A corporate officer’s scienter may be imputed to a company even where he acted adversely to the company’s interests, following a recent decision from the Ninth Circuit.

In re ChinaCast Education Corp. Securities Litigation involved a shareholder suit over allegations that ChinaCast’s former CEO made fraudulent public statements about the company’s financial health and stability, while simultaneously embezzling company funds, in violation of Rule 10b-5 under the Securities Exchange Act of 1934. The district court dismissed the complaint, finding that the officer’s statements could not be imputed to the company under the “adverse interest” exception to the common law rules of agency.

The Ninth Circuit reversed. As a matter of first impression, the court concluded that the adverse interest exception does not apply if the plaintiff is an innocent third party who relied on the apparent authority of a rogue agent. Because there was no dispute that the CEO had acted within the scope of his apparent authority when making the statements, his fraudulent intent, while contrary to ChinaCast’s business interests, could be imputed. ( (9th Cir. Oct. 23, 2015).)

See Legal Update, Agent’s Scienter Imputed to Corporate Defendant Even Where Agent’s Fraud Was Adverse to the Company’s Interests: Ninth Circuit for more on this decision.

See Practice Notes, Exchange Act: Section 10(b) Defense Strategy Overviews and Exchange Act: Section 10(b) Defenses Against Scienter Claims for more on securities litigation.

The Fifth Circuit has held that class-wide reliance, for purposes of satisfying predominance under Federal Rule of Civil Procedure (FRCP) 23(b)(3), cannot be inferred merely because the plaintiffs were defrauded by a pyramid scheme.

In Torres v. S.G.E. Management, L.L.C., the plaintiffs brought a class action under the Racketeer Influenced and Corrupt Organizations Act (RICO), alleging that they were defrauded by investing in an illegal pyramid scheme. Although the district court found no single misrepresentation could establish class-wide reliance, it certified the class. The court reasoned that a jury could infer reliance because no one would have rationally joined a pyramid scheme which, by definition, is an illegal enterprise in which the vast majority of participants will lose money.

The Fifth Circuit reversed. While most participants lose money, the court argued, a person might knowingly participate in a pyramid scheme hoping or expecting to be one of the few people at the top who do make money. Because a class member might have joined the enterprise with that hope or expectation, there could be no class-wide inference based merely on the fact that the enterprise is an alleged pyramid scheme. ( (5th Cir. Oct. 16, 2015).)

See Legal Update, Alleging Pyramid Scheme Does Not Automatically Satisfy Predominance Requirement in FRCP 23(b)(3) Class Action: Fifth Circuit for more on this decision.

See Practice Note, Class Actions: Certification for more on the class certification process and Class Action Certification: Case Tracker for a table of recent federal decisions on class action certification motions.

The DC Circuit blocked an attempt to have district courts hear challenges to ongoing SEC administrative proceedings, joining the Seventh Circuit in holding that federal district courts do not have subject matter jurisdiction over challenges to an SEC administrative hearing. According to the decision, only a US circuit court of appeals can review a final SEC order.

In Jarkesy v. SEC, the SEC brought an administrative proceeding alleging that the appellant Jarkesy and his investment company violated securities laws. While the matter was pending, the SEC issued an order approving a settlement with the appellant’s co-defendants that addressed the appellant’s alleged fraudulent misconduct. The appellant and his company sought injunctive relief from the district court to prevent the SEC from continuing the administrative proceeding, which they claimed was unconstitutional.

The DC Circuit affirmed the district court’s dismissal, holding that the SEC’s statutory and regulatory scheme:

(803 F.3d 9 (D.C. Cir. 2015).)

See Legal Update, No Judicial Review of SEC Orders in District Court: DC Circuit for more on this decision.

See Practice Note, Securities Enforcement: A Roadmap of SEC’s Investigation and Enforcement Process for information on the various stages of the SEC’s investigation and enforcement process.

The Second Circuit recently issued a decision on an issue of first impression regarding service of process under the Foreign Sovereign Immunities Act.

Harrison v. Republic of Sudan arose out of the al Qaeda terrorist attack on the USS Cole in 2000. The plaintiffs, US sailors who were wounded in the attacks and their spouses, alleged that Sudan provided material support to the terrorist group. Pursuant to 28 U.S.C. § 1608(a)(3), the plaintiffs filed an Affidavit Requesting Foreign Mailing and requested that the Clerk of Court mail the summons and complaint by registered mail, return receipt requested, to the Minister of Foreign Affairs at the Sudanese Embassy in Washington, DC rather than at the Ministry of Foreign Affairs office in Khartoum, Sudan. After Sudan failed to respond or appear, the district court entered a default judgment.

