Category: Litigation

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

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

Varnum LLP

 

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

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

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

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

© 2012 Varnum LLP

Posting By Employer Regarding Pending Legal Action Can Violate CEPA

The National Law Review recently published an article by Ari G. Burd of Giordano, Halleran & Ciesla, P.C., Posting By Employer Regarding Pending Legal Action Can Violate CEPA:

 

In Flecker v Statue Cruises, LLC, the plaintiff filed an action against his employer alleging violations of the New Jersey Wage and Hour Law.  In response, the employer posted a memorandum directed to all employees informing them of the suit.  The memo specifically identified plaintiff as the party responsible for filing the suit and advised employees that as a result, no employees would be scheduled for overtime.  Immediately thereafter, plaintiff was confronted, threatened and harassed by coworkers.  Eventually the harassment became so great that plaintiff resigned.  Plaintiff then filed a claim of retaliation under the Conscientious Employee Protection Act (CEPA), New Jersey’s whistle-blower statute.

The trial court entered summary judgment in favor of the employer and the case was dismissed.  However, on November 14, 2012, the Appellate Division reversed this ruling and reinstated the case, noting there was sufficient evidence for a reasonable jury to conclude that the employer knew or should have known its memorandum would incite the plaintiff’s co-workers and that such action could ultimately force the plaintiff to resign.  This is yet another example to show that CEPA is far-reaching, and protects workers from a wide assortment of retaliatory conduct far greater than mere discharge, suspension or demotion.

© 2012 Giordano, Halleran & Ciesla, P.C.

Supreme Court to Hear Arguments on Contours of “State Action” Exemption to Antitrust Laws

The National Law Review recently published an article by Steven J. Cernak of Schiff Hardin LLP regarding an upcoming Supreme Court Hearing:

 

On November 26, 2012, the U.S. Supreme Court will hear arguments in the only case this term to squarely raise antitrust issues. The case, FTC v. Phoebe Putney Health System, Inc., raises several issues related to the “state action” exemption to the federal antitrust laws. This case, along with another Federal Trade Commission (“FTC”) matter involving a North Carolina dental board on appeal in the 4th Circuit, should provide clearer antitrust guidance to doctors, dentists, lawyers, accountants and others arguably acting under the authority of a state, such as through licensure boards.

Since 1941, Georgia law has allowed counties to create hospital authorities to acquire and run hospitals. The Hospital Authority of Albany-Dougherty County was established immediately after the law’s passage and shortly thereafter acquired Phoebe Putney Memorial Hospital. The Authority has run the hospital ever since, the last several years through two wholly-owned subsidiaries. In 2010, the Authority gave permission for one of the subsidiaries to negotiate the purchase of the other hospital in the county, Palmyra Medical Center, from a private entity. The negotiations were successful and the Authority approved the transaction late in 2010.

In April 2011, the FTC initiated an administrative challenge to the acquisition as an anti-competitive merger and sought a preliminary injunction in district court. Both the district court and 11th Circuit denied the injunction request under the “state action” exemption to the antitrust laws. In particular, both courts found that the Georgia law’s delegation of powers to hospital authorities, including the power to acquire other hospitals, was a “clear articulation” of a policy to displace competition because such mergers were a “foreseeable result” of the legislation. Neither court thought that having the acquisition made through the Authority’s private subsidiaries precluded application of the exemption.

The Supreme Court has held that actions by a state as a sovereign trump the federal antitrust laws. Subdivisions of a state such as the Authority, however, are not sovereign and their actions are immune from prosecution under the antitrust laws only if the state legislature “clearly articulated” a policy to displace competition. If private parties are implementing that policy, they must be “actively supervised” by the state itself.

