Business Litigation Reporter October 21, 2015

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 take a close look at some of the key issues associated with D&O insurance coverage for government investigations and discuss how to maximize that coverage if an investigation arises.

California

Arbitrator to Decide if Employment Claim Can Be Pursued on Class Basis. In Universal Protection Service, LP v. Superior Court, No. C078557 (3d Dist. Ct. App. Aug. 18, 2015), the court of appeals held that under an agreement for the employment of security guards, it was up to the arbitrator to decide whether the plaintiffs could pursue their arbitrable claims on a classwide basis. In particular, the court held that the agreement incorporated the AAA’s National Rules for the Resolution of Employment Disputes and those rules provide that the arbitrability of class relief is for the arbitrator to decide. The California Supreme Court is currently reviewing whether the trial court or arbitrator should decide if an arbitration agreement permits classwide arbitration where the agreement itself is silent on the issue. Sandquist v. Lebo Automotive, Supreme Ct. Case No. S220812.

Data Disclosure to Authorized Account Users Does Not Violate Privacy Laws. In Mollett v. Netflix, Inc., No. 12-17045 (9th Cir. July 31, 2015), the Ninth Circuit held that Netflix’s display of viewing history (and recommendations based on viewing history) to third parties whom a subscriber permitted to access her account did not violate the federal Video Privacy Protection Act (“VPPA”), or the corresponding California statute, Civil Code § 1799.3. The VPPA is the law that Congress passed to protect video rental disclosure without consent after a newspaper published Judge Robert Bork’s video rental history in the 1980s. The plaintiffs in Mollett complained that their friends, family and guests could view information about their viewing history once a Netflix streaming account is registered on their television (or video game console, DVD player, etc.). The Ninth Circuit disagreed, holding that to the extent a subscriber permits others to access her account, disclosures to them are disclosures “to the consumer” that are lawful under the VPAA.

Insurance Anti-Assignment Provisions Invalidated. In Fluor Corporation v. Superior Court, No. S205889 (Aug. 20, 2015), the California Supreme Court held that enforcing an anti-assignment clause in a third-party liability insurance policy, where the assignment occurred after the coverage-triggering event, violated California Insurance Code § 520. Fluor overruled the Supreme Court’s decision just 12 years prior in Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal. 4th 934 (2003). The court explained in Fluor that Section 520, despite being a statute dating back to 1872, had not been raised in Henkel.

For more information, contact Forrest Hainline at fhainline@goodwinlaw.com.

Delaware

Amended Bylaw Allowing Stockholders To Remove Corporate Officers Held Invalid. In Gorman v. Salamone, No. 10183-VCN (Del. Ch. Ct. July 31, 2015), a Delaware corporation’s shareholders had adopted an amended bylaw that purported to authorize the stockholders to remove and replace corporate officers. The stockholders then tried to use this bylaw to oust the corporation’s CEO. The Court of Chancery held that the bylaw, and hence the CEO’s removal, were invalid under Delaware law. The Court observed that Section 141(a) of the Delaware General Corporation Law “establishes the bedrock statutory principle of director primacy” and that the ability of shareholders to amend bylaws “is limited by the board’s management prerogatives under Section 141(a).” The Court further found that the bylaw at issue question would interfere with the board of director’s ability to make “substantive business decisions,” which includes deciding who should serve as the company’s CEO.

Chancery Court Issues Discovery Guidance and Sanctions. Chancellor Bouchard recently issued a series of discovery rulings in Medicalgorithmics S.A. v. AMI Monitoring, Inc., No. 10946-CB (tr. July 15, 2015). First, he held that, absent a prior agreement, counsel producing documents must review each of them for responsiveness, rather than simply dump documents that have not been thus reviewed onto the opposing party. Second, he held that under Rule 33(d), which allows a party to respond to an interrogatory by pointing to documents in lieu of providing a narrative interrogatory response, the responding party must “identify by Bates numbers the specific documents” that contain the responsive information. Third, he held that, absent an agreement among counsel, a party withholding documents as privileged must prepare a fully compliant privilege log. Finally, he adhered to the default rule that when a plaintiff files suit in Delaware, it must make its officers available to be deposed in Delaware, absent an agreement between the parties. The Court also awarded costs and attorneys’ fees against the responding party that had not complied with its discovery obligations.

For more information, contact Adam Chud at achud@goodwinlaw.com.

