Tag: Litigation

Sixth Circuit Upholds Michigan Law Which Bars Schools from Collection Union Dues

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The 6th Circuit in Bailey v. Callahan, decided Thursday, May 9, has vacated an injunction entered by the District Court and has upheld Michigan’s Public Act 53 which prohibits Michigan’s public schools from assisting in the collection of dues and service fees for unions. The Court summarized the Union’s First Amendment challenge to the statute in this way:

“Unions engage in speech (among many other activities); they need membership dues to engage in speech; if the public schools do not collect the unions’ membership dues for them, the unions will have a hard time collecting the dues themselves; and thus Public Act 53 violates the unions’ right to free speech.”

The problem with that, according to the majority opinion, is that this argument has already been rejected by the U.S. Supreme Court in Ysursa v. Pocatello Education Association, 555 U.S. 353 (2009). Moreover, the Court determined that Public Act 53 does not restrict speech and is not designed to specifically suppress speech by teachers’ unions. Finally, the Court, in two paragraphs, rejected the plaintiff’s equal protection argument.

The opinion incited a lengthy dissent from Circuit Judge Jane Stranch who contended that the majority “mischaracterizes the First Amendment interests at stake, glosses over key distinctions the Supreme Court requires us to observe, and averts its gaze from Act 53’s blatant viewpoint discrimination.”

With a 2-1 decision and a lengthy dissent on a Constitutional claim, one would think this is headed for an en banc determination by the full Sixth Circuit.

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Circuit Court Upholds Michigan Public Act 53: Public Schools Prohibited from Collecting Union Dues

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Responding to a challenge to the constitutionality of Michigan Public Act 53, which prohibits public schools from collecting union dues from employees, the Sixth Circuit ruled that the act is constitutional. The result of this ruling is that, at this point, public schools are statutorily precluded from collecting dues for the union under any bargaining agreement that was entered into, renewed or extended after March 16, 2012.

The plaintiffs, who are school unions and union members, argued that the act violates their First Amendment and Equal Protection rights.  The district court, agreeing with the plaintiffs, had issued a preliminary injunction barring enforcement of the law.  The Sixth Circuit reversed the district court, dissolved the injunction and remanded the case “for further proceedings consistent with this opinion.”  It is unclear whether any viable challenge to the statute remains for the district court to address or whether dismissal of the claim is now in order.

The 6th Circuit ruled that Public Act 53 does not violate the First Amendment.  The plaintiffs argued that unions need membership dues to engage in speech and if the public schools don’t collect the union dues for them, the unions will have a hard time collecting the dues themselves.  Therefore, Public Act 53 violates the unions’ right to free speech.  The majority opinion stated that the First Amendment prohibits government from limiting the freedom of speech, but it does not give the right to use government payroll systems for the purpose of obtaining funds for speech.  The court concluded that Public Act 53 does not restrict speech.  It “merely directs one kind of public employer to use its resources for its core mission rather than for the collection of union dues.”

Similarly, the Court decided that the plaintiffs’ Equal Protection claim fails.  The plaintiffs argued that Public Act 53 violates the Equal Protection clause of the 14 Amendment because it applies only to unions that represent school employees and not to other public employers.  The court held that there is a legitimate interest in this classification.  That is, the Michigan legislature “could have concluded that it is more important for the public schools to conserve their limited resources for their core mission than it is for other state and local employers.”

It remains to be seen whether the Sixth Circuit’s opinion ends the debate or if there will be continued challenge.

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Timely Performance Management in Avoiding Family and Medical Leave Act (FMLA) Liability

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Managing the performance or conduct of an employee who has recently utilized leave under the Family and Medical Leave Act (FMLA) can be a legal minefield for employers.  If the poorly performing employee does not improve his or her performance upon return from FMLA leave, the employer may be hesitant to take further employment action against the employee for fear that the timing of the decision will create a risk of liability under state or federal leave laws.  A comparison of two recent court decisions serves as an important reminder that contemporaneously addressing and documenting performance or conduct issues as they occur can go a long way in protecting the employer from liability in a later FMLA retaliation claim.

In Benimovich v. Fieldston Operating, LLC, Case No. 11-CV-780 (S.D.N.Y 3-22-2013), the plaintiff, Galina Benimovich, took FMLA leave to undergo and recover from knee replacement surgery.  While on leave, the employer hired and trained a replacement.  When Benimovich learned that she had been replaced, she contacted the employer and offered to return from leave.  When the parties met a few days later to discuss the situation, the employer terminated Benimovich’s employment.

