Category: Litigation

The Empire Strikes Back — Did the DOJ Hack the Colonial Pipeline Hackers?

Now we are in no way confusing the cyber-criminal enterprise DarkSide with the plucky light-side rebels from Star Wars, but it appears the United States Department of Justice seized 63.7 bitcoins, worth $2.3 million, paid to cyber-criminal enterprise DarkSide following the May 7 ransomware attack against Colonial Pipeline. The attack resulted in a highly publicized, brief shutdown of the company’s pipeline infrastructure, which transports approximately 45% of the oil consumed on the U.S. East Coast, and which took days to resolve and create widespread gasoline shortages in some parts of the country. The seizure was coordinated through the DOJ’s recently created Ransomware and Digital Extortion Task Force, which was created to address increasing ransomware and digital extortion attacks again U.S. businesses.

The story is big news because ransoms are rarely recovered.  Typically, the victim of a ransomware attack transfers the ransom to hackers, who then transfer the funds to hundreds of other wallets and the funds are essentially gone forever.  Even if the payments can be tracked to accounts, what is even more rare is the ability to unlock those accounts.  So the question on everyone’s mind is how did the DOJ unlock the account holding the ransom?

According to documents filed in the U.S. District Court for the Northern District of California, Colonial Pipeline provided investigators with the bitcoin address of the hackers it paid on May 8.  The hackers then moved the funds through at least six more addresses by the next day.  On May 13, DarkSide told affiliates that its servers and other infrastructure had been seized, but did not provide any details.  On May 27, the FBI seized 63.7 bitcoins traced to the Colonial ransom, when it  landed at a final address.  Impressive.

So how did the FBI get the private encryption key?  The FBI disclosed in its application for a warrant that it had the private encryption key for that bitcoin address.  The FBI has not, however, disclosed how it obtained the encryption key.  There are a few possibilities.  First, it is possible someone close to the attack tipped off the FBI.  Second, the attackers may have been careless.  The FBI noted that they had been investigating DarkSide since last year.  It is possible the FBI got access to communications that may have provided clues to the private key or access to a private server holding information about the private key.  Third, the FBI may have received assistance from the cryptocurrency exchange where the bitcoin had been moving from account to account.  Fourth, the FBI could have hacked the key on its own.  The most likely scenario is that the attackers were careless, and the FBI was able to capitalize on their carelessness to uncover the private encryption key.

The good news for the crypto community is that law enforcement was able to track down and recover much of the bitcoin.  Contrary to the perception that cryptocurrency is untraceable, it appears the public blockchain made it easier in this case to track and recover the ransom than it would have been if the ransom was paid in fiat.  We may never know how the FBI unlocked the private encryption key in this case, but if the DOJ is successful in recovering future ransom payments, it may shed some additional light on this case and others.

Copyright ©2021 Nelson Mullins Riley & Scarborough LLP
For more articles on the Colonial Pipeline hack, visit the NLR Communications, Media & Internet section.

Countdown to TransUnion—How Will SCOTUS Come Out on Key Standing Issues for Data Privacy Litigations?

Data privacy litigators have their eye on the Supreme Court going into the end of the month as we wait for the Court’s opinion in Ramirez v. TransUnion.  And when the decision is issued, CPW will be there in real time to fill you in.  In the meantime, below is a refresher of the facts and issues raised in Ramirez, and why it is a must-watch decision for the end of the Supreme Court’s current term.

As readers of CPW already know, Article III limits federal court jurisdiction to actual “cases or controversies.”  U.S. Const. Art. III, § 2.  The Supreme Court has held that standing “is an essential and unchanging part of the case-or-controversy requirement of Article III.”  This includes the following three elements, which constitute the “irreducible constitutional minimum of standing”:

First, the plaintiff must have suffered an “injury in fact”—an invasion of a legally protected interest which is (a) concrete and particularized … and (b) actual or imminent not conjectural or hypothetical … Second, there must be a causal connection between the injury and the conduct complained of … Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

As relevant for Ramirez, in 2016, the Supreme Court decided Spokeo, Inc. v. Robins, 136 S. Ct. 1540.  In Spokeo, the Court affirmed that a plaintiff cannot “allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.”  (emphasis added).  The Supreme Court’s analysis emphasized that “[a] ‘concrete’ injury must be ‘de facto’; that is, it must actually exist.”  Id. (emphasis in original).

Which brings us to Ramirez.  The plaintiff alleged that he had difficulty obtaining credit, was embarrassed in front of family members, and canceled a vacation after a car dealer received a credit report indicating that his name matched a name on a government “terrorist list” of persons with whom U.S. businesses may not transact.  In response, Ramirez filed a class action alleging three violations of the Fair Credit Reporting Act (“FCRA”), two concerning the mode of providing consumers with a copy of their own credit file and one concerning the procedural requirements for furnishing an accurate credit report.

Ramirez sought to represent a class of thousands of individuals, the vast majority of whom (more than 75%) never had a credit report disseminated to any third party, let alone suffered a denial of credit or other injury anything like what he experienced.  The trial court nonetheless let the class proceed on the theory that the absent class members all suffered an Article III injury and that the vast differences between the experiences of the named plaintiff and the class he purported to represent were immaterial.  Ramirez ultimately obtained a multi-million dollar jury verdict against the credit reporting agency TransUnion for falsely flagging him and more than 8,100 other people as terrorists.

The Supreme Court granted cert for the question: “Whether either Article III or Rule 23 permits a damages class action where the vast majority of the class suffered no actual injury, let alone an injury anything like what the class representative suffered.”  (emphasis added).  TransUnion argued in its opening brief that Ramirez’s class definition includes individuals who suffered no injury because they never had a credit report disseminated to a third party with incorrect or misleading information.  TransUnion further asserted that simply alleging an FCRA violation and claiming statutory damages does not itself confer Article III standing.

