Following the US Supreme Court's decision in Daimler AG v. Bauman, the Second Circuit held for the first time that a foreign bank is not subject to general jurisdiction based on the bank's operation of a limited number of branch offices in the forum.

In Gucci America, Inc. v. Weixing Li, a group of retailers brought suit against the defendants in a New York district court for counterfeiting their brands. The district court entered a preliminary injunction freezing the defendants' assets, which included proceeds from the counterfeit sales wired by the defendants to accounts at Bank of China (BOC), and issued an order compelling BOC to comply with the injunction. BOC is headquartered in China and is owned primarily by the Chinese government, but has branch offices in New York.

The Second Circuit found that the district court had personal jurisdiction over the defendants to issue the injunction, but reversed the portion of the order compelling BOC's compliance in light of the Supreme Court's decision in Daimler. Under Daimler, a corporation is subject to a court's general jurisdiction only where its contacts are so continuous and systematic that it is essentially at home in the forum state. The Second Circuit concluded that because BOC has only four branches in the US and conducts only a small portion of its worldwide business in New York, its contacts with the forum were not sufficient for general jurisdiction. (768 F.3d 122 (2d Cir. 2014).)

The case was remanded to the district court to consider whether specific jurisdiction can be established. Simultaneously with the Gucci opinion, the Second Circuit issued a summary order in the related case, Tiffany (NJ) LLC v. China Merchants Bank, relying on the same legal analysis to reach a similar conclusion.

See Legal Update, No General Jurisdiction over Bank of China Due to New York Branches: Second Circuit for more on this decision.

See Legal Update, Supreme Court: Presence of Subsidiary in Forum State Insufficient for General Jurisdiction over Foreign Parent Corporation for more on the Daimler decision and Practice Note, Commencing a Federal Lawsuit: Initial Considerations for more on obtaining personal jurisdiction over non-resident defendants.

The applicability of the local controversy exception to federal jurisdiction under the Class Action Fairness Act (CAFA) must be assessed based on the pleadings at the time of removal. A post-removal amendment of a complaint to add a local defendant does not create a basis for remand under this exception, says the Fifth Circuit.

CAFA's local controversy exception provides that a class action must be remanded if the alleged conduct of at least one local defendant "from whom significant relief is sought … forms a significant basis for the claims asserted by the proposed plaintiff class" (28 U.S.C. § 1332(d)(4)(A)(i)). In Cedar Lodge Plantation, L.L.C. v. CSHV Fairway View I, L.L.C., the plaintiffs brought a proposed class action in Louisiana state court. After removal of the case under CAFA, the plaintiffs amended their complaint to add a new defendant, a Louisiana citizen, as a "significant local defendant," and argued that the local controversy exception applied. The district court remanded the case on that basis.

The Fifth Circuit reversed, concluding that the addition of a local defendant after removal could not defeat federal jurisdiction. Noting that the statutory text of CAFA defines a class action as any civil action "filed" under Federal Rule of Civil Procedure (FRCP) 23, the Fifth Circuit held that courts should look at the action at the time of filing to determine whether the local controversy exception applies. The Fifth Circuit explained that the local controversy exception is a narrow exception that should not be used as a jurisdictional loophole. (768 F.3d 425 (5th Cir. 2014).)

See Legal Update, Local Controversy Exception to CAFA Jurisdiction Assessed at Time of Removal: Fifth Circuit for more on this decision.

See Practice Note, Class Action Fairness Act of 2005 (CAFA): Overview for more on removal under CAFA and the exceptions to CAFA jurisdiction.

The Sixth Circuit recently clarified its requirements for pleading corporate scienter under Section 10(b) of the Exchange Act, adding to a growing circuit split on the appropriate standard.

In Ansfield v. Omnicare, Inc., the Sixth Circuit considered whether the plaintiffs properly pled their securities fraud claims, based on Section 10(b) of the Exchange Act and SEC Rule 10b-5, under the Private Securities Litigation Reform Act of 1995. The Sixth Circuit upheld the dismissal of the plaintiffs' complaint because they failed to sufficiently plead scienter, and explained that the states of mind of any of the following should be considered when determining whether a misrepresentation by a corporation had the requisite scienter:

The Sixth Circuit declined to follow the narrow approach of the Fifth and Eleventh Circuits, which allows scienter to be imputed to the corporation only under a theory of respondeat superior. It also rejected the expansive approach taken by the Sixth Circuit in an earlier case, which allowed the knowledge of a corporate officer to be imputed to the corporation even when that officer did not make or issue the false or misleading statement. Other circuit courts, such as the Second, Seventh and Ninth Circuits, have adopted their own approaches. (769 F.3d 455 (6th Cir. 2014).)

