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English High Court Weighs in on MAC Clause in M&A Transaction

It has become something of a truism for English M&A lawyers to say that material adverse change (MAC) clauses are rarely triggered in practice. A recent English judgment in Travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm) will be of interest to parties to M&A transactions as it highlights the English courts’ approach to one of the key aspects of such claims.

In a trial on preliminary issues, the High Court considered the construction of a MAC clause in a share purchase agreement for the entire share capital of two related B2B payments companies. The agreement was signed in January 2020 and completion of the transaction was subject to customary conditions precedent, including the absence of a material adverse change in respect of the target companies and their respective groups. The agreed purchase price exceeded U.S. $1 billion (likely one of the reasons why this dispute reached the trial stage).

MAC clauses are typically encountered in lending documents, but also find their way into acquisition, joint venture and technology licensing agreements, to name a few. It is one of the tools used by parties to allocate risks that are outside their control or risks that they can’t anticipate at the time of signing. A buyer may seek to include a MAC clause in an acquisition agreement to protect itself against an event or occurrence that has, or is likely to have, material adverse effect on the financial position or business of the target between signing and completion. Consequently, the buyer often insists on the right to walk away from the deal if the MAC clause is triggered before completion and can use it to force the seller to renegotiate the purchase price. Thus, a seller will want the MAC to be tightly defined to a limited set of events or circumstances. If there is a dispute whether a material adverse event has occurred, the parties may need to settle their differences in court.

It is worth noting that the MAC clause used in the agreement in this case, which was governed by English law, had the structure that is more typical for U.S.-style agreements (i.e., a list of the trigger events subject to generic carve-outs, which are in turn subject to certain exceptions to cater to disproportionally affected targets). In practice, there is a wider variety of drafting such clauses in English law-governed agreements, but the general principles underlying them are the same. As is always the case with legal arguments involving questions of contractual interpretation, a lot will depend on the exact wording of the relevant provision. In this case, Mrs Justice Cockerill confirmed that no special rules of interpretation would apply when considering MAC clauses, such as construing them narrowly or placing a higher than usual evidentiary burden on the party invoking them.

The definition of MAC used in the agreement in question contained a carve-out relating to “conditions resulting from … pandemics” and a carve-out exception providing that, where an adverse event otherwise fell within the carve-out, the buyer could invoke the exception (and thus rely on the MAC condition precedent) if the event had “a disproportionate effect on [the target groups], taken as a whole, as compared to other participants in the industries in which [they] operate.”

The central point of contention revolved around the meaning of the word “industries” when used to define the intended comparator group in the carve-out exception. The sellers contended that the correct interpretation of the term was the “travel payments industry,” while the buyer argued that the relevant comparator should be the participants in the “business-to-business payments industry.” The travel industry has been particularly adversely affected by the pandemic, and that had a negative effect on the payment services providers focusing on that segment. The narrower interpretation would have favoured the sellers, as it would have been easier for them to show that the target companies were not disproportionately adversely affected when compared to a small selection of their direct competitors. Conversely, if the buyer’s view were to be preferred, the buyer would have found it easier to prove that when compared to companies in the wider B2B payments industry, the target companies (as well as their direct competitors) were disproportionately affected, and that the MAC clause was therefore engaged.

Since the parties appeared to have opted not to clearly define the comparator group in the disproportionality exception, and did not use this ambiguity to restart the price negotiation process, it was left to the judge to determine an objective intent of the parties at the time of the entry into the agreement, which may have never been subjectively shared by the parties.

Because of a dearth of relevant English authorities on the construction and application of MAC clauses in the context of company acquisitions, the judge’s attention was drawn to Delaware caselaw and available U.S. academic commentary. She concluded that there was no clear authority or rationale to favour the sellers’ view that the purpose of MAC clauses is to allocate only target-specific risks to the sellers (i.e., risks to the business that eventuate because of the way the target business has been conducted, including in response to events that affect the industry in which the company operates generally). On the proper analysis, having considered the factual matrix and the agreement as a whole, the MAC clause in question allocated how much of the systemic risk each party was to bear in the period prior to closing, and the disproportionality exception required a comparison to be made between the target companies (and their market segment) against the wider B2B payments industry.

This case highlights that careful consideration needs to be given to the drafting of MAC clauses, in particular when defining the relevant comparator group in any exceptions. The judge noted that the parties could have but did not specify what industries (or markets, sectors or competitors) they meant, and that future drafters may want to be more prescriptive. Generally, it would be in both parties’ interest to define what is meant by material adverse effect in the interests of commercial certainty and to avoid a trip to the courts. The parties should also consider the practical aspects of using the relevant comparator group in the time constraints imposed by the deal schedule, as they may need to determine the effect of the alleged MAC event on the target in what often is quite a limited window between singing and closing.

Because this was a hearing on preliminary issues, it remains to be seen if the sellers are allowed appeal on those issues and if the parties eventually proceed to the substantive hearing on whether there was a material adverse event or if the buyer should be required to complete the purchase.

In terms of drafting, it is worth noting the developing practice of expressly excluding COVID-19 from the MAC definition on the basis that, at this point, it is a risk that the purchaser should be able to evaluate and factor its effect into the price, including sharing the risks through price adjustments or earn outs. Even if not excluded by clear wording, the party wishing to reply on the MAC clause may find it an uphill battle. As a matter of English law, a party cannot rely on a MAC clause on the basis of circumstances of which it was aware of entering into the agreement (i.e., there must be some change in the conditions / circumstances), although this does not preclude attempts to claim that the worsening of the pandemic may have caused the alleged material adverse effect.

Similarly, contracting parties should consider whether to include or exclude the COVID-19 pandemic as a force majeure event. This would depend on the nature of the contract and the potential effects of the continued lockdowns and other governmental actions on either party’s ability to perform its contractual obligations or how they could impact the buyers’ ability to conduct an effective due diligence.