Benimovich subsequently filed a lawsuit against the employer alleging a variety of claims, including a claim that the employer had unlawfully terminated her in retaliation for exercising her FMLA rights.  The employer defended that its owners had actually decided to terminate Benimovich months before she took FMLA leave, but that they wanted to hire and train a replacement before firing her. The employer claimed its motivation to terminate Benimovich was poor performance, specifically inaccurate processing of payroll records, manipulation of time records, failure to issue accurate paychecks, and untimely payments to vendors.

The court denied the employer’s motion for summary judgment on the FMLA retaliation claim.  In allowing the case to go forward, the court noted that the temporal proximity between the leave and the termination was suspect.  However, the court also relied heavily on the fact that there was no written documentation substantiating Benimovich’s alleged performance problems or the owners’ decision to terminate Benimovich months earlier.  The court further noted that Benimovich’s performance was rarely, if ever, criticized.

Contrast the outcome in Benimovich with the analysis and decision of the Court of Appeals for the Eight Circuit in Brown v. City of Jacksonville, Case No. 12-1730 (8th Cir. 2013).  The plaintiff in Brown took FMLA leave from August 9, 2008 through October 18, 2008 to undergo hip replacement surgery.  A few months before going on leave, Brown received a written warning for insubordination.  Brown’s supervisors had also verbally counseled her regarding her performance on a number of occasions.

After returning from leave, Brown received another written warning for failure to perform her duties as purchasing manager.  Brown filed a complaint with the Equal Employment Opportunity Commission (EEOC), which led the City to conduct an internal investigation into Brown’s complaints.  The investigation revealed that Brown’s co-workers considered her to be a very negative presence in the workplace and felt they had to walk on “pins and needles” due to Brown’s attitude issues.  Additionally, the investigation revealed that Brown’s co-workers were able to adequately perform Brown’s purchasing duties during her absence.  The City concluded that Brown was creating a hostile work environment for her co-workers and terminated her employment for “failure in performance of duties” and “failure in personal conduct.”

Following her termination, Brown filed a lawsuit against the City alleging FMLA retaliation and a number of other discrimination claims.  On appeal, the Eighth Circuit approved of the lower court’s grant of summary judgment to the employer on Brown’s FMLA retaliation claim.  First, the court noted that the timing of Brown’s termination – eight months after returning from leave – did not raise an inference of discrimination.  Second, the court held that the undisputed evidence (which included written warnings) showed that Brown was warned about her poor performance prior to even going on leave.  Accordingly, the Court affirmed summary judgment in favor of the City.

There are a number of distinguishing factors that explain the differing outcomes in Benimovich and Brown – including the amount of time between the employee’s leave and termination.  Importantly, however, employers should also take note of the critical role that written warnings and performance counseling played in the Eight Circuit’s award of summary judgment to the employer.  The employer in Brown was able to justify its termination and avoid liability in a tricky situation because it had the written documentation and prior performance counseling to support its claim of poor performance.   Conversely, the employer in Benimovich was denied summary judgment because it had failed to document either the purported performance issues or the earlier decision to terminate.

No doubt, terminating or taking adverse employment action against an employee who has recently utilized legally protected leave rights is risky, and an employer should consult legal counsel before taking any such action.  However, these cases illustrate that proper documentation of performance and disciplinary issues is one of the most important preventative steps an employer can take now to reduce the risk of future liability.

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Seventh Circuit Addresses Obligations Regarding the Interactive Process under the Americans With Disabilities Act (ADA)

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A common scenario often faced by employers under the Americans with Disabilities Act (ADA) involves an employee’s request for time off as a reasonable accommodation. In Basden v. Professional Transportation, Inc., No. 11-2880 (7th Cir, May 8, 2013), the Seventh Circuit U.S. Court of Appeals provides guidance in this area. There, the court explained that the employer was not liable under the ADA, even though it failed to engage in the interactive process, because the employee failed to show that the requested accommodation (a 30-day leave) would have resulted in her ability to perform the essential functions of the job.

Employee Two Weeks Shy of Leave Entitlement

Professional Transportation, Inc. (PTI) provides 24-hour ground transportation services. Terri Basden was hired as a dispatcher in June, 2007. After numerous absences in 2007 and early 2008, she received a verbal warning for absences in March 2008 and a written warning for further absences in April 2008.

