims, and that national courts must balance the “respective interests in favor of disclosure of the information and in favor of the protection of that information provided voluntarily by the applicant for leniency” on a case-by-case basis.

The impact of this decision on the effectiveness of government enforcement and the claims of civil litigants will be watched closely over the coming months as the respective courts, competition authorities, and impacted companies seek either to apply the balancing test adopted by the ECJ or to predict how that balancing test will be applied in practice by courts of the Member States. For now, the importance of the court’s ruling is already evident with respect to the following issues:

• Although the ECJ recognized the interest in preserving the confidentiality of leniency materials, it refused to give that interest preclusive force.
• The ECJ’s ruling raises as many questions as it answers because it fails to give specific guidance on what factors national courts should take into account. For example, is it relevant whether national law treats competition authority decisions as binding proof of an infringement?
• While the ability to require national competition authorities to provide third parties with access to their case files varies tremendously from one Member State to another, the ECJ’s decision strengthens the legal position of those individuals and companies asking for access to leniency applications and other sensitive documents.
• There is a risk that the ruling is going to affect access to documents in the EC’s case files. The EC relies on its interest in encouraging leniency applications through the promise of confidentiality as the main argument to block access to the EC’s case file under the EU transparency rules (see, for instance, Case T-437/08 CDC v. Commission). The ECJ’s ruling makes clear that this interest is by itself not sufficient to justify denying access to documents sought in civil damages actions. It will be interesting to see, therefore, how the ECJ deals with a similar request for access to the EC’s files in the CDC case currently pending before the General Court.
• The EC so far has issued no binding EU legislation in this area, even though the legal community has expressed a need to safeguard leniency applications. Will this decision spur a legislative response?
• This decision could also impact civil litigation outside the EU. In the United States, courts have evaluated civil plaintiffs’ demands for access to EC leniency applications in much the same way suggested by the ECJ-by balancing the competing interests of the civil plaintiffs and the specific facts of the case in the U.S. against the interests that competition authorities have in maintaining confidentiality and encouraging companies to self-report misconduct. U.S. decisions on this issue to date have been mixed, but more often than not U.S. courts have not required production of foreign leniency statements to civil litigants in the United States. The ECJ’s decision may shift the direction of this trend in the United States, as it could be read to suggest that the confidentiality interests of competition authorities in the EU are not as strong as some of the EC regulations may lead one to believe.
• The ECJ’s decision could also lead to pressure to change the manner in which leniency applications are filed with the EC and the various Member States so as not to require written leniency applications that could be at risk for disclosure to the plaintiffs in follow-on civil damages litigation.
• Private damages actions for anticompetitive conduct in the EU are gaining more significance. The EC has recently started a consultation process as the first step in preparing a guidance notice for courts in the EU Member States for quantifying harm in actions for monetary damages for violations of the EU’s competition laws.

Ninth Circuit Rejects Consumer Antitrust Challenge To Cable Television Bundling

The Ninth Circuit recently affirmed the dismissal of a consumer class action challenging the television programming industry’s practice of exclusively offering multi-channel cable packages. Brantley v. NBC Universal, Inc. No. 09-56785 (9th Cir. June 3, 2011). In so holding, the Court affirmed that allegations regarding widespread harm to consumers (either through increased prices, reduced choice, or both) — without some separate, cognizable injury to competition — fail to state a Section 1, Sherman Act claim.

Brantley involved a putative nationwide class of consumers suing two groups of industry participants: (1) programmers in the upstream market who sell television channels and programs to distributors; and (2) distributors in the downstream retail market who sell the programming to consumers. Plaintiffs alleged that programmers exploit market power derived from “must-have,” high-demand channels by bundling or tying them with less desirable, low-demand channels for sale to distributors, forcing distributors in turn to sell only higher-priced, multi-channel packages to consumers. Plaintiffs alleged that in the absence of such bundling, distributors would offer “a la carte programming” to meet consumer demand, thereby allowing consumers to purchase only those channels they wish to watch. Defendants’ vertical restraints thereby reduce consumer choice, raise prices, and limit competition between distributors. Indeed, plaintiffs cited to third party findings (including from the FCC) that the average cable subscriber is forced to pay for 85 channels that he does not watch to obtain the 16 he does, and that defendants’ bundling results in a net consumer welfare loss of $100 million.

In affirming dismissal, the Ninth Circuit held that given plaintiffs’ conscious decision not to allege any foreclosure of competitors, plaintiffs could not plead the requisite injury to competition.[1] Courts have identified horizontal collusion and foreclosure of rivals as the two types of injury to competition sufficient to state a Section 1 claim. While vertical restraints may result in foreclosure of rivals, they do not necessarily do so. The two types of vertical restraints implicated here — tying and bundling — may result in such injury to competition if: (1) for tying, the seller leverages its market power in the tying product to exclude other sellers of the tied product; or (2) for bundling, the bundler is able to use discounting, for example, to exclude rivals who do not sell as great a number of product lines. Applied to the facts of this case, the Court found neither allegations that programmers’ practice of tying “must-have” with low-demand channels excluded other sellers of low-demand channels from the market, nor allegations that defendants’ bundling excluded competitors from either the upstream or downstream markets.

Plaintiffs urged the Court to adopt an alternative theory of injury to competition. That is, defendants’ conduct harms consumers by: (1) limiting the manner in which distributors compete with one another; (2) reducing consumer choice; and (3) increasing prices. The Court, however, rejected each argument in turn. Relying on Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 US 877 (2007), it explained that limitations on distributors’ ability to compete, without proof of competitive harm, fails to state an antitrust claim. With respect to harm to consumers, it explained that price increases and reduced choice are perfectly consistent with a free, competitive market, and, without more, fail to state an antitrust claim. While the alleged harm to consumers may establish antitrust injury, it does not establish any cognizable injury to competition. Even if consumers are forced to purchase multi-channel packages that include unwanted channels for a higher price, the antitrust laws do not interfere with the ability of businesses to choose the manner in which they do business, absent an injury to competition.

In Secret Rebate Case, If It Walks Like A Duck, Allegations That It Will Also Quack Are Plausible

On May 24, 2011, United States District Court, Central District of California, denied a motion to dismiss allegations of a “price squeeze” implemented through the granting of secret rebates to the plaintiff’s customers, finding that the complaint stated a plausible claim under California Business and Professions Code section 17045. Drawing on “judicial experience and common sense”, District Judge Dean D. Pregerson held that the allegations of the first amended complaint are sufficiently “plausible” on their face to withstand challenges under Bell Atl. Corp. v. Twombly, 550 U.S. 544, (2007). Western Pacific Kraft, Inc. v. Duro Bag Manufacturing Company, Case No. CV 10-06017 DDP (SSx), 5/24/11.

Plaintiff Western Pacific Kraft, Inc. (“WPK”) is a wholesaler of paper bag products to smaller wholesale distributors. Defendant Duro Bag Manufacturing Company (“Duro”) is the largest manufacturer of paper bags in the country, and the largest seller of paper bags in California. Duro was WPK’s supplier, and also its principal competitor. For twenty years or more, Duro would reduce its prices to WPK, where WPK informed Duro that it had to meet competition from competing sources.

On October 9, 2010, however, Duro informed WPK that it would no longer do so. Instead, it raised the prices it charged WPK, while at the same time lowering the prices it charged WPK’s customers. WPK only became aware of the discriminatory pricing when asked by its existing customers to meet the competition from Duro’s lower prices.

WPK filed a complaint in federal court, alleging violations of California Business and Professions Code section 17045. Section 17045 has been a feature of California law since 1913, and was added to the California Unfair Practices Act in 1941. It prohibits the “secret payment” of rebates and unearned discounts, or secretly extending to certain purchasers special services or privileges not extended to all purchasers buying on like terms and conditions. However, additional elements of a violation are that there also be (a) injury to a competitor, and (c) a showing that such payment tends to destroy competition. It has been held to be applicable to competition at either the seller or the purchaser level, or both. ABC International Traders, Inc. v. Matsushita Elec. Corp., 14 Cal. 4th 1247 (1997). In Diesel Elec. Sales & Serv., Inc. v. Marco Marine San Diego, Inc., 16 Cal. App. 4th 202 (1993), the Court of Appeal, Fourth District, held that Section 17045 must be “liberally construed”.

The first amended complaint alleged that as a result of the price discriminations, which were unknown to WPK, Duro’s course of conduct “effectively put it out of business”. It alleged that Duro had injured WPK and destroyed competition by providing secret rebates, refunds, or discounts to its customers.