It remains to be seen to what extent buyers would be able to rely on COVID-19 as an excuse to pull out of deals by relying on available contractual protections, such as force majeure and MAC provisions, as well as on common law relief related the doctrine of frustration of contract. MAC clauses specifically may receive increased attention by the judges as the fallout from the current COVID-19-related crisis continues to impact deals signed but not completed prior to its onset.

ARTICLE BY Sergey Kvitkin and Amy B. Comer of Faegre Drinker

For more, visit the National Law Review Global section.

Failure to Fully Disclose Expert Opinions Results in Summary Judgment

Federal Rule of Civil Procedure 26(a)(2) requires retained expert witnesses to provide an expert report which gives “a complete statement of all opinions the witness will express and the basis and reasons for them.” Fed. R. Civ. P. 26(a)(2)(B)(i). If a party fails to disclose information required under Rule 26(a)(2), “the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless.” Fed. R. Civ. P. 37(c)(1). As a plaintiff in the Western District of Washington recently learned, failure to adhere to Rule 26 can be fatal to a case.

In Jacobson v. BNSF Railway Co., et al., No. C18-1722JLR, Plaintiff Teresa Jacobson brought suit on behalf of the estate of her deceased husband, a long-time railroad worker who died of renal cancer in 2015. Plaintiff alleged that BNSF was liable under the Federal Employers’ Liability Act (“FELA”) for negligently exposing her husband to known carcinogens in the course of his employment.

FELA claims arising out of exposure to toxic chemicals require expert testimony to establish that a carrier was negligent. Plaintiff in Jacobson disclosed only one expert, but one who was arguably qualified to supply all of the necessary testimony – a certified industrial hygienist who was board-certified in internal medicine, occupational medicine, and public health and general preventative medicine. Interestingly, the expert was also a licensed attorney. Plaintiff proposed to offer the expert’s testimony as to “the nature and extent of [Mr. Jacobson’s] injuries as well as their causation (general/specific)”; “the presence of known toxins on the railroad and the railroad’s knowledge concerning these carcinogens”; and “the railroad’s general failure to provide [Mr. Jacobson] with a safe place in which to work.” However, the expert’s written report said nothing about BNSF’s knowledge of toxic chemicals in decedent’s workplace or whether BNSF’s actions were reasonable in light of that knowledge.

BNSF moved for summary judgment, asserting that Plaintiff could not meet her burden on summary judgment because her expert’s report failed to offer any opinion on the element of breach. Plaintiff responded by arguing that her expert was qualified to offer an opinion on breach, and BNSF conceded that point. Plaintiff also cited the extensive discussion of causation in her expert’s report. However, she was unable to point to any part of the report that suggested BNSF had acted negligently. Therefore, the court barred Plaintiff from offering the expert’s testimony “about whether BNSF negligently breached its duty of care to Mr. Jacobson by failing to provide him a reasonably safe workplace.” Because Plaintiff had no other evidence that would raise a genuine issue of material fact as to the element of breach, the court granted BNSF’s motion for summary judgment.

Ultimately, this case is a cautionary tale about careless disclosure of expert opinions. It is not enough for litigants to understand what elements of their claims and defenses require expert testimony and disclose qualified experts on those points. Rather, the critical opinions must actually appear in the experts’ written reports.

ARTICLE BY Eric M. Friedman of Faegre Drinker

For more, visit the NLR Litigation / Trial Practice section.

They Know What You Did Last Summer: DOJ Announces First Civil Settlement Involving PPP Borrower

The long-anticipated wave of civil enforcement actions involving participants in the Paycheck Protection Program (PPP) has begun.

On 12 January 2021, the U.S. Department of Justice (DOJ) announced the first civil settlement resolving fraud allegations against SlideBelts, Inc. (SlideBelts), a California e-retailer and manufacturer of fashion accessories, and its President and CEO, Brigham Taylor.¹ As we have discussed in prior alerts,² aggressive criminal and civil enforcement activity targeting PPP borrowers was a foregone conclusion given the minimal safeguards initially imposed by the U.S. Small Business Administration (SBA), the speed with which lenders disbursed loan proceeds, and reports indicating that more than US$4 billion in PPP funds are likely attributable to fraud.³ The SlideBelts settlement agreement⁴ (Settlement Agreement) demonstrates that DOJ is following through on its promises to make PPP enforcement against companies and individuals a top priority⁵ and that the government will use all criminal and civil tools available—including the False Claims Act⁶ (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act⁷ (FIRREA)—to pursue potential PPP fraud. We expect SlideBelts to be a harbinger of the type of enforcement actions U.S. Attorney’s Offices and DOJ’s Civil Division will bring and the positions they will take in coming months.

THE SLIDEBELTS SETTLEMENT

SlideBelts and Taylor agreed to pay US$100,000 in monetary penalties and return the US$350,000 PPP loan the company received to resolve allegations that they made false statements to federally insured banks in violation of the FCA and FIRREA. According to the Settlement Agreement, on 3 April 2020, SlideBelts submitted the first of three PPP loan applications to three different lenders, each containing the false representation that the company was not presently involved in a bankruptcy proceeding. Five days later, on 8 April, SlideBelts submitted a second PPP application to a different lender, again misrepresenting its bankruptcy status.

On 10 April, the first lender, which was also a creditor in the company’s ongoing Chapter 11 case, informed Taylor that SlideBelts had incorrectly answered the bankruptcy question on its PPP application. Taylor responded that the answer was an “[o]versight” but also told the lender that he thought the bankruptcy question was “an overreach” by SBA. On 14 April, Taylor contacted the lender again to indicate that he believed the question was inappropriate and requested approval of the application. When the lender refused and reiterated that the company was ineligible for a PPP loan due to its bankruptcy status, Taylor replied “that does make sense. All good!” Three hours later, he submitted a third loan application to a different lender, again falsely representing the company’s bankruptcy status.

Ultimately, the second lender approved the company’s PPP application and Taylor signed the US$350,000 note. DOJ alleges that based on his prior communications with the lender on the first application, Taylor knew that the lender considered the company’s bankruptcy status to be material to its decision to execute a note and that Taylor knew the company would automatically default on the PPP loan because the loan agreement provided for default in the event of the borrower’s bankruptcy.

