The Complex Business Litigation Blog

New Case Filing by BNSK Featured on CBS News This Morning

A new case filing by Brown Neri Smith & Khan was featured on CBS News This Morning:

Twenty-year-old Alex Kearns took his own life last June mistakenly believing he’d lost nearly $750,000 in a risky bet on Robinhood, the stock-trading app where he started trading as a teenager.

His parents filed a lawsuit, first obtained by CBS News, on Monday accusing Robinhood of wrongful death, negligent infliction of emotional distress and unfair business practices.

While the company’s stated mission is to stand up for the little guy and “democratize finance,” Alex’s mother and father say in the lawsuit that Robinhood targeted young and inexperienced customers, then pushed them to engage in risky trading practices. And when those investors needed help — as Alex did the day he died — Robinhood provided no “meaningful customer support,” the suit says.”

CBS News This Morning

For the full article and video, click here to visit CBS News This Morning

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The Guide to Securities Fraud Elements and SEC Rule 10b-5

Securities fraud refers to misrepresenting information to investors regarding the sale or purchase of securities and/or the manipulation of financial markets. Read more.

What is securities fraud?

Securities fraud, according to the Federal Bureau of Investigation, includes a broad range of activities, including but not limited to high yield investment fraud, Ponzi and pyramid schemes, broker embezzlement, and advance fee schemes. Securities fraud is characterized by the misrepresentation of material information to investors in connection with the sale or purchase of securities and/or the manipulation of financial markets. A “security” includes, but is not limited to, a “note, stock, treasury stock, security future, security-based swap, bond, debenture… option… [or] certificate of deposit.” Additionally, insider trading, falsifying information in corporate filings, lying to corporate auditors and manipulating share prices also fall within the ambit of securities fraud. The Securities and Exchange Commission (the “SEC”) provides a comprehensive guide to identifying and avoiding securities fraud through its office of investor education and advocacy.

What are the elements of securities fraud?

The elements of securities fraud, as described by the American Bar Association, require an intentional misrepresentation or omission of material information in connection with the sale or purchase of a security. In addition, a plaintiff must also show that they relied detrimentally on this information, causing losses and ultimately resulting in harm to the plaintiff. The causal relationship between the information or lack-thereof and the resulting harm must be established.

Is securities fraud a criminal or civil matter, and how is it punishable?

Securities fraud can be prosecuted both as a criminal and/or civil matter. Securities and commodities fraud and the related punishments are covered by U.S. Code Section 1328. Specifically, securities fraud can result in a felony conviction and up to 25 years imprisonment and/or the imposition of civil fines (on top of restitution). 

Securities fraud is considered a serious white-collar crime and can lead to both criminal and civil penalties. The SEC itself often serves as plaintiff in filing securities fraud lawsuits, although private plaintiffs also have standing to do so if they were the defrauded investor. Furthermore, investors that were not directly targeted by securities fraud, and therefore do not have standing, may notify the SEC of the issue, who in turn can investigate and prosecute the alleged violation. 

What is SEC Rule 10b-5 and when does it apply?

Under the Securities and Exchange Act of 1934, the SEC is the governmental agency responsible for establishing, overseeing and enforcing laws pertaining to securities fraud. SEC Rule 10b-5, states that it is illegal for any person to defraud or deceive someone, including through the misrepresentation of material information, with respect to the sale or purchase of a security. Rule 10b-5 covers instances of insider trading, wherein an insider or executive uses nonpublic information to influence share prices to their benefit:

Employment of Manipulative and Deceptive Practices.

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

In sum, SEC Rule 10b-5 is applicable to any person that commits securities fraud, i.e., the intentional misrepresentation of material information in connection with securities trading, including insider trading. “Person”, however, is not limited to an individual and includes businesses, corporations, and possibly even governmental bodies. 

Who can sue under Rule 10b-5? And what is a Rule 10b-5 private right of action?

As stated above, the SEC often serves as plaintiff in securities fraud lawsuits. In addition, private plaintiffs may sue if they have standing – i.e., they were directly harmed by the securities fraud. Private parties that were not directly targeted by the securities fraud may seek recourse by bringing the issue to the attention of the SEC. 

Nevertheless, it is possible to file a securities fraud class action known as a “fraud-on-the-market” claim. In this type of situation, the traditional private right of action under 10b-5 is widened so as to allow a class of securities purchasers to sue an issuer for having made a public misrepresentation. 

What are some examples of Rule 10b-5 violations?

In addition to the examples of securities fraud discussed in the introduction, Rule 10b-5 violations include but are not limited to:

  • False or misleading statements made by a corporate executive intended to increase market share price
  • False or “creative” accounting used to hide losses or insufficient revenue
  • False or misleading statements by a corporate executive intended to decrease market share price, so that they are able to buy up those shares at the lower price

What is the Rule 10b-5 statute of limitations?

There are two time-frames applicable to a Rule 10b-5 claim, both of which the plaintiff must satisfy. First, the plaintiff must file the claim within two years of having discovered the facts that constitute the alleged violation. Second, the plaintiff must file the claim no more than five years after the violation occurred. 

What is a 10b-5 letter?

Also known as a disclosure or negative assurance letter, a 10b-5 letter is provided by a security issuer’s legal counsel to certify that the security transaction (e.g. the purchase of shares) does not contain any false or misleading material information, or omit any material information. A 10b-5 letter is obligatory and required for the completion of a securities offering, and attests to the purchaser’s due diligence. Nevertheless, a 10b-5 letter is not a legal opinion. 

What is a 10b-5 opinion?

A 10b-5 legal opinion, or due diligence opinion, is a letter drafted by the issuer’s counsel stating that the information contained in the issuer’s official statement is accurate and complete, and that counsel has not identified any misrepresentation or omission of material fact. 

What is Rule 10b5-1 in relation to insider trading?

In 2000, the SEC created Rule 10b-5-1 in order to clarify when and how insiders are authorized to make predetermined trades without violating insider trading laws. In such cases, the sales date, prices and amount of securities to be traded must be established in advance, and neither the seller nor purchaser may have access to any material insider information. Although a company is not legally obligated to disclose a Rule 10b-5-1 plan to its shareholders, it is typically advisable to be transparent so as to avoid unnecessary accusations or bad press. 

When is securities fraud prosecuted under Securities and Exchange Act Section 17(a)(2) instead of Rule 10b-5?

Securities and Exchange Act Section 17(a)(2) is similar to Rule 10b-5 in that it allows for the prosecution of securities fraud, as described above. Nevertheless, the main difference between the two rules is that Section 17(a)(2) does not require intent (i.e., “scienter” or reckless action on the part of the defendant). Instead, the court could find that securities fraud was committed where the defendant acted negligently. Thus, where the plaintiff argues that the defendant, or person making the misstatement, failed to act with the appropriate standard of care, Section 17(a)(2) may apply. 

When should I contact a securities litigation attorney?

You should contact a securities litigation attorney the moment you think you have been the victim of securities fraud. Generally, the phone call and consultation are free.

Do I need a securities litigation attorney near me?

We recommend working with a securities litigation attorney who has experience in the jurisdiction where the case would be tried. For example, if the case will be tried in Los Angeles Superior Court, we recommend working with an attorney who is familiar with LASC judges and proceedings.


(310) 593-9890

About Brown Neri Smith & Khan, LLP

We are complex business litigation attorneys in Los Angeles. With backgrounds across complex law practice areas, and hailing from some of the world’s largest law firms, BNSK attorneys are experienced litigators successfully defending clients around the world. Our partners founded BNSK on the belief that successful client relationships are driven by our extensive experience, and our unmatched resolve to achieve successful results. For a free consultation, visit or call us at: (310) 593-9890

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The Definitive Guide to Cumis Counsel

Cumis counsel refers to the independent attorney whom a defendant is entitled to retain in a liability insurance claim — where there is a conflict of interest between the defendant and the insurance company. The term Cumis Counsel originated in a 1984 California lawsuit between San Diego Federal Credit Union and Cumis Insurance Society, Inc.. 

In order to retain Cumis counsel, the insurance policy must provide for legal defense in a liability suit (i.e. the insurance company agreed to pay legal fees to defend the insured, unless the defendant is found to have acted contrary to, or outside of, the policy’s coverage). A conflict of interest would arise where an insurance company has appointed counsel to the defendant that is simultaneously defending the interests of the insurance company in a lawsuit wherein the insured person’s liability (and therefore extent of insurance coverage) is in question. Simply put, the defendant has a right to ensure his or her interests are not jeopardized by joint representation.

What is Cumis counsel?

The classic example of a conflict that requires Cumis counsel is a complaint that alleges negligent and intentional conduct.  Because liability insurance policies almost always exclude coverage for intentional conduct, the insurance company can avoid paying for the loss by proving that the insured acted intentionally, not negligently.  The insured, by contrast, will desire to prove the opposite — that any tortious conduct was negligent, not intentional.  Because the insurance company’s appointed lawyer cannot act in the insurance company’s best interests and the insured’s best interests at the same time, Cumis counsel should be obtained by the insured.

Does it only pertain to liability insurance claims and a conflict of interest?

Yes, Cumis counsel is limited to instances of liability insurance claims wherein there is a conflict of interest between the insured defendant and the insurer, who is responsible for providing legal representation to its client. 

To this day, courts continue to address when the right to independent counsel under Cumis is triggered and what constitutes a conflict of interest. For example, in 2018, a California appellate court held that a potential conflict of interest is not necessarily sufficient to require the appointment of independent counsel. Instead, the conflict should be actual and significant. For the sake of simplicity, where the purpose of the claim is to verify facts that would determine fault by the insured, and those same, questionable, facts serve as the basis upon which coverage will be provided or denied, a conflict of interest is likely to exist. 

How does California Civil Code Section 2860 relate to Cumis counsel?

