Tag: Litigation

Big Food Price-Fixing Update: Court Certifies Three Putative Classes in Packaged Seafood Litigation

What started out as a proposed merger between two of the largest packaged seafood manufacturers spawned a lengthy criminal investigation into antitrust violations in the tuna industry by the Department of Justice (DOJ) and multiple class and individual civil lawsuits. After four years of litigation, a major development in the class action lawsuits occurred– the Court certified three putative classes.

In 2015, the Department of Justice investigated a proposed merger between Thai Union Group P.C.L. (the parent company of Chicken of the Sea) and Bumble Bee Foods LLC. As the DOJ’s civil attorneys reviewed information related to the merger, they discovered materials that appeared to raise criminal concerns.[1]

Chicken of the Sea then “blew the whistle” to the DOJ regarding their anticompetitive conduct. This admission helped DOJ reach plea agreements with two other manufacturers, Bumble Bee[2] and Starkist,[3] as well as three packaged seafood executives—two from Bumble Bee[4],[5] and one from Starkist[6]. In connection with its guilty plea, Bumble Bee agreed to pay a $25 million fine, while Starkist’s fine is still pending. Bumble Bee’s CEO has also been indicted, and faces up to 10 years in a federal penitentiary. [7]

Now, the tuna manufacturers face a new challenge in the related civil actions. In 2015, on the heels of the DOJ investigation, three separate class actions were filed in the Southern District of California. Plaintiffs alleged that Defendants took part in various forms of anti-competitive conduct, including agreeing to fix certain net and list prices for packaged tuna. Plaintiffs alleged that the conspiracy began as early as November of 2010 and lasted until at least December 31, 2016.

On July 30, 2019, Judge Janis L. Sammartino granted the respective Motions for Class Certification filed by the Direct Purchaser Plaintiffs, as well as the two indirect classes–the Commercial Food Preparer Plaintiffs, and the End Payer Plaintiffs.[8] Judge Sammartino found that each class had satisfied Rule 23’s requirements and—contrary to the Defendants arguments—that common issues predominate over individualized issues within each class. For example, Plaintiffs contended that common evidence exists that would be used to prove the existence and scope of Defendants’ purported price fixing conspiracy.

The certification orders represent a major victory for each of the classes. They can now proceed to summary judgment and trial without any concern that their claims may be narrowed due to the mechanics of the proposed class. While dispositive motions are scheduled to be submitted later this month, no trial date is currently set. With certification rulings issued and merits briefing on the horizon, renewed settlement discussions are likely to come.

[1] https://www.justice.gov/atr/division-operations/division-update-spring-2017/civil-investigations-uncover-evidence-criminal-conduct

[2] https://www.justice.gov/opa/pr/bumble-bee-agrees-plead-guilty-price-fixing

[3] https://www.justice.gov/opa/pr/starkist-co-agrees-plead-guilty-price-fixing

[4] https://www.justice.gov/opa/pr/packaged-seafood-executive-agrees-plead-guilty-price-fixing-conspiracy

[5] https://www.justice.gov/opa/pr/first-charges-brought-investigation-collusion-packaged-seafood-industry

[6] https://www.justice.gov/opa/pr/former-packaged-seafood-executive-pleads-guilty-price-fixing

[7] https://www.justice.gov/opa/pr/bumble-bee-ceo-indicted-price-fixing

[8] Case No.: 15-MD-2670 JLS (MDD) United States Court of Southern District of California

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP
This article was written by Jerry Goldsmith and Lori Lustrin of Bilzin Sumberg.
For more food industry news, see the Biotech, Food & Drug page on the National Law Review.

Amazon Takes Aim at Patent Infringement in its Marketplace

Amazon CEO Jeff Bezos recently disclosed that gross merchandise sales in the Amazon Marketplace by independent third-party sellers (as opposed to sales made directly by Amazon itself) had grown to 58% of total sales. According to data company Statista, 73% of those sellers were small businesses with between 1-5 employees. For many of them, sales on Amazon comprise their entire revenue.

Discussion of the opportunity Amazon Marketplace represents for small business, however, is joined by the voices of many retailers complaining about sales of counterfeit and stolen goods. To better police its online sales, Amazon has launched initiatives such as Project Zero which allows owners of brands to delete counterfeit products.

The online retail giant’s latest enforcement effort—designed to combat patent infringement—has been dubbed the Utility Patent Neutral Evaluation Procedure (UPNEP). Under this new trial program, a company that believes certain products for sale on the Amazon Marketplace infringe its patents can request an evaluation by depositing $4,000. If the seller does not dispute the accusation, Amazon removes the infringing products from the marketplace, and refunds the deposit to the patent owner. If the seller decides to fight the claim, it also deposits $4,000. Amazon then assigns a lawyer with patent expertise to resolve the dispute. The patent owner submits an opening brief, the merchant files a response, and then the patent owner may submit a reply. The lawyer reviews the submissions, and decides whether the listing should be removed or maintained. The winner gets its money back, and the loser’s $4,000 gets paid to the lawyer. There is no discovery, and no appeal or request for reconsideration. The whole process takes just a few months from start to finish.

Many stakeholders in the Amazon ecosystem have applauded the UPNEP as providing both patent owners and Amazon merchants with a quick and cost-effective mechanism for resolving infringement disputes arising from third-party listings. While participation in the program does not prevent a patent owner from commencing a lawsuit, many sellers do not reside in the United States, and thus may not be subject to service of process in a U.S. federal court. Without UPNEP, patent owners would have little to no recourse in such cases.