On 22 April—the day after SlideBelts received the loan proceeds—Taylor informed the lender that the company may have inadvertently provided an incorrect answer to the PPP application’s bankruptcy question. But instead of returning the loan proceeds, on 30 April, SlideBelts asked the bankruptcy court to retroactively approve the PPP loan while again failing to disclose the company’s misrepresentation. On 16 June, SBA and the lender opposed the company’s motion. In response, SlideBelts petitioned the bankruptcy court to dismiss its case so that the company could “apply for [PPP] funds while the case is dismissed.”⁸ During a hearing on the company’s motion, which the bankruptcy court granted, SBA reiterated its position that SlideBelts was obligated to immediately return the loan. Eventually, on 8 July—more than two and a half months after receiving its PPP loan—SlideBelts returned the US$350,000 in loan proceeds to the lender.

Plaintiff to Voluntarily Dismiss False Advertisement Lawsuit Against Frito Lays

Plaintiff, on behalf of a proposed class of buyers, and Defendant Frito Lays Inc., have asked a California District Court to voluntarily dismiss a false advertisement lawsuit that was filed in October 2020.

The complaint had alleged that Frito Lays’ potato crisps —sold under its “Ruffles” brand name and labeled as “Baked Lays Cheddar & Sour Cream Flavor” —were falsely advertised because they contained artificial diacetyl, which allegedly reinforced the sour cream flavor, but were not labeled as artificially flavored. On the contrary, Plaintiff had argued that the “Cheddar & Sour Cream Flavor” statement on the front label represented to consumers that the sour cream flavor was entirely naturally derived.

The complaint was very similar to a New York action against Frito Lays which we have previously covered . This action was voluntarily dismissed earlier this month according to court records.

The reason for the dropped suit, including the terms of any settlement between the parties, has not been disclosed. We have not yet seen a court decision address the merits of an artificial diacetyl flavoring lawsuit and will continue to monitor for any further developments in this area.

ARTICLE BY Food and Drug Law at Keller and Heckman of Keller and Heckman LLP

For more, visit the NLR Litigation / Trial Practice section.

Justice Amy Coney Barrett’s Potential Impact on the Supreme Court – President Biden’s Reaction

Justice Amy Coney Barrett was confirmed by the Senate to fill the Supreme Court seat left open by Justice Ruth Bader Ginsburg’s death by a vote of 52 to 48 on October 26, 2020. Justice Barrett was sworn in on October 27. Her confirmation was the first in 150 years to not include any votes from the party in the minority, in this case the Democrats, highlighting the polarized response to her candidacy as a Supreme Court Justice.

Justice Barrett served on the U.S. Court of Appeals for the Seventh Circuit after being confirmed in 2017. In addition to her position with the Seventh Circuit, Justice Barrett also served as a professor of law at her alma mater, Notre Dame Law School – a position she held since 2002 and up to her confirmation to the U.S. Court of Appeals for the Seventh Circuit.

The Supreme Court is already hearing oral arguments in key cases concerning healthcare and anti-discrimination laws and religious freedom, Justice Barrett’s background and previous rulings shed some light on how she could eventually rule on the Supreme Court.

How Justice Barrett’s Confirmation Could Impact the Politics of the Court

The confirmation of Justice Barrett to the Supreme Court tipped the political leanings of the Court further to the right, with Republican appointees outnumbering Democratic ones by a 6-to-3-margin.

Justice Barrett clerked for late Supreme Court Justice Antonin Scalia from 1998 to 1999. Like Justice Scalia, she aligns herself with the legal philosophy of originalism – the idea that the Constitution should be given the original meaning it would have had at the time it became law. During her confirmation hearings, she answered a question from Judiciary Committee Chairman Senator Lindsey Graham about her views on originalism, saying:

“I interpret the Constitution as a law, and that I interpret its text as text, and I understand it to have the meaning that it had at the time people ratified it. So that meaning doesn’t change over time and it’s not up to me to update it or infuse my own policy views into it.”

Even though Justice Scalia was a mentor to Justice Barrett, she asserted in her confirmation hearings that with her confirmation Americans “would not be getting Justice Scalia, you would be getting Justice Barrett.” She also stressed that sometimes originalists don’t agree.

During her time as a Judge on the U.S. Circuit Court of Appeals for the Seventh Circuit, Justice Barrett voted conservatively over 80 percent of the time compared to other judges on the Seventh Circuit Court of Appeals, according to a study done by University of Virginia law professors Joshua Fischman and Kevin Cope cited by FiveThirtyEight that analyzed over 1,700 cases that were heard after her confirmation, including 378 that included rulings from Justice Barrett. Specifically, Justice Barrett voted conservatively 83.8 percent of the time in discrimination and labor cases, 87.9 percent conservative in criminal and habeas corpus cases and 83.2 percent conversative in civil rights cases.

However, Fischman told FiveThirtyEight that Justice Barrett is statistically indistinguishable from other conservative judges appointed by President Trump. Additionally, during her time as a judge on the Seventh Circuit, she didn’t always rule in line with other conservative judges, and ruled in a liberal direction 20 percent of the time when a Democratic nominee was on the panel, and 9 percent of the time when a fellow Republican nominee was on the panel, according to the study.

“This is an attempt to establish a very strong Republican, conservative presence on the federal judiciary,” said Mark Graber, Maryland Carey Law professor and constitutional scholar on Justice Barrett’s confirmation in an interview with the National Law Review.

“That’s the great and terrible truth about this nomination: Judge Barrett holds far-right views well outside the American mainstream,” said Senate Minority Leader Chuck Schumer in response to Justice Barrett’s nomination. Specifically, Schumer highlighted Justice Barrett’s past criticism about previous rulings on the Affordable Care Act (ACA).

