Business Litigation Reporter - May 2015

by Goodwin
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California

Primary Jurisdiction Doctrine Calls for Stay Rather Than Dismissal of Case. In Skye Astiana, et al. v. The Hain Celestial Group, Inc., 2015 WL 1600205 (C.A.9 (Cal.) April 10, 2015), the Ninth Circuit reversed the district court’s order dismissing a complaint without prejudice under the primary jurisdiction doctrine. Plaintiffs filed a nationwide class action complaint challenging the “all natural” and/or “pure natural” labels on cosmetic products manufactured by the defendant. The district court granted the defendant’s motion to dismiss under the doctrine of primary jurisdiction, holding that the FDA was uniquely qualified to define the parameters of a “natural” label on cosmetic products and suggesting that the plaintiffs could re-file after the FDA had weighed in. The Ninth Circuit reversed in part, holding that the district court erred by dismissing the case rather than staying it while the parties (or the district court) sought guidance from the FDA. The Ninth Circuit reasoned that where “further judicial proceedings are contemplated, then jurisdiction should be retained by a stay in proceedings, not relinquished by a dismissal.”

No-Hire Clause in Settlement Agreement May Constitute Unlawful Restraint of Trade. In Golden v. California Emergency Physicians Medical Group, 2015 WL 1543049, No. 12–16514 (C.A.9 (Cal.) April 8, 2015), the Ninth Circuit held that a “no re-hire” provision in a settlement agreement could potentially constitute an unlawful restraint of trade under California law. Dr. Golden had previously entered into a settlement agreement with the California Emergency Physicians Medical Group (“CEP”) under which he agreed to “waive any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future.” The district court subsequently granted CEP’s motion to enforce the settlement over Dr. Golden’s objection, holding that Section 16600 prohibited only non-compete clauses (rather than no-hire clauses). On appeal, the Ninth Circuit applied a more expansive view of Section 16600, finding that it could invalidate any contractual provision that caused “any ‘restraint of a substantial character’ [on the ability to practice a vocation], no matter its form or scope.” The Ninth Circuit, however, did not invalidate the no-hire provision, but instead directed the district court to determine whether the clause imposed a restraint of a “substantial character” on Dr. Golden’s medical practice.

Lawsuit Dismissed Where Defendant Hulu Did Not “Knowingly” Disclose Personal Identifying Information. In In re: Hulu Privacy Litigation, 2015 WL 1503506 (N.D. Cal. March 31, 2015), the plaintiffs alleged that Hulu had violated the federal Video Privacy Protection Act (VPPA) by disclosing users’ personal identifiable information (“PII”) to a third party. Specifically, plaintiffs claimed that the Facebook “Like” button on Hulu.com pages caused both the user’s Facebook ID and video choices to be transmitted to Facebook in violation of the VPPA. However, to establish a violation of the VPPA, plaintiffs were required to present evidence that Hulu had actual knowledge that PII – which required disclosure of both the user’s identity and the video information – was being disclosed to Facebook. The court found there was no evidence that Hulu actually knew that Facebook might combine a user’s identity – which was transmitted via a cookie – with the user’s video choice information – which was separately transmitted via the watch page URL – in order to construct PII within the meaning of the VPPA.

Delaware

New Streamlined Arbitration Law for Business Disputes. The Delaware Rapid Arbitration Act (“DRAA”) was signed into law and made effective as of May 4, 2015. The DRAA is an innovative method for fast-track resolution of business disputes. It was adopted to avoid many of the problems with traditional arbitration, including expense, duration, disputes over arbitrability, and disputes over the final arbitration award. Arbitrations under the DRAA are generally to be completed within 120 days of the arbitrator’s appointment (with a maximum 60-day extension) and arbitrators who fail to timely issue a final award face reductions in their fees of between 25% and 100%. The DRAA is streamlined in other respects as well: it assigns threshold arbitrability determinations to the arbitrator, provides that an appeal of a final arbitration award is to be heard directly by the Delaware Supreme Court, and states that, absent an appeal, a final award is deemed confirmed by the Court of Chancery within a fixed period of time. The DRAA is limited to business disputes and requires the parties to agree in writing to arbitrate under the statute.

Spun-Off Subsidiary Not Bound By Former Parent’s Contractual Obligation. In Miramar Police Officers’ Retirement Plan v. Murdoch, C.A. No. 9860-CB (Del. Ch. Ct. Apr. 7, 2015), the Court of Chancery held that a corporation created in a spin-off transaction was not bound by provisions in a contract that its former parent corporation had previously entered into. In 2006, News Corporation had entered into a settlement agreement with a 20-year duration. In 2013, News Corporation transferred its newspaper and publishing business to a new subsidiary (“New News Corp.”) and then spun off New News Corp. to its shareholders. New News Corp. then took action allegedly contrary to the 2006 settlement agreement, and the plaintiff sued, claiming that the new company was bound by the settlement agreement. The Chancery Court disagreed and dismissed the suit. It held that although News Corp. (the parent entity) was still bound by the settlement agreement, the spun-off subsidiary was not, since it was not a party to that agreement, the settlement agreement by its terms did not bind asset recipients in a spin-off transaction, and the spin-off agreement itself did not assign or transfer News Corp.’s obligations under the settlement agreement to New News Corp.