Law firms with IP litigation expertise are already offering to represent both patent owners and accused sellers in connection with the program. One such firm told The Information that his client boosted sales by 700% after using UPNEP to remove listings that were knockoffs of the client’s patented product. Consultants who advise Amazon sellers are also positioning specialized services. One such consultant advised The Information that a cup manufacturer client had used UPNEP to remove 170 product listings that it believed were infringing its patents.

There are some detractors, however. Deriding the new initiative as “the District of Amazon Federal Court,” Paul Morinville of IP Watchdog says the new initiative is a symptom of a broken patent system. He questions, among other issues, whether the lawyers evaluating the claims will be impartial, or beholden to Amazon’s interests.

Expert Peter Kent, who has served as an expert in several Amazon-related cases, is monitoring developments closely. “A critical question in my mind about the UPNEP program,” explains Kent, “is whether it will be exploited by larger companies trying to knock out competitors using spurious patent claims. For instance, if a small merchant who can’t afford the $4,000 doesn’t respond, their product listings are automatically removed, regardless of the merits of the petitioning company’s patent claims.”

We’ll continue to monitor whether UPNEP—and the model it represents—becomes popular for resolving disputes between patent owners and merchants. With experience on more than 5,000 patent matters in the past decade, proprietary intelligence systems, and the best-in-class network of top experts from complex areas ranging from 5G, artificial intelligence, and virtual reality, IMS stand ready to connect you with the expert best-aligned for your needs.

© Copyright 2002-2019 IMS ExpertServices, All Rights Reserved.

Federal Court Declares That a Ban on Mandatory Arbitration of Sexual Harassment Claims Is Inconsistent with Federal Law

Launched more than a decade ago, the #MeToo movement made its way into the national (and international) conversation in 2017, and, by 2018, the movement had such momentum that it spurred a cornucopia of new state laws.  One of these new laws, which became effective July 11, 2018, is a New York State statute that prohibits employers from requiring employees to submit sexual harassment claims to mandatory arbitration.  This new law is codified in Section 7515 of the Civil Practice Law & Rules of the State of New York (“C.P.L.R.”), entitled “Mandatory arbitration clauses; prohibited.”  Section 7515 reflects the New York State Legislature’s (which consists of the New York State Assembly and the New York State Senate) determination that employees should be allowed to have their sexual harassment claims adjudicated in a court of law, if that is their preference.  The introductory clause of Section 7515 also indicates, however, that legislators understood that an unqualified prohibition of mandatory arbitration might not pass muster under federal law:

Prohibition. Except where inconsistent with federal law, no written contract, entered into on or after the effective date of this section shall contain a prohibited clause as defined in paragraph two of subdivision (a) of this section.  (C.P.L.R. § 7515(b)(i).)

Hence, the statute engendered substantial uncertainty among employers.  Now, almost one year after C.P.L.R. § 7515 became law, a U.S. District Court Judge, the Hon. Denise Cote of the Southern District of New York, has addressed this confusion by opining on whether New York State may outlaw privately negotiated agreements to submit all disputes, inclusive of claims for sexual harassment, to arbitration.  In Latif v. Morgan Stanley & Co. LLC, et al., No. 1:18-cv-11528 (S.D.N.Y. June 26, 2019),  Judge Cote delivered a clear message about the collision of C.P.L.R. § 7515, which operates to constrain parties’ rights to agree to arbitrate claims, and the Federal Arbitration Act (the “FAA”), which, as repeatedly reinforced by the U.S. Supreme Court in recent years, mandates substantial deference to private arbitration agreements.  Employers, especially those in the financial services industry, have reason to cheer Judge Cote’s opinion in Latif, which restores a degree of certainty about whether a mandatory arbitration clause governing an employment relationship may still be enforced—at least in some courts.

The essential facts are as follows: Mahmoud Latif (“Latif”) signed an employment agreement (the “Offer Letter”) that incorporated by reference Morgan Stanley’s mandatory arbitration program.  Read together, these documents formed the “Arbitration Agreement” between Latif and Morgan Stanley.  The Arbitration Agreement provided that any “covered claim” that arose between Latif and Morgan Stanley would be resolved by final and binding arbitration, and that “covered claims” included, among other causes of action, discrimination and harassment claims.  Nevertheless, Latif commenced an action against Morgan Stanley in federal court, asserting, among other charges, claims of sexual harassment under federal, state and municipal law.  The Morgan Stanley defendants moved to compel arbitration of the entire case, inclusive of the sexual harassment claims.  Latif opposed that motion on the basis of C.P.L.R. §7515, which, according to Latif, expressed New York State’s “general intent to protect victims of sexual harassment,” and required the Court to retain jurisdiction over the sexual harassment claims—even though those claims fell clearly within the ambit of the Arbitration Agreement.

In granting Morgan Stanley’s motion to compel arbitration, inclusive of the sexual harassment claims, Judge Cote held that C.P.L.R. §7515 could not serve as the basis to invalidate the Arbitration Agreement.  The Court’s rationale is straightforward: C.P.L.R. §7515 purports to nullify agreements to arbitrate sexual harassment claims “except where inconsistent with federal law,” and the statute is indeed inconsistent with the FAA’s “strong presumption that arbitration agreements are enforceable.”  Judge Cote therefore stayed Latif’s court action pending the outcome of arbitration proceedings.

In light of the foregoing, to maximize the likelihood of full enforcement of an arbitration agreement, inclusive of claims for sexual harassment, employers should promptly consider the prospect of removal of a New York State court action to federal court, if circumstances otherwise permit such removal.

