Business Litigation Alert

Practical Perspectives on Litigation Developments & Trends

Best Practice for Retention of Federal Jurisdiction to Enforce a Settlement Agreement

By Anthony A. Dean on Posted in General Litigation

Since the vast majority of civil cases end in settlement, litigants must remain mindful of ensuring judicial enforcement of a settlement agreement.

If you thought all that was necessary to provide for continuing judicial supervision is a clause in your settlement agreement or stipulation of dismissal stating that the federal court shall retain jurisdiction to enforce its provisions, please think again. As District Judge Noel L. Hillman recently emphasized in Brass Smith, LLC v. RPI Industries, Inc., federal courts are courts of limited jurisdiction and jurisdiction cannot be created by the private agreement of the parties. Nor do district courts have “inherent power” to enforce settlements. Unless you have taken the proper steps or there is an independent basis for jurisdiction (such as diversity of citizenship or a federal question), you will probably be obliged to bring a new action in state court to enforce your settlement agreement.

Notwithstanding its limited jurisdiction, a federal court may retain jurisdiction to enforce a settlement agreement under the doctrine of ancillary jurisdiction. To give rise to such jurisdiction, the parties’ obligation to comply with the settlement agreement must expressly be made part of the order of dismissal, either by a separate provision ‘retaining jurisdiction’ over the settlement agreement or by expressly incorporating the terms of the settlement agreement in the order of dismissal.

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Third Circuit, En Banc, Approves Settlement Class Containing Members Who Lack “Viable Claim”

By Jennifer Marino Thibodaux on Posted in Class Action

The U.S. Court of Appeals for the Third Circuit has issued an en banc opinion in Sullivan v. DB Investments, Inc. affirming a District Court’s certification of two nationwide settlement classes. In sum, though the multiplicity of states’ laws would affect the predominance inquiry in a litigated nationwide class action, in the settlement context, the Circuit eased the burden somewhat by declining to require a showing that each class member possess “a viable claim” based upon what would have been the applicable state statute or law.

The consolidated cases alleged federal and state antitrust, consumer protection, and other claims against De Beers SA and its competitors on behalf of direct and indirect purchasers. The district court had certified a nationwide settlement class of indirect purchasers pursuant to Rule 23(b)(3), concluding that the predominance requirement was satisfied despite that certain states precluded claims by indirect purchasers. On appeal, a panel of the Third Circuit vacated the certifications, concluding that the predominance requirement was not satisfied because certain states prohibited indirect-purchaser claims. The Court of Appeals granted a petition for rehearing en banc and vacated the panel’s prior order.

In reaching the conclusion that each class member need not possess a viable claim, the en banc opinion reiterated three “guideposts” for the predominance inquiry. First, commonality should be “informed by the defendant’s conduct as to all class members,” not by whether each plaintiff has a colorable claim for relief. Second, “variations in state law do not necessarily defeat predominance” when “a sufficient constellation of common issues binds class members together.” Third, “concerns regarding variations in state law largely dissipate when a court is considering the certification of a settlement class” because, by definition, there will not be a trial to manage.

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New Jersey Chancery Division Determines Insurance Agents are Not Franchises for Purposes of the New Jersey Franchise Practices Act

By Robert C. Brady on Posted in General Litigation

New Jersey insurers and insurance agents must be aware that agents are not entitled to the broad protections of the New Jersey Franchise Practices Act (“NJFPA”) pursuant to a recent Chancery Division decision in DeLuca v. Allstate Insurance Co., in which the Court held that insurance agents do not meet the definition of a “franchise.” The Court thus concluded that Allstate Insurance Company was free to terminate its agents pursuant to the terms of their respective agency agreements, which permitted termination with or without cause.

In August 2011, Allstate terminated its relationship with three New Jersey based agents, who then sued Allstate, asserting the protections of the NJFPA to preclude Allstate from unilaterally terminating their relationships. In an unpublished decision the Court held that the protections of the NJFPA did not extend to the insurance agents. In reaching this conclusion, the Court concluded that, because the agents did not sell any goods or services, a necessary ingredient for a franchisor-franchisee relationship — and the application of the NJFPA — was missing.

