Business Litigation Reporter October 14, 2014

State Summaries

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 explain the scope and limitations of stockholder inspection demands under Delaware Code § 220 and highlight the issues corporations should consider upon receipt of such a demand. We hope that you find the Reporter useful and welcome your questions and comments.

California

Browsewrap Arbitration Agreement Not Enforced Against Individual Consumer. In Nguyen v. Barnes & Noble Inc., 2014 WL 4056549 (9th Cir. Aug. 18, 2014), the Ninth Circuit affirmed the denial of B&N’s motion to compel arbitration with an individual consumer. B&N sought to enforce a “browsewrap agreement” on its website which – unlike a “clickwrap” agreement – did not require users to manifest assent to the company’s terms and conditions. The court held that even though the terms of use were available through a conspicuous hyperlink on each page, that was insufficient to bind individual consumers to those terms absent proof that the plaintiff had, in fact, actually viewed the terms of use.

Personal Jurisdiction Over Out-of-State Defendant for Out-of-State and In-State Claims. In Bristol-Myers Squibb Company v. Superior Court, 228 Cal. App. 4th 605 (July 30, 2014), the First District Court of Appeal upheld the assertion of personal jurisdiction over an out-of-state defendant with respect to claims by out-of-state as well as in-state plaintiffs. The court held that under Daimler AG v. Bauman, 134 S. Ct. 746 (2014), there was no general jurisdiction because Bristol-Myers was not “at home” in California. But the Court found specific jurisdiction on the theory that the claims of the non-California plaintiffs were “connected” to the claims of the in-state plaintiffs because they were based on the “same alleged wrongs.” Bristol-Myers has filed a petition for review with the California Supreme Court.

Class Certification Denied Absent Uniform Representations. In In re Clorox Consumer Litigation, 2014 WL 3728469 (N.D. Cal. July 28, 2014), Judge Conti denied certification of all five state-specific classes in a case alleging misleading television advertising statements to cat litter purchasers. The court found that class members could not be ascertained because purchasers did not keep receipts or remember their purchases, that class members were not uniformly exposed to the allegedly misleading television commercials, and that there were individualized issues of reliance in the absence of uniform misrepresentations.

Delaware

Shareholders Entitled to Privileged Corporate Documents. In Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. July 23, 2014), the Delaware Supreme Court affirmed the Chancery Court’s order requiring Wal-Mart to produce documents to shareholders that Wal-Mart claimed were protected by the attorney-client privilege and work-product doctrine. The court adopted a narrow exception under which shareholders seeking to prove a breach of fiduciary duty may – both in a plenary stockholder/corporation proceeding and in a Section 220 books and records request – overcome their corporation’s assertion of privilege by showing that access to the privileged documents is necessary. The court also held that that standard test was satisfied in this case because the privileged documents were necessary to IBEW’s investigation of a possible cover-up of acts by Wal-Mart board members and officers.

Confidentiality of Inspected Books and Records of a Closely Held Corporation. In Jefferson v. Dominion Holdings, Inc., 2014 WL 4782961 (Del. Ch. Sept. 24, 2014), the shareholder sought to inspect a closely held corporation’s books and records to value his stake in the corporation. The Court found that to be a proper purpose though it narrowed the document requests. Most significantly, however, the court held that the corporation was entitled to continued confidentiality over the documents to be inspected: “A closely held corporation does not need to make all of its records available to the public simply because it has a stockholder with a legitimate basis for inspecting corporate records.” The Court opined that such protection is best achieved through a confidentiality agreement between the parties.

Massachusetts

Start-Up’s Lost Profits Too Speculative to Award. In LightLab Imaging, Inc. v. Axsun Technologies, Inc., 469 Mass. 181 (July 28, 2014), the Supreme Judicial Court upheld the exclusion of expert testimony regarding future lost profits of a medical device developer caused by misappropriation of trade secrets and breach of contract by a supplier with which it had a joint development agreement. The Court held that future lost profits were not available for the “as-yet undeveloped new products” that had no history of profitable sales, no regulatory clearance, and lacked the guaranteed funding needed for the product launch. But the Court expressed “concern” that the difficulty in providing lost profits “should not render [start-ups] damage proof” and encouraged such plaintiffs to test other damages theories.

Attorney-Client Privilege Extended to “Functional Equivalent” of Employee. In One Ledgemont LLC v. Town of Lexington Zoning Board, 2014 WL 2854788 (Mass Land Ct. June 23, 2014), the Court held that the attorney-client privilege between a company and its counsel could extend to communications that included the company’s consultant. The court reasoned that the consultant’s relationship with the company and his role in its decision making process made him the “functional equivalent” of an employee and a “necessary partner in the provision of legal advice.” Federal case law, upon which the court relied, recognizes the functional equivalent doctrine “when the nonemployee possesses a significant relationship to the [client] and the [client]’s involvement in the transaction that is the subject of legal services.” The Supreme Judicial Court has not yet recognized this doctrine.

New York

Shareholders Allowed to Inspect Books and Records. In Retirement Plan for General Employees of the City of North Miami Beach, et al. v. McGraw-Hill Companies, Inc., Index No. 650349/13 (N.Y. App. Div. 1st Dep’t Sept. 11, 2014), the Appellate Division, First Department, held that “shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose.” The court also held that the shareholders’ investigation of alleged mismanagement and breaches of fiduciary duty by the corporation’s board of directors in connection with its oversight of its subsidiary, S&P, was a valid purpose. Finally, the shareholders could request categories of documents beyond those delineated in BCL § 624(b) and (e).

RMBS Lawsuit Dismissed For Failure to Request Loan Files. In Phoenix Light SF Ltd., et al. v. Goldman Sachs Group, Inc., et al., Index No. 652356/13 (N.Y. Sup. Ct. June 13, 2014), Justice Ramos dismissed a lawsuit alleging defendants fraudulently made misrepresentations in the offering materials for mortgage-backed securities. Justice Ramos reasoned that the alleged misrepresentations would have been discovered if the plaintiffs had asked the defendants for the loan files, and although the complaint alleged that the defendants had not shared the loan files, it did not allege that the plaintiffs had requested the loan files but been refused. He held: “It does not matter if the failure to seek this information was because of blind faith in the process of origination and/or securitization, or if it was attributable to the desire to quickly get on board of what the investors thought was a profitable bandwagon, the obligation of a sophisticated investor to inquire cannot be merely excused.”

Commercial Division Establishes a Mandatory Mediation Pilot Project. Continuing its efforts to reduce the burden of litigation, the Commercial Division will now send every fifth Commercial Division case in which a Request for Judicial Intervention (“RJI”) has been filed to mandatory mediation as part of its Alternative Dispute Resolution Program. However, a case may be removed from the program if either (i) all parties stipulate that the case is not suitable for mediation, or (ii) the assigned judge exempts the case from mediation upon a showing of good cause by a party as to why mediation would be ineffective, unduly burdensome, or unjust. If the parties proceed with the mediation, they have 120 days to select a mediator or request that a mediator be assigned. The parties have 210 days to complete the mediation process from the time the RJI is filed.

Commercial Division Adopts Use of Category-Based Privilege Logs. As an update to the report in our last issue, the Commercial Division has adopted Rule 11-B, which establishes a “preference” for parties to use categorical descriptions in their privilege logs rather than the traditional document-by-document approach. The new rule took effect on September 2, 2014.