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SPOTLIGHT NEWSLETTERJenner & Block is excited to introduce “The Spotlight,” an electronicmonthly newsletter from the Litigation Department Chair, Craig C. Martin,designed to highlight recent cases and legislative developments fromacross the United States. Additionally, The Spotlight recaps the highimpact Litigation Department news, upcoming events and publications ofinterest.

If you would like to be added to the mailing list for The Spotlight, pleasesend an email to Justin L. Portaz at jportaz@jenner.com.

M e s s a g e f r o m t h e C o - C h a i r sIn this issue of The Spotlight, we discuss a number of continuing trendsand interesting developments. First, courts continue to limit the effect ofarbitration agreements even after the United States Supreme Court’sdecision in AT&T Mobility v. Concepcion (see discussion in July 2011Spotlight). A district court in the Southern District of Florida held that anarbitration agreement containing a class action waiver wasunconscionable because it contained mandatory fee shifting provisionsand allowed the banks to withdraw fees from customers’ accounts withoutnotice. In addition, another district court held that claims for injunctiverelief were not subject to compulsory arbitration, and the United StatesCourt of Appeals for the Eighth Circuit held that a lower court erred bydismissing a suit pending arbitration, rather than staying it.

We also discuss several cases finding that entities could assert theattorney-client privilege. Two courts found that a dissolved corporationcould, under certain circumstances, continue to assert the attorney-clientprivilege, and two other courts found specific types of communicationsprivileged: communications during an internal investigation that focusedon ways to prevent future liability and communications with a unionrepresentative. A fifth court, however, found an investigation conducted byoutside counsel was not privileged because of the participation of a sitesafety officer whose presence was not reasonably necessary in order toobtain outside counsel’s advice.

Further, we note that in light of the Wal-Mart Stores, Inc. v. Dukes decision(see discussion in July 2011 Spotlight), the Ninth Circuit remanded acertified class action, ordering the lower court to conduct a more rigorousanalysis of the commonality of the claims and to resolve any factualdisputes necessary for that analysis.

Finally, in CML V, LLC v. Bax, the Delaware Supreme Court held that acreditor of an insolvent LLC does not possess standing to pursuederivative claims, although a creditor of an insolvent corporation doeshave such standing. This decision has significant implications regardingLLCs’ potential exposure to breach of fiduciary duty suits by creditors asthe LLCs approach insolvency.

Full Art icle

October 2011

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Regards,David J. Bradford and Craig C. MartinCo-Chairs Jenner & Block Litigation Department

A n t i t r u s tSeventh Circuit Dismisses Potash Purchasers’ Claims Under FTAIA.

by Margaret J. Simpson

In Minn-Chem, Inc. v. Agrium Inc., No. 10-1712 (7thCir. Sept. 23, 2011),the Seventh Circuit vacated the District Court’s order denying potashsellers’ motion to dismiss, determining that putative class plaintiffs’complaint failed to bring their claims within the “import commerce” or“direct effects” exceptions to the Foreign Trade Antitrust Improvements Act(FTAIA), which limits the extraterritorial reach of the U.S. antitrust laws.Because it found the FTAIA barred plaintiffs’ claims in either case, thecourt declined to decide whether the FTAIA creates a jurisdictionalrequirement or merely an extra element of a Sherman Act claim whenplaintiff alleges a foreign antitrust conspiracy. The court noted,nonetheless, that the jurisdictional requirement “may be ripe forreconsideration,” citing a circuit-split in the “clear statement” rule ofArbaugh v. Y&H Corp., 546 U.S. 500 (2006), between the Third Circuit’srecent decision in Animal Science Products (see Sept. 2011 Spotlight) andpost-Arbaugh Seventh Circuit precedent. See United Phosphorus, Ltd. v.

Angus Chemical Co., 322 F.3d 942 (7th Cir. 2003) (holding that theFTAIA’s requirements are jurisdictional). On the question of whetherplaintiffs had adequately stated a claim within the FTAIA’s “importcommerce” or “direct effects” exceptions, plaintiffs failed under the “importcommerce” exception because the complaint contained no factualallegations to support an inference that the alleged conspiracy was“directed at” the U.S. market. Instead, the complaint’s specific factualallegations described anticompetitive conduct directed only at potashmarkets in Brazil, China, and India. Plaintiffs also failed under the “directeffects” exception, despite allegations that the vast majority of potashsales in the United States were made at prices set according tobenchmarks defendants established based on sales in India, China, andelsewhere, because the complaint lacked “specific factual content tosupport the asserted proposition that prices in China, India, and Brazilserve as ‘benchmarks’ for prices in the United States.”

A p p e l l a t e & S u p r e m e C o u r tFirst Circuit Issues Advisory Writ of Prohibition To Halt Transfer Of

Prisoner To The Federal Government.

by: Christopher J. Deal

In United States v. Pleau, Nos. 11-1775, 11-1782 (1st Cir. Oct. 13, 2011),a divided panel of the First Circuit issued an advisory writ of prohibition

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that will allow New Hampshire Governor Lincoln Chafee to refuse totransfer a prisoner to federal custody for prosecution on capital murderand robbery charges. The United States first sought transfer of theprisoner through an interstate compact to which New Hampshire and thefederal government are parties. After Governor Chafee denied therequest, the United States petitioned for a writ of habeas corpus adprosequendum to secure the prisoner’s appearance in court. The districtcourt issued the writ, which the court of appeals then stayed, pending theprisoner’s motion seeking a writ of prohibition. The United States arguedthat the court could not issue a writ of mandamus or prohibition becausethe prisoner could not demonstrate that he was clearly entitled to relief orthat he was likely to suffer irreparable harm. But the panel rejected thiscontention as irrelevant. The court explained these factors, which controlin claims for a supervisory writ, did not control petitioner’s claim for anadvisory writ. An advisory writ, rather, may issue where the disputedissues are novel, of great importance, and likely to recur prior to effectivereview. Because no state had ever refused to transfer a prisoner, thedispute touched on a fundamental dispute between state and federalpolicy concerning the death penalty, and because serious questionsexisted as to a prisoner’s standing to challenge the issuance of thechallenged writ of habeas corpus, the court determined that an advisorywrit of prohibition could issue, and over a forceful dissent, issued thewrit.

A r b i t r a t i o nCourts Should Stay, Not Dismiss, Cases Pending Arbitration.

by Howard S. Suskin

The Eighth Circuit held that the district court erred when it dismissed afederal action without prejudice rather than staying it pending thecompletion of an arbitration. Green v. SuperShuttle Int’l, Inc. 653 F.3d 766(8th Cir. 2011) (No. 10-3310). The court of appeals noted that Section 3of the Federal Arbitration Act generally requires a district court to stay anaction pending an arbitration, rather than to dismiss it. Although somecourts have relied upon a judicially created exception to the general rule,which indicates that district courts may, in their discretion, dismiss anaction rather than stay it where it is clear the entire controversy betweenthe parties will be resolved by arbitration, the district court abused itsdiscretion in this instance because it was not clear that all of the contestedissues between the parties would be resolved by arbitration. Dismissingthe action, rather than staying it, might prejudice the claimants becausethe statute of limitations may run and bar them from re-filing complaints instate or federal court.