Finally, employers also should note that, on June 19, 2019, the New York State Legislature voted to amend Section 7515 to prohibit not only the mandatory arbitration of sexual harassment claims, but also the mandatory arbitration of anyallegation or claim of discrimination.  While, as of this writing, the amendment has not yet been signed into law by the executive, it appears safe to predict that states will continue, in the near future, to attempt to prohibit or constrain mandatory arbitration of discrimination/harassment claims in a way that generates apparent conflict with federal law.  The Supreme Court’s adjudication of a constitutional challenge to C.P.L.R. §7515, and/or like statutes, under the Supremacy Clause of the U.S. Constitution seems to be a likely end-game.

 

©2019 Epstein Becker & Green, P.C. All rights reserved.
Read more on Arbitration and #MeToo on our arbitration type of law page.

Cardholders Seek to Capital-ize on Madden

Last week, three Capital One cardholders filed a putative class action in the Eastern District of New York, Cohen v. Capital One Funding, LLC,1 alleging that the rates of interest they paid to a securitization trust unlawfully exceed the sixteen percent threshold in New York’s usury statutes.  The Plaintiffs seek to recoup the allegedly excessive interest payments and an injunction to cap the interest rates going forward.

The Plaintiffs seek to leverage the Second Circuit’s decision in Madden v. Midland Funding, LLC.2  There are factual differences between the current lawsuit and Madden.  In Madden, the loan in question was a nonperforming credit card account that Bank of America’s Delaware-based credit card bank had assigned to Midland Funding, which sought to enforce the past-due loan.  In Cohen, the loans involve credit card receivables from otherwise performing loans that have been deposited into securitization trusts.  Another distinction is that Cohen, unlike Madden, is a putative class action.  The legal theory in both cases, however, is the same:  the Plaintiffs argue that the holders—here, securitization vehicles—do not have the originating national bank’s right to collect interest at rates above the limits of New York’s usury laws.  And any usurious interest collected, the Plaintiffs argue, must be disgorged.

As we discussed in our prior C&F Memorandum, “It’s a Mad, Mad, Madden World” (June 29, 2016), the Second Circuit’s Madden ruling is unsound.  Under the Second Circuit’s Madden theory, the usury rate applicable to a given loan—and thus its enforceability—turns on the identity of the loan’s holder.  The notion that the enforceability of a loan originated by a national bank turns on who holds the loan from time-to-time conflicts with the well-settled valid-when-made doctrine—a doctrine that provides that whether a loan is usurious is determined at the loan’s inception.   This approach was abandoned in Madden.  As a result, under Madden, bank-originated consumer loans can be less valuable if sold, thus devaluing the loans on the books of the originating bank.  Banks, then, are discouraged from originating such loans or, once originated, from selling them.  The net result is—at least in theory—a tightened consumer credit market.

In many corners, Madden is viewed to be “bad law.”  Even so, the Office of the Comptroller of the Currency recommended against petitioning the Supreme Court for a writ of certiorari in Madden.  Nor did Congress produce a legislative fix, despite such a bill being introduced in 2018.  Both the OCC and Congress faced political headwinds over the practice by some marketplace and payday lenders that originate high-rate consumer loans through banks under the so-called bank origination model; the concern was that reversing Madden could enshrine such practices and could be potentially harmful to consumers.  (For a discussion of the bank origination model, see our prior C&F Memorandum, “Marketplace Lending Update:  Who’s My Lender?” (Mar. 14, 2018).)  But that concern is not present in Cohen, where the Plaintiffs rely on Madden to attack traditional, currently performing credit card receivables that were originated by a national bank—a structure unrelated to the bank-origination model used by some marketplace lenders.

Cohen is the second Madden-related lawsuit brought against securitization trusts; the first is proceeding in Colorado against marketplace-lending receivables originated by Avant and Marlette.  See “Marketplace Lending #5:  The Very Long Arm of Colorado Law” (Apr. 24, 2019).  Until Madden is reversed, we continue to recommend that clients exercise caution when acquiring, securitizing, or accepting as collateral consumer loans (or asset-backed securities backed by such loans), when the loans were originated to residents of a state in the Second Circuit (New York, Connecticut, and Vermont) and carry a rate above the applicable general usury rate (generally, sixteen percent in New York, twelve percent in Connecticut, and eighteen percent in Vermont).

1   No. 1:19-cv-03479-KAM-RLM (E.D.N.Y. filed June 12, 2019), https://www.cadwalader.com/uploads/media/CapitalOneCase.pdf.

2   786 F.3d 246 (2d Cir. 2015), cert. denied, __ U.S. __, 136 S. Ct. 2505, 195 L. Ed. 2d 839 (2016).

 

© Copyright 2019 Cadwalader, Wickersham & Taft LLP
More on financial issues on the National Law Review Financial Institutions & Banking page.

DACA Program Continues as U.S. Supreme Court Declines to Expedite Consideration of Cases

The “Dreamers” have received another reprieve from the U.S. Supreme Court.

DACA litigation has been in the news since September 2017, when then-Attorney General Jeff Sessions announced the DACA program would be terminated. In response to that announcement, multiple lawsuits were filed in federal courts in California, New York, Maryland, Texas, and the District of Columbia, resulting in multiple nationwide injunctions blocking the termination of the program. Indeed, the injunctions have forced USCIS to continue granting DACA renewals.

According to Vice President Mike Pence, the Trump Administration is looking for a way to prevent U.S. District Courts from imposing nationwide injunctions. In a speech in May, he said these injunctions are “judicial obstruction.” Absent relief from these injunctions, the Administration is attempting to expedite review of pending cases that are blocking its policies.

