Choice of Law After England’s Blue Sky One Case

England’s Blue Sky One case presents perplexing problems for bankers, aircraft operating lessors, airlines and their lawyers.[1]This note discusses the fallout from Blue Sky One, and explains how parties can address these problems in their affected aircraft financing deals.

The Problem

Following the Blue Sky One case, there is an issue as to whether an English law mortgage creates a valid security interest in an aircraft in certain situations. A valid security interest is created under English law without additional requirements only when an aircraft is located in England at the time of closing or where the location of an aircraft is unknown.[2]

In all other situations there are now complicated legal and practical risks to address before parties can be comfortable that an English law mortgage is effective. In summary, the requirements are as follows:

  • If an aircraft is outside England at closing, an English mortgage must be valid under the law of the jurisdiction where the aircraft is located in order to be effective.
  • If an aircraft is over international waters at closing, best practice is to ensure the mortgage is valid under the law of the jurisdiction where the aircraft is registered to ensure the mortgage is effective.[3]

These new requirements have cost, risk and timing implications for transactions using an English law mortgage. A best case scenario resolution addressing the new requirements is that local counsel in the jurisdiction where an aircraft is located or registered will be able to give a clean opinion confirming that the English law mortgage is valid under local law. At worst, local counsel will give an opinion containing assumptions or exclusions that push the risk of a mortgage being invalid back to the parties, or will not be able to give an opinion at all – potentially because the English law mortgage will not, in fact, be effective under local law (as was the case in Blue Sky One).

Whichever scenario applies, Blue Sky One means that using English law will now result in higher legal costs and potential timing and closing risk.  Consequently, lenders, lessors and airlines should question their counsel carefully to understand new risks that may exist, even where a local law opinion has been provided.

The Solutions

The issues with Blue Sky One can be side-stepped by having an aircraft mortgage governed by laws other than English law. New York law is an alternative to consider, with a developed body of case law, and courts and a legislature that openly induce commercial contracts to designate New York law.

A choice of New York law in a commercial case will receive nearly absolute respect in New York courts. Section 5-1401 of New York’s General Obligations Law provides that:

“The parties to any contract, agreement or undertaking…covering in the aggregate not less than two hundred and fifty thousand dollars… may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.”

The general rule in Section 5-1401 leaves little scope for the type of uncertainty created by Blue Sky One. If an aircraft is worth more than $250,000, a mortgage under New York law will validly create a security interest in it regardless of aircraft location.[4]

A second solution is to rely solely on a mortgage governed by the law of the jurisdiction where the aircraft is located or registered at closing.[5]This will be less desirable if local rules on enforcement are not as familiar or as effective as the laws of a “moneycenter” jurisdiction like New York. Taking only a local mortgage may also necessitate local counsel and local courts becoming more involved in the enforcement process, potentially reducing certainty and increasing enforcement risk for lenders.

It is worth noting that, if the debtor is located in a country that has adopted the Cape Town Convention, then the parties arguably have a broader choice for the mortgage’s governing law. The Cape Town Convention provides that, so long as the relevant contracting state has made the election under Article XXX(1), the transaction parties are free to choose the governing law of their agreements.[6]In this case, a New York law mortgage still would be a sensible choice, as this would give the parties the choice of law protections afforded by both The Cape Town Convention and New York law.


Following Blue Sky One, lenders taking English law mortgages over aircraft that are not located in England at closing must take additional steps to ensure that they have an effective security interest including confirming that the English law mortgage is valid under the law of the jurisdiction of the location of the aircraft or considering a New York law governed mortgage.

New York’s Highest Court Reinstates $5 Billion Lawsuit By Big Banks Against MBIA

New York’s highest court yesterday reinstated a $5 billion lawsuit brought by a group of banks, including Bank of America and Wells Fargo, against insurance giant MBIA. ABN AMRO Bank, et al. v. MBIA Inc., et al., — N.E. 2d –, 2011 WL 2534059, slip op. (June 28, 2011). The Plaintiffs-banks sought to annul MBIA’s 2009 restructuring, which separated the insurer’s municipal bond business from its troubled structured finance unit, on the grounds that the transactions left the insurer incapable of paying insurance claims in violation of New York’s Debtor and Creditor Law. The Superintendent of Insurance in New York approved the transactions that effectuated the split of MBIA’s business in 2009.

The Court of Appeals’ decision represents a victory for Wall Street banks in one of the many battles being fought in connection with the collapse of the financial markets. Those banks saw their fraudulent transfer claims against MBIA dismissed earlier this year by the Appellate Division, First Department. The intermediate appellate court determined that the banks’ fraudulent transfer claims were a “collateral attack” on the Superintendent’s authorization of the restructuring and that an Article 78 proceeding challenging that authorization was the sole remedy available to the Plaintiffs. The banks’ remedies under Article 78 – a procedure entitling aggrieved parties to challenge agency decisions – would be limited compared to those remedies available in state or federal court under a fraudulent transfer theory.

At issue for the Court of Appeals was whether the Plaintiffs-banks had the right to challenge the restructuring plan in light of the Superintendent’s approval. Plaintiffs argued that the restructuring was a fraudulent conveyance because MBIA Insurance siphoned approximately $5 billion in cash and securities to a subsidiary for no consideration, thereby leaving the insurer undercapitalized, insolvent and incapable of meeting its obligations under the terms of the respective insurance policies. MBIA countered that, as held by the First Department, Plaintiffs’ claims were impermissible “collateral attacks” on the Superintendant’s approval of the restructuring.

In a 5-2 decision, the Court of Appeals modified the First Department’s decision and reinstated the Plaintiffs’ breach of contract, common law, and creditor claims. In an opinion authored by Judge Carmen Beauchamp Ciparick, the Court held that NY Insurance Law does not vest the Superintendent with “broad preemptive power” to block the banks’ claims. MBIA Inc., 2011 WL 2534059, slip op. at 16.

“If the Legislature actually intended the Superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions under the Debtor and Creditor Law or the common law, we would expect to see evidence of such intent within the statute. Here, we find no such intent in the statute.” Id.