At oral argument earlier this year, several members of the Court expressed skepticism about Ramirez’s standing argument if carried to its logical conclusion.  [For Kristin Bryan’s real time coverage of that oral argument, check it out here].  However, at this point it is an open-ended question as to whether the Court will rule in a way that curtails the availability of Article III standing in data privacy litigations going forward.  Suffice to say, depending on how the Court rules, the case could have a major impact on litigations brought under various federal and state data privacy statutes (not only the FCRA but also the Telephone Consumer Protection Act, the Illinois Biometric Information Privacy Act, among others) and for data event litigations where Article III standing is a frequently litigated issue.

© Copyright 2021 Squire Patton Boggs (US) LLP
For more articles on SCOTUS, visit the NLRLitigation / Trial Practice section.

Ancestry.com Prevails in Yearbook Database Class Action

This week, Ancestry.com Inc. prevailed in a class action which alleged that it misappropriated consumers’ images and violated their privacy by using such data to solicit and sell their services and products. The court granted Ancestry.com’s motion to dismiss the amended complaint with prejudice because the plaintiffs “did not cure the complaint’s deficiencies” after being granted leave to amend the first complaint.

As we previously wrote in November 2020, Ancestry.com was hit with a class action in the Northern District of California for “knowingly misappropriating the photographs, likenesses, names, and identities of Plaintiff and the class; knowingly using those photographs, likenesses, names, and identities for the commercial purpose of selling access to them in Ancestry products and services; and knowingly using those photographs, likenesses, names and identities to advertise, sell and solicit purchases of Ancestry services and products; without obtaining prior consent from Plaintiffs and the class.” In March 2021, the court dismissed the lawsuit based on lack of standing, but allowed the plaintiffs to amend and address the deficiencies. Although the plaintiffs added allegations of emotional harm, lost time, and theft of intellectual property, that didn’t sway the court. U.S. Magistrate Judge Laurel Beeler said that the new allegations “do not change the analysis in this court’s earlier order.” The court held that the plaintiffs still did not establish Article III standing because they had not alleged a concrete injury.

Additionally, the court noted that even if standing were established, Ancestry.com is immune from liability under the Communications Decency Act (CDA) because it is not a content creator. Magistrate Beeler said that Ancestry.com “obviously did not create the yearbooks [. . .] [i]nstead, it necessarily used information provided by another information content provider and is immune under [the CDA].”

Copyright © 2021 Robinson & Cole LLP. All rights reserved.
ARTICLE BY Kathryn M. Rattigan of Robinson & Cole LLP
For more articles on cybersecurity litigation, visit the NLR Litigation / Trial Practice section.

The Vatican Faces a Copyright Infringement Lawsuit

Street artist Alessia Babrow has sued the Vatican, alleging that the Philatelic and Numismatic Office of the Vatican City State copied her artwork without her permission and reprinted it as a stamp. The art was a painting of Jesus by nineteenth-century artist Heinrich Hofmann, to which Ms. Babrow had added the slogan “just use it.” Besides neglecting to request Ms. Babrow’s permission, the Vatican allegedly only credited Hofmann, and not Ms. Babrow, for the derivative work. Ms. Babrow is seeking approximately $160,000 in damages and reportedly turned down a private visit with the Pope in favor of continuing her lawsuit.

The remaining summaries of news headlines are separated by region for your browsing convenience.

 UNITED STATES

Graffiti Cleanup Effort Leads to VARA Lawsuit

Aerosol artist Michael McLeer a/k/a Kaves has sued the New York Police Department for painting over some of his outdoor artworks in New York City that he claims were made with full authorization of the property owner. One of the works that the NYPD allegedly painted over had been in place for 13 years. The lawsuit claims that the NYPD allegedly failed to inquire into the permitted status of the art prior to painting over it. Kaves has sued under the Visual Artists Rights Act (VARA), which has previously been used successfully to protect street art. The matter was filed before the federal court in Brooklyn, the same court in which the now-famous 5Pointz case involving destruction of street art originated.

Painting Stolen by Nazis Finds Home in Oklahoma

Camille Pissarro’s La Bergère Rentrant des Moutons (Shepherdess Bringing in Sheep) (1886) was the subject of an almost 10-year restitution saga led by Holocaust survivor Léone-Noëlle Meyer, whose parents were the lawful owners of the artwork when it was looted by the Nazis in 1941. The artwork was donated to the University of Oklahoma in 2000 by Clara Weitzenhoffer, a subsequent good faith purchaser for value. In 2016, Ms. Meyer reached a settlement with the University of Oklahoma, in accordance with which the artwork was to travel between the United States and France every three years. Ms. Meyer subsequently tried to invalidate the settlement, in part given the subsequent passage of the Holocaust Expropriated Art Recovery Act of 2016, which would have benefited her restitution efforts. After facing significant setbacks in her legal case, including fines for breaching the terms of the agreement, Ms. Meyers has discontinued her efforts to invalidate the 2016 settlement. Now, the painting will be on display on a rotating basis in France and at the University of Oklahoma.

Corita Kent’s Art Studio Granted Landmark Status, Escapes Demolition

Artist Corita Kent, a former Catholic nun who became a Pop artist and an activist, was inspired by Andy Warhol’s 1962 Ferus Gallery exhibition to address the pressing issues of racial and social injustice through art. Her studio in Los Angeles became a gathering spot in the 1960s for female activists. When the studio was slated to be razed and turned into a parking lot by the current property owner, the Corita Art Center called for the studio’s preservation, noting the shortage of cultural landmarks celebrating women’s heritage in Los Angeles (only 3 percent of the cultural monuments in Los Angeles represent women). The Los Angeles City Council agreed to grant landmark status to the studio.