Post-Concepcion, Court Holds Consumer Arbitration Agreements

Unenforceable.

by Howard S. Suskin

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A Florida district court held that bank customers suing for excessiveoverdraft fees could not be compelled to arbitrate their claims even in thewake of the U.S. Supreme Court’s recent ruling in AT&T Mobility v.

Concepcion. In re Checking Account Overdraft Litig., No. 09 02036, MDLNo. 2036 (S.D. Fla. Sept. 1, 2011). The court acknowledged that, afterConcepcion, courts may not invalidate arbitration agreements simplybecause they contain class action waivers. However, the court concludedthat Concepcion did not completely do away with unconscionability as adefense to the enforcement of arbitration agreements. Here, the courtconcluded that the arbitration agreements were procedurally andsubstantively unconscionable because they contained mandatory feeshifting provisions and allowed the banks to withdraw fees directly fromthe customers’ accounts without notice.

Injunctive Relief Claims Are Not Subject To Compulsory Arbitration.

by Howard S. Suskin

A California district court found that consumers’ claims for injunctive reliefchallenging early cancellation fees were not subject to compulsoryarbitration. In re DirecTV Early Cancellation Fee Mktg. and Sales

Practices Litig., No. 09-2093 (C.D. Cal. Sept. 6, 2011). Observing thatplaintiffs were bringing their claims under California’s Consumer LegalRemedy Act and California Unfair Competition Law as private attorneysgeneral seeking to vindicate a public right, the court concluded that thoseclaims were not subject to mandatory arbitration, even though plaintiffs’separate claims for damages based on the same alleged misconduct hadto be arbitrated.

A t t o r n e y - C l i e n t P r i v i l e g eTwo Circuits Address Discretion Of Trial Court Regarding In Camera

Review.

by David M. Greenwald

Two recent federal circuit court decisions demonstrate the breadth ofdiscretion afforded to federal district courts in determining when and howto utilize in camera review to resolve privilege disputes.

In United States v. Boender, 649 F.3d 650 (7th Cir. 2011), the appellatecourt held that the district court did not abuse its discretion when it held anin camera hearing to determine whether the crime-fraud exception appliedto communications between a criminal defendant and his attorney and itpermitted the government to attend and participate. First, the courtestablished a low bar of proof as to when a trial court may grant in camera

review: the party challenging privilege must present prima facie evidence“that gives color to the charge by showing some foundation in fact” forapplication of the crime-fraud exception. Such evidence then allows the

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district court to require the party asserting privilege “to come forward withan explanation for the evidence” offered against the privilege. The courtmay conduct an in camera review of the disputed communications so longas there is a “good faith belief by a reasonable person” that in camera

review “may reveal evidence” to establish the crime-fraud exception.Second, the appellate court held that it was not an abuse of discretion toallow the government to attend the in camera hearing and to cross-examine the defendant’s attorney. United States v. Zolin, 491 U.S. 554(1989) gives a district court flexibility to balance the need to safeguard theprivilege against the need to prevent abuse. Although an adversarial incamera hearing may not always be appropriate, it was appropriate here,where the government had significant independent evidence supportingthe exception and the court did not believe that the government was on afishing expedition.

In contrast, in King v. University Healthcare System, L.C., 645 F.3d 713(5th Cir. 2011), the appellate court held that the trial court did not err bydenying a request by the plaintiff for an in camera review of documentslisted on defendant’s privilege log. The trial court found that defendant’sdescriptions of emails on the privilege log were proper and demonstratedthat the emails were “privileged on their face;” and plaintiff had failed toprovide anything but speculation in support of her challenge to theassertions of privilege. The appellate court held that a district court maycredit the descriptions on a privilege log and need not conduct an incamera review in the absence of additional evidence from the partychallenging privilege.

Counsel’s Advice On Ways To Prevent Liability Is Privileged.

by David M. Greenwald

In Mississippi Pub. Employees’ Ret. Sys. v. Boston Scientific Corp., 649F.3d 5 (1st Cir. 2011), the appellate court held that documents generatedduring an internal investigation were privileged, despite the fact that thecommunications from counsel focused on ways to prevent liability in thefuture. In this case, Boston Scientific’s general counsel convened a RecallInvestigation Working Group and directed members of the group to sendwritten communications to each other through the general counsel andother in-house counsel. The court found that it was proper for the generalcounsel to direct communications through counsel: “BSC’s generalcounsel did not manufacture privilege but rather protected it when thecommunications were made for the purpose of providing requested legaladvice.” The court also held that advice directed toward steps that couldbe taken by the company to avoid future liability was legal advice that wasproperly within the privilege.

Two Courts Find Dissolved But Not Yet “Dead” Companies May

Assert Privilege.

by David M. Greenwald

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The United States Supreme Court has ruled that the attorney-clientprivilege survives the death of an individual client. But the weight ofauthority holds that the privilege does not survive the “death” of acorporation. Two recent cases illustrate this issue.

In Official Committee Of Administrative Claimants v. Moran, No. 11-3300(N.D. Ill. Aug. 4, 2011), the court held that a corporation could assertprivilege where it temporarily had been dissolved and permanently ceaseddoing business. Hunter, a vendor of the debtor LTV, ceased doingbusiness as a result of LTV’s failure to pay Hunter. However, Huntercontinued to pursue its claims against LTV, including as an active memberof the Administrative Claimants’ Committee. Hunter was dissolved in 2009for failure to pay its Delaware franchise taxes, but was reinstated in 2011.Following Hunter’s dissolution, defendants sought to compel production offiles from Hunter’s counsel, arguing that Hunter could no longer assertprivilege. The court denied defendant’s motion, holding that in decidingwhether a corporation has “died,” “courts should look to practical businessrealities rather than technical legal status.” The court explained that adissolved corporation should be permitted to assert its privilege during thewindup process, at least until all matters involving the company have beenfully resolved and no further proceedings are contemplated. Hunter wasnow “in the business” of pursuing claims against LTV and maintainedmanagement to assert privilege. Therefore, it was not “dead” for thepurposes of the privilege.

In PCS Nitrogen, Inc. v. Ross Development Corp., No. 2:09-3171 (D.S.C.Aug. 19, 2011), the court found that a dissolved corporation may continueto assert privilege, but ruled that the corporation’s directors could not useprivilege to protect their private interests. In this fraudulent conveyanceand breach of fiduciary duty case, defendant directors and shareholders ofa dissolved company, Ross, sought a protective order to prevent a creditorfrom discovering communications between Ross and its counsel. Thecourt found that a dissolved corporation may continue to assert privilegeeven after dissolution. The court noted that, under South Carolina law,dissolution of a corporation does not prevent the commencement of aproceeding by or against the corporation in the corporate name, anddissolved corporations have the same litigation rights that they had beforedissolution. However, the court denied the protective order and alloweddiscovery of the corporation’s communications with counsel becausedefendants were impermissibly attempting to assert the attorney-clientprivilege to protect their own interests instead of corporate interests.

