Category: Litigation

Wisconsin Supreme Court: “Retroactive Defense” Can Satisfy An Insurer’s Duty to Defend

The Wisconsin Supreme Court has issued numerous decisions over the past few years regarding an insurer’s duty to defend its insured under liability insurance. On February 13, 2020, the Court added Choinsky v. Germantown School District, Case No. 2018AP116, 2020 WI 13, where it clarified one of the four recognized procedures for insurance carriers to contest coverage while avoiding a breach of the duty to defend.  The four procedures are: (1) defend under a reservation of rights; (2) defend under a reservation of rights but seek a declaratory judgment on coverage; (3) enter into a nonwaiver agreement with the insured where the insurer preserves its right to contest coverage; and (4) file a motion to bifurcate and stay the liability determination until coverage is determined.  Choinsky addressed a wrinkle to option 4, where the insurer files the appropriate motions but the circuit court denies the stay.

In Choinsky, retirees of the Germantown School District brought a class action in 2013 after a District decision caused them to lose their long term care benefit.  The retirees alleged breach of contract, breach of implied contract, breach of the duty of good faith and fair dealing, and promissory estoppel.  The District tendered the defense to its insurer, which the insurer denied a week later.  Then, following option 4, the insurer promptly moved to intervene in the pending suit, to bifurcate the coverage and liability issues, and to stay a liability determination until coverage was decided.  Almost three months later, the circuit court granted the motion to intervene and bifurcate, but denied the motion to stay.  The insurer then agreed to retroactively defend from the date of tender until coverage was resolved.  As a result, the District had to defend itself on both coverage and liability for approximately five months and was later reimbursed only for its attorney fees on the liability defense.

After two motions by the insurer for summary judgment were denied, coverage was tried to a jury in April 2016.  The jury found that the District decision makers had acted negligently, and the circuit court accordingly determined that there was a duty to defend.  After the liability trial resulted in a jury verdict in favor of the District, the District moved again for attorney fees it incurred in proving coverage pursuant to Elliott v. Donahue, 169 Wis. 2d 310, 485 N.W.2d 403 (1992), and Newhouse v. Citizens Security Mutual Insurance Co., 176 Wis. 2d 824, 501 N.W.2d 1 (1993).  The circuit court denied that motion, reasoning that since the insurer had followed a judicially-sanctioned approach to the coverage determination, it could not be held liable for breach of contract.  The Court of Appeals affirmed.

The District argued to the Supreme Court that its insurer should be on the hook for the fees the District expended in proving coverage because the insurer initially refused to defend and cannot cure that choice by agreeing to defend six months later.  It further argued that there was a breach since the insurer didn’t start paying defense fees for almost one year after tender.  The Supreme Court held that the insurer had taken “timely” action when it responded to the tender within one week and when the insurer sought to intervene in the liability case.  The Court said that the time it took the circuit court to decide the motion for stay and then the denial of a stay caused the problem, and urged circuit courts to give these issues priority on their dockets.

The Court also concluded that any damage to the District for the insurer’s initial coverage denial was remedied by the insurer reimbursing for attorney fees retroactive to the date of tender, stating that in the situation presented “the insurer must defend its insured under a reservation of rights so that the insured does not have to pay to defend itself on liability and coverage at the same time.  Additionally, the insurer must reimburse its insured for reasonable attorney fees expended on a liability defense, retroactive to the date of tender.” 2020 WI 13, ¶ 19.

In his dissent, Justice Kelly criticized the majority: “I don’t agree, however, that an insurer can buy its way out of its breach of [the duty to defend] by reimbursing its insured for defense costs.” 2020 WI 13, ¶ 47.  He noted that the District did not receive a defense for over 5 months, and he called the retroactive payments a new concept that will incentivize insurers to refuse the duty defend between tender and resolution of coverage issues.  In doing so, the insurer “risks nothing doing so because, in the worst case, it simply pays for the defense it refused to provide.” 2020 WI 13, ¶ 56.

All coverage matters are fact-specific, and time will tell how prophetic Justice Kelly’s warning turns out to be.  The insurer in Choinsky acted in a timely fashion by responding within weeks of tender.  If an insurer takes a longer time to respond, a court might come to a different conclusion.  And while the Supreme Court again “encouraged” all circuit courts to decide motions to bifurcate and stay expeditiously, that is not always possible.  Some motions can, for one reason or another, take longer than in Choinsky and some types of claims really can’t be stayed. Environmental cases, for example, can be triggered by a “responsible party” letter from the Environmental Protection Agency or the Wisconsin Department of Natural Resources.  Johnson Controls, Inc. v. Employers Ins. of Wausau, 2003 WI 108, ¶ 92, 264 Wis. 2d 60, 665 N.W.2d 257.  It is difficult to imagine how an environmental investigation could be stayed while coverage is decided.

For now, under Choinsky it appears acceptable that an insured may be forced to defend itself on two fronts for five months– however there is no set rule and, as a result, could that mean that 10 or even 12 months is acceptable?  What if a dispute then arises over the reasonableness of fees and that dispute lasts a year and there is no payment for 24 months?  There is room to test the limits, but Choinsky suggests a safe harbor for insurers of at least a few months if insurers file “timely” bifurcation and stay motions.  Insureds should be aware of Choinsky and push to minimize the time they subject to simultaneously defending coverage and liability.