See Legal Update, Standard for Corporate Scienter in Securities Fraud Actions Clarified in Sixth Circuit for more on this decision.

See Article, The Rise and Reformation of Private Securities Litigation for more on the pleading requirements under Section 10(b) of the Exchange Act.

Deciding an issue of first impression in the Third Circuit, the US District Court for the Eastern District of Pennsylvania held that a company's widely-circulated antitrust compliance policy was not protected by the attorney-client privilege.

In In re Domestic Drywall Antitrust Litigation, the district court granted the plaintiffs' motion to compel production of the defendant's corporate antitrust compliance policy, explaining that the policy was not protected by the attorney-client privilege because it:

The court noted that the Third Circuit narrowly construes the attorney-client privilege, and that only those documents containing legal advice that lead to a decision by the client are covered by the privilege. Further, no court has found a corporate policy of lawfulness to be privileged during discovery. (MDL No. 2437, (E.D. Pa. Oct. 9, 2014).)

This decision is in line with In re Sulfuric Acid Antitrust Litigation, a 2006 decision in which the US District Court for the Northern District of California noted that antitrust compliance policies that are simply a compilation of rules are outside the scope of the attorney-client privilege.

See Legal Update, EDPA Holds that Antitrust Compliance Policy is Not Protected by Attorney-Client Privilege for more on this decision.

See Attorney-Client Privilege and Work Product Doctrine Toolkit for a collection of resources to help counsel navigate the attorney-client privilege and work product doctrine.

The 2014 London Court of International Arbitration (LCIA) Rules became effective on October 1, 2014 for all arbitrations commenced under the LCIA Rules on or after that date. The amendments bring the LCIA Rules in line with current arbitration practice and procedure, with changes to almost every rule.

Significant features of the 2014 LCIA Rules include:

See Legal Update, Changes to the London Court of International Arbitration (LCIA) Rules Effective October 1, 2014 for more on the amendments to the LCIA Rules.

See Practice Note, LCIA Arbitration (2014 Rules): A Step-by-Step Guide for information on conducting an arbitration under the 2014 LCIA Rules.

When disclosing proprietary information to other parties, businesses should ensure that they have taken reasonable steps to protect the confidentiality of that information so it is not used for unintended purposes. Having only one recipient sign a confidentiality agreement may be insufficient protection when the information has been or can be accessed by multiple parties, according to the Seventh Circuit.

In nClosures Inc. v. Block & Co., nClosures sued Block for manufacturing a competing product using designs that nClosures had shared with Block as part of a joint project. nClosures asserted that in using its designs, Block had breached the confidentiality agreement reached between the two businesses.

The Seventh Circuit held that the agreement was unenforceable under Illinois law because nClosures had not taken reasonable steps to protect the confidentiality of its information. In particular, the Seventh Circuit noted that nClosures did not:

(No. 13-3906, (7th Cir. Oct. 22, 2014).)

See Legal Update, Seventh Circuit Finds Confidentiality Agreement Unenforceable for more on this decision.

See Practice Notes, Confidentiality and Nondisclosure Agreements and Protection of Employers' Trade Secrets and Confidential Information for more on how to protect confidential information.

In a decision with significant doctrinal and practical implications for director conduct in the venture capital context, the Delaware Court of Chancery ruled in In re Nine Systems Corp. Shareholders Litigation that a recapitalization transaction undertaken by a controlling group of stockholders of an early-stage company failed to satisfy the entire fairness standard of review for controlling stockholder transactions (No. 3940, (Del. Ch. Sept. 4, 2014)).

The court reached this conclusion even though it agreed with the defendants' financial expert that the value of the common stock owned by the plaintiffs at the time of the recapitalization was $0, which meant that the price paid to the plaintiff stockholders (nothing) was fair. For a remedy, the court granted the plaintiffs leave to submit a petition for their attorneys' fees and costs.

