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Archive for the ‘Commercial Litigation/Directors & Officers’ Category

Arbitrability – Who Decides?

Posted on: September 14th, 2018

By: Ted Peters

The question of arbitrability (i.e., Who decides whether a dispute is arbitrable? The court or the arbitrator(s)?) is as ageless as the conundrum of what came first, the chicken or the egg.  In 2010, the Supreme Court decided Rent-a-Center, Vest Inc. v. Jackson, wherein it concluded that agreements to arbitrate questions of arbitrability are, themselves, enforceable.  That dispute involved an employee who had signed an arbitration agreement that provided for arbitration of disputes arising out of his employment, including discrimination claims.  The agreement expressly provided that the arbitrator, and not a court, had the exclusive authority to resolve any disputes relating to the enforceability of the arbitration agreement.  The Ninth Circuit Court determined that the employee’s argument that the agreement was unconscionable was a matter of fact for the court rather than the arbitrator.  In a split vote, the Supreme Court found otherwise, and concluded that because the employee challenged the agreement as a whole (and not only the delegation provision), the determination had to be made by the arbitrator.

The US Supreme Court will weigh in again on the issue of arbitrability. On June 25, 2018, the Court accepted certiorari in the case of Henry Schein, Inc. v. Archer & White Sales, Inc., a case in which the Fifth Circuit addressed the arbitrability of antitrust claims asserted against a distributor of dental equipment.  The defendants/appellants sought to enforce an arbitration agreement.  The magistrate granted a motion to compel arbitration, concluding that the threshold question of the arbitrability of the claims was vested in the decision of an arbitrator, and not for a court to decide.  The district court, however, reversed, finding that it had the authority to rule on the question of arbitrability and concluded that the claims at issue were not arbitrable.  The Fifth Circuit affirmed finding that submission of the dispute to the arbitrator was not necessary because the assertion of arbitrability was “wholly groundless.”  The appellate court explained that the arbitration clause in question created a carve-out for “actions seeking injunctive relief,” but did not limit the exclusion to “actions seeking only injunctive relief.”  The court reasoned that even though the agreement would allow the plaintiff/respondent to avoid arbitration by simply adding a claim for injunctive relief did not change the clause’s plain meaning.

The decision in Henry Schein underscores that a conflict has developed among the lower courts; some recognizing an exception for “wholly groundless” claims of arbitrability, but others not.  Defendants/appellants seek to have the Supreme Court reject the “wholly groundless” exception, asserting that the Fifth Circuit’s decision cannot be reconciled with the Federal Arbitration Act’s text or its overarching purpose: “to ensure that private agreements to arbitrate are enforced according to their terms.”  The question presented before the Court is simple: “Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is “wholly groundless.”

Oral argument is scheduled for October 29, 2018.

If you have questions or would like more information, please contact Ted Peters at [email protected].

Non-Disclosure Provisions – Who Is Bound?

Posted on: September 5th, 2018

By: Josh Ferguson

A California Appellate Court recently ruled that the non-disclosure and confidentiality terms of a settlement agreement bind only the parties, and not counsel, unless specifically stated otherwise.

The case involved Monster Energy Company suing Bruce Schecter and R. Rex Parris Law Firm for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) unjust enrichment, and (4) promissory estoppel. Monster Energy Co. v. Schechter, No. E066267, 2018 Cal. App. LEXIS 711 (Cal. Ct. App. Aug. 13, 2018).   Those claims were based on Defendants disclosing terms of settlement to a news outlet in violation of the executed settlement agreement.  Monster pointed out that the plain terms of the settlement agreement bound the attorneys to the confidentiality provision. The Court of Appeal of the State of California, Fourth Appellate District acknowledged “ the confidentiality provisions of the settlement agreement did at least purport to bind the Attorneys.” The terms provided, “Plaintiffs and their counsel agree that they will keep completely confidential all of the terms and contents of this Settlement Agreement … .” They also stated, “Plaintiffs and their counsel of record … agree and covenant, absolutely and without limitation, to not publicly disclose” the provisions of the settlement agreement. Finally, the agreement said, “the Parties and their attorneys … hereby agree that neither shall make any statement about the Action … in the media … .”

