Entrepreneur’s Guide to Litigation – Blog Series: Complaints and Answers

A.  The Complaint

Litigation begins with a Complaint. “Complaint” is capitalized because it is a specific legal document, rather than a garden-variety complaint about something. The Complaint lays out the plaintiff’s specific legal claims against the defendant. It needs to contain enough facts that, if everything stated is true and there are no extenuating circumstances, a judge and jury could find in favor of the plaintiff.

As an example, Paul Plaintiff is suing Diana Defendant for violating a contract. Paul files a Complaint with a court claiming several facts: 1) Diana signed a contract to buy widgets; 2) Paul delivered the widgets; and 3) Diana did not pay the agreed-upon amount. If the court finds that these facts are true, then, unless there were extenuating circumstances, Diana probably breached a contract with Paul and should pay damages.

Paul’s Complaint also needs to allege facts showing that he has a right to be in that court. For example, if Paul wants to sue Diana inTexas, he has to show that the case and the parties have some connection toTexas. If he wants to sue her in a federal court, he has to meet a number of other criteria. (Federal court is generally only available if the parties are based in different states and the damages are relatively substantial or if the legal question is one of federal law.)

B.  Response to a Complaint

Once the defendant officially learns of the Complaint, she has a certain limited time to file some sort of response with the court. The time to respond, however, does not run from when the plaintiff filed the lawsuit, but generally when he officially delivered notice of the Complaint to the defendant. (There is a timeline that starts ticking when the defendant becomes aware of a state court lawsuit she wants to “remove” to federal court.) The amount of time for the defendant to respond varies by what court the case is in, but is generally a short period of time.

After receiving the complaint, the defendant has three options: 1) Ignore the Complaint and have the court grant judgment in favor of the plaintiff; 2) Tell the court that the Complaint is defective and ask for dismissal; or 3) Answer the Complaint. Option one is usually not a good plan; courts do not look favorably on defendants who ignore the legal process, and this option prevents a defendant from fighting the plaintiff’s claims.

Option two does not deal with the merits of the plaintiff’s issue. It is simply telling the court that the Complaint is defective for a variety of reasons including, for instance, how it was served, who the parties are (or are not), which court the case is in, or simply that, even if everything is true, the plaintiff cannot win. For example, if Paul sues Diana, but never tells Diana about the suit, Diana can then ask the court to dismiss the case. Also, if Diana works for DefendCo and Paul’s contract was actually with DefendCo and not with Diana, personally, she may be able to have the case dismissed because Paul sued the wrong party. If Paul sued Diana in a federal court inTexaswhen both parties are residents ofCaliforniaand neither has ever been to or done business in Texas, then Diana may be able to get the case dismissed, at least from theTexascourt.

Finally, there is the “So, what?” defense. If the Complaint doesn’t actually allege a cause of action, the defendant can ask the court to dismiss it. This usually happens because the plaintiff simply assumes a fact, but does not include it in the Complaint. If, for example, Paul alleges only that Diana failed to pay him a certain amount of money, but does not allege that a contract existed between them, then Diana can essentially say “So, what?” and ask the court to dismiss the case. She would ask the court to dismiss the case because, even if true (she really did not pay him any money), he did not plead any facts showing that she was supposed to pay him money. The defendant is not admitting the truth of the allegation; she is just saying that even if true, the plaintiff cannot win.

Finally, a defendant can file an Answer. Again, “Answer” is capitalized because it is a specific legal document. In an Answer, the defendant responds, paragraph by paragraph, to each of the plaintiff’s allegations. The defendant must admit, deny, or say that she does not know the answer to each specific allegation. Saying “I don’t know” functions as a denial.

For example, Paul’s Complaint probably alleges that Diana lives at a certain address. Assuming Diana actually lives there, she has to admit that fact. Paul may allege that he delivered the correct number of working widgets to Diana. If the widgets were not what she actually ordered or did not work, Diana would deny that allegation. Finally, Paul may claim that those widgets cost him a certain amount of money. Diana likely has no way to know how much Paul paid for the widgets, so she would say she does not know – thus leaving Paul to prove that allegation.

Also in the Answer, the defendant can claim affirmative defenses. Those tell the court that there were extenuating circumstances so that, even if everything the plaintiff says is true, the court should not find in favor of the plaintiff.

For example, if Paul told Diana not to worry about paying him for the widgets for six months but then turned around and immediately sued her, she would claim that as an affirmative defense.

Finally, the Answer may contain counterclaims. These claims are the defendant counter-suing the plaintiff for something. The counterclaims may be related to the original suit or not. Usually they are related, but they do not have to be. This section follows the same rules as if the defendant were filing a complaint.

For example, Diana may counterclaim against Paul because he sent her the wrong widgets and, perhaps, add a claim that when Paul delivered the widgets to her warehouse, he backed his truck into her building and caused damage. She would then counterclaim for breach of contract and property damage. The court would then sort out the whole mess to decide who owed whom how much.

Prejudgment Interest in Copyright Infringement Suit Tracks to Date of First Infringement – William A. Graham Co. v. Haughey

The U.S. Court of Appeals for the Third Circuit affirmed a nearly $20 million verdict in favor of a plaintiff-appellee, finding that an additional award of prejudgment interest should be applied from the date when a fraud that resulted in a copyright infringement began, not when the plaintiff discovered the infringement.   William A. Graham Co. v. Haughey et al., Case No. 10-2762 (3d Cir., May 16, 2011) (Smith, J.).

In 1991, Thomas P. Haughey left his position with The Graham Company, an insurance brokerage, to join USI MidAtlantic Inc., one of Graham’s competitors.  When Haughey left Graham, he took two binders containing hundreds of pages of text describing various types of insurance coverages, exclusions, conditions and similar matter.  The materials had been prepared by Graham employees and were protected by Graham’s copyrights.  From July 1992 until 2005, Haughey and employees at his new employer used the materials to prepare insurance coverage proposals for presentations to clients.

Graham did not discover the unauthorized use of its binder materials until November 2004.   In February 2005, plaintiff Graham filed a copyright infringement suit against Haughey and USI MidAtlantic.  The defendants argued that the Copyright Act’s three-year statute of limitations barred the plaintiff’s claims, but the district court rejected their argument.  The district court determined that the “discovery rule,” which tolls the limitations period until the plaintiff learns of the cause of action or with reasonable diligence could have done so, applied to the Copyright Act.  At trial, the plaintiff did not seek statutory damages, but instead sought actual damages in the form of the defendants’ profits attributable to the infringement.  The plaintiff argued that defendant USI MidAtlantic had earned $32 million in profits that was directly attributable to the infringement, with defendant Haughey personally earning $3 million from the infringement due to commissions.  The burden then shifted back to the defendants to prove that their revenues were attributable to factors other than the copyrighted work.  The jury found for the plaintiff, awarding more than $16.5 million against defendant USI MidAtlantic and nearly $2.3 million from defendant Haughey, representing about 70 percent of USI’s profits and 75 percent of Haughey’s profits.  Subsequently the court set aside the jury’s verdict, determining that Plaintiff had in fact been placed on notice of Defendants’ conduct as early as fall of 1991.  A second trial, limited to damages, resulted in a second jury verdict awarding $1.4 million in damages against defendant USI and $268,000 against defendant Haughey.

