Category: Dispute Resolution

SCOTUS Significantly Narrows Scope of 28 U.S.C. § 1782 for International Arbitrations

The United States Supreme Court’s recent decision in ZF Automotive US, Inc., et al., v. Luxshare, Ltd., No. 21-401, holds that U.S. federal courts cannot order discovery in aid of international commercial arbitrations or investor-state arbitrations.  In a unanimous decision, the Court reasoned that a “foreign tribunal,” under 28 U.S.C. § 1782, “is best understood as an adjudicative body that exercises governmental authority” rather than a private body that is merely located in another country.  Because the private arbitral tribunal in the ZF Automotive case did not exercise governmental authority, the Supreme Court denied discovery in aid of the proceeding under Section 1782.

The decision resolves a circuit split over whether private commercial arbitration panels should be considered “foreign or international tribunals” under 28 U.S.C. § 1782, and thus whether U.S. discovery should be allowed in such private commercial arbitrations.  Section 1782 authorizes a district court to order the production of evidence “for use in a proceeding in a foreign or international tribunal.”  The Fourth and Sixth Circuits have previously held that international commercial arbitrations are foreign tribunals under the statute, while the Second, Fifth, and Seventh Circuits have held that they are not.  The availability of discovery under Section 1782 is a key issue for the international arbitration community because the scope of discovery allowed under Section 1782 is generally broader than any discovery allowed under institutional arbitral rules or under foreign arbitration laws.

In reaching its decision, the Court found that the word “tribunal” carries a distinctively governmental flavor.  A prior version of Section 1782 covered only “judicial proceeding[s]” in any court in a foreign country, however, Congress later expanded the legislation’s scope to cover proceedings in a “foreign or international tribunal.”  The Court found that while this change broadens the understanding of “tribunal” to include tribunals that are not formal courts, the term is still best understood to refer to an adjudicative body that exercises governmental authority.  Under the decision, a “foreign tribunal” is a tribunal belonging to a foreign nation while an “international tribunal” is best understood as one that involves two or more nations imbued with governmental authority.  Location of the tribunal or the nature of the parties to the dispute are not determinative in this interpretation.

The Court also noted that extending Section 1782 discovery to cover international arbitrations would conflict with the Federal Arbitration Act, which governs domestic arbitrations.  Thus, interpreting Section 1782 as applying to international arbitration would create a “notable mismatch between foreign and domestic arbitration.”

The Court’s decision came in a consolidated case arising out of appeals in the Sixth and Second Circuits.  The first case involves a dispute between Luxshare, a Hong Kong company and ZF Automotive US Inc., a Michigan-based company, over an allegedly fraudulent sales transaction.  The agreement between the parties provided that all disputes would be resolved by an arbitral panel under the Arbitration Rules of the German Arbitration Institute (DIS).  In preparation for bringing an arbitration, Luxshare filed an ex parte petition under Section 1782 in the U.S. District Court for the Eastern District of Michigan seeking information from ZF Automotive and its officers.  The district court granted the petition and ZF Automotive moved to quash, arguing that a panel formed under the auspices of the DIS was not a “foreign or international tribunal” under Section 1782.  The district court denied the motion and the Sixth Circuit denied a stay.

The second case involves AB bankas SNORAS, a Lithuanian bank which was nationalized by Lithuanian authorities.  The Fund for Protection of Investors’ Rights in Foreign States, a Russian corporation, commenced an ad hoc arbitration proceeding against Lithuania under a bilateral investment treaty that the country entered with Russia.  The Fund filed a petition under Section 1782 in the district court seeking information from AlixPartners, LLP, a New York-based consulting firm, and one of its officers.  AlixPartners challenged the petition, arguing that the ad hoc panel was also not a “foreign or international tribunal” under Section 1782.  The district court rejected that argument in a decision that was affirmed by the Second Circuit.

The Court’s decision is likely to spark much discussion in the international arbitration community.  There will likely be a significant impact on current and future international arbitrations, with parties having to consider their strategies for discovery in light of the unavailability of a critical information-gathering tool.  On the other hand, for better and for worse, this decision will further streamline the international arbitration process, as many arbitral proceedings will not be delayed by related litigation over discovery in U.S. courts.

Article By Travis A. Gonyou of Binder & Schwartz

For more arbitration legal news, click here to visit the National Law Review.

© 2022 Binder & Schwartz LLP. All Rights Reserved

L.A. Jury Delivers Mother of All Verdicts – $464 Million to Two Employees!

As we have previously reported, jury verdicts in employment cases have continued to skyrocket in recent months, and there is no sign they are leveling off. Late last week, a Los Angeles Superior Court jury awarded a total of over $464 million ($440 million of which was in punitive damages) in a two-plaintiff retaliation case. This verdict is more than double any previous amount ever awarded and clearly qualifies as the largest verdict of its kind since the Fall of the Roman Empire.

The plaintiffs alleged they were retaliated against for making complaints about sexual and racial harassment in the workplace, directed at them and other coworkers, leading to their being pushed out of the company.

One plaintiff brought complaints to management about the alleged sexual harassment of two female employees and claimed he was constructively discharged after being subjected to retaliatory complaints and investigations from other supervisors.  The other plaintiff made anonymous complaints to the internal ethics hotline about the racial and sexual harassment of both himself and other coworkers.

After a two-month trial, the jury awarded one plaintiff $22.4 million in compensatory damages and $400 million in punitive damages and awarded the other plaintiff $2 million in compensatory damages and $40 million in punitive damages.