Judge Robert P. Contillo, P.J. Ch., held that insurance agents “do not sell insurance products” because “they are not permitted to do so in New Jersey,” and thus, they could not meet the NJFPA’s requirement that a franchise has a place of business at which it “displays for sale and sells the franchisor’s goods or … services.” Judge Contillo emphasized that an insurance agent’s role is merely to solicit business for the insurer and act as the conduit through which the insurer writes and issues a policy to the customer. The Court found controlling the fact that the agent cannot “reject or accept an application” nor “issue, modify or terminate any policy,” and thus the agent does not “sell” anything. Essentially, the Court determined that “the agent buys nothing from the insurer and sells neither product nor services to the public,” a key characteristic of a franchisor-franchisee relationship. Continue Reading

Bankruptcy Court Service of Process Rules Set Traps for the Unwary

By Jeffrey S. Berkowitz on Posted in General Litigation

The Supreme Court’s decision in Stern v. Marshall  has generated renewed focus on what types of cases and claims can be resolved in an adversary proceeding in the bankruptcy courts, and what types of cases will have to be resolved in the federal district courts. The resulting shift should serve as a reminder that, while the Federal Rules of Bankruptcy Procedure governing adversary proceedings are similar to and modeled on the Federal Rules of Civil Procedure, there are significant differences. For example, because the Bankruptcy Rules regarding service of process may result in a shorter time within which a defendant must respond, corporations must remain mindful of these differences and avoid relying upon the more well-known Federal Rules.

The Bankruptcy Rules allow for a summons and complaint to be served quickly and efficiently at minimal expense to the debtor’s estate while simultaneously helping to expedite the ultimate resolution of the case. From a practical standpoint, it means that individuals and corporations who anticipate that they might be sued in a bankruptcy case should not operate on the assumption that if a lawsuit is filed it will be served by a process server, as would be required under Federal Rule 4(e) in a case filed in the district court. Rather, Bankruptcy Rule 7004(b) provides for mailing the summons and complaint to the defendant by first class mail postage prepaid to complete service. If the defendant is a corporation, service can be completed by mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by statute to receive service. As a result, an adversary complaint will in all likelihood arrive in the mail, and could, in the case of a corporate defendant, simply be addressed to the attention of an officer or agent.

Likewise, corporate defendants should avoid relying upon general assumptions regarding personal jurisdiction. Bankruptcy Rule 7004(b) permits service of process by mail anywhere in the United States. Thus, a defendant in a bankruptcy court proceeding may be subject to the court’s jurisdiction even though the defendant has very few or perhaps no contacts with the state where the court sits. Federal Rule 4(k)(2), in contrast, authorizes nationwide service of process only in the unlikely circumstance that the defendant has sufficient contacts with the United States as a whole, but is not subject to the jurisdiction in any one state. Continue Reading

New Jersey Framework for Analyzing Attorneys’ Fee Awards, Including Contingency Fee Enhancements, Unchanged

By James J. La Rocca on Posted in General Litigation

Last week, the New Jersey Supreme Court reiterated that lawyers who represent clients on a contingency basis in disputes brought under New Jersey laws that permit the recovery of attorneys’ fees can recover an additional fee “enhancement” pursuant to the framework the Court set forth nearly 20 years ago in Rendine v. Pantzer, 141 N.J. 292 (1995) . The decision, Walker v. Guiffre, Case Nos. 72-10, 100-10 (N.J. Jan. 25, 2012), is noteworthy for businesses that all too frequently must weigh the risk of paying their opponents’ attorneys’ fees when deciding whether to settle disputes – particularly those companies that wishfully thought the reins on contingency fee enhancers might be tightened in light of two recent decisions by New Jersey appellate courts.

The New Jersey Appellate Division ruled in Walker v. Giuffre, 415 N.J. Super. 597 (App. Div. 2010) and Humphries v. Powder Mill Shopping Plaza, Case No. 6038-08, 2010 N.J. Super. Unpub. LEXIS 2664 (N.J. App. Div. Nov. 4, 2010), that the framework established in Rendine required modification to comply with the U.S. Supreme Court’s decision in Perdue v. Kenny A., 130 S. Ct. 1662 (2010). The Court in Perdue examined attorneys’ fee awards under federal laws and held, in part, that contingency fee enhancements were improper under federal fee-shifting statutes. The N.J. Supreme Court in Walker analyzed the New Jersey appellate decisions on a consolidated basis and explained that the U.S. Supreme Court decision in Perdue had no impact on the longstanding holding of Rendine. It reasoned that the N.J. Supreme Court already had considered the very arguments and considerations set forth in Perdue when it decided Rendine, including the conclusion that contingency fee enhancements are improper under federal fee-shifting statutes. In short, the framework set forth in Rendine, which permits contingency fee enhancements under New Jersey fee-shifting statutes, remains good law.