© 2020 Davis|Kuelthau, s.c. All Rights Reserved

EMPLOYERS BEWARE: $2.4M Jury Verdict Serves as a Reminder of the Duty Employers Owe to Their Employees

A recent New Jersey Superior Court case involving PNC Bank as a defendant should serve as an eye-opening reminder to all employers that it has a duty to maintain a safe and healthy workplace for all employees, free from harassment, discrimination and any other tort or prohibited conduct. Notably, this duty to maintain a safe and healthy workplace not only applies to the eradication of wrongdoing by employees, but also affords protection to employees from improper acts of non-employees such as customers, clients, vendors, independent contractors, etc.

Following a jury trial in Essex County, PNC Bank was deemed liable in the amount of $2.4 million in damages, consisting of both back and front pay, as well as past and future emotional distress damages, awarded to a former employee who claimed she was the victim of a sexual assault/gender discrimination by a bank customer in 2013. The Plaintiff argued that the customer in question was known by the Bank to have groped and harassed others in the past, yet the Bank did not take the appropriate, remedial measures to ensure her safety and prevent it from happening again.

Although the Bank claims that it had no such knowledge of the prior bad acts of the customer and had no way of knowing any such assault would occur towards the Plaintiff, the jury clearly did not accept that defense.

This case is yet another example on how important it is to have a well-established and widely distributed anti-harassment and discrimination policy and training for all staff in the workplace, applicable to all those susceptible to harassment or discrimination in the workplace, whether it be by fellow employees or otherwise, such as customers or guests.

© 2020 Giordano, Halleran & Ciesla, P.C. All Rights Reserved

For more about employer responsibilities, see the National Law Review Labor & Employment law section.

Proposed Class Action Lawsuit Claims Arizona Beverage’s Gummies are Not “All Natural” Because They Contain Synthetic Ingredients

On February 11, 2020, Christopher Silva, a New York resident, filed a proposed class action lawsuit against Hornell Brewing Co. Inc., Arizona Beverages USA LLC, Beverage Marketing USA, Inc., and Arizona Beverage Co. (“Defendants”) over defendants’ “all natural” gummy snacks.

The plaintiff claims that defendants’ advertising and marketing campaign is false, deceptive, and misleading because the gummies contain several synthetic ingredients, such as ascorbic acid, citric acid, gelatin, dextrose, glucose syrup, and modified food starch.  Silva seeks to represent a New York class and individual classes for all 49 other states.

In the complaint, Silva cited to the United States Department of Agriculture’s Draft Guidance Decision Tree for Classification of Materials as Synthetic or Nonsynthetic (natural).  Per that guidance, a substance is natural – as opposed to synthetic – if (a) it is manufactured, produced, or extracted from a natural source (i.e. naturally occurring mineral or biological matter); (b) it has not undergone a chemical change (i.e. a process whereby a substance is transformed into one or more other distinct substances) so that it is chemically or structurally different than how it naturally occurs in the source material; or (c) the chemical change was created by a naturally occurring biological process such as composting, fermentation, or enzymatic digestion or by heating or burning biological matter.

Silva noted that while the synthetic ingredients are all listed on the back of the package, reasonable consumers are not expected or required to review the ingredients list on the back in order to confirm or debunk defendants’ prominent front-of-the-product claims.  The package in question includes the phrase “All Natural” on the packaging behind the words, “Arizona” and “fruit snacks.” We will continue to monitor any developments.

© 2020 Keller and Heckman LLP

For more on food ingredient labeling regulation see the National Law Review Biotech, Food and Drug law section.

Texas Appeals Court Rules Private Communications with Customers Not Protected Free Speech

In a case addressing the applicability of free speech as a defense to trade secret misappropriation, the Court of Appeals for the Fifth District of Texas retracted its previous ruling, holding that communications with customers and suppliers did not involve a matter of public concern and were therefore not an exercise of free speech. Goldberg, et al. v. EMR (USA Holdings) Inc., et al., Case No. 05-18-00261-CV (Tex. App. Jan. 23, 2020) (Myers, J).

The case concerns allegations of trade secret misappropriation brought by EMR (USA Holdings) (EMR), against Kenneth Goldberg, his company Geomet Recycling (Geomet), and several Geomet employees who, like Goldberg, formerly worked for EMR. EMR and Geomet are both involved in the business of scrap metal recycling. EMR alleged that Goldberg, Geomet and the former EMR employees (collectively, “Defendants”) violated the Texas Uniform Trade Secrets Act (TUTSA), breached fiduciary duties and tortuously interfered with contracts by, among other things, using EMR’s trade secrets and confidential and proprietary information to contact purchasers and suppliers.

Defendants moved to dismiss all claims under the Texas Citizen’s Participation Act (TCPA), claiming that their contacts with purchasers and suppliers were protected free speech involving a matter of public concern. The TCPA allows litigants to seek early dismissal of a lawsuit if they prove by a preponderance of the evidence that the legal action is based on, or is in response to, a party’s exercise of the right of free speech.

The TCPA defines “exercise of the right of free speech” as “a communication made in connection with a matter of public concern.” The statute states that a “‘[m]atter of public concern’ includes an issue related to: (A) health or safety; (B) environmental, economic, or community well-being; . . . or (E) a good, product, or service in the marketplace.” Id. § 27.001(7). Additionally, under the “commercial-speech exemption,” the TCPA does not apply to a legal action brought against a person engaged in the business of selling goods or services if the conduct arises out of a commercial transaction in which the intended audience is an actual or potential buyer or customer.

After the trial court denied Defendants’ motion to dismiss without providing any reasoning, Defendants appealed.

