123 Search Results

January 31, 2011 |
“Made in the U.S.A.” Decision Threatens Return to the “Wild West” for California Unfair Competition Law Class Actions

Printable PDF California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200 et seq., the "UCL") is an expansive statute that historically has been popular among plaintiffs’ lawyers.  Until recently, private parties could bring "representative," non-class UCL lawsuits even though they had no business dealings with the defendant and despite any showing of actual injury.  But in 2004, California voters responded to high-profile abuses of the UCL by adopting Proposition 64.  This initiative required private plaintiffs to comply with class certification requirements and to demonstrate actual "injury in fact" and "lost money or property as a result of" the alleged unfair competition.  On January 27, 2011, the Supreme Court of California interpreted these amendments in a way the dissenting justices criticized as "effectively making it easier for a plaintiff to establish standing," despite the electorate’s intent to strictly limit a private plaintiff’s ability to sue.  Kwikset Corp. v. Superior Court, No. S171845, 2011 Cal. LEXIS 532, at *68 (Chin, J., dissenting) (emphasis in original).  The 5-2 Kwikset opinion establishes a test for standing that is important to anyone litigating UCL claims, especially in cases predicated on product mislabeling.  Now, "plaintiffs who can truthfully allege that they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property’ within the meaning of Proposition 64 and have standing to sue."  Id. at *4.  According to the majority, the consumer has "lost money" by paying more for the mislabeled product than he or she subjectively believed it was worth–even if the mislabeled product functioned perfectly and it was no more expensive than functionally equivalent products with accurate labels.  This alert reviews Kwikset, discusses the potential impact of the decision, and identifies ways defendants may resist plaintiffs’ attempts to use this opinion to undo gains achieved after Proposition 64. I.  Proposition 64 and Prior Litigation in Kwikset Voters approved Proposition 64 in the November 2004 general election by an impressive margin.  The initiative revised the UCL, and the companion False Advertising Law (Cal. Bus. & Prof. Code § 17500 et seq.), to bring these statutes in line with other states’ consumer protection laws and to require actual injury and class certification for representative actions.  As amended, the new standing provisions require private plaintiffs to show an "injury in fact" and "lost money or property as a result" of the alleged unfair competition or false advertising. Following the passage of Proposition 64, courts grappled with the meaning and impact of the amendments.  In Californians for Disability Rights v. Mervyn’s LLC, 39 Cal. 4th 223 (2006), the Supreme Court of California ruled that these amendments applied to pending cases.  Next, the Court determined that Proposition 64 eliminated "representative" actions and required private plaintiffs to satisfy class certification requirements.  Arias v. Superior Court, 46 Cal. 4th 969, 975 (2009); Amalgamated Transit Union v. Superior Court, 46 Cal. 4th 993, 998 (2009).  Shortly thereafter, the Court held that in cases alleging a misrepresentation theory, Proposition 64 required private plaintiffs to establish actual reliance on the allegedly misleading statements but did not require that absent class members also establish standing.  In re Tobacco II Cases, 46 Cal. 4th 298 (2009). In Kwikset, the primary issue was whether plaintiffs could show that they "lost money or property" due to Kwikset Corporation’s alleged misrepresentation that its locksets were "Made in the U.S.A."  Plaintiffs claimed that this statement violated the UCL because the locksets contained some foreign-made pins and screws.  The case had been pending when voters passed Proposition 64, and the trial court had entered judgment in favor of plaintiffs following a bench trial.  Proponents of the initiative cited this case as a "shakedown" lawsuit that the initiative was designed to curb.  An appellate judge in an earlier appeal also warned that sanctioning plaintiffs’ claims would create a hostile business environment in which "a single spool of foreign thread is enough to sustain a lawsuit."  Benson v. Kwikset Corp., 126 Cal. App. 4th 887, 933 (2005) (Sills, J., dissenting). After voters approved Proposition 64, plaintiffs limited their claims to injunctive relief, and added new class representatives who could meet the initiative’s standing requirements.  The trial court refused to dismiss the case, but Kwikset sought writ relief.  In a lengthy opinion, the appellate court concluded that while plaintiffs demonstrated adequate injury in fact because they were induced into purchasing a product that was mislabeled in violation of a statute, they could not show "lost money or property."  Despite their frustrated "patriotic desire to buy fully American-made products," plaintiffs received a fully functioning lockset (the "benefit of their bargain"), they did not claim that they paid a premium based on the "Made in the U.S.A." label, and they did not assert that the lockset was defective or inferior to a product containing all-American components. The Supreme Court of California granted review in June 2009, to address whether plaintiffs’ claim that they bought the products in reliance on alleged misrepresentations made on the product’s label sufficed to show that they "lost money" and had standing to sue under the UCL. II.  The Kwikset Majority Eases Private Plaintiffs’ Burden To Establish Standing The Supreme Court of California reversed and held that plaintiffs lost money because they "bargained for locksets that were made in the United States" and "got ones that were not."  The five-justice majority ruled that the "plain language" of Proposition 64 requires that private parties "(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., caused by, the unfair practice or false advertising that is the gravamen of the claim."  2011 Cal. LEXIS 532 at *16.  The Court addressed each of the three principal elements of the UCL’s amended standing requirements as follows: "Injury in Fact":  The Court concluded that this term has a "well-settled meaning" under federal law:  "an invasion of a legally protected interest which is (a) concrete and particularized; and (b) actual or imminent, not conjectural or hypothetical."  Id. at *16-17.  "Lost Money or Property":  The majority then concluded that "lost money or property–economic injury–is itself a classic form of injury in fact" and "[i]f a party has alleged or proven a personal, individualized loss of money or property in any nontrivial amount, he or she has also alleged or proven injury in fact."  Id. at *20.  Reliance/Causation:  Reaffirming Tobacco II, the majority held that "a plaintiff must show that the misrepresentation was an immediate cause of the injury producing conduct," but the plaintiff "is not required to allege that the challenged misrepresentations were the sole or even the decisive cause of the injury-producing conduct."  Id. at *27; see also In re Tobacco II Cases, 46 Cal. 4th at 326-28. The majority concluded that it is irrelevant whether or not a plaintiff received a properly functioning product or paid a premium because of a purported error in a product label.  Instead, a plaintiff who relied on a label when making a purchase will have suffered economic harm by having "paid more for [a product] than he or she otherwise might have been willing to pay if the product had been labeled accurately."  2011 Cal. LEXIS 532 at *35-36.  The majority concluded that any other result "would bring an end to private consumer enforcement of bans on many label misrepresentations, contrary to the apparent intent of Proposition 64."  Id. at *38.  "Simply stated," Associate Justice Kathryn M. Werdegar wrote, "labels matter," and consumers who purchase a mislabeled product satisfy the Proposition 64 standing requirements.  Id. at *31-32.  A "consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the standing requirement of [Proposition 64] by alleging, as plaintiffs have here, that he or she would not have bought the product but for the misrepresentation."  Id. at *36-37.  The economic injury may be measured as the difference between what the consumer would have spent had he/she known the truth about the product, and the amount actually spent.  As has been its practice in other significant UCL decisions, the Court was careful to limit its ruling to the particular case presented–here, the sufficiency of standing allegations as a matter of pleading in a misrepresentation action.  Id. at *27 n.9.  As the majority explained, courts must accept the allegations as true at the demurrer stage, and "[a]t the succeeding stages, it will be plaintiffs’ obligation to produce evidence to support, and eventually to prove, their bare standing allegations. . . .  If they cannot, their action will be dismissed."  Id. at *45 n.18.  Acting Chief Justice Joyce L. Kennard and Associate Justices Marvin R. Baxter, Carlos R. Moreno, and former Chief Justice Ronald M. George (sitting by designation) joined Associate Justice Werdegar’s majority opinion. III.  The Dissenting Opinion Criticizes the Majority’s Holding as Dismantling Proposition 64 and Undermining Voter Intent Associate Justice Ming W. Chin wrote a dissenting opinion (joined by Associate Justice Carol A. Corrigan) that sharply criticized the majority’s holding as standing "[i]n direct contravention of the electorate’s intent," because it "effectively mak[es] it easier for a plaintiff to establish standing" after Proposition 64.  Id. at *56 (emphasis added).  Justice Chin explained that the majority effectively collapsed the "injury in fact" and "loss of money or property" requirements into a combined "economic injury" element that requires only a showing that private plaintiffs "lost" the "price the consumer paid for the product," and an allegation that plaintiffs "would not have bought the mislabeled product."  Id. at *73.  The dissenting opinion also criticized the majority for using extreme examples such as a counterfeit Rolex watch and food products mislabeled as "kosher," "halal," or "organic."  Id. at *64. IV.  Potential Impact on Future UCL Litigation If Justice Chin’s warnings are accurate, the Court’s ruling may spark a return to the pre-Proposition 64 world of questionable and even frivolous lawsuits that turned California into the "Wild West" of consumer class action litigation.  However, just as the "sky is falling" predictions immediately after Tobacco II proved unwarranted (for the reasons discussed below), the same may very well be true of any initial overreaction to Kwikset.  Looking ahead, businesses facing UCL claims still have strong defenses to liability, and the breadth of Kwikset‘s impact will ultimately be resolved through litigation in the Courts of Appeal. 1.  Potential Limits On Kwikset Holding.  Despite some broad language in the majority’s opinion, Kwikset may be limited to specific types of misrepresentations.  In particular, the "Made in the U.S.A." claim violated specific regulations that restricted the use of this label.  2011 Cal. LEXIS 532 at *5.  As the decision followed a trial, the majority also cited evidence showing many consumers (including the United States Government) have a strong preference for American-made products.  Id. at *44 & n.17.  For other types of claims, it might not be so easy for private plaintiffs to establish that their personal predilections about the importance of intangible and aesthetic values are material and therefore actionable.  2.  Extension Beyond Misrepresentation Context?  The applicability of Kwikset‘s holding to other contexts may be more limited.  For example, many courts have held that plaintiffs cannot rely on certain statements about a product, such as "puffery" that a product is "great," "improved," or "better than ever."  Moreover, in cases predicated on an omission (rather than an affirmative misrepresentation), courts have dismissed cases on the ground that a defendant was not obliged to disclose the allegedly concealed fact.  See, e.g., Daugherty v. Am. Honda Motor Co., 144 Cal. App. 4th 824, 835 (2006); Buller v. Sutter Health, 160 Cal. App. 4th 981, 988 n.3 (2008).  3.  The Increasing Importance Of Reliance.  Post-Kwikset, the focus also may shift from "injury in fact" to reliance ("as a result of . . .").  See, e.g., Durrell v. Sharp Healthcare, 183 Cal. App. 4th 1350, 1364 (2010) (dismissing complaint for failing to claim actual reliance on alleged misrepresentation).  Tobacco II establishes that in misrepresentation cases, plaintiffs must plead and prove "actual reliance . . . in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions."  In re Tobacco II Cases, 46 Cal. 4th at 306.  4.  Deferred Attacks On Standing At Summary Judgment.  The majority in Kwikset also makes clear that plaintiffs will have to establish the pleaded facts in discovery.  2011 Cal. LEXIS 532 at *45 n.18.  Defendants may respond by shifting their focus to later stages of the litigation.  A thorough investigation and targeted deposition may reveal that the named plaintiff never saw the labeling at issue, that the label was not "material" to the purchase decision, that the plaintiff would have purchased the product despite the alleged labeling error, or that the plaintiff continued to purchase the product after discovering the truth about the alleged misrepresentation.  5.  Class Certification.  In addition, because much of the Kwikset opinion rests on a plaintiff’s subjective valuations, there likely will be many opportunities to challenge class certification on the grounds that the named plaintiffs are not typical of the class (because they have an unusual attachment to the importance of the label), or that the class itself is not reasonably ascertainable.  In particular, the majority opinion in Kwikset acknowledges that while "labels matter," only some consumers are concerned about whether a product is "organic," "kosher," or "Made in the U.S.A."  In such cases, is the proper class all purchasers, or only those for whom the label matters?  And if it is the latter, can that class be appropriately defined and identified?  For a class of label-conscious purchasers, would common issues predominate over their individualized and subjective motivations for wanting to purchase a product based on its particular label, and over the variations in subjective value attached to a product that is, for example, "Made in the U.S.A."?  While it is true that Tobacco II concluded that only named class representatives, and not absent class members, must satisfy the Proposition 64 standing requirements (In re Tobacco II Cases, 46 Cal. 4th at 324), that majority also held that even if the named plaintiffs establish standing, a trial court still must determine if a proposed class meets California’s other requirements for class certification, including ascertainability, typicality, predominance.  Id. at 313.  Consequently, many of the same arguments and much of the same evidence that defendants would use to attack the standing of absent class members may be relevant to the later certification inquiry.  Since the Tobacco II decision, several courts have denied certification on these grounds, which appear to be very strong "class busters" in cases pleaded on a Kwikset theory.  See, e.g., Cohen v. DirecTV, Inc., 178 Cal. App. 4th 966, 981 (2009), rev. denied 2010 Cal. LEXIS 954 (Feb. 10, 2010); Pfizer v. Superior Court, 182 Cal. App. 4th 622, 633 (2010), rev. denied 2010 Cal. LEXIS 6162 (June 17, 2010). 6.  Applicability In Federal Cases.  The Class Actions Fairness Act has moved a significant portion of UCL litigation to federal court.  In addition to the standing provisions as modified by Proposition 64, a federal court also must apply the requirements of Article III.  While the majority concluded that the Proposition 64 standing requirements are more stringent than Article III, 2011 Cal. LEXIS 532 at *20, in practice federal "injury in fact" precedent may provide more ammunition to defendants than Kwikset.  See, e.g., Waste Mgmt. of N. Am., Inc. v. Weinberger, 862 F.2d 1393, 1397-98 (9th Cir. 1988) ("[I]t is not enough that a litigant alleges that a violation of federal law has occurred . . . .  Absent injury, a violation of a statute gives rise merely to a generalized grievance but not to standing."); Cronson v. Clark, 810 F.2d 662, 664 (7th Cir. 1987) ("A plaintiff, in order to have standing in a federal court, must show more than a violation of law . . . ."). 7.  Remedies.  It is one thing for a plaintiff to allege "lost money," but it is another thing entirely for that plaintiff to obtain a monetary recovery under the UCL.  Accordingly, whether a plaintiff may prove and recover restitution will likely be a key focus of post-Kwikset litigation.  Because it rests on standing grounds, the majority’s opinion provides no guidance for how trial courts should assess the difference between what a consumer paid for a mislabeled product, and what the consumer would have been willing to pay for the product had it been labeled accurately.  2011 Cal. LEXIS 532 at *37-38 n.15.  In another "Made in the U.S.A." case, the Court of Appeal held that an award of restitution must be "based on a specific amount found owing," and must be "supported by substantial evidence."  Colgan v. Leatherman Tool Grp., 135 Cal. App. 4th 663, 699 (2006).  If future plaintiffs offer nothing more than subjective beliefs and generalized valuations, courts may reject claims for restitution.    Gibson, Dunn & Crutcher’s Class Actions Practice Group is available to assist in addressing any questions you may have regarding this decision, or any other related issues.  Please contact the Gibson Dunn attorney with whom you work or any of the following members of the Class Actions Practice Group: Gail E. Lees – Chair, Los Angeles (213-229-7163, glees@gibsondunn.com)Andrew S. Tulumello – Vice-Chair, Washington, D.C. (202-955-8657, atulumello@gibsondunn.com)G. Charles Nierlich – Vice-Chair, San Francisco (415-393-8239, gnierlich@gibsondunn.com)Christopher Chorba – Los Angeles (213-229-7396, cchorba@gibsondunn.com)Timothy W. Loose – Los Angeles (213-229-7746, tloose@gibsondunn.com)   © 2011 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 10, 2014 |
11th Circ. Message: Be Careful With Lone Pine Orders

Washington, D.C. partner Michael Murphy and associate David Fotouhi are the authors of "11th Circ. Message: Be Careful With Lone Pine Orders" [PDF] published by Law360 at www.law360.com on November 10, 2014.

July 7, 2008 |
2008 Mid-Year FCPA Update

The frenetic pace of Foreign Corrupt Practices Act ("FCPA") enforcement set in 2007 has carried through the first half of 2008.  Mid-year prosecutions are up – substantially so – from last year’s record-setting totals.  And corporate disclosures and media reports of ongoing investigations evidence that this trend of continually increasing enforcement is here to stay for the near future.  This client update provides an overview of the FCPA and other foreign bribery enforcement activities during the first half of 2008, a discussion of the trends we see from that activity, and practical guidance to help companies avoid or limit liability under these laws.  A collection of Gibson Dunn’s publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on our FCPA website. FCPA Overview The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business.  The anti-bribery provisions apply to "issuers," "domestic concerns," and "any person" that violates the FCPA while in the territory of the United States.  The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, the approximately 1,500 foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of this statute.  The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Regulators have frequently invoked these latter two sections – collectively known as the accounting provisions – in recent years when they cannot establish the elements of an anti-bribery prosecution.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provision can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.  2008 Mid-Year Figures The continuing explosion of FCPA prosecutions during the first half of 2008 is best captured in the following chart and graph, which each track the number of FCPA enforcement actions filed by the DOJ and SEC during the past five years.  In these first six months, there have been more FCPA prosecutions than in any other full year prior to 2007.  And although the careful reader will notice that year-to-date numbers are less than half of 2007’s record numbers, by this point last year the DOJ and SEC had filed 5 and 4 enforcement actions, respectively, substantially fewer than we have seen thus far in 2008.  2008(through June 30) 2007 2006 2005 2004 DOJ7 SEC9 DOJ18 SEC20 DOJ7 SEC8 DOJ7 SEC5 DOJ2 SEC3   2008 Mid-Year Enforcement Docket Westinghouse Air Brake Technologies Corp. On February 14, the DOJ and SEC announced settlements with Westinghouse Air Brake Technologies Corp. ("Wabtec") resolving allegations that Wabtec violated the anti-bribery and accounting provisions of the FCPA.  The SEC’s complaint and administrative order allege that Wabtec’s Indian subsidiary, Pioneer Friction Ltd., made $137,400 in improper payments to officials of the Indian Railway Board.  Pioneer allegedly made these payments to influence the Board to award it new contracts to supply brake blocks and to approve Pioneer’s pricing proposals for existing contracts.  Pursuant to the SEC settlement, Wabtec agreed to pay an $87,000 civil penalty, to disgorge $288,351 in profits plus prejudgment interest, and to retain an independent compliance monitor to review and make recommendations concerning the company’s FCPA compliance program for two years.  The DOJ’s non-prosecution agreement with Wabtec additionally alleges that Pioneer made improper payments to various railway regulatory boards to facilitate the scheduling of product inspections and the issuance of compliance certificates and to the Central Board of Excise and Customs to put an end to excessively frequent audits.  Although these payments totaled more than $40,000 over the course of one year, individual payments were as miniscule as $67 per product inspection and $31.50 per month to lower the frequency of Pioneer’s audits.  To resolve these allegations, Wabtec agreed to pay a $300,000 fine and conduct an internal review of its FCPA compliance program.  The Wabtec case, in particular the non-prosecution agreement, paints a sobering picture of the DOJ’s view of the facilitating payments exception to the FCPA, arguably to the point of reading the exception out of the statute.  Companies that permit facilitating payments as a matter of corporate policy should carefully consider this settlement.  Flowserve Corp. On February 21, Flowserve Corp. became the seventh company to settle with the DOJ and SEC for its conduct under the United Nations Oil-for-Food Program.  Although we have described the Oil-for-Food scheme in greater detail in prior updates, the essential allegations (as they concern the "Humanitarian" side of the Program) are that the Iraqi government imposed a 10% "after sales service fee" ("ASSF") as a condition of sales under the Program.  To fund these mandatory payments, contractors typically increased the value of their contracts by 10%, thereby receiving an additional 10% from the United Nations escrow account, and passed the increase on to the Iraqi government through third-party agents and Iraqi-controlled bank accounts.   The SEC’s complaint alleges that Flowserve violated the FCPA’s books-and-records and internal controls provisions through the incorporation into its ledger of $646,487 in inaccurately recorded ASSF payments made (and $173,758 in additional ASSF payments agreed to but not paid) by its French and Dutch subsidiaries, Flowserve Pompes SAS and Flowserve B.V.  To settle these allegations, Flowserve agreed to pay a $3 million civil penalty and to disgorge $3,574,225 in profits plus prejudgment interest.  Flowserve’s settlement with the DOJ was limited to the conduct of its French subsidiary, Flowserve Pompes, as the DOJ (in a fascinating move described in greater detail below) declined prosecution of Flowserve B.V. in recognition of a pending home state prosecution of that subsidiary in the Netherlands.  Flowserve entered into a deferred prosecution agreement with the DOJ, paying a $4 million criminal penalty, and consented to the filing of a criminal information charging Flowserve Pompes with conspiracy to commit wire fraud and to violate the books-and-records provision.  Assuming Flowserve’s successful compliance with the deferred prosecution agreement’s terms, the DOJ will defer prosecution of Flowserve Pompes for the agreement’s three-year term and ultimately dismiss the charges.    AB Volvo One month later, on March 20, AB Volvo became the eighth company to settle with the DOJ and SEC on Oil-for-Food charges.  Alleging essentially the same scheme as with Flowserve, the SEC’s complaint charges AB Volvo with violations of the books-and-records and internal controls provisions through the incorporation into its ledger of $6,309,695 in inaccurately recorded payments made (and $2,388,419 in additional payments agreed to but not paid) by its French and Swedish subsidiaries, Renault Trucks and Volvo CE.  To settle these allegations, AB Volvo agreed to pay a $4 million civil penalty and to disgorge $8,602,649 in profits plus prejudgment interest.  To resolve the DOJ’s investigation, AB Volvo entered into a deferred prosecution agreement and agreed to pay a $7 million criminal fine.  It also consented to the filing of criminal informations against its two implicated subsidiaries, each alleging a conspiracy to commit wire fraud and to violate the books-and-records provision.  As with the Flowserve settlement, assuming AB Volvo successfully completes the three-year term of its deferred prosecution agreement, the DOJ will dismiss the charges against Renault Trucks and Volvo CE.  It is a virtual certainty that AB Volvo’s will not be the last of the Oil-for-Food settlements – likely not even the last of 2008.  At least a dozen other companies have publicly disclosed ongoing Oil-for-Food investigations by the DOJ and SEC in their securities filings.  And in announcing this most recent settlement, then-Assistant Attorney General Alice Fisher noted that the DOJ "will continue its pursuit of companies that abused the U.N. Oil for Food program."  Martin Self On May 2, Martin Self pleaded guilty to a two-count criminal information charging him with violating the anti-bribery provision of the FCPA.  Mr. Self was the President and a part owner of Pacific Consolidated Industries ("PCI").  According to the plea agreement, Mr. Self caused PCI to execute a "marketing agreement" with a relative of a United Kingdom Ministry of Defence ("UK-MOD") official and subsequently caused the payment of approximately $70,350 to the relative pursuant to the agreement.  The problem, according to the charging documents, was that Mr. Self was not aware of any genuine services that the relative provided for PCI and, in fact, Mr. Self believed that the payments were truly for the benefit of the UK-MOD official, who was in a position to influence the award of equipment contracts to PCI.  Holding these beliefs, Mr. Self purposely failed to investigate and deliberately avoided becoming aware of the full nature of PCI’s relationship with the UK-MOD official’s relative.  Mr. Self is not scheduled to be sentenced until September 29, 2008, but the DOJ has publicly announced that he has agreed to serve eight months in prison as part of the plea deal.  This case is the second prosecution of a former PCI executive, the first being the 2007 indictment of Leo Winston Smith.  Mr. Smith has not settled the charges against him and is presently set to go to trial on October 7, 2008.  Additionally, the U.K. government prosecuted the U.K.-MOD official, who is now serving a two-year prison term.  Willbros Group, Inc., Lloyd Biggers, Carlos Galvez, Gerald Jansen, and Jason Steph On May 14, Willbros Group, Inc. and four of its former employees entered into a joint civil settlement with the SEC, and Willbros additionally settled criminal charges with the DOJ.  According to the SEC’s complaint, Willbros, acting through various subsidiaries and employees, including the individual defendants: agreed to make more than $11 million in corrupt payments, at least $2,869,111 of which was actually paid, to senior Nigerian officials, the ruling Nigerian political party, and officials of a commercial joint venture operator to influence the award of several major pipeline contracts collectively worth more than $600 million; made at least $300,000 in corrupt payments to Nigerian revenue officials to lower tax assessments and judicial officials to obtain favorable treatment in litigation; agreed to make $405,000 in corrupt payments, at least $150,000 of which was actually paid, to officials of PetroEcuador, Ecuador’s state-owned oil and gas company, in order to obtain a $3.4 million pipeline modification contract; and paid $524,000 to commercial vendors in Bolivia to obtain dummy invoices that purported to increase Willbros’s subcontractor costs, thereby reducing its value-added tax ("VAT") liability to the Bolivian government by approximately $2.5 million. In summary, Willbros made approximately $3.8 million in corrupt payments, and agreed to make another $8 million in payments upon which it did not deliver, to influence the assessment of taxes, the judicial process, and the award of more than $630 million in pipeline contracts.  To settle the SEC’s complaint, which charged violations of the anti-bribery, books-and-records, and internal controls provisions of the FCPA in addition to violations of the antifraud provisions of § 10(b), Willbros agreed to disgorge $10.3 million in profits plus prejudgment interest.  Willbros additionally entered into a deferred prosecution agreement with the DOJ by which it agreed to pay a $22 million criminal penalty and consented to the filing of criminal informations against both it and its subsidiary, Willbros International, charging violations of the anti-bribery and books-and-records provisions.  Willbros will also retain an independent compliance monitor for the three-year term of the agreement.  Willbros’s combined $32.3 million settlement is thus far the largest of 2008, as well as the second largest in the FCPA’s thirty-one year history.  The SEC’s complaint also permanently enjoins the four Willbros employee defendants from future violations of the FCPA.  Additionally, Messrs. Galvez and Jansen agreed to pay civil penalties of $35,000 and $30,000, respectively.  Mr. Steph, who pleaded guilty to criminal FCPA violations arising from the same conduct in 2007, will have his civil penalty, if any, determined in conjunction with his sentencing for the criminal case later this year.  And in addition to these four Willbros defendants, a fifth, Jim Bob Brown, settled criminal and civil FCPA charges with the DOJ and SEC in 2006 and, like Mr. Steph, is awaiting sentencing.  One final noteworthy aspect of the Willbros settlement is that this case includes a criminal books-and-records prosecution unrelated to corrupt payments.  The allegations stemming from Willbros’s Bolivian tax fraud scheme are predicated on the company’s falsification of its accounts to avoid tax liability.  This potentially foreshadows a broad expansion of the DOJ’s FCPA enforcement practice.   AGA Medical Corp. On June 3, AGA Medical Corp. entered into a deferred prosecution agreement with the DOJ and consented to the filing of a two-count criminal information charging it with violating the anti-bribery provision of the FCPA as well as conspiring to violate the same.  According to the information, a high-ranking AGA officer authorized the company’s distributor to make corrupt payments to government-employed physicians in China to induce them to buy AGA products and Chinese patent officials to induce them to approve AGA patent applications.  AGA agreed to pay a $2 million criminal penalty and retain an independent compliance monitor for the three-year term of the agreement.   FARO Technologies, Inc. Exemplifying the perilous challenge of FCPA compliance in China, two days later, on June 5, the DOJ and SEC announced another China-based FCPA settlement, this one with FARO Technologies, Inc.  FARO consented to the filing of an administrative cease-and-desist order by the SEC and entered into a non-prosecution agreement with the DOJ alleging that FARO violated the anti-bribery, books-and-records, and internal controls provisions of the FCPA through the actions of its wholly owned Chinese subsidiary, FARO Shanghai Co., Ltd.  The settlement documents allege that FARO Shanghai’s country manager made $444,492 in corrupt payments, disguised as "referral fees," to various employees of Chinese state-owned or state-controlled businesses in order to obtain sales contracts.  FARO’s regional sales director for the Asia-Pacific region approved the payments, despite knowing that they were bribes and that they exposed FARO to liability, and despite explicit instruction from other FARO officers not to make such payments.  Pursuant to the non-prosecution agreement, FARO agreed to pay a $1.1 million criminal penalty and retain an independent compliance monitor for the two-year term of the agreement.  The SEC’s cease-and-desist order requires FARO to disgorge $1,850,943.32 in profits plus prejudgment interest. David Pinkerton Although not a 2008 enforcement action – David Pinkerton was indicted for his alleged role in an Azeri bribery scheme in 2005 – defense victories in FCPA cases must be celebrated when they come.  On June 30, the U.S. Attorney’s Office for the Southern District of New York moved to dismiss (which motion was granted on July 1) the charges against Mr. Pinkerton, advising, "further prosecution . . . in this case would not be in the interests of justice."  As we reported in our last update, Mr. Pinkerton and his co-defendant, Frederic Bourke, were successful in persuading Judge Shira Scheindlin to dismiss most of the charges in the indictment on statute-of-limitations grounds.  The DOJ appealed Judge Scheindlin’s decision to the Second Circuit, where the case has been briefed, argued, and is awaiting a decision, but ab initio elected to dismiss the remaining charges against Mr. Pinkerton in this motion.  The charges against Mr. Bourke, as well as his fugitive co-defendant, Victor Kozeny, are still pending.  2008 FCPA Opinion Procedure Releases (through June 30, 2008) By statute, the DOJ must provide a written opinion at the request of an "issuer" or "domestic concern" as to whether the DOJ would prosecute the Requestor under the FCPA’s anti-bribery provisions for prospective conduct that the Requestor is considering taking.  The DOJ publishes these opinions on its FCPA website, but only a party who joins in the request may authoritatively rely upon the opinions.  That said, opinion releases provide excellent – perhaps the best – insight into the DOJ’s views on the scope of the statute.  In the FCPA’s thirty-one year history, the DOJ has issued only forty-nine such opinions, including three in 2007 and two thus far in 2008.  In 2006, then-Assistant Attorney General Alice Fisher commented that "the FCPA opinion procedure has generally been under-utilized" and noted that she wants it "to be something that is useful as a guide to business."  FCPA Opinion Procedure Release 2008-01 On January 15, the DOJ issued its first FCPA opinion release of 2008.  This Opinion is unusually lengthy as compared to prior releases, and contains a myriad of details specific to the Requestor’s proposed transaction.  According to the Opinion, the Requestor sought to make an investment in a joint venture, majority-owned (56%) by an unnamed foreign government, that provides public services to foreign municipalities.  The foreign government wished to completely divest its interest in, and thereby privatize, the joint venture.  The Requestor agreed to purchase the government’s 56% interest in the joint venture, but only after the interest was first purchased by the private foreign entity that owned the minority (44%) share.  Thus, the private foreign entity would form a new company with the foreign government’s shares and then sell those shares to the Requestor. The Requestor conducted extensive pre-acquisition due diligence focused on FCPA compliance.  It considered the owner of the foreign private company to be a "foreign official" under the FCPA because he also served as general manager of the then still government-controlled joint venture.  This concerned the Requestor because it planned to purchase the shares from the general manager at a substantial premium over purchase price.  Accordingly, the Requestor sought an opinion from the DOJ that neither the projected payments to the owner of the private foreign entity nor any shares received by the owner from the divesting government entity would violate the FCPA.  It made certain representations to the DOJ, including that the foreign private company owner’s purchase of the foreign government’s shares would be lawful under the foreign country’s laws and that the owner will cease to be a "foreign official" once the private company purchased the government’s majority stake in the joint venture (i.e., before the Requestor would pay the premium purchase price). The DOJ concluded that it would not pursue an enforcement action with respect to this proposed transaction based on a number of factors.  First, the Requestor conducted reasonable due diligence of the anticipated seller of the privatized shares and would maintain the relevant documentation in the United States.  Second, the Requestor required complete transparency in the transaction and that adequate disclosures be made to the foreign government.  Third, the Requestor plans to obtain from the private foreign entity owner representations and warranties regarding past and future compliance with anti-corruption laws.  Fourth, the Requestor agreed to retain contractual rights to discontinue the business relationship if the joint venture agreement were breached for any reason, including for a violation of anti-corruption laws.  FCPA Opinion Procedure Release 2008-02  The DOJ’s second FCPA opinion release of 2008, issued on June 13, is a groundbreaking statement on an acquiror’s successor liability for FCPA violations by a target company.  The Opinion creates a framework through which U.S. acquirors might seek amnesty for pre- and even post-acquisition FCPA violations by the target, particularly in deals negotiated under the laws of foreign jurisdictions (such as the U.K.) where pre-acquisition due diligence is less open than in the United States.  The requestor, Halliburton Corp., sought to acquire Expro International Group, a publicly traded British oilfield services provider.  Halliburton’s principal competitor in the bidding, Umbrellastream, had made an unconditional bid to Expro (neither Expro nor Umbrellastream is identified in the Opinion, but both are named in numerous media accounts of the bidding war).  Halliburton represented to the DOJ that, "as a result of U.K. legal restrictions inherent in the bidding process for a public U.K. company, it has had insufficient time . . . to complete appropriate FCPA and anti-corruption due diligence."  Further, under the U.K. Takeover Code, an acquiror has no legal ability to insist upon a specified level of due diligence until after the acquisition is completed.  Accordingly, if Halliburton conditioned its bid upon satisfactory completion of pre-acquisition FCPA due diligence, Expro would be free to reject this conditional offer in favor of Umbrellastream’s unconditional bid, even if Umbrellastream offered a lower price.  Accepting the restrictive nature of U.K. due diligence procedures, the DOJ agreed to grant Halliburton a 180-day grace period post-closing during which Halliburton could self-report pre- and post-acquisition FCPA violations without itself being prosecuted, provided Halliburton adhered to a stringent post-acquisition due diligence and integration plan (described below).  Although reserving the right to proceed against Expro for any FCPA violations, the DOJ stated that it does not intend to pursue any enforcement action against Halliburton in connection with (1) the acquisition of Expro in and of itself; (2) any pre-acquisition unlawful conduct by Expro that Halliburton discloses to the DOJ within 180 days of closing; and (3) any post-acquisition unlawful conduct by Expro that Halliburton discloses to the DOJ within 180 days of closing (or within one year if, in the judgment of DOJ, the conduct cannot be fully investigated in 180 days). Five Key Takeaways from the First Half of 2008 FCPA Enforcement Beyond the frenzied nature of the prosecution environment, there are five developments in FCPA enforcement from the first half of 2008 that every general counsel of a business with international operations and every lawyer practicing in this area must key into.  They are: 1.      The outburst of civil litigation collateral to FCPA investigations; 2.      The introduction of legislation that would provide for a private right of action under the FCPA; 3.      The increasing number of foreign corruption investigations; 4.      The growing importance of FCPA due diligence in business transactions, particularly acquisitions; and 5.      Substantial jail terms for individual defendants convicted under the FCPA.   Civil Litigation Collateral to FCPA Investigations Like a broken record, our recurring advice to clients and friends has been to expect and prepare for "tag along" civil litigation when a governmental FCPA investigation becomes public.  In the first half of 2008, we have witnessed this admonition borne out as never before, with a new diversity of FCPA-inspired civil litigation theories.  Over the last few months we have seen four distinct types of collateral litigation emerge:  (1) § 10(b) securities fraud actions; (2) shareholder derivative suits; (3) lawsuits brought by foreign governments; and (4) lawsuits brought by business partners.  As we have previously reported, the first two categories – § 10(b) securities fraud and shareholder derivation actions – are not new to the FCPA world.  But FARO Technologies, Inc. has the unfortunate distinction of facing both arising from the same investigation – on top of criminal and administrative settlements with the U.S. government.  As noted previously, on June 5, FARO entered into dispositions with the DOJ and SEC through which it agreed to pay just over $2.95 million.  Only three days earlier, the U.S. District Court for the Middle District of Florida gave preliminary approval to a $6.875 million settlement resolving a § 10(b) suit filed on behalf of purchasers of FARO stock alleging that FARO "knowingly or recklessly attested to the accuracy of [its] internal controls system, when [it] knew that the system was, in fact, seriously inadequate."  And as if that were not enough, FARO is additionally in settlement negotiations with a plaintiff shareholder who filed a derivative suit on January 11, 2008.  Other companies currently engaged in shareholder derivative litigation stemming from FCPA investigations include BAE Systems PLC and Chevron Corp.  A Michigan public pension system filed suit in 2007 in federal district court in the District of Columbia against BAE’s officers and directors alleging that they breached their fiduciary duties by permitting the company’s managers to make and authorize more than $2 billion in bribes and kickbacks in violation of the FCPA and other foreign anti-corruption laws.  The defendants have moved to dismiss the complaint arguing that plaintiffs lack personal jurisdiction over the leadership of the British company and that, in any event, English law grants plaintiffs neither standing to sue nor a cause of action against BAE’s officers and directors.  The plaintiff shareholder in the Chevron matter filed suit in California state court in May 2007, just two weeks after the New York Times reported that Chevron was in settlement negotiations with the U.S. government concerning its conduct under the Oil-for-Food Program (Chevron would ultimately settle its U.S. government liability in November 2007 for $30 million).  The plaintiff ultimately converted his suit to a shareholder demand on Chevron’s Board of Directors, but a Special Committee of the Board recently declined, after investigation, to file suit against the directors.  The plaintiff shareholder has since refiled his lawsuit.     Chevron has also found itself part of a new wave of FCPA-inspired civil litigation:  one where foreign governments sue U.S. companies that allegedly corrupted the foreign government’s own officials.  On June 27, 2008, the Republic of Iraq filed suit in Manhattan federal district court against ninety-one companies and two individuals alleging that the defendants conspired with Saddam Hussein’s regime to corrupt the Oil-for-Food Program by diverting as much as $10 billion in funds intended for the humanitarian use of the Iraqi people to the illicit use of Hussein’s government.  Iraq claims, inter alia, that the defendants violated the Racketeering Influenced Corrupt Organizations ("RICO") Act, with mail fraud, wire fraud, money laundering, and violations of the Travel Act constituting the necessary predicate violations.  In addition to Chevron, ten other defendants named by the Republic of Iraq have already settled with U.S. government regulators for allegations arising from the Oil-for-Food Program.  Iraq’s Oil-for-Food lawsuit follows closely on the heels of another RICO action filed by a foreign government, that brought by the Kingdom of Bahrain against Alcoa, Inc.  Bahrain’s state-owned aluminum smelter, Aluminum Bahrain ("Alba"), filed suit in federal district court in Pittsburgh on February 27 alleging that Alcoa and its affiliates conspired to corrupt one or more of Alba’s senior officials, influencing the officials to cause Alba to pay inflated prices for Alcoa’s products and to favor the sale of a controlling interest in Alba to Alcoa.  Alba is seeking more than $1 billion in damages, including punitives, but the court has stayed the suit on motion of the DOJ as an intervener.  DOJ sought the stay of proceedings, which neither party opposed, so that it might conduct its own criminal investigation – which does not appear to have been open prior to the civil suit – without the ongoing distraction of civil litigation.  But the DOJ’s stay of Alba’s lawsuit did not stay all of the civil litigation arising from this matter, for on May 1, 2008 a Hawaiian pension fund filed a shareholder derivative action.  Interestingly, the DOJ has not (yet) moved to stay those proceedings, which are presently at the stage of defendants moving to dismiss for failure to make a pre-suit demand upon Alcoa’s Board of Directors.  The final category of FCPA-inspired civil litigation emerging in 2008 is commercial litigation brought by a private plaintiff against its business partners.  On February 21, 2008, Jack Grynberg filed a RICO suit against BP plc and StatoilHydro ASA alleging that they bribed Kazakh officials to win oil rights for joint ventures in which he had an interest, thereby diverting his share of the joint venture profits.  Bringing the classic aphorism "the best defense is a good offense" to the FCPA context, Mr. Grynberg recently told the Daily Telegraph that he brought this suit in an effort to head off a potential prosecution by the DOJ, stating, "Unless I assert that I am an unwilling participant in this, my neck could be on the line."   Another recent example of such a business partner lawsuit with FCPA connotations is that brought by Agro-Tech Corp. against its Japanese distributor, Yamada Corp.  Yamada is presently under investigation by Japanese government authorities for its dealings with Japan’s Ministry of Defense, an investigation that has led to the arrest of a senior Yamada executive as well as the former Vice Minster of Defense.  On March 24, 2008, Agro-Tech filed suit in the U.S. District Court for the Northern District of Ohio seeking a declaratory judgment that it may now lawfully terminate its distributor agreement with Yamada on the grounds that Yamada has breached its contractual obligations to use "ethical means" and to "obey the letter and spirit" of anti-bribery laws, including the FCPA.  Yamada has since counter-sued Agro-Tech, claiming that Agro-Tech’s lawsuit is just a ploy to terminate unlawfully the fifty-year exclusive distributorship arrangement Yamada has with Agro-Tech.    Foreign Business Bribery Prohibition Act of 2008 (H.R. 6188) In a pending development related to our collateral civil litigation discussion above – yet significant enough to warrant individual mention – on June 4, 2008 Rep. Ed Perlmutter (D. Colo.) introduced in the House of Representatives the Foreign Business Bribery Prohibition Act of 2008.  This bill would provide for a limited right of private action under the FCPA; such a right does not presently exist.  Rep. Perlmutter’s bill would amend the FCPA to permit issuers and domestic concerns to bring suit seeking treble damages against "foreign concerns" for FCPA violations that both assist the foreign concern in obtaining or retaining business and prevent the plaintiff from obtaining or retaining that business.  The bill would provide a right of action only against "foreign concerns," defined as any person other than an issuer or domestic concern, and even then only where the foreign concern’s actions violate the FCPA.  Therefore, the class of potential defendants under this bill would be limited to foreign persons and businesses unaffiliated with U.S. stock exchanges and who corruptly use instrumentalities of interstate commerce within the United States in furtherance of their bribes.  Still, this would be an important development in the effort to "level the playing field" of FCPA enforcement worldwide.  The bill is presently awaiting consideration in the House Judiciary and Energy and Commerce committees.  FCPA Acquisition Due Diligence and Post-Acquisition Compliance Integration One of the most pressing issues facing the FCPA bar right now is how to assess successor liability of an acquiror for pre-acquisition FCPA violations by a target company.  The government’s right to impose successor liability as a matter of law is difficult to challenge.  Yet as a policy matter, such prosecutions can have a perverse effect:  discouraging the "race to the top" created where companies with superior FCPA compliance programs acquire those with less thorough programs, inculcating the latter into the former’s culture of compliance.  At the end of the day, everyone, including the U.S. government, benefits when companies with superior compliance programs acquire companies with less effective programs, even when they come with warts.   The DOJ’s focus on this issue in the two FCPA opinion releases issued this year is encouraging.  Particularly so is the DOJ’s acknowledgement in FCPA Op. Proc. Rel. 2008-02 that providing Halliburton with a limited safe harbor in which to conduct post-acquisition due diligence without fear of prosecution "advances the interests of the Department in enforcing the FCPA and promoting FCPA due diligence in connection with corporate transactions."  In detailing the procedures that Halliburton must follow in order to avail itself of the protection afforded by 2008-02, the DOJ has set forth its view on "best practices" for post-acquisition compliance integration.  Halliburton agreed to take the following steps: Immediately upon closing, imposing Halliburton’s Code of Business Conduct on all Expro operations and meeting with the DOJ to discuss whether the information that Halliburton has learned to that point shows potential pre-acquisition FCPA violations; within 10 days of closing, preparing and presenting to the DOJ a comprehensive FCPA due diligence work plan that addresses and categorizes each of the following into high, medium, and low risk elements:  use of third-party representatives, commercial dealings with state-owned customers, joint ventures, teaming or consortium agreements, customs and immigration matters, tax matters, and government licenses and permits; utilizing in-house resources, outside counsel, and third-party consultants (e.g., forensic accountants) as appropriate to conduct post-acquisition due diligence, including a review of Expro e-mails and financial records and interviews of legacy-Expro employees; requiring legacy Expro third-party representatives that Halliburton intends to use post-acquisition to sign new contracts with Halliburton that incorporate audit rights and FCPA and other anti-corruption provisions; providing FCPA training to legacy Expro employees "whose positions or job responsibilities warrant such training on an expedited basis" within 60 days of closing and providing such training to all other employees within 90 days; and disclosing to the DOJ all "FCPA, corruption, and related internal controls and accounting issues that it uncovers during the course of its 180-day due diligence." Although not all of these measures will be practical in all acquisitions, companies should take note of these procedures and structure their integration measures in line with these steps where possible.  For additional guidance on the topic of transactional due diligence, please see the article by F. Joseph Warin, et al., Acquisition Due Diligence: A Recipe to Avoid FCPA Enforcement, TEXAS STATE BAR OIL, GAS, & ENERGY RESOURCES LAW SECTION REPORT 2 (June 2006).  Parallel Foreign Proceedings Another key trend that we have been following during the first half of 2008 is that the enforcement of foreign bribery statutes is increasingly becoming a global enterprise.  After years of not-too-subtle nudging by international anti-corruption watchdogs, most notably the Organization for Economic Cooperation and Development ("OECD") and Transparency International ("TI"), foreign jurisdictions are finally beginning to launch their own investigations that parallel those brought by U.S. enforcement agencies.  Although some jurisdictions have not pursued bribery investigations aggressively and none can claim to match the torrid pace set by the DOJ and SEC, we believe that the trend of parallel foreign enforcement actions and investigations will only intensify in the future.  Investigations arising out of the Oil-for-Food Program comprise a significant portion of the foreign parallel proceedings.  For example, the United Kingdom’s Serious Fraud Office (“SFO”) is actively pursuing Oil-for-Food investigations against several major companies, including at least one (GlaxoSmithKline plc) that has publicly disclosed being under investigation by the DOJ and SEC.  Other foreign countries with open Oil-for-Food investigations include Italy, which has initiated preliminary court proceedings against a number of companies and their employees, Ireland, and Switzerland, which has already imposed $17 million in fines against eight unnamed companies.    Although international anti-corruption activity is increasing overall, not all countries have been consistent in investigating and prosecuting corruption offenses.  As we have reported previously, in 2006 the SFO controversially dropped on national security grounds its investigation concerning allegedly corrupt payments made by BAE Systems plc to senior Saudi governmental officials.  On April 10, 2008, the High Court of London declared the SFO’s decision to close the investigation illegal and ordered the agency to reopen the investigation.  The British government is now appealing that decision to the House of Lords, the U.K.’s highest court.  A fascinating development in the interplay between foreign and domestic corruption investigations is the DOJ’s recent decision to forgo – in two Oil-for-Food cases – criminal sanctions against foreign businesses in light of pending actions against the companies in their home states.   In our last FCPA review, we reported that the DOJ elected not to impose a criminal fine in connection with its December 2007 non-prosecution agreement with Akzo Nobel provided that Akzo Nobel caused one its Dutch subsidiaries to enter into a criminal disposition with the Dutch Public Prosecutor and pay a fine of at least €381,602 ($549,419) within six months.  And during the current reporting period, on February 21, 2008, the DOJ completely declined prosecution of a Dutch subsidiary of Flowserve in return for Flowserve agreeing to cause that subsidiary to enter into a criminal disposition with the Dutch Public Prosecutor.  Although these prosecutions in the Netherlands are not publicly reported, a Dutch representative recently informed TI that Dutch prosecutors have filed seven Oil-for-Food cases.  It took the United States many years to reach its current state of enforcement and we expect that other nations will experience growing pains as well.  But with an enhanced commitment on the part of many nations, coupled with pressure from non-governmental organizations and a newfound willingness by the DOJ to defer to home state prosecution in appropriate circumstances, we expect anti-corruption enforcement to take on an increasingly global character in the future.  Substantial Jail Time for Individual Defendants As we have reported previously, efforts to prosecute individuals for violations of the FCPA have skyrocketed in the past few years.  Focusing on criminal prosecutions, we have identified forty-six individual defendants charged by the DOJ over the last ten years for allegedly participating in foreign bribery schemes, including many former senior executives and other high-ranking employees.  Approximately 91% of the individuals to resolve their charges – thirty-three of thirty-six – have pleaded guilty or been convicted at trial of at least one charge.  Only three defendants has been acquitted at trial or have had their charges dismissed.  Resolution of Criminal FCPA Anti-Bribery Cases Brought Against Individuals from 1998 to the Present. Of the thirty-three convicted individual defendants, only twenty have gone to sentencing.  This reflects the DOJ’s common practice in FCPA prosecutions of postponing sentencing for lengthy periods – even years – as the convicted defendant cooperates with the government’s investigation.  Of the twenty sentenced defendants, thirteen have received jail terms, ranging from several months to more than five years.  This figure includes sentences of incarceration for all four defendants to have been convicted at trial and sentenced. These figures are not trending more favorably to individual FCPA defendants.  In the past five years, eight out of ten individuals sentenced for their role in a foreign bribery scheme have been sentenced to a term of imprisonment.  Sentences for Individual Criminal Defendants Convicted in FCPA  Cases from 1998 to the Present.  Sentences for Individual Criminal Defendants Sentenced in FCPA Cases from 2003 to the Present. This trend is unmistakable:  incarceration is becoming a near certainty for individuals convicted of violating the FCPA.  One recent example is Ramendra Basu, a former World Bank official, who on April 22, 2008 was sentenced to 15 months incarceration for assisting consultants in bribing a Kenyan official.  Additionally, sentencing is pending for thirteen defendants, all of whom face the prospect of at least several months’ imprisonment.  We anticipate that many, if not all, of these individuals will receive jail time.  Given the zeal with which the DOJ has pursued FCPA cases in recent years, it does not appear that the trend toward aggressive prosecution of individuals and imposition of severe penalties will soon abate.  Conclusion As breathtaking as the pace of FCPA enforcement was in 2007, the first half of 2008 has proved a worthy successor.  With many large matters pending in the investigative stage, we expect more of the same for the second half.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 20 attorneys with substantive FCPA expertise. Joe Warin, a former federal prosecutor, currently serves as a compliance consultant pursuant to a DOJ and SEC enforcement action. The firm has 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)  Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) Judith A. Lee (202-887-3591, jalee@gibsondunn.com) David P. Burns (202-887-3786, dburns@gibsondunn.com)  Jim Slear (202-955-8578, jslear@gibsondunn.com)Michael S. Diamant (202-887-3604, mdiamant@gibsondunn.com)John W.F. Chesley (202-887-3788, jchesley@gibsondunn.com)Patrick F. Speice, Jr. (202-887-3776, pspeicejr@gibsondunn.com) New YorkLee G. Dunst (212-351-3824, ldunst@gibsondunn.com)James A. Walden (212-351-2300, jwalden@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com)J. Taylor McConkie (303-298-5795, tmcconkie@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los Angeles Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com), the former United States Attorney for the Central District of California,Michael M. Farhang (213-229-7005, mfarhang@gibsondunn.com)Douglas M. Fuchs (213-229-7605, dfuchs@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 8, 2009 |
2008 Year-End False Claims Act Update

I.  Introduction Today’s headlines are riddled with allegations of fraud and fraudulent schemes–against investors, markets, homeowners, individuals, corporations, and the government.  To combat the latter, the government calls upon its primary weapon – the False Claims Act, 31 U.S.C. §§ 3729-33 (“FCA” or the “Act”).  The Act, as amended in 1986, provides for treble damages and substantial civil penalties from any person or entity that knowingly submits or causes another to submit a false or fraudulent claim to the United States.  Unique “qui tam” provisions of the Act empower private individual whistleblowers, called “Relators,” to file suit in federal court on behalf of the government and to share in anyrecovery.  Recently, the Department of Justice (“DOJ”) reported that in fiscal year 2008 alone, it recovered approximately $1.34 billion in FCA settlements and judgments.[1] While our nation engages in unprecedented amounts of federal spending,[2] legislation with bipartisan support is likely to be reintroduced in the current Congress, which would expand the scope of the Act and relax restrictions on those who may initiate lawsuits.  Meanwhile, industries that did not receive federal funding in the past may soon receive, directly or indirectly, a portion of billions of dollars in federal “bailouts” recently announced.  Unwary companies, therefore, could find themselves the target of federal or state FCA investigations and lawsuits for allegedly misusing or fraudulently obtaining federal funds.  For these and other reasons, Gibson Dunn predicts continued (if not unprecedented) growth in FCA investigation, enforcement, and litigation. This year-end update provides: (1)  A brief overview of the federal statute, including its unique damages, penalty, and private enforcement provisions. (2)  A review of significant activities in 2008, including substantial recoveries by industry, including healthcare, defense, public works, government contracts, and education. (3)  Information regarding Government intervention and the importance of early involvement of qualified FCA counsel and appropriate cooperation with the government to limit exposure to FCA claims.[3] (4)  A summary of important federal court decisions in 2008 and certain legal trends that the FCA lawyers at Gibson Dunn observed this past year. (5)  An overview of legislation, proposed in late-2007, passed out of Committee in 2008, and which may be re-introduced and enacted in 2009, that would broaden the scope of the Act and reverse many of the judicial limitations that have recently emerged. (6)  An overview of state false claims acts.  Because many federal programs, contracts, and grants are jointly funded and/or administered by the states (such as Medicaid), companies are increasingly likely to face simultaneous state and federal enforcement actions. (7)  An overview of new rules for government contractors (effective December 12, 2008) that require internal controls and self-disclosure of suspected FCA violations. We conclude our review with some predictions for the year ahead. II.   FCA – An Overview A.  Liability Under The Statute The FCA provides for recovery of civil penalties and treble damages from any person who knowingly submits or causes the submission of false or fraudulent claims to the United States for money or property.[4]  Under the most commonly-enforced provisions of the statute, a person is liable for “knowingly” (1) presenting or causing the presentment of a claim for payment or approval; (2) making a “false record or statement to get a false or fraudulent claim paid or approved by the Government;” or (3) conspiring to defraud the government “by getting a false or fraudulent claim allowed or paid.”  The FCA also penalizes so-called “reverse false claims,” in which a person “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.”  The FCA defines “knowingly” as having “actual knowledge” of falsity or acting in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information.  “No proof of specific intent to defraud is required.”  31 U.S.C. §3729(b). The FCA’s qui tam provisions empower private individuals to file litigation in federal court on behalf of the government and to share in any subsequent recovery.  Qui tam complaints are filed under seal for at least 60 days, to allow the government to investigate the allegations and determine whether to intervene.  After review, the DOJ, on the government’s behalf, decides whether to:  (1) intervene and dismiss the action, (2) intervene and assume primary responsibility for prosecuting the action; or, (3) decline intervention and permit the alleged whistleblower to proceed with the lawsuit on his or her own.  Even if the government initially declines to intervene, it may later intervene in a qui tam action at any time upon a showing of good cause.  31 U.S.C. § 3730(c)(3).  Moreover, because the alleged whistleblower ostensibly brings the action on behalf of the government, the government always retains the right to approve or reject any settlement, even in those cases where the government initially opted out.  See 31 U.S.C. §§ 3730(b)(1) (a qui tam action “may be dismissed only if the court and the Attorney General give written consent to the dismissal”); 31 U.S.C. § 3730(c)(3). B.   Damages And Penalties FCA civil damages and penalties are harsh.  A defendant may be liable for up to three times actual damages plus penalties between $5,500 and $11,000 per claim.[5]  Depending on the manner in which the number of “claims” is calculated, civil penalties may far exceed any actual damages the government sustained.  The DOJ and plaintiffs’ bar have recently pursued expansive theories of liability, seeking the maximum possible damages.  For example, under a “fraudulent inducement” theory (discussed further below under current trends), plaintiffs contend that if a government contractor makes a misrepresentation to obtain a government contract, then every single claim or invoice submitted to the government pursuant to that contract is “false” (and thus subject to a civil penalty).  Under that theory, therefore, all monies paid by the government to the contractor would be recoverable as damages, as the government would have paid nothing had it known of the falsity.  This expansive theory of damages persists regardless of whether the government actually received a valuable product, service, or benefit.  Some courts, it appears, have been receptive to such arguments.  See, e.g., United States v. Rogan, 517 F.3d 449 (7th Cir. 2008).[6] Voluntary disclosure of an FCA violation and full cooperation with the government may help reduce damage exposure to double, instead of triple, recovery.  31 U.S. C. § 3729(a).  Accordingly, companies that do business with the federal government, or receive federal monies, should implement and maintain robust internal compliance programs and take any related employee complaints seriously.  In fact, as discussed further below, Federal Acquisition Regulations (“FARs”) now require certain federal government contractors to create business ethics awareness and compliance programs, an internal control system, and to voluntarily disclose suspected FCA violations to the federal government.  See FAR Case 2007–006; Contractor Business Ethics Compliance Program and Disclosure Requirements. C.  Qui Tam Provisions The FCA’s qui tam provision provides enormous incentives for qui tam Relators to expose fraud against the government.[7]  Successful Relators may receive 15-30% of settlement or judgment proceeds, and may be entitled to reasonable attorney fees’ and costs, which can be substantial.  31 U.S.C. § 3730(d). In FY 2008 (ending September 30, 2008), Relators received approximately $198 million of the federal government’s recoveries, which is an increase from approximately $180 million in FY 2007.[8]  On a dollar for dollar basis, Relators recover significantly more money when the government actually intervenes in their FCA whistleblower actions, despite the fact that Relators receive a greater percentage of any recovery when the government declines to intervene.  In FY 2008, for example, Relators recovered only $197,438,998 (approximately 1% of total relator share awards) in cases where the government declined to intervene.  Id.  The statistics are similar for FY 2007 (approximately 3% of Relator share awards derived from cases in which the government declined to intervene).  Id. Although the FCA authorizes private qui tam enforcement actions, the FCA limits an individual’s ability to file suit to avoid multiple actions against the same defendants and/or about the same conduct.  For example, the FCA’s “first-to-file” bar would prohibit any private action “based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party,” 31 U.S. C. § 3730(e)(3), but the provision has created significant debate about how closely related the suits must be to trigger the limitation.  Another limitation, and the one most frequently litigated, is the “public disclosure bar,” 31 U.S.C. § 3730(e)(4), which divests a court of jurisdiction over any action “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media,” unless the action is brought by an “original source” of the information.  Id.  To qualify as an “original source,” and thereby avoid dismissal based on the “public disclosure,” the Relator must (1) have “direct and independent knowledge” of the information on which the allegations in his or her complaint are based, and (2) must voluntarily provide the information to the Government before bringing suit.  Id. D.  Statute Of Limitations An FCA action must be brought within six years of the date on which a violation was committed, 31 U.S.C. § 3731(b)(1), or within three years of the date on which the government knew or should have known that a violation was committed, and in no event more than 10 years after the date on which the violation was committed.  31 U.S.C. § 3731(b)(2).  Courts are divided about whether the limitations period begins to run from the date a false claim is submitted to the government or from the date a false claim is paid by the government.  Additionally, courts are split over whether a qui tam Relator is entitled to take advantage of the three-year tolling provision, or whether that provision only applies to the government.  Finally, there is also debate as to whether government claims first asserted in a complaint-in-intervention beyond the limitations period may nevertheless survive by “relating back” to the time of filing the original qui tam complaint under seal. III.  2008 In Review Total federal recoveries under the FCA have exceeded $21.6 billion since 1986.[9]  For FY 2008, the federal government obtained more than $1.34 billion in FCA settlements and judgments.[10]  While the $1.34 billion recovered in FY 2008 is a staggering number, it is a decline from the last two fiscal years.  The government reportedly recovered almost $2 billion in settlements and judgments in FY 2007, and a record $3.2 billion in settlements and judgments in FY 2006.[11]  Commentators (largely from the plaintiffs’ bar) generally attribute the recent decline in recoveries to a substantial backlog of whistleblower cases awaiting DOJ action.  But Gibson Dunn attributes the decline, at least in part, to significant legal developments in the federal courts that have limited the scope of the Act and made it more difficult for private individuals to sustain claims. Significantly, virtually all monies recovered by the government under the FCA arose in cases where the government intervened.  For example, in FY 2008, of the $1.34 billion recovered, only $5,956,644 (less than ½ of 1%) resulted from actions in which the government elected not to intervene, continuing a consistent trend from previous years (see chart immediately below).  Without question, early involvement of qualified FCA defense counsel and effective communication with the government are essential to dissuading the government from intervening and otherwise minimizing exposure to FCA claims. Settlements or Judgments in Cases Where the Government Declines Intervention as a Percentage of Total Annual FCA Recoveries A.  Federal Recoveries By Industry The government uses the FCA to combat fraud in connection with any federal contract or program, and has enforced the Act within virtually every federal agency, from the Department of Agriculture to the Department of Veterans Affairs (essentially all but federal tax fraud is included).  The overwhelming majority of FY 2008 FCA recoveries (nearly 90% or more than $1.11 billion) came from the health care industry, including pharmaceutical companies and related entities in particular.  The following summarizes some of the significant recoveries in 2008 within certain industries frequently targeted for FCA enforcement and litigation activity. 1.  Healthcare As the foregoing chart demonstrates, recoveries from the healthcare industry represent the vast majority of FCA recoveries in every year since 2000.  Gibson Dunn expects this trend to continue into 2009 in part because Congress has allocated more than $25 million to combat fraud and abuse in the Medicaid Program under the Supplemental Appropriations Act of 2008 and Section 6035 of the Deficit Reduction Act.[12]  Already, the fiscal year 2009 Work Plan for the U.S. Department of Health & Human Services (“DHHS”), Office of Inspector General (“OIG”), identifies as its primary area of investigative focus, the Durable Medical Equipment supplier business and targets “potentially illegal practices by suppliers and manufacturers who do not directly bill [federal healthcare] programs,” and “business arrangements that allegedly violate the Federal health care anti-kickback and anti-referral statutes.”[13]  Accordingly, Gibson Dunn looks for these enforcement initiatives to spark an increase in FCA litigation in 2009 and beyond. In 2008, significant healthcare recoveries included the following: a.  Prescription Drugs In February 2008, Merck & Company agreed to pay $650 million to resolve allegations that it knowingly failed to pay proper rebates to Medicaid and other government health care programs and paid kickbacks to health care providers to induce them to prescribe the company’s products.  The settlement resulted from two qui tam lawsuits.  In the first lawsuit, a former Merck employee alleged that the company violated the Medicaid Rebate Statute by providing discounts to hospitals that used its drugs Zocor and Vioxx in place of competitors’ brands, without reporting those discounts and other cost information to reflect its “best price,” as the statute requires.  The suit also alleged that Merck paid kickbacks to physicians to induce them to prescribe its drugs.  In the second lawsuit, a physician alleged that Merck provided discounts to hospitals to induce them to administer its antacid, Pepcid.  Under the two settlement agreements, the federal government received more than $360 million, and forty-nine states and the District of Columbia received over $290 million. In March 2008, CVS Caremark Corporation agreed to pay $36.7 million ($21.1 million to the federal government and $15.6 million to 23 states) to settle claims that from 2000-2006, the company illegally switched patients from the tablet form of the drug Ranitidine (generic Zantac) to a capsule form in order to increase Medicaid reimbursement.  A whistleblower initiated the lawsuit in 2003 and received more than $4.3 million as his share of the settlement.