EUROPE

Artists Who Sell Directly to Collectors Are Not “Art Market Participants” Under New UK Law

On June 10, a new anti‒money laundering regulation came into full force in the United Kingdom, under which art market participants (AMPs) who sell artworks for €10,000 or more must comply with the new regulations, including verification of clients’ identity, due diligence on each transaction and involved compliance programs. In a relief for artists, however, the UK Treasury recently announced that artists will not be considered AMPs and will therefore not need to comply with the new costly regulations. Welcome relief it may be, but too late for many artists who already undertook the expense to comply with the regulations.

Banksy’s Work May Not Be Protected by Either Copyright or Trademark

Famously anonymous street artist Banksy’s words, “copyright is for losers,” are coming back to haunt him as his representatives lose another trademark battle to protect one of his artworks against commercial exploitation by third parties. Pest Control Office Limited, the company that holds itself out as responsible for issuing certificates of authenticity for Banksy, filed a number of applications for trademark protection, in the United Kingdom and abroad for some of Banksy’s works. One such graphic trademark, consisting of Banksy’s image of a monkey wearing a sandwich board, was held invalid by the European Union Intellectual Property Office (EUIPO). The application for declaration of invalidity was brought by a greeting card company that had copied Banksy’s work for use in their greeting cards. The EUIPO cited Banksy’s explicit statements that the public is free to use any copyrighted work, as well as the artist’s elusive identity, making it difficult to protect his artworks under copyright laws, as factors in its decision. Similar applications to invalidate other trademarks of Banksy’s artworks are to be heard by EUIPO within the next month or so. The outcome is likely to be similar.

Oxford Classics Professor Accused of Selling Stolen Art to Hobby Lobby

Craft chain Hobby Lobby filed suit against an Oxford University professor of classics for allegedly selling Hobby Lobby $760,000 worth of stolen ancient Egypt art. According to the complaint, Hobby Lobby made many purchases of art from Dr. Obbink over the course of three years to include in Hobby Lobby’s planned Museum of the Bible, but the art it received had allegedly been stolen from Oxford University’s Sackler Library. Obbink had represented to Hobby Lobby that he was selling papyri that came from private collectors. Hobby Lobby has returned the art to Oxford.

© 2021 Wilson Elser

ARTICLE BY Jana S. Farmer and Sarah Fink of
Wilson Elser Moskowitz Edelman & Dicker LLP
For more articles on art law, visit the NLRIntellectual Property section.

U.S. Supreme Court Rejects Latest Challenge to ACA in 7-2 Ruling

On June 17, 2021, the U.S. Supreme Court rejected a long-anticipated challenge to the Patient Protection and Affordable Care Act, known as the “Affordable Care Act” (ACA). This was the third case in a trilogy of challenges to the ACA. See California et al. v. Texas et al., No. 19-840.

In a 7-2 decision, the Court held that the state of Texas (along with over a dozen states and two individuals) simply lacked standing to challenge the constitutionality of a statutory mandate with no consequences. Justices Alito and Gorsuch dissented, and Justice Coney Barrett joined the majority.

The Court did not reach the merits of the appeal, which concerned whether the individual mandate provision of the ACA, previously determined to be unconstitutional, may be severed from the rest of the law or whether the entire law must be struck down. Basically, the plaintiffs argued that if the individual mandate provision was unconstitutional, the entire ACA was unconstitutional.

Instead, the Court determined that the plaintiffs lacked standing, explaining that the plaintiffs could not demonstrate any actual injury traceable to the penalty for violating the individual mandate, which was established in 2017 at an amount of $0.

From its inception, the status of this case has been of concern to a wide variety of stakeholders in the health care industry. Beginning with the ruling by a federal district court in Texas that invalidated the ACA in its entirety, to the Fifth Circuit Court of Appeal’s ruling that only the individual mandate was unconstitutional while the rest of the ACA should remain intact, onlookers have eagerly anticipated the Supreme Court’s decision on this matter.

For now, the ACA remains the law of the land.

©2021 Greenberg Traurig, LLP. All rights reserved.
For more articles on the Supreme Court, visit the NLR Litigation / Trial Practice section.

Supreme Court: Philadelphia Ordinance Unconstitutionally Burdened Religious Exercise

The U.S. Supreme Court has found that Philadelphia’s ordinance requiring a private foster care agency to certify same-sex couples as foster parents burdened the agency’s religious exercise in violation of the Free Exercise Clause of the First Amendment. Fulton et al. v. City of Philadelphia, Pennsylvania et al., No. 19-123 (June 17, 2021).

Justice John Roberts, writing for the Court, found that Philadelphia unconstitutionally burdened the religious exercise of Catholic Social Services (CSS) — a private foster care agency in Philadelphia — by “forcing it to either curtail its mission or to certify same-sex couples as foster parents in violation of its religious beliefs.”

The Court’s decision primarily focused on whether Philadelphia’s Fair Practices Ordinance was both neutral and generally applicable and, therefore, constitutional, even if it incidentally burdened religion. For employers, however, the Court’s decision that CSS’s actions were not subject to the public accommodation provisions of Philadelphia’s Fair Practices Ordinance presents significant implications in cases alleging discrimination in places of public accommodation. The scope of this decision is limited in its application to the private sector.