On August 22, 2019, the Court of Appeals for the Fifth District of Texas affirmed the trial court’s decision. The Court held that the commercial-speech exemption to the TCPA applied to the Defendants’ communications with purchaser and suppliers. However, the Court also found that these communications concerned “an issue related to . . . a good, product, or service in the marketplace” and therefore involved a matter of public concern under the TCPA.

Both sides asked for rehearing. In its new ruling, the Court of Appeals reversed course and found that Defendants’ communications with purchasers and suppliers did not involve matters of public concern. Defendants argued that the business of recycling scrap metal relates to environmental, economic and community well-being, which are considered matters of public concern under the TCPA. The Court rejected this argument, noting that while scrap metal recycling may indeed relate to matters of public concern, the communications at issue “were private communications regarding private commercial transactions for the purchase and sale of a commodity.” The Court held that, because the communications themselves did not implicate matters of public concern, they were not subject to the TCPA.

Practice Note:

The new ruling significantly restricts the application of the TCPA. The holding indicates that the TCPA cannot shield defendants from trade secret claims based on communications between the defendant and potential customers or suppliers that solely relate to the purchase or sale of a commodity—even if the commodity at issue might arguably relate to matters of public concern.

© 2020 McDermott Will & Emery

For more on TCPA rule application, see the National Law Review Communications, Media & Internet law section.

D.C. District Court Limits the HIPAA Privacy Rule Requirement for Covered Entities to Provide Access to Records

On January 23, 2020, the D.C. District Court narrowed an individual’s right to request that HIPAA covered entities furnish the individual’s own protected health information (“PHI”) to a third party at the individuals’ request, and removed the cap on the fee covered entities may charge to transmit that PHI to a third party.

Specifically the Court stated that individuals may only direct PHI in an electronic format to such third parties, and that HIPAA covered entities, and their business associates, are not subject to reasonable, and cost-based fees for PHI directed to third parties.

The HIPAA Privacy Rule grants individuals with rights to access their PHI in a designated record set, and it specifies the data formats and permissible fees that HIPAA covered entities (and their business associates) may charge for such production. See 45 C.F.R. § 164.524. When individuals request copies of their own PHI, the Privacy Rule permits a HIPAA covered entity (or its business associate) to charge a reasonable, cost-based fee, that excludes, for example, search and retrieval costs. See 45 C.F.R. § 164.524(c) (4). But, when an individual requests his or her own PHI to be sent to a third party, both the required format of that data (electronic or otherwise) and the fees that a covered entity may charge for that service have been the subject of additional OCR guidance over the years—guidance that the D.C. District Court has now, in part, vacated.

The Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH Act set a statutory cap on the fee that a covered entity may charge an individual for delivering records in an electronic form. 42 U.S.C. § 17935(e)(3). Then, in the 2013 Omnibus Rule, developed pursuant to Administrative Procedure Act rulemaking, the Department of Health and Human Services, Office for Civil Rights (“HHS OCR”) implemented the HITECH Act statutory fee cap in two ways. First, OCR determined that the fee cap applied regardless of the format of the PHI—electronic or otherwise. Second, OCR stated the fee cap also applied if the individual requested that a third party receive the PHI. 78 Fed. Reg. 5566, 5631 (Jan. 25, 2013). Finally, in its 2016 Guidance document on individual access rights, OCR provided additional information regarding these provisions of the HIPAA Privacy Rule. OCR’s FAQ on this topic is available here.

The D.C. District Court struck down OCR’s 2013 and 2016 implementation of the HITECH Act, in part. Specifically, OCR’s 2013 HIPAA Omnibus Final Rule compelling delivery of protected health information (PHI) to third parties regardless of the records’ format is arbitrary and capricious insofar as it goes beyond the statutory requirements set by Congress. That statute requires only that covered entities, upon an individual’s request, transmit PHI to a third party in electronic form. Additionally, OCR’s broadening of the fee limitation under 45 C.F.R. § 164.524(c)(4) in the 2016 Guidance document titled “Individuals’ Right under HIPAA to Access their Health Information 45 C.F.R. Sec. 164.524” violates the APA, because HHS did not follow the requisite notice and comment procedure.” Ciox Health, LLC v. Azar, et al., No. 18-cv0040 (D.D.C. January 23, 2020).

All other requirements for patient access remain the same, including required time frames for the provision of access to individuals, and to third parties designated by such individuals. It remains to be seen, however, how HHS will move forward after these developments from a litigation perspective and how this decision will affect other HHS priorities, such as interoperability and information blocking.

© Polsinelli PC, Polsinelli LLP in California

For more on HIPAA Regulation, see the National Law Review Health Law & Managed Care section.

Clash of Consumer Protection Goals: Does the Text of the TCPA Frustrate the Purposes of the CPSA?

“Hello.  This is an automated call from Acme Manufacturing. Our records indicate that you purchased Product X between December 2019 and January 2020. We wanted to let you know that we are recalling Product X because of a potential fire risk. Please call us or visit our website for important information on how to participate in this recall.”

When companies recall products, they do so to protect consumers.  In fact, various federal laws, including the Consumer Product Safety Act (CPSA), the Federal Food, Drug, and Cosmetic Act (FDCA), and National Highway and Motor Vehicle Safety Act (MVSA), encourage (and may require) recalls. And the agencies that enforce these statutes would likely approve of the hypothetical automated call above because direct notification is the best way to motivate consumer responses to recalls.[1]

But automated calls to protect consumers can run into a problem: the Telephone Consumer Protection Act (TCPA).