Sudan appealed, arguing that service of process was improper. The Second Circuit disagreed and affirmed the default judgment, noting that:

(802 F.3d 399 (2d Cir. 2015).)

See Legal Update, Service to Sudanese Embassy Complied with Foreign Sovereign Immunities Act: Second Circuit for more on this decision.

See Practice Note, International Litigation: US Laws Governing Cross-Border Service of Process for more on cross-border service of process.

In a highly watched case, the Ninth Circuit confirmed that the National Collegiate Athletic Association (NCAA) is subject to antitrust law, and provided clarity on the NCAA’s ability to limit the compensation given by member schools to student-athletes.

The plaintiffs in O’Bannon v. National Collegiate Athletic Ass’n, a group of current and former college athletes, alleged that the NCAA rules on compensation were unlawfully anticompetitive. The district court held that the NCAA’s restrictions on compensating student-athletes beyond scholarship and grants unreasonably restrained trade in violation of Section 1 of the Sherman Act, and issued an injunction that required the NCAA to permit member schools to provide student-athletes with:

The Ninth Circuit affirmed the district court’s Sherman Act ruling, finding that the NCAA’s challenged compensation rules fall within the broad, modern definition of commerce subject to the statute. The court upheld the court’s injunction on cost-of-attendance scholarships, but reversed and vacated the injunction on deferred compensation. While the former was a valid, less restrictive alternative to the NCAA’s compensation rules, the latter would directly contradict the NCAA’s amateurism rules instead of providing a less restrictive alternative to them. (802 F.3d 1049 (9th Cir. 2015).)

See Legal Update, Ninth Circuit: NCAA Not Required to Allow Its Member Schools to Pay Student Athletes $5,000 Per Year for more on this decision.

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

Resolving a split among the district courts on standing under the Telephone Consumer Protection Act (TCPA), the Third Circuit adopted a new standard that extends the zone of interests protected by the TCPA, permitting more plaintiffs to sue under the statute.

The TCPA makes it unlawful to initiate any call to a residential telephone line using an artificial or a prerecorded voice to deliver a message, without the prior express consent of the called party. In Leyse v. Bank of America National Ass’n, the plaintiff brought an action after his residence received a prerecorded call from a telemarketer. His roommate was the telephone subscriber and intended recipient of the call. However, it was unclear from the complaint whether the plaintiff, his roommate, or an answering machine picked up the call.

The Third Circuit applied a zone of interests analysis under which a plaintiff has standing, even if he is not the intended recipient of the call, if the plaintiff:

In holding that the plaintiff met this standard and was within the zone of interests the TCPA protects, the court noted that Congress enacted the TCPA to protect the privacy of consumers who were actually contacted and reasonably expect protection from nuisance and invasion of privacy. (804 F.3d 316 (3d Cir. 2015).)

See Legal Update, Third Circuit Clarifies Statutory Standing for TCPA Robocalls for more on this decision.

See Practice Note, TCPA Litigation: Key Issues and Considerations for more on TCPA litigation.

The Delaware Supreme Court has affirmed that transactions ordinarily subject to enhanced scrutiny qualify for the presumptions of the business judgment rule after the disinterested stockholders approve the transaction through a fully informed vote.

In Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court upheld the decision of the Court of Chancery that dismissed claims of breach of fiduciary duty in connection with the acquisition of KKR Financial Holdings LLC by private equity firm KKR & Co. L.P. The Supreme Court ruled that a vote by the fully informed and uncoerced stockholders of the target company is outcome-determinative and restores the presumptions of the business judgment rule, even when the merger is a change-of-control transaction to which the enhanced scrutiny standard of review under Revlon and its progeny ordinarily applies. ( (Del. Oct. 2, 2015).)

Because director defendants rarely lose in cases where they are entitled to the presumptions of the business judgment rule, the KKR decision represents a powerful deterrent against bringing post-closing claims for damages. Unless the plaintiffs can either demonstrate a conflict of interest that justifies entire fairness review or that seriously defective disclosures undermined the stockholder vote, the typical Revlon claim will become far less useful for anything other than pre-closing injunctions.

