A recent decision by the Southern District of New York (SDNY) warns parties to a potential suit to issue a litigation hold and carefully preserve electronically stored information (ESI) as soon as they contemplate becoming involved in litigation, or risk substantial sanctions. In Sekisui American Corp. v. Hart, Judge Shira Scheindlin held that a party that willfully destroys evidence may face sanctions for spoliation, even without a showing of bad faith.

The plaintiff in Sekisui deliberately deleted the e-mails of several key players in the action after informing the defendants that it intended to sue. The plaintiff did not issue a litigation hold notice until 15 months after it threatened to sue the defendants and failed to monitor the preservation of ESI.

Judge Scheindlin granted the defendants' request for an adverse inference jury instruction and an award of reasonable costs for litigating the sanctions motion, including attorneys' fees. In holding that imposing sanctions was appropriate, Judge Scheindlin reasoned that:

(No. 12-3479, , at *5-8 (S.D.N.Y. Aug. 15, 2013).)

See Legal Update, Judge Scheindlin Sanctions Plaintiff for Deleting Employee E-mails for more on this decision.

See Standard Document, Litigation Hold Notice and Practice Note, Implementing a Litigation Hold for more on how to properly preserve potentially relevant evidence when the possibility of a dispute arises.

Parties to a shareholder derivative suit should take note that the mere implication of the "say on pay" vote provision of the Dodd-Frank Act will not confer federal jurisdiction supporting removal where no federal claims are alleged.

Dennis v. Hart involved a shareholder vote against an executive compensation package passed by the board of directors of PICO Holdings, Inc. The PICO board took no action after the vote, and the plaintiffs brought two shareholder derivative actions in California state court. The plaintiffs asserted various state law claims, including breach of fiduciary duty, connected to the failure to respond to the say on pay vote. The defendants removed both cases to federal court.

The district court dismissed the claims relating to the say on pay vote and remanded the cases to state court because the remaining claims did not state a federal law claim or involve a substantial issue of federal law. The Ninth Circuit vacated and remanded the suits, holding that a shareholder derivative suit alleging state law claims was not removable to federal court merely because the case implicated Dodd-Frank's say on pay vote provision. The Ninth Circuit also noted that the availability of a strong federal defense, such as the advisory nature of the say on pay vote, is inadequate to confer federal jurisdiction. (No. 12-55241, (9th Cir. July 31, 2013).)

See Legal Update, Ninth Circuit: Derivative Suit Not Removable Based on Dodd-Frank's "Say on Pay" Vote Issue for more on this decision.

See Practice Note, Commencing a Federal Lawsuit: Initial Considerations and Subject Matter Jurisdiction Flowchart for more on when a federal court has subject matter jurisdiction over a case.

A recent Second Circuit decision found that the federal, rather than state, statute of limitations period applies to actions brought under the Telephone Consumer Protection Act (TCPA). Additionally, the Second Circuit joined eight other circuits in determining that the statute of limitations tolling period in class actions stops once class certification has been denied.

In Giovanniello v. ALM Media, LLC, the plaintiff alleged that the defendant sent him an unsolicited fax advertisement in January 2004 in violation of the TCPA. After the dismissal of three suits between 2004 and 2007, the plaintiff brought a fourth proposed class action under the TCPA in 2009. Following a lengthy procedural history that included a trip to the US Supreme Court, the Second Circuit concluded that:

(No. 10-3854, (2d Cir. Aug. 8, 2013).)

See Legal Update, Second Circuit Adopts New Rules for TCPA Limitations and Class Action Tolling Periods for more on this decision.

See Practice Note, Direct Marketing for information on the statutes, regulations and voluntary codes of practice that apply to direct marketing activities.

A DC Circuit decision shows that courts will more rigorously analyze statistical models purporting to prove predominance in granting class certification under Federal Rule of Civil Procedure (FRCP) 23(b)(3), since the US Supreme Court's decision in Comcast Corp. v. Behrend, which decertified a class because a required damages calculation could not be measured class-wide.

The plaintiffs in In re Rail Freight Fuel Surcharge Antitrust Litigation, a group of shippers who paid inflated fuel surcharges to four major freight railroads, filed suit against the freight railroads for allegedly violating Section 1 of the Sherman Act by colluding to raise fuel surcharge rates. The plaintiffs sought class certification, arguing that their two statistical models demonstrated predominance and that the damages model quantified the injury-in-fact caused by the defendants' collusive conduct.