The parties appealed to the 3d Circuit (Graham I).  The plaintiff argued that the district court’s holding regarding notice was mistaken, while the defendants argued that the plaintiff had failed to prove a causal nexus between the defendants’ alleged infringement and profits.  The 3d Circuit ruled in Graham I that the plaintiff had effectively shown causation and that the district court had erred in finding that the plaintiff could have reasonably discovered the infringement before February 2002.  The 3d Circuit remanded the case to the district court for a determination of whether the defendants were correct in their argument that 70 percent and 75 percent apportionments of the defendants’ profits was “excessive.”  On remand, the district court rejected the “excessiveness” argument and reinstated the original jury verdict.

In their second appeal to the 3d Circuit (Graham II), the defendants argued that the nearly $20 million jury verdict “shocks” the judicial conscience and was improper.   The defendants further argued that the award of prejudgment interest dating from when the fraud allegedly began was improper, maintaining that such interest should only be applied from 2004, the date when the plaintiff allegedly discovered the infringement.  The defendants also argued that the district court’s tolling of the limitations period because of the “discovery rule” and USI MidAtlantic’s alleged concealment of the infringement should also toll the interest period.

The 3d Circuit disagreed, upholding the jury verdict and finding that use of the discovery rule to change the date of accrual and delay the onset of prejudgment interest would “warp its fundamentally plaintiff-friendly purpose” and would “give defendants additional incentive to conceal their tortious or otherwise illegal acts,” given that “a fraudster would owe no interest on his purloined cash until discovery of the theft, and would thus be allowed to benefit from an interest-free loan.”  The 3d Circuit also rejected USI’s arguments that its profits could be attributed to the expertise and hard work of its brokers, more than its use of the plaintiff’s copyrighted materials, noting that while it had some sympathy for USI MidAtlantic, “such sympathy is not, however, sufficient to justify overturning the jury’s verdict.”

Practice Note:   If a plaintiff overcomes the tolling of the statute of limitations based on the “discovery rule,” that rule has no effect on the date upon which prejudgment interest begins to accrue.  Prejudgment interest will accrue beginning on the date the infringement occurred, not the date when the plaintiff discovered the infringement.

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.)

Pennsylvania Abolishes Joint Liability with Enactment of Fair Share Act

On June 28, Pennsylvania Governor Tom Corbett signed the Fair Share Act (the Act) (2011 Pa. S.B. 1131) into law. The Act amends Pennsylvania’s long-standing practice of joint and several liability to a several liability model that permits a jury to award damages based on a percentage of fault. A prior iteration of the Act was signed into law in 2002 but was found to violate the Pennsylvania Constitution on procedural grounds.

Under current Pennsylvania law, joint and several liability requires a defendant that is found responsible for any portion of a plaintiff’s injury to be responsible for 100% of the damages owed to the plaintiff, regardless of the apportionment of fault. Under the Act, a defendant that is found less than 60% liable will only be responsible for its proportionate share of the total. Conversely, a defendant that is found to be liable for 60% or more of the damages will be jointly and severally liable for the total damages owed to the plaintiff. If joint and several liability applies, a defendant that has paid more than its proportionate share of damages may seek to recover contributions from co-defendants. The Act contains exceptions permitting joint liability to continue to be imposed for intentional misrepresentations, intentional torts, certain environmental contamination claims, and certain violations of the Liquor Code.

With respect to apportionment of fault, the Act limits the population of potentially responsible nonparties that a jury may consider. The Act permits a jury to consider nonparties that entered into a settlement agreement with the plaintiff. Although judgment cannot be entered against a settling party, the jury is permitted to find the settled party responsible for a percentage of the damages. The Act does not permit a jury to apportion fault to employers who are immune from tort liability pursuant to the Workers’ Compensation Act.

Pennsylvania will now join the overwhelming majority of states that recognize some form of apportionment of fault.

United States Supreme Court Strikes Down Largest Employment Discrimination Class Action in History

On June 20, 2011, the United States Supreme Court granted employers some long-awaited relief by substantially raising the bar for plaintiffs (and their lawyers) seeking to certify large employment discrimination class actions. In Wal-Mart v. Dukes (No. 10-277), the Court reversed the Ninth Circuit Court of Appealsen banc decision upholding the certification of a class action filed on behalf of approximately 1.5 million hourly and salaried female employees alleging sex discrimination in pay and promotions. The potential damages were estimated to be more than a billion dollars.

As we have detailed in prior newsletters and bulletins, because of potentially large damage awards and fee-shifting provisions, employment class actions have been a boon for the Plaintiff’s bar while exposing employers to significant liability and litigation costs.  Although the Dukes decision will not put an end to class actions, it, at the very least, temporarily halts the large nationwide employment discrimination class actions. In its ruling, the Supreme Court significantly increased the plaintiffs’ burden of proof at the class certification phase and mandates that district courts look more carefully at whether class certification is appropriate, including a critical assessment of plaintiffs’ proof of class-wide discrimination.

The Supreme Court’s Decision in Dukes

Following an increasing trend, the Dukes plaintiffs alleged that Wal-Mart discriminated against its female employees by delegating subjective decision making authority with respect to pay and promotion decisions to its local store managers and by building a corporate culture that fostered sex bias in these managerial decisions. Both the district court and the Ninth Circuit held that plaintiffs demonstrated that their class claims were appropriate for certification by relying on:

(i) statistical evidence purportedly demonstrating disparities in the pay and promotions of males and females; (ii) anecdotal reports of discrimination by 120 female employees; and (iii) the “expert” testimony of a sociologist who concluded that Wal-Mart’s culture was susceptible to gender discrimination.

Plaintiffs Did Not Satisfy Their “Commonality” Burden under Rule 23(a)

In a strongly worded opinion, Justice Scalia, writing for the 5–4 majority, disagreed that the Dukes plaintiffs’ evidence was sufficient to support class certification because it did not meet plaintiffs’ burden of satisfying Rule 23 of the Federal Rules of Civil Procedure requirements for certification. As recast by Justice Scalia, to meet these requirements, plaintiffs must provide “significant proof” that their class claims involve a common issue the resolution of which is “central to the validity of each one of the [class members’] claims in one stroke”; for example, discriminatory bias on the part of the same manager or the use of a discriminatory test.

The majority’s decision removes any doubt that a trial court must conduct a “rigorous analysis” to ensure that plaintiffs have satisfied the Rule 23 elements, including a searching review of evidence that goes to the merits of the case. Exploration of the merits was appropriate in Dukes, the majority found, because it necessarily overlapped with the plaintiffs’ class-wide allegations that Wal-Mart engaged in a pattern and practice of discrimination.

In Dukes, the majority found plaintiffs’ evidence fell far short of the required “significant proof.” The Court did not reverse a prior decision that delegation of subjective decision making to individual managers could constitute a common discriminatory practice, but the majority found plaintiffs’ evidence lacking where Wal-Mart had a “general policy of non-discrimination” and where thousands of managers were making literally millions of pay and promotion decisions in some 3,400 stores. Specifically, the Court rejected plaintiffs’ sociological expert’s conclusion that Wal-Mart’s corporate culture made it more susceptible to gender bias in managerial decision making because the expert could not even opine, let alone show, that gender bias infected .5 percent or 95 percent of managerial decisions. The Court concluded that this was “the opposite of uniform policy that could provide commonality needed for a class action.”