Critical to the Court’s holding was that Plaintiffs had no notice or input into the Insurance Department’s decision to approve MBIA’s restructuring. “That the Superintendent complied with lawful administrative procedure, in that the Insurance Law did not impose a requirement that he provide plaintiffs notice before issuing his determination, does not alter our analysis,” Judge Ciparick wrote. “To hold otherwise would infringe upon plaintiffs’ constitutional right to due process.” MBIA Inc., 2011 WL 2534059, slip op. at 21. Moreover, the Court noted that Plaintiffs’ claims could not be properly raised and adjudicated in an Article 78 proceeding. Id.

The Court’s decision re-opens claims by multiple financial institutions that MBIA instituted the restructuring in order to leave policyholders without financial recourse.

The case is ABN AMRO BANK NV. et al., v. MBIA Inc., et al, 601475-2009 (N.Y. State Supreme Court, New York County.)

EPA Takes Action to Protect Ground Water from Petroleum Contamination

(New York, N.Y.) The U.S. Environmental Protection Agency (EPA) has issued a complaint to the owners and operators of several upstate New York gasoline stations for violating federal regulations governing seventeen underground storage tanks. The complaint, which seeks $233,000 in penalties, was issued to Andrew B. Chase; Chase Services, Inc.; Chase Convenience Stores, Inc., and Chase Commercial Land Development, Inc. These companies owned or operated gas stations in the towns of Lyon Mountain, Plattsburgh, Peru, Redford and Dannemora in upstate New York with underground storage tank violations.

“Gas station owners have an important role to play in ensuring that ground water is not contaminated with petroleum,” said EPA Regional Administrator Judith Enck. “When underground storage tanks are not properly maintained, they can leak and contaminate ground water, which in many instances in this area of New York is used for drinking water.”

The complaint alleged that the various owners and/or operators failed to:

  • Test the protection system that is designed to prevent corrosion, in three underground tanks;
  • Perform annual tests of automatic line leak detector systems for sixteen underground tanks;
  • Provide adequate overfill prevention equipment for three underground tanks;
  • Conduct an annual leak test, or conduct monthly monitoring of five underground pressurized pipes;
  • Report, investigate and confirm a suspected release at one facility;
  • Properly cap off and permanently close one underground tank; and
  • Keep adequate records of release detection monitoring.

“Situs of the Injury” for Exercising Personal Jurisdiction over Defendant for Online Copyright Infringement Is Location of Copyright Owner

In a decision favorable to copyright owners based in the state of New York, the New York State Court of Appeals held that in copyright infringement cases involving the uploading of copyrighted literary works onto the internet, the situs of the injury for purposes of determining personal jurisdiction under New York’s long-arm jurisdiction statute is the location of the copyright holder and not the location of the infringing conduct.   Penguin Group (USA), Inc. v. American Buddha, 2011 N.Y. Slip Op. 02079, 2011 WL 1044581 (N.Y., March 24, 2011). (Graffeo, J.)

Plaintiff Penguin Group (USA) is a book publisher based in New York City.   Defendant American Buddha is an Oregon not-for-profit corporation with a principal place of business in Arizona.  American Buddha operates two websites, hosted on servers in Oregon and Arizona, that make available free of charge to its members a variety of publications.  Penguin Group brought a copyright infringement action in New York federal court, alleging that the defendant published complete copies of four of Penguin’s books on the defendant’s websites.  The electronic copying and uploading of the books occurred in Oregon or Arizona.

American Buddha moved to dismiss the complaint for lack of personal jurisdiction, arguing that as an Oregon company, it possessed insufficient ties to New York.   Further, the plaintiff had not alleged any infringing activity within New York.   Penguin Group claimed that jurisdiction was proper under New York’s long-arm jurisdiction statute, which provides jurisdiction over non-New York residents who commit tortuous acts outside of the state that result in injuries within New York.  The district court granted the defendant’s motion to dismiss, holding that the plaintiff was injured in Oregon or Arizona where the copying and uploading of the copyrighted works took place.

On appeal, the U.S Court of Appeals for the Second Circuit recognized a split of authority in New York district courts concerning the application of New York’s long-arm statute to copyright infringement cases involving out-of state defendants and certified the issue for consideration to the New York Court of Appeals.   After reviewing the applicable New York cases, the New York Court of Appeals determined that the jurisdictional analysis required in internet cases is different than that used in traditional commercial tort cases.   Because the infringed works were made available to internet users everywhere there was internet access, it was “difficult, if not impossible, to correlate lost sales to a particular geographic area,” as would be the focus in a more traditional commercial tort case. Therefore, in internet copyright infringement cases the court determined that it was more reasonable to determine that the injury caused by the infringement was suffered where the copyright owner is located.  The decision clarifies that New York copyright owners may bring infringement actions in New York for online infringement of their literary works, even if the infringing download or use occurs outside of the state.

Donald Trump’s Lawsuits Could Turn Off Conservatives Who Embrace Tort Reform

As billionaire Donald Trump flirts with a run for the White House, his lengthy history of filing lawsuits — often to protect his image or gain a financial edge — is making conservatives wary of excessive litigation wince.

The real estate tycoon has been a party (as defendant or plaintiff) in about 100 federal lawsuits, according to a review of a legal database. Moreover, five of Trump’s major companies have been embroiled in over 200 civil suits in federal courts, according to court records.

A few examples:

  • Trump has filed lawsuits against Palm Beach County, Fla., where he owns a palatial home and private club, called Mar-a-Lago, seeking to block a new runway at a local airport because it could increase the noise levels near his property.
  • He has sued his former New York law firm, Morrison Cohen, for citing him as an ex-client on its website and treating him like a “cash cow.”
  • Trump sued former New York Times  journalist Tim O’Brien and his publisher seeking $5 billion in damages because he was depicted in the journalist’s book as worth much less than what Trump claimed was correct.

Trump lost his lawsuit against O’Brien, failed to block Morrison Cohen from using his name as a former client, and so far has been stymied by court rulings in a multi-year battle to halt Palm Beach County’s runway expansion.

For decades, Trump has used the courts to punish and pressure adversaries. No cause is too trivial — from a small Georgia company producing business cards called “Trump Cards” to a Mrs. Universe beauty pageant he claimed infringed on his Miss Universe trademark.

Trump’s heavy use of litigation against critics or those he’s trying to gain a financial edge against could create image and political headaches for him if he chooses to run for the GOP nomination.