In this case, the FTC objects to a finding of a “clear articulation” where the action being challenged is just a “foreseeable result” of the state action. Instead, the FTC urges the Court to require that the clear articulation be made explicitly and clearly by the legislature or that the anti-competitive effect be a “necessary” or “inherent” effect of the state action. The FTC also believes that these private hospital parties were not “actively supervised”. The Authority and Phoebe parties respond that the lower courts’ “foreseeable results” standard was correct and correctly applied. In addition, the Authority and Phoebe parties argue that the “active supervision” prong is not necessary here because either 1) the Authority, not the hospitals, was taking the action; or, if rejected, 2) the hospitals were agents of the state-created Authority.

The case has attracted several amicus briefs. Perhaps the most important comes from the American Medical Association urging the Court not to rule in this case in such a way that the state action doctrine would not be available to state or local medical licensure boards that contained competitors. Here, the AMA is referring to another current FTC challenge to allegedly anti-competitive actions by a state-sponsored health care agency, this one involving a North Carolina dental licensure board with private dentist members. That case has been fully briefed for the 4th Circuit but oral argument has not yet been scheduled. These two cases are the latest examples of a decade-long effort by the FTC to obtain clear guidance from the courts on the limits of the state action exemption.

Clients acting at the behest of a governmental entity — such as serving on the local licensure board for insurance, real estate or other professionals — need to be aware of the current limits to the state action doctrine and the possibility that those limits might be further explained by the Court in this case.

© 2012 Schiff Hardin LLP

Government Sanctioned for Destruction of Documents

The National Law Review recently published an article by Eric W. Sitarchuk and Meredith S. Auten of Morgan, Lewis & Bockius LLP, Government Sanctioned for Destruction of Documents:

 

U.S. district court decision may now allow defendants in False Claims Act cases to obtain sanctions where potentially relevant documents are lost or destroyed due to the government’s failure to issue a timely litigation hold.

In United States ex rel. Baker v. Community Health Systems, Inc., the U.S. District Court for the District of New Mexico upheld Magistrate Judge Alan Torgerson’s recommendation of sanctions against the federal government for failing to issue a timely and adequate litigation hold.[1]  The court held that sanctions were appropriate because the government’s actions resulted in the destruction ofelectronically stored information (ESI) that could have been helpful to Community Health Systems’ defense.

Untimely Litigation Hold

On April 29, 2005, relator Robert Baker filed a qui tam lawsuit under the False Claims Act (FCA) alleging that the defendant hospitals had engaged in Medicaidfraud. The government investigated for several years before deciding to intervene, filing its notice of intervention on February 20, 2009. Although the government issued a notice to the defendants to preserve documents in 2005, the government did not issue its own litigation hold to safeguard its internal documents until the day it intervened, by which time certain relevant ESI had been deleted or destroyed.

Magistrate Judge Torgerson applied the general spoliation rule that the duty to preserve documents arises once a party “‘reasonably anticipates litigation.'”[2] Under this standard, he rejected the government’s argument that it could not have reasonably anticipated litigation until it received permission from theDepartment of Justice to intervene in the case. Instead, Magistrate Judge Torgerson found that the “Government’s intervention was reasonably foreseeable after receipt of defense counsel’s letter rejecting the Government’s offer of settlement on September 5, 2008.”[3] Giving the government the “benefit of the doubt,” Magistrate Judge Torgerson came to the conclusion that litigation could be considered “imminent” on September 5, 2008, by applying the standard set forth by the U.S. Court of Appeals for the Tenth Circuit in Burlington Northern and Santa Fe Railway v. Grant.[4] The court agreed with Magistrate Judge Torgerson’s findings regarding the timing and adequacy of the government’s litigation hold.[5]

As a result of the untimely and inadequate litigation hold, the ESI of two key employees at the Centers for Medicare and Medicaid Services (CMS) was allowed to be automatically deleted and destroyed. The court agreed with Magistrate Judge Torgerson that sanctions were warranted, finding “overwhelming evidence” that the defendants were prejudiced because the lost documents went “directly to . . . one of their strongest defense theories.”[6]