The majority also found plaintiffs’ statistical and anecdotal evidence to be equally unpersuasive. Plaintiffs’ statistical expert conducted a region-by-region analysis and found that female representation in management positions was substantially less than in lower hourly positions and that females earned less than men. The Court discounted this proof, stating that any disparity at the regional level could not by itself establish that there were pay or promotion disparities at the individual stores, and even less so across all class members, which the majority stated was necessary to support plaintiffs’ theory of commonality. Furthermore, even if the statistics supported disparity at all the individual stores, the analysis did not consider potential assertions by Wal-Mart’s managers that women are not as readily available in certain store areas or the differences in the criteria used by the individual stores to make the decisions. The Court further found that the plaintiffs’ anecdotal evidence comprised of 120 affidavits representing the reporting experiences of only 1 out of every 12,500 class members and only 235 of Wal-Mart’s 3,400 stores could not show the whole company operated under a general policy of discrimination.

Plaintiffs Could Not Pursue Individualized Monetary Claims under Rule 23(b)(2)

The Court also unanimously resolved a split in the Courts of Appeal and held that the claims for backpay should not have been certified as a class action under Rule 23(b)(2) because such backpay damages were not “incidental” to the injunctive or declaratory relief sought. The Court concluded that certification under Rule 23(b)(2) is inappropriate when “each member would be entitled to an individualized award of monetary damages.”

Instead, the Court held that the monetary claims involving individualized proof must proceed under Rule 23(b)(3), which permits class certification only upon a showing that common questions of law and fact predominate over questions affecting individuals and after providing notice of the class action to potential class members and an opportunity to opt out. The Court reasoned that these procedural safeguards were necessary to protect class members’ individual interests in monetary relief.

The Court also rejected the position adopted by the Ninth Circuit that a statistical sample of class members could be used to determine the damages for the whole class without individualized proceedings. The Court reasoned that this sampling method was inconsistent with the procedures established by the Supreme Court for determining the scope or lack of individual damages in Title VII claims. The majority further suggested, without deciding, that this approach might also violate an employer’s right to individualized determinations of each class member’s eligibility for backpay.

Implications of the Court’s Decision in Dukes

The most immediate effect of the Dukes decision is that district courts will need to reconsider the appropriateness of employment discrimination class actions on their docket that were certified under Rule 23(b)(2). In the longer run, Dukes may not have sounded the death knell for all large discrimination class actions but it has made it very difficult for plaintiffs to mount class actions that seek to cover multiple types of claims, e.g., pay and promotions, and many different job classes, facilities and/or managers. As a consequence, future class actions are more likely to focus on more discrete claims of discrimination covering fewer locales and limited to common decision makers and covering a more homogenous class. In particular, Dukes is likely to curtail the bringing of class actions under the “delegation of subjective decision making” theory. Although the Court did not articulate clear evidentiary standards for establishing “commonality,” the Court emphasized the need to demonstrate a common allegedly operative discriminatory practice and injury across all putative class members. It is difficult to see how plaintiffs will mount class actions based on “subjective decision making” given the Court’s emphasis that “demonstrating the invalidity of one manager’s use of discretion will do nothing to demonstrate the invalidity of another’s.”

The Dukes decision also, as a practical matter, will require district courts to probe more deeply into the merits at the class certification stage, and the Supreme Court endorsed the consideration of Daubert motions to exclude expert testimony before class certification to assess such testimony’s adequacy. Moreover, although Dukes is restricted to class certification requirements, its emphasis on proving that the alleged discriminatory practice applied to and may have injured all class members may also lead to higher standards of proof in establishing class-wide discrimination on the merits.

Dukes also will lessen the incentive of plaintiffs’ attorneys to bring class actions by making it more difficult to seek monetary damages for large, diffuse classes.

How plaintiffs’ attorneys will respond is open to speculation. The attorneys representing Dukes profess their intent to bring individual and more discreet, localized class actions. This may become an overall trend. Employers should keep in mind that the Dukes decision has no immediate impact on the ability of the EEOC to bring company-wide pattern and practice suits because the EEOC generally is not required to satisfy the “commonality” principles espoused by the Supreme Court. Nevertheless, the Dukes decision, which comes on the heels of the Court’s May 2011 pro-employer decision in AT&T Mobility v. Concepcion et ux. seemingly validating the use of mandatory arbitration agreements to bar employees’ ability to litigate claims on a class basis, is a welcome change for employers.

Social Media and Discovery: Accessing Password Protected Material

Social media is everywhere, including, with increasing frequency, in lawsuits, particularly those involving employment-related claims. For example, employers sued by potential, current, and former employees are seeking social media information to learn if on-line postings by those employees on social media sites contradict statements or contentions made by them in their lawsuit. For their part, plaintiff-employees are seeking social media information to try to bolster their claims, such as looking for information from social mediate sites to show a pattern of allegedly harassing conduct by a supervisor or co-worker that extends beyond the workplace.

In a recent case, Zimmerman v. Weis Markets, Inc., No. CV-09-1535, 2011 WL 2065410 (Pa. Com. Pl. May 19, 2011), the trial court permitted the defendant employer to access the plaintiff’s password-protected on-line information. The plaintiff brought suit against his former employer after he injured his leg on the job while operating a forklift. The plaintiff sought damages for lost wages, lost future earning capacity, pain and suffering, scarring and embarrassment. The plaintiff claimed that he could no longer participate in certain activities and that his injuries affected his enjoyment of life. At his deposition, the plaintiff stated that he never wore shorts because he was embarrassed by the scar on his leg from the accident. However, the employer discovered on various publically-available social media websites, pictures posted by the plaintiff where his scar was clearly visible.

The defendant pursued this matter further, filing a motion to obtain access to private portions of the plaintiff’s social media sites and posts. The defendant argued that there may be other relevant information contained on those sites that would pertain to the plaintiff’s damages claim. The defendant sought the plaintiff’s passwords, user names and login names. Not surprisingly, the plaintiff opposed the defendant’s efforts to gain access to his private social media sites, arguing that his privacy interest outweighed any need to obtain discoverable material.

The court granted the defendant’s motion, finding that the plaintiff’s privacy interests did not outweigh the defendant’s need to obtain the information, that liberal discovery is favored, and the pursuit of truth is paramount. The court noted that it was the plaintiff who placed his physical condition at issue, and the defendant therefore has a right to find out information about the plaintiff’s condition. The court further reasoned that because the plaintiff posted the information to share with others, he could not now claim a reasonable expectation of privacy.

The court was careful to note, however, that its ruling should not be interpreted as a blanket entitlement to dig into employees’ private social media activities in every case, or that the court would allow “fishing expeditions.” Rather, the court clarified that it would consider an application seeking private social media information if the party seeking the material could make a threshold showing that the publicly accessible portions of the site indicate that there would be further relevant postings in the non-public portions. Thus, what the court essentially held was that if the plaintiff opens the door by posting publically-available information relevant to the lawsuit, private portions of a plaintiff’s social media are fair game. At bottom, this makes sense, however, watch for this rationale to be tested further, and perhaps expanded.