Massachusetts

Books and Records Claim Dismissed After Special Committee Investigation: In Chitwood v. Vertex Pharmaceuticals, Inc., No. 15-0854 (Mass. Super. Aug. 4, 2015), a corporation’s shareholder sued under the Massachusetts shareholder inspection statue seeking to examine the books and records of a special board committee’s investigation into the shareholder’s allegations of wrongdoing. After holding the first trial under this Massachusetts statute, the Court held that plaintiff failed to satisfy the statute’s requirements. In particular, the Court found that the plaintiff had failed to adduce evidence “calling into question the independence of the Special Committee or the diligence of its efforts.” And the Court explained that absent such evidence, “the Special Committee’s conclusion (ultimately accepted by the Board) would warrant dismissal of any derivative action the plaintiff might file.” The ruling strongly endorsed the process of using a Special Committee to investigate claims and reserving the final decision to the independent directors on the Board. [Disclosure: Goodwin Procter LLP served as counsel for the defendant.]

Nonsignatory Can Compel Arbitration: In Machado v. System4 LLC, 471 Mass. 204 (Apr. 13, 2015), a franchisee plaintiff sued a subfranchisor (NECCS) and master franchisor (System4), claiming, among other things, that NECCS and System4 had improperly classified the plaintiff and those like him as independent contractors. Id. at 405. The relevant franchise contracts were signed by the franchisee plaintiffs and NECCS, and contained a clause that required the arbitration of nearly all claims arising out of the franchise relationship. Id. at 405. At issue was whether System4, despite not being a party to the contracts, could compel the plaintiffs to arbitrate their claims against System4. The court held that System4 could compel arbitration both (1) because plaintiffs’ claims arose out of the franchise contracts and resolution of the dispute would require the fact-finder to analyze the contracts’ terms, and (2) because plaintiffs had alleged concerted misconduct by NECCS and System4.

New BLS Requirements for Partial Dispositive Motions. Effective July 1, 2015, the Business Litigation Session (“BLS”) of the Massachusetts Superior Court amended its procedural order governing partial dispositive motions. The order both reaffirms the basic requirements for such a motion and adds further provisions, including a Certificate of Compliance requirement. The order is motivated by the BLS’s concern that such motions often consume substantial resources without materially reducing the litigation.

New York

State Franchise Act Invalidates Pre-Agreement Non-Reliance Provision. In EV Scarsdale Corp. and Jonathan Lerner v. Engel & Voelkers North East LLC, 13 N.Y.S.3d 805 (Sup. Ct. June 5, 2015), the plaintiff franchise owners sued the defendants franchisors alleging violations of New York Franchise Sales Act (“NYFSA”), including alleged fraudulent representations in pre-agreement oral discussions. The defendants argued that a non-reliance disclaimer in the franchise agreement barred that claim. Justice Kornreich held, however, that New York intermediate state appellate court precedent required her to agree with the plaintiff that the NYFSA does not permit such a disclaimer, even though federal courts have disagreed with that intermediate state court authority. Justice Kornreich called on the state appellate courts to give the issue “serious consideration.”

Alleged Affirmative Misrepresentation in Response to Direct Inquiry May Be Sufficient to Plead Fraud. In ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043 (May 7, 2015), the Court of Appeals reversed an order granting a motion to dismiss a claim of fraudulent inducement brought by a company that had guaranteed a collateralized debt obligation. The Court held that, at the motion to dismiss stage, the plaintiff sufficiently alleged reliance by pleading that it had made express inquiries of the defendant, and the defendant had made affirmative misrepresentations in response to those inquiries, prior to the plaintiff entering into the transaction. The Court further held that, given those specific allegations, the plaintiff had no duty to insist on a “prophylactic provision” in the parties’ agreement, and in any event there was no written agreement into which such a provision could have been added.

New Commercial Division Rule Regarding Corporate Depositions. Beginning December 1, 2015, Commercial Division Rule 11-f will take effect, bringing practice ever more in line with federal court. Unlike in federal court, New York’s CPLR does not provide for a “30(b)(6)” deposition. Rather, historically, a litigant would specify the corporate officer or employee he/she wished to depose. Frequently, and at great expense and delay, that witness would not have the required information and had not done anything to prepare for the deposition. Under the new rule, litigants will be able to notice the deposition of a corporate entity and provide a list of deposition topics, and the onus will be on the entity to provide an appropriate witness to testify about “information known or reasonable available to the entity.” This rule change, along with other recent ones, should reduce discovery costs and streamline litigation in the Division.

For more information, contact Jordan Weiss at jweiss@goodwinlaw.com.