• An Insider Trader: Martoma (SAC Capital) Guilty Verdict Upheld

    After a slew of appellate reversals on insider trading cases, the Second Circuit has upheld the conviction of former hedge fund trader, Mathew Martoma.  U.S. v. Martoma, F.3d  2017 WL 3611518 (2nd Cir. 2017). Martoma worked for SAC Capital, a now defunct firm of Steven A. Cohen, which entered a guilty plea to insider trading in 2013 and paid a $1.2 billion penalty. 

    Mr. Martoma set up relationships with doctors who were experts on Alzheimer’s disease. Dr. Sidney Gilman was one of the doctors who had 43 consultations with Mr. Martoma, who paid him $1,000 per hour. Dr. Gilman had access to the results of the clinical trials of the drug at the pharmaceutical companies, Elan and Wyeth.  Mr. Martoma also consulted with Dr. Joel Ross, who was one of the principal investigators on the trials and paid him $1,500 per hour. Both doctors shared information about the trials as well as the dates the safety committee (expert panels pharmaceutical companies hire to review the results) met, information that they had agreed to keep confidential in their engagements with the pharmaceutical firms.  

    Mr. Martoma increased SAC’s holdings in Elan and Wyeth during the time of these meetings because the trials looked promising, according to the doctors.  However, when Dr. Gilman was finally “unblinded,” i.e., permitted to look at the actual data, he told Mr. Martoma that there were negative issues.  Based on this disclosure, Mr. Martoma talked with Mr. Cohen and SAC reduced its stock holdings in the two companies. When Dr. Gilman publicly presented the results, the stocks of Elan and Wyeth dropped 42% and 12% respectively. The trades that Martoma  and Cohen before the release of the negative information gave SAC $80.3 million in gains and $194.6 million in averted losses. Martoma  received a $9 million bonus for the Elan and Wyeth stock successes. He left behind his Florida estate and began serving a 9-year sentence in November 2014. 

    Martoma appealed his guilty verdict arguing that the jury should have been instructed that he did not have a close personal relationship with Dr. Gilman, something that appeared to be required following the United States v. Newman, 773 F.3d 438 (2d Cir. 2014) decision. In addition, the U.S. Supreme Court decision, Salman v. U.S., 137 S.Ct. 420 (2016), held that gaining confidential, inside information to a trading relative or friend was insufficient to establish insider trading unless the tipper’s goal was to obtain money, property, or something of value.  Mr. Martoma said Dr. Gilman did not make money on the stock. However, the court held that Dr. Gilman did receive compensation for talking with Dr. Gilman and that a jury could properly conclude that there was sufficient evidence of intent because of those payments to convict Mr. Martoma for insider trading.

    The court also held that the jury instructions on relationship requirements were sufficient.  If the relationship is one of benefit to both parties, the issue of a close relationship is not important in establishing the crime of insider trading. The court illustrated with an example:

     Imagine that a corporate insider, instead of giving a cash end-of-year gift to his doorman, gives a tip of inside information with instructions to trade on the information and consider the proceeds of the trade to be his end-of-year gift. In this example, there may not be a “meaningfully close personal

    relationship” between the tipper and tippee, yet this clearly is an illustration of prohibited insider trading, as the insider has given a tip of valuable inside information in lieu of a cash gift and has thus personally benefitted from the disclosure.

    This clarification is an important one for future cases.  Casual sharing of information with friends and family and only the expectation of love in return may not be insider trading.  However, compensation paid to an insider or tippee for confidential information still constitutes insider trading. The decision, was 2-1, so, if Mr. Martoma is game, there may be  an en banc hearing by the full circuit, or, yet another U.S. Supreme Court decision to clarify insider trading.

    DISCUSSION STARTERS

    Give a summary of the facts in the Martoma case.

    Explain what is and is not insider trading in relationship tipper/tippee cases.

     

     

  • The Cash Bail Bond: State Laws Prohibiting It Are Under Constitutional Challenges in Federal Court

    New Jersey, New Mexico, and Maryland now have statutes that prohibit the use of cash bail bonds. In New Jersey, for example, those who are arrested are not required to post bond to be free prior to trial.  However, they are fitted with electronic devices that monitor their locations and are required to check in with the court system every two weeks. 

     These types of reforms are hard fought because the issue of cash bail bonds has captured the attention of documentary filmmakers, JayZ, and the bail bond industry, spearheaded by Beth Chapman, the president of the Professional Bond Agents of America.  Ms. Chapman is married to Duane Chapman, former star of the  TV series, “Dog the Bounty Hunter.”  Ms. Chapman’s association has issued a “Declaration of War” in her association’s newsletter, vowing to fight the elimination of the cash bail bond, which she argues is an effective tool in keeping communities safe. Alan Feuer, “In National Battlem Over Bail Bond Industry, New Jersey Is on the Front Line,” New York Times, August 22, 2017, p. A20.

     Other groups have filed suit in federal district court challenging the constitutionality of the laws. Lexington National Insurance Corporation, a major underwriter for the bail-bond industry has filed suit in New Jersey.  The suit is a class-action suit with Brittan E. Holland as the lead plaintiff. Mr. Holland was arrested and had the cash to post bail, but, under New Jersey’s law, was unable to gain his freedom because he was required to wear an ankle bracelet.  The suit alleges that as a result, he was deprived of basic liberties pending his trial. You can read a copy of the complaint here. His arguments are based on the Fifth and Fourteenth amendments to the U.S. Constitution.  Mr. Holland was arrested following a bar fight over the Philadelphia Eagles in a bar in Joe’s Tavern in Winslow Township, New Jersey.

