Business Litigation Alert

Business Litigation Alert

Practical Perspectives on Litigation Developments & Trends

“Bound by the Terms of His Bargain”: Third Circuit Underscores the Difficulty of Vacating Arbitration Awards

Posted in General Litigation

In a recent precedential decision, Whitehead v. The Pullman Grp., LLC, the Third Circuit reminded litigants that it’s as tough as ever to vacate an arbitration award – and cast further doubt on the viability of the “manifest disregard of the law” standard here.

Appellant Pullman entered into a contract with two singer-songwriters in May 2002, which gave him the exclusive option to purchase their song catalog following a 180-day due diligence period. Pullman’s due diligence uncovered tax liens on the songbook, and when he (apparently) told the songwriters about them, they reneged on the agreement, which Pullman took as a breach. The songwriters subsequently died and their estates – claiming no knowledge of the agreement with Pullman – offered the songs to another buyer for $4.4 million. Soon after, Pullman publicly disclosed his deal with the songwriters, which, not surprisingly, “torpedoed the deal” with the second buyer. The estates sued, Pullman counter-sued, and the case wound up in arbitration.

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Third Circuit in Chesapeake Appalachia: Incorporating AAA Rules Not Enough to Satisfy the Onerous Burden of Overcoming Presumption in Favor of Judicial Resolution of Class Arbitrability

Posted in Consumer Class Action Defense

In Chesapeake Appalachia, L.L.C. v. Scout Petroleum, L.L.C., the Third Circuit picked up where it left off after Opalinski v. Robert Half International Inc. Click here for our prior blog on Opalinski. In Opalinski, the Circuit held, for the first time, that “the availability of class arbitration constitutes a ‘question of arbitrability’ to be decided by the courts—and not the arbitrators—unless the parties’ arbitration agreement ‘clearly and unmistakably’ provides otherwise.”

In another published decision, the court in Chesapeake Appalachia addressed the question left open in Opalinski: what must be established to “satisfy the onerous burden of overcoming the presumption in favoring of judicial resolution of the question of class arbitrability.” Chesapeake Appalachia rejected the argument that an arbitration agreement “clearly and unmistakably” provided for the arbitrator to decide this question by incorporating the Rules of the American Arbitration Association (“AAA”). The Court held that simply incorporating the AAA Rules, or the Supplementary Rules, was “not enough” to establish that the agreement “clearly and unmistakably delegate[d] the question of class arbitrability to the arbitrators.”

Chesapeake Appalachia involved oil and gas leases which provided that, “in the event of a disagreement between ‘Lessor’ and ‘Lessee’ concerning “this lease,” performance “‘thereunder,’ or damages caused by ‘Lessee’s’ operations, ‘all such disputes’ shall be resolved by arbitration ‘in accordance with the rules of the American Arbitration Association.'” The lessors sought class arbitration claiming that the AAA’s Supplementary Rules, among others, clearly provided for class arbitration, and that the arbitrator should decide whether the arbitration clause permits class arbitration. The lessee filed a declaratory judgment action seeking a declaration that the district court, and not the arbitrator, must decide and that the leases did not provide for class arbitration. Summary judgment was granted in favor of the lessee and that decision was appealed to the Third Circuit.

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Super Bowl Tickets Not the Ticket to Federal Class Action, as Third Circuit Finds No Standing for Uninjured Plaintiffs

Posted in Class Action Defense

“[T]he disappointment of wanting to attend a concert or athletic event only to discover that the event has sold out,” does not confer constitutional standing. That was the take away from the Third Circuit Court of Appeals recent precedential decision, Finkelman v. Nat’l Football League. Addressing the always-thorny contours of constitutional standing to bring a federal lawsuit, the Court held, in the face of high Super Bowl ticket prices, that neither non-purchasers of tickets nor purchasers of “scalped” tickets at elevated prices, had standing to sue under Article III. This opinion sets up yet another obvious roadblock in the path of plaintiffs looking to bring claims—whether or not as class actions—when their perceived injuries are either non-existent or so tenuous as to make “difficulties in alleging an injury-in-fact . . . insurmountable.”

The Plaintiffs, football fans who wanted to attend Super Bowl XLVIII at New Jersey’s MetLife Stadium in February 2014, claimed that “the NFL distributed 99% of Super Bowl tickets to NFL teams and League insiders.” The fraction that was left for the general public was only offered via lottery, the prize being the ability to buy a ticket to the Super Bowl for $800.00 per ticket.