Are Recall Calls a Nuisance or an Emergency?

The TCPA seeks to protect consumers from the “nuisance and privacy invasion” of unwanted automated marketing calls.[2] The TCPA prohibits any person from making marketing calls to landlines, or any non-emergency calls or text messages[3] to wireless lines, using automated dialers or recorded messages unless the recipient has given prior written consent. The Act includes a private right of action and statutory per-violation damages – $500, trebled to $1,500 if a court finds the violation willful and knowing.[4] These penalties can add up quickly: In one case, a jury found that a company violated the TCPA nearly two million times, exposing the company to minimum statutory damages totaling almost $1,000,000,000.[5]

There is an important exception to the TCPA’s prohibition on automated calls. The TCPA allows autodialed calls for emergency purposes,[6] but the Act does not define that phrase. While the FCC has interpreted emergency purposes to mean “calls made necessary in any situation affecting the health and safety of consumers,”[7] recalls are not explicitly identified within this definition. As a result, aggressive plaintiffs have demanded millions in damages from companies that use automatic dialers to disseminate recall messages.[8]

For example, a grocery chain – Kroger – made automated calls to some purchasers of ground beef as part of a recall stemming from salmonella concerns. A plaintiff responded with a purported class action that did not mention the recall [9] but was based on consumers alleging that they had received “annoying” “automated call[s] from Kroger.”

Moving to dismiss, Kroger observed that the plaintiff – who had not listened to the call beyond its initial greeting[10] and thus could not comment on the call’s text – had “cherry-picked”[11] portions of consumers’ online comments to support the case, omitting text that clearly demonstrated that the calls were made for health and safety purposes.[12] Kroger argued that the online comments did not support the plaintiff’s allegations that Kroger had made any marketing calls.

The court granted Kroger’s motion and dismissed the complaint without leave to amend. Even so, Kroger was compelled to spend time and money defending the claim.

In light of this type of lawsuit, one communications firm involved in automotive recalls has petitioned the FCC to “clarify . . . that motor vehicle safety recall-related calls and texts are ‘made for emergency purposes.’”[13] The Association of Global Automakers and the Alliance of Automobile Manufacturers commented in support of the petition, arguing that the “[l]ack of clarity regarding TCPA liability for vehicle safety recall messages has had a chilling effect on these important communications.”[14] The Settlement Special Administrator for the Takata airbag settlements also wrote in support, commenting that automated “recall-related calls and texts serve an easily recognizable public safety purpose.”[15]

The TCPA’s emergency exception offers protection in litigation. The FCC’s definition – “calls made necessary in any situation affecting the health and safety of consumers” – neatly encapsulates the entire function of a recall, namely acting to protect consumers’ health and safety. Moreover, in developing the emergency exception, Congress broadened initial language that excepted calls made by a “public school or other governmental entity” to the enacted “emergency purposes” phrasing precisely to ensure the exception encompassed automated emergency calls by private entities.[16] One of the seminal emergency purposes for which a private entity might seek to make automated calls is a product recall.

Even with such sound arguments that TCPA claims related to recall calls are without merit within the statute, however, aggressive plaintiffs have brought such claims. These efforts compel companies to spend finite resources defending claims that should not be brought in the first place. An express statutory or regulatory statement that recalls are squarely within the definition of emergency purposes would give companies greater confidence that not only would they be able to successfully defend against any effort to pit the TCPA against consumer-protection values, but that the claims are so unlikely to be brought that the companies need not even fear to have to defend.

Protecting Against Recall-Call Complaints

Until the FCC or Congress expressly instructs plaintiff’s counsel not to try to litigate against automated recall calls, there are steps companies that want to use automated dialers to drive recall responses can take to minimize any risk of a court misinterpreting their calls or finding TCPA liability where it should not attach.

For example, companies may (as some already do) ask for customers’ consent to be autodialed in connection with the products they have purchased – e.g., by including consent language on product warranty cards or registration forms. In fact, the Consumer Product Safety Improvement Act of 2008 (CPSIA)[17] already requires manufacturers of durable infant and toddler products to include registration cards for recall-communication purposes.[18] Companies in some other industries (like the on- and off-road motor vehicle industries) typically have robust registration systems that can incorporate auto dialing consent, and more companies in other spaces may want to consider using registration to facilitate recalls.

Further, automated recall calls should focus on the recall. If calls extend to marketing messaging, that could undermine both a future TCPA defense and the efficacy of that and future recall communications.

Optimally, companies would be less likely to need these defenses if the statute more clearly signaled to would-be litigants that they should not even bother. If the FCC grants the pending petition and plainly states that product recalls are emergencies for TCPA purposes, courts’ deference to agency interpretations might deter at least some complaints. A statutory amendment would be the surest guarantee, though, and manufacturers may wish to ask Congress to amend the TCPA to clarify that recall messages are emergency messages.

[1] See, e.g., Joseph F. Williams, U.S. Consumer Prod. Safety Comm’n, Recall Effectiveness Workshop Report, 5 (Feb. 22, 2018).

[2] Pub. L. No. 102-243, § 2(12), 105 Stat. 2394, 2395 (Dec. 20, 1991).

[3] Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, CG Docket No. 02-278, Report and Order, 18 FCC Rcd 14014, 14115, para. 165 (2003)

[4] TCPA at § 3(a), 105 Stat. at 2399 (codified at 47 U.S.C. § 227(c)(5)).