In light of the Delaware Supreme Court’s new guidance, the Court of Chancery reversed its own decision in In re Zale Corp. Stockholders Litigation. After it initially applied enhanced scrutiny to its review of a target board’s conduct when the board learned of its financial advisor’s potential conflict of interest, the court later applied the business judgment rule and granted a motion to dismiss on that basis. ( (Del. Ch. Oct. 29, 2015).)

See Legal Updates, Delaware Supreme Court Affirms “KKR,” Lowers Standard of Review from Enhanced Scrutiny to Business Judgment when Merger Approved by Fully Informed Stockholder Vote and Delaware Court of Chancery Reverses Own Decision in “Zale” Following “Corwin,” Dismisses Claim Against Financial Advisor for more on these decisions.

See Practice Note, Fiduciary Duties of the Board of Directors for more on the business judgment rule and enhanced Revlon scrutiny.

Regulation of protected health information contained in portable devices and computers remains a top enforcement priority for the US Department of Health and Human Services (HHS), as demonstrated by a recent $750,000 settlement over violations of privacy and security rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Earlier this year, HHS announced a $1.7 million settlement resulting from the theft of an unencrypted laptop. These settlements emphasize the importance of proper encryption of mobile devices and electronic media.

HHS began its investigation of the private physician practice involved in the latest settlement after the practice reported, through a HIPAA breach notification, the theft of a laptop bag from an employee’s car. The bag contained the employee’s computer and backup media with unsecured electronic protected health information (ePHI). HHS’s investigation revealed that the practice had failed to:

Under the resulting settlement, the practice must pay $750,000 and adopt a robust corrective action plan. (Press Release, HHS, $750,000 HIPAA Settlement Emphasizes the Importance of Risk Analysis & Device & Media Control Policies (Sept. 2, 2015).)

See Legal Update, Stolen Laptop Bag Leads to $750,000 HIPAA Settlement for more on this settlement.

See Practice Note, HIPAA Enforcement: Penalties and Investigations for more on the privacy, security, and breach notification rules under HIPAA.

A recent Third Circuit decision could significantly affect the structure of section 363 bankruptcy sales, particularly in cases where there are substantial priority claims. The decision reflects flexibility in the section 363 sale process that is not permitted when purchasing assets under a Chapter 11 plan.

In In re ICL Holding Co., Inc., the debtor’s secured lenders offered to credit most of the debt they were owed and pay certain fees and costs incurred by the debtor and the creditors’ committee. These amounts were placed into separate escrow accounts (escrowed funds).

After the secured lenders and the debtor entered into an asset purchase agreement, the debtor filed for bankruptcy and requested to sell substantially all of its assets through a court-supervised auction under section 363(b)(1) of the Bankruptcy Code. The creditors’ committee promised to support the sale in exchange for the secured lenders’ agreement to deposit $3.5 million in trust for the benefit of unsecured creditors (settlement sums). The government objected to the settlement, arguing that it violated the absolute priority rule.

On appeal, the Third Circuit held that the escrowed funds and the settlement sums were not property of the estate and therefore did not need to be distributed in accordance with the Bankruptcy Code’s priority scheme because:

(802 F.3d 547 (3d Cir. 2015).)

See Legal Update, In re ICL Holding Co., Inc.: Third Circuit Allows Purchaser to Gift Non-Estate Property to Junior Creditors to Resolve Section 363 Sale Objections for more on this decision.

See Practice Note, Buying Assets in a Section 363 Bankruptcy Sale: Overview for more on the sale process under section 363.

Another attempt to hold a video streaming service provider liable under the Video Privacy Protection Act (VPPA) failed when the Eleventh Circuit found that a plaintiff does not become a subscriber under the statute merely by downloading a free app to view content.

The VPPA precludes providers from knowingly disclosing a subscriber’s personally identifiable information (PII) to a third party. In Ellis v. Cartoon Network, Inc., the plaintiff brought suit claiming that Cartoon Network, Inc. (CN) violated the VPPA by sending records from CN’s mobile app of the plaintiff’s viewing history, and the unique Android ID number of the plaintiff’s smartphone, to a third-party behavioral tracking company. The CN app is free and users may view video clips and television shows without signing up for an account.

