Category: Litigation

Picking the Perfect Jury:What Should Be Done About the Problem of Race-Based Exemptions ABA Teleconference & Live Audio Webcast – October 21st

The National Law Review would like to make you aware of an upcoming ABA Teleconference and Live Webcast which has been approved for Elimination of Bias Credits in applicable jurisdications as well as CLE credit — Picking the Perfect Jury:What Should Be Done About the Problem of Race-Based Exemptions: 

Program Description

As recently reported in the New York Times, “Today, the practice of excluding blacks and other minorities from Southern juries remains widespread” and, according to the Equal Justice Initiative and defense lawyers, is “largely unchecked.” There is a continuing indifference to prosecutors’ race-based exclusions of prospective jurors.  Prosecutors have learned how to claim that their exclusions are race-neutral, even where they do not exclude white jurors whose answers during jury selection are indistinguishable from those of jurors of color whom the same prosecutors do exclude.

At this program, the renowned Executive Director of the Equal Justice Initiative, Bryan Stevenson, will discuss his organization’s June 2010 report on this subject (a report which was the basis for the Times story and other media reports) and will join with other expert panelists and discussing the report’s implications and what those who attend this program can do to rectify this situation.  There will be special focus on Tennessee, Alabama, Arkansas, and Mississippi.

CLE Credit

1.0 hours of CLE credit in 60-minute states/1.2 hours of CLE credit in 50-minute states have been requested in states accrediting ABA teleconferences and live audio webcasts.*

NY-licensed attorneys: This non-transitional CLE program has been approved for experienced NY-licensed attorneys in accordance with the requirements of the New York State CLE Board for 1.0 total NY CLE credits.

Elimination of bias credit has been requested in states with elimination of bias requirements.

The following states accept ABA teleconferences for CLE credit:
AL, AK, AR, AZ, CA, CO, FL, GA, IA, ID, IL, KY, LA, ME, MN, MO, MS, MT, NC, ND, NH, NM, NV, NY, OK, OR, RI, SC, TN, TX, UT, VA, VI, VT, WA, WI, WV, WY.

*States currently not accrediting ABA teleconferences: DE, IN, PA, KS, OH

Teleconference / Live Audio Cast Hours: 

4:30 PM-5:30 PM Eastern

3:30 PM-4:30 PM Central

2:30 PM-3:30 PM Mountain

1:30 PM-2:30 PM Pacific

To Register or for More Information: 

Register by Phone:  800.285.2221 / Monday – Friday 
8:30 AM – 6:00 PM Eastern Event Code: cet0rbe   http://bit.ly/dkP9EQ

Class Action Defense Cases–American Honda v. Allen: Seventh Circuit Court Reverses Class Action Certification Order Holding District Court’s Daubert Analysis Inadequate And Expert Testimony Inadmissible

National Law Review’s featured blogger Michael J. Hassen of Jeffer, Mangels, Butler & Mitchell LLP provides some insight on a recent 7th Circuit class action case which addresses expert testimony:

District Court Erred in Granting Class Action Certification because Expert Testimony Establishing Rule 23(b)(3)’s Predominance Prong was Unreliable and District Court’s Daubert Analysis Inadequate Seventh Circuit Holds

Plaintiffs filed a putative class action against American Honda and Honda of America (collectively “Honda”) alleging product defect liability concerning Honda’s Gold Wing GL1800 motorcycle; specifically, the class action complaint alleged that a design defect in the steering assembly causes the motorcycle to “wobble.” American Honda Motor Co., Inc. v. Allen, 600 F.3d 813, 814 (7th Cir. 2010). Plaintiffs moved the district court to certify the litigation as a class action under Rule 23(b)(3), relying heavily on an expert’s opinion that common issues predominate; Honda opposed class action treatment and challenged the expert opinion relied upon by plaintiffs in their motion. Id. Defense attorneys moved under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993), to strike plaintiffs’ expert report on the grounds that the expert’s “wobble decay standard was unreliable because it was not supported by empirical testing, was not developed through a recognized standard-setting procedure, was not generally accepted in the relevant scientific, technical, or professional community, and was not the product of independent research.” Id. The district court agreed to rule on the admissibility of the report prior to ruling on class certification because the report was central to the motion, id. But while the court announced “definite reservations about the reliability of [the expert’s] wobble decay standard,” it refused to exclude the report entirely “at this early stage of the proceedings.” Id., at 814-15. The district court granted class action certification, id., at 815, and Honda sought leave to appeal, id., at 814. The Seventh Circuit granted Honda’s request and reversed.

The Circuit Court explained that the issue before it was “whether the district court must conclusively rule on the admissibility of an expert opinion prior to class certification in this case because that opinion is essential to the certification decision.” American Honda, at 814. The Court summarized the expert’s “wobble decay” opinion, which was based on a standard the expert himself had devised and that he himself characterized as “reasonable.” Id. The expert opinion was important because “most of Plaintiffs’ predominance arguments rest upon the theories advanced by [their expert].” Id. (quoting Allen v. Am. Honda Motor Co., 264 F.R.D. 412, 425 (N.D. Ill. 2009)). In response to Honda’s objections and following the Daubert hearing, the district court “noted that it was concerned that, among other things, [the expert’s] wobble decay standard may not be supported by empirical evidence, the standard has not been generally accepted by the engineering community, and [his] test sample of one may be inadequate to conclude that the entire fleet of GL1800s is defective.” Id., at 814-15. Nevertheless, the lower court believed it was too early in the litigation to dismiss the expert’s opinion in its entirety, and so it granted class action treatment without prejudice to Honda moving to exclude the expert’s opinion. Id., at 815.