“We’re talking about the rights and freedoms of the American people. Their right to affordable health care. To make private medical decisions with their doctors … Judge Amy Coney Barrett will decide whether all those rights will be sustained or curtailed for generations,” Schumer said. “And based on her views on the issues—not her qualifications but her views on the issues—Judge Barrett puts every single one of those fundamental American rights at risk.”

While many on the left have expressed fears about a conservative majority on the Supreme Court, O. Carter Snead, a professor of law at the University of Notre Dame and one of Justice Barrett’s former colleagues for over 15 years, wrote that Democrats have “nothing to fear” from her in an op-ed published in the Washington Post.

“There is of course no way to know in advance how a Justice Barrett would rule on hot-button cases. What is clear is that she would carefully analyze each case on its merits, respectful of the stakes for both the rule of law and the stability of our polity, doing her level best to get the question right, regardless of her own personal views,” he said.

What Her Confirmation Could Mean for the ACA

When it comes to healthcare, Justice Barrett has been critical of past Supreme Court decisions on the ACA, writing in a 2017 article published by Notre Dame Law School that Chief Justice John Roberts’ opinions in previous ACA cases NFIB v. Sebelius and King v. Burwell “pushed the Affordable Care Act beyond its plausible meaning to save the statute.”

Additionally, Justice Barrett said in an interview with NPR that the dissent had the better legal argument in King v. Burwell. However, Justice Barrett maintained in her confirmation hearing that she was not determined to overturn the ACA.

“I’m not here on a mission to destroy the Affordable Care Act,” she said.

Specifically, Justice Barrett seemed to suggest in her confirmation hearing that the ACA could survive without the individual mandate because of severability, or that there is a presumption on the Court’s part under judicial tradition to save an underlying law if part of it is struck down.

“The presumption is always in favor of severability,” Justice Barrett said in her hearing.

Supreme Court Oral Arguments in California v. Texas

On November 10, the Supreme Court heard oral arguments in California v. Texas, a case considering if Congress’ 2017 decision to reduce the penalty for the ACA’s individual mandate renders the law unconstitutional. The Court also considered if the challengers to the law have the legal right to sue.

During the arguments, Justice Barrett didn’t indicate whether she thought the ACA should stand, but did express misgivings about whether the penalty could be reduced to zero and still be considered a tax.

“Why can’t we say that when Congress zeroed out the tax, it was no longer a tax because it generated no revenue and, therefore, it could no longer be justified as a taxing power?” she asked.

Justice Brett Kavanaugh and Chief Justice Roberts argued that Congress’ 2017 decision to reduce the penalty for not purchasing health insurance did not indicate the desire to throw out the law in its entirety.

“I think it’s hard for you to argue that Congress intended the entire act to fall. The same Congress that lowered the penalty to zero did not even try to repeal the rest of the act,” Chief Justice Roberts said. “I think, frankly, that they wanted the court to do that. But that’s not our job.”

“It does seem fairly clear that the proper remedy would be to sever the mandate provision and leave the rest of the act in place,” Justice Kavanaugh said.

A decision is expected on California v. Texas in 2021.

What Could Come Next

In the weeks following Justice Barrett’s confirmation to the Supreme Court, much of the political response to the confirmation has revolved around the possibility of adding more justices to the Supreme Court to remedy its shift rightward, and to dampen fears that the Court could undermine the incoming Biden Administration by legislating from the bench.

“The Court might be a little more conservative or the Court might be a little more liberal, but it turns out, through most of American history, the court is about as close to public opinion to the other branches as anything else,” Professor Graber said. “What I think people are worried about is [that] it shouldn’t be the mission of the Roberts Court to, in some sense, undermine the fundamental initiatives of a Biden administration.”

While the Constitution allows Congress to add and take away judges from the Supreme Court, it has not done so since 1869. In 1937, President Franklin D. Roosevelt supported adding more justices to the Supreme Court, but that proved to be unsuccessful.

President Joe Biden responded to Justice Barrett’s confirmation by stating he would assemble a commission of bipartisan constitutional scholars to determine what the next steps would be moving forward.

In an interview with 60 Minutes, President Biden said that “there’s a number of other things that our constitutional scholars have debated and I’ve looked to see what recommendations that commission might make.”

President Biden said that after 180 days of the commission’s creation, he would expect recommendations from them on how to reform the court system.

When it comes to how Justice Barrett’s confirmation will affect the Supreme Court and the U.S. judicial system in the long term, only time will tell.

“Which type of judge is Barrett going to be? Is she going to be with Roberts? Or, is going to be with Thomas and Alito and say, ‘We control the court and we’re going to fight the Democrats tooth and nail?’ … We don’t really know yet,” Professor Graber said.

ARTICLE BY Rachel Popa of The National Law Review / The National Law Forum LLC

For more, visit the National Law Review Election Law / Legislative News section.

Data Breach Litigations: 2020 Year in Review

2020 has been a year for the record books, and the area of data breach litigation is no exception. Several key developments, when considered individually or in conjunction, will likely make breach litigation a top of mind data privacy issue going into the next year. So fasten your seatbelts and read on as CPW recaps what you need to know going into 2021.

Overview of Industries Impacted by Data Breach Litigation in 2020

What industries were impacted by data breach litigations in 2020? The short answer: all of them.

Despite the widespread adoption of cybersecurity policies and procedures by organizations to safeguard their proprietary information and the personal information of their clients, consumers, and employees, data breaches are all too common. CPW has covered previously how “[t]echnical cybersecurity safeguards, such as patching, are obviously critical to an effective cybersecurity program. However, many of the most common vulnerabilities can be addressed without complex technical solutions.” Top five practical recommendations to reduce cyber risk can be reviewed here.

In fact, the number of data breaches in 2020 was more than double that of 2019, with industries that were frequent targets including government, healthcare, retail and technology. In this instance, correlation equals causation—as more and more companies experienced crippling security breaches, the number of data breach litigations is also on the rise.

What Has Changed with Data Breach Litigations in 2020?

Besides increasing in frequency, the considerations implicated by data breach litigation have also grown increasingly complex. This is due to several factors.