     The arguments against the cash bail system relate to the inequities in treatment.  Poor families cannot afford to post cash bonds with the result being that those defendants remain in jail pending trial.  On the other side are data indicating that the release of those arrested with monitoring devices indicate that they are simply committing more crimes when released and present a greater danger to society.

     There is a similar suit pending in New Mexico.  Texas is facing similar litigation because a federal judge ruled there that all defendants charged with misdemeanors must be released without posting bail. Forty percent of those released in Texas have failed to appear for trial. The county challenging the judge’s order has an appeal pending before the Fifth Circuit. In the matter of O'Donnell, et al v. Harris County, Texas, ____ F. Supp. 3d ____ 2017 WL 1735456 (S.D. Tex. 2017).

     DISCUSSION STARTERS

     Explain the arguments for no-cash releases.

    Explain the arguments against no-cash releases. 

  • Pepperdine Univ. Wins Lesbian Discrimination Trial; Case Nonetheless Significant for LGBT

        

    Two lesbian members of the Pepperdine University female basketball team who were in a romantic relationship sued the school in 2014. They claimed harassment, discrimination, and privacy infringement by the basketball coach and other staff of the Athletic Department. Both players received full scholarships and, as incoming freshmen, were excited to join the team. But once they arrived they were dismayed by comments allegedly made by the coach. Per the complaint, the coach told them, “Lesbianism isn’t tolerated here. Lebianism is a real and big problem in women’s basketball.” Further, he allegedly told the girls their lesbian relationship would “cause the team to lose games.” An academic coordinator for athletes at the school asked, “Are you gay? Do you push your beds together? Do you sleep together?” When the girls reported these occurrences to school authorities, allegedly no action was taken.

    The university asserted it conducted a thorough investigation and found no evidence to support plaintiffs’ claims. It argued that the “alleged intrusion” into the women’s person lives was untrue, that any comments or inquiries resulted from a desire to improve team dynamics, and any negative statements made about the effect of two women dating while playing on the same team were part of a desire to end off-court distractions.

    The three-week federal trial was just completed in late August, 2017. The jury found insufficient evidence to determine that the university targeted the plaintiffs based on their sexual orientation.

    The case is nonetheless very significant for LGBT rights because it marks one of the first times that a discrimination claim based on sexual orientation has gone to trial under the landmark law Title IX, adopted in 1972, that prohibits sex discrimination in any federally funded education program or activity. Title IX bars sex-based harassment and bullying, as well as sexual assault. Included by judicial decision is discrimination based on sexual orientation. Harassment encompasses annoying or alarming behavior including name-calling, images and graphics, demeaning or threatening statements, and action that is physically threatening or humiliating. If the school tolerates any form of gender discrimination, or inadequately addresses it, or simply ignores it, such inaction violates Title IX. Given that the vast majority of schools receive at least some federal funding, the breadth of Title IX’s reach is significant.

    Pepperdine is affiliated with the Churches of Christ. The home page on its website begins, “Pepperdine is a Christian university committed to the highest standards of academic excellence and Christian values, where students are strengthened for lives of purpose, service, and leadership.” Further, “With Christian values infusing all aspects of student life and administrative policy, Pepperdine has established an environment that assures both academic and personal betterment.” Several years ago, the school allegedly denied repeatedly a request by its LGBT students to create a support group. The Dean of Students reportedly said the organization would conflict with the school’s religious teachings on sexual morality. Its website currently states the following: “Pepperdine believes that students who experience same-sex attraction and gender dysphoria [an emotional state characterized by anxiety or unease] are best supported if they are able to share their questions, struggles or their self-understanding with others in a trusted environment. . . . Thus, the Counseling Center offers a voluntary support group for LGBT (and questioning) students, overseen by an experienced counselor. Also, each school has an informal or officially recognized LGBT student organization that welcomes all students to participate.."

    Although the jury found for the school on the facts, the circumstance hat the case proceeded to trial helps to reinforce the legal principle of a broad interpretation of Title IX’s prohibition of sex discrimination to include sexual orientation.

    For more information, click here.

    DISCUSSION QUESTION:

    Explain how a case lost on the facts might still be important to the litigants as establishing or reinforcing a legal principle.

  • An Update on the Bridal Store Bankruptcy: The Lawyer Delivers the Dresses

    On July 17, 2017, the blog post for the day was on the bankruptcy of Alfred Angelo, a 61-store bridal boutique that had gone into Chapter 7 bankruptcy.  The result was that brides and bridesmaid were left with no dresses and their deposits tied up in bankruptcy.  However, attorney Patricia Redmond, the bankruptcy lawyer in charge of the bankruptcy began receiving a deluge of calls and e-mails from the brides, mothers of the brides, bridesmaids, and grooms.  She was struck by the compelling stories and the subject lines of e-mails, “I WILL BE KICKED OUT OF THE WEDDING IF I DON’T GET MY DRESS.” Lillian Rizzo, “I Now Pronounce You . . . America’s Most Beloved Bankruptcy Lawyer,” Wall Street Journal, August 17, 2015, p. A1.