As a matter of first impression in the Seventh Circuit, the Court “specifically addressed whether a district court must resolve a Daubert challenge prior to ruling on class certification if the testimony challenged is integral to the plaintiffs’ satisfaction of Rule 23’s requirements.” American Honda, at 815. The Circuit Court held “that when an expert’s report or testimony is critical to class certification, as it is here…, a district court must conclusively rule on any challenge to the expert’s qualifications or submissions prior to ruling on a class certification motion.” Id., at 815-16. Thus, in the Seventh Circuit’s view, “the district court must perform a full Daubert analysis before certifying the class if the situation warrants.” Id., at 816. This includes not only the expert’s qualifications, but “any challenge to the reliability of information provided by an expert if that information is relevant to establishing any of the Rule 23 requirements for class certification.” Id.

In this case, the district court “started off on the right foot by beginning to undertake what might have become a fairly extensive Daubert analysis,” and both acknowledged “and largely agreed with” Honda’s concerns about the reliability of the testimony of plaintiff’s expert, “[y]et the district court ultimately declined, without further explanation, ‘to exclude the report in its entirety at this early stage of the proceedings.’” American Honda, at 816. The Circuit Court explained at page 816 that the district court’s analysis (or lack thereof) constituted an abuse of discretion: “The court’s effective statement of admissibility here is not even conclusory; it leaves open the questions of what portions of [the expert’s] testimony it may have decided (or will decide) to exclude, whether [the expert] reliably applied the standard to the facts of the case, and, ultimately, whether Plaintiffs have satisfied Rule 23(b)(3)’s predominance requirement. As a result, the district court never actually reached a conclusion about whether [the] expert report was reliable enough to support Plaintiffs’ class certification request. Instead it denied Honda’s motion to exclude without prejudice and noted that the case was in an ‘early stage of the proceedings.’”

Reviewing the expert’s report on the merits, the Seventh Circuit held that “our examination of the record reveals that exclusion is the inescapable result when the Daubert analysis is carried to its conclusion.” American Honda, at 817. The issue here was one of reliability rather than qualifications, but the Circuit Court noted that “even the most ‘supremely qualified expert cannot waltz into the courtroom and render opinions unless those opinions are based upon some recognized scientific method and are reliable and relevant under the test set forth by the Supreme Court in Daubert.’” Id. (citing Clark v. Takata Corp., 192 F.3d 750, 759 n.5 (7th Cir.1999)). Based on the Court’s analysis, the expert’s testimony was unreliable, see id., at 817-18, and “expert testimony that is not scientifically reliable should not be admitted, even ‘at this early stage of the proceedings,’” id., at 819 (citation omitted). Because the expert’s testimony formed the foundation for Rule 23(b)(3)’s predominance test, class action certification could not stand. Id. Accordingly, the Seventh Circuit granted Honda’s petition for leave to appeal and vacated the denial of Honda’s motion to strike and the district court’s order grant of class action treatment. Id.

NOTE: In response to plaintiffs’ request that the Circuit Court deny leave to appeal, the Seventh Circuit explained, “Given the uncertainty surrounding the propriety of conducting a Daubert analysis at the class certification stage, and the frequency with which this issue arises, we find the question to be one appropriate for resolution under Rule 23(f).” American Honda, at 815 (citation omitted).

© 2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved.

About the Author:

Michael J. Hassen is a Litigation Partner at Jeffer Mangels Butler & Mitchell LLP with more than 23 years experience in general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition.  415-984-9666 / www.jmbm.com

Class Action Defense Cases–Donovan v. Philip Morris: Massachusetts Federal Court Certifies Class Action Seeking Medical Monitoring For Lung Cancer Of 20-Year Marlboro Smokers

This week’s featured blogger at the National Law Review is Michael J. Hassen of Jeffer, Mangels, Butler & Mitchell LLP who writes for the Class Action Defense Blog.

Class Action Against Tobacco Company Alleging Unfair Trade Practices and Breach of Implied Warranty and Seeking Medical Monitoring for Lung Cancer on Behalf of Class of Smokers who have not been Diagnosed with Lung Cancer and who are Asymptomatic Warranted Class Action Certification under both Rule 23(b)(2) and (b)(3) Massachusetts Federal Court Holds

Plaintiffs filed a putative class action against Philip Morris alleging “unfair or deceptive” trade practices in violation of Massachusetts state law, breach of implied warranty, and negligence; specifically, the class action complaint “allege[d] that Philip Morris designed, marketed, and sold Marlboro cigarettes that delivered an excessive and dangerous level of carcinogens.” Donovan v. Philip Morris USA, Inc., ___ F.Supp.2d ___ (D.Mass. June 24, 2010) [Slip Opn., at 1]. According to the allegations underlying the class action complaint, “plaintiffs have no apparent symptoms of lung cancer, and as such, are not seeking damages.” Id. Thus, this class action “diverges from a typical tobacco suit,” id. Instead of seeking damages, the class action sought to compel Philip Morris to pay for medical monitoring – “that is, regular screenings to determine whether they have early signs of the disease” based on the argument that “if [class members] do eventually develop lung cancer, these screenings will increase their likelihood of survival almost six-fold.” Id., at 1-2. Plaintiffs sought certification of a class action “on behalf of Massachusetts residents, age fifty and older, who have smoked Marlboro cigarettes for at least twenty pack-years.” Id., at 1. Further, “No class member may be diagnosed with lung cancer or be under a physician’s care for suspected lung cancer, and all must have smoked Marlboro cigarettes within the Commonwealth of Massachusetts.” Id., at 2. Defense attorneys opposed class action treatment. In a 56-page order, the district court granted plaintiffs’ motion for class action certification.

