Reconciling the opposite conclusions recited by two district courts on essentially identical facts, the U.S. Court of Appeals for the Federal Circuit has clarified when a litigant is under a duty to preserve documents at risk of committing spoliation. Micron Technology v. Rambus, Inc., Case No. 09-1263 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part); Hynix Semiconductor, Inc. v. Rambus, Inc., Case No. 09-1299; -1347 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part, joined by Newman, J.). In these cases, the Federal Circuit concluded that Rambus improperly destroyed millions of pages of documents in advance of litigation, handing the technology licensing giant a major setback in its patent enforcement program.
Rambus licenses patents that relate to enhanced performance memory chips. Most of Rambus cash flow is from patent licensing revenue. Rambus initiated its first enforcement action in 2000, slightly before Micron and Hynix initiated declaratory judgment actions against it, seeking declarations of invalidity, non-infringement and unenforceability. In advance of its enforcement actions against Micron or Hynix, Rambus, in 1999, conducted what has been termed “shred days” or a “shred party,” during which millions of pages of documents were destroyed. In the Micron case, the district court (Delaware) concluded that Rambus had engaged in spoliation of documents that related to its patent licensing program and ordered dismissal of the action against Micron as a sanction. The district court did so after concluding that litigation was reasonably foreseeable (to Rambus) by the end of 1998.
In the Hynix case, the district court (ND Ca) concluded that litigation was not foreseeable (to Rambus) at the time of the shredding and so found that there was no spoliation. In the opinion of Hynix court, litigation must be “immediate” or “certain” to be foreseeable.
In the present appeal the Federal Circuit was called upon to resolve the issue of when litigation was foreseeable and so a duty to preserve documents arose. Rambus urged the Court to adopt a standard whereby a party would be obligated to preserve documents only when litigation became “probable.”
In the Micron case, the Federal Circuit affirmed the district court ruling that spoliation had occurred but reversed the district court on the sanction of dismissal and remanded the case for reconsideration of that sanction. The Federal Circuit left it to the district court to determine, based on the totality of the circumstances, the date the duty to preserve arose, but the Federal Circuit did conclude that the duty to preserve did arise prior to the August 1999 shred day and that spoliation had occurred. In terms of the circumstances to be considered (under the totality of circumstances test), the Federal Circuit cited facts such as Rambus’ knowledge of the potentially infringing activity (of Micron), as well as the steps it had taken in furtherance of litigation such as selecting forums, prioritizing targets and creating claim charts. The Court noted that for Rambus, litigation was “an essential element of its business model.”
As part of the remand, the Federal Circuit instructed the Delaware district court to make a determination on the issue of bad faith and to re-assess its finding of prejudice, i.e., in terms of whether, independent of the propriety of Rambus’ document destruction, the shredding had an impact on the ability of potential defendants to defend themselves. In reversing the dismissal sanction, the Federal Circuit instructed the district court to reassess the sanction based on the degree of bad faith and prejudice it found and whether there was another, lesser sanction that would be sufficient.
In the Hynix appeal, the Federal Circuit reversed the district court, concluding that the standard of foreseeability used in that case (“imminent or probable, without significant contingencies”) was too narrow and that even if there are contingencies, so long as their resolution is “reasonably foreseeable,” the litigation is also reasonably foreseeable. The district court was instructed, on remand, to determine (under the same totality of the circumstances test) when Rambus’ duty to preserve arose and whether Hynix was entitled to relief.
Attorney-Client Privilege and Crime-Fraud Exception
The Federal Circuit agreed with both district courts that even though the evidence used to advance the spoliation argument was subject to an attorney-client privilege, that privilege was “pierced” by the crime-fraud exception since the communications in issue were in furtherance of a violation of a destruction of evidence statute (notwithstanding Rambus’ argument that the California statute in question only applied where there was “immediacy of temporal closeness” between the time the destruction occurred and the time set for document production). The Court rebuffed Rambus’ argument, noting that it would make “no sense” given Rambus’ control of the timing of events, to permit a party to intentionally destroy evidence and then just wait some “arbitrary period of time” before filing suit to avoid the consequences of the crime-fraud exception.
On June 20, in Dukes v. Wal-Mart, the U.S. Supreme Court dealt a huge blow to plaintiffs seeking to certify employment discrimination class actions under Federal Rule of Civil Procedure 23, as well as consumer, antitrust, and other class actions. The heavily publicized case involved a proposed 1.5-million-person class of female Wal-Mart employees seeking to bring disparate impact and pattern or practice claims for discrimination in promotions and compensation. Justice Scalia wrote for the majority. In a 5-4 decision, the Court found that allegations that Wal-Mart had a “common” policy of permitting local managers to use discretion to make employment decisions based upon subjective factors did not satisfy the commonality requirement of Rule 23(a)(2). Significantly, the Court held that the commonality requirement is not met by “generalized questions” that do not meaningfully advance the litigation and is not met where named plaintiffs and members of the purported class have not suffered the “same injury.” In addition, in a unanimous decision, the Court found that claims for “individual monetary damages,” including back pay, could not be certified under Rule 23(b)(2). This decision provides defendants in class actions with a variety of tools to defeat efforts to certify large class actions involving disparately situated plaintiffs.
The Court Must Consider Certain Merits Issues in Deciding Class Certification Motions
The Court reached several conclusions that addressed, and rejected, arguments plaintiffs have made for years in support of certifying broad class actions in all contexts. For example, the Court put the final nail in the coffin of the argument that a district court must accept plaintiffs’ allegations as true and avoid any factual considerations of the “merits” in ruling upon class certification. The Court made it clear that a district judge must engage in a “rigorous analysis” before certifying a class action and must consider the merits of plaintiffs’ claims if they overlap with issues related to certification. The Court also suggested that a district court must scrutinize supposedly expert opinions offered in support of class certification. In making this ruling, the Court suggested that the standard set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) (the Daubert standard) likely applies to expert evidence used in the class certification process.
“Commonality” Element Not Met Where Common Questions Are Not Significant
While acknowledging that even a single common question could be sufficient to establish communality, the Court held that reciting basic common questions, such as whether Title VII was violated, is not enough. A plaintiff must identify common questions that depend upon the same contention and the resolution of that contention must “resolve an issue that is central to the validity of each one of the claims in one stroke.” For example, the Court acknowledged that the case before it presented common questions like “do all of us plaintiffs indeed work for Wal-Mart?” and “do our managers have discretion over pay?” but held that “reciting these questions is not sufficient to obtain class certification.” Rather, it held that “commonality requires the plaintiff to demonstrate that the class members have suffered the same injury.” In discussing this point, the Court made clear that “commonality” does not exist merely because a purported class all allegedly suffered a violation of the same provision of law. This will be a significant benefit to defendants in defeating class actions where many purported class members have suffered no injury at all.
The Court then addressed the “wide gap” between an individual claim of discrimination and the existence of a company policy of discrimination that creates a class of individuals with the same injury as the named plaintiff, which was first acknowledged by the Supreme Court in General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 157-58 (1982). It noted that such a gap could be bridged, and commonality found, in two ways. First, it cited the case of a uniform biased testing procedure that impacted all test takers in the same way. Second, it could occur when there is “significant proof” that an employer “operated under a general policy of discrimination.” In discussing the second way, the Court made it clear that “the bare existence of delegated discretion” is not sufficient to establish commonality.
Significantly, the Court rejected three arguments routinely made by plaintiffs in arguing for class certification. First, the Court rejected the testimony of plaintiffs’ social science expert, Dr. William Bielby, who claimed that Wal-Mart had a culture that made it susceptible to gender bias, finding it useless to the salient question of whether plaintiffs could prove a general policy of discrimination. In doing so, the Court suggested that the testimony of expert witnesses used in support of class certification is subject to the Daubert standard. Second, the Court rejected the use of aggregate statistical analyses and the mere existence of gender disparities in pay, promotion, or representation as enough to meet the commonality burden in an employment case. Instead, the Court suggested that to show commonality, a plaintiff would at least need to demonstrate store-by-store disparities. Third, the Court found that affidavits from 120 individuals, or 1 out of every 12,500 class members, fell well short of meeting the burden of having “significant proof” that Wal-Mart operates under a general policy of discrimination. While these rejections occurred in the context of this employment discrimination claim, purported class plaintiffs in many other cases frequently attempt to rely on similar evidence to support class certification. For example, antitrust plaintiffs attempt to use aggregate statistical analyses of costs and prices and consumer class action lawyers use surveys, regression analyses, and purported social science analyses to establish the existence of commonality. The Court’s decision in Dukes makes clear that the Court may not merely accept plaintiffs’ efforts to homogenize out individual issues through unreliable expert testimony.