Sanctions

Magistrate Judge Torgerson rejected the defendants’ harshest requests for sanctions, including an adverse inference that the destroyed documents would have been exculpatory, finding that, while the government’s culpability was more than negligent, it did not amount to bad faith or intentional misconduct.[7] However, Magistrate Judge Torgerson recommended sanctions that would require the government to produce certain documents withheld under work product or deliberative process privilege; to produce all emails from, to, or copying the CMS employees whose ESI was destroyed, regardless of any claim of work product immunity or privilege; to pay reasonable attorneys fees and costs associated with the defendant’s motion for sanctions; and to show cause why it should not be required to conduct further forensic searching for the missing ESI.[8] The court agreed that the recommended sanctions were appropriate, noting that the sanctions were “designed to prevent the Government to benefit from its apathetic conduct in preserving documents that were clearly meant to be preserved, when it had ample reason to believe the documents and ESI should have been preserved for some time prior to the litigation hold.”[9]

Implications

It is clear that “[t]he duty to preserve material evidence arises not only during litigation but also extends to that period before the litigation when a party reasonably should know that the evidence may be relevant to anticipated litigation.”[10] Baker provides greater clarity on the question of when the government’s duty to preserve documents arises in a qui tam action under the FCA. Exculpatory documents within the government’s control may be particularly susceptible to being lost or destroyed in FCA cases because the complaint may remain sealed for several years while the government decides whether to intervene. The decision in Baker signals that litigation may be reasonably foreseeable to the government long before it receives approval to intervene in a case and even before it requests permission to intervene, thus requiring that the government take action to preserve its documents even sooner to avoid sanctions. Baker may pave the way for other defendants in FCA cases to obtain sanctions where potentially relevant documents are lost or destroyed because the government fails in its duty to issue a timely litigation hold.

[1]. United States ex rel. Baker v. Cmty. Health Sys., Inc., No. 05-279 WJ/ACT (D.N.M. Oct. 3, 2012), available here.

[2]. Baker, slip op. at 7 (citing Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003)).

[3]. Id. at 7.

[4]. Id. at 7 (citing Burlington N. & Sante Fe Ry. v. Grant, 505 F.3d 1013 (10th Cir. 2007)).

[5]. Id. at 8.

[6]. Id. at 11.

[7]. Id. at 22, 29.

[8]. Id. at 10.

[9]. Id. at 14 (citing Reilly v. Natwest Mkts. Grp., Inc., 181 F.3d 253, 267-68 (2d Cir. 1999)).

[10]. Silvestri v. Gen. Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001) (citing Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998)).

Copyright © 2012 by Morgan, Lewis & Bockius LLP

No Material Change – No Forbidden CON Application Amendment

The National Law Review recently published an article regarding CON Applications written by Pamela A. Scott of Poyner Spruill LLP:

 

The North Carolina Court of Appeals recently made crystal clear that a certificate-of-need (CON) applicant’s submission of additional information after its application has been filed does not constitute a forbidden amendment, unless it materially changes the proposal set forth in the application. The CON regulation prohibiting amendments of applications has been around for more than 30 years, but it has rarely been interpreted by our appellate courts. The no-amendment rule is often a basis for attack against CON applicants that submit any supplemental information after their applications have been filed and deemed complete by the CON Section. In a recent opinion in WakeMed v. N.C. DHHS (COA11-1558), the Court of Appeals rejected the notion that the CON Section’s consideration of any additional information submitted by an applicant after an application is deemed complete constitutes a prohibited amendment requiring disapproval of the application. Instead, the court held that the proper test is whether the additional information materially changed representations made in the application.

At issue in the WakeMed appeal were competitive applications for operating rooms in Wake County and the Division of Health Service Regulation’s decision to award a CON for three ambulatory ORs to Holly Springs Surgery Center (HSSC), a subsidiary of Novant Health, Inc. Rex Hospital, Inc. d/b/a Rex Healthcare (Rex), whose competing application was denied, argued that HSSC’s application should not have been approved because it was impermissibly amended after being filed and deemed complete. Rex’s argument hinged on HSSC’s submission of several subsections of the application and a letter of support from an orthopedic physician practice as attachments to its responsive comments during the CON review approximately two months after the application was deemed complete by the CON Section. Both the subsections and support letter were inadvertently omitted from the application when it was originally filed.

