Business Litigation Alert

Business Litigation Alert

Practical Perspectives on Litigation Developments & Trends

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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Don’t Get Hacked By Your Cyber-Insurer

Posted in Insurance

The risks inherent in the maintenance and storage of confidential information present an ongoing challenge to daily operations. Cyber insurance may be an appropriate mechanism to mitigate those risks. But – BUYER BEWARE – broad exclusions and other conditions in a cyber policy can hack into coverage and leave your company uninsured and exposed to significant liability for defense costs, liability payments, and regulatory damages.

A recent lawsuit highlights the need for an organization buying cyber insurance to carefully review the terms and conditions of the policy to insure that it can comply with all requirements and pre-conditions to coverage, or risk having the expected coverage evaporate when a potentially covered claim arises.

A 2013 data breach resulting in the release of private healthcare information of 32,500 patients stored on the network servers of Cottage Health System spawned a class action lawsuit against Cottage Health and an investigation by the California Department of Justice. Cottage Health settled the class action lawsuit for more than $4 million. The investigation is ongoing.

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Recent DGCL Sections Facilitate Ratification, Validation of Defective Corporate Acts; Minimal Reported Court Activity To Date But More Expected

Posted in General Litigation

It’s been more than a year since the Delaware General Corporation Law added sections 204 and 205, allowing boards of directors to ratify, or the Court of Chancery to validate, defective corporate acts, including the issuance of stock that did not fully comply with corporate formalities. The Delaware General Assembly’s unanimous adoption of sections 204 and 205 elevated substance over form by giving effect to corporate action that at all times was treated as validly authorized, even if the action was technically deficient.

Sections 204 and 205 have potentially far-reaching consequences and rolled back longstanding judicial precedent. Yet they appear to have been the subject of very few decisions to date. In the most prominent and first reported decision, In re Numoda Corp. Shareholders Litigation, the Court of Chancery invoked sections 204 and 205 to validate issuances of stock in a closely-held corporation that were evidenced by “a bona fide effort bearing resemblance to a corporate act but for some defect that made [them] void or voidable.” Specifically, the Court found sufficient evidence of Board action in stock certificates (albeit with defects), unsigned meeting minutes, and the purported ratification of certain acts to satisfy itself that the company intended to do that which the Court was being asked to validate. In other instances where no such evidence existed, the Court declined to find a corporate act upon which to validate the shares.

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Supreme Court Declines to Hear Challenge to New Jersey’s Requirement of Express Waiver Language for Enforcement of Arbitration Provision in Consumer Contracts

Posted in Class Action Defense, General Litigation

The Supreme Court of the United States declined to review the New Jersey Supreme Court decision in U.S. Legal Services Group v. Atalese, holding that an arbitration provision in a consumer contract was not enforceable because the contract’s language waiving the consumer’s right to sue was not clear and unambiguous. The New Jersey Supreme Court’s decision, which affects the enforceability of arbitration provisions interpreted under New Jersey law, directs that such provisions must clearly notify the parties of their waiver of the right to bring a lawsuit.

For a thorough discussion of the underlying case, visit our October 2014 blog.

Following the New Jersey Supreme Court’s decision, the defendant petitioned the Supreme Court of the United States for certiorari, alleging the Federal Arbitration Act preempts any “state-law rule holding that an arbitration agreement is unenforceable unless it affirmatively explains that the contracting party is waiving the right to sue in court.” The Supreme Court declined to hear the appeal, thus keeping the rule of Atalese alive for now. But Atalese eventually may be found contrary to the Federal Arbitration Act and U.S. Supreme Court precedent. As previously reported on this blog, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), for example, provides that the FAA may preempt a state law disfavoring enforceability of arbitration provisions. Particularly in light of Concepcion, the issue may soon be ripe for additional appellate commentary.
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Wrap Up of United States Supreme Court’s 2014-2015 Term

Posted in General Litigation

With the close of the United States Supreme Court’s 2014-15 term, we offer this wrap up of the Court’s term, focusing on the Court’s most important business and commercial cases (excluding patent cases):

Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund: It is widely known that if the registration statement an issuer files with the SEC contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading, then a purchaser of securities sold pursuant to the registration statement may sue the issuer for damages. But what about statements of opinion that appear in a registration statement? In Omnicare, the Supreme Court held that a sincere statement of pure opinion — even if the issuer’s belief is ultimately proven wrong — is not actionable under Section 11 of the Securities Act, because the opinion expresses merely a view, not a certainty. That is good as far as it goes, but it’s not the end of the story. That’s because if, as the Court also held, an opinion is at odds with other information the issuer has, then omitting from the registration statement facts about that other information can create Section 11 liability. To steer clear of opinion liability under Section 11, then, an issuer should divulge the basis for its opinion or else make clear the real tentativeness of its belief so as not to mislead.