The court emphasized the unitary element of entire fairness review, holding that a fair price does not automatically cleanse an unfair process for purposes of satisfying entire fairness. In so doing, the court distinguished last year's In re Trados Inc. Shareholder Litigation decision, which ruled in a case involving a merger of a venture capital company that the board's approval of the merger satisfied entire fairness despite an unfair process because the common stockholders received the substantial equivalent in value of what they had before (nothing).

Notably, the court held that the plaintiffs' expropriation claims were both direct and derivative. When considered with its 2013 ruling in Carsanaro v. Bloodhound Technologies, the two decisions suggest that an eventual merger of a company will not extinguish expropriation claims when a majority of the directors are conflicted, even if there is no controlling stockholder.

See Legal Update, In re Nine Systems: Chancery Court Finds Recapitalization with Fair Price Still Failed Entire Fairness Review, Shifts Attorney Fees as Remedy for more on this decision.

See Practice Note, Shareholder Derivative Litigation for more on shareholder derivative lawsuits.

As the first circuit court to consider the issue, the Sixth Circuit held that a venue selection clause in an ERISA-governed retirement plan that limited venue to a specific district court was enforceable.

In Smith v. AEGON Cos. Pension Plan, the Sixth Circuit upheld the dismissal of an ERISA plan participant's suit because the plaintiff did not bring the action in the district court specified in the plan's venue selection clause. ERISA's venue provision (29 U.S.C. § 1132(e)(2)) permits a suit to be brought in one of several enumerated districts, but the clause at issue limited venue to one of those districts. The Sixth Circuit concluded that:

While stating that the clause at issue was consistent with ERISA because it selected a venue that fell within ERISA's venue provision, the Sixth Circuit noted that based on the logic of a previous Sixth Circuit case upholding the validity of mandatory arbitration clauses in ERISA plans, the clause would still be enforceable even if it selected a venue outside of the statutorily designated districts. (No. 13-5492, (6th Cir. Oct. 14, 2014).)

See Legal Update, Venue Selection Clause in Retirement Plan is Enforceable: Sixth Circuit for more on this decision.

See Practice Note, Title I of the Employee Retirement Income Security Act (ERISA): Overview for more on ERISA generally and Practice Note, Choice of Law and Choice of Forum: Key Issues for more on forum selection clauses generally.

A recent decision by the US Bankruptcy Court for the Southern District of New York may shift leverage to debtors and unsecured creditors in negotiating consensual plans of reorganization.

In In re MPM Silicones, LLC, the bankruptcy court issued a bench ruling addressing the debtors' proposed plan of reorganization, which had been rejected by the noteholders who were holding first-lien notes and "1.5 lien" notes due in 2020. The plan provided that the noteholders would receive payment of their claims in full in cash, without a make-whole premium, if they voted in favor of the plan, or receive replacement notes bearing a below-market interest rate if they rejected the plan.

In addition to holding that the noteholders were not entitled to make-whole premiums after automatic acceleration because this was not explicitly provided for in the governing documents, the court also concluded, among other things, that the debtors could cram down their plan of reorganization on their secured lenders under section 1129(b)(2)(A)(i) of the Bankruptcy Code by providing them with replacement notes paying a below-market interest rate.

The court followed the Supreme Court's decision in Till v. SCS Credit Corp., a Chapter 13 case, and determined that, after making a slight adjustment, the debtors' plan met the present value standard for satisfying the cramdown requirements. In Till, the Supreme Court applied a "formula" approach under which the proper interest rate is determined by taking a risk-free base rate, such as the prime rate or Treasury rate, and adding a risk premium to reflect the repayment risks unique to that debtor. The MPM court explained that a cramdown interest rate should not include any profit or cost element. (No. 14-22503-RDD (Bankr. S.D.N.Y. Aug. 26, 2014) (Transcript), as modified by (Sept. 9, 2014).) To the extent this interpretation of cramdown provisions is upheld or followed by other courts, it has important implications for secured creditors.

See Legal Update, In re MPM Silicones: SDNY Bankruptcy Court Denies Make-whole Claim and Approves Cramdown of Secured Creditors with Below-market Replacement Notes for more on this decision.