[5] Wakefield v. ViSalus, Inc., No. 3:15-cv-1857-SI (D. Or.).

[6] See, e.g., TCPA at § 3(a), 105 Stat. at 2395-96 (codified at 47 U.S.C. § 227(b)(1)(A)).

[7] 47 C.F.R. § 64.1200(f)(4).

[8] See, e.g., Compl., Ibrahim v. Am. Honda Motor Co., Inc., No. 1:16-cv-04294, Dkt. #1 (N.D. Ill. Apr. 14, 2016).

[9] Compl., Brooks v. Kroger Co., No. 3:19-cv-00106-AJB-MDD, Dkt. #1 (S.D. Cal. Jan. 15, 2019) (“Brooks”).

[10] Pl. Opp. to Mot. to Dismiss at 5, Brooks, Dkt. #9 (Apr. 4, 2019).

[11] Reply in Supp. of Mot. to Dismiss at 7, Brooks, Dkt. #10 (Apr. 11, 2019).

[12] The plaintiff quoted one complaint as “Automated call from Kroger.” Compl. at 3-4, Brooks. As the defense noted, that complaint continued, “requesting that you return ground beef . . . due to the threat of salmonella.” Mem. in Supp. of Mot. to Dismiss at 6, Brooks Dkt. #7 (Mar. 21, 2019).

[13] IHS Markit Ltd. Petition for Emergency Declaratory Ruling, CG Docket No. 02-278, Petition, ii (Sept. 21, 2018).

[14] IHS Markit Ltd. Petition for Emergency Declaratory Ruling, CG Docket No. 02-278, Comments of Association of Global Automakers, Inc. and Alliance of Automobile Manufacturers, 9 (Nov. 5, 2018).

[15] IHS Markit Ltd. Petition for Emergency Declaratory Ruling, CG Docket No. 02-278, Comments of Patrick A. Juneau, 3 (Nov. 5, 2018).

[16] S. Rep. No. 102-178, 5 (Oct. 8, 1991).

[17] Pub. L. No. 110-314, 122 Stat. 3016 (Aug. 14, 2008) (codified as amended at 15 U.S.C. § 2056a).

[18] 15 U.S.C. § 2056a(d).

© 2020 Schiff Hardin LLP

For more on CPSA, FDCA, MVSA & other recalls, see the National Law Review Consumer Protection law section.

Lyft Sexual Assault Claims Consolidated for Pre-Trial Proceedings

Lyft and other companies have become a part of life and people look to them for a safe ride home at the end of a night out.   However, ridesharing companies, like Lyft and Uber, have been under fire for passenger safety concerns, and the stories of women being sexually assaulted by their drivers are prolific, harrowing and terrifying.  In response to this disturbing trend, a wave of lawsuits in California are addressing the company’s responsibility when a passenger is assaulted.

Lyft Sexual Assault Claims Consolidated in San Francisco Superior Court

Recently,  California Superior Court Judge Hon. Kenneth Freeman granted a petition to consolidate multiple Lyft sexual assault cases in California recommending the Superior Court of California San Francisco County as the appropriate venue for the “complex” coordinated matters to be heard.

The Lyft passenger lawsuits claim the plaintiffs were sexually assaulted by sexual predators driving for Lyft after Lyft had been on actual notice of ongoing, sexual assaults by its drivers. According to the complaints, Lyft failed to respond to the sexual assaults by adopting and implementing adequate driver hiring or monitoring systems and procedures to protect riders. This failure to respond to an identified, systemic issue of sexual assault put more riders at risk.

The Lyft plaintiffs filed a motion to coordinate the cases, as most of the cases included in the ruling had been filed in San Francisco Superior Court.  The court agreed with the Lyft plaintiffs that: Lyft’s corporate headquarters are in San Francisco, as are the majority of corporate witnesses and documents.   The court added, the San Francisco Superior Court uses e-filing, which could potentially save the parties significant costs.  Additionally, only cases that are “complex” as defined by California’s Judicial Council standards may be coordinated.

Need for ESI (Electronically Stored Information)  Orders, Are Lyft Drivers are Independent Contractors or Employees, Additional Plaintiffs Joining Requires Complex Case Management

Co-Counsel for the Lyft Sexual Assault Plaintiffs, Brooks Cutter of Cutter Law argued that there are likely to be thousands of documents, studies, e-mails, and memoranda that are relevant to the claims and defenses in this case and discovery will inevitably require a complex ESI (Electronically Stored Information) order and accordingly a court like San Francisco Superior Court is well-equipped to handle such issues, including staying discovery, staying portions of the case, obtaining stipulations that apply to the entire coordinated case, and selecting bellwether plaintiffs.

Many of the underlying cases in the consolidation action allege vicarious liability or the liability of Lyft for the torts or wrongful actions of their drivers whether or not Lyft classifies them as an employee or independent contractor.  Lyft, Uber, and Doordash are actively fighting California Assembly Bill 5 Pledging over $90 Million To Fund Voter Initiative To Overturn AB-5  which went into effect January 1, 2020.  AB-5 profoundly alters the legal standard applied in evaluating whether a worker is classified as an employee or an independent contractor.   Furthermore,  Uber and Postmates on December 31st  filed a legal challenge in Federal Court alleging AB-5 violates individuals’ constitutional rights, seeking declaratory and injunctive remedies claiming the law unfairly discriminates against technology platforms and those who make a living through them.

