Business Litigation Reporter

For a long time, practice in New York’s Commercial Division was a double-edged sword. Stacked with the state’s most sophisticated judges, a tilt towards aggressive case management practices, and an inclination towards utilizing technological advancements in the litigation of cases, The Division offered an uncommon level of certainty, professionalism, and forward-thinking—a magnet for complex cases. However, in recent years the rules have failed the promise. Although The Division has long had its own set of rules, they are relatively sparse and conspicuously unconcerned with discovery practice. Thus, for most of the life of a case (and certainly its most expensive phase—discovery), litigation in The Division was governed largely by the state’s default rules of civil practice, the CPLR. That was like hitching a Ferrari to a motorhome.

But change has come. Over the past two years The Division has adopted new rules to restore itself as an effective, efficient forum for complex business litigations. These changes may become pitfalls to the uninitiated and weapons to the wise. In this article we identify the most significant changes to the Division’s rules and offer insight into how they might impact litigation in the Division—for better or worse.

At the threshold, Eligibility Requirements for the Division are now stricter. For one thing, unless a party seeks declaratory or equitable relief, cases will not be heard unless damages are alleged to be greater than $500,000 in New York County [i]. Moreover, if you and your opponent fail to designate your case as commercial within 90 days of service of the complaint, you will lose your chance to litigate in the Division [ii] (absent good cause for delay [iii]) and thus the benefit of the Division’s business expertise. You are also likely to spend your time waiting for hearings behind a line of slip-and-fall cases.

Once a case is accepted into the Division, the next rule change you will encounter is the Mandatory Mediation Pilot Project. As of July 28, 2014, every fifth Division case in New York County is referred to mandatory mediation. [iv] Litigants may find this unsettling—does this mean the judge doesn’t think we will win? Will this delay my case? How much will mediation cost?—but there is little to fear. Not only is it automatic, but the first four hours (the only portion that is mandatory) are free. Moreover, absent a request from the parties, there is typically no stay during the mediation.

The Division is now offering an Expedited Case Process that includes the option to accelerate adjudication by, in part, limiting the completion of discovery to no more than nine months—substantially shorter than is normal for a case in the Division. [v] In exchange, litigants must waive certain rights, including the right to a jury trial, to recover punitive or exemplary damages, and to seek interlocutory appeal. The Courts will also limit the number of depositions and other discovery available to each side. Whether such a deal makes sense must be determined on a case-by-case basis. However, there is another catch: both parties must agree to the process. Of course, agreement is unlikely in very acrimonious cases and asymmetric disputes. Clients interested in the benefits of being in court but looking for the expedited proceedings should consider, where applicable, including an agreement to these procedures as part of any choice-of-forum or other dispute resolution clause in their contracts.

A substantial portion of the new rules are designed to rein in the time and costs devoted to discovery in the Division. The Division now limits parties to 25 interrogatories which, until 30 days before the discovery cut off, may only concern computation of damages, the location and custody of documents, and the identity of witnesses. [vi] Moreover, for cases filed in the Division on or after April 1, 2015, the parties will be allowed only 10 depositions of no more than seven hours each, absent relief from the Court. [vii] This is a substantial deviation from prior practice in the Division. The authors personally deposed one important witness in a commercial case for five days!

Rules in the Division have also recently changed to address what was perceived as widespread gamesmanship in the deposition of corporations. Previously, CPLR 3106(d) and 3107 governed and permitted the appearance of witnesses without relevant information who were uneducated by the corporation, neither of which provide for a traditional 30(b)(6) deposition notice. Rather, at best, parties could describe the deponent they wanted—e.g., head of purchasing. While the corporation was required to produce the employee fitting that description, it did not necessarily follow that such employee had any information relevant to the dispute. There were no “topics” (although one could ask for the person most knowledgeable about something) and no requirement that the corporation educate the witnesses beyond their personal knowledge. Under Commercial Division Rule 11-f, effective December 1, 2015, litigants may notice the deposition of a corporate entity and provide a list of deposition topics. The onus is then on the entity to provide an appropriate witness(es) to testify about “information known or reasonably available to the entity.”