California Civil Code Section 2860 sets forth legislation pertaining to Cumis counsel. It outlines the various elements of an insurer’s obligation to provide independent legal counsel to an insured client in circumstances where there is a potential conflict of interest between the two. 

California Civil Code Section 2860 states that the insured party may expressly waive this right in writing, and that the insurance policy may include provisions regarding the process of obtaining independent counsel. It further describes what a conflict of interest entails, namely “when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist.” Further, it outlines certain limitations, such as the insurance company’s right to require that any independent counsel meet certain professional qualifications and that the fees charged align with those that the insurance company pays to its own lawyers.  

What is a reservation of rights letter? 

A “reservation of rights” letter is a letter from the insurance company notifying the insured that an investigation into a claim has begun and that the company reserves the right to ultimately deny coverage to the client depending on the final judgement, as well as demand that any legal fees paid be reimbursed should coverage be denied. In accordance with the terms of the policy contract, the letter should also state that the company will appoint an attorney to the insured client to represent him in the liability claim. The letter should provide sufficient information regarding the company’s coverage defenses so that the insured party can decide whether or not to use the appointed attorney or seek independent counsel. Importantly, where a conflict of interest has been identified, the reservation of rights letter must notify the insured of its right to Cumis counsel.

Note, however, if you’ve received a general reservation of rights letter, this does not automatically translate into you having the right to independent counsel. Instead, as mentioned above, there must be a conflict of interest, which arguably must be actual and significant, not simply a potential conflict of interest. The reservation of rights itself doesn’t create a conflict of interest. 

What are the policy limitations on Cumis counsel, if any?

Legal fees for a liability claim are covered by the policy, where a liability insurance policy provides for the “duty to defend” the insured party, and where the underlying claim falls within the policy’s coverage. 

In instances where an insured party is authorized to retain Cumis counsel, one might wonder if there are limits on the fees payable to the independent counsel, especially given that the insurance company is responsible for covering those costs? While the insurance policy itself will delineate the limitations, California Civil Code Section 2860 provides that any fees paid must align with the fees paid by the insurance company to its own attorneys “in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” Moreover, the policy may include separate terms regarding fees that the legislation will not override. Lastly, should a dispute arise as to the fees charged, the policy will set forth the manner in which the dispute should be settled. If the policy doesn’t elaborate on this issue, the parties must resort to arbitration. 

There is one exception to the above, however. Some liability insurance policies referred to as “self-consuming” or “burning limits” policies, are designed specifically to allow for legal defense fees to be part of a policy’s limits. This means that in some limited cases, a policy may not cover legal fees irrespective of the policy coverage limits and instead defense fees will reduce the policy’s limit. 

Is there a time limit or statute of limitations?

There is no statute of limitations or time limit on the right to Cumis counsel, although it should be noted that an insured party is obligated to provide a timely response to any communication by the insurance company. 

For example, after the insured party receives a reservation of rights letter from the insurance company, the insured party is likely to be obligated to respond in order to protect their coverage under the policy and avoid any potential breach of contract. This response should be carefully crafted with the help of a qualified attorney who will assist you in ensuring your response does not waive any of your rights to Cumis counsel.

Is there a template response to a reservation of rights letter?

We recommend that you contact an experienced insurance litigation lawyer to assist you in drafting your response. Why? A template response to a Reservation of Rights Letter will NOT address the specific items pertinent to your claim, NOR your insurance company’s reservation of rights letter.

When should I hire an insurance litigation attorney?

Contact an insurance litigation lawyer the moment you receive a reservation of rights letter and believe there may be a conflict of interest between you, the insured, and your insurer. It is important to act in a timely manner so that you do not risk violating the terms of your policy or losing coverage, including your right to Cumis counsel. Generally, the consultation should be free.

Do I need an insurance litigation attorney for a Cumis counsel legal malpractice claim?

As in any legal malpractice claim, you should seek an experienced insurance litigation attorney to represent you should you feel that your Cumis counsel failed to fulfill his legal duties to you. Specifically, if you think that your Cumis counsel acted negligently, breached his or her fiduciary duty, or breached the contract that you entered into with them, you should contact an insurance litigation attorney to discuss your options. 

Do I need an insurance litigation attorney near me?

We recommend choosing an insurance litigation attorney who has experience serving as Cumis counsel in the jurisdictions where the case will be tried. For example, if the liability claim will be tried in Los Angeles Superior Court, we recommend working with one of our insurance litigation attorneys that is familiar with LASC judges and proceedings.


(310) 593-9890

About Brown Neri Smith & Khan, LLP

We are complex business litigation attorneys in Los Angeles. With backgrounds across complex law practice areas, and hailing from some of the world’s largest law firms, BNSK attorneys are experienced litigators successfully defending clients around the world. Our partners founded BNSK on the belief that successful client relationships are driven by our extensive experience, and our unmatched resolve to achieve successful results. For a free consultation, visit or call us at: (310) 593-9890

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The Guide to Executive Compensation Clawback Provisions for In-House Lawyers

A clawback provision, clause, or agreement is often included in a financial contract and outlines how money previously paid to an employee must be returned to the employer, based on certain factors and situations. Here’s a quick overview, and when to consider pursuing litigation.

What is a clawback provision, clause, or agreement?

Clawback provisions are clauses that specify a set of factors or situations in which money already paid must be returned. Frequently, these clawback provisions are included in employment contracts. For example, say an executive was paid a performance bonus of $100,000 by Company A, but it was later discovered the performance bonus was calculated incorrectly, then the employee may be required to return portions of that money.

We see most litigation surrounding clawback provisions relating to stock grants, stock plans, and stock options. Due to the nature of stock options, IPOs, and company valuations, the clawback provisions can sometimes result in returning millions of dollars to the employer. At these levels of income, it’s easy to understand why an employee may refuse to return money, and why parties may pursue litigation.

What is a clawback policy?

A clawback policy generally refers to a standardized clawback provision or clause that is included in most employee employment contracts. The policy may vary based on the employee’s role: Executive, Manager, Contributor, etc.

Clawback Agreement Example

One of the largest clawback settlements in history dates back to 2017, when two Wells Fargo executives were required to pay back upwards of $120 million when it was discovered the bank had opened millions of accounts without customer approvals.

We see the most litigation surrounding clawback agreements in regards to employee stock plans, grants, and options. For example, a senior executive may have been awarded $1 million dollars in stock, based on company performance. Then years later, it may be discovered that the company performance calculations were inaccurate or fraudulent. If the company asks for some of the $1 million to be returned, the employee may pursue litigation to protect their assets.

How should in-house lawyers use clawback provisions in employment contracts?

Generally, adding a clawback provision into employment contracts is straightforward. However, we see complications arise when updating past employment contracts and stock plans to meet new clawback policies.

Here are the steps we pursue when helping clients update their employment contract policies:

  1. We understand why the company wants a clawback, and what it wants to accomplish.
  2. We analyze existing agreements and policies in place to determine if and how they fall short of the company’s goals.
  3. We use our expertise in the law to draft and edit clawback provisions that protect the company and stay well within the law.

What is a clawback in a shareholder agreement?

Clawbacks are common to stock options, restricted share units (RSUs), and other stock plans or grants. Often, companies may claim repurchase rights for stock options or RSUs that have vested, but were subject to a clawback agreement.

We commonly see employees seeking litigation when they are surprised to discover the clawback clauses in their shareholder agreement allow the employer to repurchase stock options at a discount, leaving the employee with thousands or millions of dollars less equity than they assumed.

When should companies pursue clawback litigation?

Generally, we see companies pursuing clawback litigation relating to highly compensated executives. For example, if an executive was paid $10,000,000 for achieving a performance based bonus, and then it was later discovered that the executive had fraudulently represented performance numbers.

Clawback Provision Forms and Templates

It’s recommended that a company seek expert legal counsel when creating employment contracts that include a clawback provision. To view an example, here’s a template found on the website.

When do I need to pursue clawback litigation?

Contact a complex business litigation attorney the moment you suspect you may need to pursue clawback litigation. Generally, the phone call and consultation are free.

Do I need a complex business litigation attorney near me?

We recommend choosing a complex business litigation attorney who has experience in the industries involved, and the jurisdictions where the case will be tried. For example, if it’s an employment law case that will be tried in Los Angeles Superior Court, we recommend working with an employment law attorney who is familiar with LASC judges and proceedings.

(310) 593-9890

About Brown Neri Smith & Khan, LLP

We are complex business litigation attorneys in Los Angeles. With backgrounds across complex law practice areas, and hailing from some of the world’s largest law firms, BNSK attorneys are experienced litigators successfully defending clients around the world. Our partners founded BNSK on the belief that successful client relationships are driven by our extensive experience, and our unmatched resolve to achieve successful results. For a free consultation, visit or call us at: (310) 593-9890

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How to Choose a Complex Commercial Litigation Attorney

Complex commercial litigation generally describes a range of legal disputes pursued or filed by companies and businesses. Choosing an attorney or law firm can be a daunting task, unless approached in an organized manner. Here’s a guide.

What is complex commercial litigation?

Complex commercial litigation describes a wide range of legal disputes pursued or filed by companies and businesses, i.e., commercial entities, frequently involving corporate fraud and breach of contract. As an example, Company A may claim that Company B failed to fulfill a contractual duty or obligation — and because of that failure, now Company A is asking for financial compensation via litigation.

How do I choose a commercial litigation attorney or law firm?

Choosing a commercial litigation attorney can seem overwhelming. We recommend keeping it simple, and focused on three elements:


Choose a firm with experience working in the jurisdiction where the case would be tried if in-court proceedings becomes the only option. Ex., if the case would be tried in Los Angeles Superior Court, only consider law firms experienced with LASC judges and proceedings.


Visit the law firm, and meet the attorneys in-person. Only consider firms that practice clear and straightforward communication. The right firm will quickly help you and your team develop a sense of trust.


Choose a firm with a track record of successful settlements and in-court proceedings. Consider whether the firm has experience with the legal issues you are likely to face — as these issues will often cut across industries.

