Business Litigation Reporter - February 2015

By Brenda Sharton
Goodwin Procter LLP
Feb 9, 2015

Goodwin Procter’s Business Litigation Reporter provides timely summaries of key cases and other developments within dedicated Business Litigation sessions and related courts throughout the country – courts within which Goodwin Procter’s Business Litigation attorneys are continually litigating. In addition, each issue of the Business Litigation Reporter provides a more thorough discussion of one topic of particular importance to the business community. In this issue, we explain the impact Caremark could have on the personal liability directors and officers might face in the event of a data security breach, and how to mitigate this risk.

California

Arbitration Waived By Classwide Discovery And Settlement Negotiations. In Bower v. Inter-Con Security Systems Inc., 2014 WL 7447677 (Cal. Ct. App. Dec. 31, 2014), the First District Court of Appeal affirmed the superior court’s denial of Inter-Con’s motion to compel arbitration on the ground of waiver. The plaintiff filed a putative class action in the California Superior Court, and Inter-Con asserted an affirmative defense that the claims were subject to arbitration. Inter-Con then propounded class-wide discovery, and participated in settlement discussions with the plaintiff. The Court of Appeal held that Inter-Con waived its right to arbitrate because both the discovery that it had propounded, and the settlement discussions in which it had engaged, had been class-wide rather than limited to the individual plaintiff’s claim, and hence were broader than the scope of arbitration would have been.

No Arbitration Agreement With Service Provider Following Free Trial Period Provided By Car Dealer. In Knutson v. Sirius XM Radio Inc., 771 F.3d 559 (9th Cir. 2014), a putative class action alleging violations of the Telephone Consumer Protection Act, the Ninth Circuit reversed the district court’s order granting Sirius XM’s motion to compel arbitration pursuant to the Federal Arbitration Act. The plaintiff purchased a Toyota vehicle that came with a trial subscription to Sirius XM satellite radio. When the trial period ended, Sirius XM sent the plaintiff a Welcome Kit that contained a customer agreement with an arbitration provision. The plaintiff argued he did not assent to that agreement because he did not read the documents in the Welcome Kit, believing that his relationship was with Toyota. The Ninth Circuit held that a reasonable person in the plaintiff’s position would not have understood he was entering into a contractual relationship with Sirius XM, and rejected Toyota’s argument that the plaintiff’s continued use of the radio service indicated his acceptance of the agreement.

Claim Challenging “All Natural” Product Label Dismissed Absent Proof Of Consumer Expectations. In Brazil v. Dole Packaged Foods, LLC, 2014 WL 6901867 (N.D. Cal. Dec. 8, 2014), Judge Koh granted Dole’s motion for summary judgment in an action by California consumers of packaged fruit and fruit juice containing allegedly misleading “all-natural” statements. The court held that plaintiffs had failed to adduce expert or otherwise evidence – as opposed to mere assertions – that consumers would not have expected the products to contain citric acid or ascorbic acid. Based on this conclusion, Judge Koh also rejected the claim that the statements were unlawful under California’s Unfair Competition Law. The plaintiff has appealed to the Ninth Circuit.

Delaware

Chancery Court Has Jurisdiction Over Asset Sale Involving Allegedly Unique Property. In Willis v. PCA Pain Center of Virginia, Inc., 2014 WL 5396164 (Del. Ch. Oct. 20, 2014), the Delaware Court of Chancery held that it had jurisdiction over a breach-of-contract action seeking specific performance of the completion of an asset sale where the property in question allegedly was “unique” – that is, constituted “a truly unique opportunity that cannot be adequately monetized.” The court warned, however, that a mere request for specific performance in a case involving personal property typically is not enough to confer jurisdiction on the Court of Chancery. The court also stayed the action pending resolution of an earlier-filed action in Virginia involving many of the same parties and arising from common facts. Although the Court concluded that the specific facts warranted a stay, it noted that the first-filed rule is not strict and that “[w]hen actions are filed within a very narrow time frame, the Court will sometimes consider the actions to have been filed contemporaneously.”

Records Inspection Can Be Conditioned On Limitation Of Forum For Resulting Litigation. In United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014), a corporation requested the court to require, as a precondition to its production of documents in response to a shareholder’s Section 220 books and records demand, that any suit arising from the production be brought in a Delaware court. The Chancery Court held that it lacked authority to impose such a forum restriction as a condition to a Section 220 demand. The Delaware Supreme Court reversed, holding that Section 220 gives the Chancery Court broad power to condition a books and records inspection, including the condition requested here. The Supreme Court remanded the case to the Chancery Court to consider whether, in the exercise of its discretion, to impose a forum restriction in this particular case.