[14]  In its press release, the Government announced,  “[s]witching medication from tablets to capsules might seem harmless, but when that is done solely to increase profit and in violation of federal and state regulations that are designed to protect patients, pharmacies must know that they are subjecting themselves to the possibility of triple damages, civil penalties and attorney fees. . . .  These penalties, coupled with the willingness of insiders to report fraud, should deter such misconduct, but when it doesn’t, the result in this case and others serve notice that we will aggressively pursue all available legal remedies.”[15] Walgreen Co. settled multiple qui tam actions this year for nearly $45 million.  In June 2008, Walgreens agreed to pay $35 million (federal share $18.6 million with remainder to 46 states and Puerto Rico) to settle claims that it switched patients to different prescription drugs in order to increase Medicaid reimbursement.  In September 2008, Walgreens agreed to a $9.9 million settlement to resolve allegations that the company over-billed four state Medicaid agencies for prescription drugs provided to beneficiaries covered both by Medicaid and by private third-party insurance.  Although pharmacies may bill Medicaid for prescription drug costs not covered by private insurers, which typically amounts to a co-payment alone, DOJ alleged that Walgreens knowingly submitted claims to the Medicaid programs in excess of the co-pay amount. In September 2008, Cephalon Inc. agreed to pay a total of $425 million to resolve criminal and civil claims arising from allegations that the company marketed three drugs for off-label uses in violation of FDA rules resulting in false claims to Medicaid, Medicare and other programs for unapproved uses of the drugs the programs did not cover.  $375 million was paid to resolve the civil FCA allegations, $116 million of which was paid to several states.  The settlement resolved four qui tam lawsuits, three of which were brought by former Cephalon sales representatives.  The Relators received over $46 million of the federal share of the settlement. In September 2008, Abbott Laboratories, Inc. agreed to pay a total of $28 million to resolve false claims allegations stemming in part from a qui tam lawsuit alleging that the company falsely reported drug prices to state and federal Medicaid programs, which are used to calculate reimbursement rates, causing the federal and state governments to overpay for prescription medications. b.  Outlier Payments Under certain conditions, Medicaid and Medicare disburse  “outlier payments,” in addition to standard reimbursement rates, to compensate providers when the length of stay or cost of treating a beneficiary is exceptionally high relative to the average length of stay or average cost of treating comparable conditions.  Following a record-breaking $900 million settlement in July 2006 with Tenet Healthcare Corporation resolving fraudulent outlier payment allegations (among other alleged violations), this type of fraud continued to be a focus in FY 2008. On December 10, 2007, Warren Hospital agreed to pay $7.5 million to resolve claims from two separate qui tam actions alleging the hospital fraudulently claimed outlier payments.  In March 2008, Cathedral Healthcare Systems settled three separate qui tam actions for $5.3 million to resolve allegations that it fraudulently obtained outlier payments.  In August 2008, BlueCross BlueShield of Tennessee settled outlier fraud claims for $2.1 million, and in September 2008, Cooper University Hospital (in New Jersey) agreed to pay $3.85 million to resolve allegations that it defrauded Medicare by increasing charges and fraudulently obtaining outlier payments. c.  Illegal Kickbacks and Referrals[16] In December 2007, HealthSouth Corporation and two physicians agreed to pay $14.9 million to settle allegations that the company submitted false Medicaid and Medicare claims to the government and paid illegal kickbacks to physicians in violation of the Anti-Kickback Statute and the Stark Law.  Notably, the settlement resulted from company disclosures to the government following a change in management and an internal investigation. In April 2008, a Florida radiologist, his imaging center, and related entities agreed to pay $7 million to resolve allegations of fraudulent billing and violations of the Stark law and Anti-Kickback statute.  Memorial Health, Inc. also agreed to pay $5.08 million to resolve a qui tam lawsuit alleging Medicare fraud and violations of the Stark Law. In May 2008, Baptist Health South paid nearly $7.8 million to settle claims that it violated the FCA and Stark laws. In July 2008, Lester E. Cox Medical Centers agreed to pay $60 million to settle claims that it violated the FCA, the Anti-Kickback Statute, and the Stark Law.  The United States alleged that Cox entered into illegal financial relationships with referring physicians at a local physician group and engaged in improper billing practices with respect to Medicare.  The settlement also resolved claims that Cox included non-reimbursable costs on its Medicare cost reports and improperly billed for dialysis services. In November 2008 (FY 2009) Bayer Healthcare LLC agreed to pay $97.5 million to settle FCA allegations that it had paid illegal kickbacks to diabetic suppliers. d.    Fraudulent Healthcare Billing In November 2007, Stryker Corporation and its former outpatient therapy division, Physiotherapy Associates Inc. agreed to pay $16.6 million to settle allegations that Physiotherapy submitted false claims to Medicare and other federal and state health care programs.  Former Physiotherapy employees brought the lawsuit alleging that Physiotherapy falsely billed services as one-on-one services and improperly retained excess or duplicate payments. In March 2008, HealthEssentials Solutions, Inc. agreed to pay $117 million to resolve claims that it committed health care fraud against Medicare, Medicaid, and other federally subsidized health care programs by “upcoding” claims.  The settlement resulted from three different whistleblower lawsuits. In May 2008, Medtronic Spine, LLC (formerly Kyphon Inc.) agreed to pay $75 million to settle claims that it violated the FCA by knowingly causing the submission of false claims to Medicare in connection with its kyphoplasty spinal procedure (allegedly performed on an inpatient basis rather than the less costly outpatient basis).  The settlement resolved a qui tam lawsuit filed by two former Kyphon employees. In August 2008, Amerigroup Corporation agreed to pay $225 million to settle federal and state FCA charges that the corporation systematically avoided enrolling pregnant women and other high-cost patients in the company’s managed care program in Illinois in violation of Medicaid regulations.  In October 2006, a federal district court entered judgment for $334 million.  Amerigroup appealed the decision to the Seventh Circuit, but ultimately settled.  A former employee filed the lawsuit and received approximately $55 million as his share of the settlement proceeds. In September 2008, Staten Island University Hospital (SIUH) agreed to pay $74 million to settle two FCA qui tam actions and two other matters for alleged fraudulent Medicare and Medicaid billing.  In addition, SIUH  agreed to pay the State of New York more than $14.8 million. 2.    Procurement Fraud In October 2006, the government announced a new National Procurement Fraud Task Force “to promote the early detection, prevention and prosecution of procurement fraud associated with increased contracting activity for national security and other government programs.”  The task force includes members from the DOJ Criminal and Civil Divisions, U.S. Attorneys’ Offices, and other federal law enforcement agencies, such as the FBI, the Special Inspector General for Iraq Reconstruction, the Offices of Inspectors General for the Department of Defense, the Central Intelligence Agency, the General Services Administration, and the Department of Homeland Security, among others.  One of the Task Force’s primary objectives is to “[i]ncrease and accelerate civil and criminal prosecutions and administrative actions to recover ill-gotten gains resulting from procurement fraud.”[17]  In its December 2008 Progress Report, the Task Force reported that in the two years since its formation, it had recovered more than $362 million in civil settlements or judgments arising from procurement fraud claims.  Id.  The Task Force credits some of the significant recoveries in 2008 set forth below to its coordinated investigation and prosecution efforts. a.    Department of Defense[18] There were several multimillion dollar settlements in connection with the manufacture and supply of defective Zylon bulletproof vests purchased and paid for by the government.  In October 2007, for example, Hexcel Corporation agreed to pay $15 million.  In October 2008 (FY 2009), Armor Holdings Products LLC agreed to pay $30 million.  On June 5, 2008, the government sued Honeywell International, Inc. under the FCA for allegedly failing to inform Armor Holdings or the government of known defects in the Zylon Shield vests.  The National Procurement Fraud Task Force’s 2008 Progress Report also notes that the government has brought FCA causes of action against Second Chance Body Armor and Toyobo Corporation for making similar false claims. In March 2008, National Air Cargo agreed to pay $28 million in a global settlement to resolve criminal and civil FCA allegations of fraudulently billing the DOD for the shipment of freight by surface rather than air transportation as DOD regulations require.  Of the total payment, National Air Cargo paid $11.75 million to settle civil FCA claims brought by a whistleblower. In May 2008, the Pasha Group agreed to pay $13 million to resolve allegations that the company participated in a conspiracy to rig bids and fix prices for transportation of household goods belonging to U.S. military and DOD personnel, which allegedly caused the government to overpay for transportation claims, in violation of the FCA. In August 2008, Pratt & Whitney agreed to pay $53 million to resolve allegations that the companies knowingly submitted false claims for defective turbine blades the Air Force purchased.  The government pursued the case as part of the National Procurement Fraud Initiative.  Gibson Dunn believes that the wars in Iraq and Afghanistan likely will give rise to a surge in FCA enforcement actions and new claims against government defense contractors in the near future.  Indeed, just last month, on December 8, 2008, the DOJ announced that a subsidiary of L-3 Communications Holdings Inc. paid the government $4 million to settle allegations that its employees falsified time cards for services to the Army between March 2004 and August 2005.  A former L-3 employee brought the action.  Further, the National Procurement Fraud Task Force in 2008 identified contracts related to the wars in Iraq and Afghanistan, and the rebuilding of those countries, as a “major focus of the Civil Division’s procurement fraud efforts.”[19] b.    Public Works In January 2008, Bechtel Infrastructure Corp. and PB Americas Inc. agreed to pay $458 million to settle federal and state claims (which included $23 million to the United States and over $40 million to the Commonwealth of Massachusetts to settle state FCA allegations).  The claims arose in connection with a major public transportation infrastructure project in Boston known as the “Big Dig.”  The government alleged the firms submitted false claims for federal highway funds by failing to provide adequate management and quality assurance services during construction.  The settlement also resolved claims brought in a qui tam action filed in the United States District Court for the District of Massachusetts. Of note, President-elect Obama recently announced plans for enormous infusions of federal funds to the states for the purpose of infrastructure and public works projects.[20]  Accordingly, Gibson Dunn expects to see enhanced federal and state FCA activity in this area. c.  Government Contracts; GSA In May 2008, Computer Sciences Corporation (“CSC”) agreed to pay $1.37 million to settle allegations that it solicited and received improper payments and failed to disclose conflicts of interest in connection with government agency technology contracts.  The settlement is significant because the action against CSC is part of a larger investigation of government technology vendors and consultants, which also resulted in FCA actions filed in 2007 against Accenture, LLP, Hewlett-Packard Company, and Sun Microsystems Inc.[21] 3.    Education In addition to university teaching hospitals, which are frequent targets of FCA actions alleging Medicaid and Medicare fraud, many universities and institutions of higher learning apply for and receive federal student aid and research grants from agencies such as the NIH or CDC.  In exchange, they must adhere to federal regulations, such as the Higher Education Act (HEA).  Some of the nation’s most prominent universities have settled FCA allegations in the past few years, including Harvard ($31 million in 2005; $2.4 million in 2004), Weill Medical College of Cornell University ($4.4 million in 2005), John Hopkins ($2.6 million in 2004), the Mayo Clinic ($6.5 million in 2005), and Northwestern ($5.5 million in 2003).  In July 2007, Oakland City University paid $5.3 million to resolve a qui tam action alleging false certification of compliance with HEA provisions. This trend continued in 2008.  In February 2008, the Puerto Rico Department of Education paid more than $19 million to resolve allegations that it falsely certified its eligibility to receive federal funds under the Migrant Education Program.  In July 2008, St. Louis University agreed to pay $1 million to settle a lawsuit filed by a former Dean of the school alleging that it improperly supplemented faculty pay by misusing federal (CDC) grant funds. On December 23, 2008, the DOJ announced that Yale University had agreed to pay $7.6 million to resolve allegations that it violated the FCA by misusing and mismanaging federally-funded research grants.  The government alleged that researchers transferred non-allocable costs to certain grant accounts in order to obtain unspent grant funds near the expiration dates of the grants.  In addition, the settlement resolved allegations that certain researchers improperly charged federal grant accounts for time spent on unrelated work, in order to obtain salaries over the summer months.  Yale cooperated with the government during its investigation, and DOJ reports that as a result of such cooperation and the settlement, there will be no lawsuit filed against the university regarding more than 6,000 federally-funded grants covered by the agreement.  The DOJ stated that the settlement should “send a clear message that the regulations applicable to federally-funded research grants must be strictly adhered to.”[22] A significant qui tam action remains pending in California federal court against the University of Phoenix, alleging the university defrauded the federal government out of millions of dollars in federal education loans by paying unlawful bonuses and other gifts to recruiters.  The government declined to intervene.  Although the district court dismissed the action, the Ninth Circuit reversed.  The case is in the midst of discovery and is presently scheduled for trial in 2010. B.   Hot Topics, Significant Legal Trends, and Key Cases in 2008 There were several significant legal developments in the FCA arena during 2008.  These developments include, among others: (1) the Supreme Court’s ruling in Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008), which significantly curtailed the potential reach of the FCA; (2) further development regarding the nature of the public disclosure bar including a growing trend of dismissing cases on public disclosure grounds; (3) further narrowing of false certification and fraudulent inducement theories of liability which relators and DOJ have used in an attempt to expand potential FCA liability; (4) courts insisting on a greater level of specificity in a Relator’s pleadings to avoid dismissal under Rule 9(b); and, (5) an increased willingness of courts to grant summary judgment for lack of evidence of a “knowing” violation of the FCA.  Each of these trends is discussed in further detail below. 1.    The U.S. Supreme Court Curtails the Reach of the FCA and Warns Against “transform[ing] the FCA into an all-purpose antifraud statute” In Allison Engine Co. v. United States ex rel., Sanders, 128 S.Ct. 2123 (2008) the Supreme Court addressed the issues of whether a plaintiff asserting a claim under Section 3729(a)(2) (using a false record or statement to get a false or fraudulent claim paid) and Section 3729(a)(3) (conspiracy) “must show regarding the relationship between the making of a ‘false record or statement’ and the payment or approval of ‘a false or fraudulent claim . . . by the Government.'”  The Court unanimously held that a Relator must prove “that the defendant intended that the false record or statement be material to the Government’s decision to pay or approve” a false claim. The facts:  The United States Navy procured missile destroyers from two prime-contractor shipbuilders.  The two prime contractors contracted with Petitioner Allison Engine, which subcontracted with Petitioner General Tool Company, which subcontracted with Petitioner Southern Ohio Fabricators, Inc., to manufacture the generator sets (“Gen-Sets”) which supplied the electrical power to the destroyers.  Each Gen-Set had to be manufactured according to Navy specifications, and each subcontractor invoice had to be accompanied by a Certificate of Conformance (“COC”).  Relators introduced evidence that the Gen-Sets were not manufactured according to Navy specifications and that the Petitioners’ invoices were accompanied by false COCs, but “did not, however, introduce the invoices submitted by the shipyards to the Navy.” The Supreme Court, for the first time, addressed the requisite proof of an offense under 31 U.S.C. § 3729(a)(2).  The Court held, “If a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment, the statement is not made with the purpose of inducing payment of a false claim ‘by the Government.’  In such a situation, the direct link between the false statement and the Government’s decision to pay or approve a false claim is too attenuated to establish liability.” Allison Engine increases the burden on plaintiffs when bringing an FCA false record and/or conspiracy claim against subcontractors and others who deal only indirectly with the federal government.  Specifically, the Supreme Court confirmed that Relators must demonstrate that the subcontractor made a false statement to a private entity intending that the Government would rely upon the statement in order to make payment.  To prevail on an FCA conspiracy claim, Allison Engine instructs that “it is not enough for a plaintiff to show that the alleged conspirators agreed upon a fraud scheme that had the effect of causing a private entity to make payments using money obtained from the Government.  Instead, it must be shown that the conspirators intended to ‘defraud the Government.’” The lower courts in 2008 have only just begun considering the ramifications of Allison Engine.  However, several decisions suggest that Allison Engine has already curtailed the reach of the Act.  For example, following the Allison Engine decision, a district court in Iowa entered summary judgment sua sponte dismissing Section 3729(a)(2) and (3) claims in connection with allegedly false crop insurance claims.  See United States v. Hawley, 566 F. Supp. 2d 918 (N.D. Iowa 2008).  In Hawley, the government alleged that Mr. Hawley engaged in improper conduct that allowed certain ineligible farmers to obtain and make claims against multi-peril crop insurance policies that were sold by Hawley, issued by North Central Crop Insurance, and reinsured by the Federal Crop Insurance Corporation.  The court dismissed the “false statement” and conspiracy claims because the alleged fraud was too attenuated.  Id. at 927-28 (“the allegedly false crop insurance claims themselves were never forwarded to or approved by the government, nor was the payment of the crop insurance claims conditioned on review or approval by the government, and there is no showing that the defendant intended that the false records or statements would be material to the government’s decision to pay or approve the false claim.”) Similarly, in United States ex rel. Sterling v. Health Ins. Plan of Greater N.Y., Inc., 2008 U.S. Dist. LEXIS 76874 (S.D.N.Y. Sept. 30, 2008), the Relator alleged that defendant Health Insurance Plan of Greater New York, Inc. (“HIP”) defrauded the federal government and the City of New York by fraudulently altering statistical data about its treatment procedures in order to obtain accreditation needed to maintain a contract to provide health benefits and health management services to federal employees, recipients of Medicaid, and federal beneficiaries of various programs, including Child Health Insurance Plus.  Following Allison Engine, the district court dismissed the complaint because the allegedly false statements to the accreditation agency (the National Committee for Quality Assurance) were too far removed from any actual claims.  Id. at *14 (the “Relator’s claim does not show a substantial connection between HIP’s alleged fraud and the Government’s payment to HIP.  Relator attempts to draw such a connection by stating that HIP had a contractual requirement to maintain accreditation, that the strep-throat testing statistics would have affected its accreditation, that HIP therefore falsified the results that it gave to NCQA to maintain good ratings, and then, finally, that the Government relied on this fraudulently obtained positive NCQA rating to award HIP continuing contracts. …  This line of argument stretches the narrow boundaries that Allison Engine created.”). By contrast, in United States v. Eghbal, 548 F.3d 1281 (9th Cir. 2008), the court determined that under the standards set forth in Allison Engine, FCA liability could attach to false statements in loan applications for federally-insured loans that have a “”material effect’ on the Government’s eventual decision to pay a claim.”  Id. at *6.  The defendants in Eghbal purchased HUD-foreclosed homes and resold them for profit to buyers with mortgage secured loans insured by HUD.  Defendants sold the loans to buyers who lacked sufficient assets to cover the down payment on the properties, and provided the down payment for the buyers in violation of HUD rules (HUD would not insure a loan for a home for which the down payment was paid by the seller).  Defendants signed documents falsely certifying that they provided no funds towards the down payment.  Defendants argued that “they sought only to fraudulently induce HUD to insure the mortgage, not to have the buyers default or cause the mortgage holders to make claims on HUD.”  Id. at *5.  The court rejected their claims and held “liability under the FCA nevertheless attaches, because the false statements were ‘relevant to the government’s decision to confer a benefit,'” and the “plain language of the FCA contemplates liability not only for fraudulently causing the Government to pay a claim, but also for causing the Government to approve a claim.”  Id. at *5-6. Some have speculated that Allison Engine may restrict actions in the Medicaid arena, because claims are presented to state agencies and paid with state funds (which the federal government then reimburses to the state on a percentage basis).[23]  It is too soon to make any generalizations about the precise effect of Allison Engine, but litigation of the issue is sure to surface in the year ahead. 2.    The Federal Courts Interpret the Public Disclosure Bar As noted above, a district court does not have jurisdiction over a private individual’s FCA action if the claim is based on publicly disclosed information unless the Relator qualifies as an “original source” of the information upon which his/her action is based.  31 U.S.C. §3730(e)(4).  Congress enacted the provision to balance competing desires to encourage private citizens to expose fraud on the government, but also to discourage opportunistic or “parasitic” plaintiffs from capitalizing on publicly disclosed information. In determining whether a court has jurisdiction over an FCA claim, in the first instance, courts must answer three questions – (1) Was there a public disclosure?  If so, (2) Is the qui tam action based upon the public disclosure?  If so, (3) Is each Relator an original source of the information underlying each of the allegations of the complaint?  Each of those three questions has given rise to considerable litigation and has divided the Federal Circuit Courts.  Indeed, plaintiff lawyers (and, consequently, the courts) have subjected every word of the statute to varied interpretation, making the search for clarity and guidance elusive.  In 2007 the Supreme Court resolved a circuit split about the third question in Rockwell  Int’l Corp. v. United States, 549 U.S. 457 (2007), thereby restricting the interpretation of the “original source” requirement. a.    Do State Reports Qualify as A Source of Public Disclosure?   U.S. Supreme Court May Resolve Issue Shortly With respect to the first question, whether there was a public disclosure of the information, the FCA enumerates several sources of public disclosure, including disclosure in a “Congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation.”  A common point of debate, however, is whether a state administrative report constitutes a public disclosure.  On June 9, 2008, the Fourth Circuit held “the public disclosure bar applies to federal administrative audits, reports, hearings or investigations, but not to those conducted or issued by a state or local governmental entity.”  United States ex rel. Wilson v. Graham County Soil & Water Conservation Dist., 528 F.3d 292, 296 (4th Cir. 2008) (emphasis added). The defendant in that case has petitioned the U.S. Supreme Court for review, and, in December 2008, the Supreme Court invited the United States Solicitor General to file a brief expressing its views whether administrative reports or audits issued by state or local governments constitute “public disclosures” within the meaning of the FCA.  Several states’ Attorney Generals and representatives of the pharmaceutical and biotechnology industries have filed amicus briefs in the case, as those non-parties are vitally concerned that the Supreme Court hear the issue and resolve the Circuit split in favor of a decision that a state audit or report is a “public disclosure” within the meaning of the FCA.  States regularly administer programs involving federal funds (such as Medicaid, which is jointly administered and funded), during the course of which they routinely investigate improper or fraudulent claims. b.    A Stricter Interpretation of the Original Source Requirement With respect to the third question, that is, proof required to demonstrate “original source” status, the FCA defines an original source as an “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action . . . which is based on the information.”  31 U.S.C. § 3730(e)(4)(A) and (B).  In March 2007, the Supreme Court decided Rockwell Int’l Corp. v. United States, 549 U.S. 457 (2007), which resolved a split among the circuits and narrowly construed the “original source” requirement. First, Rockwell clarified that the “original source” issue is a jurisdictional issue, which cannot be conceded or waived, may be raised, and must be satisfied, at all stages of the litigation, even post-trial.[24]  Second, Rockwell held that a Relator must possess “direct and independent knowledge” of the information on which the allegations of his or her complaint are based, as opposed to the information on which the publicly disclosed allegations are based (this particular holding resolved the split in the Circuits).  Third, Rockwell prohibits “claim smuggling;” a Relator must qualify as an original source as to all claims raised, and some claims may be severed and dismissed even if the Relator is an original source as to other claims in the same litigation.  Fourth, Rockwell held that a qui tam Relator’s “prediction” or suspicion of wrongdoing is not first hand knowledge sufficient to satisfy the “original source” requirement. Following Rockwell, and throughout late-2007 and 2008, Gibson Dunn identified a trend in which courts appear far more willing to dismiss claims for lack of jurisdiction under the public disclosure bar.  See, e.g., United States ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F. Supp. 2d 25 (D.D.C. 2007); United States ex rel. Boothe v. Sun Healthcare Group, Inc., 496 F.3d 1169 (10th Cir. 2007); United States ex rel. Fried v. West Independent School Dist., 527 F.3d 439 (5th Cir. 2008) (“The burden was on [Relator] to show that the information and allegations he discovered were qualitatively different information than what had already been discovered and not merely the product and outgrowth of publicly disclosed information.”) (internal quotations omitted); United States ex rel. Duxbury v. Ortho Biotech Products, 551 F. Supp. 2d 100 (D. Mass. 2008). 3.    The Rise of False Certification and Fraudulent Inducement Theories of Liability and Federal Courts’ Efforts To Restrict Such Theories The DOJ and Relators have taken ever expansive views of liability under the FCA.  For example, allegations of promissory fraud continue to percolate in the federal courts, with plaintiffs taking the position that if an FCA defendant lied to obtain a contract at the outset, then liability attaches to all claims submitted under that contract because all claims are “tainted” by the alleged fraudulent inducement and all monies paid under the fraudulently obtained contract must be re-paid to the government.  Additionally, Relators frequently attempt to bring claims under implied or express “false certification” theories of liability, arguing that a defendant may be liable for falsely certifying compliance with a broad range of federal statutes, regulations, or guidelines at the time of seeking payment on a claim, whether or not the regulations directly relate to the actual claim for government funds.  In other words, private individuals who would not otherwise have standing to enforce myriad laws (e.g., healthcare or environmental regulations) because those regulations contain no private enforcement mechanisms like the FCA’s qui tam provisions, seek to use the FCA as a back-door to enforce compliance with those laws and to severely penalize non-compliance, even if the noncompliance itself resulted in little or no monetary loss.  Some of the most prevalent FCA actions in 2008 involved allegations that healthcare providers falsely certified compliance with anti-kickback and self-referral legislation, or that government contractors fraudulently obtained contracts in violation of government procurement regulations and/or fraudulently certified compliance with regulations at the time of claim submission. a.    False Certification The Tenth Circuit this year in United States ex rel. Conner v. Salina Regional Health Center, Inc., 543 F.3d 1211 (10th Cir. 2008) addressed “whether a qui tam plaintiff, proceeding under the FCA, can maintain a cause of action against a Medicare provider based on an allegation that the provider’s certification of compliance with Medicare statutes and regulations, contained in the annual cost report, render[ed] all claims submitted for reimbursement by that provider false within the meaning of the FCA.”  In other words, can FCA liability arise if the Medicare provider is not in complete compliance with all Medicare statutes and regulations? The facts:  Dr. Brian E. Conner was an ophthalmologist and eye surgeon who worked as a member of the medical staff for Salina Regional Health Center, Inc. (“SRHC”) at its Salina, Kansas facility.  When SRHC provided a Medicare service, it submitted individual Medicare reimbursement requests to an intermediary of the Government, which then calculated and dispensed estimated periodic payments.  Final payments were calculated based on actual costs, as set forth in annual cost reports the Medicare provider submits.  As part of its annual cost reports, an SHRC representative certified, among other things, that “the services identified in this cost report were provided in compliance with [Medicare] laws and regulations.”  Conner asserted that at the time SRHC made this representation, it was not in compliance with all Medicare laws and regulations. Conner filed a qui tam complaint after SHRC refused to reappoint him to its medical staff and alleged that SHRC had “presented false claims because it was in violation of various regulations and statutes establishing Medicare conditions of participation at all times from 1987 until the present day.”  The district court granted SHRC’s Rule 12(b)(6) motion to dismiss, holding that “the government’s payment for services rendered was not conditioned on” compliance with Medicare statutes and regulations, and Conner appealed. The Tenth Circuit affirmed because although the certification represented “compliance with underlying laws and regulations, it contain[ed] only general sweeping language and d[id] not contain language stating that payment [was] conditioned on perfect compliance with any particular law or regulation.”  In reaching its holding the Tenth Circuit distinguished between “[c]onditions of participation, as well as provider’s certification that it has complied with those conditions, [which] are enforced through administrative mechanisms,” from “[c]onditions of payment . . . which, if the government knew they were not being followed, might cause it to actually refuse payment.  Conner is representative of the growing trend of cases rejecting false certification claims based on boilerplate certifications of compliance with federal regulations. By contrast, plaintiffs may prevail where they identify a false certification of compliance with a specific regulation that is a condition of payment.  Compare United States ex rel. Roberts v. Aging Care Home Health, Inc., 2008 U.S. Dist. LEXIS 56846, *28-34 & n.13 (W.D. La. July 25, 2008) (holding Medicare conditions payment of a claim upon a certification of compliance with the Stark Laws, but also noting that “[v]iolations of Stark II or any other law, without more, do not create liability under the FCA.”) with Abner v. Jewish Hosp. Health Care Servs., 2008 U.S. Dist. LEXIS 61985, *22-25 & n.3 (S.D. Ind. Aug. 13, 2008) (noting the Circuit split regarding the viability of express or implied false certification theories of liability; dismissing false certification claims for failure to plead with particularity where “relators pointed the court generally to 42 C.F.R. parts 482 and 493 but did not point to any specific regulation requiring certification before dispensation of payment, let alone point to one that defendants allegedly violated;” and warning, “[i]f relators file a second amended complaint that alleges false certification with particularity, they must direct the court to a specific regulation conditioning payment on certification of compliance.”) (emphasis added). b.    Fraudulent Inducement The Fourth Circuit in United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370 (4th Cir. 2008) addressed the issue of whether a fraudulent inducement theory of FCA liability can arise when a defendant fails to satisfy generic statements of contractual obligations.  The Facts:  Kellogg Brown & Root, Inc. (“KBR”) entered into a Logistics Civil Augmentation Program contract with the Department of Defense (“DOD”) to provide operational support to the United States military in wartime situations.  Under the general contract, the Army requested specific services pursuant to Task Orders.  The Task Orders also contained Statements of Work that further delineated KBR’s responsibilities.  Pursuant to Task Order 43, KBR agreed to provide transport services for the army.  Task Order 43 required KBR, among other things, to maintain vehicles “in a safe operating condition and good appearance.”  Relators Wilson and Warren, KBR employees who drove supply trucks in Iraq, brought suit under the FCA using a “fraudulent inducement” theory.  They argued that KBR fraudulently induced the United States into issuing Task Order 43 by knowingly misrepresenting that KBR would comply with the Task Order’s maintenance requirements.  The Relators asserted that KBR had signed a DOD form accepting the task order subject to its terms and conditions, which was required to be signed before payment could be made, knowing that KBR had not fulfilled its maintenance obligations in the past and would not do so in the future.  The district court granted KBR’s rule 12(b)(6) motion to dismiss because the DOD form did not constitute a “false statement or fraudulent course of conduct.” The Fourth Circuit affirmed the district court’s dismissal of the claims, holding that Relators’ assertions that KBR did not fulfill its maintenance obligations were mere “allegations of poor and inefficient management of contractual duties,” insufficient to create a cause of action under the FCA   Furthermore the “imprecise nature of the general maintenance provisions at issue” made it difficult to determine what qualified as adequate or inadequate maintenance under Task Order 43.  The Fourth Circuit also noted that the DOD form in question had been signed more than five months after KBR began performance under the Task Order so, as a matter of law, even if the DOD form contained a misstatement, such misstatement could not explain how Task Order 43 had been “obtained originally” through fraudulent inducement as the FCA requires. KBR confirms that Relators pursuing fraudulent inducement theories of recovery under the FCA must identify specific false statements made while negotiating a contract that induced the government to contract with, or pay, the contractor. 4.    Requiring Increased Particularity In Pleading Pursuant To Rule 9(b) FCA actions are subject to the Federal Rules of Civil Procedure, including special pleading requirements applicable to fraud actions.  Specifically, Rule 9(b) requires a plaintiff to plead with particularity the who, what, when, where, and how of the alleged fraud.  When facing Motions to Dismiss, court often struggle to determine the appropriate level of specificity required in a complaint, particularly where the plaintiff alleges a fraudulent scheme occurring over many years and/or in multiple programs or locations. Gibson Dunn has identified a trend in which courts appear to demand an increasing level of specificity in complaints to withstand dismissal.  For example, plaintiffs frequently allege an underlying “scheme to defraud” the government in detail, but courts nevertheless seem more apt to dismiss such complaints unless at least some representative examples of specific false claims resulting from the alleged fraudulent schemes are identified in, or attached to, the complaint.  See, e.g., United States ex rel. Fowler v. Caremark, R.X., LLC, 496 F.3d 730, 740 (7th Cir. 2007), cert. denied, 128 S. Ct. 1246, 170 L. Ed. 2d 66 (2008); United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379-80 (4th Cir. 2008) (agreeing with district court that the third amended complaint failed to satisfy Rule 9(b) in part because the “complaint lacks any specific facts about several important elements of the alleged scheme”); United States ex rel. Marlar v. BWXT Y-12, L.L.C., 525 F.3d 439 (6th Cir. 2008) (affirming dismissal of substantive FCA claims for failing to comply with Rule 9(b)); Barys v. Vitas Healthcare Corp., 2008 U.S. App. LEXIS 22619 (11th Cir. 2008) (district court did not err in refusing to relax pleading requirements nor in dismissing amended complaint for failure to satisfy the requirements of Rule 9(b)); United States ex rel. Hebert v. Dizney, 2008 U.S. App. LEXIS 21413, *13-14 (5th Cir. Oct. 10, 2008) (“While we agree that Rule 9(b) does not require a qui tam plaintiff alleging a long-running scheme involving many false claims to list every false claim, its dates, [and] the individuals responsible, . . . the allegedly great extent and complexity of a fraudulent scheme does not excuse a failure to plead at least  one false claim with the requisite specificity.”) (internal quotations omitted); United States ex rel. Serrano v. Oaks Diagnostics, Inc., 568 F. Supp. 2d 1136, 1143 (C.D. Cal. 2008) (“The general allegations that all claims submitted during an almost four year period were fraudulently submitted is insufficient particularity to satisfy the 9(b) pleading standard.  While the Court is not suggesting that Rule 9(b) requires precise details  pertaining to each of the allegedly 1393 claims submitted, the Ninth Circuit requires some specifics, such as the time, place, nature of the false statement, as well as the identities of the parties to the misrepresentation be present to comply with Rule 9(b) pleading standards. . . .  [B]ecause not a single allegedly false claim is stated with those particularities, the FCA claims must be [dismissed].”).[25] Defendants served with FCA complaints should carefully consider challenging the complaint on the basis of Rule 9(b) at the outset.  Even if dismissal is granted with leave to file an amended complaint, defendants are far better prepared to defend against detailed and specific allegations and may even be successful in narrowing the scope of discovery, which can be expensive, intrusive, and time consuming. 5.    Granting Summary Judgment For Lack Of Evidence Of a “Knowing” Violation The FCA penalizes only “knowing” violations, defined as actual knowledge, or a deliberate ignorance of, or reckless disregard for, the truth or falsity of information.  31 U.S.C. §3729(b).  Repeatedly, courts have held that negligent or innocent billing mistakes are not actionable under the statute.  See, e.g., United States ex rel. Farmer v. City of Houston, 523 F.3d 333, 338-39 (5th Cir. 2008) (“Though the FCA is plain that “proof of specific intent to defraud” is not necessary, . . . that mens rea requirement is not met by mere negligence or even gross negligence. . . . Given [the FCA’s] definition of ‘knowingly,’ courts have found that the mismanagement-alone-of programs that receive federal dollars is not enough to create FCA liability.”) Predictably, plaintiffs almost invariably argue that “scienter” or state-of-mind element is a factual issue, inappropriate for summary disposition prior to trial.  Recently, however, federal courts appear far more willing to dispose of FCA cases on summary judgment where plaintiffs fail to submit evidence to support a reasonable inference of knowledge or reckless disregard, particularly in areas where there is evidence that governing regulations or contract terms are ambiguous and the defendant’s interpretation was reasonable.[26] IV.  Significant Proposed Legislation – The False Claims Correction Act of 2007 A.  Introduction For more than 100 years, since President Lincoln signed the FCA into law in 1863 to combat fraud perpetrated against the Union Army, the FCA remained virtually untouched by legislators.  In 1986, however, Representative Howard Berman (D-Cal) and Senator Chuck Grassley (R-Iowa) reinvigorated the century-old law by adding provisions that allow citizens to act as “private attorneys general” and sue for government fraud.  Then, in late 2007, these lawmakers introduced bills in the U.S. House of Representatives and Senate to amend the False Claims Act.  Both bills are entitled the False Claims Correction Act of 2007. Specifically, on September 12, 2007, Senator Grassley introduced the Senate’s amended bill, S. 2041, 110th Cong., which was intended to “modernize and strengthen” the False Claims Act, expanding the government’s ability to protect treasury assets and fight fraud.  Senator Grassley has long been a champion of the False Claims Act, and the bill’s other sponsors show that it has enjoyed bi-partisan support.  On December 19, 2007, Representative Berman introduced a companion bill in the House, H.R. 4854, 110th Cong., which includes substantially the same provisions.  The House bill also has bipartisan support.  Both bills were debated and passed out of Committee in 2008, but were not voted on by either chamber or signed into law.[27] With the end of the 110th Congress on January 3, 2009, the bills will not automatically carry over to the 111th Congress.  However, Gibson Dunn anticipates that Senator Grassley and Representative Berman will submit materially identical versions of these bills for consideration by the 111th Congress. B.   Important Proposed Changes To The Current Act The congressional bills seek to affect crucial changes on the structure and operation of the False Claims Act.  Most notably, the bills expand the availability of lawsuits under the Act. 1.    The Public Disclosure Bar Possibly the most significant change to the FCA under the proposed amendments seeks to confer on private individuals the right to bring FCA claims without exposing any fraud.  The amendments circumscribe the public disclosure bar by defining “public information” narrowly to encompass only information “on the public record” or “broadly disseminated to the general public.”  Thus, the amendments would allow individuals to bring qui tam actions even if the government already knew about an alleged fraud but failed to disclose that fraud through the public channels previously articulated in the statute.  The amendments further constrict the public disclosure bar by limiting the bar to situations where “all essential elements” of the plaintiff’s claim are publicly available.   This would effectively eliminate the public disclosure bar in all but the most egregious of cases because plaintiffs would need only show one non-public source of information to escape the bar–a substantially lower standard than currently required: “direct and independent” knowledge of the fraud.  And finally, and perhaps most significantly, only the U.S. Attorney General–not the court–would have the power to dismiss a qui tam Relator’s claims for violating the public disclosure bar. 2.    Expanded Definition of “Claim” The proposed legislation also expands the definition of a “claim.”  Indeed, the amendments would broaden the availability of FCA suits by allowing suits against any person who knowingly presents a false or fraudulent claim for government money or property. The amendments effectively repeal any “presentment” requirement by tying FCA claims directly to federal money and property, regardless of to whom the claim is presented.  Similarly, the amendments would expand the definition of “government property” to encompass third-party property that is merely administered by the government.  If passed, this amendment would permit FCA suits arising out of a purely private transaction and would greatly expand the reach of the Act.  It remains to be seen whether the verbiage of any proposed amendment in this regard will change following the Supreme Court’s decision in Allison Engine providing that the link between a false statement and the federal government’s decision to pay or approve a false claim must not be “too attenuated” (discussed above). 3.    Qui Tam Actions by Government Employees One of the amendments’ most controversial provisions would allow government employees to bring qui tam actions themselves after exhausting internal procedures and administrative remedies.  Historically, courts have restricted government employees from bringing FCA claims as a matter of strong public policy.  See United States ex rel. Fine v. Chevron U.S.A., Inc., 72 F.3d 740 (9th Cir. 1996).  The proposed amendments would create increased incentives for exposing fraud, but also may create conflicts of interest among public employees and encourage opportunistic behavior. For example, federal employees may owe a duty of loyalty and candor to the government to report fraud, and many (such as auditors, investigators and attorneys) are specifically employed in part to identify fraud.  Opportunity for personal financial gain may create at least the appearance of investigative and/or enforcement decisions motivated by such personal gain rather than the public interest.  Further, if the government has determined not to act upon information disclosed by a government employee, then that employee should not be able to file a private action based on such information.  Indeed, the amendments create incentives for government employees to withhold critical information from the government.  In addition, if an active government employee files a qui tam action, his or her financial incentive may give rise to a conflict of interest which impairs his or her (and possibly other government employees’) ability to work on the matter or to serve as a witness in any trial.[28] 4.    Procedural Changes The amendments also seek to drastically alter the procedural requirements of the Act.  Indeed, in a significant departure from current law, the amendments would permit the Attorney General to delegate his broad investigatory powers under the FCA to third parties, including private entities.  Presently, only the Attorney General may issue civil investigative demands (CIDs), before commencing a civil proceeding, which may require the target to produce documents and answer oral or written questions regarding such documents.  31 U.S.C. § 3733(a).  The “Attorney General may not delegate [that] authority.”  Id.  By expanding the power to issue CIDs to private parties, the congressional amendments would eliminate what has been a powerful check on investigative fishing expeditions. The bills also affect procedural changes by requiring the government, if it elects to intervene and proceed with an action, to file its own complaint, or to amend the complaint of a person who brought a civil action.  Further, the amendments seek to lengthen the statute of limitations from six years under the current statute (31 U.S.C. § 3731(b)) to ten years.  Of note, the House committee shortened this time to eight years. 5.    Whistleblower Protections Finally, the amendments strengthen the Act’s prohibition against retaliatory actions taken by employers against whistleblowers by prohibiting employers from taking actions that materially hinder a whistleblower in obtaining new employment or other business opportunities.  Similarly, the Senate bill authorizes relief for government employees and contractors from retaliatory actions taken against them because of lawful acts done in furtherance of efforts to stop violations of the Act. C.  Support For The Amendments The amendments’ supporters argue that the legislation is needed because recent judicial decisions have weakened the FCA.  Indeed, on February 20, 2008, Senator Grassley criticized the courts for doing “their best to undo the most effective tool of the federal government in rooting out fraud and abuse.”[29]  Senator Grassley observed that “[o]ur bill works to make sure recent court decisions won’t weaken the government’s ability to recover taxpayer dollars lost to fraud, whether it’s in health care, defense, or another area of spending.”  Id. Plaintiffs’ attorneys and members of the “Relators’ bar” have argued that recent Supreme Court cases such as Rockwell were wrongly decided, and that the public disclosure bar has routinely, and incorrectly, been utilized to avoid liability.  They argue that the amendments are necessary to effectuate the original purposes of the legislation. D.  Opposition To The Amendments Opponents argue that the amendments greatly expand liability under the Act and will make it more difficult for companies to defend themselves against costly litigation.  Indeed, although the House and Senate bills both enjoy bipartisan support, some skepticism has emerged.  Not surprisingly, some of the most vehement criticism has been lodged against the bills’ amendments to the public disclosure bar. The business community has given both bills a cold reception.  The U.S. Chamber of Commerce opposes the legislation on the ground that it is unnecessary and that it could harm small businesses that do not have the resources to defend themselves in court.[30]  The bills have also been criticized for benefiting plaintiffs’ attorneys and not the federal government.  The DOJ has also expressed “significant concerns” with the bills as written, particularly with respect to provisions that would allow government employees to act as Relators and virtually eliminate the public disclosure bar.[31]  The DOJ has echoed others’ complaints, arguing that these provisions would spawn frivolous, costly litigation and hinder the DOJ’s efforts to combat fraud. V.  State False Claims Acts More than 20 states and the District of Columbia (and even some cities) have now enacted their own civil False Claims Acts modeled after the federal statute, and more are sure to follow.  In fact, the federal government provides an incentive to states that enact such legislation:  Section 6031 of the Deficit Reduction Act of 2005 provides that if a state has qualifying false claims act in effect, then the state will get ten percent more of any amount recovered in any false claims action brought under the state’s act.  See Section 1909(b) of the Social Security Act, 42 U.S.C. § 1396h(b). In a recently, highly-publicized case, thought to be the largest recovery ever against a utility for overcharging customers, a California Superior Court ruled in June 2007 that the Los Angeles Department of Water & Power deliberately overcharged Los Angeles County, the school district and other plaintiffs in the case for nearly 10 years and ordered the agency to pay a total of $223.8 million.  In October 2008, DWP announced that it had decided not to appeal the verdict and instead settled for a total of $160 million.  The lawsuit was initiated by an energy consultant under the California False Claims Act whistleblower provisions.  Similarly, in September 2008, Boehringer Ingelheim Roxane, Inc., a drug manufacturer, paid the Commonwealth of Massachusetts $1.8 million to settle an FCA lawsuit alleging that it falsely inflated the prices of certain drugs that it reported to the national pharmaceutical price reporting services, which states (including Massachusetts) use to determine the reimbursement amounts for drugs dispensed to Medicaid recipients.  The state sued 13 drug manufacturers and had already settled similar claims against four other drug companies for nearly $6 million. Those doing business with the government should be aware that many programs are jointly funded by the federal and state governments (such as Medicaid),[32] and many government contracts are similarly funded by the federal and state governments (such as infrastructure improvement).  Accordingly, companies may face concurrent allegations of liability under federal and state versions of the FCA.  And qui tam plaintiffs may be able to convince state regulators to intervene and pursue state claims, even if the federal government declines intervention. VI.  Increased FCA Activity in the Future?  A.  The Federal Bailout The federal government’s recent and expanding bailout places substantial federal funds into the hands of a stunning variety of entities.  And with the growing demand for oversight, it is possible that a new form of FCA claims will emerge–claims alleging that the entity receiving federal funds defrauded the government based on misrepresentations to receive the federal monies in the first instance, or false statements made to continue to receive the monies.  FCA claims could also be brought by whistleblowers claiming that the federal funds that have been received were not appropriately applied to their intended uses. B.   New Rules For Government Contractors A final rule issued on November 12, 2008, and effective on December 12, 2008, amends the Federal Acquisition Regulation (“FAR”) to require the disclosure of violations of the FCA and “significant” overpayments on a contract, and a knowing failure by a federal government contractor to timely disclose “credible evidence” of these violations or overpayments may result in suspension or debarment, in addition to FCA damages and penalties.  The new rule also mandates that certain federal government contractors create a business ethics awareness and compliance program, as well as an internal control system.  For more information on the FAR, please see Gibson Dunn client alert, “New Federal Regulation Requires Mandatory Disclosure and Amplified Compliance Programs for Government Contractors,” November 13, 2008. Although the full effect of the new rule remains to be seen, it clearly signals an attempt to significantly change the relationship between contractors and the federal government regarding the disclosure of certain criminal and ethical violations, including violations of the FCA, as well as instances of significant overpayment.  Key terms such as “significant overpayments” are not clearly defined in the rule, so questions remain as to how broadly the new disclosure requirements will be interpreted and applied.  Additionally, the requirements regarding compliance and control programs are complex and are likely to present significant business and legal challenges to contractors in the near future.[33] C.  Proposed Legislative Changes Passage of the proposed legislative changes would certainly lead to expanded FCA activity.  As previously described, the proposed changes would undermine the “public disclosure” bar likely resulting in an increase of the number of private individuals that could bring FCA suits even if they have only indirectly witnessed alleged fraud.  A broader definition of a “claim,” opening the FCA to government employees, extending the statute of limitations, and enhancing whistleblower protections are all steps that will likely increase the number of FCA suits brought by the public.  Indeed the legislative changes likely would undo many of the judicial trends previously noted in this update that point towards a narrower interpretation of the FCA. VII.  Conclusion Based on recent events, Gibson Dunn predicts that 2009 will be an active and interesting time for False Claims Act activity.  In Rockwell and Allison Engine, the U.S. Supreme Court restricted the class of persons able to bring FCA actions, narrowed the application of the Act, and expressly warned against “transform[ing] the FCA into an all-purpose antifraud statute.”  And lower federal courts have applied these requirements, which make it more difficult to pursue FCA claims.  But legislation with bipartisan support is likely to be reintroduced and enacted in the current Congress that would essentially reverse those decisions, expand the scope of the Act, and increase penalties.  Government agencies (such as DHHS OIG) have increased budgets and issued marching orders to strengthen oversight and enforcement activities to prevent fraud and abuse.  Task forces among various government agencies (notably, in the healthcare and procurement areas) have recently been formed with specific goals of combining and leveraging their investigative and prosecutorial resources to more efficiently and effectively recoup federal funds obtained by fraud.  And all of this at a time when the federal government has infused, and has announced plans to further infuse, unprecedented amounts of money into many sectors of the economy.  The year ahead is sure to present a robust level of enforcement activity.    [1]  See DOJ Press Releases available at http://www.usdoj.gov/criminal/npftf/pr/press_releases/2008/nov/11-10-08_frd-fls-clam-fy08.pdf and http://www.usdoj.gov/opa/pr/2008/November/fraud-statistics1986-2008.htm.  [2]  According to the U.S. Census Bureau’s September 2008 Consolidated Federal Funds Report for Fiscal Year 2007, the federal government allocated $2.56 trillion in domestic spending for FY 2007, which was up 4.4% from the prior year, and nearly half of all spending (over $1.3 trillion) went to Social Security, Medicare, and Medicaid.  Defense spending accounted for approximately 16% ($430.5 billion).  See http://www.census.gov/prod/2008pubs/cffr-07.pdf; http://www.census.gov/Press-Release/www/releases/archives/governments/012743.html.  FY 2008 figures are not yet final and available.   [3]  Companies that do business with the federal government or receive federal funds should implement and maintain robust internal compliance programs and take employee complaints seriously.  Because FCA lawsuits are most frequently initiated by present or former employees, and because the employee’s investigation and participation in an FCA action constitutes protected activity under the Act, companies should also engage qualified FCA counsel before making any employment decisions regarding an individual who has complained of potentially fraudulent activity.   [4]  18 U.S.C. § 287 makes it a crime to knowingly present a “false, fictitious, or fraudulent” claim to the government punishable by up to five years imprisonment and/or a fine.  Id.  This year-end summary focuses on the civil False Claims Act, but the government can, and often will, pursue both criminal and civil remedies.   [5]  The Act defines “claim” as “any request or demand, whether under a contract, or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United Sates Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.”  31 U.S.C. § 3729(c).   [6]  In Rogan, an individual was liable under the FCA for conspiring to defraud the government by concealing illegal referrals and kickbacks and for otherwise inflating Medicaid and Medicare claims.  Following a bench trial, the court awarded damages equal to three times the entire amount that the medical facility (Edgewater) received from the government plus penalties.  The court refused to discount damages based on any actual services or treatment provided at the medical facility.  Id. at 451-52 (court did not “think it important that most of the patients for which claims were submitted received some medical care–perhaps all the care reflected in the claim forms. …  Edgewater did not furnish any medical service to the United States.  The government offers a subsidy (from the patients’ perspective, a form of insurance), with conditions.  When the conditions are not satisfied, nothing is due.  . . .  Now it may be that, if the patients had gone elsewhere, the United States would have paid for their care.  Or perhaps the patients, or a private insurer, would have paid for care at Edgewater had it refrained from billing the United States.  But neither possibility allows Rogan to keep money obtained from the Treasury by false pretenses, or avoid the penalty for deceit.”)   [7]  The FCA protects whistleblowers from retaliation by their employers as a result of the whistleblower’s investigative activities.  31 U.S.C. §3730(h).   [8]  See http://www.usdoj.gov/opa/pr/2008/November/fraud-statistics1986-2008.htm.     [9]  See supra, note 1.    [10]  DOJ statistics confirm that the government depends heavily on whistleblowers to expose fraud.  Of the 542 new FCA matters opened in FY 2008 (including referrals, investigations and qui tam actions), 375 (70%) of those were qui tam actions.  This represents a slight decline in the percentage of actions initiated by private individuals (in FY 2007, of the 472 new FCA investigations, 364 (77%) were qui tam actions; similarly, in FY 2006, of the 455 new investigations, 384 (84%) were qui tam actions).  Of the total amount of recoveries in 2008, 78% (approximately $1.04 billion) resulted from investigations or actions originally initiated by whistleblowers.   [11]  See supra, note 1. [12]  See http://www.oig.hhs.gov/publications/docs/workplan/2009/WorkPlanFY2009.pdf.   [13]  The OIG also intends to focus on Medicare Part D drug benefits,” as well as “enrollment and marketing schemes,” “prescription shorting,” quality-of-care and substandard care issues and will “expand [its] focus on these issues to additional institutions and community-based settings.”  Further, the OIG intends “to conduct investigations related to false claims submitted to Medicaid for services not rendered, claims that manipulate payment codes in an effort to inflate reimbursement amounts, claims for substandard care provided to nursing home residents, and claims submitted to obtain program funds.”  Id.   [14]  Notably, the relator in the CVS action (a pharmacist) initiated similar claims (switching from tablets to more expensive capsule versions of certain prescription drugs) against Omnicare, Inc, which resulted in a $49.5 million settlement in FY 2007.  The whistleblower received over $6.4 million of that award, bringing his total qui tam share recovery to more than $10 million.   [15]  See http://www.usdoj.gov/opa/pr/2008/March/08_crt_214.html.   [16]  The Anti-Kickback Statute, 42 U.S.C.S. § 1320a-7b, imposes liability on anyone who knowingly and willfully offers or pays any remuneration directly or indirectly, to any person to induce that person to refer an individual for the provision of any item or service for which payment may be made under a Federal health care program.  The Stark Law, 42 U.S.C.S. § 1395nn, generally prohibits physicians having a financial relationship with an entity from making a referral to the entity for the provision of health services.  Some courts have held that violations of the Anti-Kickback Statute and the Stark Law are actionable under the FCA if the government conditioned payment upon compliance therewith.   [17]  See http://www.usdoj.gov/criminal/npftf/resource/Dec08progress_report.pdf.   [18]  The U.S. Census Bureau reports that federal government procurement contracts accounted for $440 billion (17 percent) of total federal spending in FY 2007.  Of that spending, defense contracts compromised 67% percent.  FY 2008 figures are not yet available.   [19]  The National Procurement Fraud Task Force 2008 Progress Report noted that in 2007, the FBI launched a project “to scan approximately seven million DOD payment vouchers totaling over $10 billion dollars in expenditures/payments . . . to aid in retention, retrieval, and proactive review for fraud indicators and red flags.  . . . . Several cases have been referred to [federal] agencies as a result of red flags and anomalies discovered during the review of these vouchers.” http://www.usdoj.gov/criminal/npftf/resource/Dec08progress_report.pdf.  Litigation is sure to follow.   [20]  See, e.g., Scott Horsley, Can Infrastructure Spending Rev Up The Economy?, Nat’l Pub. Radio, Dec. 8, 2008 (available at http://www.npr.org/templates/story/story.php?storyId=97973470), reporting that President-elect Obama voiced his intention to “lead the biggest government infrastructure investment since the interstate highway system was launched in the 1950s.”   [21]  In August 2007, IBM Corporation and PricewaterhouseCoopers agreed to pay more than $5.2 million to settle allegations stemming from that investigation.  In FY 2007, Oracle Corporation paid the government $98.5 million to resolve allegations that PeopleSoft, Inc. (acquired by Oracle in 2005) engaged in defective pricing of its software and services under the company’s multiple award schedule with GSA.   [22]  See http://www.usdoj.gov/usao/ct/Press2008/20081223-1.html.   [23]  See, e.g., CRS Report for Congress, “The False Claims Act, the Allison Engine Decision, and Possible Effects on Health Care Fraud Enforcement,” Nov. 6, 2008, available at http://assets.opencrs.com/rpts/RS22982_20081106.pdf.  [24]  This holding should greatly interest companies that are presently defendants in FCA actions.  As a jurisdictional inquiry, even if the case has progressed beyond motions to dismiss or for summary judgment, the “public disclosure” bar may be a viable defense to claims, regardless of whether it was raised at an earlier stage of the litigation.   [25]  District court cases dismissing FCA complaints for failure to satisfy Rule 9(b) pleading requirements have been published on a weekly, if not daily basis, over the past few months.  See, e.g., United States ex rel. Kennedy v. Aventis Pharmaceuticals, Inc., 2008 U.S. Dist. LEXIS 100444 (N.D. Ill. Dec. 10, 2008); United States ex rel. Radcliffe v. Purdue Pharma L.P., 2008 U.S. Dist. LEXIS 81688 (W.D. Va. Oct. 14, 2008); Unterschuetz v. In Home Pers. Care, Inc., 2008 U.S. Dist. LEXIS 81914 (D. Minn. Oct. 14, 2008); United States ex rel. Sterling v. Health Ins. Plan of Greater N.Y., Inc., 2008 U.S. Dist. LEXIS 76874 (S.D.N.Y. Sept. 30, 2008); United States ex rel. Lacy v. New Horizons, Inc., 2008 U.S. Dist. LEXIS 73814 (W.D. Okla. Sept. 25, 2008).   [26]  Some of the Circuit Court decisions in 2008 that affirmed summary judgment for lack of evidence of scienter include:  United States ex rel. K & R Ltd. P’ship v. Mass. Hous. Fin. Agency, 530 F.3d 980, 981 (D. C. Cir. 2008); United States ex rel. Hefner v. Hackensack Univ. Medical Ctr., 495 F.3d 103, 110 (3d Cir. 2007); United States ex rel. Farmer v. City of Houston, 523 F.3d 333, 339 (5th Cir. 2008); United States ex rel. Taylor-Vick v. Smith, 513 F.3d 228, 232 (5th Cir. 2008); United States ex rel. Gudur v. Deloitte & Touche, 2008 U.S. App. LEXIS 17038, *4-5 (5th Cir. Aug. 7, 2008); United States ex rel. Bustamante v. Orenduff, 2008 U.S. App. LEXIS 24303, *49 (10th Cir. Nov. 28, 2008).   [27]  S. 2041 was referred to the Committee on the Judiciary, which held hearings on the measure on February, 27, 2008.  After debating the bill, the committee passed the bill in early April 2008 without a single dissenting vote.  H.R. 4854 bill was referred to the House Committee on the Judiciary, which held hearings in June 2008.  The bill was also referred to the Subcommittee on Commercial and Administrative Law and the Subcommittee on Courts, the Internet, and Intellectual Property.  On July 16, 2008, the Committee voted to report the bill to the full chamber.   [28]  For these and other policy reasons, the DOJ “strongly opposes the proposed amendment” in this regard and “believes there should be a complete ban on any qui tam suit that utilizes information acquired during the course of Government employment.”  See http://www.usdoj.gov/ola/views-letters/110-2/07-15-08-hr4854-false-claims-act-correction-act.pdf. [29]  Geof Koss, Senate Judiciary to Weigh Changes to Key Whistleblower Law, CongressNow (Feb. 21, 2008).   [30]  Brendan Brown, Chamber of Commerce Argues Against Update of False Claims Act, CongressNow (June 19, 2008).   [31]  See http://www.usdoj.gov/ola/views-letters/110-2/07-15-08-hr4854-false-claims-act-correction-act.pdf and http://www.usdoj.gov/ola/views-letters/110-2/02-21-08-s2041-false-claims-correction-act.pdf.    [32]  On October 28, 2008, the Department of Health & Human Services Centers For Medicare & Medicaid Services (CMS) issued a letter to the states setting forth CMS policy on refunding the federal share of Medicaid overpayments recovered under state false claims act statutes.  See SHO #08-004 (“this letter explains what amounts must be returned to the Federal Government on any recovery, the proper accounting of the relator’s share and litigation”).    [33]  Many critics of the proposed rule argued that FCA violations are difficult to define, and contractors are likely to have an honest disagreement about whether a violation of the FCA has occurred sufficient to warrant self-disclosure.  In enacting the Rule, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council stated, “the disclosure requirement applies only where the contractor has ‘credible evidence’ that a violation of the civil FCA has occurred. . . . Genuine disputes over the proper application of the civil FCA may be considered in evaluating whether the contractor knowingly failed to disclose a violation of the civil FCA.”  Further, “the mere filing of a qui tam action under the civil FCA is not sufficient to establish a violation under the statute, nor does it represent, standing alone, credible evidence of a violation.  Similarly, the decision by the Government to decline intervention in a qui tam action is not dispositive of whether the civil FCA has been violated, nor conclusive of whether the contractor has credible evidence of a violation of the civil FCA.” Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Gibson Dunn successfully argued the Allison Engine case in the Supreme Court, which resulted in a unanimous decision by the Court.  Our attorneys have handled more than 100 FCA investigations and have a long track record of litigation success.  The firm has more than 30 attorneys with substantive FCA expertise and 20 former Assistant U.S. Attorneys and DOJ attorneys.  Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com) Andrew Tulumello (202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (202-955-8536, kmanos@gibsondunn.com) Joseph D. West (202-955-8658, jwest@gibsondunn.com),    New York Randy Mastro (212-351-3825, rmastro@gibsondunn.com) James A. Walden (212-351-2300, jwalden@gibsondunn.com) Denver Robert C. Blume (303-298-5758, rblume@gibsondunn.com) Jessica H. Sanderson (303-298-5928, jsanderson@gibsondunn.com) Laura Sturges (303-298-5929, lsturges@gibsondunn.com) Dallas Evan S. Tilton (214-698-3156, etilton@gibsondunn.com) Orange County Nick Hanna (949-451-4270, nhanna@gibsondunn.com) Los Angeles Timothy Hatch (213-229-7368, thatch@gibsondunn.com)    © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 5, 2009 |
2008 Year-End FCPA Update