For instance, the Administration attempted to force the Supreme Court’s early consideration of the DACA cases in early-2018, which the Court rejected. At the end of May 2019, the government again sought to expedite the case by filing a brief urging the Court to decide whether to grant review by the end of this term, i.e., by June 24, 2019. The Administration argued, “The very existence of this pending litigation (and lingering uncertainty) continues to impede efforts to enact legislation addressing the legitimate policy concerns underlying the DACA policy.” But that argument did not prevail. On June 3, 2019, the Court rejected the Administration’s request.

The Court probably will not even consider reviewing the DACA cases until the fall and, if it grants review, a decision might not come down until sometime in 2020.

For now, the “Dreamers” can continue to renew their status, but they also will have to continue to live with the uncertainty. There is always the possibility that Congress will pass legislation that might provide a permanent solution for the “Dreamers,” but the legislative route has been bumpy. While numerous deals have been proposed regarding a DACA solution, stumbling blocks continue to appear in the form of unacceptable “quid pro quos.” Indeed, DACA was even a pawn in the most recent government shutdown.

Jackson Lewis P.C. © 2019

This post was written by Forrest G. Read IV of Jackson Lewis P.C.

Get updates on Immigration and the Dreamers on our Immigration type of law page.

US Supreme Court Refines Impossibility Preemption Doctrine, Changes Litigation Dynamics

Following confusion from a 2009 decision, the US Supreme Court on May 20, 2019, decided a significant impossibility preemption case. This new decision will change the dynamics of litigation involving the impossibility defense, and will introduce new litigation uncertainty due to a shift in the decision maker for impossibility preemption.

IN DEPTH

On May 20, 2019, in a unanimous judgment, the US Supreme Court decided Merck Sharp & Dohme Corp. v. Albrecht, No. 17-290, an important impossibility preemption case, and held that the judge, not the jury, must decide whether a state-law failure-to-warn claim is preempted because there is “clear evidence” that the Food and Drug Administration (FDA) would not have approved a change to a drug’s label to include the warning.

The Court’s decision in Albrecht comes on the heels of its decision in Wyeth v. Levine, 555 US 555 (2009), which held that a pharmaceutical manufacturer could escape liability under state-law failure-to-warn claims if the manufacturer could provide “clear evidence that the FDA would not have approved a change to [the drug’s] label.” Confusion blossomed after Wyeth in the lower courts as to how to apply the “clear evidence” standard and, importantly, whether the “clear evidence” decision was for the judge or the jury.

The Fosamax Litigation

Albrecht involved state-law claims for Merck’s alleged failure-to-warn about “atypical” femur fractures in consumers taking Fosamax, a drug that treats osteoporosis in postmenopausal women. In 2008, Merck sought FDA approval through the Prior Approval Supplement (“PAS”) process to add warnings to Fosamax’s label about “atypical” femur fractures in patients. The FDA did not approve Merck’s label change, and stated that there was “inadequate” justification for the new warning. Eventually, in 2011, the FDA did agree to the labeling change. But the interim years provided fertile ground for plaintiffs to sue Merck for failing to warn about the risk of “atypical” femur fractures.

In that litigation, Merck won summary judgment at the district court, arguing that the state-law claims were preempted because the FDA did not permit the label change that was at the heart of the failure-to-warn case. The US Court of Appeals for the Third Circuit reversed and held that the “clear evidence” standard from Wyeth was a factual burden of proof and required that Merck show by “clear and convincing” evidence that the FDA would have rejected the proposed warnings, that this determination is a question of fact for the jury and that there were material facts in dispute as to whether Merck could satisfy that standard.

The Court’s Decision and Concurring Opinions

In an opinion by Justice Stephen Breyer, the Supreme Court vacated and remanded the Third Circuit’s decision. The Court framed the issue as one of federal preemption and whether it was “impossible for a private party to comply with both state and federal requirements.” The state law at issue was the requirement for drug manufacturers to warn about risks of taking a particular drug. The federal law was the FDA’s regulation of the content of drug warning labels.

The Court explained that after a drug’s initial label is approved by the FDA, there are several ways in which a company can change that label if new or different warnings are needed as time passes. One way is called the “changes being effect” or “CBE” process, which allows a company to change a label without pre-approval by the FDA, though the FDA may review that change after it is made and approve or disapprove of it. Another method, the one used by Merck, is the PAS method, which requires the FDA’s pre-approval before the change can be made.

The Court explained that, under Wyeth, to succeed on the defense of impossibility preemption, the manufacturer must demonstrate that federal law—that is, the FDA after being fully informed regarding the justification for a label change—prohibited “the drug manufacturer from adding a warning that would satisfy state law.” The Court went on to explain that because the CBE process allows a manufacturer to make a label change without prior FDA approval, “a drug manufacturer will not ordinarily be able to show that there is an actual conflict between state and federal law such that it was impossible to comply with both.”

After providing that descriptive recitation of Wyeth, the Court proceeded to the normative portion of its decision, stating first that it would not further define Wyeth’s use of “clear evidence” in terms of evidentiary standards because the issue of preemption is one for the judge and not the jury, and the judge must “simply ask himself or herself whether the relevant federal and state laws ‘irreconcilably conflict.’” In coming to that conclusion on the “determinative question,” the Court relied upon its seminal patent litigation decision in Markman v. Westview Instruments, Inc., where it concluded that the construction of claims of a patent are for the judge not the jury to decide, to conclude that “judges, rather than lay juries are better equipped to evaluate the nature and scope of an agency’s determination” and whether the determination conflicts with state law.  The Court acknowledged, as it did in Markman, that the legal question before the courts may contain contested facts, but those factual questions are “subsumed within an already tightly circumscribed legal analysis.”  The Court then vacated the judgment of the Third Circuit because the Third Circuit incorrectly concluded that the preemption issue was one of fact, not law.