As is much in vogue, Duro moved to dismiss, citing Twombly, and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). In discussing the applicable legal standards, the District Court recited the litany of quotes from Twombly that, while a complaint need not include “detailed factual allegations”, it must offer “more than an unadorned, the–defendant–unlawfully–harmed–me accusation.” Iqbal at 1949. While “conclusory allegations”, “labels and conclusions”, including “formulaic recitation of the elements,” or “naked assertions” are insufficient, the court will assume the veracity of “well-pleaded factual allegations”. Because this is somewhat of a subjective exercise, courts are to draw on their “judicial experience and common sense” in evaluating the two schools of thought. When is an allegation “well-pleaded” and “factual”, as opposed to being a “legal conclusion”? This may be difficult to parse prior to at least initial discovery.

Nevertheless, the court is to use its “common sense”. To paraphrase Lewis Carroll’s famous logical fallacy of officers marching, where at least one of the officers “waddles”, and has been heard to even utter the phrase, “quack”, a degree of common sense may tell us whether the allegation is, in context, “plausible on its face”. Is one of the officers really a duck?

The central attack by Duro was that the allegations of the first amended complaint do not plead sufficient factual allegations to show that Duro’s price discriminations were “secret”. Duro argues that this is so because it advised WPK that it would no longer grant “meeting competition” price reductions. However, as the court reasoned, WPK alleged a “price squeeze” in which Duro simultaneously raised its net prices to WPK, while at the same time lowering net prices charged to its former customers. The court held that on a motion to dismiss on Twombly grounds, the allegations were sufficient that the prices attributable to secret rebates were “secret”. This was on the basis of the allegations that the rebates were never disclosed to WPK. Here we have a “hint” of a possible concerted refusal to deal.

Duro also contended that the first amended complaint failed to establish that WPK could have been harmed by the secret rebates, assuming they were “secret” at all. The court disagreed, as a fair reading of the first amended complaint was that as a result of the price discriminations and rebates, “virtually all of the plaintiff WPK’s major customers began buying paper products directly from defendant Duro”. Thus, it alleged that as a result of the secret discriminatory pricing, it had been effectively run out of business. Perhaps not surprisingly, and as it would have been endorsed by Lewis Carroll, these allegations were sufficient to satisfy the three prongs of 17045. First, the price discriminations were “secret”. Second, by effectively putting WPK out of business, WPK was harmed as a competitor. Third, the elimination of WPK as a competitor would have reduced consumer search opportunities, and thus would have contracted the available consumer choices, and thereby allocatively inefficiently injuring the competitive process.

The motion to dismiss, interestingly, did not attack the first amended complaint on DuPont Cellophane grounds. It did not argue that paper bags, like cellophane, may have been substitutable with an array of packaging materials, and that “paper bags” or “paper bags in California”, were an insufficient allegation of a properly defined relevant market for an evaluation whether the allegations of antitrust injury were sufficiently “plausible”. See United States v. E.I. DuPont de Nemours & Co., 353 U.S. 586 (1957). Thus, the court has held that through an application of “common sense” as determined by the district court, there can be life after Twombly. While further developments could determine that we have but an impersonation of a duck, the allegations are sufficient to allow the connection between the waddles, the quacks, and a judicial determination that in fact, we are dealing with something like a duck.

FEDEX Driver Found To Be Employee – Not Independent Contractor

Under federal and state wage and hour law, a company must pay its employees wages for all hours worked, maintain records of hours worked and wages paid, and pay overtime for non-exempt employees for hours they work over 40 in a workweek.  A company need not maintain the records on or pay overtime to independent contractors. Nor must a company withhold for income tax or payments or contribute to Social Security, Medicaid, Medicare, unemployment compensation, workers’ compensation or any other benefit program with true independent contractors. With this real cost savings, some companies attempt to classify certain parts of their workforce as independent contractors. That can lead to trouble when those individuals file suit seeking to have themselves reclassified as employees. This happened recently to a well-known nationwide delivery company in Anfinson v. FedEx Ground, 159 Wn. App. 35 (2010).

In Anfinson, pickup and delivery drivers working for FedEx filed a class action on behalf of 320 drivers seeking four years of wages, including overtime, 12% prejudgment interest, double damages and attorneys’ fees. FedEx, which has faced similar challenges nationwide, fought the delivery drivers and won at trial. Its victory did not last. On appeal the Anfinson Court  of Appeals reversed the jury verdict on a technical basis: the legal instructions given to the jury as to the definition of “employer” were incorrect. FedEx submitted that an “employee” is one who has the right to control the details of the performance of the work – which clearly the drivers had – versus the drivers’ definition which was that an “employee” is any person acting directly or indirectly in the interest of the company – which clearly the drivers did. Thus, whatever definition the appellate court adopted would determine the outcome. The Anfinson court adopted the drivers’ definition that whether a worker is an employee or independent contractor is a matter of the “economic realities.” If a worker is dependent on the business to which he renders service, he is an employee. The Anfinson court found that FedEx’s proposed definition – a right to control – is for tort liability such as a car crash or other employee inflicted injury. The “economic realities” test analyzes the permanence of the working relationship, the degree of skill the work entails, the worker’s investment in equipment or materials, the worker’s opportunity for profit or loss, the degree of control over the worker, and whether the service rendered by the worker is integral to the company’s business. A classic example of an independent contractor is the plumber who purchases his tools, has a high degree of skill, works for various customers, can make or lose money based on how much time he invests in the job, works on the pipes without the customer’s direction, and is not integral to the business’ operations.

In an interesting twist, FedEx pointed out that the drivers had asserted the common law right to control test in order to certify the class and then changed its position on the proper employee test only a few months before trial. FedEx asserted that this change from right to control to economic realities was inconsistent and that the doctrine of judicial estoppel precluded them from challenging the jury instruction. The Anfinson court rejected this argument, noting that parties can change their legal positions as long as the trial court does not.

There are several takeaways from Anfinson.

First, companies must be cognizant that Washington’s public policy strongly favors finding that workers are employees so that they are paid overtime, have withholdings made, ensure payment to governmental insurance programs, and receive benefits. The proverbial cards are stacked against a company that attempts to classify its workers as independent contractors. Even if the company and the worker believe that there is an independent contractor relationship, the Anfinson court makes it clear that later, the worker (and a class of hundreds) can seek to reclassify that status and expose the company to claims of overtime, double damages, attorneys’ fees and prejudgment interest. The Anfinson court also makes it clear that by adopting the economic realities test, workers will rarely be found to be independent contractors unless they meet the strict standard of the economic realities. The Anfinson court ignored other judicial decisions in sister states which dealt directly with FedEx drivers in trailblazing its own adoption of the federal economic realities test. Therefore, the ultimate takeaway from Anfinson is that employers would be in a better position to protect themselves if, in most cases, they classified their workers as employees.

Global Warming and Droughts Not New Information; Project Opponents Must Fairly Present Claims Before Filing CEQA Lawsuit

On May 19, 2011, the California Court of Appeal for the Fourth Appellate District upheld an Addendum to an Environmental Impact Report (“EIR Addendum”) over claims that the lead agency failed to follow statutory procedures for adopting a Water Supply Assessment (“WSA”) and that a supplemental EIR (“SEIR”) was required to analyze “new” environmental impacts related to drought and global warming.

Citizens for Responsible Equitable Environmental Development v. City of San Diego involved an Addendum to an EIR initially prepared for a 664-acre master planned community in the City of San Diego in 1994. The EIR Addendum addressed environmental impacts from the last phase of the master planned community — a 1,500-unit multi-family project (“Project”).

WSA Approval Procedure

Before the lead agency approved the Project, the City’s water department prepared a WSA, which was then approved by the City Council at the Project’s public hearing through a resolution certifying the EIR Addendum. The resolution did not specifically reference the WSA. The Citizens for Responsible Equitable Environmental Development (“CREED”) argued the California Water Code[1] required the City Council, acting as the water department’s legislative body, to approve the WSA in advance at a separate hearing because the Legislature deemed the coordination of water supply planning and land use planning too important to adopt as just an ordinary technical report supporting the EIR Addendum’s water supply analysis.

The Court of Appeal disagreed. Unlike many other jurisdictions that have a separate water agency governing board, the City’s water department is governed by the same entity (the City Council) as the lead agency; thus no separate hearing or resolution was required. The court held that requiring the same legislative body to hold two different hearings on the matter, or approve a WSA and CEQA document in different motions, would not enhance public review or local agency decision-making. Instead, it affirmed that the “purpose of CEQA is to inform government decision-makers and their constituency of the consequences of a given project, not to derail it in a sea of administrative hearings and paperwork.” (Long Beach Sav. & Loan Assn. v. Long Beach Redevelopment Agency (1986) 188 Cal. App. 3d 249, 263.)

Drought Not New Information

The City Council adopted the project despite then Governor Schwarzenegger’s drought declaration and a notice from the Department of Water Resources that it would be reducing water deliveries to the City due to the statewide drought and a separate court order to reduce water pumping from the Bay/Delta area to protect endangered Delta Smelt. CREED argued that the drought declaration and notice of reduced water deliveries occurred after the WSA was completed and therefore was the type of “new” information that required the City to process a SEIR, instead of an EIR Addendum.