Basden provided doctors’ notes reflecting that she had been referred to a neurologist with a possible diagnosis of multiple sclerosis after emergency room tests showed brain abnormalities indicative of the disease. After several job transfers, Basden was granted a request for a part time position on May 1, 2008. She incurred additional absences in May which resulted in suspension. While on suspension, Basden submitted a request for a 30-day leave of absence due to “complications due to medical illness (MS).” PTI policy provides employees with one year of service may be eligible to take a 30-day, unpaid leave of absence. However, Basden had not been employed for one year. PTI denied her request for leave, and thereafter terminated Basden when she failed to return to work following her suspension.

Employee Could Not Show Leave Would Enable Her to Perform Essential Functions

Basden sued PTI, claiming that PTI violated the ADA by terminating her instead of accommodating her request for 30 days leave, that PTI failed to engage in the interactive accommodation process required by the ADA, and that PTI did not show that the requested leave was unreasonable. The district court granted summary judgment for PTI.

On appeal, the Seventh Circuit first observed that an employee’s request for an accommodation under the ADA requires the employer to engage in a flexible, interactive process to identify a reasonable accommodation. In this case, the employee requested a 30-day leave that, according to the employer’s policy, she would have been eligible for with two weeks’ additional seniority. The court noted that PTI’s response to this request, specifically, failing to engage in an interactive process, denying the leave, and terminating her, was not an appropriate employer response under the ADA.

However, the court held that PTI’s actions did not violate the ADA. The failure to engage in the interactive process is not an independent basis for liability under the statute, and in any event, such a failure is actionable only if it prevents identification of an appropriate accommodation. Thus, even if an employer fails to engage in the interactive process, that failure need not be considered if the employee fails to show that she was able to perform the essential functions of her job with an accommodation.

Here, PTI cited regular attendance as an essential function of Basden’s job. Yet, Basden did not demonstrate that she was able to come to work regularly at the time of her termination, or that her regular attendance could have been expected either following the requested leave or with any other accommodation. Therefore, the court held, summary judgment for PTI was appropriate on the ADA claim despite any shortcomings in PTI’s response to Basden’s request. (Basden also alleged violation of the Family and Medical Leave Act, which the court also affirmed summary judgment on because Basden had not worked for PTI for 12 months at the time of her leave request and thus was not eligible for leave under the statute.)

Identify and Document Essential Functions

Of course, employers should continue to comply with their obligations to engage in the interactive process. However, as this case suggests, the obligation to explore and provide accommodation does not necessarily extend to accommodations that are or would be futile and would not enable the employee to perform essential functions. This case highlights the importance of well-written job descriptions that clearly set forth essential job functions. An employer’s identification of and ability to prove essential functions of the job can be used to guide the interactive process and its obligations to provide accommodation under the ADA, and can play a key role in defending a lawsuit under the ADA.

False Marking Claims Must Be Pled with Specificity as to Intent

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The U.S. Court of Appeals for the Federal Circuit settled a split among the district courts when it held that false patent marking claims must be pled with particularity under Fed. R. of Civ. Pro. 9(b).   In granting the defendant’s petition for a writ of mandamus, the Federal Circuit held that the district court should have dismissed a false marking complaint for failure to plead, with particularity, the circumstances of defendant’s alleged intent to deceive the public.   In re BP Lubricants USA Inc., Misc. Docket No. 960 (Fed. Cir., Mar. 15, 2011) (Linn, J.).

The plaintiff had included in its complaint allegations that BP was a “sophisticated company” having experience applying for, obtaining and litigating patents.   Based on that categorization, the plaintiff claimed BP “knew or should have known” that the patent had expired.   The district court concluded that the complaint satisfied the requirements of Rule 9(b) because it had pled the who, how, what and when of the alleged fraud.  BP sought mandamus at the Federal Circuit.

The Federal Circuit clarified that in all cases sounding of fraud or mistake, Rule 9(b) requires the plaintiff to plead “with particularity the circumstances constituting the fraud or mistake.”   The Court noted that Rule 9(b) acts as a “safety valve to assure that only viable claims alleging fraud or mistake are allowed to proceed to discovery.   … Permitting a false marking complaint to proceed without meeting the particularity requirement of Rule 9(b) would sanction discovery and adjudication for claims that do little more than speculate that the defendant engaged in more than negligent action.” The Court stated that the district court erred in denying BP’s motion to dismiss because it expressly relied on the plaintiff’s general allegations that BP knew or should have known that the patent expired. The Court explained that a complaint must provide some objective indication to reasonably infer that the defendant was aware that the patent expired.  Accordingly, general allegations that the defendant is a “sophisticated company” and that it “knew or should have known” that the patent expired are insufficient under Rule 9(b).