Supreme Court Decision

The Court ruled that the contractual terms in contracts offered to private foster care agencies by Philadelphia forbidding discrimination on the basis of sexual orientation were not neutral and generally applicable. This ruling was based on a key exception in Philadelphia’s Fair Practices Ordinance granting the Commissioner of the Department of Human Services the authority to make individual exceptions to its general prohibition on discrimination based upon sexual orientation — “in his/her sole discretion.” Justice Roberts reasoned, “No matter the level of deference we extend to the City, the inclusion of a formal system of entirely discretionary exceptions in section 3.21 renders the contractual nondiscrimination requirement not generally applicable.”

The Court also ruled that CSS’s refusal to certify same-sex couples did not constitute an “Unlawful Public Accommodations Practice[]” in violation of Philadelphia’s Fair Practices Ordinance, which prohibits “deny[ing] or interfer[ing] with the public accommodation opportunities of an individual or otherwise discriminat[ing] based on his or her race, ethnicity, color, sex, sexual orientation,” among other protected categories. The Court explained that the decision whether or not to certify foster parents for adoptions was not a service “made available to the public” because it “involves a customized and selective assessment that bears little resemblance to staying in a hotel, eating at a restaurant, or riding a bus.” Justice Roberts noted, “[T]he ‘common theme’ is that a public accommodation must ‘provide a benefit to the general public allowing individual members of the general public to avail themselves of that benefit if they so desire.’” Therefore, because of the personalized nature of evaluating and selecting foster parents for adoption, CSS’s certification process was not the type of public service that Philadelphia’s Fair Practices Ordinance was intended to cover, the Court said.

Finally, the Court rejected Philadelphia’s various justifications for its non-discrimination requirements in its contracts with foster care agencies. This included the City’s stated interest in “the equal treatment of prospective foster parents and foster children.” The Court acknowledged that “this interest is a weighty one,” but could not justify denying CSS an exception for its religious exercise in this case, while making such exceptions available to others in the Commissioner’s “sole discretion” under the Fair Practices Ordinance.

Concurring Opinions

In three separate concurring opinions, the justices questioned the scope and impact of the majority’s decision, though endorsing its holding. Justice Amy Coney Barrett’s concurrence (joined all or in part by Justices Brett Kavanaugh and Stephen Breyer) questioned what standard would apply if the Court were, in a future case, to overrule Employment Div., Dept. of Human Resources of Ore. v. Smith, 494 U.S. 872 (1990), which set the standard that neutral and generally applicable laws do not violate the First Amendment’s Free Exercise Clause. However, Justice Barrett noted the Court need not find a replacement for Smith now, as Smith did not apply in the present dispute, because the contract at issue was neither neutral nor generally applicable. As the CSS contract gave the government the right to make discretionary exemptions from its non-discrimination rule, the law was subject to strict scrutiny, instead of the Smith standard.

In another concurrence, Justice Alito (joined by Justices Clarence Thomas and Neil Gorsuch) reasoned that the majority should have ruled on the constitutionality of Smith, and strongly suggested that Smith should be overruled, because of its perceived failure to sufficiently protect the free exercise of religion, as well as failing to provide a clear-cut standard.

In a separate concurrence, Justice Gorsuch (joined by Justices Samuel Alito and Thomas) agreed that the Court should have ruled on the constitutionality of Smith, and recounted the past cases in which the Court’s decision not to address Smith’s constitutionality led to a perceived lack of predictability and prolonged lower court litigation.

Implications

For organizations with a religious-based mission, the Court’s ruling represents an expansion of their ability to dictate the terms on which they offer their services to the public. State and federal government agencies may want to re-evaluate and re-consider their current contracts with private entities. Employers who contract with state or federal government should examine closely the existing terms and conditions of their arrangements, as well as understand what exceptions, if any, are available under relevant state or federal law.

The implications of the Court’s interpretation of the public accommodation provision under Philadelphia’s ordinance on future public accommodation disputes remains to be seen.

(Summer law clerk Nicholas Bonelli contributed significantly to this article.)

Jackson Lewis P.C. © 2021
ARTICLE BY Michelle E. Phillips, Kristopher W. Peters, and Christopher M. Repole of Jackson Lewis P.C.

 

For more articles on the Supreme Court, visit the NLR Litigation / Trial Practice section.

Yu v. Apple – Transubstantiation of a Camera into an Abstract Idea

Every time the courts re-define a mechanical device as an abstract idea, I struggle with the rationale that is applied to evaluate the claimed subject matter for patent eligibility under s. 101. I am not a computer scientist so the Alice/Bilski notion that a computer programmed to perform a function more quickly than it can be performed by a human sitting at a desk with a pencil and paper is not a technological advance has some appeal. After all, the idea of patents being granted for computerized versions of hoary business practices threatened to overwhelm the PTO. One the other hand, Diehr warned that all inventions can be reduced to underlying principles of nature which, once known make their implementation obvious. Recently, Yu v Apple , Appeal No. 2020-1760  (Fed. Cir., June 11, 2021) exemplifies the dangers of this oversimplification when it is used to render a specialized camera claimed in U.S. Pat. No. 6,611,289 patent-ineligible. This was a split panel decision, with Judge Prost writing for Judge Taranto and Judge Newman dissenting.

Transubstantiation is, of course, a religious doctrine that is the change—though not the appearance—of the bread and wine used in the Eucharist to become Christ’s real presence. I do not intend to discuss religion, but only to provide an example of a big leap of faith. Applying this definition so that the wine and the bread are concrete compositions while the presence of Christ is necessarily an abstract or intangible idea, it becomes apparent that a majority on the Yu panel held that it is appropriate to convert a concrete machine into an abstract idea which, in this case, is defined as its purpose:

          “Claim 1. An improved digital camera comprising:

A first and a second image sensor closely positioned with respect to a common plane…

Two lenses, each being mounted in front of one of said two image sensors:

said first image sensor producing a first image and said second image sensor producing a second image;

an analog-to-digital converting circuitry coupled to said first and said second image sensor and

digitalizing said first and said intensity images to produce correspondingly a first digital image and a second digital image;

an image memory…for storing [the digital images]; and

a digital image processor…producing a resultant digital image from the first digital image enhanced with said second digital image.”