Relatedly, the rules in the Division have recently been changed to provide non-parties with greater protections against discovery abuses. For the first time, the rules explicitly state that parties seeking discovery must reasonably limit their requests and pay expenses—including attorneys’ fees, and other vendor, technology and business costs—identified by the non-party. [viii] Going forward, litigants would be wise to show greater discipline in the discovery sought from non-parties, since they will likely be paying for it.

The final two noteworthy changes in the Division concern costs and games associated with the production of documents.

Historically, as in many other courts, a party responding to document demands would object on several bases and then provide some form of vague assurance of production that confused the response more than it clarified it. That practice no longer flies in the Division. As of April 1, 2015, parties objecting to document demands must identify the grounds for objections, including whether the objection pertains to all or part of the demand, whether any documents or categories of documents are being withheld, which objections pertain to which documents or categories of documents and the manner in which the responding party intends to limit the scope of its production. [ix] Although there is no decisional law on how this Rule is to be put into practice, Robert Haig of New York practice eminence provides an example response that “should” satisfy the requirements of the new rule. [x] Litigators struggling with this new rule can take comfort in the perhaps understated comments of the New York City Bar: “conflicts among litigants could arise with respect to these issues.” [xi]

As a complement to the changes concerning objections to document demands, the rules in the Division have also changed with regard to privilege logs. Since September 2014, it has been the Division’s “preference” that in the place of itemized logs, parties agree to employ categorical privilege logs. [xii] Parties “are encouraged to utilize any reasoned method of organizing the documents that will facilitate an orderly assessment as to the appropriateness of withholding documents in the specified category.” [xiii] The devil, so to speak, is in translating that rule into practice. What categories are acceptable? How detailed must the descriptions be? Unfortunately, there is no definitive answer at the moment. Although this rule has been in place since 2014, we found only one New York case from which to draw guidance. [xiv] For now, it appears the practitioners should look instead to relevant federal law, which is somewhat more robust. [xv] A measure of assistance has also been provided by the New York City Bar Association which produced a model categorical privilege log that may serve as a useful starting point in organizing a categorical log. [xvi] The key take away, however, is that the only way to utilize categorical logs without risking significant motion practice is to work with opposing counsel and reach agreements early in the case, before issues relating to methodology become disputes.

In summary, practice in the Division is evolving at a rapid pace. Failure to maintain vigilance as to these changes could seriously disadvantage a litigant and increase the costs of prosecuting or defending a case. On the other hand, there is a reasonableness and intuitive quality to the rules. This suggests that even though it still early, and there are likely bumps on the road ahead, the Division is on the right path to fulfilling its promise as a sought-after forum for complex commercial disputes.

[i] 22 NYCRR § 202.70(a); 22 NYCRR § 202.70(b).

[ii] 22 NYCRR § 202.70(d).

[iii] 22 NYCRR § 202.70(e).

[iv] See the Administrative Order of Hon. Sherry Klein Heitler, Administrative Judge (June 23, 2014), and Rule 15 of the Rules and Procedures of the Alternative Dispute Resolution (“ADR”) Program of the Commercial Division. The Administrative Order, ADR Rules, and other applicable resources are available at https://www.nycourts.gov/courts/comdiv/ny/ADR_overview.shtml.

[v] Rule 9 of the Rules of practice for the Commercial Division (22 NYCRR § 202.70(g)). All references to “Commercial Division Rules” refer to the relevant Uniform Rules for the Supreme Court and the County Court, available at http://www.nycourts.gov/courts/comdiv (click on Statewide Rules).

[vi] Commercial Division Rule 11-a.

[vii] Commercial Division Rule 11-d.

[viii] Commercial Division Rule 11-c and Appendix A.

[ix] Commercial Division Rule 11-e.

[x] 3 Robert M. Abrahams & Scott S. Balber, N.Y. Prac. Series - Com. Litig. in New York State Courts § 27:8 (Robert L. Haig ed., 4th ed. 2015).