By any measure, 2008 was a monster year in Foreign Corrupt Practices Act ("FCPA") enforcement.  With thirty-three enforcement actions between the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC"), the statute’s dual enforcers, 2008 was the second busiest numerical year on the books, trailing only 2007.  But beyond the numbers (after all, with the massive Siemens resolution, 2008 dwarfs all other years combined in fines and disgorgement), 2008 saw the FCPA’s enforcement regime mature like never before.  There were no unimportant FCPA enforcement actions this year.  Whether the trend was increasingly aggressive enforcement against individuals, ramped up international coordination, the joining of FCPA prosecutions with prosecutions for distinct federal crimes, or others trends discussed herein, every case fits an important trend in foreign bribery enforcement that we expect to continue into 2009 and beyond. This client update provides an overview of FCPA and other anti-corruption enforcement activity from the past year and a discussion of the trends that we see emerging from that activity.  A collection of Gibson Dunn’s publications concerning the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on Gibson Dunn’s FCPA website.   FCPA Overview The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business.  The anti-bribery provisions apply to "issuers," "domestic concerns," and "any person" that violates the FCPA while in the territory of the United States.  The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, the approximately 1,500 foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of this statute.  The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Regulators have frequently invoked these latter two sections – collectively known as the accounting provisions – in recent years when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency. 2008 in Review The recent trend of increased FCPA enforcement activity is best captured in the following chart and graph, which each track the number of FCPA enforcement actions filed by DOJ and the SEC during the past five years:  2008 2007 2006 2005 2004 DOJ20 SEC13 DOJ18 SEC20 DOJ7 SEC8 DOJ7 SEC5 DOJ2 SEC3 For some time, we have been reporting – based on our representation of corporations and individuals, our network of relationships, and our constant review of public disclosures – that there are approximately 100 companies that are the subject of open FCPA investigations.  This figure was recently confirmed by Mark Mendelsohn, the Deputy Chief of the Fraud Section in DOJ’s Criminal Division and DOJ’s top-FCPA enforcer, at an FCPA enforcement conference.  With so many active matters in the pipeline, we expect that U.S. enforcement agencies will continue their aggressive pursuit of companies and executives suspected of international bribery for the foreseeable future. Top Five Trends in FCPA Enforcement The past year in FCPA enforcement activity bore out many of the key enforcement themes that we have observed in recent years.  Although there are many important trends that can be drawn from last year’s prosecutions, we have identified below the top five that we believe best highlight the myriad risks facing companies and their employees doing business internationally.  These significant trends are: 1.  Escalating corporate financial penalties; 2.   Increasing focus on individual prosecutions; 3.   Internationalization of foreign anti-corruption enforcement; 4.   DOJ’s coupling of FCPA prosecutions with other charges; and 5.   Continuing upswing in FCPA litigation. Escalating Corporate Financial Penalties Scott Friestad, Deputy Director of Enforcement for the SEC, recently forewarned the FCPA community, "The dollar amounts in the [FCPA] cases that will be coming within the next short while will dwarf the disgorgement and penalty amounts that have been obtained in prior cases."  When Friestad made this statement, Baker Hughes, Inc.’s 2007 joint DOJ/SEC resolution of approximately $44.1 million held the record for the largest FCPA settlement.  But, on December 15, 2008, DOJ and the SEC eclipsed this record by nearly twenty times in announcing their long-anticipated resolution with Siemens AG.  Siemens pleaded guilty to FCPA books-and-records and internal controls charges brought by DOJ and consented to the filing of a civil complaint by the SEC charging Siemens with anti-bribery, books-and-records, and internal controls violations.  Three of Siemens’s "regional operating companies" also pleaded guilty to conspiring to violate various provisions of the FCPA.  Under the plea agreement and civil settlement, Siemens and its subsidiaries agreed to pay a total criminal fine of $450 million to DOJ and to disgorge $350 million in illicit profits to the SEC.  Siemens consented to an SEC injunction against future violations of the FCPA and agreed to retain an FCPA compliance monitor for up to four years.  In addition to the U.S. settlements, Siemens on the same day settled the balance of its liabilities in the long-running Munich Public Prosecutor’s corruption probe (Siemens’s communications business reached a settlement with that office in 2007).  Siemens agreed to pay €395 million (~ $569 million), consisting of €394.75 million in profit disgorgement and €250,000 in administrative penalties, to resolve this investigation.  If you add to these settlements the roughly $287 million in fines and disgorgement imposed in connection with the 2007 Munich Public Prosecutor settlement with the company’s communications business, and Siemens’s approximately $255 million settlement with German tax authorities in 2007, Siemens has paid well over $1.9 billion to resolve the U.S. and German corruption probes.  The scope of illicit conduct alleged by DOJ and the SEC covers thousands of corrupt payments, totaling approximately $1.4 billion, to foreign government officials in ten countries in connection with hundreds of individual projects or sales.  At the press conference announcing the settlement, DOJ’s Acting Assistant Attorney General, Matthew Friedrich, went so far as to say that bribery was, for Siemens, "nothing less than standard operating procedure."  SEC Director of Enforcement Linda Thomsen described Siemens’s "pattern of bribery" as "unprecedented in scale and geographic reach."  The DOJ and SEC settlements allege that Siemens corruptly influenced contracts and tenders in Argentina, Bangladesh, China, Iraq, Israel, Mexico, Nigeria, Russia, Venezuela, and Vietnam. The DOJ and SEC settlements detail "systematic efforts" to falsify Siemens’s books and records and circumvent Siemens’s system of internal controls, including the use of off-book accounts as pools of money for corrupt payments, signing approval forms for corrupt payments with removable Post-It notes, thereby concealing the identity of the signors, and operating "cash desks" where employees could withdraw up to €1 million at a time for use in corrupt payments.  Siemens’s internal controls failures were substantial and widespread enough to merit the first ever criminal FCPA internal controls charge filed by DOJ.  But the settlement papers also tell a remarkable story of corporate remediation and an internal investigation of unparalleled magnitude.  Papers filed by both sides in support of the agreed-upon sentence in the criminal case detail more than $1 billion in investigative and remediation costs incurred by Siemens in the just over two years since German authorities raided Siemens in late 2006.  Some of the eye-popping figures include: 1.6 million billable hours logged by Siemens’s Audit Committee counsel and the company’s forensic auditor at a cost of over $850 million; 1,750 interviews and 800 informational meetings concerning the company’s operations in 34 countries; administration, with approval from DOJ and the SEC, of two employee amnesty programs, which led to 100 employees coming forward with useful information; over 100 million documents preserved and 80 million documents stored in an electronic database at a cost to Siemens of more than $100 million; analysis of 38 million transactions from Siemens’s "Finavigate" accounting system and a review of 127 million accounting records related to those transactions; more than $5.2 million in document translation costs; and more than $150 million spent on the creation of an anti-corruption kit for 162 distinct operating entities, including six weeks of auditors "on the ground" at each of the fifty-six entities determined to be a "high risk."  DOJ concluded in its sentencing memorandum that the "reorganization and remediation efforts of Siemens have been extraordinary and have set a high standard for multi-national companies to follow."  DOJ’s Friedrich succinctly summarized this point at the press conference announcing the Siemens resolution, referring to Siemens’s cooperation as, "in a word, . . . exceptional."  Not only does the Siemens FCPA resolution dwarf the prior record FCPA settlement, but the combined U.S. settlements (not to mention the German settlements) substantially exceed the aggregate of every dollar ever collected by the U.S. government in connection with FCPA settlements over the statute’s thirty-one year history.  Still, the fact remains that Siemens’s settlement figures could have been much higher.  For example, DOJ’s sentencing guideline calculation called for a criminal fine of between $1.35 and $2.7 billion.  Clearly, DOJ and the SEC gave Siemens significant credit for its remediation efforts and for the substantial settlements it paid abroad.  Although many orders of magnitude smaller than the Siemens resolution, in May 2008, Willbros Group, Inc., agreed to pay the then-second (now third) highest combined fine/disgorgement figure to DOJ and the SEC to settle FCPA charges arising out of Willbros’s operations in Bolivia, Ecuador, and Nigeria.  The allegations against Willbros Group, which are described in greater detail in our 2008 Mid-Year FCPA Update, involve claims that the company, acting through various subsidiaries and employees, made $3.8 million in corrupt payments, and agreed to make another $8 million in payments, to influence the assessment of taxes, judicial processes, and the award of more than $630 million in pipeline contracts.  To settle the SEC’s complaint, Willbros agreed to pay $10.3 million in disgorgement plus prejudgment interest.  To resolve the criminal charges, Willbros entered into a deferred prosecution agreement with DOJ, agreeing to pay a $22 million fine, to have a criminal information filed against its subsidiary Willbros International, Inc., and to retain an independent compliance monitor for three years. The Willbros settlement underscores the difficulty of conducting business in Nigeria, which as we note below was the most frequent locale for FCPA violations alleged in 2008 settlements.  Some companies have found it so difficult to operate in this nation without running afoul of the FCPA that they have withdrawn their business operations altogether.  And demonstrating that enormous foreign bribery settlements are certain not to be a fluke of 2008, ABB Ltd. recently announced that it has reserved $850 million for "potential costs related to the . . . investigations by the U.S. and European authorities into suspect payments and alleged anti-competitive practices" and business restructuring costs.  Market analysts have pegged the expected legal share of this reserve at between $650 and $700 million, although it is not clear how much is attributable to the anticipated corruption settlement(s) vis-à-vis the anticipated antitrust settlement(s).  The corruption investigations reportedly stem from ABB’s operations in Iraq, Kazakhstan, and Nigeria.  This would be ABB’s second brush with the FCPA, its now-divested Vetco Gray business having been the subject of a $16.4 million settlement in 2004.  Increasing Focus on Individual Prosecutions Although the FCPA is commonly perceived – and perhaps, historically speaking, with good reason – to be a statute of predominantly corporate enforcement, 60% of the FCPA defendants in 2008 were individuals.  DOJ’s Mendelsohn recently said of the continuing trend of holding individuals to answer for foreign bribery, "The number of individual prosecutions has risen – and that’s not an accident. . . .  It is our view that to have a credible deterrent effect, people have to go to jail."  SEC Associate Director Fredric Firestone, speaking at a separate engagement, expressed a similar sentiment:  "The Commission very clearly has stated to us that enforcement actions against individuals as well as companies is a priority."  The landmark case in individual FCPA prosecutions in 2008 has to be the joint DOJ/SEC prosecution of Albert Stanley, the former Chairman and Chief Executive Officer of former Halliburton subsidiary Kellogg, Brown & Root, Inc. ("KBR").  On September 3, 2008, Stanley pleaded guilty to criminal charges of conspiring to violate the FCPA’s anti-bribery provisions and of conspiring to violate the mail and wire fraud statutes in a separate kickback scheme.  Stanley also entered into a civil settlement with the SEC charging him with violating the FCPA’s anti-bribery provisions and enjoining him from future violations of the FCPA.  The charging documents allege that Stanley was KBR’s senior representative on the steering committee of a four-company joint venture formed to obtain and administer more than $6 billion in contracts to build liquefied natural gas production facilities in Bonny Island, Nigeria.  Stanley and his co-conspirators allegedly authorized more than $182 million in payments to third-party agents with the expectation that the agents would pass most of those payments on to senior officials of a Nigerian state-controlled oil company.  In connection with the kickback scheme, Stanley pleaded guilty to a mail and wire fraud conspiracy premised on his receipt of approximately $10.8 million in kickbacks from a former KBR employee to whom Stanley directed as much as $65 million in KBR consulting contracts.  Although he has not yet been sentenced, Stanley has agreed to serve seven years in prison and to pay $10.8 million in restitution to KBR.  Stanley is cooperating with DOJ in its continuing investigation in hopes that DOJ will file a motion to reduce his sentence pursuant to § 5K1.1 of the U.S. Sentencing Guidelines.  Announcing Stanley’s guilty plea, DOJ’s Friedrich commented, "Today’s plea demonstrates that corporate executives who bribe foreign officials in return for lucrative business deals can expect to face prosecution." In another significant development in individual FCPA prosecutions in 2008, on December 19, DOJ unsealed the January 2008 indictment of James Tillery, the former President of Willbros International, Inc., and Paul Novak, a former Willbros International consultant.  DOJ made the indictment public after arresting Novak when he arrived at Houston’s George Bush Intercontinental Airport on a flight from South Africa.  Novak returned to the United States after the revocation of his U.S. passport.  Tillery remains a fugitive with a warrant outstanding for his arrest.  Tillery and Novak are each charged with violating the anti-bribery provisions of the FCPA, conspiring to do the same, and conspiring to commit money laundering.  The indictment alleges that Tillery and Novak conspired with other Willbros International employees, including Jim Brown and Jason Steph, who themselves pleaded guilty to FCPA charges in 2006 and 2007, respectively, to pay more than $6 million in bribes to Nigerian government officials in return for the award of more than $380 million in gas pipeline contracts.  The co-conspirators allegedly delivered approximately $2 million of these bribes to employees of various Nigerian state-owned gas companies, to a senior official in the executive branch of the Nigerian government, and to officials of the dominant political party in Nigeria.  The indictment further alleges that Tillery and Novak agreed to make approximately $300,000 in corrupt payments, and delivered $150,000 of this amount, to officials of the Ecuadorian state oil company in return for the award of a $3 million gas pipeline project.  Finally, Tillery and Novak are alleged to have conspired with other Willbros International employees to transmit money from within the United States to places outside of the United States with the intent to promote violations of the FCPA, a "specified unlawful activity" within the money laundering statutes.  The Tillery/Novak indictment makes seven former Willbros employees and representatives, in addition to the company, who have been charged with FCPA violations by either or both DOJ and the SEC.  As noted above, Brown and Steph pleaded guilty to criminal FCPA charges in 2006 and 2007.  Brown also consented to an SEC injunction from future FCPA violations in 2006.  Then, on May 14, 2008, Jason Steph and three other former Willbros International employees – Lloyd Biggers, Carlos Galvez, and Gerald Jansen – settled civil FCPA charges with the SEC and agreed to permanent injunctions from future FCPA violations.  Additionally, Galvez and Jansen agreed to pay civil penalties of $35,000 and $30,000, respectively.    Another 2008 corporate FCPA prosecution in which DOJ charged multiple individuals is the Nexus Technologies, Inc. matter.  On September 4, 2008, DOJ filed an indictment charging Nexus Technologies and four employees – An Nguyen, Kim Nguyen, Nam Nguyen and Joseph Lukas – with one count of conspiring to violate the FCPA and multiple substantive FCPA counts, in connection with alleged corrupt payments to officials of various Vietnamese government agencies.  According to the indictment, over a ten-year period the defendants paid at least $150,000 in bribes, styled as "commissions," to Vietnamese government officials in order to secure contracts for the supply of a wide variety of equipment, ranging from helicopter parts to underwater mapping equipment to chemical detectors.  Federal agents arrested the four individual defendants on September 5, 2008, and both they and their employer are presently awaiting trial.  Rounding out the cadre of individual FCPA defendants in 2008 are Misao Hioki, Shu Quan-Sheng, Martin Self, and Mario Covino.  We discuss the Hioki and Quan-Sheng prosecutions below as evidence of DOJ’s movement towards charging FCPA crimes in conjunction with violations of unrelated criminal statutes.  Self, the former President and part owner of Pacific Consolidated Industries ("PCI"), pleaded guilty to two counts of violating the anti-bribery provisions of the FCPA on May 8, 2008, and was subsequently sentenced to pay a $20,000 fine and serve a probationary sentence.  Self was alleged to have executed a "marketing agreement" with a relative of a United Kingdom Ministry of Defence ("UK-MOD") official and subsequently causing the payment of approximately $70,350 to the relative pursuant to the agreement.  According to the charging documents, Self was not aware of any genuine services that the relative provided to PCI and, in fact, Self believed that the payments were truly for the benefit of the UK-MOD official, who was in a position to influence the award of equipment contracts to PCI.  Holding these beliefs, Self purposely failed to investigate and deliberately avoided becoming aware of the full nature of PCI’s relationship with the UK-MOD official’s relative.  Another former PCI executive, Leo Winston Smith, was indicted on FCPA charges in 2007 and is currently awaiting a May 2009 trial date. Covino was the Director of Worldwide Factory Sales for an unnamed Rancho Santa Margarita, California-based manufacturer of service control valves for the nuclear, oil and gas, and power generation industries.  On December 17, 2008, DOJ filed a plea agreement by which Covino agreed to plead guilty to charges of conspiring to violate the FCPA’s anti-bribery provisions.   The plea agreement and accompanying criminal information allege that Covino conspired with his former colleagues to implement a sales approach that encouraged the company’s salespeople to cultivate "friends-in-camp" at the company’s government customers.  Covino and his co-conspirators allegedly made more than $1 million in corrupt payments to friends-in-camp employed by state-owned entities in Brazil, China, India, Korea, Malaysia, and the United Arab Emirates so that the foreign officials would either award Covino’s employer contracts or influence the technical specifications of competitive tenders in a manner that would favor Covino’s employer.  Covino’s plea agreement does not specify an agreed upon sentence, but does include a Sentencing Guidelines calculation that calls for a sentence of five-years imprisonment, the statutory maximum for conspiracy.  Internationalization of Foreign Anti-Corruption Enforcement Speaking at an FCPA conference, DOJ’s Mendelsohn called 2008 the year of "foreign coordination."  Similarly, in connection with the Siemens settlement described above, in which DOJ, the SEC, and the Munich Public Prosecutor coordinated announcement of their resolutions, DOJ’s Friedrich echoed this sentiment:  "We are now working with our foreign law enforcement colleagues in bribery investigations to a degree that we never have previously."  And, as reported in the Wall Street Journal, anti-bribery prosecutors from around the globe gathered in Paris during the summer of 2008 for an "informal, roll-up-your sleeves meeting" as part of a first-of-its kind effort to increase collaboration in international investigations.  Mendelsohn, in his speech, leveraged this increased international collaboration into advice on self-reporting violations to foreign regulators, noting that if DOJ speaks with prosecutors in a foreign country, companies under investigation by DOJ for conduct in that country should consider disclosing the conduct to the foreign regulator as well.  Putting some statistical meat on the bone, Mendelsohn reported that DOJ sent out at least forty-five letters rogatory invoking Mutual Legal Assistance Treaties in 2008.  DOJ’s prosecutors also took at least sixteen international trips to locations including Greece, Hungary, Panama, Romania, and the United Kingdom.  And DOJ is now involved in at least twenty-three multi-jurisdictional investigations, including matters with anti-corruption authorities in the Czech Republic, Finland, Germany, Greece, Japan, Norway, Sweden, Switzerland, and the United Kingdom. Not only have anti-corruption prosecutors from around the globe been assisting U.S. authorities, they are now beginning to increase their own enforcement efforts.  The combined 2007 and 2008 Siemens resolutions with the Munich Public Prosecutor, at $856 million, topped the $800 million combined DOJ and SEC resolutions with Siemens.  And, pursuant to a new multinational cooperation initiative known as Eurojustice, Munich prosecutors invited their Greek counterparts to question Siemens officials in Munich about Greek transactions.  The Munich authorities also gave their Greek counterparts broad access to Swiss financial records in their possession.  Moving to the United Kingdom, prosecutors there obtained their first foreign bribery conviction with the guilty plea of Niels Tobiasen, the Managing Director of CBRN Team Ltd., a U.K. security-consulting firm, for bribing two Ugandan officials to obtain a security-consulting contract with the Ugandan Presidential Guard.  And when one of these two Ugandan officials, Ananais Tumukunde, happened to fly into Heathrow Airport, U.K. authorities were waiting to arrest him.  Using the authority under U.K. law to prosecute foreign government officials who receive bribes – a power that does not exist under the FCPA – U.K. authorities successfully prosecuted Tumukunde and obtained a twelve-month jail sentence as well as forfeiture of the corrupt payment.  In another significant U.K. case, borrowing from the now widespread U.S. model of deferred and non-prosecution agreements, the U.K.’s Serious Fraud Office ("SFO") sought and obtained judicial authorization to employ a Civil Recovery Order ("CRO") against Balfour Beatty plc in connection with Balfour Beatty’s self-reported admission to payment irregularities in connection with a $130 million contract to rebuild the Alexandria Library in Egypt.  The CRO, the first of its kind in U.K. foreign bribery prosecutions, allows authorities to recover a monetary penalty without a corresponding criminal prosecution and represents a powerful new tool for U.K. anti-corruption regulators.  That Balfour Beatty self-reported its conduct to the SFO is itself quite noteworthy.  Historically, the U.K. criminal law regime has given prosecutors little discretion in charging decisions once they discover a violation of law, which in turn has limited the motivation of companies to turn themselves in.  The Balfour Beatty non-prosecution agreement might begin to change this calculus.  In other anti-corruption news out of the United Kingdom, the SFO has created a new position for Head of Anti-Corruption, filled by Keith McCarthy, and reallocated resources within the office to increase the number of anti-corruption investigators from sixty-five to one hundred.  And in a fascinating "reverse-FCPA" prosecution, the SFO obtained several guilty pleas for conspiracy to commit corruption from U.K. nationals who conspired to bribe the U.S. Attorney General in an attempt to persuade him to unfreeze assets seized by the SEC in a Ponzi scheme investigation.  Of course, the story of foreign corruption prosecutions in the United Kingdom was not all pro-enforcement in 2008.  On July 30, the U.K. House of Lords reversed the decision of the High Court of London, which had ordered the SFO to reopen its investigation of allegedly corrupt payments by BAE Systems plc to senior Saudi government officials.  The SFO terminated its investigation of BAE’s Saudi operations, citing national security concerns, after the Saudi government threatened to stop sharing counter-terrorism intelligence.  The House of Lords declared the SFO’s decision to terminate its investigation to be within the anti-corruption agency’s authority.  Nonetheless, U.S. enforcers continue to pursue the BAE investigation, including by, according to press reports, briefly detaining senior BAE executives at a U.S. airport until they could be served with grand jury subpoenas.  In other 2008 foreign anti-corruption prosecutions of note, Japanese prosecutors obtained guilty pleas from Pacific Consultants International and four of its senior executives under that nation’s Unfair Competition Prevention Law.  The defendants admitted bribing senior Vietnamese government officials to obtain infrastructure development contracts in Ho Chi Minh City.  Elsewhere in Asia, Chinese authorities are currently investigating two American law firms with offices in Hong Kong and Beijing for alleged corrupt payments tied to business and investment licenses granted to foreign businesses seeking to operate in China.  It has been reported that this investigation is linked to an October 2008 disclosure by cosmetic retailer Avon Products, Inc., in which Avon announced an internal investigation into possible FCPA violations in China.  Finally, the Dutch, Italian, and Swiss governments all filed foreign corruption cases in 2008 against corporations relating to their participation in the United Nations Oil-for-Food Program.  This uptick in international anti-corruption enforcement activity makes clear that, as DOJ’s Friedrich put it when announcing the Siemens settlement, the "United States is not the only player at the table" when it comes to "fighting global corruption."  But just what this increased anti-corruption enforcement abroad will mean for companies under investigation by DOJ and the SEC remains to be seen.  Both DOJ and SEC officials have said that they will pay heed to the foreign investigations of those also under investigation in the United States.  For example, the SEC’s Firestone, speaking at an FCPA conference, said that, although the SEC might not decline an enforcement action simply because a company is subject to prosecution in a foreign jurisdiction, neither will the SEC "turn a blind eye" to any foreign action:  "We certainly will take that into account in terms of what we are going to do."  And DOJ’s Mendelsohn, speaking at an American Bar Association event, said that although the United States does not recognize the concept of "international double jeopardy," DOJ’s resolutions will "reflect . . . what’s going on in [the foreign] jurisdiction in some way."  Mendelsohn cited the 2006 Statoil and 2007 Akzo Nobel prosecutions as examples in which DOJ has credited penalties paid in foreign jurisdiction against those to be paid in the United States.  And he further noted: There are other cases that are not public where we have elected to do nothing in deference to ongoing foreign investigations – or to sit back and wait to see what the outcome of that foreign investigation will be. . . .  If that foreign investigation results in some enforcement action, we may elect to do nothing.  On the other hand, if . . . that foreign prosecution never gets off the ground, we may step in and proceed with our investigation. International coordination and non-U.S. enforcement will be a hugely important part of the global fight against corruption in 2009 and beyond.  DOJ’s Coupling of FCPA Prosecutions with Other Charges DOJ has long charged FCPA defendants with other crimes incidental to the improper payments (e.g., wire fraud, mail fraud, money laundering, tax evasion, violations of the Travel Act, etc.).  But 2008 saw DOJ join FCPA charges with prosecutions for violations of federal statutes that have distinct patterns of conduct and criminal elements in a way that it has seldom done before.  In 1999, then-Deputy Assistant Attorney General of DOJ’s Antitrust Division (and now Gibson Dunn partner) Gary Spratling gave a speech at an FCPA conference in which he noted that "in today’s global economy there is a recurring intersection of conduct that violates both the Sherman Antitrust Act and the Foreign Corrupt Practices Act.  A payment to a foreign official in violation of the FCPA may also be an act by an international bid-rigging, price-fixing, or market allocation cartel . . . ."  Spratling went on to observe that an improper payment detected by a corporate FCPA compliance program can lead to the discovery and report of related antitrust violations, potentially allowing the company to take advantage of the Antitrust Division’s Corporate Leniency Policy. It took some time, but on December 10, 2008, DOJ’s Antitrust and Criminal Divisions announced the first ever joint FCPA/antitrust prosecution.  Misao Hioki, the former General Manager of Bridgestone Corporation’s Japanese marine hose business, pleaded guilty to one count of conspiracy to rig bids in violation of the Sherman Act and one count of conspiracy to violate the FCPA’s anti-bribery provisions.  According to the charging documents, Hioki authorized and approved contracts with government agencies throughout Latin America, in particular in Mexico, that included commissions for third-party agents, which commissions included a percentage to be given to officials of those government agencies.  Hioki was sentenced to serve two years in prison and pay an $80,000 criminal fine. Hioki is the ninth individual to plead guilty in the Antitrust Division’s long-running marine hose investigation (which began in May 2007 with a headline-grabbing sweep of arrests coinciding with an alleged cartel meeting), but the first to be charged with FCPA violations.  His former employer, Bridgestone, has publicly announced that it too is under investigation for potential violations of both the FCPA and antitrust laws.  Bridgestone announced that it discovered the improper payments during its internal investigation into the alleged antitrust violations and reported these payments to U.S. and Japanese authorities.  Other ongoing, publicly announced joint FCPA/antitrust investigations include those of ABB Ltd., Innospec, Inc., and Halliburton, Inc.  In another example of a case involving alleged violations of both the FCPA and of a distinct criminal regime, on September 24, 2008, DOJ announced the arrest of Shu Quan-Sheng, a renowned physicist and naturalized U.S. citizen who was born in China.  Quan-Sheng was charged with two counts of exporting defense services and articles to China without a license in violation of the Arms Export Control Act and one count of offering bribes to Chinese government officials in violation of the FCPA.  According to the charging documents, Quan-Sheng offered to pay three bribes, totaling $189,300, to officials of a Chinese space research agency in connection with a $4 million procurement for the development of a liquid hydrogen tank system.  Quan-Sheng was acting as an agent of an unnamed French company in offering to make these payments, which do not appear to have ever been delivered.  On November 17, 2008, Quan-Sheng pleaded guilty to all three counts of the criminal information and is scheduled to be sentenced in April 2009.  Continuing Upswing in FCPA Litigation For a statute now in its fourth decade, the dearth of FCPA litigation is remarkable.  But two trends that we have noted in this and past FCPA updates – the rise of private litigation collateral to government enforcement actions and the increase in individual prosecutions – are slowly adding to the body of judicial precedent.  This is a welcome addition to private practitioners who still oftentimes find themselves arguing precedent from settled enforcement actions drafted by the government and untested before neutral judicial bodies.  Although there is no private right of action under the FCPA, enterprising plaintiffs’ lawyers have been creative in parlaying alleged FCPA violations into alleged violations of securities laws that do allow for private redress.  As a result, and as described in more detail in our 2008 Mid-Year FCPA Update, FCPA investigations have increasingly spurred a variety of collateral civil suits, including securities fraud actions, shareholder derivative suits, and lawsuits initiated by foreign governments or business partners.  Accordingly, companies can no longer assume that making peace with DOJ and the SEC will end the pain associated with their alleged FCPA violations. To date, the most common type of collateral civil litigation has come in the form of securities fraud class actions or derivative shareholder suits against publicly traded corporations.  Such cases typically involve claims that the defendant issuer misled investors by understating the risks associated with an FCPA investigation or overstating the quality of its bookkeeping policies and internal controls, which ultimately caused financial losses for the company.  In recent years, courts have been trending towards finding that plaintiffs adequately alleged false or misleading statements, thereby meeting the heightened scienter pleading requirements under the Private Securities Litigation Reform Act ("PSLRA") and enabling plaintiffs to survive the motion to dismiss.  But a recent decision by the U.S. Court of Appeals for the Ninth Circuit makes clear that there are limits on the types of allegations that will meet this threshold. On November 26, 2008, the Ninth Circuit affirmed the dismissal of a securities fraud class action filed against InVision Technologies, Inc.  The plaintiff shareholders claimed that InVision misled investors by making three misstatements in a merger agreement that the company filed in conjunction with its March 2004 annual report.  In particular, the plaintiffs alleged that InVision misstated in its regulatory filing announcing its proposed merger with the General Electric Company that InVision was in compliance with all applicable laws, that the company was in compliance with the books-and-records provision of the FCPA, and that neither the company nor its employees knew of any violations of the FCPA’s anti-bribery provisions.  This report was filed just a few months before InVision announced that it had uncovered potential FCPA violations and reported those violations to DOJ and the SEC, ultimately resulting in InVision settling FCPA charges with both enforcement agencies.  The announcement of the FCPA investigation caused InVision’s stock price to drop significantly and nearly undermined the pending merger.   In early 2006, the district court dismissed the shareholders’ complaint, triggering the appeal to the Ninth Circuit.  The Ninth Circuit upheld the district court’s dismissal, holding that plaintiffs must plead that the senior officials who prepared the company’s allegedly misleading disclosures were aware of the unlawful conduct – and therefore knew that the statements at issue were false – in order to survive a motion to dismiss under the PSLRA.  Because the plaintiffs had not pled that InVision’s Chief Executive Officer or Chief Financial Officer, who prepared the statements at issue in the merger agreement, knew about the improper payments in March 2004, the scienter pleading requirements of the PSLRA were not met. Three other recently filed cases demonstrate new categories of collateral civil litigation arising in conjunction with potential FCPA violations.  On June 27, 2008, eLandia International, Inc. filed an action in Florida state court against Jorge Granados, the former Chief Executive Officer of Latin Node, Inc., and others relating to eLandia’s acquisition of the Latin Node business in 2007.  The complaint, which asserts claims for, among other things, breach of contract, breach of the obligation of good faith and fair dealing, and fraudulent inducement, alleges that Granados and others failed to disclose during the acquisition process that Latin Node had made payments to various governmental parties in violation of the FCPA.  eLandia discovered the potentially corrupt payments by Latin Node employees after completing the acquisition and reported the same to DOJ and the SEC.  eLandia noted in a recent quarterly filing that it has offered $2 million to DOJ in an effort to settle the successor liability claims arising from the Latin Node business.  Next, on October 21, 2008, Supreme Fuels Trading FZE filed a complaint in Miami federal court against its competitor, International Oil Trading Co. ("IOTC"), alleging that IOTC bribed Jordanian government officials to ensure that only IOTC would receive a letter of authorization from the Jordanian government allowing IOTC to transport fuel through Jordan into Iraq.  Contractors that do not have such a letter are ineligible to win certain U.S. government contracts.  The complaint asserts that, but for IOTC’s bribes, Supreme Fuels Trading would have been able to obtain the necessary letter of authorization from Jordan and would have won certain U.S. government contracts.  Supreme Fuels Trading claims that IOTC’s conduct tortuously interfered with Supreme Fuels Trading’s business relations and violated the Racketeer Influenced and Corrupt Organizations Act, the Sherman Act, and the Florida state law equivalents of those federal acts.  And on December 23, 2008, Willbros International filed suit against its former executive James Tillery and several of its former consultants, including Paul Novak and Hydrodive International, Ltd., some of the parties allegedly responsible for Willbros International’s own guilty plea to FCPA charges in May 2008.  Willbros International alleges that Tillery purchased an approximately 30% interest in Hydrodive International four months before causing Willbros International to enter into a consulting agreement with Hydrodive and without disclosing this ownership interest to Willbros.  Tillery and Novak, who themselves were indicted on FCPA charges in 2008 (Willbros International’s complaint was filed only four days after the Tillery/Novak indictment was unsealed), allegedly then used Hydrodive International and other consulting entities "as a conduit to make corrupt payments to foreign officials in Nigeria" in violation of the Racketeer Influenced and Corrupt Organizations Act.  Moving to the criminal litigation front, on October 6, 2008, the U.S. Supreme Court denied David Kay and Douglas Murphy’s petition for certiorari, leaving the Fifth Circuit’s 2007 decision in place and finally bringing to a conclusion one of the FCPA’s longest-running and highest-profile cases.  The underlying decision of the Fifth Circuit, as well as the protracted and winding history of this case, is described in detail in our 2007 Year-End FCPA Update.  Speaking shortly after the Supreme Court’s cert denial, DOJ’s Mendelsohn proclaimed that this action confirms DOJ’s long-held interpretation of the FCPA as more than "just a procurement fraud statute."  2008 also saw significant judicial decisions in what is perhaps now the FCPA’s longest running prosecution: that of Frederic Bourke, David Pinkerton, and Victor Kozeny.  The three were indicted in 2005 on charges of bribing senior Azeri government officials to influence the officials’ decision to privatize Azerbaijan’s state-owned oil company.  As reported in our 2007 Year-End FCPA Update, Bourke and Pinkerton (Kozeny has never appeared to answer his charges and is still a fugitive living in the Bahamas) moved to dismiss their charges on statute-of-limitations grounds.  Their argument turned on whether 18 U.S.C. § 3292, which permits DOJ to toll the statute-of-limitations in FCPA cases for up to three years while it pursues an official inter-governmental request to obtain evidence located in a foreign jurisdiction, requires DOJ to file the § 3292 tolling application within the five-year statue-of-limitations period.  DOJ argued that it was sufficient for it to simply file the foreign legal assistance request within the statute-of-limitations period, as it had in this case, and then file the § 3292 tolling order after the limitations period expired.  Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York granted Bourke and Pinkerton’s motion to dismiss on most of the FCPA counts, leading DOJ to seek review in the U.S. Court of Appeals for the Second Circuit.  On August 29, 2008, the Second Circuit affirmed Judge Sheindlin’s decision, holding that "the plain language of [18 U.S.C. § 3292], and the structure and content of the law by which it was enacted, require the government to apply [to the district court] for a suspension of the running of the statute of limitations before the limitations period expires."  DOJ had voluntarily dismissed the charges against Pinkerton after the case was argued in the Second Circuit but before the decision had been rendered, and the Second Circuit’s decision removed all but one FCPA count against Bourke.  The single remaining FCPA count against Bourke was then the subject of a second opinion by Judge Scheindlin, issued on October 21, 2008.  Bourke filed a motion to dismiss his remaining FCPA charge on the ground that the alleged payments were lawful under the written laws of Azerbaijan, and thus fell within the FCPA’s "local law" affirmative defense.  Bourke argued that Azeri law relieves from criminal liability those who pay bribes under duress of extortionate demands as well as those who self-report their bribes to Azeri authorities, both of which Bourke claimed applied to him.  Following a hearing at which Judge Scheindlin heard from dueling Azeri law experts testifying pursuant to Rule 26.1 of the Federal Rules of Criminal Procedure, the Court rejected Bourke’s argument, reasoning that the FCPA focuses on the legality of the payment, not the foreign government’s ability to prosecute the payer.  So with respect to Azeri law’s absolution for bribes self-reported to the government, the payments are never themselves lawful, they are simply barred from prosecution, much as the majority of Bourke’s alleged improper payments were barred from prosecution by the U.S. statute of limitations.  Similarly, Judge Scheindlin held that with respect to Bourke’s extortion argument, a "payment to an Azeri official that is made under threat to the payer’s legal interests is still an illegal payment, though the payer cannot be prosecuted for the payment."  Because the FCPA is not meant to apply to cases of "true extortion" (e.g., payments to prevent the dynamiting of an oil rig), which generally do not meet the statute’s corrupt intent requirement in any event, Judge Scheindlin instructed Bourke to prepare jury instructions on extortion that he may present to the jury if he can lay an evidentiary foundation that the alleged extortion was "true extortion" and not merely economic coercion (e.g., payments to gain entry to a market).  Bourke’s trial is currently scheduled for March 2009.  Two other FCPA cases went up to the circuit courts of appeal in 2008 on non-FCPA issues.  In the high-profile prosecution of U.S. congressman William Jefferson, described in detail in our 2007 Year-End FCPA Update, a three-judge panel of the United States Court of Appeals for the Fourth Circuit affirmed the district court’s denial of Rep. Jefferson’s motion to dismiss his indictment on Speech or Debates Clause grounds on November 12, 2008.  Rep. Jefferson had argued that the grand jury’s consideration of evidence unlawfully seized from his congressional office tainted his indictment.  The Panel observed that "there are limits to the protection afforded to legislators by the Speech or Debate Clause" and concluded that the district court properly decided that the evidence in question was not properly Speech or Debate Clause material protected by the Constitution.  The full Fourth Circuit then denied Rep. Jefferson’s petition for rehearing en banc on December 12, 2008.  There is presently no trial date set and Rep. Jefferson may still seek certiorari on the Speech or Debate Clause issue from the U.S. Supreme Court.   The other FCPA case to find its way into the federal appellate courts on non-FCPA grounds is the prosecution of husband and wife film producers Gerald and Patricia Green.  We first profiled this case in our 2007 Year-End FCPA Update, after the Greens were arrested in December 2007 on charges of conspiring to pay more than $1.7 million in bribes to the former governor of the Tourism Authority of Thailand in return for lucrative contracts to administer the annual Bangkok International Film Festival.  But on October 1, 2008, the grand jury returned a superseding indictment adding new charges alleging bribery of the same Thai official in return for contracts related to the introduction of an "elite privilege card" service marketed to wealthy foreigners.  Additionally, the superseding indictment added money laundering charges and allegations that Mrs. Green knowingly subscribed two false corporate income tax returns that included deductions for "commissions" as business expenses while Mrs. Green knew that these commissions represented "a false and overstated amount including bribes to a foreign official . . . ."  Collectively, the Greens now face twenty-one counts on the superseding indictment.  The Greens’ docket sheet is shrouded in a veil of "under seal" filings.  But the publicly available entries show that the Greens have sought interlocutory review by the Ninth Circuit of a district court order for the production of grand jury testimony and documents that the Greens argue is protected by the attorney-client privilege.  The district court ruled that the documents and testimony were subject to the "crime fraud" exception to the attorney-client privilege and therefore are not protected.  The case appears to have been argued in front of the Ninth Circuit, though a decision has not yet been released.  Other Significant Enforcement Developments Four More Oil-for-Food Prosecutions Make Ten In 2008’s final FCPA enforcement action, DOJ and the SEC jointly announced that Fiat S.p.A. had agreed to a settled FCPA resolution in connection with the company’s participation in the Oil-for-Food Program.  This made Fiat the fourth company of 2008 – Flowserve Corp., AB Volvo, and Siemens AG being the first three – and the tenth company overall to settle FCPA charges with DOJ and/or the SEC arising out of this United Nations program.  We described the Oil-for-Food scheme in greater detail in our 2007 Year-End FCPA Update, but the essential allegations (as they concern the "Humanitarian" side of the Program) are that the Iraqi government imposed a 10% "after sales service fee" ("ASSF") as a condition of sales under the Program.  To fund these mandatory payments, contractors typically increased the value of their contracts by 10%, thereby receiving an additional 10% from the United Nations escrow account, and passed the increase on to the Iraqi government through third-party agents and Iraqi-controlled bank accounts.   The settlement documents allege that Fiat violated the FCPA’s books-and-records and internal controls provisions through the incorporation into its ledger of $4,379,657 in inaccurately recorded ASSF payments made (and $312,198 in additional ASSF payments agreed to but not paid) by the company’s Dutch, French, and Italian subsidiaries.  To settle these allegations, Fiat agreed to pay a $7 million criminal penalty to DOJ and more than $10.8 million in civil penalties, disgorgement, and prejudgment interest to the SEC.  Fiat also (i) entered into a deferred prosecution agreement with DOJ, (ii) consented to the filing of criminal informations charging the three implicated subsidiaries with various FCPA books-and-records and wire fraud conspiracy charges (which will be dismissed in three years assuming compliance with the deferred prosecution agreement’s terms), and (iii) consented to the filing of an SEC injunction permanently enjoining it from future violations of the FCPA.  Aibel Group’s Deferred Prosecution Agreement Revoked On November 21, 2008, DOJ for the first time ever revoked a deferred prosecution agreement and filed criminal charges against the previously protected party.  As reported in our 2007 Year-End FCPA Update, in February 2007, Aibel Group entered into a deferred prosecution agreement with DOJ in connection with the payment of approximately $2.1 million in alleged bribes to Nigerian customs officials in return for preferential treatment in customs clearance matters.  But twenty-one months later, DOJ announced that Aibel Group had breached its deferred prosecution agreement and had agreed to plead guilty to a two-count superseding information re-alleging the same conduct underlying the deferred prosecution agreement.  DOJ did not specify the reason for its revocation of the 2007 agreement, except to say in the plea agreement that despite Aibel’s commitment of "substantial time, personnel, and resources to meeting the obligations of its DPA," Aibel "failed to meet its obligations."  Pursuant to the plea agreement, Aibel Group paid a $4.2 million criminal fine and will serve a two-year term of organizational probation requiring the company to submit annual reports on the implementation of anti-bribery compliance measures within the business.  This revocation and prosecution demonstrate DOJ’s willingness to hold companies accountable for violations of deferred and non-prosecution agreements, which should grab the attention of every corporation now serving a term of DOJ probation pursuant to one of these agreements.                Trouble Spots Still Troubled Compliance professionals know that a select number of foreign locales have historically proven especially difficult to navigate for U.S.-based multinationals and others subject to the FCPA’s reach.  2008 was no exception in this regard, with Nigeria, Iraq, and China pulling down to the "top" three slots for the dubious distinction of being the most-referenced setting for FCPA allegations.  What Facilitating Payments Exception? For years, we have advised our clients on the pitfalls of the "facilitating payments" exception to the FCPA’s anti-bribery provisions.  Pursuant to this exception, payments to "expedite or to secure the performance of a routine government action" are not considered bribes within the scope of the anti-bribery provisions.  But DOJ and the SEC have long been openly skeptical of the reach of this exception.  For example, speaking at an FCPA conference, DOJ’s Mendelsohn advised that simply because the statute contains the exception does not mean that DOJ encourages such payments as a good business practice.  In the first FCPA settlement of 2008, DOJ took perhaps its strongest stance yet against facilitating payments in a non-prosecution agreement with Westinghouse Air Brake Technologies Corp. ("Wabtec").  On February 14, Wabtec entered into a joint resolution with DOJ and the SEC whereby it consented to the filing of an SEC complaint and entered into a non-prosecution agreement with DOJ, both alleging that the company violated the FCPA’s anti-bribery and accounting provisions.  The SEC’s complaint focused on $137,400 in improper payments made by Wabtec’s Indian subsidiary, Pioneer Friction, Ltd., to officials of the Indian Railway Board in order to influence the Board to award it new contracts for the supply of brake blocks and to approve Pioneer’s pricing proposals for existing contracts.  Pursuant to the SEC settlement, Wabtec agreed to pay an $87,000 civil penalty, to disgorge $288,351 in profits plus prejudgment interest, and to retain an independent compliance monitor to review and make recommendations concerning the company’s FCPA compliance program for two years.  But DOJ’s non-prosecution agreement is of particular interest.  There, DOJ alleged that Pioneer made improper payments to various regulatory boards to facilitate the scheduling of product inspections and the issuance of compliance certificates and to the Central Board of Excise and Customs to put an end to excessively frequent audits.  Although these payments totaled more than $40,000 over the course of one year, individual payments were as miniscule as $67 per product inspection and $31.50 per month to lower the frequency of Pioneer’s audits.  To resolve these allegations, Wabtec agreed to pay a $300,000 fine and conduct an internal review of its FCPA compliance program.  DOJ’s non-prosecution agreement paints a sobering picture of DOJ’s view of the facilitating payments exception to the FCPA, arguably to the point of reading the exception out of the statute.  Companies that permit facilitating payments as a matter of corporate policy should carefully consider the lessons to be drawn from this settlement.  2008 DOJ FCPA Opinion Procedure Releases By statute, DOJ is required to provide a written opinion at the request of an "issuer" or "domestic concern" as to whether DOJ would prosecute the requestor under the FCPA’s anti-bribery provisions for prospective conduct that the requestor is considering taking. These opinions are published on DOJ’s FCPA website, but only a party who joins in the request may officially rely upon the opinions.  The SEC does not itself issue FCPA opinion procedure releases, but has opted as a matter of policy not to prosecute issuers that obtain clean opinions from DOJ.  DOJ has issued fifty such written opinions in the statute’s thirty-one years, including three in 2008.  In 2006, then-Assistant Attorney General Alice Fisher commented that "the FCPA opinion procedure has generally been under-utilized" and noted she wants it "to be something that is useful as a guide to business." The three opinion releases issued in 2008 equal the number of releases issued in 2007 and continues a slight upward trend.  We detailed the first two FCPA Opinion Procedure Releases of 2008, including the landmark 2008-02 opinion that is a must read for any company undertaking an international acquisition, in our 2008 Mid-Year FCPA Update.  Here we will tackle the third release.  FCPA Opinion Procedure Release 2008-03 The third DOJ opinion procedure release of 2008 involves the FCPA’s second affirmative defense (in addition to the "local law" defense discussed above in connection with the Bourke prosecution) – that for "reasonable and bona fide expenditures" related to "the promotion, demonstration, or explanation of products or services" or "the execution or performance of a contract with a foreign government or agency thereof."  Global anti-corruption watchdog TRACE International, a domestic concern under the FCPA, submitted the request in advance of an FCPA conference held in Shanghai, China.  TRACE sought clearance to pay travel-related expenditures for Chinese journalists (most media outlets in China are state-owned, rendering the journalists foreign officials under the FCPA) to attend a TRACE press conference timed to coincide with the FCPA conference.  TRACE represented that it would provide the journalists with modest cash stipends – approximately $28 for in-town journalists and $62 for out-of-town journalists – to cover meals, local transportation costs, and, in the case of the out-of-town journalists, would reimburse the journalists for economy rate inter-city travel and pay directly for their overnight lodging in the hotel where the conference was to take place.  TRACE further represented, among other things, that members of the state-owned media in China are not typically reimbursed for work-related travel expenses, that TRACE would not condition the stipends and expense reimbursements on the journalists’ coverage of TRACE’s press conference, that TRACE would send letters to the journalists’ employers advising them of the proposed stipends and expense reimbursements, and that TRACE had obtained "written assurance from an established international law firm that TRACE’s payment of the stipends is not contrary to [Chinese] law." Based on these representations, DOJ concluded that the proposed payments would "fall within the FCPA[’]s promotional expenses affirmative defense in that the expenses are reasonable under the circumstances and directly relate to ‘the promotion, demonstration, or explanation of [TRACE’s] products or services.’"  DOJ explicitly disclaimed any reliance on TRACE’s representations "that it may be a common practice for companies in [China] to provide such benefits to journalists attending a press conference."  Legislative Developments 2008 also saw the introduction of several pieces of legislation that, if passed, could have substantial ramifications for companies subject to the FCPA. As reported in our 2008 Mid-Year FCPA Update, on June 4, 2008, Rep. Ed Perlmutter (D. Colo.) introduced H.R. 6188, the Foreign Business Bribery Prohibition Act of 2008.  This bill would provide for a limited right of private action under the FCPA; such a right does not presently exist.  Rep. Perlmutter’s bill would amend the FCPA to permit issuers and domestic concerns to bring suit seeking treble damages against "foreign concerns" for FCPA violations that both assist the foreign concern in obtaining or retaining business and prevent the plaintiff from obtaining or retaining that business.  The bill would provide a right of action only against "foreign concerns," defined as any person other than an issuer or domestic concern, and even then only where the foreign concern’s actions violate the FCPA.  Therefore, the class of potential defendants under this bill would be limited to foreign persons and businesses unaffiliated with U.S. stock exchanges and who corruptly use instrumentalities of interstate commerce within the United States in furtherance of their bribes.  Still, this would be an important development in efforts to "level the playing field" of FCPA enforcement worldwide.  The bill was referred to the House Judiciary and Energy and Commerce committees, but no action was taken in the 110th Congress. On May 16 2008, Rep. Barney Frank (D. Mass.) introduced H.R. 6066, the Extractive Industries Transparency Disclosure Act, in the House.  This bill would amend the ’34 Exchange Act to require issuers to disclose in their annual SEC filings all payments to foreign governments, including their agencies and instrumentalities, in connection with the extraction of natural resources.  Long advocated by human rights groups, the purpose of this legislation is to increase the transparency of funds flowing into the coffers of oppressive Third World regimes that sit on great natural wealth while their citizens live in poverty.  Of course, a side effect of the law would be mandatory disclosures of certain payments that may implicate the FCPA.  Unlike the Foreign Business Bribery Prohibition Act, this bill has seen movement.  The House Financial Services Committee held hearings on the bill in June 2008 and then, in July, Sen. Charles Schumer (D. N.Y.) introduced a companion bill (S. 3389) in the Senate.  The Senate and House bills have collectively gathered forty co-sponsors and, according to a recent article in the Houston Chronicle, additional committee hearings are scheduled for 2009 with a goal of passing the law in 2010.    Finally, although technically neither legislation nor relating specifically to the FCPA, we would be remiss not to mention this year’s major compliance development in the Federal Acquisition Regulation ("FAR").  On November 12, 2008, the FAR Council amended the FAR with FAR Case 2007-006, which requires mandatory disclosure by federal government contractors of certain violations of federal criminal law and the civil False Claims Act and requires many government contractors to create a business ethics awareness and compliance program.  The push for this rule originated with DOJ’s Criminal Division, which has long criticized what it sees as a lack of voluntary disclosure by federal contractors of legal and ethical violations. FAR Case 2007-006 requires government contractors to disclose all violations of criminal law involving fraud, conflict of interest, bribery, and gratuities connected to any aspect of a federal government contract or subcontract, as well as violations of the civil False Claims Act and "significant" overpayments on a contract.  A knowing failure to timely disclose "credible evidence" of such violations may result in suspension or debarment.  The rule also requires contractors, other than those classified as small business concerns or contracting solely for commercial items, to implement a business ethics awareness and compliance program as well as a system of internal controls.  And even small business concerns are covered to the extent that they work on federal government contracts valued in excess of $5 million and with performance periods longer than 120 days.  These compliance and control systems must be reasonably calculated to, among other things, facilitate timely discovery of improper conduct related to a federal government contract and guarantee that effective corrective measures are taken once such conduct has been discovered.  Although FAR Case 2007-006 applies only to U.S. government contracts, and its criminal disclosure obligations do not on their face apply to the FCPA (the criminal law disclosure obligations are limited to Title 18 of the U.S. Code whereas the FCPA is contained in Title 15), one could easily spin a hypothetical in which this development becomes very relevant to companies with FCPA concerns.  For more on FAR Case 2006-007, please see Gibson Dunn’s November 13, 2008 Client Alert, New Federal Regulation Requires Mandatory Disclosure and Amplified Compliance Programs for Government Contractors.  Conclusion Although the number of FCPA enforcement actions brought in 2008 was slightly down from 2007’s record pace, the FCPA enforcement agencies have continued to prosecute violators aggressively.  In doing so, DOJ and the SEC have taken an expansive view of the scope of the FCPA’s prohibitions and continue to seek increasingly large penalties against both corporate and individual defendants. With approximately 100 pending FCPA investigations, we expect this trend of aggressive enforcement to continue in 2009 Washington, D.C. F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)  Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) Judith A. Lee (202-887-3591, jalee@gibsondunn.com) David P. Burns (202-887-3786, dburns@gibsondunn.com)  Jim Slear (202-955-8578, jslear@gibsondunn.com)Michael S. Diamant (202-887-3604, mdiamant@gibsondunn.com)John W.F. Chesley (202-887-3788, jchesley@gibsondunn.com)Patrick F. Speice, Jr. (202-887-3776, pspeicejr@gibsondunn.com) New YorkLee G. Dunst (212-351-3824, ldunst@gibsondunn.com)James A. Walden (212-351-2300, jwalden@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com)J. Taylor McConkie (303-298-5795, tmcconkie@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los Angeles Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com), the former United States Attorney for the Central District of California,Michael M. Farhang (213-229-7005, mfarhang@gibsondunn.com)Douglas M. Fuchs (213-229-7605, dfuchs@gibsondunn.com) MunichMichael Walther (+49 89 189 33-180, mwalther@gibsondunn.com)Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 7, 2009 |
2009 Mid-Year FCPA Update

As the inauguration of Barack Obama in January 2009 ushered in a new U.S. presidential administration, things remained business-as-usual for regulators charged with enforcing the Foreign Corrupt Practices Act ("FCPA").  The number of FCPA prosecutions initiated by the Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") during the past six months continued the recent explosion of FCPA enforcement activity, and the number of ongoing investigations suggests that this trend will not soon subside.  Beyond the overall trend of increased activity, the first half of 2009 has brought several other interesting FCPA enforcement developments.  In June 2009, two individual criminal defendants opted to try their cases before juries, rather than enter into plea agreements with DOJ, as has been the norm in FCPA cases.  Both trials are currently underway, and the defense bar will be watching closely to see how these defendants fare in the first FCPA trials in nearly five years.  Outside of traditional FCPA enforcement circles, interest in anti-corruption enforcement issues has also increased.  There is legislation pending in Congress that could alter the FCPA enforcement landscape, and the House Financial Services Committee recently held a hearing on combating global corruption.  In addition, the Financial Industry Regulatory Authority ("FINRA"), the self-regulatory organization of the U.S. securities industry, recently announced that FCPA compliance would be one of its primary areas of focus during 2009 examinations, and the New York State Insurance Department similarly indicated its intention to focus on FCPA compliance in future licensee examinations.  Overseas, a number of foreign regulators have recently stepped up their own anti-corruption enforcement activities.  This update provides an overview of the FCPA and a survey of U.S. and foreign anti-corruption enforcement activities during the first half of 2009, as well as a discussion of the trends that we see from that activity and practical guidance to help companies avoid or limit liability under these laws.  A collection of Gibson Dunn’s publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on our FCPA Website. FCPA Overview The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business.  The anti-bribery provisions apply to "issuers," "domestic concerns," and "any person" that violates the FCPA while in the territory of the United States.  The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, the approximately 1,500 foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of this statute.  The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Regulators have frequently invoked these latter two sections – collectively known as the accounting provisions — in recent years when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency. 2009 Mid-Year Figures The continuing explosion of FCPA prosecutions is best captured in the following table and graph, which each track the number of FCPA enforcement actions filed by the DOJ and SEC during the past six years.  In just the first six months of 2009, more FCPA prosecutions were brought than in any other full year prior to 2007.  Moreover, the nineteen enforcement actions initiated to date in 2009 exceeds the enforcement activity undertaken during the first half of any prior year, including the sixteen enforcement actions filed during the first half of 2008 and the nine enforcement actions filed during the first six months of 2007.    2004 2005 2006 2007 2008 2009(through June 30) DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC 2 3 7 5 7 8 18 20 20 13 14 5 It is clear that this trend of heightened enforcement activity will not soon subside.  Mark F. Mendelsohn, the Deputy Chief of the Fraud Section in DOJ’s Criminal Division and the government’s top criminal FCPA enforcer, recently confirmed that at least 120 companies are the subject of ongoing FCPA investigations. 2009 Mid-Year Enforcement Docket United Industrial Corp. and Thomas Wurzel On May 29, 2009, United Industrial Corporation ("UIC"), an aerospace and defense systems contractor, settled administrative charges with the SEC alleging violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions.  The SEC claimed that, in 2001 and 2002, UIC subsidiary ACL Technologies, Inc. ("ACL"), made more $100,000 in payments to an agent with the expectation that the agent would pass portions of those payments to officials of the Egyptian Air Force in order to influence the award of a contract to construct and staff a military aircraft depot in Cairo.  The SEC noted the agent’s position as a retired Egyptian Air Force general, his friendship with a current high-level Air Force official, and the belief within ACL that "it’s a very small community of high-level military people" in Egypt.  The payments to the agent included $50,000 for "marketing services," which were unsupported by any marketing agreement, and $100,000 in "advance" payments to the agent that UIC later forgave through a fraudulent "repayment" plan involving inflated invoices.  Taking UIC’s remedial efforts into account, the SEC issued a cease-and-desist order that required UIC to pay $337,679.42 in disgorgement and prejudgment interest, but it did not assess a civil penalty.  On the same day, Thomas Wurzel, the former president of ACL, settled his own civil charges with the SEC.  Alleging violations of the anti-bribery, books-and-records, and internal controls provisions of the FCPA, the SEC cited numerous e-mails between Wurzel and ACL’s Egyptian agent to establish that Wurzel "knew or consciously disregarded the high probability that the agent would offer, provide or promise at least a portion of [his agency] payments to Egyptian Air Force officials" in order to influence the award of contracts to ACL.  Wurzel consented to the entry of a permanent injunction against future violations of the FCPA and agreed to pay a $35,000 civil penalty.  Juan Diaz and Antonio L. Perez On May 15, 2009, DOJ announced FCPA guilty pleas by the former controller of an unnamed Miami-based telecommunications company and the agent that it used as an intermediary for acquiring contracts with Telecommunications D’Haiti, the Haitian state-owned telephone company and sole provider of landline telephone service to and from the island nation.  The criminal informations charge that, between 2001 and 2003, the defendants authorized and paid bribes to officials of Telecommunications D’Haiti to reduce the amounts owed to the state-owned company, including by reducing per-minute rates and the number of minutes for which payment was owed. Antonio L. Perez, the former controller of the unnamed Miami telecommunications company, pleaded guilty to a one-count information charging him with conspiracy to violate the FCPA’s anti-bribery provision and to commit money laundering.  Perez admitted to personally authorizing more than $36,000 in bribes to Haitian officials, while his co-conspirators within the company, including the President and Executive Vice President, allegedly authorized approximately $675,000 in bribe payments.  Juan Diaz, the President of a shell company that served as an intermediary between the Haitian government and three unnamed Miami-based telecommunications companies, including Perez’s company, likewise pleaded guilty to a two-prong conspiracy count involving the FCPA and the money laundering statute.  Diaz admitted to collecting more than $1 million in "commissions" and "vendor payments" from these three companies, keeping $73,824 for himself and passing the balance to officials of Telecommunications D’Haiti.  As part of his scheme, Diaz structured his transactions to evade the obligation to file currency transaction reports on checks of more than $10,000.  Both Perez and Diaz face up to five years in prison at their respective sentencings, currently scheduled for later this year.  In addition, both have agreed to forfeit to the United States all funds traceable to their violations.  Novo Nordisk A/S In yet another prosecution stemming from the United Nations Oil-for-Food Program, Danish pharmaceutical company Novo Nordisk A/S settled civil and criminal FCPA charges on May 11, 2009.  According to the charging documents, Novo Nordisk paid approximately $1.4 million, and agreed to pay an additional $1.3 million, to the Iraqi government in connection with thirteen contracts that netted the company more than $4.3 million in profits.  The eleventh company to settle FCPA charges arising from the Oil-for-Food Program, Novo Nordisk admitted to inflating its contract submissions to the United Nations escrow account by 10% and to passing the difference to the Iraqi government as "after sales service fee" payments.  The SEC’s complaint alleges that Novo Nordisk violated the FCPA’s books-and-records and internal controls provisions.  To settle those allegations, Novo Nordisk agreed to pay a civil penalty of $3,025,066 and to disgorge $6,005,079 in profits plus prejudgment interest.  To resolve the criminal charges, Novo Nordisk entered into a deferred prosecution agreement with DOJ, agreeing to pay a $9 million criminal fine, and consented to the filing of a criminal information charging the company with conspiracy to commit wire fraud and to violate the books-and-records provision of the FCPA.  Assuming that Novo Nordisk successfully complies with the deferred prosecution agreement’s terms, DOJ will defer prosecution for the agreement’s three-year term and dismiss the charges in 2012.  Numerous Executives of Control Components, Inc. As part of its ongoing investigation of Control Components, Inc. ("CCI"), a California-based manufacturer of service control valves, on April 8, 2009, DOJ indicted six former CCI executives on charges of violating the FCPA’s anti-bribery provision and the Travel Act.  The indictment alleges a conspiracy to cultivate "friends-in-camp" at CCI’s government-owned and private customers worldwide by making corrupt payments to influence these individuals either to award CCI contracts or to influence the technical specifications of competitive tenders to favor CCI.  The defendants charged in this indictment include the following: Stuart Carson – former Chief Executive Officer; Hong "Rose" Carson – former Director of Sales for China and Taiwan; Paul Cosgrove – former Head of Worldwide Sales; David Edmonds – former President of Worldwide Customer Service; Flavio Ricotti – former Head of Sales for Europe, Africa, and the Middle East; and Han Yong Kim – former President of CCI’s Korean office.  The government’s allegations are far-ranging, claiming that the co-conspirators authorized and made 236 payments, totaling approximately $6.85 million, to customers in more than thirty countries to secure contracts for CCI that generated approximately $46.5 million in profits.  Indeed, so expansive are the government’s charges that Stuart Carson’s attorneys successfully moved the Court for a bill of particulars, resulting in DOJ filing a ten-page chart, with endnotes, ostensibly identifying, where known, the dates, beneficiaries, and recipients for each of the 236 allegedly unlawful payments.  Pre-trial litigation continues in this matter, and trial is set to begin on December 8, 2009. The April 2009 indictment followed a February 3, 2009 guilty plea by CCI’s former Finance Director, Richard Morlok, to charges of conspiring to violate the FCPA.  And, in December 2008, former Director of Worldwide Factory Sales Mario Covino also pleaded guilty to FCPA conspiracy charges.  Covino and Morlok are both presently scheduled to be sentenced in July 2009, but look for these dates to move as they continue to cooperate in DOJ’s ongoing investigation.  The company, CCI, has yet to be charged in this matter, although IMI plc, CCI’s parent company, announced on March 4, 2009, that it expects to "reach final agreement in the near future on a settlement with [DOJ] in respect of certain irregular payments by [CCI] that violated the [FCPA]."  IMI’s 2008 preliminary results announcement also noted that an investigation concerning other "possible incidental breaches of US trade law by CCI" has been completed and that the company will "have to deal with a number of collateral issues in other jurisdictions."  Latin Node, Inc. On April 7, 2009, Latin Node, Inc., a Miami-based telecommunications provider, pleaded guilty to criminal FCPA charges filed in connection with allegedly unlawful payments made to government officials in Honduras and Yemen in return for the award of new contracts and the negotiation of favorable terms on existing contracts, including reduced per-minute connectivity rates.  DOJ alleged that, between 2004 and 2007, Latin Node paid approximately $2.25 million in bribes, directly and through intermediaries, to officials at Hondutel and TeleYemen, the state-owned telecommunications companies in Honduras and Yemen, respectively.  Latin Node’s payments came to light after eLandia International, Inc. ("eLandia"), a public telecommunications provider that acquired Latin Node in June 2007, discovered irregularities during its post-acquisition financial integration review.  Within three months of uncovering the suspected misconduct, eLandia voluntarily disclosed the payments to the DOJ and SEC.  eLandia then conducted an extensive internal investigation and took substantial remedial actions, most notably shutting down Latin Node’s business operations at a cost to the company of millions of dollars.  DOJ’s sentencing memorandum makes clear that all of the alleged improper payments were made prior to eLandia’s acquisition, but it also implicitly suggests that eLandia conducted little, if any, FCPA due diligence in connection with its acquisition.  Latin Node, which eLandia maintained as a separate legal entity solely for purposes of resolving the criminal investigation, pleaded guilty to a one-count information charging it with violating the anti-bribery provisions of the FCPA and agreed to pay a $2 million fine.  A corporate guilty plea may well seem a harsh result in light of eLandia’s remediation and the presumed availability of the commonly employed deferred and non-prosecution agreements, but this might well have been eLandia’s choice resolution.  Although corporate entities with ongoing operations typically prefer a deferred or non-prosecution agreement to a guilty plea, eLandia had already ceased Latin Node’s business operations and therefore likely had lesser concerns relating to potential collateral actions, such as debarment proceedings.  Indeed, a deferred or non-prosecution agreement would have entailed substantial future reporting obligations that eLandia may have preferred to avoid.  Halliburton, KBR, Wojciech Chodan, and Jeffrey Tesler On February 11, 2009, Kellogg, Brown & Root LLC pleaded guilty to criminal violations of the FCPA, and Halliburton Co. and KBR, Inc., its former and current parent companies, respectively, settled related civil FCPA charges.  The road that led them there was long and winding, even by FCPA standards. In 1998, Halliburton acquired M.W. Kellogg Co. and merged it with an existing Halliburton subsidiary to form Kellogg, Brown & Root LLC.  At the time of the acquisition, M.W. Kellogg was a member of a four-party joint venture that had allegedly been engaged for several years in the practice of bribing Nigerian officials, through purported consulting payments to two different third-party agents, in return for the award of natural gas pipeline engineering, procurement, and construction ("EPC") contracts.  