I have compressed the claim somewhat. The panel agreed with the district court that the claims were directed to “the abstract idea of taking two pictures and using these pictures to enhance each other in some way.” The majority continues its Mayo/Alice Step 1 analysis:

“Given the claim language and the specification, we conclude that claim 1 ‘is directed to a result or effect that itself is the abstract idea and merely invoke[s] generic processes and machinery’ rather than ‘a specific means or method that improves the relevant technology.’”

I have written in earlier posts that whether or not a claimed invention is an improvement over the prior art is now a requirement to get past both steps of the Mayo/Alice test. This “improvement test” has not historically been used in patent eligibility analyses. In other words, the fact that a claim provides no more than an alternative route to the same outcome found in the prior art should not be a factor given weight in determining if the claim is a patent-eligible “machine”. That is the task of s.101. Furthermore, once the claim has been simplified to a broad abstract idea, the majority applies a “generic environment” test to the mechanical components recited in the claim. Although the Yu claim recited very concrete components, such as lenses and sensors, because these components were well-known and conventional, they merely “provide a generic environment in order to carry out the abstract idea”  [citing In re TLI Comm. LLC Patent Litigation, 823 Fed. Cir. 607 (Fed. Cir. 2016)]. This is a slippery slope since, if the machine—the camera—does not add up to a technological advance—and the components are, at least, individually described in terms of their “basic functions”, the Mayo/Alice inquiry is over. Almost by definition, there can be no inventive step, and the majority certainly agrees that Step 2 fails to make the abstract idea inventive:

“Here, the claimed hardware configuration itself is not an advance and does not itself produce the asserted advance of enhancement of one image by another, which, as explained, is an abstract idea. The claimed configuration does not add sufficient substance to the underlying abstract idea of enhancement—the generic hardware limitations of claim 1 merely serve as a “conduit for the abstract idea.”[citing TLI again.]

Judge Newman’s dissent gets right down to first principles: “This camera is a mechanical and electronic device of defined structure and mechanism; it is not an ‘abstract idea’… The ‘289 patent specification states that the digital camera achieves superior image definition. A statement of purpose or advantage does not convert a device into an abstract idea…A device that uses known components does not thereby become an abstract idea, and is not on that ground ineligible for access to patenting.” Judge Newman sees the majority’s opinion as “enlarging this instability [of technological development] in all fields, for the court holds that the question of whether the components of a new device are well-known and conventional affects Section 101 eligibility, without reaching the patentability criteria of novelty and nonobviousness.”

© 2021 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

ARTICLE BY Warren Woessner of Schwegman, Lundberg & Woessner, P.A.
For more articles on IP law, visit the NLRIntellectual Property section.

Coca-Cola Sued For Deceptive Sustainability Claims

Last week, Coca-Cola was sued by Earth Island Institute for deceptive marketing regarding its sustainability efforts “despite being one of the largest contributors to plastic pollution in the world.”

In the Complaint, Earth Island Institute, a not-for-profit environmental organization, alleges that Coca-Cola is deceiving the public by marketing itself as sustainable and environmentally friendly while “polluting more than any other beverage company and actively working to prevent effective recycling measures in the U.S.” Coca-Cola has developed a number of initiatives to advertise its commitment to plastic waste reduction and recycling, in part through its “Every Bottle Back” and a “World Without Waste” campaigns. It touts its goal to collect and recycle one bottle or can for each one it sells by 2030. Coke also claims that its plastic bottles and caps are designed to be 100% recyclable. The Complaint presents a number of examples of these allegedly misleading statements across a range of mediums, including on its website, in advertising, on social media, and in other corporate reports and statements.

Meanwhile, according to the Complaint, Coca-Cola is the world’s leading plastic waste producer, generating 2.9 million tons of plastic waste per year. It uses about 200,000 plastic bottles per minute, amounting to about one-fifth of the world’s polyethylene terephthalate (PET) bottle output. This plastic production also relies on fossil fuels, resulting in significant CO2 emissions.

This waste generation is complicated by significant deficiencies in recycling. Despite the public’s common understanding that plastic bottles can be recycled, only about 30 percent of them actually are. According to the Complaint, the plastics industry has long understood this problem, but it has sought to convince the consumer that recycling is viable and results in waste reduction. The Complaint even quotes former president of the Plastics Industry Association as saying, “If the public thinks that recycling is working, then they are not going to be as concerned about the environment.”

The Complaint alleges that not only has Coca-Cola failed to implement an effective recycling strategy, it has actively opposed legislation that would improve recycling rates. According to the Complaint, Coke has actively fought against “bottle bills”—laws that would impose a small fee on plastic bottle purchase that would be returned to the consumer when that bottle is returned to a recycling facility. Jurisdictions with these laws tend to have better recycling rates, albeit at a small additional cost to the consumer at the point of purchase.

The Complaint does not allege that Coke has violated any environmental laws. Instead, Earth Island Institute seeks to hold Coke accountable under the Washington, D.C. Consumer Protection Procedures Act. The Complaint alleges that Coca-Cola’s misrepresentations mislead consumers, and that Coke’s products “lack the characteristics, benefits, standards, qualities, or grades” that are stated and implied in its marketing materials. Earth Island Institute does not seek damages; it only seeks to stop Coca-Cola from continuing to make these statements.