The Court of Appeals disagreed with Rex’s theory that the test for whether a CON application has been amended should be whether the agency “considered” information provided after the application was filed. Instead, the court harkened to the single case in which the court previously held that an application had been impermissibly amended. In that 1996 Presbyterian-Orthopedic Hospital v. N.C. DHHS case, the Court of Appeals had concluded that the CON applicant made a material amendment to its application when it changed the management company that would oversee the operations of its proposed facility, because all the applicant’s logistical and financial data was based upon using the original management company. Consistent with this prior decision, in WakeMed the court ruled that because the answers to the questions in the missing application subsections were found elsewhere in the HSSC application as originally submitted, and because the physician letter of support was specifically referenced in the original application — including identification of the surgeons who signed the letter – the additional information submitted by HSSC did not materially amend the application. The court also noted the testimony of the CON Section chief and project analyst that the approval of the HSSC application was not based upon the additional materials filed.

It is always the best practice to ensure a CON application is complete and contains all necessary information before it is filed with the CON Section. However, inadvertent omissions and other mistakes in the content of applications do happen. The Court of Appeals’ recent analysis of this issue sheds light for long term care providers on the type of additional information that can be submitted regarding a CON application under review, without crossing the amendment line. It should also help CON applicants ward off specious and hyper technical challenges by opponents that are grounded in nothing other than the mere submission of supplemental or clarifying information after an application is filed.

© 2012 Poyner Spruill LLP

Court Rules SEC Cannot Invoke Its Investigatory Powers to Circumvent Discovery Rules

The National Law Review recently published an article regarding the SEC’s Investigatory Powers written by Jennifer Tomsen of Greenberg Traurig, LLP:

GT Law

 

A Texas federal district court recently refused to reconsider its order imposing sanctions on the U.S. Securities and Exchange Commission (“SEC”) for conducting an “extra-judicial deposition” of a third party without providing notice to defendants in a pending civil action to which the third party’s testimony was relevant. Order on reconsideration, SEC v. Life Partners Holdings, Inc. et al., Case No. 1:12-CV-00033-JRN, in the United States District Court for the Western District of Texas, Austin Division (Sept. 27, 2012)[Doc. 56]; original order dated Aug. 17, 2012 [Doc. 47]. The court determined that the SEC obtained the testimony for use in the pending case and could not invoke its investigatory powers to do an end-run around the governing discovery rules.

The orders were entered in a case brought by the SEC against financial services firm Life Partners Holdings, Inc. and three of its executives, Brian Pardo, R. Scott Penden, and David M. Martin. The SEC alleged that defendants systematically underestimated life expectancy estimates the company used to price life settlement transactions so as to create a false appearance of a steady stream of earnings.

After the SEC complaint was filed but before the parties’ Rule 26(f) conference, the SEC deposed a non-party witness, the auditor for Life Partners. The SEC did not seek the court’s permission to depose a witness prior to the conference and did not give notice to defendants. Defendants sought to preclude the SEC from using any documents or testimony obtained by the witness for any purpose relating to the litigation. The SEC argued that the deposition was a valid exercise of its regulatory authority to investigate potential violations of federal securities laws and was not an attempt to obtain ex parte discovery.

Although the filing of a civil action “does not inhibit the SEC’s broad authority to investigate securities-law violations,” administrative agencies are bound by the Federal Rules of Civil Procedure (“FRCP”) when they are parties in a civil action. The rules require leave of court to take a deposition before the Rule 26(f) conference, and notice to all parties must be provided. The question for the court was whether the deposition was taken as part of a regulatory investigation unrelated to the civil action.