The DC Circuit overturned the district court's certification of the class and remanded the case for reconsideration in light of the Comcast decision. It noted that courts were far more accommodating to class certification under FRCP 23(b)(3) before Comcast. The DC Circuit found that the plaintiffs' damages model did not reliably prove class-wide injury, in part, because it yielded false positives by detecting injury where none could exist. It reasoned that common questions of fact cannot predominate where there is no reliable means of proving class-wide injury and cases that turn on individualized proof of injury require separate trials. (No. 12-7085, (D.C. Cir. Aug. 9, 2013).)

See Legal Update, DC Circuit Overturns Antitrust Class Certification in Light of Comcast Corp. v. Behrend for more on this decision.

See Legal Update, Supreme Court Rules for Comcast in Class Action Antitrust Case for more on the Comcast decision.

The Seventh Circuit has joined the DC and Second Circuits in holding that a party that seeks to avail itself of the nationwide service of process provision in Section 12 of the Clayton Act must also satisfy Section 12's venue provision.

In KM Enterprises, Inc. v. Global Traffic Technologies, Inc., the Seventh Circuit had to decide whether a plaintiff relying on Section 12's service of process provision may also rely on the general venue statute, 28 U.S.C. § 1391. The Seventh Circuit considered two approaches:

The Seventh Circuit agreed with the DC and Second Circuits and further noted that if a party seeks to establish venue exclusively through Section 1391, it must establish personal jurisdiction in another way. (No. 12-3406, (7th Cir. Aug. 2, 2013).)

See Legal Update, Seventh Circuit: Clayton Act's Section 12 Venue and Service of Process Provisions Must Be Read Together for more on this decision.

See Practice Note, Private Antitrust Actions for an overview of key issues related to private enforcement of antitrust laws in the US.

A recent Seventh Circuit decision furthers a circuit split regarding the extent of a court's authority to appoint an arbitrator under Section 5 of the Federal Arbitration Act (FAA). In Green v. U.S. Cash Advance Illinois, LLC, the Seventh Circuit upheld an arbitration agreement even though the arbitration forum named in the agreement no longer accepted cases for arbitration, and ordered the district court to appoint a substitute arbitrator under Section 5 of the FAA.

The district court had denied the defendants' request to appoint a substitute arbitrator, holding that the identity of the arbitrator is an integral part of the agreement. The district court therefore found that the arbitration clause at issue was void.

However, the Seventh Circuit reasoned that the agreement called for the use of the forum's code of procedure, not the forum itself, to conduct the arbitration proceedings. Specifically, the agreement stated that disputes "shall be resolved by binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum" (emphasis added).

The majority recognized that the Third and Eleventh Circuits appointed substitute arbitrators in similar cases involving the National Arbitration Forum, although the Fifth Circuit refused to compel arbitration and found that the choice of the National Arbitration Forum was integral to the parties' agreement. Notably, the Seventh Circuit did not answer the question of whether the identity of the arbitrator is an integral part of the agreement. (No. 13-1262, (7th Cir. July 30, 2013).)

See Legal Update, Seventh Circuit: Substitute Arbitrator Should Be Appointed Where Forum No Longer Accepts Cases for Arbitration for more on this decision.

See Practice Note, Understanding the Federal Arbitration Act for more on the FAA.

Appellate courts are hesitant to find arbitral misconduct under the FAA absent a clear abuse of authority. Two circuit courts recently refused to vacate arbitration awards based on evidentiary decisions made by arbitrators, finding that the arbitrators' decisions were not misconduct.

In Doral Financial Corp. v. García-Vélez, the First Circuit found that an arbitration tribunal's refusal to grant subpoenas was not misconduct under the FAA (No. 12-1519, (1st Cir. July 31, 2013)). Similarly, in LJL 33rd Street Associates, LLC v. Pitcairn Properties Inc., the Second Circuit concluded that an arbitrator's refusal to admit exhibits on hearsay grounds was not misconduct, noting that arbitrators have substantial discretion to admit or exclude evidence (Nos. 11-5425, 12-1382, (2d Cir. July 31, 2013)).

Parties who seek to appeal an arbitrator's decision under 9 U.S.C. § 10(a)(3) (the FAA provision governing arbitral misconduct) should be aware of the high standards that appellate courts have set for finding misconduct, and should remember that arbitrators have broad discretion to determine the admissibility of evidence.