In analyzing whether to grant class action treatment, the district court noted that “the motion was not easily resolved because it raised threshold issues of Massachusetts products liability law.” Donovan, at 2. First, the class action certification motion presented a set of issues tied to “the unusual remedy plaintiffs seek, a supervised medical monitoring program using Low-Dose Computed Tomography (‘LDCT’) scans.” Id. Plaintiffs argued that unlike x-rays, which could only detect lung cancer “when it had reached an advanced stage,” the new LDCT-scanning technology allowed for much earlier detection “significantly increasing survival rates from about fifteen percent to eighty-five percent.” Id. (Plaintiffs argued that monetary damages would not adequately compensate class members for the cost of medical monitoring, id., at 3.) Second, the class action certification motion presented the question of whether the named plaintiffs had standing to prosecute the class action because “[b]y definition, plaintiffs who seek medical monitoring to determine whether they have cancer are asymptomatic.” Id. And third, the class action presents a “novel issue [that] pertains to the timing of plaintiffs’ claims and the related issue of claim preclusion.” Id. “Typically, toxic tort exposure cases put the plaintiffs on the horns of a dilemma. If they bring a claim when they are aware of their exposure – assuming the standing issues are resolved – they take the risk that they cannot recover if they develop cancer in the future under the ‘single controversy rule.’ If they wait until they develop cancer to bring a claim, the statute of limitations will have expired because they knew of the risks at an earlier time.” Id. Here, plaintiffs argued that this dilemma was avoided because “The statute of limitations should run from the date that plaintiffs develop subcellular changes that substantially increase their risk of cancer and where that increase triggers a medically-accepted form of screening.” Id., at 4.

The district court noted that, in light of these novel issues, it certified two questions to the Supreme Judicial Court of Massachusetts: “(1) Does the plaintiffs’ suit for medical monitoring, based on the subclinical effects of exposure to cigarette smoke and increased risk of lung cancer, state a cognizable claim and/or permit a remedy under Massachusetts state law? (2) If the plaintiffs have successfully stated a claim or claims, has the statute of limitations governing those claims expired?” Donovan, at 4. In a unanimous opinion, the Supreme Judicial Court answered “yes” to the first question, and “no” to the second. Id.; see Donovan v. Philip Morris, 914 N.E.2d 891, 894-95 (Mass. 2009). The federal court summarized that opinion at pages 4 and 5 as follows:

On the first question, the court held that subclinical effects on lung tissue constituted a legally cognizable injury on which plaintiffs’ medical monitoring claim could be based and outlined what comprised proof of such a claim. On the second question, the court held that the statute of limitations began to run only after the plaintiffs suffered “physiological change[s] resulting in a substantial increase in the risk of cancer” due to their smoking and “that increase, under the standard of care, triggers the need for available diagnostic testing . . .” Id. at 903. Finally, the Supreme Judicial Court held that there would be no claim preclusion under the “single controversy rule.” Litigation of the plaintiffs’ medical monitoring claim in this action would not preclude a future action for damages if plaintiffs eventually contract lung cancer.

Armed with the Supreme Judicial Court’s decision on the novel issues presented by the class action certification motion, the federal court granted class action treatment under both Rule 23(b)(2) and Rule 23(b)(3) to plaintiffs’ unfair trade practices and implied warranty claims, but denied class action treatment as to plaintiffs’ negligence claim. Donovan, at 6. Moreover, in light of Seventh Amendment concerns, the federal court held that the class action would proceed as a jury trial. Id.

© 2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved.

About the Author:

Michael J. Hassen is a Litigation Partner at Jeffer Mangels Butler & Mitchell LLP with more than 23 years experience in general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition. 415-984-9666 / www.jmbm.com

Wal-Mart Class Action Defense Cases–Dukes v. Wal-Mart : Ninth Circuit Court Affirms Class Action Certification Of Largest Labor Law Class Action In U.S. History

The National Law Review’s Featured Guest Blogger Michael J. Hassen of Jeffer, Mangels, Butler & Mitchell LLP discusses the recent California Employment Class Action cases involving WalMart’s female employees.  

Labor Law Class Action Alleging Wal-Mart Discriminates Against Female Employees in Violation of Title VII of the Civil Rights Act of 1964 Properly Certified As Nationwide Class Action by District Court Ninth Circuit Holds

Plaintiffs filed a class action against Wal-Mart alleging violations of Title VII of the Civil Rights Act of 1964; specifically, the class action complaint alleged that Wal-Mart discriminates against its female employees. Dukes v. Wal-Mart Stores, Inc., ___ F.3d ___ (9th Cir. April 26, 2010) [Slip Opn., at 6137, 6146]. According to the allegations underlying the class action complaint (originally filed in 2004), Wal-Mart discriminated against women employees in violation of Title VII of the 1964 Civil Rights Act because “women employed in Wal-Mart stores: (1) are paid less than men in comparable positions, despite having higher performance ratings and greater seniority; and (2) receive fewer—and wait longer for—promotions to in-store management positions than men.” Id., at 6147. The class action complaint sought to represent a nationwide class on the grounds “that Wal-Mart’s strong, centralized structure fosters or facilitates gender stereotyping and discrimination, that the policies and practices underlying this discriminatory treatment are consistent throughout Wal-Mart stores, and that this discrimination is common to all women who work or have worked in Wal-Mart stores.” Id. The proposed class included “women employed in a range of Wal-Mart positions, from part-time entry-level hourly employees to salaried managers.” Id. Plaintiffs’ counsel moved the district court to certify the litigation as a class action, defined as “All women employed at any Wal-Mart domestic retail store at any time since December 26, 1998 who have been or may be subjected to Wal-Mart’s challenged pay and management track promotions policies and practices.” Id., at 6148. Defense attorneys opposed class certification and stressed that the proposed class would consist of as many as 1.5 million current and former employees who worked at 3,400 stores in 41 regions. Id., at 6148 and n.3. The district court granted the motion and certified the litigation as a class action, id., at 6146-47. The Ninth Circuit affirmed. The Circuit Court opinion is quite lengthy, so we simply “hit the highlights” in this article. Defense attorneys may contact the author of the Blog for a more detailed discussion of the case.