Lyft has also been accused of stalling and slowing down discovery. Coordinated proceedings could help plaintiffs’ attorneys combat Lyft’s delays, and it could be beneficial to have one judge see how Lyft has conducted itself in discovery.

Attorney Cutter stated he is aware of five more related sexual assault cases that have been filed in the time since that petition was filed.   According to attorney Cutter, “There are definitely victims who have not yet come forward.”

Lyft Fought Against Sexual Assault Lawsuit Consolidation

Lyft, represent by Williams & Connolly, argued that the consolidation of  Lyft Sexual assault cases “would make in San Francisco Superior Court a national clearinghouse for claims against San Francisco-based companies.”    Furthermore, Lyft contended that:

“all claims against a California based-company —wherever the underlying incidents arise, and however much the disputed facts occurred elsewhere and other states’ laws govern the contested legal issues — could be brought in California courts and coordinated.”

Lyft’s two main objections to consolidation are that “the allegations of misconduct are not the same and that the majority of the cases did not occur in California.”

Judge Freeman, however, disagreed with the company, focusing instead on Lyft’s actions or inactions as an organization to protect rider’s safety. “To the contrary, the predominating legal and factual issues will examine Lyft’s liability for allegedly failing to institute a system to have prevented the assaults in these cases and potential future assaults.” Judge Freeman said. “The court agrees with plaintiffs that this is not a case against the drivers; it is fundamentally a case against Lyft.”

Significance of Lyft Consolidation Ruling

Judge Freeman also found that coordination of the suits would make the most efficient use of court resources and avoid duplicative testimony. In giving his ruling he further noted that there is a risk of duplicative and inconsistent rulings if the cases were not coordinated, which would create confusion, and it would hinder the Court of Appeal’s ability to hear challenges to inconsistent rulings, orders, and judgments, which would inevitably cause significant delays.

“This is an important ruling for victims as it means the claims will be heard in a single court in California,” plaintiff’s co-counsel Brooks Cutter said. “Lyft opposed our motion and wanted to force victims to undergo litigation in separate courts across the country. As a California company, it is appropriate for these Lyft claims to be heard in California.”

The Lyft sexual assault and rape claims each allege that the company did not adequately address the issue of sexual misconduct committed by sexual predators who drove for the ride-sharing company. Furthermore, they allege Lyft owed that duty to its riders, who believed it offered a safe form of transportation.  Attorney Cutter says, “The occurrence of sexual assault in the vast majority of these lawsuits is undisputed. The focus of these lawsuits is Lyft’s accountability for the assaults, which plaintiffs contend were enabled by Lyft’s lax background checks and failure to enact reasonable in-app monitoring to help ensure rider safety.”

Alexandra LaManna, a spokeswoman for Lyft, disclosed to the New York Times: in 2019 nearly one in five employees at the company had been dedicated to initiatives strengthening the rideshare platform’s safety, and that in recent months Lyft had introduced more than 15 new safety features.  Lyft announced in September of 2019 some of these safety features: access to 911 through the app and monitoring and offers of support from Lyft personnel to the driver and passenger if a trip is experiencing an unexpected delay.  These are on top of the company’s criminal background checks, steps to prevent fraudulent use of the app and identify driver identity, and harassment prevention programs.

However, despite these steps, more Lyft lawsuits are being filed, alleging the ride-sharing company has not taken adequate steps to protect riders from sexual assault.

Lyft has not Released a Safety Report – Lyft Victims Can Still File Lawsuits

In December 2019, Lyft competitor Uber released a safety report.  Uber reported that in 2017 and 2018 it received reports of 5,981 incidents of sexual abuse.  In 2018, this included 235 rapes and 280 reports of attempted rape, 1,560 reports of groping, 376 reports of unwanted kissing to breast, buttocks or mouth and 594 reports of unwanted kissing to another body part.  Because Uber’s figures are based on the information it received, the actual numbers could in fact be higher than reported.

Lyft has not released its safety report regarding sexual assaults, rapes, and accidents. Attorney Cutter finds the lack of safety report from Lyft to be problematic.  He says, “It is important for Lyft to issue a safety report so the public has a better understanding of the significant risk of sexual assault in rideshare vehicles.”

Victims who suffered sexual assault committed by a Lyft driver are still eligible to file a lawsuit. Consolidation of the current lawsuits does not prevent future lawsuits from being filed, and it is likely there are many more victims who have yet to come forward about their experiences.

Copyright ©2020 National Law Forum, LLC

More on consolidated case litigation in the National Law Review Litigation and Trial Practice section.

Securities Class Action Filings Reach Record Levels in 2019

Securities fraud class action filings accelerated in 2019, according to a report released today by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The report, Securities Class Action Filings—2019 Year in Review, finds that filing activity remains elevated well above historical levels by several key measures.

For the third year in a row, plaintiffs filed more than 400 securities class actions. In 2019, there were 428 securities class actions across federal and state courts—the highest number on record—with 268 core filings and 160 M&A filings. This marks a historic high for core filings, surpassing even 2008 when class actions peaked in response to financial market volatility. Market capitalization losses in 2019 eclipsed $1 trillion for the second consecutive year.

The combined number of filings with 1933 Act claims in federal and state courts reached unprecedented levels.

The likelihood of core filings targeting companies listed on U.S. exchanges was also at its highest in 2019. This measure reached new levels due to the record number of filings, as well as an extended decline in the number of public companies over the last 15 years.