The Court went further and provided exemplary allegations with which a court may reasonably infer an intent to deceive, “[alleging that a] defendant [had] sued a third party for infringement of a patent after the patent had, e.g., expired or made multiple revisions of the marking after expiration” may set forth facts upon which intent to deceive can be reasonably inferred.

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Replication without Human Intervention: Lessons from Monsanto v. Bowman

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Until now, the practicing of an invention needed some direct form of human action; someone was needed to “do something” to bring the invention into existence, as well as replicate it by making more (in the case of a physical object) or performing it again (in the case of a method). However, this may no longer be necessary in all instances. At least in the case of some biological technologies, once an invention has been created by a human, further human intervention may no longer be needed for replicating the invention. In these instances, does a patent owner lose the right to exclude future uses, sales, offers for sale or importations of such an invention?

In Monsanto v. Bowman, the Supreme Court is poised to bring some clarity to this question. Monsanto Company designs and manufactures herbicide-resistant soybean seeds and related technology. Monsanto sold patented seeds to farmers for growing and resale as commodity items to be used in such things as public-school lunches and animal feed. Such sales were made under license agreements that allowed the beans to be sold without any ongoing restrictions on the use of those beans.

Vernon Bowman is a soybean farmer. Bowman purchased these beans and replanted them as second-generation seeds, which were the products of seeds purchased from a licensed Monsanto technology distributor.

Monsanto sued Bowman for patent infringement, arguing that the beans were products of Monsanto’s patented herbicide-resistant seeds and that, by planting them instead of purchasing new seeds, Bowman violated the Monsanto Technology Agreement for the seeds. The U.S. District Court found that Bowman’s activities infringed upon Monsanto’s patent and awarded damages to Monsanto for violation of its patented technology. The Federal Circuit agreed and upheld the decision, holding that Monsanto’s patent covered both the original seeds and a product of the original seeds, such as those second-generation beans grown by Bowman.

Bowman appealed, arguing that, under the doctrine of patent exhaustion, Monsanto’s patent rights were exhausted upon its initial sale of the seeds that Bowman later purchased from the licensed distributor, and that use of progeny seeds is an expected use of the product. In response, Monsanto argued that in the case of self-replicating technologies, such as seeds that grow and produce more seeds, the patent extends to the underlying technology (i.e., herbicide resistance) and not only to the seed itself.

The important question raised in this case is whether an exception to the doctrine of patent exhaustion for self-replicating technologies is needed and/or warranted. While this question is clearly important to the biotechnology and agricultural industries, it also has the potential to significantly affect the software and robotics industries. For example, as robotics and artificial intelligence become increasingly sophisticated in their abilities to adapt and “grow,” it does not seem too outlandish to think that, one day, these may also become self-replicating technologies.

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National Labor Relations Board (NLRB) Issues Guidance on Lawful Confidentiality Language

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On July 30, 2012, the NLRB (“Board”) issued a decision in Banner Health System dba Estrella Medical Center, 358 NLRB No. 93 holding, among other things, that the employer violated Section 8(a)(1) (which prohibits employers from interfering, restraining or coercing employees in the exercise of their rights), by restricting employees from discussing any complaint that was then the subject of an ongoing internal investigation.

To minimize the impact of such a confidentiality mandate on employees’ Section 7 rights, the Board found that an employer must make an individualized determination in each case that its “legitimate business justification” outweighed the employee’s rights to protected concerted activity in discussing workplace issues.  In Banner Health, the employer did not carry its burden to show a legitimate business justification because it failed to make a particularized showing that:

  • Witnesses were in need of protection;
  • Evidence was in danger of being destroyed;
  • Testimony was in danger of being fabricated; or
  • A cover-up must be prevented.

The Board concluded that the employer’s one-size-fits-all rule, prohibiting employees from engaging in any discussion of ongoing internal investigations, clearly failed to meet these requirements.