This latest verdict comes on the heels of a judge reducing another huge December 2021 verdict from a Los Angeles Superior Court jury (which we wrote about here) that awarded $5.4 million in compensatory damages and $150 million in punitive damages to a fired insurance company executive who alleged discrimination and retaliation. The judge ordered a reduction in the verdict to $18.95 million in punitive damages (or, in the alternative, a new damages trial) on the grounds that the prior verdict involved an impermissible double recovery ($75 million each from two Farmers Insurance entities) and a presumably unconstitutional ratio of punitive damages to compensatory damages (a ratio exceeding 9 or 10-to-1 is presumed to be excessive and unconstitutional, and the ratio, in that case, was 28-to-1).

Only time will tell if this $464 million verdict stands. In the meantime, our advice to employers worried about these gargantuan verdicts remains the same: ARBITRATE!

Article By Anthony J Oncidi and Morgan J. Peterson of Proskauer Rose LLP

For more labor and employment news, click here to visit the National Law Review.

© 2022 Proskauer Rose LLP.

Suing Attorneys In Texas For Participating in Fiduciary Breaches

It is not uncommon for an attorney to execute all or part of his or her client’s wishes, which may be in breach of a fiduciary duty owed by the client to a third party. The third party can certainly sue the client for breaching fiduciary duties. But can the third party also sue the attorney for participating in the client’s actions?

An officer or director of a company may set up a competing business and direct company business to the new competing business. If the officer or director uses an attorney to set up this business and the attorney knows that new business will be used to usurp opportunities, can the company sue the attorney for facilitating the creation of the new business? What if the attorney is an owner of the new company or works for the new company in a nonlegal position?

Certainly, Texas has legal theories that can hold a party liable for participating with a fiduciary in breaching duties owed by the fiduciary. There is a claim for knowing participation in a breach of fiduciary duty. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942); Paschal v. Great W. Drilling, Ltd., 215 S.W.3d 437, 450 (Tex. App.—Eastland 2006, pet. denied) (holding wife liable for knowing participation in employee’s embezzlement where funds were placed in joint account and wife benefitted from stolen funds). See also Westech Capital Corp. v. Salamone, 2019 U.S. Dist. LEXIS 143577, 2019 WL 4003093, at *1 (W.D. Tex. Aug. 23, 2019) (collecting cases that explain that “Texas appellate courts have routinely recognized the existence of a cause of action for knowing participation in the breach of fiduciary duty.”). The general elements for a knowing-participation claim are: 1) the existence of a fiduciary relationship; 2) the third party knew of the fiduciary relationship; and 3) the third party was aware it was participating in the breach of that fiduciary relationship. D’Onofrio v. Vacation Publ’ns, Inc., 888 F.3d 197, 216 (5th Cir. 2018); Meadows v. Harford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007). There is also a recognized civil conspiracy claim in Texas. The essential elements of a civil conspiracy are (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result. Juhl v. Airington, 936 S.W.2d 640, 644 (Tex. 1996). Finally, there may be an aiding-and-abetting breach-of-fiduciary-duty claim. The Texas Supreme Court has stated that it has not expressly adopted a claim for aiding and abetting outside the context of a fraud claim. See First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214, 224 (Tex. 2017); Ernst & Young v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 583 n. 7 (Tex. 2001); West Fork Advisors v. Sungard Consulting, 437 S.W.3d 917 (Tex. App.—Dallas 2014, no pet.). Notwithstanding, some Texas courts have found such an action to exist. See Hendricks v. Thornton, 973 S.W.2d 348 (Tex. App.—Beaumont 1998, pet. denied); Floyd v. Hefner, 556 F.Supp.2d 617 (S.D. Tex. 2008). One court identified the elements for aiding and abetting as the defendant must act with unlawful intent and give substantial assistance and encouragement to a wrongdoer in a tortious act. West Fork Advisors, 437 S.W.3d at 921. Some courts have held that here is no aiding and abetting breach of fiduciary duty claim. Hampton v. Equity Trust Co., No. 03-19-00401-CV, 2020 Tex. App. LEXIS 5674 (Tex. App.—Austin July 23, 2020, no pet.). See also Midwestern Cattle Mktg., L.L.C. v. Legend Bank, N.A., 2019 U.S. App. LEXIS 36966, 2019 WL 6834031, at *7 (5th Cir. Dec. 13, 2019); In re DePuy Orthopaedics, Inc., Pinnacle Hip Implant Prod. Liab. Litig., 888 F.3d 753, 782, 781 (5th Cir. 2018)  For a discussion of these forms of joint liability for breach of fiduciary duty, please see E. Link Beck, Joint and Several Liability, STATE BAR OF TEXAS, 10TH ANNUAL FIDUCIARY LITIGATION COURSE (2015).

It is clear that at least under some theories, that third parties can be held liable for participating in fiduciary breaches with the party owing fiduciary duties. Can the third party be an attorney? Prior to Cantey Hanger, LLP v. Byrd, 467 S.W.3d 477 (Tex. 2015), it was unclear in Texas whether a party could assert a claim against an attorney not representing the party, such as for negligent misrepresentation or aiding and abetting fraud or breaches of fiduciary duty. Some courts allowed the claim if the attorney was committing or participating in fraud. Others did not.

The plaintiff in Cantey Hanger alleged that the attorneys who represented her husband in a divorce proceeding had committed fraud by falsifying a bill of sale to shift tax liabilities from the sale of an airplane from her husband to her. Id. at 479-80. The Texas Supreme Court held that attorney immunity barred the claim because “[e]ven conduct that is ‘wrongful in the context of the underlying suit’ is not actionable if it is ‘part of the discharge of the lawyer’s duties in representing his or her client.’” Id. at 481. The following are key excerpts from the opinion:

Texas common law is well settled that an attorney does not owe a professional duty of care to third parties who are damaged by the attorney’s negligent representation of a client. Barcelo v. Elliott, 923 S.W.2d 575, 577 (Tex. 1996); see also McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 792 (Tex. 1999) (explaining that a lack of privity precludes attorneys’ liability to non-clients for legal malpractice). However, Texas courts have developed a more comprehensive affirmative defense protecting attorneys from liability to non-clients, stemming from the broad declaration over a century ago that “attorneys are authorized to practice their profession, to advise their clients and interpose any defense or supposed defense, without making themselves liable for damages.” Kruegel v. Murphy, 126 S.W. 343, 345 (Tex. Civ. App. 1910, writ ref’d). This attorney-immunity defense is intended to ensure “loyal, faithful, and aggressive representation by attorneys employed as advocates.” Mitchell v. Chapman, 10 S.W.3d 810, 812 (Tex. App.—Dallas 2000, pet. denied).