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

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

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

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

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

The Wisconsin Court of Appeals Upholds Dismissal of Medical Monitoring Claims

In Alsteen v. Wauleco, 2011 WL 2314988 (Wis. Ct. App. June 14, 2011), the Wisconsin Court of Appeals upheld the dismissal of numerous plaintiffs’ claims for medical monitoring, holding that the plaintiffs’ alleged increased risk of future harm was not an actual injury that would support an award of damages under Wisconsin law. Amber Alsteen and 69 other plaintiffs (collectively, “Alsteen”) alleged the defendants were liable for the release of a chemical preservative called “Penta” into a residential neighborhood in Wausau, Wisconsin from 1946 to 1986. While Alsteen did not suffer from any present adverse health effects due to the alleged contamination, she alleged that Penta exposure “significantly increased [her] risk of contracting cancer” and sought “future expenses related to medical monitoring.” The trial court dismissed Alsteen’s claims, finding that the alleged risk of future harm was insufficient to state a claim for actual injury, as required by Wisconsin law.

The Wisconsin Court of Appeals affirmed the dismissal of Alsteen’s claims. The court noted that Wisconsin law requires plaintiffs to prove an actual injury before they may recover in tort, and Alsteen did not allege any actual injury or damage. First, Alsteen’s allegation that she faces a significantly increased risk of cancer does not state an injury, because Wisconsin law holds that the “mere possibility of future harm” does not constitute actual injury. Second, the court held that mere exposure to a hazardous substance is not an actual injury, rejecting Alsteen’s reliance on cases involving needlesticks and the fear of HIV. The court explained that the needlestick cases involved actual injury (the needlestick) and different policy concerns than the possibility of environmental exposure to toxins, as “most people are exposed to a wide variety of environmental contaminants, including carcinogens, on a daily basis.” Finally, the court rejected Alsteen’s argument that her alleged future need for diagnostic examinations was an actionable injury. As the court explained, “Alsteen’s argument turns tort law on its head by using the remedy sought – compensation for future medical monitoring – to define the alleged injury.” Id.

By dismissing Alsteen’s claims, the Wisconsin Court of Appeals “recognize[d] that allowing a medical monitoring claim absent present injury would constitute a marked alteration in the common law.” Thus, the court preserved Wisconsin’s basic common law principle that a plaintiff must allege and prove an actual, present injury to recover in tort.

Amber Alsteen et. al. v. Wauleco, Inc. et al., 2011 WL 2314988, 2010AP1643 (Ct. App. June 14, 2011)

Domain Name Registrant Found to Lack Bad Faith in UDRP Proceeding Later Loses Against ACPA Claim

Considering whether a domain name registrant who prevailed in a Uniform Domain Name Dispute Resolution Policy (UDRP) proceeding possessed legitimate rights in the domain name in a subsequent court action for federal cybersquatting, the U.S. Court of Appeals for the Fourth Circuit affirmed a grant of summary judgment to plaintiff, finding that the defendant domain name registrant ceased to possess rights in the underlying domain name when it changed the content of its website to content concerning a geographical location referenced by the mark to content targeting the same type of products sold by a trademark owner under the mark.   Newport News Holdings Corp. v. Virtual City Vision, Inc., Case No. 09-1947 (4th Cir., Apr. 18, 2011) (Duncan, J.)

Plaintiff Newport News Holding Corporation sells women’s clothing and accessories under the mark NEWPORT NEWS and has been in existence for more than 20 years.  The plaintiff sells its products through catalogs and the internet at the domain name Newport-news.com, which it purchased in November 1997.  The plaintiff attempted to purchase the domain name Newportnews.com at that time, but it had already been acquired by defendant Virtual City Vision.  Virtual City Vision owns at least 31 domain names incorporating the names of geographic locations, including the domain name newportnews.com.

The plaintiff brought a UDRP complaint against the defendant in 2000, seeking the transfer of the domain name newportnews.com, but did not prevail.   Acknowledging that while the domain name and trademark were identical, the UDRP panel determined that no likelihood of confusion existed because the defendant’s website explicitly provided information about Newport News, Virginia, and had no connection whatsoever to women’s fashions.  The panel further held that defendant’s website provided “bona fide service offerings” consisting of disseminating city information towards tourism, finding there was a “total absence” of competition between the parties.

Approximately four years after obtaining the UDRP decision in its favor, the defendant began running occasional advertisements for women’s clothing on its Newportnews.com website.  Between 2004 and 2008, the defendant’s website shifted its focus from offering information about Newport News, Virginia, to one emphasizing women’s fashions.  The website also ran advertisements for women’s apparel.  In 2007, the plaintiff made an offer to purchase the defendant’s domain name.  The defendant rejected the offer, demanding more $1 million or an arrangement whereby the defendant would sell the plaintiff’s goods on its website for a commission.

In 2008, the plaintiff filed an action against the defendant for trademark infringement, false advertising, unfair competition, cybersquatting and related claims.  The plaintiff later filed a motion for summary judgment on its cybersquatting claim under the Anti-Cybersquatting Consumer Protection Act (ACPA).  The district court granted summary judgment to the plaintiff on its ACPA claim pertaining to the domain name newportnews.com, finding that the defendant possessed bad-faith intent to profit and awarding statutory damages and attorneys’ fees.  The defendant appealed, arguing that the district court erred in finding that it acted in bad faith.

On appeal, the 4th Circuit upheld the district court’s finding of bad faith.  While the defendant argued that it offered a legitimate service under the domain name by providing information about the city of Newport News, the court pointed to clear evidence that the defendant had shifted its focus away from providing information about Newport News and became a website devoted primarily to women’s fashion.  It would undermine the purpose of the ACPA, the court explained, if a domain name registrant was permitted to profit from another company’s trademark simply by providing some minimal amount of information about a legitimate subject as the defendant did here.  Further, the 4th Circuit pointed to the UDRP decision as additional proof of the defendant’s bad faith.  The UDRP panel found the defendant’s use proper precisely because its business of providing city information was unrelated to the plaintiff’s clothing business.  However, “in the face of the cautionary language [from the UDRP decision],” the court noted, “Defendant purposefully transformed its website into one that competed with Plaintiff by advertising women’s apparel.”

Further, the 4th Circuit further found no abuse of discretion in the district court’s award of attorneys’ fees to the plaintiff, agreeing with the district court’s finding that the defendant’s conduct was exceptional in light of the timing of the transformation of the site—the defendant had changed its website content clearly after it had been made aware by the UDRP panel that only lack of competition between the parties made the defendant’s use of the domain name legitimate.  Similarly, the court affirmed the district court’s statutory damages award of $80,000, finding the amount appropriate given the particularly egregious nature of the defendant’s conduct.