This case is the latest example of ESG—Environmental, Social, and Governance—factors playing out in practice.

Copyright © 2021 Robinson & Cole LLP. All rights reserved.
ARTICLE BY Megan Baroni of Robinson & Cole LLP
For more articles on Coca-Cola litigation, visit the NLR Litigation / Trial Practice section.

No Good Deed Goes Unpunished: Growing ESG Litigation Risks

Summary

Plaintiffs are inventing new theories to attack businesses for alleged ESG-related deficiencies.  Companies need to carefully manage their ESG initiatives, performance, and representations.

Introduction

Public companies are facing increased pressure to develop and publish goals around Environmental, Social and Governance (“ESG”) objectives. A number of groups and organizations have developed scoring metrics which attempt to grade companies on their ESG performance.  Private investor groups have added pressure by indicating they will invest their dollars in companies which meet certain criteria.  For example, in his January 2021 letter to CEO’s, Blackrock Investments’ Larry Fink wrote this:

Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.

The Securities and Exchange Commission (“SEC”) has also weighed in, making the case for enhanced ESG disclosures.

More than 95% of the Fortune 50 now include some ESG disclosures in their SEC filings.  The topics on the rise in 2020 included Human Capital Management, Environmental, Corporate Culture, Ethical Business Practices, Board Oversight of E&S Issues, Social Impact and Shareholder Engagement.

Developing Litigation Trends

While the increased attention on ESG presents an opportunity for companies to showcase their good work, it also creates increased litigation risk.  These new challenges primarily fall into three areas: misrepresentations, unfair and deceptive trade practices, and securities fraud.

1. Misrepresentation & Breach of Warranty: Challenges to Misleading ESG Statements

While claims alleging defective products and labels are nothing new, the increased amount of publicly available ESG information has given plaintiffs’ attorneys new targets.  In Ruiz v. Darigold, Inc./Nw. Dairy Ass’n1, the dairy association highlighted the company’s social consciousness in a Social Responsibility Report.  Consumers sued stating they purchased the products in reliance on these statements, which plaintiffs contended were false.  The court dismissed the claims, finding that the statements were largely statements of opinion, and that “a reasonable consumer would not have interpreted the 2010 CSR as a promise that there were no problems at any of the 500+ dairies that make up the NDA or that Darigold’s products were generated by only healthy, happy, respected workers and cows.”2

The court reached a similar result in Nat. Consumers League v. Wal-Mart Stores, Inc.3, finding that Walmart’s “aspirational statements” were not actionable, although other claims based on detailed information about auditing programs could proceed.  The case settled before any final judgment.

After Chiquita made a number of marketing representations on its website regarding its environmentally safe business practices, including that it protects water sources by reforesting all affected natural watercourses it was sued by a non-profit.4  While the court dismissed a number of claims, the claims for unfair and deceptive trade practices and for breach of express warranty were allowed to proceed.

Governments have also asserted claims against companies which exaggerate their ESG accomplishments.  One decision which received considerable attention was brought by the Commonwealth of Massachusetts claiming that ExxonMobil had deceived both investors and consumers with a “greenwashing” campaign.5  Greenwashing refers to the practice of making false or misleading claims about sustainability or environmental compliance. The federal court declined jurisdiction, and sent the case back to Massachusetts state courts.

Another example is the 2019 settlement of an FTC complaint against Truly Organic, which advertised its product as vegan, even though they contained honey and lactose.  Truly Organic paid $1.76 million to settle the case.

2. Unfair and Deceptive Business Practices

Most states have laws designed to protect consumers from unfair and deceptive trade practices. These consumer protection laws can form the basis for greenwashing claims.6

In one landmark case, consumers brought a class action against Fiji Water, which marketed itself as carbon-negative and featured a green drop on the bottle.  After the trial court dismissed the case, plaintiffs appealed.  The California appeals court concluded that “no reasonable consumer would be misled to think that the green drop on Fiji water represents a third party organization’s endorsement or that Fiji Water is environmentally superior to that of the competition.7  This case has been cited hundreds of times by courts and commentators.8

In 2019, purchasers of StarKist tuna filed a class action alleging the company falsely claimed that its products were 100 percent “dolphin-safe” and sustainably sourced.  The court concluded that plaintiffs had stated a claim that StarKist’s fishing methods were not actually dolphin-safe.9  Discovery in this case is on-going, and the court recently required production of fishing records.10  Labels with claims such as “100 percent” are likely to draw similar attacks.

Keurig, which sells millions of disposable coffee pods, labeled some pods as “recyclable.”  Consumers sued, alleging that in fact the pods were not recyclable in a practical way.  The court concluded the claims were adequately pled under the reasonable consumer test.11  In September, 2020, the court granted class certification in the matter.12  This case serves a warning to be very careful about recycling claims.

In an even more recent case, California courts considered claims against Rust-Oleum, which marketed its products as “Non-Toxic” and “Earth Friendly.”  The court concluded that these terms were not deceptive as used, because there was a sufficient allegation that the products were harmful or damaging to the earth.  The Court rejected plaintiffs’ argument that the wording amounted to an environmental claim about the packaging.13

Like other unfair and deceptive acts and practices complaints, consumer claims of greenwashing may be enforced by the FTC pursuant to 15 U.S.C.A. § 45.  The FTC has published the Green Guides, 16 C.F.R. §§ 260.1 et seq., to assist manufacturers and retailers in avoiding making false or misleading claims about the environment benefits of products and/or services.  Failing to follow these guidelines are often cited by consumer plaintiffs as a basis for liability.