Although the judgment of the Court was unanimous, its reasoning was not. Justice Clarence Thomas, although he joined in the Court’s opinion, wrote a concurring opinion to explain his “understanding of the relevant pre-emption principles and how they apply to this case.” Justice Thomas explained that he remained “skeptical” that “physical impossibility” is the correct test. Instead, a logical contradiction test between state and federal law is the correct test under the original meaning of the Supremacy Clause. But even under the “physical impossibility” test, Justice Thomas would have concluded that Merck could not prevail because there was nothing that prevented Merck from using the CBE process to change the Fosamax label. And, even if Merck believed that the FDA would have ultimately disapproved of its label change under the CBE process, that “hypothetical” would not have rendered the earlier change impossible; “hypothetical agency action is not ‘Law.’”

Justice Samuel Alito, joined by Chief Justice John Roberts and Justice Brett Kavanaugh, only concurred in the judgment. Justice Alito explained that he agreed with the Court on the “only question that it actually decides”—namely, whether the preemption question is for the judge or jury. Justice Alito then discussed what he viewed to be critical omissions in both the discussion of the law and facts in the Court’s opinion in an effort to ensure that the Court’s opinion was not “misleading on remand.”

Key Takeaways

Much of the Court’s opinion in Albrecht focused on reiterating the Wyeth decision, with only a small portion devoted to answering the question presented: who decides the impossibility preemption question, the judge or jury. But, as can often be the case, the Court’s dictum provides interesting guidance to future litigants. One interesting issue not definitively answered in Albrecht is whether a manufacturer must use the CBE process now whenever it seeks to make a label change in hopes of preserving the impossibility preemption defense. The Court’s opinion does not go that far, however, only saying that because of the CBE process, manufacturers will not “ordinarily be able to show that there is an actual conflict between state and federal law such that it was impossible to comply with both.” Justice Thomas’s view suggests that the CBE process is required to preserve the preemption defense until such time as the FDA provides a final decision on the label change in accordance with its congressionally granted authority. In view of these statements in the Court’s opinion and Justice Thomas’s concurrence, it seems possible, if not likely, that many lower courts will simply default to a bright-line rule that requires manufacturers to use the CBE process—and for the FDA to thereafter disapprove the label warning alleged to be required by state law—to successfully invoke the impossibility defense.

Also important for litigants to understand is how the shift in the decision maker for impossibility preemption changes the dynamics of litigation involving that defense. Because impossibility preemption is now a question of law, with factual underpinnings, it will be subject to de novo review on appeal, making any decision by a district court on the issue much more susceptible to reversal. In the analogous context of construing patent claims as a matter of law under Markman, district court decisions are routinely reversed by the Federal Circuit. This specter of reversal of any district court decision in impossibility preemption brings litigation uncertainty to all the parties. We will closely be watching how these issues ultimately play out in the lower courts.

 

© 2019 McDermott Will & Emery
This post was written by Ethan H. Townsend of McDermott Will & Emery.
Read more SCOTUS news on the National Law Review’s Litigation page.

Health Care Company Asks U.S. Supreme Court to Find False Claims Act Unconstitutional

If one appellant has its way, the False Claims Act (FCA) would be gutted by way of its qui tam provisions struck down as unconstitutional by the United States Supreme Court. That is the position taken by Intermountain Health Care, Inc. (Intermountain), which found itself on the wrong end of an FCA suit brought by a physician who alleges that one of his colleagues submitted improper requests for reimbursement for unnecessary medical procedures.

The teeth behind the False Claims Act are its qui tam provisions, which enable private individuals (known as “relators”) to pursue FCA actions on a “qui tam” basis. “Qui tam” is shorthand for the Latin phrase, “he who sues on behalf of the King as well as for himself.” These provisions provide a financial incentive to report noncompliance, as successful qui tamplaintiffs are statutorily entitled to share up to 30 percent of the government’s recovery in an FCA case.

Procedural Summary

The underlying details in the matter — Intermountain Health Care, Inc., et al. v. U.S. ex rel. Polukoff et al., Supreme Court petition no. 18-911 — allege that a doctor, Sherman Sorensen, conspired with two hospitals (including Intermountain) to perform unnecessary heart surgeries and receive federal reimbursements by fraudulently certifying that the surgeries were medically necessary. After the district court dismissed the complaint for failure to meet pleading requirements, the relator appealed to the Tenth Circuit. There, Intermountain and its co-defendants raised for the first time that the claims against them could not proceed on the grounds that the qui tam provisions of the FCA violate Article II of the Constitution, among other arguments. The Tenth Circuit did not reach the merits of this argument, finding that defendants had forfeited those challenges by failing to raise them at the district court level. The Tenth Circuit reversed the district court’s order and remanded, holding that the relator’s amended complaint did satisfy pleading requirements.

Intermountain, in response, petitioned the Supreme Court for a writ of certiorari, raising two questions: (1) whether the False Claims Act’s qui tam provisions violate the Appointments Clause of Article II of the Constitution, and (2) whether a court may create an exception to Federal Rule of Civil Procedure 9(b)’s particularity requirement when the plaintiff claims that only the defendant possesses the information needed to satisfy that requirement. This post addresses the constitutional arguments only, i.e., the first question.

Merits of the Arguments Raised: Constitutional Challenge

The Appointments Clause provides that the President “shall nominate, and by and with the advice and consent of the Senate, shall appoint…officers of the United States… [and] that Congress may by Law vest the appointment of…inferior officers…in the President alone, in the Courts of Law, or in the Heads of Departments.” U.S. Const. art. II, § 2, cl. 2. Intermountain asserts that the FCA qui tam provisions violate this Clause because (1) relators are officers (not appointed pursuant to the appointments clause and thus in violation of it), or, alternatively because (2) the FCA impermissibly vests a core function of officers in non-officer relators. According to Intermountain, qui tam relators constitute “officers” or “inferior officers” of the United States when they prosecute FCA actions on behalf of the United States, which is unconstitutional without proper appointment.