….

In accordance with this purpose, there is consensus among the courts of appeals that, as a general rule, attorneys are immune from civil liability to non-clients “for actions taken in connection with representing a client in litigation.” Alpert v. Crain, Caton & James, P.C., 178 S.W.3d 398, 405 (Tex. App.—Houston [1st Dist.] 2005, pet. denied); see also Toles v. Toles, 113 S.W.3d 899, 910 (Tex. App.—Dallas 2003, no pet.); Renfroe v. Jones & Assocs., 947 S.W.2d 285, 287-88 (Tex. App.—Fort Worth 1997, pet. denied). Even conduct that is “wrongful in the context of the underlying suit” is not actionable if it is “part of the discharge of the lawyer’s duties in representing his or her client.” Toles, 113 S.W.3d at 910-11;

….

Conversely, attorneys are not protected from liability to non-clients for their actions when they do not qualify as “the kind of conduct in which an attorney engages when discharging his duties to his client.” Dixon Fin. Servs., 2008 Tex. App. LEXIS 2064, 2008 WL 746548, at *9; see also Chapman Children’s Trust v. Porter & Hedges, L.L.P., 32 S.W.3d 429, 442 (Tex. App.—Houston [14th Dist.] 2000, pet. denied) (noting that “it is the kind of conduct that is controlling, and not whether that conduct is meritorious or sanctionable”).

Because the focus in evaluating attorney liability to a non-client is “on the kind—not the nature—of the attorney’s conduct,” a general fraud exception would significantly undercut the defense. Dixon Fin. Servs., 2008 Tex. App. LEXIS 2064, 2008 WL 746548, at *8. Merely labeling an attorney’s conduct “fraudulent” does not and should not remove it from the scope of client representation or render it “foreign to the duties of an attorney.” Alpert, 178 S.W.3d at 406 (citing Poole, 58 Tex. at 137); see also Dixon Fin. Servs., 2008 Tex. App. LEXIS 2064, 2008 WL 746548, at *9 (“Characterizing an attorney’s action in advancing his client’s rights as fraudulent does not change the rule that an attorney cannot be held liable for discharging his duties to his client.”).

….

Fraud is not an exception to attorney immunity; rather, the defense does not extend to fraudulent conduct that is outside the scope of an attorney’s legal representation of his client, just as it does not extend to other wrongful conduct outside the scope of representation. An attorney who pleads the affirmative defense of attorney immunity has the burden to prove that his alleged wrongful conduct, regardless of whether it is labeled fraudulent, is part of the discharge of his duties to his client.

Id. at 481-484.

Based on the holding in Cantey Hanger, if an attorney is performing duties that a lawyer would typically perform, the attorney immunity defense would apply. This defense would likewise apply to aiding and abetting fraud and breaches of fiduciary duty. See Kastner v. Jenkens & Gilchrist, P.C., 231 S.W.3d 571, 577-78 (Tex. App.—Dallas 2007); Span Enters. v. Wood, 274 S.W.3d 854, 859 (Tex. App.—Houston [1st Dist.] 2008).

In Bethel v. Quilling, Selander, Lownds, Winslett & Moser, P.C., the Court extended the Cantey Hanger holding to allegations of criminal conduct. 595 S.W.3d 651, 657-58 (Tex. 2020). There, the plaintiff had urged the Court “to recognize an exception” to attorney immunity “whe[n] a third party alleges that an attorney engaged in criminal conduct during the course of litigation.” Id. The Court rejected the invitation to adopt an exception or state a categorical rule because doing so would allow plaintiffs to avoid the attorney-immunity defense through artful pleading—”by merely alleging that an attorney’s conduct was ‘criminal.’” Id. The Court eschewed a categorical exception for criminal conduct because such an exception would defeat the purposes of the attorney-immunity defense. Instead, the Court held that conduct alleged to be criminal in nature “is not categorically excepted from the protections of attorney civil immunity when the conduct alleged is connected with representing a client in litigation.” Id. As we explained there, a lawyer who is doing his or her job is not more susceptible to civil liability just because a nonclient asserts that the lawyer’s actions are fraudulent, wrongful, or even criminal. Id.

In 2021, the Texas Supreme Court further clarified the holding in Cantey Hanger to state that “When an attorney personally participates ‘in a fraudulent business scheme with his client,’ as opposed to on his client’s behalf, the attorney ‘will not be heard to deny his liability’ because ‘such acts are entirely foreign to the duties of an attorney.’” Haynes & Boone, LLP v. NFTD, LLC, 631 S.W.3d 65, 77 (Tex. 2021) (quoting Poole v. Hous. & T.C. Ry. Co., 58 Tex. 134, 137 (1882)). The Court in Haynes & Boone, LLP, also expanded the Cantey Hanger holding to extend to transactional work that the attorney performs, in addition to litigation work covered in the Cantey Hanger opinion:

Today we confirm that attorney immunity applies to claims based on conduct outside the litigation context, so long as the conduct is the “kind” of conduct we have described above. We reach this conclusion because we see no meaningful distinction between the litigation context and the non-litigation context when it comes to the reasons we have recognized attorney immunity in the first place. We have recognized attorney immunity because attorneys are duty-bound to competently, diligently, and zealously represent their clients’ interests while avoiding any conflicting obligations or duties to themselves or others.