“If he’s taken seriously as a candidate it’s going to be appropriate to look at his record of litigation,” conservative legal scholar Walter Olson of the Cato Institute told iWatch News . He said a big question will be “how consistent is [Trump’s record] with the Republican idea that litigation should be a last resort and not a weapon for tactical advantage.”

Suing your own law firm is a “sign of something very dysfunctional,” observed Columbia University law professor John Coffee in an interview.

Some legal analysts said Trump’s heavy use of the courts is fairly commonplace in the real estate business in New York. “I’d say that real estate owners and builders in New York use the courts as a way of buying time when they need it,” New York University law professor Stephen Gillers said. “The courts are an extension of their business plans.”

Curbing excessive litigation — or tort reform — is an issue that business interests and Republicans have pressed for in recent years. Democrats have generally been more sympathetic to trial lawyers, many of whom have been generous financial donors.

Trump spokesman Michael Cohen said Trump has been involved in thousands of business deals and “I’d say the percentage of lawsuits was minimal.”

“There’s a true distinction between a career politician and a successful businessman like Donald Trump. That distinction is that the politician has never been in involved in business that at times requires litigation,” Cohen said.

Trump not only sues others with considerable frequency. In recent years, he has been hit with a few class action lawsuits, including one filed last year against his eponymous online business school, Trump University, alleging fraud and other misconduct.

In a long running litigation fight going back to the mid-1990s, Trump has filed several suits against Palm Beach County, where his 18-acre Mar-a-Lago is located. Trump bought the historic property in the mid-1980s and later converted much of it to a private club which now has over 400 members. He still has a personal residence there too.

Trump’s three suits against the county include two about the local airport runway, arguing that an expansion violates his privacy and creates too much noise and emissions, which hurt his property values.

Trump has tried to curb planes flying over Mar-a-Lago. In a suit filed last July in a Florida circuit court, Trump cited the noise harassment from the planes and accused Palm Beach County airport director Bruce Pelly of “intentional battery.”

Pointing to several actions taken by Pelly to expand the runway, the complaint calls Pelly’s actions “deliberate and malicious.” The complaint noted that Trump sued Pelly personally in the mid-1990s and alleges that in retaliation Pelly is “attacking Mar-a-Lago from the air.”

Last December, a local circuit court judge ruled in favor of the county, which had argued that the Federal Aviation Administration controls flight paths, but gave Trump the option of refiling his suit, which he did in much the same language as before, but with some tweaks.

Amy Petrick, an attorney for Palm Beach County, told iWatch News that last year in responding to Trump’s suit the county “pointed out that battery is something done to a person and not to a building.” Petrick said that in his new complaint, Trump alleges that “Pelly battered him personally by the airplanes that fly over Mar-a-Lago.”

The county has moved to dismiss the new complaint but no action has been taken yet by the court.

On a separate legal battlefield, Trump was embroiled in multiple complaints against the law firm of Morrison Cohen, which represented him for several years.

One suit that Trump filed in 2007 charged Morrison Cohen with legal malpractice.

In that suit, Trump accused the firm of treating him as a “cash cow” because of fees it sought from him after it won a case where Trump claimed he’d been overcharged by a contractor for work on a golf course.

A Westchester County Supreme Court judge awarded Trump about $2 million in damages for breach of an earth moving contract, but only about $40,000 on another claim he made involving infrastructure charges. And the same judge awarded Trump about $1.3      million in attorney’s fees.

Trump, who had paid the firm $1 million for its work, alleged that his lawyers should have advised him not to file his infrastructure claims because they would not be cost effective. Trump reportedly said he had a “Ph.D. in legal fees” as a result of his extensive litigation experience.

The firm countersued Trump, seeking an extra $470,000 in unpaid legal bills. Ultimately in 2009, Trump settled with the firm for an undisclosed sum.

Then in 2008, Trump sued Morrison Cohen in a New York federal court for invasion of privacy because it used his name on its website after he was no longer a client. This claim too was settled in 2009, without the terms being disclosed, but the law firm was permitted to continue citing Trump as an ex-client.

Trump’s ego was also badly bruised by estimates of how much he was worth in a book published in 2005 by then- New York Times reporter Tim O’Brien and Time Warner Book Group. “TrumpNation: the Art of Being the Donald” cited three unnamed sources who pegged his worth at between $150 million and $250 million. By contrast, Trump claimed he was worth between $4 billion and $6 billion, which prompted his $5 billion defamation suit.

In 2009, New Jersey Superior Court Judge Michele Fox rejected the argument of Trump’s lawyers that he had been the victim of “actual malice” because of what O’Brien wrote.

Trump’s image has been a factor in a lengthy legal battle he’s been waging against Rancho Palos Verdes, a small community on a lovely California peninsula where he developed a golf course in 2002. The town, which has an annual budget of $20 million, was sued in late 2008 by Trump for $100 million in damages for allegedly violating his civil rights and defrauding him.

The suit, filed in Los Angeles Superior Court, charges that the town has been delaying plans for adding 20 luxury homes on the grounds of his Trump National Golf Course, while requiring stringent environmental and safety studies since the area is known to have landslides. Trump’s lawsuit charged that the town has forced him to spend “millions of dollars on unnecessary, repetitive, unreasonable and unlawful geologic surveys.”

Trump was also irked because local officials have balked at renaming a highway Trump National Drive.

In January, Los Angeles Court judge Ann I. Jones ruled against part of Trump’s claims by denying him permission to build another 20 homes on the golf course’s grounds, noting that plans for those homes were never submitted to the city. The judge ruled that since the “plaintiffs never applied for permits, they had no clear, present and beneficial rights to the performance of that duty.” The city has approved plans for 36 other homes.

Trump has also been on the other side in numerous court cases: the billionaire has been the target of several class action suits that allege, among other things, deceptive business practices and fraud.

Last year Trump University, an online business school, was hit with a class action suit charging that students are not given the real estate education that the institution advertises. Tarla Makaeff, a California marketer who filed it, said she spent nearly $60,000 to “Learn from the Master,” in the words of a Trump University flyer. The lawsuit charged that the main lesson centers around how to max out on credit cards.

Makaeff charged that the course is basically an “infomercial. … The primary lesson Trump University teaches its students is how to spend more money buying more Trump seminars.” The suit, which is pending in federal court in California, seeks damages for violations of consumer protection laws.

