We are pleased to introduce the inaugural issue of Goodwin Procter’s Business Litigation Reporter. This unique publication 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 tackle arbitration clauses and the often overlooked implications of whether and how to arbitrate. We hope that you find the Reporter useful and welcome your questions and feedback.
Close Scrutiny of Arbitration Clauses: Notwithstanding the United States Supreme Court’s pro-arbitration rulings, California state and federal courts continue their tough inspection of arbitration clauses in consumer and employment contracts. On October 28, 2013, in Chavarria v. Ralphs Grocery Co., 2013 WL 5779332 (9th Cir. Oct. 28, 2013), the Ninth Circuit struck down an arbitration clause in an employment contract that prohibited the use of JAMS or AAA to serve as the arbitrators and imposed hefty administrative and filing costs. In Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (Cal. 2013), the California Supreme Court reiterated its views that an arbitration clause may be invalidated if it is “unreasonably one-sided in favor of the employer” and that an unconscionability defense should be resolved prior to compelling arbitration. Please see this issue’s Business Litigation Corner for a more in-depth discussion of the pros and cons and risks of arbitration clauses.
Threshold Dismissal of Food Labeling Challenges: Recent decisions have granted motions to dismiss several lawsuits challenging food product labels as false or misleading under California law. In Simpson v. The Kroger Corp., 219 Cal. App. 4th 1352 (Cal. Ct. App. 2013), the court affirmed dismissal of claims that the labeling misled consumers into thinking the products were pure butter, noting that the labels stated that the product contains canola or olive oil. And in Pelayo v. Nestle USA, 2013 WL 5764644 (C.D. Cal. Oct. 25, 2013), and Morgan v. Wallaby Yogurt Co., Inc., 2013 WL 5514563 (N.D. Cal. Oct. 4, 2013), courts dismissed lawsuits challenging “all natural” claims because the labels disclosed the specific ingredients in the food products.
Limits on Shareholder Inspection Rights: In Louisiana Municipal Police Employees’ Retirement System v. Hershey Co., 2013 WL 6120439 (Del. Ch. Nov. 8, 2013), the Court of Chancery rejected a shareholder’s demand for records under Delaware General Corporation Law Section 220. The plaintiff sought to inspect Hershey’s records for evidence of illegal child labor practices by Hershey’s foreign suppliers, but the Master held that allegations about the supply chain gave no credible basis to infer wrongdoing by the company itself and hence furnished no ground to obtain its records.
Equitable Defenses Can Preserve Voidable Corporate Acts: In Klaassen v. Allegro Dev. Corp., 2013 WL 5739680 (Del. Ch. Oct. 11, 2013), the Court of Chancery held that equitable defenses are available in cases challenging corporate acts that are voidable rather than void. Void acts, such as board actions that violate corporate bylaws, are fundamentally contrary to public policy and will automatically be held invalid. Voidable acts, like those performed in the interest of a corporation but beyond the authority of management, can be ratified by shareholder approval or validated in equity.
No Duty to Fund Insured’s DJ Action: In Barletta Heavy Division, Inc. v. Travelers Insurance Co., 1:12-cv-11193-DPW (D. Mass. Oct. 25, 2013), the court held that an insurance company had no duty to fund a declaratory judgment action that the insured had brought against a third party seeking contribution for a claim the insured had settled. Judge Woodlock held that the insurer’s “duty to defend” did not apply by its plain terms and that the policy’s subrogation clause gives the insurer “the right – but clearly does not create the obligation – to launch offensive litigation to recoup damages covered by the insurance policy.”
New State Court Rules on Electronically Stored Information: The SJC has amended the Massachusetts Rules of Civil Procedure to add provisions regarding discovery of electronically stored information (“ESI”). The amendments, which will take effect January 1, 2014 and apply in all state trial courts in the Commonwealth, are modeled after the federal court civil rules. As particularly relevant to business litigation, the amendments (i) allow a party to object to discovery where the ESI is inaccessible, (ii) address the inadvertent destruction of ESI, and (iii) codify a “clawback” provision for the inadvertent production of privileged or protected material. The amendments and the Reporter’s Notes can be found here.
Fraud Claims Dismissed Despite Written Representations: Three new decisions hold that even if a contracting party obtains a written representation that a statement is true, a fraudulent inducement claim will fail if that party was on notice that the representation was untrue. In Syncora Guarantee, Inc. v. EMC Mortgage, LLC, No. 653519 (N.Y. Sup. Ct. Aug. 21, 2013), Judge Ramos dismissed the purchaser’s fraud claim, even though the contract contained an express representation as to loan quality, because the purchaser had in fact obtained information about the allegedly poor quality of the loans at issue prior to the transaction. In VisionChina Media Inc. v. Shareholder Representative Servs., LLC., 109 A.D.3d 49, 57-58 (1st Dep’t 2013), the Appellate Division affirmed dismissal of a fraud claim because the purchaser had access to information that would have revealed the truth concerning the seller’s financial statements. And in AIX Partners I, LLC v. AIX Energy, Inc., No. 651401/2012 (N.Y. Sup. Ct. Aug. 22, 2013), Judge Bransten dismissed a fraud claim because the claimant had learned the truth about the other party’s allegedly inadequate capital prior to the closing.
Controlling Weight Given to “Notwithstanding” Clause: The Appellate Division, First Department, has held that conclusive effect is to be given a provision in a contract starting with the words “notwithstanding any other provision,” even where doing so produces a result that is “bizarre” and renders another portion of the contract “impotent” and “inoperative.” In so ruling in Warberg Opportunistic Trading Fund, L.P., et al. v. GeoResources, Inc., Index 652332/12 (1st Dep’t Oct. 22, 2013), the court emphasized that “trumping language such as a ‘notwithstanding’ provision controls over any contrary language in a contract” and that because the plaintiffs were sophisticated institutional investors, “they could have appreciated the effect of [that] trumping language.”