More recently, the NLRB’s Office of the General Counsel clarified the limits of how such policies could be drafted without running afoul of Section 7 in an advice memorandum released on April 24, 2013 (dated January 29, 2013).   The Region had submitted Verso Paper, Case 30-CA-089350 (January 29, 2013) to the Office of the General Counsel for advice regarding the confidentiality rule at issue and whether it unlawfully interfered with employees’ Section 7 rights.  Specifically, the Verso Code of Conduct contained this provision prohibiting employees from discussing ongoing internal investigations:

Verso has a compelling interest in protecting the integrity of its investigations.  In every investigation, Verso has a strong desire to protect witnesses from harassment, intimidation and retaliation, to keep evidence from being destroyed, to ensure that testimony is not fabricated, and to prevent a cover-up.  To assist Verso in achieving these objectives, we must maintain the investigation and our role in it in strict confidence.  If we do not maintain such confidentiality, we may be subject to disciplinary action up to and including immediate termination.

Reiterating that employees have a Section 7 right to discuss disciplinary investigations of their co-workers, the General Counsel’s Office found that the Verso Paper provision did not allow for a case-by-case analysis of whether or not the employer’s business justification for the restriction outweighed the employees’ Section 7 rights as required by Banner Health.  According to the General Counsel’s Office, the employer may establish this by presenting facts specific to a given investigation that give rise to a legitimate and substantial business justification for imposing confidentiality restrictions.

However, in footnote 7 of its advice, the General Counsel’s Office, after noting that the first two sentences of the Verso Paper rule lawfully set forth the employer’s interest in protecting the integrity of its investigations, surprisingly put forward a modified version of the remainder of the Verso Paper provision that it said would pass muster under Banner Health:

Verso may decide in some circumstances that in order to achieve these objectives, we must maintain the investigation and our role in it in strict confidence.  If Verso reasonably imposes such a requirement and we do not maintain such confidentiality, we may be subject to disciplinary action up to and including immediate termination.

Although this guidance is not binding, combining this language above with the first two sentences of the Verso Paper provision could certainly strengthen an employer’s argument that its intent was not to violate an employee’s Section 7 rights, but rather, to lawfully put employees on notice that if the employer “reasonably” imposes a confidentiality requirement, they must abide by it or face discipline.  However, employers must remain mindful that using a provision like this suggested does not obviate the need for the employer to engage in the particularized case-by-case determination of its substantial and legitimate business need that would permit it to impose confidentiality restrictions on the investigation.

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Early Patent Trial and Appeal Board Orders Demonstrate Differences Between America Invents Act (AIA) Patent Trials and District Court Trials

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Patent practitioners are still absorbing some of the differences and advantages that are unique to litigation in the PTAB as opposed to district court litigation.  For example, PTAB proceedings only decide questions of validity and are not directed to rule on questions of infringement or damages, as is the practice in traditional litigation.  Another example is that PTAB trials require that the petitioner provide a lot of technical arguments and factual evidence in the original petition, as opposed to traditional litigation where parties make sure they have a good faith basis to sue and then rely on discovery to later develop the case.  Thus, a petition for review of patentability in PTAB practice is more akin to a summary judgment motion than a complaint in trial practice.  But a PTAB petition is still very different than a summary judgment motion.  And these differences can be exploited to more inexpensively and quickly resolve validity issues.

In considering summary judgment, a judge must decide if there is “no genuine dispute as to any material fact,” as set forth in FRCP Rule 56.  In contrast, the technical patent judges on the Board can decide technical disputes instantly and can resolve disputes of technical and legal nature.  PTAB panels use their technical and patent law experience to quickly identify dispositive issues and focus the parties on how their respective positions are being viewed by the Board early in the proceedings.  This means that PTAB trials will put a premium on identification of technical defects in patents early in the proceedings, as opposed to traditional litigation approaches that favor discovery before attempting summary judgment or that shy away from summary judgment as a mechanism for resolution of complex technical disputes.

Examples of the Board’s unique capabilities are already being demonstrated in recent orders.  For example, in an inter partes review by Chimei Innolux Corporation against Semiconductor Energy Laboratory Co.,Ltd. concerning U.S. Patent No. 8,068,204 (IPR2013-00068), the Board squarely addressed technical disputes between what the petition asserted versus what the patent owner’s preliminary statement set forth when the Board decided to institute trial.