The SEC claimed it was investigating the auditor to ensure he had fulfilled his professional obligations, but District Judge James R. Nowlin found the deposition was not taken solely to investigate matters outside the complaint. The auditor was examined regarding Life Partners’ revenue recognition and other practices, “as well as Defendants Pardo, Peden, and Martin’s knowledge of the same — all of which form the very bases of Plaintiff’s Complaint in this case.” The court also rejected the SEC’s assertion that testimony relating to the civil suit “inadvertently came out.” The SEC relied on SEC v. O’Brien, 467 U.S. 735 (1984) for the proposition that the target of an SEC investigation is not entitled to notice of investigative subpoenas issued to third parties. The court held that O’Brien did not apply because the subpoena was issued after the Complaint was filed “and with the intention of obtaining evidence against the named Defendants.”

The court also rejected the claim that there was no prejudice because the SEC provided the deposition transcript to defendants, who were free to depose the auditor themselves. The court determined that the lack of notice deprived defendants of their ability to cross-examine the auditor and object to the testimony elicited.

The court asserted, “Plaintiff cannot administer an extra-judicial deposition regarding an investigation, elicit testimony during that deposition regarding allegations made in the Complaint for use against defendants, and then claim immunity from the FRCP by labeling the deposition as ‘investigative.’” The multiple violations of the FRCP warranted sanctions because the deposition without notice to opposing counsel “frustrated the fair examination” of the witness. In addition to awarding Defendants $5,000 in attorney’s fees, the court prohibited the SEC from using the deposition testimony in the civil case.

In a motion for reconsideration, the SEC claimed that the court had “introduced a new rule of law” that “upon the filing of a civil suit, the Commission may not use its investigatory powers to investigate any related violations.” The court rejected this interpretation of its order. It noted that the SEC Enforcement Manual itself cautioned staff about issuing investigative subpoenas after commencement of a civil action because “[a] court might conclude that the use of investigative subpoenas to conduct discovery is a misuse of the SEC’s investigative powers and circumvents the court’s authority and limits on discovery in the Federal Rules of Civil Procedure.”

While the deposition in this case appears to have been a fairly transparent effort to circumvent the FRCP to gain discovery for use in the civil case, the court’s order reinforces important limits on the SEC’s investigatory powers. The court sent a clear signal that it would not tolerate abuses of those powers to gain an advantage  over civil litigants. Defendants in an SEC proceeding should be alert for the possibility of such abuses. They will find strong support in this order should the SEC take non-party depositions without notice that could be relevant to the civil suit.

©2012 Greenberg Traurig, LLP

The Best Laid Plans: What To Do If You Go To Trial Unexpectedly

Kathryn S. Wood of Dickinson Wright PLLC recently had an article, The Best Laid Plans: What To Do If You Go To Trial Unexpectedly, published in The National Law Review:

There is nothing like appearing for a settlement conference only to learn that not only is the case not going to settle, but that the trial that you thought would start in three months is actually starting in less than three weeks.  That is precisely what happened to me last week. As I walked back from court to my office, the realities of the time crunch set in.  What if my witnesses were unavailable? Would my demonstrative exhibits be able to be prepared in time? Motions in limine and a Daubert motion needed to be considered.  Having thought less than an hour before I had three months to prepare my case for trial, how was I going to get ready in such a short time?

Two hours later, I had a plan.  But before I launch into explaining the plan, I will state that in my view, the two hours spent crafting the trial plan was the most important part of the plan itself.  A trial plan, much like a project management plan, is important for any trial.  Listing out the tasks to be completed, the deadlines (both for client review and court submission), and the person or team responsible for the particular task makes for your best hope for an orderly trial preparation (if such a thing exists).  But when your time is tight either because the court surprised you by moving the trial date forward or because the press of other business made it impossible to turn your full attention to trial preparation, the trial plan is essential.