In support, Intermountain points to qui tam relators’ prosecutorial duties, that they receive compensation from the government, and that they exercise significant authority under federal law. Accordingly, Intermountain claims, relators are in fact “officers” or “inferior officers.” Intermountain posits alternatively that, even if relators are not officers, the FCA still violates the Appointments Clause because it vests the functions of core officers in un-appointed relators.

The relator, Gerald Polukoff, and the Government (which intervened solely on this constitutional issue) opposed, arguing: (1) there is no circuit split on the constitutional argument raised, (2) every circuit that has considered the argument has rejected it, (3) this case is a poor vehicle to consider the issue raised because Intermountain failed to raise it at the district court level, and the Tenth Circuit did not consider it on the merits, and (4) qui tam relators are merely private plaintiffs pursuing a cause of action under federal law and do not constitute “officers.”

The Government’s Opposition details this last point, offering that Intermountain’s position is inconsistent with the Supreme Court’s analysis in Vermont Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 772, 120 S. Ct. 1858, 1862, 146 L. Ed. 2d 836 (2000) (discussing relators’ actions as a “private stake” in a “private suit”). The Government also asserts that qui tam relators neither evince the “practical indicia” of federal officers (i.e., “the ideas of tenure, duration, emolument, and duties”) nor are they akin to “independent counsel,” which the Supreme Court considered to be “inferior officers” in Morrison v. Olson, 487 U.S. 654 (1988). The Government posited that a relator “does not occupy a continuing position established by law.” Lastly, the Government responds to Intermountain’s claim that the FCA impermissibly vests “a core officer function” to un-appointed relators on the grounds that relators bring only private suits and do not administer or enforce public law.

On balance, Intermountain faces a steep climb for the Supreme Court to accept review of its constitutional argument. But, if the Supreme Court accepts review, government attorneys, the defense bar, in-house counsel, and relators’ counsel alike have a lot at stake, and all will be watching closely.

 

© 2019 Foley & Lardner LLP
Read more US Supreme Court news on the National Law Review’s Litigation page.

That Agreement Isn’t Worth the Paper It’s Printed On: Settlements, Consent Judgments, and Penn-America Insurance Co. v. Osborne

A settlement is in place. The parties to the litigation have executed an agreement that embodies their negotiations. Some walk away with a release. Others walk away with a check. Still others had their heart set on an assignment of claims against a third-party. Once the consideration changes hands, the parties submit a stipulation of dismissal, or the court enters a consent judgment. Does that mean the dispute is over? For most cases, it does. Occasionally, however, the dispute lives on or is inherited by a third-party against whom claims were assigned. This article explores the circumstances in which settlement agreements are subject to attack in West Virginia, either by the parties or by third-parties against whom they are sought to be enforced.

As a general matter, settlement agreements signal the end of a dispute. They are “highly regarded and scrupulously enforced, so long as they are legally sound.”1 Indeed, because “[t]he law favors and encourages the resolution of controversies by contracts of compromise and settlement . . . it is the policy of the law to uphold and enforce such contracts if they are fairly made and are not in contravention of some law or public policy.”2 In West Virginia, parties to a settlement may only re-open it if they overcome the heavy burden of establishing that the settlement was the result of an accident, mistake, or fraud.3 Given these high hurdles, it is the rare case that a litigant will be successful in directly challenging its own settlement agreement.4

But an agreement that resolves a matter among discrete parties does not necessarily fix the obligations of a non-consenting or non-party insurer. “Most attempts to resolve litigation without the consent of the defendant’s liability carrier involve three components: (1) an assignment of the defendant’s rights against his or her liability insurer to the plaintiff; (2) the plaintiff’s covenant not to execute against the defendant’s assets; and (3) a judgment establishing the defendant’s liability and the plaintiff’s damages.”5 Due to the potential that such agreements will arise from fraud or collusion, many courts “cast a suspicious eye” on them.6

Accordingly, a consent or confessed judgment against an insured party may be subject to attack when it is entered into without the participation of a relevant liability carrier. For instance, in West Virginia, “a consent or confessed judgment against an insured party is not binding on that party’s insurer in subsequent litigation against the insurer where the insurer was not a party to the proceeding in which the consent or confessed judgment was entered, unless the insurer expressly agreed to be bound by the judgment.”7 This is because,

[w]hen dealing with consent judgments, courts must ensure that circumstantial guarantees of trustworthiness exist concerning the genuineness of the underlying judgment. The real concern is that the settlement may not actually represent an arm’s length determination of the worth of the plaintiff’s claim.8

The judiciary’s circumspect approach to consent judgments is especially heightened when the underlying agreement is coupled with a covenant not to execute. A covenant not to execute is an agreement by “which a party who has won a judgment agrees not to enforce it.”9 Such covenants are suspect because they come with perverse incentives. “When the insured actually pays for the settlement of the claim or when the case is fully litigated, the amount of the settlement or judgment can be assumed to be realistic.”10 But when an insured walks away from the agreement with no practical consequences, it has little reason to challenge the amount of the claim, and the accuracy of the judgment becomes questionable.