The Board took great care to understand and sift through extremely technical differences between the claimed subject matter and the prior art as it was characterized by the parties.  This is a highly complicated task, because the patent relates to improvements for substrate bonding and electrical connections in liquid-crystal displays and because the parties were advancing very technical arguments on both sides of the validity issue.  In this early order to institute trial the Board construed a phrase from the claims and used that construction to decide the merits of the positions taken by the petitioner and patent owner.  The Board then considered technical arguments made by both parties, such as whether a reference used in combination in an obviousness challenge teaches away from the combination (page 15), or whether it would have been obvious to employ a known (contact) structure (page 18).  The Board decided that certain arguments were not persuasive and used the order to focus the parties on the issues it ruled upon.  The following excerpt from pages 19-21 of the the order instituting trial demonstrates the attention to detail that the Board is devoting to these proceedings:

SEL responds that “[. . .] a person of ordinary skill in the art does not know whether an insulating film (first insulating film) is formed between the bottom layer of the first wiring line 127 (formed in the step of forming the scanning lines Yj) and the top layer of the first wiring line 127 (formed in the step of forming the data lines Xi).” (Prelim. Resp. 31.) According to SEL, Shiba’s “‘two-layered structure’” might be “sequentially stacked” without an insulating layer therebetween. (Id.) As noted, claim 31 requires such an intervening insulating layer.

SEL’s argument is not persuasive. Shiba implies or suggests that the two wiring layers in the two-layered structure 127, formed in the same manner as the two-layered scanning and data lines as the quoted passage shows, have an insulating layer therebetween just like the scanning and data lines. [cite omitted]  [. . .  .]  Skilled artisans also would have understood that overlapping portions readily could have been “partially connected” together by known methods, including using a connecting hole through such an insulating layer. [cite omitted]

Because the two-layered structure in Shiba’s lines 127 connect to pad 751, SEL maintains that under various hypothetical scenarios, pad 751 also must have a two-layered structure, and as such, with Sukegawa’s transparent layer modified to be on Shiba’s pad as CMI proposes in its ground of unpatentability, the pad structure would become a three-layered structure. . . .  SEL also argues that the Petition inconsistently conflates or interchanges Sukegawa’s transparent layer and the top layer of Shiba’s two-layered wiring structure 127, and thereby fails to show how the combination renders obvious the external connection line and transparent conductive film as recited in claims 31 and 54. (See Prelim. Resp. 25-26.)

It is clear from the analysis set forth by the Board that it is not afraid to weigh in on very technical issues and clarify how it perceives the arguments.  Of course, the preliminary response by the patent owner is considered a first initial response and is not a comprehensive response with evidence.  Therefore, the Board’s institution of trial is based on limited argument and is well before the patent owner has had an opportunity to fully respond.  But this process focuses the parties on issues that the Board (at least initially) perceives to be negative to the patent.  It is a preliminary ruling on the disputed issues by the Board that will shape discovery to come, as opposed to traditional litigation where discovery often leads and shapes the issues brought before the court.

Parties who believe that an asserted patent has validity issues may find it difficult to challenge disputed technical issues in summary judgment motion practice.  Validity issues are frequently accompanied with fact questions and in litigation there is a clear and convincing standard for invalidity that makes it hard to prove invalidity.  And it is unlikely that counsel will recommend a motion for summary judgment before conducting at least some discovery.  In contrast, in patent reviews and reexaminations the burden of proof is based on a preponderance of the evidence and can be done without discovery.  Given the different standards and the costs of e-discovery, there are significant advantages to the PTAB patent review option for defendants with genuine validity arguments.  But one must be careful to choose the PTAB trial option carefully to avoid estoppel should the proceeding not result in destruction of the relevant patent claims.

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Making Copies! The Fourth Circuit Defines Taxable Costs Associated With eDiscovery

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Can this happen to your client? Your client gets sued, is forced to spend over $100,000 on eDiscovery despite you making all the right objections, you deliver a clean victory on dispositive motions and the District Court awards costs of … $200. Here is what happened in the Fourth Circuit and what you can do to help your clients avoid the same fate:

The Fourth Circuit just decided the scope of taxable eDiscovery costs under 28 U.S.C. § 1920(4) in Country Vintner of North Carolina v. E. & J. Gallo Winery, Inc., __ F.3d __, 2013 WL 1789728 (4th Cir. Apr. 29, 2013). Section 1920(4) allows the District Courts to “tax as costs … [f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” Id. 1   Under Federal Rule of Civil Procedure 54(d)(1), the cost of making copies “should be allowed to the prevailing party.” As an initial matter, the Fourth Circuit concluded that section 1920(4) applies to the costs related to documents produced in discovery – not just used at trial or in connection with a dispositive motion. Country Vintner, 2013 WL 1789728, *7. The Fourth Circuit then examined the meaning of “making copies,” and held that section 1920(4) “limits taxable costs to … converting electronic files to non-editable formats and burning files onto discs.” Id., *9. 2   In reaching that conclusion, the Fourth Circuit explicitly rejected the argument that “ESI processing costs constitute[d]” “making copies” under Section 1920(4). Id., *7. As a consequence, Appellant Gallo was awarded only $218.59 out of the $111,047.75 in eDiscovery costs it sought.