Personal Jurisdiction Lacking Despite Twenty Internet Users from Forum State Signing Up for Defendant’s Website

Considering whether a New Jersey website operator was subject to personal jurisdiction in Illinois, the U.S. Court of Appeals for the Seventh Circuit held that for personal jurisdiction to arise, a defendant must in some way target the forum state’s market in addition to operating an interactive website that is accessible from the forum state.  be2 LLC v. Ivanov, Case No.10-2980 (7th Cir., Apr. 27, 2011) (Hamilton, J.)

The plaintiffs operated an international internet dating website at the domain name be2.com.  The plaintiff’s U.S. affiliate was located in Delaware.  Defendant Nikolay Ivanov, an individual alleged to be the co-founder of a competing internet dating website, was located in New Jersey.  The plaintiffs brought a federal trademark infringement action against Ivanov in Illinois, based upon his operating of an internet dating website at the domain name be2.net.  The district court entered default judgment against Ivanov after the defendant failed to answer the complaint and attend a scheduled status hearing.  Ivanov appeared for the first time through counsel after the entry of default judgment against him, filing a motion to vacate the judgment as void for want of personal jurisdiction.  Ivanov argued that he was not subject to personal jurisdiction in Illinois because, among other things, he was not the co-founder or CEO of the competing internet dating company and he had never set foot in Illinois.  Ivanov’s sworn declaration, however, contained several unbelievable representations.  For example, the defendant claimed that the website reference to him as “CEO” actually meant to communicate that he was the website’s “Centralized Expert Operator,” who merely translated content on the website from Bulgarian to English.  The district court denied Ivanov’s motion, and he appealed.

Although the Seventh Circuit recognized that Ivanov’s declaration contained “preposterous” claims, the court nonetheless reversed the district court and remanded the case with instructions to vacate the judgment and dismiss the plaintiffs’ complaint for lack of personal jurisdiction.  The court performed a “minimum contacts” analysis to determine whether personal jurisdiction was proper.  Toward the “purposeful availment” factor, the court considered whether Ivanov had “purposely exploited the Illinois market” to determine if his contacts with the state were sufficient to confer personal jurisdiction.  The plaintiffs had submitted evidence showing that 20 persons who listed Illinois addresses had at some point created free dating profiles on Ivanov’s website.  Even assuming that those 20 individuals were active users of Ivanov’s website and were actually located in Illinois, the court determined that such contacts, without more, were attenuated contacts that did not subject the defendant to personal jurisdiction in Illinois.  In so holding, the court noted that there was no evidence of any interactions between Ivanov and the 20 individuals.  Further, the court reasoned that the evidence submitted showed that the 20 individuals may have created their dating profiles unilaterally by simply stumbling upon Ivanov’s website and clicking a button that automatically published their dating preferences online.  Without additional evidence showing that the defendant targeted or exploited the Illinois market, the court could not find that Ivanov availed himself of the privilege of doing business in the state.

Court Tosses Transpacific Air Passengers’ Claims Based on Alleged Overcharges for Flights Originating in Asia

On May 9, 2011, the District Court for the Northern District of California dismissed with prejudice air passenger travel claims based on foreign injury in an MDL action alleging a ten-year international conspiracy among the airlines to fix the prices of transpacific air passenger travel. Memorandum Opinion, In re Transpacific Passenger Air Transp. Antitrust Litig., No. C-07-05634 CRB (“Mem. Op.”).

The court drew the line at claims of injury based on “the overcharges associated with flights originating in Asia” and held that such claims of injury fall outside the Court’s subject matter jurisdiction under the Foreign Trade Antitrust Improvement Act (“FTAIA”).

To support their claims, Plaintiffs had first argued that they satisfied the import trade exception to the FTAIA’s subject matter jurisdiction bar. See 15 U.S.C. § 6a (“Section 1-7 of [the Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations…”) (emphasis added). Turning to the dictionary definition of “import” as a verb, plaintiffs had argued that the word means “to bring in; to introduce from a foreign or external source,” and that the delivery of air passengers from airports in Asia to airports in the United States and vice versa thus involves import trade. Mem. Op. at 5 (internal quotations and citation omitted). The court found this definition unpersuasive.

In rejecting application of the “import trade” exception, the court explained that plaintiffs failed to take account of the significant difference between cargo, to which their definition of “import” commonly applies, and people. Id. at 6 (“air passengers are not products like the oriental rugs that were found to be the object of import commerce in Carpet Group, 227, F.3d at 72…”); see also id. (import “generally denotes a product (or perhaps a service) [that] has been brought into the United States from abroad”) (quoting Turicentro S.A. v. Am. Airlines Inc., 303 F.3d 293, 303 (3d Cir. 2002)). The court explained that the focus of the FTAIA inquiry is on whether defendants’ conduct, not plaintiffs’, involves import trade, and that defendants’ relevant conduct of air passenger transportation could not fairly be equated with “importing of people.” Id. at 6-7.

The court also rejected plaintiffs’ reliance on the “domestic effects” exception to FTAIA’s jurisdictional bar. This exception required plaintiffs to show that “the effects on U.S. commerce or American interests engaged in foreign commerce must be direct, substantial and reasonably foreseeable – not minor impacts – and it must give rise to the antitrust claims.” In re Dynamic Random Access Memory (DRAM) Antitrust Litig., 546 F.3d 981, 986 (9th Cir. 2008). To support their argument that they satisfied this exception, plaintiffs made two assertions. First, they alleged that U.S. residents and citizens paid more for air passenger transportation. Second, they alleged that “travelers using price-fixed air transportation services are able to allocate a smaller fraction of their total travel budget to the purchase of commercial goods and services during their stay in the United States.” Id. at 7 (internal quotation marks and citation omitted).

Turning to the first prong of the exception, i.e., the “directness” of the asserted effect on U.S. commerce, the court rejected the second allegation out of hand, explaining that such an asserted effect “is entirely indirect” and based on “numerous speculative assumptions about travelers’ spending habits.” Mem Op. at 8. However, the court found plaintiffs’ the assertion that U.S. residents and citizens paid more for air passenger travel sufficiently satisfied the “directness” requirement. Id.

The court nonetheless found the exception inapplicable because plaintiffs could not show that it was the “domestic effects” of the alleged conspiracy that caused the foreign injury, rather than “the same overall price-fixing conspiracy that caused the domestic effect.” Id. at 10. Here, the court rejected plaintiffs’ claim that “prices for travel originating in foreign countries and travel originating in the United States are inextricably bound up with and dependent on each other” because “the seats on Defendants’ planes simultaneously carry passengers whose travel originated in foreign countries as well as those whose travel originated in the United States.” Id. at 10 (internal citation and quotation marks omitted). The court explained, “‘bound up,’ even very bound up, is not proximate causation.” Id.

Finally, the court also concluded that plaintiffs lacked antitrust standing largely for the same reasons, observing that the standing analysis “implicates many of the same issues as the jurisdictional analysis under the [FTAIA].” Id. at 12 (internal quotation marks and citation omitted). The court turned to the five factors relevant to determining whether a plaintiff has antitrust standing: (1) the intent of the alleged conspirators (here to fix prices of both domestic and foreign flights); (2) the directness of the injury (here caused by the same alleged conspiracy, not domestic effects of that conspiracy); (3) the character of the damages (here the allegedly higher prices for flights originating outside the U.S.); (4) the existence of more appropriate plaintiffs (here those persons allegedly overcharged for flights originating in the U.S.); and (5) nature of the plaintiffs’ claimed injury (here foreign injury). Id. at 13.

