Business Litigation Reporter August 23, 2017

Business Litigation Courts Case Summaries

California

Arbitration Clause That Bars Seeking Public Injunctive Relief Is Invalid: In McGill v. Citibank, N.A., S224086 (Cal. Apr. 6, 2017), a Citibank customer filed a class action under California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act. As part of her relief, plaintiff requested an injunction in favor of the public prohibiting Citibank from engaging in the challenged marketing practices. Citing an arbitration clause in the customer agreement, Citibank sought to compel arbitration. The California Supreme Court held that the arbitration clause was invalid because it prohibited the plaintiff from seeking public injunctive relief not just in arbitration but in any forum – which, the court held, violated substantive California state law.

Party That Obtains Forum Non Conveniens Dismissal of Contract Claim Is Not Entitled to Attorneys’ Fees: The parties’ software-related contract at issue in DisputeSuite.com LLC v. Scoreinc.com, S226652 (Cal. Apr. 6, 2017), specified that any dispute would be resolved in Florida. When the plaintiff nevertheless filed a breach of contract action in California, the court dismissed the case for forum non conveniens based on the forum selection clause. The defendant then sought to recover more than $80,000 in fees from litigating the motion to dismiss pursuant to California Civil Code § 1717, which provides that the prevailing party in certain contract actions may recover attorneys’ fees and costs. The California Supreme Court held that although the defendant had won its motion to dismiss, it was not entitled to recover its attorneys’ fees under Section 1717 because it had not achieved a final victory as to the parties’ contract dispute.

After 17 Years of Litigation, Court Dismisses Cross-Claim for Lack of Jurisdiction: The Ninth Circuit, in Herklotz v. Parkinson, Nos. 07-56657, 07-56662 (9th Cir. Feb. 14, 2017), reminded litigants that a federal court may exercise jurisdiction over a severed cross-claim only if that claim has its own jurisdictional basis. In 2000, WRS Inc. filed a federal court suit in Pennsylvania against various defendants, and defendant Herklotz – a California resident – had asserted a state law cross-claim against the other defendants – also California residents.  In 2007, WRS was granted summary judgment, and the cross-claims were severed and transferred to federal court in California. On appeal from a merits ruling on the cross-claim, the Ninth Circuit held that the federal court lacked subject matter jurisdiction over the cross-claim. The court rejected Herklotz’s argument that the district court retained supplemental jurisdiction over the claim, holding that once a cross-claim is severed, it becomes an independent action and requires an independent basis for jurisdiction.

California’s Expansive Assertion of Jurisdiction in Multi-Plaintiff Cases Is Overturned: Issuing a much-needed corrective ruling in a case described in our last issue, the United States Supreme Court, in Bristol Myers Squibb Co. v. Superior Court of San Francisco County, No. 16-466 (U.S. June 19, 2017), reversed a California Supreme Court decision which had held that a California court had personal jurisdiction over an out-of-state defendant for tort claims asserted by numerous out-of-state plaintiffs, as well as for the claims asserted by in-state plaintiffs, because all of the claims allegedly arose out of a “single, coordinated, nationwide course of conduct.” The U.S. Supreme Court, calling the California Supreme Court’s approach a “loose and spurious form of general jurisdiction,” held that because the out-of-state plaintiffs’ claims did not arise from conduct by the defendant in California, the California court lacked specific jurisdiction over the defendant with respect to the out-of-state plaintiffs’ claims.

Delaware

Allegations That Board Was Not Adequately Informed Establish Demand Futility Needed to Bring Shareholder Derivative Action: Under Delaware law, the failure of shareholders to make a pre-suit demand before filing a derivative action will be excused if particularized allegations in the complaint create reasonable doubt, measured by the concept of gross negligence, that the board was adequately informed in making the challenged decision. In H&N Management Group, Inc. v. Couch, 2017 Del. Ch. LEXIS 140 (Aug. 1, 2017), the Court of Chancery held that this test was met based on allegations that the board’s compensation committee had met only briefly to discuss the issue even though the challenged management agreement was the company’s largest annual expenditure, did not hire any external advisers, was conflicted, based its decision on only information from the manager itself, and did not conduct a thorough review of the manager’s performance.