Id. at 79.

Most recently, in Taylor v. Tolbert, the Court reviewed whether there was an exception to immunity for private-party civil suits asserting that a lawyer has engaged in conduct criminalized by statute. No. 20-0727, 2022 Tex. LEXIS 385 (Tex. May 6, 2022). The court discussed the immunity defense as follows:

The common-law attorney-immunity defense applies to lawyerly work in “all adversarial contexts in which an attorney has a duty to zealously and loyally represent a client” but only when the claim against the attorney is based on “the kind of conduct” attorneys undertake while discharging their professional duties to a client. Stated inversely, if an attorney engages in conduct that is not “lawyerly work” or is “entirely foreign to the duties of a lawyer” or falls outside the scope of client representation, the attorney-immunity defense is inapplicable.

In determining whether conduct is “the kind” immunity protects, the inquiry focuses on the type of conduct at issue rather than the alleged wrongfulness of that conduct. But when the defense applies, counsel is shielded only from liability in a civil suit, not from “other mechanisms” that exist “to discourage and remedy” bad-faith or wrongful conduct, including sanctions, professional discipline, or criminal penalties, as appropriate.

Conduct is not the kind of conduct attorney immunity protects “simply because attorneys often engage in that activity” or because an attorney performed the activity on a client’s behalf. Rather, the conduct must involve “the uniquely lawyerly capacity” and the attorney’s skills as an attorney. For example, a lawyer who makes publicity statements to the press and on social media on a client’s behalf does “not partake of ‘the office, professional training, skill, and authority of an attorney’” because “[a]nyone—including press agents, spokespersons, or someone with no particular training or authority at all—can publicize a client’s allegations to the media.” Immunity attaches only if the attorney is discharging “lawyerly” duties to his or her client.

A corollary to this principle is that attorneys will not be entitled to civil immunity for conduct that is “entirely foreign to the duties of an attorney.” “Foreign to the duties” does not mean something a good attorney should not do; it means that the attorney is acting outside his or her capacity and function as an attorney. For that reason, whether counsel may claim the privilege turns on the task that was being performed, not whether the challenged conduct was meritorious.

This is so because the interests of clients demand that lawyers “competently, diligently, and zealously represent their clients’ interests while avoiding any conflicting obligations or duties to themselves or others.” To prevent chilling an attorney’s faithful discharge of this duty, lawyers must be able to pursue legal rights they deem necessary and proper for their clients without the menace of civil liability looming over them and influencing their actions. Attorney immunity furthers “loyal, faithful, and aggressive representation” by “essentially . . . removing the fear of personal liability,” thus “alleviating in the mind of [an] attorney any fear that he or she may be sued by or held liable to a non-client for providing . . . zealous representation.” In this way, the defense protects not only attorneys but also their clients, who can be assured that counsel is representing the client’s best interests, not the lawyer’s.

Id. The Court acknowledged that “there is a wide range of criminal conduct that is not within the ‘scope of client representation’ and [is] therefore ‘foreign to the duties of an attorney,’” and that “when that is the case, the circumstances do not give rise to an ‘exception’ to the immunity defense; rather, such conduct simply fails to satisfy the requirements for invoking the defense in the first instance.” Id. “[O]ur approach to applying the attorney-immunity defense remains functional, not qualitative, and leaves an attorney’s improper conduct addressable by public remedies.” Id.

The Court then held that the common-law defense of attorney immunity would still apply to state statutes (unless the statute specifically abrogated that defense). Id. The Court stated:

That does not mean that all conduct criminalized by the wiretap statute is immunized from civil liability or free of consequences. As we explained in Bethel, while criminal conduct is not categorically excepted from the attorney-immunity defense, neither is it categorically immunized by that defense. Criminal conduct may fall outside the scope of attorney immunity, and even when it does not, “nothing in our attorney-immunity jurisprudence affects an attorney’s potential criminal liability if the conduct constitutes a criminal offense.”

Id. However, regarding federal statutes, the Court concluded “that attorney immunity, as recognized and defined under Texas law, is not a defense under the federal wiretap statute because, quite simply, a state’s common-law defense does not apply to federal statutes.” Id.

In light of the foregoing authorities, it appears claims against attorneys merely doing work for a client (whether fraudulent, tortious, or even criminal) would be covered by attorney immunity and bar any participation in breach of fiduciary duty claim. However, if the misconduct relates to the attorney personally benefitting from the transaction, or having been a party to the transaction (as opposed to merely the attorney for a party), such an immunity would not apply. See, e.g., Olmos v. Giles, No. 3:22-CV-0077-D, 2022 U.S. Dist. LEXIS 77134 (N.D. Tex. April 28, 2022) (refused to dismiss breach of fiduciary duty claim and misrepresentation claim against attorneys where it was unclear whether the defendant attorneys were a part of the transaction).