Halliburton conducted minimal due diligence on the agents, and the payments continued for another six years.  All told, between 1995 and 2004, the joint venture allegedly paid nearly $182 million in consulting fees to the two agents with the expectation that some or all of the payments would be passed along to Nigerian officials.  These unlawful payments allegedly led to the award of $6 billion in contracts to the joint venture, netting approximately $235.5 million in profits to Kellogg, Brown & Root.  To settle the charges, Kellogg, Brown & Root LLC pleaded guilty, paid a $402 million criminal fine, and agreed to retain an independent compliance monitor for a term of three years.  Both Halliburton and KBR settled civil FCPA charges filed by the SEC, agreeing to be held jointly liable for $177 million in disgorgement of ill-gotten gains.  This resolution, both individually at the DOJ and SEC, and in the aggregate, represents the second largest FCPA settlement in the statute’s history, behind only the record-shattering Siemens settlement of 2008.  On February 17, 2009, less than one week after finalizing the Halliburton/KBR settlements, DOJ filed a sealed indictment against two British citizens for their alleged roles in the bribery scheme.  The indictment charges Wojciech Chodan, a former sales vice president for M.W. Kellogg who was retained as a consultant after its acquisition by Halliburton, and Jeffrey Tesler, a U.K. solicitor and agent of the joint venture, with one count of conspiracy and ten substantive counts of violating the FCPA’s anti-bribery provision.  Chodan and Tesler allegedly participated in "cultural meetings" at which the joint venture members agreed to hire two agents to pay bribes to Nigerian officials in order to secure the EPC contracts.  Tesler was retained to bribe top-level officials in the Executive Branch of the Nigerian government, including three successive vice presidents, while a second, as yet uncharged Japanese agent was hired to bribe lower level Nigerian officials.   The Chodan/Tesler indictment was unsealed on March 6, 2009, after London police arrested Tesler at DOJ’s request.  Extradition proceedings have just begun, with Tesler "strongly den[ying] any wrongdoing" and promising a "hotly contested" fight.  Chodan has not yet been arrested, and press reports suggest that he has not been seen recently at his Somerset Village home.  The Halliburton, KBR, Chodan, and Tesler cases follow the 2008 guilty plea by former KBR Chairman and Chief Executive Officer Albert "Jack" Stanley.  Stanley’s sentencing has been delayed as he continues to cooperate in DOJ’s investigation with the hope that DOJ will file a pre-sentencing motion under § 5K1.1 of the U.S. Sentencing Guidelines requesting a reduced sentence due to Stanley’s "substantial assistance in the investigation or prosecution of another person."  Stanley is currently scheduled to be sentenced on August 27, 2009. ITT Corp. On February 11, 2009, the SEC filed a settled civil complaint against global conglomerate ITT Corporation, alleging violations of the FCPA’s books-and-records and internal controls provisions.  The SEC’s complaint alleges that, from 2001 to 2005, ITT’s Chinese subsidiary, Nanjing Goulds Pumps, Ltd. ("NGP"), paid approximately $200,000 to officials at Chinese state-owned entities that designed the specifications for large infrastructure projects on which NGP was a bidder.  The payments, which were allegedly transmitted directly by NGP and through NGP’s third-party agents, were tendered for the purpose of influencing the officials to formulate bid specifications that would favor NGP’s products.  NGP then allegedly improperly recorded the payments to the government officials as "commissions" in its corporate ledger, which was then consolidated into ITT’s financial statements at year end.  Upon discovering the potentially unlawful payments, ITT voluntarily disclosed the payments to the government.  Without admitting or denying the allegations, ITT agreed to pay a $250,000 civil penalty and to surrender $1,428,650 in disgorgement of profits and prejudgment interest.  DOJ has not yet filed any charges against ITT, and it remains unclear whether any criminal prosecution will be brought.  2009 Mid-Year Sentencing Docket In addition to the settlements described above, on April 7, 2009, Shu Quan-Sheng, who pleaded guilty to violating the FCPA and the Arms Export Control Act in November 2008, was sentenced to fifty-one months incarceration followed by two years of supervised release.  This sentence is demonstrative of the significant periods of incarceration that may follow from an FCPA conviction. Ongoing Criminal Litigation Throughout more than three decades of FCPA enforcement, only a handful of defendants charged with criminal violations of the statute have opted to take their cases before a jury rather than settle before trial with DOJ.  Indeed, coming into this year, the most recent FCPA trial occurred nearly five years ago, with the fall 2004 prosecution of David Kay and Douglas Murphy.  But, with the significant uptick in FCPA enforcement, trials are beginning to line up for the next several years.  DOJ’s recent focus on individual defendants, who face a much different calculus in weighing their settlement options due to the prospect of incarceration, appears to be driving this trend.  As we go to press with this publication, two FCPA cases are currently in trial, and verdicts will soon follow.  Frederic Bourke Trial For years, we have been reporting on the winding progress in the prosecution of Frederic Bourke.  First indicted in 2005 along with alleged co-conspirators Victor Kozeny and David Pinkerton, Bourke is presently on trial in the U.S. District Court for the Southern District of New York for conspiring to bribe senior Azeri government officials, including the nation’s former President, to influence these officials to privatize Azerbaijan’s state-owned oil company ("SOCAR").  Specifically, Bourke is alleged to have invested $8 million with Kozeny, while knowing that Kozeny was paying millions of dollars in bribes to Azeri officials and had promised these officials a two-thirds share of the profits from the privatization effort.  Bourke stands alone in this trial, with Pinkerton having been dismissed from the case in the wake of a significant statute-of-limitations decision in 2008 by Judge Shira Scheindlin and Kozeny remaining a fugitive in the Bahamas, which has refused U.S. extradition requests.  In the months leading up to the June 1, 2009 trial date, both DOJ and Bourke continued to aggressively litigate against each another.  On May 26, DOJ filed a second superseding indictment, dismissing the substantive FCPA count against Bourke and foreshadowing that the government would focus on Bourke’s knowledge of (or willful blindness to) the alleged corrupt payments, rather than his facilitation of the payments themselves.  Just three days later, Judge Scheindlin issued a significant evidentiary ruling permitting DOJ to introduce background evidence relating to corruption in Azerbaijan.  Judge Scheindlin held that evidence demonstrating that (i) Azerbaijan was widely known to be a corrupt nation, (ii) post-Communism privatization efforts in other states had been tainted by corrupt practices, and (iii) Kozeny was notoriously known as the "Pirate of Prague" due to alleged prior corrupt dealings arising from privatization efforts in the Czech Republic, all made it more probable that Bourke was aware that Azeri officials were being bribed in connection with the SOCAR privatization effort.  Further, Judge Scheindlin ruled that DOJ could present evidence that Bourke’s alleged co-conspirators, with whom he had substantial direct contacts, were aware of corruption in Azerbaijan in order to demonstrate that Bourke likely also had such knowledge.  On June 2, 2009, DOJ Attorney Robertson Park opened the government’s case before the jury by stating:  "This is a case about money – lots of it.  This is a case about bribes.  This is a case about lies."  As the opening statements for each side unfolded, it became clear that a central piece of evidence in the case would be a tape-recorded conversation between Bourke and his attorney in which Bourke can be heard to ask, if he learned that Kozeny was bribing government officials in Azerbaijan, "What are you going to do with that information? …  You got knowledge of it.  What do you do with that?"  DOJ characterized these statements as evidence that Bourke knew of, or was willfully blind to, the bribery scheme.  But the defense, which itself turned the tape over to DOJ during proffer negotiations, claimed that the tape is "the best piece of evidence in the case of Mr. Bourke’s innocence," because it shows that Bourke took his concerns about Kozeny to his attorneys so that he would not break the law.  After three weeks of testimony from more than a dozen witnesses, the prosecution rested its case on June 26.  The two star witnesses for the prosecution were Hans Bodmer and Thomas Farrell, a former attorney and aide to Kozeny, respectively, who each have pleaded guilty to their own FCPA violations and were testifying as cooperating witnesses for the government.  Bodmer and Farrell both testified that they told Bourke that Kozeny was using the investments he raised to bribe Azeri officials, but the defense countered with its own witnesses undercutting their recitation of events and affirmatively testifying that, although Bourke knew that Azeri officials had financial interests in the privatization scheme, Bourke had been told that the officials had paid for their stake and that the arrangement had been blessed by their lawyers.  The defense rested on June 30, electing not to call Bourke to testify on his own behalf.  One highlight of the defense was more than four hours of testimony from former Democratic Senate Majority Leader and current Special Envoy to the Middle East, George Mitchell.  Mitchell, a friend of Bourke’s, testified that he personally lost approximately $200,000 when the SOCAR privatization investment that Bourke had recommended to him failed, but that Bourke never suggested to him that bribes were being paid to ensure that the deal succeeded.  Closing arguments began on July 6, with DOJ concurrently putting forward two theories of its case.  First, relying principally on the testimony of Bodmer and Farrell, prosecutors argued that Bourke actually knew of the alleged conspiracy to bribe Azeri officials.  And second, as an alternative theory, the government argued that Bourke "stuck his head in the sand" and "consciously avoided" the "high probability" that his co-investors were paying bribes (the FCPA provides that knowledge of improper payments may be established by evidence that the defendant was "aware of a high probability of the existence of [the payments]").  Bourke’s defense team is scheduled to deliver its summation on July 7, and the jury should see the case before the week is out.  William Jefferson Trial On June 9, 2009, just one week after the first FCPA trial in nearly five years began, a second FCPA trial kicked off before U.S. District Court Judge T.S. Ellis in the Eastern District of Virginia with the long-awaited trial of former U.S. Congressman William Jefferson.  Jefferson faces a sixteen-count indictment alleging nearly a dozen distinct bribery schemes in which Jefferson variously plays the role of briber and bribee.  With respect to the FCPA, Jefferson is charged with substantive and conspiracy counts alleging that he attempted to bribe then-Nigerian Vice President Atiku Abubakar to induce favorable regulatory action for iGate, Inc., a Kentucky-based technology company for which Jefferson was acting as an agent.  A cooperating witness allegedly provided Jefferson with $100,000 in marked bills for ultimate delivery to Abubakar, $90,000 of which agents of the Federal Bureau of Investigation ("FBI") recovered from Jefferson’s freezer during a 2005 raid of his Virginia home.  Other evidence to come out at trial includes an allegation that Jefferson accepted $100,000 in bribes from Abubakar in return for introducing him to other congressmen so that Abubakar could build political contacts to support his bid for the Nigerian presidency.  As we go to publication, the government’s case continues with the fourth week of prosecution testimony.  Pre-trial litigation in the Jefferson case illustrates how it can be quite difficult for defendants to obtain foreign-based testimony and documentary evidence.  Several months before his trial began, Jefferson sought a court order requiring the U.S. government to invoke its Mutual Legal Assistance Treaty ("MLAT") with Nigeria to secure a deposition of Abubakar and Suleiman Yahyah, another alleged Nigerian co-conspirator.  Judge Ellis denied Jefferson’s request, holding that the MLAT process is available only to its signatories and cannot be invoked by private parties.  As an alternate route, Jefferson asked the Court to issue letters rogatory to secure deposition testimony from Abubakar and Yahyah.  Noting that such a request requires "exceptional circumstances" not present in this case due to the likelihood that the alleged co-conspirators would invoke their Fifth Amendment right not to testify, the Court instead issued only a preliminary letter rogatory seeking Nigerian judicial assistance in questioning Abubakar and Yahyah about their willingness to waive their Fifth Amendment rights.  After several months of silence from Nigerian judicial authorities, the Court ultimately directed the government to withdraw the preliminary letter rogatory, meaning that Jefferson will not have the testimony of either party available for his defense.  Other Ongoing Criminal Litigation Other post-indictment FCPA matters currently set for trial in 2009-2010 include the following:  Defendant(s) Allegations Mid-Year 2009 Developments Trial Date (Venue) Gerald Green Patricia Green The husband and wife film producers are accused of paying more than $1.7 million in bribes to a senior official with the Tourism Authority of Thailand in exchange for at least $14 million in contracts to administer a film festival and to market an "elite privilege card" to wealthy foreigners.   The 9th Circuit dismissed an appeal from the District Court ordering the Greens’ attorney to testify before a grand jury because the attorney had not yet submitted to a contempt citation, and, alternatively, in camera review provided a basis for concluding that the communications at issue were subject to the crime-fraud exception to the attorney-client privilege. DOJ filed a second superseding indictment, adding a 22nd count alleging that Gerald Green sought to alter and falsify business records to disguise the bribe payments after learning of the FBI’s investigation.  Aug. 4, 2009(C.D. Cal.) Paul Novak James Tillery The former President (Tillery) and consultant (Novak) of Willbros International are accused of conspiring to pay more than $6 million in bribes to Nigerian government officials in return for the award of more than $380 million in gas pipeline contracts and agreeing to make an additional $300,000 in corrupt payments to officials of the Ecuadorian state oil company in return for the award of a $3 million gas pipeline project.    Multiple continuances to facilitate discovery, including interviews in foreign jurisdictions, in the Novak prosecution.  Tillery remains a fugitive. Aug. 10, 2009(S.D. Tex.) Leo Winston Smith The former Director of Sales and Marketing of Pacific Consolidated Industries is accused of paying more than $300,000 to secure U.K. Ministry of Defense contracts.  Trial date continued. Sept. 29, 2009(C.D. Cal.) Nexus Technologies Joseph Lukas An Quoc Nguyen Kim Anh Nguyen Nam Quoc Nguyen   The export company and its executives are all accused of bribing Vietnamese officials to influence purchases of a wide variety of equipment and technology, including underwater mapping equipment, bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts, and air tracking systems. Lukas pleaded guilty to FCPA conspiracy charges on June 29, 2009.  His sentencing is currently scheduled for April 2010.  The Court ordered DOJ to "work out the declassification and production of documents" to the remaining defendants by September 18, 2009. Mar. 1, 2010(E.D. Pa.) Collateral Civil Litigation Much as individuals implicated in foreign bribery schemes are increasingly finding themselves targeted for prosecution, companies unfortunate enough to find themselves under investigation by the DOJ and SEC are increasingly finding themselves embroiled in follow-on private civil litigation.  Although the FCPA does not provide for a private right of action, enterprising plaintiffs’ lawyers have not been deterred from shoehorning alleged FCPA violations into a variety of civil causes of actions that do provide for private redress, including securities fraud actions, shareholder derivative suits, contract claims, and tort claims.  On the other side of the coin, some corporate defendants in government enforcement actions have brought suit against the individuals responsible for those violations. Securities Fraud Actions The protracted securities fraud litigation initiated in 2004 against the former executives and the controlling shareholder of UTStarcom, Inc., gathered momentum in the early months of 2009.  Among the numerous claims, the plaintiff-shareholders allege that UTStarcom knowingly violated the FCPA by bribing officials in China, Mongolia, and India to secure contracts, ultimately forcing the company to restate its financial results and leading to joint DOJ/SEC investigations.  In March 2009, the U.S. District Court for the Central District of California denied the defendants’ motion to dismiss the plaintiffs’ fourth amended complaint, leading the Court to finally set a class certification hearing for September 21, 2009.  Additionally, the Court outlined a schedule for pre-trial motions and discovery continuing through the latter part of 2010. Shareholder Derivative Suits Perhaps no company better exemplifies the myriad pains that can accompany an FCPA investigation than FARO Technologies, Inc. ("FARO").  In 2009, FARO appears finally to have closed the book on the legal actions stemming from its alleged improper payments to Chinese government officials.  As originally reported in our 2008 Mid-Year FCPA Update, FARO settled FCPA charges in June 2008 with the DOJ and SEC, immediately after settling a § 10(b) suit with investors, who alleged that the company knowingly or recklessly attested to the adequacy of its internal controls, when it knew that they were inadequate.  As if this series of settlements was not enough, in April 2009, FARO settled a shareholder derivative lawsuit alleging that its officers and directors breached their fiduciary duties by failing to properly oversee the company’s internal activities.  The shareholder derivative settlement mandates the implementation of certain corporate governance changes at FARO and the payment of $400,000 in plaintiffs’ attorneys’ fees.  Personifying the axiom that crime doesn’t pay, FARO has now shelled out more than $10.2 million in criminal and civil settlements, not including its own attorneys’ fees or the costs of remedial measures, arising from roughly $450,000 in allegedly improper payments that netted it less than $1.9 million in profits.  The defendants in two other shareholder derivative lawsuits arising from settled FCPA enforcement actions fared somewhat better than FARO in 2009.  On May 26, 2009, Judge Vanessa Gilmore of the U.S. District Court for the Southern District of Texas dismissed a derivative claim filed by the Midwestern Teamster Pension Trust Fund on behalf of Baker Hughes, Inc., against twenty-five current and former directors.  Originally filed in June 2008, the lawsuit alleged that the company’s directors breached their fiduciary duties by not ensuring adequate oversight of Baker Hughes’s FCPA and Exchange Act compliance efforts.  Under Delaware law, a plaintiff filing a derivative claim must, with few exceptions, initially request that the Board of Directors bring the lawsuit on behalf of the corporation.  Judge Gilmore held that the exceptions did not apply in this case and that Baker Hughes’s Board was improperly denied the opportunity to decide whether the corporation should seek redress from its current and prior directors.  She therefore rejected the plaintiff’s demand futility argument and dismissed the claim because of the plaintiff’s failure to make an initial demand on the Board. Similarly, on March 10, 2009, Superior Court Judge David Flynn dismissed a 2007 derivative lawsuit filed in California state court on behalf of Chevron Corporation.  The plaintiffs originally filed the complaint after media reports described a then-pending FCPA settlement arising from Chevron’s participation in the United Nations Oil-for-Food Program.  But rather than dismiss the plaintiffs’ complaint, the Court instead treated the claim as a formal demand on Chevron’s Board of Directors to investigate whether a claim should be brought.  That challenge was accepted, with the Board appointing a special investigative committee to investigate the allegations, including by interviewing thirty-four witnesses and reviewing more than 150,000 pages of evidence.  After reviewing the results of the rigorous inquiry, the Board determined that a lawsuit would not be in Chevron’s best interest.  A board’s refusal to pursue a legal claim, after an initial demand is made, is protected by the business judgment rule under Delaware law.  A plaintiff can only overcome this obstacle in rare instances in which there is reasonable doubt about whether the board acted in good faith, with independence, or in a thorough manner.  Judge Flynn found that the plaintiffs offered little evidence that Chevron’s Board acted improperly in refusing to bring a lawsuit and therefore dismissed the derivative claim. Litigation surrounding two other recently filed derivative lawsuits arising from potential FCPA violations is ongoing.  On April 8, 2009, a shareholder filed a derivative action in the District of Massachusetts against BG Group P.L.C.’s current directors.  The complaint alleges that BG Group participated in a consortium of large oil companies that made at least $90 million in payments to Kazakh officials to secure oil and gas drilling opportunities in violation of the FCPA and other laws.  The plaintiff-shareholder further claims that BG’s Board wasted corporate assets when it later sold the company’s interest in this consortium for a fraction of its true market value.  And on May 14, 2009, three months after settling FCPA claims with the DOJ and SEC, numerous current and former directors of Halliburton and KBR found themselves named as defendants in a Texas state derivate suit filed by the Policemen and Firemen Retirement System of the City of Detroit.  The lawsuit alleges that the defendants breached their fiduciary duties by failing to oversee the companies’ operations, citing the FCPA settlement, alleged illegal exports to Libya, over-billing on government contracts in Iraq, hazardous waste dumping, and impermissible business with Iran.  The plaintiff further asserts that making a demand upon either company’s board of directors would be futile and, thus, should be excused.  On June 19, 2009, the defendants filed a notice of removal to the U.S. District Court for the Southern District of Texas. Lawsuits Brought by Foreign Governments and Business Partners As reported in our 2008 Mid-Year FCPA Update, on June 21, 2008, the Republic of Iraq filed suit in Manhattan federal district court against ninety-one companies and two individuals, alleging that the defendants conspired with Saddam Hussein’s regime to corrupt the United Nations Oil-for-Food Program by diverting as much as $10 billion in funds intended for the humanitarian use of the Iraqi people to the illicit use of Hussein’s government.  After a long period of stagnation, during which the Iraqi government sought and received continuances to effect service on the many defendants, this action picked up steam in February 2009, with Iraq applying to the Court to issue letters rogatory to courts in Austria, Jordan, Malaysia, South Africa, and the United Arab Emirates to effect services on numerous of the foreign defendants.  Since then, attorneys for more than fifty of the defendants have appeared in the case, and Judge Gerald Lynch has set a motion to dismiss briefing schedule that runs into February 2010.  Litigation continues in the previously reported civil dispute pitting Supreme Fuels Trading FZE ("Supreme Fuels") against its competitor, International Oil Trading Co. ("IOTC").  A civil claim filed by Supreme Fuels in October 2008 alleges that IOTC bribed Jordanian officials to receive the only license for transporting fuel through the country to Iraq.  IOTC filed a motion to dismiss the lawsuit on March 13, 2009, and Supreme Fuels has requested that the court schedule oral arguments on the motion.  The trial in this matter is tentatively set to begin on January 11, 2010, in the U.S. District Court for the Southern District of Florida. Discovery proceeded during the first half of 2009 in Argo-Tech Corporation’s civil case against Yamada Corporation and its subsidiary, Upsilon International Corporation.  Yamada served as an authorized distributor of Argo-Tech’s fuel pumps and related equipment, as well as the products of many other defense contractors.  A Japanese government investigation launched in 2007 uncovered evidence suggesting that Yamada bribed a Vice Defense Minister and fraudulently over-billed the Japanese Ministry of Defense for equipment.  Argo-Tech alleges that Yamada’s unlawful acts, including FCPA violations, breached its distributorship contract.  The complaint seeks damages resulting from the breach and attorneys’ fees.  The U.S. District Court for the Northern District of Ohio recently extended discovery into early 2010 and intends to refer the case to mediation during the summer of 2009. Lawsuits Filed by Companies That Have Settled FCPA Actions In a legal battle certain to be repeated in the coming years, given the government’s increasingly aggressive stance in successor liability FCPA actions (as discussed below), eLandia filed suit in June 2008 in Florida state court against Retail Americas VoIP, LLC, Latin Node’s former parent company, and Jorge Granados, the former Chief Executive Officer of Latin Node.  eLandia alleged breach of contract, breach of the obligation of good faith and fair dealing, and fraudulent inducement in connection with the defendants’ failure to disclose during acquisition due diligence information concerning the improper payments that ultimately led to Latin Node’s post-closing FCPA conviction.  On February 12, 2009, the defendants settled the matter, agreeing to return 375,000 of the 3.2 million shares of eLandia stock that they had received in connection with the acquisition.  There has been little movement thus far in 2009 on the December 2008 civil claim filed by Willbros International, Inc. ("Willbros"), in the U.S. District Court for the Southern District of Texas, against several former executives and consultants.  Willbros pleaded guilty to violating the FCPA in 2008 and now alleges that the defendants were responsible for the unlawful conduct.  Of the five defendants named in the lawsuit, only Paul Novak has responded, and he is currently embroiled in a parallel criminal proceeding stemming from the same acts.  The Court is currently considering Novak’s motion to dismiss.  No trial date has yet been scheduled. International Anti-Corruption Enforcement Activities As the DOJ and SEC have accelerated FCPA prosecutions, governmental authorities in a number of other countries have likewise stepped up their own anti-corruption enforcement efforts.  This internationalization of the fight against graft has resulted in an increasing pace of prosecutions for violations of foreign anti-corruption laws and further fostered cooperation between U.S. regulators and their foreign counterparts.  And yet, despite the increasingly global focus on combating corruption, international anti-corruption watchdog Transparency International is not prepared to rest.  In its fifth annual progress report on member states’ adherence to the Organisation for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions ("OECD Convention"), Transparency International makes the case that there is still much progress to be made in the fight against international graft.  Never afraid to name names, Transparency International categorized the enforcement efforts of thirty-six of the thirty-eight OECD member states, finding that twenty-one are engaged in "little or no enforcement."  Only four nations were classified as actively enforcing the OECD Convention, while eleven countries moderately enforce the Convention.    Developments Across the Pond On January 8, 2009, the British Financial Service Authority ("FSA") announced a settlement with London-based reinsurer Aon Ltd.  According to the FSA, between 2005 and 2007, Aon made nearly $7 million in payments to multiple firms and individuals as a consequence of the company’s alleged failure "to properly assess the risks involved in its dealings with overseas firms and individuals who helped it win business."  In announcing the £5.25 million fine, the highest ever imposed by the nongovernmental U.K. financial regulator, FSA Director Margaret Cole noted that the action "sends a clear message to the U.K. financial services industry that it is completely unacceptable for firms to conduct business overseas without having in place appropriate anti-bribery and corruption systems and controls."  But the FSA was also clear in commending Aon’s current management for identifying the past issues and substantially improving upon the firm’s systems and controls, an approach that the regulator called "a model of best practice that other firms may wish to adopt."  In accordance with FSA settlement procedures, the company’s substantial cooperation and early agreement to settle qualified it for a 30% discount on what would otherwise have been a £7.5 million fine.  Coupled with the U.K. Serious Fraud Office’s ("SFO") £2.25 million settlement with Balfour Beatty plc in 2008, described in our 2008 Year-End Update, the Aon settlement suggests that British authorities are seeking to put behind them their reputation for lax anti-corruption enforcement.  And they may receive some assistance from Parliament in the near future.  On March 25, 2009, the U.K. Ministry of Justice introduced draft legislation to modernize and tighten anti-bribery laws in the U.K.  The bill, offered in response to sharp criticism by the OECD, contains several important changes to the U.K.’s foreign and domestic anti-bribery laws, including the creation of a new, stand-alone offense for bribing foreign officials, the extension of British anti-bribery law to cover foreign nationals living and working in the U.K., and the creation of a corporate offense of negligently failing to prevent bribery.  Similar legislative reforms may be needed in France, according to a report published on March 12, 2009, by the Group of States Against Corruption ("GRECO").  GRECO, established in 1999 by the Council of Europe to monitor member states’ anti-corruption efforts, explained, "France has severely restricted its jurisdiction and its ability to prosecute cases with an international dimension, which, given the country’s importance in the international economy and the sale of many of its companies, is very regrettable."  According to the report, anti-corruption offenses committed outside of France can be investigated by French officials only "at the request of the state prosecution service and must be preceded by a complaint from the victim or his or her beneficiaries, or an official report by the authorities of the country where the offense was committed."  Moreover, French prosecutors also lack the power to prosecute foreign companies that have bribed French public officials abroad. The report stands in stark contrast to a decision handed down by the most senior French investigating judge, Françoise Desset, on May 7, 2009.  In his decision, Judge Desset ruled that a case brought by the French chapter of Transparency International could proceed, demanding that French authorities investigate how three African presidents acquired a large amount of expensive French real estate.  Transparency International hopes that the investigation "will uncover the truth about the origin of the contested assets, and eventually lead to the concrete implementation of the right to restitution – a fundamental principle of the United Nations Convention against Corruption," which France ratified in 2005.  Elsewhere in Europe, German authorities are following their blockbuster 2007 and 2008 settlements with Siemens AG, described in our 2008 Year-End Update, with another substantial corruption investigation concerning MAN AG.  The Munich Public Prosecutor’s Office is investigating allegations that MAN paid approximately €14 million in bribes to customers between 2002 and 2005 to secure business.  More than 300 police personnel are reported to be involved in the investigation of the company and more than 100 individuals.  MAN has announced that it is fully cooperating with prosecutors, and it has promised to terminate any employees involved in the corruption and to share the results of the internal investigation with prosecutors.  Rounding out European enforcement efforts, on June 26, Danish authorities announced settlements with seven different companies arising from their alleged payment of after-sales-service fees to the Government of Iraq in connection with the United Nations Oil-for-Food Program.  Collectively, the companies agreed to disgorge $8.4 million in profits.  Among the defendants was Novo Nordisk, which disgorged $5.6 million in profits to Danish authorities after settling the above-described joint DOJ/SEC enforcement actions filed earlier this year.  Developments in Asia Not to be outdone by their counterparts in Europe, anti-corruption enforcement authorities in Asia have also recently stepped up their fight against international graft.  On January 29, 2009, Tokyo-based consulting company, Pacific Consultants International, and three of its former executives, were convicted in a Japanese court of bribing a senior Vietnamese official to secure contracts for road projects backed by Japanese aid money.  The executives admitted at trial to paying $820,000 in bribes to a senior transport official in Ho Chi Minh City.  After the conviction and issuance of a ¥70 million fine, however, the judge suspended the sentences of all three convicted men, a common result for white-collar criminals in Japan who admit the allegations against them.  The convictions represent Japan’s first foreign bribery prosecution.  As a result of the Pacific Consultants investigation, Japan suspended all aid to Vietnam, including low-interest loans for infrastructure projects.  In response, Vietnamese officials arrested the alleged recipient of the bribes for "abuse of power" and asked Japan, the country’s largest source of aid, to resume the loan program.  The Japanese Ministry of Foreign Affairs has announced its intention to do so.  Prosecutors in Bahrain are in the midst of an investigation concerning $8.7 million in bribes allegedly paid by the Sojitz Group, a large Japanese commodities-trading firm, to two employees of Aluminum Bahrain BSC ("Alba"), Bahrain’s state-operated aluminum producer.  Affiliates of Sojitz Group and Swiss commodities trader Glencore International AG are alleged to have made the improper payments, between August 1998 and April 2004, in exchange for negotiated discounts on the purchase of aluminum.  State prosecutors filed money-laundering charges against the two Alba employees in March 2009.  And, according to news reports, Glencore has agreed to pay Alba more than $20 million in connection with a settlement of Alba’s internal probe into the payments. Legislative Anti-Corruption Developments In Congress, the first six months of 2009 have seen the reintroduction of legislation that would create a private right of action under the FCPA and a hearing before the Financial Services Committee of the U.S. House of Representatives that suggests that Congress may be interested in adopting stricter anti-corruption legislation. In an effort to level the playing field between firms subject to the FCPA and their foreign competitors not subject to the same stringent levels of anti-corruption scrutiny, Representative Ed Perlmutter (D. Colo.) reintroduced H.R. 2152, The Foreign Business Bribery Prohibition Act.  Similar to the proposed legislation of the same name that Representative Perlmutter introduced in 2008, the bill would create a private right of action enabling individuals and entities subject to the FCPA to sue foreign concerns not subject to the statute for actions that would be FCPA violations if the jurisdictional element of the statute were satisfied.  Successful plaintiffs would be awarded treble damages for the value of any contract that they had lost because of the defendants’ corrupt practices or for the value of any contract that the defendants thereby gained.  Because the bill implicates issues under the jurisdiction of both the House Judiciary Committee and the House Energy and Commerce Committee, portions of it were assigned to each committee in April 2009.  Although the 2008 bill never received much attention, the 2009 bill was mentioned during the House Financial Services Committee hearing described below as one possible way to discourage foreign corruption.  Neither committee has held any hearings specifically considering the bill, however, and no immediate action is expected.  Nevertheless, Representative Perlmutter’s Office continues to solicit comments and suggestions on the proposal. On May 19, 2009, the House Financial Services Committee held a hearing regarding "Capital Loss, Corruption and the Role of Western Financial Institutions."  During that hearing, the Committee members heard impassioned pleas for greater international anti-corruption cooperation from the representatives of nongovernmental organizations and former top-level law enforcement officials of Nigeria and Romania.  The witnesses’ chief concern was the huge transfer of wealth, which one witness claimed to be between $850 billion and $1 trillion per year, from developing nations to developed countries in the form of illicit money transfers, the use of tax havens, and graft by local officials invested in developed countries.  Nuhu Ribadu, the former Chief of Nigeria’s Economic and Financial Crimes Commission who obtained more than 275 corruption convictions and was the target of two assassination attempts, testified, "In a globalized and networked world, we all need to believe that the fight against corruption must assume a transborder dimension."  He then asked that Congress "push the boundaries of the [FCPA] to be expanded … to bite both givers and takers of bribes" and proposed "that Congress support civil society monitoring programs and direct support for programs building investigative journalism, which can support transparency and anti-corruption efforts."  Similarly, Anthea Lawson of Global Witness urged the Committee to consider legislation requiring banks to know the identity of the beneficial owners of accounts and to take steps to ensure that the funds that they accept are not the fruits of government corruption.  And Raymond Baker of Global Financial Integrity called for the creation of an international database of "Politically Exposed Persons," whose transactions would be subject to particular scrutiny because of their political power and opportunities for corrupt behavior. Although no formal legislative proposals have yet emerged from the hearing, it is clear that Committee Chairman Barney Frank (D. Mass.) intends to pursue concrete legislative action:  "I will reiterate that we have the entire legislative jurisdiction in this committee and it is our intention to move legislation, so I thank the witnesses.  You are helping us with a process that we think is going to result in better law." Regulatory Anti-Corruption Developments Complementing the heightened enforcement and legislative focus on the FCPA, on March 9, 2009, FINRA sent out its 2009 Examination Priorities Letter to broker-dealers and other financial services firms outlining the areas on which the self-regulatory organization intends to focus during its 2009 routine examinations, including FCPA compliance.  More generally, the letter suggests that the financial services industry may be the subject of increasingly FCPA scrutiny.  Accordingly, firms subject to FINRA’s examination authority should take steps to assess the effectiveness of their anti-corruption compliance programs and implement any required enhancements prior to undergoing a FINRA examination.  And, on June 29, 2009, New York’s then-Insurance Superintendent, Eric Dinallo, issued Circular Letter No. 11 (2009), admonishing all companies subject to his state’s insurance regulations to "assess their business models and circumstances to determine the extent to which they should formulate or revisit their policies to ensure proper compliance" with the FCPA and various other federal laws.  Dinallo warned that in future examinations, his Department "may make limited inquiry into a licensee’s compliance function to assess how well the licensee takes into consideration the risks of money laundering, bribery of foreign persons, and recognition of federal economic sanctions, … [including by] specifically ask[ing] the members of a licensee’s senior most governing body or senior management about those policies."  Avoiding Successor Liability through Acquisition Due Diligence For years now, we have consistently emphasized the perils associated with failure to conduct adequate pre-acquisition FCPA due diligence.  In recent years, the DOJ and SEC have frequently addressed this topic in public speeches and have initiated multiple enforcement actions against companies that merged with or acquired entities that had paid bribes.  Indeed, three of the five corporate FCPA enforcement actions filed during the first half of 2009 implicate successor liability issues.  The Latin Node case is the first FCPA enforcement action ever filed based entirely on pre-acquisition conduct that was unknown to the acquirer when the transaction closed.  As described above, eLandia appears to have conducted little, if any, FCPA due diligence in connection with its acquisition of Latin Node, discovering the alleged unlawful payments only after the acquisition closed.  Sufficient pre-acquisition due diligence could possibly have enabled eLandia to avoid purchasing an entity that it subsequently had to shut down, at great expense to the business, not to mention the attendant headache of the government enforcement action.    The Halliburton/KBR settlement further highlights the substantial penalties that companies may face if they fail to conduct adequate pre-acquisition due diligence and then follow up with targeted post-integration FCPA reviews (which, in the Latin Node case, at least prevented the problem from growing on eLandia’s watch).  As described above, Halliburton did not know about M.W. Kellogg’s participation in a joint venture that was making unlawful payments because it did not conduct FCPA due diligence prior to acquiring the company.  Subsequently, it did not implement an effective compliance program in the newly formed subsidiary or conduct sufficient due diligence on M.W. Kellogg’s legacy operations or agents.  Consequently, the unlawful conduct continued long after the acquisition, and both Halliburton and KBR were subjected to FCPA enforcement actions and more than $575 million in fines and disgorgement.  UIC‘s2009 civil settlement with the SEC also implicates the assessment of successor liability.  By the time of UIC’s settlement, the company had been acquired by Textron, Inc.  But Textron was on notice of the FCPA investigation due to UIC’s pre-acquisition public filings, and thus was able to factor any attendant liability into the purchase price.  Textron was then mentioned only as a footnote to the UIC settlement documents, making clear that the improper payments occurred entirely prior to the acquisition.  The topic of successor liability is one that U.S. authorities have often discussed publicly, providing some guidance to companies considering international mergers or acquisitions.  Most recently, in September 2008, Mendelsohn stated at an FCPA Conference in Washington, D.C. that the "nature and quality" of pre-acquisition due diligence is "one of the most critical factors" DOJ considers when making charging decisions in the context of a merger or acquisition.  If a company is unable to conduct effective pre-merger due diligence, Mendelsohn noted that DOJ expects the acquirer to move "aggressively and quickly" post-acquisition to investigate high-risk areas.  Although he declined to establish a specific timeline, he advised that waiting a full year to look for and remediate FCPA issues would be inadequate.  And in 2007, then-Assistant Attorney General Alice Fisher described the specific steps that DOJ expects companies to take when conducting effective pre-acquisition FCPA due diligence.  In prepared remarks delivered at a 2007 FCPA Conference, Fisher set forth the following five pieces of information that an acquirer should know, at a minimum, about a potential target: The extent to which the company’s customers are government entities, including state owned companies; Whether the company is involved in any joint ventures with government entities; What government approvals and licenses the company needs to operate abroad, how it obtained them, and when they require renewal; The company’s requirements relating to Customs in foreign countries and how it fulfills those requirements; and The company’s relationships with third party agents or consultants who interact with foreign officials on the company’s behalf, including how those agents were chosen and vetted by the company. Advising that "an acquiring company should be comfortable that it has assessed [these five] risks before closing a deal," Fisher further noted: If any of these due diligence exercises result in the discovery of a potential FCPA problem, we, of course, encourage the company to voluntarily disclose that problem to the Department.  If a company does not conduct some sort of due diligence, and it finds out a year later that the conduct has continued, the Department will want to know why there wasn’t any effort to assess whether there had been criminal conduct? Accordingly, the quality of an acquirer’s pre-acquisition due diligence efforts and voluntary disclosure of any potential FCPA issues uncovered during that process may influence the government’s position regarding successor liability in the FCPA context.  For additional guidance on the topic of acquisition due diligence, please see the article by F. Joseph Warin, et al., Acquisition Due Diligence: A Recipe to Avoid FCPA Enforcement, TEXAS STATE BAR OIL, GAS & ENERGY RESOURCES LAW SECTION REPORT 2 (June 2006). Conclusion The number of recent enforcement actions and ongoing investigations suggests that the heightened FCPA enforcement environment that we have observed over the past several years is here to stay.  This increased enforcement activity has created an ever-changing anti-corruption enforcement landscape, and we anticipate that new developments in enforcement and compliance will continue to emerge in the coming years.  It is essential that companies with international operations stay abreast of these developments to avoid running afoul of the FCPA and to address effectively any potential corruption issues.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 20 attorneys with substantive FCPA expertise. Joe Warin, a former federal prosecutor, currently serves as a compliance consultant pursuant to a DOJ and SEC enforcement action and as FCPA counsel for the first non-U.S. compliance monitor. The firm has 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)  Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) Judith A. Lee (202-887-3591, jalee@gibsondunn.com) David P. Burns (202-887-3786, dburns@gibsondunn.com)  Jim Slear (202-955-8578, jslear@gibsondunn.com)Michael S. Diamant (202-887-3604, mdiamant@gibsondunn.com)John W.F. Chesley (202-887-3788, jchesley@gibsondunn.com)Patrick F. Speice, Jr. (202-887-3776, pspeicejr@gibsondunn.com) New YorkJoel M. Cohen (212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com)Mark A. Kirsch (212-351-2662, mkirsch@gibsondunn.com)Jim Walden (212-351-2300, jwalden@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com)J. Taylor McConkie (303-298-5795, tmcconkie@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los Angeles Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com), the former United States Attorney for the Central District of California,Michael M. Farhang (213-229-7005, mfarhang@gibsondunn.com)Douglas M. Fuchs (213-229-7605, dfuchs@gibsondunn.com) MunichBenno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com)Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 24, 2009 |
2009: First-Quarter Update on Class Action Trends

Los Angeles partner Gail E. Lees, Washington, D.C. partner Andrew S. Tulumello, San Francisco partner Charles Nierlich, Dallas associate Mark Whitburn and Los Angeles associate Christopher Chorba are the authors of "2009: First-Quarter Update on Class Action Trends" [PDF] published in the April 24, 2009 issue of BNA’s Class Action Litigation Report. Reproduced with permission from Class Action Litigation Report, 10 CLASS 399 (Apr. 24, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

September 13, 2010 |
2010 Fall Update on Class Actions: The Plaintiffs’ Bar on the Move

Like 2009, 2010 has witnessed frenetic activity in the class action bar.  Continuing the trend of recent years, class action filings are up; the targets of class action lawsuits have expanded; and plaintiffs’ firms that historically have focused on other areas are diversifying their portfolios by filing class suits in areas such as false advertising, consumer fraud, products liability, ERISA, and employment discrimination. While some academic commentators have opined that "the long-term future of the class action is in doubt,"[1] the experience of defendants shows otherwise.  According to a report published in the L.A. Daily Journal, 30% of United States companies had a class action filed against them in 2009, with California companies leading the way with a whopping 39% of surveyed companies facing new class litigation.  Gibson Dunn has obtained data charting filings in several major state courts in California, and those statistics also show a significant spike in class action activity.  The past year also has witnessed significant decisions from the Supreme Court on class action issues, including the proper standard for determining a corporation’s principal place of business under CAFA (Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010)); whether Rule 23 trumps state law rules that prohibit certain types of class actions (Shady Grove Orthopedic Assocs., P.A., v. Allstate Ins. Co., 130 S. Ct. 1431 (2010)); and the standards governing class arbitration where arbitration clauses are silent about class procedures (Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010)). Meanwhile, the lower federal courts have pressed forward.  The so-called Eisen debate increasingly is no longer a "debate" at all, as a chorus of federal circuits now expressly require a "rigorous analysis" of Rule 23 factors at the certification stage, even if such analysis overlaps with merits-related inquiries.  In 2010, the courts of appeals by and large converged around this principle, recognizing that not only contested factual questions but also Daubert issues need to be resolved at the class stage if resolution is necessary to the certification decision.  Set against these cases is the Ninth Circuit’s 6-5 en banc decision in Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (2010), cert. petition pending, which exacerbated a conflict among the circuits on several core class action issues, including the nature of the factual showing necessary to satisfy Rule 23’s requirements, and whether claims for monetary relief can be certified under Rule 23(b)(2).  If the Supreme Court decides to hear the case, Dukes has the potential to clarify a range of unresolved issues at the heart of Rule 23 practice.  (Gibson Dunn is counsel of record in Dukes.  A copy of the petition for certiorari can be found here.)  On the state side, in the last year the Supreme Court of California interpreted Proposition 64’s standing amendments to California’s Unfair Competition Law (In re Tobacco II Cases, 46 Cal. 4th 298 (2009)), bringing some clarity to this area but raising a host of follow-up issues that the courts of appeal have begun to tackle.  The plaintiffs’ bar has not remained silent or static.  As the doctrinal loopholes facilitating easy certification are closed, plaintiffs’ theories continue to evolve.  In response to the near uniform federal appellate precedents denying certification of nationwide or multistate class actions that would require the application of the laws of many states, the plaintiffs’ bar is testing new "headquarters" theories that attempt to apply a single state’s law (the law of a defendant’s headquarters) to an entire class dispute.  This has led to notable and highly controversial decisions in California and New Jersey holding that, under "traditional" choice-of-law principles, a single state’s law can apply extraterritorially to a nationwide class.  The plaintiffs’ bar also continues to press ahead with "fraud-on-the-market" theories in non-securities settings, generally challenging purported "omissions" by a company that are said to have caused "price inflation" that caused injury to consumers or others.  These cases are efforts to bypass the bedrock elements in many common law causes of action such as reliance, causation, and injury—and are classic "no injury" suits brought under a different name.  They have met with mixed success, but continue as a wave of the future.    This update provides an overview of developments and trends in class action practice.  Part I of the update summarizes recent facts and figures related to recent class action activity.  Part II discusses key developments and unresolved class action issues in the federal courts.  Part III identifies key unresolved issues in the state courts. For Gibson Dunn’s previous updates on Class Actions, please see here and here I.  Facts and Figures Class actions continued to plague corporate America at a daunting rate over the last 18 months, with just under a third of United States companies defending new class action litigation in 2009 (and just over a third of California companies).[2]  Our analysis of available data from state and federal courts shows that class action filings are up across the board. A.  Federal Court Class Action Activity Plaintiffs have taken particular advantage of new opportunities in the consumer protection/fraud and labor class action arenas.  Between late 2001 and early 2007 (the most recent available federal data), consumer class actions rose 156% and accounted for more than 20% of all class action filings in the latter period.  Over the same time frame, labor class actions increased 228%, constituting 46.9% of class action filings in late 2007. Class Action Filings by Case Type, 2001-2007 The West Coast has led the way in class action growth, with the Ninth Circuit experiencing a 577% increase in filings between July-December 2001 and January-June 2007, as compared with the two circuits with the next greatest increases (the Third Circuit at 400% and the Tenth Circuit at 250%).[3]  Plaintiff-friendly consumer protection statutes in California and the willingness (however suspect) of some California state and federal courts to apply California law in multi-state class actions may partly explain this trend. Percentage Increase in Consumer Class Action Filings, 2001-2007 Labor class actions also have exploded.  The Eleventh Circuit’s labor class action load, shown in the chart below, increased even more than the rise in the Ninth Circuit.  The Eleventh Circuit’s labor case load increased 493%, with the Second Circuit and the Ninth Circuit increasing 317% and 218%, respectively. Percentage Increase in Labor Class Action Filings, 2001-2007 B.  State Court Class Action Activity The overall number of state class action filings also has increased substantially in recent years.  A report released in March 2009 by the California Administrative Office of the Courts shows that class action activity was increasing in California even before 2005 (the last year for which the report had complete data).  According to this study, class actions filed in twelve representative courts across the state increased from 460 in 2000 to a high of 833 in 2004, with a slight drop-off to 751 in 2005.[4] Gibson Dunn has determined that this trend continued at a steady pace after 2005: California State Class Action Filings By County (2005-2008) According to data that we have received from several of the largest county superior courts in California,[5] state class action filings remain on the rise: The Los Angeles County Superior Court saw a 55.4% increase in class action filings from 2005 to 2008.  The Los Angeles filings alone exceed the total number of filings the Administrative Office of the Courts reported for the twelve studied courts combined in 2005.  Class action filings in Orange County increased 27.3% from 2005 to 2008. The San Diego Superior Court began collecting data on class action filings in July 2007, and these data show a 71% increase in class action filings between July 2007 and December 2009. Alameda County was one of the few jurisdictions to see a decrease in class action filings, from 60 in 2005 to 53 in 2008. The fact that the increase is most pronounced in Los Angeles is not surprising to practitioners in that county.  Like several other counties in California, Los Angeles has a designated panel of complex case judges who are very experienced in handling class action and other complex litigation, and this program has proved extremely popular among plaintiffs and defendants.  Notably, removals occurred in only 12% of the class cases filed in Los Angeles County Superior Court in December 2008. The overall statistics confirm what defendants already know.  In both federal and state court, class action filings are up.  Although it is difficult to explain with certainty the reasons for the steady increases, it does appear that the economic pressures of the last 18 months have driven new plaintiffs’ firms into the class action arena, and that these firms are filing more suits, testing new theories, and selecting new defendants and industries as class action targets.  Although lead counsel fights on the plaintiffs’ side are nothing new, the sheer volume of suits and leadership struggles generated in connection with headline stories such as the gulf oil spill and automotive and pharmaceutical recalls demonstrate the fierce competition on the plaintiffs’ bar side. II.  Key Developments (Federal Courts) Class action issues continue to be fleshed out in the federal courts, with conflicts on several significant aspects of class action practice maturing and deepening.  We start with CAFA, where the story is one chapter of clarity and many volumes of uncertainty. A.  The Class Action Fairness Act 1.  Jurisdictional Clarity:  The Principal Place of Business Under Hertz Corp. v. Friend The U.S. Supreme Court waded into CAFA waters this year, holding on February 23, 2010, that the "principal place of business" of a corporation for purposes of the federal diversity jurisdiction statute (28 U.S.C. § 1332(c)(1)) refers to a corporation’s "nerve center" or "the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities."  Hertz Corp. v. Friend, 130 S. Ct. 1181, 1186 (2010).  The decision reversed a Ninth Circuit ruling applying a "place of operations" test that would have accorded significant weight to the degree of business activity undertaken by the company in California.  Under that test, almost any nationwide business present in California could be deemed a citizen of California simply because California is so large.  The underlying case was a wage and hour class action filed in California state court that Hertz removed under CAFA.  Hertz submitted declarations showing that its "principal place of business"—its leadership team and corporate headquarters—was located in New Jersey.  In remanding the case,  the district court determined that a plurality of Hertz’s operations were located in California.  For example, Hertz operated 273 of its 1,606 car rental locations in California (which accounted for 3.8 million of its 21 million annual rental transactions), and approximately 2,300 of its 11,230 full-time employees were located in California.  The Ninth Circuit affirmed.  It applied the "place of operations" test for determining corporate citizenship, and it held that "Hertz’s relevant business activities are ‘significantly larger’ in California than in the next largest state."  297 F. App’x. 690, 691 (9th Cir. 2008). The Ninth Circuit’s decision threatened to attract an even greater concentration of class action and other litigation to California state courts.  Because California accounts for 12% of the entire population of the United States, most retailers and other businesses with widespread operations would be deemed California "citizens" simply because a "plurality" of their operations occurred there—and even though they were incorporated and headquartered elsewhere.   The Supreme Court reversed and unanimously adopted a "nerve center" test.  The "nerve center" refers to "the place where a corporation’s officers direct, control, and coordinate the corporation’s activities."  130 S. Ct. at 1192.  "[I]n practice," the Court said, this "should normally be the place where the corporation maintains its headquarters."  Id.  Although there are still close cases under the "nerve center" test, id. at 1195, the decision should allow corporations to better predict where they are subject to state court jurisdiction and when they can remove to federal court based on diversity jurisdiction.  Perhaps the most significant impact will be on class actions removed under CAFA’s "minimal diversity" provisions, because the opinion limits plaintiffs’ ability to keep corporations in state court in large states like California.  Finally, the decision should help non-California defendants resist attempts to apply California law to their activities.  An aggressive interpretation of the Ninth Circuit’s "place of operations" test may have encouraged attempts to apply California law to nonresident defendants on the theory that they were citizens of that state. 2.  Jurisdictional Muddle:  CAFA Purportedly Does Not Permit Aggregation to Satisfy the Amount-In-Controversy Requirement (Eleventh Circuit, Cappuccitti v. Direct TV) The jurisdictional clarity provided by Hertz will be swamped by the jurisdictional confusion created by a recent federal appellate decision.  In Cappuccitti v. DirecTV, Inc., 611 F.3d 1252 (11th Cir. 2010), the Eleventh Circuit held that in a class action originally filed in federal court under CAFA, at least one individual plaintiff must allege a claim worth more than $75,000 in order for a federal district court to have jurisdiction over the case.  The immediate impact of this decision, if left intact, would be to deprive federal district courts in the Eleventh Circuit of subject matter jurisdiction over a substantial number of class actions initiated in federal court. The primary purpose of CAFA was to channel state-law based class actions into federal court.  Tanoh v. Dow Chem. Co., 561 F.3d 945, 952 (9th Cir. 2009).  CAFA does this by conferring federal diversity jurisdiction over class actions in which the overall amount in controversy exceeds $5 million and the parties are minimally diverse (at least one plaintiff and one defendant from different states).  28 U.S.C. § 1332(d)(1)-(6).  CAFA thus imposes an amount-in-controversy requirement much greater than the $75,000 required to invoke traditional diversity jurisdiction under Section 1332(a), but in doing so the Act "abrogates the rule against aggregating claims" to reach that threshold.  Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 571 (2005); see also 14A Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 3704 (3d ed. 2010) ("[CAFA] … provides for aggregation even if no individual class member asserts a claim that exceeds $75,000.").  The Eleventh Circuit’s recent decision breaks with this heretofore unchallenged interpretation of CAFA’s language and purpose.  In Cappuccitti, the plaintiff filed a putative class action in federal court under CAFA, seeking recovery of television subscriber fees that allegedly violated Georgia law.  The plaintiff alleged minimal diversity and class-wide damages exceeding $5 million.  Neither party disputed the court’s jurisdiction under CAFA.  But on review of the district court’s denial of the defendant’s motion to compel arbitration, the court of appeals raised sua sponte the issue of subject matter jurisdiction and concluded that "jurisdiction under CAFA was absent from the moment Cappuccitti brought this case."  611 F.3d at 1254.  The jurisdictional defect was Cappuccitti’s failure to allege that any one plaintiff individually met the $75,000 amount in controversy set forth in Section 1332(a).  Id. at 1256. The Eleventh Circuit reached this novel conclusion by treating CAFA’s aggregate amount-in-controversy requirement (Section 1332(d)(2)) as a supplement to the traditional $75,000 requirement:  "CAFA did not alter the general diversity statute’s requirement that the district court have original jurisdiction ‘of all civil actions where the matter in controversy exceeds the value of $75,000’ and is between citizens of different States."  Id.  The court reasoned that although CAFA was intended to relax the requirement of complete diversity of citizenship, "there is no evidence of congressional intent in § 1332(d) to obviate § 1332(a)’s $75,000 requirement as to at least one plaintiff."  Id. at 1257. The court evidently did not view Congress’s inclusion of a distinct amount-in-controversy requirement for CAFA class actions as evidence to the contrary.  Instead, the court looked to a CAFA provision governing the removability of "mass actions"—which, unlike class actions, are not a representative device but rather an aggregation of individual claims by multiple named plaintiffs.  Section 1332(d)(11)(B)(i) gives defendants the right to remove certain "mass actions" to federal court if they satisfy the requirements of Section 1332(d)(2)-(10) and "satisfy the jurisdictional amount requirements under [Section 1332(a)]."  Id. at 1257 n.12.  The court also relied extensively on circuit precedent concerning removal of a mass action under CAFA.  Id. at 1255-56 (discussing Lowery v. Ala. Power Co., 483 F.3d 1184 (11 Cir. 2007)). On August 9, both parties in Cappuccitti filed petitions for rehearing en banc.  Each party contends that the panel misconstrued CAFA and confused the class action and mass action provisions of the Act.  Meanwhile, some district courts hearing class actions in the Eleventh Circuit have called for briefing on the implications of Cappuccitti.  Outside the circuit, however, it appears that no federal court has followed the decision, and at least one district court has noted and rejected its holding.  See Gutierrez v. Wells Fargo Bank, N.A., No. 07-05923, 2010 WL 3155934, at *56 (N.D. Cal. Aug. 10, 2010). If other circuits were to adopt the rule of Cappuccitti, it would close federal courts as forums for consumer class actions, in which any one plaintiff ordinarily does not have more than $75,000 in damages.  Such a result would defeat the basic goal of CAFA, which the Eleventh Circuit acknowledged was "to situate more class actions in federal court ab initio and to make it easier for defendants in a state court class action to remove the action to federal court."  611 F.3d at 1254. 3.  Standards for Determining the "Amount in Controversy" Under CAFA The courts of appeals also continue to debate and develop the appropriate standards and burdens of proof for establishing that CAFA’s $5 million amount-in-controversy requirement is met.  In some cases, the plaintiff’s complaint will be silent as to the amount in controversy; in other cases, the complaint will plead expressly that the amount in controversy is less than the $5 million jurisdictional minimum.  The circuits have adopted different approaches to these issues.  Some circuits generally require a removing defendant to show a "reasonable probability" that more than $5 million is at stake.  Blockbuster, Inc. v. Galeno, 472 F.3d 53, 58 (2d Cir. 2006).  Others have applied a "preponderance of the evidence" test.  Lowery v. Ala. Power Co., 483 F.3d 1184, 1192 (11th Cir. 2007) (per curiam); Abrego v. Dow Chem. Co., 443 F.3d 676, 683 (9th Cir. 2006).  And still others apply different standards depending on whether the complaint is silent or has pleaded an amount lower than $5 million.  See, e.g., Lowdermilk v. U.S. Bank Nat’l Ass’n, 479 F.3d 994, 996 (9th Cir. 2007); Morgan v. Gay, 471 F.3d 469, 472-73 (3d Cir. 2006); Brill v. Countrywide Home Loans, Inc., 427 F.3d 446, 447 (7th Cir. 2005). Since our last update, the First and Eighth Circuits have clarified the standards for determining the amount in controversy for purposes of CAFA removability.  The First Circuit held that where a complaint does not allege the amount in controversy, a removing defendant must show by "a reasonable probability" that the amount exceeds $5 million—a test that is similar to the Ninth Circuit’s "preponderance of the evidence" test.  Amoche v. Guarantee Trust Life Ins. Co., 556 F.3d 41, 48, 50 (1st Cir. 2009).  The First Circuit also noted that if a complaint expressly alleges less than $5 million in controversy, some courts required a removing defendant to demonstrate to a "legal certainty" that $5 million or more was in controversy.  Id. at 49 n.2 (citing, e.g., Lowdermilk, 479 F.3d at 999-1000).  Without deciding the issue, the court questioned "why the defendant should be put to a higher standard simply because the plaintiffs have pled an amount under $5 million."  Id.  This would appear to suggest a disagreement with the Ninth Circuit’s approach. In Bell v. Hershey Co., 557 F.3d 953 (8th Cir. 2009), the Eighth Circuit vacated a remand order in a case where the plaintiff artfully pled a total amount in controversy of $4.99 million and ruled that a defendant need only demonstrate by a preponderance of the evidence that the amount in controversy exceeds $5 million.  Id. at 957.  The court noted that requiring a legal certainty, like the Third and Ninth Circuits require when a plaintiff pleads less than $5 million in controversy, would "invert the legal certainty test" and could "have unintended consequences."  Id. at 957-58 (quoting Guglielmino v. McKee Foods Corp., 506 F.3d 696, 702 (9th Cir. 2007) (O’ Scannlain, J., specially concurring); see Lowdermilk, 479 F.3d at 1000; Morgan, 471 F.3d at 474.  The court noted that Congress enacted CAFA to "expand federal diversity jurisdiction over class actions" and that such a removal standard would have an inconsistent tendency to limit federal jurisdiction.  Bell, 557 F.3d at 957 (internal quotations and citations omitted).  See also Pretka v. Kolter City Plaza II, Inc., 608 F.3d 744, 754 (11th Cir. 2010) ("The point is that a removing defendant is not required to prove the amount in controversy beyond all doubt or to banish all uncertainty about it. … The law does not demand perfect knowledge or depend any less on reasonable inferences and deductions than we all do in everyday life."). 4.  Is There Federal Jurisdiction Under CAFA if Class Certification is Denied? The federal appellate courts appear to have agreed that a federal district court retains jurisdiction over a case removed under CAFA after class certification is denied.  A few federal district courts had remanded these actions after denying certification, holding that this deprived them of subject matter jurisdiction.[6]  The theory of these cases is that CAFA vests district courts with jurisdiction over "class actions" and that a case cannot be a "class action" once certification is denied.  To date, every federal appellate court to address this issue (the Seventh, Ninth, and Eleventh Circuits) has rejected this argument and held that post-removal or post-filing events do not deprive the district court of jurisdiction.[7]  Therefore, a federal district court’s jurisdiction cannot be ousted by a pro-defendant decision on class certification.  This interpretation of CAFA is persuasive, consistent with long-standing Supreme Court precedent in other contexts, and avoids the peculiar circumstance in which a case can be dismissed on jurisdictional grounds after it has been aggressively litigated through the class certification stage.  B.  The Supreme Court Holds That Rule 23 Trumps Certain State Rules Prohibiting Class Actions (Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co.) The Supreme Court decided a second class action case this year, this one pitting a New York state rule hostile to class actions against Rule 23.  In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 130 S. Ct. 1431 (2010), the Supreme Court held that Rule 23 trumps at least some state rules that prohibit class actions in state court.  Some early commentary suggested that the Supreme Court had broadly invalidated any and all state anti-class action rules, but a close reading of the decision strongly suggests this is not the case.  So long as a state rule looks like and operates as a damages limitation, it should be enforceable in federal court even after Shady Grove. The Court in Shady Grove considered the effect of a New York statute that precludes class action suits to recover certain statutory minimum damages or penalties.  The Court held that the New York law conflicts with, and is superseded by, Federal Rule of Civil Procedure 23, which provides the general criteria for class action suits in federal court.  The Court’s ruling allows class actions in federal court for violations of certain New York statutes even when those class actions could not be brought in state court and are expressly proscribed by New York law. Under the Class Action Fairness Act of 2005, federal courts have jurisdiction over class actions raising state law claims when the amount in controversy exceeds $5 million and the parties are minimally diverse.  28 U.S.C. § 1332(d).  In those cases—as in any federal case where subject-matter jurisdiction is based on the parties’ diversity of citizenship—the federal court must apply state "substantive" law and federal "procedural" rules.  See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).  Where both a federal procedural rule and a provision of state law would control a particular issue, federal courts sitting in diversity apply the federal rule so long as it does not violate the Rules Enabling Act, 28 U.S.C. § 2072, by abridging, enlarging or modifying any substantive right—including substantive rights guaranteed under state law. In Shady Grove, the plaintiff sought relief on behalf of all parties who were allegedly owed statutory interest that had accrued on late payments from Allstate.  Although Federal Rule of Civil Procedure 23 authorizes class actions if certain requirements are satisfied, a New York statute explicitly forbids class actions in cases asserting violations of statutes that impose a "penalty" such as statutory interest.  N.Y. C.P.L.R. 901(b).  The issue in Shady Grove was how courts should determine which of those rules should apply. In a fractured decision, the Supreme Court held that Rule 23 trumps the New York anti-class action provision in federal court.  Although five Justices arrived at the same result, they disagreed on most of the rationale behind the ruling.  Justice Scalia’s opinion, on behalf of himself and three other Justices, advocated a categorical approach under which any federal rule that regulates procedure "is valid in all jurisdictions, with respect to all claims, regardless of its incidental effect upon state-created rights."  130 S. Ct. at 1444.  (Opinion of Scalia, J.).  