    Doing yeoman’s work, Ms. Redmond sorted through the 7,300 + messages and determined which stores had the dresses and prioritized them by wedding date. Douglas Hanks, “Who Can Brides Call for Help After Alfred Angelo Shut Down? This Miami Lawyer,”  Miami Herald, July 14, 2017.  She found that there were 45 of the 61 stores that had not gotten the dresses delivered before their doors were shut with only 24 hours notice. Once she had the stores, she arranged to have former employees, landlords, and even a former law students of hers open the stores for three hours to allow the notified customers to come and pick up their dresses, veils, garters, and anything else for which the stores had received payment (70% of the paid-for merchandise was dresses for the brides). Ms. Redmond even flew to Baltimore to handle the store there because it was the largest store with the most customers affected. Ms. Redmond then took the remaining dresses to her office, where the sorting continues, pick-ups are made,  and shipments go out daily. The bankruptcy court had allotted $300 per store for administrative expenses, and Ms. Redmond is using that money to cover the costs of the shipment.

    Any dresses not picked up will be sold through an auction, with the proceeds going into the bankrupt store’ s estate. 

    Such involvement is rare. Ms. Redmond provided all the work on her own time.  She said that she “saw miracles happen” as merchandise was connected with brides. Ms. Redmond has a daughter and a niece about to be married and said that she saw the e-mails and felt that she had to do something.

    Ms. Redmond was not obligated to take such actions.  Normally, the customers who had paid for goods or made deposits on merchandise would simply have a priority positions above general creditors under the consumer deposits level of priorities.  Ms. Redmond had the authority to turn over the goods that were in existence at the time of the bankruptcy, i.e, the dresses were made and in the store because those dresses belonged to the brides.

    FYI: Ms. Redmond was married in 1975, and bought her dress off the rack.  No deposits, no holding, no problems.

    DISCUSSION STARTERS

    Explain what the trustee did and why.

    Discuss what the results would be if the dresses had not been returned. 

  • FBI Search of Manafort’s Home; No-Knock Warrants

                         

    President Trump’s former campaign chair, Paul Manafort, is being investigated by the FBI concerning possible collusion by the Trump campaign with Russia during the 2016 presidential election. Prior to Manafort’s involvement with Trump’s election efforts, he was an advisor to a Kremlin-backed political party in the Ukraine and to its former leader for almost ten years. The FBI special prosecutor (a lawyer appointed to investigate and potentially prosecute a particular case of suspected wrongdoing for which a conflict of interest exists for the usual prosecuting authority on the case), Robert Mueller, is apparently also focusing on Manafort’s tax records and lobbying activitiues overseas. Manafort denies any wrongdoing.

    Manafort worked as Trump’s campaign chair from March to August, 2016. He was forced to resign because he came under scrutiny for his past work consulting in Ukraine. A focus of the investigation is whether Trump or any of his associates colluded with Moscow or committed any crimes. As part of the investigation, agents are looking into activities and financial dealings of Trump associates.

    On July 26, 2017, at least twelve FBI agents executed a pre-dawn no-knock search warrant at Manafort’s home in northern Virginia, apparently seeking banking records and tax documents. A search warrant represents authorization given to police by a judge to search a residence. Only a judge can issue a warrant. A judge will issue a warrant only upon sworn affidavits by police establishing probable cause to believe that evidence of a crime is located in the place the police seek to search. Probable cause means a threshold amount of evidence that would lead a reasonable person to believe that evidence of criminal activity will be found. The agents who searched Manafort’s home were observed leaving with various records. The raid was a surprise to many because Manafort had reportedly been cooperating with investigators, providing relevant documents upon request.

    Generally, the Fourth Amendment right of the Constitution against illegal searches and seizures, requires knock and announce before executing a warrant. This means officers, even with a warrant, cannot immediately force their way into a residence. Rather, they must first knock, identify themselves, and state they have a warrant. They then must wait a reasonable amount of time for the occupants to let the officers inside. But courts recognize that, by giving notice, sometimes a risk arises that occupants will destroy evidence before responding to the officer’s knock, or a risk of injury to officers might result from occupants who fear police will find incriminating evidence. In those situations, the court can grant authorization to law enforcement to enter the premises to be searched without first giving notice. Warrants authorizing such entry are called no knock. The warrant issued to search Manafort’s residence was a no knock warrant. In recent times, officers have increasingly relied on no-knock warrants in drug cases, particularly in major cities. They are not the norm in white collar investigations.

    Rush Limbaugh, conservative radio commentator, described it this way: “Here you’re sleeping – you’re soundly sleeping – and all of a sudden lights and sirens appear outside your house” and police enter.

    Additionally, the FBI has issued grand jury subpoenas to several banks with which Manafort was associated. A grand jury is a body of people who decide whether the police have probable cause to make an arrest. Grand juries do not decide the question of guilty or not guilty. A subpoena is a written directive issued on behalf of a court or legal entity requiring someone to appear in court as a witness or to provide documents as evidence.

    Stay tuned to the news for updates on the status of the investigation.

    For more information, click here.