Rule 23(b)(2) Cannot Be Misused to Circumvent Due Process
The Court next ruled, in the unanimous portion of the opinion that will have a substantial impact on class actions generally, that individualized claims for money damages cannot be certified under Rule 23(b)(2) and instead must be certified, if at all, under the more onerous requirements of Rule 23(b)(3). In so ruling, the Court noted that Rule 23(b)(3), unlike Rule 23(b)(2), mandates notice to the class and an opportunity for class members to opt out of the lawsuit, necessary safeguards consistent with preserving the constitutional due process rights of class members whose individual claims for monetary damages would be adjudicated if a class were certified. The Court rejected the “predominance test” established by the Ninth Circuit, which permitted the certification of claims for monetary damages as long as claims for injunctive relief “predominated” over the claims for monetary damages. It cited favorably to the “incidental damages” test first adopted by the Fifth Circuit in Allison v. Citgo Petroleum Corp., 151 F.3d 402, 415 (5th Cir. 1998), which permits certification of claims for monetary relief as long as that relief “flow[s] directly from liability to the class as a whole,” which “should not require additional hearings.” While seeming to express skepticism that monetary damages could ever be incidental to injunctive and declaratory relief, the Court declined to adopt a bright-line rule prohibiting all money damages from ever being certified under Rule 23(b)(2). This ruling has widespread implications because Rule 23(b)(3) requires plaintiffs to prove that common questions predominate over individual ones and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. Given the Court’s cynicism regarding the use of discretionary decisionmaking as grounds for the less stringent commonality standard, this burden should be extremely difficult for plaintiffs’ attorneys to meet in employment class actions without significantly altering the types of class actions they bring.
Even in the many jurisdictions that have long been critical of Rule 23(b)(2) certification of claims for monetary damages, plaintiffs’ attorneys have previously had some success in distinguishing back pay from monetary damages and thereby getting claims for huge back pay awards certified under Rule 23(b)(2). The Supreme Court put an end to that practice as well. In a far-reaching ruling that will effectively require plaintiffs who bring class action employment discrimination lawsuits (except those solely for classwide injunctive relief) to meet the standards of Rule 23(b)(3), the Court held that back pay, regardless of whether it is characterized as equitable, cannot be certified under Rule 23(b)(2). Central to this holding was the Court’s rejection of the Ninth Circuit’s proposed sampling-based approach to doling out back pay to the class without ever permitting Wal-Mart to defend the employment decisions it made regarding each individual class member. Rather than approve this approach, which it derisively referred to as “trial by formula,” the Court held that Wal-Mart was “entitled to individualized determinations of each employee’s eligibility for backpay.” This ruling not only precludes certification of the claims for money damages under Rule 23(b)(2), but will also make it difficult for plaintiffs to certify claims for monetary damages under Rule 23(b)(3). In addition, this ruling will limit the use of Rule 23(b)(2) to obtain “restitution damages” or any other type of money damages in all kinds of cases, including consumer class actions, antitrust class actions, and products liability actions.
What Comes Next?
In general, it will be more difficult for plaintiffs to obtain class certification in all cases. District courts will now be required to scrutinize closely all alleged common questions of law and fact to determine if the proposed class action can generate common answers to those questions that are apt to drive the resolution of the litigation. In particular, variations in whether class members suffered injury will be ripe for attack given the express language of the Court’s opinion. It will not be sufficient for plaintiffs to allege a “general policy” without proving the existence of such a policy and its impact on each class member. In addition, defendants are now more likely to have challenges to expert testimony at the class certification stage heard under the Daubert standard, which will have the effect of further requiring an actual showing of commonality by plaintiffs rather than mere assertions of commonality by lawyers or their experts. Even where some level of commonality is shown, in damages cases plaintiffs will also need to meet the predominance and other standards of Rule 23(b)(3), and they will not be able to circumvent due process through the use of formulaic damages awards that do not permit defendants to address the individual variations in the claims of each class member.
We also expect this decision to be tremendously helpful to retailers and other businesses that delegate authority to the local level in all types of class actions. The Court held that decisions relevant to the case were “decentralized” and made in local Wal-Mart stores, which it found to be the “opposite” of a common practice that would justify a class action. Retail and other similar companies frequently operate in this manner with respect to employment and many other decisions. These companies will be able to argue that nationwide class actions are inappropriate where the relevant decisions are made at the local level.
Class action employment discrimination lawyers will likely respond to this decision by modifying the types of cases they bring and how they characterize the common questions asserted in those cases. We expect plaintiffs’ attorneys to file smaller class actions focused on specific job groups and/or locations, perhaps with multiple subclasses. Joe Sellers, one of the lawyers for the plaintiffs in Dukes, has already been quoted as saying the decision will result in “more class actions at the store or regional level.” See “Wal-Mart Case Is a Blow for Big Cases and Their Lawyers,” http://www.nytimes.com/2011/06/21/business/21class.html?_r=1&smid=tw-nytimes&seid=auto. These smaller class cases may be brought under state laws in state courts to avoid some of the impact of this decision on certification. In addition, plaintiffs may focus on more tailored challenges targeting specific aspects of employers’ personnel policies that apply to a broad range of employees. It is also likely that employers will face more multiplaintiff cases that attempt to consolidate various individual discrimination claims, including pattern or practice claims. Mr. Sellers has stated that the plaintiffs’ lawyers in Dukes have prepared “thousands” of individual charges of gender discrimination that they plan to file with the Equal Employment Opportunity Commission (EEOC). See “Wal-Mart Women Vow to Press Bias Fight in Courts, Agency,” http://www.businessweek.com/news/2011-06-21/wal-mart-women-vow-to-press-bias-fight-in-courts-agency.html. In short, we expect to see plaintiffs’ attorneys testing various avenues to obtain the most expansive classes possible under the new standards.
We also expect to see an increase in Equal Pay Act claims. While the standard for certification in those cases is demanding, plaintiffs’ counsel may view it as a favorable alternative to proceeding under Rule 23 in light of this decision. Moreover, while class action counsel are not likely to entirely abandon theories premised upon subjectivity and stereotyping, we expect more class actions focused on objective personnel policies, such as employment tests, that apply generally to a large group of employees. The EEOC has been aggressively investigating such cases for several years as part of its focus on screening procedures and claims of systemic discrimination.
Finally, as has already started, we expect calls for government action. The EEOC has stated that it is reviewing the Dukes decision and determining whether it warrants any changes in its strategies for enforcement of Title VII. The Commission, which is not bound by Rule 23, could respond by more aggressively filing representative actions, potentially in partnership with intervening private class counsel. In addition, civil rights groups have already started calling for congressional action, including a renewed push for passage of the Paycheck Fairness Act. While the current Congress is unlikely to move forward with such legislation, as we saw with the Lilly Ledbetter Fair Pay Act, future political changes to the makeup of Congress could result in legislation designed to eat away at some of the employer-friendly aspects of the Dukes decision.
What Should Employers Do Now?
The Dukes decision is a great win for employers who no longer face the prospect of defending overbroad class claims indiscriminately attacking the individualized decisionmaking of local managers based upon ill-defined, allegedly discretionary policies. However, now is not the time for employers to become complacent. As noted above, we expect more targeted class claims as class action plaintiffs’ attorneys test the boundaries of this decision. While this next wave of cases will almost certainly focus on smaller classes than that at issue in Dukes and the other large class actions of recent years, it will still create significant risks to organizations who are sued, in terms of litigation costs, potential exposure, and public relations. Fortunately, Dukes ups the ante for plaintiffs’ attorneys as well, as they now face a much greater battle when filing class actions, and we expect that they will be more diligent in researching and selecting cases than they have been in the past. For this reason, as well as to most efficiently manage their businesses, employers should continue to develop employment practices and policies that reflect best practices, monitor those practices and policies to ensure compliance with EEO policies, and analyze the impact of such practices and policies for equity and consistency with diversity policies and goals.
In a decision with implications for companies facing class action litigation, the U.S. Supreme Court ruled unanimously that a federal district court, having rejected certification of a proposed class action, could not take the additional step of enjoining a state court from addressing a motion to certify the same class under state law. In an opinion authored by Justice Kagan, the Court in Smith v. Bayer Corp., No. 09-1205, 564 U.S. ____ (June 16, 2011), held that principles of stare decisis and comity should have governed whether the federal court’s ruling had a controlling or persuasive effect in the later case, and the state court should have had an opportunity to determine the precedential effect (if any) of the federal court ruling.
Facts of Bayer
In Bayer, a plaintiff sued in West Virginia state court alleging that Bayer’s pharmaceutical drug Baycol was defective. After removal to federal court, the plaintiff moved to certify the action as a class action on behalf of all West Virginia purchasers of Baycol. The federal court rejected class certification because proof of injury from Baycol would have required plaintiff-specific inquiries and therefore individual issues of fact predominated over common issues. It then dismissed the plaintiff’s claims on independent grounds.