However, the court ultimately opined that was not the issue.  They stated the issue is not one of contractual interpretation. A party cannot bind another to a contract simply by so reciting in a piece of paper.  No matter how clearly the contract provided that the Attorneys were bound, they could not actually be bound unless they manifested consent. In this case, that did not happen.

The settlement agreement identified the “Parties” as the Fourniers and Monster. The Attorneys then signed under the words, “Approved as to form and content.”  The signature block identified them as “Attorneys for [the Fournier] Plaintiff[s].” The court went on to say that “The only reasonable construction of this wording is that they were signing solely in the capacity of attorneys who had reviewed the settlement agreement and had given their clients their professional approval to sign it. In our experience, this is the wording that the legal community customarily uses for this purpose.”

The moral of the story is that if you want to bind someone to a provision, you need to get them to explicitly agree to same and require their execution.

If you have any questions or would like more information, please contact Josh Ferguson at [email protected].

Despite Causing Wildfires, PG&E Avoids Punitive Damages

Posted on: August 2nd, 2018

By: Carlos Martinez-Garcia

On July 2, 2018, the Third Appellate District of California awarded Pacific Gas and Electric Company (PG&E) its first critical victory in defending itself against fire claims caused by its power lines: Butte Fire Cases, (2018) 24 Cal. App. 5th 1150. In 2015, the “Butte Fire” started after a gray pine came into contact with one of PG&E’s power lines, burning more than 70,868 acres, damaging hundreds of structures, and claiming two lives. The subsequent lawsuits, which were consolidated in a judicial council coordinated proceeding in Sacramento Superior Court, are comprised of 2,050 plaintiffs who sought punitive damages under Civil Code § 3294.

The master complaint alleged that the utility company and two contractors failed to properly maintain the power line and adjacent vegetation, warranting punitive damages. The Third Appellate District disagreed, striking Plaintiffs’ prayer for a punitive damages award.

In California, punitive damages may be recovered under section 3294 “where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice.” (Civ. Code § 3294) Malice is defined by section 3294, subdivision (c)(1) as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.”

In seeking summary adjudication, PG&E submitted evidence that it devotes significant resources to vegetation management programs intended to minimize the risk of wildfire, spending more than $190 million per year on vegetation management operations. The operations include routine annual patrols, quality assurance and control programs, and a public safety and reliability program. PG&E also contracted with ACRT, Inc. to conduct inspections and vegetation management, Quantum Spatial, to collect data using LiDAR to identify dead or dying trees, and Trees, Inc. to trim noncompliant trees. No inspections identified the subject tree as a danger.

The Third District was unpersuaded by Plaintiffs’ contention that PG&E’s vegetation management program was “window dressing”, PG&E’s vegetation management methodologies were defective, or that PG&E evinced a cavalier attitude towards public safety evidenced by the infamous San Bruno pipeline explosion and a 1994 “Rough and Ready” fire caused by PG&E.

Plaintiffs failed to demonstrate the existence of a triable issue of material fact that showed PG&E acted despicably, or with willful and conscious disregard for the rights and safety of others. PG&E’s nondelegable duty to safely maintain the power lines does not alter the analysis of punitive damages under § 3294. There was nothing despicable in the utility company’s assumption that contractors were training their employees as required, and any criticisms of PG&E’s methodologies do not amount to clear and convincing proof that PG&E acted with malice. At most, plaintiffs’ evidence showed mere carelessness or ignorance.

If you have any questions, or would like more information, please contact Carlos Martinez-Garcia at [email protected].