Massachusetts

Acquirer Controls Target Corporation’s Attorney-Client Privilege Under Delaware Law. In Novack v. Raytheon Co., No. 13-2852-BLS1, Judge Billings of the Business Litigation Session of the Massachusetts Superior Court held that after a merger, under Delaware law, the acquiring corporation – not the shareholders of the acquired company – controls the attorney-client privilege applicable to pre-merger communications between the acquired company and its attorneys regarding the merger. The court acknowledged that because disputes arising out of a merger are likely to pit the interests of the acquired corporation against those of the acquirer, courts in some states have refused to pass the attorney-client privilege regarding the merger to the surviving corporation. Nevertheless, the court held that because Delaware law provides that “all property, rights, [and] privileges” vest in the surviving corporation, that includes the target corporation’s attorney-client privilege. The court also noted that “parties to merger agreements can – and have – negotiated special contractual agreements to protect themselves and prevent certain aspects of the privilege from transferring to the surviving corporation,” but that the parties did not do so here.

Systematic Contacts Insufficient For General Personal Jurisdiction. In Fed. Home Loan Bank of Boston v. Ally Fin., Inc., No. 11-10952-GAO (D. Mass.), Judge O’Toole issued the first written opinion within the First Circuit to apply the new, stricter standard for establishing general personal jurisdiction over out-of-state companies announced in Daimler AG v. Bauman, 134 S. Ct. 746 (2014). The case concerned the existence of personal jurisdiction over ratings agencies that were being sued in Massachusetts over certain mortgage-backed securities. The court, prior to Daimler, had held that the defendants’ contacts with Massachusetts “were sufficiently continuous and systematic to justify the exercise of general personal jurisdiction,” even though the defendants were incorporated and had their principal place of business elsewhere. Based on Daimler, however, the court reconsidered its prior decision and dismissed the case against the rating agencies for lack of personal jurisdiction. As the court noted, Daimler rejected “the exercise of general jurisdiction in every State in which a corporation engages in a substantial, continuous, and systematic course of business.”

Violation Of The FDCPA Per Se Violates Chapter 93A. In McDermott v. Marcus, Errico, Emmer & Brooks, P.C., 2014 WL 7373201 (1st Cir. Dec. 29, 2014), the First Circuit held that a violation of the federal Fair Debt Collection Practices Act (“FDCPA”) constitutes a per se violation of Chapter 93A, the Massachusetts consumer protection statute that makes unlawful “unfair or deceptive acts or practices in the conduct of any trade or commerce.” This is so, the court reasoned, because Chapter 93A fully “incorporates” the Federal Trade Commission Act (“FTCA”), and “the FDCPA establishes that an unfair debt collection act in violation of the FDCPA is a per se violation of the FTC Act.”

New York

Common Interest Privilege Expanded Beyond Anticipated Litigation Context. In Ambac Assurance Corp. v. Countrywide Home Loans, Index No. 651612/10 (N.Y. App. Div. 1st Dep’t Dec. 4, 2014), the Appellate Division, First Department, held that “litigation need not be actual or imminent” in order for parties having a common interest to be able to share attorney-client communications without losing their privileged status. The court recounted that, until now, New York courts had held that the “common interest doctrine” allowed entities to share privileged advice only with respect to “pending or reasonably anticipated litigation.” But the court observed that “[b]usiness entities often have important legal interests to protect even without the looming specter of litigation,” such as in the context of merger discussions. The court therefore held that such communications fall under the common interest doctrine “so long as the primary or predominant purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties, and not to obtain advice of a predominately business nature.” (Disclosure: Goodwin represented Bank of America in this litigation)

Commercial Division Rule Changes. The Commercial Division has recently amended several of its rules regarding discovery, effective as of April 1, 2015. The revised Rule 11-d limits parties to taking 10 depositions for up to seven hours per deponent. Rule 8 will require parties to confer prior to the preliminary conference about the need to alter the “presumptive limitation” on depositions in Rule 11-d. Amended Rule 14 establishes a procedure for the submission of letters, instead of motions, to the court over discovery disputes. Additionally, a preamble to the Rules has been added advising that judges will sanction parties who engage in “dilatory tactics, fail to appear for hearings or depositions, undue delay in producing relevant documents, or otherwise cause the other parties in a case to incur unnecessary costs.”