Such a framework would call into question numerous state law provisions, including those that limit class action remedies or prohibit class action treatment for certain types of claims. Justice Stevens provided the fifth vote for the majority and filed a separate, narrower concurring opinion that ultimately controls the case.  His opinion preserves important arguments for defendants that state law provisions limiting class actions can still survive in federal court.  In Justice Stevens’ view, determining whether a federal rule applies in a diversity action requires a case-by-case assessment of the state rule with which the federal provision conflicts.  Under that approach, "federal rules must be interpreted with some degree of sensitivity to important state interests and regulatory policies," because some state laws, though nominally "procedural," are in fact "part of a State’s framework of substantive rights or remedies."  130 S. Ct. at 1449.  (Stevens, J., concurring) (internal quotation marks omitted).  Justice Stevens concluded that a federal procedural rule, as applied, can violate the Rules Enabling Act by effectively abridging, enlarging, or modifying a state-created right or remedy.  When a federal rule cannot be construed in a way to avoid such an outcome, "federal courts cannot apply the rule."  Id. at 1452. Justice Stevens ultimately determined that Section 901(b) is not the sort of procedural rule that is sufficiently interwoven with substantive rights to avoid the application of Rule 23.  Importantly, however, he emphasized that each case must be addressed on its own merits: In some instances, a state rule that appears procedural really is not.  A rule about how damages are reviewed on appeal may really be a damages cap.  A rule that a plaintiff can bring a claim for only three years may really be a limit on the existence of the right to seek redress.  A rule that a claim must be proved beyond a reasonable doubt may really be a definition of the scope of the claim.  These are the sorts of rules that one might describe as "procedural," but they nonetheless define substantive rights.  Thus, if a federal rule displaced such a state rule, the federal rule would have altered the State’s "substantive rights." 130 S. Ct. at 1453 n.8 (Stevens, J., concurring) (citation omitted). Some early commentary has suggested that Shady Grove automatically renders state anti-class action rules unenforceable in federal court.  A close reading of Justice Stevens’ controlling concurring opinion suggests that this will not be the case, and that each state restriction needs to be judged on its own merits under the framework Justice Stevens announced.  Time will tell how courts will respond to this apparent shift in the dynamic between state and federal rules.[8]  What is clear, however, is that the Court’s decision will result in additional scrutiny of state efforts to restrict large damage awards and coercive litigation mechanisms.  In addition, some state laws may benefit from revision to ensure that they remain effective in federal court as well as state court. C.  Plaintiffs Attempt to Circumvent Choice-of-Law Issues and Persuade Courts to Allow Nationwide Class Actions Predicated on One State’s Law In recent years, the federal courts of appeals have become increasingly reluctant to certify multistate or nationwide class actions.  These courts have reasoned that the need to apply the law of more than one state creates individualized issues that defeat the "predominance" or manageability requirements of Rule 23(b)(3) or the "commonality" requirement of Rule 23(a).  See, e.g., In re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1015, 1018 (7th Cir. 2002); Castano v. Am. Tobacco Co., 84 F.3d 734, 741 (5th Cir. 1996). In the face of these unfriendly precedents, the plaintiffs’ bar has been shopping a new theory that would impose a single state’s law on an entire class action.  Under this theory, plaintiffs purport to ask the court merely to apply "traditional" choice-of-law analysis to the claims of the entire class.  And under that "traditional" analysis, they claim, the law of the defendant’s home state should govern.    Recently, federal courts in California and New Jersey have certified multi-state or nationwide class actions on this basis.  The district courts in the California cases noted that defendants—as the purported "proponents" of applying foreign (e.g., not California) law—failed to show that laws in other states conflict with California’s Unfair Competition Law in "material" respects.  See Menagerie Prods. v. Citysearch, No. 08-4263, 2009 WL 3770668, at *15 (C.D. Cal. Nov. 9, 2009); Mazza v. Am. Honda Motor Co., 254 F.R.D. 610, 621-24 (C.D. Cal. 2008). The Ninth Circuit may give the district courts some guidance on these issues in deciding Honda’s Rule 23(f) petition in Mazza, 9th Cir. Case No. 09-80000 (oral argument held June 9, 2010). In re Mercedes Benz Tele-Aid Contract Litigation, 257 F.R.D. 46 (D.N.J. 2009), also applied one state’s law (New Jersey) to a nationwide class under "traditional" choice-of-law principles.  The court stated that New Jersey’s interests outweighed those of other states because the bulk of Mercedes-Benz’s alleged misstatements and omissions occurred in New Jersey.  Further, it concluded that the unjust enrichment laws of various states (such as New Jersey, New York, California, Missouri, Illinois, and Washington) do not conflict in any material respect. These decisions are highly suspect on a number of grounds.  First, to the extent they are predicated on assumptions that claims such as negligence, unjust enrichment, and consumer fraud or deception are the same across the states, they are plainly incorrect.  Second, they also are doubtful applications of choice-of-law principles.  Under any of the well-settled choice-0f-law tests, a state does not typically have the right to inject its law into transactions that occur entirely in other states.  These decisions also are in significant tension with the Supreme Court’s decision in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), which squarely held that the Due Process Clause and the Full Faith and Credit Clause preclude one state from applying its laws to the claims of out-of-state residents, unless the state has a "’significant contact or significant aggregation of contacts’ to the claims asserted by each member of the plaintiff class … in order to ensure that the choice of [that particular state’s] law is not arbitrary or unfair."  Id. at 821-22 (quoting Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13 (1981)). D.  No Injury Suits and Statutes Return to the Limelight In addition to deploying inventive choice-of-law theories, the plaintiffs’ bar continues to push and experiment with "no injury" causes of action.  The "no injury" cause of action appears to have originated in the products liability world.  Stymied by the elements necessary to prove classic design defect claims, plaintiffs experimented with claims that certain "defects," while not leading to physical harm, created risk of "unmanifested injury" or "economic harm" by providing plaintiffs with "less than they paid for."  In this way, plaintiffs tried to make manufacturers liable for alleged defects that caused no personal injury whatsoever, but were somehow not as "valuable" as what they claim they should have received.  Over time, the "no injury" class action has gravitated into other areas, most notably into challenges to marketing and labeling and into consumer products as varied as pet products, baby seats, and telephone cards based on the "economic injuries" stemming from their purchase of the respective products rather than any injury suffered from the product’s use.  See, e.g., Rule v. Fort Dodge Animal Hosp., Inc., 604 F. Supp. 2d 288 (D. Mass. 2009); Whitson v. Bumbo, No. 07-05597, 2009 WL 1515597 (N.D. Cal. Apr. 16, 2009); Grayson v. AT&T Corp., 980 A.2d 1137 (D.C. 2009).  In this permutation of the "no injury" theory, an asserted "omission" by the defendant in marketing or labeling is said to have caused a plaintiff to purchase a product that otherwise would not have been purchased or to purchase the product at a higher price than what "should" have been charged.  This simple formulation—omission leads to price inflation leads to injury—has been launched across a range of industries.  While the "no injury" suit has received a fairly hostile reception in the products liability arena, it continues to received mixed reception in other settings, largely because it masquerades under a different name.  In its most classic form, it is an attempt to impose a "fraud-on-the-market" theory outside of the securities context, where the efficient market hypothesis presumptively permits courts to excuse an affirmative showing of reliance.  When applied outside of the securities arena, the no injury claim improperly bypasses elements (such as reliance, causation, and injury) that plaintiffs invariably need to establish under common state law claims.  These types of no injury suits are likely to be the wave of the future.  In certain jurisdictions, the no injury suit might be a creature of statute.  The D.C. Consumer Protections and Procedures Act prohibits unfair and deceptive trade practices and allows plaintiffs to bring suits "on behalf of the General Public."  D.C. Code § 28-3905(k)(1).  It forbids 32 unlawful trade practices, including false, deceptive or misleading advertising, and it declares these practices unlawful "whether or not any consumer is in fact misled, deceived or damaged thereby."  D.C. Code § 28-3904.  Remedies include treble damages or $1,500 per violation, whichever is greater; reasonable attorney’s fees; punitive damages; an injunction against the use of the unlawful trade practice; and, in representative actions, additional relief as necessary.  D.C. Code § 28-3905(k)(1).  The D.C. Court of Appeals recently held that the D.C. Act does not require that a plaintiff suffered an injury-in-fact as a result of a defendant’s trade practices and thus potentially authorizes any person to sue any company for engaging in an unlawful or deceptive trade practice—even if the consumer never purchased a company’s product.  Grayson, 980 A.2d at 1154.  The D.C. Court of Appeals recently granted the defendants’ request for en banc hearing.  989 A.2d 709 (D.C. 2010).  If the D.C. Court of Appeals upholds the decision, D.C. would revert to pre-Proposition 64 law in California, and D.C. would likely become a class action magnet.  Another example is the Florida Deceptive and Unfair Trade Practices Act, Fla. Stat. Ann. § 501.201 et seq., ("FDUTPA") which is designed to "protect the consuming public and legitimate business enterprises from those who engage in unfair methods of competition, or unconscionable, deceptive, or unfair acts or practices in the conduct of any trade or commerce."  Fla. Stat. Ann. § 501.202(2).  A few Florida courts have held that this provision permits individuals to seek injunctive and declaratory relief without ever having purchased the product at issue.  See, e.g., Gritzke v. M.R.A. Holding, LLC, 2002 WL 32107540, at *3-4 (N.D. Fla. Mar. 15, 2002).  The Eleventh Circuit recently granted a 23(f) petition to review a district court order certifying a class action under FDUTPA, in which a key question is whether FDUTPA excuses traditional showings of causation and reliance.  See Fitzpatrick v. Gen. Mills, Inc., 263 F.R.D. 687 (S.D. Fla. 2010). E.  Courts Weigh in on the Eisen Debate and on the Certification of Classes Seeking Monetary Relief Under Rule 23(b)(2) The federal appellate courts continue to define the proper standard for evaluating whether the moving party has satisfied the requirements of Rule 23, particularly where this inquiry overlaps with the merits.  The courts of appeals also exacerbated an already deep conflict over whether and to what extent claims for monetary relief can be certified under Rule 23(b)(2).  In the last 18 months, the Third, Fifth, Seventh, Ninth, Tenth, and Eleventh Circuits have addressed these issues.  1.  The Seventh Circuit Rules That Daubert Applies to Expert Evidence at the Class Certification Stage On April 7, 2010, the Seventh Circuit also weighed in on the standard for evaluating expert testimony at the class certification stage in American Honda Motor Co. v. Allen, 600 F.3d 813 (7th Cir. 2010).  In Allen, the district court had certified a Rule 23(b)(3) class of purchasers of a certain type of Honda vehicle who alleged a design defect.  Id. at 814.  To support their argument on predominance, plaintiffs "relied heavily on a report prepared by … a motorcycle engineering expert."  Id.  The district court "concluded that it was proper to decide whether the report was admissible prior to certification" and noted reservations about the reliability of the standards employed in the report, but it declined to exclude the report entirely because of the early stage of the proceedings.  Id. at 814-15.  Honda appealed the certification order, contending that the district court should have performed a full Daubert analysis.  The Seventh Circuit agreed, reversed the certification grant, and remanded to the district court, holding that "when an expert’s report or testimony is critical to class certification … a district court must conclusively rule on any challenge to the expert’s qualifications or submissions prior to ruling on a class certification motion.  That is, the district court must perform a full Daubert analysis before certifying the class if the situation warrants."  Id. at 815-16. 2.  The Fifth Circuit Demands Rigorous Analysis of Loss Causation at the Certification Stage, Including Weighing Conflicting Expert Testimony In Fener v. Belo Corp., 579 F.3d 401 (5th Cir. 2009), the Fifth Circuit held that plaintiffs must present expert testimony in support of a motion for class certification as part of proving loss causation in a securities case.  Plaintiffs’ original certification motion did not meet Fifth Circuit standards for proving loss causation because they submitted only SEC reports, stock-price charts, analyst reports, and other similar information, but not the requisite expert testimony and supporting analytical research or event study necessary to show loss causation.  Id. at 409.  Although plaintiffs belatedly submitted an expert report and event study with their reply brief, the Fifth Circuit found this evidence fatally flawed and affirmed the district court’s denial of certification.  The court held that plaintiffs and their expert did not meet plaintiffs’ burden to provide "’evidence linking the culpable disclosure to the stock-price movement.’"  Id. at 410.  In so holding, the Fifth Circuit reinforced the trend requiring rigorous analysis at the class certification stage, as the court demanded expert testimony and appropriate accompanying evidence at the class certification stage at least in connection with a loss causation inquiry and affirming the denial of certification where such evidence was either lacking altogether or could not hold up under the court’s scrutiny. 3.  The Third Circuit Reverses Certification of Largest Class Action in the History of the Americans with Disabilities Act In Hohider v. United Parcel Service, Inc., 574 F.3d 169 (3d Cir. 2009), the Third Circuit reversed a district court order certifying the largest class in the history of the Americans with Disabilities Act.  Gibson Dunn briefed and argued the case before the Third Circuit.  The appeal involved an order certifying a nationwide class of all current and former employees of United Parcel Service, Inc. who took medical leave and were allegedly deterred from returning to work.  Plaintiffs alleged, among other things, that UPS had violated the Americans With Disabilities Act (ADA) by enacting a "100% healed policy" in which employees were not permitted to work following an injury without a full medical release.  The United States District Court for the Western District of Pennsylvania certified the class.  The Third Circuit reversed, holding that when inherently individualized claims, such as an ADA failure-to-accommodate claim, require sufficiently individual determinations at the liability stage that they lack cohesion and are not brought on "grounds generally applicable to the class," a class should not be certified under Rule 23(b)(2).  The Third Circuit confirmed that in the Rule 23(b)(2) context, as in the Rule 23(b)(3) context, rigorous analysis of each of the Rule 23 elements is required at the class certification stage.  Hohider is thus another important addition to the appellate decisions requiring district courts to conduct a rigorous analysis of the Rule 23 factors at the class certification stage, including by resolving disputed factual questions and competing expert testimony. The Hohider decision also speaks to the limits of Rule 23(b)(2) certification.  Rule 23(b)(2), by its terms, authorizes a class action if "the party opposing the class has acted on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole."  In addressing the monetary relief sought by the putative plaintiff class—including punitive and compensatory damages, and backpay—the Third Circuit joined other courts of appeals in barring Rule 23(b)(2) certification in cases in which substantial monetary relief is sought.  Importantly, in questions not previously considered in that Circuit, the Hohider court confirmed that compensatory and punitive damages cannot be obtained on a classwide basis under Rule 23(b)(2).  Similarly, with respect to backpay claims, the Court held that it is error to fail to treat such claims as monetary relief at the class certification stage in determining whether monetary relief predominates. 4.  The En Banc Ninth Circuit Votes 6-5 to Affirm the Controversial Certification of Class Under Rule 23(b)(2) Against Wal-Mart The Ninth Circuit’s most significant class action decision since our last update is the controversial affirmance of the largest class action in history—the certification under Rule 23(b)(2) of a Title VII class purportedly seeking billions of dollars in backpay, among other forms of relief.  Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (2010), cert. petition pending.  Gibson Dunn is counsel of record in this case and has sought Supreme Court review of the decision.  The Ninth Circuit’s decision deepens conflicts across a range of Rule 23 issues, including whether and to what extent classes seeking monetary relief (such as backpay) can be certified under Rule 23(b)(2) and whether and to what extent Daubert and contested expert and evidentiary issues must be resolved at the class certification stage (even if they conflict with the merits).  If the Supreme Court accepts the case, it will have an opportunity to address a host of core Rule 23 issues that have divided the circuits both in labor class actions and beyond. 5.  The Tenth and Eleventh Circuits Require Rigorous Inquiry into Rule 23 Factors at Certification Stage Even If It Overlaps with a Merits Inquiry The Tenth and Eleventh Circuits joined the trend requiring a district court to make the necessary Rule 23 findings at the class certification stage, even if those issues are intertwined with the merits.  See Vallario v. Vandehey, 554 F.3d 1259, 1266 (10th Cir. 2009) (holding no "’impermeable wall’ exists between the merits of a case and a district court’s decision whether to certify a class"); Williams v. Mohawk Indus., Inc., 568 F.3d 1350, 1358 (11th Cir. 2009) ("Although a court should not determine the merits of a claim at the class certification stage, it is appropriate to consider the merits of the case to the degree necessary to determine whether the requirements of Rule 23 will be satisfied.  A district court must consider, for example, how the class will prove causation and injury and whether those elements will be subject to class-wide proof."). F.  The Supreme Court Leaves the Door Open for Class Arbitration Agreements and Class Waivers in Consumer Agreements The enforceability of class action waivers continues to be a hot topic, and federal and state courts continue to invalidate class action waivers under several different theories.  The most common line of attack is that class action waivers are unconscionable and that they violate state public policy.  Courts that invalidate waivers under these theories are generally concerned that enforcing the waivers would deter plaintiffs from redressing alleged violations of their rights because the cost of individual arbitration would exceed the expected damages that they would receive. In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), the Supreme Court held that "a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."  Id. at 1775.  However, the Court left several important issues unresolved.  For example, it did not decide "what contractual basis may support a finding that the parties agreed to authorize class-action arbitration."  Id. at 1776 n.10.  Because Stolt-Nielsen construed federal law, states purporting to recognize "a ‘default rule’ under which an arbitration clause is construed as allowing class arbitration in the absence of express consent," id. at 1769, may not feel bound to construe silence as precluding class arbitration.  Nor did the Court address the question, left open by the lack of a majority in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), of whether an arbitrator or a court should decide if an arbitration clause contains an agreement allowing class arbitration. In the wake of its decision in Stolt-Nielsen, the Court vacated and remanded a Second Circuit decision that had invalidated class action waivers in arbitration clauses under the Federal Arbitration Act.  See In re Am. Express Merchants’ Litig., 554 F.3d 300, 319-20 (2d Cir. 2009), vacated and remanded by 30 S. Ct. 2401 (2010).  The Second Circuit had concluded that class action waivers are not per se unenforceable, but that a waiver would deprive the plaintiffs of substantive rights because the claims were of very low value and not worth pursuing through individual claims.  Id. at 304.  It is unclear what effect the Supreme Court’s opinion in Stolt-Nielsen will have because the Second Circuit based its decision that the arbitration provision was unenforceable on contract law.  Id. at 320 ("Section 2 of the FAA … provides that an agreement to arbitrate ‘shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’  Given that we believe that a valid ground exists for the revocation of the class action waiver, it cannot be enforced under the FAA.").[9] Relatedly, the United States Supreme Court granted certiorari to the Ninth Circuit in AT&T Mobility LLC v. Concepcion, 130 S. Ct. 3322 (2010), which presents the question of "[w]hether the Federal Arbitration Act preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures—here, class-wide arbitration—when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims."  The Ninth Circuit in Laster v. AT&T Mobility LLC, 584 F.3d 849, 856-59 (9th Cir. 2009), had answered this question in the negative. G.  The Rise of Ascertainability as an Independent Check on Class Certification Rule 23 by its express terms authorizes suits by "one or more members of a class" to bring suit provided that the requirements of Rule 23(a) and (b) are met.  To have a "class," its members must be ascertainable.  Although "ascertainability" is not an enumerated element of Rule 23(a) and (b), many defendants have stated that it is either an antecedent requirement for a class action, an implied requirement of Rule 23, or a requirement that flows directly and necessarily from the enumerated Rule 23(a) and (b) factors.  See, e.g., John v. Nat’l Sec. Fire & Cas. Co., 501 F.3d 443, 445 (5th Cir. 2007) ("The existence of an ascertainable class of persons to be represented by the proposed class representative is an implied prerequisite of Federal Rule of Civil Procedure 23."); Romberio v. Unumprovident Corp., 2009 WL 87510 at *7 (6th Cir. Jan. 12, 2009) (same); see also Weiner v. Snapple Bev. Corp., 2010 U.S. Dist. LEXIS 79647, at *39-40 (S.D.N.Y. Aug. 3, 2010) (noting the implied requirement of ascertainability "turns on the definition of the proposed class"); Grimes v. Rave Motion Pictures Birmingham, LLC, 264 F.R.D. 659, 663 (N.D. Ala. 2010) ("[C]ourts have universally recognized that the first essential ingredient to class treatment is the ascertainability of the class.").  The ascertainability concept requires a plaintiff to demonstrate—at the time of certification-that the class can be defined in a sufficiently objective fashion as to ensure that class members can be identified.  Defendants have increasingly relied on the ascertainability requirement to attack class definitions that by their terms encompass both injured and uninjured persons in the class definition, or that ex ante could not permit the court to decide "who is in and who is out" without individualized proof.[10]  As discussed below, this is an increasingly common and promising basis for defendants opposing certification of state class actions under California’s Unfair Competition Law. H.  The Courts Grapple With Preclusion Issues in Class Cases Although the Supreme Court has stated that preclusion principles operate the same way in class actions as in individual actions, in practice this has proved a more complicated precept to state than to apply.  See Cooper v. Fed. Reserve Bank of Richmond, 467 U.S. 867, 874 (1984) ("There is of course no dispute that under elementary principles of prior adjudication a judgment in a properly entertained class action is binding on class members in any subsequent litigation.").  The preclusive effect of factual findings and/or judgments in class actions continues to gain prominence, as would-be plaintiffs try to escape the preclusive effect of earlier class action settlements, or try to invoke estoppel against defendants based on litigation victories in earlier class litigation.  Defendants also have tested the preclusive effect of federal court orders denying class certification when would be-plaintiffs plead the same theory in a follow-on class action in state court. Many of these issues remain in flux.  In Brown v. R.J. Reynolds Tobacco Co., 611 F.3d 1324 (11th Cir. July 22, 2010), the Eleventh Circuit added the latest chapter to the confusion created by the Supreme Court of Florida’s ruling in Engle v. Liggett Group., Inc., 945 So. 2d 1246 (Fla. 2006) that so-called Phase I findings in a class action suit by all smokers in Florida or their survivors who suffered from "medical conditions … caused by their addiction to cigarettes that contain nicotine" could have preclusive effect in follow-on litigation.  The Phase I findings were general in scope and involved purportedly common issues concerning the general health effects of smoking.  Brown, 611 F.3d at 1327.  In Engle, the Supreme Court of Florida held that, although the plaintiffs could not prosecute their claims as a class, the general Phase I findings nonetheless could have "res judicata" effect in individual follow-on cases.  The plaintiffs have sought to convert this statement into a federal court ruling estopping defendants from contesting various elements of the plaintiffs’ damages claims.  In Brown, the Eleventh Circuit held that the scope of the factual findings in Engle remained undetermined, and that "[u]ntil the scope of the factual issues decided in the Phase I approved findings is determined, it is premature to address whether those findings by themselves establish any elements of the plaintiffs’ claims."  Id. at 1336.   The case has been remanded to the district court, where these issues will be vetted anew. In Baycol Products Liability Litigation, 593 F.3d 716 (8th Cir. 2010), the court held that a federal court order denying the certification of a nationwide class seeking a refund on a cholesterol therapy had issue preclusive effect in a follow-on state court suit that sought to certify a class of West Virginia purchasers of the drug.  Baycol relies on the Seventh Circuit’s decision in In re Bridgestone/Firestone, 333 F.3d 763 (7th Cir. 2003), which likewise accorded preclusive effect to an order denying class certification in follow-on state litigation.  Baycol and Bridgestone/Firestone should help defendants defeat second-bite-at-the-apple attempts to assert class claims that were defeated in federal court, but, as with many class issues, the circuits appear to take different views on these issues, with at least part of the disagreements stemming from views about a district court’s power to enjoin later state court proceedings under the relitigation exception to the Anti-Injunction Act.  See, e.g., J.R. Clearwater, Inc. v. Ashland Chem. Co., 93 F.3d 176, 179 (5th Cir. 1996) (holding that a federal district court that has denied class certification may not enjoin certification of a similar class in state court); In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 134 F.3d 133, 146 (3d Cir. 1998) (finding that denial of certification is not preclusive because it is discretionary, procedural decision). I.  Courts Require Further Guidance as to the Degree to Which Settlement Classes Should Be Treated Differently at the Certification Stage In Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), the Supreme Court issued its most definitive statement to date concerning the degree to which a court should analyze the Rule 23 class certification factors differently when evaluating a settlement class as opposed to a litigation class.  The Court acknowledged that "[s]ettlement is relevant to class certification."  Id. at 619.  In particular, when "[c]onfronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems [in connection with an inquiry under Rule 23(b)(3)(D)], for the proposal is that there be no trial."  Id. at 620.  However, the Court insisted that "other specifications of the Rule—those designed to protect absentees by blocking unwarranted or overbroad class definitions—demand undiluted, even heightened, attention in the settlement context."  Id.  The sprawling class of putative class members under the Court’s review, each of whom "was, or some day may be, adversely affected by past exposure to asbestos products manufactured by one or more of 20 companies" id. at 597, could not meet these "other specifications."  In particular, the named representatives could not adequately represent all of the many subgroups in the class, many of which had potentially conflicting interests. Despite the Court’s guidance in Amchem, lower courts have applied these principles differently.  Some courts have not hesitated to view settlement classes as critically different from litigation classes, without appearing to confine their application of that distinction to issues of manageability.  See, e.g., In re Mexico Money Transfer Litig., 267 F.3d 743, 747 (7th Cir. 2001); Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 440 (4th Cir. 2003); In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 529 (3d Cir. 2004).  At least some of these courts have viewed Amchem as primarily addressing adequacy issues, suggesting that the difference between settlement and litigation classes is still relevant at the certification stage, as long as the named representatives adequately represent the class.  See, e.g., In re Prudential Ins. Co. of Am. Sales Practice Litig. Agent Actions, 148 F.3d 283, 308 (3d Cir. 1998).  Other courts have appeared to view Amchem as allowing considerably less flexibility in this regard.  See, e.g., Hanlon v. Chrysler Corp., 150 F.3d 1011, 1023-24 (9th Cir. 1998).  Recently, in Sullivan v. DB Investments, Inc., 2010 WL 2736947 (3d Cir. July 13, 2010), the Third Circuit made clear that parties could not use the certification of a settlement class to provide a cause of action to subgroups of plaintiffs who would have had no individual cause of action whatsoever under applicable laws and thus could not in effect "use class action procedures to create a bridge to recovery where otherwise none would exist."  Id. at *14 n.16.  The Third Circuit vacated this decision pending an en banc hearing.  2010 WL 3374167 (3d Cir. Aug. 27, 2010). Resolution of these issues is particularly critical in that some courts have held defendants to have waived their Rule 23(a) and (b) defenses (other than manageability) to certification of a litigation class if they support the certification of a settlement class, but the settlement is not approved.  For example, in Carnegie v. Household International, Inc., 376 F.3d 656 (7th Cir. 2004), cert. denied, 543 U.S. 1051 (2005), the court of appeals reversed the district court’s approval of a class settlement.  The district court to whom the case was reassigned then certified what was essentially the same class.  The defendants appealed this certification ruling, but the Seventh Circuit held that they were precluded by the doctrine of judicial estoppel from challenging the adequacy of the class due to their endorsement of a settlement class.  Id. at 659-61.  The court reasoned that the policy underlying the doctrine "is fully engaged when a party obtains a judgment on a ground that it later repudiates," which was what the defendants had done here by first obtaining the district court judgment approving the settlement class, and then trying to dispute the propriety of a litigation class.  Id. at 660.  In light of these and other difficulties, the Supreme Court may well weigh in further on this issue in the near future. III.  Key Developments and Unresolved Issues (State Courts) A.  California’s Proposition 64 California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200 et seq., the "UCL") is a popular statute among plaintiffs’ counsel in class action litigation that authorizes plaintiffs to sue for conduct deemed "unlawful" (violations of virtually any law, even if the underlying statute provides no private right of action), "fraudulent" (conduct that is "likely to deceive" reasonable consumers), and "unfair" (defined vaguely and inconsistently by appellate courts).  In 2004, following several high-profile abuses of the UCL,[11] California voters approved Proposition 64, a statewide initiative that modified some of the most pernicious aspects of the UCL by requiring named plaintiffs to demonstrate (1) that they suffered "injury in fact," (2) and "lost money or property," (3) "as a result of the unfair competition," and to otherwise comply with the procedural requirements governing class actions in California.  B.  Tobacco II and Subsequent Applications In re Tobacco II Cases, 46 Cal. 4th 298 (2009), provided the Supreme Court of California’s first opportunity to construe and apply the Proposition 64 standing amendments.  Those cases involved putative UCL class actions claiming that the defendants engaged in a long-term advertising campaign that deceived consumers about the health risks of tobacco products.  The trial court ruled that Proposition 64 required each class member to demonstrate that he or she purchased cigarettes from the defendants and did so because of the allegedly deceptive advertising.  Because such a showing by each class member would mean that individual issues would predominate over any common questions, the trial court de-certified the class.  The California Court of Appeal affirmed. The California Supreme Court granted review to consider two questions concerning Proposition 64: 1.  Who, in a UCL class action, must comply with Proposition 64’s standing requirements of establishing "injury in fact," the class representatives or all unnamed class members? 2.  What is the causation requirement for purposes of establishing standing under the UCL, and in particular what is the meaning of the phrase "as a result of"?  1.  Standing of Absent Class Members The Supreme Court issued a 4-3 opinion that was a mixed bag for defendants.  In response to the first question, the Tobacco II majority held that only the named class representatives—and not absent class members—must satisfy the standing requirements of Proposition 64.  46 Cal. 4th at 324.  The Court determined that the ballot materials that accompanied Proposition 64 did not reflect voter intent to alter "accepted principles" of class action procedure that analyze standing only in regards to class representatives.  Id. at 321.[12] As the dissent in Tobacco II observed, however, this rule is not so "well-established" in the federal courts.  Id. at 331-32 (Baxter, J., dissenting).  In fact, both state and federal courts have "stressed that the definition of a class cannot be so broad as to include persons who would lack standing to bring suit in their own names."  Id. at 331 (Baxter, J., dissenting).  As more state law class actions are removed to federal court under the Class Actions Fairness Act (CAFA), defendants will have an opportunity to challenge Tobacco II‘s holding that only named class representatives must establish standing.  Under Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), and its progeny, federal courts sitting in diversity must apply federal procedure, including federal standing rules.  Defendants may argue that because the Supreme Court of California has twice stated that Proposition 64 modified only procedural aspects of the UCL, see Tobacco II, 46 Cal. 4th at 314; Californians for Disability Rights v. Mervyn’s, LLC, 39 Cal. 4th 223, 227 (2006), it should have no application at all in federal UCL litigation under Erie.[13]  Despite the Tobacco II majority’s insistence that established federal law requires that only named plaintiffs establish standing, there are a number of authorities to the contrary.  In 2009, the Northern District of California dismissed a class action suit brought by a class including all purchasers of a certain Apple computer on the grounds that some class members lacked standing and "[n]o class may be certified that contains members lacking Article III standing….  The class must therefore be defined in such a way that anyone within it would have standing."  Sanders v. Apple, Inc., 672 F. Supp. 2d 978, 991 (N.D. Cal. 2009) (citing Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006)). 2.  Reliance Next, the Tobacco II majority concluded that the "as a result of" term demands proof of "actual reliance … in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions."  46 Cal. 4th at 306.  However, the majority limited this reliance requirement in several major respects: First, although a plaintiff must show that the misrepresentation or omission was an "immediate" cause of the injury, the plaintiff need not establish that the misrepresentation was the only such cause.  Id. at 326.  Second, the court may presume reliance if the misrepresentation at issue is "material."  Id. at 327.  The majority explained that a misrepresentation is material "if ‘a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question’ …, and as such materiality is generally a question of fact unless the ‘fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.’"  Id. (citations omitted).  Third, when a plaintiff "alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements."[14]  Id. at 328.  Fourth, "an allegation of reliance is not defeated merely because there was alternate information available to the consumer-plaintiff, even regarding an issue as prominent as whether smoking causes cancer."  Id. Fifth, consistent with its normal practice of deciding UCL questions as narrowly as possible, the Court limited its holding to private UCL claims alleging fraudulent business practices.  The majority observed that an actual reliance requirement may have "no application" in cases involving "unlawful" or "unfair" business practices, id. at 325 n.17, or suits seeking only injunctive relief, id. at 320 n.13.  The Court also limited its holding to specific types of fraud allegations—namely, "a fraud theory involving false advertising and misrepresentations to consumers."  Id. at 325 n.17.  One fertile anticipated area of litigation will be how lower courts apply this ruling to UCL claims based on other theories of fraud, such as concealment. Finally, and apart from the standing question, a UCL plaintiff in federal court must still satisfy Federal Rule of Civil Procedure 9(b) and plead the causation elements of a UCL fraud claim with specificity, even if such specificity is not required in California state court.  See, e.g., In re Actimmune Mktg. Litig., No. 08-02376, 2009 WL 3740648, at *13 (N.D. Cal. Nov. 6, 2009). 3.  Applications of Tobacco II The federal and state courts have not applied the divided decision in Tobacco II in a consistent manner.  Immediately after the decision, many defense counsel spilled a lot of ink lamenting the majority’s evisceration of Proposition 64 and predicting a return to the pre-2004 days of boundless standing.  But, while Tobacco II addressed the issue of who in a class must establish standing, it also made clear that even if named plaintiffs establish standing, a trial court must still determine if a proposed class meets California’s other requirements for class certification, including an ascertainable class with a defined community of interest, a common set of legal and factual issues, and class claims that are typical of those of the named plaintiffs.  Consequently, many of the same arguments and much of the same evidence that defendants would use to attack the standing of absent class members may be relevant to ascertainability, typicality, predominance, and the other Rule 23 factors.  Indeed, since the Tobacco II decision, several courts have applied this analysis to deny certification. For example, in Cohen v. DirecTV, Inc., 178 Cal. App. 4th 966 (2009), the California Court of Appeal affirmed the trial court’s denial of a nationwide UCL false advertising class on the grounds that common factual issues did not predominate because, among other problems, each class member would need to prove that DirecTV’s alleged false advertising induced the purchase of high-definition services.  Id. at 979-80.  The court held that Tobacco II did not alter this conclusion, because that decision did not assess the issue of commonality, which "is a matter addressed to the practicalities and utilities of litigating a class action in the trial court."  Id. at 981.  Even if only a named plaintiff would need to establish reliance for standing purposes, this did not eliminate the requirement that each class member show that he or she was actually induced by the alleged misrepresentations to purchase services from DirecTV.  Id.  The California Supreme Court denied the plaintiff’s petition for review and de-publication of Cohen. In Hodes v. Van’s International Foods, No. 09-01530, 2009 WL 2424214 (C.D. Cal. July 23, 2009), the district court also denied certification in a UCL action because the proposed class failed to satisfy Rule 23(b)(3)’s predominance requirement.  Id. at *4.  Assuming that Tobacco II required only that a named plaintiff demonstrate reliance in a UCL class action, the court concluded that common questions did not predominate over a host of individual issues including who purchased the defendant’s products, which type of product was purchased, how many products were purchased, and whether the purchased product was defective in a relevant way.  Id.[15] C.  The Meaning of "Injury In Fact" and "Lost Money Or Property" Tobacco II addressed both who in a putative class must establish standing, and the meaning of the term "as a result of" under Proposition 64.  However, that decision did not interpret Proposition 64’s other requirements of "injury in fact" and "lost money or property."  In an opinion focused on questions of antitrust standing, the Court also addressed Proposition 64’s "lost money or property" requirement in Clayworth v. Pfizer, Inc., 49 Cal. 4th 758 (2010).  In that case, a group of pharmacies brought antitrust and unfair competition claims against a group of major pharmaceutical companies and their trade association.  Id. at *2.  The defendants argued that the pharmacies lacked standing to pursue their UCL claims because they "passed on" any price increases to their customers, and thus they did not lose any money or property as required by Section 17204.  Id. at 766.  Reversing a grant of summary judgment for the defendants, the Court rejected this argument, holding that the plaintiffs "lost money" in the form of "the overcharges they paid."  Id. at 788.   The Court also aligned itself with intermediate appellate decisions rejecting the argument that plaintiffs may not pursue restitution under the UCL if they did not purchase the product or service "directly" from the defendant.  Id. ("Pharmacies have established standing [for UCL purposes] … Pharmacies acted as retailers for Manufacturers’ drugs and thus indirect business dealings with Manufacturers.") (citing Shersher v. Super. Ct., 154 Cal. App. 4th 1491, 1499-1500 (2007)). The Court also addressed an important question that had divided some lower courts in the wake of Proposition 64:  can a plaintiff who is otherwise unable to establish an entitlement to restitution maintain a claim for injunctive relief after Proposition 64?  Some defendants had argued that the "lost money or property" requirement of  Section 17204 to establish private party standing entailed that plaintiffs could not seek injunctive relief unless they could also seek restitution.  After all, Section 17203 specifically requires that private plaintiffs pursuing injunctive relief must satisfy the "standing requirements" of Section 17204.  These issues usually arise in competitor cases, where a plaintiff competitor is unable to show an entitlement to restitution and is limited to pursuing injunctive relief through the UCL.  But the unanimous Court ruled that private plaintiffs who establish standing under Section 17204 are also free to seek injunctive relief, because "the right to seek injunctive relief under section 17203 is not dependent on the right to seek restitution; the two are wholly independent remedies."  Id. at 790.  In addition, the Court will address the meaning of "lost money or property" in the closely watched Kwikset Corp. v. Superior Court, which is one of several recent cases challenging lock sets (and related products) for allegedly misrepresenting their status as "Made in the U.S.A."  The Court of Appeal held that the plaintiffs had suffered injury in fact insofar as the plaintiffs alleged that they would have not bought Kwikset’s locks but for the alleged false labeling.  90 Cal. Rptr. 3d 123, 129 (Cal. Ct. App. 2009), review granted and opinion superseded, 97 Cal. Rptr. 3d 271 (Cal. 2009).  But the court rejected plaintiffs’ argument that they had "lost money or property" "as a result of" any fraudulent business practice because they received "the benefit of their bargain"—a fully functioning lock set for which they paid no premium—and therefore suffered no restorable economic loss.  Id. at 129-30.  The Supreme Court of California granted review to determine the meaning of the "injury in fact" and "lost money or property" requirements of Proposition 64. Kwikset is fully briefed and awaiting argument. D.  Rise of Public-Private UCL Suits In addition to imposing stricter standing requirements, Proposition 64 also imposed two other important changes in private UCL actions:  first, private plaintiffs seeking relief on behalf of others must comply with California’s class certification rules, and second, the initiative barred private recovery of civil penalties.  Since the passage of Proposition 64, enterprising plaintiffs have begun to partner with public prosecutors to avoid these limitations altogether.  We anticipate an increased growth in these alliances in the near term. On July 26, 2010, the Supreme Court of California took an important step in facilitating these partnerships by expanding the authority of public entities to hire private counsel on a contingent fee basis.  See County of Santa Clara v. Super. Ct., 50 Cal. 4th 35 (2010).  While that particular case involved nuisance claims, the Court’s ruling encourages private-public partnerships as long as "the government attorneys would maintain full control over the litigation."  Id. at 47.  Accordingly, "retention of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise the litigation."  Id. at 58.  The Court also explained that governmental attorneys must directly supervise the litigation and make "discretionary decisions vital to an impartial prosecution."  Id. at 59.  In particular, contingent fee agreements "must provide: (1) that the public-entity attorneys will retain complete control over the course and conduct of the case; (2) that government attorneys retain a veto power over any decisions made by outside counsel; and (3) that a government attorney with supervisory authority must be personally involved in overseeing the litigation."  Id. at 64. E.  Class Action Waivers Just as federal courts have expressed concerns about class action waivers, so too have state courts found them problematic.  For example, the Massachusetts Supreme Court, in Feeney v. Dell, Inc., held that class action waivers in consumer contracts are unconscionable and unenforceable because they are contrary to Massachusetts public policy, which "strongly favors [consumer protection law] class actions" and "the aggregation of small consumer protection claims."  908 N.E. 2d 753, 762 (Mass. 2009).  On the other side of the country, California state courts continued the trend of invalidating class action waivers and struck down class action waivers in employment agreements, even when individual claims could approach $30,000.  See Franco v. Athens Disposal Co., 171 Cal. App. 4th 1277, 1282, 1295 (2009); Sanchez v. W. Pizza Enters., Inc., 172 Cal. App. 4th 154, 181 (2009). Despite these cases, there were some encouraging developments for class action defendants.  In Cronin v. CitiFinancial Services, Inc., a Third Circuit panel distinguished Homa (discussed above) and found that a class action waiver in a consumer loan agreement was enforceable under Pennsylvania law.  352 F. App’x. 630, 633 (3d Cir. 2009).  The court interpreted Pennsylvania law as not deeming all class action waivers per se unconscionable, but only those where "the particular class action waiver effectively ensures that a defendant will never face liability for wrongdoing."  Id. at 636.  Federal district courts in Colorado, West Virginia, and Mississippi upheld class action waivers and rejected state law unconscionability arguments.[16] F.  Eisen and Predominance Debates State courts also continue to disagree on the extent to which trial courts may delve into the merits of a case when evaluating class certification criteria.  As noted in last year’s update, a number of state courts have adopted the federal approach of resolving factual issues at the certification stage, even if they overlap with the merits, so long as the analysis is limited to what is necessary to make requisite certification determinations.  See, e.g., Cruz v. Unilock Chicago, Inc., 892 N.E.2d 78, 92 (Ill. App. Ct. 2008).  However, some state courts have refused to adopt the federal approach.  See, e.g., Gen. Motors Corp. v. Bryant, 374 285 S.W.3d 634, 642 (Ark. 2008); In re S.D. Microsoft Antitrust Litig., 657 N.W.2d 668, 675-77 (S.D. 2003); Howe v. Microsoft Corp., 656 N.W.2d 285, 291, 293-95 (N.D. 2003).  The last year brought more division over the issue. In Mattson v. Montana Power Co., the Montana Supreme Court adopted the IPO approach to class certification, explaining "that the approach of the federal courts [in determining class certifications] is sound."  215 P.3d 675, 694 (Mont. 2009).  In Whitaker v. 3M Co., a Minnesota Court of Appeal also adopted the federal approach.  764 N.W.2d 631 (Minn. Ct. App. 2009).  The court held that "parties moving for class certification under Minn. R. Civ. P. 23 must prove, by a preponderance of the evidence, that the certification requirements of the rule are met.  This means that district courts must address and resolve factual disputes relevant to class-certification requirements, including disputes among expert witnesses."  Id. at 640. The Michigan Supreme Court, however, refused to adopt "the federal ‘rigorous analysis’ requirement" in Henry v. Dow Chemical Co., 772 N.W.2d 301, 311 (Mich. 2009).  Instead, the court explained that "when it is necessary to look beyond a party’s assertions to determine whether class certification is proper, the courts shall analyze any asserted facts, claims, defenses, and relevant law without questioning the actual merits of the case."  Id. at 312.  Similarly, in Wright v. Honeywell International, Inc., 989 A.2d 539, 552 (Vt. 2009), the Vermont Supreme Court explained that "[a]lthough trial courts must assure that questions common to the putative class predominate … they must not rigidly apply Rule 23 so as to prematurely determine the merits of the case and deny a class of indirect consumers … the opportunity to present their case to a jury."  State courts are likely to continue to struggle with the issue in the coming year. G.  The Extraterritorial Application of the UCL and Other Consumer Protection Statutes In 2008, the Ninth Circuit held that the UCL "does not apply to allegedly unlawful behavior occurring outside California causing injury to nonresidents of California."  Sullivan v. Oracle Corp., 547 F.3d 1177, 1187 (9th Cir. 2008).  The Ninth Circuit subsequently certified the case for review by the California Supreme Court.  Sullivan v. Oracle Corp., 557 F.3d 979 (9th Cir. 2009).  Among the issues before the California Supreme Court is whether an out-of-state plaintiff can assert a claim for a violation of the UCL predicated on a California employer’s violation of the Federal Fair Labor Standards Act.  No decision has been issued in the case, but a reversal of the Ninth Circuit’s original decision in Sullivan could re-invigorate efforts by the plaintiffs’ bar to file nationwide class actions predicated solely on UCL violations where there is no discernable connection to California.  Similarly, in January 2010, the Washington Supreme Court held that the Washington Consumer Protection Act could not be applied in extraterritorial fashion to a putative nationwide class of AT&T Wireless consumers.  The named plaintiffs in Schnall v. AT&T Wireless Services, Inc., 225 P.3d 929 (Wash. 2010), alleged that the company misled consumers throughout the country when it billed them for a charge that was not included in the advertised monthly rates and was not described clearly in billing statements.  The Washington Supreme Court upheld choice of law provisions in the applicable contracts that categorized consumers by area codes, and it reversed the Court of Appeals’ decision approving certification of a nationwide class.  Among other things, the Washington Supreme Court observed that "nothing in our law indicates that [Washington Consumer Protection Act] claims by nonresidents for acts occurring outside of Washington can be entertained under the statute.  …  This geographic and jurisdictional limitation originates in the [Act’s] history as a tool used by the State attorney general to protect the citizens of Washington."  Id. at 938.  See also Morrissey v. Nextel Partners, Inc., 2009 WL 400030, at *12 (N.Y. Sup. Ct. Feb. 19, 2009) (declining to certify a putative multi-state class based on allegations concerning cell phone subscribership agreements, noting that the court would be "precluded from applying New York consumer protection laws to claims arising out-of-state" in the class action context, and declining to interpret at least thirty other states’ consumer protection statutes). V.  Conclusion  Class action filings will undoubtedly continue full speed ahead.  Plaintiffs may begin to concentrate these filings even more in particular jurisdictions with plaintiff-friendly laws, especially when those jurisdictions willingly apply those laws to residents of other states.  In the consumer class action context, the Ninth Circuit—already surging ahead of all other circuits in relevant filings—may increase this lead if its courts apply California’s newly interpreted Unfair Competition Law even beyond that state’s borders.  One way or the other, we expect the U.S. Supreme Court to weigh in soon to resolve some deepening variances between the circuits in the application of Rule 23 and in the proper approach towards other class action issues, such as settlement-only class certifications.  __________________________   [1]  John Coffee, Jr. & Daniel Wolf, Class Certification:  Developments over the Last Five Years, BNA Class Action Litigation Report (Nov. 13, 2009) at 60.  See also id. ("'[O]nly some basic compromises (such as the acceptance of partial certification) seem likely to maintain it as a broad form of litigation practice.")  [2]  Robert W. Fischer, Jr., "California Tops Litigation Wave," L.A. Daily Journal, December 2, 2009.  [3]  Circuit breakdowns derived from data received by Gibson Dunn on request from the Federal Judicial Center on March 5, 2009.  Note that consumer class action data may be somewhat affected by "the addition during the [FJC] study period of a new nature of suit code for cases based on federal debt collection and credit reporting statutes . . . . "  See Emery G. Lee III & Thomas E. Willging, The Impact of the Class Action Fairness Act of 2005 on the Federal Courts, Federal Judicial Center, April 2008, at 4.  [4]  See Hilary Hehman, Findings of the Study of California Class Action Litigation, 2000-2006: First Interim Report, at 3 (Fig. 1) (March 2009).  [5]  These statistics are based on reports generated from the Superior Courts for the Counties of Los Angeles, Orange, San Diego, and Alameda, which showed the following levels of class action filings from 2005 to 2009:   2005 2006 2007 2008 2009 Alameda 60 34 52 53 50 Los Angeles 516 573 717 802 773 Orange County 132 120 102 168 (not available) San Diego (not available) 100 135 171 TOTAL 708 727 971 1158 994   The authors thank the Hon. Carl J. West, Peter D. Lichtman, and Charles W. McCoy of the Los Angeles County Superior Court, and the Hon. Kevin Enright of the San Diego County Superior Court, for sharing these data.   [6]  See, e.g., Salazar v. Avis Budget Group, Inc., No. 07-0064, 2008 WL 5054108, at *5 (S.D. Cal. Nov. 20, 2008) (remanding action after denying class certification because that decision represented the court’s determination that "there is not-and never was-CAFA diversity jurisdiction"); Ronat v. Martha Stewart Living Omnimedia, Inc., No. 05-520, 2008 U.S. Dist. LEXIS 91814, at *23 (S.D. Ill. Nov. 12, 2008) (holding that CAFA jurisdiction no longer exists after denial of class certification, because 28 U.S.C. § 1332(d)(8) provides that this subsection "shall apply to any class action before or after the entry of a class certification order by the court with respect to that action").  [7]  See United Steel v. Shell Oil Co., 602 F.3d 1087, 1091-92 (9th Cir. 2010); Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805, 807 (7th Cir. 2010); Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1268 n.12 (11th Cir. 2009).  [8]  Compare In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 2010 WL 2756947, at *1-2 (N.D. Ohio Jul. 12, 2010) (holding that an Ohio law prohibiting class actions where the defendant’s conduct had not been declared deceptive or unconscionable by the Attorney General or an Ohio court “is intimately interwoven with the substantive remedies available under the OCSPA,” and therefore enforceable under Justice Steven’s analysis in Shady Grove) and Bearden v. Honeywell Int’l Inc., 2010 U.S. Dist. LEXIS 83996, at *30 (M.D. Tenn. Aug. 16, 2010) (upholding a “class-action limitation contained in the [Tennessee Consumer Protection Act] [that was] so intertwined with that statute’s rights and remedies that it functions to define the scope of the substantive rights”), with Am. Copper & Brass, Inc. v. Lake City Indus. Prods., 2010 U.S. Dist. LEXIS 76160, at *7-8 (W.D. Mich. Jul. 28, 2010) (holding that a Michigan procedural rule prohibiting a type of class action (M.C.R. 3.501(A)(5)), similar to the New York procedural rule in Shady Grove, did not apply in federal court).  [9]  The Ninth Circuit also recently issued two opinions dealing with consumer-agreement provisions that seek to avoid class actions.  In Doe 1 v. AOL LLC, 552 F.3d 1077 (9th Cir. 2009), AOL had a forum selection clause that selected Virginia courts under Virginia law as the forum for any disputes with its consumers.  The district court dismissed the case for improper venue.  Id. at 1081.  The Ninth Circuit reversed, noting that California’s public policy against class action waivers renders the provision unenforceable because Virginia state courts do not permit class actions.  Id. at 1084.  Similarly, the Ninth Circuit held an arbitration provision unenforceable because it allowed for only individual arbitration.  See also Chalk v. T-Mobile USA, Inc., 560 F.3d 1087 (9th Cir. 2009) (applying Oregon law).  Likewise, the Third Circuit reached a similar conclusion in Homa v. Am. Express Co., 558 F.3d 225, 227 (3d Cir. 2009) (invalidating class action waiver in customer agreement, despite choice of law provision selecting Utah law, which authorizes such waivers).  The Second Circuit, in Fensterstock v. Education Finance Partners, 611 F.3d 124 (2d Cir. 2010), invalidated an entire arbitration clause containing a class action ban.  Id. at 132-40. Under the Supreme Court’s Stolt-Nielsen decision, because the contract was silent as to class arbitration once the unconscionable class action ban was excised, the court had "no authority to order class-based arbitration" and the action would have to proceed in court instead.  Id. at 141.  [10]  See generally Joel S. Feldman et al., Ascertainability:  An Overlooked Requirement for Class Certification, 10 Class 607, BNA Class Action Litigation Report (June 26, 2009).  [11]  See, e.g., Angelucci v. Century Supper Club, 41 Cal. 4th 160, 178 n.10 (2007) (noting that Proposition 64 "restrict[ed] previously broad standing requirements for a private right of action ., stating in the preamble to the measure that the broader standard had encouraged frivolous litigation, had been abused by attorneys who were motivated only by private financial gain, and negatively had affected many businesses.") (citing Prop. 64, § 1, subds. (b), (c) & (e), as enacted at Gen. Elec. (Nov. 2, 2004)); People ex. rel Lockyer v. Brar, 115 Cal. App. 4th 1315, 1316-17 (2004) (describing abuses of the UCL that fueled Proposition 64, including attorney manufactured claims generated by "scour[ing] public records on the Internet for what are often ridiculously minor violations of some regulation or law ..").  [12]  The majority also ruled that forcing all class members to establish standing would effectively eliminate the UCL as a vehicle to vindicate the rights of a class.  46 Cal. 4th at 321.  [13]  Under federal law, "standing is a procedural issue" and thus "any discrepancies between state and procedural federal rules are irrelevant."  Canady v. Allstate Ins. Co., 282 F.3d 1005, 1019 (8th Cir. 2002), abrogated on other grounds by Ark. Blue Cross & Blue Shield v. Little Rock Cardiology Clinic, P.A., 551 F.3d 812 (8th Cir. 2009).   [14]  Morgan v. AT&T Wireless Services., Inc., 177 Cal. App. 4th 1235 (2009), illustrates how some courts may apply Tobacco II‘s reliance requirement.  In Morgan, several plaintiffs asserted UCL claims based on alleged misrepresentations that induced them to purchase an expensive mobile phone that was rendered obsolete due to changes in AT&T’s wireless network.  Specifically, the complaints contended that the plaintiffs saw advertisements concerning the phone, heard statements from AT&T store personnel, conducted research, "and that they relied upon their research … in deciding" to purchase the phone.  Id. at 1257-58.  Without any discussion of the extent of plaintiffs’ exposure to any of the alleged misrepresentations, or whether these representations were an immediate cause of plaintiffs’ alleged harm, the court simply concluded that the exposure alleged by plaintiffs met Tobacco II‘s reliance requirement.  Id. at 1258.  [15]  See also Pfizer, Inc. v. Superior Court, 182 Cal. App. 4th 622, 631-32 (2010) (affirming prior rejection of class certification after Tobacco II, because the proposed class of all California purchasers of Listerine over a six-month period was overbroad in that many putative class members were "not exposed to the alleged misrepresentations and therefore could not possibly have lost money or property as a result of the unfair competition" and because the advertisements at issue did not run continuously and there was "no evidence that a majority of Listerine consumers viewed any of those commercials"); In re Vioxx Class Cases, 180 Cal. App. 4th 116, 133-35 (2009) (upholding denial of class certification on UCL, FAL, and CLRA claims concerning advertising of pharmaceutical in part because individual questions of reliance, materiality, and injury predominated); Kaldenbach v. Mut. of Omaha Life Ins. Co., 178 Cal. App. 4th 830, 846-50 (2009) (holding that even if a named plaintiff could establish injury and reliance, individual questions concerning the application of the defendant’s business practices to each class member predominated over any common questions).          But see Yokoyama v. Midland Nat’l Life Ins. Co., 594 F.3d 1087, 1094 (9th Cir. 2010) (reversing the district court’s denial of certification to a class of senior citizens who purchased various allegedly deceptively marketed annuities and holding that the Hawaii consumer protection statute required no showing of actual reliance "[b]ecause the proper inquiry under Hawaii law considers the effect upon a reasonable consumer, not a particular consumer" and that plaintiff thus satisfied the predominance inquiry as there were "no individualized issues sufficient to render class certification inappropriate under Rule 23"); Steroid Hormone Prod. Cases, 181 Cal. App. 4th 145, 154 (2010) (reversing denial of class certification on UCL product labeling claim because after Tobacco II "once the named plaintiff" establishes standing "no further individualized proof of injury or causation is required to impose restitution liability against the defendant in favor of absent class members"); Wiener v. Dannon Co., 255 F.R.D. 658, 669-70 (C.D. Cal. 2009) (holding that Rule 23(b)(3)’s predominance requirement was satisfied for a UCL fraud claim when a manufacturer advertised its product’s distinguishing characteristics on the product’s packaging, which was seen by all class members); Menagerie Prods. v. Citysearch, No. 08-4263, 2009 WL 3770668, at *12-13 (C.D. Cal. Nov. 9, 2009) (declining to follow Hodes and holding that plaintiffs satisfied Rule 23(b)(3) because Tobacco II required only inquiry into whether the defendant’s conduct (allegedly the same toward all class members) would deceive a reasonable consumer, thus rendering inquiry into individual deception, reliance, or injury unnecessary).  [16]  See Bonanno v. Quizno’s Franchise Co., LLC, No. 06-cv-02358-CMA-KLM, 2009 U.S. Dist. LEXIS 37702, at *76-77 (D. Colo. Apr. 20, 2009) ("The facts of this case do not support a finding under Colorado law that the class action bar is unconscionable or otherwise unenforceable.");  Anglin v. Tower Loan of Miss., Inc., 635 F. Supp. 2d 523, 530 (S.D. Miss. 2009) ("Plaintiff’s alternative argument that the unavailability of the class action device in an arbitral forum renders the arbitration unconscionable as a matter of Mississippi law is patently without merit."); Strawn v. AT&T Mobility, Inc., 593 F. Supp. 2d 894, 898-900 (S.D. W. Va. 2009) (holding that a class action waiver was not unconscionable).   Gibson, Dunn & Crutcher’s Class Actions Group is available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work or any of the following members of the Class Actions Group: Gail E. Lees – Chair, Los Angeles (213-229-7163, glees@gibsondunn.com)Andrew S. Tulumello – Vice-Chair, Washington, D.C. (202-955-8657, atulumello@gibsondunn.com)G. Charles Nierlich – Vice-Chair, San Francisco (415-393-8239, gnierlich@gibsondunn.com)Christopher Chorba – Member, Los Angeles (213-229-7396, cchorba@gibsondunn.com) © 2010 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 7, 2012 |
2011 Year-End Data Privacy and Security Update