Although the court found nearly all factors to be lacking, it gave particular weight to the nature of plaintiffs’ injury being foreign. Id. at 13 (noting, “The last factor is one of ‘tremendous significance.'”). Because “Plaintiffs’ injuries were not caused by the domestic effects of the conspiracy,” the court concluded that the foreign nature of their injury was “fatal” to their antitrust standing. Id. Accordingly, the court dismissed plaintiffs’ foreign injury claims with prejudice.

Software Compilation Not A Trade Secret Under State Law

The U.S. Court of Appeals for the Fourth Circuit vacated and remanded a grant of summary judgment to Defendants on Plaintiff’s claims for misappropriation of trade secrets and breach of contract against defendant Sentia Group and several former employees of the plaintiff.  Decision Insights, Inc. v. Sentia Group, Inc et al., Case No. 09-2300, (4th Cir., March 15, 2011) (per curiam).

Decision Insights offers software used as an analytical tool in preparing negotiation strategies.   In 2006, Decision Insights filed suit against a group of former employees alleging that they improperly used the plaintiff’s propriety source code and breached non-disclosure agreements in forming Sentia Group, a competing software company.   Decision Insights also alleged that the defendants used materials containing the plaintiff’s trade secrets, such as marketing and research reports, client information and information contained in its software user manual.

To qualify as a trade secret under Virginia law, information must possess independent economic value, not be generally known or readily ascertainable by proper means and   be subject to reasonable efforts to maintain secrecy.

The district court granted summary judgment for the defendants, holding that Decision Insights failed to establish that its software qualified as a trade secret, because the plaintiffs did not show that the software was not generally known or ascertainable.   The district court also dismissed the plaintiff’s trade secret claims towards the additional, non-software materials, finding that because the plaintiff’s claims failed towards its source code, the plaintiff’s other claims also failed.

On appeal, the 4th Circuit determined that the deposition testimony and testimony of Plaintiffs’ expert witnesses created sufficient issues of fact to merit consideration by a jury and on that basis vacated and remanded the summary judgment determination.   One of the plaintiff’s expert witnesses, a co-author of the original source code at issue, opined that certain elements of the source code had never been published, supporting a finding that the plaintiff’s source code qualified as a trade secret.   A second expert witness, also a co-author of the source code, testified that portions of the source code and its sequence had been purposefully kept confidential.

Further, the 4th Circuit determined that the district court improperly granted summary judgment without considering the other two elements required for trade secret protection – whether the plaintiff’s source code possessed independent economic value and whether Decision Insights engaged in reasonable efforts to maintain secrecy.   Further, the 4th Circuit directed the district court to consider the plaintiff’s trade secret claims towards non-source code materials independently from the trade secret claim concerning the plaintiff’s source code.

Time To Review Your Company’s Consumer Disclosures?

A series of recent federal court decisions highlight the importance of making sure your company’s online consumer disclosures are robust and accurate. If done properly, they just might help you avoid a class-action lawsuit.

In Berry v. Webloyalty.com, Inc., the court dismissed a putative nationwide consumer class action, concluding that the company’s business practices were not unfair or misleading as a matter of law because of the company’s disclosures. Slip Opinion, No. 10-1358 (S.D. Cal. Apr. 11. 2011).

The case involved “post-transaction marketing,” the practice of presenting a consumer with an offer from a third party after the primary transaction has been completed. This type of marketing generally involves a data-sharing arrangement, where the company completing the primary transaction passes data to a second company for marketing purposes. After the consumer takes some further action (e.g., entering an email address, checking a box and clicking “yes”), the second company charges the consumer for a new product or service using the payment information provided to the first company.

This practice has been criticized by certain legislators and officials at the Federal Trade Commission. Last December, Congress passed and the President signed the Restore Online Shoppers’ Confidence Act into law, targeting online post-transaction marketing; the law now requires additional disclosures to be made and prohibits third-party sellers from charging consumers for goods or services without the consumer’s express consent and from receiving certain financial information obtained during the initial transaction.

Notwithstanding any public debate over the propriety of these marketing practices, several federal courts have granted motions to dismiss in post-transaction marketing cases based on the companies’ disclosures. The most recent example is Berry, where the court took judicial notice of the company’s disclosures and ultimately dismissed the case, concluding that no reasonable consumer could have been misled, given the disclosures that were made.

After reviewing the online disclosures and terms of service, the court in Berry held that “the explicit and repeated disclosures that defendants made in their enrollment page suffices to defeat” all of the plaintiffs’ claims, including fraud, invasion of privacy and violations of the Electronic Communications Privacy Act, Electronic Funds Transfer Act and California’s Unfair Competition Law. Slip Op’n at 9. The court explained that by completing his transaction after receiving such disclosures, plaintiff had consented to the conduct about which he complained. Id. Although the plaintiff claimed he did not understand he would be charged for the third party’s product (here a membership club providing discounts on products and services), the court emphasized that the enrollment page disclosed more than five times that, by signing up, plaintiff would be charged $12 per month after an initial thirty-day trial period. Id. at 10.

Bsed on these disclosures, the court granted the defendants’ motion to dismiss, thus ending the case and potentially saving the companies millions in discovery costs and other expenditures.

Other federal courts have reached similar conclusions. In Baxter v. Intelius, Inc., No. 09-1031, (C.D. Cal. Sept. 16 2010), the court granted a motion to dismiss, concluding that “[t]he disclosures combined with the affirmative steps for acceptance are sufficient that, as a matter of law, the webpage is not deceptive.” Similarly, in In re Vistaprint, Marketing and Sales Practices Litigation, No. 08-1994 (S.D. Tex. Aug. 31, 2009), aff’d, No. 09-20648 (5th Cir. Aug. 23, 2010), the court held that a “consumer cannot decline to read clear and easily understandable terms that are provided on the same webpage in close proximity to the location where the consumer indicates his agreement to those terms and then claim that the webpage, which the consumer has failed to read, is deceptive.”

A key factor in each of these cases was the courts’ willingness to examine the company’s online disclosures in connection with a motion to dismiss. In each case, the plaintiffs opposed any review of the disclosures, arguing that they were outside the four corners of the complaint and may not be authentic. In Baxter and Vistaprint, the court rejected the argument because plaintiffs came forward with nothing to challenge the authenticity of the disclosures. In Berry, the court took the extraordinary step of allowing discovery on the authenticity and accuracy of the disclosures before ruling on the motion to dismiss. When the plaintiffs were unable to offer any evidence that the disclosures were not authentic, the court considered them in connection with the motion to dismiss and granted the motion.

These cases highlight two strategies that could help your company reduce the risk of class-action lawsuits.

First, the cases demonstrate that, even for controversial business practices, robust consumer disclosures may provide an effective defense against a consumer class-action lawsuit.

Action Step: Consider conducting a comprehensive review of your company’s consumer disclosures to evaluate whether your company is adequately protected and in compliance with existing law.