For my trial plan, the first order of business was making sure that my witnesses were available and scheduling time for their trial preparations so that they would not be unavailable to me in the days before trial.  Next, I outlined the remaining issues I wanted researched and made decisions about what motions I wanted to file.  Because of the late notice of the trial, the third task was one I wouldn’t have had to address if the trial had gone in three months, as previously planned; I worked with my partners to completely free my second-chair associate so that he would not have to worry about other work.  My legal assistant’s call to folks who create the demonstrative exhibits assured me that I would indeed have the demonstrative exhibits I envisioned.  Finally, I made a realistic schedule with respect to preparing my examinations, cross examinations and opening and closing arguments.

That statement, naturally, begs the question as to what “realistic” means.   The “realistic” schedule I crafted built in time for the time it would take to get meetings and depositions adjourned that I needed to be at and to reaching out to my partners to cover hearings that were not essential that I argue.  The schedule also contemplated the inevitable daily calls that turn one’s attention from the task at hand and for honoring my promise to participate in this blog.   Sure, I could have asked that my turn to participate in this blog be moved to a different date, but having some time to step back from the trial preparation and put my mind to something else will allow me to return to my briefs, examinations and exhibits with a cleared mind, which is all part of the plan.

© Copyright 2012 Dickinson Wright PLLC

The Sunday Funnies

The National Law Review is pleased to bring you today’s edition of the Sunday Funnies, submitted to us by Kendall M. Gray of Andrews Kurth LLP:

This is why patent lawyers need an appellate lawyer who was an arts and crafts major.

Hat tip to Legally Drawn.

Seventh Circuit Joins Ranks of Courts Holding that Internal Grievances about Employer Fiduciary Duty Breaches is Actionable Under ERISA Section 510

Seventh Circuit Joins Ranks of Courts Holding that Internal Grievances about Employer Fiduciary Duty Breaches is Actionable Under ERISA Section 510, an article by Mark E. Furlane of Drinker Biddle & Reath LLP recently appeared in The National Law Review:

 

In Victor George v. Junior Achievement of Central Indiana Inc.,decided September 24, 2012, the Seventh Circuit joined the Fifth and Ninth Circuits in holding that Section 510 of ERISA applies to unsolicited, informal grievances to employers.  The courts of appeals have disagreed about the scope of §510, and the Second, Third and Fourth Circuits have permitted Section 510 retaliation claims only where the person’s activities were made a part of formal proceedings or in response to an inquiry from employers (i.e., §510’s language does not protect employees who make “unsolicited complaints that are not made in the context of an inquiry or a formal proceeding.”).  Concluding that the language of Section 510 of ERISA was “ambiguous” and “a mess of unpunctuated conjunctions and prepositions,” the Seventh Circuit concluded that, “an employee’s grievance is within §510’s scope whether or not the employer solicited information.”  The court did, however, reiterate the high threshold to prevail on a Section 510 claim:  “It does ‘not mean that §510 covers trivial bellyaches—the statute requires the retaliation to be ‘because’ of a protected activity…. What’s more, the grievance must be a plausible one, though not necessarily one on which the employee is correct.”

Section 510 of ERISA prohibits retaliation “against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to this [Act].”  Remedies for violation of that section are limited to “injunctive and other ―appropriate equitable relief,” which would not include back pay typically, but could include an injunction and reinstatement.  Attorney’s fees are also possible.  In the case, Victor George was a former vice president of Junior Achievement who sued his former employer alleging he was terminated after complaining that money withheld from his pay was not being deposited into his retirement and health savings accounts.  He complained to management, outside accountants, the board, the Department of Labor (although he did not file a complaint).  The District Court dismissed the case on summary judgment, holding George’s informal complaints to his employer did not constitute an “inquiry” under ERISA.  The appellate court reversed holding that George’s informal proceedings do trigger the statute’s protections.