A different plaintiff, who had been a putative class member in the first action and was represented by the same class counsel in the federal action, moved to certify the same class in West Virginia state court. Bayer sought an injunction from the federal court in the first case, arguing that the court’s rejection of the class bid should bar the plaintiff’s relitigation of the same class certification question in state court. The district court granted the injunction, and the Circuit Court affirmed.
The Supreme Court’s Decision
The issues before the Court were (i) the district court’s power to enjoin the later state-court class action to avoid relitigation of the previously decided class certification determination; and (ii) whether the federal court’s injunction complied with the Anti-Injunction Act, 28 U.S.C. § 2283, which permits a federal court to enjoin a state court action when necessary to “protect or effectuate its judgment.” The Court granted certiorari to resolve a circuit split concerning the application of the Anti-Injunction Act’s relitigation exception.
The Supreme Court overturned the injunction. It determined that enjoining the state court proceedings under the circumstances of the case was improperly “resorting to heavy artillery.” The Court noted that “[d]eciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court.” It observed that a federal court may under the relitigation exception to the Anti-Injunction Act enjoin a state court from relitigating an already decided issue-including whether to certify a case as a class action-when two conditions are met: “First, the issue the federal court decided must be the same as the one presented in the state tribunal. And second, [the party in the later case] must have been a party to the federal suit, or else must fall within one of a few discrete exceptions to the general rule against binding nonparties.” Notably, the Court commented that, in conducting this analysis, “every benefit of the doubt goes to the state court” being allowed to determined what effect the federal court’s prior ruling should be given.
The Court held that neither condition was met in Bayer. The issue of class certification under West Virginia’s Rule 23 (the language of which mirrored Federal Rule of Civil Procedure 23) was not “the same as” the issue decided by the federal court because the West Virginia Supreme Court had expressly disapproved of the approach to the “predominance” analysis adopted by federal courts interpreting the federal class action rule. In addition, the Court also held that unnamed persons in a proposed class action do not become parties to the case if the court declines to certify a class. By contrast, the Court affirmed the established rule that “a judgment in a properly entertained class action is binding on class members in any subsequent litigation.”
According to the Court, Bayer’s “strongest argument” centered on a policy concern that, after a class action is disapproved, plaintiff after plaintiff may relitigate the class certification issue in state courts if not enjoined by the original court. The Court suggested that these concerns were ameliorated by the Class Action Fairness Act of 2005, through which Congress gave defendants a right to remove to federal court any sizable class action involving minimal diversity of citizenship. The Court noted the availability of consolidating certain federal class actions to avoid inconsistent results and offered that the Class Action Fairness Act’s expanded federal jurisdiction should result in greater uniformity among class action decisions and in turn reduce serial relitigation of class action issues.
Implications of Bayer
Bayer exposes defendants to the potential for repetitive class action litigation by plaintiffs in state courts. Bayer does not alter existing standards for class certification, however, and its holding is a limited one: a defendant who has defeated class certification may not invoke the “heavy artillery” of an injunction against future state-court bids for class certification in a case raising the same legal theories unless that future bid is advanced by the same named plaintiff(s) (or a person who falls within one of the few discrete exceptions to the general rule against binding nonparties) and the defendant can establish that state standards for class certification are similar to Federal Rule 23. In this regard, the Court held that “[m]inor variations in the application of what is in essence the same legal standard do not defeat preclusion,” but if the state courts would apply a “significantly different analysis” than the federal court, an injunction will not be upheld. The Anti-Injunction Act analysis from Bayer applies directly only where the enjoining court is a federal court and the second court is a state court.
The Bayer opinion also highlights avenues for companies facing serial class actions to mitigate risk. The Court all but acknowledged that “class actions raise special problems of relitigation.” These relitigation problems in the class action context and beyond will remain after Bayer. But a number of strategic steps can be taken to reduce the burdens, expenses, and risks associated with multiple lawsuits. For example, the enactment of the Class Action Fairness Act provides expanded federal jurisdiction over many class actions and therefore permits enhanced removal opportunities for state court class actions. If subsequent class actions are filed and removed, the Court noted that multidistrict litigation proceedings may be available for coordination of pretrial proceedings to avoid repetitive litigation. Even if transfer and consolidation cannot be effectuated, the Court observed that “we would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.”
Finally, the Court’s treatment of absent class members as nonparties to the class certification question in the first action may have significance to other issues in class actions, including often hotly disputed issues relating to communications with putative class members by the defendant before class certification.
On June 7, 2011, the New York Court of Appeals affirmed the dismissal of a $900 million lawsuit brought by former shareholders against America Movil SAB (“Movil”), Latin America’s largest mobile phone carrier, on the grounds that a general release entered into by the parties in 2003 barred Plaintiffs’ claims. Centro Empresarial Cempresa SA et al. v. America Movil SAB de CV et al., — N.E. 2d –, 2011 WL 2183293, slip op. at 1, 14 (June 7, 2011). The unanimous decision by New York’s highest court underscores the extent to which sophisticated parties to arms-length transactions can contract away future claims, even “fraud claims . . . unknown at the time of contract.” Id at 9.
The facts underlying the litigation date back to 1999 when Plaintiffs Centro Empresarial Cempresa SA (“Centro”) and Conecel Holding Ltd. — two British Virgin Island entities holding a combined majority interest in the Ecuadorian telecom company Consorcio Ecuatoriano de Telecomunicaciones S.A. Conecel (the “Company”) — sought financing from Mexican billionaire Carlos Slim Helu (“Slim”).
Slim’s company, Telmex Mexico (“Telmex”) injected $150 million into the Company in 2000, taking a majority interest. Following the transaction, Plaintiffs and Telmex held their interests in the Company through a new entity, Telmex Wireless Ecuador LLC (“TWE”). The parties agreed that in the event Slim consolidated his Latin American telecommunications interests into one entity, Plaintiffs would have the right to exchange their units in TWE for equity shares of the new entity.
That consolidation occurred in late 2000, when Movil was spun off from Telmex Mexico, triggering Plaintiffs’ right to negotiate an exchange of their units in TWE for shares of Movil. This exchange never happened. Rather, pursuant to a Purchase Agreement entered into in 2003, Plaintiffs sold their units in TWE to Defendants for cash.
The Purchase Agreement released Telmex and its affiliates, shareholders, and agents from:
“all manner of actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands, liability, whatsoever, in law or equity, whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members and/or arising out of, based upon, attributable to or resulting from the ownership of membership interests in [TWE] or having taken or failed to take any action in any capacity on behalf of [TWE] or in connection with the business of [TWE].” (Emphasis added.)
In 2008, Plaintiffs filed suit, accusing Movil and the Defendants of fraudulently inducing them to sell their interest in TWE. According to the Complaint, in connection with a possible exchange of their TWE units for shares in Movil, Plainitffs allegedly were provided inaccurate financial information about the Company, and never received other information, despite repeated requests. The Complaint alleges that if Plaintiffs had exchanged their TWE units for shares in Movil rather than selling them outright for cash, they would have been entitled to receive approximately $900 million in Movil stock. The allegations included breach of contract, fraud, fraudulent inducement, unjust enrichment, and a claim for accounting.
Last year, a divided panel in the Appellate Division, First Department, held that the Plaintiffs’ suit was “barred by the general release they granted defendants in connection with the sale of their interest.” Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 76 A.D.3d 310 (1st Dep’t 2010). Last week, the Court of Appeals affirmed.
In a unanimous opinion, Judge Carmen Beauchamp Ciparick held that “[a]s sophisticated entities, [the plaintiffs] negotiated and executed an extraordinarily broad release with their eyes wide open. They cannot now invalidate that release by claiming ignorance of the depth of their fiduciary’s misconduct.” As detailed below, the Court’s opinion centered around the broad nature of the release and Plaintiffs’ failure to conduct thorough due diligence in the face of red flags:
- Plaintiffs Released “Unknown Fraud Claims.” The Court relied on the broad language of the release; specifically, that the phrase “all manner of actions,” in conjunction with the reference to “future” and “contingent” actions “indicate[d] an intent to release defendants from fraud claims, like this one, unknown at the time of contract.” America Movil, 2011 WL 2183293, slip op. at 9. The Court stated that, to circumvent such a broad release, Plaintiffs would have had to plead facts from which the court could infer that “the release itself was induced by a separate fraud” (which they did not.) Id.