Among New Jersey laws that permit the recovery of attorneys’ fees and, therefore, the potential for a contingency fee enhancer, are the two laws most frequently implicated in New Jersey employment lawsuits: the New Jersey Conscientious Employee Protection Act (“CEPA”) and the New Jersey Law Against Discrimination (the “LAD”). A number of laws outside the employment context likewise place businesses on the defensive and permit the recovery of attorneys’ fees, including the New Jersey Consumer Fraud Act (“CFA”). (A listing of New Jersey statutes that permit fee-shifting can be found here.) Notably, the court’s decision in Walker arose from claims brought under the CFA and LAD.
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Third Circuit Enforces Arbitration Provision in Consumer Contract Where Designated Arbitral Forum is Unavailable

By Eugene H. Kim on Posted in General Litigation

In a matter of first impression, the Third Circuit in Khan v. Dell Inc. held that the Federal Arbitration Act requires the appointment of a substitute arbitral forum where the forum designated by the parties is unavailable and the designation of that particular (unavailable) forum was not integral to the arbitration provision.

The case stemmed from alleged design defects in a Dell computer purchased by plaintiff Khan. Dell’s Terms and Conditions of Sale included an arbitration provision which provided that any dispute between Khan and Dell “SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF)” and that “this provision shall be governed by the Federal Arbitration Act 9 U.S.C. sec. 1-16 (FAA).” The arbitration provision did not designate a replacement arbitrator in the event that NAF was unavailable.

Khan filed a putative class action in the District of New Jersey alleging several claims, including consumer fraud and breach of warranties. At the time Khan filed suit, a consent judgment resolving unrelated litigation barred the NAF from conducting consumer arbitrations as a result of having engaged in deceptive practices that disadvantaged consumers. There was no evidence that Dell knew of such practices when it selected the NAF as the arbitral forum.
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Federal Removal Statute Amended to Codify Later-Served Defendant Rule in Multi-Defendant Cases

By Jennifer A. Hradil on Posted in General Litigation

Today, the Federal Courts Jurisdiction and Venue Clarification Act of 2011 (the “Act”) comes into effect, amending a number of well-known removal and venue provisions. This post briefly outlines a few of the more noteworthy changes to the removal and venue statutes.

Resolving a circuit split regarding the time for removal in multi-defendant cases, the Act codifies the “later-served defendant rule,” which a majority of courts addressing the issue had adopted. As a result of the Act, 28 U.S.C. §1446(b)(2)(B), now expressly provides that “[e]ach defendant shall have 30 days after receipt by or of service on that defendant of the initial pleading or summons” to petition for removal. The Act also codifies the well-known “rule of unanimity” requiring all defendants in a case removed pursuant to Section 1446 to join in or consent to removal and the new § 1446(b)(2)(C) expressly allows an earlier served defendant to join in the removal petition of a later served defendant, even if the earlier-served defendant’s 30-day removal period has expired.

With respect to the removal of civil actions based on federal question jurisdiction, the Act amends section 1441(c) to require district courts to sever and remand any unrelated state law claims joined in the action and over which the federal court would not have either independent subject matter or supplemental jurisdiction. Previously, section 1441 afforded district courts the discretion to retain the entire action.
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Work Product Protection of Communications Between Counsel and a Treating Physician/Expert

By Jennifer Lynn Seme on Posted in General Litigation

In Barrick v. Holy Spirit Hospital, the Superior Court of Pennsylvania considered whether communications between plaintiff’s counsel and plaintiff’s treating physician, who was later designated as plaintiff’s expert, were discoverable. The court held: (1) that such communications exceeded the scope of expert discovery permissible under Pa. R.C.P. 4003.5(a)(1); and (2) that the documents at issue constituted core work product which is immune from discovery even if the requesting party can establish cause.