Second, the cases demonstrate the importance of being able to provide a court with accurate copies of the disclosures individual consumers saw and in a form that is subject to judicial notice in connection with a motion to dismiss.

Litigating a class action can be incredibly expensive and risky. One effective way to mitigate the risk is to have a strategy for defeating them at the earliest stages of the case, preferably on a motion to dismiss. But if you cannot provide accurate copies of the actual disclosures made to the named plaintiff, the court may be unwilling to consider them on a motion to dismiss and you may have lost one of your company’s most effective weapons against class actions.

Action Step: Consider reviewing your company’s systems for documenting consumer transactions to ensure you can provide accurate copies of consumer disclosures for any given transaction.

Watch “Loose Lips” Statements in Terminations

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.

Seventh Circuit Reverses Summary Judgment In Kraft ERISA “Excessive Fees” Case

On April 11, 2011, a divided Seventh Circuit panel reversed summary judgment in favor of Kraft Foods Global, Inc. in a class action ERISA breach of fiduciary duty case involving “excessive fees” claims in connection with Kraft’s 401(k) plan. The main take away from the decision is that fiduciaries must continue to be diligent and thoroughly consider plan administration issues and document why decisions were made or not made or practices followed, even on decisions and practices once thought to be routine or common industry standards. By following such a prudent practice, fiduciaries will substantially increase their ability to defend challenges concerning fiduciary conduct.

In Kraft, plaintiffs alleged three primary claims considered on appeal: that the use of a unitized company stock fund as an investment option was improper; that the plan’s recordkeeping fees were too high and imprudently monitored; and that the fiduciaries imprudently allowed the plan trustee to retain interest income from “float.”

In a 2-1 decision, the panel ruled that the plaintiffs could proceed to trial on their theory that the unitized company stock fund was imprudently designed because of “investment drag” and “transaction drag” that is inherent with the widely popular unitized funds. Like most company stock funds, Kraft plan participants held units of the fund rather than directly holding shares of company stock. The plaintiffs alleged that the fiduciaries should have considered the “drag” that unitized funds cause on gains (and losses). The Seventh Circuit ruled that there was no evidence that the fiduciaries ever consciously decided in favor of a unitized plan finding that the benefits of a unitized fund outweighed the downsides, or whether they just ignored the issue. According to the majority, that was sufficient to proceed to trial. In a strongly worded dissent, Judge Cudahy called the plaintiffs’ theories on this, and others in the case, an “implausible class action based on nitpicking with respect to perfectly legitimate practices of fiduciaries.”

The majority further reversed summary judgment for the defendants on whether the recordkeeping fees were too high. The plaintiffs argued that the fiduciaries should have solicited competitive bids from other recordkeepers about every three years. Kraft had used the same recordkeeper since 1995, without a competitive bid, although Kraft received advice from several third-party independent consultants that the fees were reasonable. The plaintiffs submitted an opinion from an expert finding that the fees were excessive. In a decision with potentially wide-sweeping ramifications, the Seventh Circuit held that while the defendants’ reliance on the contemporaneous opinions of outside independent consultants that the fees were reasonable may be enough to prevail at trial, it was not enough to overcome the plaintiffs’ contrary admissible expert opinion at summary judgment which created a genuine issue of fact. The use of a consultant cannot “whitewash” otherwise unreasonable fees and a trier of fact could conclude that the defendants did not satisfy their duty solely through the use of independent consultants to ensure that the recordkeeping fees were reasonable. The dissent argued that the fiduciaries’ use of an outside consultant to confirm the reasonableness of the fees showed a prudent process and asked “what the majority’s holding means for ERISA fiduciaries” and “what is adequate to support a fee without the fear of litigation?” As noted by the dissent, this decision “will only serve to steer [fiduciaries] attention toward avoiding litigation instead of managing employee wealth.”

The Seventh Circuit upheld summary judgment for the defendants on whether the float income the trustee received was a reasonable part of the trustee’s overall compensation, because the fiduciaries proved that they received reports showing the float income and the plaintiffs failed to offer admissible evidence that such information was not considered.

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.

Second Circuit Affirms the Importance of Adequately Pleading Loss Causation in Securities Fraud Claims

On February 2, 2011, the U.S. Court of Appeals for the Second Circuit handed down its opinion in Amorosa v. AOL Time Warner, Inc., one of the last cases stemming from an alleged fraud perpetrated by AOL executives pursuant to a merger with Time Warner.  AOL executives allegedly overstated their revenues, profits and future business prospects in order to secure the merger.  Afterwards, while the company’s stock prices were still artificially inflated, executives allegedly cashed in hundreds of millions of dollars in personal shares, ultimately triggering a massive plummet in the value of the company’s stock.

The plaintiff, a holder of common stock in America Online predating the company’s merger with Time Warner, brought suit in federal court, alleging fraudulent accounting practices by AOL’s accounting firm, Ernst & Young.  The allegations stemmed from a “clean” audit opinion provided by Ernst & Young prior to the merger, which, according to plaintiff, ultimately led to the dramatic decline in the value of his stock.  Specifically, plaintiff alleged violations of Sections 14(a) and 10(b) of the Securities Exchange Act of 1934.1

The U.S. District Court for the Southern District of New York dismissed plaintiff’s Section 14(a) and 10(b) claims for failure to adequately plead that Ernst & Young’s alleged misrepresentations proximately caused his investment losses (this causal link—referred to as “loss causation”—is a requisite component of securities fraud claims).  Plaintiff appealed to the Second Circuit Court of Appeals, which affirmed the district court’s rulings.  Regarding the Section 14(a) and 10(b) claims, the appellate court held that it was plaintiff’s burden to plead and prove loss causation, and that he had failed to do so.  Plaintiff’s attempt to plead loss causation consisted of his allegation that, as the public became aware of AOL Time Warner’s accounting practices, his stock lost value.

In assessing the sufficiency of plaintiff’s securities claims, the appellate court articulated the standard for proving loss causation under a “materialization of risk” theory:  a plaintiff must show that “the fraudulent statement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.”  Plaintiff had to allege specific misstatements or omissions made by the defendant that were connected to his eventual economic loss.  Because plaintiff alleged only that Ernst & Young’s audit report was the cause of his losses, but did not point to any specific misrepresentations or omissions regarding the disputed report or AOL’s accounting practices in general, the Second Circuit affirmed the district court’s dismissal of plaintiff’s securities fraud claims.

With its holding, the Second Circuit further entrenched the importance of pleading and proving loss causation in securities fraud cases.  In the process, it demonstrated that even sympathetic plaintiffs who appear to have suffered legitimate pecuniary injury from an alleged fraud—which, in this case, resulted in the SEC bringing multiple civil suits against AOL executives—will be given no quarter when they fail to meet this requirement.

Application to Securities Fraud Cases Generally

There is no appellate-circuit-transcending standard for pleading and proving loss causation, and many cases explain only what does not amount to loss causation.  See, e.g., Dura Pharms., Inc. v. Brudo, 544 U.S. 336, 342 (2005) (plaintiff’s demonstration that the price of a security on its date of purchase was inflated due to an alleged misrepresentation was insufficient to plead loss causation); New York City Employees Ret. Sys. v. Jobs, 593 F.3d 1018, 1023–24 (9th Cir. 2010) (allegation of share dilution was insufficient to plead loss causation because economic loss does not necessarily accompany dilution).