See Legal Update, First and Second Circuits Confirm Arbitrators' Ability to Exclude Evidence for more on these decisions.

See US Arbitration Toolkit for a collection of resources to assist counsel with US arbitration and drafting alternative dispute resolution clauses and agreements.

Signature requirements, particularly electronic signature requirements, vary from state to state. Practitioners in New York should be aware that a typed e-mail signature can satisfy statutory signature requirements and create a binding and enforceable settlement agreement.

In Forcelli v. Gelco Corp., a representative of the defendants sent an e-mail message to the plaintiffs' attorney confirming the settlement terms that had been orally agreed to by the parties and requesting that the plaintiffs sign a release, which they did. When the plaintiffs attempted to enforce the settlement agreement, the defendants argued that it failed to satisfy the criteria of New York's settlement agreement statute, CPLR § 2104, because an e-mail is not a subscribed (signed) writing.

The Second Department of the Appellate Division, New York Supreme Court, held that the e-mail message containing the sender's typed name created a binding and enforceable stipulation of settlement. The court directed that an e-mail may be deemed a subscribed writing under CPLR § 2104 if:

(No. 2011-07796, (N.Y. App. Div. 2d Dep't July 24, 2013).)

See Legal Update, New York Appellate Court: E-mail Signature Created Binding and Enforceable Settlement for more on this decision.

See Practice Note, Signature Requirements for an Enforceable Contract and Standard Clauses, General Contract Clauses: Electronic Signatures for information on signature requirements and electronic signature clauses in commercial contracts.

Creditors who merely receive notice of a bankruptcy will preserve their liens unless they take some action in the bankruptcy proceedings, such as filing a proof of claim or other pleading in the case, according to the Fifth Circuit in Acceptance Loan Corp., Inc. v. S. White Transportation, Inc. (In re S. White Transportation, Inc.). While this decision is favorable for secured creditors, it may negatively impact the bankruptcy process by enabling creditors to bypass the Chapter 11 plan by merely failing to actively participate.

The Fifth Circuit affirmed a district court decision holding that a secured creditor's mere receipt of notice of a debtor's bankruptcy without any activity does not satisfy the participation requirement necessary to void a lien upon confirmation of a plan of reorganization under section 1141(c) of the Bankruptcy Code. The Fifth Circuit explained that participation connotes activity, noting that Black's Law Dictionary defines "participation" as "the act of taking part in something, such as partnership, a crime, or a trial." Additionally, the Fifth Circuit pointed out that in addressing similar issues, both the Seventh and Eighth Circuits have required a more active level of participation to void a lien. (No. 12-60648, (5th Cir. Aug. 5, 2013).)

See Legal Updates, In re S. White Transportation, Inc.: Fifth Circuit Requires Actual Creditor Participation to Void Liens under Section 1141(c) and In re S. White Transportation: Creditor's Participation Beyond Receipt of Bankruptcy Notice Required to Void its Lien for more on this case.

See Practice Note, Chapter 11 Plan Process: Overview for information on the Chapter 11 process.

A recent Second Circuit case provides useful insight into how New York courts will interpret securitization indentures. Courts will interpret these indentures as a matter of basic contract law and consider extrinsic evidence if ambiguity exists in the plain language of the agreement.

In Bank of NY Trust, N.A. v. Franklin Advisers, Inc., the Second Circuit affirmed that the portfolio manager of a collateralized loan obligation transaction was entitled to its contingent fee upon redemption by the equity holders under the terms of the transaction's indenture. As a threshold issue, the Second Circuit examined the plain language of the indenture like any other contract, noting that if ambiguity exists, the court will use extrinsic evidence to try to determine the parties' expectations when the agreement was entered into.

The Second Circuit approved of the district court's reliance on extrinsic evidence concerning certain provisions of the indenture impacting the contingent fee and dismissed arguments that, under Sharon Steel Corp. v. Chase Manhattan Bank, N.A., the use of extrinsic evidence is disfavored when interpreting boilerplate clauses. It noted that:

The case illustrates that courts (and arbitrators) are often reluctant to construe ambiguous provisions in favor of equity holders to relieve them of burdens associated with their shares, especially in asset-backed securities transactions where the shareholders are qualified institutional investors who bargained for the riskiest piece of the transaction. This consideration appears particularly relevant to the Second Circuit's interpretation of the contingent fee date-of-accrual clause, which, the court acknowledged, could have been read either way. (No. 12-0168, (2d Cir. Aug. 1, 2013).)