The court dismissed CREED’s claim finding that CREED failed to satisfy its burden of proof to address all the information regarding available water supply, including the WSA’s references to water supply during multiple dry years. The court affirmed that it was proper for the City to rely on testimony from the City’s planning staff during the public hearings that the drought was only temporary and the City had adequate water supply to serve the project in the long term.

Global Warming Not New Information

CREED argued that the 1994 EIR contained no references to global warming and that the passage of state global warming laws, such as AB 32 and SB 97, revealed new information about the scientific link between global warming and human development activities. The court dismissed this claim because lead agencies may not require preparation of a SEIR unless “[n]ew information, which was not known and could not have been known at the time of [EIR] was certified as complete, becomes available.” (Cal. Pub. Res. Code § 21167(c).) The court found that by the time the EIR was certified in 1994, there was enough information available from various executive orders, international scientific panels, and the National Academy of Sciences demonstrating the link between global warming and human activities that an impact analysis could have been included in the 1994 EIR. Because the statute of limitations on the 1994 EIR had long since passed, CREED was time-barred from raising those issues in a legal challenge against the 2009 EIR Addendum, where public policy favors finality. The evidence that there was sufficient information about global warming in 1994 came from the City of Los Angeles’ 1990 lawsuit against the National Highway Safety Administration[2] and the U.S. Supreme Court opinion in Massachusetts v. EPA (2007) 549 U.S. 497, where the high court summarized the history of official government actions related to global warming from the 1970s to 2007.

Failure to Exhaust Administrative Remedies

During the six years the City reviewed the Project, CREED did not submit a comment opposing the Project when the Notice of Preparation was issued, the Draft EIR Addendum was circulated, community outreach hearings were held, the Planning Commission’s hearing was held or participate in the City Council hearings for the Project. Instead, hours before the City Council was scheduled to review the Project in a January 20, 2009 public hearing, CREED attempted to preserve its right to sue the Project approval in court by filing with the City Clerk’s office a two page letter with general allegations that the Project violated CEQA and referring to an attached DVD with 5,000 pages of general information about water supply, drought, global warming, and copies of previous EIRs around the state discussing water supply and global warming issues. The City Council postponed the hearing until February 17, 2009 for other reasons and only later discovered CREED had submitted the letter. During the month between the two letters, the Project’s air quality consultant provided a letter analyzing the Project’s greenhouse gas impacts.

Then, on the morning of the February 17, 2009 hearing, CREED filed a second two-page letter with an attached DVD with several thousand more general documents about global warming and droughts. CREED did not participate in the City Council’s hearing to elaborate on its comments. When the City refused to include the second DVD in the administrative record, the trial court judge denied CREED’s Motion to Augment the Record, finding that under the totality of the circumstances, CREED failed to fairly present its arguments to the City Council in a manner that the City could reasonably be expected to respond. CREED did not appeal the motion.

The CEQA statute prohibits judicial review “unless, the alleged grounds for noncompliance with [CEQA] were presented to the public agency orally or in writing by any person during the public comment period provided by this division or prior to the close of the public hearing…” (Cal. Pub. Res. Code § 21177(a).) Nevertheless, the Court of Appeals took the next step and found that CREED’s January 20, 2009 letter with 5,000 pages of exhibits was insufficient to exhaust the administrative remedies available to CREED even though it was submitted a month in advance of the City Council’s final hearing on the Project.

The court noted that “To advance the exhaustion doctrine’s purpose ‘[t]he “exact issue” must have been presented to the administrative agency….’ [Citation omitted] and “[T]he objections must be sufficiently specific so that the agency has the opportunity to evaluate and respond to them.” (Sierra Club v. City of Orange (2008) 163 Cal.App.4th, 523, 535-536.) The court held that CREED failed to satisfy the exhaustion doctrine because its letters only contain general, unelaborated objections. The letters did not contain the term “drought” or object to the content of the WSA. The letters made only general, unelaborated objections such as, “global climate change has been raised as a significant environmental issue that has been frequently analyzed in current environmental documents” and the “project will cause direct and indirect greenhouse-gas emissions that, when considered cumulatively, are significant.”

The court affirmed that “The City cannot be expected to pore through thousands of documents to find something that arguably supports CREED’s belief the project should not go forward. Additionally, CREED did not appear at either CEQA hearing to elaborate its position. It appears from CREED’s haphazard approach that its sole intent was to preserve an appeal.” The court noted that if Petitioners were not required to give specific objections so the agency has the opportunity to evaluate and respond to them, every project approval would be subject to litigation on new or expanded issues.

Significant Conclusions from the Case

The case is significant for a number of reasons.

First, for a developer or lead agency that wants to amend entitlements to respond to market changes, but is concerned that the state’s new global warming laws will automatically require an exhaustive SEIR, this case affirms that holders of post-1994 entitlements can likely amend their entitlements without an SEIR. The expedited EIR Addendum procedure is available where development project changes do not otherwise trigger new or more severe unmitigated environmental impacts compared to those disclosed in the original EIR, even where the original EIR contains no information on the project’s global warming impacts. With the passage of state and local legislation (SB 1185, AB 333, and possibly SB 208 later this year), the “life” of projects with vesting tentative maps, tentative maps, and parcel maps has been extended due to the economic downturn. There are likely more older, unfinished development projects whose build-out can be facilitated with an EIR Addendum.

Second, the opinion may improve the quality of the debate at public hearings on development projects because it discourages “stealth” legal attacks and encourages a clear discussion of the merits of a project. Project opponents who wait to the last day to submit a long list of CEQA based project objections risk losing their right to appeal on those grounds if the information is not presented in an organized manner that gives the lead agency a fair opportunity to respond. Even project opponents who submit documents a month in advance of a public hearing must be cautious to present the information in an organized manner that identifies the exact issue so the lead agency has a fair opportunity to respond to the specific issues raised. Furthermore, the risk of courts finding that a project opponent failed to exhaust remedies is likely greater where the project opponent is represented by legal counsel and fails to indentify the specific issues that are the basis for its claims. CEQA attorneys will therefore now need to identify carefully what specific evidence support their legal claims against a project.

Third, it may improve the quality of the response from lead agencies, resulting in better development projects. When specific objections to a project are made, the lead agency can better decide whether those objections have merit and either make necessary changes in the project or determine if there is other substantial evidence to rebut the claim. Where the objections do not have merit, the lead agency is assured it can rely on expert opinion from its planning staff during a public hearing.

Fourth, WSA findings that address the availability of water during multiple dry years can be used to reject claims that drought conditions trigger the need to prepare an SEIR.

Fifth, cities and counties that govern water supply departments without a separate governing board can approve a project’s WSA without conducting duplicative hearings or special approvals for the WSA. The WSA can be treated like any other technical report supporting a CEQA document.

Finally, the case affirms that CEQA petitioners who repeat the evidence in opposition to a project fail to satisfy their legal burden of proof when they do not address all the evidence in the record supporting the lead agency’s decisions. The court is not a forum to revisit debate over a project’s public policy merits, but instead is a forum to determine if the lead agency had any substantial evidence to support its findings.

Supreme Court Limits Bankruptcy Court Jurisdiction – Stern v. Marshall

In a decision that may create serious problems for bankruptcy case administration, the Supreme Court this morning invalidated part of the Bankruptcy Court jurisdictional scheme. Stern v. Marshall, No. 10-179, 564 U.S. ___ (June 23, 2011). Specifically, the Court held that the Bankruptcy Courts cannot issue final judgments on garden variety state law claims that are asserted as counterclaims by the debtor or trustee against creditors who have filed proofs of claim in the bankruptcy case.

Thus, while the Bankruptcy Court could issue a final order resolving the creditor’s claim against the estate, it could issue only a proposed ruling with respect to the counterclaim. Final judgment on the counterclaim could only be issued by the District Judge after de novo review of any matters to which a party objects. See 28 U.S.C. § 157(c).

In a five-to-four opinion by Chief Justice Roberts, the Court affirmed the Ninth Circuit Court of Appeals decision that had reversed an $88 million judgment in favor of Vickie Lynn Marshall (a/k/a Anna Nicole Smith) against E. Pierce Marshall for tortious interference with Vickie’s expectancy of a gift from her late husband J. Howard Marshall, Pierce’s father and one of the richest people in Texas.

The Court’s decision was based on constitutional principles defining the limits of Article III of the U.S. Constitution. Thus, it is likely to have implications that reach far beyond the narrow issue resolved in the instant case. The majority relies on the “public rights” doctrine to define the class of judicial matters that can be resolved by non-Article III tribunals like the Bankruptcy Courts. However, it adopts a narrower view of what constitutes “public rights” than was generally understood prior to this decision.