The district court found that the plaintiff was a subscriber and consumer under the VPPA, but dismissed on the basis that no PII was disclosed. The Eleventh Circuit affirmed the dismissal, but, notably, did not reach the question of whether a user’s viewing history or unique smartphone identification number qualify as PII under the statute. Instead, the court concluded that the plaintiff was not a subscriber because he did not:

(803 F.3d 1251 (11th Cir. 2015).)

See Legal Update, Free App Users Are Not Subscribers Under the VPPA: 11th Circuit for more on this decision.

See Practice Note, US Privacy and Data Security Law: Overview for more on privacy and data security laws and Practice Note, Key Issues in Consumer Data Breach Litigation for more on trends in consumer data breach class actions.

The Federal Circuit recently issued a rare reversal of a decision by the Patent Trial and Appeal Board (PTAB) in an inter partes review, finding that the PTAB ignored overwhelming evidence of obviousness.

In Belden Inc. v. Berk-Tek LLC, the PTAB determined the patentability of claims of the ‘503 patent, which relates to a method of manufacturing a data communications cable. The PTAB ruled that claims one through four of the ‘503 patent were invalid for obviousness based on a combination of Japanese and Canadian prior art. However, the PTAB found that claims five and six were not invalid for obviousness, because the prior art did not teach a method of manufacturing the specific types of cables claimed in the ‘503 patent.

On appeal, the Federal Circuit held that the PTAB should have found all of the ‘503 claims invalid for obviousness. The court reasoned that the PTAB’s decision rested on legal errors, and the evidence clearly demonstrated that a skilled artisan would have combined the Japanese and Canadian prior art to arrive at the methods covered by claims five and six. ( (Fed. Cir. Nov. 5, 2015).)

See Legal Update, PTAB Erred in Upholding Claims in Inter Partes Review: Federal Circuit for more on this decision.

See Practice Notes, Patent Infringement Claims and Defenses and PTAB Trial Practice Rules for more on patent litigation before the PTAB.

The creator of an unauthorized derivative work who makes a fair use parody of preexisting copyrighted material may claim protection for any original contributions under the Copyright Act, held the Second Circuit.

Keeling v. Hars involved a parody stage adaptation of the 1991 movie, Point Break. The plaintiff authored a parody entitled Point Break Live! (PBL), but did not own the copyright or have a license to the Point Break film. The parties entered into a production agreement for the defendant to produce a two-month stage run of PBL. After the defendant continued to produce PBL beyond the period in their agreement, the plaintiff sued the defendant and her production company for copyright infringement.

After the district court denied summary judgment and a jury rendered a verdict in the plaintiff’s favor, the defendants appealed. The defendants claimed that PBL, as unauthorized fair use, was not copyrightable, and that the plaintiff’s original contributions were insufficient to establish independent copyright protection. However, on appeal, the defendants did not dispute the jury’s verdict that PBL was fair use.

Invoking the policy behind the Copyright Act, the Second Circuit affirmed the district court’s denial of summary judgment and the jury verdict, holding that PBL was copyrightable because:

( (2d Cir. Oct. 30, 2015).)

See Legal Update, Original Elements of Unauthorized Parody Copyrightable: Second Circuit for more on this decision.

See Practice Note, Copyright Fair Use for more on fair use and Practice Note, Copyright Infringement Claims, Remedies, and Defenses for more on copyright infringement.

Two recent decisions offer expanded protections for whistleblowers under the Dodd-Frank Act and the Sarbanes-Oxley Act of 2002 (SOX).

In Berman v. Neo@Ogilvy LLC, the Second Circuit split from the Fifth Circuit and several district courts in finding that the anti-retaliation provisions of the Dodd-Frank Act apply with equal force to both employees who report violations internally and those who report wrongdoing to the SEC. Noting that the statutory language was ambiguous, the Second Circuit deferred to the SEC’s interpretative rule allowing whistleblower protection regardless of whether the employee reported the violation to the SEC. (801 F.3d 145 (2d Cir. 2015).)

Whistleblower plaintiffs also may increasingly target individual corporate directors in retaliation cases challenging a plaintiff’s termination, following a decision from the Northern District of California. In Wadler v. Bio-Rad Laboratories, Inc., the court held that individual corporate directors may be personally liable under both SOX and the Dodd-Frank Act when they take part in a decision to terminate a whistleblower. The court acknowledged that both statutes were ambiguous on this issue, but found that subjecting directors to personal liability was consistent with each statute’s purpose. ( (N.D. Cal. Oct. 23, 2015).)