The Ninth Circuit spent a considerable amount of time discussing the standard governing district court consideration of class certification under Rule 23 and clarified the “proper standard of Rule 23 adjudication.” See Dukes, at 6149-83. This analysis includes a discussion, and rejection, of the dissent’s “significant proof” standard. See id., at 6177-83. The Circuit Court then turned to the merits of the Rule 23 analysis, beginning with Rule 23(a)(1)’s numerosity requirement, which was not contested given the enormous size of the class. Id., at 6185. The Court also found that Wal-Mart had not waived its right to object to Rule 23(a)(3)’s typicality requirement, see id., at 6209-10, but concluded that the district court did not err in finding that the named-plaintiffs’ claims were sufficiently typical of those of the class: “Even though individual employees in different stores with different managers may have received different levels of pay or may have been denied promotion or promoted at different rates, because the discrimination they claim to have suffered occurred through alleged common practices—e.g., excessively subjective decision making in a corporate culture of uniformity and gender stereotyping—the district court did not abuse its discretion by finding that their claims are sufficiently typical to satisfy Rule 23(a)(3).” Id., at 6210. Moreover, “because all female employees faced the same alleged discrimination, the lack of a class representative for each management category does not undermine Plaintiffs’ certification goal.” Id., at 6211. And the Ninth Circuit found no difficulty in finding that the adequacy of representation test in Rule 23(a)(4) had been met. Id., at 6212.

The Circuit Court spent the vast majority of its time discussing Rule 23(a)(2)’s commonality test. See Dukes, at 6186-6209. The district court found that this test had been met: “Plaintiffs have exceeded the permissive and minimal burden of establishing commonality by providing: (1) significant evidence of company-wide corporate practices and policies, which include (a) excessive subjectivity in personnel decisions, (b) gender stereotyping, and (c) maintenance of a strong corporate culture; (2) statistical evidence of gender disparities caused by discrimination; and (3) anecdotal evidence of gender bias. Together, this evidence raises an inference that Wal-Mart engages in discriminatory practices in compensation and promotion that affect all plaintiffs in a common manner.” Id., at 6186-87 (citation omitted). The Ninth Circuit agreed, id., at 6287. Despite the wide-ranging nature of the class, the Court held that there was sufficient evidence of a common policy of discrimination, see id., at 6187-6207. The Circuit Court also found that the district court did not err in finding “substantial evidence suggesting common pay and promotion policies among Wal-Mart’s many stores” and that “Wal-Mart’s decision to permit its managers to utilize subjectivity in interpreting those policies offers additional support for a commonality finding.” Id., at 6207. Thus, the Court concluded at page 6209:

Plaintiffs’ factual evidence, expert opinions, statistical evidence, and anecdotal evidence provide sufficient support to raise the common question whether Wal-Mart’s female employees nationwide were subjected to a single set of corporate policies (not merely a number of independent discriminatory acts) that may have worked to unlawfully discriminate against them in violation of Title VII. Evidence of Wal-Mart’s subjective decision-making policies suggests a common legal or factual question regarding whether Wal-Mart’s policies or practices are discriminatory.

Finally, “Plaintiffs moved to certify the class under Rule 23(b)(2), which requires showing that ‘the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief . . . is appropriate respecting the class as a whole.’” Dukes, at 6214. The Circuit Court recognized that a (b)(2) class was inappropriate if the primary relief sought by the class action complaint is monetary. Id., at 6214-15. The Ninth Circuit previously had adopted “a test that focuses on the plaintiffs’ subjective intent in bringing a lawsuit.” Id., at 6215. But the Court now reversed that position and adopted an entirely new standard, set forth at page 6217 as follows:

Rule 23(b)(2) certification is not appropriate where monetary relief is “predominant” over injunctive relief or declaratory relief. To determine whether monetary relief predominates, a district court should consider, on a case-by-case basis, the objective “effect of the relief sought” on the litigation. [Citation.] Factors such as whether the monetary relief sought determines the key procedures that will be used, whether it introduces new and significant legal and factual issues, whether it requires individualized hearings, and whether its size and nature—as measured by recovery per class member—raise particular due process and manageability concerns would all be relevant, though no single factor would be determinative.

The Court then concluded: “Under this standard…, the district court’s decision to include claims for back pay in a class certified under Rule 23(b)(2) was not an abuse of its discretion. On the other hand, the district court did abuse its discretion by failing to analyze whether certifying Plaintiffs’ punitive damages claims under Rule 23(b)(2) caused monetary damages to predominate, notwithstanding its decision to require notice and an opportunity for Plaintiffs to opt-out of the punitive damages claims.” Dukes, at 6217. Thus, the Ninth Circuit reversed and remanded the matter to the district court for further consideration of the punitive damage relief claim. Additionally, the Circuit Court agreed with Wal-Mart that (b)(2) class may not be proper as to employees who no longer worked for Wal-Mart at the time the class action was filed because those individuals “do not have standing to pursue injunctive or declaratory relief.” Id., at 6228. Wal-Mart argued that since former employees lacked standing to seek injunctive relief, monetary relief would predominate for those class members. Id. But while the Court reversed the district court order to the extent it included former employees in the (b)(2) class, it remanded the matter for further consideration as to whether a (b)(3) class could be certified for such individuals noting, “The district court may, in its discretion, certify a separate Rule 23(b)(3) class of former employees for back pay and punitive damages.” Id., at 6229. Accordingly, the Court affirmed in part and reversed in part. Id., at 6236-37.