Tibble v. Edison Int’l: A fiduciary of a 401(k)/retirement plan has a duty not only to exercise prudence in selecting investments for inclusion in the plan but also to continually monitor those investments and remove imprudent ones. A claim for breach of that continuing duty will be deemed timely if it is filed within six years of the alleged breach — the statute of limitations for a breach of fiduciary duty under ERISA. The plaintiffs in Tibble filed their complaint in 2007, alleging that the fiduciaries of their company 401(k) plan acted imprudently by adding six retail-class mutual funds to the plan — three in 1999, the other three in 2002 — which had higher fees than their identical institutional-class counterparts. In a unanimous decision, the Supreme Court vacated the Ninth Circuit’s decision and held that the claims relating to the mutual funds added in 1999 were not automatically time-barred just because they were selected more than six years before the complaint was filed. On remand, the court was to determine whether the plaintiffs stated a viable claim for breach insofar as the defendants failed, at any time between 2001 and 2007, to conduct a regular review of the investment options in the plan.
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Online News Sources Have Standing to Protect Free Speech Rights for Anonymous Users, According to New Jersey Appellate Division

Posted in General Litigation

Online newspapers, internet service providers, and website hosts have standing to assert the constitutional rights of their users, according to the New Jersey Appellate Division’s recent unpublished decision in Trawinski v. Doe.

In Trawinski, the Appellate Division affirmed the denial of a plaintiff’s request for a subpoena requiring NJ.com to disclose the identity of an anonymous commenter. Underlying plaintiff’s request were allegedly defamatory remarks made by an anonymous poster using the screen name “EPLifer2” concerning plaintiff and her husband, a borough council member of Elmwood Park.

A threshold question for the court was whether NJ.com had standing to oppose the subpoena. The panel noted that New Jersey has not yet addressed the issue in a published decision. Accordingly, the Court looked to other jurisdictions for guidance and found that an online newspaper and internet service provider have standing to assert the rights of their readers and subscribers as third parties. In reaching this conclusion, the Appellate Division considered the difficulty anonymous commenters may face to assert their own First Amendment rights without sacrificing their anonymity, the fact that the newspaper itself has the requisite injury-in-fact to litigate, and the fact that the newspaper would zealously argue on behalf of the poster.

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Class Action Certified in In re Yahoo Mail Litigation for Violations of Stored Communication Act and California’s Invasion of Privacy Act

Posted in Class Action Defense, Data Privacy & Security

On May 28, 2015, U.S. District Judge Lucy Koh in the Northern District of California certified a class of email users in a privacy action that claims Yahoo Inc. (“Yahoo”) violated the federal Stored Communications Act (“SCA”) and California’s Invasion of Privacy Act (“CIPA”) through its practice of scanning and analyzing emails of non-Yahoo Mail subscribers in order to display targeted ads to Yahoo Mail subscribers. In re Yahoo Mail Litigation, No. 13-CV-04980-LHK, (N.D. Cal. 2015). Plaintiffs are non-Yahoo Mail subscribers who sent emails to Yahoo Mail subscribers from non-Yahoo email accounts and allege that Yahoo routinely copies and extracts key words from emails and stores this information for later use. Plaintiffs allege that Yahoo’s practices violate § 2702(a)(1) of the SCA, which prohibits, among other items, divulging the contents of a communication without consent and § 631 of CIPA, which prohibits the recording or reading of any type of communication without the prior consent of all parties.

In light of the court’s prior decision in In re Google Inc. Gmail Litigation, No. 13-MD-2430-LHK (N.D. Cal. Mar. 18, 2014) which dealt with a very similar set of facts, the plaintiffs seek injunctive relief under Federal Rule of Civil Procedure 23(b)(2) instead of seeking class-wide damages under Rule 23(b)(3), which among other things, requires a showing of the predominance of common questions of law and fact and ascertainability of the members of the class. The injunctive relief sought would require Yahoo to cease scanning the emails of non-Yahoo Mail subscribers without consent, permanently delete all data Yahoo has collected and stored from non-Yahoo Mail subscribers without consent, and identify all individuals and entities with which Yahoo has shared or sold information or data collected from non-Yahoo Mail subscribers’ emails.