Union Agent Representative Privilege Adopted As A Matter Of

Federal Common Law.

by David M. Greenwald

In Bell v. Village of Streamwood, No. 10-3263 (N.D. Ill. Aug. 15, 2011), thecourt took the rare step of adopting a new privilege under federal common

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law – the employee-union representative privilege, which is recognizedunder Illinois law. In this federal civil rights action arising from allegedpolice brutality by officer Mandarino, plaintiffs sought to compel depositiontestimony from officer Ruthenberg, a colleague of Mandarino and a formerunion representative. At his deposition, Ruthenberg asserted the Illinoisunion agent privilege with regard to all questions relating to officerMandarino. Because the constitutional excessive use of force claim aroseunder federal law, the court determined that federal common law appliedto questions of privilege. The court noted that the Supreme Court inJaffee v. Redmond, 518 U.S. 1 (1996) had explained that the federal lawof privilege should continue to evolve through the courts’ interpretingprivileges “in light of reason and experience.” The court found that thenature of a union agent’s role suggests a need to protect somecommunications between union agents and union members. Although notadopting the full breadth of the Illinois privilege, the court held that anemployee-union representative privilege extends to communications made(1) in confidence; (2) in connection with “representative services relating toanticipated or ongoing disciplinary proceedings”; (3) between an employeeand his union representative; and (4) where the union representative isacting in his or her official representative capacity. This privilege,however, does not apply to any informal communications in whichRuthenberg acted merely as a colleague or friend.

C l a s s A c t i o nSecond Circuit Rejects Settlement Due To Inadequate

Representation.

by Michael T. Brody

A class of freelance authors sued publishers claiming that the electronicre-publication of their works violated their rights. The parties reached asettlement that divided the relief into three categories, and provideddifferent recovery for each category. Although Category C encompassedmore than 99% of the total claims, the bulk of the settlementcompensation flowed to Categories A and B. Objectors argued that thenamed plaintiffs favored the fewer and more lucrative Category A and Bclaims over the more numerous Category C claims, and that the CategoryC claimants should have been separately represented as a subclass. Thedistrict court approved the settlement, but the Second Circuit reversed. Inre Literary Works in Electronic Databases Copyright Litig., 654 F.3d 242(2d Cir. 2011) (No. 05-5943). Objectors argued that even though classrepresentatives held claims in all three categories, there was a substantialrisk that the class representatives sacrificed the Category C claims in favorof more favorable compensation for Category A and B claims. TheSecond Circuit agreed, and held that to negotiate a fair settlement,Category C claims must be represented separately in a subclass. Thecourt directed that, on remand, the district court to establish threesubclasses to negotiate a settlement.

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Ninth Circuit Applies Wal-Mart’s “Rigorous Analysis.”

by Michael T. Brody

In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), the SupremeCourt made clear that district courts must engage in a “rigorous analysis”to determine whether there are common questions of law or fact amongthe class members’ claims. Before Wal-Mart, several federal circuits,notably the Ninth Circuit, had applied a less rigorous analysis and certifiedclasses based on untested factual claims. Ellis v. Costco Wholesale

Corp., 657 F.3d 970 (9th Cir. 2011) (No. 07-15838), the Ninth Circuitapplied Wal-Mart’s rigorous standard to an employment discriminationcase. Recognizing that that class certification analysis may overlap withthe merits, the Ninth Circuit reversed the lower court’s certification andremanded the case to the district court to conduct a rigorous analysis ofcommonality. The appellate court held that the district court had erred incertifying a class based on its finding that admissible evidence existed insupport of the plaintiff’s position. On remand, the district court wasdirected to resolve any factual disputes necessary to determine whetherthere was a common practice that could affect the class as a whole.

Prior Class Arbitrations Do Not Defeat Local Controversy Exception.

by Michael T. Brody

CAFA’s local controversy exception requires the district court to declinejurisdiction in cases in which the class action primarily involves partiesfrom a single state and in which no other class action has been filedasserting the same or similar factual allegations during the three yearperiod prior to the filing of the class action. The purpose of the latterprovision is to prevent plaintiffs from pursuing repetitive actions in statecourt. In circumstances in which repetitive actions are filed, CAFA permitsfederal jurisdiction notwithstanding the otherwise local nature of thedispute. In Williams v. Homeland Insurance Co. of New York, No. 11-30646 (5th Cir. Sept. 19, 2011), the Fifth Circuit addressed whether a priorclass arbitration constituted a class action, such that the local controversyexception would not apply. The Fifth Circuit concluded that a classarbitration is not a class action for this purpose. As a result, the prior classarbitration did not defeat the local controversy exception, and the casewas properly remanded to state court.

Expansion Of Proposed Class Revives Opportunity To Seek

Arbitration.

by Michael T. Brody

In Krinsk v. SunTrust Banks, Inc., 654 F.3d 1194 (11th Cir. 2011) (No. 10-11912), the named-plaintiff complained about defendants’ home equityloan program. The parties’ contract contained an arbitration clause that

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precluded class actions. SunTrust answered and moved to dismiss thecomplaint, but did not raise the existence of an arbitration clause. Thedistrict court granted the motion to dismiss in part and permitted plaintiff toreplead. Plaintiff filed an amended complaint that expanded the class. Inresponse to the amended complaint, after nine months of litigation,SunTrust raised its arbitration defense. The district court found SunTrusthad waived arbitration by participating in the litigation, and found plaintiffwould suffer prejudice due to this delay. The Eleventh Circuit reversed. Itheld that “in limited circumstances, fairness dictates that a waiver ofarbitration be nullified by the filing of an amended complaint.” A priorwaiver may be nullified when the plaintiff files an amended complaint thatunexpectedly expands the litigation. In this case, the amended complaintvastly augmented the putative class so that despite its prior acceptance ofthe judicial process, SunTrust should have been allowed to rescind itswaiver of the right to arbitrate. We note the United States Supreme Courthad agreed to review this Term a case involving the waiver of anarbitration clause, but it dismissed the case when the parties reached asettlement. See Stok & Assocs. v. Citibank, N.A., 131 S. Ct. 2955 (2011)(No. 10-514).

C o m p l e x C o m m e r c i a l L i t i g a t i o nCreditors Of LLC Lack Standing To Bring Derivative Claims.

by C. John Koch

In CML V, LLC v. Bax, No. 735, 2010 (Del. Sept. 6, 2011), the DelawareSupreme Court held that a creditor of an insolvent LLC, unlike a creditor ofan insolvent corporation, does not possess standing to pursue derivativeclaims. CML, which had lent money to a jet leasing company that laterbecame insolvent, brought a derivative action charging that the company’sofficers had engaged in mismanagement and self-interested transactions.Affirming the Chancery Court’s dismissal, the Delaware Supreme Courtheld that the Delaware LLC Act requires a derivative plaintiff to “be amember or an assignee of a limited liability company interest” at the timeof bringing the action, explaining that the Act is “clear, unequivocal andexclusive, and operates to deny derivative standing to creditors who arenot members or assignees of membership interests.”