3. Securities Fraud Claims

Section 10-b of the Securities Exchange Act and SEC Rule 10b-5, which form the common legal grounds for claims of securities fraud, prohibit any false or misleading statement of material fact or omission of material fact in connection with the purchase or sale of any security.14   Liability potentially extends to individual officers and directors for ESG-related misstatements or omissions about which they knew or should have known.15

Shareholders frequently bring claims under the Securities Exchange Act for statements made by public companies.  In Ramirez v. Exxon Mobil Corp.16, the court found that the plaintiffs sufficiently alleged that: (i) the company made material misstatements regarding its use of proxy costs of carbon in formulating business and investment plans; (ii) the company made material misstatements concerning the financial implications of specific projects with climate change implications; and (iii) the defendants made the requisite statements with the scienter (i.e., intent to deceive) required for securities fraud claims.

Yum! Brands, which owns Taco Bell and KFC, made a number of statements regarding the importance of food safety and strict compliance with safety standards in their securities filings.  After news broke about several instances of food contamination, shareholders sued.  The court dismissed the claim, finding “a reasonable investor would pay little, if any, attention to Defendants’ statements concerning the quality of Yum!’s food safety program.  Those statements are vague and subjective, evidencing only the opinion of management, or derived from sources that are aspirational, rather than reliable.”17

On the other hand, statements about health and safety practices made by Transocean in SEC filings led the court to deny a motion to dismiss security fraud claims filed against that company following the Deepwater Horizon disaster.18  The case remains in litigation.  Another securities fraud case was filed against Brazilian mining company Vale after two dam collapses.  The plaintiffs alleged that the safety-focused statements in Vale’s SEC filings were deceptive.  Vale ultimately settled the case for $25 million.

Action Items

1. Carefully consider Voluntary Disclosures

All public disclosures create a risk of liability.  As a result, any non-mandatory disclosure must be carefully evaluated to determine whether the benefit of the disclosure outweighs the potential risk. Aspirational statements involve less risk than concrete statements and metrics, but the line between these is often blurred.  If the benefit justifies the risk, then the company must take affirmative steps to: (i) ensure the accuracy of the disclosure, (ii) prevent inconsistencies with other company disclosures; and (iii) evaluate which party should make the disclosure and the reporting framework.

2. Review the Green Guides and other FTC Guidance

The Green Guides were first issued in 1992 and were revised in 1996, 1998, and 2012.  They remain relevant today for companies looking for guidance.  A few items to pay particular attention to include:

  • Companies should avoid general environmental benefit claims, like the term “eco-friendly.”
  • Carbon offsets must be properly quantified, and companies must disclose if they are more than two years in the future.  Offsets required by law are not a “reduction.”
  • Claims about compostability, degradability and recyclability must be carefully documented.
  • Claims of “made with renewable energy” are often deceptive, because it can be difficult to prove where the energy actually came from, unless it is generated entirely within the same facility.

3. Evaluate which Sustainability Standard will be used

For many years, companies looked to GRI’s Sustainability Reporting Framework.  However, a number of new and different standards are emerging, including SASB, TCFD and the UN Global Goals.19  While a full review of these standards is beyond the scope of this article, companies should carefully select a standard for tracking and reporting and then be in a position to demonstrate compliance with those requirements.  Particular attention must be paid to disclosures around implementation, especially as it relates to supply chain impacts.

1 Ruiz v. Darigold, Inc./Nw. Dairy Ass’n, No. C14-1283RSL, 2014 WL 5599989, at *2 (W.D. Wash. Nov. 3, 2014)
2 2014 WL 5599989, at *6.
3 Nat. Consumers League v. Wal-Mart Stores, Inc., No. 2015 CA 007731 B, 2016 WL 4080541, at *1 (D.C. Super. July 22, 2016)
4 Water & Sanitation Health, Inc. v. Chiquita Brands Int’l, Inc., No. C14-10 RAJ, 2014 WL 2154381, at *1 (W.D. Wash. May 22, 2014).
5 Massachusetts v. Exxon Mobil Corp., 462 F. Supp. 3d 31, 38 (D. Mass. 2020).
6 See Cause of Action Under State Consumer Protective Law for “Greenwashing,” 79 Causes of Action 2d 323 (Originally published in 2017).
7 B. Hill v. Roll Internat. Corp., 195 Cal. App. 4th 1295, 1301, 128 Cal. Rptr. 3d 109, 113 (2011).
8 See, e.g. Jou v. Kimberly-Clark Corp., No. C-13-03075 JSC, 2013 WL 6491158, at *7 (N.D. Cal. Dec. 10, 2013) (concluding “pure & natural” was a sufficiently specific representation).
9 Gardner v. StarKist Co., 418 F. Supp. 3d 443, 449 (N.D. Cal. 2019).
10 Gardner v. Starkist Co., No. 19-CV-02561-WHO, 2021 WL 303426, at *5 (N.D. Cal. Jan. 29, 2021).
11 Smith v. Keurig Green Mountain, Inc., 393 F. Supp. 3d 837, 847 (N.D. Cal. 2019).
12 Smith v. Keurig Green Mountain, Inc., No. 18-CV-06690-HSG, 2020 WL 5630051, at *1 (N.D. Cal. Sept. 21, 2020).
13See Bush v. Rust-oleum Corp., 2020 WL 8917154 (N.D. Cal.).
14 15 U.S.C. §§78a et seq.
15 See Growing ESG Risks: The Rise of Litigation, 50 ELR 10849 (2020).
16 Ramirez v. Exxon Mobil Corp., 334 F. Supp. 3d 832 (N.D. Tex. 2018)
17 In re Yum! Brands, Inc. Sec. Litig., 73 F. Supp. 3d 846, 864 (W.D. Ky. 2014), aff’d sub nom. Bondali v. Yum! Brands, Inc., 620 F. App’x 483 (6th Cir. 2015).
18 In re BP P.L.C. Sec. Litig., No. 4:12-CV-1256, 2013 WL 6383968, at *1 (S.D. Tex. Dec. 5, 2013).
19 The ESG Movement: Why All Companies Need to Care, Womble Bond Dickinson (US) LLP and Pamela Cone

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.