What does that mean?

Appellant Gallo sought more than $70,000 for “indexing” and “flattening” ESI – processing methods that extracted irrelevant files and duplicates, made the remaining data searchable, and organized the data; spent more than $15,000 extracting and organizing metadata and preparing it for review; less than $100 on electronic bates numbering; and over $20,000 on quality assurance and preparing the document production. None of these costs were taxed. Instead, Gallo received only $178.59 to convert certain native files into TIFF and PDF format and another $40 to burn images onto CDs. While the documents could not be “copied” without all of the processing that preceded it, such processing costs will not be shifted through a bill of costs. Id., *8-9 (citing Race Tires Am., supra n. 2, 674 F.3d at 169).

What lessons can we learn?

The Fourth Circuit seems to recognize the harshness of its ruling and provides two helpful clues for future litigants seeking to manage their eDiscovery burdens. The court first observes: “That Gallo will recover only a fraction of its litigation costs under our approach does not establish that our reading of the statute is too grudging in an age of unforeseen innovations in litigation-support technology.” Id., *9. Then, the court leaves open the question of whether the allowable costs of production might include the processing costs had the parties “clearly agreed to the production of ESI on a particular database or in native file format.” Id., *9 n. 20 (citing In re Ricoh Co., Ltd. Patent Litig., 661 F.3d 1361, 1365–66 (Fed. Cir. 2011) (holding that $234,702.43 for the cost of an electronic database which the parties agreed to use for document production would have been allowed, but for the parties’ agreement to share costs)). Next, the court points out that, where discovery costs are excessive, the responding party can move for a protective order and, if that motion is denied (as Gallo’s motion was denied), then the responding party “can appeal that decision” Id., *9; id., *9 n. 21 (noting that Gallo had not appealed the denial of its motion for protective order).

Lesson #1: While it is not entirely clear how the parties’ agreement to utilize a particular format or database alters the conclusion that processing is not “making copies,” the Fourth Circuit seems to suggest that it might. 3  So, any party seeking to shift its eDiscovery costs should consider agreeing with the other side regarding the format or database to be used to handle the parties’ productions.

Lesson #2: While it is not entirely clear whether parties are entitled to file an interlocutory appeal with respect to the denial of a motion for protective order, the Fourth Circuit seems to urge parties to do so. 4  Either the court is encouraging interlocutory appeals before the ESI expenses are incurred, or the court is suggesting that a final judgment (for either party) does not moot the trial court’s refusal to shift pre-trial eDiscovery costs.

 1 Because appellant Gallo’s eDiscovery costs neither involved authentication of public records nor demonstrative exhibits – two potential meanings of exemplification – the Fourth Circuit did not define the meaning of exemplification in this case.  Country Vintner, 2013 WL 1789728, *10.

 2 In reaching that conclusion, the Fourth Circuit aligned itself with the Third Circuit’s approach in Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012).

3  In distinguishing In re Ricoh Co., the Third Circuit explained: “we have acknowledged that the costs of conversion to an agreed-upon production format are taxable as the functional equivalent of ‘making copies.’ It is all the other activity, such as searching, culling and deduplication that are not taxable.” Race Tires Am., 674 F.3d at 171 n.11.

 4 On one hand, discovery orders against a party are not immediately appealable. See, e.g., Nicholas v. Wyndham Int’l, Inc., 373 F.3d 537 (4th Cir. 2004). On the other hand, most discovery orders will be moot by the time a final order is entered. See, e.g., E. H. Reise v. Bd. of Regents of the Univ. of Wisconsin, Sys., 957 F.2d 293, 295-296 (7th Cir. 1992).

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Supreme Court (Sort Of) Approves “Picking Off” Strategy in Fair Labor Standards Act (FLSA) Collective Action Cases

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If you have ever received a complaint alleging minimum wage or overtime violations from one of your employees, the United States Department of Labor’s Wage and Hour Division, or a similar state agency (in Wisconsin, the Labor Standards Bureau of the Equal Rights Division), you have probably considered the possibility that other employees might raise similar claims.  Depending on the size of your workforce, this single-employee headache could quickly evolve into a class action or collective action migraine.