The impact of the U.S. Supreme Court’s 2018 decision in Cyan Inc. v. Beaver County Employees Retirement Fund continues to reverberate. The report, which includes expanded data on state court filings from 2010 to 2019, found that Securities Act of 1933 claims in state courts rose to 49 in 2019, a 40% increase from the previous year. Almost half of these had parallel actions in federal court.

“The increase in state court Section 11 filings under the 1933 Act has caused a sharp jump in the cost of D&O insurance for companies going public,” said Joseph A. Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse. “Many IPO issuers have adopted rules that would move this litigation back to federal courts where these claims have traditionally been resolved. The enforceability of these provisions, however, has been challenged, and the IPO market is awaiting a decision by the Delaware Supreme Court that will likely define the contours of federal securities fraud litigation for years to come. That decision will likely be handed down before the end of April.”

Key Trends

  • Both Disclosure Dollar Loss (DDL) and Maximum Dollar Loss (MDL) decreased in 2019. DDL fell by 14% to $285 billion, and MDL by 9% to $1,199 billion as the size of the typical filing decreased.
  • Combined core federal filings in the Technology and Communication sectors grew by almost a third from 2018 and have more than doubled since 2017.
  • Second Circuit core federal filings increased to 103, the highest number on record. The Ninth Circuit’s core federal filings decreased by 25% to 52 filings.
  • Core federal filings against companies headquartered outside the United States increased to 57, the highest total on record. The likelihood of a core federal filing against a non-U.S. company increased from 4.8% to 5.6% from 2018 to 2019.
  • Beginning in the latter part of 2018, companies with connections to the cannabis industry were increasingly the target of federal class action filings. There were six such filings in 2018 and 13 in 2019.

Cyan Inc. v. Beaver County Employees Retirement Fund

In March 2018, the U.S. Supreme Court issued a unanimous opinion allowing plaintiffs to assert claims under the Securities Act of 1933 (1933 Act) in state courts. Under the 1933 Act, Section 11 allows investors to pursue damages for alleged misrepresentations or omissions in securities registration statements. It is generally believed that the ruling will lead to more securities class action filings in state courts based on this claim.

Read an excerpt of the report on 1933 Act Filings.

Read the report, Securities Class Action Filings—2019 Year in Review.

Figure 4 Securities Class Action Cornerstone Research

Copyright ©2020 Cornerstone Research

For more SEC litigation & regulation, see the National Law Review Securities & SEC section.

Business Owners Take Note as Enterprise Completes Its Mission: Supreme Court Holds No Common Law Partnership Was Formed with ETP

Logic is the beginning of wisdom, not the end.

— Dr. Spock, Star Trek, Starfleet Officer

The long running legal saga between Enterprise Products Partners (“Enterprise”) and Energy Transfer Partners (“ETP”) finally concluded on January 31, 2020, when the Texas Supreme Court unanimously decided that no partnership had ever arisen between the parties. (Read) This dispute between two of the major players in the energy industry focused on the legal standard for determining when a partnership is formed. ETP argued that the test should be based on the parties’ conduct, while Enterprise maintained that the parties had agreed that specific conditions in their contracts had to be established before a partnership was created, and those conditions were never met.

As the Supreme Court’s opinion brings to a close eight years of hard-fought litigation between Enterprise and ETP, we will share our third, and hopefully last, blog post about the case and also review some important lessons for business owners gleaned from this legal conflict. ¹

Predictable Legal Result

The staggering $535 million jury verdict that ETP secured against Enterprise in 2014 had always rested on tenuous legal ground because it conflicted with the terms of the parties’ written agreements. At trial, ETP claimed that Enterprise had breached its fiduciary duty as a partner when it ditched ETP to enter into a new pipeline deal with a competitor, Enbridge. The result at trial rested on the jury’s finding that the parties’ conduct had created a partnership between them, which gave rise to a duty of loyalty that was owed by Enterprise. The jury’s verdict, however, disregarded the parties’ written agreements, which set forth specific conditions precedent to the formation of a partnership, including approval by both companies’ boards. Enterprise therefore argued that it had become subject to a “partnership by ambush.”

The Texas Supreme Court has long championed the sanctity of contract. In numerous previous cases, the Court expressed the view that sophisticated business parties who enter into contracts must honor their bargain. Therefore, the Court’s decision on behalf of Enterprise was not surprising to Court watchers. In addition, a decision in ETP’s favor upholding its common law partnership claim would have created significant uncertainty in the business community as to when a partnership, and related partnership duties, would arise between contracting parties.

In its decision, the Court cited common law strongly favoring the freedom of contract, and held that parties can adopt conditions precedent that must be met before a partnership will be formed. The Court also cited language from a case it had decided more than a decade ago, and noted that: the Legislature did not “intend to spring surprise or accidental partnerships” on parties. While the Court acknowledged that the conditions precedent the parties agreed to could have been waived or modified, it held that ETP was required to either obtain a jury finding that the conditions had been waived or prove waiver conclusively at trial, and ETP had done neither. ²

Business Lessons Learned

While Enterprise ultimately prevailed in defeating ETP’s partnership claims, the legal battle required an enormous amount of time, caused considerable distraction and required each of the parties to incur millions of dollars in legal expense. Thus, the Court’s holding in ETP v. Enterprise provides some key take-aways for business owners. If the practices reviewed below are followed when parties are considering entering into a new business relationship, they may help to avoid future litigation. At a minimum, these practices will make it more likely that a court or an arbitration panel would grant a summary judgment dismissing before trial claims alleging that the parties entered formed a new partnership based on their conduct.