The pace of data privacy and security legal events accelerated in 2011, as the global economy became increasingly dependent on online, mobile and server-based platforms and networks.  The past year witnessed a number of significant legal developments as private plaintiffs and regulators around the globe focused heavily on practices and intrusions involving user data in a wide range of industries and technical environments.  At the same time, the law continues to lag behind technological change, and legislative proposals in the United States, the European Union and elsewhere signal significant legal risks and threats to technical innovation. Gibson Dunn’s Information Technology and Data Privacy group–which was at the forefront of many of these developments–has detailed the key data privacy and security events of the past year and anticipated trends for the year to come.  This Review covers six core areas: (1) class actions and civil litigation related to data privacy and security; (2) FTC and regulatory activity; (3) criminal enforcement; (4) federal legislative activity; (5) data security; and (6) select international developments in the European Union and Asia Pacific Region. Table of Contents (click on link) I. Class Action Developments           A. Article III Standing          B. Substantive Claims and Theories in Data Privacy and Security Class Actions          C. Terms of Service II. FTC Regulatory Developments           A. The FTC Gets Social          B. Mandating Privacy by Design          C. Affirmative Express Consent          D. Covered Information          E. COPPA Developments III. Criminal Enforcement IV. Legislative Developments           A. Stop Online Piracy Act ("SOPA") and the Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act ("PROTECT IP Act" or "PIPA")          B. Online Protection and Enforcement of Digital Trade Act ("OPEN Act")          C. Notable Federal Privacy and Data Breach Legislation V. Data Security           A. High-Profile Breach Incidents and Trends from 2011          B. 2011 Developments in Breach Notification Obligations          C. Insurance Issues VI. International Developments           A. European Union          B. Asia  I.   Class Action Developments In 2011, the plaintiffs’ bar was extremely active in filing class actions asserting a variety of novel claims relating to the allegedly unauthorized collection, use or disclosure of consumer data, or following widely publicized data breaches.  Despite significant setbacks to plaintiffs who struggled to articulate a viable theory of harm, data privacy and security-related filings continue to gain significant momentum. A.   Article III Standing The past year witnessed several critical developments in the application of Article III standing requirements to the theories of injury being asserted by plaintiffs in data privacy and security class actions–beginning with the first decision dismissing a privacy class action for lack of Article III standing in LaCourt v. Specific Media, Case No. 10-cv-01256-GW-JCG, 2011 WL 1661532 (C.D. Cal. Aug. 29, 2011) (Gibson Dunn represented Specific Media in this case).  While several courts have followed and extended the reasoning in Specific Media to dismiss other privacy-related class actions for lack of Article III standing, other courts have accepted alternative theories of injury proffered by plaintiffs, including theories arising from the alleged invasion of a statutory right or from the increased risk of sufficiently "credible" future harms (particularly in the context of a data breach). Plaintiffs’ theories of harm in data privacy cases vary, but typically have involved some assertion that the unexpected collection and use of plaintiffs’ personal information harmed plaintiffs in some way, either by diminishing the value of that information or by depriving plaintiffs of the opportunity to use and control that information as they see fit.  Plaintiffs also frequently assert that entities collecting their personal information are misappropriating or misusing it.  In cases involving data breaches, plaintiffs typically assert the increased risk of identity theft and the costs flowing from it (for example, the purchase of credit monitoring) as the alleged harm.  Notably, lawsuits asserting these theories are often spurred by the publication of academic articles, blogs or media reports documenting a potential privacy concern or security vulnerability (often within 24 hours of an initial news report), rather than any concrete instance of user harm.           No Injury in Fact Gibson Dunn’s client, Specific Media, was the first to challenge plaintiffs’ ability to demonstrate a concrete injury in fact, a requirement for Article III standing, in a data privacy case.  Specific Media was targeted (along with several other online publishers and advertising networks) in a series of class actions claiming that it had improperly used Adobe "Flash cookies" to track the online behavior of users who had configured their browser settings to avoid being tracked.  After approving settlements by the other defendants in these cases, Judge Wu granted Specific Media’s motion to dismiss on grounds that plaintiffs had not alleged any concrete injury in fact and therefore lacked standing under Article III.  LaCourt v. Specific Media, Case No. 10-cv-01256-GW-JCG, 2011 WL 1661532 (C.D. Cal. Aug. 29, 2011). In the first decision to apply Article III to a data privacy case, Judge Wu concluded that the various theories of injury advanced by the named plaintiffs in the Specific Media case did not demonstrate an injury in fact, in terms that have broad application to many data privacy and security class actions: The Complaint does not identify a single individual who was foreclosed from entering into a ‘value-for-value’ exchange as a result of Specific Media’s alleged conduct.  Furthermore, there are no facts . . . that indicate that the Plaintiffs themselves ascribed an economic value to their unspecified personal information.  Finally, even assuming an opportunity to engage in a ‘value-for-value exchange,’ Plaintiffs do not explain how they were ‘deprived’ of the economic value of their personal information simply because their unspecified personal information was purportedly collected by a third party.  Specific Media, 2011 WL 1661532 at *5.  These arguments were successfully advanced (again by Gibson Dunn) in In re iPhone Application Litig., No. 11-md-02250-LHK, 2011 WL 4403963 (N.D. Cal. Sept. 20, 2011), which involved a series of consolidated class actions challenging the alleged "tracking" of smartphone users by mobile device manufacturers and third-party advertising and analytics companies (the "Mobile Industry Defendants") that support the "apps" that can be downloaded onto these devices.  There, Plaintiffs alleged that the Mobile Industry Defendants collected and disclosed users’ personal information located on their mobile Apple devices without their knowledge or permission, allegedly in violation of several federal and state laws.  Plaintiffs also sought to hold Apple liable for these alleged violations on the grounds that (i) its design of the iOS system allowed apps to access users’ personal information despite Apple’s alleged representations, and (ii) Apple exercised control over the apps that could be sold in the Apple App Store but failed to adequately police their collection and disclosure of users’ personal information.  Plaintiffs also sought to hold Apple liable for allegedly enabling iOS devices to maintain, synchronize, and retain detailed, unencrypted location history files, an issue that also has also received significant media attention[1]. In a detailed opinion that surveyed the broad range of relevant case law and relied heavily on the reasoning in Specific Media, the court dismissed the consolidated complaint for lack of Article III standing, finding that plaintiffs had failed to plead an injury in fact on two grounds.  First, plaintiffs failed to "allege injury in fact to themselves."  Id. at *4 (emphasis in original).  As the Court explained, "Plaintiffs do not identify what [Apple devices] they used, do not identify which Defendant (if any) accessed or tracked their personal information, do not identify which apps they downloaded that access/track their personal information, and do not identify what harm (if any) resulted from the access or tracking of their personal information."  Id.  Second, agreeing with the holding in Specific Media, the Court held that "Plaintiffs [have] not identified a concrete harm from the alleged collection and tracking of their personal information sufficient to create injury in fact."  Id. at *5.  The Court observed that, as in Specific Media, the named plaintiffs "had not alleged any ‘particularized example’ of economic injury or harm to their computers, but instead offered only abstract concepts, such as ‘opportunity costs,’ ‘value-for-value exchanges,’ ‘consumer choice,’ and ‘diminished performance.’"  Id.  Notably, Judge Koh made clear that "[t]he Court does not take lightly Plaintiffs’ allegations of privacy violations."  Id. at *4.  However, she stated that "for purposes of the standing analysis under Article III, Plaintiffs’ current allegations [were] clearly insufficient."[2]  Id.; see also Low v. LinkedIn, No. 11-CV-01468-LHK, 2011 WL 5509848, at *6 (N.D. Cal. Nov. 11, 2011), (dismissing case for failure to sufficiently allege an "injury in fact" as required for Article III standing because plaintiff "failed to put forth a coherent theory of how his personal information was disclosed or transferred to third parties, and how it has harmed him."). Despite a series of decisions rejecting claims brought based on the allegedly unauthorized track collection of user data for lack of Article III standing, the filing of such cases shows no sign of abating.  See, e.g., Cousineau v. Microsoft Corp., No. 11-CV-01438-JCC (W.D. Wash. Aug. 31, 2011) (challenging alleged collection of detailed location file histories); Kim v. Space Pencil, Inc., No. 11-CV-3796-LB (N.D. Cal. Aug. 1, 2011) (challenging analytics company’s alleged use of Flash cookies, ETags, and HTML5 storage to identify computers of users who blocked or deleted browser cookies); Garvey v. KISSmetrics, et al., No. 11-CV-3764-LB (N.D. Cal. Jul. 29, 2011) (same); Kenny v. Carrier IQ, Inc., No. 11-cv-05774-PSG (N.D. Cal. Dec. 1, 2011) (first of 70 class actions against mobile device manufacturers, wireless carriers, and Carrier IQ relating to alleged tracking of smartphone user activity through Carrier IQ’s diagnostic tool). This may be due in part to the relative liberality with which courts have thus far granted plaintiffs leave to amend, as well as to language holding out hope that it may yet be possible to articulate an actionable theory of harm.  See, e.g., Specific Media, 2011 WL 1661532 at *6 ("It is not obvious that plaintiffs cannot articulate some actual or imminent injury in fact.  It is just that at this point they haven’t offered a coherent and factually supported theory of what that injury might be.").  Indeed, as explained in the following section, plaintiffs are already aggressively developing–with some success–alternate theories of injury in order to overcome the significant hurdles posed by the requirements of Article III standing in data privacy and breach cases.           Alleged Invasion of Statutory Right In response to the various decisions in 2011 dismissing online and mobile privacy complaints for failure to allege a cognizable injury in fact sufficient to demonstrate Article III standing, the plaintiffs’ bar has begun to shift to pleading statutory claims that may not have an express injury component–asserting that the alleged invasion of a statutory right itself constitutes a de facto injury in fact.  See Warth v. Seldin, 422 U.S. 490, 500 (1975) (quoting Linda R.S. v. Richard D., 410 U.S. 614, 617 n.3 (1973)) ("The actual or threatened injury required by Art[icle] III may exist solely by virtue of ‘statutes creating legal rights, the invasion of which creates standing.’").  This theory of injury was given new life by the Ninth Circuit’s decision in Edwards v. First American Corp., 610 F.3d 514 (9th Cir. 2010), cert. granted, 131 S. Ct. 3022 (2011), which reaffirmed the holding in Warth.  In a few recent cases, plaintiffs that have invoked this approach have survived Article III challenges.  Relying on Edwards, Judge Ware in In re Facebook Privacy Litigation, 791 F. Supp. 2d 705 (N.D. Cal. 2011) held that plaintiffs, who claimed that Facebook had transmitted Facebook IDs to advertisers without consent, had constitutional standing where they alleged violation of their rights under the Wiretap Act, 18 U.S.C. §§ 2510, et seq.–even though the Court dismissed plaintiffs’ Wiretap Act claim as insufficiently pled.  791 F. Supp. 2d at 711-13; see also In re Zynga Privacy Litig., No. 10-CV-04680-JW (N.D. Cal. June 15, 2011) (same); Low v. LinkedIn, 2011 WL 5509848 at *6 n.1 ("There is also an argument, though not specifically advanced by Plaintiff, that the creation of a statutory right may be sufficient to confer standing on Plaintiff.").  In addition, the Ninth Circuit recently relied on the holding in Edwards and Warth to find that the alleged violation of plaintiffs’ rights under the under the Stored Communications Act, the Electronic Communications Privacy Act, and the Foreign Intelligence Surveillance Act were sufficient to confer Article III standing–albeit in a case involving unique allegations of a government "dragnet" that was used to monitor the contents of plaintiffs’ and class members’ wireless communications.  See Jewel v. Nat’l Sec. Agency, 2011 WL 6848406 (9th Cir. Dec. 29, 2011) (holding that alleged violations of statutory rights conferred standing).  The Ninth Circuit emphasized in Jewel, however, that while the injury required by Article III may be satisfied through the alleged violation of a statutory right, the injury must nonetheless be particularized.  Id. at *6.   Given the amorphous and theoretical injuries claimed by plaintiffs in many privacy class actions, we anticipate that strategic challenges to Article III standing will continue to be an important defense for companies facing data privacy and security claims (including claims asserting the alleged violation of a statutory or constitutional right), regardless of the outcome of the Supreme Court’s decision in Edwards.             Data Breach Cases  In the wake of several prominent hacking incidents, courts have seen a significant increase in data breach class actions.  Plaintiffs have had somewhat greater success demonstrating Article III standing in cases involving a data security breach, and several key decisions issued last year addressed the extent to which the risk of identity theft and other alleged injuries are sufficient to confer standing to plaintiffs who information may have been compromised in a security breach.    In late 2010, the Ninth Circuit joined the Seventh Circuit in finding that the increased risk of future harm resulting from an identified data breach could establish the injury in fact required for Article III standing.  See Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir. 2010); Pisciotta v. Old Nat’l Bancorp, 499 F.3d 629 (7th Cir. 2007) (threat of future harm resulting from third-party hack into banking records was injury in fact).  Krottner involved claims resulting from the theft of an unencrypted laptop allegedly containing the personal information of hundreds of Starbucks employees by an unknown party.  The plaintiffs alleged that their injuries consisted of anxiety, stress, and time and expense spent monitoring their finances.  One plaintiff even alleged that a bank account was opened using his social security number; the bank closed the account immediately, with no financial loss to the plaintiff.  Citing the Seventh Circuit’s decision in Pisciotta, the Ninth Circuit held that there was a "credible threat of real and immediate harm stemming from the theft of a laptop containing . . . unencrypted personal data."  Id. at 1143.  Observing that the threat would be "far less credible" if the laptop had not yet been stolen, the court held that the plaintiffs nonetheless had pled sufficient injury to satisfy Article III.  Id.    Following the Krottner decision, one court in the Northern District of California refused to dismiss claims for lack of Article III standing where plaintiffs alleged that a hacker had exploited a security vulnerability and accessed the database of RockYou, a publisher and developer of online services and social networking applications, and copied the email and social networking login credentials of approximately 32 million registered RockYou users.  Claridge v. RockYou, Inc., 785 F. Supp. 2d 855 (N.D. Cal. 2011).  Although plaintiffs alleged that RockYou had failed to utilize adequate encryption to prevent intruders from accessing and reading their personally identifiable information, they were unable to point to specific harm resulting from this incident, instead claiming that they had lost the "value" of their personal information.  Id. at 861.  While the court recognized the need for "actionable harm or concrete, non-speculative harm," it noted the "paucity" of controlling authority in this area, and that the "unauthorized disclosure of personal information via the Internet is itself relatively new" and raised "issues of law not yet settled in the courts."  Id.  Despite its reservations, the court declined to find that the plaintiffs’ allegations were insufficient to confer standing as a matter of law.  Id.  But in a significant decision in December, the Third Circuit, in Reilly v. Ceridian Corp., 664 F.3d 38 (3d Cir. 2011), departed from the approach taken by the Seventh and Ninth Circuits.  In Reilly, plaintiffs filed suit against Ceridian, a payroll processor, following a 2009 security breach in which an unknown hacker gained access to employees’ personal and financial information.  Although the plaintiffs asserted injuries including the increased risk of identity theft and the cost of credit monitoring services, the court found that unless plaintiffs’ "conjectures [came] true," they had not yet suffered any injury in fact sufficient to satisfy Article III standing.  Id. at 42.  The Third Circuit emphasized that plaintiffs’ injuries were "dependent on entirely speculative, future actions of an unknown third-party," while distinguishing the circumstances in Krottner and RockYou on the grounds that the security intrusions there involved "malicious," "sophisticated" third-parties or the actual misuse of compromised data.  Id.  Given the emerging and variable treatment of Article III standing requirements in data breach cases among the circuits, forum considerations will be particularly critical in litigating data breach actions.  These factors should be taken into account when assessing transfer motions in any multidistrict litigation resulting from a data breach episode, and companies may also need to consider whether to enforce any venue selection clauses in light of the emerging jurisprudence (see infra Terms of Service).  Litigants should consider the factors courts use to evaluate the "credibility" of future injury for Article III standing, including the sophistication of third-party hackers, the strength of encryption and protections systems employed by the defendant, the demonstrated comprehension of the accessed data, or other means of quantifying the risk of harm.  *   *   * Collectively, these recent decisions underscore the importance of closely examining plaintiffs’ allegations of harm when defending against a putative class action, especially a class action involving alleged privacy invasions directed to new and developing technologies–an area in which the plaintiffs’ class action bar has become especially active.  Oftentimes, these suits–spurred by sensational media reports–allege widespread privacy violations that may be challenging to parse at the pleadings stage, but which are lacking in any specific or credible allegation of harm.  Under such circumstances, a strong standing challenge may get the entire case dismissed at the outset and avoid the potential challenges involved in seeking to dismiss individual claims under Federal Rule of Civil Procedure 12(b)(6), which may include claims that do not require an initial showing of injury or that may require the Court to address confusing and technical allegations in the context of a one-sided pleading. B.   Substantive Claims and Theories in Data Privacy and Security Class Actions During the past year, plaintiffs have filed class actions in response to a number of data privacy and security incidents, including many involving relatively new technologies such as online social games and mobile applications.  The theories pursued by Plaintiffs have been varied, but frequently involve state or federal statutes prohibiting criminal hacking or other computer crimes (such as the Computer Fraud and Abuse Act, Stored Communications Act or Electronic Communications Privacy Act).  Others state unfair competition claims, or common law claims ranging from trespass to invasion of privacy to negligence.  During the past year, courts continued to grapple with how–or whether–to apply these claims to a range of highly technical facts involving the collection, use or disclosure of user data.           "Do Not Track" Cases 2011 saw a wave of filings in "do not track" cases, involving claims that defendants had intentionally collected plaintiffs’ personal data without their knowledge or permission, allegedly in ways that users would not anticipate–such as through Adobe "Flash cookies" (for behavioral advertising) or mobile applications.  See Specific Media, 2011 WL 2473399 (challenging the use of Adobe "Flash cookies" and alleging violations of the Computer Fraud and Abuse Act, California Comprehensive Computer Data Access and Fraud Act, California Invasion of Privacy Act, California Consumer Legal Remedies Act, California Unfair Competition Law, trespass to personal property, and unjust enrichment); In re Google Inc. Street View Elec. Commc’ns Litig., 794 F. Supp. 2d 1067 (N.D. Cal. 2011) (challenging Google’s practice of intercepting data packets from Wi-Fi networks and alleging three causes of action–violation of the federal Wiretap Act, the state wiretap act, and the California UCL); In re Facebook Privacy Litig., 791 F. Supp. 2d 705 (N.D. Cal. 2011) (alleging violations of the Wiretap Act and the California Comprehensive Computer Data Access and Fraud Act, and fraud under Cal. Civ. Code §§ 1572 and 1573). In such "do not track" cases, plaintiffs have struggled to articulate even the facial elements of their claims.  See, e.g., Specific Media, 2011 WL 1661532 (dismissing plaintiffs’ complaint for lack of Article III standing but also noting severe substantive defects in each of the six claims asserted by plaintiffs); In re iPhone Application Litig., 2011 WL 4403963 (same); Bose v. Interclick, Inc., No. 10-cv-09183-DAB, 2011 WL 4343517 (S.D.N.Y. Aug. 17, 2011) (dismissing plaintiff’s Computer Fraud and Abuse Act class action claim and holding that plaintiff failed to quantify any damage or loss, as defined by the statute); Google Street View, 794 F. Supp. 2d 1067 (dismissing plaintiffs’ California UCL claim for failure to satisfy California’s UCL standing requirements, which requires the plaintiff to establish the loss of money or property). But it was not all bad news for plaintiffs in these cases, and plaintiffs in several "do not track" cases succeeded in overcoming motions to dismiss on at least one of their claims.  For example, in Bose v. Interclick, Inc., the court permitted plaintiff’s challenge to the use of Adobe Flash cookies to track user information for behavioral advertising purposes to go forward on state law claims based on New York General Business Law Section 349 (deceptive business practices) and trespass to chattels.  The court held that even though plaintiff had failed to plead a cognizable economic injury, an alleged "privacy violation" was sufficient to state a claim under Section 349.  2011 WL 4343517 at *9.  With respect to the trespass claim, the court held that plaintiff’s generic allegations of harm to her computer were "arguably sufficient to survive a motion to dismiss."  Id.  As another example, the plaintiffs in Google Street View were able to survive a motion to dismiss their Wiretap Act claim by convincing the court that the data packets (which included plaintiffs’ SSID information, MAC address, usernames, passwords, and personal emails) collected by the defendant through the capturing of Wi-Fi data by a "wireless sniffer," through unprotected wireless networks, were not "readily accessible to the general public" for purposes of the Wiretap Act.  794 F. Supp. 2d at 1084. Finally, in Pineda v. Williams-Sonoma Stores, Inc. 51 Cal. 4th 524 (2011), the California Supreme Court construed "personal information" under the Song-Beverly Credit Card Act to include ZIP codes, breathing new life into a series of lawsuits alleging that retailers collected ZIP codes as a condition to accepting payment.  51 Cal. 4th at 531-36.  However, the scope of this ruling appears limited: on August 24, 2011, the San Francisco Superior Court dismissed claims against Craigslist for allegedly violating the Song-Beverly Credit Card Act, finding that the Act "on its face does not apply to online transactions."  Gonor v. Craigslist, Inc., No. CGC-11-511332 (Cal. Super. Ct. Aug. 24, 2011), affirming Saulic v. Symantec Corp., 596 F. Supp. 2d 1323 (C.D. Cal. 2009).           Persistent Identifiers Several cases filed in the past year have involved claims that internal identifiers used by online publishers to organize and deliver user content (such as a Facebook user ID) or device identifiers (such as smartphone serial numbers) are the functional equivalent of personally identifiable information given their potential ability to be tied to identifying information, such as a name (see also infra discussion of proposed FTC revisions to COPPA, expanding definition of "personal information" to include persistent identifiers).  Keying off of this theory, plaintiffs have targeted companies that disclosed personal identifiers to third parties (often through routine technical protocols such as HTTP referrers), arguing that this effectively disclosed users’ personal information to third parties.  So far, courts have not been receptive to claims involving the alleged disclosure of user IDs or device identifiers to advertisers or other third parties.  See, e.g, In re Facebook Privacy Litig., 2011 WL 6176208 (dismissing claims centered around defendant’s alleged transmission of user IDs and usernames to third-party advertisers); In re Zynga Privacy Litig., No. 5:10-CV-04680-JW (same); In re iPhone Application Litig., 2011 WL 4403963 (dismissing claims based on, among other things, defendants’ transmission of unique mobile phone identifiers); see also Hines v. OpenFeint, Inc., No. 11-cv-03084-EMC (N.D. Cal. Dec. 5, 2011) (plaintiffs voluntarily dismissed claims against OpenFeint brought on the basis of researcher reports that its mobile social gaming service transmitted information such as the user’s mobile phone identifier and Facebook user ID in an unencrypted format, following a motion to dismiss prepared by Gibson Dunn).           "Privacy" of Social Media  Last year, courts also considered the extent to which plaintiffs could challenge various practices involving the use of information they elected to share on social networking sites like Twitter and Facebook.  In Cohen v. Facebook, Inc., Judge Seeborg rejected claims that Facebook’s use of plaintiffs’ Facebook profile pictures on other users’ pages to promote the "Friend Finder" service constituted a violation of their statutory rights of publicity.  Cohen v. Facebook, Inc., 798 F. Supp. 2d 1090 (N.D. Cal. 2011) ("Cohen I"); Cohen v. Facebook, Inc., No. 10-cv-05282-RS, 2011 WL 5117164 (N.D. Cal. Dec. 27, 2011) ("Cohen II").  The court concluded that the plaintiffs had not alleged injury (a required element of their claim) sufficient to survive a motion to dismiss on claims, because plaintiffs’ "names and likenesses were merely displayed on the pages of other users who were already plaintiffs’ Facebook ‘friends’ and who would regularly see, or at least have access to, those names and likenesses in the ordinary course of using their Facebook accounts."  Cohen II, 2011 WL 5117164 at *3.  But one court reached a different conclusion with respect to the facial sufficiency of claims relating to Facebook’s republication of plaintiffs’ "likes" (and related use of plaintiffs’ names and profile pictures) in "Sponsored Stories," which are generated when Facebook users "like" an organization, company or cause.  See Fraley v. Facebook, Inc., No. 11-cv-001726-LHK, 2011 WL 6303898 (N.D. Cal. Dec. 16, 2011) (finding Facebook’s alleged use of "[plaintiffs’] names, photographs, and likenesses . . . in paid commercial endorsements targeted . . . at other consumers, without their consent" sufficient to allege injury).           Data Breaches As with Article III standing challenges, plaintiffs had greater success overcoming motions to dismiss in claims arising from third-party hacking or other data breach incidents.  See Anderson v. Hannaford, 659 F.3d 151 (1st Cir. 2011) (plaintiffs’ negligence and implied contract claims survived a motion to dismiss because mitigation damages, such as replacement credit card costs and identity theft insurance, were sufficient to allege injury where credit card information was obtained by a third-party hacker and there was evidence that the hacked information was used for an improper purpose); RockYou, 785 F. Supp. 2d 855 (plaintiffs’ claims for breach of contract, breach of implied contract, negligence, and negligence per se survived a motion to dismiss because the personally identifiable information that was hacked constituted valuable property, but noting that the plaintiffs could have difficulty proving their damages theory).  The courts’ decisions in these cases appeared to turn, in part, on concerns that defendants failed to use adequate measures to protect sensitive client information.  See, e.g., id. at 861 (noting plaintiffs’ allegations that RockYou failed to employ "commercially reasonable" methods for safeguarding personally identifiable information); Anderson, 659 F.3d at 164 (pointing out that the third-party hacking was "a large-scale criminal operation conducted over three months").  C. Terms of Service Defendants confronting data privacy and security class actions continued to invoke contractual provisions–such as forum clauses or limitations on liability–contained in their terms of service.  During 2011, courts frequently were reluctant to enforce provisions contained in online terms of service, particularly at the outset of litigation.  For example, in Harris v. Comscore, 2011 WL 4738357, at *2 (N.D. Ill. 2011), the Northern District of Illinois refused to enforce a forum selection clause in a class action challenging Comscore’s alleged use of "deep packet inspection" to collect plaintiffs’ personal information, finding that the hyperlink to Comscore’s forum selection clause was not "readily apparent."  The court observed that valid forum selection clauses could appear in click-through agreements, but that for such clauses to be enforceable, they needed to be "immediately available and obvious."  Id. at *2.  See also Hoffman v. Supplements ToGo Management, LLC, 419 N.J. Super. 596, 607 (App. Div. 2011) (holding forum selection clause in online terms unenforceable because it was not visible unless a user scrolled down to a concealed portion of the defendant’s web page and thus failed to provide "fair and forthright" notice to plaintiffs). On the other hand, courts began to expand the Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) to the online context.  For example, one court in the Northern District of California enforced an arbitration clause in Zynga’s online terms of service, dismissing claims that Zynga had engaged in unfair and deceptive practices in certain in-game advertising under the terms of service applicable to Zynga’s online social games.  Swift v. Zynga, No. 09-cv-05443-EDL (N.D. Cal. Aug. 4, 2011) (order granting Zynga’s motion to compel arbitration). Defendants faced challenges when seeking to avoid liability for data privacy and security claims based on their agreements with end users at the pleading stage.  Given frequent changes in online terms, courts were often reluctant to assess which contract versions may have applied to plaintiffs or class members in the absence of a complete record.  For example, in Cohen I, the court refused to apply Facebook’s terms of service when determining if Facebook’s Friend Finder service was authorized under Facebook’s terms of service; in part because it did not think it proper to consider the terms at the motion to dismiss stage, and in part because "substantial questions would remain in this instance as to when various versions of the documents may have appeared on the website and the extent to which they necessarily bound all plaintiffs."  798 F. Supp. 2d at 1094 (noting that even if it was "theoretically , . . possible to apply the [t]erms documents against plaintiffs at the motion to dismiss stage," Facebook did not show that its terms were sufficient to insulate it from plaintiffs’ claims). Even where courts did consider online terms of service at the motion to dismiss stage, they typically concluded that fact issues prevented the court from resolving the claims based on the terms of the user agreement.  See, e.g., RockYou, 785 F. Supp. 2d at 865 (terms of service not dispositive on plaintiffs’ contract claims at motion to dismiss stage where terms provided that RockYou used secure servers, and a factual question existed as to whether the servers were secure); Fraley, 2011 WL 6303898, at *15 (finding the question of whether Facebook’s terms authorized use of information in Social Stories to be a disputed question of fact); but see In re iPhone App. Litig., 2011 WL 4403963, at *7-8 (noting that in any amended complaint the plaintiffs must explain why Apple’s terms of service would not bar privacy claims). We expect that the contractual provisions contained in online terms of service will be of increased importance as data privacy and security cases advance into later stages of litigation. Back to Top II.   FTC Regulatory Developments The FTC was extremely active in 2011 in pushing to expand and apply its Section 5 authority to combat "unfair and deceptive" conduct to a broad range of practices and technologies related to consumer privacy. A.   The FTC Gets Social Reflecting a particular focus on user information shared on social networking sites, the FTC in 2011 announced and/or finalized settlements with Twitter, Google, and Facebook, in that order.  Although each of these settlements contains certain unique provisions, the cornerstone of the FTC’s complaints against these companies was that consumers were misled as to how their information would be protected, shared, and used. The FTC pursued Twitter following a hacking incident in which third parties obtained, among other things, unauthorized access to non-public user information and tweets that consumers had designated as private, alleging that the company misled users about the extent to which the company protects the security, privacy, and confidentiality of consumer information.  With respect to Google, the FTC charged that the company’s launch of Google Buzz was misleading and that the company, among other things, improperly used data supplied by users solely for use in Google’s Gmail product to launch its Buzz social network.  Against Facebook (represented by Gibson Dunn), the FTC’s core allegations related to changes in how certain pieces of profile information were shared.  Key takeaways from these settlements are discussed below. B.   Mandating Privacy by Design The Google and Facebook consent orders are the first FTC settlements to require the implementation of comprehensive privacy programs that apply to the development of new features and products and also require privacy assessments by an independent third party.  Although the FTC frequently has required companies in data security cases to implement comprehensive security programs (and to submit to ongoing security audits)–as it did in the Twitter order–the Google and Facebook consent orders represent the FTC’s first attempt to expand this requirement to encompass privacy. These moves reflect the FTC’s recent emphasis on integrating privacy into the product development process, which the FTC refers to as "Privacy by Design."  (This is evocative of Article 20(1) of the proposed EU Data Privacy Regulation which would impose an obligation for all data controllers targeting EU consumers to engage in "privacy by design".)  The FTC’s Initial Privacy Report, for example, states that companies "should promote consumer privacy throughout their organizations and at every stage of the development of their products and services" and "should maintain comprehensive data management procedures throughout the life cycle of their products and services."  FTC, Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Business and Policymakers¸ Preliminary FTC Staff Report at ix (Dec. 2011).  Given the repeated emphasis of this principle in the FTC’s public discourse, privacy report, and recent consent orders, it is likely that these provisions will become more standard going forward. C.   Affirmative Express Consent Over the past year, the FTC staff has seemingly renewed efforts to leverage its Section 5 authority to impose a prescriptive requirement on companies to obtain the express affirmative consent of their users before making retroactive changes to their privacy policies.  Though not required by any specific statute or FTC rule, the FTC staff for many years has taken the position that companies should obtain the express affirmative consent of their customers before using or disclosing previously collected information in a manner that differs from representations made to the customers at the time of collection.  For example, in a 2000 report to Congress, the FTC warned that "the chance that new, inconsistent policies may be applied to previously collected information is troubling and may undermine consumer confidence in the rest of the privacy policy."  FTC, Privacy Online: Fair Information Practices in the Electronic Marketplace:  A Report to Congress at 26 (May 2000).  The FTC further expressed its view that "[i]n certain circumstances, the application of new information practices to information collected pursuant to different, stated practices may constitute an unfair and/or deceptive practice," and that in some instances, "affirmative choice by the consumer may be required."  Id.   The FTC staff issued a more definitive endorsement of express affirmative consent in its 2009 report on self-regulatory principles for online behavioral advertising.  FTC, FTC Staff Report: Self-Regulatory Principles for Online Behavioral Advertising (Feb. 2009).  The report advised that "before a company can use previously collected data in a manner materially different from promises the company made when it collected the data, it should obtain affirmative express consent from affected consumers."  Id. at 46.  The FTC Staff reiterated this view a year later, stating "companies must provide prominent disclosures and obtain affirmative express consent before using consumer data in a materially different manner than claimed when the data was collected."  Protecting Consumer Privacy in an Era of Rapid Change at 76. Until recently, however, the FTC had only used its enforcement hammer in a single case (in 2004) to obtain a defendant’s agreement to obtain express affirmative consent before retroactively applying privacy policy changes.  See In re Gateway Learning Corp., FTC File No. 042-3047 (July 7, 2004).  In 2011, the FTC imposed express affirmative consent provisions in two landmark cases, both in the social networking field.  The first appeared in the consent order settling the FTC’s claims against Google Inc., which stemmed from allegations that the search and webmail behemoth violated its privacy policy by using customers’ Gmail account information to launch Google’s Buzz social networking platform, without obtaining those customers’ express consent.  Complaint, In re Google Inc., FTC File No. 102-3136 (Mar. 30, 2011).  As part of the negotiated settlement, Google agreed to provide notice (outside of a privacy policy or similar document) and obtain the "affirmative express consent" of a user before "any new or additional sharing by [Google] of the Google user’s identified information with any third party, that 1) is a change from stated sharing practices in effect at the time [Google] collected such information, and 2) results from any change, addition, or enhancement to a product or service."  Agreement Containing Consent Order, In re Google Inc., FTC File No. 102-3136 (Mar. 30, 2011).  Notably, Commissioner J. Thomas Rosch issued a strong concurring statement that raised "substantial reservations" with the express affirmative consent requirement, which the Commissioner noted was "seemingly brand new," was not required under Google’s original privacy policy, and had significant implications for Google’s ability to launch new products, particularly "[b]ecause internet business models (and technology) change so rapidly."  Concurring Statement of J. Thomas Rosch, In re Google Inc., FTC File No. 102-3136 (Mar. 30, 2011).  Several months later, the FTC obtained a similar–though far narrower–affirmative express consent commitment from Facebook as part of a settlement resolving various concerns relating to the company’s privacy practices, including allegations related to 2009 changes designating certain categories of information as "publicly available."  Complaint, In re Facebook, Inc., FTC File No. 092-3184 (Nov. 29, 2011).  The FTC alleged that Facebook failed to clearly inform users of the scope of these changes when migrating users through a mandatory "Privacy Wizard" that users completed before these changes were implemented.  Notably, in contrast to the Google order, the "express affirmative consent" provision proposed in Facebook is limited to non-public information and applies only when such information is shared in a manner that materially exceeds restrictions the user imposed using a Facebook privacy setting.  Proposed Agreement Containing Consent Order, In re Facebook, Inc., FTC File No. 092-3184 (Nov. 29, 2011). The Facebook order also features an express carve-out for information that is re-shared by users and others on Facebook and includes language allowing the company to seek modification of the order "to address relevant developments [related to] . . . technological changes and changes in methods of obtaining . . . consent."  Id. In addition to these two enforcement actions, the FTC also recently attempted (unsuccessfully) to persuade the court overseeing the Borders Group, Inc. bankruptcy to forbid Borders from selling detailed customer records to Barnes & Noble without first obtaining those customers’ express affirmative consent.  In a letter dated September 14, 2011, David Vladeck, Director of the FTC’s Bureau of Consumer Protection, urged the Consumer Privacy Ombudsman assigned to the bankruptcy proceedings to recommend that any transfer of customer records in connection with a bankruptcy sale only occur with the customers’ express affirmative consent.  The bankruptcy court rejected the FTC’s recommendation, authorizing the sale subject to a limited period during which Borders’ customers had the option to "opt out" of having their information disclosed.  Based on the FTC’s actions in the Google, Facebook, and Borders cases and Gibson Dunn’s ongoing representation of several companies in investigations and enforcement actions, we expect the FTC staff to continue to vigorously pursue express affirmative consent provisions in future consent orders, particularly in cases where the target of the enforcement action is alleged to have taken actions that violate prior commitments to consumers regarding the privacy and use of their personal information. D.   Covered Information During the past year, the FTC has also sought to dramatically expand the scope of information covered by consent decrees in the privacy and data security fields.  In the past, the scope of the information covered by these orders has been limited typically to "individually identifiable information from or about a consumer," which typically included traditional categories of personally identifiable information–i.e., information that in and of itself operates to identify unique individuals (such as a first and last name, email address or social security number)–as well as other information that is combined with specifically enumerated categories of personally identifiable information.  During the past year, the FTC has entered into several consent decrees that reach a significantly broader scope of personal information.  For example, though the scope of the FTC’s consent order with Twitter is limited to "individually identifiable information," the term is defined to include specifically any IP addresses and other persistent identifiers (e.g., mobile device identifiers), even though IP addresses and persistent identifiers have historically not been considered "individually identifiable information" unless they are associated with other categories of individually identifiable information such as a name or street address.  Decision and Order, In re Twitter, FTC File No. 092-3093 (Mar. 11, 2011).  Similarly, both the recent Google and Facebook consent decrees utilize a definition of "covered information" that would include all "information from or about an individual consumer," regardless of whether the information is individually identifying or not.  Agreement Containing Consent Order, In re Google Inc., FTC File No. 102-3136; Proposed Agreement Containing Consent Order, In re Facebook, Inc., FTC File No. 092-3184 (The Facebook order also contains a separately defined term, "nonpublic user information," that is used to narrow the scope of covered information for key provisions, such as the notice and consent requirements.).  See also Agreement Containing Consent Order, In re Chitika, Inc., FTC File No. 102-3087 (June 17, 2011) (expanding the definition of "data collected" to encompass "any information or data received from a computer or device"). The FTC’s attempts to expand the information covered under recent consent orders are consistent with recent statements expressing the Staff’s view that "the traditional distinction between [personally identifiable information and non-personally identifiable information] has eroded and that information practices and restrictions that rely on this distinction are losing their relevance."  Protecting Consumer Privacy in an Era of Rapid Change at 34-35.  Accordingly, the Staff’s proposed framework for business is "not limited to those who collect personally identifiable information," but rather "applies to those commercial entities that collect data that can be reasonably linked to a specific consumer, computer, or device."  Id. at 43.  Consistent with this view, we expect the FTC staff to continue to push the scope of covered information covered by privacy and data security consent orders in 2012. E.   COPPA Developments The Children’s Online Privacy Protection Act of 1998 (COPPA), effective April 21, 2000, requires companies that operate websites or online services to obtain parental consent before collecting, using, or disclosing "personal information" from children under age 13, if (1) those companies’ websites or services are directed to children under 13, or (2) they have knowledge that they are collecting personal information from children under 13.  16 C.F.R. § 312.2.  Currently, personal information covered by the Act includes (1) individually identifiable information, such as full name, home address, email address, telephone number, social security number; (2) persistent identifiers, such as customer numbers collected through cookies or processor serial numbers, if they are associated with individually identifiable information; and (3) information concerning the child or the parents of that child that the website operator collects online from the child and combines with the types of information covered by (1) or (2).  Id.  The FTC has been especially active in pursuing enforcement actions under COPPA during the past year, with a particular focus on new and emerging mobile and online technologies.           Recent FTC Orders Related to COPPA Over the past year, the FTC for the first time targeted mobile applications, online virtual worlds, and social networking websites directed to children for alleged COPPA violations.  The orders entered in the past year clarify that the FTC interprets "Web site located on the Internet," the language employed by the Act, broadly to cover virtually any content that children can access through a browser on a computer or on a mobile device.  See Children’s Online Privacy Protection Rule, 76 Fed. Reg. 59,804, 59,807 (proposed Sept. 27, 2011) (to be codified at 16 C.F.R. pt. 312).  The FTC’s consent orders in these cases provide important guidance on the potential application of COPPA to online and mobile services that may collect information from children under 13. In United States v. Playdom, Inc., the FTC charged operators of twenty online virtual worlds with violations of COPPA and the FTC Act.  Case No. SACV11-00724, FTC File No. 1023036 (C.D. Cal. May 12, 2011).  Defendants’ registration process elicited personal information from all potential users, who could publicly post additional personal information after registering.  The FTC charged defendants under COPPA for failing to provide proper notice to or obtain verifiable consent from parents before collecting or disclosing children’s personal information, as well as with violating Section 5 of the FTC Act due to related misrepresentations in defendants’ privacy policy.  Significantly, only one of the virtual worlds at issue was explicitly directed at children, while the other nineteen were intended for general audiences (although they attracted a significant number of children).  Defendants agreed to settle the charges for $3 million, the largest civil penalty for a violation of COPPA to date.  We anticipate that the FTC will be increasingly aggressive in pursuing COPPA complaints against developers of games and mobile apps that are used by a significant number of children, even when the apps or websites are not expressly directed to children. Last year, the FTC also pursued the first enforcement action under COPPA against a mobile application developer, W3 Innovations, LLC (W3).  United States v. W3 Innovations, LLC, Case No. CV-11-03958-PSG, FTC File No. 102 3251 (N.D. Cal. Aug. 12, 2011).  W3 operated approximately forty apps–through which it collected and maintained thousands of children’s email addresses and allowed children to publicly post information, including personal information, on message boards–without providing proper notice or obtaining verifiable parental consent.  The settlement imposed a $50,000 penalty on the mobile app company, but also required the developer to delete all personal information collected in violation of COPPA, in addition to other requirements.  This type of requirement could have significant implications for any company that depends on continued access to an installed user base that includes children under 13, since the deletion of all personal information would include account information and content posted by those users–effectively requiring the company to delete the accounts for all users under 13.  Finally, in United States v. Godwin, the FTC targeted a social networking website directed to children ages 7 to 14.  Case No. 11-cv-03846-JOF, FTC File No. 1123033 (N.D. Ga. Nov. 8, 2011).  The FTC charged Godwin, the operator of www.skidekids.com (a website that markets itself as the "Facebook and Myspace for kids") with COPPA violations for collecting personal information from children without obtaining prior parental consent and with violating the FTC Act for making allegedly deceptive claims about its information collection practices by stating that children must provide a parent’s valid email address to register, when in fact the site permitted children to register without a parent’s email address.  The Order imposed a $100,000 civil penalty (although all but $1,000 of this amount could be suspended if Godwin provides truthful information about his financial condition and complies with the Order’s oversight provision).  Notably, the FTC’s action targeted the operator of the website in his individual capacity, rather than his company–a trend that may be of particular interest to app developers and start-up tech companies.  Like W3, Godwin was also ordered to destroy personal information obtained in violation of COPPA and, for a limited time, to link to educational material and to retain an online privacy professional to oversee any COPPA-covered websites.           Proposed Revisions to COPPA In response to the dramatic increase in mobile and online products used by children, the FTC proposed a number of substantial amendments to COPPA to modify the Act’s definitions and requirements regarding provision of parental notice, parental consent mechanisms, security of children’s personal information, and oversight of self-regulatory safe harbor programs.  Children’s Online Privacy Protection Rule, 76 Fed. Reg. 59,804.  FTC Chairman Jon Leibowitz explained that the proposed revisions to the law were prompted by "an explosion in children’s use of mobile devices, the proliferation of online social networking and interactive gaming."[3]  The most significant and controversial proposed change to COPPA is an expanded definition of "personal information" that dramatically enlarges the scope of information covered by the Act.  For the first time, the FTC’s proposed definition would include geolocation information.  In addition, the FTC would expand the scope of persistent identifiers covered by the Act to include any persistent identifier used for functions other than the operator’s own internal operations (potentially sweeping in all persistent identifiers contained in third-party cookies, for example, even when they do not contain individually identifiable information).[4]  The tech industry has urged the FTC to abandon this revision, citing a significant impact on innovation as well as privacy.  Web-based services, such as Google and Yahoo, and telecommunications carriers, such as AT&T and Verizon, caution that treating persistent identifiers like personal information "could negatively impact the way many web services have been designed to function, and would have a devastating impact on the advertising that supports the flow of free online content."[5]  In addition to negatively impacting businesses, the proposed change has the potential to undermine COPPA’s confidentiality objectives: "[p]lacing identifiers on a level playing field with other personal information could result in the collection of more, rather than less, personal information" and could "reduce incentives for businesses to take privacy-enhancing steps to anonymize or de-identify the child’s personal information."[6] The FTC has also proposed significant changes to the manner of parental notice and consent, requiring that operators provide an in context, "just-in-time" notice concerning its collection of children’s personal information (as opposed to disclosing that information in a privacy policy)–a requirement that may be particularly challenging to implement in a mobile environment.  As to consent, the FTC has proposed to eliminate the "e-mail plus" method for obtaining consent from parents, while adding new, more complex methods for operators to obtain verifiable parental consent, including electronic scans of signed parental consent forms, video-conferencing, and use of government-issued identification checked against a database. Many companies have expressed concern with the FTC’s notice and consent proposals, noting that "in an environment where many companies offer services on the same webpage . . . it is becoming increasingly unworkable for each operator to provide notice and obtain parental consent."[7]  There is particular concern over the FTC’s proposal to eliminate "e-mail plus," which many sites and services have integrated into their products to ensure compliance with COPPA.  Eliminating what had long been a widely accepted method of consent "pulls the rug out from under them and creates major short-term marketplace uncertainty."[8]  The Center for Democracy and Technology has criticized the FTC’s proposed new method of consent via government-issued identification, warning that the method only proves the operator has received someone’s ID, as it cannot verify that the person on the ID is in fact a parent of the minor.[9] The FTC also has proposed revisions intended to impose greater responsibility on companies that disclose children’s personal information to third parties (such as platforms that disclose information through APIs to third-party developers), as well revisions intended to increase oversight over self-regulatory industry groups that implement safe harbor programs under COPPA. The comment period on the proposed changes closed on December 23, 2011, and it is unclear how the FTC will respond to these concerns.  The outcome of these issues will have significant implications for online and mobile developers and services, particularly the increasing number that are used by children. Back to Top III.   Criminal Enforcement 2011 demonstrated that cybercrime continues to be a priority for U.S. law enforcement officials.  In recent years, the FBI has repeatedly stated that cybercrime was the agency’s number three priority after counterterrorism and counterintelligence, and FBI officials, including Director Robert Mueller, have emphasized that they expect computer-related threats to increase in the future.  The past year saw a number of developments relating to criminal prosecutions of cybercrime, detailed below, including new enforcement strategies and challenges to the Computer Fraud and Abuse Act ("CFAA"), 18 U.S.C. § 1030.  The CFAA establishes federal criminal penalties and a civil cause of action for unauthorized computer access, and is the primary federal statute used to prosecute computer hacking and misuse cases.  Among its other provisions, the CFAA creates a criminal cause of action against any person who "intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains . . . information from any protected computer," or who "intentionally accesses a protected computer without authorization."  See 18 U.S.C. §§ 1030(a)(2)(C), (a)(5)(C), and (g).           United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010) In a decision issued on December 27, 2010, the Eleventh Circuit upheld the conviction of Roberto Rodriguez, a former employee of the Social Security Administration ("SSA"), for criminal violations of the CFAA based upon his unauthorized use of SSA databases to access individuals’ personal records for non-business reasons.  The Eleventh Circuit ruled that, although Rodriguez was authorized to access the SSA databases, he exceeded his authorized access by using the databases for non-business reasons even after being notified of SSA policies prohibiting employees from such use and warning them of potential criminal penalties.  Mr. Rodriguez was sentenced to one year’s imprisonment.  This case is among the latest examples of the criminal prosecution of "insiders"–employees convicted of exceeding authorized access to their employer’s computer network–and stands as a reminder of that ever-present threat.           United States v. Kramer, 631 F.3d 900 (8th Cir. 2011) Neil Kramer pleaded guilty to transporting a minor in interstate commerce with the intent to engage in criminal sexual activity and acknowledged using his cellular telephone to communicate with the victim for a six-month period prior to the offense.  The Eighth Circuit affirmed the district court’s conclusion that the phone was a "computer" within the meaning of the CFAA that was used to facilitate the offense, and Kramer’s actions therefore merited an enhancement to his prison sentence under the federal sentencing guidelines.  In reaching this conclusion, the Eighth Circuit confirmed the breadth of the CFAA, noting that the CFAA’s definition of a computer is "exceedingly broad" and includes "any device that makes use of a[n] electronic data processor," regardless of an Internet connection.           United States v. Scheinberg, No. 10-CR-336 (S.D.N.Y. Mar. 10, 2011) On April 15, 2011, the government announced charges against the founders of the three largest Internet poker companies operating within the United States–PokerStars, Full Tilt Poker, and Absolute Poker–alleging that the companies engaged in bank fraud, money laundering, and violations of gambling laws including the Unlawful Internet Gambling Enforcement Act ("UIGEA").  The indictment charged that the defendants, over a nearly five-year period, created phony merchants to process payments to their sites after the passage of the UIGEA prompted banks and payment processors to refuse to process their transactions.  Further, the FBI seized the domain names of five related websites, preventing user access to the sites.  This case and a related civil lawsuit brought by the government represent the Department of Justice’s most significant recent attempt to pursue Internet gambling operators.  Relatedly, the DOJ’s Office of Legal Counsel issued an opinion on December 23, 2011, stating that the Federal Wire Act only applies to interstate transmissions of wire communications that relate to "a sporting event or contest."  This is contrary to the Criminal Division’s previous view that the U.S. operations of virtually any type of Internet gambling site would violate the Wire Act.  Thus, it is likely that future criminal prosecutions will rely on the UIGEA as in Scheinberg.           United States v. Nosal, 642 F.3d 781 (9th Cir. 2011), en banc rehearing granted In a closely watched case that has garnered significant national media attention, the Ninth Circuit has agreed to an en banc rehearing of a case that will have enormous impact on future prosecutions under the CFAA.  Nosal is one in a line of cases in which contract-based violations of computer terms of use are equated with "exceeding authorized access" under the CFAA, and thus serve as the basis for criminal charges.  This case tests the limits of the CFAA’s scope, making the en banc rehearing particularly significant.  In April 2011, a three-judge panel of the Ninth Circuit reversed the district court’s granting of David Nosal’s motion to dismiss the indictment, holding that an employee "exceeds authorized access" within the meaning of the CFAA when an employee violates an employer’s computer access restrictions, including use restrictions.  Similar to a growing number of employee disloyalty cases involving confidential computer data, Nosal, a former employee of the executive search firm Korn/Ferry International, allegedly obtained confidential information from one of his employer’s databases, which he planned to use to establish his own competing executive search firm.  Critics of the decision have argued that the Ninth Circuit’s ruling broadens the scope of the CFAA and that, under Nosal, even minor violations of an employer’s computer use policies would create the potential for criminal liability.  The Ninth Circuit agreed to review the case en banc and oral arguments were heard in December 2011, but no decision has yet been issued.           United States v. Fricosu, No. 10-CR-00509-01-REB (D. Colo. May 6, 2011) In a case that implicates the law governing search and seizure of computer data, including Fourth and Fifth Amendment issues, on January 23, 2012, a district court judge ordered Ramona Fricosu, who was charged with perpetrating a complex mortgage fraud, to unlock the hard disk of her seized laptop computer, which utilized full hard disk encryption.  The judge ruled that compelling the production of documents stored on the encrypted hard drive did not violate the Fifth Amendment privilege against compelled testimony and also found that the government had met its burden to show that Fricosu either owned the laptop or was its primary user.  Fricosu would not necessarily be required to reveal her actual password in order decrypt the computer data–for example, she could enter the password into the laptop directly.  The decision in this case is a significant contribution to the growing body of case law on this issue.  Several previous cases involving similar issues have been decided in recent years.  In In re Boucher, No. 06-MJ-91, 2009 WL 424718 (D. Vt. Feb. 19, 2009), the first case to test whether an individual could be constitutionally compelled to provide an encryption key to decrypt computer data, immigration officials seized a laptop held by Canadian national Sebastien Boucher as he entered the United States from Canada, after the officials detected images that appeared to contain child pornography on the laptop.  The laptop was subsequently shut down and its files were encrypted behind a password.  A magistrate judge ruled that compelling Boucher to provide the password would compel testimonial evidence in violation of the Fifth Amendment privilege against self-incrimination, but was later overruled by a district court judge, and Boucher subsequently decrypted the laptop. However, later cases took positions contrasting with Boucher.  In United States v. Kirschner, No. 09-MC-50872, 2010 WL 1257355 (E.D. Mich. Mar. 30, 2010), a district court judge quashed a subpoena to compel the defendant to reveal his password to an encrypted computer, noting that the government was seeking incriminating testimony from the defendant by compelling him to reveal his password, which was unconstitutional under the Fifth Amendment.  And in United States v. Rogozin, No. 09-CR-379, 2010 WL 4628520 (W.D.N.Y. Nov 16, 2010), a magistrate judge suppressed evidence from a seized laptop because the defendant had not been notified of his Miranda rights before law enforcement officials asked for his laptop password in an oral interview.  The magistrate judge ruled that the defendant’s response to the questions of federal agents constituted incriminating testimony. In Fricosu, prosecutors argued that the encrypted laptop is a form of physical evidence and that failing to compel Fricosu to decrypt the data would permit future criminal defendants to evade search warrants through the increasingly common use of computer encryption.  Fricosu and an amicus curiae brief filed by the Electronic Frontier Foundation, citing Kirschner, Rogozin, and the magistrate judge’s decision in Boucher, argued that the password is a form of knowledge and that compelling Fricosu to decrypt the data would violate her Fifth Amendment privilege against self-incrimination.           United States v. Pu, No. 11-CR-00699-1 (N.D. Ill. Oct. 10, 2011) In yet another employee disloyalty case, Yihao Pu, a former employee of an asset management firm, was charged with criminal theft of trade secrets for using unauthorized computer software on his employer’s computer to circumvent access restrictions and obtain confidential trading information.  The complaint alleged that the compromised information would give a significant advantage to competitive businesses and that trades using that information would undermine the firm’s trading strategies.  The fact that this case was prosecuted as a trade secrets case, rather than as a computer hacking case under the CFAA, serves to demonstrate the variety of tools federal prosecutors have at their disposal in pursuing cybercrime.  As of this writing, Pu is currently free on bail and awaiting indictment.           United States v. Dotcom, No. 12CR3 (E.D. Va. Jan. 5, 2012) On January 19, 2012, the Department of Justice announced that it had charged Megaupload, an online file-sharing website, and seven individuals with operating an "international organized criminal enterprise" engaged in racketeering, money laundering, and copyright infringement.  In its indictment, the government alleged that Megaupload generated more than $175 million in revenue and led to more than $500 million in damage to copyright holders.  Megaupload allegedly employed a business model designed to promote copyright infringement, which offered financial incentives to users who uploaded infringing content, and Megaupload failed to terminate the accounts of users who it knew had engaged in copyright infringement.  A district court judge ordered the seizure of 18 domain names affiliated with Megaupload, and four of the individual defendants were arrested in New Zealand.  The case continues the trend of seizing domain names and shutting down websites as an enforcement tool and highlights the level of international cooperation in cybercrime investigations. Back to Top IV.   Legislative Developments While privacy and information security are invariably hot topics in the political arena, 2011 proved to be a uniquely active year in this area, as many proposals tackling cybersecurity, personal privacy, online infringement and data breach notification were introduced at the federal level.  While the prospects of the following bills are difficult to predict with certainty, some of the most notable proposals are discussed below. A.   Stop Online Piracy Act ("SOPA") and the Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act ("PROTECT IP Act" or "PIPA") SOPA and PIPA are the House and Senate versions of what were easily the most controversial pieces of privacy-related legislation introduced in 2011, both intended to combat "rogue websites" committed to online piracy. Representative Lamar Smith (R-TX) introduced the House version of the bill, H.R. 3261, known as SOPA, on October 26, 2011.  The law would, in relevant part, permit the Attorney General or an injured holder of an intellectual property right to sue a website owner, website operator, or domain name registrant of a "foreign infringing site" committing or facilitating the criminal violation of a U.S. user’s intellectual property rights.  The Attorney General could seek court orders to have ISPs block access to the infringing site, block payment network providers from completing transactions with the site, prevent advertisers from continuing to advertise on the site, and have search engines take reasonable measures to prevent the site from being served as a direct link, within five days of receipt of the order.  Individual rights holders could seek similar injunctive relief after a two-step notification procedure (restricting payment and advertising, but not ISPs or search engine results).  Senator Patrick Leahy (D-VT) introduced the Senate version of the bill, S. 968, known as the PROTECT IP Act or PIPA, on May 12, 2011.  Similarly to SOPA, PIPA would give the Attorney General or an injured copyright or trademark holder the right to commence an action against website owners or operators, or against domain name registrants, if either were "dedicated to infringing activities," meaning that the site has "no significant use other than engaging in, enabling, or facilitating" copyright or trademark infringement, or "is designed, operated, or marketed by its operator or person operating in concert with the operator, and facts or circumstances suggest is used, primarily as a means for engaging in, enabling, or facilitating" the same.  Another portion of the bill would have also permitted the Attorney General or injured plaintiffs to seek court orders to compel ISPs to block allegedly infringing websites’ domain names or web addresses, if the website or domain name has certain connections to the United States, conducts business directed to United States residents, and harms holders of United States intellectual property rights.  The legislation has inspired robust debate.  Supporters of the bills view the legislation as a targeted means to combat rogue websites dedicated to counterfeiting and piracy, particularly those based abroad.  The bills inspired a groundswell of opposition from supporters of the technology sector, including many who had not previously been involved in the political process.  Critics of the bills raised concerns about censoring websites for hosting infringing content, chilling innovation, and other privacy concerns. As a result of the flurry of protests in mid-January 2012 (political activism which is, in and of itself, a notable trend), several former House and Senate co-sponsors of the bills pulled their support, leaving the future of both bills in doubt.  A scheduled vote to bring PIPA to the Senate floor for debate on January 24, 2012 was postponed indefinitely on January 20, 2012.  SOPA was referred to the House Judiciary’s Subcommittee on Intellectual Property, Competition and the Internet, with hearings and markup sessions being held through December 2011. B.   Online Protection and Enforcement of Digital Trade Act ("OPEN Act")  Opponents of PIPA, led by Senator Ron Wyden (D-OR), introduced the OPEN Act, S. 2029, on December 17, 2011.  The OPEN Act–which would amend the Tariff Act of 1930–would authorize the International Trade Commission (rather than the Justice Department) to issue cease and desist orders against websites dedicated to infringing activity.  The orders would restrict payments from being made to, and advertisements from being made on, infringing websites served with such orders, "as expeditiously as reasonable." Senator Wyden has reportedly promoted the OPEN Act as an alternative to SOPA and PIPA that would achieve the same goals "without the collateral damage."  Critics of the OPEN Act, however, argue that SOPA and PIPA may be more effective at combatting piracy sites that make money from foreign advertisers, and that the OPEN Act would give the executive branch too much power to pardon foreign websites for mere "policy reasons."  The OPEN Act was referred to the Senate Finance Committee. C.   Notable Federal Privacy and Data Breach Legislation The following three related bills have all been reported out of committee and are awaiting Senate consideration.           Personal Data Privacy and Security Act (including Proposed Amendments to Computer Fraud and Abuse Act) Senator Patrick Leahy (D-VT) introduced the Personal Data Privacy and Security Act, S. 1151, on June 7, 2011.  The bill would create several new federal crimes for unauthorized access to personal information, pertaining to hacking, identity theft, and security breaches.  The bill would also require certain government agencies and private business entities that use, access, transmit, store, dispose of, or collect personally identifiable information to establish certain security measures, and provide data breach notices to affected individuals. Entities engaging in interstate commerce that collect, access, transmit, use, store, or dispose of sensitive, personally identifiable information on 10,000 or more United States persons would have to establish a data privacy and security program designed to ensure the security of such information.  Covered entities would be required to engage in periodic risk assessments of its security program and train employees accordingly for its implementation within a year of the law’s implementation.  Financial institutions regulated by the Gramm-Leach-Bliley Act and HIPAA-regulated entities would be exempt from these requirements because those statutes provide similar rules.  The bill includes steep civil and criminal penalties. Notably, the bill also contained proposed amendments to the CFAA.  The bill adopts (in revised form) Senators Chuck Grassley’s (R-IA) and Al Franken’s (D-MN) proposals to amend 18 U.S.C. § 1030(g) to state that no action may be brought under the CFAA for Terms of Service violations based upon unauthorized access or access in excess of authority.  In addition, Senator Leahy’s proposed amendments to the CFAA would substantively rewrite the statute to punish accessing particular categories of information, and would create new penalties for aggravated damage to a critical infrastructure computer.  The Senate Judiciary Committee filed a written report on the bill in November 2011, and it is awaiting Senate consideration.           Data Breach Notification Act Senator Dianne Feinstein (D-CA) introduced the Data Breach Notification Act, S. 1408, on July 22, 2011.  Feinstein’s bill would establish one federal data breach notification standard whenever an agency or business entity engaged in interstate commerce that uses, access, transmits, stores, disposes of, or collects sensitive personally identifiable information discovers a breach has occurred.  Covered entities would be required to notify affected owners or licensees of such breaches "without unreasonable delay" following the breach according to specified content notification provisions.  Reasonable delay could include the time necessary to determine the scope of the breach, prevent further disclosures, restore the integrity of affected system, and provide notice to law enforcement.  Notice generally would not be required if the agency or business entity concluded that there was "no significant risk" that a breach resulted in or would result in harm to the affected individual. If the breach is reasonably believed to have affected over 5,000 residents of a state, major media outlets would have to be notified.  If the breach is reasonably believed to have affected over 10,000 people or involved particularly large databases (or those owned by the federal government), the United States Secret Service must be notified.  Other law enforcement agency notification provisions are also included if the breach involves particularized circumstances such as espionage or mail fraud, for example.  The law would be enforced by state attorneys general, providing for severe civil penalties and possible injunctive relief. The Judiciary Committee held a hearing on the bill in September 2011, and the bill was ordered reported out to the Senate with amendments.           Personal Data Protection and Breach Accountability Act Senator Richard Blumenthal (D-CT) introduced the Personal Data Protection and Breach Accountability Act, S. 1535, on September 8, 2011.  The bill would provide for criminal fines or imprisonment for the intentional or willful concealment of security breaches resulting in harm to any person.  The bill further prohibits the interception, redirection, monitoring, manipulation, aggregation or marketing of an authorized user’s web search or query without that user’s consent and without clear and conspicuous disclosure of the data collected.  The bill would also require interstate companies that use, access, transmit, store, dispose, or collect personal information pertaining to more than 10,000 people to implement a comprehensive security program to safeguard that information from vulnerabilities or unauthorized access.  Among the extensive notification provisions, the bill would require that such companies notify affected individuals of a security breach without unreasonable delay (while providing for certain exceptions for federal law enforcement and the intelligence community), and provides for the methods and content of such notice.  Companies required to provide notice to individuals would also be required to provide for the affected individual at no cost, upon his or her request, quarterly consumer credit reports, credit monitoring services, a security freeze on the individual’s credit report, and compensation for damages caused by the security breach. The bill provides for exceptions for HIPAA-regulated entities and financial institutions covered by Gramm-Leach-Bliley, among a few other exceptions.  The bill is enforceable by the Attorney General, FTC, and state attorneys general, but also would permit individuals to bring civil actions to obtain injunctive relief or to recover damages (including punitive damages) for violations of the notice requirements. The bill was placed on the Senate’s Legislative Calendar under General Orders.           White House Cybersecurity Legislative Proposal The Obama administration has pursued a comprehensive national cybersecurity agenda, publicly stating a desire to invest in and secure the nation’s digital infrastructure as a means of combatting repeated cyber intrusions and an increase in cybercrime.  The administration has further expressed the view that our cybersecurity law requires updating in order to properly defend against such threats.  To that end, on May 12, 2011, the White House released a Cybersecurity Legislative Proposal to provide input for Congressional consideration.  The proposal has two central goals.  First, it suggests a framework for national data breach reporting, to simplify and standardize the patchwork of state laws currently in place.  Second, it would enhance criminal penalties for cybercrimes and extend the Racketeering Influenced and Corrupt Organizations ("RICO") Act to cover cybercrimes. The White House proposal would also enable the Department of Homeland Security ("DHS") to help private sector companies or state and local governments with responding to data breaches, and would permit voluntary information sharing between those entities and DHS, while providing immunity for those entities when doing so.  Additionally, the proposal envisions centralizing (largely through DHS) management of cybersecurity, recruitment of cybersecurity professionals, installation of intrusion prevention systems, and embracing cloud computing. The House and Senate are considering several pieces of legislation that incorporate pieces of the White House proposal, including the Federal Protective Service Reform and Enhancement Act, H.R. 2658 (referred to two committees and forwarded with markups to House Homeland Security Committee by voice vote in July 2011) and the Cyber Intelligence Sharing and Protection Act, H.R. 3523 (referred to the House Committee on Intelligence in November 2011).           Promoting and Enhancing Cybersecurity and Information Sharing Effectiveness Act ("PRECISE Act") Representative Daniel Lungren (R-CA) introduced the PRECISE Act, H.R. 3674, on December 15, 2011.  That bill would give the DHS authority to protect federal and critical infrastructure systems, conduct risk assessments, coordinate with other entities, and designate a lead cybersecurity official to report to Congress.  The bill would further authorize coordinating the development of sector-specific security standards, and would create a National Cybersecurity Authority to centralize national cybersecurity efforts.  Lungren’s bill would also create a nonprofit organization to serve as a national clearinghouse for cybersecurity threat information, called the National Information Sharing Organization.  The board of directors would be composed of a representative from the DHS, four representatives from three different Federal agencies with significant responsibility for cybersecurity, ten representatives from specific private sectors (including at least one member representing a small business interest), two representatives from the privacy and civil liberties community, and the Chair of the National Council of Information Sharing and Analysis Centers. The bill was referred to the House Subcommittee on Technology and Innovation on January 12, 2012. Some other notable federal legislative efforts in the past year include: Senator Patrick Leahy (D-VT) introduced a bill, S. 1011, on May 17, 2011 to amend the Electronic Communications Privacy Act.  Senator Leahy’s amendment would require the government to obtain warrants to access any e-mails or wireless communications (eliminating the statute’s current distinction permitting the government to access such communications over 180 days old with a court order rather than a warrant).  It would further require disclosure to affected individuals within three days (absent the government obtaining a court order granting delayed notice for up to 90 days for investigative or security-related reasons).  Finally, the amendment would require warrants to obtain individuals’ geolocation information.  The bill was referred to the Senate Judiciary Committee, but no further action has been reported since. Senator Mark Pryor (D-AR) introduced the Data Security and Breach Notification Act, S. 1207, on June 15, 2011.  This bill would require covered entities (including "information brokers") owning, possessing, or contracting with third parties to maintain personal information to establish and implement reasonable information security safeguards for such information.  It would also establish a national standard for data breach notification, requiring covered entities to notify affected individuals and the FTC within 60 days unless the entity could prove that doing so was not feasible for enumerated practical reasons, or upon written notice of a law enforcement or national security agency.  The bill details the notification required, along with substitute notification methods for unusual circumstances such as when normal notification methods would be exceedingly costly.  Covered entities may also be required to arrange for free consumer credit reports or credit-monitoring services at the affected individual’s request, for up to two years.  The bill, which provides for stiff civil penalties, would be enforced jointly by the FTC and state attorneys general.  