If all three areas are addressed positively, only then consider moving forward to retain the attorney and firm.

What does a commercial litigation attorney do?

A commercial litigation attorney represents a business or company in a legal dispute, i.e., related to contracts, financial claims, or other legal contests. Some cases may go to civil court, and others may be decided out of court via arbitration, mediation and settlements by litigation attorneys representing each party. At BNSK, we frequently advise clients to pursue a satisfactory out-of-court settlement, simply because it saves time and money.

Common Types of Commercial Litigation Disputes

The most common commercial litigation disputes we see are business to business disputes. However, the types of cases vary widely:

How much does a commercial litigation attorney cost?

Commercial litigation costs are generally based on an hourly fee. It’s common for larger firms to charge more, and boutique firms to charge less. As an example, BNSK fees are typically up to 30-40% less than a large firm — even though all our partners have extensive large firm experience. In some cases, a flat fee will be considered and negotiated.

In rare circumstances, a commercial litigation attorney may work on contingency, meaning the case costs client nothing out of pocket, as all fees are paid only when the case is settled or won.

One financing alternative that we encounter more and more frequently is “litigation financing.” Under this model, the client takes a loan from a third party “litigation funder” that is only repaid when the case is won. The possibility of commercial litigation funding is based on the bank or lender’s confidence that the case will be won. Because of this reality, approvals are not guaranteed.

What is a commercial litigation loan or commercial litigation funding

Frequently, a commercial litigation loan is a “non-recourse” loan. Meaning, it must only be repaid by the principal, if the principal wins their case. Because of that, most litigation loan finance companies will only fund a litigator representing a case that the finance company deems to have merit — and is therefore highly likely to “win” their case or settlement.

Something to consider, the finance company offering the commercial litigation loan will frequently include stipulations in the loan agreement that specify how the monies provided by the loan can be used. In most cases, an experienced litigation firm is well-versed in commercial litigation loan stipulations. However, it’s always smart to be aware of, and even negotiate these financial stipulations while applying for, and agreeing to the loan contact.

What are commercial litigation services?

Commercial litigation services typically refer to some of the procedural duties required to professionally research and gather evidence. From forensic services to taking video depositions, commercial litigation services are the responsibility of the law firm. However, individual litigation services can be outsourced to a third party to take advantage of specific expertise — or simply help things proceed more quickly.

When do I need a commercial litigation lawyer?

Contact a commercial litigation lawyer the moment you suspect corporate fraud, breach of fiduciary duty, or an abuse of trust. Generally, the consultation should be free.

Do I need a commercial litigation attorney near me?

We recommend choosing a commercial litigation attorney who has experience in the industries involved, and the jurisdictions where the case will be tried. For example, if it’s an intellectual property case that will be tried in Los Angeles Superior Court, we recommend working with one of our intellectual property attorneys who are familiar with LASC judges and proceedings.

(310) 593-9890

About Brown Neri Smith & Khan, LLP

We are complex business litigation attorneys in Los Angeles. With backgrounds across complex law practice areas, and hailing from some of the world’s largest law firms, BNSK attorneys are experienced litigators successfully defending clients around the world. Our partners founded BNSK on the belief that successful client relationships are driven by our extensive experience, and our unmatched resolve to achieve successful results. For a free consultation, visit or call us at: (310) 593-9890

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Ryan Abbott Named “50 Most Influential People in IP”

Partner Ryan Abbott has been selected as one of the 50 most influential people in IP for 2019 by Managing Intellectual Property magazine. Ryan’s listing notes that, “[h]is work on artificial intelligence (AI) and IP has contributed to the international dialogue on how new technologies are challenging existing legal standards.” Managing IP is the leading source of analysis on IP developments worldwide.


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Court of Appeal Rules Materiality is Imperative for Order Disqualifying Counsel

In a published opinion (38 Cal.App.5th 1069), the 2nd District of the Court of Appeal reversed a trial court order disqualifying Richie Litigation, P.C. from representing Plaintiff and Appellant Thomas Wu. BNSK represented Mr. Wu for purposes of appeal.

In late 2017, Mr. Wu sued O’Gara Coach Company, LLC for various workplace violations including unlawful racial discrimination, wrongful termination, and others that arose during his time at the car dealership. During some time that Mr. Wu worked for O’Gara Coach, the president and COO of O’Gara Coach was Darren Richie. Eventually, both Mr. Wu and Mr. Richie were forced from their positions. Mr. Richie then passed the California bar exam, incorporated a law firm, and Mr. Wu hired them to sue O’Gara Coach.

O’Gara Coach moved to disqualify Richie Litigation from representing Mr. Wu early in the case. O’Gara Coach argued that Mr. Richie’s former position – while not an attorney then – provided him with confidential and privileged information that would put Mr. Wu at an advantage. O’Gara Coach also argued that Richie Litigation should be disqualified because Mr. Richie would be called as a witness. It submitted declarations from its outside counsel who averred to the hundreds of emails and telephone calls that they had with Mr. Richie regarding all of O’Gara Coach’s various legal issues. None of the declarations indicated that Mr. Richie discussed any issues with Mr. Wu with O’Gara’s outside counsel when Mr. Richie was employed by O’Gara Coach. Mr. Wu’s opposition highlighted the facts Mr. Richie never was its attorney, and that Mr. Wu was fully informed and consented to Mr. Richie being called as a witness, if it would occur.

The trial court agreed with O’Gara Coach. In granting the motion to disqualify, the trial court ruled that Mr. Richie “had significant responsibility for the formulation of implementation of anti-harassment and anti-discrimination policies for O’Gara [Coach], and it is more likely than not that in those roles he consulted with outside counsel for O’Gara [Coach].” The trial court also ruled that it was highly probable that Mr. Richie would be called to testify and that further supported disqualification. Mr. Wu appealed.

In the opinion, the Court of Appeal explained its reasoning from a prior related case entitled Joseph Ra v. O’Gara Coach Company, LLC (30 Cal.App.5th 1115). The court explained that its reversal of an order refusing to disqualify Richie Litigation there relied on evidence that “[Mr.] Richie possessed attorney-client privileged information directly related to O’Gara Coach’s defense of the claims being asserted against it in the litigation then before us and to O’Gara Coach’s prosecution of its cross-claims against Ra in that lawsuit.” (emphasis added.) 

Contrasting Mr. Wu’s case from Ra, the court found that in Mr. Wu’s case, “[n]one of the declarations suggest Richie was involved in any way in investigating Wu’s complaints of a hostile work environment or had any discussions with O’Gara Coach’s outside counsel regarding Wu’s claims.” The court equated O’Gara Coach’s evidence to “playbook” information – business practices or litigation philosophy. The court held that the trial court’s ruling was based on an incorrect finding that Mr. Richie acquired information during his former position that was material to Mr. Wu’s claims. 

The Court of Appeal further held that even if Mr. Richie were to be called as a witness, that the exception to the rule – informed client consent – negated any grounds to disqualify Richie Litigation. The court also reversed the trial court in that holding as well.

After the opinion was issued O’Gara Coach petitioned for rehearing. That was petition was denied and O’Gara Coach then petitioned the California Supreme Court for review. That petition as well was denied.

In addition to the Ra and Wu cases, Richie Litigation represented another former O’Gara Coach employee, Jorge Loera, who also sued O’Gara Coach for the harms it caused. O’Gara Coach successfully moved to disqualify Richie Litigation in that matter was well, which was also reversed in a similar opinion to the Wu appeal (Jorge Loera v. O’Gara Coach Company, LLC, et al. – 2019 WL 4014086).

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FT: “A patent predicament: who owns an AI-generated invention?”

October 6, 2019 — Excerpt. Originally published in Financial Times

Brown, Neri, Smith & Khan LLP partner, Ryan Abbott, was recently quoted in the Financial Times, regarding his groundbreaking efforts to obtain patent protection for AI-generated inventions. For the full article, click here. Excerpt below:

Ryan Abbott, professor of law and health sciences at the University of Surrey and one of the lawyers campaigning on behalf of Dabus, argues that the AI system should be recognised as the inventor. The system’s creator would then hold the patent in the same way that someone named successor in title can take ownership rights of an estate or business.

The problem is that if AI cannot be recognised as an inventor, the owners of the AI will not have any protection for the ideas generated by their work. This may discourage them from pushing further development. Not recognising the AI as an inventor threatens innovation by “failing to encourage the production of socially valuable inventions”, argues Mr Abbott’s team.

While the idea of granting intellectual property protections to a machine may seem a niche concern now, it will become more pressing as AI systems invent more routinely. Indeed, it is possible that AI is already generating new ideas but that its role is being concealed because of legal uncertainty, according to Mr Abbott.

“AI will need to play a more important role in research and development,” he says. “These machines may be the best way we have to come up with inventions . . . We need a framework for protecting this stuff.”


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BNSK Secures $6.2 Million Verdict for North American Emergency Response and Restoration Contractor Client

Managing partner, Ethan Brown, first-chaired a 12 day trial in Los Angeles Superior Court before Judge Elizabeth Allen White, along with BNSK counsel Patricia Eberwine Tenenbaum, Sara Colón and Nona Yegazarian, where BNSK represented plaintiff, Interstate Restoration, in a breach of contract action against defendant, A Community of Friends (“ACOF”). Plaintiff alleged that ACOF failed to pay Interstate Restoration for remediation services provided on two of its properties in downtown Los Angeles. In its defense, ACOF argued that Interstate fraudulently induced ACOF into the contract and grossly overbilled for the work provided. The jury arrived at its verdict after 2.5 hours of deliberation, holding unanimously for plaintiff, Interstate Restoration, and awarding the full contract amount of $6,191,047.48.

In post-trial motions, the Court awarded prejudgment interest at a rate of 18 percent per annum, resulting in a judgment that will exceed $9.7 million.