[xi] See Letter from Steven M. Kayman et al., Chair, Council on Judicial Administration, The New York City Bar Association, to John W. McConnell, Esq., Office of Court Administration (November 25, 2014 ) (providing New York City Bar comments on proposed Commercial Division rule changes) available at http://www2.nycbar.org/pdf/report/uploads/20072811-CommentsonProposedCommercialDivisionRuleChanges.pdf.

[xii] Commercial Division Rule 11-b.

[xiii] Id.

[xiv] See Herman v Herman, 2015 N.Y. Misc. LEXIS 2447 (N.Y. Misc. 2015) (J. Kornreich holding “a list of bates numbers without further description” other than notation regarding grounds for redaction or withholding was “insufficient to comply with CPLR 3122, Commercial Division Rule 11-b, which suggests categorical logging of documents…”).

[xv] See, e.g., SEC v. Yorkville Advisors, LLC, 300 F.R.D. 152 (S.D.N.Y. 2014); Auto. Club of N.Y., Inc. v. Port Auth. of N.Y. & N.J., 297 F.R.D. 55, 59 (S.D.N.Y. 2013) (“[A] categorical privilege log is adequate if it provides information about the nature of the withheld documents sufficient to enable the receiving party to make an intelligent determination about the validity of the assertion of the privilege.").

[xvi] See Memorandum from the New York City Bar Committee on State Courts of Superior Jurisdiction regarding Guidance and a Model for a Categorical Privilege Log, available at http://www2.nycbar.org/pdf/report/uploads/20072891-GuidanceandaModelforCategoricalPrivilegeLogs.pdf.

(also appearing on Law360, March 29, 2016)

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 take a deep dive into recent changes to the Commercial Division rules in New York state and what they mean, good and bad, for litigants.

California

Illegality Challenge to Arbitration Award is Rejected. In Epic Med. Mgmt., LLC v. Paquette, B261541 (Cal. App. 2d Dist. Dec. 29, 2015, published Jan. 28, 2016), an arbitrator had ruled against a doctor’s claim for additional fees from a medical management company, and the doctor petitioned to vacate the arbitration award on the ground that, as construed by the arbitrator, the contract was illegal. The Court of Appeal for Los Angeles, affirming the trial court, upheld the arbitration award. The court explained that an arbitration award is reviewable for illegality if “the contract in its entirety is illegal,” but found that here the alleged illegality only concerned one situation. The court also explained that an arbitration award is reviewable if the award would “contravene an explicit legislative expression of public policy that undermines the strong presumption in favor of private arbitration,” but found that even if the arbitrator had adopted an erroneous interpretation of law, the case did not satisfy that high standard, which permits review only in “limited an exceptional circumstances.”

State Law Consumer Protection Remedies are Not Preempted by Federal Organic Foods Law. Quesada v. Herb Thyme Farms, Inc., 62 Cal. 4th 298 (Dec. 3, 2015), involved a putative class action alleging that an herb grower’s marketing of its herbs as “organic” violated the California Consumers Legal Remedies Act, the unfair competition law, and the false advertising law. The California Supreme Court observed that the federal law “effectively federalizes the term ‘organic’” and also “federalizes certification, the process by which growers may seek to demonstrate their production methods comply with the uniform federal standard.” But, the court held, federal law does not preempt state law remedies if a company’s advertising does not satisfy the uniform federal standards for use of the term “organic.” The court observed that the federal act contains no private right of action, and thus finding “implied preemption [of state remedy laws] would render organic labeling uniquely immune from suits for deception.”

By Forrest A. Hainline III

Delaware

Award of Estimated Expectation Damages for Failure to Negotiate Final Agreement is Upheld. In SIGA Technologies, Inc v. PharmAthene, Inc., No. 20, 2015 (Del. Dec. 28, 2015), a divided Delaware Supreme Court upheld an award of estimated expectation damages after the defendant failed to negotiate in good faith a license agreement consistent with a term sheet that the parties had agreed upon. In a prior ruling, the court had upheld the enforceability of both preliminary agreements that resolve all issues but have not been formalized as well as agreements to negotiate in good faith over the parties’ remaining open issues. In its new ruling, the court rejected the defendant’s argument that the damages calculation in the context of a breach of an agreement to negotiate was too speculative, holding that “[w]here the injured party has proven the fact of damages—meaning that there would have been some profits from the contract—less certainty is required of the proof establishing the amount of damages.” The majority also rejected the dissent’s view that the plaintiff in such a case should be limited to its reliance (rather than expectation) damages.