Massachusetts

Insurer’s Duty to Defend Doesn’t Include Prosecuting Counterclaim. In Mount Vernon Fire Ins. Co. v. VisionAid, Inc., No. 13-12154 (D. Mass. Mar. 10, 2015), the court held that an employer’s liability insurer had no obligation to prosecute a counterclaim that the employer had brought against an ex-employee. The Court held that because the policy only covered claims asserted against the insured, forcing the insurer to fund the employer’s counterclaims “would fundamentally rewrite the Policy.” The Court distinguished the “in for one, in for all” rule adopted in Massachusetts, which requires insurers to defend all claims asserted against the insured, not just those covered by the policy. Finally, the Court rejected the employer’s arguments that the insurer had the obligation to pursue the counterclaim because it could defeat liability or was inextricably intertwined with the defense, finding that the counterclaim was not necessary to defeat the underlying discrimination claim and sought affirmative relief that went beyond simply defeating the claim.

Breach of Implied Covenant Requires Proof of Bad Faith. In Robert and Ardis James Foundation v. Meyers, No. 13-P-1169 (Mass. App. Ct. Feb. 12, 2015), the Appeals Court of Massachusetts held that a plaintiff claiming breach of an implied covenant must establish that the defendant acted in bad faith, not simply that the plaintiff’s good faith expectations had not been met. Under the parties’ agreements, the plaintiff provided funds for the defendant to purchase shares of stock in exchange for a right to participate in the proceeds of the sale of those shares, but the agreements did not provide when the shares would be sold. The plaintiff claimed that the defendant had breached an implied covenant of good faith and fair duty by refusing the plaintiff’s demand to sell the shares. The Appeals Court disagreed, noting that the scope of the implied covenant of good faith and fair dealing “is only as broad as the contract that governs the particular relationship.” The court concluded that the defendant’s decision not to immediately negotiate a termination of the agreements was not an effort to extract undue concessions. The court also emphasized that the plaintiff had to prove that the defendant had acted in bad faith, not just that the plaintiff had a good faith basis for its expectation as to how the defendants would act. [Disclosure: Goodwin Procter served as counsel for the defendant.]

Demand Futility Requires Allegations Showing Substantial Likelihood of Personal Liability. In Liang v. Berger, et al., Nos. 13-cv-12816-IT, 13-cv-13097-IT (D. Mass. Mar. 9, 2015), the District Court, applying Delaware law, granted a motion to dismiss a shareholder derivative suit on the grounds that plaintiff did not make a demand on the board of directors and did not adequately allege that demand would have been futile. Plaintiff alleged that the outside directors were interested because they faced personal liability, and therefore demand would have been futile. But the court noted that the threat of personal liability must be “substantial” to excuse demand. And the court held that the plaintiff “has not put forth sufficient particularized factual allegations demonstrating that the outside directors are subject to a substantial likelihood of liability … because they do not sufficiently plead that the outside directors either consciously ignored their duties under Caremark or acted with intent in authorizing the disclosure of materially false or misleading statements.” Instead, the plaintiff had only alleged that the outside directors had actual or constructive knowledge regarding the false or misleading statements by virtue of their membership on the Audit committee. The court held that “simply pleading that the director defendants ‘caused’ or ‘caused to be allowed’ the company to issue the certain statement is not sufficiently particularized to excuse demand.”

New York

Shareholder Derivative Action Alleging FCPA Violations Cannot Be Litigated in Federal Court. In Pritika v. Moore, 2015 U.S. Dist. LEXIS 31793 (S.D.N.Y. Mar. 16, 2015), the plaintiffs filed a shareholder derivative action in federal court asserting that Avon’s directors breached their fiduciary duties based on the company’s alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The court dismissed for lack of subject-matter jurisdiction because the plaintiffs’ breach of fiduciary duty claim arose under state law. The plaintiffs argued that their claim necessarily raised issues of federal law involving the FCPA, but the court rejected that argument both (1) because the FCPA issues were not “significant to the federal system as a whole” and hence were not sufficient to create federal jurisdiction over a state-law claim, and (2) because exercising jurisdiction “would be tantamount to recognizing a private right of action under the FCPA, … an outcome directly contrary to Congress’ apparent intent.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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