In addition, although earlier cases could be read to adopt a flexible pragmatic approach to Article III that focused only on significant threats to the Judiciary, Chief Justice Roberts takes a very firm approach, stating, “We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.” Of particular interest, this case focuses on the nature of the Bankruptcy Judge as a non-Article III judge (i.e., no life tenure and no salary protection) and rejects the view that the Bankruptcy Courts are merely “adjuncts” of the Article III District Courts. Note that the “adjunct” construct was one of the foundations of the 1984 Act’s post-Northern Pipeline jurisdictional fix that created the core/non-core distinction. See Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).

The narrow holding is that Bankruptcy Judges, as non-Article III judges, lack constitutional authority to hear and “determine” counterclaims to proofs of claim if the counterclaim involves issues that are not essential to the allowance or disallowance of the claim. Here, although the counterclaim was a compulsory counterclaim, it was a garden variety state law tort claim and did not constitute a defense to the proof of claim. Contrast this with the preference claim involved in Langenkamp v. Culp, 498 U.S. 42 (1990). The receipt of such an unreturned preference is a bar to the allowance of the claim. See 11 U.S.C. 502(d). The opinion also distinguishes Langenkamp (and the earlier pre-Code case of Katchen v. Landy, 382 U.S. 323 (1966)) on the ground that the preference counterclaims in those cases were created by federal bankruptcy law. It is unclear whether that reference establishes a second condition to Bankruptcy Court resolution of counterclaims — i.e., that the counterclaim be based on bankruptcy law in addition to its resolution being essential to claim allowance.

The Court begins its opinion by interpreting the “core” jurisdictional grant of 28 U.S.C. 157(b)(1). The Court finds the provision ambiguous, but rejects the view of the Ninth Circuit that the Bankruptcy Court’s jurisdiction to determine matters involves a two-step process of deciding both whether the matter is “core” and whether it “arises under” the Bankruptcy Code or “arises in” the bankruptcy case. The Court states that such a view incorrectly assumes there are “core” matters that are merely “related to” the bankruptcy case (and which cannot be “determined” by the Bankruptcy Court). The Court states that core proceedings are those that arise in a bankruptcy case or arise under bankruptcy law and that noncore is synonymous with “related.” Thus, since counterclaims to proofs of claim are listed as core in the statute, the Bankruptcy Court has statutory authority to enter final judgment. (Note that the opinion does not explain how a tort claim that arose before the bankruptcy and that was based on non-bankruptcy state law could be a claim “arising in” the bankruptcy case or “arising under” bankruptcy law. Possibly the fact that procedurally it arises as a counterclaim is sufficient to convert a “related” claim into an “arising in” or “arising under” claim. Cf. Langenkamp.)

The Court also rejects the argument that the personal injury tort provision of 28 U.S.C. 157(b)(5) deprives the Bankruptcy Court of jurisdiction to resolve the counterclaim. The Court holds that section 157(b)(5) is not jurisdictional and thus the objection was waived.

Although the statute authorized the Bankruptcy Court to determine the counterclaim, the Court holds that grant violates Article III. The Court rejects the view that the Article III problem was resolved by placing the Bankruptcy Judges in the judicial branch as an “adjunct” to the District Court. The Court focuses on the liberty aspect of Article III and its requirement of judges who are protected by life tenure and salary guarantees. After outlining the extensive jurisdiction of Bankruptcy Judges over matters at law and in equity and their power to issue enforceable orders, the Court states “a court exercising such broad powers is no mere adjunct of anyone.”

The Court then uses the “public rights” doctrine as the test for which matters can be delegated to a non-Article III tribunal. Although Granfinanciera v. Nordberg, 492 U.S. 33 (1989), suggested a balancing test that considered both how closely a matter was related to a federal scheme and the degree of District Court supervision (a test that arguably supports the Bankruptcy Court’s entry of a judgment on a compulsory counterclaim), the Court settles on a new test for public rights limited to “cases in which resolution of the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency’s authority.” The state common law tort counterclaim asserted here does not meet that test. Instead, adjudication of this claim “involves the most prototypical exercise of judicial power.”

Interpreted in the most restrictive fashion, this ruling might create serious problems for case administration. In proof of claim matters, the Bankruptcy Court would be limited to proposed findings on most counterclaims, with the District Court entering the final order after de novo review. Query whether the majority’s limited view of “public rights” would prevent the Bankruptcy Judge from entering final judgment in other disputes that involve the non-bankruptcy rights of non-debtor parties. Bankruptcy Courts regularly resolve inter-creditor disputes and resolve disputes regarding the non-bankruptcy rights of parties to the bankruptcy case in contexts other than claim allowance. Whether the Bankruptcy Court’s exercise of this power is constitutional may turn on how broadly the courts interpret the “cases in which resolution of the claim at issue derives from a federal regulatory scheme” prong of the “public rights” test.

Did I Really Sign That? When Signed Affidavits Are Altered Before Filing

Most law firm clients would assume that an affidavit, once signed, would remain unchanged when it is filed in court. Recently, however, certain affiants in Cook County would have been perfectly justified in asking, “Did I really sign that?”

This issue was brought to light by General Administrative Order No. 2011-01 (GAO 2011-01), entered in March 2011 by Judge Moshe Jacobius in the Chancery Division of the Circuit Court of Cook County. GAO 2011-01 illustrates the importance of a close working relationship between law firms and their clients. In particular, clients must know and understand the content of any affidavit they sign. Similarly, if an affidavit that was previously executed is changed, a law firm must make its client aware of the alteration, have the client approve it and execute the affidavit after the alteration is made. As can be seen from the synopsis that follows, failure to follow this protocol can have dire results for both the client and the attorney.

The entry of GAO 2011-01 came about because a well-known Chicago law firm that specializes in mortgage foreclosures informed Judge Jacobius that in certain instances it had filed affidavits that varied from what the affiant actually signed. According to GAO 2011-01, employees of the law firm would remove the signature page from the affidavit as executed by the affiant. They would then make changes to the document—by adding attorneys’ fees, insurance costs and preservation costs, among other things—and reaffix the original signature page to the altered affidavit. Upon receiving this information, Judge Jacobius felt he had to take steps to protect the integrity of the court, the Illinois Mortgage Foreclosure Law, the Illinois Code of Civil Procedure and the Illinois Supreme Court Rules. Because there were approximately 1,700 cases with questionable affidavits, he ordered specific procedures designed to ensure that the affidavits were true and correct when signed.

First, the court mandated a stay of all the cases in which the offending law firm was involved. After that, the court required the firm to file the following motions, at a minimum, in each of the cases:

1. A motion to vacate judgment of foreclosure and sale;
2. A motion for leave to file an amended affidavit;
3. A motion to vacate judicial sale (if the sale had occurred);
4. A motion to lift the stay, which at a minimum must verify that the most recent affidavit filed with the court was true and correct and based on the personal knowledge of the affiant;
5. A motion to vacate confirmation of sale, if applicable.

Needless to say, the procedures mandated by GAO 2011-01 were time consuming and created a significant hardship for the law firm and its clients. GAO 2011-01 also sent a clear message to other law firms in Cook County: in addition to damaging a law firm’s reputation with its peers and the court, failure to properly prepare and execute affidavits can negatively affect an affiant’s credibility and give the court a basis to void or vacate a judgment. While it may seem like a needless and ministerial task, a client/affiant and its law firm should always review and re-sign an affidavit that has been modified since it was originally executed.

Collision Occurs Between Copyrights and Misappropriation in Electronic News Media Space

Despite winning in court to protect valuable copyrights, Wall Street firms are unable to protect their valuable trading recommendations as federal and state laws collide in Barclays Capital Inc. v. Theflyonthewall.com, Inc.¹ (pending any potential review on appeal). The electronic news media continues to lead the charge, and now the walls of exclusivity are beginning to crumble for these respected recommendations.

Wall Street firms have for long provided detailed research reports and trading recommendations—exclusively to firm customers—to drive order flow with the recommending firm, thereby generating commission revenue. Storming the walls, however, are those in the electronic news media blasting the once-exclusive information to all corners of the Internet, immediately upon its release by Wall Street. But for Wall Street, this widespread, uncontrolled dissemination has cut into profitability and has wreaked havoc on traditional business models for market research.

Although the electronic news media scored a fresh victory, Wall Street has not suffered a devastating loss. The copyrightable aspects of Wall Street research—the published models, insights, and facts, for example, are often more valuable to institutional customers than the basic recommendation itself (e.g., Buy, Sell, or Hold). These copyrightable aspects, of course, remain protected by federal copyright law.² Outside the realm of finance, however, this case may signal much broader implications for any business with both feet in the Information Age.