The school promptly countersued, and said it has tapes of Makaeff describing the program as “awesome.”

Trump University has also come under scrutiny from the New York Education Department. Last year it demanded that the online school cease referring to itself as a university because it was a violation of the state’s education law. Trump changed the name of his institution to the Trump Entrepreneur Initiative.

The bankruptcy courts have also seen plenty of Trump action. His casino companies have filed for bankruptcy four times, a practice that Trump has boasted publicly is a smart business tactic.

“I do play with the bankruptcy laws — they’re very good for me” as a tool for trimming debt, he recently told Newsweek.

Some legal experts argue that Trump’s extensive use of bankruptcy courts seems at odds with the GOP’s efforts to curb consumer bankruptcies.

“He brags about bankruptcy being a good deal,” Stephen Burbank, a law professor at the University of Pennsylvania told iWatch News . “He looks like a serial debt avoider. The GOP has been behind making consumer bankruptcy more difficult. Those people should have a problem with the notion of using bankruptcy as another tool in the quest for business advantage.”

The criticism doesn’t seem to daunt Trump. Speaking at a tea party rally on April 16 in Boca Raton, Fla., Trump boasted of his business smarts and financial acumen. “We need people that win. We don’t need people that lose all the time,” he told a cheering throng.

Split Within Federal Circuit On Preemption In Ownership Disputes

The U.S. Court of Appeals for the Federal Circuit has denied a petition for rehearing en banc of its panel decision in Abraxis Bioscience v. Navinta LLC (see IP Update, Vol. 13, No. 11>) regarding the applicable rule of law to apply in patent ownership dispute standing issues.  Concurring and dissenting opinions were filed by several members of the Court.  Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Mar. 14, 2011) (per curiam) (concurring opinion by Gajarsa, J. joined by Linn, J. and Dyk, J.) (dissenting opinion by O’Malley, J. joined by Newman, J.).

The problem with title to the patent in suit arose from a series of mergers and asset acquisitions carried out in relatively quick succession. In chronological order, the inventors assigned ownership to Astra Lakemedel Aktiebolag (Astra L) and AB Astra. AB Astra then merged into AstraZeneca AB (AZ-AB). Astra L and AZ-AB later (in late 2007) assigned ownership to their parent, AstraZeneca (AZ-UK), but not before plaintiff Abraxis had entered (on April 26, 2006) into an asset purchase agreement (APA) with AZ-UK. Thus, even at closing on June 28, 2006, when AZ-UK made a present assignment of its ownership to Abraxis in an IP assignment agreement included in the closing documents, AZ-UK did not have legal title to the patents, which had not yet been assigned to AZ-UK by its subsidiaries Astra L and AZ-AB. When the oversight was corrected in late 2007, Abraxis had already filed its complaint against Navinta.

Although patent law is often thought to be exclusively federal, in fact many disputes over patent ownership turn on common law rules of contract and property that, at least since Erie Railroad v. Tompkins, have been considered state rather than federal.  Last November, a split panel of the Federal Circuit vacated a district court finding of infringement by generic drug maker Navinta on the grounds that the plaintiff Abraxis had not properly transferred ownership of the asserted patents prior to the filing of the complaint.  Abraxis Bioscience v. Navinta LLC (seeIP Update, Vol. 13, No. 11).  In that decision, the panel majority recognized limited federal preemption of state law in interpreting contracts of assignment.  Unfortunately for Abraxis, the APA provided only that AZ-UK “shall cause” the assignment of ownership to Abraxis. In accordance with the Federal Circuit precedent of DDB Techs. (2008) (which applies to the interpretation of assignment), the Court found that such an assignment does not operate as a present assignment of rights, but rather as a promise to assign in the future.

The dissent from the original panel opinion (by Judge Newman) and the dissent from rehearing en banc by Judge O’Malley (joined by Judge Newman) argue that the application of New York state law by the district court (which upheld Abraxis’s claim to ownership) was correct and that the majority was overextending the reach of federal jurisdiction.

Practice Note:  The concurring and dissenting opinions in connection with the rehearing en banc petition expose differences at the Court on the choice of law for interpretation of patent assignments. The precise rule of law (the issue of when an assignment is a present assignment or a promise of a future assignment) invoked by the panel majority is now under consideration by the Supreme Court in Stanford v. Roche (see IP Update, Vol. 13, No. 11).

In that case, the Federal Circuit vacated a judgment against Roche because the inventor had made only a promise to assign.  The Supreme Court agreed to review is directed to the issue of whether the Bayh-Dole Act (which permits transfer of title of federally funded inventions to universities) trumped common law rules of property. The Federal Circuit decision applied the rule of DDB without comment on the preemption of state by federal law.

In advising buyers in a merger, counsel should make closing contingent upon clear documentation of chain of title from any subsidiaries to the seller, so that a present assignment at closing includes all the bargained-for rights.

New York Court Rules Parties to International Arbitration May Attach New York Assets as Security Even Without Personal Jurisdiction

In a case of first impression, the New York Appellate Division ruled in March 2011 that parties to an international arbitration may attach assets located in New York as security for a future award in the arbitral proceeding.  This is the case even if the New York courts lack personal jurisdiction over the parties and even if the underlying dispute has no connection whatsoever to New York.

In a case of first impression, the Appellate Division, First Department, of the State of New York ruled in March 2011 that parties to a foreign arbitral proceeding may attach assets located in New York as security for a future award in the proceeding—even when there is no connection to New York by way of personal or subject matter jurisdiction.  The Appellate Division’s decision, which was a ruling of first impression, provides the only judicial affirmation to date of changes that the New York Legislature made to New York’s Civil Practice Law and Rules (CPLR) in 2005.  In light of the ruling, the New York courts will likely see a proliferation of motions for orders of attachment by foreign parties to international arbitrations.