Another issue that should be discussed is the impact on the attorney client privilege when an attorney participates in fraud or criminal activities. The attorney-client privilege cannot be enforced when “the services of the lawyer were sought or obtained to enable or aid anyone to commit what the client knew or reasonably should have known to be a crime or fraud.” Tex. R. Evid. 503 (d)(1). As one court describes:

The exception applies only when (1) a prima facie case is made of contemplated fraud, and (2) there is a relationship between the document at issue and the prima facie proof offered. A prima facie showing is sufficient if it sets forth evidence that, if believed by a trier of fact, would establish the elements of a fraud or crime that “was ongoing or about to be committed when the document was prepared.” A court may look to the document itself to determine whether a prima facie case has been established.…

We begin our analysis by examining the scope of the fraud portion of the crime/fraud exception. The Texas Rules of Evidence do not define what is intended in Rule 503(d)(1) by the phrase “to commit . . . [a] fraud.” Black’s Law Dictionary defines fraud as: “A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” The Texas common law tort of fraud also requires proof of misrepresentation, concealment, or non-disclosure. The legal concept of fraud therefore has at its core a misrepresentation or concealment. This definition also dovetails with the apparent reasoning behind inclusion of fraud in the exception: by keeping client communications confidential–pursuant to the attorney-client privilege –the attorney whose client intends to make a misrepresentation or concealment helps prevent the injured party from learning the truth about the misrepresentation or concealment. Thus, in that situation, the attorney’s silence affirmatively aids the client in committing the tort. This is not generally true of other torts (not based on misrepresentation or concealment) and explains why the exception is not the crime/tort exception.

In re Gen. Agents Ins. Co. of Am., Inc., 224 S.W.3d 806, 819 (Tex. App.—Houston [14th Dist.] 2007, orig. proceeding). Moreover, the Texas Court of Criminal Appeals has held that this exception includes the work-product in the proper circumstances. Woodruff v. State, 330 S.W.3d 709, 2010 Tex. App. LEXIS 9569 (Tex. App. Texarkana Dec. 3, 2010), pet. ref’d No. PD-1807-10, 2011 Tex. Crim. App. LEXIS 749 (Tex. Crim. App. May 25, 2011), pet. ref’d No. PD-1807-10, 2011 Tex. Crim. App. LEXIS 770 (Tex. Crim. App. June 1, 2011), cert. denied, 565 U.S. 977, 132 S. Ct. 502, 181 L. Ed. 2d 347, 2011 U.S. LEXIS 7788 (U.S. 2011).

So, though an attorney may be immune from civil liability, the crime/fraud exception may open up attorney/client communications to the light of day. Regarding crimes involving breaches of fiduciary duty, in addition to theft crimes, the Texas Legislature has created the following crimes: (1) Financial Abuse of Elderly Individual in Texas Penal Code Section 32.55; 2) Financial Exploitation of Vulnerable Individuals in Texas Penal Code Section 32.53; (3) Misapplication of Fiduciary Property in Texas Penal Code Section 32.45; and (4) Failure to Report of the Exploitation of the Elderly or Disabled Individuals in the Texas Human Resources Code Section 48.051.

Article By David Fowler Johnson of Winstead

For more litigation and trial practice news, click here to visit the National Law Review.

© 2022 Winstead PC.

Shijiazhuang Market Supervision Bureau Fines Trademark Agency 50,000 RMB for Attempting to Trademark Olympic Gold Medalist’s Social Media Account

On May 18, 2022, the Shijiazhuang Yuhua District Market Supervision Administration issued an Administrative Penalty Decision against a Shijiazhuang trademark agency for attempting to trademark the name of Eileen Gu’s Douyin account (TikTok’s sister app in China). Eileen Gu won three gold medals in the Beijing Winter Olympics earlier this year and has become extremely popular in China.

On February 11, 2022, Wang XX, the legal representative of the trademark applicant Hebei Yi Biotechnology Co., Ltd., contacted Wang YY, a staff member of a trademark agency in Shijiazhuang, China, to apply for trademarks for Frog Princess Eileen in English and Chinese.  Frog Princess Eileen is the name of the 2022 Winter Olympics champion and model Eileen Gu’s (Gu Ailing) Douyin registered account. This account has released videos since August 29, 2018.  Ms. Gu won gold medals in big air and halfpipe and a silver medal in slopestyle at the 2022 Winter Olympics in Beijing. She then received a lot of media coverage and became famous, with a great reputation and influence. Therefore, Ms. Gu has the prior rights to the names of her Douyin registered account “Frog Princess Eileen” and due to their high popularity and influence, the scope of protection for “Frog Princess Eileen” is more powerful than the general right of trade names.

 

A promotional image from Gu’s recent campaign with Louis Vuitton. Credit: Louis Vuitton

 

At the same time, Ms. Gu made outstanding contributions to my China’s gold medal list in this Winter Olympics. Applicants other than Ms. Gu herself that register and apply for the trademarks “Frog Princess Eileen”  not only damages the prior rights of the Winter Olympic champion Gu but also damages the public interests of the society, which is easy to cause social damage and adverse effects. In this case, the trademark agency in Shijiazhuang, as a trademark agency agency for many years, nonetheless applied for a trademark even though it should have known or knew that the trademark would damage the existing prior rights of others.

Accordingly, the trademark agency was fined 50,000 RMB and Wang YY and Li (business personnel) were each fined 5,000 RMB.

The full text of the punishment is available here (Chinese only) courtesy of 知识产权界: 行政处罚决定书.

Article By Aaron Wininger of Schwegman, Lundberg & Woessner, P.A.

For more intellectual property news, click here to visit the National Law Review.

© 2022 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

Half-Billion Dollar Arbitration Award in Trade Secrets Case Affirmed by Minnesota Supreme Court in Trade Secrets Dispute

Jackson Lewis Law firm

The Minnesota Supreme Court has affirmed an arbitrator’s eye-popping award of $525 million plus prejudgment interest totaling $96 million and post-award interest in a trade secrets dust up between Seagate Technology, LLC and Western Digital Corporation, et al. Seagate Technology, LLC v. Western Digital Corporation, et al and Sining Mao, No. A12-1994 (Minn. October 8, 2014).  The Court’s decision is replete with lessons about the legal boundaries, risks, and protections for litigants in arbitration. It is notable also for the magnitude of the award which was, in part, the consequence of falsified evidence.