The appeals court received this case after the District Court for the Southern District of New York granted injunctive relief to plaintiffs Barclays Capital Inc.; Merrill Lynch; Pierce, Fenner & Smith Inc.; and Morgan Stanley & Co. Inc. (“the Firms”), which prohibited Theflyonthewall.com, Inc. (“Fly”) from publishing information about the Firms’ recommendations, within certain parameters.³ The issue presented on appeal was whether Fly could be enjoined from publishing “news,” i.e., bare facts, that the Firms [had] made certain recommendations.⁴ The appeals court vacated the injunction, paving the way for the electronic news media to publish Wall Street recommendations far and wide, and of course, to direct profits to publishers and sponsors, away from the recommending firm. In the wake of this decision, Wall Street firms must now reconsider business models built upon the value of their proprietary information.

Without further recourse from federal copyright law, which does not protect bare “facts” alone, the Firms sought relief under New York tort law through the doctrine of “hot news” misappropriation of information. The appeals court was bound to consider, however, whether federal copyright law preempted the applicability of state law in these circumstances. To survive preemption, Firms were required to prove that Fly’s use of the information constitutes “free riding” on the Firms’ efforts.⁵ By concluding that there was no “free riding,” the appeals court significantly narrowed the circumstances in which similar state law misappropriation claims can survive preemption by federal copyright law. Accordingly, this case signals a broader victory for electronic publishers hoping to widely distribute, and to profit from, factual information created by others.

In determining whether Fly engaged in “free riding,” the court looked to precedent in National Basketball Association v. Motorola, Inc.⁶ (“the NBA Case”). In the NBA Case, the NBA collected and broadcast information, based on live sports games, over a communication network; and likewise, a competitor collected and broadcast its own information, based on live sports games, over a competing communication network. The appeals court noted that, in the NBA Case, there was no free riding, in part, because Motorola was bearing its own costs of collecting factual information.

In the present case, the appeals court’s ultimate inquiry was whether any of the Firms’ products enabled Fly “to produce a directly competitive product for less money because it has lower costs.”⁷ Extending the reasoning from the NBA Case to cover Fly’s actions, the appeals court concluded that that there was no “free riding” because approximately half of Fly’s twenty-eight employees were involved in the collection and distribution of Firms’ recommendations.⁸ According to the appeals court, Fly “is reporting financial news—factual information on Firm Recommendations—through a substantial organizational effort.”⁹

The appeals court, however, did not consider it important that the Firms had incurred substantial costs in research and analysis (i.e., acquiring and creating information) as the basis for their recommendations, whereas Fly’s only costs were in collecting and reporting the recommendations. The appeals court discarded the relevance of these basis costs—even though they provide an arguable distinction over the NBA Case—stating that although the Firms “may be ‘acquiring material’ in the course of preparing their reports . . . that is not the focus of this lawsuit. In pressing a ‘hot news’ claim against [Fly], [Firms] seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.”¹⁰ The appeals court concluded that there was no meaningful difference between “taking material that a Firm has created . . . as the result of organization and the expenditure of labor, skill, and money . . . and selling it by ascribing the material to its creator” and the “unexceptional and easily recognized behavior by members of the traditional news media [reporting on] winners of Tony Awards . . . with proper attribution of the material to its creator.”¹¹ We expect that the contours of these differences to be a key issue if this case [is] heard on appeal, either at the Second Circuit en banc or at the United States Supreme Court.

Absent any legal recourse to ensure the exclusivity of their recommendations, Wall Street firms must now scramble to implement even greater security and counter-intelligence measures. After all, publishers such as Fly rely on information leaks and intelligence to timely obtain the recommendations in the first place. More likely, however, is that Wall Street firms will soon refine their business models to otherwise adequately monetize, or else reduce expenditures in, their intensive research and analysis efforts.

The broader implications of this case—that the “ability to make news . . . does not give rise to a right for it to control who breaks that news and how”¹²—will bear critically on the development, funding, and overall power of rapidly-advancing electronic information sources. In particular, businesses providing information aggregation services of all stripes—including, for example, those provided by Google, Inc. and Twitter, Inc.—will rejoice in the ability to gather and publish information from multiple sources across the entire nation with a lower risk of encountering divergent legal standards for misappropriation, on a state-by-state basis.

California’s Tuition Equity Law Upheld by U.S. Supreme Court

BY Suman Raghunathan, Progressive States Network

Proposals to increase educational access for students (particularly the undocumented) continue to advance in state legislatures nationwide, even as they are being upheld in the nation’s courts. Earlier this month, the U.S. Supreme Court reinforced and upheld California’s tuition equity law, the nation’s oldest and one of the strongest tuition equity models nationwide, by choosing not to consider a challenge to the law. California’s law, AB 540, passed a decade ago and was already unanimously upheld by the State’s Supreme Court last November.

California’s law allows all students who graduate from state high schools and have attended state schools for at least three years to pay in-state tuition rates at public universities and colleges regardless of their immigration status. The law was challenged in the courts by some U.S. citizen students for several years, yet was ultimately (and resoundingly) reinforced by the State Supreme Court. By denying without comment the request to review the law again, the U.S. Supreme Court sent a strong message that state tuition equity laws remain legally sound—and that it is a waste of time and legal fees to continue to challenge these laws in court. In fact, proposals to repeal existing tuition equity laws in four states (California, Kansas, Nebraska, and Utah) failed this year alone, according to the National Immigration Law Center (NILC).

Tuition equity laws ensure that cost is not a barrier for talented and motivated immigrant students by allowing them to pay in-state tuition rates at state universities and colleges, provided they meet a set of requirements. Out-of-state tuition rates are significantly more expensive, often by a factor of up to 400%—so allowing immigrant students to get an affordable college education often hinges upon them being able to pay in-state tuition.

At least ten other states have introduced bills to increase access to higher education for undocumented students by allowing them to pay in-state tuition rates while attending state universities and colleges.

Maryland and Connecticut both passed laws that make a college education affordable by allowing undocumented students and others who are not considered state residents to pay in-state tuition rates at state universities and colleges. Proposals in Oregon and Colorado came very close to passage: Oregon’s bill was short of only five votes in the State House after passing in the State Senate. Similarly, Colorado’s proposal was postponed indefinitely in the House after passing in the Senate.

The victories in Maryland and Connecticut bring the total number of states that have passed tuition equity laws to thirteen. And advocates and legislators in Colorado and Florida are determined to continue their work to expand educational access for immigrant and non-resident students—many are already preparing to re-introduce their tuition equity bills next year.

Business executives, educators, and immigrant youth are unanimous in their support for in-state tuition rates, particularly as a workforce development issue. The nation as a whole desperately needs college graduates, particularly high-technology industries: in fact, the U.S. is poised to be short of roughly 16 million college graduates as soon as 2025. Allowing promising immigrant students to fill that need for college-educated workers simply makes sense for America’s future.

Photo by Phil Roeder.

Jose Vargas – My Life as an Undocumented Immigrant

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One August morning nearly two decades ago, my mother woke me and put me in a cab. She handed me a jacket. “Baka malamig doon” were among the few words she said. (“It might be cold there.”) When I arrived at the Philippines’ Ninoy Aquino International Airport with her, my aunt and a family friend, I was introduced to a man I’d never seen. They told me he was my uncle. He held my hand as I boarded an airplane for the first time. It was 1993, and I was 12.

My mother wanted to give me a better life, so she sent me thousands of miles away to live with her parents in America — my grandfather (Lolo in Tagalog) and grandmother (Lola). After I arrived in Mountain View, Calif., in the San Francisco Bay Area, I entered sixth grade and quickly grew to love my new home, family and culture. I discovered a passion for language, though it was hard to learn the difference between formal English and American slang. One of my early memories is of a freckled kid in middle school asking me, “What’s up?” I replied, “The sky,” and he and a couple of other kids laughed. I won the eighth-grade spelling bee by memorizing words I couldn’t properly pronounce. (The winning word was “indefatigable.”)

One day when I was 16, I rode my bike to the nearby D.M.V. office to get my driver’s permit. Some of my friends already had their licenses, so I figured it was time. But when I handed the clerk my green card as proof of U.S. residency, she flipped it around, examining it. “This is fake,” she whispered. “Don’t come back here again.”

Confused and scared, I pedaled home and confronted Lolo. I remember him sitting in the garage, cutting coupons. I dropped my bike and ran over to him, showing him the green card. “Peke ba ito?” I asked in Tagalog. (“Is this fake?”) My grandparents were naturalized American citizens — he worked as a security guard, she as a food server — and they had begun supporting my mother and me financially when I was 3, after my father’s wandering eye and inability to properly provide for us led to my parents’ separation. Lolo was a proud man, and I saw the shame on his face as he told me he purchased the card, along with other fake documents, for me. “Don’t show it to other people,” he warned.

I decided then that I could never give anyone reason to doubt I was an American. I convinced myself that if I worked enough, if I achieved enough, I would be rewarded with citizenship. I felt I could earn it.