The case in question, Sojitz Corp. v. Prithvi Info. Solutions Ltd., N.Y. Slip Op. 01741, 2011 WL 814064 (1st Dep’t March 10, 2011), concerned a dispute between Sojitz Corporation, a Japanese compay with its principal place of business in Tokyo, and Prithvi Information Solutions, an Indian company with its principal place of business in Hyderabad, India.  The parties’ dispute arose out of a contract, entered into in Delhi, whereby Sojitz agreed to provide telecommunications equipment manufactured in China to Prithvi in India.  As such, the transaction at issue had nothing to do with the United States, much less with New York state.  Moreover, neither Sojitz nor Prithvi regularly engaged in business in New York, such that the New York courts would have personal jurisdiction over the companies.

In August 2009, Sojitz made an ex parte motion in the Supreme Court of New York for an order of attachment against Prithvi.  In this motion, Sojitz stated that it intended to commence an arbitration against Prithvi in Singapore within 30 days of the order of attachment (inasmuch as the parties’ contract required Singapore arbitration), and alleged that, if the requested attachment order was not granted, Prithvi might dissipate its New York assets pending the completion of the Singapore arbitration.  The Supreme Court granted Sojitz’s motion and issued an order, under CPLR 7502(c), attaching a $18,500 debt owed to Prithvi by a company in New York, which was Prithvi’s only asset in New York state.  In so doing, the court held that it had the authority to attach the New York assets of a foreign party solely as security for a possible future award in an arbitration pending abroad.

On appeal, Prithvi maintained that it does not have any offices in New York, is not licensed to do business in New York and has no bank accounts, real estate or employees in New York.  Prithvi also maintained that the transaction in question had nothing to with the the United States.  Accordingly, Prithvi argued that because the New York courts do not have personal jurisdiction over it, or subject matter jurisdiction over the parties’ dispute, the lower court overstepped its authority in issuing the attachment order.

In rejecting Prithvi’s argument and affirming the lower court’s order of attachment, the Appellate Division held that there was “nothing fundamentally unfair about an attachment for security pending arbitration in a proper [foreign] forum.”  In reaching this decision, the court gave a brief summary of the development of the law in New York with respect to interim measures in support of arbitrations.   Until relatively recently, this form of interim relief was only available to parties in domestic proceedings.  However, in 2005, the New York Legislature amended CPLR 7502, explicitly empowering the courts of New York to issue preliminary injunctions and attachments in aid of all arbitrations, including those involving foreign parties or in which the arbitration is conducted outside of New York.  CPLR 7502(c) reads in relevant part as follows:

The supreme court … may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state, whether or not it is subject to the United Nations convention on the recognition and enforcement of foreign arbitral awards, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.

The Sojitz court noted that CPLR 7502(c) “provides several substantive and procedural safeguards intended to permit attachment consistent with due process.”  Among other things, the statute requires the movant to demonstrate that any award issued by the arbitrators in the foreign country would be rendered ineffectual if the relief was not granted.  In addition, the statute provides that if the foreign arbitration is not commenced within 30 days after the attachment order is granted, the order “shall expire and be null and void.”

The decision in Sojitz is the first time that a New York court has ever ruled on the legality and due process implications of CPLR 7502(c).  As it is often difficult to obtain security attachment orders for international arbitrations, the Sojitz  decision is likely to make New York an attractive venue for international parties seeking to preserve assets while they arbitrate in a foreign country.

Facebook Wars: In the Age of Social Media, a Trademark Registration Is More Important Than Ever

In the olden days (say, pre-1996), a Complexions Spa for Beauty and Wellness in New York and a Complexions Day Spa in California could peacefully coexist. After all, what savvy New Yorker would accidentally book her weekly manicure at a spa in “the O.C.” due to the confusingly similar names? However, with the recent popularization of social media, businesses are bumping into each other online in the realm of “friends,” “fans” and “tweets.” And so, it is more important than ever to take these basic steps to create and protect a unique business name, service mark and trademark.

  • Choose a name or mark that no one else is using.
  • Register your mark nationally.
  • Recognize others’ preexisting common law rights (rights based on use only).

New Litigation Pits Common-Law Users against Federal Registrants

A case recently filed in the Northern District of New York raises just these issues. See Complexions Inc. v. Complexions Day Spa and Wellness Center, Inc., 1:11-cv-00197-GLS-DHR (N.D.N.Y., complaint filed Feb. 18, 2011). The case involves a spa in New York which has been operating under the names “Complexions” and “Complexions Spa for Beauty and Wellness,” since 1987, but with no federally registered service mark. Enter “Complexions Day Spa” which began doing business in California in 2001 and applied to register several “Complexions”-based marks in 2007 with the U.S. Trademark Office. The New York Complexions did not seek federal registration until 2010.

Both spas have Facebook pages. Last January, Complexions Day Spa (CA) requested that Facebook take down the site for Complexions (NY). Facebook complied. Complexions (NY) responded by filing a suit for a declaratory judgment of its trademark rights and for an injunction requiring Facebook to restore the disputed page.

Protecting Your Rights in the Age of Social Media

In hindsight, this conflict (and the accompanying legal expense) could have been avoided. Complexions Day Spa (CA) could have chosen a unique name. As it turns out, dozens of spas use the term “Complexions” in their names. Having chosen a common name, the California spa now faces the prospect of challenging numerous senior users who may someday want to advertise with Facebook pages as well. A trademark attorney can help a new business owner determine not only whether another company has registered a similar name or mark but also whether other companies may have prior common law rights to a similar, but unregistered, name or mark.

Likewise, Complexions (NY) could have prevented this fight altogether by registering its trademark with the U.S. Trademark Office in 1987 when it opened its doors. Though a business’ common law rights are circumscribed to its geographical marketplace and natural area of expansion, a federal registration provides prospective rights throughout the U.S. Amid the expense and busyness of starting a new venture, it can be tempting to skip the step of registering your name as a trademark or service mark. After all, registration is not required for your business to begin operations. Yet, relying on common law trademark rights, which are restricted to a geographical area of use, is no longer feasible now that every local business can readily create a national and international presence through social media. (We will save international registrations for another article.)

For companies that have already secured national registration and want to limit the rights of common law senior users, the outcome of the Complexions case will be instructive. Getting a national registration does not deprive those who were using the mark before you of their right to keep doing so in their current geographical marketplace and area of natural expansion. Whether that area includes Facebook remains to be seen. Sending takedown notices to social media websites may prove a fruitless and even liability-inducing endeavor. (For instance, sending false takedown notices alleging copyright infringement has already been outlawed by statute.) Morover, defending one’s unique social media presence may turn out to be a necessary step in maintaining the validity of one’s own trademark. Stay tuned.

