Business Litigation Reporter February 25, 2016

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 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