I’ve tried. Over the past 14 years, I’ve graduated from high school and college and built a career as a journalist, interviewing some of the most famous people in the country. On the surface, I’ve created a good life. I’ve lived the American dream.

But I am still an undocumented immigrant. And that means living a different kind of reality. It means going about my day in fear of being found out. It means rarely trusting people, even those closest to me, with who I really am. It means keeping my family photos in a shoebox rather than displaying them on shelves in my home, so friends don’t ask about them. It means reluctantly, even painfully, doing things I know are wrong and unlawful. And it has meant relying on a sort of 21st-century underground railroad of supporters, people who took an interest in my future and took risks for me.

Last year I read about four students who walked from Miami to Washington to lobby for the Dream Act, a nearly decade-old immigration bill that would provide a path to legal permanent residency for young people who have been educated in this country. At the risk of deportation — the Obama administration has deported almost 800,000 people in the last two years — they are speaking out. Their courage has inspired me.

There are believed to be 11 million undocumented immigrants in the United States. We’re not always who you think we are. Some pick your strawberries or care for your children. Some are in high school or college. And some, it turns out, write news articles you might read. I grew up here. This is my home. Yet even though I think of myself as an American and consider America my country, my country doesn’t think of me as one of its own.

My first challenge was the language. Though I learned English in the Philippines, I wanted to lose my accent. During high school, I spent hours at a time watching television (especially “Frasier,” “Home Improvement” and reruns of “The Golden Girls”) and movies (from “Goodfellas” to “Anne of Green Gables”), pausing the VHS to try to copy how various characters enunciated their words. At the local library, I read magazines, books and newspapers — anything to learn how to write better. Kathy Dewar, my high-school English teacher, introduced me to journalism. From the moment I wrote my first article for the student paper, I convinced myself that having my name in print — writing in English, interviewing Americans — validated my presence here.

The debates over “illegal aliens” intensified my anxieties. In 1994, only a year after my flight from the Philippines, Gov. Pete Wilson was re-elected in part because of his support for Proposition 187, which prohibited undocumented immigrants from attending public school and accessing other services. (A federal court later found the law unconstitutional.) After my encounter at the D.M.V. in 1997, I grew more aware of anti-immigrant sentiments and stereotypes: they don’t want to assimilate, they are a drain on society. They’re not talking about me, I would tell myself. I have something to contribute.

To do that, I had to work — and for that, I needed a Social Security number. Fortunately, my grandfather had already managed to get one for me. Lolo had always taken care of everyone in the family. He and my grandmother emigrated legally in 1984 from Zambales, a province in the Philippines of rice fields and bamboo houses­, following Lolo’s sister, who married a Filipino-American serving in the American military. She petitioned for her brother and his wife to join her. When they got here, Lolo petitioned for his two children — my mother and her younger brother — to follow them. But instead of mentioning that my mother was a married woman, he listed her as single. Legal residents can’t petition for their married children. Besides, Lolo didn’t care for my father. He didn’t want him coming here too.

But soon Lolo grew nervous that the immigration authorities reviewing the petition would discover my mother was married, thus derailing not only her chances of coming here but those of my uncle as well. So he withdrew her petition. After my uncle came to America legally in 1991, Lolo tried to get my mother here through a tourist visa, but she wasn’t able to obtain one. That’s when she decided to send me. My mother told me later that she figured she would follow me soon. She never did.

The “uncle” who brought me here turned out to be a coyote, not a relative, my grandfather later explained. Lolo scraped together enough money — I eventually learned it was $4,500, a huge sum for him — to pay him to smuggle me here under a fake name and fake passport. (I never saw the passport again after the flight and have always assumed that the coyote kept it.) After I arrived in America, Lolo obtained a new fake Filipino passport, in my real name this time, adorned with a fake student visa, in addition to the fraudulent green card.

Using the fake passport, we went to the local Social Security Administration office and applied for a Social Security number and card. It was, I remember, a quick visit. When the card came in the mail, it had my full, real name, but it also clearly stated: “Valid for work only with I.N.S. authorization.”

When I began looking for work, a short time after the D.M.V. incident, my grandfather and I took the Social Security card to Kinko’s, where he covered the “I.N.S. authorization” text with a sliver of white tape. We then made photocopies of the card. At a glance, at least, the copies would look like copies of a regular, unrestricted Social Security card.

Lolo always imagined I would work the kind of low-paying jobs that undocumented people often take. (Once I married an American, he said, I would get my real papers, and everything would be fine.) But even menial jobs require documents, so he and I hoped the doctored card would work for now. The more documents I had, he said, the better.

While in high school, I worked part time at Subway, then at the front desk of the local Y.M.C.A., then at a tennis club, until I landed an unpaid internship at The Mountain View Voice, my hometown newspaper. First I brought coffee and helped around the office; eventually I began covering city-hall meetings and other assignments for pay.

For more than a decade of getting part-time and full-time jobs, employers have rarely asked to check my original Social Security card. When they did, I showed the photocopied version, which they accepted. Over time, I also began checking the citizenship box on my federal I-9 employment eligibility forms. (Claiming full citizenship was actually easier than declaring permanent resident “green card” status, which would have required me to provide an alien registration number.)

This deceit never got easier. The more I did it, the more I felt like an impostor, the more guilt I carried — and the more I worried that I would get caught. But I kept doing it. I needed to live and survive on my own, and I decided this was the way.

Mountain View High School became my second home. I was elected to represent my school at school-board meetings, which gave me the chance to meet and befriend Rich Fischer, the superintendent for our school district. I joined the speech and debate team, acted in school plays and eventually became co-editor of The Oracle, the student newspaper. That drew the attention of my principal, Pat Hyland. “You’re at school just as much as I am,” she told me. Pat and Rich would soon become mentors, and over time, almost surrogate parents for me.

After a choir rehearsal during my junior year, Jill Denny, the choir director, told me she was considering a Japan trip for our singing group. I told her I couldn’t afford it, but she said we’d figure out a way. I hesitated, and then decided to tell her the truth. “It’s not really the money,” I remember saying. “I don’t have the right passport.” When she assured me we’d get the proper documents, I finally told her. “I can’t get the right passport,” I said. “I’m not supposed to be here.”

She understood. So the choir toured Hawaii instead, with me in tow. (Mrs. Denny and I spoke a couple of months ago, and she told me she hadn’t wanted to leave any student behind.)

Later that school year, my history class watched a documentary on Harvey Milk, the openly gay San Francisco city official who was assassinated. This was 1999, just six months after Matthew Shepard’s body was found tied to a fence in Wyoming. During the discussion, I raised my hand and said something like: “I’m sorry Harvey Milk got killed for being gay. . . . I’ve been meaning to say this. . . . I’m gay.”

I hadn’t planned on coming out that morning, though I had known that I was gay for several years. With that announcement, I became the only openly gay student at school, and it caused turmoil with my grandparents. Lolo kicked me out of the house for a few weeks. Though we eventually reconciled, I had disappointed him on two fronts. First, as a Catholic, he considered homosexuality a sin and was embarrassed about having “ang apo na bakla” (“a grandson who is gay”). Even worse, I was making matters more difficult for myself, he said. I needed to marry an American woman in order to gain a green card.

Tough as it was, coming out about being gay seemed less daunting than coming out about my legal status. I kept my other secret mostly hidden.

While my classmates awaited their college acceptance letters, I hoped to get a full-time job at The Mountain View Voice after graduation. It’s not that I didn’t want to go to college, but I couldn’t apply for state and federal financial aid. Without that, my family couldn’t afford to send me.

But when I finally told Pat and Rich about my immigration “problem” — as we called it from then on — they helped me look for a solution. At first, they even wondered if one of them could adopt me and fix the situation that way, but a lawyer Rich consulted told him it wouldn’t change my legal status because I was too old. Eventually they connected me to a new scholarship fund for high-potential students who were usually the first in their families to attend college. Most important, the fund was not concerned with immigration status. I was among the first recipients, with the scholarship covering tuition, lodging, books and other expenses for my studies at San Francisco State University.

As a college freshman, I found a job working part time at The San Francisco Chronicle, where I sorted mail and wrote some freelance articles. My ambition was to get a reporting job, so I embarked on a series of internships. First I landed at The Philadelphia Daily News, in the summer of 2001, where I covered a drive-by shooting and the wedding of the 76ers star Allen Iverson. Using those articles, I applied to The Seattle Times and got an internship for the following summer.

But then my lack of proper documents became a problem again. The Times’s recruiter, Pat Foote, asked all incoming interns to bring certain paperwork on their first day: a birth certificate, or a passport, or a driver’s license plus an original Social Security card. I panicked, thinking my documents wouldn’t pass muster. So before starting the job, I called Pat and told her about my legal status. After consulting with management, she called me back with the answer I feared: I couldn’t do the internship.