Corporate Officers are Potentially Liable for Company’s Allegedly False Statements. In Prairie Capital III, L.P. v. Double E Holding Corp., No. CV 10127-VCL, 2015 WL 7461807 (Del. Ch. Nov. 24, 2015), the defendant asserted counterclaims against the plaintiff and two of its officers, alleging that the officers knew that representations made by a company in a stock purchase agreement were false. The Chancery Court refused to dismiss the claims against the two individuals because the complaint sufficiently alleged facts to show that they “were the brains behind the Company’s business activities and the voice that relayed the details of those activities to the world.” It also emphasized that “flesh and blood humans can be held account-able for statements that they cause an artificial person, like a corporation, to make” and thus officers “actively participating in [] fraud cannot escape personal liability.”

By Adam M. Chud

Massachusetts

Arbitration Clause Enforced Despite Commencement of Discovery and Eight-Month Delay in Requesting Arbitration. In Harelick v. CRIC, LLC, et al., No. 2014-3930 BLS1 (Sup. Ct. Sept. 28, 2015) (Leibensperger, J.), some of the defendants included, in their motion to dismiss the plaintiff’s amended complaint, a motion to stay the case pending arbitration, even though the case had been pending for eight months and discovery had commenced. While holding that the issue of whether the defendants had waived arbitration was a “close call,” the court compelled arbitration on the grounds that (i) the delay, by itself, was not unduly long, (ii) the discovery had not prejudiced the plaintiff because such discovery would have occurred in the arbitration anyway, and (iii) the plaintiff had suffered no more than “slight prejudice” from having had to respond to the unresolved motion to dismiss because “he will have to confront [defendants’] legal arguments in arbitration just as he did here.”

Confidentiality Agreement Must be Expressly Preserved in New Employment Agreement. The decision in Meschino v. Frazier Industrial Co., 2015 WL 7295463, at *1 (D. Mass. Nov. 18, 2015) (Stearns, J.), underscores that an employer entering into a new employment agreement with an employee should take care to expressly preserve any separate confidentiality agreement with that employee. In 2005, Meschino had signed both a confidentiality agreement and a separate employment agreement that expressly referenced the confidentiality agreement. In 2012, Meschino signed a new employment agreement, but the new agreement did not expressly reference the separate confidentiality agreement. When a dispute later arose, the court rejected the employer’s effort to enforce the confidentiality agreement against the employee. The employer argued that its intent had been to preserve the confidentiality agreement, but the court held that the plain language of the 2012 employment agreement, which said it contained “‘the terms of [Meschino’s] employment’ without any reservation or reference to any other document or agreement,” did not support the employer’s argument.

New York

Funds’ Malpractice Claim Against Their Auditor is Barred by Funds’ Own Misconduct. In FIA Leveraged Fund Ltd. v. Grant Thornton LLP, 2016 N.Y. Slip Op. 50093(U), 2016 WL 350932 (Sup. Ct., January 16, 2016), the plaintiff funds sued their auditor for alleged negligence and malpractice in failing to detect the funds’ accounting misconduct. That misconduct included overstating the value of certain funds, failing to disclose related-party transactions, and misusing investor funds. Justice Bransten dismissed the complaint under the doctrine of in pari delicto, which “mandates that courts will not intercede to resolve a dispute between two wrongdoers” because “a wrongdoer should not profit from his own misconduct.” The court rejected the funds’ argument that, under the “adverse interest” exception to that doctrine, the funds’ managers’ misconduct should not be imputed to the funds themselves. The court reasoned that “this most narrow exception” applies only where the managers had “totally abandoned” the funds’ interests and had been acting “entirely” for their own purposes, which the complaint’s allegations did not show.

By Jordan D. Weiss

Editor: Richard M. Wyner