  • Get it clearly in writing — This is the clear guidance from the Supreme Court. If a party does not want to be saddled with partnership duties, it should confirm in writing that: (i) no partnership has been formed, and (ii) no partnership will be formed unless specifically stated conditions are met, e.g., the requirement that a written partnership agreement must be signed and approved by the company’s board and/or managers.
  • Address waiver — All agreements can be waived or modified, but the parties can expressly agree there will be no waiver or amending of any conditions to forming a partnership unless the waiver or amendment is signed and in writing;
  • Disclaim all fiduciary duties — In addition to making it clear that no partnership exists without specific conditions being met, the parties can also state that they do not owe each other any fiduciary duties unless and until they sign off on a binding written agreement between them;
  • Consider use of arbitration — The parties may require that all disputes arising between them will be decided by sophisticated business lawyers in an arbitration proceeding, and they can require that the arbitration hearing be held promptly, within 60 or 90 days;
  • Impose damage caps — The parties can agree to limit recoverable damages in a variety of days in any future dispute that arise between them, which can include their agreement to eliminate all claims for consequential damages, for lost profits and for punitive damages; and
  • Award fees to prevailing party — The parties can also award reasonable legal fees to the prevailing party, which will require the losing party to pay all of the legal fees that are incurred in the litigation or arbitration.

Conclusion

One man cannot summon the future. But one man can change the present!

Alternate Mr. Spock, “Mirror, Mirror”

The Supreme Court’s decision in the Enterprise case confirms the critical importance of securing written agreements that document the parties’ business relationship. Business owners who sign letters of intent, or enter into other preliminary documents before formally starting a new business relationship need to take care to ensure they are not forming a partnership or joint venture unless specific conditions are met. The failure to incorporate these conditions in a signed agreement may result in adverse consequences for the business owner, including being saddled with claims that a partnership was formed and that, as a result, they are now burdened with burdensome fiduciary duties.

¹ This post has a Star Trek reference based on the USS Enterprise, the name of the flagship in the show. As Star Trek fans know, the series was written in 1964, and first debuted on television in 1966. Perhaps it is a coincidence, but the first United States nuclear-powered aircraft carrier, the USS Enterprise, entered into service just a few years before, in 1962.

² In issuing its decision, the Supreme Court upheld the opinion of the Dallas Court of Appeals, which had overturned the trial court’s judgment. The appellate court had determined that ETP had not shown that it met the conditions precedent set forth in the parties’ agreements and, further, there was no jury finding these conditions had ever been waived or modified by the parties.

 

© 2020 Winstead PC.

ARTICLE BY Ladd Hirsch of Winstead.
For more on common-law partnerships see the National Law Review Corporate & Business Organizations Law section.

Federal Court Preliminary Enjoins Enforcement of New California Arbitration Law AB 51

On Friday, January 31, 2020, Chief District Judge Kimberly J. Mueller of the federal District Court for the Eastern District of California issued a Preliminary Injunction (PI) against the State of California, enjoining the State from enforcing Assembly Bill 51 (AB 51) with respect to mandatory arbitration agreements in employment to the extent governed by the Federal Arbitration Act (FAA).1

As discussed in the Vedder Price employment law alert, TRO Halts New Arbitration Law AB 51, the District Court had previously issued a Temporary Restraining Order (TRO) on December 30, 2019 temporarily enjoining enforcement of AB 51 pending a preliminary injunction hearing scheduled for January 10, 2020. The Court subsequently continued the January 10 hearing and extended the TRO until January 31 to allow the parties time to submit supplemental briefing. AB 51, the new California law previously slated to take effect on January 1, 2020, purportedly prohibited employers from requiring applicants or employees in California to agree, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to arbitrate claims involving violations of the California Fair Employment and Housing Act (FEHA) or the California Labor Code. AB 51 did not specifically mention “arbitration” but instead broadly applied to the waiver of “any right, forum, or procedure for a violation of [the FEHA or Labor Code], including the right to file and pursue a civil action.”

In issuing the PI, the District Court specifically: (a) enjoined the State from enforcing sections 432.6(a), (b), and (c) of the California Labor Code where the alleged “waiver of any right, forum, or procedure” is the entry into an arbitration agreement covered by the FAA2; and (b) enjoined the State from enforcing Section 12953 of the California Government Code [FEHA] where the alleged violation of “Section 432.6 of the Labor Code” is entering into an arbitration agreement covered by the FAA.

The PI will remain in place pending a final judgment, which would likely occur following a motion for summary judgment rather than a full trial on the merits since there are no material facts in dispute to be tried. However, pursuant to 28 U.S.C. § 1292(a)(1), an order granting a preliminary injunction is immediately appealable. Accordingly, it is likely that the State of California will file an immediate appeal directly with the 9th Circuit Court of Appeals.

In the interim, based on this PI, employers should feel comfortable in continuing to require employees in California to sign mandatory arbitration agreements as a condition of employment without being subjected to criminal prosecution under AB 51, provided that the arbitration agreement is clearly governed by the FAA. Employers are encouraged to consult with legal counsel to ensure compliance in this regard.

1 See Chamber of Commerce of U.S., et al. v. Xavier Becerra, et al., Case No. 2:19-cv-02456-KJM-DB, Dkt. No. 44 (E.D. Cal. Jan. 31, 2020).

2 Federal Arbitration Act, 9 U.S.C. §§ 1-16

© 2020 Vedder Price

For more on recent employment law litigation in California and elsewhere, see the National Law Review Labor & Employment law section.