ARTICLE BY Mark P. Henriques of  Womble Bond Dickinson (US) LLP
For more articles on ESG litigation risks, visit the NLR Litigation / Trial Practice section.

Supreme Court Update: Van Buren v. United States (No. 19-783), United States v. Cooley (No. 19-1414), Garland v. Ming Dai (No. 19-1155)

Greetings, Court Fans!

Three more opinions this week, as The Nine continue to chip away at OT20’s remaining backlog. Most notably, in Van Buren v. United States (No. 19-783), an interesting mix (no scare-quotes this time, as it actually is a unique line-up) led by Justice Barrett concluded that the Computer Fraud and Abuse Act (CFAA) does not apply to all individuals who misuse authorized access to a computer, but only to those who exceed their authorized access by obtaining information located in particular files, folders, or databases that are off-limits to him. We’ll have more on yesterday’s decision in Van Buren, the first major case dealing with the CFAA, next time. For now, read on for summaries of United States v. Cooley (No. 19-1414), which held that tribal police officers have authority to detain and search non-Indian persons on public rights-of-way within reservations, and Garland v. Ming Dai (No. 19-1155), which rejected a Ninth Circuit rule that courts reviewing orders denying asylum applications must a treat noncitizen’s testimony as credible in the absence of express adverse credibility findings.

United States v. Cooley (No. 19-1414) addresses the power of tribal police officers to temporarily detain and search non-Indians within reservations. In a unanimous opinion, the Court held that tribal authorities retain fairly broad power to detain and search provided it is necessary to preserve the health and welfare of the tribe.

The case began when Officer James Saylor of the Crow Police Department approached a truck parked on U.S. Highway 212, which runs through the Crow Reservation in Montana. Saylor questioned the driver, Joshua James Cooley, and observed that he appeared to be non-native and had watery, bloodshot eyes. He also happened to notice two semiautomatic rifles on the front seat. Fearing violence, Saylor ordered Cooley out of the car and conducted a pat-down search, during which he found drugs. After Cooley was indicted in federal court on gun and drug charges, the District Court granted Cooley’s motion to suppress the drug evidence on the ground that Saylor lacked authority to detain and search Cooley, a non-Indian. The Ninth Circuit affirmed, concluding that tribal police officers can stop and detain non-Indian suspects but only if they first try to determine whether the suspect is non-Indian and, in the course of doing so, find an apparent violation of state and federal law. Because Saylor didn’t inquire whether Cooley was a non-Indian, the Ninth Circuit found the search invalid.

The Supreme Court unanimously reversed, in a decision by Justice Breyer. Breyer acknowledged that, as a “general proposition,” the inherent sovereign powers of an Indian tribe do not extend to nonmembers of the tribe. But there are two exceptions to that rule, one of which “fits the present case, almost like a glove”: A tribe retains inherent power to exercise civil authority over the conduct of non-Indians on lands within its reservation “when that conduct threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe.” Here, Saylor acted to preserve the health and welfare of the tribe, which he reasonably thought might be imperiled if Cooley—apparently drunk and armed—was let alone. Breyer approvingly cited several state court decisions recognizing that tribal police must have the power to detain drunk drivers, for example, as well as the Court’s own decisions permitting tribal police to detain suspects for the purpose of transporting them to proper authorities. Though the Ninth Circuit gave lip service to this authority (and the need for tribal police to preserve the health and welfare of the tribe), its standard is unworkable. If tribal police could only detain suspects for violations observed in the course of determining whether they’re tribe members, it would give actual tribe members an incentive to lie and claim to be non-Indian. And permitting officers to detain and search only in connection with “apparent” legal violations would introduce a new standard into general search-and-seizure law, and with it new interpretation problems.

Justice Alito penned a brief concurrence explaining that he joined the Court’s opinion “on the understanding that it holds no more than the following: On a public right-of-way that traverses an Indian reservation and is primarily controlled by tribal police, a tribal police offer has the authority to (a) stop a non-Indian motorist if the officer has reasonable suspicion that the motorist may violate or has violated federal or state law, (b) conduct a search to the extent necessary to protect himself or others, and (c) if the tribal officer has probable cause, detain the motorist for the period of time reasonably necessary for a non-tribal officer to arrive on the scene.” Whether lower courts will also share that understanding (considering Alito’s vote was not necessary to the judgment) remains to be seen.

Next up, in Garland v. Ming Dai (No. 19-1155), Justice Gorsuch led a unanimous Court in scrapping a longstanding Ninth Circuit immigration rule that, in the absence of an explicit adverse credibility determination by an immigration judge or the Board of Immigration Appeals, a reviewing court must treat a noncitizen’s testimony as credible and true. Agreeing with numerous Ninth Circuit judges who’ve objected to the rule, Justice Gorsuch concluded that it has no place in a reviewing court’s analysis. While there is a rebuttable presumption of credibility in appeals, judicial proceedings in immigration cases are not “appeals.” Under the INA, the “sole and exclusive means for judicial review of an order of removal” is through a “petition for review,” not an “appeal.” Therefore, while a presumption of credibility might arise in appeals from immigration judges to the BIA, there is no such presumption in the antecedent proceedings before the immigration judge, or in subsequent petitions for review before a federal court. Enough said.

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ARTICLE BY Tadhg A.J. Dooley and David Roth of Wiggin and Dana LLP
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