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Third Circuit Holds That Absent Class Members Need Not Show Standing and Reiterates Comcast’s Reiteration of Basic Rule 23 Principles

Posted in Class Action Defense

In a precedential opinion in Neale v. Volvo Cars of North America, the U.S. Court of Appeals for the Third Circuit held that putative class members need not establish Article III standing, and emphasized that the Supreme Court’s decision in Comcast v. Behrend, 133 S. Ct. 1426 (2013) “was not breaking any new ground” because “the predominance analysis was specific to the antitrust claim at issue.”

The appeal concerned the District Court’s certification of six statewide classes of Volvo owners and lessees who alleged a design defect in their vehicles’ sunroof drainage systems. The Third Circuit first considered Volvo’s argument that all putative class members must have Article III standing. The Circuit Court recounted the long history of representative actions, dating back to medieval times, and concluded that “[r]equiring individual standing of all class members would eviscerate the representative nature of the class action.” The Third Circuit held that “a class action is permissible so long as at least one named plaintiff has standing.”

The Court observed that standing must be “satisfied by those who seek to invoke the power of federal courts” and that in the class action context the named plaintiffs fill that role. The Court further opined that requiring that absent class members possess standing would be “inconsistent with the nature of an action under Rule 23,” noting that all class members may not even be known until after discovery and that courts have long permitted individuals who suffered no legal injury to be members of Rule 23(b)(2) classes. Issues concerning whether and how absent class members have been injured should be addressed when deciding whether class certification is appropriate under Rule 23 and not as part of an Article III standing analysis.
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Delaware Supreme Court Says that Minority Stockholder Which Manages Company’s Day-to-Day Affairs is not a “Controlling Stockholder” and Confirms that Mandatory Stockholder Approval of Merger Transaction Compels Application of Business Judgment Rule

Posted in General Litigation

The Delaware Supreme Court’s recent decision in Corwin v. KKR Financial Holdings LLC makes two important points about corporate governance litigation. First, the court rejected the novel argument that an owner of less than 1% of a company’s stock could be considered a “controlling stockholder” because it managed the company’s day-to-day affairs under a management agreement. Second, the court confirmed that when a transaction has been approved by a majority of the company’s disinterested stockholders, the highly deferential business judgment rule should govern any challenges to the transaction, even if the stockholder vote was statutorily required and not voluntary.

KKR Financial Holdings LLC was a Delaware limited liability company. It delegated its day-to-day operations of investing in corporate securities to a management company, pursuant to a management agreement. KKR Financial had no employees of its own and was completely reliant on the management company for its operations. The equity interests of KKR Financial were widely held, and the corporate parent of the management company owned less than 1% of the company.

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Jersey City Restriction on Chain Stores and Restaurants Could be Unconstitutional

Posted in General Litigation

Jersey City, New Jersey’s second largest city, recently passed an ordinance that restricts “formula businesses” in certain neighborhoods. The ordinance defines a “formula business” as one which is “contractually obligated” to maintain certain “standardized characteristics” such as merchandise, menu items, design, signage, and trademarks. In other words, Jersey City is seeking to limit chain restaurants and stores from opening in certain city neighborhoods.

Steve Fulop, Jersey City’s Mayor and proponent of the ordinance, was quoted in news reports about the ordinance as saying “[w]e don’t want every retail space to become a Gap, TGI Fridays or a Starbucks”, and “[l]ook at New York, it’s just Starbucks after Duane Reade after Chipotle after (TGI Fridays).” Without the ordinance, according to the Mayor, Jersey City would be “an environment that doesn’t necessarily foster the creative class and foster an interesting place for people to want to live in.” A challenge to this ordinance would not be surprising – it is the first of its kind in New Jersey, according to the New Jersey Chamber of Commerce, which opposed the ordinance.

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Third Circuit Relaxes Pleading Requirements for Limited Liability Company Defendants and Urges Supreme Court to Redefine Citizenship Rule

Posted in General Litigation

Should limited liability companies continue to be treated differently than corporations for diversity-of-citizenship purposes? If a limited liability company’s citizenship continues to be determined by the citizenship of each of its members, how can a plaintiff get past the pleading stage if the identity of one or more members is unknown even after a diligent pre-filing investigation? In a recent precedential opinion, the Third Circuit in Lincoln Benefit Life Company v. AEI Life, LLC answered the latter question for the first time, holding that a plaintiff need not affirmatively allege the citizenship of each member of a defendant limited liability company to survive a motion to dismiss for lack of subject-matter jurisdiction. And in a separate concurrence targeted directly at the U.S. Supreme Court, the Third Circuit urged the Supreme Court to consider the former question and adopt a more practical rule for determining the citizenship of limited liability companies.