New York’s Highest Court Requires Policyholder-Specific Choice-of-Law Analysis by Insurers in Liquidation

The New York Court of Appeals decision on April 5, in the Midland Insurance Company liquidation (In re Liquidation of Midland Insurance Company[1]) is an important affirmation of policyholder rights.

In this decision, New York’s highest court held that a policyholder is entitled to a claim and policy-specific choice of law analysis in the liquidation process, rejecting the Midland liquidator’s effort to make a blanket application of New York law to Midland’s 38,000 policyholders. The essential holding of the New York Court of Appeals, i.e., that insolvency does not alter an insurer’s obligations to its policyholders, is not itself remarkable. However, this holding by New York’s highest court will have broad implications because of New York’s status of the domicile of hundreds of insurance companies. And, because this decision is also consistent with the decision of the only other state supreme court to address this question, policyholders may more confidently assert an individualized choice-of-law position when prosecuting claims in insurance company liquidation proceedings.

In liquidation proceedings, policyholders typically are required to submit claims to the liquidator of the insurance company in liquidation, appointed by the state regulatory body of the state in which the insolvent insurer is chartered. An “allowed claim” or “recommended amount” in the liquidation process must typically be approved by a trial court in the state in which the insurance company in liquidation is chartered. This court also hears disputes when a policyholder disagrees with a determination by the liquidator. Frequently, liquidators seek to make a blanket application of the law of the state in which the liquidation is proceeding, not only for administrative reasons but also because the law of such jurisdiction is typically friendly to insurers. New York is a particularly apt example of such a jurisdiction.


Midland Insurance Company is a New York-chartered multiline insurer.[2] When the New York State Insurance Department determined that Midland’s liabilities exceeded its assets in 1985, Midland was placed into liquidation pursuant to Article 74 of the New York Insurance Law (Article 74).[3] Pursuant to the liquidation order, the Superintendent of the Insurance Department (the Liquidator) took possession of Midland’s property and sold or otherwise disposed of it.[4] The Liquidator provided notice to persons with potential claims against Midland, including more than 38,000 known Midland insurance policyholders.[5]

Claimants in Midland were policyholders based in various states who submitted proofs of claim to the Liquidator seeking an allowed claim in the liquidation for various environmental and toxic tort liabilities.[6] The Liquidator determined that some of the policyholders’ claims should be disallowed, prompting the policyholders to file an objection with the New York Supreme Court.[7] A key aspect of the policyholders’ objections was the Liquidator’s unilateral decision to make a blanket application of New York law in making its disallowance decisions.[8] The New York Supreme Court disagreed with the Liquidator, concluding that the applicable substantive state law should be decided based on the “grouping of contacts” approach of the Restatement (Second) of Conflict of Laws, and that a choice-of-law determination must be made on a case-by-case basis.[9] Under the “grouping of contacts” analysis, “[i]n the context of liability insurance contracts, the jurisdiction with the most ‘significant relationship to the transaction and the parties’ will generally be the jurisdiction ‘which the parties understood was to be the principal location of the insured risk . . . unless with respect to the particular issue, some other [jurisdiction] has a more significant relationship.'”[10]

The New York Appellate Division reversed. It distinguished the policyholders’ insurance claims from claims against solvent insurers, reasoning that New York law must apply to the claims in a liquidation proceeding because of New York’s “paramount” interest in ensuring equitable distributions from an insolvent insurer’s estate.[11] The Appellate Division voiced concern that to do otherwise would create “subclasses” among the policyholders in violation of New York Insurance Law Section 7434(a).[12]

The Final Decision

On further appeal, the New York Court of Appeals found the Appellate Division’s decision to be in error, concluding that each policy in dispute should receive an individual choice-of-law analysis to determine which jurisdiction’s law should govern. The Court of Appeals reaffirmed that under New York law, the “center of gravity” or “grouping of contacts” approach applies to choice-of-law when an insolvent insurer is involved.

The Liquidator did not dispute the applicability of the rule to claims against solvent insurers, but argued that Article 74 creates an exception to the rule where the insurer has been adjudged insolvent and is in liquidation.[13] The Court of Appeals performed a thorough analysis of Article 74 and flatly rejected the Liquidator’s arguments. The court concluded that post-insolvency laws do not address choice-of-law issues or dictate any variation in common law choice-of-law principles when handling claims.[14] The court acknowledged that the policyholders’ claims against Midland derived from insurance policies that were issued prior to insolvency and reasoned that, because the “grouping of contacts” analysis would apply to claims submitted to an insurer, there was no reason that claims submitted to a liquidator after the insurer’s insolvency should be treated differently.[15] To the contrary, the court recognized that blanket application of New York law to all of the policies would conflict with the statutory mandate that the Liquidator determine the amount “justly owed” to the policyholders because the calculation of what is “justly owed” varies based on different jurisdictions’ methodologies of calculating the insured’s loss.[16] The Court of Appeals further dispensed with the Appellate Division’s concern that to allow individual law choice-of-law analyses would create prohibited “subclasses” of persons entitled to distributions from the liquidations.[17] The court held that the proscription against subclasses applies only to the treatment of claimants at the asset distribution phase, not at the claim allowance or valuation stage.[18]

Thus, through its analysis of the plain language of Article 74, the court concluded that the policyholders are “entitled to an evaluation of their claims by the Liquidator under the same common law choice-of-law principles that clearly applied to their claims prior to Midland’s insolvency.”[19]


The holding of Midland is consistent with the language of general liability policies and with existing law.[20]

The New York Court of Appeals approvingly cited a 2004 Missouri Supreme Court case that held that “the insurer’s insolvency did not change its coverage obligations” and that “insurer insolvency laws did not address choice-of-law and therefore Missouri’s pre-insolvency choice-of-law principles continued to govern the insurance policies at issue.”[21] With these two state supreme court decisions reaching the same result, policyholders prosecuting claims in insurer liquidation proceedings may confidently assert individualized choice-of-law positions, either on a policyholder-specific, claim-specific, or policy-specific basis, just as they would if they were litigating over coverage in a court of law.