In Barrick, the defendant subpoenaed the plaintiff’s medical records from the treating physician. The facility took the position it would produce only those records created for the purpose of medical treatment but not communications between that physician and plaintiff’s counsel. The trial court granted the defendant’s motion to enforce the subpoena. The appellate court reversed, finding that the requested information was not discoverable.

The court reasoned that any correspondence concerning the physician’s preparation as an expert witness would be governed by Pa. R.C.P. 4003.5 which restricts the scope of discovery from non-party witnesses retained as experts. In this case, the communications at issue did not fall within the purview of information subject to disclosure under Pa. R.C.P. 4003.5(a)(1), which permits the use of interrogatories for the sole purpose of identifying each expert and the substance and grounds for each opinion offered. To prevail in obtaining discovery beyond the parameters of Pa. R.C.P. 4003.5(a)(1), a party must establish cause under Pa. R.C.P. 4003.5(a)(2). Since no such showing was made, the subpoena could not be used to obtain the communications between counsel and the expert.

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Third Circuit Holds That Plaintiffs Lack Standing to Sue for Data Breach Where Alleged Harm is Only Speculation That Personal and Financial Information May Be Misused

By Eugene H. Kim on Posted in General Litigation

The Third Circuit in Reilly v. Ceridian Corp. affirmed the district court’s dismissal of a putative class action against payroll processing company Ceridian for a data breach, holding that the plaintiffs lacked standing because their alleged injuries were too speculative.

In December 2009, an unidentified hacker breached Ceridian’s Powerpay system and potentially gained access to personal and financial information belonging to approximately 27,000 employees at 1,900 companies. It was unknown, however, whether the hacker read, copied, or understood the data. Two individual plaintiffs filed suit on behalf of all individuals whose information was exposed in the security breach, alleging that they (1) had an increased risk of identity theft, (2) incurred costs to monitor credit activity, and (3) suffered emotional distress.

Concluding that the plaintiffs lacked standing, the court emphasized the necessity of an injury-in-fact, which must be actual or imminent, not conjectural or hypothetical. An increased risk of future harm from an unknown third party is insufficient. Although the plaintiffs speculated that the hacker would misuse their information, the court found that there was no evidence suggesting that would happen and there could be no injury unless and until the plaintiffs’ conjectures came true. That the plaintiffs voluntarily expended time and money to monitor their financial situation did not change the court’s conclusion.
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Southern District of New York Implements Pilot Program to Govern Pretrial Procedures in Complex Civil Cases

By Daniel S. Weinberger on Posted in General Litigation

The Judicial Improvements Committee of the Southern District of New York issued a report for a Pilot Project Regarding Case Management Techniques for Complex Civil Cases (the “JIC Report”) in October 2011. The pilot project is designed to run for 18 months and apply to certain matters designated as complex civil cases. The “complex civil case” designation applies to class action lawsuits, multi-district litigation actions, stockholder suits, most product liability cases, antitrust suits, patent and trademark suits, securities cases, environmental matters and cases involving the constitutionality of state statutes. Although many Southern District of New York judges already had individual procedures in place similar to those implemented by the JIC, some of the more novel aspects of this pilot project are described below.

In cases that are designated for participation in the program, the parties are required to submit, no later than 7 days before the initial pretrial conference, an Initial Report addressing important preliminary procedural and scheduling issues including those listed on the new “Initial Pretrial Conference Checklist,” which is attached as Exhibit A to the JIC Report. Topics that should be addressed include whether initial disclosures should be made in whole or in part, whether discovery should be stayed or limited pending a dispositive motion, and possible limitations on preservation of documents and electronically stored information. For more information on the JIC Report’s treatment of electronic discovery issues, see the Gibbons E-Discovery Task Force’s blog “Southern District of New York Implements Pilot Program to Require Early Identification & Resolution of E-Discovery Issues in Complex Cases.”

In cases governed by the pilot program, discovery of documents may proceed pursuant to Rule 34 while a motion to dismiss pursuant to Rule 12(b)(6) or 12(c) is pending, but all other discovery should be stayed pending the Court’s decision on the motion. If appropriate, however, the Court may stay all discovery during the pendency of the motion. Continue Reading