One potential circumstance is illustrated by Penn-America Insurance Co. v. Osborne, 11 which was decided by the Supreme Court of Appeals of West Virginia in 2017. There, the plaintiff was injured in a timbering accident while conducting work for his employer, H&H Logging Company, on land owned by Heartwood Forestland Fund, IV, Limited Partnership, and leased by Allegheny Wood Products, Inc., for the purpose of harvesting timber.12 The plaintiff sued his employer for deliberate intent and both Heartwood and Allegheny for negligent failure to inspect and/or maintain the land.13 When it came time for the defendants to arrange the defense among their insurers, communications fell apart. H&H requested a defense from its commercial general liability insurer, Penn-America Insurance Company, but Penn-America declined to defend the case against H&H because deliberate intent claims were excluded under the relevant policy.14

For their part, Allegheny and Heartwood requested a defense from Allegheny’s insurer, which accepted coverage. Some time later, Allegheny and Heartwood realized that H&H was contractually obligated to provide them a defense and wrote H&H to demand that it or Penn-America provide a defense. None of the parties ever notified Penn-America that Allegheny and Heartwood had requested a defense against the plaintiff’s allegations. Nonetheless, Allegheny and Heartwood moved for leave to file a third-party complaint for a declaration that Penn-America had wrongfully failed to provide them a defense. The court never ruled on the motion, and the third-party complaint was never filed.15

Thereafter, without providing notice to Penn-America, the parties entered into a settlement agreement, stipulating that Penn-America had damaged Allegheny and Heartwood by breaching its contractual obligation to provide them a defense against the plaintiff’s allegations.16 The key aspects of the agreement are as follows:

Allegheny and Heartwood consented to a $1,000,000.00 judgment for [the plaintiff’s] leg injury, and they agreed to assign to [the plaintiff] any claims they may have had against Penn-America for failing to provide them a defense in the lawsuit. In return, [the plaintiff] covenanted not to execute on the $1,000,000.00 judgment against Allegheny and Heartwood. Instead, he would collect judgment from Penn-America by asserting his assigned claims.17

The plaintiff dismissed his lawsuit against Allegheny and Heartwood and filed a new lawsuit against Penn-America, seeking to recover $1,000,000 as relief for its alleged failure to provide a defense in the plaintiff’s case against Allegheny and Heartwood.18

Ultimately, the Supreme Court of Appeals of West Virginia decided that “the consent judgment [was] not binding on Penn-America, and the assignment of claims to [the plaintiff was] void.”19 As to the enforceability of the consent judgment itself, the court adhered to its prior reasoning that a consent judgment coupled with a covenant not to execute is especially suspect and deserving of scrutiny. It further reasoned that “[n]one of the parties to the pre-trial settlement agreement had any motive to contest liability or an excessive amount of damages.”20 Moreover, the parties valued the claim at $1,000,000 by reference to Penn-America’s coverage, not the plaintiff’s actual injuries. Because “Penn-America was not a party to the lawsuit in which the consent judgment was entered,” the judgment could not be binding on PennAmerica.21

The assignment of bad faith claims by Allegheny and Heartwood fared no better. The Court found that the assignment was based on falsehoods, and that the parties’ agreement bore the hallmark characteristics of fraud and collusion.22 As the Supreme Court of Appeals summarized:

[T]he facts underlying Mr. Osborne’s assigned claims were misrepresented. Moreover, a $1,000,000.00 valuation of a lawsuit for an injured leg, without any cited evidence regarding permanency of the injury, permanent disability, severity, medical expenses, etc., hardly reflects a “serious negotiation on damages.” Lastly, concealment also characterizes the pre-trial settlement agreement because the parties never notified Penn-America of their pre-trial settlement negotiations. Once Penn-America learned after-the-fact of the pre-trial assignment and covenant not to execute, it was prohibited from conducting discovery on the extent of Mr. Osborne’s injuries and damages. Thus, through secretive means, Allegheny and Heartwood awarded Mr. Osborne a $1,000,000.00 windfall for his injured leg with Penn-America’s money.23

In essence, the consent judgment entered by the putative insureds was ineffective to subject the insurer to liability or exposure in a subsequent case brought by the plaintiff.

The reasoning of the Supreme Court of Appeals of West Virginia in Penn-America is the majority approach as to whether a consent or confessed judgment can be binding on a third party.23 For those engaged in settling cases on behalf of their insureds, Penn-America counsels against using the settlement agreement as an instrument to foist liability onto a non-party, especially one that has not been given notice of the negotiations. Moreover, insurers against whom consent judgments are sought to be enforced should bear in mind that the enforcers face a steep uphill battle. The Supreme Court of Appeals of West Virginia, along with the majority of courts, looks askance on enforcing such judgments against non-parties.

1 DeVane v. Kennedy, 205 W. Va. 519, 534, 519 S.E.2d 622, 637 (1999)

2 Syl. Pt. 6, DeVane, 205 W. Va. 519, 519 S.E.2d 622 (quoting Syl. Pt. 1, Sanders v. Roselawn Mem’l Gardens, 152 W. Va. 91, 159 S.E.2d 784 (1968))

3Syl. Pt. 2, Burdette v. Burdette Realty Improvement, Inc., 214 W. Va. 448, 590 S.E.2d 641 (2003) (quoting Syl. Pt. 7, DeVane, 205 W. Va. 519, 519 S.E.2d 622).

4 See, e.g., Burdette, 214 W. Va. 448, 590 S.E.2d 641 (fi nding that a settlement agreement was unenforceable because a party to the agreement had repudiated his signature before the agreement left his attorney’s offi ce, thus resulting in no meeting of the minds)

5 John K. DiMugno, Consent Judgments and Covenants Not To Execute: Good Deals or Too Good to Be True? Part II: Practical Concerns About Collusion and Fraud, 25 No. 1 INS. LITIG. REP. 5 (2003).