    DISCUSSION QUESTION:

    What specific facts in an investigation might justify a court granting a no-knock warrant?

  • Costco Ordered to Pay Tiffany $19 Million for Trademark Infringement

    It all began in 2012 when a Tiffany’s customer wrote to Tiffany’s to complain that the high-end retailer was selling its engagement rings at Costco.  That was news to Tiffany’s because the company was not aware of the sales and had not authorized them. An investigator went to the Huntington Beach Costco and saw the rings, complete with the Tiffany brand and referred to by the Costco sales personnel as “Tiffany rings.” Interestingly, Costco did not offer the rings online, something that Tiffany alleged was done to avoid detection of the infringement. 

     Tiffany filed suit in 2013 (Tiffany & Company and Tiffany (NJ) LLC v. Costco Wholesale Corp, U.S. District Court, Southern District of New York, 13-1041.  In 2014, the case survived a Costco motion for summary judgment.  Costco had argued that “Tiffany” was a generic term used to describe a certain type of engagement ring setting, i.e., a “Tiffany setting.”  In a Costco motion for summary judgment, the court held that there was a genuine issue of fact on the question of the generic meaning and/or infringement.  Tiffany and Company v. Costco Wholesale Corporation, 994 F. Supp. 2d 474 (S.D.N.Y. 2014) Following a trial, in September 2015, a federal judge held that Costco did indeed infringe the Tiffany trademark. Tiffany & Co. v. Costco Wholesale Corp., 127 F. Supp. 3d 251 (S.D.N.Y. 2015). The verdict in that trial was followed by a separate trial for the determination of Tiffany’s damages. A federal judge has now awarded Tiffany $11.1 million for trademark infringement and $8.25 million in punitive damages.  Tiffany’s original claim was for $2 million in damages.  Costco has indicated that it will appeal the decision.

    The punitive damages were based on Costco’s lack of good faith. Under New York law, punitive damages may be awarded only when the wrongdoing is not simply intentional, but involves a high degree of moral turpitude and demonstrates wanton dishonesty that implied criminal indifference to civil obligations. The court found such willful conduct on Costco’s part. 

    Costco has argued that use of "Tiffany" is generic, in the same way that we use "Kleenex" instead of tissue or "Xerox" instead of copy. However, the court found that the Tiffany ring is not a generic term.  The court found that Costco selling the rings with the description “Tiffany style,’ even though the rings were stamped with generic marks.The Tiffany style is unique because the diamond is not held in a bezel setting.  Rather it is lifted up so that it better reflects the light.

    Tiffany had presented sufficient evidence of consumer confusion.  Also, Costco used a word mark identical to Tiffany’s registered trademark, which added to the confusion. Further, the court held that the name “Tiffany style” was not a generic term because 9 of 10 consumers surveyed believed that the use of the word “Tiffany,” was a brand identifier. In other words, Costco customers were misled about the nature of the rings they were buying. The Tiffany style is unique because the diamond is not held in a bezel setting.  Rather it is lifted up so that it better reflects the light. The punitive damages were based on Costco’s lack of good faith. Under New York law, punitive damages may be awarded only when the wrongdoing is not simply intentional, but involves a high degree of moral turpitude and demonstrates wanton dishonesty that implied criminal indifference to civil obligations. The court found such willful conduct on Costco’s part.

     DISCUSSION STARTERS                                                 

    1.  Explain the court process in the case.
    2. Is “Tiffany ring setting” a generic term?  Why is that issue important?

  • Google, the Employee Memo on Diversity, and Firing Employees

    p James Damore, a young engineer who worked for Google was fired for circulating a memo (which eventually went public and viral) that raised issues and questions regarding the reasons Google and the Silicon Valley were struggling with gender diversity.  Titled, “Google’s Ideological Echo Chamber,” and written after Mr. Damore had attended a company diversity training seminar,  the memo raised the possibility that not all disparities between men and women were the result of discriminatory treatment. He wrote that “differences in distribution of traits between men and women may in part explain why we don’t have 50% representation of women in tech and leadership.” Heather Mac Donald, Don’t Even Think About Being Evil.” Wall Street J., August 15, 2017, p. A15.  He suggested that placing people in jobs for which they are not well suited in order to meet diversity goals means that the individual will struggle or the work would suffer. He urged Google to challenge current thinking by looking to “the science of human nature.” He wrote that managerial goals for increased diversity have resulted in discrimination.

    Mr. Damore was fired by Google for violating the company’s code of ethics by “advancing harmful gender stereotypes in our workplace.” James Damore, “Why I Was Fired By Google,” Wall Street Journal, August 12-13, 2017, p. C2. Read Google’s VP of Diversity’s response here.

    In California, unless specified, an employee relationship is presumed to be at-will.  In an at-will relationship, an employee-at-will can be fired for cause, no cause, or for economic reasons.  In practice, employers generally document employee performance and document their reasons for termination of employees at will.  In addition, there are some offenses, listed in employee handbook materials or in documents employees sign when hired, that result in automatic termination.  One of those reasons for automatic termination at Google is violation of the code of ethics, the reason given to Mr. Damore for his termination. However, the Google code of ethics does not contain the language on gender stereotypes referenced in the company’s termination of Mr. Damore. The code has provisions that prohibit discrimination, harassment, and bullying, but the stereotypes issue is not discussed in the code. 