Judge Graber filed a brief concurring opinion to stress the “unremarkable” nature of the Court’s holding: “The majority and the dissent have written scholarly and complete explanations of their positions. What the length of their opinions may mask is the simplicity of the majority’s unremarkable holding: [¶] Current female employees may maintain a Rule 23(b)(2) class action against their employer, seeking injunctive and declaratory relief and back pay on behalf of all the current female employees, when they challenge as discriminatory the effects of their employer’s company-wide policies. [¶] If the employer had 500 female employees, I doubt that any of my colleagues would question the certification of such a class. Certification does not become an abuse of discretion merely because the class has 500,000 members.” See Dukes, at 6237-38.

NOTE: Judge Ikuta dissented, joined by Chief Judge Kozinski and Judges Rymer, Silverman and Bea. See Dukes, at 6238-6279. The dissent argued that “the district court abused its discretion in two ways. First, it failed to follow the Supreme Court’s direction to ‘evaluate carefully the legitimacy of the named plaintiff’s plea that he is a proper class representative under Rule 23(a),’ [citation], and to ensure ‘after a rigorous analysis’ that the prerequisites of Rule 23(a) have been met, [citation]. Second, the district court erred in ignoring Wal-Mart’s statutory right to raise defenses to liability for back pay and punitive damages under Title VII, see 42 U.S.C. § 2000e- 5(g)(2); Rules Enabling Act, 28 U.S.C. § 2072(b), and therefore abused its discretion in holding that the proposed class could be certified under Rule 23(b)(2).” Dukes, at 6243.

Chief Judge Kozinski joined the dissent and added the following concise explanation: “Maybe there’d be no difference between 500 employees and 500,000 employees if they all had similar jobs, worked at the same half-billion square foot store and were supervised by the same managers. But the half-million members of the majority’s approved class held a multitude of jobs, at different levels of Wal-Mart’s hierarchy, for variable lengths of time, in 3,400 stores, sprinkled across 50 states, with a kaleidoscope of supervisors (male and female), subject to a variety of regional policies that all differed depending on each class member’s job, location and period of employment. Some thrived while others did poorly. They have little in common but their sex and this lawsuit. [¶] I therefore join fully Judge Ikuta’s dissent.” Dukes, at 6279.

© 2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved.

About the Author:

Michael J. Hassen is a Litigation Partner at Jeffer Mangels Butler & Mitchell LLP with more than 23 years experience in general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition.  415-984-9666 / www.jmbm.com


Cy Pres Class Action Defense Cases–In re American Tower: Massachusetts Federal Court Rejects Request To Distribute Class Action Settlement Cy Pres Funds To Non-Profit Organization

First of a series of daily guest blog spots from the National Law Review’s featured blogger Michael J. Hassen of  Jeffer, Mangels, Butler & Mitchell LLP.  Michael Hassan authors  JMBM’s Class Action Defense Blog.

Distribution of Unclaimed Class Action Settlement Funds to Non-Profit Organization Unconnected to Harm Suffered by Class Members Inappropriate Massachusetts Federal Court Holds

Plaintiff filed a putative class action against American Tower Corp. alleging violations of federal securities laws and purported to be brought on behalf of “members of the public who were harmed by the securities fraud.” In re American Tower Corp. Securities Litig., 648 F.Supp.2d 223, 224-25 (D.Mass. 2010). Eventually, the parties negotiated a settlement of the class action which provided for the distribution of unclaimed funds through a cy pres fund. Id., at 224. Lead Plaintiff moved the district court for authorization to distribute the cy pres funds “to The Peggy Browning Fund, a private, nonsectarian, not-for-profit organization with 501(c)(3) tax-deductible status.” Id. The federal court denied the motion because plaintiff sought “to disburse settlement funds to a non-profit organization with little connection to the harms class members suffered,” id. Because the author has received numerous inquiries from defense and plaintiff counsel concerning the proper scope of a cy pres fund, we include this article on the district court’s ruling.

The district court noted that the proper inquiry was to “determine whether the Peggy Browning Fund is an appropriate recipient of any residual settlement funds” of the class action settlement. In re American Tower Corp., at 224. The court explained that the purpose of the use of a cy pres fund is effect a distribution of class action settlement funds “to a ‘next-best’ recipient” when it is impractical to distribute the settlement funds to the class members. Id., at 224-25 (citing In re Airline Ticket Commission Antitrust Litig., 268 F.3d 619, 626 (8th Cir.2001)). “‘In such cases, the court, guided by the parties’ original purpose, directs that the unclaimed funds be distributed for the prospective benefit of the class.’” Id. (citation omitted). The federal court easily concluded, then, that the Peggy Browning Fund was “an inappropriate recipient of any unclaimed class funds.” Id. “Disbursement of unclaimed funds must have some relationship to the harm suffered by class members…. However, the Peggy Browning Fund focuses on labor issues…. Therefore, it does not appear that funds donated to the Peggy Browning Fund would benefit the class or address the harms suffered by class members.” Id. (italics added). The district court therefore denied the motion, without prejudice to Lead Plaintiff renewing the request and noting that Lead Plaintiff “should, if possible, propose a national organization whose work relates to the harm suffered by class members in this case.” Id.

NOTE: The author notes that trial courts are far too willing to authorize the distribution of cy pres funds to practically any organization. In such cases, the courts appear to be more interested in punishing the defendant than in effecting a distribution of funds to the “next-best” recipient.