Seagate designs and manufactures hard disk drives for computers. Sining Mao was a senior director for advanced head concepts at Seagate working on technology that involves incorporating tunneling magnetoresistance (“TMR”) in to read heads to improve storage capacity. When he was hired by Seagate, he signed an employment agreement which included a requirement to preserve the confidentiality of trade secrets and to return company documents. The employment agreement contained an arbitration clause which stated, in part, that the “arbitrator may grant injunctions or other relief in such controversy” arising out of the agreement.  Arbitration was subject to the rules of the American Arbitration Association (“AAA”).

Mao left Seagate in September 2006 to join Western Digital, a competitor. Seagate then commenced a district court action seeking injunctive relief and alleging misappropriation of trade secrets related to TMR technology.  Western Digital invoked the arbitration clause of Mao’s employment agreement with Seagate, and the district court stayed the lawsuit pending arbitration.

Things started to go south for Western Digital and Mao argued that three of the alleged trade secrets had been publicly disclosed before Mao left Seagate because they were included in a PowerPoint presentation he gave at a conference.  Seagate argued that Mao had fabricated and inserted additional PowerPoint slides containing the information after the fact to make it appear as if this information had been made public.  The arbitrator found that “[t]he fabrications were obvious. There is no question that Western Digital had to know of the fabrications and yet continued to represent to the Arbitrator that Dr. Mao did in fact insert the disputed slides at the time of the conferences.” The arbitrator found that the fabrication and Western Digital’s complicity was an egregious form of litigation misconduct that warranted severe sanctions.

Specifically, the arbitrator precluded any evidence or defense by Western Digital and Mao disputing the validity of the three trade secrets or any defense to the allegation of misappropriation or use of the three trade secrets, which resulted entry of judgment on liability and monetary damages in the amount of $525 million, calculated based on an unjust enrichment method. Western Digital brought a motion to vacate the award in district court. The district court granted the motion in part, finding that the arbitrator exceeded the scope of his authority under the arbitration agreement.  The Minnesota Court of Appeals reversed the district court on the ground that Western Digital had waived its right to challenge the arbitrator’s ability to issue punitive sanctions by not raising the issue with the arbitrator himself (and because Western Digital had earlier sought sanctions against Seagate in the same matter).

The Minnesota Supreme Court affirmed the Court of Appeals although based on a different analysis. The Supreme Court held that Western Digital did not waive its right to challenge the Arbitrator’s authority under Minnesota statutes regarding arbitrations and requests for vacatur, specifically Minn. Stat. Section 572.19.   The high Court then went on to conclude that the arbitrator did have the authority to impose the disputed sanctions, looking at the employment agreement, AAA arbitration rules, and case law.

The Court noted that:

Some believe that arbitration has benefits, potentially including faster resolution and less expense than the judicial system as well as a higher degree of confidentiality. But the benefits come with costs, including significantly less oversight of decisions, evidentiary and otherwise, and very limited review of the final award. Here, despite the best efforts of experienced appellate counsel to argue otherwise, Mao and Western Digital’s decision to demand arbitration necessarily limited the availability of the protections and advantages of the judicial system.

It is unclear if a district court could have reached the same result as the arbitrator in the Seagate case, but the Minnesota Supreme Court’s decision suggests that arbitrators can have greater discretion than judges.  The case certainly highlights the fact that arbitration may not always be the best forum, depending on which side of the dispute you are on.

Jackson Lewis P.C. © 2014
ARTICLE BY

V. John Ella
OF
Jackson Lewis P.C.

Supreme Court Hears Oral Arguments Regarding Limits on Class Arbitration Waivers in Federal Cases

Womble Carlyle

Recently, the United States Supreme Court heard oral argument in American Express Co. v. Italian Colors Restaurant, a case that will have a substantial impact on the enforceability of arbitration agreements that contain class action waivers.  Italian Colors picks up where the Supreme Court left off in AT&T Mobility, LLC v. Concepción when a sharply divided Supreme Court held that a state law purporting to invalidate class action waivers in arbitration agreements was preempted by the Federal Arbitration Act.

Here, the Supreme Court is confronting the question of whether, as the Second Circuit Court of Appeals put it, the “federal substantive law of arbitrability” can invalidate class action waivers in arbitration agreements when the underlying claims are based on federal law.  The Second Circuit Court of Appeals determined that federal law requiredthe invalidation of the class action waiver because the cost of litigation compared to the relatively minimal amount of potential damages would effectively prohibit plaintiffs from pursuing their federal claims.  Concepción did not compel a different result, according to the Second Circuit, because in that case there was no showing that ”the practical effect of the enforcement would be to preclude [the plaintiff class’s] ability to vindicate their statutory rights.”

The Supreme Court’s decision in this case will have a substantial impact on the viability of class action waivers contained in arbitration clauses.  If the Second Circuit’s ruling is upheld, it will provide plaintiffs with a way around the limitations of Concepción if they are able to show that litigating a matter on an individual basis would be prohibitively expensive.  A decision reversing the Second Circuit would give business owners a greater ability to avoid complex and expensive class action litigation through carefully worded arbitration agreements.

The Supreme Court is expected to decide the case before the end of June 2013.

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Not so Fast at the Eden Roc

The National Law Review recently published an article, Not so Fast at the Eden Roc, written by Nelson F. Migdal with Greenberg Traurig, LLP:

GT Law

 

Within hours of the appeals court’s ruling [Marriott International v Eden Roc 3-26-2013.pdf], there have been announcements about the demise of the long-term hotel management agreement and the hotel owner’s inviolate right to terminate (revoke) management agreements “at-will.”  But the wiser course might be to not speak too soon, but, rather, to ponder the consequences.  Remember that Judge Schweitzer’s prior ruling on October 26, 2012 granted Marriott’s request for a preliminary injunction to prevent the hotel owner from removing the hotel operator in another of a series of “midnight raids,” where the hotel owner sweeps in and removes the hotel operator.  The hotel operator at the Eden Roc chose to stand its ground, and the injunction order maintained the status quo.  In many situations, the parties are able to resolve their dispute, either on their own or with the assistance of a mediator.  In fact, the Judge urged the parties to do just that.