    The Damore memo became an embarrassment for Google as it struggles to present itself as a diverse company. The company had to cancel a meeting to discuss diversity issues because of fears about safety for employees.  There is disagreement about Mr. Damore’s termination. However, Google’s CEO, Sundar Pichal, wrote, “We strongly support the right of Googlers to express themselves, and much of what was in that memo is fair to debate, regardless of whether a vast majority of Googlers disagree with it.” Jack Nicas, “Google Cancels Meeting on Diversity,” Wall Street Journal, August 11, 2017, p. B1. 

    There are a significant number of employment-at-will cases in California and other states, brought by employees who challenge their dismissal on grounds of public policy or violation of the law.  One of the frequent challenges is retaliatory dismissal of employees who report legal or safety issues about the company. In Mr. Damore’s case, he raised issues about the Google diversity policy, but there was no whistleblowing situation.  Many experts, however, have noted that Google will work out some kind of settlement agreement with Mr. Damore over his termination because of the public relations issues and the issues and information that discovery and depositions would uncover should there be litigation.

    Apart from the legality of the termination is the management issue of the signal that is sent when an employee raises questions about company policies.  Such terminations could have a chilling effect on the willingness of employees to raise issues or concerns. 

    DISCUSSION STARTERS

    What did the memo discuss?

    What are the risks of terminating an employee for raising issues and concerns?

  • Panhandling: The Constitutional Problems with City Ordinances Against Begging

    Since 2006, the number of cities with ordinances against panhandling has increased 43%.  Panhandling, or asking passers-by for money, is generally an activity targeted by commercial property owners who want to remove the panhandlers from their properties because of customer complaints and public safety issues.  Panhandlers walk through parking lots, causing safety issues as  cars swerve to avoid them.  Those who stand along freeway exits and entrances or turn lanes in city traffic create hazards when the step into the street to collect from drivers.  Many of the ordinances are written to address these safety issues.  For example, in Houston, the ordinance prohibits panhandling in roadways, near ATMs, and outdoor cafes.  

    However, the increased regulation has also resulted in increased litigation.  Backed largely by the ACLU, the ordinances are being challenged on constitutional grounds.  A suit challenging the constitutionality of the Houston ordinance was filed in May.  The suits focus on constitutional protections of speech.  While the safety “time and place” regulations have passed constitutional challenges (the roadway prohibitions), federal judges have held that “a repeated request for money or other thing of value” does not threaten public safety. 

    Underlying many of the lower court decisions is the precedent set by the U.S. Supreme Court in Reed v. Town of Gilbert, Arizona, 135 S.Ct. 2218 (2015).  In that case, local churches challenged the town of Gilbert’s length restriction on the amount of time churches and ono-profit groups could post signs for services or events. In a unanimous decision, the justices found that the speech being curbed was based on its content and thereby subject to the strictest level of constitutional scrutiny because of its chilling effect on speech. That level of strict scrutiny required proof of a compelling state interest in the regulation as well as proof that the regulation is drawn as narrowly as possible.  The court noted that an ordinance that was designed to prevent the safety hazards that signage can create (size, location, etc.) would be content neutral and satisfy the compelling state interest requirement.  However, exemptions for political signs, yard-sale signs, direction signs, and construction signs, made the ordinance one that was targeting churches and non-profit groups.

    Since the Reed decision, courts have labeled panhandling restrictions a form of content-based speech and subjected the regulations to strict scrutiny. Few of the panhandling laws have survived this level of scrutiny.  Ordinances in Akron, Ohio and Grand Junction, Colorado have been repealed following judicial challenges.  The interesting phenomenon is that a judicial challenge in one city often results in repeal of other cities’ ordinances in the same state, Dayton, Toledo and Youngstown repealed their ordinances after the Akron suit, and Denver, Aurora, Boulder, and Colorado Springs repealed theirs after the Grand Junction victory. Joe Palazzolo, “Courts Overturn Panhandling Laws,” Wall Street Journal, August 9, 2017, p. A3.

    The panhandling statutes generally prohibit “vocal appeals” for money.  As a result, many of those who once asked for money now only hold signs and say nothing.  They are then technically in compliance with the law.  Further, their use of signs subjects them to the precedent of the Reed case.  The panhandlers have begun to study the law and are able to avoid arrest and fines by conforming their activity to the ordinance language. The new trend is called “signing.”  They are no longer panhandling, so the regulations do not apply. Their “signing” activity does, however, enjoy significant constitutional protection.

    DISCUSSION STARTERS

    Explain the constitutional issues in panhandling.

    Discuss what a constitutional ordinance would prohibit.

  • Fire Ball Ride Accident Kills and Injures; The Role of Discovery and Expert Witnesses

          

     

    A terrible accident occurred on a Fire Ball ride at the Ohio State Fair and sent passengers flying. A teenager was killed and seven more were injured.   Five remain in critical condition a week after the incident. The best description of the ride is the top picture that accompanies this post. The coroner’s report indicates that the teen died of blunt force trauma after suffering injuries to his head, trunk and lower extremities.