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DotConnectAfrica Trust Defeats Motion for Summary Judgment

DotConnectAfrica Trust (DCA), a client of our firm, won a victory in its ongoing efforts to bring greater internet access to the continent of Africa.

DCA is currently in a suit against the Internet Corporation for Assigned Names and Numbers (ICANN) for the fraudulent rejection of DCA’s application for the top-level domain name “.Africa”.  In an effort to dismiss the case, ICANN moved for summary judgment, arguing DCA’s suit was barred by 1. a Covenant Not To Sue, and 2. Judicial Estoppel.

In its Motion, ICANN contended that DCA had completely waived its right to sue by signing a litigation waiver in ICANN and DCA’s original contract.  Additionally, ICANN argued that DCA’s previous statements before an Independent Review Panel were so contradictory to its current positions that the suit should be barred by the doctrine of Judicial Estoppel.

Judge Howard L. Halm, however, ultimately agreed with DCA’s lawyers from BNSK. He ruled that, under California statutory law (Cal. Civ. Code § 1668), Covenants Not To Sue did not apply to lawsuits for fraud or willful injury. Therefore, six of DCA’s causes of action could not be barred by the Covenant, because they alleged fraud and/or willful injury. Additionally, Judge Halm did not apply Judicial Estoppel because 1. the evidence was unclear whether DCA had taken a contradictory position in the past, and 2. ICANN had not produced evidence indicating that, if DCA had changed its position, it had done so in bad faith.

With this victory, DCA can continue to vindicate its rights, in an effort to ensure that the significant benefits of information technology are available to the people of Africa.

DCA was represented by BNSK attorneys Ethan Brown, Sara Colón, and Rowennakete Barnes. ICANN was represented by international law firm, Jones Day.

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Potential Expansion of Attorney-Client Privilege for Inadvertent Disclosure

The California Supreme Court’s refusal to hear an appeal regarding Gibson Dunn & Crutcher LLP’s recent disqualification from representing another large firm should serve as both a clarification of attorney-client privilege and a word of warning to law firms.

The Court rejected a petition to hear McDermott Will & Emery LLP v. Superior Court, 10 Cal. App. 5th 1083 (2017), a decision from the California Court of Appeals’ Fourth District.  There, the appeals court affirmed the disqualification of Gibson Dunn from representing McDermott Will & Emery LLP in a malpractice suit.  It also held that an email sent by a client to a third party prior to the litigation did not waive the attorney-client privilege protecting that email’s content.

Case Background

Dick Hausman, the older head of a wealthy family, ran a company that was regularly represented by the law firm, McDermott Will & Emery.  However, during an internal struggle for control of the family company, Hausman retained personal, third party counsel, and had a meeting with this new attorney to discuss his legal options.  Shortly after, the attorney sent an email summarizing the meeting, and Hausman, who was 80 and suffered from Multiple Sclerosis, accidentally forwarded the message to his daughter-in-law. She, in turn, sent the message to multiple members of the family. 

Two years later, McDermott Will & Emery was sued by the family over conflicts of interest and was represented by the law firm, Gibson Dunn & Crutcher. Gibson’s attorneys offered the email as evidence, and did not return the email when opposing counsel said it was inadvertently disclosed privileged material. In turn, opposing counsel filed motions seeking 1. Judicial determination that the email was privileged and had been inadvertently disclosed, and 2. Gibson Dunn be disqualified from representing McDermott in the matter at hand.  The trial court granted both motions and the court of appeals affirmed.  In its affirmance, the court of appeals ruled that the email was obviously privileged because it was from an attorney and summarized a meeting with a client.  Furthermore, the court held that Hausman did not waive his privilege as to the email, because his forwarding was accidental.  Furthermore, it also held that disqualification was the appropriate remedy because Gibson Dunn had reviewed and used the email already, which raised the likelihood the exposure could affect the outcome of the case.

Impact of Case

This case seemingly expands the strength of attorney-client privilege.  Prior to this case, the State Fund rule, which requires that opposing firms not use materials which are obviously privileged, had mostly been applied to instances of disclosure by opposing counsel and during litigation.  In contrast, this court found there was obvious privilege even though the disclosure was made by the client and years before the onset of litigation.  Essentially, the court ruled that the email, on its face, should have indicated to Gibson Dunn that it should not be used, even though the client had directly sent it to a third party.

McDermott currently has requested the court to depublish the case, meaning that it could not be used as binding law in the future.  In the meantime, California lawyers and clients need to be aware of the documents they use as evidence.  If there is any indication that the information is privileged, regardless of when and by whom it was disclosed, it would be wise to not use that information until it is approved by opposing counsel or the judge.

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Governor Brown Expands Privacy Laws with Respect to Electronic Information

On October 6, 2015, Governor Brown signed five privacy bills into law.  The laws add protections and procedures for the collection and maintenance of electronic identifying information by law enforcement, automated license plate readers, and voice-activated smart-TVs.  The laws also define the term “encryption” and change the method of data breach notifications by businesses, agencies, and individuals.  Most of the bills amend Civil Code Sections 1798.29 and 1798.82 in addition to creating or modifying the sections described below.

Collection of Data by Law Enforcement

The first of the bills, The Electronic Communications Privacy Act (S.B. 178), constricts law enforcement’s ability to collect electronic information without either a warrant or wiretap order.  Law enforcement is prohibited from compelling either a service provider, entity, or person from producing or providing access to electronic information or communications for the purposes of investigation and prosecuting a crime without court approval.  Law enforcement can obtain the same information by subpoena, if for purposes other than criminal investigation or prosecution.  In addition to the warrant or order, law enforcement may access an electronic device or information if: (1) there is specific consent of the owner; (2) the device was lost and the owner’s specific consent is obtained; (3) a good faith belief exists that an emergency involving death or serious bodily harm will occur requiring access to the device; (4) the device is believed to be lost and accessed only for identification purposes; (5) the device is seized from an inmate in a correctional facility.  In addition to the warrant protections, law enforcement is required to notify the individual who’s information is sought. (  

Breach Notification Laws

Next on the list, is the amendments to California’s Data Breach Notification laws (S.B. 570).  The changes in the law are not significant, but make notice of data breaches that are made to consumers, more conspicuous.  The amendments also provide model forms for issuing notices of data breaches for business, agencies, and individuals.  (


“Encrypted” has now received a formal definition under AB-964, also amending Civil Code 1798.29.  Under the bill, “Encrypted” is defined as: rendered unusable, unreadable, or indecipherable to an unauthorized person through a security technology or methodology generally accepted in the field of information security. (

Automated License Plate Readers

With respect to automated license plate readers, S.B. 34 adds Civil Code sections 1798.90.50-1798.90.55, as well as language to Sections 1798.29 and 1798.82.   The changes from this bill impose specific privacy requirements on an “ALPR operator” to maintain reasonable security procedures and practices to protect identifying individual information.  The amendments also require an ALPR operator to maintain access logs and require that any information accessed only be used for authorized purposes.  If a violation occurs, ALPR operators are subject to private actions, including statutory damages of $2,500, punitive damages, attorney’s fees, and other preliminary and equitable relief awarded by the court.  Finally, any data breaches must also comply with the notification laws referenced above.  (

Voice-Recognition Smart-TVs

Last on the list of the privacy laws, A.B. 1116, modifies Business and Professions Code Sections 22948.20-22948.25.  Although existing law requires manufacturers of voice-recognition TVs to obtain affirmative consumer action before the voice-recognition is activated, the new law adds more protection concerning the use and dissemination of any voice-recordings.  Actual recordings, even for the purpose of improving the voice-recognition technology are prohibited.  Manufacturer’s are also prohibited from creating software for the purpose of criminal investigation or law enforcement monitoring.  However, the law loses a lot of strength, by limiting a manufacturer’s liability to the functionality at the time of sale.  If the user installs updates or applications that violate the law, the manufacturer cannot be held liable. (

Although many privacy laws protect individual consumer information with respect to the areas described above, these amendments further those protections, and exceed federal standards ensuring the citizens of California additional safeguards to electronic information and communications. 

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No Set Limit for Numerosity Requirement in Class-Action

In a wage-and-hour class action (Hendershot v. Ready to Roll Transportation, Inc., 228 Cal. App. 4th 1213) a California Court of Appeal reversed the denial of class certification and held that no set number applies to the numerosity requirement for a putative class.

The plaintiffs filed a class action against Ready to Roll (RTR) for failure to pay overtime wages and other various causes of action.  The complaint alleged that the plaintiffs were non-exempt employees who chauffeured for RTR and that RTR failed to pay them for on-call periods between services.  As soon as possible, the plaintiffs propounded discovery to determine potential class members.  When RTR asked for an extension, plaintiffs conditioned it on an agreement that RTR would provide good faith responses and not simply objections, and contact information for potential class members.  RTR then changed counsel, who acknowledge the parties’ agreement but failed to honor it in either respect.  Around the same time, RTR’s CEO met with putative class members and obtained 29 releases.  When the plaintiffs received incomplete discovery responses and boilerplate objections, they moved to compel further responses, including documents pertaining to RTR’s defenses.  The Court granted plaintiffs’ motion.   

The plaintiffs then applied ex parte to re-set the deadline to move for class certification based upon RTR’s discovery delays.  Although RTR consented, the Court denied the plaintiffs’ request.  Soon after, the parties scheduled the deposition of RTR’s CEO.  On the day before the deposition was to occur however, the defendant’s counsel stated without explaining, that the CEO was traveling out of state.  RTR finally provided the plaintiffs with the releases it obtained fifth months after the fact. 

The plaintiffs moved for class certification, arguing that the class was sufficiently numerous and had at least 53 potential members.  One week after, RTR produced 24 arbitration agreements that were signed prior to court’s order granting the plaintiffs’ motion to compel further responses.  In its opposition, RTR argued that most of the class members agreed either to arbitrate or already released their claims – a defense RTR raised for the first time.  The plaintiffs argued that RTR waived that defense, that it could not rely upon documents withheld in discovery, and that the agreements were unenforceable.   The Court denied class certification on the grounds that the plaintiffs only produced evidence of nine potential class members and ruled that the record did not demonstrate improper conduct or prejudice to the plaintiffs.