This was devastating. What good was college if I couldn’t then pursue the career I wanted? I decided then that if I was to succeed in a profession that is all about truth-telling, I couldn’t tell the truth about myself.

After this episode, Jim Strand, the venture capitalist who sponsored my scholarship, offered to pay for an immigration lawyer. Rich and I went to meet her in San Francisco’s financial district.

I was hopeful. This was in early 2002, shortly after Senators Orrin Hatch, the Utah Republican, and Dick Durbin, the Illinois Democrat, introduced the Dream Act — Development, Relief and Education for Alien Minors. It seemed like the legislative version of what I’d told myself: If I work hard and contribute, things will work out.

But the meeting left me crushed. My only solution, the lawyer said, was to go back to the Philippines and accept a 10-year ban before I could apply to return legally.

If Rich was discouraged, he hid it well. “Put this problem on a shelf,” he told me. “Compartmentalize it. Keep going.”

And I did. For the summer of 2003, I applied for internships across the country. Several newspapers, including The Wall Street Journal, The Boston Globe and The Chicago Tribune, expressed interest. But when The Washington Post offered me a spot, I knew where I would go. And this time, I had no intention of acknowledging my “problem.”

The Post internship posed a tricky obstacle: It required a driver’s license. (After my close call at the California D.M.V., I’d never gotten one.) So I spent an afternoon at The Mountain View Public Library, studying various states’ requirements. Oregon was among the most welcoming — and it was just a few hours’ drive north.

Again, my support network came through. A friend’s father lived in Portland, and he allowed me to use his address as proof of residency. Pat, Rich and Rich’s longtime assistant, Mary Moore, sent letters to me at that address. Rich taught me how to do three-point turns in a parking lot, and a friend accompanied me to Portland.

The license meant everything to me — it would let me drive, fly and work. But my grandparents worried about the Portland trip and the Washington internship. While Lola offered daily prayers so that I would not get caught, Lolo told me that I was dreaming too big, risking too much.

I was determined to pursue my ambitions. I was 22, I told them, responsible for my own actions. But this was different from Lolo’s driving a confused teenager to Kinko’s. I knew what I was doing now, and I knew it wasn’t right. But what was I supposed to do?

I was paying state and federal taxes, but I was using an invalid Social Security card and writing false information on my employment forms. But that seemed better than depending on my grandparents or on Pat, Rich and Jim — or returning to a country I barely remembered. I convinced myself all would be O.K. if I lived up to the qualities of a “citizen”: hard work, self-reliance, love of my country.

At the D.M.V. in Portland, I arrived with my photocopied Social Security card, my college I.D., a pay stub from The San Francisco Chronicle and my proof of state residence — the letters to the Portland address that my support network had sent. It worked. My license, issued in 2003, was set to expire eight years later, on my 30th birthday, on Feb. 3, 2011. I had eight years to succeed professionally, and to hope that some sort of immigration reform would pass in the meantime and allow me to stay.

It seemed like all the time in the world.

My summer in Washington was exhilarating. I was intimidated to be in a major newsroom but was assigned a mentor — Peter Perl, a veteran magazine writer — to help me navigate it. A few weeks into the internship, he printed out one of my articles, about a guy who recovered a long-lost wallet, circled the first two paragraphs and left it on my desk. “Great eye for details — awesome!” he wrote. Though I didn’t know it then, Peter would become one more member of my network.

At the end of the summer, I returned to The San Francisco Chronicle. My plan was to finish school — I was now a senior — while I worked for The Chronicle as a reporter for the city desk. But when The Post beckoned again, offering me a full-time, two-year paid internship that I could start when I graduated in June 2004, it was too tempting to pass up. I moved back to Washington.

About four months into my job as a reporter for The Post, I began feeling increasingly paranoid, as if I had “illegal immigrant” tattooed on my forehead — and in Washington, of all places, where the debates over immigration seemed never-ending. I was so eager to prove myself that I feared I was annoying some colleagues and editors — and worried that any one of these professional journalists could discover my secret. The anxiety was nearly paralyzing. I decided I had to tell one of the higher-ups about my situation. I turned to Peter.

By this time, Peter, who still works at The Post, had become part of management as the paper’s director of newsroom training and professional development. One afternoon in late October, we walked a couple of blocks to Lafayette Square, across from the White House. Over some 20 minutes, sitting on a bench, I told him everything: the Social Security card, the driver’s license, Pat and Rich, my family.

Peter was shocked. “I understand you 100 times better now,” he said. He told me that I had done the right thing by telling him, and that it was now our shared problem. He said he didn’t want to do anything about it just yet. I had just been hired, he said, and I needed to prove myself. “When you’ve done enough,” he said, “we’ll tell Don and Len together.” (Don Graham is the chairman of The Washington Post Company; Leonard Downie Jr. was then the paper’s executive editor.) A month later, I spent my first Thanksgiving in Washington with Peter and his family.

In the five years that followed, I did my best to “do enough.” I was promoted to staff writer, reported on video-game culture, wrote a series on Washington’s H.I.V./AIDS epidemic and covered the role of technology and social media in the 2008 presidential race. I visited the White House, where I interviewed senior aides and covered a state dinner — and gave the Secret Service the Social Security number I obtained with false documents.

I did my best to steer clear of reporting on immigration policy but couldn’t always avoid it. On two occasions, I wrote about Hillary Clinton’s position on driver’s licenses for undocumented immigrants. I also wrote an article about Senator Mel Martinez of Florida, then the chairman of the Republican National Committee, who was defending his party’s stance toward Latinos after only one Republican presidential candidate — John McCain, the co-author of a failed immigration bill — agreed to participate in a debate sponsored by Univision, the Spanish-language network.

It was an odd sort of dance: I was trying to stand out in a highly competitive newsroom, yet I was terrified that if I stood out too much, I’d invite unwanted scrutiny. I tried to compartmentalize my fears, distract myself by reporting on the lives of other people, but there was no escaping the central conflict in my life. Maintaining a deception for so long distorts your sense of self. You start wondering who you’ve become, and why.

In April 2008, I was part of a Post team that won a Pulitzer Prize for the paper’s coverage of the Virginia Tech shootings a year earlier. Lolo died a year earlier, so it was Lola who called me the day of the announcement. The first thing she said was, “Anong mangyayari kung malaman ng mga tao?”

What will happen if people find out?

I couldn’t say anything. After we got off the phone, I rushed to the bathroom on the fourth floor of the newsroom, sat down on the toilet and cried.

In the summer of 2009, without ever having had that follow-up talk with top Post management, I left the paper and moved to New York to join The Huffington Post. I met Arianna Huffington at a Washington Press Club Foundation dinner I was covering for The Post two years earlier, and she later recruited me to join her news site. I wanted to learn more about Web publishing, and I thought the new job would provide a useful education.

Still, I was apprehensive about the move: many companies were already using E-Verify, a program set up by the Department of Homeland Security that checks if prospective employees are eligible to work, and I didn’t know if my new employer was among them. But I’d been able to get jobs in other newsrooms, I figured, so I filled out the paperwork as usual and succeeded in landing on the payroll.

While I worked at The Huffington Post, other opportunities emerged. My H.I.V./AIDS series became a documentary film called “The Other City,” which opened at the Tribeca Film Festival last year and was broadcast on Showtime. I began writing for magazines and landed a dream assignment: profiling Facebook’s Mark Zuckerberg for The New Yorker.

The more I achieved, the more scared and depressed I became. I was proud of my work, but there was always a cloud hanging over it, over me. My old eight-year deadline — the expiration of my Oregon driver’s license — was approaching.

After slightly less than a year, I decided to leave The Huffington Post. In part, this was because I wanted to promote the documentary and write a book about online culture — or so I told my friends. But the real reason was, after so many years of trying to be a part of the system, of focusing all my energy on my professional life, I learned that no amount of professional success would solve my problem or ease the sense of loss and displacement I felt. I lied to a friend about why I couldn’t take a weekend trip to Mexico. Another time I concocted an excuse for why I couldn’t go on an all-expenses-paid trip to Switzerland. I have been unwilling, for years, to be in a long-term relationship because I never wanted anyone to get too close and ask too many questions. All the while, Lola’s question was stuck in my head: What will happen if people find out?

Early this year, just two weeks before my 30th birthday, I won a small reprieve: I obtained a driver’s license in the state of Washington. The license is valid until 2016. This offered me five more years of acceptable identification — but also five more years of fear, of lying to people I respect and institutions that trusted me, of running away from who I am.

I’m done running. I’m exhausted. I don’t want that life anymore.

So I’ve decided to come forward, own up to what I’ve done, and tell my story to the best of my recollection. I’ve reached out to former bosses­ and employers and apologized for misleading them — a mix of humiliation and liberation coming with each disclosure. All the people mentioned in this article gave me permission to use their names. I’ve also talked to family and friends about my situation and am working with legal counsel to review my options. I don’t know what the consequences will be of telling my story.