See Practice Notes, Treatment of Make-whole and No-call Provisions in Bankruptcy and Chapter 11 Plan Process: Overview for more on make-whole provisions and cramdown plans.

The Seventh Circuit has rejected transformative use as a litmus test for copyright fair use. In a recent decision, it declined to follow the approach adopted in Cariou v. Prince, where the Second Circuit concluded that an accused infringer's transformative use of a work is enough to qualify her copying of the underlying original work as a fair use under Section 107 of the Copyright Act.

In Kienitz v. Sconnie Nation LLC, the district court awarded summary judgment to the defendants, holding that their use of the plaintiff's photo of the Madison, Wisconsin mayor on shirts parodying the mayor's anti-block-party policy was a noninfringing fair use. In finding fair use, the district court engaged in a lengthy analysis of transformative use that relied, in part, on the Second Circuit's decision in Cariou.

The Seventh Circuit affirmed the grant of summary judgment, but rejected the district court's transformative fair use rationale. Contrary to the Second Circuit's analysis in Cariou, the Seventh Circuit reasoned that the transformative use of a work is not enough to invoke fair use because this test:

(766 F.3d 756 (7th Cir. 2014).)

See Legal Update, Seventh Circuit Rejects Transformative Use Test for Copyright Fair Use for more on this decision.

See Practice Note, Copyright: Case Tracker for a table tracking key decisions on copyright issues, including fair use.

In the Third Circuit, an accused infringer's patent misuse affirmative defense to infringement claims by a non-practicing entity (NPE) is not subject to the heightened pleading standards adopted in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, according to the US District Court for the District of Delaware.

In Intellectual Ventures I LLC v. Symantec Corp., the district court refused to strike Symantec's patent misuse defense against the plaintiff NPE, finding that the defense implicated disputed facts that could not be resolved at the pleading stage. Having agreed with Symantec that the NPE's motion for judgment on the pleadings should be viewed as a motion to strike, the court noted that most courts in the Third Circuit do not require affirmative defenses (such as patent misuse) to satisfy heightened pleading standards. The court then found that Symantec's misuse defense satisfied the more permissive pleading standard for FRCP 12(f) because it implicated several disputed issues of fact, which a court cannot resolve at the pleading stage. (No. 13-440, (D. Del. Sept. 24, 2014).)

See Legal Update, Patent Misuse Defense Against Non-practicing Entities Survives Motion to Strike: D. Delaware for more on this decision.

See Patent Litigation Against Non-practicing Entities Toolkit for a collection of resources designed to assist counsel when litigating against NPEs.

Accused infringers may be able to refute large damages demands based on patent owners' use of an entire market value damages theory against a multi-component accused device. This may be particularly helpful to accused infringers litigating against NPEs asserting software patents, where the claimed software feature does not by itself drive market demand for the accused product.

In VirnetX, Inc. v. Cisco Systems, Inc., the Federal Circuit vacated a $368 million patent infringement damage award against Apple Inc. based on the district court's erroneous jury instruction concerning the entire market value rule and the plaintiff's expert's flawed reasonable royalty analysis, in addition to deciding issues of validity and infringement.

Under the entire market value rule, a patent owner may assess damages based on the entire market value of a multi-component infringing product, but only if the patented feature creates the basis for customer demand or substantially creates the value of the other component parts. The Federal Circuit therefore has emphasized that a patent owner should seek damages attributable only to the infringing feature and assess damages based on the entire market value of a multi-component product only in limited circumstances.

Against this background, the Federal Circuit held that the district court erred by instructing the jury that it could use an entire market royalty base for Apple's infringing products if either:

Because the damages award did not apportion the royalty base down to account for the unpatented elements of the products that also drive market demand, vacating the damages award was necessary. (767 F.3d 1308 (Fed. Cir. 2014).)

See Legal Update, Patent Owner Must Apportion Down Royalty from Multi-component Smallest Saleable Unit: Federal Circuit for more on this decision.

See Article, Patent Monetization and Valuation for information on patent monetization and valuation, and methods used to calculate patent infringement damages.

While the after-acquired evidence defense typically is available to reduce an employee's potential damages in employment discrimination cases, a recent Second Circuit decision could lead to widespread court approval of the use of after-acquired evidence to bolster employers' substantive defenses against discriminatory termination claims.