Let’s Eat Grandma! Punctuation Matters

Posted on: July 19th, 2018

By: Ted Peters

California Corporations Code Section 1601 provides certain rights to shareholders of corporations doing business in California.  Specifically, as the statute currently reads, corporations are required to open their books and records upon written demand from any shareholder as long as the purpose of the demand is “reasonably related” to the shareholder’s interests.  In 2016, the California Court of Appeal in Innes v. Diablo controls, Inc., 248 Cal.App.4th 139 (2016), held that Section 1601 did not require a corporation to produce records in any particular place; rather, the corporation was required only to produce records in the state where they were located, even if outside of California.

On February 13, 2018, California Representative Brian Maienschein (R) sponsored a bill that would amend Section 1601.  In June, and without a single “no” vote against it, the California Legislature enacted the bill, AB 2237 (Maienschein).  Governor Jerry Brown signed the bill into law on July 9, 2018.

A redlined version of the changes to Section 1601 clearly illustrates that the amendments, which go into effect next year, effectively reverse the holding from Innes.  Specifically, when a shareholder demands an inspection, the records are to be made available for inspection “at the corporation’s principal office in [California], or if none, at the physical location for the corporation’s registered agent for service of process in [California].”  The amendment also provides an alternative procedure which would permit the shareholder to elect to receive the corporation’s books, records, and minutes by mail or electronically, as long as the shareholder agrees to pay the reasonable costs for copying or converting the requested documents to electronic format.

Thus, it is now clear that corporations doing business in the State of California will be required to produce records in California, regardless of where the records are maintained.  The significance of this change is obvious enough, but wait, there’s more… When amending the statute, the legislature made another minor change to the first sentence of the statute.

Previously, what was open to inspection were “The accounting books and records and minutes of proceedings…”  As amended, what will be open to inspection will be “The accounting books, records, and minutes of proceedings…”  The insertion of two commas seems innocent enough, but could lead to a heated debate as to the scope of shareholder inspections in general.  The term “accounting” in the original statute could have been interpreted to modify just “books” or both “books and records.” With the amendment, however, it would seem that “accounting books” and “records” are two separate things and a corporation might be justified in refusing to produce “accounting records” to the extent they differed from “accounting books.”

Maybe the drafters of the amendment were simply sticklers for the proper use of punctuation and thought it best to tidy the statute up.  Or maybe they intended to narrow the scope of what records corporations are required to produce.  Or perhaps the change was intended to send no message at all.  Why does it matter and who really cares?  Well, punctuation does matter, even one little comma.  At least grandmothers around the globe think so; there is a world of difference between  “Let’s eat Grandma” and “Let’s eat, Grandma.”

If you have questions or would like more information, please contact Ted Peters at [email protected].

New York High Court Narrows Statute of Limitations Under Martin Act

Posted on: June 22nd, 2018

By: Ali Sabzevari

New York’s primary weapon aimed at fraud entitled the Martin Act was drastically hindered by New York’s high court, which found that the law’s statute of limitations was three years, not six years.  The case is People v. Credit Suisse Sec. (USA) LLC, 2018 NY Slip Op 04272, ¶ 1 (New York State Court of Appeals).

The Martin Act has been used to police the securities markets since the 1920s. This Act regulates the advertisement, issuance, exchange, purchase or sale of securities, commodities and certain other investments within or from New York.  It is one of the country’s oldest anti-fraud laws and is used by the New York Attorney General to file both civil suits and criminal charges against alleged violators of the Act.

In the Credit Suisse Sec. (USA) LLC opinion, the Court of Appeals noted that it had never before considered the law’s statute of limitations. Contemplating whether claims were governed by a three-year period or a six-year period, the Court ultimately held that the three-year term applies because of the fraudulent nature of the claims brought under the Martin Act.

This decision will have a big impact on claims brought under the Martin Act as well as the defense of such claims.  If you have any questions or would like more information, please contact Ali Sabzevari at [email protected].