I do know that I am grateful to my grandparents, my Lolo and Lola, for giving me the chance for a better life. I’m also grateful to my other family — the support network I found here in America — for encouraging me to pursue my dreams.

It’s been almost 18 years since I’ve seen my mother. Early on, I was mad at her for putting me in this position, and then mad at myself for being angry and ungrateful. By the time I got to college, we rarely spoke by phone. It became too painful; after a while it was easier to just send money to help support her and my two half-siblings. My sister, almost 2 years old when I left, is almost 20 now. I’ve never met my 14-year-old brother. I would love to see them.

Not long ago, I called my mother. I wanted to fill the gaps in my memory about that August morning so many years ago. We had never discussed it. Part of me wanted to shove the memory aside, but to write this article and face the facts of my life, I needed more details. Did I cry? Did she? Did we kiss goodbye?

My mother told me I was excited about meeting a stewardess, about getting on a plane. She also reminded me of the one piece of advice she gave me for blending in: If anyone asked why I was coming to America, I should say I was going to Disneyland.

Discovery in the Digital Age: Meeting the Challenges of Electronically Stored Information

Anyone who has been involved in a lawsuit understands that the discovery phase is critical. During discovery, each party investigates the claims of its opponents and requires them to produce all documents that support their respective positions. Traditionally, each responding party would produce a box or two containing paper documents that it intended to offer as evidence at trial. Today, with the advent of electronically stored information (ESI), the thought of examining a few hundred pages of documents seems quaint.

Most businesses now create and store all of their information electronically. E-mail, for example, is routinely stored in multiple locations: on the sender’s hard drive, on central and backup servers, and on the recipients’ computers and servers. Many of those servers are periodically backed up to tape. In addition, both the sender and recipients may review, edit and forward an e-mail or attachment from their personal laptops, tablets and smartphones. That original e-mail has now been stored and perhaps modified in multiple locations. If some or all recipients reply to the sender, the process swiftly multiplies.

It is not uncommon for millions of digital images to be produced in discovery in a single lawsuit. To complicate matters further, when a paper document is shredded, the document is irretrievable—end of story. Not so with ESI. Deleting an electronically stored e-mail, spreadsheet or other document simply means that space is available on the computer for overwriting. Until a file is actually overwritten, that deleted document can easily be recovered. Conversely, ESI can intentionally be destroyed if the hard drive or server containing the information is reformatted.

In recent years, courts have developed standards for preserving and collecting ESI. Judges frequently issue opinions regarding the duty of parties to ensure that relevant information is preserved and produced in a timely, efficient and cost-effective manner. If a party does not fulfill its ESI obligations, the consequences can be severe. In the Texas case of Green v. Blitz U.S.A., Inc., when a federal district court judge learned that the corporate defendant failed to produce certain electronically stored documents and preserve other information while the case was pending, he imposed sanctions of $250,000—a full year after the case settled. In imposing the sanction award, the judge said the company “made little, if any effort to discharge its electronic discovery obligations.”

In response to these trends, Much Shelist has established an e-discovery task force that is monitoring developments in ESI and is ready to guide our clients in all aspects of the process, including the following:

• Preserving all information potentially relevant to a claim or lawsuit;
• Collecting information in an organized, efficient manner;
• Determining the scope of ESI to request from opposing parties and implementing appropriate steps to ensure compliance;
• Addressing privacy concerns associated with information stored by Facebook, Twitter and other social media websites;
• Evaluating the applicability of the attorney-client privilege;
• Analyzing metadata and other information hidden in ESI;
• Rebutting potential claims that evidence has been improperly withheld or destroyed; and
• Working with opposing counsel, the courts and outside vendors to reduce the cost of responding to requests for ESI.

The days of examining a handful of paper documents produced in discovery are over. Lawyers and clients alike must be prepared to meet the legal and technological challenges of ESI head on. If you are contemplating filing a lawsuit or have reason to believe your business may become involved in litigation, the best time to discuss your ESI obligations with counsel is before the case is filed.

Supreme Court Limits Class Actions in Wal-Mart Victory

Supreme Court’s unanimous decision in favor of Wal-Mart restricts the ability of plaintiffs to seek certification of a class for damages.

On June 20, 2011, the Supreme Court of the United States issued its highly-anticipated ruling in Wal-Mart Stores, Inc. v. Duke.  The Court unanimously held that the Ninth Circuit Court of Appeals erred in affirming the certification of the class under Rule(b)(2) of the Federal Rules of Civil Procedure.  A 5-4 majority further held that the plaintiffs failed to carry their burden of establishing commonality under Rule 23(a)(2). 

The majority held that Rule 23(a)(2) requires a party seeking certification of a class to demonstrate more than the mere existence of common questions; rather, the party seeking certification must demonstrate that class-wide proceedings will generate common answers to those questions.  The Court ruled that the plaintiffs failed to come forward with “significant proof” that Wal-Mart operated under a general policy of discrimination.  The Court concluded that evidence that Wal-Mart’s policy of discretion produced an overall sex-based disparity was insufficient.  Because there was “no convincing proof of a company wide discriminatory pay and promotion policy,” the plaintiffs failed to establish the existence of any common question.

The majority also held that the class was improperly certified under Rule 23(b)(2) because the monetary relief sought by the plaintiffs was not merely incidental to the injunctive or declaratory relief that they requested.  The Court concluded that Rule 23(b)(2) does not authorize class certification when each class member would be entitled to an individual award of monetary damages, which, in this case, was the request for backpay.

Justice Ginsburg, Justice Breyer, Justice Sotomayor and Justice Kagan concurred in the majority’s reversal of certification of the class under 23(b)(2), but found that the majority erred in its analysis under Rule 23(a)(2).  The concurring Justices stated that the case should have been remanded to the district court for analysis under Rule 23(b)(3).  They also criticized the majority for conducting a “dissimilarities” analysis under Rule 23(a)(2) which essentially grafted onto Rule 23(a)(2) the predominance analysis required under Rule 23(b)(3).

The Court’s ruling greatly restricts the ability of plaintiffs to seek certification of a class for damages without meeting all of the requirement of Rule 23(b)(3), including predominance and superiority, by seeking certification under Rule 23(b)(2).  Plaintiffs also will no longer be able to satisfy their burden under Rule 23(a)(2) simply by identifying the common issues in the case.  Rather, plaintiffs must now present significant proof that the common questions can be answered with common proof.

Dukes v. Wal-Mart: What the Supreme Court Decision Means for Employers

In Dukes v. Wal-Mart, the United States Supreme Court reversed certification of the largest sex discrimination class action in our nation’s history. The Plaintiffs sought to certify a nation-wide class of approximately 1.5 million former and current female Wal-Mart employees. The Plaintiffs alleged that nation-wide class certification was appropriate because Wal-Mart engaged in a policy or practice of denying its female employees raises or promotions by giving its local managers discretion to determine when to give raises or promotions.

Justice Scalia, writing for a 5-4 majority, gave renewed life to the requirement that plaintiffs establish common questions of law or fact when seeking to certify a class action. In reversing class certification in Dukes, Justice Scalia explained that a proper class must present both a common question and, more importantly, a common answer to the question of “why was I disfavored?” Significantly, plaintiffs must present “convincing proof” to support their contentions, instead of simply relying on allegations in a complaint. The majority of the Supreme Court agreed that the Plaintiffs had failed to establish a “common answer” because they sought to litigate over millions of employment decisions without “some glue holding the alleged reasons for all of those decisions together.” In so holding, the Supreme Court specifically noted that Wal-Mart had an EEO policy that it enforced, including providing penalties to those who violated the policy.

The Supreme Court’s reversal of class certification in Dukes is a significant victory for employers everywhere. Plaintiffs will have to narrow their class definitions. Employers may delegate authority to local managers without concern that the delegation, in and of itself, will form the basis for a class action complaint. However, to take advantage of the Dukes decision, employers should make sure to enforce their EEO policies and be aware that senior executives’ memos or emails setting forth corporate policy may well be the evidence that decides whether a company-wide or region-wide class action is appropriate.

Additionally, employers should be aware of their workplace demographics. Wal-Mart was accused of having a statistically significant bias against women in both promotions and pay. While Wal-Mart may have had a non-discriminatory explanation for these statistics, the cost of providing such an explanation may prove to be prohibitively high. Employers should consider periodically monitoring their workplace demographics to determine if any evidence of possible discrimination exists. Because it is unlawful (in most cases) to intentionally favor groups of workers, even if the goal is to avoid a perceived statistical bias, dealing with problematic demographics/statistics may be complicated and may require counsel. In almost all cases, however, employers will be better served knowing about adverse statistical evidence they find on their own, rather than learning of the evidence through the filing of a class discrimination complaint.