Minority Shareholders Denied Access to Privileged Corporate Documents to Support Derivative Action: In Salberg v. Genworth Financial, Inc., No. 2017-0018-JRD (Del. Ch. July 27, 2017), the Chancery Court addressed whether a corporation must produce privileged documents in response to a shareholder’s section 220 books and records demand. The court observed that minority shareholders alleging a breach of fiduciary duty may obtain privileged documents by showing “good cause,” and that the three factors with “particular significance” are “the colorability of the claim,” “the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing,” and “the apparent necessity or desirability of shareholders having the information and availability of it from other sources.” The court held that the plaintiffs had not shown good cause because they were using the section 220 request to obtain documents to use in a derivative action that they would not have been able to obtain through discovery in the derivative action itself.

Massachusetts

Agreement’s Choice-of-Law Provision Does Not Control Which Statute of Limitations Governs Disputes: In Petrucci v. Esdaile, No. 1684-cv-03998-BLS2 (Suffolk Sup. Ct. May 31, 2017), the plaintiff asserted claims for breach of contract, breach of fiduciary duty and unfair business practices against the defendants. The defendants invoked the Delaware choice-of-law provision in the operating agreement and argued that the plaintiff’s claims were time-barred under Delaware’s three-year statute of limitations. The Business Litigation Session of the Suffolk County Superior Court (BLS), however, held that Massachusetts’ six-year statute of limitations applied because Massachusetts had a more substantial relationship to the claims than Delaware, as the parties lived and worked in Massachusetts and the operating agreement was signed and allegedly breached in Massachusetts. The BLS reasoned that the choice-of-law provision did not “expressly address limitations periods” and, thus, did not “control which State’s statute of limitations” applied in the case.

Preliminary Injunction in Non-Competition Case Denied Due to Delay and Type of Allegedly Misused Information: In Easy Access Distribution, Inc. v. Potter, et al., No. 1784-cv-01105-BLS1, 2017 WL 2466128 (Suffolk Sup. Ct. Apr. 24, 2017), the Business Litigation Session of the Suffolk County Superior Court (the BLS) denied the plaintiff company’s motion for preliminary injunction seeking to enjoin its former employee and his new company from competing with the plaintiff or soliciting its vendors or customers. The company alleged that the former employee breached a non-competition agreement by copying the company’s customer contact list and forming the competing enterprise. In denying the motion for a preliminary injunction, the BLS held that the company failed to establish that the former employee breached his non-competition agreement because the only “confidential information” the former employee allegedly used was a customer list that the BLS determined was not a trade secret under the circumstances. The BLS also ruled that the company had not shown irreparable harm, as the company had known for months that the former employee had formed a competing company and had information suggesting that the former employee had taken the customer list, yet the company delayed in seeking preliminary relief.

New York

Allegations of Lost Opportunity, Potential Loss of Reputation, and Potential Litigation Expenses Are Insufficient to Support a Fraud Claim: Under New York law, a claim of fraud must allege actual, out-of-pocket damages. In Connaughton v. Chipotle Mexican Grill, Inc., et al., 29 N.Y.3d 137, 75 N.E.3d 1159 (2017), the plaintiff chef claimed that he was fraudulently induced to enter into an agreement with defendant Chipotle by its failure to disclose a prior arrangement with another chef. The New York Court of Appeals upheld dismissal of the complaint because it merely alleged a “lost opportunity” to enter into an arrangement with another company, “which [is] not a recoverable out-of-pocket loss.” Justice Rivera also held that the plaintiff’s allegations that he might incur litigation expenses or suffer a loss of reputation if sued by the other chef similarly did not constitute not actual, out-of-pocket losses.

Corporate Officer’s Access to Financial Information Is Insufficient to Establish Liability for Fraud: In RKA Film Fin., LLC v. Kavanaugh, 2017 N.Y. Misc. LEXIS 2459, 2017 NY slip op. 50846(U), 56 Misc. 3d 1203(A) (N.Y. Sup. Ct. June 27, 2017), the plaintiff claimed that it had been fraudulently induced to invest in a media company and it sued, among others, one of the company’s officers (Steve Mnuchin) on the theory that he could have determined through his access to the company’s financial information that loaned funds were not being used for their previously represented purpose. Justice Ramos granted Mnuchin’s motion to dismiss on the ground that (a) he did not make any of the alleged misrepresentations, which occurred before he joined the company, and (b) even if he had been aware of the alleged misconduct (which he was not), he had no fiduciary or other duty of disclosure to the investor. Justice Ramos emphasized that an officer’s “[m]ere knowledge (or awareness) of [a company’s] finances is inconclusive to establish fraud absent evidence of any representation made by” the officer.

Editor-in-Chief, Richard M. Wyner

Contributing Editors, Yvonne W. Chan, Adam M. Chud, Joseph P. Rockers, Jordan D. Weiss