- Fiduciary Relationship Irrelevant. The Court noted that Telmex, as TWE’s majority shareholder, owed a fiduciary duty to Plaintiffs, which required Defendants to “disclose any information that could reasonably bear on plaintiffs’ consideration of [its purchase] offer.” Id. at 11. However, the Court also held that a sophisticated principal is able to release its fiduciary from claims, “at least where, as here, the fiduciary relationship is no longer one of unquestioning trust — so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into.” Id. The Court noted that: (1) Plaintiffs were large corporations engaged in complex transactions in which they were advised by counsel; and (2) as sophisticated entities, they negotiated and executed an extraordinarily broad release “with their eyes wide open.” Id. at 12.
- Plaintiffs Failed to Allege Justifiable Reliance On Defendants’ Fraudulent Statements In Executing The Release. Citing its recent decision in DDJ Mgt., LLC v. Rhone Group LLC, 15 NY3d 147, 153-43 (2010), the Court held that Plaintiffs failed to allege justifiable reliance because “plaintiffs knew that defendants had not supplied them with the financial information necessary to properly value the TWE units, and that they were entitled to that information.” America Movil, 2011 WL 2183293, slip op. at 12-13. The fact that Plaintiffs cashed out their interests and released defendants from fraud claims without demanding either access to the information or assurances in the form of representations and warranties was fatal to Plaintiffs’ case. Plaintiffs “have been so lax in protecting themselves that they cannot fairly ask for the law’s protection.” Id. at 13.
The America Movil decision is instructive for parties seeking to foreclose future litigation in connection with Asset Sales and Purchases. A broad release, even one that waives future, unknown and contingent claims, will be enforced by New York courts, as long as the release itself is not procured by fraud. It is imperative that parties conduct thorough due diligence, and that in the face of uncertainty, purported inaccuracies or other red flags, parties demand further warranties and access to information prior to agreeing to any release in connection with an asset purchase or sale.
Despite all of the anticipation surrounding the outcome of the Microsoft v. i4i case, on June 9, 2011, the Supreme Court upheld the current state of patent law rather than change long-held precedent. Specifically, the Court held unanimously that when an accused infringer alleges that a patent is invalid, such an allegation needs to be proven by clear and convincing evidence.
This “clear and convincing evidence” standard has been defined as requiring “evidence indicating that the thing to be proved is highly probable or reasonably certain.” This standard provides a relatively high hurdle for accused infringers to overcome in order to invalidate a patent and, thus, provides a rather stable environment for patents.
The Court based this decision on section 282 of the Patent Act of 1952, which grants to patents a presumption of validity. The Court noted that “Congress specified the applicable standard of proof in 1952 when it codified the common-law presumption of patent validity.” Relying on previous Supreme Court precedent, the Court cited Justice Cardozo, who stated, “There is a presumption of validity, a presumption not to be overthrown except by clear and cogent evidence.”
In this case, Microsoft asserted an invalidity defense to an allegation of infringement which relied on evidence that had not been considered by the United States Patent and Trademark Office (USPTO) during examination. Microsoft alleged that i4i sold a version of the software covered by U.S. Patent No. 5,787,449 (“the ’449 patent”) more than a year before the patent was filed. Microsoft presented evidence that suggested the software at issue was previously marketed and sold to another company. The evidence included various documents describing the software such as manuals, a funding application, and letters to potential investors, etc. However, i4i maintained that the software that was sold did not include the contents of the patent at issue in this case. Unfortunately, the code at issue was destroyed and was not available for a comparison to the patent. The lower courts determined that the evidence presently did not clearly and convincingly show that the software sold was the same as the software described in the ’449 patent. While one might be able to infer that fact from the evidence in question, it did not meet the clear-and-convincing standard of proof. Therefore under the Court’s interpretation the patent remains valid.
Further, the Court determined that the standard of evidence should be consistent regardless of whether the evidence was previously considered by the USPTO. However, the Court also stated that juries may be instructed to give more weight to evidence not previously considered by the USPTO when considering the issue of patent validity. Thus, in cases, such as Microsoft, where some material was not before the USPTO during prosecution, the jury may be instructed to give these materials more weight during consideration. Unfortunately for Microsoft, no such request was made of the district court.
With respect to the policy arguments put forth, the Court found itself “in no position to judge these policy arguments.” The Court relied instead on the almost thirty-year history of interpretation and congressional action regarding section 282 of the Patent Act of 1952. During this time frame, the Court noted that the evidentiary standard has been left “untouched.”
The Court affirmed the current standard of proof for invalidity. Many patent holders are now breathing a sigh of relief.
Now the question is, will Congress take up the challenge set forth by the Court when it stated, “Any recalibration of the standard of proof remains in its hands.”
On June 9, 2011, the Supreme Court in an 8-0 decision authored by Justice Sotomayor, affirmed the long-standing rule that a challenger must demonstrate invalidity of a patent by “clear and convincing evidence.” Microsoft Corp. v. i4i Ltd. Partnership, 564 U.S.__, slip op. at 20 (June 9, 2011). Microsoft had argued for a more relaxed “preponderance of the evidence” standard in a case where the prior art that formed the basis for the challenge had not been considered by the Patent Office. While the holding puts to rest speculation over whether the Court would apply the lesser standard of proof, the Court endorsed the use of a jury instruction on the weight to be given prior art evidence that had not been considered by the Patent Office, stating that such an instruction, “when requested, most often should be given.” Id.at 17.
Section 282 of the Patent Act of 1952 provides that “[a] patent shall be presumed valid” and “[t]he burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity.” 35 U.S.C. § 282. While § 282 expressly places the burden of proof regarding validity of the patent upon an accused infringer, it does not expressly address the standard of proof. Microsoft argued that the preponderance standard applied generally or, in the alternative, at least where the prior art asserted had not been considered by the Patent Office. The Court rejected both contentions.
The Supreme Court rejected Microsoft’s first contention by finding that Congress had adopted the heightened standard from the common-law in 1952 when it enacted § 282. The Court determined that by the time of the 1952 Act, the common law presumption of validity reflected the “universal understanding” that the preponderance standard was insufficient. That understanding was reflected in the holding of Radio Corp. of America v. Radio Engineering Laboratories, Inc., 293 U.S. 1 (1934). In that case, the Supreme Court held that an accused infringer must overcome the presumption of validity by “clear and cogent evidence.” Id.at 2. Accordingly, the Court held that the codification of the presumption in § 282 brought with it its common-law meaning, including the heightened standard proof, and there was no reason to “drop” the heightened standard simply because §282 does not explicitly recite it.
In arguing for the lesser “preponderance of the evidence” standard of proof when the prior art was not considered by the Patent Office, Microsoft relied in part on the Supreme Court’s dicta in KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398, 426 (2007), that at least in cases where the invalidating prior art was not before the Patent Office, the presumption of validity “seems much diminished.”
Notwithstanding its earlier observation, the Supreme Court rejected the notion of a variable standard of proof. The Court acknowledged language found in “numerous courts of appeals” cases before the 1952 Act, that referred to the presumption of validity being “weakened” or “dissipated” when the evidence was not considered by the Patent Office. However, it explained that such language could not be read as supporting a different standard. “Instead, we understand these cases to reflect the same common sense principle that the Federal Circuit has recognized throughout its existence—namely, that new evidence supporting an invalidity defense may ‘carry more weight’ in an infringement action than evidence previously considered by the Patent Office.” Slip op. at 17. Accordingly, “new evidence” of invalidity may make it “easier” for a challenger to meet the “clear and convincing” standard.
The Court suggested that the weight to be given this new evidence be explained in an instruction to the jury:
[A] jury instruction on the effect of new evidence can, and when requested, most often should be given. When warranted, the jury may be instructed to consider that it has heard evidence that the PTO had no opportunity to evaluate before granting the patent. . . [T]he jury may be instructed to evaluate whether the evidence before it is materially new, and if so, to consider that fact when determining whether an invalidity defense has been proved by clear and convincing evidence.
Id.at 17. This language will undoubtedly increase the frequency of requests for a specific instruction on the weight of the new evidence and on the use of such instructions.
Justice Breyer, joined by Justices Scalia and Alito, wrote a concurring opinion which emphasizes the need to pay careful attention to the distinction between fact questions and legal questions, noting that the standard only applies to evidence of the facts. The Court’s opinion, slip op. at 2, does note that the ultimate question of patent validity is a question of law and that the same factual questions underlying the Patent Office’s original examination will also be present in an infringement action. Id. While this language is suggestive, the Court’s opinion never expressly states that the standard of proof applies only to the factual questions. The concurrence thus raises the question of whether a court should refrain from applying the clear and convincing standard to legal conclusions, such as whether given facts render an invention obvious. Further, the observations of the concurrence may impact the specific questions put to the jury in the form of a special verdict and instructions regarding the standard of proof.