7th Circuit Affirms Discovery Sanctions And Reduces Damages To

$3.

by Matthew J. Thomas

In e360 Insight, Inc. v. The Spamhaus Project, Nos. 10-3538, 10-3539 (7thCir. Sept. 2, 2011), plaintiff, an online marketing company, suedSpamhaus, an internet watchdog group, over Spamhaus’s placement ofthe plaintiff on its list of spamming websites. After the district courtentered (and the Seventh Circuit affirmed) a default judgment in favor of

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plaintiff, the case proceeded to discovery and trial on the issue ofdamages. During this phase, plaintiffs failed to fully and timely respond toSpamhaus’s interrogatories and, after the court ordered a new responsedate, the plaintiff again failed to meet the deadline. Only after Spamhausmoved for sanctions did plaintiff serve supplemental interrogatory answers– in which it identified 16 new witnesses and increased its damagesestimate from approximately $11 million to $135 million. The district courtimposed sanctions, striking all 16 of the newly identified witnesses andprecluding any evidence of damages in excess of plaintiff’s initial estimate.Following a bench trial, the district court awarded damages of just over$27,000. On appeal, the Seventh Circuit affirmed the discovery sanctions,finding that plaintiff’s failure to respond timely to discovery was the resultof at least negligence, and that plaintiff’s delays coupled with its drasticamendment of its previous answers provided “powerful evidence” thatplaintiff was not engaging in the discovery process in good faith. Further,the court held that the damages awarded by the district court wereexcessive, because they represented lost gross revenue, and not lostprofits. Finding that plaintiff had failed to offer any evidence that wouldallow the district court to determine what portion of the $27,000 lost grossrevenue would have been profit, the appellate court entered judgment inthe nominal amount of $3.

Supreme Court To Resolve Circuit Split Over Taxing of Translation

Costs.

by Matthew J. Thomas

The U.S. Supreme Court will address the Circuit split over whether costsfor translating documents are recoverable under 28 U.S.C. § 1920(6),which permits a court to tax as costs the “compensation of interpreters.”The Court granted certiorari in Taniguchi v. Kan Pacific Saipan, Ltd., 633F.3d 1218 (9th Cir. 2011) (No. 09-15212), in which the Ninth Circuitaffirmed an award of costs for translating written documents and medicalrecords under § 1920(6). In that case, the court noted that other Circuitswere split on the issue, with the Sixth and D.C. Circuits holding that suchtranslations costs are recoverable under § 1920(6), and the SeventhCircuit holding that such costs are separate and distinct from costsassociated with “interpretation” and thus may not be taxed under thestatute.

Government Compensation Fund Makes China An Adequate Forum.

by Matthew J. Thomas

In Tang v. Synutra International, Inc., 656 F.3d 242 (4th Cir. 2011) (No.10-1487), plaintiffs, all of whom were Chinese citizens and residents,brought suit against defendant, a corporation with its principal place ofbusiness in Maryland, seeking recovery for injuries allegedly suffered inChina as a result of contaminated infant formula manufactured and

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distributed by defendant’s Chinese subsidiary. The district court granteddefendant’s motion to dismiss on the ground of forum non conveniens.Despite conflicting evidence regarding the willingness of China’s courts tohear and resolve contaminated formula cases, the court determined thatChina was an adequate alternative forum because, even if the Chinesecourts were not open to plaintiffs, the Chinese government hadestablished a fund to compensate affected children and families. Onappeal, the Fourth Circuit affirmed, finding that the forum non conveniens

doctrine does not limit adequate alternative remedies to judicial ones.Rather, the reach of the doctrine extends to nonjudicial alternativeremedies such as the compensation fund established by the Chinesegovernment. Because plaintiffs did not dispute their eligibility to receivecompensation from the fund, the district court did not abuse its discretionin deeming China an adequate forum.

E l e c t r o n i c D i s c o v e r yU.S. Required To Follow Rule 34 And Re-Produce ESI Brady And

Jencks Material.

y Martina E. Vandenberg

The district court considered e-discovery in the criminal context in United

States v. Briggs, No. 10-CR-184S, 2011 WL 4017886 (W.D.N.Y. Sept. 8,2011). Twenty-four defendants faced criminal charges in an allegedconspiracy to distribute cocaine. Several defendants moved to compel thegovernment to produce call data from wiretaps in an easily reviewableformat. Lamenting the absence of a standard in the Federal Rules ofCriminal Procedure, the court stated, “The problem now is that, absent arule, each judge faced with a motion to compel criminal discovery with ESIdata will have to devise his or her own scheme for ESI discovery….”The court held that the government had the burden to organize and re-produce the materials provided to the defendants, and thus required thegovernment to adhere to the standard of Federal Rule of Civil Procedure34(b)(2)(E)(ii) and produce the ESI “in a reasonably usable form or forms.”The court asked, however, that the Advisory Committee on Criminal Rulestake note of this omission and address it at the “earliest opportunity.”

Abandonment Of Server In Warehouse Results In Spoliation

Sanctions.

Martina E. Vandenberg

The plaintiff in United Central Bank v. Kanan Fashions, Inc., No. 10 C 331,2011 WL 4396856 (N.D. Ill. Sept. 21, 2011), filed a motion for sanctionsagainst defendants and their previous counsel for spoliation. The motionalleged that defendants had failed to preserve responsive electronicallystored information (“ESI”) on a computer server kept at an off-sitewarehouse. The court referred the discovery matter to a magistrate judge,who heard testimony from ten witnesses and reviewed 240 exhibits. The

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magistrate judge filed a report, 2011 WL 4396912, in which he concludedthat defendants had control of the server at the time that their discoveryobligations arose. He found that the defendants made a consciousdecision to abandon the server when they vacated the warehouse. Themagistrate judge recommended that sanctions be imposed and that thedefendants should pay all reasonable attorneys’ fees and costs associatedwith the sanctions motion. The court agreed, and ordered two sanctions:1) defendants could not introduce evidence relating to data on the server;and 2) defendants would face an adverse inference instruction to the jury.The court also declined to certify the issue for interlocutory review.

E n v i r o n m e n t a l L i t i g a t i o nVirginia Supreme Court Finds No Duty to Defend Climate Change

Nuisance Claims.

by Steven M. Siros

On September 16, 2011, the Virginia Supreme Court issued its long-awaited decision in AES Corp. v. Steadfast Insurance Co., holding that aninsurer had no duty to defend claims arising out of damages allegedlycaused by greenhouse gas (“GHG”) emissions. 715 S.E.2d 28 (Va. 2011)(No. 100764). The case represents the first reported decision directlyaddressing the issue of whether GHG damage claims implicate aninsurer’s duty to defend.

In 2008, The AES Corporation (“AES”), along with 23 other defendants,were sued by a native Alaskan village (“Kivalina Complaint”) for allegedlyemitting GHGs which contributed to climate change, specifically citingrising sea levels and a reduction in the Arctic ice pack, which resulted inthe coastline’s erosion, rendering the Alaskan village uninhabitable. AEStendered the claim to its insurers, Steadfast Insurance Company(“Steadfast”). Steadfast denied the claim and shortly thereafter filed anaction for declaratory relief in Virginia state court. The trial court ruled forSteadfast, concluding that the insurer had no duty to defend because theallegations in the Kivalina Complaint did not constitute an “occurrence” asthat term was defined in the policy. AES appealed to the VirginiaSupreme Court.