First, plaintiffs bringing data breach litigations have continued to rely on common law causes of action (negligence and fraud, among others) in addition to asserting new statutory claims (although of course there are exceptions). The reason for this boils down to the fact that while nearly every state has a data breach statute, many do not include a private right of action and are enforced by the state attorneys general. Hence plaintiffs’ reliance on common law and tort based theories. Insofar as statutory causes of action are concerned, the California Consumer Privacy Act (“CCPA”) has only been on the books since the start of this year, but emerged as a focal point for data breach litigations (be sure to check out our CCPA Year-in-Review coverage). The first CCPA class action settlement was announced last month and will likely serve as a benchmark going forward (keep a close eye on organizations agreeing to adopt increased security and data privacy controls, as has been done on the regulatory front).

Second, there was a monumental development in the spring that sent shockwaves through the data breach defense bar. A federal judge ordered production of a forensic report prepared by a cybersecurity firm in the wake of the Capital One data breach. The report was found not protected as attorney work product despite having been prepared at the direction of outside counsel. [Note: A forensic report is usually prepared by a cybersecurity firm following a thorough investigation into a company’s cyberattack. The report will address, among other areas, any vulnerabilities in a company’s IT environment that enabled the cyberattack. Obviously, while these findings can help a company defend itself in subsequent litigation and mitigate risk, the utility of the forensic report can cut both ways. Plaintiffs can also use this information to substantiate their claims.] This ruling reaffirmed several key lessons for companies facing cyber incidents. This includes that to shield a forensic report as work product, a company must demonstrate that the report would not have been created in essentially the same form absent litigation. Notably, this burden is more difficult to meet where the company has a pre-existing relationship with the cybersecurity vendor that prepares the report.

And third, as seen from a high profile case earlier this year, the legal fallout from a data breach can extend to company executives. A company’s former Chief Security Officer (CSO) was charged with obstruction of justice and misprision of felony for allegedly trying to conceal from federal investigators a cyberattack that occurred in 2016, exposing the data of 57 million individuals. Although an outlier, it is a significant reminder for companies and executives to take data breach disclosure obligations seriously—notwithstanding regarding murkiness in the law regarding when these obligations arise.

What Changed With Standing in Data Breach Cases in 2020?

Experienced litigators may be familiar with the classic requirements for standing, but even the most experienced of them are not likely familiar with standing as it applies to data breach litigation. The reason for this discrepancy is simple: although standing case law can be generally straightforward, this case law has not caught up to the unique challenges posted by data breaches. This, when combined with the absence of national-level legislation for data privacy, has created a hodgepodge of circuit splits and differing interpretations.

As you will recall, Article III standing consists of three elements: (1) an injury-in-fact that is concrete and particularized, as well as actual or imminent; (2) the injury must be fairly traceable to the defendant’s act; and (3) it must be “likely” that a favorable decision will compensate or otherwise rectify the injury.

When a data breach occurs, the penultimate standing question is whether the theft of data may, by itself, constitute a sufficient injury. Is there an injury when leaked personal information is not copied or used to facilitate fraud or another crime? Should an injury occur when only certain types of personal information, such as Social Security numbers, are leaked, or may the disclosure of other types of information, such as credit card numbers or addresses, be sufficient for injury? These questions are the heart of data breach litigation, and 2020 brought us a few notable cases that are worth reflecting on at this time of the year.

Given the absence of uniform causes of action in data breach litigation, plaintiffs often employ a number of strategies when drafting their complaints. One strategy has been to allege a negligence cause of action. This year, this strategy drew increased attention when Wawa, a convenience store chain, moved to dismiss a class action lawsuit filed against it by a group of credit unions regarding an alleged data breach. In In Re: Wawa Inc. Data Security Litigation, No. 2:19-cv-06019 (E.D. Pa.), a group of credit unions alleged that a convenience store chain’s failure to abide by the PCI DSS–the payment card industry’s data security standards–should be the standard of care for determining a negligence claim. In opposition, the plaintiffs argued that Wawa had an independent and common law duty to use reasonable care to safeguard the data used by credit and debit cards for payments. The parties held oral argument in November and a decision remains pending. Our previous coverage provides more information.

While some commentators have reported a trend this year towards viewing standing in data privacy cases to be more permissive towards plaintiffs, at least one court this year paused this trend. In Blahous v. Sarrell Regional Dental Center for Public Health, Inc., No. 2:19-cv-00798 (N.D. Ala.), a group of patients filed suit against a dental provider due to an alleged data breach. After conducting an investigation, the defendant determined that there was no evidence that any breached files were copied, downloaded, or otherwise removed. This factual finding was included in the notice that the defendant sent to its patients.

The court rejected the plaintiff’s argument and granted the defendant’s motion to dismiss. Crucial to the court’s opinion was that there were no allegations that suggested any disclosure of the acquired data, “such as an actual review by a third party,” had occurred. The court stated “the fact that the [b]reach occurred cannot in and of itself be enough, in the absence of any imminent or likely misuse of protected data, to provide Plaintiffs with standing to sue.” The court looked to the notice of the data breach and observed “[t]he [n]otice upon whose basis the Plaintiffs sue, included as exhibits to their own pleading, denies that any personal information was copied, downloaded, or removed from the network, despite Plaintiffs’ mistaken belief to the contrary.”

Perhaps the biggest takeaway of Blahous is that the disclosure of a patient’s Social Security number and health treatment information were not sufficient for standing. This was contrary to other decisions where the absence of a Social Security number in a data breach specifically led a court to conclude there was no injury. See Antman v. Uber Technologies, No. 3:15-cv-01175 (N.D. Cal.) (allegations are not sufficient when the complaint alleged “only the theft of names and driver’s licenses. Without a hack of information such as social security numbers, account numbers, or credit card numbers, there is no obvious, credible risk of identity theft that risks real, immediate injury.”).