Thus, the development of the patent law may be more affected by dicta from Microsoft Corp. v. i4i Ltd. Partnership than by its holding, which affirms the long-standing “clear and convincing” standard.
A unanimous Supreme Court has rejected Microsoft’s argument that a lower “preponderance of the evidence” standard should apply to patent invalidity challenges. The Supreme Court, in last week’s Microsoft Corp. v. i4i Limited Partnership decision, reaffirmed the longstanding principle that a party challenging the validity of a patent must present “clear and convincing” evidence of invalidity.
The Supreme Court first established this heightened burden in the 1934 case of Radio Corp. of America v. Radio Engineering Labs, Inc. 293 U.S. 1 (1934). There, the Supreme Court held that invalidation required “clear and cogent evidence” to overturn an issued patent. The Patent Act later codified this heightened burden in 35 U.S.C. § 282, explaining that a patent “shall be presumed valid.”
Microsoft argued that the Court’s settled interpretation of Section 282 was incorrect and that the presumption of validity does not establish the need for “clear and convincing” evidence to invalidate a patent.
Relying on almost a century of precedent, the Supreme Court disagreed:
[B]y the time Congress enacted § 282 and declared that a patent is “presumed valid,” the presumption of patent validity had long been a fixture of the common law. According to its settled meaning, a defendant raising an invalidity defense [bears] “a heavy burden of persuasion,” requiring proof of the defense by clear and convincing evidence.
The Court also disagreed with Microsoft’s alternative argument—that the presumption of validity should be weakened when a party challenges a patent using art not before the Patent Office during prosecution. According to the Court, invalidity of a patent must always be proven by clear and convincing evidence.
An interesting twist comes in the Court’s recognition that “new evidence” of invalidity likely carries more weight than evidence already considered by the Patent Office. The Court references with approval the jury instruction given in the 1993 case of Mendenhall v. Cedarrapids, Inc. that states:
Because the deference to be given the Patent Office’s determination is related to the evidence it had before it, you should consider the evidence presented to the Patent Office during the  application process, compare it with the evidence you have heard in this case, and then determine what weight to give the Patent Office’s determinations.5 F.3d 1557 (Fed. Cir. 1993).
The Court explained that “[a] jury may be instructed to evaluate whether the evidence before it is materially new, and if so, to consider that fact when determining whether an invalidity defense has been proved by clear and convincing evidence.” Put differently, the Court recognized that a jury may properly give evidence of “new” prior art special weight in deciding whether the clear and convincing standard has been met.
On the whole, the Court’s ruling on the clear and convincing evidence standard can be viewed as a pro-patent decision (contrary to several of the Court’s other recent decisions, like KSR (obviousness), MedImmune (declaratory judgment jurisdiction), and eBay (permanent injunctions)). Yet, its explicit acknowledgement of the role which “new” prior art can have may give accused infringers and their defense counsel some degree of satisfaction. Using “new” prior art not considered by the Patent Office during prosecution, along with the benefit of good jury instructions emphasizing the proper place of this “new” prior art, defendants may improve their chances of invalidating asserted patents.
In Luther v. Countrywide Financial Corp., No. B222889, 2011 WL 1879242 (Cal. App. 2d Dist. May 18, 2011), the California Court of Appeal for the Second District reversed the dismissal of a class action asserting a claim under Section 11 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77k. The trial court had sustained a demurrer on the ground that the court lacked jurisdiction by operation of the federal Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The Court of Appeal interpreted SLUSA to establish exclusive federal court jurisdiction only over “covered class actions” that involve a defined “covered security.” Because the securities in this case did not fit within that definition, the Court held, the state court had concurrent jurisdiction over the case. The Luther decision draws a fine distinction in SLUSA between class actions that may be removed to federal court and class actions as to which the federal courts have exclusive jurisdiction, thereby distinguishing decisions from other jurisdictions that appeared, at least on their face, to reach a contrary conclusion.
In Luther, investors who had purchased mortgage-backed securities from Countrywide Financial Corporation (“Countrywide”) filed a class action complaint in California Superior Court against Countrywide and certain of its officers alleging that they made false and misleading statements in registration statements and prospectus supplements related to the securities they had purchased. Plaintiffs’ complaint was based exclusively on alleged violations of the Securities Act.
The Securities Act, as originally enacted, provided for concurrent jurisdiction in state and federal courts and barred removal of claims filed in state court. In 1998, in an attempt to address perceived abuses in securities class actions, Congress enacted SLUSA to, among other things, amend the Securities Act to vest federal courts with exclusive jurisdiction over certain Securities Act class actions. Defendants demurred to the complaint by invoking SLUSA, arguing that the state court lacked jurisdiction because plaintiffs’ lawsuit was a “covered class action” over which the federal courts had exclusive jurisdiction. The California Superior Court for the County of Los Angeles sustained the demurrer.
The Court of Appeal reversed. The Court began by observing that in order for a class action to be subject to exclusive federal jurisdiction under SLUSA, it must be a “covered class action” and implicate a “covered security.” To support its conclusion, the Court examined the language of Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), which states:
The district courts of the United States and the United States courts of any Territory shall have jurisdiction of offenses and violations under [the Securities Act] and under the rules and regulations promulgated by the Commission in respect thereto, and, concurrent with State and Territorial courts, except as provided in Section 16[15 USC § 77p] of this title with respect to covered class actions . . . .
Applying the rules of statutory construction, the Court then noted that Section 22 (i) does not say that there is an exception to concurrent jurisdiction for all covered class actions; (ii) references Section 16 in its entirety (which requires both a “covered class action” and a “covered security” for exclusive federal jurisdiction); and, (iii) reading the statute as a whole, Section 16 specifies that a lawsuit must involve a “covered security” for it to be removable to federal court. On this basis, the Court reasoned that:
[n]othing . . . in section  describes this case, and . . . nothing in section  puts this case into the exception to the rule of concurrent jurisdiction . . . the fact that the case is not precluded and can be maintained, but cannot be removed to federal court if it is filed in state court, tells us that the state court has jurisdiction to hear the action.
Although defendants cited dicta from several federal district court decisions that supported their argument that all “covered class actions” are subject to exclusive federal jurisdiction (see, e.g., Knox v. Agria Corp., 613 F. Supp. 2d 419 (S.D.N.Y. 2009)), the Court of Appeal distinguished each because they all involved “covered securities” and concerned removal jurisdiction. The Court also countered by citing contrary authorities.
The Court recognized that that “SLUSA was enacted to stem the shift from federal to state courts and to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of” the Private Securities Litigation Reform Act of 1995. Nonetheless, the Court held, “an intent to prevent certain class actions does not tell us that this class action, or all securities class actions must be brought in federal court.”
In Luther, the parties did not dispute that the action was a “covered class action” which did not concern a “covered security.” Under the Court of Appeal’s interpretation of SLUSA, this was dispositive for purposes of the exclusivity of federal jurisdiction.
The Federal Circuit issued its much anticipated en banc decision in Therasense, Inc. v. Becton, Dickinson & Co. on May 25, 2011 regarding inequitable conduct by patent applicants and attorneys during prosecution of patents. The Federal Circuit established a new standard for materiality and clarified its contradictory precedent on intent to deceive—the two factual predicates that must be established to prove inequitable conduct. The Court thus recognized the problems created by the overuse of inequitable conduct claims by litigants and the differing standards applied by federal courts in evaluating issues of materiality and intent to deceive.
Inequitable conduct is an affirmative defense to a claim of patent infringement. At its most fundamental level, the battle cry of inequitable conduct is an assertion that the patent applicant or lawyer acted fraudulently before the United States Patent and Trademark Office. Therefore, notwithstanding any finding of infringement, the patent should be rendered unenforceable.
Because of the frequency with which it is plead, the potential devastating effects it has on the rights of the patent owner, the potential harm it may cause to the reputation of patent lawyers associated with the prosecution of the patent and the harm it has caused the examination process before the Patent and Trademark Office, the Federal Circuit has described inequitable conduct as both an “atomic bomb” and a “plague” on the patent system.
Court Creates “But-For” Test for Materiality
The Court laid out a new test for materiality that significantly raises the bar. With one exception, the Federal Circuit explained that information is material only when a claim would not have been allowed by the Patent and Trademark Office had the office been aware of the information. The one exception to this “but-for” test is in cases of affirmative egregious misconduct. For example, where the patent applicant “deliberately planned and carefully executed scheme[s]” to defraud the Patent and Trademark Office or courts, such information and misconduct is always material.