The Virginia Supreme Court decisively ruled that such claims arising fromthe intentional release of GHGs are not covered “accidents” under CGLpolicies. Steadfast argued that the Kivalina Complaint sought damagesthat did not arise as a result of an accident but rather that arose fromAES’s intentional release of GHGs. AES responded that the KivalinaComplaint alleged negligent conduct by AES which AES arguedconstituted an “accident” under the policy. AES also argued that becausethe alleged harm (i.e., climate change) was “unintended,” it constituted an“accident” as defined in the policy.

Noting that the policy defined “occurrence” as “an accident, including

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continuous or repeated exposure to substantially the same general harmor condition,” the Virginia Supreme Court rejected AES’s arguments underwell-established Virginia law, which holds that the terms “occurrence” and“accident” refer to an incident that was unexpected from the viewpoint ofthe insured. Because the Kivalina Complaint alleged that AESintentionally emitted the GHGs , the emissions could not be construed asunexpected or unintended. The court further explained that AES’s intentwas not determinative; “if the result is the natural and probableconsequence of the insured’s intentional act, it is not an accident.”

While the Kivalina Complaint alleged that AES was negligent, the courtnoted that the complaint alleged that AES was negligent only because it“knew or should have known that its actions would cause injury no matterhow they were performed.” The Kivalina Complaint had not alleged thatAES’s intentional acts were done negligently, which, although not decidedby the court, may have been sufficient to trigger coverage under thepolicy.

Illinois Supreme Court Limits Environmental Groups’ Appeal Rights.

by Gabrielle Sigel and Phoebe B. Scott

On October 27, 2011, the Illinois Supreme Court held 5-2 that the SierraClub and Peoria Families Against Toxic Waste (“the opposition groups”)did not have standing to seek review of an Illinois Pollution Control Board(“Board”) decision granting a company’s petition to be relieved ofcompliance with a hazardous waste regulation. Sierra Club v. Illinois

Pollution Control Bd., No. 110882 (Ill. Oct. 27, 2011).

In 1989, the Illinois Environmental Protection Agency (“IEPA”) issued apermit to Peoria Disposal Company (“PDC”), allowing it to operate a wastestabilization facility for the storage and treatment of hazardous andnonhazardous waste, which waste is regulated by federal andsubstantially similar state law. In 2008, PDC filed a petition asking theBoard to delist certain residue in order to exclude it from hazardous wasteregulation. The opposition groups filed a petition for judicial review of theBoard’s subsequent order granting PDC’s request.

The appellate court concluded that the opposition groups had standing toappeal but affirmed the Board’s decision. The opposition groups thenappealed the decision on the merits.

The Illinois Supreme Court first analyzed the opposition groups’ standingunder the provisions of the Illinois Environmental Protection Act (“the Act”).The Act establishes certain categories of persons and procedures whichcan be appealed. Specifically, Section 29(a) of the Act provides that anyperson adversely affected by a “rule or regulation” of the Board, canappeal the issuance of that rule or regulation. The parties disputedwhether the adjusted standard issued to delist PDC’s residue as a

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hazardous waste was such an appealable “rule or regulation.”

The court concluded that the Board’s order is not a rule or regulationsubject to appeal by the opposition groups. Although the oppositiongroups had participated in public comment, they were not officially partiesto the Board proceedings and, thus, were not listed among the specificentities entitled to appeal the issuance of an adjusted standard. The courtfound that, as a matter of statutory language and administrative practice,an adjusted standard, which had been issued to PDC, is distinct from aregulation of general application, the latter of which is appealable.Therefore, the court held that persons who participate in public commentproceedings do not have the right under Illinois law to appeal the Board’sdetermination of individualized adjustments to state rules or regulations.

In dissent, two Justices wrote that the majority’s distinctions between rulesof general application and individualized adjusted standards aredistinctions without a difference with respect to appellate rights. Thedissenting Justices urged that all those adversely affected by an adjustedstandard should have the right to appeal.

H e a l t h C a r e L i t i g a t i o nOIG Announces that 27 States Fail to Meet Criteria to Allow Increased

Medicaid Recovery Payments.

by Sandi J. Toll and Christine M. Bowman

The Department of Health and Human Services Office of InspectorGeneral (“OIG”) sent letters to twenty-seven states in March, 2011informing them of their ineligibility to receive increased Medicaid recoverypayments because their False Claim Act (“FCA”) statutes were not asleast as stringent as the federal False Claim Act, 31 U.S.C. § 3729-3733. Seventeen of those states recently also received supplementalletters. Under Section 1909 of the Social Security Act, a state is eligible toreceive higher Medicaid reimbursements if the state passes FCAlegislation that contains requirements at least as stringent as the federalstatute. 42 U.S.C. § 1396h. In these instances, however, the OIGfound that the 17 recently notified states had shorter statutes of limitationperiods for raising a FCA claim than is set forth in the federal FCA (e.g.

unlike the federal FCA, New York does not allow an interveninggovernment complaint to relate back to the filing of the relator’s complaint).The OIG also identified several other provisions of various state FCAstatutes that were not as stringent as the federal FCA, includingimplementing legislation that was more restrictive of a court’s ability tohear state FCA cases (Virginia); providing less protection to employees,contractors, or agents who are retaliated against (California); providing amore restrictive definition of what constitutes an “original source” (NewJersey); only allowing a relator to receive attorneys’ fees if the governmentor relator prevail (New York); and only allowing third parties to intervene ina relator action after receiving permission from the state’s Attorney

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General (New York). Of the twenty-seven states that initially receivedletters, fourteen were given a grace period, until March 31, 2013, toamend their FCA statutes because OIG had previously reviewed therespective statutes and found that they were compliant. Eleven of thosefourteen states received an extended grace period, until August 31, 2013,because OIG had not mentioned the statute of limitations deficiency inprior correspondence. The remaining states were not given a graceperiod because OIG had not previously reviewed their statutes forcompliance.

Medical Provider Settles Lawsuit Over Improper Medicare

Reimbursements for $65 Million.

by Sandi J. Toll and Christine M. Bowman

On September 30, 2011, LHC Group, Inc., a home and hospice careprovider, agreed to pay $65 million to the Department of Justice to settle awhistleblower lawsuit. Justice News, U.S. Dep’t of Justice, Louisiana-Based LHC Group Inc. Agrees to Pay U.S. $65 Million to Resolve FalseClaims Act Allegations (Sept. 30, 2011),http://www.justice.gov/opa/pr/2011/September/11-civ-1299.html. The DOJalleged that from 2006 to 2008, LHC Group failed to provide sufficientdocumentation supporting its determination that skilled nursing, therapy,and home health aid services provided to Medicare patients weremedically necessary. In addition to paying $65 million, LHC Group agreedto enter into a corporate integrity agreement with the Department of Healthand Human Services that requires regular audits, training for staff onproper record-keeping requirements, and the development of an internalcompliance department. LHC Group did not admit any wrongdoing in thesettlement and noted there were no findings that the company billed orreceived payment for services it did not actually provide to beneficiaries.