©2012 Drinker Biddle & Reath LLP

‘Get-Rich-Quick’ Systems Penalized by FTC to Tune of $478 Million

As part of the Federal Trade Commission’s ongoing efforts to shut down scams that target financially vulnerable consumers, a U.S. district judge has issued a $478 million judgment at the request of the FTC against the marketers of three get-rich-quick systems that the agency says are used for deceiving consumers. The order is the largest litigated judgment ever obtained by the FTC.

The judgment was awarded against companies and individuals who marketed the schemes, titled “John Beck’s Free & Clear Real Estate System,” “John Alexander’s Real Estate Riches in 14 Days,” and “Jeff Paul’s Shortcuts to Internet Millions.”

Nearly a million consumers paid $39.95 for one of these “get-rich-quick” systems, and some consumers purchased personal coaching services, which cost up to $14,995. According to the FTC complaint filed in June 2009, one system was marketed to consumers with the promise that consumers could “quickly and easily earn substantial amounts of money by purchasing homes at tax sales in their area ‘free and clear’ for just ‘pennies on the dollar’ and then turning around and selling these homes for full market value or renting them out for profit.”

The FTC said that nearly all the consumers that bought the systems lost money.

The FTC’s suit alleged violations of the Federal Trade Commission Act, based on the defendants’ representations in connection with the advertising, marketing, promoting and sale of the systems. The FTC also alleged that the defendants’ violated the Telemarketing Sales Rule through their marketing to consumers.

Two of the individual defendants, Douglas Gravnik and Gary Hewitt, were held jointly and severally liable for the monetary part of the judgment. The judge also imposed a lifetime ban from infomercial products and telemarketing against Gravnik and Hewitt. Gravnik and Hewitt indicated that they are likely to appeal the order to the extent it imposes a lifetime ban. A third individual, John Beck, is responsible for $113.5 million of the judgment.

In its case, the FTC filed 30 consumer declarations detailing consumers’ experiences with the defendants’ products. The defendants objected to many of these declarations on various grounds, including hearsay, relevance, and the best evidence rule among other objections, but these objections were all overruled.

The defendants also objected to the use of a survey by the FTC that showed that less than 0.2 percent of consumers who purchased the defendants’ system made any profits and only 1.9 percent of consumers who purchased coaching material made any revenue. The defendants moved to exclude all evidence relating to the survey on the ground that the pre-notification letter “poisoned the well in such a way as to invalidate whatever survey finding the FTC obtained” and argued that the manner in which the survey was conducted rendered the results unreliable. The court found that the survey was performed under accepted principles used by experts in the field and was admissible.

The court granted summary judgment for the FTC , finding that the defendants made material misrepresentations that were either false or unsubstantiated. The court pointed out that the materials provided by the defendants to consumers taught consumers how to purchase tax liens and certificates, but these purchasers do not obtain title to the property and thus were not “purchasing” the homes as the advertising materials stated.

The court also granted summary judgment on the Telemarketing Sales Rule allegations. The basis of the defendants’ argument was that the violations were isolated and should not be the basis for liability. The court found that there was no dispute that the defendants’ telemarketers repeatedly initiated calls to consumers who asked the defendants not to contact them. The FTC also produced “overwhelming” evidence that the defendants lacked a meaningful compliance program or any written procedures in place to comply with the regulations.

Jeffrey Klurfeld, director of the FTC’s Western Region, stated in a press release that “This huge judgment serves notice to anyone thinking of using phony get-rich-quick schemes to defraud consumers. The FTC will come after you if you violate the law.”

In this case, the FTC had already completed its surveys when it went to court. Trial judges will often be very impressed with FTC surveys and will grant judgment to the agency in nearly every case. Therefore, it is critical that a company that is being targeted by the FTC obtain counsel at the earliest possible stage, before the agency files anything in court. Counsel should be ready to vigorously defend the client’s marketing practices with techniques such as the use of countersurveys and customer testimonials and expert testimony, before the FTC files in court.

© 2012 Ifrah PLLC