Court Adopts “Single Most Reasonable Inference” Test for Intent
Addressing the “intent” prong, the Federal Circuit clarified that a party must show, by clear and convincing evidence, that the patentee made a deliberate decision to withhold a known material reference. The Court was careful to note that the intent prong is independent of the materiality prong and that the sliding scale approach where a party could demonstrate a lower level of intent if the information was highly material is no longer acceptable. Instead, to meet the test, the evidence must be sufficient to require a finding of deceitful intent in light of all the circumstances. The specific intent to deceive must be the single most reasonable inference able to be drawn from the evidence. Finally, the Court noted that a patentee need not offer any good faith explanation to counter a finding of intent until the accused infringer first proves a threshold level of intent to deceive by such clear and convincing evidence.
Overall, the Federal Circuit adopted a more stringent standard for proving inequitable conduct that is likely to reduce the high number of meritless inequitable conduct claims in litigation. Notwithstanding the high hurdles introduced by way of this landmark opinion, patent applicants still need to take care in managing the disclosure of information during prosecution and be ever mindful of material information including disclosures and arguments made in related foreign applications.
In the recent case of Staub v Proctor Hospital, the United States Supreme Court addressed the so-called “cat’s paw” claim of discrimination under the Uniformed Services Employment and Reemployment Rights Act. In a cat’s paw case, the employee seeks to hold the employer liable for the discriminatory intent of a supervisor who was not the ultimate “decision maker” for the challenged adverse employment action. The Court’s holding in Staub now makes it easier for employees to establish liability in such cases where a biased supervisor has influenced someone else to take the adverse employment action. This case is sure to impact employers, as its holding potentially reaches beyond USERRA and into other types of federal discrimination cases.
Staub worked as an angiography technician for Proctor Hospital. He also served in the U.S. Army Reserve, and took leaves of absence from work in order to attend monthly drill. Staub’s immediate supervisor (Mulally), as well as Mulally’s supervisor (Korenchuk), were allegedly hostile towards Staub’s military obligations. Mulally issued Staub a corrective action for purportedly violating the hospital’s work rules regarding failure to remain in his work area whenever he was not working with a patient. The corrective action directed Staub to report to his supervisors when had no patients. A few months later, Korenchuk reported to the hospital’s vice president of human resources (Buck) that Staub had violated the corrective action by leaving the work area without notifying his supervisors. Buck relied on this report and, after reviewing Staub’s personnel file, made the decision to discharge Staub for failure to comply with the corrective action
Staub later sued the hospital in Federal court for wrongful discharge in violation of USERRA, claiming that his discharge was motivated by his obligations as a member of the Army Reserves. Significantly, that claim did not allege that the decision maker regarding his discharge (Buck) held a discriminatory motive. Instead, and pursuant to the cat’s paw theory, Staub claimed that supervisors Mulally and Korenchuk held discriminatory animus and that their actions influenced the discharge decision. The jury found in favor of Staub on this claim, but the Seventh Circuit Court of Appeals reversed. The Seventh Circuit held that since the decision maker conducted an albeit limited investigation of the facts, her decision to discharge Staub was not singularly influenced by the non-decision maker supervisors holding discriminatory animus. Staub then appealed to the Supreme Court, which reversed the appellate court’s decision.
Writing for the Court, Justice Scalia first noted that USERRA’s statutory language provides that an employer has violated the Act where an employee’s membership in the uniformed services is a “motivating factor” in the employer’s adverse employment action. Justice Scalia’s opinion pointed out that this language is similar to that found in another major Federal employment statute, Title VII of the Civil Rights Act of 1964 (which prohibits discrimination on the basis of race, color, religion, sex or national origin). The key issue for the Court was to define the term “motivating factor” within the context of a cat’s paw case where the decison maker was not motivated by discriminatory intent. The Court held that “if a supervisor performs an act motivated by antimilitary animus that is intended by the supervisor to cause an adverse employment action, and if that act is a proximate cause of the ultimate employment action, then the employer is liable under USERRA.” Thus, the adverse employment action must be both the intended consequence of the non-decision maker’s conduct, as well as proximately caused by that conduct. The Court noted that proximate cause requires only “some direct relation” between the supervisor’s conduct and the adverse employment action. This holding apparently rejects any rule that a decision maker’s independent investigation prior to taking the adverse action automatically precludes liability for the employer. However, the Court left open the possibility that an investigation which leads to reasons unrelated to the supervisor’s biased conduct, and which would justify the adverse employment action, would allow the employer to avoid liability.
The Supreme Court’s decision in Staub will almost certainly encourage more employees to pursue “cat’s paw” litigation. Also, because of the similarity in statutory language with respect to the requirement that unlawful discrimination be a “motivating factor” for an adverse employment action, it seems likely that this decision will be applied in Title VII as well as USERRA cases. However, while the Court’s decision has made it easier for employees to advance a cat’s paw claim, employers should keep several important things in mind. First, the employee still has the burden of proving that the non-decision maker supervisor engaged in conduct motivated by discriminatory intent. Second, whenever the employer receives information which could prompt the taking of an adverse employment action, an immediate and thorough investigation should be undertaken. A decision maker must review all the facts and interview all relevant employee witnesses in order to make an informed and proper judgment as to the proper action. Lastly, employers should make sure that all supervisors are trained with respect to equal employment opportunity and anti-harassment laws, and that the employer’s policies in these areas are up to date. These steps still provide meaningful defenses to reduce the likelihood that any adverse employment action can be challenged successfully.
The U.S. Court of Appeals for the Federal Circuit settled a split among the district courts when it held that false patent marking claims must be pled with particularity under Fed. R. of Civ. Pro. 9(b). In granting the defendant’s petition for a writ of mandamus, the Federal Circuit held that the district court should have dismissed a false marking complaint for failure to plead, with particularity, the circumstances of defendant’s alleged intent to deceive the public. In re BP Lubricants USA Inc., Misc. Docket No. 960 (Fed. Cir., Mar. 15, 2011) (Linn, J.).
The plaintiff had included in its complaint allegations that BP was a “sophisticated company” having experience applying for, obtaining and litigating patents. Based on that categorization, the plaintiff claimed BP “knew or should have known” that the patent had expired. The district court concluded that the complaint satisfied the requirements of Rule 9(b) because it had pled the who, how, what and when of the alleged fraud. BP sought mandamus at the Federal Circuit.
The Federal Circuit clarified that in all cases sounding of fraud or mistake, Rule 9(b) requires the plaintiff to plead “with particularity the circumstances constituting the fraud or mistake.” The Court noted that Rule 9(b) acts as a “safety valve to assure that only viable claims alleging fraud or mistake are allowed to proceed to discovery. … Permitting a false marking complaint to proceed without meeting the particularity requirement of Rule 9(b) would sanction discovery and adjudication for claims that do little more than speculate that the defendant engaged in more than negligent action.” The Court stated that the district court erred in denying BP’s motion to dismiss because it expressly relied on the plaintiff’s general allegations that BP knew or should have known that the patent expired. The Court explained that a complaint must provide some objective indication to reasonably infer that the defendant was aware that the patent expired. Accordingly, general allegations that the defendant is a “sophisticated company” and that it “knew or should have known” that the patent expired are insufficient under Rule 9(b).
The Court went further and provided exemplary allegations with which a court may reasonably infer an intent to deceive, “[alleging that a] defendant [had] sued a third party for infringement of a patent after the patent had, e.g., expired or made multiple revisions of the marking after expiration” may set forth facts upon which intent to deceive can be reasonably inferred.
The U.S. Court of Appeals for the Federal Circuit has affirmed that an examiner meets the requirements for establishing prima facie invalidity where the examiner provides the statutory basis of the rejection and the references relied upon in a sufficiently articulate and informative manner as to meet the notice requirement under 35 U.S.C. § 132. In re Jung et al., Case No. 10-1019 (Fed. Cir., March 28, 2011) (Linn, J.).
After the examiner issued an office action, rejecting all claims of Jung’s application for anticipation or single-reference obviousness, Jung responded by arguing that the claimed “well-charge-level controller” was different from the reset controller of the prior art. The examiner finally rejected all claims, noting that he found Jung’s argument unpersuasive and finding the claimed well-charge-level controller to be the same as the prior art reset controller. Jung appealed to the Board of Patent Appeals and Interferences (the Board).
In the appeal, Jung argued that the claimed “well-charge-level controller” must “more or less continuously adjust the control signal inputs of active charge source and/or active charge sink” as disclosed in one embodiment and thus is different from the reset controller disclosed in the prior art. The Board, however, construed the claimed “well-charge-level controller” as “any component that controls the charge level of a well.” In response to Jung’s request for rehearing, the Board rejected Jung’s argument that the Board erred in failing to address whether the examiner had set forth a prima facie rejection. Jung appealed to the Federal Circuit.