    The manufacturer has now reported that “excessive corrosion” on the interior of the gondola support beam reduced the beam’s thickness and led to the accident. Per experts , corrosion can be caused by the type of metal used, type of coating, weather to which the amusement is exposed, age of the ride (the Fire Ball in question had been in use 18 years), water, salt and acidity levels. Motion also can speed up corrosion. Further, as something is shaken around, new surfaces can be exposed which can also lead to corrosion.

    Organizations that invite the public to their premises have a duty to take reasonable steps to protect the safety of visitors to the property. This requirement includes a need to inspect the premises periodically at reasonable intervals to locate and remedy unsafe conditions. What is a reasonable frequency depends on the circumstances. The greater the likelihood of a dangerous condition developing, the more frequent must be the inspections. For example, the owner of a catering house with, say, one banquet on a Monday night, does not need to inspect with the same frequency as on a Saturday night when perhaps five banquet halls are in service. The more people present at a given location, the greater the likelihood someone will inadvertently create a potentially dangerous condition, such as spilling coke on the floor making it slippery. Also, the more people present at a facility, the greater the likelihood someone will encounter an existing dangerous condition and be hurt.

    Amusement parks and fairs have a duty to make those periodic inspections of their facilities including the condition of the rides. Corrosion occurs slowly over time, ostensibly resulting in substantial opportunity for inspectors to detect the problem and undertake whatever remediation would have been needed.  Thus, if the corrosion was on the outside of the ride, we could conclude that whoever performs the inspections should have discovered the deterioration long before it reached serious proportions. Once discovered, repairs should have been made. Therefore, at first blush, the fact the Fire Ball’s corrosion was not discovered suggests negligence (carelessness) on the part of the inspector. Based on respondeat superior (the legal rule that holds employers responsible for the negligent acts of their employees), the inspector’s employer – the park, the fair, or the county – would also be liable.

    However, facts involved in lawsuits are frequently not as clear cut as they may first appear. Indeed, the circumstance here is much more complicated. Turns out the corrosion on the ride was internal and therefore not easily discoverable. Checking for internal corrosion requires special equipment such as ultrasound, experts say. State documents show that an independent company that specializes in in-depth ride testing had cleared the amusement for use as recently as October, 2016. That company used ultrasound in addition to a visual check of the ride’s structural components.

    So, was anyone negligent? The fair? The manufacturer? The inspectors? The ride operators? The facts are not at all clear. The purpose of discovery, the procedures prior to trial whereby the parties exchange information, is a critical part of litigation because it serves to unearth the facts.  As the discussion herein on corrosion indicates, expert witnesses (people with specialized knowledge relevant to the case and not likely to be known by lay people) will be important at trial to help jurors understand the corrosion issues involved with the ride and the accident. Also, keep in mind that places of public accommodation (fairs, theaters, stadiums, hotels, restaurants, etc.) are not insurers of guests’ wellbeing. The fact that someone was injured on their premises or while using their products does not necessarily mean they are liable. Liability results only if someone’s negligence caused the accident. Who if anyone in the Fire Ball accident is liable remains to be determined.

    Note: Following the accident, the manufacturer of the ride sent a notice to all Fire Ball operators, advising them to re-inspect the ride including the thickness of the gondola support beam and any cracks and corrosion. The alert also advised that the device’s joints should be tested magnetically. This is an important precaution to help the manufacturer avoid further accidents and, if any occur, reduce any liability it might have.

    For more information, click here.

  • Who Pays When a Contractor Cuts a Cable that Cuts off Vacations?

    As the video explained, PCI Construction was doing work and severed an underground cable to overhead transmission lines that resulting in power to the Hatteras and Ocracoke Islands being cut.  With no power to the islands except limited emergency generators, authorities ordered all those who were no permanent residents to evacuate the islands.  Non-residents who remained on the islands were charged with misdemeanor 2 violations, carrying 60 days in jail and $1,000 in penalties. Over the course of two days, 60,000 tourists left the islands. The islands went for a week without power before the cable could be repaired. The mom-and-pop businesses earned no income for that week. Those islands are summer destinations, with year-round residents dependent on the summer trade for the annual incomes.  There were 9,000 homes without power, in addition to the businesses affected.

    When the power was restored, the tourists began returning, but the week was still lost. Maggie Astor, “After a Week Without Electricity, Businesses in the Outer Banks Add Up Their Losses,” New York Times, August 5, 2017, p. A12. Business owners were asked to submit their loss figures to county officials who will negotiate with PCI for payments of those damages.

    Commercial contractors are generally required to carry what is known as Commercial General Liability insurance (CGL). The purpose of the insurance is to cover losses or injuries to third parties harmed as a result of any accidents during construction.

    Because PCI was under contract with two counties for the power transmission work, the third parties would be the residents and businesses within those counties. The insurance covers “occurrences” during construction.  Generally, the term “occurrence” includes mistakes and missteps, but no events that could have been foreseeable as part of the work. Everything from a dropped hammer to an accidental severing of a cable would be covered.  

    However, the key to this particular contractor and whether there is insurance coverage is whether the policy covers consequential damages. Consequential damages are those damages that result economically because of the occurrence, i.e., accident.  In the PCI occurrence, the harm is not property or personal injury; it is largely economic damage, the loss of summer income for one week. Consequential damages can be excluded under CGL. In addition, some types of activities are excluded from coverage.  For example, damages from excavation are usually excluded unless the parties negotiated a special policy rider.