EEOC Sues HD Dimension Corp. To Enforce Conciliation Agreement

Tech Company Failed to Comply With Terms Settling Race and Age Bias Charge, Federal Agency Says

NEWARK, N.J. – A Newark, N.J., information technology training and service company violated a settlement agreement stemming from an age and race discrimination charge when it failed to complete payments that were a condition of the agreement, the U.S. Equal Employment Opportunity Commission (EEOC) charged in a lawsuit announced today.

According to the EEOC, HD Dimension Corp. entered into a conciliation agreement to resolve a discrimination charge and agreed to pay $32,500 to an applicant who, the EEOC found, had been discriminated against because of her age and race. The agreement also required various injunctive provisions including training for HD Dimension employees and management and training for third-party companies who did recruitment for HD Dimension. From October 2009 through February 2010, the company made monthly payments toward satisfying the conciliation agreement, but stopped after paying only $17,500 of the agreed-upon $32,500. HD Dimension never complied with any of the injunctive relief.

The EEOC filed suit in U.S. District Court for the District of New Jersey to enforce the agreement after HD Dimension failed to make any payments for 12 months. The EEOC filed suit after first attempting to reach a pre-litigation settlement through its conciliation process.

The conduct alleged in the original discrimination charge violates Title VII of the Civil Rights Act of 1964, which prohibits employment discrimination based on race, color, religion, sex (including sexual harassment or pregnancy) or national origin and protects employees who complain about such offenses from retaliation. The alleged conduct also violates the Age Discrimination in Employment Act (ADEA), which prohibits discrimination in the workplace based on age.

“When the EEOC enters into conciliation agreements with companies, the process does not end there,” said Charles F. Coleman, Jr., a trial attorney in the EEOC’s New York office. “We continue to monitor these agreements to ensure that they are carried out and, in this case, it was not, so we had to take forthright action.”

Judy Keenan, the EEOC’s acting regional attorney in the New York office, said, “The EEOC will absolutely enforce the conciliation agreements it reaches, even if that means filing a lawsuit. The objective of this suit is to obtain full relief under the conciliation agreement and place others on notice that the EEOC will not tolerate this behavior.”

The New York State Department Of Labor Issues Guidelines, Instructions, FAQ’s and Model Notices For the Wage Theft Prevention Act

On April 9, the Wage Theft Prevention Act (“WTPA”) will officially take effect. In connection therewith, the New York State Department of Labor (“NYSDOL”) has issued model notices, as well as guidelines, instructions and frequently asked questions (“FAQ’s”), concerning the WTPA’s requirements.

The WTPA was signed into law on December 10, 2010 and significantly amended the notice requirements of New York Labor Law (“NYLL”) section 195.1. The WTPA instructed the Commissioner of Labor to prepare model notices complying with these amendments. These model notices were recently released along with guidelines, instructions and FAQ’s in order to assist employers in implementing the changes required by the WTPA.

The documents released by the NYSDOL mostly track the WTPA’s amendments to section 195.1. However, the NYSDOL has clarified its position with respect to whether an employer’s section 195.1 notices must specify the overtime exemptions that are being applied to exempt employees.

The NYSDOL’s previous guidelines, instructions and model notices left employers uncertain as to whether they were obligated to tell notify employees regarding which overtime exemptions were being applied to such employees. This confusion stemmed from the NYSDOL’s conflicting language between its guidelines, which stated that the “notice to exempt employees must state the specific exemption that applies,” and its instructions, which suggested that employers “should identify the overtime exemption” that applies.

The NYSDOL’s newly issued information attempts to clarify this issue. More specifically:

  • The new guidelines state that employers “may” state the specific exemption that applies to exempt employees;
  • The instructions for form LS 59 (which is the new NYSDOL template form for exempt employees) states that the employer “should” identify the overtime exemption that applies to such employee;
  • Form LS 59 itself states that it is “optional” to inform the exempt employee what exemption applies to him/her; and
  • Finally, the FAQ’s state in pertinent part that employers are not required to identify the specific exemption that is being applied to exempt employees.

Based upon the above it appears that while the NYSDOL would prefer that employers provide exempt employees with information regarding the specific exemption that is being applied, it is not required. The NYSDOL also provides clarification on additional WTPA requirements including, when annual notices must be issued, when employees must be notified of wage rate changes, and how notice may be provided to newly hired employees.

The NYSDOL’s guidelines can be found here.

The NYSDOL’s FAQ’s can be found here.

Additionally, the NYSDOL has created model notices for:

  • Employees being paid at a single hourly rate, which can be found here.
  • Employees being paid at multiple hourly rates, which can be found here.
  • Employees paid a weekly rate or a salary for a fixed number of hours, which can be found here.
  • Employees paid a prevailing rate and for other jobs, which can be found here.
  • Employees paid a salary for varying hours, day rate, piece rate, flat rate or other non-hourly pay, which can be found here; and
  • Employees who are exempt from applicable overtime provisions, which can be found here.

The NYSDOL’s instructions for its model notices can be found here.

The NYSDOL does not require employers to use its model notices. Instead, employers can use their own notices so long as the notices provide employees with the information required by the WTPA, employees receive a copy of the notice, employees sign an acknowledgment that they received the notice, and employers keep a copy of the notice and acknowledgement for 6 years.

As we previously wrote in this space in an entry covering the WTPA titled “New York Enacts The Wage Theft Prevention Act”, the WTPA will likely be a useful tool for plaintiffs’ counsel to challenge the pay practices of New York employers. It is therefore imperative that employers review their notice and payroll practices to ensure compliance with the WTPA and other portions of the NYLL.

Are You A Foreign Company With A Relationship To A New York Company? It May Be Your Agent And Provide A Basis For Jurisdiction

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.

SEC Aggressively Targets Insider Trading and Expert Networks

As part of its widespread ongoing investigation focusing on expert networks, on February 8, 2011, the SEC charged a New York-based hedge fund and four hedge fund portfolio managers and analysts with trading on illegal tips received from expert network consultants in SEC v. Longoria et al., brought in the Southern District of New York.

Focus on Insider Trading

The case involves insider trading by ten individuals and one investment adviser entity, all of whom are consultants, employees or clients of the California-based expert network firm Primary Global Research LLC (PGR).  The complaint alleges that PGR’s employees sought experts who had access to and were willing to share inside information in exchange for fees of $150 to $1,000 per hour.  In some cases, the so-called experts willingly shared sales forecasts, earnings, performance data, revenues and other detailed information about their own companies with clients of PGR.