On appeal, the Court noted that “The question of class certification is essential procedural and does not involve the legal or factual merits of the action.”  To be sufficiently numerous, a class must be “numerous” in size such that “it is impracticable to bring them all before the court.” (CCP §382).  No set number exists.  The denial of class certification based on the conclusion that the remaining nine members did not constitute a sufficient number, without any analysis as to impracticality, was incorrect.  That ruling also improperly considered the merits of RTR’s defense.

The Court of Appeal also held that the trial court violated the plaintiffs’ due process rights by denying them the ability to conduct discovery and brief issues related to certification.  These violations included RTR not providing adequate notice of the arbitration agreement/release defense and allowing RTR to rely upon the late-produced documents.  RTR violated the parties’ agreement regarding discovery, did not produce the documents although they possessed them for months, and failed to produce the CEO for deposition as agreed upon, all to the detriment of plaintiffs. 

Based upon the foregoing, the Court of Appeal reversed the denial of class certification and remanded the case.

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Subsequently adopted arbitration by-law cannot apply to accrued claim

In 1999, Ironwood County Club entered into a land-purchase agreement with current members.  The members loaned the club $25,500 with the agreement that any funds would be repaid by the Club to the member upon resigning membership.  The agreement also required new members to pay the balance of the members’ land-purchase account and any unamortized portion.

In 2012, the Club announced that it was abandoning the practice of repaying resigning members any balance.  It was also alleged that the Club failed to require payment from new members’ as described above.  Two current and two former members brought suit against the Club (Cobb v. Ironwood Country Club, 233 Cal.App.4th 960).  Four months after filing, the Club passed an arbitration by-law and filed a motion to compel arbitration.  The Club argued that the plaintiffs’ prior agreement to be bound by the by-laws, which allowed amendment thereto, constituted their agreement to the mandatory arbitration by-law.  The trial court denied the motion to compel on the grounds that retroactive application would impose terms on the plaintiffs to which they did not agree.

On appeal, the Club continued to argue that plaintiffs agreed to the arbitration by-law through their agreement to allow amendment.  The Club also disputed the application as retroactive and argued public policy favored arbitration because the application was not clear.

The Court explained such a retroactive application would violate the covenant of good faith and fair dealing.  When a party retains an unfettered right to modify an agreement, the right must be exercised in good faith.  Since the Club sought to interfere with the rights of the plaintiffs’ for the Club’s benefit, the application violated the covenant.  The Court quickly rejected the Club’s argument that the dispute was not retroactive because it was on-going – the by-law was being applied the accrued claim retroactively, not the on-going lawsuit.  Finally, the Court found no doubt as to whether the plaintiffs agreed to arbitration and denied the Club’s public policy argument.  In addition to those findings, the Court also held the by-law unconscionable because it only applied to claims by members and waived any award of punitive or consequential damages.

The Court of Appeal affirmed the trial court order.

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Signed Acknowledgement of Arbitration Agreement Defeats Employee’s Arguments

In Serafin v. Superior Court (2011 Cal. LEXIS 12706) former employee Madeline Serafin sued Balco for wrongful termination, harassment and defamation.  Balco moved to stay the suit pending arbitration based on the arbitration agreement Serafin signed when she was hired.  The arbitrator found in Balco’s favor on all issues and the trial court confirmed the award and entered judgment in Balco’s favor.  Serafin appealed, arguing that she never entered into a binding arbitration agreement, or alternatively, that the agreement was unconscionable.

Similar to other arbitration agreements, the agreement in question subjected “any and all claims arising out of or in any way connected with [employment] to mandatory arbitration.”  The agreement also included an acknowledgment to be signed, that the employee “reads and understands” the agreement.  Serafin’s main argument focused on the language of the acknowledgment.  Serafin cited numerous cases indicating that an acknowledgment of receipt of an employee handbook or agreement to be bound by the handbook’s contents is insufficient to bind arbitration.  However, unlike the cases she cited, she actually received the arbitration policy.  Furthermore, the policy stated that employees were required to sign the acknowledgment indicating their understanding and agreement to comply with it.

Serafin tried to argue that the agreement was illusory, binding only the employee to arbitration, but her claim was undermined by the fact that Balco authored the agreement on its letterhead and initiated arbitration.

With regards to her unconscionable arguments, the Court only found a minimal degree of procedural unconscionability based on the take-it-or-leave-it nature, but found the fee-bearing provision of the agreement substantively unconscionable.  Since the trial court correctly severed the fee-bearing provision, Serafin suffered no substantive unconscionability. 

The Court affirmed the judgment.

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“Compelling and Meritorious” Constitutionality Challenge of the SEC Dismissed

After a two-year investigation, the SEC issued an order for enforcement proceedings against Laurie A. Bebo, the former CEO of Assisted Living Concepts (“ALC”).  The SEC alleged that ALC’s disclosure documents contained false or misleading statements and accused Bebo of securities fraud.

In response, Bebo filed a civil action against the SEC (Bebo v. SEC, 2015 U.S. Dist. LEXIS 25660) and moved for a preliminary injunction challenging the constitutionality of §929P(a) of the Dodd-Frank Act.   Bebo argued that the SEC’s authority in administrative penalty proceedings coupled with the ability to seek penalties in federal court violated the equal protection clause and due process because it gave the SEC the ability to choose the prosecutorial forum and effectively deny a citizens’ seventh amendment right to a jury trial.  The SEC’s ability to choose an administrative forum rather than federal court, also prevented the accused from calling key witnesses beyond subpoenaing power of the SEC ALJ – a procedural due process violation.  Finally, Bebo also argued that SEC administrative proceedings violate Article II, Section III of the Constitution, providing that the executive “take Care that the Laws be faithfully executed” because SEC ALJ’s have multiple levels of protection from being removed by the President.

The Court found Bebo’s claims “compelling and meritorious,” but refused to rule in her favor; the Court stated that Bebo’s exclusive remedies were provided by the Securities Exchange Act.  She must first litigate her claims before the SEC before she is able to appeal to the Seventh Circuit.  And because the Exchange Act provided for review in federal court, she could not be granted relief at this time. 

The district court dismissed Bebo’s case.

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Court Affirms Preliminary Injunction Prohibiting Delegation of “.Africa” Top-Level Domain on Reconsideration

On June 20, 2016, the Hon. R. Gary Klausner ruled in favor of our client DotConnectAfrica Trust (DCA), affirming his April 12 order enjoining Defendant Internet Corporation for Assigned Names and Numbers (ICANN) from delegating the top-level internet domain .Africa. 

On May 6, former Defendant ZA Central Registry filed a motion for reconsideration challenging the Court’s decision issuing the preliminary injunction.  ICANN joined the motion shortly after.  However, ZACR’s motion to dismiss was pending prior to the motion for reconsideration.  The Court granted ZACR’s motion to dismiss and refused to consider ZACR’s arguments for reconsideration as moot.  Thus, the Court only addressed points raised by ICANN.

ICANN raised two main points: (1) an erroneous factual finding; and (2) plaintiff’s misrepresentation of facts regarding irreparable injury.  ICANN further argued that a bond was required by DCA, should the preliminary injunction remain in place. 

As to the first point, the Court acknowledged the erroneous finding of fact – as did both ICANN and DCA – but agreed with DCA that the error was harmless.  The Court held “upon reconsideration of the facts and evidence, there still exists serious questions going to whether Plaintiff had acquired a sufficient number of endorsements to have passed the geographic names evaluation phrase in the first instance.”  Relying on ICANN’s internal review process holding, Judge Klauser held that “both the actions and inactions of the [ICANN’s] Board with respect to the application of Plaintiff relating to the .AFRICA gTLD were inconsistent with the Articles of Incorporation and Bylaws of ICANN.”  Judge Klaunser found it reasonable to infer that ICANN improperly rejected DCA’s application at the geographic names evaluation phrase and that the application should proceed to the delegation phrase.  The error in ruling was “not determinative to its [the Court’s] ultimate conclusion” that there are serious questions going to DCA’s likelihood of success.

As to ICANN’s second point, the Court held that ICANN failed to raise the arguments in the first place.  The argument failed for that reason alone.  Regardless, the Court also held that DCA sufficiently demonstrated irreparable harm. 

Finally, the Court refused to consider ICANN’s request for a bond.  Holding that ICANN also failed to raise this point opposing when opposing the preliminary injunction, ICANN would not get a second bite at the apple.

The Court also noted that ZACR failed to respond to DCA’s argument that ZACR had sufficient time to oppose the preliminary injunction before it was issued and held that ZACR’s evidence of damages too speculative to require any bond.

A copy of the order can be found here.

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Exclusion of Non-Exclusivity Clause Supports Exclusive Contractual Relationship

In a recent unpublished decision from the Ninth Circuit Court of Appeals (Global BTG, LLC v. National Air Cargo, Inc., 2015 U.S. Dist. LEXIS 70386), the Court affirmed a jury verdict finding an exclusive contractual relationship in the absence of any express exclusivity contractual provision.  Although lacking any express exclusivity, the Court found the extrinsic evidence of intentionally omitting a non-exclusivity provision, the type of business relationship, and industry norms sufficient to support the verdict.

In July 2010, the parties entered into a Letter of Intent (LOI) for financing several commercial airplanes.  Less than a year later, Global brought suit for breach of the LOI.  The jury found in favor of Global and awarded $8 million in damages.