An entity would be exempt from the notice provisions if it determined that a breach presented no reasonable risk of identity theft, fraud, or other unlawful conduct.  The bill was referred to the Senate Committee on Commerce, Science, and Transportation, but no further action has been reported since. Senator John Kerry (D-MA) introduced the Commercial Privacy Bill of Rights Act, S. 799, on April 12, 2011.  Largely tracking recommendations of the Department of Commerce, this bill would be the nation’s first comprehensive federal privacy law, covering data across all sectors and industries.  The law, enforceable by the FTC, would apply to "covered entities" maintaining covered information concerning over 5,000 people, including common carriers and nonprofit organizations, but excluding financial institutions.  The law would have an opt-out standard for "non-sensitive" personally identifiable information ("PII"), and an opt-in standard for "sensitive" PII.  Covered entities would be required to implement "reasonable security measures," and would be required to provide "clear, concise and timely notice" to individuals regarding the entity’s privacy practices (and any material changes thereto).  The law would also require giving individuals reasonable access to request correction or to cease collection of their information in certain circumstances.  The law would further impose certain restrictions and opt-in requirements before PII can be transferred to third parties, unless companies participate in an FTC safe harbor pre-approval program under an opt-out standard.  Covered entities would be permitted to seek only as much covered information as reasonably necessary, retain it only for as long as necessary, and would be required to establish and maintain reasonable procedures for ensuring the accuracy of the information being retained.  State attorneys general and FTC could seek civil penalties when companies do serious harm, but the law would provide no private right of action. The bill was referred to the Senate Commerce, Science and Transportation Committee in early 2011, but no further action has been reported since.  Back to Top V.   Data Security Data security breaches and their consequences continued in 2011 to be a burgeoning area of attention and concern for businesses, government enforcement agencies, and private litigants.  One needed to look no further than the mainstream news media for evidence of the escalating magnitude, sophistication, and cost of data breaches.  As a result, sophisticated businesses that handle sensitive customer, employee, or commercial information are not only increasing their attention and investment in data security, but also taking steps to anticipate the potential for breach incidents in spite of their best efforts.  We will be discussing leading-edge strategies for preparing for and responding to a security incident or vulnerability report in a complimentary client briefing on February 29, 2012 entitled Data Breaches, Hacks and Vulnerabilities: Leading Strategies for Responding to a Data Breach Incident.  The one-hour briefing will discuss important considerations for any business that handles consumer, business or personal information in today’s rapidly evolving technical and legal environment.  Please click here for additional information and to register for the briefing. Below we illustrate a sampling of high-profile data breach incidents that occurred in 2011 and some of the potential trends they illustrate, followed by an update of legal developments relating to breach notification obligations, and a discussion of insurance issues that may arise from data breach incidents. A.   High-Profile Breach Incidents and Trends from 2011                    Citicorp In May, hackers succeeded in breaching Citicorp’s online account system.  According to published reports, personal account information for a subset of Citicorp’s 21 million customers may have been exposed, including account information for more than 360,000 of the company’s U.S. credit card holders.  The hackers were able to infiltrate the bank by first logging onto Citicorp’s online credit card website and then inserting account numbers into the text in the address bar to access various accounts.  The breach, one of the first known hacking cases at a bank, was discovered during routine system maintenance.  Despite the banking industry’s significant focus on data security, hackers continue to target businesses in the financial sector and to find new vulnerabilities to exploit, in large part due to the potential value of the data they handle, such as payment card and account information.           Epsilon Epsilon, a unit of Texas-based Alliance Data Systems, manages email marketing and communications for more than 2,500 clients, including prominent businesses such as Best Buy, Marriott International, Chase, Capital One, and Citigroup.  In April, Epsilon reported a massive data security breach that exposed millions of individual email addresses and consumer names.  Although sensitive financial information was not exposed, the information obtained by hackers could be used to send personalized emails in "phishing" scams.  In a phishing scam, hackers send fake emails pretending to be a company with which the consumer does business.  The emails trick customers into clicking a link that installs malware or spyware or asks for credit card or login information to the customer’s account with that business where more sensitive data is stored.  Given that data such as that exposed in the Epsilon breach can facilitate phishing and similar scams, this data can have considerable value to online fraudsters even if no financial information or personally identifying information is involved. *   *   * As these and numerous other high-profile breach incidents illustrate, hacking attacks continue to grow in both size and sophistication.  At the same time, a growing segment of the legal industry stands ready to press private litigation on behalf of those whose information is potentially compromised, often within days or even hours of a breach coming to light, and frequently without any evidence of direct financial harm or misuse of the data that was compromised.  Both of these trends are illustrated in the recently announced Zappos breach.  Within a day of announcing that one of its servers had been infiltrated, thereby potentially exposing limited customer data, Zappos was named in multiple class action lawsuits brought on behalf of customers despite the absence of direct financial loss on their part.  Moreover, data security issues are no longer limited merely to businesses that handle or host significant amounts of user data.  Hewlett-Packard ("HP"), for example, was targeted during 2011 in a class action lawsuit following media reports that researchers had developed a malicious tool that could allow hackers to take control of HP printers through embedded firmware, even though no evidence existed that such an attack had ever taken place.  These and other suits illustrate the readiness of private litigants to bring suit based on new and creative theories of liability, although–as discussed in the class actions section above–it is unclear which of these theories ultimately will gain traction and survive legal challenges. Given the volume and increasing sophistication of data breach attacks, as well as the exponential growth in the volume and potential value of stored personal data, attention in the information technology sphere has evolved from simply preventing an attack to being prepared for one.  Virtually no commercial network is truly hacker-proof, and so while prudent businesses invest in the means to detect, rebuff, and contain potential intrusion, many CIOs and in-house counsel also recognize that the prospect of a data security incident is not so much a question of "if," but "when."  The new goal, then, is not just to maintain best practices defenses, but also to have the right structure in place to respond to a breach.  As part of this new paradigm, many businesses are recognizing the importance of planning for a potential breach incident even before it occurs.  Since data security incidents are extremely fast moving, involve high potential exposure, and implicate many different disciplines, sophisticated businesses have developed formal data breach incident response plans. B.   2011 Developments in Breach Notification Obligations The U.S. has yet to enact a uniform national law on data breach notification.  Accordingly, for now, businesses must contend with a patchwork quilt of local statutes in 46 states, the District of Columbia, Puerto Rico and the Virgin Islands requiring notification to those impacted by security breaches involving personal information.[11]  Data security attacks also frequently precipitate law enforcement and government regulatory agency attention, including by the Department of Justice, the FBI, the Federal Trade Commission, and state attorneys general.  In addition, particularly high-profile breaches have subjected the companies involved to inquiries from Congress and requests to testify in congressional hearings.  Moreover, individual executives must be aware of their potential exposure in this setting.  On April 7, 2011, the Securities and Exchange Commission for the first time assessed fines against three former executives of broker-dealer GunnAllen Financial, Inc.  Without admitting or denying the SEC’s findings, the three former executives agreed to settle charges that they had violated Regulation S-P of the Securities Exchange Act of 1934 by failing to protect confidential information about their customers.[12] In the absence of a unified federal statute addressing breach notification obligations, entities are subject to a patchwork quilt of state statutes, narrow federal laws regulating specific industries (such as financial institutions), and specific regulatory obligations.  Two developments during 2011 elaborate on these emerging standards.           SEC Guidance on Breach Reporting On October 13, 2011, the SEC Division of Corporation Finance released guidance that assists public companies in assessing what disclosures should be made when faced with cybersecurity risks and incidents.  SEC, CF Disclosure Guidance: Topic No. 2–Cybersecurity (Oct. 13, 2011).  The guidance provides an overview of disclosure obligations under current securities laws, acknowledging that no existing disclosure requirements explicitly refer to cybersecurity risks and incidents but that a number of existing disclosure requirements may impose an obligation upon registrants to disclose such risks and incidents.  In addition to the brief summary that follows, we discuss the SEC’s guidance in greater detail in our October 17, 2011, client alert, SEC Issues Interpretive Guidance on Cybersecurity Disclosures Under U.S. Securities Laws.            Risk Factors The guidance provides that public companies should disclose risk of cybersecurity incidents in their risk factors if "these issues are among the most significant factors that make an investment in the company speculative or risky."  Companies are expected to evaluate their cybersecurity risks, taking into account all relevant information, including the following: prior cybersecurity incidents and the severity and frequency of those incidents; the probability of cybersecurity  incidents occurring and the qualitative and quantitative magnitude of those risks, including potential costs and other consequences resulting from misappropriation of assets or sensitive information, corruption of data or operational disruption; and the adequacy of preventative actions taken to reduce cybersecurity risks in the context of the industry in which they operate and risks to that security, including threatened attacks of which they are aware. If the company finds that a disclosure related to cybersecurity risks is necessary, it "must adequately describe the nature of the material risks and specify how each risk affects the registrant," avoiding general "boilerplate" disclosure.  Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") The guidance also advises public companies to address cybersecurity risks and incidents in their MD&A "if the costs or other consequences associated with one or more known incidents or the risk of potential incidents represent a material event, trend, or uncertainty that is reasonably likely to have a material effect on the registrant’s results of operations, liquidity, or financial condition or would cause reported financial information not to be necessarily indicative of future operating results or financial condition."  For example, the MD&A should discuss a material reduction to a company’s revenues due to a loss of customers following a cybersecurity incident, or a material increase in costs resulting from litigation linked to a cybersecurity incident, or related to protecting the company from future cyber incidents.           Description of Business Public companies should discuss cybersecurity incidents in their Description of Business to the extent that such incidents materially affect a company’s products and services, relationships with customers or suppliers, or competitive conditions.  Such disclosure should consider the impact of cybersecurity incidents on each reportable segment.           Legal Proceedings Companies may need to include in their Legal Proceedings disclosure a discussion of any pending material legal proceeding involving a cybersecurity incident where the company or any of its subsidiaries is a party to the litigation.           Financial Statement Disclosures Cybersecurity risks and incidents may have significant effects on a company’s financial statements.  For example, prior to a cybersecurity incident, a company may incur substantial costs in the development of preventative measures.  During and after a cybersecurity incident, companies may offer customers additional incentives to encourage customer loyalty, and may incur significant losses and diminished cash flows resulting in impairment of certain assets.  Companies should ensure that any such impacts to financial statements are accounted for pursuant to applicable accounting guidance.           Disclosure Controls and Procedures Companies should consider the risks that cybersecurity incidents may pose to the effectiveness of their disclosure controls and procedures.  If it is reasonably possible that a cybersecurity event might disrupt a company’s ability to provide the SEC with information required to be disclosed in SEC filings, then a company may conclude that its disclosure controls and procedures are ineffective.           California State Notification Law Amendments In 2011, California amended its security breach notification law with changes that went into effect on January 1, 2012.  The updated law mandates a number of additional requirements for entities that have experienced a data breach incident.  Most notably, the updated law touches on two important disclosure requirements. First, the notification sent to affected California residents must include certain mandatory content, such as the name and contact information of the reporting entity, the types of personal information that were potentially leaked, the date of the breach (if known), the date of the notice, whether notification was delayed as a result of a law enforcement investigation, a general description of the breach incident, and toll-free telephone numbers and addresses of the major credit reporting agencies (if the breach exposed a social security number or a California driver’s license or identification card number).  Additionally, the entity may, at its discretion, include information about what it has done to protect individuals whose information has been compromised and provide advice on steps that such individuals can take to protect themselves.  The law requires that the notice must be written in "plain language," requiring entities to ensure that the notice is plain and easy to understand. Second, the updated law requires entities that are required to issue breach notices to more than 500 California residents as a result of a single breach incident to also submit an electronic "sample copy" of its security breach notification directly to the California attorney general. C.   Insurance Issues Given the complexity and expense (and, some might say, the inevitability) of responding to data breach incidents, the availability of financial protection through insurance coverage tailored to data breach losses has become a significant and growing area of attention.  Many businesses confronted with a data breach incident have found, to their dismay, that claims arising from a breach may not readily fit within their standard Commercial General Liability ("CGL") coverage.  Insurers frequently reject claims in connection with breach liabilities as falling outside typical CGL coverage for "bodily injury," property damage," and the like.  Moreover, some insurers have taken the position that claims arising from a data security breach are expressly excluded by their policy terms.    Similar disputes may arise in connection with claims for "loss of use" of tangible property, as is often covered under CGL policies.  Even though lost or damaged data may itself be considered intangible, coverage may be triggered by, for example, a company’s loss of use of infected servers or other network assets due to a hacker attack.  In response, however, express exclusions for data breaches and other cyber claims are becoming more common in CGL policies. Given this potential gap in coverage, many businesses are considering the purchase of policies that specifically protect against losses resulting from data breach incidents.  These increasingly common policies can include both first-party and third-party protections.  First-party protections can include payment for loss of digital assets, cyber-extortion, cyber-terrorism, and expenses such as consumer notification costs.  Third-party liability coverage can include disclosure injury (such as lawsuits alleging unauthorized access to or dissemination of the plaintiff’s private information), content injury (such as suits arising from intellectual property infringement), reputational injury (such as lawsuits alleging disparagement of products or services, libel, slander, defamation, and invasion of privacy), conduit injury (such as suits due to system security failures that result in harm to third-party systems), and impaired access injury (such as suits arising from system security failure resulting in an insured’s system being unavailable to its customers).  Given the broad coverage provided by cybersecurity policies, companies with large amounts of sensitive data should carefully consider the costs and potential benefits of maintaining such coverage. Back to Top VI.   International Developments A.   European Union           Proposed New Privacy Regulation to Replace Data Protection Directive On January 25, 2012, the European Commission released its proposed new regulation that would replace the 1995 Data Protection Directive (the "Directive").  The aim of the new regulation is to update the outdated Directive to deal with technical developments and to unify the existing data privacy legislation of each EU member state.  We discuss this significant legislative proposal in our client alert Proposed EU Privacy Rules Add to the Burden on International Business.           Implementation of EU Cookie Consent Requirement Since 2003, the European Union’s Privacy and Electronic Communications Directive (the "e-Privacy Directive") has required website operators and others who place cookies[13] on users’ computers to inform the users about the purpose of the cookie and to give a right to opt out.  The European Union took additional steps to strengthen this obligation on May 25, 2011, by amending Article 5(3) of the e-Privacy Directive, which now requires that website operators obtain consent before storing cookies on users’ computers.  This new "opt-in" regime is in stark contrast to that of the "opt-out" standard generally adopted in the United States and has been widely criticized as being unworkable in practice. Over six months have passed since the May 2011 deadline for member states to adopt legislation implementing the new rule.  However, partly as a result of uncertainty over the legal and technical manner in which consent can be obtained, the provision has yet to be fully implemented in each member state.           Germany The German legislature is debating a draft Employee Data Protection Act.  The bill would provide a much more detailed–and in some respects more restrictive–regulation on the use of employee data.   For example, it would implement specific restrictions on employee background screenings, video surveillance at work, the use of social media and employee health checks.  It would also restrict the ability of companies to "contract out" of these and other data protection provisions by agreeing to less onerous standards with their works councils.  On the other hand, the bill would allow employee data to be used in the context of compliance-related and other internal investigations (subject to appropriate safeguards).  And, for international companies, the bill would facilitate data transfers to affiliated companies outside the European Union.  The bill is expected to be enacted in the coming months but remains subject to ongoing public debate and developments at EU level.  Two important recent regional court decisions have considered the legality of reviewing employee emails as part of discovery and compliance-related internal investigations in workplaces that permit (or tolerate) personal use of corporate email.  Although these decisions were favorable from an employer’s perspective, it is important to note that the German Federal Supreme Court has not yet decided this question.  Because a violation of telecommunication secrecy laws involves the risk of criminal prosecution for the investigators, conducting internal investigations in Germany continues to require a high degree of caution.           United Kingdom The UK Information Commissioner ("IC") has shown an increased willingness to sanction data controllers with monetary penalties under the UK Data Protection Act ("DPA").  The IC exercised his power to issue monetary penalties four times in 2011 and obtained formal public undertakings in 60 other cases.  The DPA grants the IC the power to serve a data controller with a monetary penalty of up to £500,000 when there has been a serious violation that is likely to cause substantial damage or distress and where the violation was either deliberate or reckless.  Three of the four sanctions have been against government entities for violations including mishandling of medical records and social work case files, and for issuing an unencrypted laptop that was later stolen.  The penalties against the government entities ranged from £70,000 to £130,000.  This new wave of monetary sanctions in the United Kingdom underscores the growing prominence of data privacy and data security issues throughout the European Union.  Businesses have been warned: laptops and other portable storage devices should be encrypted to guard against theft, and personal data should be appropriately encrypted when sent via email, post or courier.  B.   Asia           China While often cited as the origin of cyber-attacks, China is not immune to data breaches within its own borders.  In December 2011, hackers attacked popular social networking site tianya.cn and computer programmer community site CSDN, leaking the personal information of a total of 46 million users.  Despite this, China has fallen behind other countries in the region on data privacy legislation, with no comprehensive national law or regulation currently in effect.  A Draft Personal Information Protection Law was submitted to the State Council for review in 2008 but not yet passed into law, and it is not known when (or if) it will be enacted.  However, this does not mean that data breaches go unpunished, and 2011 has seen the introduction of two major privacy measures.  Serious cases of illegally obtaining, selling, or providing citizens’ personal information are prosecuted under Article 235(1) of the PRC Criminal Law.  In August, for instance, a Beijing appellate court convicted 21 defendants under this provision for illegally obtaining, providing, and selling personal information including cell phone registration information, call records, text message lists and geolocation information, household registration information, bank account information, vehicle information, and real estate registration information.  14 of the defendants received prison sentences.  Although the Criminal Law provides serious sanctions for serious data security breaches, it does not form the basis of a comprehensive data protection regime.  Nevertheless, the Chinese government has made notable progress in 2011: On December 29, 2011, the Ministry of Industry and Information Technology ("MIIT") introduced Several Provisions on Regulating the Market Order for Internet Information Services (the "IIS Provisions"), which take effect on March 15, 2012.  The IIS Provisions cover a range of topics concerning "Internet information service" and "related activities" within the PRC.  In terms of data privacy, the IIS Provisions set forth certain limits on Internet information service providers’ ("IISPs") collection, use, and transmission of "user personal information" ("UPI"), defined as "user-related information that can be used to identify the user, either by itself or in combination with other information."  IISPs may not collect UPI or transmit it to third parties without users’ consent.  IISPs collecting UPI must clearly inform the user of the methods, contents, and purpose of the data collection; may not collect information beyond that necessary to provide services; and may not use UPI for other purposes.  IISPs must properly safeguard UPI, and must take immediate remedial measures in the event of a data breach.  Breach incidents that have caused or may cause "serious consequences" must be reported to the relevant telecommunication regulatory body and violations of these provisions are subject to fines of up to ¥30,000 RMB. Earlier in the year, the MIIT also released a set of draft standards entitled Information Security Technology–Guide of Personal Information Protection (the "Draft Guide").  While the Draft Guide shares some features with the IIS Provisions’ data privacy provisions, it is of broader application but not legally binding.  The Draft Guide defines "personal information" ("PI") as "any information that may be learned and processed, is related to a specific natural person, and can be used to identify that natural person either by itself or in combination with other information."  The Draft Guide sets forth basic rights for data subjects and regulates the collection, processing, transmission, use, blocking, deletion and management of PI by "administrators of personal information" ("APIs")–any person or entity who have actual administration authority over PI.  Most notably, it would prohibit APIs from collecting PI, publicly disclosing it, or transmitting it to third parties without the data subject’s consent.  The Draft Guide also prohibits APIs from transferring PI to "APIs registered overseas," absent clear permission to so under the law or approval by industry regulators.  This provision may impose a substantial burden on multinational companies that currently store or process customer or employee information outside of China.  In addition, the Draft Guide provides extra protection for data subjects under the age of sixteen and certain types of sensitive PI.  The MIIT’s recent rulemaking efforts may represent an attempt to fill the legislative void left by the long delay in enacting the Personal Information Protection Law.  However, the IISP Provisions are essentially limited to the website operators and providers of Internet-based services such as instant messaging, and the Draft Guide is simply a set of non-binding standards containing no enforcement provisions.  Given these limitations, it is unclear how much impact these measures will have on the protection of personal information.           Taiwan Across the strait, Taiwan has made greater strides towards the comprehensive protection of personal information.  The country’s new Personal Information Protection Act ("PIPA") replaces the 1995 Computer Processed Personal Information Protection Act, and now covers all public and private entities’ collection, processing and use of all personal information ("PI"), electronically processed or otherwise.  The new law includes an enforceable requirement to notify affected data subjects of data breach incidents caused by a violation of the PIPA, a first in the region.  Other notable features include restrictions on the collection of certain types of sensitive PI; increased civil, criminal, and administrative liabilities; and government power to restrict cross-border transmission of PI under certain circumstances.  PIPA is expected to come into effect in 2012. In addition, Taiwan’s Ministry of Economic Affairs has established the Taiwan Personal Information Protection and Administration System ("TPIPAS"), a set of standards intended to help private entities establish internal policies to comply with PIPA’s requirements.  Entities that have established compliant privacy protection systems may be certified and issued the Data Privacy Protection Mark ("DP Mark"), similar to the PrivacyMark in Japan and TRUSTe in the U.S.            Hong Kong Hong Kong also recently moved to revamp its 15-year-old Personal Data (Privacy) Ordinance ("PDPO") after a scandal broke in 2010 exposing the sale of two million personal data records by the Octopus Card operator without card users’ direct consent.  The Personal Data (Privacy) (Amendment) Bill 2011 ("2011 Amendment") was introduced into the Legislative Council on July 8, 2011.  Most notably, the 2011 Amendment would require data users intending to sell personal data or use such data for direct marketing to provide data subjects with certain information and a means to opt out.  Unauthorized sale or disclosure of personal data would be subject to criminal liability.  The 2011 Amendment also addresses the powers of the Privacy Commissioner for Personal Data, and would increase penalties for violations of the PDPO, among other things.  At the time of this writing, the 2011 Amendment has not yet been enacted.           India Until recent years, Indian law had no provisions dealing with privacy protection.  The Information Technology Act 2000 was originally amended in 2009 to require a body corporate that possesses, deals with or handles any "sensitive personal data or information" in a computer resource which it owns, controls or operates to maintain "reasonable security practices and procedures."  But the task of defining these terms was delegated to the Central Government.  On April 11, 2011, the Ministry of Communications and Information Technology (Department of Information Technology), Government of India ("IT Ministry") issued the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules 2011 ("Data Privacy Rules").  The new Data Privacy Rules require "bodies corporate" to observe certain standards in the collection, maintenance and disclosure of "sensitive personal data or information." The Data Privacy Rules give the term "sensitive personal data or information" an exhaustive definition.  The term refers, inter alia, to (a) passwords, (b) financial information (details relating to bank accounts, credit cards, debit cards, or other payment instruments), (c) physical, physiological and mental health conditions, (d) sexual orientation, (e) medical records and history, and (f) biometric information.  Broadly speaking, a body corporate must observe the following standards while collecting sensitive personal data or information: Informed Consent–A body corporate must inform a "provider" of sensitive personal data or information of the purpose for which the data will be used, and must obtain the provider’s consent.  Consent may be withdrawn in writing. Lawful Purpose–Sensitive personal data or information cannot be collected except for a lawful purpose, one that is related to a function or activity carried out by the body corporate.  The information must only be collected and used for that purpose. Knowledge–A body corporate that collects information directly from the "person concerned" must ensure that the person knows (i) the fact that the information is being collected, (ii) the purpose for which the information is being collected, (iii) the intended recipients of the information, and (iv) the name and addresses of the agency that is collecting the information and the agency that will retain the information. Retention–The information may only be retained for as long as is required for the purpose for which the information has been collected. Review–Providers of information must be given an opportunity to review the information, and inaccuracies and deficiencies must be corrected as feasible. Sensitive personal data or information can only be disclosed to a third party if prior consent has been obtained from the provider, unless otherwise agreed in the contract between parties, or unless otherwise required by law.  Sensitive personal data or information cannot be published by the body corporate.  A body corporate which has adopted the international standard IS/ISO/IEC 27001 on "Information Technology–Security Techniques–Information Security Management System–Requirements" is deemed to have complied with its obligation to observe "reasonable security practices and procedures."  Alternatively, if an industry association does not follow the IS/ISO/IEC best practices for data protection, a body corporate that complies with a code of best practices approved and notified by the Central Government will also be deemed to have complied with its obligation to observe "reasonable security practices and procedures."  In both cases, the observance of best practices must be certified or audited on an annual basis by an independent auditor approved by the Central Government.  A body corporate will also be considered to have satisfied its obligation to observe "reasonable security practices and procedures" if it has demonstrably implemented a comprehensive, documented information security program that contains managerial, technical, operational and physical security control measures commensurate with the information assets being protected, in keeping with the nature of the business. Further, a body corporate must maintain a policy for dealing both with "sensitive personal data or information" and with "personal information."  The term "personal information" means any information that relates to a natural person which is capable of identifying such person, either by itself or in conjunction with other information likely to be available to the body corporate.  The policy must be published on the body corporate’s website. Once the Data Privacy Rules were issued, there was an outcry that these rules would make it difficult for Indian outsourcers to operate if they were required to take written consent from individuals in other countries whose data they collect and process through call centers and business process outsourcing operations.  On August 24, 2011, the IT Ministry clarified that the obligations under the Data Privacy Rules apply only to Indian companies.  Foreign companies are exempt.  In addition, it was clarified that Indian companies that provide outsourcing services and which possess information under contract are no longer bound by the requirements of the Data Privacy Rules to obtain consent from the data subject.  Also, "Providers of Information" as referred to in the Data Privacy Rules were limited only to natural persons. Given that the rules are fairly new and have not been tested, they are still open to interpretation. Back to Top   [1]       See, e.g., Jennifer Valentino-Devries, iPhone Stored Location in Test Even if Disabled, WALL ST. J., Apr. 25, 2011.   [2]       The Court in In re iPhone Application Litigation granted plaintiffs leave to amend their complaint, which they did in November 2011.  Apple and the Mobile Industry Defendants have filed motions to dismiss the amended complaint, which are scheduled to be heard on May 3, 2012.  Similar complaints are also pending against Google and Microsoft, and motions to dismiss those complaints are likely to be decided in the first part of 2012.  See In re Google Android Consumer Privacy Litig., No. 11-MD-02264-JSW (N.D. Cal. Aug. 15, 2011); Cousineau v. Microsoft Corp., No. 11-CV-01438-JCC (W.D. Wash. Aug. 31, 2011).   [3]       Somini Sengupta, Update Urged on Children’s Online Privacy, N.Y. Times (Sept. 16, 2011).   [4]       The current Act, by contrast, covers only a narrow set of persistent identifiers–those that are associated with individually identifiable information.   [5]       Amy E. Bivins, Web Services, Telecoms Challenge Proposed COPPA Extension to All "Persistent Identifiers", Bloomberg (Jan. 18, 2012).   [6]       Id.   [7]       Id.   [8]       Adam Thierer, Some Thoughts on FTC’s Proposed COPPA Revisions, The Technology Liberation Front (Sept. 16, 2011).   [9]       Ctr. for Democracy & Tech., CDT Statement on FTC’s Proposed COPPA Revisions (Sept. 15, 2011). [10]       Ponemon Inst., LLC, 2010 Annual Study: U.S. Cost of a Data Breach (Mar. 2011). [11]       See Nat’l Conference of State Legislatures, State Security Breach Notification Laws. [12]       Press Release, SEC, SEC Charges Brokerage Executives with Failing to Protect Confidential Customer Information (Apr. 7, 2011). [13]       A "cookie" is a file that a website places on a user’s computer to store user-specific information and track the user (for instance to keep them logged on to a website).  Advertising networks use cookies to offer ads based on users’ interests.  The rule prevents the storage or retrieval of any information from the user’s computer equipment.   The following Gibson Dunn attorneys assisted in preparing this client alert:  Ashlie Beringer, Catherine Brewer, Tzung-Lin Fu, Kai Gesing, Daniel Li, Justin Liu, Priya Mehra, Scott Mellon, Joshua Mitchell, Karl Nelson, Laura O’Boyle, Jessica Ou, Jai Pathak, Daniel Pollard, Shawn Rodriguez, Ilissa Samplin, Michael Saryan, Meredith Smith, Alexander H. Southwell, Oliver Welch and Susannah Wright. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the Information Technology and Data Privacy Group: United StatesS. Ashlie Beringer – Co-Chair, Palo Alto (+1 650-849-5219, aberinger@gibsondunn.com) M. Sean Royall – Co-Chair, Dallas (+1 214-698-3256, sroyall@gibsondunn.com)Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com)Debra Wong Yang – Co-Chair, Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)Howard S. Hogan – Member, Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Karl G. Nelson – Member, Dallas (+1 214-698-3203, knelson@gibsondunn.com) EuropeJames A. Cox – Member, London (+44 207 071 4250, jacox@gibsondunn.com)Andrés Font Galarza – Member, Brussels (+32 2 554 7230, afontgalarza@gibsondunn.com)Kai Gesing – Member, Munich (+49 89 189 33-180, kgesing@gibsondunn.com)Bernard Grinspan – Member, Paris (+33 1 56 43 13 00, bgrinspan@gibsondunn.com)Daniel E. Pollard – Member, London (+44 207 071 4257, dpollard@gibsondunn.com)Jean-Philippe Robé – Member, Paris (+33 1 56 43 13 00, jrobe@gibsondunn.com)Michael Walther – Member, Munich (+49 89 189 33-180, mwalther@gibsondunn.com) ChinaKelly Austin – Member, Hong Kong (+852 2214 3788, kaustin@gibsondunn.com) IndiaJai S. Pathak – Member, Singapore (+65 6507 3683, jpathak@gibsondunn.com)  Questions about SEC disclosure issues concerning data privacy and cybersecurity can also be addressed to any of the following members of the Securities Regulation and Corporate Disclosure Group: Amy L. Goodman – Co-Chair, Washington, D.C.  (202-955-8653, agoodman@gibsondunn.com)James J. Moloney - Co-Chair, Orange County, CA (949-451-4343, jmoloney@gibsondunn.com)Elizabeth Ising – Member, Washington, D.C. (202-955-8287, eising@gibsondunn.com)   © 2012 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 30, 2012 |
2011 Year-End Update on Class Actions

The business world and class action litigators on both sides of the courtroom will remember 2011 for its blockbuster Supreme Court decisions and the sea changes they wrought.  But the waters were roiled in disparate venues across the country as well, so that companies facing class action litigation in 2012 will indeed be doing so in a new world.  In this new world, they will have powerful weapons available to them that should help level the playing field–among them:  (1) the possibility of obtaining dismissal of a class action because of the applicability of an arbitration clause that waives class action rights; (2) the elimination of the use of federal Rule 23(b)(2) to circumvent obstacles to certification of a damages class; (3) an all-important clarification that not only must common questions be present to support Rule 23 certifications, but common answers to those questions as well; and (4) much-needed confirmation of the requirement of injuries (both real and common) before a class action can proceed.  In the eight months since the Wal-Mart Stores, Inc. v. Dukes decision, alone, lower courts have cited the decision hundreds of times and relied on it to deny certification or decertify in many of those cases.  These developments bring welcome changes–including the enforcement of important contract rights and a refined approach to Rule 23’s class certification prerequisites.  Yet we do not see these changes as tolling the death knell on class actions by any means.  Finding historical precedent for this prediction only requires looking back as far at 2004-05, when the dual developments of Proposition 64 in California (bringing the state in line with others in requiring that class action procedures and an "injury" requirement apply before a suit could proceed on behalf of others) and the passage of the Class Action Fairness Act on the federal level were heralded as a one-two punch on class action filings.  Instead, what we saw was a massive increase in federal filings based on diversity (approximately a 400% increase in filings in the Third, Ninth, and Eleventh Circuits) paralleled by a surge in state court filings in California (a 55% increase in Los Angeles alone).  Now as then, one thing is certain:  despite some significant setbacks for the plaintiffs’ bar, class action lawsuits aren’t going away.  To the contrary, there is every indication that class actions will present significant challenges for companies in the years to come.  Federal and state courts are just beginning to interpret this year’s landmark cases, and states are applying their own procedural and substantive rules with a variety of consequences in the class setting.  In short, 2012 should be a busy year in the world of class actions as plaintiffs’ lawyers continue to explore new theories and develop novel arguments. *************** Class actions took center stage during the October 2010 Supreme Court Term.  The Court handed down a number of major decisions addressing issues ranging from class certification to class action waivers to loss causation at the certification stage:  In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), the hallmark case of the Term, the Court reversed class certification in the largest employment class action ever filed in the United States.  Dukes reinvigorated Rule 23(a)’s "commonality" requirement and unanimously rejected the notion that claims for individualized monetary relief may be certified under Rule 23(b)(2).  Courts nationwide have taken heed of Dukes, citing it widely both as a general guide for evaluating class certifications and, most significantly, as the basis for denying certification or decertifying in more than a hundred cases in the past six months alone. In another momentous decision, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court examined state rules that purport to classify class action waivers as unconscionable in consumer arbitration agreements.  Concepcion held that the Federal Arbitration Act preempts such rules.  Concepcion undoubtedly strengthens the enforceability of parties’ agreements to arbitrate claims, including those raised in state courts, but many issues remain to be resolved in the lower courts–the plaintiffs’ bar has been making a push to limit the applicability of Concepcion. The Court provided a small counterpoint to Dukes and Concepcion in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), a case involving the relitigation exception to the federal Anti-Injunction Act.  In Smith, the Court held that a federal district court had overstepped its authority by enjoining a state court from considering a class certification request similar to one a federal court had previously denied in another case.  The Court reiterated that absent putative class members are not "parties" to a litigation unless there is a certified class.  Time will tell whether Smith has opened the door to repetitive class certification fights over the same basic claims by allowing plaintiffs’ counsel simply to switch the named parties on the caption and avoid preclusion issues.  The Supreme Court also issued a pair of securities decisions that will have an impact on class litigation.  In Erica P. John Fund v. Halliburton Co., 131 S. Ct. 2179 (2011), the Court ruled that class proponents need not "show loss causation as a condition of obtaining class certification."  And in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Court clarified that the speaker of a statement who can be subject to liability under the securities laws must be one who has "ultimate authority" over the statement. 2011 also saw the lower federal courts grappling with significant class action issues.  For instance, class settlements received increased scrutiny:  Courts examined the standards governing cy pres distributions of settlement funds; the propriety of mooting class actions pre-certification by settling with the named plaintiff; Article III standing requirements for objectors; and the fairness of fee awards in light of possible collusion between the parties.  In addition, Internet privacy class actions were a heavy focus of activity this past year–suits involving "Flash cookies" and other Internet "tracking" devices were particularly noteworthy.  Finally, the federal courts of appeals also continued to develop the appropriate standards for assessing "adequacy of representation" under Rule 23(a)(4). There also were a number of important rulings and developing trends in the state courts in 2011–particularly in California, a traditional hotbed of class action lawsuits.  The California Supreme Court decided Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), which relaxed Proposition 64’s statutory heightened standing requirement of "lost money or property" applicable to private plaintiffs in an unfair competition lawsuit.  In addition, the California Supreme Court held in Pineda v. Williams-Sonoma Stores, Inc., 51 Cal. 4th 524 (2011), that recording zip codes as part of a credit card transaction violates the Song-Beverly Credit Card Act–creating a tremendous surge of consumer lawsuits based on this theory.  But it was not all bad news:  The D.C. Court of Appeals issued a noteworthy decision in 2011 that bolstered the pleading requirements for claims under D.C.’s consumer protection law; and peeking through the keyhole into January, 2012, the Ninth Circuit Court of Appeals importantly clarified in Mazza v. American Honda, No. 09-55376, 2012 WL 89176 (9th Cir. Jan 12, 2012), that courts at the certification stage may not presume reliance by individual class members who may not have been exposed to the challenged practice.  California also joined several other states in addressing the extraterritorial reach of their respective unfair competition laws.  This year-end update highlights 2011’s key decisions in greater detail and considers the far-reaching implications of these cases in federal and state courts, including an examination of how the cases currently are being applied.  It also provides a report on trends in class action practice over the last year and identifies important class action issues likely to be litigated in 2012 and in the years ahead.  Part I of this update highlights the United States Supreme Court decisions addressing class actions during the October 2010 Term.  Part II identifies significant trends in class action practice in the federal courts.  Part III discusses trends in class action practice in the state courts. I.  The Supreme Court Issues Long-Awaited Decisions on Several Core Class Action Issues A.  Wal-Mart v. Dukes–Commonality and Rule 23(b)(2) Certification On June 20, 2011, the U.S. Supreme Court in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), unanimously reversed a Ninth Circuit opinion that had upheld certification of the largest employment class action ever.  The district court had certified a nationwide class of as many as 1.5 million current and former female employees of Wal-Mart Stores, Inc. stores across the country.  The plaintiffs alleged, among other things, that Wal-Mart had violated Title VII by adopting policies that "foster[] or facilitate[] gender stereotyping and discrimination, . . . and that this discrimination is common to all women who work or have worked in Wal-Mart stores." In 2010, a sharply divided Ninth Circuit, sitting en banc, found class treatment appropriate based not on a showing of any commonly applied policy or practice, but, rather, on a "common question" whether female employees at Wal-Mart had experienced discrimination.  The Ninth Circuit also found that plaintiffs’ claims for billions of dollars in backpay could be certified pursuant to Rule 23(b)(2).  In this first case ever to reach the Supreme Court on Rule 23(f) interlocutory appeal, the Court unanimously reversed the Ninth Circuit.  Writing for the Court, Justice Scalia explained that "the crux of this case . . . is commonality–the rule requiring a plaintiff to show that ‘there are questions of law or fact common to the class.’"  Dukes, 131 S. Ct. at 2550-51 (quoting Rule 23(a)(2)).  "That common contention, moreover, must be of such a nature that it is capable of classwide resolution–which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke."  Id. at 2551.  Indeed, "[w]hat matters to class certification . . . is not the raising of common ‘questions’–even in droves–but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation."  Id. (citation omitted).  The plaintiffs had asserted that a common question existed because all Wal-Mart managers were afforded some discretion in making pay and promotion decisions.  "On its face," the Court explained, "that is just the opposite of a uniform employment practice that would provide the commonality needed for a class action; it is a policy against having uniform employment practices."  Id. at 2554.  This, the Court found, undermined commonality.  "Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored."  Id. at 2552. Without any claim that Wal-Mart had applied a uniform employment standard, the Court explained, Rule 23 required that Title VII plaintiffs show "significant proof" that Wal-Mart had operated under a general policy of discrimination.  Id. at 2553 (quoting Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 159 n.15 (1982)).  But the Court found that "significant proof" that Wal-Mart "operated under a general policy of discrimination . . . is entirely absent here."  Id.  To the contrary, "Wal-Mart’s announced policy forbids sex discrimination, and . . . the company imposes penalties for denials of equal employment opportunity."  Id. The plaintiffs had attempted to show commonality through a combination of isolated anecdotes, statistical evidence, and the expert testimony of a sociologist.  The Court held that such evidence should be "disregarded" and thus that plaintiffs’ case was "worlds away from ‘significant proof’ that Wal-Mart operated under a general policy of discrimination."  Id. at 2554.  Explained the Court:  "In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction.  Respondents attempt to make that showing by means of statistical and anecdotal evidence, but their evidence falls well short."  Id. at 2555.  Quoting Chief Judge Kozinski’s dissent in the Ninth Circuit, the Court reiterated that the members of the class "have little in common but their sex and this lawsuit."  Id. at 2557. The Court further reached the unanimous conclusion that the class could not properly be certified under Rule 23(b)(2), given plaintiffs’ claims for individualized backpay.  Claims for monetary relief may not be certified under (b)(2), "at least where (as here) the monetary relief is not incidental to the injunctive or declaratory relief."  Id.  The Court contrasted the mandatory class authorized under Rule 23(b)(2) with those authorized under subsection (b)(3).  Citing the structure and history of Rule 23, the Court explained that "[t]he key to the (b)(2) class is ‘the indivisible nature of the injunctive or declaratory remedy warranted–the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.’ . . . [Rule 23(b)(2)] does not authorize class certification when each individual class member would be entitled to a  different injunction or declaratory judgment against the defendant."  Id. Similarly, Rule 23(b)(2) "does not authorize class certification when each class member would be entitled to an individualized award of monetary damages."  Id. at 2557 (citation omitted).  In contrast, Rule 23(b)(3) may apply when class action treatment is not as clearly called for, as it provides the added procedural protections of notice to class members and the opportunity for class members to opt out.  The Court explained that allowing classes for monetary damages to proceed under Rule 23(b)(2), even where an injunction or declaratory remedy predominates, would nullify the procedural protections that the Rule provides under subsection (b)(3).  Reserving the question whether monetary claims can ever be certified in a (b)(2) class, the Court unanimously concluded that the plaintiffs could not meet this standard in any event.  The plaintiffs’ backpay claims required individualized determinations that could not be considered "incidental" to a classwide injunction.  The Court also emphasized the "need for plaintiffs with individual monetary claims to decide for themselves whether to tie their fates to the class representatives’ or go it alone–a choice Rule 23(b)(2) does not ensure that they have."  Id. at 2559. The Court also unanimously rejected the "Trial by Formula" plan approved by the Ninth Circuit, which would have allowed the district court to try a sample set of selected cases and then apply the percentage of claims found to be valid and the average backpay award to determine recovery for the entire class.  Id. at 2561.  Rejecting this "novel project," the Court explained that Title VII affords Wal-Mart the right to raise individual defenses regarding each class member’s eligibility for backpay.  Id.  Dukes clarifies fundamental rules of class action law and establishes principles that will protect the rights of all participants in the civil justice system.  Dukes also demonstrates the importance of interlocutory challenges to class certification to curb Rule 23 abuses.  Indeed, the decision appears to confirm that class certification proceedings have increasingly become the "main event" where courts must resolve factual disputes, consider competing expert testimony, and make a preliminary judgment as to the merits of the plaintiffs’ claims before allowing them to proceed with their claims as a class under Rule 23.  And while Dukes was widely celebrated by the defense bar, companies would be wise not to assume that plaintiffs’ class-action lawyers will simply find a new practice area.  To put things in perspective, following the enactment of the Class Action Fairness Act of 2005–which was supposed to curb class action abuses–consumer class action filings increased by 577% in the district courts in the Ninth Circuit!           1.  Applying Dukes in Federal Courts As expected, Dukes has had an immediate and widespread impact. In one of the first circuit court opinions to rely on Dukes, the Ninth Circuit had a swift opportunity to make a course correction in Ellis v. Costco Wholesale Corp., 657 F.3d 970 (9th Cir. 2011).  Like Dukes, this appeal challenged the certification of a nationwide class of female employees alleging gender discrimination.  The Ninth Circuit emphasized that "district courts are not only at liberty to, but must perform ‘a rigorous analysis [to ensure] that the prerequisites of Rule 23(a) have been satisfied,’" which "will entail some overlap with the merits of the plaintiff’s underlying claim."  Id. at 980 (quoting Dukes, 131 S. Ct. at 2551).  In this case, the plaintiffs’ experts identified only regional pockets of possible discrimination, which undermined the theory of a nationwide policy applicable to all plaintiffs.  Because "the district court failed to engage in a ‘rigorous analysis’" by declining to "resolve the critical factual disputes centering around the national versus regional nature of the alleged discrimination," the Ninth Circuit reversed and remanded for further proceedings.  Id. at 984; see also Sepulveda v. Wal-Mart Stores, Inc., No. 06-56090 (9th Cir. Dec. 30, 2011) (granting rehearing based on Dukes; affirming the denial of class certification in an employment class action seeking individualized monetary relief  brought under Rules 23(b)(2) and (b)(3)).  Similarly, the Third Circuit relied on Dukes to affirm the denial of class certification in an environmental class action because plaintiffs failed to demonstrate sufficient commonality.  In Gates v. Rohm & Haas Co., 655 F.3d 255 (3d Cir. 2011), plaintiffs claimed that chemical companies dumped an alleged carcinogen at an industrial complex near their residences.  The district court denied certification of both Rule 23(b)(2) and (b)(3) classes, because "[i]t found the medical monitoring class lacked the cohesiveness needed to maintain a class under Rule 23(b)(2) and that common issues of law and fact did not predominate as required under Rule 23(b)(3).  Both failed for the same reason–the ‘common’ evidence proposed for trial did not adequately typify the specific individuals that composed the two classes."  Id. at 261.  The Third Circuit affirmed, explaining:  "The evidence here is not ‘common’ because it is not shared by all (possibly even most) individuals in the class.  Averages or community-wide [exposure] estimations would not be probative of any individual’s claim because any one class member may have an exposure level well above or below the average."  Id. at 266.  A few days into the new year, the Ninth Circuit issued its long-awaited decision in Mazza v. American Honda Co., Inc., No. 09-55376, 2012 WL 89176 (9th Cir. Jan 12, 2012), holding that individualized choice-of-law issues precluded certification of a nationwide class action brought under California’s consumer-protection laws, and that individualized reliance issues precluded certification of a California-only class of consumers.  The court reiterated the rigorous Rule 23 analysis that the Supreme Court articulated in Dukes and made clear that those standards apply in the consumer-protection context.  The court’s choice of law analysis casts serious doubt on the propriety of certifying nationwide classes under California’s consumer protection laws, even in cases in which the defendant has extensive contacts with California.  Significantly, the court also questioned presumptions of reliance by a class as a whole.  Distinguishing In re Tobacco II Cases, 46 Cal. 4th 298 (2009)–in which the California Supreme Court found that plaintiffs were not required to demonstrate reliance for individual class members where there was a long-term, consistent advertising campaign–the court refused to presume class-wide reliance where "it [wa]s likely that many class members were never exposed to the allegedly misleading advertisements insofar as advertising of the challenged system was very limited."  Mazza, 2012 WL 89176 at *11. Dukes exerts its influence no less at the trial level, where courts have applied it to a wide variety of cases outside the employment context.  See, e.g., In re Wells Fargo Residential Mortg. Lending Discrim. Litig., No. 08-MD-01930, 2011 U.S. Dist. LEXIS 99830 (N.D. Cal. Sept. 6, 2011) (applying Dukes to putative class of approximately one million minority mortgage borrowers); Walter v. Hughes Commc’ns, Inc., No. 09-2136, 2011 U.S. Dist. LEXIS 72290 (N.D. Cal. July 6, 2011) (applying Dukes to deny preliminary approval and conditional class certification of putative nationwide class composed of satellite broadband users); Aho v. Americredit Fin. Servs., Inc., No. 10cv1373, 2011 U.S. Dist. LEXIS 80426 (S.D. Cal. July 25, 2011) (applying Dukes analysis while certifying Rule 23(b)(2) class composed of persons from whom defendant alleged repossessed automobiles by means that violated California debt-collection statutes).           2.  Dukes‘ Impact on State Courts Because Federal Rule of Civil Procedure 23(a) often serves as a guide for analogous state class certification rules, Dukes should have a significant impact on state class certification decisions.  In California, for instance, certification requires proof "of a well-defined community of interest" embodying three factors analogous to Rule 23’s commonality, typicality, and adequacy requirements.  See In re Tobacco II Cases, 46 Cal. 4th at 318 (explaining that Rule 23(a) contains "requirements [that] are analogous to the requirements for class certification under Code of Civil Procedure section 382").  The Supreme Court of California has "urged trial courts . . . to incorporate procedures from outside sources in determining whether to allow the maintenance of a particular class suit" and specifically "directed them to [Rule 23]."  City of San Jose v. Superior Court, 12 Cal. 3d 447, 453 (1974). Not surprisingly, several state courts already have applied Dukes in assessing state-law class certification issues.  A Michigan Circuit Court, for example, relied explicitly on Dukes when it reversed certification of a class of more than 2,000 property owners alleging that dioxin contamination from a Dow facility had damaged the value of their properties.  See Henry v. Dow Chem. Co., No. 03-47775 (Saginaw County, Mich. Cir. Ct. July 18, 2011).  The court had previously ruled that the plaintiffs satisfied Michigan’s statutory certification requirements, including Michigan’s equivalent of Rule 23(b)(3).  Slip op. at 2.  On remand of a different issue, however, the court reconsidered its commonality ruling and held that denial of class certification was "mandated by" Dukes.  Id. at 5.  "Even assuming that defendant negligently released dioxin and that it contaminated the soil in plaintiffs’ properties, whether and how the individual plaintiffs were injured involves highly individualized factual inquiries regarding issues such as the level and type of dioxin contamination in the specific properties, the different remediation needs and different stages of remediation for different properties, and the fact that some of the properties have been sold."  Id. at 5–6 (emphasis added).  Henry illustrates the broad impact of Dukes on class actions outside the employment context as well as the openness of some state courts to adopting the robust commonality standards elucidated by the Supreme Court.  See also Price v. Martin, — So.3d —-, 2011 WL 6034519, at *3-12 (La. Dec. 6, 2011) (adopting and applying Dukes‘ commonality standard). California state courts also have relied favorably on Dukes.  In Marler v. Johansing, LLC, 199 Cal. App. 4th 1450 (2011), the Court of Appeal explicitly adopted Dukes‘ explanation that class certification requires a "rigorous analysis [that frequently] will entail some overlap with the merits of the plaintiff’s underlying claim."  Id. at 1458 (quoting Dukes, 131 S. Ct. at 2551).  Likewise, in American Honda Motor Co. v. Superior Court, 199 Cal. App. 4th 1367 (2011), the court seemed implicitly to rely on Dukes when it denied class certification in a suit alleging that Honda violated California’s Unfair Competition Law (UCL) by withholding information about alleged transmission defects about Acura vehicles.  The court concluded that the "UCL cause of action is not subject to common proof."  Id. at 1379 (emphasis added).  Although a connection to Dukes was not made explicit, the court went beyond the predominance question and noted the absolute lack of commonality itself.  Other states have reacted differently to Dukes.  Perhaps in response to the impression that federal courts have adopted "a policy of limiting class actions," the Colorado Supreme Court eased the standard by which trial courts assess class certification under Colorado’s own version of Rule 23.  Jackson v. Unocal Corp., 262 P.3d 874, 883 (Colo. 2011).  Although a Colorado trial court must "conduct a rigorous analysis of the evidence" at the class certification stage, it need only "find to its satisfaction that each [Colorado Rule of Civil Procedure] 23 requirement is established."  Id. at 882.  The court explained, "[l]eaving class certification to the discretion of the trial court without requiring a specific burden of proof squares with the pragmatic and flexible nature of the class certification decision, recognizes the trial court’s ongoing obligation to assess the certification decision in light of new evidence, and preserves the trial court’s case management discretion."  Id. (emphasis added).  In a vigorous dissent, Justice Allison Eid lamented that no court has required anything less than proof by a preponderance of the evidence that a proposed class satisfies Rule 23, and that "the majority’s standardless approach makes class certification in Colorado essentially unreviewable by appellate courts and raises serious procedural due process concerns."  Id. at 894 (Eid, J., dissenting).  Time will tell how other states respond to Dukes and whether state court interpretations of Dukes will have the effect of shifting more class action activity from federal to state courts.  B.  AT&T Mobility LLC v. Concepcion–Supreme Court Upholds Class Action Waivers in Arbitration Agreements In recent years, state courts have resisted defendants’ efforts to avoid class actions by compelling individual arbitration.  In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held that the Federal Arbitration Act ("FAA") preempts state rules that purport to invalidate class action waivers in consumer arbitration agreements as unconscionable.  In so ruling, the Court expressly preempted California’s "Discover Bank rule" (Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005)).  The Court reasoned that although the FAA preserves generally applicable contract defenses (through its "savings clause," which provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," 9 U.S.C. § 2), the FAA "cannot be held to destroy itself."  Concepcion, 131 S. Ct. at 1748.  In other words, nothing in the FAA’s savings clause suggests an intent to preserve state laws or rules that are an obstacle to the FAA’s principal purpose of "[e]nsur[ing] that private arbitration agreements are enforced according to their terms."  Id.   In reaching its decision, the Court also relied in part on its prior decision in Stolt-Niselen S.A. v. Animal Feeds International Corp., 130 S. Ct. 1758 (2010), where the Court held that arbitrators exceeded their powers by ordering class arbitration when the parties had not expressly agreed to it, and where the arbitration agreement was otherwise silent.  Likewise, the Court in Concepcion reiterated:  "The conclusion follows that class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA."  Concepcion, 131 S. Ct. at 1750-51.  The shift from individual to class arbitration sacrifices the principal advantages of arbitration–its informality–and makes the process slower, more costly, and more likely to generate a procedural morass.  Id. at 1751.  Moreover, class arbitration lacks the procedural protections captured in Rule 23 and necessary to protect the rights of absent class members.  Id.  To put it succinctly, "[a]rbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations."  Id.  The Court specifically rejected the Concepcions’ argument that class proceedings are necessary to prosecute small dollar claims that might otherwise offer an insufficient return to justify their pursuit.  "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons."  Id.           1.  Plaintiffs’ Attempts to Limit Concepcion In the wake of Concepcion, defendants filed a host of motions to compel arbitration with considerable success in federal district courts and state trial courts across the country, including in cases where arbitration previously had been denied.  Yet, it remains to be seen exactly how courts will interpret common law principles and rules that invalidate arbitration agreements and, more specifically, whether they will find that such laws and rules run afoul of the FAA because they discriminate against arbitration.  The plaintiffs’ bar has been pushing to shift the focus away from Concepcion and turn attention to contract formation issues (by arguing that there can be no agreement to arbitrate where there is no agreement in the first place), and it has been making global unconscionability attacks.  These efforts are aimed at advocating for the savings clause provision of the FAA to permit states to invalidate arbitration agreements.  The plaintiffs’ bar also has made arguments–accepted by at least some courts–that Concepcion is inapplicable to certain claims or causes of action.  Public Justice has taken the lead in advocating for ways to limit Concepcion, with a section of their website devoted to this issue.  See http://www.publicjustice.net.  Efforts to influence public opinion against the use of arbitration clauses have taken strong hold as well.  Plaintiffs’ attempts to escape Concepcion’s broad holding have been met with at least some success in the courts.  Some courts have found that arbitration provisions are unenforceable because the contract that contains the arbitration provision is unenforceable for failure to follow laws concerning the formation of contracts generally.  For example, in NAACP of Camden County East v. Foulke Management Corp., 421 N.J. Super. 404 (2011), the court invalidated an arbitration provision on the basis that the "disparate arbitration provisions in this case were too confusing, too vague, and too inconsistent to be enforced."  Id.  The court first discussed Concepcion, found that "state courts remain free to decline to enforce an arbitration provision by invoking traditional legal doctrines governing the formation of a contract and its interpretation," and then concluded that the "fundamental requirements of clarity and consistency in form contracts" dictate that the arbitration provision is "unenforceable for lack of mutual assent."  Id.     Even after Concepcion, courts continue to apply–and sometimes invalidate arbitration provisions under–what they consider to be generally applicable laws specifically premised on the doctrine of unconscionability.  In Sanchez v. Valencia Holding Co., 2011 WL 5865694 (Cal. Ct. App. Nov. 23, 2011), the court noted that "Concepcion is inapplicable where . . . we are not addressing the enforceability of a class action waiver or a judicially imposed procedure that is inconsistent with the arbitration provision and the purposes of the Federal Arbitration Act."  The court continued, "[t]he unconscionability provisions on which we rely govern all contracts, are not unique to arbitration agreements, and do not disfavor arbitration."  Based on what the court found to be generic principles of the doctrine of unconscionability, the court found an arbitration provision unenforceable on the basis that its terms were both procedurally and substantively unconscionable.  Id.; see also Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803, 816 (N.M. 2011) (invalidating an arbitration provision in an auto dealership sales contract, because the named arbitration service was no longer available and, despite Concepcion, the arbitration arrangement was "unfairly one-sided and substantively unconscionable").  In addition, in the wake of Concepcion, a group of Democratic senators introduced bills intended to supersede the Court’s decision–the "Arbitration Fairness Act," which would amend the FAA to invalidate arbitration clauses in consumer or employment contracts, and the "Consumer Mobile Fairness Act," which would apply solely to wireless devices.  Neither bill has gained much traction, but proponents are hoping to lay the groundwork for passage down the road.  Accordingly, the battle continues on multiple fronts.           2.  Broader Application of Concepcion Courts also are interpreting the contexts in which Concepcion applies–and are coming to differing conclusions in some of these contexts.  For example, courts have not been able to agree whether claims under the federal Magnuson-Moss Warranty Act ("MMWA") are arbitrable.  In Kolev v. Euromotors West/The Auto Gallery, 658 F.3d 1024 (9th Cir. 2011), the Ninth Circuit created a circuit split when it held that the MMWA precludes enforcement of a pre-dispute agreement that requires mandatory binding arbitration of consumer warranty claims.  In contrast to the Ninth Circuit, the Fifth and Eleventh Circuits, pre-Concepcion, held that the MMWA does not overcome the FAA’s presumption in favor of arbitration.  See Walton v. Rose Mobile Homes LLC, 298 F.3d 470 (5th Cir. 2002); Davis v. S. Energy Homes, Inc., 305 F.3d 1268 (11th Cir. 2002).  The Ninth Circuit based its decision on the Federal Trade Commission’s interpretation of the MMWA; the court did not present any substantial analysis of Concepcion.  It remains to be seen how courts will interpret Kolev in light of the Supreme Court’s recent decision in CompuCredit Corp. v. Greenwood, 565 U.S. —- (Jan. 10, 2012), in which the Court upheld arbitration agreements relating to claims under the Credit Repair Organizations Act ("CROA") because the CROA was silent on arbitrability. As with the MMWA context, courts have come to inconsistent conclusions when interpreting whether claims under California’s Private Attorney General Act ("PAGA") may be arbitrated.  In Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), the court held that Concepcion does not apply to enforce waivers of representative actions for California employees under the PAGA.  The court reasoned that Concepcion "does not address a statute such as the PAGA, which is a mechanism by which the state itself can enforce state labor laws, for the employee suing under the PAGA ‘does so as the proxy or agent of the state’s labor law enforcement agencies.’"  Id. at 503.  The court therefore found unenforceable an employee’s waiver of the right to file a representative action under the PAGA.  See also Plows v. Rockwell Collins, Inc., No. SACV 10-01936 DOC (MANx), 2011 WL 3501872, at *5 (C.D. Cal. Aug. 9, 2011) ("[C]lass waivers contained in arbitration agreements may not be used to divest plaintiffs of their right to bring representative actions under PAGA.").  In contrast, in Grabowski v. Robins, — F. Supp. 2d —-, 2011 WL 4353998 (S.D. Cal. Sept. 19, 2011), the court expressly disagreed with Brown and instead relied on the reasoning in Quevedo v. Macy’s Inc., 798 F. Supp. 2d 1122 (C.D. Cal. 2011), to find that PAGA claims were arbitrable and that an agreement barring an employee from bringing a representative PAGA claim is enforceable.  The court explained, based on Concepcion, that a state cannot prohibit outright the arbitration of a particular type of claim.  See id. at 1142.  Although Concepcion is a landmark decision in favor of enforcing parties’ agreements to arbitrate claims, many issues remain to be resolved–even in the consumer context.  For instance, in the absence of a direct-purchase requirement, plaintiffs in California have attempted to avoid the impact of Concepcion by suing retailers, with whom consumers generally have no arbitration agreements.  Other jurisdictions may see similar types of claims in the wake of Concepcion. Outside the consumer context–e.g., claims against employers–Concepcion‘s application is less clear.  On January 3, 2012, the National Labor Relations Board ruled that an employer engages in an unfair labor practice when it requires employees to sign an agreement precluding them from filing employment-related class action claims (that decision is being appealed).  See D.R. Horton, Inc., 357 N.L.R.B. No. 184.  