    Typically, under CGL policies, economic damages are limited to the contracting parties and their losses for delays.  The islands power loss is unique and may be why the county is asking the businesses for numbers on their losses for “negotiation” because the coverage, for whom, and how much may be an issue depending upon the terms of the counties’ protections under the policy.

    DISCUSSION STARTERS

    What kind of damages are consequential damages?

    What lessons do you learn about checking CGL insurance of your hired contractors?

  • Teamsters on Trial for Harassing Top Chef Staff; Legal Picketing or Extortion?

       

    Top Chef, a TV reality competition show, filmed some episodes in a Boston suburb in 2014. While there, five members of the Teamsters Union Local 25 allegedly intimidated the show’s staff. Four are currently on trial for their actions and face up to 20 years in prison. The fifth pled guilty and was sentenced to six months home confinement, two years probation, and $34,123 in fines and restitution.

    The Teamsters had discovered that the show was filming at at the Steel & Rye Restaurant without using any union members. Top Chef, which is currently in its 15th year on the air, brought some of its own nonunion personnel to Boston, and the restaurant hired some additional nonunion workers. Other restaurants had considered participating in the shoot but backed out when they received threats from the union.

    The four defendants allegedly used physical violence, threats, and racial and homophobic slurs toward the crew and performers of Top Chef, with the goal of intimidating them to hire union labor. Additionally, the four are accused of chest-bumping, and preventing food deliveries to the restaurant by blocking the eatery’s driveway. One of the men allegedly stuck his arm into a minivan in which the show’s host, Padma Lakshmi, was riding, and said, “ Lookie what we have here - I’ll smash your pretty little face.” Jennifer Levy, a former executive of Bravo, the network on which Top Chef is produced, testified that, as she tried to cross the picket line, the men shouted at her, “You fucking scumbag! Are you going to work today, you fucking scab scumbag.”  Jennifer Busch, a line producer on the show, said the Teamsters were yelling racial and derogatory terms, including “faggot” and “***.”

    The defendants are charged with the crimes of conspiracy to commit extortion, and aiding and abetting. Their trial began August 1st. Extortion consists of forcing others to do something against their will by threats of violence, property damage, damage to reputation or to financial circumstances. Success by the extortionist in obtaining the desired outcome is not necessary for the commission of the crime. Rather, by making the threat the offender commits extortion. The crime is a felony in most states. Penalties vary depending on the severity of the threats and accompanying action.

    Conspiracy consists of an agreement between two or more people to commit a crime together. Aiding and abetting is the crime of directly helping someone else in the commission of a crime (“willfully aids, abets, counsels, commands, induces or procures” the commission of a crime). A person who aids and abets is punished as a principal in the crime, the same as if he committed it.

    Picketing by unions is legal and protected by the constitutional rights of freedom of assembly and freedom of speech. Permissible picketing activity includes carrying signs, distributing information fliers, and urging customers not to purchase products or services from a targeted business.

    Everyone has the right, if they choose, to cross a picket line and to ignore the protestors. Picketers can exercise peaceful persuasion but other interference with passersby is prohibited. Thus picketers cannot legally use threatening, abusive or insulting words or conduct, or engage in violent, disorderly or unruly behavior. Nor can they obstruct entranceways or roads, or otherwise attempt to physically prevent vehicles or people from passing.

    In the Top Chef case, the defense denied many of the prosecution witnesses’ allegations and called the defendants’ actions legal picketing with the goal of trying to secure jobs for union members.

    The prosecution claims defendants’ actions exceeded the legitimate right of unions to protest. Instead, the prosecutor argues that defendants used actual and threatened violence, and instilled fear of economic and physical harm.

    The jurors will have to decide – what did the protestors actually do at the site, and was their behavior lawful economic pressure or extortion?  As with all juries, they will listen carefully to the evidence, decide what the facts are, and then apply to the facts the law as told to them by the judge during the judge’s charge (the last proceeding at trial when the judge instructs the jury about the relevant law).

    For more information, click here.

    DISCUSSION QUESTION:

    Based on the allegations, do you think the union members have committed the crime of extortion?  If so, what particular actions constitute the crime?  If not, what additional conduct would be needed?

     

     

  • Lady Gaga Evades Deposition in Kesha Case

       

    Music producer Dr. Luke is seeking to take a deposition of Lady Gaga relating to text messages she exchanged with pop star Kesha. Per Luke, the texts are relevant to a defamation lawsuit brought by Luke against Kesha.