The complaint further alleges that managers and analysts at the hedge fund Barai Capital Management illegally traded in securities of AMD, Seagate Technology, Western Digital, Fairchild Semiconductor and Marvell, among others, on the basis of material, nonpublic information obtained from employees moonlighting as expert network consultants for PGR, netting more than $30 million in illicit gains.

This case is an example of joint criminal and civil investigations by the SEC, the FBI and the U.S. Attorney’s Office for the Southern District of New York targeting allegedly pervasive practices of financial industry professionals eliciting material, nonpublic information from firms that match industry specialists with money managers, and trading on such information.  The fallout from PGR’s conduct has resulted in criminal charges against a number of technology company employees, traders (including former employees of SAC Capital, a $12 billion hedge fund group) and consultants for PGR.

Widespread Investigations; Civil and Criminal Charges Pending

These charges come on the heels of other investigations into insider trading and at least two SEC enforcement actions, SEC v. Galleon Management, LP et al. and SEC v. Cutillo et al.  According to the SEC, the insider trading rings identified in these enforcement actions include several prominent hedge funds and high-profile hedge fund managers, as well as Wall Street professionals such as attorneys, professional traders and senior corporate executives.

Most recently, the SEC announced civil insider trading charges against Rajat K. Gupta, a former member of the Boards of Directors of Goldman Sachs and Procter & Gamble, for allegedly disclosing material, nonpublic information about these companies to Raj Rajaratnam, who is the founder and managing partner of Galleon Management, LP.  Among other things, Gupta, a former managing director of McKinsey & Co., is alleged to have disclosed to Rajaratnam material, nonpublic information concerning Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs before it was publicly announced on September 23, 2008, as well as information about the investment bank’s financial results for both the second and fourth quarters of 2008.

Key Takeaways

These insider trading cases raise several pertinent issues to be examined by public companies and their employees as well as research analysts, hedge funds and other money managers.  Public companies should have clear insider trading and shareholder communication policies.  Only designated individuals should be permitted to speak on behalf of a company. Problems with rogue employees may persist, but well-documented policies and ongoing training programs for Regulation FD compliance for public company executives, boards of directors and investor relations departments are critical to minimizing the release of material, nonpublic information.  Moreover, companies should review their relationships with third-party consultants and vendors to ensure that their contracts are designed to guard against the distribution or misappropriation of confidential information.  Third parties should have access to such information only as needed to perform their duties.

Analysts and traders should be mindful of the fine line between channel checks (i.e., procuring manufacturing and sales data from third-party suppliers, vendors and retailers), which traditionally factor into fundamental investment research, and trading on material, nonpublic information.  No doubt investors may be wary of research practices such as channel checks after the SEC’s most recent aggressive insider trading investigations.

It is important to note that the SEC’s current activity should not eliminate established research practices, but it highlights the importance of sound compliance programs.  Similar to operating companies, investment companies should have well-documented insider trading policies, which promote practices that (1) educate analysts, traders and other employees, (2) encourage communication with legal and compliance personnel regarding research practices, (3) seek thorough due diligence and supervision of any third-party expert network firm or consultant and (4) facilitate the isolation of suspected material, nonpublic information and prevent trading on such information.

Retailers Accuse AmEx of Antitrust Breach as Battle Over Debit Card Cap Heats Up

Retailers in a long-running lawsuit against American Express Co. over charge card swipe fees are now accusing the card giant of violating antitrust law to keep them from suing as a class.

American Express representatives were ordered to obtain “collective action waivers” from merchants as a condition of doing business with the company, according to a complaint filed Wednesday in U.S. District Court in New York. The waivers were designed by AmEx “with the specific intention of immunizing itself against liability that it might otherwise incur under the antitrust laws in connection with the rules it imposes upon merchants,” the lawsuit says.

A class action, filed by retailers more than six years ago, accuses the company of forcing merchants to accept all AmEx credit and debit cards as a cost of doing business and seeks to free the merchants to “steer” customers to credit cards with the lowest interchange fees. That would likely mean discounts for customers who pay for purchases with lower-fee credit and debit cards.

AmEx charges merchants about 2.5 percent of the cost of any transaction, the highest interchange fee in the industry.

In a settlement with the Department of Justice last October, Visa and MasterCard agreed to free retailers from similar steering restrictions. AmEx, which was also the subject of a DOJ investigation, vowed to fight on.

Meanwhile, a broader battle over interchange fees, which the Center for Public Integrity first wrote about last September, has gained momentum as banks of all sizes lobby to convince Congress to drop or delay a provision of the Dodd-Frank financial overhaul law that would prohibit big banks from charging merchants more than 12 cents to process each debit card transaction. Banks now charge an average 44 cents, and the Federal Reserve’s proposed cap would cost them billions of dollars.

Small banks, which do not have to abide by the new regulation, say that they won’t be able to compete with the big banks unless they also slash their fees. And big banks insist that 12 cents does not cover what it costs them to process a debit card transaction.

Card companies and their network banks reaped more than $35 billion from merchant fees in 2009 alone.

A bipartisan bill was introduced earlier this month in the U.S. Senate, where Democrats hold a slim majority, to delay a debit card fee cap for two years. The legislation is backed by three Democrats — Jon Tester of Montana, Ben Nelson of Nebraska, and Tom Carper of Delaware — but it remains to be seen whether the legislation can muster the 60 votes needed to defeat any filibuster threats.

Gary Friedman, a New York lawyer who represents the small merchants in the class action against AmEx, said that the card company must drop its restriction on retailers offering discounts to customers who use other credit or debit cards. Otherwise, the government deal with Visa and MasterCard doesn’t mean much. Any merchant that accepts AmEx would be violating that company’s policy.

But after six years, the parties to the lawsuit are still fighting over whether the merchants can sue as a class, or whether, as their contracts dictate, they must arbitrate individually with the company.

The U.S. Court of Appeals for the Second Circuit recently ruled that AmEx could not force merchants to resolve lawsuits with the company individually. The next stop for the case is likely the U.S. Supreme Court.

AmEx did not respond to a request for comment.