Another case highlighted the current circuit split concerning injury in data breaches. In Hartigan v. Macy’s, No. 1:20-cv-10551 (D. Mass.), a Macy’s customer filed a class action lawsuit after his personal information was leaked due to a breach through Macy’s online shopping platform. The court granted Macy’s motion to dismiss, attributing three reasons for its holding: (1) the plaintiff did not allege fraudulent use or attempted use of his personal information to commit identify theft; (2) the stolen information “was not highly sensitive or immutable like social security numbers”; and (3) immediately cancelling a disclosed credit card can eliminate the risk of future fraud.

Hartigan has at least two takeaways. First, the change brought by Blahous may be an anomaly. In Blahous, the court found no standing when a Social Security number was disclosed. The Hartigan court, however, specifically stated that the absence of any disclosed Social Security numbers was a reason why the plaintiff did not suffer an injury. Although issued later in the year, the Hartigan court did not cite Blahous or any opinion from within the Eleventh Circuit.

Second, Hartigan highlighted the current circuit split regarding standing in data breach cases. The court’s analysis was based on First Circuit precedent that was issued prior to the Supreme Court’s decision in Clapper. The court then looked to six other circuits for guidance. It cited opinions in the D.C. and Ninth Circuits that suggested the disclosure of “sensitive personal information,” like Social Security numbers, creates a substantial risk of an injury. It then looked to opinions from the Fourth, Seventh, and Ninth Circuits that suggested post-theft criminal activity created an injury. Finally, it noted that the Third, Fourth, and Eighth Circuits found no standing in the absence of criminal activity allegations, even when Social Security numbers were disclosed.

Finally, no year-in-review would be complete without additional discussion of the CCPA (including in the area of standing). At least one notable standing opinion highlights what may be to come. In Fuentes v. Sunshine Behavioral Health Group, LLC, No. 8:20-cv-00487 (C.D. Cal.), a Pennsylvania resident filed suit against an operator of drug and alcohol rehabilitation treatment centers regarding an alleged data breach. A significant issue was whether the plaintiff, a Pennsylvania resident that stayed in one of the defendant’s California facilities for one month, may be a “consumer” under the CCPA for standing purposes.

The defendant seized on the plaintiff’s residency issues for its motion to compel arbitration, or, in the alternative, to dismiss. The defendant argued that the plaintiff’s one-month at a California treatment facility did not make him a “consumer.” The CCPA defines a “consumer” as “a natural person who is a California resident,” as defined by California regulations. Cal. Civ. Code § 1798.150(h). That part of the California Code of Regulations includes in its definition of “resident”: (1) individuals who are in California for other than a temporary or transitory purpose; or (2) individuals domiciled in California who are outside the state for a temporary or transitory purpose.

Unfortunately, the court did not evaluate this issue because the parties voluntarily dismissed the suit prior to a decision.

Trends in 2021

The nation’s political landscape and the pending circuit split will likely fuel developments in 2021.

With a new Congress arriving shortly, most eyes are watching to see whether the 117th Congress will finally bring about comprehensive federal data privacy legislation. Of the previously introduced federal legislation, one point of difference has been whether there should be a private cause of action. The CCPA, which permits private causes of action for California residents, may be one source of influence. Should federal legislation recognize a private cause of action, cases like Fuentes may foreshadow a standing argument to come.

The change of administration will also likely influence data privacy trends. The Vice President-Elect’s prior experiences with data privacy issues may place her on-point for any federal action. When she was Attorney General of California, the Vice President-Elect had an active interest in data privacy issues. In January 2013, her office oversaw the creation of the privacy Enforcement and Protection Unit of the California Attorney General’s Office, which was created to enforce laws related to data breaches, identity theft, and cyber privacy. The Vice President-Elect also secured several settlements with large companies, some of which required creation of specific privacy-focused offices within settling companies, such as chief privacy officer (mirroring recent trends discussed above).

2021 may also be the year of the Supreme Court. In recent years, the Supreme Court has denied several cert petitions in cases involving data breaches. 2021, however, may be the year when we see the nation’s highest court decide who has standing in a data breach and when an injury occurs. Several high-profile data privacy cases have increased the public’s attention to data issues, such as the recent creation of two MDLs. Additionally, the circuit split referenced in Hartigan may be coming to a head. Finally, the implementation of the CCPA and possibility of federal legislation may make this the year of data privacy.

CPW will be there to cover these developments, as they occur. Stay tuned.

ARTICLE BY Kristin L. Bryan and Christina Lamoureux of Squire Patton Boggs (US) LLP

For more, visit the NLR Corporate & Business Organizations section.

Can’t Hold Macklemore and Ryan Lewis Liable for Copyright Infringement Says Fifth Circuit

In 2017, a New Orleans Jazz Musician, Paul Batiste’s (“Batiste”), sued the world-renowned duo Macklemore and Ryan Lewis (“Macklemore”) alleging the duo copied eleven of his songs. Batiste v. Lewis, 2019 U.S. Dist. LEXIS 69130, 2019 WL 1790454 (E.D. La., Apr. 23, 2019). Batiste claimed Macklemore had, without permission, digitally sampled Batiste’s songs, and as a result, Macklemore’s hits, “Can’t Hold Us,” “Thrift Shop,” “Neon Cathedral,” “Same Love,” and “Need to Know” were based on or derivatives of Batiste’s copyrighted musical works. The district court disagreed after finding Batiste failed to sufficiently prove Macklemore had “access” to Batiste’s music and that Macklemore’s songs were strikingly similar to Batiste’s. Additionally, the district court held Batiste liable to pay Macklemore’s attorney fees pursuant to 17 U.S.C. § 505.

Batiste appealed and on September 22, 2020, the Fifth Circuit affirmed the lower court’s decision. See Batiste v. Lewis, Nos. 19-30400, 19-30889, 2020 U.S. App. LEXIS 30346 (5th Cir. Sep. 22, 2020). The Fifth Circuit agreed Batiste did not sufficiently prove Macklemore had access to Batiste’s works and failed to show substantial similarity between the competing works. Furthermore, the Fifth Circuit upheld the attorneys’ fees award, to the tune of $125,000, in favor of Macklemore.