In 2013, Lincoln Benefit Life Company filed a complaint in the District of New Jersey against numerous defendants, including two limited liability companies. Lincoln Benefit premised federal subject-matter jurisdiction on diversity of citizenship, but the complaint did not allege the citizenship of any of the members of the two limited liability companies. According to Lincoln Benefit, the identity and citizenship of those members was not discernable at the time that it filed suit. The District Court dismissed the complaint for lack of jurisdiction because Lincoln Benefit failed to affirmatively allege the citizenship of each member of each defendant limited liability company.

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Third Circuit Says Bananas to Forum Shoppers Seeking Second Bite at the Apple

Posted in Class Action Defense

In a recent precedential 2-1 decision, Chavez, et al. v. Dole Food Company, Inc., et al., the Third Circuit emphasized the importance of the “first filed” rule and affirmed the dismissal of a Delaware suit that was “materially identical” to one first brought in Louisiana. The Circuit Court reiterated that “[t]he ‘first filed’ rule is a well-established policy of the federal courts that in all cases of concurrent jurisdiction, the court which first has possession of the subject must decide it. This rule permits the district courts, in their discretion, to stay, transfer, or dismiss cases that are duplicates of those brought previously in other federal fora.”

The plaintiffs, foreign agricultural workers, first filed a putative class action against Dole (and other related companies) in 1993, followed by a convoluted procedural history, and then filed another lawsuit in the United States District Court for the Eastern District of Louisiana in 2011. Dole successfully moved for summary judgment on statute of limitations grounds, and the United States Court of Appeals for the Fifth Circuit affirmed the dismissal. While Dole’s motion for summary judgment was pending in federal court in Louisiana, the same plaintiffs filed a nearly identical action against the same defendants in the United States District Court for the District of Delaware, and Dole moved to dismiss the second action based upon the “first filed” rule. The federal court in Delaware granted Dole’s motion, and dismissed the action with prejudice, explaining that the plaintiffs “filed in Delaware notwithstanding their choice to file first in Louisiana. Decisions have consequences; one fair bite at the apple is sufficient.”

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Class Action Plaintiffs Have Standing Based on Actual Injuries and Costs of Mitigation Following Corporate Hacking, Says Seventh Circuit

Posted in Class Action Defense

The Court of Appeals for the Seventh Circuit recently held that class action plaintiffs alleging injuries due to corporate hacking scandals have standing to pursue those claims in federal court, based on both actual injuries suffered repairing damage done by fraudulent charges, as well as costs of mitigating potential future harm, such as credit monitoring. Remijas v. Neiman Marcus Group, LLC, No. 14-3122 (7th Circ. July 20, 2015). As with other cases that come to the same conclusion, the court placed great emphasis on the fact that the data thieves were specifically targeting personal data, as well as the company’s admission of the breach and offer of a year of credit monitoring to those whose information had been exposed.

Neiman Marcus was hacked by sophisticated cyber criminals sometime in 2013, which was not discovered until some customers notified the company of fraudulent charges on their cards in December 2013. The company undertook an investigation and publicly announced the hack on January 10, 2014. Over 350,000 customers’ credit cards were exposed, and 9,200 of those cards are known to have been used fraudulently. Neiman Marcus notified all customers for whom the company had either physical or email addresses, and who had shopped at its stores between January 2013 and January 2014, of the potential exposure of their cards. Neiman Marcus also offered those customers a year of free credit-monitoring and identity-theft protection services.

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Board-Friendly Rales Test Determines Futility of Pre-Suit Demand When Challenged Decision Is Made by a Board Committee Comprised of a Minority of Board Members

Posted in General Litigation

Delaware courts have two tests for determining when it is futile for a plaintiff in a derivative action to make a pre-suit demand of the corporation’s board of directors under Court of Chancery Rule 23.1.

The Aronson v. Lewis test applies when the board which would consider the demand made the business decision challenged in the derivative action. Under that test, demand is futile if (1) there is a reasonable doubt that the directors are disinterested and independent or (2) there is a reasonable doubt that the challenged transaction was otherwise the product of a valid exercise of business judgment.

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