See Legal Update, Bank of NY Trust v. Franklin Advisers: Indenture Permits CLO Manager's Fee upon Redemption for more on this decision.

See Practice Note, Securitization in the Courts: Key US Cases Affecting Securitization for a summary of important cases in the area of securitization.

The Ninth Circuit recently aligned with the Third Circuit in rejecting Electronic Arts, Inc.'s (EA's) First Amendment defense to right of publicity claims brought by former football players against the video game developer concerning its use of their likenesses in its football video games.

In Keller v. Electronic Arts, Inc., the Ninth Circuit held that under the transformative use test developed by the California Supreme Court in Comedy III Productions, Inc. v. Gary Saderup, Inc., EA's use did not qualify for First Amendment protection as a matter of law because it literally recreated the plaintiff, Samuel Keller, in the very setting in which he became famous. The Ninth Circuit rejected EA's suggestion to import the balancing test set out by the Second Circuit in Rogers v. Grimaldi to evaluate Lanham Act claims into the right of publicity arena. (No. 10-15387, (9th Cir. July 31, 2013).) Keller is consistent with the Third Circuit's recent ruling in Hart v. Electronic Arts, Inc.

On the same day, in Brown v. Electronic Arts, Inc., the Ninth Circuit affirmed the dismissal of retired professional football player Jim Brown's action alleging that EA violated Section 43 of the Lanham Act through the use of his likeness in its Madden NFL video games. In this case, the Ninth Circuit held that the district court correctly applied the Rogers test for balancing trademark and similar rights with First Amendment rights. Applying Rogers, the Ninth Circuit concluded that Brown's likeness was artistically relevant to the games and no facts were alleged to support the claim that EA explicitly misled consumers on Brown's involvement with the games. The Ninth Circuit noted that, in this case, the public interest in free expression outweighed the public interest in avoiding consumer confusion. State right of publicity claims were not before the appellate court in Brown. (No. 09-56675, (9th Cir. July 31, 2013).)

See Legal Update, Ninth Circuit Aligns with Third Circuit and Rejects EA's First Amendment Defense to Right of Publicity Claims for more on these decisions.

See Practice Note, Right of Publicity: Overview for more on US law governing the right of publicity.

In certain circumstances, senior common law use of a trademark can limit the rights of the owner of a federal registration for the mark, even where the registration is incontestable. Depending on the facts, the registrant may not only be precluded from entering into the other party's trade area, but may also be subject to an infringement claim by the other party. Before initiating trademark litigation, counsel should carefully assess whether there may be any territorial limitations on the plaintiff's rights and, where such limitations exist, consider potential alternatives to a lawsuit.

In Dorpan, S.L. v. Hotel Meliá, Inc., the First Circuit vacated the District of Puerto Rico's grant of summary judgment to the plaintiff, Dorpan, and remanded to the district court. Dorpan sought a declaration that as the owner of an incontestable registration, it was entitled to exclusive use of the mark "Meliá" throughout Puerto Rico, with the possible exception of the city of Ponce where the defendant, HMI, had operated a hotel for over 100 years.

The First Circuit found that HMI's senior common law use of the mark "Meliá" geographically limited the rights flowing from Dorpan's incontestable registration for the mark "Gran Meliá." The court found that the scope of the limitation depended on the reach of HMI's trade area which, in turn, depended on whether Dorpan's use in the relevant area resulted in a likelihood of confusion with HMI's mark. The court concluded that a reasonable factfinder could find that the parties' marks could not coexist in Puerto Rico without a likelihood of confusion. (No. 12-1679, (1st Cir. Aug. 28, 2013).)

See Legal Update, First Circuit Rules in Battle Between Owner of Incontestable Trademark Registration and Senior Common Law User for more on this decision.

See Practice Note, Trademark Infringement and Dilution Claims, Remedies and Defenses for more on trademark claims under the Lanham Act.

Changing an IP address to access information from a public website after being banned from the website violates the Computer Fraud and Abuse Act (CFAA), according to the Northern District of California.

In Craigslist, Inc. v. 3Taps, Inc., Craigslist alleged that 3Taps violated the CFAA and its California statutory counterpart by copying or scraping content from Craigslist's website. After Craigslist sent 3Taps a cease and desist letter and blocked all IP addresses associated with 3Taps, 3Taps changed its IP addresses and used proxy servers to continue scraping Craigslist's data.