On appeal, National sought review of partial summary judgment, the denial of judgment as a matter of law, and the denial of a motion for a new trial, among other things.  National’s main argument on appeal was that the facts did not support a finding of exclusivity.  National argued that the lack of an exclusivity provision – or silence as to the matter – could not amount to an exclusive contractual relationship.  The Court disagreed.  Despsite the lack of an exclusivity provision, the language of the LOI created an exclusive relationship.  The LOI was for the purchase, lease and finance of eight specific aircraft.  That relationship between two parties, for the specific goods identified, could only have been exclusive.

Providing more weight to Global’s argumen was the intentionally omission a non-exclusive provision during the parties’ negotiations.  Global presented this fact to the jury, along with the fact that a non-exclusive relationship was impractical to its business, and other industry norms.   Because the jury could have reasonably found an exclusive relationship, the Court affirmed the trial court’s ruling on summary judgment and refused to reverse the jury verdict or grant a new trial.

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Preliminary Injunction Issued Barring Delegation of .Africa Top-Level Domain Until Case Resolution


On Tuesday, April 12, 2016, the Honorable R. Gary Klausner of the Central District of California granted a preliminary injunction in favor of our client DotConnectAfrica Trust (“DCA”). The preliminary injunction prohibits defendant Internet Corporation for Assigned Names and Numbers from delegating the rights to the generic top-level domain (“gTLD”) “.Africa” until the case resolves. 

As a initial issue to the preliminary injunction motion (and central to ICANN’s opposition), ICANN argued that DCA was barred from pursuing any court-related relief as a result of a provision included in the gTLD application Guidebook.  The relevant portions of the provision are as follows: 

“Applicant hereby releases ICANN…from any and all claims by applicant that arise out of, are based upon, or are in any way related to, any action, or failure to act, by ICANN…in connection with ICANN’s…review of this application…Applicant agrees not to challenge, in court…any final decision made by ICANN with respect to the application, and irrevocably waives any right to sue or proceed in court…on the basis of any other legal claim against ICANN….with respect to the application.”

DCA argued that because the provision barred relief from any and all claims arising out of the application process – including fraudulent or intentional wrongdoing – the release was void as a matter of law pursuant to Cal. Civil Code §1668.  Section 1668 provides that “[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property or another, or violation of law, whether willful or negligent, are against the policy of the law.”  The Court agreed with DCA, finding the provision “against the policy of law” by exempting ICANN from fraudulent or intentional wrongdgoin.  The court rejected both of ICANN’s arguments that (1) the release had to affect public policy to be void, and (2) because DCA’s motion for a preliminary injunction was not based on DCA’s claims for fraud, the provision was enforceable here.  The Court held that DCA alleged intentional misconduct and those allegations sufficed for purposes of finding the provision unenforceable.

Continuing through its analysis, the Court found serious questions as to the merits of DCA’s declaratory relief claim that ICANN be ordered to follow the decision of its internal review process and continue to process DCA’s .Africa application in accordance with ICANN’s bylaws and articles of incorporation.  Agreeing with DCA, the Court emphasized the fact that .Africa can only be issued once; if DCA’s application was improperly processed and ICANN is not barred from delegating the .Africa rights, DCA could suffer irreparable harm losing the chance to control the .Africa domain.  Balancing this fact against any potential harm to ICANN, the scales tipped sharply in DCA’s favor.  Finally, with respect to the public interest involved in the issuance of a preliminary injunction, ICANN claimed that delay would prejudice the African community.  ICANN put forth a declaration to support this claim from Moctar Yedaly – the head of the AUC’s Information Society Division of the Infrastructure and Energy Department.  As the AUC was alleged to have improper involvement in the processing of DCA’s application, the Court noted Mr. Yedaly’s conflict of interest and gave little weight to the declaration.  The Court stated that “it is more prejudicial to the African community, and the international community in general, if the delegation of .Africa is made prior to a determination of the fairness of the process by which it was delegated.”

A copy of the order can be accessed here.

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Judge Real Extends TRO Enjoining Defendants Conduct Until Resolution of Case

On April 11, 2016, Judge Real of the Central District of California granted an ex parte application for a temporary restraining order in favor of our client ReachLocal, Inc.  ReachLocal sought to prevent defendants Kieran Cassidy and his company, PPC Claim (collectively, the “Defendants”), from contacting its clients, employees, and investors.  The article on the TRO can be accessed here.  After granting the TRO, Judge Real set an expedited hearing for April 11 for a preliminary injunction.

On April 11, 2016, at 10:00 a.m., Judge Real heard arguments from counsel for the issuance of a preliminary injunction against the Defendants.  Judge Real granted the preliminary injunction and issued an order shortly after setting forth the same terms for the preliminary injunction as the TRO.  A copy of the minute order granting the preliminary injunction can be found here.

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Court Grants Ex Parte TRO Enjoining Defendants’ Further Disruptive Communications

On Friday, April 1, 2016, the Honorable Manuel L. Real of the United State District Court for the Central District of California, granted our client’s ex parte application for a temporary restraining order against the defendants.

Our client, ReachLocal, Inc., caught wind of spurious internet postings and communications made on Defendant PPC Claim Limited’s website and by Defendant Kieran Cassidy.  Cassidy claimed that ReachLocal was misleading its clients and that he obtained ReachLocal’s entire current and former client list and would be contacting them in the future.  After the communications and postings continued, ReachLocal filed suit (C.D. Cal. 2:16-cv-01007) and applied for a temporary restraining order to prevent further communications by the Defendants.  In one of his last communications to ReachLocal’s CEO, Defendant Cassidy stated that he would be willing to come to an “agreement/arrangement” with ReachLocal, in order to (effectively) go away.  However, in his communications to ReachLocal clients, Cassidy failed to disclose his interest in a competing business – a fact significant to Judge Real in granting ReachLocal’s temporary restraining order.

Judge Real found ReachLocal to have demonstrated all elements for a preliminary injunction: (1) ReachLocal demonstrated a likelihood of success on its claim for trade secret misappropriation (among others); (2) threatened use of the customer list constituted irreparable harm; (3) in balancing the potential harms of the parties, ReachLocal’s harm outweighed any the Defendants would incur by temporarily ceasing their communications; and (4) although Defendants claimed to be consumer advocates, by “engaging in this information campaign as part of a veiled competitive commercial practice[,] the desire to acquire an improper commercial advantage,” did not constitute injury to any public interest.

Judge Real granted the temporary restraining order, enjoining the Defendants from further communicating to ReachLocal clients and investors, directly, through massing mailings, email, LinkedIn, or any other website, until hearing a motion for a preliminary injunction.  Judge Real set the hearing for April 11, 2016.

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A/C Privilege – Common Interest Doctrine

In Seahaus La Jolla Owners Association v. Superior Court (224 Cal.App.4th 754), the California Court of Appeals explained the Common Interest Doctrine of the attorney-client privilege.  The defendant sought to obtain information disclosed by counsel of the HOA at pre-litigation meetings; the defendant claimed that the presence of homeowners (who were affiliated with the defendant) at the pre-litigation meetings waived the attorney-client privilege. The plaintiff claimed the disclosure was was protected under the Common Interest Doctrine and contested the defendant’s request.

The Court ruled in favor of the plaintiff and held the information privileged. As the Court explained, the Common Interest doctrine was a qualified privilege dependent on the content and circumstances of the communication sought to be privileged.  The qualification required that all parties (to the allegedly privileged communication) have (1) a common interest in securing legal advice related to the same matter, and (2) the communications are made to advance that common interest.  Since the homeowners were concerned with their respective property values in relation to the claim made by the HOA, they shared a common interest in the legal status of the HOA’s claim.  Since the disclosures were also made pursuant to the HOA’s claims, they were made to advance said common interest.  Because the HOA was required by law to notify all homeowners of upcoming litigation, its was required to disclose the information to homeowners affiliated with the defendant, and that did not destroy the privilege.

The court concluded that the decision did not expand the scope of the attorney-client privilege, but only applied recognized rules to an unusual set of facts.

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Settling plaintiff is prevailing party entitled to costs even if remaining claims are voluntarily dismissed

California Code of Civil Procedure §1032(a)(4) defines the “prevailing party” to include “the party with a net monetary recover” and “a defendant in whose favor a dismissal is entered.”  The statute entitles the prevailing party to the costs in the proceeding.  In a recent proceeding, the California Supreme Court was faced with the question of whether a plaintiff who settles some claims and voluntarily dismisses the remaining claims is considered the prevailing party and therefore entitled to costs.

In DeSaulles v. Community Hospital of the Monterey Peninsula (62 Cal.4th 1140 [2016]), Maureen DeSaulles sued Community Hospital of the Monterey Peninsula (the “Hospital”) for: (1) failing to accommodate physical disability or medical condition; (2) retaliation under Cal. FEHA; (3) breach of implied conditions of an employment contract; (4) breach of the implied covenant of good faith and fair dealing; (5) negligent and (6) intentional infliction of emotional distress; and (7) wrongful termination.  The Hospital successfully moved for summary judgment and the exclusion of evidence for all but DeSaulles’ third and fourth claims.

Prior to trial, the parties settled the remaining claims. Under the settlement, the Hospital would pay DeSaulles $23,500, DeSaulles retained the right to appeal the summarily adjudicated claims, and DeSaulles would voluntarily dismiss her remaining causes of action.  After the Court of Appeal affirmed summary judgment in the Hospital’s favor, both parties sought costs as the prevailing party.  The district court held the Hospital to be the prevailing party based on the fact that it succeeded on the majority of claims pleaded.  The Court of Appeal reversed, holding DeSaulles as the prevailing party for obtaining a net monetary recovery.  The Court of Appeal explained that summary judgment did not dispose of the case;  As two causes of action remained for trial, the Hospital at most obtained a partial dismissal.  The California Supreme Court granted review.