In finding that the plaintiffs satisfy all four requirements under Rule 23(a), the court stated that the numerosity requirement under Rule 23(a)(1) is satisfied because the estimation of potentially hundreds of thousands of class members is not disputed by plaintiffs and Yahoo. The court stated that Rule 23(a)(2)’s commonality element requires just a single common question and does not require that all issues be common. The court also identified common questions to the case, such as when and whether Yahoo intercepts emails and whether the contents are disclosed to third parties. With regard to typicality, the court held that Rule 23(a)(3) requires only that the plaintiffs’ claims are “reasonably co-extensive,” not “substantially identical” with the proposed class members’ claims. Plaintiffs and the proposed class members are subject to the same interception and scanning practices by Yahoo and the court held this was sufficient to satisfy the typicality requirement. The court also found the plaintiffs to be adequate class representatives pursuant to Rule 23(a)(4), and the plaintiffs’ strategic decision to only pursue certification of an injunctive relief class under Rule 23(b)(2) did not affect the plaintiffs’ adequacy to serve as class representatives. Here, the court also pointed out that certification of a Rule 23(b)(2) class does not preclude subsequent individual damages claims by class members.
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Foreign Judgment by Confession Issued Without Pre-Judgment Notice Can Be Domesticated in New Jersey

Posted in General Litigation

New Jersey, like many states, is suspicious of judgments by confession and allows them to be issued only if the procedures in R. 4:45-2 are strictly followed. Among those procedures is a requirement that the prospective judgment debtor be given notice of the prospective judgment creditor’s application for entry of judgment and an opportunity to be heard.

Some states, including Maryland, do not require pre-judgment notice, although Maryland does give the judgment debtor 60 days after the entry of a judgment by confession to seek to open, modify, or vacate the judgment. What happens when a judgment creditor seeks to enforce in New Jersey a Maryland judgment by confession issued without any pre-judgment notice?

New Jersey’s Appellate Division, in a recently issued to-be-published opinion, Ewing Oil, Inc. v. John T. Burnett, Inc., answered that question, holding that New Jersey courts may — indeed, must — enforce such a judgment despite the fact that Maryland provided fewer procedural safeguards to the judgment debtor than New Jersey would have.
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Supreme Court Set to Weigh in on Whether Offer of Judgment for Complete Relief to Named Plaintiff in Putative Class Action Moots TCPA Claims

Posted in Class Action Defense

The Supreme Court of the United States has granted certiorari in Campbell-Ewald v. Gomez, which is positioned to resolve the circuit split as to whether an offer of judgment to the named plaintiff in a class action for the full amount of the plaintiff’s individual claim can moot claims brought under the Telephone Consumer Protection Act (“TCPA”) for that named plaintiff only and prevent the matter from proceeding to the class certification stage.

In Gomez, Campbell-Ewald was charged with violating the TCPA by transmitting unsolicited marketing text messages. Campbell-Ewald served on Gomez a Rule 68 offer of judgment to pay three dollars above the maximum allowable statutory recovery, plus reasonable costs. Gomez rejected the offer by allowing it to lapse. Campbell-Ewald moved to dismiss, alleging Gomez’s rejection of the offer mooted the personal and putative class claims. The District Court denied the motion to dismiss but later granted summary judgment for Campbell-Ewald on other grounds.

Gomez appealed to the Ninth Circuit, which vacated the summary judgment. Regarding Campbell-Ewald’s mootness argument, the court found that “an unaccepted Rule 68 offer of judgment—for the full amount of the named plaintiff’s individual claim and made before the named plaintiff files a motion for class certification—does not moot a class action.” In vacating the summary judgment the Ninth Circuit also confirmed the potential for vicarious liability in the TCPA context where the defendant did not actually make the calls in question. On this point, the Ninth Circuit stated that “the Court must presume that Congress intended to apply the traditional standards of vicarious liability” in the absence of a “clear expression of Congressional intent to apply another standard.”
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Federal Law Preempts NJ Fair Credit Report Act and TCCWNA Claims, New Jersey Court Says

Posted in Class Action Defense

Claims based on a retailer’s improper inclusion of too many credit card digits or a credit card expiration date on a sales receipt may not be brought under either the New Jersey Fair Credit Report Act (“NJFCRA”) or New Jersey’s Truth-in-Consumer Contract, Warranty, and Notice Act (“TCCWNA”), according to a recent ruling by the New Jersey Law Division.

Judge Robert C. Wilson of Bergen County held in an unpublished opinion in Kim v. Paris Baguette America, Inc., that the federal Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Card Transactions Act (“FACTA”), expressly preempts both NJFCRA and TCCWNA claims predicated on a failure to omit credit card information. Nevertheless, a plaintiff may bring claims under FCRA for the same conduct in New Jersey state courts.

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