© 2010 Jeffer Mangels Butler & Mitchell LLP. All rights reserved.

About the Author:

Michael J. Hassen is a Litigation Partner at Jeffer Mangels Butler & Mitchell LLP with more than 23 years experience in general business and commercial litigation, including class action defense and matters involving intellectual property, securities and unfair competition.  415-984-9666 /www.jmbm.com

Protecting Tax Documents after United States v. Deloitte

This week’s National Law Review featured blogger is Matthew D. Lerner of Steptoe & Johnson LLP who provides some great tips on how to manage tax documents to best prepare for legal action. 

A recent appeals court decision provides the latest development in the ongoing battle between taxpayers and the IRS regarding the disclosure of tax workpapers.  It also provides hope that work product protections may still be available for litigation analyses that a company’s attest auditors review in preparing financial statements.[i] Typically, taxpayers claim that certain workpapers are protected by the work product doctrine because they contain analysis of potential tax issues raised by transactions in anticipation of future litigation with the IRS over those issues.  The IRS asserts that these workpapers are used to prepare financial statements and should not be subject to protection either because they are not prepared in anticipation of litigation or because they are disclosed to third party auditors, thus waiving any protection.

On June 29, 2010, the D.C. Circuit became the latest court to address this controversy in a matter that involved documents prepared by, or in the possession of, the accounting firm Deloitte LLP (then known as Deloitte & Touche LLP) (“Deloitte”).  In this case, the United States sought to compel Deloitte to produce two categories of documents related to a civil tax refund case brought by partnerships formed by subsidiaries of the Dow Chemical Company (“Dow”) (the partnerships are referred to as the Chemtech partnerships or “Chemtech”).   The first category included three documents Deloitte withheld on the basis of privileges asserted by Dow, including (i) a June 2005 tax opinion related to Chemtech; (ii) a September 1998 legal and tax analysis provided to Deloitte by an in-house attorney at Dow; and (iii) a July 1993 internal Deloitte memorandum recording thoughts and impressions of Dow’s attorneys concerning tax issues related to Chemtech.  The second category of documents included all responsive documents maintained at Deloitte’s affiliate in Zurich, Switzerland ( “Deloitte Switzerland”).

At the trial court level, the District Court for the District of Columbia held that the three documents in the first category were protected from disclosure by the work product doctrine because they were prepared in anticipation of future litigation over the tax treatment of Chemtech.[2]  The court held that the protection was not waived by disclosure to Deloitte because Deloitte, as Dow’s independent auditor, was not a potential adversary, and no evidence suggested that it was unreasonable for Dow to expect Deloitte to maintain confidentiality.

The trial court also denied the motion to compel with respect to the second category of documents.  The court held that Deloitte did not have sufficient control over the documents maintained at Deloitte Switzerland to enable their production.  The court stated that the government failed to establish that Deloitte had the “legal right, authority or ability to obtain documents upon demand” from Deloitte Switzerland.  The court determined, “Close cooperation on a specific project does not per se, establish an ability, let alone a legal right or authority, on [Deloitte’s] part to acquire documents maintained solely by a legally distinct entity.”

The United States appealed the District Court’s decision with respect to the three documents in the first category withheld by Deloitte: (i) the June 2005 tax opinion related to Chemtech; (ii) the September 1998 legal and tax analysis provided by an in-house attorney at Dow; and (iii) the July 1993 internal Deloitte memorandum recording thoughts and impressions of Dow’s attorneys concerning tax issues related to Chemtech.[3]

The government argued that the 1993 internal Deloitte memorandum was not work product because (i) it was prepared by Deloitte, not Dow or Dow’s counsel; and (ii) it was generated as part of the audit process, not in anticipation of litigation.  The D.C. Circuit rejected the government’s categorical arguments with respect to the first document prepared by Deloitte.  The court stated that Deloitte’s preparation of the document does not exclude the possibility that it contains Dow’s work product.  The court also stated that a document can contain protected work product material even though it serves multiple purposes, so long as the protected material was prepared because of the prospect of litigation.  However, the court determined that the District Court did not have a sufficient evidentiary foundation for its holding that the Deloitte memorandum was purely work product.  The court therefore remanded so that the District Court could conduct an in camera review of the document and determine whether it was entirely work product, or whether a partial or redacted version of the document could be disclosed.

The government also argued that the other two documents were not protected from disclosure because Dow waived work product protection by disclosing the documents to Deloitte. The D.C. Circuit rejected this argument and concluded that (i) Deloitte was not a potential adversary with respect to the litigation that the documents address and (ii) Deloitte was not a conduit to potential adversaries because Dow had a reasonable expectation of privacy as a result of Deloitte’s obligation to refrain from disclosing confidential information.

The Appeals court decision makes clear that some documents that become part of the tax audit workpapers do retain work product protection, even if disclosed to financial auditors to assist in the preparation of financial statements.  However, it is also evident from this decision that such work product claims will likely continue to be challenged by the IRS and heavily scrutinized by the courts.  Accordingly, it is imperative that taxpayers take as many precautions as possible to preserve work product protection, as well as attorney-client privilege, with respect to sensitive analysis contained in tax workpapers. 

Taxpayers must understand that proving work product generally involves common sense.  One trying to prove that a document was prepared in anticipation of litigation should ask herself what steps would indicate to a court that litigation truly was expected and this document was prepared for that purpose.  What follows is a series of suggestions to help preserve such protection to the extent possible. 