In Weber v. Tada, the Second Circuit affirmed in a summary order a district court's grant of summary judgment to the defendants on an employee's race discrimination claim, and noted that it found no basis to reverse the district court's evidentiary rulings. Fujifilm Medical Systems USA (FMSU) had terminated the employee, claiming that he mismanaged the company's finances. The employee argued that he was terminated based on his race and national origin in violation of 42 U.S.C. § 1981, and also brought claims for tortious interference with contract and business expectancy.

The district court allowed evidence of the employee's workplace misconduct, discovered after the employee's termination, to show that:

The Second Circuit found that the district court did not err in allowing the defendants' use of after-acquired evidence of the employee's misconduct to confirm their suspicions about his mismanagement of FMSU's finances. (No. 13-4891, (2d Cir. Oct. 9, 2014).)

See Legal Update, After-acquired Evidence Admissible to Bolster Employer's Termination Reasoning: Second Circuit for more on this decision.

See Practice Note, Race, Color and National Origin Discrimination under Title VII and Section 1981 for more on the defenses and limits on liability under Section 1981.

In one of the few cases addressing the professional exemption to the overtime requirements of the Fair Labor Standards Act (FLSA), the US District Court for the Southern District of New York set a framework for evaluating whether attorneys performing services in the legal industry are exempt from overtime. Other courts are likely to adopt and apply this analysis when reviewing the increasing number of attorney claims for unpaid overtime.

In Lola v. Skadden, Arps, Slate, Meagher & Flom LLP, the district court granted an employer's motion to dismiss a contract attorney's complaint alleging that the law firm to which he was staffed and the staffing agency failed to pay him overtime in violation of the FLSA. The court found that the document review tasks performed by the plaintiff in North Carolina constituted the practice of law in that state, placing it within the FLSA's professional exemption.

The court held that for the purposes of applying the FLSA's professional exemption as implemented by 29 C.F.R. § 541.304(a)(1), federal courts should look to the definition of "practice of law" in the state where the employee performed the work. Accordingly, the court analyzed the definition under North Carolina law and also considered an ethics opinion from the North Carolina bar discussing the term "legal services." (No. 13-5008, (S.D.N.Y. Sept. 16, 2014).)

If this analysis is applied by other courts, then law firms and companies that have discretion in selecting locations for contract attorney document reviews should consider choosing states that have broad definitions of the practice of law to avoid overtime liability.

See Legal Update, Attorney Performing Document Review Engaged in Practice of Law, Exempt from Overtime: SDNY for more on this decision.

See Practice Note, Wage and Hour Law: Overview for more on exempt status under the FLSA.

Employers should be encouraged by the Seventh Circuit's holding that a prompt and reasonable response to an employee's complaints of sexual and racial harassment that were effective in stopping the harassment shielded an employer from liability under Title VII of the Civil Rights Act of 1964 (Title VII).

In Muhammad v. Caterpillar, Inc., an employee brought suit alleging that he was harassed by coworkers with offensive comments and graffiti about his race and perceived sexual orientation and that he was suspended in retaliation for reporting the graffiti to the shift supervisor. In affirming the district court's grant of summary judgment for the employer, the Seventh Circuit held that the employer reasonably and effectively responded to the employee's complaints of sexual and racial harassment, and therefore was not liable under Title VII. Each time the employee reported the offensive conduct, the employer quickly responded and soon ended the harassment.

Rejecting the argument that the employer should have done more to punish the harassing coworkers, the Seventh Circuit stated that Title VII requires employers only to take reasonable action to stop unlawful harassment, not discipline the harasser.

Additionally, the Seventh Circuit concluded that there was no evidence to support the employee's retaliation claim, and that an employee cannot maintain this type of claim based on statements regarding sexual orientation because it is not a protected class under Title VII (although many state and local laws treat sexual orientation as a protected class). (767 F.3d 694 (7th Cir. 2014).)

See Legal Update, Reasonable Response to Employee's Complaints of Harassment Shields Employer from Title VII Liability: Seventh Circuit for more on this decision.

See Practice Notes, Harassment and Retaliation for more on the laws prohibiting workplace harassment, and retaliation claims and defenses.