Batiste argued Macklemore must have had access as a result of Batiste’s songs being “widely disseminated” through radio stations, record stores, and live performances at local nightclubs. Citing to evidence of “meager sales in only a handful of local stores” and “sparse” streaming and downloads, the court disagreed with Batiste and found the dissemination of his music was “quite limited.” The court further noted that Batiste’s songs did not become available to stream until after Macklemore had released most of their hit songs. Because Batiste failed to prove Macklemore had actual or constructive access, he was then tasked with proving “strikingly similarity” in order to prevail on his infringement claim since a “probative similarity can make up for a lesser showing of access.” In that regard, the Court found Batiste fell flat and did not “even try to meet the striking-similarity standard.”

Considering the objective unreasonableness of Batiste’s claims, his history of litigation misconduct, and his pattern of filing pugnacious copyright infringement actions, the court upheld the district court’s award of attorneys’ fees to Macklemore.

Accordingly, copyright infringement plaintiffs should think twice before filing suit capriciously and without first objectively evaluating the strength of their “access” and “similarity” proofs. The more access a defendant had to plaintiff’s copyrighted works the less similarity is required for a finding of infringement, and vice-versa, however, proof of both is ideal.

ARTICLE BY Gene Markin of Stark & Stark

For more, visit the NLR Intellectual Property section.

Much A-Brew About Nothing: Court Dismisses False Ad Suit Against Starbucks

Judge Alison Nathan of the U.S. District Court for the Southern District of New York recently dismissed with prejudice a putative class action alleging Starbucks misrepresented itself as a “premium” coffee retailer. In doing so, the Court found that plaintiffs failed to allege Starbucks made any statements likely to mislead reasonable consumers, and that nearly all of the challenged statements were just puffery. George v. Starbucks, (S.D.N.Y. Nov. 19, 2020).

Plaintiffs alleged Starbucks marketed itself as a high-end coffee brand, including claims that it serves “the finest whole bean coffees”; has a reputation for “quality” products; provides a “PERFECT” coffee experience; offers the “Best Coffee for the Best You”; brags that “It’s Not Just Coffee. It’s Starbucks;” and touts its warm welcoming environment. According to plaintiffs, this was false and misleading because many New York Starbucks locations allegedly are infested with pests and use noxious pesticides to abate these pests. Plaintiffs alleged violations of Sections 349 and 350 of the New York General Business Law, this statute’s unfair competition and false advertising provisions.

In dismissing plaintiffs’ claims, Judge Nathan found that “[n]early all of the language the customers object to consists of obvious ‘puffery’” that no reasonably buyer would take at face value. Plaintiffs argued that the whole of Starbucks’s brand messaging was “more than the sum of its parts,” pointing to two cases in which courts allowed advertising suits to proceed even where a defendant’s ads were not literally false when taken in isolation. However, the court noted that in both those cases, the plaintiffs claimed that defendants’ advertising campaign “implied specific, falsifiable facts.” By contrast, plaintiffs here did not allege Starbucks’s advertising communicated—even indirectly—any specific details about its products. Instead, plaintiffs argued the advertising was misleading because it portrayed Starbucks as providing “premium products made with the best ingredients.” However, as Judge Nathan found, claims that a seller’s products are “premium” or “the best” cannot support a cause of action for deceptive practices, whether made once or across all of the company’s brand messaging.

The court found one statement cited in the amended complaint could, if false, be actionable—that Starbucks baked goods contain “no artificial dyes or flavors.” However, the court noted the pesticide mentioned in the complaint was not an “artificial dye or flavor,” and no reasonable consumer would understand this statement to convey information about the company’s use of pesticides in its stores.

In their amended complaint, plaintiffs alleged that the pesticides Starbucks supposedly uses have manufacturer warnings against use in food service establishments, and the CDC warns that exposure to these pesticides can have serious health effects. However, none of the plaintiffs claimed to have gotten sick. Nor did plaintiffs allege that Starbucks advertised that it did not use these (or any other) pesticides. This case serves as yet another reminder that absent an actionably false or misleading statement, false advertising claims cannot be used to remedy other consumer complaints, and consumer assumptions not grounded in the text of advertising are ripe for dismissal. Watch this space for further development.

ARTICLE BY Lawrence I Weinstein, Jeffrey H Warshafsky, and Brooke G. Gottlieb of Proskauer Rose LLP

For more, visit the NLR Litigation / Trial Practice section.

2020 National Law Review Thought Leadership Awards

The National Law Review’s 2020 “Go-To Thought Leader Awards” recognizes 71 legal authors and legal organizations, pulled from 20,000+ of pieces of content published in 2020.

With the exceptional challenges of COVID-19, thought leadership from attorneys and other leading professionals became more important and impactful than ever before. The Coronavirus pandemic and resulting economic and social upheaval along with the uncertain political environment presented unparalleled challenges for both businesses and individuals that made the detailed analysis prepared by the National Law Review’s authors more relevant and sought after than ever, leading to 4.3 million page views in both March and April of 2020, during the first wave of news coverage related to the pandemic.

This is the third year the NLR editors have formally recognized the efforts of less than 1% of the publication’s 15,000 authors across a variety of legal specialties and in law practice management and operations. In 2020 the National Law Review saw thousands of articles on COVID-19’s impact on employer compliance, new legislation such as the Families First CoronavirusRecovery Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) as well as the Paycheck Protection Program (PPP) and changing state regulations and mandates. National Law Review attorney authors were able to stay top of mind with their clients, by explaining and analyzing these issues, even as face-to-face events and client visits were impossible.

Additionally, with the turmoil related to the impeachment, election, judicial changes, and an uncertain global economy the topics addressed by the National Law Review were broader and more topical than ever.

Authors chosen as NLR Go-To Thought Leadership recipients not only demonstrate impressive legal knowledge and business acumen, but write with an eye towards compliance or adaptation, and along with attracting high numbers of readers they are also frequently referenced in other media and academic journals.

Click here to view 2020’s winners.