1.  Get Counsel Involved.

To preserve privilege, be certain to include counsel meaningfully in communications regarding legal issues, and document counsel’s substantive role in these communications.  While an attorney’s involvement is not legally required to make something work product in most jurisdictions, as an evidentiary matter, it helps to establish an anticipation of litigation and indicates that an issue is being treated as more than just an item for audit.  Coordinate with the company’s General Counsel with respect to sensitive tax documents to avoid waiver of work product with respect to those documents through disclosure in other litigation.   At the same time, be careful to avoid asserting inappropriate claims of protection on documents.  An inappropriate claim of privilege risks waiver of privilege with respect to documents that otherwise would be privileged with respect to the same issue.  Inappropriate privilege claims can also damage your credibility and result in higher tensions and increased controversy over what should be “routine” privilege claims.

2.  Formalize a Tax Litigation Group.

Creating a formal tax litigation group within the company can help to identify tax controversy matters more clearly and separate issues that are anticipated to result in litigation.  Such a group should advise the company on the conduct of tax controversies and litigation.  In this primary role, the group should give advice to the company regarding whether and how to proceed in litigation, whether to settle, and what settlement terms to propose or accept.   Secondarily, the company may use the group’s hazards-of-litigation advice in establishing financial statement tax reserves.

It is preferable that the group’s leader be an attorney responsible for managing tax litigation and have at least a dotted line reporting relationship to the law department (to enjoy a presumption that the attorney-client privilege applies as well).  The group should exclude the persons whose responsibilities are solely the preparation of financial statements.

This does not require hiring new personnel or re-assigning people to a new tax controversy position.  The group may be composed of people with other job responsibilities.  It is really a “part-time” committee of people with related roles.  The key is that decisions about which matters litigation may be expected for come in the setting of this separate group’s meetings or consideration, that the group members separately perform this function, and that they document their conclusions and clearly identify issues for which more than a mere audit is expected.  In the group’s analyses, it must be careful not to suggest that the company believes its position is wrong and that is why litigation is expected.  Document only that the IRS, given its policies and positions, is expected to challenge the company on the issue and the company intends to fight.[4]

 3.  Control Who Creates Documents.

If the company has a tax litigation group, sensitive analysis of tax issues should be confined to documents created at the direction of, and under the control and supervision of, the group’s leader.  If not, they should be prepared by someone with a key role and responsibilities regarding tax controversy decisions.  Such documents should indicate that they are prepared by attorneys or tax practitioners and that they are prepared at the request of the group leader for litigation purposes.  Take care not to attach these labels to other documents or that label will cease to have meaning and potentially be used to argue that a waiver of privilege or work product protection has occurred with respect to other documents.  Do not combine these work product analyses with non-work product discussions.

4.  Create Only Defined Types of Documents.

Categorizing your documents and establishing guidelines for what types of analysis should be included in each category can help confine sensitive legal analysis to litigation-oriented documents that are most entitled to privilege and work product protection.  When creating documents, separate legal analysis from non-privileged information, including: (i) business advice; (ii) tax reserve numbers and calculations; and (iii) other advice not intended to remain confidential.   Create specific documents for disclosure outside the group that are limited to only hazards-of-litigation percentages and only aggregate reserve information.[5] 

5.  Control How Documents Are Labeled

Documents should be labeled, as appropriate, to state that they contain confidential legal advice, subject to privilege and protected by the work product doctrine.  While not legally required, attaching a work product label to a document intended as such provides evidence of the company’s intent with respect to that document.  Likewise, be careful not to label business advice, tax return advice, or other advice not intended to be confidential, as privileged or protected.  If one overuses labels, the labels lose credibility even when properly attached, and may be ignored by a court in its analysis.  At the same time, also take care not to label documents containing legal analysis and advice as documents that relate to tax reserve analysis or tax contingency analysis.

6.  Control Access to Documents Inside the Company

The wider the distribution of a document, the more likely it is that a court will find there has been a waiver with respect to attorney-client privilege or work product protection.  Because one of the indicia of privilege or work product is the care with which a document is handled, common sense dictates that a court will look askance at claims for protection of documents that were made widely available within the company to people whose jobs did not require their access to those materials.  Accordingly, only disclose legal documents with respect to an issue to other employees/officers on a need-to-know basis.  Also, to the extent possible, try to avoid “broadcast” emails and limit email “chains” related to documents.  Each e-mail and response to an e-mail generates a copy of the document and increases the risk of waiver.  When storing documents, separate and clearly mark legal documents.  This not only protects against waiver, but can demonstrate intent to keep the information confidential.  Keep in mind that no protections attach to business advice documents, so store business documents in a separate location from the legal documents.

 7.  Enact and Follow Policies to Identify Anticipated Litigation

It is critical to prove that litigation was anticipated with respect to an issue in order to establish work product protection for documents that contain analysis of that issue.  General litigation policies can be used effectively as “designation” tools to identify issues for which litigation is anticipated clearly.  For example, make use of document hold requests to communicate that litigation is anticipated.  Consider formal guidelines that certain counsel must be involved in issues expected to result in litigation, and then include such counsel only when litigation is expected.  When enacting such general policies, be cognizant of the fact that the presence of a general policy and the absence of its application in a specific case can create a negative inference.  Thus, if a company has a general policy that documents related to issues for which litigation is anticipated are made subject to a litigation hold, then the absence of a litigation hold with respect to documents related to another issue may be used to demonstrate that litigation was not anticipated with respect to that issue.[6]  As a result, the tax department must apply a litigation hold to those documents relating to any issue for which the company is claiming to anticipate litigation Likewise, if company policy dictates that the General Counsel must approve litigation-related decisions (e.g. budget, choice of counsel), be sure those policies are followed for potential tax litigation.