The CFAA applies when a person intentionally accesses a computer used in or affecting interstate or foreign commerce or communication "without authorization or exceeds authorized access, and thereby obtains … information from any protected computer." 3Taps argued that because Craigslist made the classified ads on its website publicly available, this authorized all persons, including 3Taps, to access the website. The Northern District of California found, however, that the CFAA does not prohibit a computer owner from selectively revoking authorization to access its computer. Craigslist could therefore rescind access to its public website on a case-by-case basis and because 3Taps' intentional circumvention of Craigslist's IP address ban was clearly without authorization, it violated the CFAA. (No. 12-03816, (N.D. Cal. Aug. 16, 2013).)

The court noted that given Craigslist's actions, its revocation of authorization was clear cut. However, later courts are likely to encounter more difficult cases regarding what constitutes an effective revocation of authorization to access a publicly-available website.

See Legal Updates, Intentionally Circumventing IP Address Ban Violates CFAA: N.D. Cal. and Craigslist's Terms of Use Don't Support Copyright or CFAA Claims: N.D. Cal. for more on this case.

The Second Circuit has further clarified the pleading requirements for a wage and hour action under the Fair Labor Standards Act (FLSA) and provided guidance on establishing employee status under the FLSA.

In Dejesus v. HF Management Services, LLC, the Second Circuit held that a plaintiff must allege particular facts to state a plausible overtime claim under the FLSA. The district court held that the plaintiff in Dejesus failed to sufficiently state a claim for overtime because she simply alleged that she worked more than 40 hours in any workweek, essentially repeating the language of the statute.

However, the Second Circuit disagreed and held that the plaintiff properly alleged her status as an employee under the broad definition of the FLSA by detailing:

(No. 12-4565, (2d Cir. Aug. 5, 2013).)

This decision represents a victory for employers because it makes clear that more is required to state an FLSA overtime claim than threadbare allegations mirroring the statute's language. However, it also serves as a reminder that the definition of employee under the FLSA is very flexible and, therefore, employers will have difficulty avoiding overtime claims by arguing employee status.

See Legal Update, Second Circuit Clarifies FLSA Pleading Requirements for Overtime, Employee Classification for more on this decision.

See Practice Note, Wage and Hour Law: Overview for more on an employer's rights and obligations under the FLSA.

In more good news for employers, the Second Circuit has joined the Fourth, Fifth and Eighth Circuits in finding that the text of the FLSA does not forbid class action waivers. In Sutherland v. Ernst & Young LLP, the Second Circuit reversed an order from the district court and held that an employment agreement with a class action waiver for wage and hour claims was lawful.

Citing the US Supreme Court's decision in American Express Co. v. Italian Colors Restaurant, the Second Circuit held that:

(No. 12-304, , at *6 (2d Cir. Aug. 9, 2013).)

Importantly, the Second Circuit also held that American Express Co. effectively prevents litigants from pursuing expense arguments as a means to void a class action waiver. FLSA plaintiffs may still seek "judge-made" exceptions to avoid arbitration, but after the Second Circuit's decision, the list of exceptions to be argued has undoubtedly narrowed.

See Legal Update, Second Circuit Upholds Class Action Waiver, Cites Supreme Court in Rebuffing the Effective Vindication Doctrine for more on this decision.

See Practice Note, Defending Wage and Hour Collective Actions for information on defending wage and hour collective actions brought under Section 16(b) of the FLSA.

A recent Ninth Circuit decision confirms that courts will rigorously enforce arbitration agreements containing class action waivers in the employment context.

In Richards v. Ernst & Young, LLP, the Ninth Circuit:

Among other things, the plaintiff argued that the court should affirm the district court's ruling based on the decision of the National Labor Relations Board in D.R. Horton, which held that arbitration agreements with class action waivers create an unfair labor practice under the National Labor Relations Act. The Ninth Circuit declined to rule on the issue because the plaintiff failed to raise this argument before the district court. However, it opined that D.R. Horton is inconsistent with US Supreme Court precedent, noting that the overwhelming majority of courts that have considered the issue have not deferred to D.R. Horton for this reason. (No. 11-17530, (9th Cir. Aug. 21, 2013).)

See Legal Update, Ninth Circuit Enforces Class Action Waiver in Arbitration Agreement for more on this decision.

See Practice Note, Class Arbitration Waivers in the US: Case Tracker for an outline of court decisions on the enforceability of class arbitration waivers in the US.