OIG Officials Tell Health Care Executives To Expect Increased

Prosecution and Exclusion of Individuals.

by Sandi J. Toll and Christine M. Bowman

In October 2011, the HHS Office of Inspector General (“OIG”), 11 Op. Off.Inspector Gen. 15 (2011), published guidance on the nonbinding factorsthat it will consider when deciding whether to impose permissiveexclusions from federal health care programs under Section1128(b)(15)(A)(ii) of the Social Security Act (the “Act”). Section1128(b)(15) of the Act authorizes the OIG to exclude individuals with anownership or control interest in a sanctioned entity if the evidencedemonstrates the owner knew or should have known of the conduct thatformed the basis for the sanction. The Act also authorizes the OIG toexclude officers and managing employees with control of daily operationsof sanctioned entities, but notably, the Act does not require the OIG toestablish that such officers or managing employees had knowledge of the

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sanctioned conduct. As a result of this lower standard for officers andmanaging employees, the OIG will consider the following factors whenmaking its exclusionary decisions: (i) the nature and scope of the entity’smisconduct; (ii) the individual’s role in the entity’s misconduct; (iii) how theindividual responded to the entity’s misconduct; and (iv) whether thismisconduct is the sanctioned entity’s first offense.

I n t e l l e c t u a l P r o p e r t yFederal Circuit Splits on Patentable Subject Matter post-Bilski in

Classen.

by Jennifer K. Gregory

In Classen Immunotherapies, Inc. v. Biogen IDEC, Nos. 2006-1634, -1649(Fed. Cir. Aug. 31, 2011), the Federal Circuit held that of Classen’s threepatents directed to a method for determining risk associated withimmunization schedules, only two were directed to patentable subjectmatter under 35 U.S.C. § 101 (Inventions patentable). The DistrictCourt of Maryland had granted summary judgment to the Defendants afterconcluding that the three Classen patents were ineligible for patentingbecause they are “directed to the ‘abstract idea’ that there is a relationbetween the infant immunization schedule for infectious diseases and thelater occurrence of chronic immune-mediated (non-infectious) disorders.”

Reversing the district court’s conclusion for two of the patents, the FederalCircuit held that those two were patent eligible because the claims weredirected to a specific, tangible application, which is a “method of loweringthe risk of chronic immune-mediated disorder, including the physical stepof immunization on the determined schedule.” The third patent, however,was not patent eligible because it only involves “collecting and comparingknown information” with no associated step of “applying the data.” TheFederal Circuit avoided setting a “categorical rule” about patent eligibilityunder § 101, and simply stated that two of the three patents made itthrough the “coarse eligibility filter of § 101” and that othersubstantive patentability issues related to the claims of the Classenpatents could be dealt with under Sections §§ 102, 103 and 112of the Patent Act.

Two additional opinions were filed with the majority’s decision. JudgeRader filed additional views, joined by Judge Newman, stating that thecourt will continue to avoid imposing limitations not present in 35 U.S.C§ 101. That opinion points out that more strictures placed on patenteligibility simply encourage more “gamesmanship” in patent drafting, whichincreases the transaction cost of protecting intellectual property and stiflesinnovation. Judge Moore dissented, stating that all three patents shouldbe classified as patent ineligible, “conceptually abstract” subject matterunder § 101. She explained that the claims for all three Classenpatents were abstract and unpatentable due to their breadth. She notedthat the claims contained no limitations on the drug, the schedule, or the

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type of chronic immune disorder.

P r o d u c t L i a b i l i t ySouth Carolina Court Of Appeals Reverses Negligent Design Verdict.

by Barry Levenstam

In 5 Star, Inc. v. Ford Motor Co., No. 4862 (S.C. Ct. App. Aug. 10, 2011),the South Carolina Court of Appeals reversed a jury verdict for plaintiff andentered judgment in favor of Ford Motor Company in a case in whichplaintiff had alleged that Ford’s design of a speed control deactivationswitch was negligent, and had caused a fire that destroyed the Ford truckin which that switch was installed. Although plaintiff’s expert testified thatthe switch was negligently designed because power came to it even whenit was not in use, plaintiffs failed to sustain their burden of proving thatFord’s conduct was negligent with respect to the switch. Apparentlyplaintiffs failed to adduce any evidence that Ford designed the speedcontrol deactivation switch or that the design on the switch was negligentwhen made, in 1996.

Texas Court Of Appeals Rejects Design Defect Claim.

by Barry Levenstam

In Zavala v. Burlington Northern Santa Fe Corp., No. 08-10-00169 (Tex.App. Aug. 24, 2011), the Texas Court of Appeals affirmed the grant ofsummary judgment in favor of the defendant in a design defect case.Plaintiff had injured his wrist attempting to open a railcar doormanufactured by defendant and claimed that his difficulty in opening thedoor evidenced a malfunction or design defect in the door. The court heldthat a design defect could not be inferred from the simple fact that aninjury had resulted in the course of using the door. Further, evidence thata safer alternative design existed did not suffice to raise a material issue offact concerning whether the existing door had a design defect.

Kansas Holds Sellers Of Used Products Subject To Strict Liability.

by Barry Levenstam

In Gaumer v. Rossville Truck and Tractor Co., 257 P.3d 292 (Kan. 2011)(No. 99,990), the Kansas Supreme Court addressed the question whetherKansas applies its doctrine of strict liability to sellers of used products aswell as to sellers of new products. The court looked to Restatement(Second) of Torts § 402A, on which it relied when it originally adoptedits strict liability rule, which does not distinguish between sellers of newand used products. The court also studied the legislative history of theKansas Product Liability Act, which revealed that the Kansas legislaturehad removed language from that Act that formerly distinguished betweensellers of used products and sellers of new products. The court therefore

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concluded that, in Kansas, strict liability law extends to sellers of usedproducts.

Fifth Circuit Affirms Jury Verdict For Plaintiff In Design Defect Case.

by Barry Levenstam

In Goodner v. Hyundai Motor Co., 650 F.3d 1034 (5th Cir. 2011) (No. 10-10660), the Fifth Circuit, applying Texas law, upheld a jury verdict findingthat an automobile seat that reclines more than 45 degrees entails risk ofejection in a rollover that outweighs the benefits of that design. The courtalso held that jurors reasonably could find that defendant’s warnings andcommon knowledge about reclining seats were insufficient to have allowedthe decedent to take steps to protect herself from harm. In particular, thetestimony of plaintiff’s expert regarding alternative designs that would haveprevented, or at least reduced, the risk of the decedent’s injury andregarding the risks of ejection in rollover accidents from seats reclinedmore than 45 degrees, was sufficient to sustain the verdict.