8.  Work With Your Auditors and Other Third Parties to Protect Work Product

Interactions with auditors and other third parties create significant risks that material that would otherwise be subject to privilege or work product protection will lose that protection as a result of waiver.  Accordingly, take steps to work with your auditors and other third parties to develop a good relationship and preserve protection where possible. 

For example, many times accountants are hired not as auditors but to provide specific support in connection with a tax issue.  In those instances, enter into written agreements through counsel with third-party consultants to whom you wish to disclose privileged information (e.g., so-called Kovel arrangements), so that their work is performed under the direction and control of counsel.  Such a step makes the assertion of attorney-client privilege possible for communications with the consultant, and provides strong evidence of the anticipation of litigation.  Be aware of the potential limitations of the accountant-client privilege, particularly when considering whether to disclose sensitive documents in the context of the preparation of an opinion letter.  Request that your attest auditors’ engagement letter include a specific confirmation that those accountants must and will maintain confidentiality of your documents to the fullest extent allowed by law.  It may also be helpful to have the engagement letter acknowledge that the relationship between company and auditor is non-adversarial and the two expect to work together cooperatively. Where possible, have auditors review key documents but not take copies.  While that has no direct, legal effect on whether a protection is actually waived, it can bolster a claim that you took all possible steps to avoid wider dissemination by keeping control of the actual document, which is a key element of proving work product protection should apply.  Ask that your auditors specifically note when a conclusion in their workpapers was derived from documents prepared by the company as litigation analyses.  Finally, do not prepare separate documents directly for the auditors that discuss litigation analysis.  While a decision regarding work product should be based on the purpose for which the underlying analysis was prepared, not the specific documents, the recent decisions suggest that it is easier to preserve work product protection when the document itself was prepared for the purpose of litigation.

9.  Negotiate Disclosures with the IRS

After taking some or all of the above steps above to preserve protection of documents, take steps to prevent inadvertent disclosure to the IRS of protected documents.  Require approval of the group’s leader before documents are disclosed to the Service or establish some other formal screening process to prevent disclosures that could result in a waiver of privilege.  When withholding documents subject to protection, prepare a detailed privilege log, stating the specific grounds that support the claim for privilege and protection of each document withheld.

It is inevitable that there will be disagreements about the scope of protection afforded specific documents.  Try to manage the disclosure process to minimize the scope and intensity of these disagreements.  Be candid with the IRS about your concerns, try to get overbroad demands for protected materials scaled back, work quickly to provide responsive, non-protected materials, and be reasonable about the scope of your privilege claims.  Doing this can help establish a cooperative relationship with the IRS and focus the controversy, if any, on the most protected documents. Likewise, consider disclosing the least confidential documents to the Service.  For example, disclose to the Service those documents that contain no legal analysis or advice.  Where there is protected material the IRS really wants that the company is willing to disclose, attempt to negotiate a written agreement that the disclosure of that document will not waive privilege or work product protection more broadly.  If, after all this, controversy about a protection still arises, the fact of your cooperation and efforts to comply as much as possible may influence either the IRS’s decision to seek the documents through judicial proceedings, or the judge’s view of the matter.  Force the IRS to determine whether it wishes to press the issue against a taxpayer that has cooperated, but that has taken careful steps to create and maintain confidential documents.

The confines of the work product doctrine in the tax context are still being defined.  These suggested steps will help you best position your company to obtain the maximum protection.  As you consider the creation of materials, ask yourself “does this step help show that we really did anticipate litigation and that this document was created for that purpose.”   That is what a court may be called on to determine, and you want the record to demonstrate that the answer is yes.

[1] This is important because the review of such documents by third party auditors waives attorney-client privilege, the other common protection for sensitive materials.

[2] United States v. Deloitte, Case No. 08-411 (D. D.C. June 8, 2009).

[3] United States v. Deloitte, No. 09-5171, (D.C. Cir. June 29, 2010)

[4] Although not free from doubt, it is generally believed that the expectation of having an issue be unagreed and go to IRS Appeals is sufficient to show “an expectation of litigation.”

[5] Understand that there is a tension between protecting the attorney-client privilege and the work product protection.  Providing your accountant with a privileged document prepared in anticipation of litigation may result in a broad attorney-client privilege waiver, but it is more likely the document will be viewed as work product than a document drafted especially for the auditor.  Given the broad scope of auditors’ need for information and the fact that the document prepared for an auditor likely reveals privileged communications anyway and thus waives attorney-client privilege, many companies are placing more of their eggs in the work product basket.   

[6] A litigation hold consists of formal notification of the likelihood of litigation to personnel whose files may contain relevant information, and the implementation of document preservation steps to make certain those materials are not discarded.

© 2010 STEPTOE & JOHNSON LLP, ALL RIGHTS RESERVED

About the Author:

Matthew D. Lerner is a partner in the Washington-based law firm of Steptoe & Johnson LLP, where he is a member of the Litigation and Business Solutions Departments. He represents both corporations and high net worth individuals involved in tax controversies, from pre-audit advice about transaction documentation, file organization and privilege protection, to representation during IRS audits and appeals, through litigation in the Federal Courts. His experience is broad and includes cases involving repair and rehabilitation expenses, asset classification for depreciation purposes, losses from trading in securities and derivatives, corporate restructuring, domestic production activities, international intercorporate transactions, foreign tax credits, tax accounting method questions, and valuation issues. Matt also advises clients facing legal and public relations crises, coordinating responses to congressional inquiries, criminal investigations, civil litigation, public relations scrutiny, and agency review. 

Matt received his J.D. from Harvard Law School, magna cum laude, and was editor of Harvard Law Review. He received his A.B. from Amherst College, Phi Beta Kappa. 202-429-8024 /  www.Steptoe.com