Some courts, however, have articulated clearer guidelines.  The Seventh Circuit, for example, has spelled out three theories of loss causation:  (1) materialization of risk; (2) fraud on the market; and (3) risk-free assurance by defendant. See Ray v. Citigroup Global Mkts., Inc., 482 F.3d 991, 995 (7th Cir. 2007). The standard for the materialization of risk theory—claimed by the plaintiff in Amorosa—is discussed above.  For the fraud-on-the-market theory, a plaintiff must show “both that the defendants’ alleged misrepresentations artificially inflated the price of the stock and that the value of the stock declined once the market learned of the deception.”  Id.  Finally, under the aptly named “risk-free assurance by defendant” theory, a plaintiff must show that a broker falsely assured him or her that the disputed investment was risk free.

Looking Forward  

The issue of loss causation will be addressed by the Supreme Court this month, when it hears Erica P. John Fund, Inc. v. Halliburton Co., on appeal from the Fifth Circuit.  At issue in that case is whether loss causation must be established as a prerequisite for class certification, or whether it is an issue best left for trial.

District Of Columbia Circuit Holds That Certifications In Financial Statements Do Not Constitute Omissions That Qualify For A Presumption Of Reliance In Fraud Claims

In In re InterBank Funding Corp. Securities Litigation, No. 09-7167, — F.3d —-, 2010 WL 5299882 (D.C. Cir. Dec. 28, 2010), the United States Court of Appeals for the District of Columbia Circuit affirmed the dismissal with prejudice of a class action asserting securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, based upon a failure to adequately plead the essential element of reliance. The sole issue before the Court was whether the fraud allegations in the complaint involved material omissions, which would allow plaintiffs to invoke the presumption of reliance established by the United States Supreme Court in Affiliated UteCitizens v. United States, 406 U.S. 128 (1972). In affirming the district court’s decision, the Court held that the complaint’s allegations of fraud focused primarily on affirmative misrepresentations, not omissions, and thus did not qualify for the Affiliated Ute presumption of reliance.

Plaintiffs were purchasers of securities of InterBank Funding Corporation (“InterBank”). InterBank was formed in 1996 to buy and restructure or rehabilitate distressed loans. From 1996 through 1999, InterBank formed several funds that offered private placement notes to investors bearing interest between eight to ten percent annually, plus a share of gross profits. Without notifying its investors, InterBank established and adhered to a “related party transaction policy” that permitted it to purchase a loan from one of its funds if there was a question regarding whether the loan would be collected before the fund’s scheduled liquidation. Pursuant to that policy, InterBank would pay the full amount outstanding on a loan, even if the loan was deemed “uncollectable.”  InterBank used proceeds from new offerings to pay off prior note holders — effectively, a Ponzi scheme.

Plaintiffs filed a complaint against InterBank, certain of its officers and directors, and InterBank’s outside auditor, Radin Glass & Co., LLP (“Radin”), which had certified InterBank’s financial statements as fairly presented in accordance with generally accepted accounting principles (“GAAP”). Plaintiffs alleged that InterBank’s financial statements did not comply with GAAP, that Radin’s audits did not comply with generally accepted audit standards and that Radin certified financial statements that failed to disclose related-party transactions.

The district court dismissed the complaint with prejudice. The Court of Appeals reversed, holding that the district court failed adequately to explain why the dismissal should have been with prejudice. After remand, the district court again dismissed the complaint with prejudice because it concluded that there was no indication that plaintiffs could cure the deficiencies in the complaint. On appeal again, the Court of Appeals vacated in part, and remanded for the district court to consider plaintiffs’ allegations of scienter. Following the second remand, a settlement was reached with the InterBank defendants, leaving Radin as the only defendant in the case. Plaintiffs moved for leave to file an amended complaint that asserted claims solely against Radin.  The district court denied the motion, holding that the amendment would be futile because the proposed amended complaint did not and could not adequately plead reliance. Plaintiffs appealed.

To state a claim under Section 10(b) and Rule 10b-5, plaintiffs must allege that (1) defendants a material misrepresentation or omission; (2) defendants acted with an intent to deceive, manipulate or defraud, or with reckless disregard of the risk that investors would be misled; (3) they reasonably relied on that misrepresentation or omission; and (4) the misrepresentation or omission caused plaintiffs to suffer an economic loss. The only issue before the Court of Appeals was whether plaintiffs could demonstrate reliance. Plaintiffs took the position that they did not need to plead actual reliance because they were entitled to a presumption of reliance set forth by the Supreme Court in Affiliated Ute.

In Affiliated Ute, two bank managers devised a scheme to purchase shares of stock issued by the U.S. Government to each “mixed-blood” member of the Ute Indian Tribe at prices below fair market value. The managers were employed by the bank that served as the transfer agent for the shares. The Supreme Court held that the bank managers had an affirmative duty under Section 10(b) and Rule 10b-5 to disclose that they had a financial interest in the transactions, and that “[u]nder the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance [on the alleged omissions] is not a prerequisite to recovery.”

Plaintiffs in InterBank conceded that the Affiliated Ute presumption applies only to allegations of omissions, and not to allegations of affirmative misstatements. They argued, however, that their claims against Radin were not premised upon misrepresentations, but instead on an alleged omission by Radin in InterBank’s financial statements that the company was being operated as a Ponzi scheme. The Court held that plaintiffs’ characterization of their claims as alleging omissions only was “off the mark.” In order to effectuate the scheme, the Court observed, InterBank’s financial statements “necessarily misrepresented the company’s financial position in order to attract new investors, and Radin affirmatively misrepresented the accuracy of these statements by stating that they fairly presented Interbank’s financial position and conformed with GAAP.”

Plaintiffs’ argument also was contradicted by the allegations in their complaint. The complaint specifically alleged that Radin made public statements regarding the accuracy of InterBank’s financial documents, which the district court correctly characterized as “positive statements.” Had Radin not included express certifications in InterBank’s financial documents, the Court held, its silence “might have been akin” to the bank managers in Affiliated Ute. However, because Radin did make express, affirmative misrepresentations, the reliance presumption ofAffiliated Ute did not apply.

Plaintiffs also argued that the “primary importance” of Radin’s non-disclosure of the Ponzi scheme to their case entitled them to application of the Affiliated Ute presumption. The Court also rejected this assertion, finding that a fraud’s “significance” to a case is entirely irrelevant to whether or not it stems from a misrepresentation or an omission, “which is the dispositive inquiry in determining the availability of the Affiliated Ute presumption.”

Finally, the Court also rejected the plaintiffs’ assertion that several district courts previously have held that the Affiliated Ute presumption applied “if a defendant fails to notify plaintiffs that they invested in a Ponzi scheme.” Without any detailed explanation, the Court found that, to the extent these cases were contrary to its analysis, they were unpersuasive.

In this case, the D.C. Circuit confirms that the Affiliated Ute presumption of reliance upon actionable omissions is of limited utility to most plaintiffs in securities fraud cases, as nearly all such cases spring first and foremost from affirmative misrepresentations.