On appeal, Jung argued that the examiner failed to make a prima facie case of anticipation. Jung argued that establishing a prima facie case requires more than just a notice under §132 and that theprima facie case requirement is not met unless the examiner provides a reasonable construction and evidence bridging the facial differences between that reasonable claim construction and the purported anticipatory reference. Further, instead of arguing that the Board’s decision constituted a new ground of rejection, Jung argued that the Board acted as a “super-examiner” by performing independent fact-finding and applying an improperly deferential standard of review to the examiner’s rejections.
In rejecting Jung’s prima facie invalidity argument, the Court ruled that “[t]here has never been a requirement for an examiner to make an on-the-record claim construction of every term in every rejected claim and to explain every possible difference between the prior art and the claimed invention in order to make out a prima facie rejection.” Further, the Court wrote, “there is no reason to impose a heightened burden on examiners beyond the notice requirement of §132.” The Court found that the examiner’s discussion of the theory of anticipation, the prior art and the identification of where each limitation of the rejected claims is shown in the prior art by specific column and line number was more than sufficient to meet the burden.
In rejecting the “super-examiner” argument (as applied to the Board), the Court ruled that the findings by the Board were simple factual assertions and the same as the examiner’s findings. The Court further ruled that “[t]o assert that the Board’s thoroughness in responding to his explanation put it in the position of a ‘super examiner’ would limit the Board to verbatim repetition of the examiner’s office actions, which would ill-serve the Board’s purpose as a reviewing body.
On April 20, 2011, the Federal Circuit granted the petition by Akamai Technologies for rehearing en banc its appeal in Akamai Technologies, Inc. v. Limelight Networks, Inc. The order vacated the earlier opinion of December 20, 2010. The order includes a request to file new briefs addressing this question:
If separate entities each perform separate steps of a method claim, under what circumstances would that claim be directly infringed and to what extent would each of the parties be liable?
This question asks for a definition of what constitutes joint infringement and how to apportion liability. Joint infringement is based on a theory is that one acts as a “mastermind” who orchestrates the infringement and that the activities of the other joint infringer(s) must be under the “direction and control” of the mastermind. The result is as if the mastermind performed the infringement by itself. BMC Res., Inc. v. Paymentech, L.P., 498 F.3d 1378, 1380 (Fed. Cir. 2007).
The latest tests for what constitutes “direction and control” have been selective. For example, the court in BMC Resources referenced a legal principle that imposed “vicarious liability on a party for the acts of another in circumstances showing that the liable party controlled the conduct of the acting party.” And in the Akamai opinion of December 20, 2010 (just vacated), the Federal Circuit panel had set forth a standard that required an agency relationship between the parties. It reiterated that joint infringement occurs when a party is contractually obligated to the accused infringer to perform its part of the method, according to cases like Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008) and BMC.
Questions of joint infringement are encountered frequently in patent litigation of software, e-commerce, and internet-related inventions. It is not uncommon to find method claims reciting a step or two that a consumer or other user of the system might perform. Consequently, it can be difficult to prove “direction and control” for a lot of software/internet method patents that involve more than one actor to perform the recited method steps (typically a consumer plus at least one other actor). Accordingly, patent prosecutors endeavor to draft claims that require actions by a single actor whenever possible to avoid the extra hurdle that such cases have made to proof of joint infringement. Of course, there are times when this is difficult to do because software systems are always evolving and it can take years for patents to issue.
Patents that have method claims requiring activities by multiple actors to infringe may not easily be corrected with reexamination, since valid claim amendments in reexamination cannot broaden claim scope. Such corrections can be made in a broadening reissue application, but it must be filed within two years of issue of the original patent.
We shall have to wait for the decision of the en banc Court (and any resulting new law) to determine the best way to correct claims in view of any changes to joint infringement law.
Wrongful termination cases may be difficult enough to win. When you add the potential that the employee may also sue for defamation and other privacy related torts arising from termination, you increase the dangers. In Corey v. Pierce County, 154 Wn. App. 752 (2010), Pierce County learned how expensive such awards can be when the Washington Court of Appeals affirmed a $3 million award for defamation and privacy claims related to a deputy prosecuting attorney’s termination.
The plaintiff was a 30-year deputy prosecuting attorney who was promoted to chief criminal deputy. Shortly after her promotion, she raised concerns about a prosecutor in the sexual assault unit and sought to have him transferred. There were problems associated with his transfer, and the plaintiff’s superior, the Pierce County Prosecuting Attorney, became concerned about her ability to communicate and manage the transfer. When she challenged his decision, he started the process to terminate her. She, however, resigned before he could communicate the “good news.”
In her desk, the county discovered money that had been raised for a colleague whose child was ill, but had not been distributed. News of these collected funds leaked to a local newspaper which published an article about the money and her departure from the Prosecuting Attorney’s office. In the article, her supervisor stated that he had lost confidence in her, questioned her truthfulness and claimed that she was subject to a “criminal investigation” regarding the money in her desk. In the article, her supervisor also stated that the plaintiff had told several lies in connection with the transfer of the deputy prosecutor out of the sexual assault unit. The plaintiff sued claiming that she was devastated emotionally and professionally, suffered severe depression, became suicidal and experienced epileptic seizures because of the article. She also claimed that she was unable to find another legal position and was unemployable for the rest of her life because of the article. She sued her supervisor and the County for invasion of privacy, defamation, defamation by implication, false light, outrage, intentional and negligent infliction of emotional distress and breach of contract. After a three week trial, the jury returned a verdict in excess of $3 million.
On appeal, the Court held that it could only overturn the jury verdict where there was a lack of substantial evidence and that the jury verdict would not be disturbed. Because her supervisor knew that the internal investigation had not revealed any improper conduct – simply money waiting to be disbursed to the child – his statements to the press established sufficient evidence for the defamation and false light claims. The Court also found that her supervisor’s statements concerning the investigation into missing donations, in which he had essentially accused her of criminal behavior despite knowledge that the internal investigation revealed a lack of substance, created a viable claim of intentional infliction of emotional distress. The Court did reject the plaintiff’s claim of negligent dissemination of harmful information. It held that Washington does not impose a duty of care on employers regarding the disclosure of possibly truthful but harmful information to third parties.
The final claim related to an alleged promise by the supervisor that, before taking a management position with his administration, the plaintiff would receive “just cause” termination. Many public employees, such as assistant prosecutors, are covered by civil rules or collective bargaining agreements that provide for “just cause” termination. Supervisors, however, do not receive the same protection. The plaintiff claimed that she had multiple conversations with her supervisor who promised that she would have such just cause termination. The supervisor disagreed and the county pointed out that there was no corroborating testimony to establish such a promise. The Court held that, because the jury believed the plaintiff, the county lost.
Finally, the Court addressed the county’s argument that it should have been allowed to introduce evidence that the plaintiff had been the subject of prior internal investigations, that her husband had been prosecuted for embezzlement and that post-employment she had filed for bankruptcy and divorce. At the trial court level, the county sought to introduce this evidence as to the reasonableness of the investigation into the missing money and to rebut her claim that the newspaper article had damaged her reputation – i.e., it was already damaged. Although conceding such evidence was potentially relevant, the Court nonetheless affirmed its exclusion as unfairly prejudicial because this evidence stemmed from her personal life. The Court found that such evidence did not concern her reputation in the community but about her past personal life.
The takeaways from Corey relate to post-employment publication of reasons for termination. Employers should limit the details they provide to third parties, such as new employers, friends and family, and of course, newspapers. When discussing the reasons for the termination, the employer should reveal only facts that have been substantiated. Opinions should be avoided.
When an employer knowingly publishes facts that are unsubstantiated, it faces a potential claim for defamation, false light and other privacy related claims. Another takeaway from Corey is that employers should not orally agree to alter the at-will employment relationship with an employee. Promises of just cause termination or notice can result in a breach of contract claim that includes recovery of attorneys’ fees and costs of litigation. Although an employee’s claim of just cause termination may be oral and disputed by a supervisor as in Corey, juries do not always believe an employer’s proffered reasons for the termination. Arguably, since most juries are composed of employees and not supervisors, they may prefer to believe that an employer made a promise of just cause termination. Thus, it is prudent to memorialize the at-will nature of employment in written documents such as an employment handbook, any employment agreement, an offer letter, or even simply in an email. Finally, the Coreydecision acts as cautionary tale for employers that not all “smoking gun” evidence will be admitted at trial and they should instead focus on developing the factual bases for their decisions.
A California appellate court has ruled that the “pay-or-perform under protest” procedures of Government Code sections 66020 and 66021 do not apply to all types of development exactions. In its opinion, the Sixth Appellate District narrowed the scope of the statutory pay under protest provisions, and held that they should be interpreted so as to be available for review of exactions imposed by a local agency as a condition of development approval only if the exaction is “for the purpose of defraying all or a portion of the cost of public facilities related to the development project.”