The parties were not able to resolve their differences, and on March 26, 2013, a New York appeals court vacated Judge Schweitzer’s injunction.  This is not a sweeping and staggering new law. Citing the 1991 Woolley case, the order merely confirms that a principal may freely remove its agent and terminate the agency relationship “at-will” (absent the presence of a “coupled interest” as part of the contract; see the attached link to our prior piece on the Turnberry decision).  (To this extent, I disagree with the appellate court’s dicta that the agreement in question is not an agency agreement; in fact it is). The order further confirms that certain contracts that have the characteristics of a personal services contract cannot be enforced by means of an injunction.  It is also not news that if a hotel owner desires to terminate its management agreement with the hotel operator in this manner, that the hotel owner may be answerable in damages to the hotel operator.  Some blog posts within the last 24 hours make reference to the recent Fairmont Hotels & Resorts termination at the Turnberry Resort.  Very few of those blog posts complete the factual story and note that the hotel owner ultimately paid Fairmont damages reported to be roughly $19,000,000, representing the approximate present value of expected future management fees. Depending on the performance of the hotel, an Owner’s summary revocation of a hotel management agreement could be akin to selling “puts”; you get to own the stock, but do you really want to own it that cost?

So, let’s just be more judicious here.  Hotel owners and hotel operators actually do talk with each other more often than not, and do enter into legally binding agreements for management of the owner’s hotel.  I will continue to advocate for good faith negotiation over litigation, and monitor the complete story, including the fact that terminating the hotel management agreement may grant an owner its wish to regain the hotel, but that will come at a price, and then, the next step is that the hotel owner will need to replace the removed hotel operator with yet another hotel operator – which hotel owners realize can add a significant expense for the owner.

©2013 Greenberg Traurig, LLP

The ABC’s of Government Contract Claims – 10 Ways to Maximize Your Chance of Success

Sheppard Mullin 2012

1. Understand the Basic Contract Requirement – Every contract lawyer will begin an assessment with a very simple, fundamental question, i.e., “What does the contract say?” Your obligation is to perform to the contract; nothing more; nothing less.

2. Identify Variances Between What the Contract Says and What You Actually Are Doing – If you are doing something other than what the contract actually says, you may be entitled to relief.

3. Ask Yourself “Why Am I Doing This?” –You cannot blame Uncle Sam for your or (generally) your suppliers’ inefficiencies and delinquencies, but there are many Government acts or omissions that might entitle you to relief, e.g., Government direction, a defective specification, an acceleration order, late or defective GFP/GFE/GFI, and Government delinquencies relating to contractually prescribed review periods.

4. Do a Disciplined “Root Cause” Analysis – You perform these kinds of analyses in reporting on discrepancies to the Government. Require no less when analyzing a possible claim. Do not accept the easy answer, e.g., “We missed it.” If that is the response, probe – “What did you miss exactly?” “Show me where it was.” “Let me see the documentation you missed.”

5. Notify the Contracting Officer – Tell the PCO, in writing, of the circumstance that you believe gives rise to a change. Deprive the PCO of the ability to claim, later on, “If only I had known, I would have told you to stop doing that.”

6. Accept No Substitutes – No one but the Contracting Officer has the authority to change the contract. COTR’s, contracting specialists, Program Managers, general officers – they all love to issue orders and they will jawbone you to follow them. Don’t. Report the order to the PCO and ask the PCO to confirm the order to you in writing.

7. Trust But Verify – This one is simple. Never act on an oral direction. Send a letter to the PCO asking for confirmation. 8. Read Your “Changes” and “Notification of Changes” Clause(s) – They impose time limits for notification of a change. Failure to comply can be overcome in many cases, but why take that chance?

9. Use Change Order Accounting – A valid changes claim is only as good as your ability to prove quantum. Establish separate job numbers to collect the costs of the changed work.

10. Earn Interest – An REA can linger without closure for months, and years. If there is no progress, transform the REA into a certified claim and start the accrual of interest. And remember, the statute of limitations for submission of a certified claim is six years from the date of its accrual.

And for those of you who read this far, here is your bonus eleventh tip:

11. Read Those Unilaterally Issued Change Orders – They invariably say the work is not a change and ask you to sign. Don’t.

Copyright © 2013, Sheppard Mullin Richter & Hampton LLP

Transitional Program for Covered Business Method Patents under the America Invents Act

Transitional Program for Covered Business Method Patents under the America Invents Act, an article by Lee Davis and Gregory L. Porter with Andrews Kurth LLP was recently featured in The National Law Review:

Andrews Kurth

The Leahy-Smith America Invents Act (AIA) includes expanded procedures for challenging patents administratively rather than through the courts. One of the new post-grant review procedures for challenging covered business method patents went into effect on September 16, 2012.

Post-grant review of covered business method patents is available to challenge any patent, even patents issued before the effective date of the AIA, and is handled by the newly created Patent Trial and Appeals Board (PTAB). For purposes of post-grant review, a “covered business method” (CBM) patent claims a method or corresponding apparatus for performing data processing or other operations used in practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions. Whether a patent claims a “technological invention” is considered on a case-by-case basis, and a technological invention is defined as claimed subject matter that as a whole recites a technological feature that is novel and unobvious over the prior art and solves a technical problem using a technical solution.