Under the Fair Labor Standards Act (FLSA), a single employee may file a wage and hour lawsuit on behalf of himself and other “similarly situated” employees.  The FLSA’s collective action mechanism requires potential plaintiffs to opt into the lawsuit, meaning that individuals must choose to participate in the case.  This mechanism differs from a class action lawsuit because individuals covered by a class certified by the court mustopt out of the case.  In other words, in a class action, an individual covered by a certified class must choose to not participate in the case.

Defense counsel have typically attempted to protect employers from prolonged and costly collective action litigation by “picking off” the named plaintiff(s) in lawsuits filed under the FLSA.  This “picking off” strategy refers to Rule 68 of the Federal Rules of Civil Procedure, which allows a defendant to make an offer of judgment to the plaintiff.  An offer of judgment amounts to giving the plaintiff the full relief requested in the complaint and costs accrued by the plaintiff.  A plaintiff’s acceptance of a Rule 68 offer of judgment moots (i.e., a dispute no longer exists) the case as to the plaintiff, thereby depriving the court of jurisdiction.

In the collective action context, however, employers have had mixed results on the issue of whether acceptance of a Rule 68 offer by the named plaintiff(s) also moots the claims of the potential collective group of affected employees.  The question also remained:  what happens when the named plaintiff(s) rejects the Rule 68 offer of judgment?

On Tuesday, April 16, 2013, the United States Supreme Court issued a decision, Genesis Healthcare Corp. v. Symczyk, that attempted to answer this question.  In this case, the employer, Genesis, made a Rule 68 offer of judgment to the plaintiff, Symczyk, while simultaneously answering the complaint and prior to Symczyk moving for conditional certification.  By its terms, the offer automatically expired after ten days.  Symczyk did not accept the offer, and Genesis moved for judgment in its favor, arguing that its offer of judgment mooted Symczyk’s claim and the potential collective action.  Symczyk did not contest Genesis’ argument that the offer fully satisfied her claim.  The district court agreed with Genesis and dismissed the case for lack of subject-matter jurisdiction.

The Court of Appeals for the Third Circuit agreed with the district court that Genesis’ Rule 68 offer mooted Symczyk’s claim, but it disagreed about the effect the offer had on the potential collective action.  The court of appeals held that allowing a defendant to “pick off” named plaintiffs for the purpose of avoiding the certification of a collective action would run contrary to the purpose of the collective action mechanism permitted by the FLSA.

On appeal, the Supreme Court held that a plaintiff “has no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness.”  According to the Supreme Court, a Rule 68 offer of judgment that renders the claims of the named plaintiff(s) moot also eliminates the plaintiff’s interest in the collective action.  More importantly, the Supreme Court held that a collective action under the FLSA, even if “conditionally certified” by a court, does not give the “class” of potential plaintiffs “an independent legal status.”  A “conditional certification” simply results in “the sending of court-approved written notice to employees[.]“  Thus, the Supreme Court has given some legitimacy to the strategy of “picking off” named plaintiffs by offering them full relief through a Rule 68 offer of judgment.

Note, however, that the Supreme Court did not hold that an unaccepted Rule 68 offer renders a claim (the named plaintiff’s or the collective action claim) moot.  Because Symczyk waived these arguments in the lower courts, the Supreme Court simply assumed, without deciding, that the unaccepted Rule 68 offer rendered her claim moot.

While, at first blush, the decision seems like a great win for employers, it has potential limitations, many of which Justice Elena Kagan points out in her dissent, including the following:

  1. Symczyk waived several important arguments throughout the litigation, including the argument that the unaccepted Rule 68 offer in fact did not moot her individual claim.
  2. The Genesis case addresses a scenario in which no other plaintiffs had yet joined the collective action (due in part to the timing of Genesis’ offer to Symczyk and her failure to move for certificaiton).
  3. The Court simply ignored the limitations of a Rule 68 offer of judgment, including that Rule 68 only gives courts authority to enter judgment when the plaintiff accepts the offer and that “[e]vidence of an unaccepted offer is not admissible except in a proceeding to determine costs.”

Despite the limitations of the Genesis decision, employers can take comfort in the Court’s indication of its leanings regarding collective actions.  In addition to the Court’s holding regarding the mootness issue, employers can also point to the Court’s statements calling into question the legitimacy of applying class action rules and precedent to collective actions under the FLSA.

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