6 Id

7 Syl. Pt. 7, Horkulic v. Galloway, 222 W. Va. 450, 665 S.E.2d 284 (2008).

8 Id. at 460, 665 S.E.2d at 294 (quoting Ross v. Old Republic Ins. Co., 134 P.3d 505 (Colo. App. 2006)).

9 Covenant, BLACK’S LAW DICTIONARY (10th ed. 2014).

10 Horkulic, 222 W. Va. at 460-61, 665 S.E.2d at 294-95 (quoting Ross, 134 P.3d 505).

11 238 W. Va. 571, 797 S.E.2d 548 (2017).

12 Id. at 573, 797 S.E.2d at 550.

13 Id

14 Id

15 Id. at 574, 797 S.E.2d at 551.

16 Id

17 Id

18 Id

19 Id. at 575, 797 S.E.2d at 552.

20 Id. at 576, 797 S.E.2d at 553

21 Id. at 578-79, 797 S.E.2d at 555-56; cf. Strahin v. Sullivan, 220 W. Va. 329, 647 S.E.2d 765 (2007) (reasoning that the assignment of a bad faith claim may not be made when the insured enters a covenant not to execute as the insured was never actually exposed to an excess verdict that would support a bad faith claim against his insurer).

22 Penn-America, 238 W. Va. at 579-80, 797 S.E.2d at 556-57

23 LITIGATION & PREVENTION OF INSURER BAD FAITH § 3:50 (3d ed. 2018) (referring to Penn-America as representative of the majority rule “that the consent or confessed judgment is simply not binding where the party from which indemnity is sought was not a party to the previous proceeding”).

 

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This post was written by James E. McDaniel of Steptoe & Johnson PLLC. 

Sixth Circuit Erases Chalking of Parked Cars

It’s not often that a dispute over parking tickets ends up in federal court. But that’s exactly what happened this week in Taylor v. City of Saginaw – a case that has already drawn the attention of the national media.

Taylor involved a challenge to “a common parking enforcement practice known as ‘chalking,’ whereby City parking enforcement officers use chalk to mark the tires of parked vehicles to track how long they have been parked.” This practice can be surprisingly effective (as certain blog authors unfortunately can attest). But it is apparently very effective in Saginaw – according to Judge Donald’s decision, one particular parking enforcement officer managed to chalk (and then ticket) Ms. Taylor fifteen separate times between 2014 and 2017.

Armed with a slew of parking tickets, Ms. Taylor filed suit in federal court, alleging that the City violated the Fourth Amendment by chalking her tires without her consent or a valid warrant. The Sixth Circuit agreed, relying upon the Supreme Court’s recent decision in United States v. Jones, 565 U.S. 400 (2012), to hold that chalking constitutes an unreasonable trespass upon a constitutionally-protected area (your car).

At first blush, chalking a car’s tires may not seem like the type of “search” typically raising Fourth Amendment concerns. But as Judge Donald explained, Jones signaled a rebirth of “the seldom used ‘property-based’ approach to the Fourth Amendment search inquiry,” which focuses on physical intrusion to one’s property:

Under Jones, when governmental intrusions are accompanied by physical intrusions, a search occurs when the government: (1) trespasses upon a constitutionally protected area, (2) to obtain information.

In the Court’s view, chalking satisfied both of these requirements: the officer came into contact with Ms. Taylor’s car, in an attempt to obtain information about her (whether she remained in her parking spot too long).

The Court proceeded to hold that the search was unreasonable because the car was parked legally when chalked, and the officer lacked any reasonable suspicion (let alone probable cause) that a crime had been committed. The Court also specifically rejected the City’s assertion of the “community caretaker” exception, explaining that “the purpose of chalking is to raise revenue, and not to mitigate [a] public hazard.”

Taylor is the latest in a series of interesting Fourth Amendment cases playing out on our public roadways. The Sixth Circuit’s decision relied heavily on the Supreme Court’s decision in Jones, which addressed the constitutionality of electronically monitoring an individual’s location by affixing a GPS device to his car.

And the Supreme Court heard argument yesterday in Mitchell v. Wisconsin, which asks whether a statute authorizing a blood draw from an unconscious motorist suspected of driving under the influence provides an exception to the Fourth Amendment warrant requirement.

 

© Copyright 2019 Squire Patton Boggs (US) LLP
Read more news from the Sixth Circuit from the National Law Review on our Litigation Page.

US Supreme Court Agrees to Decide Whether Title VII Prohibits LGBT Discrimination

After considering the petitions at eleven separate private conferences, on April 22, 2019, the U.S. Supreme Court granted certiorari in three cases involving the extent of protection provided by Title VII of the Civil Rights Act of 1964 – if any – against employment-based discrimination on the basis of sexual orientation and gender identity.  As we previously reported here, this issue has been watched closely by the nation, with multiple federal courts, government agencies, and employers reaching differing conclusions.  The Court consolidated the two sexual orientation cases, Altitude Express v. Zarda and Bostock v. Clayton County, Georgia, and allocated a total of one hour for oral argument for both cases.  In the gender identity case, R.G. & G.R. Harris Funeral Homes Inc. v. Equal Employment Opportunity Commission et al., the Court limited its consideration to only the question of whether Title VII prohibits discrimination against transgender people based on (1) their status as transgender or (2) sex stereotyping under Price Waterhouse v. Hopkins, 490 U. S. 228 (1989).

The Court will hear argument in these cases next term, which means that it’s possible that a decision may not issue until as late as June 2020.  We will continue to update you with ongoing developments in these cases.

© Copyright 2019 Squire Patton Boggs (US) LLP

This post was written by Melissa Legault of Squire Patton Boggs (US) LLP.

Read more on the US Supreme Court on the National Law Review’s Litigation Type of law Page.