There are likely to be patents that fall on the outskirts of the definition of a covered business method patent. The Final Rules promulgated by the U.S. Patent and Trademark Office provide some guidance. For example, the Rules suggest that CBM patents subject to post-grant review are anticipated to be typically classified in Class 705 of the United States Patent Classification System. Class 705 is the classification for patents directed to data processing in the following areas: financial, business practice, management or cost/price determination. While the Rules specifically refer only to Class 705, they make clear that patents in other classifications, which fit the definition of business method patents, may also be subject to post-grant review.

To institute post-grant proceedings for CBM patents, the person challenging the patent must have been sued for infringement or have been charged with infringement under the patent. If post-grant review is sought, a party may seek a stay of any pending civil patent infringement action. In considering whether to grant the stay, the district court decides whether a stay will simplify the issues in question and streamline the trial, whether discovery is complete or a trial date has been set, whether a stay would prejudice the nonmoving party or present a tactical advantage to the moving party, and whether a stay will reduce the burden of litigation on the parties and the court. A party may take an immediate interlocutory appeal to the U.S. Court of Appeals for the Federal Circuit for de novo review of a district court’s decision. Affording immediate interlocutory appeal of the district court’s decision indicates the AIA’s strong preference for use of the new post-grant review proceedings for covered business method patents. Therefore, absent unusual circumstances it appears that most lawsuits in their early stages will be stayed.

Institution of post-grant review proceedings requires that the petitioner demonstrate that it is more likely than not that at least one of the claims challenged is unpatentable. If instituted, a trial proceeds only on the challenged claims for which the threshold standard has been met. The Board will enter a Scheduling Order concurrent with a decision to institute a trial that sets due dates for taking action and accounts for the complexity of the proceeding. The Scheduling Order sets out a sequenced discovery process where each party is provided respective discovery periods, beginning with the patent owner. The sequenced discovery is to allow meaningful discovery before motions and oppositions are submitted during trial. Thus, discovery before the PTAB is focused on what the parties reasonably need to respond to the grounds raised by their opponent. The types of discovery available under the Federal Rules of Civil Procedure can be sought by the parties, and requests for such discovery are considered under a “good cause” standard. The clear intent here is to reduce the scope and amount of discovery and its attendant costs from that in a district court case.

Each party to the proceeding is afforded an opportunity to present their case before at least three members of the PTAB at an oral hearing. Prior to any decision by the Board on the merits, the parties may agree in writing to terminate the proceedings. The PTAB will enter a final written decision not more than a year from the date trial was instituted, except that the time may be extended up to six months for good cause. A party dissatisfied with the PTAB’s final written decision may file a request for rehearing and/or an appeal to the U.S. Court of Appeals for the Federal Circuit.

Several petitions challenging a number of business method patents have already been filed since the new post-grant review procedures took effect. Based on today’s count, the PTAB Patent Review Processing System (PRPS) shows 10 pending petitions for post-grant review of alleged CBM patents. It is interesting to note that all of the patents are classified in Class 705, therefore we are unlikely to have an early ruling on a patent outside of Class 705. While the first petition was filed on September 16, 2012, as of about one month later, no trial has been instituted or scheduling orders entered for even the oldest petition. Thus, answers to what patents will be considered, what discovery will be sought and allowed, and the time to trial under these rules remain open.

In sum, only time will tell if the new post-grant procedures provide a more efficient, less costly manner of challenging business method patents.

© 2012 Andrews Kurth LLP

Court Grants Summary Judgment Against Coca-Cola in Breach of Collective Bargaining Agreement Claim by United Steel Workers

The National Law Review recently published an article by Bryan R. Walters of Varnum LLP regarding Coca-Cola’s Breach of Collective Bargaining Agreement:

Varnum LLP

 

In Local Union 2-2000 United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial, Chemical and Service Workers International Union v. Coca-Cola Refreshments U.S.A. Inc. (W.D. Mich. Nov. 21, 2012), the Honorable Janet T. Neff granted summary judgment in favor of the United Steel Workers against Coca-Cola on a breach of contract claim concerning wage increases under the parties’ collective bargaining agreement. The opinion addressed two interesting legal issues.

First, the court rejected Coca-Cola’s statute of limitations argument under 29 U.S.C. § 160(b), which provides that “no complaint shall issue based upon any unfair labor practice occurring more than six months prior to the filing of the charge with the Board and the service of a copy thereof upon a person against whom such charge is made.”  Coca-Cola argued that, because the United Steel Workers had filed an unfair labor practice charge concerning their unpaid wages claim approximately nine months after becoming aware of the issue, Section 160(b) barred the union’s claim.  The court rejected this argument, concluding that it would be “inappropriate” to apply the six-month limitations period to what was a pure breach of contract claim.  Instead, the court held that the applicable statute of limitations was the six-year statute of limitations under Michigan law for breach of contract actions.  Op. at 13–15.

The second significant issue related to interpretation of the collective bargaining agreement.  The collective bargaining agreement included schedules for wage increases in “Year 1, Year 2, and Year 3” without further defining those terms within the primary contract document.  The court held that this contract language was ambiguous, requiring introduction of parol evidence of the parties’ negotiation history. The court found clear and convincing evidence in the negotiating history that the union’s interpretation of the “Years” was correct, in that “Year 1” referred to the first 365 days after the effective date of the contract, etc.  Id. at 19.

The court also concluded that there was clear and convincing evidence of a mutual mistake in the drafting of the final collective bargaining agreement. Coca-Cola listed specific dates for the wage adjustments in an appendix to the collective bargaining agreement. The court found that the dates listed in the appendix were not bargained for and never agreed to by the parties, rejecting as self-serving subsequent statements from Coca-Cola’s negotiators that Coca-Cola did not consider the dates unilaterally added to the appendix by Coca-Cola a “mistake.”  Id. at 20–21.

© 2012 Varnum LLP