P r o f e s s i o n a l R e s p o n s i b i l i t y & E t h i c a lD e v e l o p m e n t sABA Says Lawyers May Help Clients Talk With Represented

Adversary.

by Gregory M. Boyle

According to a new ABA opinion, the Model Rules of Professional Conductallow a lawyer who believes that a client’s best interest is served bycommunicating directly with a represented adversary may advise the clientto communicate directly with the adversary and provide direct assistanceto the client regarding the substance of the communications. However,the lawyer must be careful to avoid overreaching that violates Model Rule4.2. ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 11-461(2011) (Advising Clients Regarding Direct Contacts with RepresentedPersons). Model Rule 4.2 prohibits a lawyer from communicating with aperson the lawyer knows is represented by counsel unless that person’scounsel has consented to the communication or the communication isotherwise authorized by law or court order. ABA Model Rule 4.2. Alawyer may not cause an otherwise prohibited communication to occurthrough the use of an intermediary. ABA Model Rule 8.4(a); Model Rule4.2, Comment 4. However, Comment 4 also states that “a lawyer is notprohibited from advising a client concerning a communication that theclient is legally entitled to make” and notes that parties to a matter areentitled to communicate directly with each other. The ABA opinion notesthat Comment 4 raises this question: To what extent may the lawyeradvise and assist a client in communicating directly with a representedadversary without violating Rule 4.2 through the acts of the client? Theopinion answers that “without violating Rules 4.2 or 8.4(a), a lawyer maygive substantial assistance to a client regarding a substantive

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communication with a represented adversary.” The opinion notes withapproval the approach taken by the Restatement (Third) of the LawGoverning Lawyers (2000), which suggests that a lawyer may advise aclient about talking points, proposed settlement, and strategies that maybe used during the communication. The line between permissible andimpermissible assistance should be drawn “on the basis of whether thelawyer’s assistance is an attempt to circumvent the basic purpose of Rule4.2” by imposing undue pressure without the opposing party having theopportunity to seek the advice of counsel.

S e c u r i t i e s L i t i g a t i o nSEC Charges Bank Executives With Hiding Large Losses During

2008 Financial Crisis.

by Michael K. Lowman

On October 11, 2011, the SEC charged three former bank executives withmisleading investors about mounting loan losses at United CommercialBank in 2008 and 2009. SEC v. Wu, No. 11-04988 (N.D. Cal. filed Oct.11, 2011), SEC Litigation Release No. 22121 (October 11, 2011). TheSEC alleged that the bank’s former CEO, COO and another senior bankofficer concealed losses on loans and other assets from the bank’sauditors, causing the bank’s public holding company UCBH Holdings, Inc.(“UCBH”) to understate its 2008 operating losses by at least $65 million,which equaled approximately half of the holding company’s reportedlosses. The SEC complaint alleged that the three defendants committedsecurities fraud by deliberately delaying the proper recording of loanlosses and making misleading statements to UCBH’s independentauditors. During 2008 and the first quarter of 2009, the three defendantsallegedly were aware of significant losses on several large loans. Despitethis knowledge, the SEC alleged the three defendants hid this informationfrom UCBH’s auditors and investors during the preparation of UCBH’sForm 10-K. The bank later failed, causing a loss of $2.5 billion to theFDIC’s insurance fund.

The SEC’s complaint charged the CEO with violating Section 10(b) of theSecurities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5, andSection 17(a)(1) of the Securities Act of 1933 (“Securities Act”). The SEC’scomplaint charges the COO and the other senior officer with violatingSections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) andRule 10b-5 of the Exchange Act. Moreover, the SEC charged all threeofficers with aiding and abetting UCBH’s violations of Section 10(b), Rule10b-5 of the Exchange Act, and its SEC reporting requirements, itsfalsification of its books and records, and its false or misleadingstatements made to its auditors. The SEC seeks injunctive relief, civilpenalties, and an order barring the three defendants from serving asofficers or directors of any public company.

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Second Circuit Ruling Expands Applicability Of FINRA Arbitration To

Customers Of Underwriter of ARS Auctions.

by Michael K. Lowman

On September 22, 2011, the United States Court of Appeals for theSecond Circuit held that a purchaser of bond auction services from anunderwriter, UBS Financial Services Inc. (UBS) in this case, is a“customer” entitled to arbitrate its claims against UBS under FinancialIndustry Regulatory Authority’s (“FINRA”) arbitration rules. UBS Fin. Serv.

Inc. v. West Virginia Univ. Hosp., Inc., No. 11-235-cv (2d Cir. Sept. 22,2011). West Virginia University Hospitals, Inc. (“WVUH”) issued a total of$329 million in bonds in three separate offerings in 2003, 2005, and 2006.In a FINRA arbitration, WVUH alleged that a significant portion of thebonds were issued in the form of auction rate securities (“ARS”) at therecommendation of UBS. ARSs are free-floating debt securities with long-term maturities whose interest rates are set through periodic auctions.UBS not only served as both the lead underwriter of the bond issuance,but also the primary broker-dealer that facilitated the auctions whereWVUH's bonds were resold and their interest rates set. In February 2008,the ARS market collapsed for WVUH’s ARS bonds. WVUH alleged that asa result it had to pay significantly higher interest rates on the bonds until itrefinanced its payments. WVUH further alleged that UBS violated Section10(b) of the Exchange Act by advising WVUH to issue ARSs whilewithholding critical information about the ARS market and UBS's role inthe ARS market. UBS filed an action in federal district court seeking toenjoin the FINRA arbitration. The district court denied the motion. UBSappealed. The Second Circuit affirmed, reasoning that FINRA arbitrationrules are not limited only to those parties receiving broker-dealer services.According to the Second Circuit, FINRA arbitration is available to allcustomers of FINRA members. The term “customer” includes a personwho purchases, or undertakes to purchase, a good or service from aFINRA member. The Second Circuit concluded that WVUH was acustomer because WVUH’s purchase agreement with UBS reflected anundertaking by WVUH to pay UBS a fee for the service of facilitating theauctions of WVUH ARSs.

Second Circuit Rules That FINRA Lacks Authority To Enforce

Financial Penalties Assessed Against Broker In Court.

by Michael K. Lowman

On October 5, 2011, the United States Court of Appeals for the SecondCircuit held that Financial Industry Regulatory Authority (“FINRA”) lacksthe authority to file a judicial action to collect fines assessed in a FINRAdisciplinary proceeding. Fiero v. Fin. Indus. Regulatory Auth., Inc., Nos.09-1556, 09-1863 (2d Cir. Oct. 5, 2011). FINRA initiated a disciplinaryproceeding against John Fiero and the registered broker dealer he owned,Fiero Brothers (collectively, the “Fieros”). The FINRA hearing panel

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concluded that the Fieros violated Section 10(b) of the Exchange Act, Rule10b-5, and FINRA Rules of Conduct. FINRA expelled the Fieros, barredthem from associating with any FINRA-member firm, and fined them $1million. FINRA later commenced a state court action against the Fierosseeking a judgment collecting the $1 million fine under the premise thatthe respondents were contractually bound to pay the fine when theyvoluntarily executed their FINRA registration forms. After losing before thestate court, the Fieros filed a declaratory judgment in federal district courtseeking a determination that FINRA had no authority to collect finesthrough judicial proceedings. The district court dismissed the declaratoryjudgment action. In reversing the district court, the Second Circuit heldthat FINRA may not use judicial proceedings to collect fines assessedagainst its members. The court noted that Section 15A(b) of theExchange Act only authorized FINRA to discipline its members “byexpulsion, suspension, limitation of activities, functions and operations,fine censure, being suspended or barred from being associated with amember, or any fitting sanction.” The Second Circuit stated that absentfrom this list was Congressional authorization for FINRA to resort tojudicial actions to enforce its fines. The Second Circuit noted that, bycontrast, Section 21(d) of the Exchange Act expressly authorizes the SECto bring enforcement actions in federal courts and seek judicialenforcement of penalties assessed in the SEC’s favor. Thus, the SecondCircuit reasoned that when Congress enacted the Exchange Act, and thevarious amendments to the Exchange Act, it was well aware of how togrant an agency access to the courts to seek enforcement of its sanctions.The Second Circuit concluded that the lack of such a provision extendingthat authority to FINRA “is significant evidence that Congress did notintend to authorize FINRA to seek judicial enforcement to collect itsdisciplinary fines.”