Simon says “Don’t Close Yours Stores in My Shopping Centers”

Simon Property Group is at it again. Two years ago, Simon took the shopping center world by storm when it obtained an injunction preventing Starbucks Corporation from shuttering 77 of its Teavana stores in Simon malls across the United States. While the Simon Property Group L.P. v. Starbucks Corporation decision gave shopping centers owners a moment of hope that they could prevent retailers from closing stores during the retail apocalypse, many shopping center professionals soon concluded that the court’s decision probably has little impact beyond the specific facts of that case. We analyzed that decision in our January 2018 article “Decaffeinated: Simon Property Group L.P. v. Starbucks Corporation Is Not a Fix for the Retail Apocalypse”. Undeterred by the narrow application of the Starbucks decision, Simon has once again taken aim at a retailer looking to close its stores in Simon malls.

In the recent decision Abercrombie and Fitch Stores, Inc. v. Simon Property Group, LP, Simon forced national retailer Abercrombie and Fitch to keep its doors open. In February 2019, Simon and Abercrombie began negotiating terms to renew 54 leases in Simon malls and to resolve a rent dispute. Most of the existing Abercrombie leases had expired or were set to expire soon. Simon and Abercrombie exchanged emails confirming the final deal terms for each location and agreeing that the parties would draft conforming documents. In the meantime, Abercrombie continued to operate in the leased spaces and it paid the rents due under the yet-to-be-drafted lease documents. Two months later – and only days before the COVID-19 pandemic stopped the world from spinning – Abercrombie sent Simon the Abercrombie-signed versions of the lease documents and encouraged Simon to have them executed “as quickly as possible.” Days later, Abercrombie closed all of its stores because of the COVID-19 pandemic, and Simon began sending its signed copies of the lease documents to Abercrombie in piecemeal. One day later, Simon closed all of its malls across the country due to the pandemic. That same day, Abercrombie attempted to retract its signatures on 42 of the lease documents citing “the current uncertainty regarding the impact of COVID-19.”

Simon promptly commenced suit seeking a declaratory judgment that the lease documents were valid and also seeking money damages and specific performance. Three weeks later, Abercrombie made clear its intent to permanently close its stores subject to the Simon agreements. Simon responded by seeking a temporary restraining order to prevent Abercrombie from permanently closing these locations. The trial court agreed with Simon, and Abercrombie appealed.

The purpose of a temporary restraining order is to maintain the status quo. One compelling fact in the Starbucks decision was that each of the Teavana stores was open and operating at the time the court entered its injunction preventing any closures, such that the status quo was maintained. In the Abercrombie decision, however, Abercrombie had closed its stores before Simon sought an injunction. Abercrombie argued that compelling it to reopen these stores was an “improper mandatory injunction” and would make Abercrombie take action and engage in conduct that it was not already doing (i.e. re-open and operate in nearly 50 Simon malls). The court disagreed, explaining that the parties had been performing under the pending agreements for nearly two months before COVID-19 temporarily shut down Simon’s malls; yet, Abercrombie decided to close its stores permanently. The injunction did not compel Abercrombie to re-open its stores in defiance of temporary closure orders imposed by state or local governments; the injunction merely prohibited Abercrombie from closing its stores permanently. While this explanation focuses on a distinction without a difference – Abercrombie’s stores were closed, whether because of the COVID-19 pandemic or an Abercrombie business decision – the court reasoned that the status quo is determined as of “last, actual, peaceful, and non-contested status which preceded the pending controversy.” The last, actual, peaceful, and non-contested status between Simon and Abercrombie existed before the COVID-19 pandemic forced Simon to close its malls, when Abercrombie was still operating in Simon’s malls.

Although many shopping centers have seen tenants try to use the COVID-19 pandemic as a shield against their lease obligations, the Abercrombie decision is one of the few instances where the pandemic has actually benefitted a shopping center owner. The court did not say whether Simon would have been denied an injunction in the absence of COVID-19, but the court’s distinction between a temporary closure and a permanent one and the timing of determining the status quo hints that the result might have been different Abercrombie had closed its stores before COVID-19 plagued the United States.

The Abercrombie decision is important for another reason as well. In each of its transmittals to Abercrombie, Simon’s correspondence stated, “to be enforceable by or against a party, a final agreement between the parties must also be written and signed by both parties.” Attorneys use this type of language in negotiations all the time, seeking to avoid being bound to a deal until the ink is dry. Abercrombie seems to have argued that it was not bound to any lease document that Simon had not countersigned by the time Abercrombie retracted its signatures. The court disagreed with Abercrombie here too, explaining that “absolute certainty of all contract terms is not required for a contract to be enforceable.” The parties must only agree to the essential terms. Simon and Abercrombie had confirmed all the essential terms of each lease in email correspondence and memorialized that negotiations were complete long before the leases were drafted.

Additionally – and critically – “the parties’ performance under an agreement will amount to an unambiguous and overt admission by both parties that a contract existed.” Abercrombie kept operating its stores and started to pay – and Simon accepted – the rent due under each of these yet-to-be-drafted leases. Abercrombie also made the settlement payment to resolve the rent dispute. Under these facts, the court concluded that Simon presented prima facie evidence of enforceable agreements and did not hold Simon to its self-serving language that there would be no deal until the parties actually signed the documents. The Abercrombie decision is a cautionary tale for practitioners and business people alike: substance will (and should) prevail over form. If the parties act like an agreement exists, a court may find that one actually does exist. Had the court enforced Simon’s disclaimer, Abercrombie may very well have been free to close its stores in Simon’s malls.

Just as the Starbucks decision is limited by the specific facts in that case, the Abercrombie decision is similarly narrow. It does not empower shopping center owners to force their tenants to remain open and operating under all circumstances. It is, however, another Simon-led example of how shopping center owners are pushing back against retailers. Shopping center owners and retailers alike should take note.

ARTICLE BY David P. Vallas and Kelly D. Stohs

of Polsinelli PC

For more articles on malls, visit the National Law Review Corporate & Business Organizations section.

Category: Litigation

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