The Court explained that an award of costs is justified on the theory that “to a plaintiff […] the default of the defendant made it necessary to sue him, and to a defendant, that the plaintiff sued him without cause.”  Put otherwise, the party responsible for initiation of the lawsuit pays the costs to the blameless party.  Under CCP §1032, a prevailing party is entitled to recover costs and defines the prevailing party as: “a party with a net monetary recovery, a defendant in whose favor a dismissal is entered, a defendant whether neither plaintiff nor defendant obtains any relief, and a defendant against those plaintiffs who do not recover any relief against that defendant.”  A recovery other than monetary relief or outside of the described situations, vests the court with discretion to award costs.  The statutory rule is only a default rule and can be modified by agreement of the parties.

The Hospital relied upon Chinn v. KMR Property Management (166 Cal.App.4th 175 [2008]) for the holding that settlement proceeds are not a “net monetary recovery” that would make the settling plaintiff the prevailing party.  Reviewing the legislative history of Section 1032 and the related case law, the Court overturned the holding in Chinn.  The Court explained that the language providing for costs to a defendant when the plaintiff voluntarily dismissed the case did not include the situation where the plaintiff obtained a monetary settlement as well.  Costs available to a defendant prevented a plaintiff from filing a claim without merit and driving up the costs, only to dismiss on the eve of trial and force the expense of a frivolous lawsuit on the defendant.  A situation where the plaintiff obtained a monetary settlement was separate and distinct.

Since Chinn no longer applied, the question remained whether a plaintiff who obtains a monetary settlement and voluntarily dismisses the remaining claims is entitled to costs as the prevailing party.  The Court found no reason why a monetary settlement was outside the definition of “monetary recovery.”  Just as a plaintiff cannot avoid costs if a suit without merit is dismissed prior to trial, a defendant cannot avoid costs if it settles also prior to trial.

The Court held that a dismissal pursuant to a monetary settlement is not a dismissal in the defendant’s “favor” and the plaintiff is entitled to costs.  The rule only clarified the default rule, while leaving open the availability of a private agreement between the parties apportioning costs.  The Court disapproved the holding of Chinn and affirmed the Court of Appeal’s judgment.

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Court Grants Ex Parte TRO preventing issuance of .Africa top-level domain

On Friday, March 4, the Honorable R. Gary Klausner ruled in favor of BNS’ client, granting a temporary restraining order, enjoining Internet Corporation for the Assigned Names and Numbers (ICANN) from issuing the .Africa top-level domain.

Plaintiff Dot Connect Africa Trust (DCA) applied ex parte for a temporary restraining order on Wednesday March 2, believing that ICANN would be issuing the .Africa domain at its triannual meeting in Marrakesh, Morocco on March 5.  DCA brought suit in state court just weeks before, seeking to enforce ICANN’s internal review process ruling that held ICANN improperly processed DCA’s application, among other claims.  After ICANN removed to federal court, DCA amended its complaint and moved for a preliminary injunction.  Because the meeting would occur only days after, DCA followed the preliminary injunction with an ex parteapplication for a temporary restraining order.

Ruling in DCA’s favor, Judge Klauser found serious questions going to the merits of DCA’s case.  Coupled with the facts that .Africa can be issued only once and cannot be compensated for monetarily, the Court granted the temporary restraining order, enjoining ICANN from issuing .Africa until DCA’s preliminary injunction is heard.

DCA’s motion is set to be heard April 4, 2016

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BNS Obtains Dismissal of Anticipatory Lawsuit on Forum Non-Conveniens Grounds

On February 5, 2016, the Central District granted a motion to dismiss on forum non conveniens grounds, entering judgment in favor of our client. 

After being warned of pending litigation overseas, the California manufacturer our client distributed for initiated a declaratory relief action in Los Angeles Superior Court.  After removing to federal court, BNS argued that convenience favored a dismissal or a stay of the action until the now-pending British suit was adjudicated.  The Court agreed and completely dismissed the case.   

Our client – a UK-based distributor – entered into a distribution agreement with a California manufacturer for distribution of products throughout Europe.  After a dispute arose between our client and the manufacturer, our client attempted to resolve the issue but warned of litigation if the efforts failed.  In an apparent attempt to avoid litigating in England, the manufacturer filed a lawsuit in Los Angeles Superior Court for declaratory relief.  The manufacturer sought a declaration that it properly terminated the distribution agreement.   

After removing the case to the Central District, BNS moved to dismiss the lawsuit on the grounds of forum non conveniens and lack of personal jurisdiction.  Although the agreement’s forum-selection clause was only permissive, the parties agreed that English law applied.  During the period of removal and moving to dismiss, our client initiated proceedings in England for breach of contract. 

The Court agreed with BNS that England provided an adequate alternative forum and both the public and private interest factors favored dismissal.   Particularly important to the Court was the fact that separate proceedings were now pending in England.  The Court noted that these proceedings not only determined whether the termination was proper, but also whether any breach and resulting damages occurred.  The Court also found persuasive the fact that our client’s witnesses were located in Europe, the costs of bringing those witnesses to California is high, and the manufacturer consented to jurisdiction in Europe by virtue of the permissive forum-selection clause.  The Court noted: “Even considering the “greater deference [afforded] to a plaintiff’s choice of [its] home forum” the private interest factors thus strongly favor dismissal.”  The Court further agreed that the “first-to-file” rule did not apply, as Plaintiffs were warned of litigation and filed in anticipation thereto.

With respect to the public interest factors, the Court emphasized the mandatory application of English law.  Although the manufacturer argued that English law would not be “odd or uninterpretable” as compared to California law, the Court held that the evaluation did not require such a consideration.  The fact that foreign law applied strongly favored dismissal.  Coupled with the fact that English courts are less congested than California courts, the Court held the public interest factors favored dismissal.

The Court granted the motion on the grounds of forum non conveniens without reach an analysis of personal jurisdiction. The Court entered judgment pursuant to FRCP 58, dismissing and closing the case.

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Are injuries to “holders” of stock direct or derivative claims under Delaware law?

A recent decision by the Second Circuit Court of Appeal seeks to clarify the distinction between direct and derivative standing under Delaware law.  

InAHW Inv. P’ship v. Citigroup, Inc.(806 F.3d 695), the plaintiffs brought claims for various false statements that resulted in losses over $800 million.  The plaintiffs were numerous investment entities organized by Arthur L. Williams, that held nearly 18 million shares of Citibank stock.  Prior to the financial crash, Williams planned to sell all of his shares.  The first million sold for $55/share, but Williams stopped there, based mostly on direct assurances from senior officers.  Ultimately, the shares plummeted and Williams sold at $3.09 per share.

Under the various entities, Williams brought suit for negligent misrepresentation and fraud.  On a motion to dismiss brought by Citibank, the court held the claims direct, but granted the motion for failure to state a claim.  Both parties appealed.

On appeal, Citibank argued that the court erred holding the claims direct.  Thus, as derivative claims, the Plaintiffs lacked standing and all other arguments were irrelevant.  Applying the well-known Tooley v. Donaldson, Lufkin & Jenrettte, Inc. (845 A.2d 1031), and its more recent progeny, the Second Circuit found no clear answer.  Under Tooley, the distinction between direct or derivative standing turns on two factors: (1) who suffered the alleged harm (the corporation or the individual stockholder); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the individual stockholder).  As alleged, the Williams based their harm on the direct statements made after the damage to Citibank occurred.  The senior officers were concealing the harm to Citibank at that point, delaying the inevitable for Williams to hold his shares.  The Court found both factors in the Williams’ favor.  Under Tooley the claim was direct.

The analysis did not end there however.  More recent decisions interpreting Tooley indicate that when a claim is based upon any dilution in value of the corporation’s stock, the claim is generally derivative (SeeGentile v. Rossette [906 A.2d 91]; In re J.P Morgan Chase & Co. Shareholder Litigation[906 A.2d 808]; Feldman v. Cutaia [951 A.2d 727].  The court struggled with the fact that, regardless of the individualized aspect of what caused the William’s injury – the direct statements from senior officers – the actual harm they suffered was dilution of their stock.  Harm no different than that suffered by all Citibank stockholders. 

Examining Second Circuit law for the answer, the question remained whether the harm alleged, based upon retention of stock, rather than purchase or sale, makes the claims direct or derivative.  Here the Williams were “Holders” when their injury occurred.  No precedent authority existed, so the Second Circuit certified the following question to the Delaware Supreme Court:

Are the claims of a plaintiff against a corporate defendant alleging damages based on the plaintiff’s continuing to hold the corporation’s stock in reliance on the defendant’s misstatements as the stock diminished in value properly brought as direct or derivative claims.

Based on the particularity of the question, it is likely that the answer will be narrowly applied.

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Derivative Action for JP Morgan’s Investigation of “London Whale” Incident Dismissed on Third Appeal

In May 2012, JP Morgan Chase announced an estimated trading loss of $2 billion.  After the details were finalized, actual losses exceeded $6 billion.  As a result, Ernesto Espinoza brought a derivative shareholder action against JPMorgan’s directors and officers for breach of fiduciary duty and related claims. 

Around the same time of the announced losses, Espinoza formally demanded the board investigate and commence proceedings against various executives involved in the incident and those responsible for risk management within the corporation. The board created a Review Committee, consisting of three outside directors, outside counsel, and an expert advisor.  In addition to the Review Committee, JP Morgan’s Management Task Force conducted a separate investigation.  Eight months later, the Review Committee refused Espinoza’s demand, determining that it was against the company’s best interests to litigate.

After the district court dismissed Espinoza’s complaint twice, Espinoza argued that the investigation was insufficient because it failed to take into consideration the executives’ subsequent statements after the “London Whale” incident.  For the third time, the district court granted JPMorgan’s motion to dismiss for failure to plead sufficient facts to rebut the business judgment rule presumption. Espinoza appealed again.  (Espinoza v. Dimon, et al., 2015 U.S. App. LEXIS 21021).

On a de novo review of the complaint, the Second Circuit determined the appeal presented an unclear question of Delaware law.  The court certified the following question to the Delaware Supreme Court:

If a shareholder demand that a board of directors investigate both an underlying wrongdoing and subsequent misstatements by corporate officers about that wrongdoing, what factors should a court consider in deciding whether the board acted in a grossly negligent fashion by focusing its investigation solely on the underlying wrongdoing?