The court held that there was no showing that the City’s affordable housing requirement imposed on the developer (exacting five homes at admittedly “below market” prices set by the City) was intended to serve the purpose of defraying the cost of public facilities related to the development project, so the pay under protest procedure was not applicable and the developer’s protest and action for review were deemed untimely. The court emphasized that its decision was limited to the facts of this case.
The City approved a 42 home development project in 2007, subject to a condition that required the developer to execute a “Below Market Rate” housing agreement prior to obtaining building permits. The BMR agreement required the developer to sell five of the new homes to qualified buyers selected by the City at below market prices, to be adjusted annually. In 2009, when construction was underway and the time for sale of the BMR homes was approaching, the developer sent a written protest of the requirements to convey the new homes at the BMR prices as required by the City, and filed suit for review and relief from the BMR exactions, under Government Code section 66020. The City demurred on the grounds that the action was barred by the short statutes of limitations for either section 66499.37 (for challenges to decisions under the Subdivision Map Act) or section 65009 (for challenges to planning or zoning decisions). Plaintiff argued that neither applied, because the BMR requirement was not imposed as a tentative map condition, but rather as a special permit condition; and because section 66020 was the more specific statute applicable to review of development fees and other exactions. The lower court sustained the City’s demurrer, and the appellate court affirmed, albeit on somewhat different grounds.
The Court of Appeal agreed that if the protest procedure of section 66020 applied to this action for review of the City’s requirement that the developer provide “below market rate” homes, then it would have been error to sustain the demurrer. The “pay under protest” procedure enacted in 1983 (and currently codified at Government Code Section 66020) provides: “Any party may protest the imposition of any fees, dedications, reservations, or other exactions imposed on a development project . . .” by tendering payment, or performance, of the disputed exaction under protest within 180 days of receiving written notification from the City that the protest period has commenced. Since the City had never given that statutory notification, the action would not be untimely if section 66020 were applicable to review of these housing exactions.
The court tried to ascertain the Legislature’s intent in providing for protest of development fees or “other exactions” in section 66020 and 66021. The decision appears to acknowledge that the BMR housing requirements could be viewed as a form of “exaction” for some purposes, but not necessarily for the limited purpose of determining whether the pay under protest statute may apply. The court observed that “not all exactions imposed by a public entity on a development project constitute an ‘other exaction’ within the meaning of section 66020 and 66021.” Noting that the term “other exaction” is not defined in either of the pay under protest statutes, the court concluded that “exaction” should be interpreted for purposes of this protest statute by reference to language from a distinct part of the Mitigation Fee Act (Gov’t Code section 66000(a)) defining “fees” as charges “to defray the cost of public facilities, etc.” Alternatively, the decision appears to hold that the protest statutes also apply to “other exactions” if imposed for the substantially broader “purpose” as stated in a 2005 Supreme Court decision “to alleviate the effects of the development on the community.”
The decision thus requires that “the purpose of the exaction … must be scrutinized,” in order to determine the applicable procedure for seeking review of a development exaction, and the applicable statute of limitations. It may be difficult to definitively identify and conclusively ascertain the “purpose” of an exaction in many cases. In this case, the court took judicial notice of the City’s Municipal Code to determine that the City’s “purpose” for its below market rate housing requirement was to “enhance the public welfare” by mandating that future housing development contribute to attaining the City’s housing goals, rather than to defray the cost of public facilities related to the development. (The decision did not examine whether the housing exactions here met the alternative purpose test, i.e., “to alleviate the effects of the development on the community.”) Despite announcing a new pleading requirement to be met by parties seeking to follow the pay under protest procedure (i.e., the “purpose” of the challenged exaction), the court affirmed the denial of any leave to amend, and apparently accepted “the express language of the City’s below market housing ordinance” as being conclusive as to the purpose of the exaction in this case. The court concluded by emphasizing that its decision “is limited to the facts of this case.”
To the extent that this decision interprets the pay (or perform) under protest statutes as being applicable only to such “exactions” as may be imposed for one of the newly required limiting purposes set forth in the decision, it raises several questions. The decision ascertains the “legislative intent” for the term “other exactions” as used in the 1983 and 1984 protest statutes, by incorporating a limitation (i.e., for the “purpose” of “defraying the cost of public facilities”) from distinct legislation that wasn’t adopted until 1987. The Legislature amended the protest statute in 1996 to require written notification of the final amount of a fee or exaction and the commencement of the time for protest because of concern that there was uncertainty as to when a fee or exaction might be deemed to have been “imposed” for purposes of timely protests and limitations. By limiting the protest procedures to only such exactions as are imposed for the specified “purpose,” the decision may add to such uncertainty. The decision would apparently require local governments, development applicants, and the courts to try to identify the ostensible “purpose” for each of the many types of exactions imposed as conditions of development approval, in order to determine what method of review and what statute of limitations may be applicable. The new uncertainty inherent in such efforts, requiring applicants to guess as to whether the protest procedure is applicable in any particular case, may limit the utility of a perform under protest process, or fail to achieve the Legislature’s purpose for creating a distinct statutory protest process for fees and other development exactions.
In Arbeeny v. Kennedy Executive Search,Index No. 105733/2007 (Sup. Ct., NY County, Jan. 14, 2011) (“Arbeeny“), Defendants Jason Kennedy (“Kennedy”) and Kennedy Associates (“Kennedy Associates “) (collectively the “Moving Defendants”) moved to dismiss on the basis of Plaintiff Daniel Arbeeny’s failure to serve the complaint in a timely manner pursuant toCPLR § 306-b. Justice Eileen Bransten, of the New York Commercial Division, granted the Moving Defendants’ motion to dismiss as to Kennedy but denied it as to Kennedy Associates. In so doing, she addressed issues that may be important to United States-based companies that have a relationship with foreign corporations.
Plaintiff was formerly employed by Kennedy Executive Search (“KES”). KES was a New York-based executive search firm and was affiliated with Kennedy Associates, a British executive search firm. The underlying suit arose when KES allegedly lowered Plaintiff’s salary and terminated him for refusing to accept the reduction, allegedly a violation of Plaintiff’s employment agreement. Plaintiff commenced the action seeking to recover outstanding salary and commission pay.
KES and Jack Kandy, the former president of KES, were the only defendants that Plaintiff served. These defendants moved to dismiss. The court granted their motion to dismiss in April of 2008, but the First Department reversed in part in January of 2010. After the case was remanded, Kennedy Associates and Kennedy, moved to dismiss on the ground that they had not been served.
“Mere Department“ and Agency Theories
In opposing Kennedy Associates’ motion to dismiss, Plaintiff argued that service upon KES constituted service upon Kennedy Associates because KES was a “mere department” of Kennedy Associates. Plaintiff also argued that KES was Kennedy Associates’ agent.
New York courts have repeatedly held that where a subsidiary is shown to be a “mere department” of a parent corporation, service on the subsidiary will constitute service on the parent. Though she acknowledged this history, Justice Bransten ultimately held that Plaintiff failed to show that KES was a mere department of Kennedy Associates. In so doing, she relied on a number of factors identified by the Second Circuit inVolkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120-22 (2d Cir. 1984). These factors include (i) the financial dependency of the subsidiary on the parent, (ii) the degree to which the parent corporation interferes in the selection and assignment of the subsidiary’s executive personnel and fails to observe corporate formalities, and (iii) the degree of control over the marketing and operational policies of the subsidiary. See id. While Plaintiff alleged that these factors were present, Justice Bransten found that Plaintiff failed to submit evidence to support the allegations and, therefore, the Court held that KES was not a “mere department” of Kennedy Associates.
However, Justice Bransten found Plaintiff’s agency theory to be meritorious. Because KES and Kennedy Associates were commonly owned and KES was established to do all the business that the United Kingdom-based Kennedy Associates could do if it were present in New York, Justice Bransten held that KES was, for jurisdictional purposes, an agent of Kennedy Associates. Thus, service upon KES was sufficient for service upon Kennedy Associates.
The Moving Defendants asserted that the “mere department” and agency theories were inapplicable in actions where New York’s long-arm statute,CPLR § 302, is the alleged basis for personal jurisdiction. The Moving Defendants argued that because Plaintiff’s cause of action had a basis in New York, Plaintiff could not invoke the “presence doctrine” where another basis for jurisdiction existed. The presence doctrine provides that if an entity is doing business in New York, it is “present” in New York for jurisdictional purposes. Justice Bransten rejected Moving Defendants’ argument. The Court held that while there is no requirement that a court undertake the presence doctrine analysis when the long-arm statute provides a basis for personal jurisdiction over the parent corporation, this does not mean that the presence doctrine cannot be used when there is an alternative basis for personal jurisdiction. See Arbeeny, at pg. 6.