See Legal Updates, Dodd-Frank Protects Whistleblowers Filing Internal Complaints: Second Circuit and Directors May Be Personally Liable for Retaliating Against Whistleblowers Under SOX and Dodd-Frank: N.D. Cal. for more on these decisions.

See Practice Note, Whistleblower Protections Under Sarbanes-Oxley and the Dodd-Frank Act for more on the whistleblower provisions of SOX and the Dodd-Frank Act.

Requiring an employee to travel to a designated break area might shorten an otherwise bona fide meal period to a compensable “rest break” under the Fair Labor Standards Act (FLSA), according to the Fifth Circuit.

Under Department of Labor regulations, there are two categories of workplace breaks. Rest breaks of short duration (5 to 20 minutes) are customarily paid for as working time because a shorter break is deemed to predominately benefit the employer by reenergizing the employee. By contrast, bona fide meal periods (30 minutes or more) are not deemed working time.

In Naylor v. Securiguard, Inc., the Fifth Circuit considered whether a gate guard’s travel time to a designated break area qualified as a rest break or a meal period. The court held that:

(801 F.3d 501 (5th Cir. 2015).)

See Legal Update, Travel Time That Eats into Meal Periods Cannot Be a “Mere Inconvenience” as a Matter of Law: Fifth Circuit for more on this decision.

See Practice Note, Compensable Time for more on calculating compensable time under the FLSA.

Counsel defending employers have new clarity on when the statute of limitations is triggered under the Family and Medical Leave Act (FMLA), following a recent decision from the Seventh Circuit. The two-year statute of limitations runs from the date of the employer’s last alleged FMLA violation, not the date of the employee’s termination.

The plaintiff in Barrett v. Illinois Department of Corrections was terminated for violating the defendant’s unauthorized absence policy, under which employees who accumulated 12 unauthorized absences could be terminated. The plaintiff alleged that the defendant had violated her FMLA rights by improperly denying leave requests between 2003 and 2005, each of which she had challenged before the defendant’s employee review board, and terminating her under the absence policy.

The Seventh Circuit affirmed the district court’s award of summary judgment to the defendant. In finding the plaintiff’s suit untimely, the court determined that:

(803 F.3d 893 (7th Cir. 2015).)

See Legal Update, FMLA Limitations Period Runs from Denial of Leave Not Later Termination Date for Unauthorized Absences: Seventh Circuit for more on this decision.

See Practice Notes, Employment Litigation: FMLA Claims and Family and Medical Leave Act (FMLA) Basics for more on the FMLA.

The US Supreme Court’s denial of certiorari of a Ninth Circuit decision has the potential to undermine the credibility of state environmental agencies, leaving the Environmental Protection Agency (EPA) as the sole entity that can approve Superfund or Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) settlements. Counsel must now carefully consider the best strategy for negotiating with state environmental agencies and the EPA.

Arizona v. City of Tuscon involved a hazardous waste site in Tucson, Arizona that was later developed into two landfills. The Arizona Department of Environmental Quality (ADEQ) settled with several potentially responsible parties who agreed to pay de minimis amounts ranging from 0.01% to 0.2% of the overall cleanup cost of $75 million in exchange for a release of potential CERCLA liability.

On appeal, the Ninth Circuit reversed the district court’s approval of the consent decree, finding that the district court had afforded undue deference to the ADEQ’s judgment on the fairness of these settlements. Instead, the district court must independently scrutinize the settlement to ensure the terms were fair, reasonable, and consistent with CERCLA’s objectives.

By denying the two petitions for certiorari, the Supreme Court casts doubt over the authority of state environmental agencies to fulfill their statutorily mandated roles under CERCLA. (ABB Inc. v. Arizona Bd. of Regents, 136 S. Ct. 30 (2015); Arizona v. Ashton Co. Inc. Contractors & Engineers, 136 S. Ct. 30 (2015).)

See Legal Update, US Supreme Court Denies Cert After Ninth Circuit Rejects Superfund Settlement for more on this decision.

See Practice Note, Commercial Real Estate Loans: Minimizing the Environmental Risk for Lenders Under CERCLA for more on the steps lenders in commercial real estate loan transactions can take to minimize their risk of environmental liability under CERCLA.