The SEC Requires a CEO to Repay Incentive-Based Compensation

After Accounting Staffers’ Embezzlement Causes Company

Restatement.

by Michael K. Lowman

On October 24, 2011, the SEC announced that it had filed a settled civilenforcement action requiring, under Section 304 of Sarbanes-Oxley, theCEO of a public company to repay all of his cash and equity-based bonuscompensation received for three years the company restated. SEC v.

Koss Corp., No. 11-00991 (E.D. Wis. filed Oct. 24, 2011), SEC LitigationRelease No. 22138 (Oct. 24, 2011). Michael Koss was the CEO of KossCorporation (“Koss”). The SEC alleged that between 2005 and 2009,Koss’s principal accounting officer and a former Koss senior accountantembezzled over $30 million. Due to alleged inadequacies in Koss’sinternal controls and computerized accounting software, the former Kossaccounting employees were able to circumvent Koss’s internal financialcontrols and manipulate Koss’s accounting records to hide theembezzlement from the CEO and Koss’s auditors. As a result, the SEC

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alleged that Koss issued false and misleading SEC filings and the CEOcertified materially inaccurate financial results. After the embezzlementwas discovered, Koss self-reported the embezzlement to both itsshareholders and law enforcement authorities and restated its financialstatements for 2008, 2009 and the first quarter of 2010. There was noallegation that the CEO knew or should have known about theembezzlement scheme. However, the SEC alleged that Koss improperlyrelied upon sub-certifications of the accounting staff because he failed topersonally verify certain financial functions were actually performed. Kossand the CEO consented, on a neither admit nor deny basis, to the entry ofa judgment enjoining Koss from violating and the CEO from aiding andabetting violations of the reporting, books and records and internalcontrols provisions of the Exchange Act. The CEO also consented to aninjunction against future violations of the financial certification provisionsand to an order requiring him to repay all of the cash and stock options hereceived for those periods pursuant to Section 304 the Sarbanes-OxelyAct, totaling over $610,000. This amount represented the entirety of theCEO’s incentive-based compensation for 2008 through 2010.

W h i t e C o l l a r D e f e n s e & I n v e s t i g a t i o n sJapanese Company Settles FCPA/Antitrust Charges Arising From

Latin America Sales.

by Iris E. Bennett

Bridgestone Corporation, a Tokyo-based manufacturer of marine hose andother industrial products, will plead guilty to conspiracy to violate theSherman Act and the FCPA regarding its alleged involvement inconspiracies to rig bids and to make corrupt payments to foreigngovernment officials in Latin America. Bridgestone and its co-conspiratorsallegedly agreed not to compete for one another’s customers, either by notsubmitting prices or bids, or by submitting intentionally high prices or bidsto certain customers. In addition, Bridgestone allegedly authorized andapproved corrupt payments through third-party sales agents to employeesof state-owned entities in Latin America in order to obtain sales of marinehose products. The DOJ asserted it had jurisdiction because Bridgestoneutilized employees at its U.S. subsidiary, located in Houston, Texas, toaccomplish the relevant sales as well as the services of a U.S.-basedthird-party sales agent to accomplish the alleged improper payments inLatin America. According to the plea agreement, the SentencingGuidelines fine would be between $39.9 million and $79.8 million. Inrecognition of Bridgestone’s cooperation with DOJ’s investigation andremediation efforts, however, the agreed-upon fine is $28 million. See

Criminal Information, United States v. Bridgestone Corp., No. 11-cr-00651(S.D. Tex. Sept. 15, 2011); Joint Motion re Plea and Sentencing, United

States v. Bridgestone Corp., No. 11-cr-00651 (S.D. Tex. Sept. 15, 2011).

Assistance By Contractor Renders Internal Investigation Not

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Privileged.

by Robert R. Stauffer

In Ward v. Equilon Enterprises, LLC, No. 09-4565 (N.D. Cal. July 13,2011), the plaintiff was injured while working for a contractor that wasdoing work for the defendant at an oil refinery. The defendant retained anoutside law firm to conduct an investigation, which it asserted served twopurposes: (1) to provide legal advice as to actions to take to respond toanticipated litigation and regulatory action, and (2) to meet therequirements of the state OSHA regulations. The investigative teamincluded the contractor’s Site Safety Supervisor (“SSS”). Plaintiff sued thedefendant to recover for his injuries and sought discovery concerning theinvestigation and resulting report, which the court allowed. First, the courtrejected the defendant’s claim of attorney-client privilege because of thepresence of the SSS on the investigative team, finding that the SSS’spresence was not reasonably necessary in order to obtain outsidecounsel’s legal advice. Second, the court rejected the defendant’s claimof work product. It found that the SSS’s presence waived the workproduct protection, rejecting the argument that the contractor and thedefendant had a common interest relating to defense of potential claims.The court found that the claims were too different in nature to provide acommon interest, as the claim against the contractor would be a worker’scompensation claim, which would not be contingent on a finding of liabilityfor the accident. The court also found that the investigation wasconducted in part to satisfy regulatory requirements so its results would beshared with employees and other personnel performing work on the sitewhere the accident occurred; the investigation was thus neitherconfidential nor protected from disclosure.

Fine Imposed For Delayed Self-Reporting Of Medicaid Fraud.

by Robert R. Stauffer

There generally is no requirement that a company self-report wrongdoingto enforcement authorities, but self-reporting obligations are becomingincreasingly common in highly regulated industries, such as health care.A Florida statute requires that managed care plans implement andmaintain a strong fraud detection program and self-report any suspectedfraud or abuse within 15 days of detection. Fla. Stat. § 409.91212(6). Thereporting requirements relate not only to occasions of known fraud, butalso to any suspected fraudulent activity. Plans that fail to report possibleviolations are subject to a $1,000 per-day fine. Id. On August 9, 2011,Florida’s Agency for Health Care Administration (“AHCA”) fined HumanaMedical Plan, Inc. $3.4 million in connection with its failure to timely self-report suspected Medicaid fraud. Letters from Fl. Agency for Health CareAdmin. to Humana Med. Plan, Inc. (Aug. 9, 2011). The AHCA assertedthat between September, 2009 and August, 2010, Humana violated bothFlorida law and its Medicaid Managed Care Contract when it failed to

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report suspected or confirmed instances of provider or recipient fraudwithin the prescribed time period after detection. The sanctions related to16 instances of "provider shopping," upcoding, "questionable charges,""services not rendered," and "excessive services." The fine was imposedeven though of the 16 instances, 12 were investigated by Humana and nofraud was found, and four remained under investigation.