In its response, the Delaware Supreme Court emphasized that review of a decision to initiate legal proceedings starts with the premise that such decision is an internal corporate matter within the board’s discretion.  The merits of the board’s decision did not control the matter.  In order to defeat the motion to dismiss, Espinoza had to plead sufficient facts to demonstrate the decision not to initiate legal proceedings constituted gross negligence.

Espinoza’s claims failed again.  The court found JP Morgan’s investigation exhaustive, resulting in many of the demands Espinoza made on the board, as well as acknowledging many of the subsequent statements Espinoza based his latest argument upon.  The Delaware Supreme Court noted that JP Morgan may have had two materially distinct categories to investigate, and that the investigation of only one could constitute gross negligence, but that the crucial question was the importance of the matter not investigated in the entire context.  Espinoza’s claim as to the subsequent statements was one of five demands.  The board’s decision was protected by the business judgment rule.

In addition to granting the motion to dismiss, the Second Circuit enunciated two practical considerations for refusal letters.  First, that requiring boards to provide a detailed response to every issue raised in a demand letter would provide an incentive to plaintiffs to laundry list an excessive number of demands.  Second, that providing a detailed refusal letter could expose the board to other legal risks, an effect contrary to the board’s duty to mitigate risk.

The court affirmed dismissal of Espinoza’s complaint.

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Retroactive application of Conception to California arbitration provision waives class-arbitration

Recently, the Supreme Court reversed a California court’s refusal to enforce an arbitration agreement made unenforceable by valid California state law.  The Court emphasized the fact that under the Federal Arbitration Act, state law prohibiting class-arbitration waivers is invalid.  In her dissent, Justice Ginsburg focused on the parties’ intent at the time of execution and warned of the expansive path the Court is embarking on issuing decisions in a pro-business manner and wholly precluding relief to consumers.

In 2007, the plaintiffs in DirecTV, Inc. v. Imburgia (136 S. Ct. 463) entered into a service agreement with DirecTV.  The service agreement required all claims to be resolved by binding arbitration and included a class-arbitration waiver, with the caveat that “if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.””  Although the agreement provided that the FAA would interpret the language, it was unclear whether the clause applied to this specific “law of your state” provision.  In 2008, the plaintiffs brought suit against DirecTV for early termination fees they believed violated California law.  At that time, California law held class-arbitration waivers unenforceable and DirecTV did not attempt to compel arbitration.  Five years later, when the Supreme Court invalidated California law holding class-action waivers unenforceable in AT&T Mobility LLC v. Conception, DirecTV moved to compel arbitration.  The California Court of Appeal found the phrase “law of your state” ambiguous and interpreted it against DirecTV (the drafting party), and ultimately denied the motion.  The California court conceded that Conception invalidated the class-action waiver ban under the FAA, but concluded that, exclusively under California law, the waiver in the service contract remained unenforceable.  The California court reasoned that the parties were free to select whatever law they chose to interpret the contract.  Since this specific provision required the application of the plaintiff’s state law, and ambiguous terms are interpreted against the drafter, the decision complied with Conception.  The California Supreme Court denied review and DirecTV petitioned for certiorari.

The Supreme Court started off with the premise that lower courts must follow the rule created in Conception.  Neither party contested this.  The Court then admitted that the parties are allowed to choose what law governs some or all of its provisions.  Although the main issue was whether California law, as applied, was consistent with the FAA, the underlying question was whether the application of California law included now invalid law. 

The first matter addressed was the language of the provision.  The Court rejected the idea that the phrase was ambiguous.  Next the Court stated that California case law held under general contract principles that references to California law incorporate the legislature’s power to change the law retroactively.  Third, the Court held that nothing indicated that a California court would apply invalid state law in any context other than arbitration.  Fourth, expanding on the third premise, the Court held that the interpretation of “laws of your state” to the extent they are not preempted by the FAA, would limit the application to arbitration.  Fifth, because the state law was invalidated by Conception, it could not maintain independent force under state law.  Sixth, and finally, reiterating the equal footing adhered to in the third and fourth points, because no authority suggested that “laws of your state” would apply invalid law in other contexts, the interpretation was invalid.  The Court rejected the interpretation that this specific clause was exempted from the general adoption of the FAA in the parties’ agreement.  Because the interpretation did not place arbitration agreements “on equal footing with all other contracts” the Court reversed and remanded for further proceedings.

In her dissent, Justice Ginsburg stressed the preclusive effect on consumers, making the cost of recovery more than it is worth.  She started her discussion with the fact that DirecTV did not oppose litigation until after Conception.  There was no reason to at that time, because DirecTV would have been precluded by California law.  When DirecTV moved to compel arbitration, the Court of Appeal based its decision on the fact that DirecTV knew of California law in 2007 and could not have predicted that, four years later, the Supreme Court would hold the FAA preempts state-law protection against compelled class-arbitration waivers. Even in its state court filing, DirecTV admitted that California prevented enforcement of the class-arbitration waiver. 

Going further, Ginsburg explains that Conception only holds that a state cannot compel class arbitration when prohibited by the agreement.  Just as the parties may agree to individual or class arbitration, the parties are also free to select the choice of law.  Since the CLRA was and is still valid in California, the parties were free to select that law.  The question at issue, according to Justice Ginsburg, was not whether the parties intended the “law of your state” phrase to include laws preempted by the FAA, but rather the law of the state as frame by the state legislature.  Ginsburg agreed with the California court, arguing that specifically referring to the “law of your state” in one provision, rendered the language meaningless if preempted by the FAA, considering the general FAA choice of law provision.  Ginsburg found it unbelievable, that any consumer would have anticipated the Court’s decision in Conception four years later.  Although the court has found a “federal policy favoring arbitration” in the FAA, it has also cautioned that finding to “where it reflects, and derives its legitimacy from a judicial conclusion that arbitration is what the parties intended because their express agreement to arbitrate was validly formed, legally enforceable, and best construed to encompass the dispute.”  

For the rest of her opinion, Ginsburg expressed her concern for the majority decision and the expansive deprivation of consumer rights.  Included in many consumer agreements, class action waivers effectively preclude consumers from obtaining remedies for minor injuries that make individual recovery cost prohibitive. She closed noting that in the EU only post-dispute arbitration agreements are binding, and mandatory arbitration clauses in consumer contracts are nearly nonexistent outside of the United States.

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DOJ to Focus on Individual Accountability for Corporate Misconduct

In her September 9, 2015, memorandum –generally known as the “Yates Memo” – Deputy Attorney General Sally Yates stresses the DOJ’s intent to focus on individual culpability in corporate misconduct investigations and prosecutions.  And in both the Memo, and Yates’ November 16, 2015 speech at the American Bank Association and American Bar Association Money Laundering Enforcement Conference, Yates states the obvious: corporations act through individuals and by placing a higher focus on individual actors, corporate misconduct is more effectively deterred.

The Yates Memo lays out six changes for corporate misconduct investigations: (1) in order to qualify for anycooperation credit, corporations must provide the DOJ all relevant facts relating to individuals responsible for misconduct; (2) criminal and civil corporate investigations should focus on individuals from the beginning; (3) criminal and civil attorneys investigating corporate misconduct should openly communicate; (4) except in rare cases, the DOJ will not terminate individual investigations when resolving corporate cases; (5) corporate cases should not be resolved without a clear plan for related individual cases; and (6) civil attorneys should not focus solely on an individual’s ability to pay when considering whether the bring a civil action against the individual.

Of all the factors listed above, in her November 16 speech, Yates said that cooperation credit has received the most attention.  As the memo states: “In order for a company to receive any consideration for cooperation under the Principles of Federal Prosecution of Business Organizations, the company must completely disclose to the Department all relevant facts about individual misconduct.”  Although this concept is nothing new, the policy consequences have changed.  Previously, the DOJ provided cooperation credit on a sliding scale.  Under the new policy, credit is unavailable until and unless all information on an individual’s involvement in wrongdoing is provided.  Even in that instance, a company will only be eligible for consideration for cooperation credit.  The conflict this creates in the corporate hierarchy is clear.  If an executive is personally liable, as a decision-maker, the executive will not be willing to implicate themselves.  On the other hand, if a lower-level employee comes forth with facts implicating an executive, that individual could face various repercussions.  In any instance, if a corporation or individual provides all information and receives little cooperation credit, the incentive dissolves.  Taking the cost of investigating and providing these facts also limits the effects of this policy. Yates acknowledges these issues, but believes they are over-emphasized.

The next four factors reiterate the focus of the Memo – individual accountability in both civil and criminal forums and the importance and practicality of communication and cooperation between enforcement attorneys.  The Yates Memo states that individual accountability should be the focus from the start of the investigation.  Again, as a corporation only acts through individuals, the most effective means of prosecuting corporate wrongdoing and deterring future misconduct, is to hold specific bad actors accountable.  Utilizing communication and cooperation between civil and criminal attorneys, ensures that all avenues and remedies are considered. 

Finally, the Yates Memo states that an individual’s ability to pay should not be the determinative factor in civil enforcement.  The investigation should also consider whether conduct is actionable, whether evidence is admissible to obtain a judgment, whether pursuit of judgment constitutes an important federal interest, past history and circumstances, the needs of the communities served, and federal resources and priorities.  In short, any prosecution, whether civil or criminal, should further the DOJ’s interest in minimizing corporate fraud and losses to the public fisc.

In her speech, Yates reiterated her point in the policy articulated in the memo: “Our mission is not to recover the largest amount of money from the greatest number of corporations; our job is to seek accountability from those who break our laws and victimize our citizens.”  Yates also recognized the importance of public trust and rooting out misconduct to hold those accountable for their wrongdoings.  Whether the changes in policy will lead to more individual convictions or pleas is an issue of time.

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