    Kesha is a popular singer famous for, among other hits, “Tik Tok”. She was on contract with Kemosabe Records which is owned by Dr. Luke (Lukasz Gottwald). Kesha claimed he drugged and raped her, and continuously harassed her sexually. He denied the allegations. She sued for rescission (nullification, cancellation; a remedy in equity which is a system of law based on fairness) seeking to terminate the recording contract, and for the tort of intentional infliction of emotional distress, which requires “extreme and outrageous conduct intolerable in a civil society.” A judge can grant rescission when the interests of fairness and justice demand. In 2016 a judge dismissed Kesha’s rescission case. In doing so, the judge noted that the record company offered to record Kesha’s music without Dr. Luke being involved in the process. The judge also commented that Kesha’s evidence was insufficient to support a claim of intentional infliction of emotional distress

    Dr. Luke is now suing Kesha for defamation, the tort of harming a person’s reputation by untruthful statements. He claims she falsely accused him of drugging and raping her. He discovered that Kesha and Lady Gaga had texted about Kesha’s claims and he has sought copies of the texts from Gaga. She provided a four page spreadsheet of text messages but, per Luke, they were “heavily redacted” (edited). Luke wants to see the unedited version; Lady Gaga has refused saying the material is irrelevant to the lawsuit and addresses private matters. Luke served a subpoena (an order directing a witness to appear) mandating her appearance at a deposition, which is a question and answer session, often held at an attorney’s office, during which opposing counsel asks the other party or a witness about the case. She has failed to respond claiming, through her lawyer, a busy concert and film schedule. Her world tour begins August 1st. Luke’s lawyer, Jeffrey Movit, has repeatedly offered to travel to a location on the singer’s tour and/or film shoot. He further offered to limit the deposition to no more than three hours. Gaga has nonetheless refused to offer a date when she will make herself available. Movit has now made a motion (a request to a judge for specified relief while a case is pending) seeking to compel the pop star to participate in the deposition. The motion is returnable in court on August 8th. Gaga’s attorney claims she is not an essential witness, and that Luke is seeking the deposition only to attract press attention to his case.

    A deposition is part of discovery, the pre-trial process in a lawsuit whereby each party obtains information held by the other.   Answers to questions are given under oath, meaning the person being deposed is sworn to tell the truth. Untruthful answers could lead to a perjury charge which is the crime of lying under oath and punishable by jail and/or a fine. A court reporter records the testimony using a stenography machine, and thereafter creates a written transcript that is typically used by the attorneys at trial when cross-examining a party or witness.

    Anybody with information relevant to a case can be deposed provided the deposition does not invade the witness’ privacy and the deposition is not sought for an improper purpose. The party seeking the deposition must serve the witness with a subpoena. If the person fails to appear, the party seeking the deposition can seek a court order mandating the person to appear at the deposition or face penalty for civil contempt (not criminal), disobeying a court order in a civil proceeding. Civil contempt can result in punishment, including jail time and/or a fine, but the sanctions typically end once the party in contempt complies with the court order.

    If a person subpoenaed for a deposition believes the procedure is improper for one of the stated reasons (testimony not relevant, privacy would be invaded, and the deposition is sought for an improper purpose), that person can seek a protective order from a court which limits the permissible scope of discovery.

    Dr. Luke is seeking the court order to compel Lady Gaga to attend the deposition. Her attorney will no doubt seek a protective order. Watch the news for the result following the upcoming hearing.

    For more information, click here.

    DISCUSSION QUESTION:

    Do you think Lady Gaga is legally justified in refusing to appear at the deposition?  Why or why not?

     

  • UC Irvine Rescinds the Acceptance of 499 Admitted Students: Can They Do That?

    Universities issue acceptance letters to more students than they can accommodate.  They do so because they know that a certain percentage of the applicants who are admitted will not be coming to their school.  Students apply to more than one university and then make their decision on which one to attend after all the acceptances and rejections have arrived.  

    The University of California at Irvine got into a bit of a pickle this year because it had accepted 7,300 freshmen, but that was 850 more than UCI had anticipated attending. The rate of accepted students finally sending in that deposit to attend was much higher than in previous years. So, UCI had to trim.  It did not by sending 499 rescission letters to accepted students. 

    Can they do that?  The acceptance letter, oddly named, is an offer to the applicant.  The applicant accepts that offer by signing al necessary forms and shooting off that deposit.  

    However, there are conditions subsequent to that contract formed by the applicants with their deposit.  The acceptance letter makes the following events critical to the acceptance being valid: 

    • Applicants must maintain a 3.0 GPA through to their high school graduation
    • Applicants must not earn a “D” or an “F” in any of their remaining classes
    • Applicants must meet all deadlines for submitting transcripts and deposits

    The 499 who had their acceptances rescinded all failed to meet one or more of these conditions.  UCI’s solution to the oversubscription was to strictly enforce the conditions.  Some applicants who received the rescission offered to drive hours to get their transcripts there immediately.  Many of the applicants filed appeals trying to be re-admitted. Jacey Fortin, “Hundreds Accepted by a California University Are Now Told They Can’t Attend,” New York Times, July 30, 2017, p. A13. 

    After receiving the appeals and realizing that many of the students were victims of their high schools failing to process their transcripts, UCI rescinded the rescissions of 300 of the 499.  The 300 were those who had just missed deadlines and were not those who had failed to meet the two conditions of academic performance. UCI’s president apologized, indicating that the applicants should not have been treated as they were, with such a sudden and unexpected withdrawal of their admission, “We should not have treated you this way over a missed deadline." 

    Some lessons here for both universities and applicants.  For universities, watch your data on acceptance rates of those who are admitted.  One tool is to use a wait list.  If you under-accept and need more students after the deadline for deposits, then turn to the wait list.  For applicants, get your documents in and always follow up to be sure high schools and testing services have fulfilled your requests to send documentation to the university.

    DISCUSSION STARTERS

    Explain offer and acceptance in university admission processes.

    Discuss the conditions involved in acceptances by universities.