On October 31, 2011, the United States Supreme Court granted certiorari in Sonic-Calabasas v. Moreno, 132 S. Ct. 496 (2011), and vacated and remanded the California Supreme Court’s decision in that case.  See Sonic-Calabasas v. Moreno, 51 Cal. 4th 659 (2011).  There, the California Supreme Court had held, pre-Concepcion, that a provision in an employment contract waiving the right to a particular type of hearing (a Berman hearing) in favor of arbitration was unconscionable and unenforceable.  On remand, this will be the first California Supreme Court case to be heard regarding arbitration since Concepcion struck down the California Supreme Court’s Discover Bank rule, which had held that an arbitration agreement that precludes class actions in standard consumer contracts was unconscionable and unenforceable.  C.  Smith v. Bayer Corp.–The Court Puts a Damper on Relitigation Injunctions In a Supreme Court term that generally drew tighter limits on class actions, Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), provided a small counterpoint.  On June 16, 2011, the Supreme Court held in Bayer that a federal district court overstepped its authority under the relitigation exception to the Anti-Injunction Act when it enjoined a West Virginia court from considering a request for class certification similar to one a federal court had previously denied in another case.  Id. at 2382. In a prior lawsuit, plaintiff George McCollins had brought claims against Bayer in West Virginia state court arising from Bayer’s sale of an allegedly hazardous prescription drug called Baycol.  Bayer removed the case to the federal district court, which ultimately denied McCollins’s request to certify a proposed class of plaintiffs under federal Rule 23.  In a subsequent case, plaintiffs Keith Smith and Shirley Sperlazza brought suit against Bayer, also in West Virginia state court, alleging claims nearly identical to those in the McCollins suit.  When Smith and Sperlazza sought class certification, Bayer requested an injunction from the same federal district court that had denied certification in the McCollins suit, arguing that the injunction was necessary to protect the earlier certification ruling.  The federal court agreed and granted the injunction.  The Eighth Circuit affirmed on appeal.  In re Baycol Prods. Litig., 593 F.3d 716 (8th Cir. 2010). The Supreme Court unanimously reversed and held that "any doubts as to the propriety of a federal injunction against state court proceedings should be resolved in favor of permitting the state courts to proceed."  Bayer, 131 S. Ct. at 2375.  Because the relitigation exception is narrow and should not be enlarged by loose statutory construction, "an injunction can only issue if preclusion is clear beyond peradventure."  Id. at 2376.  An injunction may issue under the relitigation exception only if (1) "the issue the federal court decided [is] the same as the one presented in the state tribunal," and (2) the state court plaintiff was "a party to the federal suit or [fell] within one of a few discrete exceptions to the general rule against binding nonparties."  Id.  The Court found that neither of these requirements had been satisfied.  First, the cases did not raise the "same" issue because, although Smith’s substantive claims broadly overlapped with McCollins’s, the federal court adjudicated McCollins’s certification motion under federal Rule 23, while the state court was poised to consider Smith’s proposed class under West Virginia Rule 23.  Id. at 2377-78.  Absent "clear evidence" that a state court has adopted an approach tracking federal Rule 23, the Court explained, any uncertainty as to whether certification issues are identical should preclude an injunction.  Id. at 2378.  Second, the Court ruled Smith was not a formal "party" to the prior federal suit.  Although "an unnamed member of a certified class may be considered a ‘party’ for the particular purpose of appealing an adverse judgment," it would be "surely erroneous" to argue that an unnamed class member "is a party to the class-action litigation before the class is certified."  Id. at 2380 (internal quotation marks, citations, and alterations omitted).  "Still less does that argument make sense once certification is denied.  The definition of the term ‘party’ can on no account be stretched so far as to cover a person like Smith, whom the plaintiff in a lawsuit was denied leave to represent."  Id.  Likewise, Smith could not be bound as a "nonparty" class member because "the McCollins suit . . . was not a class action."  Id. at 2380.  Indeed, because the very ruling that Bayer argued ought to be given preclusive effect denied class certification, the Court explained, "we cannot say that a properly conducted class action existed at any time in the litigation."  Id. (emphasis added).  In sum, "[n]either a proposed class action nor a rejected class action may bind nonparties."  Id.  Bayer does elucidate some helpful principles for defendants, such as the notion that courts may not afford relief to (or, in some cases, preclude a defendant’s communication with) plaintiffs who are not before the court–including absent class members prior to class certification or after decertification.  In addition, the opinion in Bayer underscores Rule 23’s "representativeness" requirement at the certification stage:  courts may bind absent class members only if the named plaintiffs’ claims truly are "the same" as those of the class.  Id. at 2376.  The representativeness requirement is grounded in notions of due process.  See Taylor v. Sturgell, 553 U.S. 880, 891, 894, 898 (2008) ("Due process limitations" require "[r]epresentative suits" to rest on actual and direct representation of one party by another, not merely representation that is "close enough").)  Bayer also clarifies that when a class is decertified, it means the class was never properly certified–not merely that the class no longer enjoys such status. On the whole, however, Bayer will likely make it more difficult for defendants to rely on the preclusive effect of federal denials of class certification in ancillary or subsequent state court proceedings raising substantially the same claims.  Indeed, Bayer argued that the Court’s approach would permit class counsel to try repeatedly to certify the same class "by the simple expedient of changing the named plaintiff in the caption of the complaint."  Bayer, 131 S. Ct. at 2381.  The Court attempted to reassure Bayer that (1) "principles of stare decisis and comity among courts generally suffice to mitigate the sometimes substantial costs of similar litigation brought by different plaintiffs," (2) defendants may remove any sizable class action involving minimal diversity to federal court under the Class Action Fairness Act, and (3) Congress may enact legislation to "modify established principles of preclusion" and/or the Federal Rules of Civil Procedure may be changed to address this issue.  Id. at 2381-82 & n.12.  Nonetheless, experience suggests these safeguards offer little solace to the litigation-weary defendant.  D.  Halliburton and Janus–The Court’s Treatment of Securities Class Actions Finally, in 2011 the Supreme Court also issued an important pair of decisions involving class treatment of private securities actions.  In Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Court ruled that plaintiffs pursuing claims under Rule 10b-5 need not "show loss causation as a condition of obtaining class certification."  Id. at 2186.  Yet, following up in Dukes, the Court also explained that, consistent with a plaintiff’s obligation at class certification actually to establish that the requirements of federal Rule 23 are satisfied, a 10b-5 plaintiff seeking to use the "fraud on the market" presumption to obtain class certification "must prove that their shares were traded on an efficient market, an issue they will surely have to prove again at trial in order to make out their case on the merits."  Dukes, 131 S. Ct. at 2552 n.6.  Separately, in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Court addressed what type of speaker of an alleged misstatement can be subject to liability in a private securities action.  The court ruled that "[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."  131 S. Ct. at 2302.  By essentially limiting the universe to issuers and certain others specified by Congress, the Court has made clear that the vast array of service providers to public companies–including bankers, lawyers, accountants, investment and financial advisers, and others–will not generally be subject to suit in private Rule 10b-5 class action suits. II.  Class Action Trends in the Federal Courts A.  Class Settlements Subject to More Rigorous Scrutiny In 2011, the lower federal courts weighed in on a number of important issues relating to class settlement procedures and settlement fund disbursement methods:  cy pres distribution of settlement funds; the strategy of mooting a class action pre-certification by settling with the named plaintiff; objectors to a class settlement attempting to circumvent Article III’s standing requirement; and possible collusion among the parties in structuring a settlement, to the detriment of the class.           1.  Courts Frown on Cy Pres Distributions The Fifth and Ninth Circuits took a critical look at cy pres distribution of class settlement funds in 2011.  Such distributions are frequently used "in the settlement of class actions where the proof of individual claims would be burdensome or distribution of damages costly."  Nachshin v. AOL, LLC, No. 10-55129, 2011 WL 5839610, at *3 (9th Cir. Nov. 21, 2011).  The cy pres doctrine permits a court to put unclaimed class settlement funds "to [their] next best compensation use, e.g., for the aggregate, indirect, prospective benefit of the class."  Id.  The doctrine has come under attack, however, because cy pres distributions conspicuously untethered to the interest of the absent class members and "the specter of judges and outside entities dealing in the distribution and solicitation of settlement money may create the appearance of impropriety."  Id. at *4.  In Nachshin, a class of 66 million AOL subscribers brought claims against AOL for inserting footers containing promotional messages into subscribers’ e-mails without permission.  Although the millions of plaintiffs lived throughout the United States, the parties designated three local charities in Los Angeles and the Federal Judicial Center for cy pres donations in lieu of a cost-prohibitive settlement disbursement.  The Ninth Circuit reversed the district court’s approval of this settlement because the donations failed to (1) "address the objectives of the underlying statutes" upon which plaintiffs based their claims, (2) "target the plaintiff class" by accounting for the class members’ geographic diversity, and (3) "provide reasonable certainty that any member of the class would be benefited."  Id. at *4.  The court remanded for reconsideration and directed the district court to consider escheating the funds to the United States Treasury if a suitable cy pres beneficiary could not be located.  Id. at *5.  Addressing another cy pres donation, the Fifth Circuit, in All Plaintiffs v. All Defendants, 645 F.3d 329, 335, 337 (5th Cir. 2011), reversed the award of unclaimed settlement funds in an antitrust class action, because the district court had failed to follow state law governing fund distribution.  After settlement of the case, many checks returned as undeliverable or never cashed were aggregated in a cy pres donation to the Center for Energy and Environmental Resources at the University of Texas.  The Fifth Circuit determined, however, that the settlement administrator was subject to the Texas Unclaimed Property Act, which required the unclaimed funds to escheat to the State of Texas. Naschin and All Plaintiffs demonstrate that courts and parties must carefully account for the interests of silent class members and abide by applicable state law in crafting cy pres distributions of settlement funds.           2.  Mooting Class Actions Pre-Certification by Settling with the Named Plaintiff A class settlement issue that continued to divide federal courts this past year is the practice of settling with named plaintiffs as a means of mooting a class action before a class can be certified.  In 2011, the Seventh Circuit renewed a split with the Third, Fifth, Ninth, and Tenth Circuits, when it held that a defendant moots a class action by making a complete offer of judgment to a named plaintiff before a class certification motion.  In Damasco v. Clearwire Corp., 662 F.3d 891 (7th Cir. 2011), the named plaintiff filed a putative class action in Illinois state court alleging that Clearwire violated the Telephone Consumer Protection Act by sending unsolicited text messages to cellphone users.  Before the plaintiff moved for class certification, Clearwire offered him his full request for relief, removed to federal court, and moved to dismiss, arguing that the offer mooted the plaintiff’s claim.  The district court agreed, and the Seventh Circuit affirmed.  The Seventh Circuit acknowledged that four other circuits have fashioned a rule allowing a plaintiff to move to certify a class and avoid mootness even after an offer for complete relief, but the court explained that "the exception created by these circuits is unnecessary.  To allow a case not certified as a class action and with no motion for class certification even pending, to continue in federal court when the sole plaintiff no longer maintains a personal stake defies the limits on federal jurisdiction expressed in Article III."  Id. at 896.  To placate the concern that defendants might try to "buy off" plaintiffs prior to class certification, the court suggested that class plaintiffs "move to certify the class at the same time that they file their complaint.  The pendency of that motion protects a putative class from attempts to buy off the named plaintiffs."  Id.  The key takeaway from Damasco is that plaintiffs in the Seventh Circuit are still decidedly susceptible to pre-certification offers of settlement unless they file a motion for class certification concurrently with their complaint.           3.  Article III Standing of Objectors In Glasser v. Volkswagen of Am., Inc., 645 F.3d 1084 (9th Cir. 2011), the Ninth Circuit closed the door on an attempted end-run around Article III standing requirements for parties objecting to class settlements.  Glasser involved a settlement of class claims against Volkswagen relating to replacement vehicle keys.  The Ninth Circuit affirmed the district court’s ruling that an objector to the attorney’s fees award lacked standing because the objector had no interest in that independent award–that is, the fee was not paid from a common settlement fund.  Id. at 1087-88.  Although objectors may still have standing outside a common fund settlement scenario where objectors allege class counsel has leveraged "an excessive attorney fee award as part of a deal to accept an inadequate settlement for the class," id. at 1088, the objector in Glasser made no such allegation.  Instead, the objector argued that an excessive fee award would cause Volkswagen to pass settlement costs along to shareholders and customers, and that preventing such an award would somehow benefit him as a customer in avoiding these costs.  The Ninth Circuit rejected this novel theory, explaining that the objector failed to establish an injury in fact that is "concrete and particularized and . . . actual or imminent, not conjectural or hypothetical."  Id. at 1089 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)).  For now, objectors must continue to identify a concrete interest in the class settlement before raising formal objections in court.           4.  Indicia of Collusion Among Settling Parties In another recent class settlement decision, the Ninth Circuit reversed the approval of a proposed class settlement because the disproportionately high attorney fee award raised "at least an inference of unfairness" and the record failed to "adequately dispel the possibility that class counsel bargained away a benefit to the class in exchange for their own interests."  In re Bluetooth Headset Prod. Liab. Litig., 654 F.3d 935, 938 (9th Cir. 2011).  Bluetooth involved plaintiffs in twenty-six putative classes against manufacturers of wireless headsets who alleged that the manufacturers knowingly failed to disclose potential risk of noise-induced hearing loss, in violation of state consumer fraud protection and unfair business practice laws.  The parties agreed to settle early in the case; the district court approved an agreement providing plaintiffs with $100,000 in cy pres awards and $0 for economic injury, while setting aside up to $800,000 for class counsel and $12,000 for the class representatives.  Id. at 939–40.  The Ninth Circuit reversed, agreeing with objectors that the attorney fee award, amounting to nearly 84% of the total settlement, was disproportionate to the class members’ award and far exceeded the 25% benchmark for fair and reasonable attorney fees.  Id. at 945.  Bluetooth indicates that district courts must do more to "assure [themselves] that the amount awarded [to plaintiffs’ counsel is] not unreasonably excessive in light of the results achieved," and that plaintiffs’ counsel may need to accept fee awards more proportionate to the settlements they negotiate for silent class members.  Id. at 943, 945.  B.  Wave of Internet Privacy Class Actions Undaunted by the advances in class action defense principles in courts at all levels, the plaintiffs’ bar was increasingly active in 2011 and the first month of 2012 in bringing putative class actions involving alleged privacy invasions directed to new and developing technologies.  We expect this area to continue to be one of focus for the plaintiffs’ bar as more and more people spend a significant amount of their time interacting with new technologies–whether on the Internet or on mobile devices such as smartphones and tablets–that may involve the collection of a user’s data.  In several suits in 2011, plaintiffs challenged the use of "Flash cookies" and other Internet "tracking" technologies employed by online advertising networks, analytics companies, and website publishers to track the computers of Internet users for the purpose of serving relevant advertisements to those users or gathering anonymous data about their Internet usage.  Plaintiffs also filed suits related to their use of mobile devices and the mobile application ("app") marketplace, targeting Apple, Google, Microsoft, and several other companies that provide advertising or analytics services on mobile platforms.  Finally, 2011 also saw a number of putative class actions filed in the wake of alleged data breaches.  Lawsuits in each of these categories frequently were spurred by the publication of academic articles, blog postings, or sensational media reports. Plaintiffs’ theories of harm in these cases vary, but typically they involve some assertion that the unexpected collection and use of plaintiffs’ "personal information" harmed the plaintiffs in some way–either by diminishing the value of that information or by depriving plaintiffs of the opportunity to use and control that information as they see fit.  Plaintiffs also frequently assert that their "personal information" is being misappropriated or misused by the entities that collect it, although plaintiffs frequently fail to cite any examples of actual misappropriation or misuse.  In cases involving data breaches, plaintiffs typically assert the increased risk of identity theft and the costs flowing from it (for example, the purchase of credit monitoring) as the alleged harm.            1.  Flash Cookies Suits and Article III Standing The year began with the settlement of several putative class actions filed in mid-2010 alleging that online advertising networks and several website publishers had used Flash cookies to track Internet users without their knowledge or consent for the purpose of serving behaviorally-targeted advertisements.  See In Re Clearspring Flash Cookie Litig., Case No. 10-CV-5948-GW (C.D. Cal.); In Re Quantcast Advertising Cookie Litig., Case No. 10-CV-5716-GW (C.D. Cal.); Davis, et al. v. VideoEgg, Inc., Case No. 10-CV-7112-GW (C.D. Cal.).  Defendants in these cases denied any wrongdoing, but they did not mount a challenge to the pleadings, and the parties settled after private mediation (the defendants collectively agreed to pay $3.2 million).  Despite these settlements,  online advertising network Specific Media, Inc.–which also was named in a consolidated class action complaint alleging the improper use of Flash cookies–moved to dismiss the complaint for lack of Article III standing on the ground that plaintiffs had not suffered any injury in fact.  On April 28, 2011, in the first decision of its kind, the court agreed and dismissed the complaint.  See In re Specific Media Flash Cookies Litig., Case No. 10-CV-1256-GW, 2011 WL 1661532 (C.D. Cal. Apr. 28, 2011).  In this groundbreaking decision, the court stated that while it "would recognize the viability in the abstract" of the amorphous theories of harm advanced by plaintiffs–including "such concepts as ‘opportunity costs,’ ‘value-for-value exchanges,’ ‘consumer choice,’ and other concepts,"–the plaintiffs had failed to "give some particularized example of their application in this case."  Id. at *4.  The court also observed that "the Complaint does not identify a single individual who was foreclosed from entering into a ‘value-for-value exchange’ as the result of [defendant’s] alleged conduct," and stated that "even assuming an opportunity to engage in a ‘value-for-value exchange,’ Plaintiffs do not explain how they were ‘deprived’ of the economic value of their personal information simply because their unspecified personal information was purportedly collected by a third party."  Id. at *5. After the holding in Specific Media, federal courts dismissed several other putative class actions challenging the use of Flash cookies and other Internet tracking technologies.  See, e.g., Del Vecchio v. Amazon.com, Inc., 2011 WL 6325910 at *7 (W.D. Wash. Dec. 1, 2011) (dismissing a Flash cookies case against Amazon.com, holding that plaintiffs had "simply not pled adequate facts to establish any plausible harm"); Bose v. Interclick, Inc., 2011 U.S. Dist. LEXIS 93663 (S.D.N.Y. Aug. 17, 2011) (dismissing all claims with prejudice against several companies–including Microsoft, Mazda, McDonald’s, and CBS–that had contracted with Interclick to serve targeted advertisements). Flash cookies lawsuits filed in state court also lost momentum.  For example, defendants obtained dismissal of  putative privacy class action complaint filed in Arkansas against a host of traditional corporate internet sites–initially on the grounds that the plaintiffs had failed to plead injury as required to state a claim under the Arkansas statutes at issue, and later (after the filing of an amended complaint) on the basis that plaintiffs’ claims were subject to mandatory arbitration pursuant to the terms of service governing the relevant website. Despite these setbacks, the plaintiffs’ bar continues to mount legal challenges to the use of any online "tracking" technologies other than standard browser cookies.  See, e.g., Kim v. Space Pencil, Inc., et al., Case No. 11-CV-3796-LB (N.D. Cal.) (challenging analytics company’s alleged use of Flash cookies, Etags, and HTML5 storage to identify computers of users who have blocked or deleted browser cookies); Garvey v. KISSmetrics, et al., Case No. 11-CV-3764-LB (N.D. Cal.) (same); Couch v. Space Pencil, Inc., et al., Case No. 4:11-CV-5606-LB (N.D. Cal.) (same).  This trend should continue in 2012 and beyond, particularly as technology continues to evolve and plaintiffs become more creative in their theories of harm.           2.  Privacy Challenges to Mobile Devices and Article III Standing In 2011, the plaintiffs’ bar also mounted privacy challenges to the alleged "tracking" of smartphone users by mobile device manufacturers (or the creators of those devices’ operating systems) and third-party advertising and analytics companies that support the "apps" that can be downloaded onto such devices.  As with the Flash cookies litigation, however, plaintiffs encountered significant challenges in this area.  On September 20, 2011, the United States District Court for the Northern District of California relied in large part on the decision in Specific Media and issued an order dismissing a putative nationwide class action against Apple Inc. and eight mobile advertising and analytics companies .  See In re iPhone Application Litig., Case No. 11-MD-02250-LHK, 2011 U.S. Dist. LEXIS 106865 (N.D. Cal. Sept. 20, 2011).  The case involved several consolidated class actions filed throughout the country on behalf of all users of apps on Apple iPhones, iPads, and other iOS devices, against Apple and eight different "Mobile Industry Defendants" that provide advertising and analytics services to app developers.  Plaintiffs alleged that the Mobile Industry Defendants violated federal and state laws by collecting and disclosing users’ personal information located on mobile Apple devices without users’ knowledge or permission.  The court dismissed the complaint for lack of Article III standing because plaintiffs had "not identified a concrete harm from the alleged collection and tracking of their personal information sufficient to create injury in fact."  Id. at *15-17.  While plaintiffs had "stated general allegations about the Mobile Industry Defendants, the market for apps, and similar abstract concepts (e.g., lost opportunity costs, value-for-value exchanges)" to those advanced by plaintiffs in Specific Media, the court held that plaintiffs had "not identified an actual injury to themselves sufficient for Article III standing."  Id. at *18.  (Apple and the Mobile Industry Defendants have filed similar motions to dismiss the plaintiffs’ amended complaint, which are scheduled to be heard in May 2012.) Following the holdings in In re iPhone Application Litig. and Specific Media, a federal court also dismissed a putative privacy class action against the business networking website, LinkedIn, for lack of Article III standing.  See Low v. LinkedIn Corp., 2011 WL 5509848, at *5 (N.D. Cal. Nov. 11, 2011).  Similar complaints are also pending against Google and Microsoft, and motions to dismiss those complaints are likely to be decided in the first part of 2012.  See In re Google Android Consumer Privacy Litig., 11-MD-02264-JSW (N.D. Cal.); Cousineau v. Microsoft Corp., Case No. 11-CV-01438-JCC (W.D. Wash.).  In response to the various decisions in 2011 dismissing privacy complaints for failure to allege a cognizable injury in fact, the plaintiffs’ bar has begun to shift, with some success, to pleading statutory claims that may not have an express damages component–such as the federal Wiretap Act (18 U.S.C. § 2510) or California’s Right of Publicity statute (Cal. Civ. Code § 3344).  Plaintiffs’ theory in such cases is generally that they have satisfied Article III’s injury-in-fact requirement by pleading "statutes creating legal rights, the [mere] invasion of which creates standing."  Warth v. Seldin, 422 U.S. 490, 500 (1975).  This premise, however, is being tested this Term in First American Corp. v. Edwards, 131 S. Ct. 3022 (2011), in which the U.S. Supreme Court will decide whether a statutory violation alone is sufficient to create Article III standing where the plaintiff fails to allege any actual harm.  It therefore remains to be seen how successful plaintiffs will be with such tactics in the absence of any concrete injury to a named plaintiff (and often in the absence of the ability actually to plead a statutory claim that passes muster under federal Rule 12(b)(6)).            3.  Data Breach Suits Finally, 2011 also saw the filing (or continued prosecution) of several lawsuits filed in the wake of alleged data breaches.  In this arena, too, the injury-in-fact requirement was at the forefront.  In Claridge v. RockYou, Inc., 785 F. Supp. 2d 855 (N.D. Cal. 2011), for example, the court declined to dismiss the complaint for lack of Article III standing where plaintiffs alleged that a hacker had exploited a security vulnerability and accessed the database of RockYou (a publisher and developer of online services and applications for use with social networking sites) and copied the e-mail and social-networking login credentials of approximately 32 million registered RockYou users.  Although plaintiffs could point to no specific harm that had occurred, the court declined to dismiss for want of standing given the "paucity of controlling authority regarding the legal sufficiency of plaintiff’s damages theory," as well as the fact that the "context in which plaintiff’s theory [arose]–i.e., the unauthorized disclosure of personal information via the Internet–is itself relatively new, and therefore more likely to raise issues of law not yet settled in the courts."  Id. at 861. In sharp contrast, the plaintiffs in Hines v. OpenFeint, Inc., Case No. 11-CV-03084-EMC (N.D. Cal.) voluntarily dismissed their complaint after defendant OpenFeint, the largest mobile social gaming network for Apple and Android devices in the world, moved to dismiss for lack of Article III standing.  In its motion to dismiss, OpenFeint noted that plaintiffs had not even identified an actual data breach, but at most had identified an entirely hypothetical security vulnerability.  Thus, at the very least, it appears that even the plaintiffs’ bar recognizes that an actual data breach is a prerequisite to such lawsuits (even if the issue of injury in fact after a breach has occurred remains somewhat unsettled). The year 2012 should see more important decisions in the emerging data breach arena, as several such cases, which are now routinely filed within days of publicized data breaches, wind their way through the courts. C.  Raising the Bar on Adequacy of Representation   In 2011, the courts of appeals continued to develop the appropriate standards for assessing adequacy of representation under federal Rule 23(a)(4).  In In re Literary Works in Elec. Databases Copyright Litig., 654 F.3d 242 (2d Cir. 2011), for example, the Second Circuit affirmed the denial of class certification where subtle conflicts arose among various groups within the proposed class.  The plaintiffs, freelance authors, alleged that defendant publishers reproduced plaintiffs’ articles in their own online databases without the plaintiffs’ permission, thus infringing on the plaintiffs’ copyrights.  Id. at 245.  The claims were divided into three categories.  Id. at 251.  Most class members fell into the third category of authors who had not registered their copyrights and, therefore, had weaker claims.  Id.  Although the class representatives belonged to all three categories, the court determined that the interests of class members belonging only to the third category might be jeopardized because no representative exclusively represented their interests.  The only way to ensure that the interests of every class member were adequately represented, according to the court, was to create subclasses with independent representatives.  Id. at 257.  This decision suggests that even in classes where plaintiffs do not share an overt conflict, courts should carefully consider the need for subclassing with independent counsel representing the interests of each subset of plaintiffs.   Similarly, in Randall v. Rolls-Royce Corp., 637 F.3d 818 (7th Cir. 2011), the Seventh Circuit reversed the grant of class certification in a sex discrimination suit, because the female class representatives earned pay exceeding the base pay of most male employees and were therefore subject to a defense that would not defeat the claims of most unnamed class members.  This holding should impact future decisions on class certification because it stresses that the issue of class certification cannot always be separated from the merits of the case.  Based on the court’s statement that "[i]ntervention shouldn’t be allowed just to give class action lawyers multiple bites at the certification apple, when they have chosen, as should have been obvious from the start, patently inappropriate candidates to be the class representatives," this decision should also influence future rulings on intervention where class action lawyers have chosen "patently inappropriate candidates to be the class representatives."  Id. at 827.   Finally, in In re Aqua Dots Prod. Liab. Litig., 654 F.3d 748 (7th Cir. 2011), the Seventh Circuit affirmed denial of certification where the class representative could not "adequately protect the interests of the class" because "[t]he principal effect of class certification . . . would be to induce the defendants to pay the class’s lawyers enough to make them go away" and relief for consumers was unlikely.  Id. at 752–53.  The plaintiffs, purchasers of a children’s toy, brought products liability actions against the manufacturer, distributor, and retailers of that toy, challenging the adequacy of a recall program after children who swallowed large quantities of the toy allegedly became sick.  Id. at 749.  Yet the plaintiffs "[only] want[ed] relief that duplicate[d] a remedy that most buyers already [had] received, and that remain[ed] available to all members of the putative class."  Id. at 752 (alterations and emphasis added).  Relying on Rule 23(a)(4), "which says that a court may certify a class action only if ‘the representative parties will fairly and adequately protect the interests of the class,’" the court held that "[a] representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests."  Id.    In re Aqua Dots should be of particular interest to defendants in consumer class actions who have provided voluntary remedies to consumers.  The decision suggests that such remedy programs are relevant to the adequacy of representation, as well as to the superiority of a class action.  Id. at 748.  In other words, effective and voluntarily undertaken consumer remedies, such as recall programs, have the potential to reduce the class action exposure of manufacturer, distributor, or retailer defendants.  III.  State Court Trends and Developments A.  California Relaxes UCL Injury-In-Fact Pleading Requirement As the result of Proposition 64’s amendments to California’s UCL and False Advertising Law (Cal. Bus. & Prof. Code §§ 17200 et seq. & 17500 et seq.), private plaintiffs must now show an "injury in fact" and have "lost money or property as a result" of the allegedly unlawful conduct in order to have standing under these statutes.  In a series of recent decisions, the California Supreme Court has addressed the meaning of these amendments–most notably in its decision in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), in which the Court ruled that a private plaintiff in a class action must establish actual reliance on the allegedly misleading statements in accordance with traditional tort principles. One issue that remained unresolved was the meaning of "lost money or property," a subject addressed by the Supreme Court this past year in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011).  In Kwikset, the primary issue was whether plaintiffs could show that they "lost money or property" due to Kwikset’s alleged misrepresentation that its locksets were "Made in the U.S.A."  Plaintiffs claimed that this statement violated the UCL because the locksets contained some foreign-made pins and screws.  The Court of Appeal had rejected this position and concluded that plaintiffs could not show "lost money or property."  According to that court, despite plaintiffs’ frustrated "patriotic desire to buy fully American-made products," they received a fully functioning lockset (the "benefit of their bargain"), they did not claim that they paid a premium based on the "Made in the U.S.A." label, and they did not assert that the lockset was defective or inferior to a product containing all-American components. On review, the Supreme Court reversed and held that plaintiffs satisfied the "lost money or property" requirement because they "bargained for locksets that were made in the United States" and "got ones that were not."  Id. at 332.  The five-justice majority ruled that the "plain language" of Proposition 64 requires that private parties "(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., caused by, the unfair practice or false advertising that is the gravamen of the claim."  Id. at 322.  According to the Court, "lost money or property–economic injury–is itself a classic form of injury in fact" and "[i]f a party has alleged or proven a personal, individualized loss of money or property in any nontrivial amount, he or she has also alleged or proven injury in fact."  Id. at 325.  It was irrelevant, in the majority’s view, whether or not a plaintiff received a properly functioning product or paid a premium because of a purported error in a product label.  Instead, a plaintiff who relied on a label when making a purchase has suffered economic harm by having "paid more for [a product] than he or she otherwise might have been willing to pay if the product had been labeled accurately."  Id. at 329.  Any other result "would bring an end to private consumer enforcement of bans on many label misrepresentations, contrary to the apparent intent of Proposition 64."  Id. at 330.  "Simply stated," Justice Kathryn M. Werdegar wrote, "labels matter," and consumers who purchase a mislabeled product satisfy Proposition 64’s standing requirements.  Id. at 328. Justice Ming W. Chin wrote a dissenting opinion (joined by Justice Carol A. Corrigan) that sharply criticized the majority’s holding as standing "[i]n direct contravention of the electorate’s intent," because it "effectively mak[es] it easier for a plaintiff to establish standing" after Proposition 64.  Id. at 338 (emphasis added).  Justice Chin explained that the majority effectively collapsed the "injury in fact" and "loss of money or property" requirements into a combined "economic injury" element that requires only a showing that private plaintiffs "lost" the "price the consumer paid for the product," and an allegation that plaintiffs "would not have bought the mislabeled product."  Id. at 345. Looking ahead, companies facing UCL claims still have strong defenses to liability notwithstanding Kwikset.  For instance, Kwikset may be limited to specific types of misrepresentations–the "Made in the U.S.A." claim violated specific regulations and many consumers have a strong preference for American-made products.  Moreover, Kwikset may not apply in cases predicated on an alleged omission (rather than an affirmative misrepresentation).  In addition, because the Court’s reasoning in Kwikset rests largely on the subjective valuations of the plaintiff, there likely will be many opportunities to challenge class certification on the grounds that named plaintiffs are not typical of the class, the class itself is not ascertainable, or individual issues predominate (under Tobacco II, even if the named plaintiffs establish standing, the court must still determine if the proposed class meets these other requirements for certification). B.  California Supreme Court Expands Reach of Consumer Protection Laws to Non-California-Based Employees In 2011, the California Supreme Court joined several other state courts in addressing the extra-territorial reach of the state’s unfair competition laws.  See, e.g., Schnall v. AT&T Wireless Servs., Inc., 225 P.2d 929, 938 (Wash. 2010) ("[N]othing in our law indicates that [Washington Consumer Protection Act] claims by nonresidents for acts occurring outside of Washington can be entertained under the statute."); Morrissey v. Nextel Partners, Inc., No. 3194-06, 2009 WL 400030, at *12 (N.Y. Sup. Feb. 19, 2009) (the court "would be precluded from applying New York consumer protection laws to claims arising out-of-state" in the class action context); Landau v. CNA Fin. Corp., 886 N.E.2d 405, 407 (Ill. App. 2008) ("The Consumer Fraud Act is a statute without extraterritorial effect; the Illinois General Assembly did not intend the Act to apply to fraudulent transactions that take place outside Illinois."). In a ruling that broke with the trend of these other courts, and one that could spur a new wave of wage and hour class action litigation, the Supreme Court of California unanimously held in Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011), that non-California employees who work for a California-based employer were entitled to overtime pay under California law (which requires daily overtime pay after eight hours worked in a day) for full days and full weeks worked in California under the facts presented in that case.  Sullivan involved a suit originally brought in federal court by plaintiffs from Colorado and Arizona who worked as "Instructors" for Oracle Corporation, which is headquartered in California.  Plaintiffs worked mainly in their home states, but traveled periodically to California to perform training.  After years of federal litigation, the case found its way to the California Supreme Court on three questions certified by the Ninth Circuit. The Court first ruled that California’s overtime rules apply to "work performed in California for a California-based employer by out-of-state plaintiffs."  Id.  According to the Court, California’s overtime statutes applied to all work performed in the state, regardless of the residence of the worker.  Moreover, even though the overtime laws of Arizona and Colorado did not require the same overtime payments as were required in California, neither of those states’ laws expressed a public policy contrary to California’s, such that application of California law would impair any policy goals of those states. Next, the Court ruled that, because the out-of-state plaintiffs were due overtime wages under California law, California precedent also permitted the plaintiffs to seek relief under the UCL.  Id. at 1206 (applying Cortez v. Purolator Air Filtration Prods. Co., 23 Cal. 4th 163, 177 (2000)). Finally, the Court ruled that the UCL "does not apply to overtime work performed outside California for a California-based employer by out-of-state plaintiffs in the circumstances of this case based solely on the employer’s failure to comply with the overtime provisions of the FLSA."  Sullivan, 51 Cal. 4th at 1209.  Oracle’s decision to classify its Instructors as exempt, which was the only nexus to California, was not in itself an unlawful act.  The Court left open the question of whether there would be a sufficient nexus to California if the wages for the out-of-state employees were paid in California.  Id. at 1208.  This final point may offer a silver lining to defendants:  The rule that the UCL cannot be applied to out-of-state class members, combined with Mazza‘s holding that class claims based on the laws of many different states cannot be certified (see supra at Section I.A.1), should make it more difficult to certify nationwide classes in California. C.  Recording Customers’ ZIP Codes Can Violate California Consumer Law In Pineda v. Williams-Sonoma Stores, Inc., 51 Cal. 4th 524 (2011), the California Supreme Court held that a ZIP code constitutes "personal identification information" under the Song-Beverly Credit Card Act and that requesting and recording ZIP codes as part of a credit card transaction violates the Act.  In Pineda, the plaintiff alleged that she made a purchase at a Williams-Sonoma store with her credit card and that the clerk asked her for and recorded her ZIP code.  Williams-Sonoma subsequently used her name and ZIP code to locate her home address.  Id. at 528.   The Court found that the only reasonable interpretation of the Song-Beverly Act, which prohibits retailers from requesting or requiring the customer to provide personal identification information as a condition to accepting the credit card payment, is that personal identification information includes a cardholder’s ZIP code.  Id. at 535.  The Court reasoned that "the Legislature, by providing that personal identification information includes the cardholder’s address," intended to include components of the address.  Id. at 531.  Further, the Court noted that several considerations weighed in favor of a broad reading of the Act, including its expansive language and the liberal construction generally owed to consumer protection statutes.  Failing to protect ZIP codes would, in the Court’s view, undermine the statute’s clear intent, because with the ZIP code, a merchant could readily obtain the information that was supposed to be protected–such as home addresses and telephone numbers–through marketing software.  Id.  The immediate impact of Pineda has been swiftly felt; dozens of class actions were filed following this decision.  See, e.g., Folgelstrom v. Lamps Plus, Inc., 195 Cal. App. 4th 986 (2011); Dardarian v. Nordstrom, Inc., 2011 U.S. Dist. LEXIS 48567, at *9 (N.D. Cal. 2011).  Nonetheless, although Pineda may be a concern for retailers, it does not wholly foreclose them from collecting personal identification information.  The Song-Beverly Act does not apply to cash transactions, for instance; nor does it prevent retailers from collecting personal identification information for delivery or other special purposes incidental, but related to credit card transactions.  In addition, the Song-Beverly Act does not prohibit retailers from collecting personal identification information in connection with online transactions. D.  Heightened Pleading Requirements for Claims Under D.C.’s Consumer Protection Procedures Act In Grayson v. AT&T Corp., 15 A.3d 219 (D.C. 2011), the D.C. Court of Appeals found that plaintiffs asserting claims under D.C.’s Consumer Protection Procedures Act ("CPPA") must satisfy the standing requirements of Article III of the U.S. Constitution, including the element of injury-in-fact.    In the first action of this consolidated case, plaintiff Grayson alleged that several telecommunications companies defrauded the federal government by failing to report as unclaimed property the unused value of prepaid calling cards purchased by Grayson and others.  Although the court acknowledged that Grayson had alleged an injury-in-fact, the court ultimately concluded that Grayson failed to allege a violation of his statutory rights under the CPPA.  Id. at 247–50.  In the second action, where the court was once again confronted with the threshold issue of standing, a different plaintiff (Breakman) alleged that the Internet service provider AOL failed to disclose to its existing members that it was offering new members a cheaper option for monthly dial-up Internet service.  Id. at 246.  The court concluded that because Breakman was not an AOL customer, his claim was brought solely in "a representative capacity on behalf of the interests of the general public" under the CPPA.  Id.   Grayson and Breakman both argued that amendments to the CPPA enacted in 2000 authorized plaintiffs to bring suits "on behalf of the general public," regardless of whether the plaintiff had any contact with the defendant, purchased the defendant’s products, or suffered injury of any kind.  Id. at 242-44.  Based on the structure and legislative history of CPPA amendments, the court concluded that the D.C. Council did not intend to override the D.C. courts’ longstanding practice of adhering to federal Article III standing requirements, even though those principles do not directly bind the D.C. judiciary (an Article I creation).  Instead, the court held that a plaintiff must suffer "actual or threatened injury" from the alleged unlawful practice to have standing to assert a CPPA claim.  Id. at 243. The holding in Grayson has affected such cases as OneWest Bank, FSB v. Marshall, 18 A.3d 715 (D.C. 2011), which noted that "[s]tanding is a threshold jurisdictional question which must be addressed prior to and independent of a party’s claims."  Id. at 720.  Further, Grayson restored stability to litigation under the CPPA.  The District of Columbia was at risk of becoming a magnet for "no-injury" lawsuits filed by professional plaintiff’s law firms and litigation advocacy groups.  By adhering to traditional standing requirements, the D.C. Court of Appeals has ensured that only plaintiffs with a true stake in the outcome will be able to file suit.        Gibson, Dunn & Crutcher’s Class Actions Practice Group is available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you work or any of the following members of the Class Actions Group: Gail E. Lees – Chair, Los Angeles (213-229-7163, glees@gibsondunn.com)Andrew S. Tulumello – Vice-Chair, Washington, D.C. (202-955-8657, atulumello@gibsondunn.com)G. Charles Nierlich – Vice-Chair, San Francisco (415-393-8239, gnierlich@gibsondunn.com)Christopher Chorba – Member, Los Angeles (213-229-7396, cchorba@gibsondunn.com)   © 2012 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 20, 2015 |
2014 Year-End E-Discovery Update

Click for PDF In our Mid-Year E-Discovery Update, we reported that 2014 was shaping up to be the “year of technology” in e-discovery. The remainder of the year more than lived up to those expectations. Powerful new data analytics tools have become available for search and review, predictive coding pricing is becoming more accessible and its use appears to be gaining more traction, e-discovery technologies are becoming available through the cloud, and technologies that automate aspects of information governance are becoming increasingly available. New technologies are also creating new challenges, such as the increasing use of texting and other applications on smart phones and other mobile devices. The important case law trends in 2014 have focused on (1) predictive coding and technology assisted review; (2) sanctions and the duties of counsel in connection with implementing legal holds; (3) text messaging and mobile devices; (4) proportionality; and (5) social media. After a lengthy process that began in 2010, the Judicial Conference issued a final set of proposed amendments to the Federal Rules of Civil Procedure in September that, if approved by the Supreme Court, will become effective on December 1, 2015. The most significant proposed amendments deal with building in proportionality considerations to the scope of discovery, new requirements for responding to document requests, and uniform standards for imposing sanctions for preservation failures. Most significantly, the Judicial Conference substantially overhauled its proposed sanctions rule following the public comment period. We also saw in late 2014 a greatly heightened interest emerge in information governance and the need to defensibly delete data for which there is no legal obligation or business need to retain. While information governance was primarily viewed in the past as a means of bringing high e-discovery costs under control, data breaches in 2014 that have resulted in highly publicized leaks of sensitive company emails and other confidential corporate information have added new urgency to the proper management and defensible deletion of data. Looking forward to 2015 and beyond, we expect to see the following likely trends: An increasing recognition that quite often there is not a single “magic bullet” to solve the challenges of enormous document volumes, high review costs and often inflexible production deadlines. More “holistic” approaches will be taken to search and review, utilizing more than one methodology or technology at different stages of the process or in combination with one another. The continued adoption of predictive coding at a relatively slow pace, as its use is being hampered by an absence of consistent and well-reasoned jurisprudence–or a general consensus in the legal community–regarding key issues such as whether irrelevant documents used to train and validate predictive coding models must be shared with opposing counsel. A greatly increased adoption of information governance programs, including defensible disposal of data, and the emergence of automated document classification and disposal technologies to carry out such programs. The defensibility of these programs and technologies also will also likely become an increasingly common subject in judicial decisions. Text messaging, social media and other data created or stored on mobile devices and in the “personal cloud” will increasingly become the subject of discovery and sanctions decisions. More sanctions decisions generally, even with the adoption of the proposed amendment to Rule 37(e), as the challenges and complexities of preservation and timely review and production of electronically stored information (ESI) grow. The increased use of lawyers with practices focused on e-discovery to address increasingly complex issues regarding preservation, collection, search and review strategies and technologies, and defending the reasonableness of processes employed by clients and counsel related to e-discovery. We invite you to review our discussion of these trends below, and to look out for our client updates, webinars and articles in the upcoming year.                                                                          Table of Contents The Year of Technology in E-Discovery             Data Analytics in Search and Review             Predictive Coding             Information Governance and Insourcing E-Discovery Sanctions and Ethics in E-Discovery Text Messaging and Mobile Devices Proportionality Social Media Federal Rule Amendments                         Cooperation (Rule 1)                         Proportionality and the Scope of Discovery (Rule 26(b)(1))                         Proposed Limits on Discovery Methods Withdrawn (Rules 30, 31, 33 and 36)                         Objections to Document Requests (Rule 34)                         Sanctions for Failure to Preserve ESI (Rule 37(e)) Conclusion                                                                                 The Year of Technology in E-Discovery In 2014, powerful new data analytics tools became available for search and review, predictive coding pricing became more accessible and its use appeared to be gaining more traction, e-discovery technologies became available through the cloud, and technologies that automate aspects of information governance began to emerge. While we reported on these trends in our Mid-Year E-Discovery Update, we saw them continue during the remainder of 2014, along with an increasing recognition that quite often there is not a single “magic bullet” to solve the challenges of enormous document volumes, high review costs and often inflexible production deadlines. Rather, various approaches can be taken to search and review, including a holistic approach that uses more than one methodology or technology at different stages of the process, or in combination with one another. The use of search terms has continued to be, by far, the predominant approach to search. But increasingly parties are combining the use of search terms with other technologies to improve the effectiveness and efficiency of their search and review processes. Looking forward to 2015 and beyond, counsel who are literate in the use of the latest search and review technologies will realize substantial efficiencies and advantages in litigation for their clients. Additionally, in light of leaks of sensitive emails and other corporate information as a result of highly publicized hacks and thefts of terabytes of company data, we are likely to see a greater interest in information governance and the use of technological solutions–such as automated classification and disposal–to help ensure implementation of document retention and disposal policies. A significant challenge, however, will be reconciling more complex approaches to search and review–often still using search terms as part of the process–with a judiciary and legal community that is very comfortable with the relatively straightforward, but often burdensome, methodology of running search terms through the document collection and having attorneys review every document that the search terms retrieve. Disputes related to the use of predictive coding, either alone or in combination with search terms, are an example of these growing pains. Back to Top Data Analytics in Search and Review In the past, the term “technology-assisted review” or “TAR” was often used as a synonym for predictive coding. While predictive coding has garnered much of the publicity about new search and review technologies, other technologies rightfully fall within the meaning of technology-assisted review. Indeed, in Chen-Oster v. Goldman, Sachs & Co., Magistrate Judge James Francis IV of the Southern District of New York even referred (correctly) to the use of search terms as a form of TAR. See Chen-Oster v. Goldman, Sachs & Co., 2014 WL 716521 (S.D.N.Y. Feb. 18, 2014), (holding that a party’s use of a technology-assisted review process does not mean that it must produce documents that the process identifies as potentially relevant without further human review). One of the hallmarks of 2014 is that new visual analytics applications have become available that can be a powerful supplement to other search methodologies such as search terms and predictive coding. Such analytics applications organize documents based on their internal content and their similarity to other documents in the set. While concept clustering technologies have been available for a while, the new visual analytics applications provide a more powerful user interface that visually shows clusters of documents that users click through to more detailed levels, shows how the documents are related to one another, and shows their relationships with other clusters of documents. Once a relevant or important document is found, the tool can help find similar documents. Visual analytics and other concept clustering applications can be used to find important documents early in a case and to supplement or confirm the effectiveness of other methodologies, such as search terms or predictive coding.  See Gareth Evans and David Grant, Tools Let Attorneys Follow the Breadcrumbs, The National Law Journal (Sept. 1, 2014); see also David Grant, Seeing is Believing: Using Visual Analytics to Take Predictive Coding Out of the Black Box (FTI Technology White Paper). Various analytics applications to improve the search and review process are not new, of course, but anecdotal evidence suggests they are being used more frequently than in the past. These include conceptual searching, using analytics to find documents similar to those already found, conceptual near duplicate detection, and clustering to group similar documents together into virtual folders displayed by topic. These tools can be used to find important documents more quickly and to code groups of documents more efficiently. Back to Top Predictive Coding It has become popular of late to count the growing number of judicial decisions mentioning predictive coding and to interpret that as an indication of the increasing adoption of predictive coding as a search and review methodology. By that measure, 2014 was seemingly a banner year for predictive coding, with 17 cases mentioning predictive coding compared to 9 in 2013 and 6 in 2012). But many of these cases, as in past years, merely involved references to the technology and not substantive discussions or approval of its use in the particular case. See, e.g., FDIC v. Bowden, No. 4:13-cv-245, 2014 WL 2548137 (S.D. Ga. Jun. 6, 2014) (ordering parties to “consider the use of predictive coding”); In re Domestic Drywall Antitrust Litig., 88 Fed. R. Serv. 3d 966 (E.D. Pa. 2014) (referring to the availability of predictive coding for searching ESI); Deutsche Bank Nat. Trust Co. v. Decision One Mortg. Co., LLC, No. 13 L 5823, 2014 WL 764707 (Ill. Cir. Ct. Jan. 28, 2014) (“If the parties agree that predictive coding would be appropriate in this case, they are encouraged to use that tool.”); Aurora Coop. Elevator Co. v. Aventine Renewable Energy, No. 4:12-civ-230, slip op. at 1-2 (D. Neb. Mar. 10 2014) (ordering parties to “consult with a computer forensic expert to create search protocols, including predictive coding as needed, for a computerized review of the parties’ electronic records.”); U.S. v. Exxonmobil Pipeline Co., No. 4:13-cv-00355, 2014 WL 2593781 (E.D. Ark. Jun. 10, 2014 (defendants suggested the use of predictive coding to ease the burden of production and to meet their production deadline, but the issue was not presented to the court for approval); Green v. Am. Modern Home Ins. Co., No. 1:14-cv-04074, 2014 WL 6668422 (W.D. Ark. Nov. 24, 2014) (entering parties’ stipulated ESI protocol allowing the parties with the option of using a “technology assisted review platform” in lieu of search terms to search documents); Good v. American Water Works, No. 2:14-cv-01374, 2014 WL 5486827 (S.D. W. Va. Oct. 29, 2014) (encouraging defendants to use technology-assisted review in combination with manual review to expedite privilege review). Two cases reflected that plaintiffs’ counsel had used predictive coding in analyzing and reviewing documents they had received in document productions from defendants and third parties.  In The New Mexico State Investment Council v. Bland, No. D-101-cv-2011-01434, 2014 WL 772860 (N.M. Dist. Feb. 12, 2014), the court in approving settlements in the litigation stated that “[i]n reviewing documents, [plaintiff’s counsel] implemented various advanced machine learning tools such as predictive coding, concept grouping, near-duplication detection and e-mail threading.” Id. at *6. The court further stated that “[t]hese tools . . . enabled the reviewers on the document analysis teams to work more efficiently with the documents and identify potentially relevant information with greater accuracy than the standard linear review.” Id. In approving a settlement and an award of attorney’s fees in Arnett v. Bank of America, No. 3:11-cv-1372, 2014 WL 4672458 (D. Or. Sept. 18, 2014), the court stated that plaintiff’s counsel reviewed the more than 1.1 million documents produced in the case using “search terms, predictive coding, and manual review methods.” Id. at *9. Similarly, three cases reflected that defendants had used predictive coding in reviewing documents for production in response to the initial round of document requests.  In United States v. Univ. of Nebraska at Kearney, No. 4:11-cv-3209, 2014 WL 4215381 (D. Neb. Aug. 25, 2014), the defendant objected to subsequent document requests in light of its prior use of predictive coding. Id. at *3. Although the defendant argued for cost-shifting for the additional production, the court held that the additional document requests were overbroad and did not reach the cost-shifting issue. See id. at *5. In Smilovits v. First Solar, No. 2:12-cv-00555, slip op. at 1-2 (D. Ariz. Nov. 20, 2014), the court held that defendants’ use of predictive coding did not confine plaintiffs’ document discovery to the first round of requests and noted that defendants had not provided any information about the costs to “retrain” the predictive coding tool to deal with subsequent requests. And in In re Bridgepoint Educ., Inc. Sec. Litig., No. 12-cv-1737, 2014 WL 3867495 (S.D. Cal. Aug. 6, 2014), the court denied plaintiffs’ request to require the defendant to use predictive coding on custodians’ documents that it had previously searched using traditional search terms. Id. at *4. In one case, the court ordered the defendant to use predictive coding to search more than 2 million documents after “little or no discovery was completed” before the discovery cutoff and the parties had ongoing disputes after “months of haggling” over search terms that yielded large numbers of documents for review. See Independent Living Center v. City of Los Angeles, No. 2:12-cv-00551, slip op at 1-2 (C.D. Cal. Jun. 26, 2014).  The court also held that the defendant was not necessarily required to engage in a quality assurance process as part of the predictive coding protocol, but if the plaintiff insisted upon such a process, then plaintiff would be required to pay for 50% of its costs. Id. at 2-3. A handful of cases addressed parties’ requests to use predictive coding over the objection of the opposing party. In Federal Housing Finance Agency v. JPMorgan Chase & Co., Inc., et al., No. 11-cv-6189, 2014 WL 584300, at *3 (SDNY Feb. 14, 2014), Judge Denise Cote indicated that she had approved the use of predictive coding over the objections of the plaintiff at an earlier hearing in the case. At that earlier hearing, Judge Cote is quoted in the transcript as having stated that “[i]t seems to me predictive coding should be given careful consideration in a case like this, and I am absolutely happy to endorse the use of predictive coding and to require that it be used as part of the discovery tools available to the parties.”  Id. (transcript of Jul. 24, 2012 hearing at 8). In Progressive Casualty Ins. Co. v. Delaney, No. 2:11-cv-00678, 2014 WL 3563467, at *8-*11 (D. Nev. Jul. 18, 2014), Magistrate Judge Peggy Lean of the District of Nevada denied the plaintiff’s request to use predictive coding, primarily because the request was made extremely late in the discovery period and the plaintiff had previously agreed in the parties’ ESI protocol to use search terms and human review. Nevertheless, Judge Lean described in very positive terms the potential effectiveness of predictive coding and stated that she would not have hesitated to approve a predictive coding protocol had it been submitted earlier in the case. See id. at *8. The court also criticized the plaintiff’s plan to apply predictive coding to documents hitting the search terms and not to the entire document population. Id. at *10. The Progressive decision is controversial, however, in that it also criticized plaintiff’s unwillingness to share with opposing counsel the irrelevant documents used to train the predictive coding tool. Judge Lean erroneously stated that, in the reported decisions that have approved predictive coding, “the courts have required the producing party to provide the requesting party with full disclosure about . . . the documents used to ‘train’ the computer.” See id. at *10 (emphasis added) (citing Da Silva Moore and In re: Actos). In both Da Silva Moore and Actos, which Judge Lean cited in Progressive (and in other cases allowing the opposing party to see irrelevant documents in the training sets), however, the parties seeking to use predictive coding had voluntarily stipulated to allow access to the irrelevant training documents. While in those matters the parties may not have been concerned about disclosing irrelevant documents to opposing counsel, that is often not the case–for example, in disputes among competitors, in disputes where the stakes are extraordinarily high, where there are concerns that counsel will use the knowledge gained from the irrelevant documents either in the present case or in the next case he or she brings (i.e., the “you can’t un-ring the bell” phenomenon), or where there are concerns that mistakes can be made in keeping the information confidential and the consequences of such disclosure are too great. Additionally, where document volumes are large and the prevalence of relevant documents is low, there can be several thousand irrelevant documents in the training and validation sets. In those circumstances, using predictive coding may be a non-starter if it means that the opposing party will get to see the irrelevant documents. In contrast with Progressive, the court in Bridgestone Americas, Inc. v. IBM permitted the plaintiff to change its search and review methodology mid-stream to predictive coding.  See Bridgestone Americas, Inc. v. IBM, No. 3:13-1196, 2014 WL 4923014, at *1 (M.D. Tenn. Jul. 22, 2014). The court also permitted plaintiff to undertake a hybrid approach, using predictive coding on documents initially identified through the use of search terms (nevertheless, resulting in over two million documents requiring review). The court expressly recognized that using predictive coding “is a judgment call” and that, in a case involving “millions of documents to be reviewed with costs likewise in the millions . . . . [t]here is no single, simple, correct solution possible under these circumstances.” Id. In Dynamo Holdings Ltd. Partnership v. Commissioner of Internal Revenue, 143 T.C. No. 9, 2014 WL 4636526 (Sept. 17, 2014), the tax court approved the petitioner’s use of predictive coding over the respondent’s objection that it is an “unproven technology.” Addressing one of the issues that those considering using predictive coding frequently face–i.e., whether court approval is necessary–the court observed that the petitioner’s request to use predictive coding “is somewhat unusual.” Id. at *3. The court stated that, “although it is a proper role of the court to supervise the discovery process and intervene when it is abused by the parties, the court is not normally in the business of dictating the process that they should use when responding to discovery.” Id. “If our focus were on paper discovery,” the court continued, “we would not (for example) be dictating to a party the manner in which it should review documents for responsiveness or privilege, such as whether that review should be done by a paralegal, a junior attorney, or a senior attorney.” Id. While stating that, if the respondent believes “the ultimate discovery response is incomplete,” then it could file a motion to compel “at that time,” the court nevertheless took up the issue of whether predictive coding would be allowed “because we have not previously addressed the issue of computer-assisted review tools[.]” Id. In response to the respondent’s assertion that predictive coding is an “unproven technology,” the court stated that while predictive coding is a relatively new technique, “the understanding of e-discovery and electronic media has advanced significantly in the last few years, thus making predictive coding more acceptable in the technology industry than it may have previously been.” Id. at *5. The court added that, “[i]n fact, we understand that the technology industry now considers predictive coding to be widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden.” Id. Whether these cases are the tip of a small or large iceberg–or something in between–of cases where predictive coding is being used is impossible to tell. By any measure, however, the number of reported decisions reflecting the use of predictive coding is very small compared to the overall number of cases being litigated. The increased number of decisions discussing predictive coding does appear to reflect an increase in awareness among the judiciary and litigants of predictive coding as an option for search and review. Some vendors of predictive coding technology claim that predictive coding is quietly gaining usage, and that it has particularly done so in 2014. Additionally, vendors’ pricing for predictive coding applications has generally come down quite significantly, making it more frequently a viable option from a cost perspective than in the past. Regardless, it is apparent that predictive coding is still in its early stages and the existing jurisprudence has not finally resolved significant issues relating to its use. Those issues include (1) whether the use of predictive coding must be disclosed to the opposing party; (2) whether court approval is necessary; (3) whether predictive coding may be used in combination with keywords; (4) whether a party must disclose irrelevant documents in the seed, training and validation sets; (5) whether the review decisions on such documents are protected attorney work product; and (6) whether and under what circumstances a party may be compelled to use predictive coding when it has selected an alternative methodology. Until there are more consistent and definitive rulings on these issues, or a general consensus emerges in the legal community, it is likely that the use of predictive coding will grow, but it will continue doing so at a slow pace. Back to Top Information Governance and Insourcing E-Discovery Information governance–generally defined as an integrated approach to records management that involves legal, business operations and IT in managing, controlling and defensibly deleting data–has been a hot topic for the past three years. Information governance can help control the rising costs of e-discovery by helping to ensure that companies do not keep data that they have not legal obligation or business need to retain. In 2014, data security became a much more prominent reason to implement an information governance program. Recent highly publicized leaks of sensitive company emails and other confidential corporate information in data breaches involving thefts of terabytes of company data have added urgency to the need to defensibly dispose of unneeded information. While in the past many companies may have merely considered implementing information governance procedures or made only marginal changes in their existing practices, we expect that in 2015 there will be much more attention paid to actually undertaking information governance programs. Technologies such as automated document classification and disposal (think predictive coding for information governance) will also increasingly play a role in such programs. What remains to be seen is courts’ reaction to the very short retention periods that some companies are implementing. As we reported in our Mid-Year Update, companies are also increasingly insourcing aspects of the e-discovery process that previously were handled by outside e-discovery vendors. One 2014 survey found that 90% of responding companies have internal teams, rather than an outside service provider, handle preservation and collection. See also Gareth Evans, Technology: Self-Collection is Not Always the Fox Guarding the Henhouse (Inside Counsel Dec. 27, 2013). Exceptions were noted for high-stakes matters where a third-party expert may need to testify on the defensibility of the collection process, matters where compliance with foreign data privacy regulations is an issue, and social media platforms and “bring your own device” environments involving more complex collection issues. Additionally, many companies are now handling data processing for e-discovery internally, which has been estimated to account for almost 20% of e-discovery costs. The availability of e-discovery software and storage through the cloud has also meant that more companies and law firms can handle internally some or all of the process that has traditionally been provided by outside e-discovery service providers. While many companies are finding that preservation and collection may be well-suited to be managed in-house, they continue to outsource other aspects of the e-discovery process. The same survey, for example, found that 83% of respondents outsource review and production. Respondents cited staffing and internal budget limitations–as well as the expertise of outside providers–among the reasons for the ongoing need to outsource. Back to Top Sanctions and Ethics in E-Discovery A series of opinions focusing on legal holds and the obligations of counsel in their implementation featured prominently in the e-discovery sanctions area in 2014. In Brown v. Tellermate Holdings, Ltd., No. 2:11-cv-1122, 2014 WL 2987051 (S.D. Ohio July 1, 2014), the court imposed evidence preclusion and monetary sanctions for the defendant’s failure to timely preserve and produce relevant ESI in an age discrimination case. In doing so, the court focused on the duty of counsel to examine critically the client’s representations about the existence and availability of responsive documents. The most significant failures the court found in Brown v. Tellermate related to a web-based application utilized by the defendant’s sales force, including the plaintiffs. See id. at *17-*20. When information from the application was requested, the defendant and its counsel asserted that the defendant was not in control of the data and could not produce it, which turned out to be untrue. Id. No steps had been taken to preserve the information based, at least in part, upon counsel’s “unfounded” and “mistaken” belief that a third-party service provider would preserve the data. See id. at *20. By the time counsel checked this assumption, the integrity of the data (which was ultimately produced) was in question because it had been subject to possible changes by the defendant’s sales force, which was still using the application. Id. The court stated that “[l]ike any litigation counsel, Tellermate’s counsel had an obligation to do more than issue a general directive to their client to preserve documents which may be relevant to the case. Rather, counsel had an affirmative obligation to speak to the key players at Tellermate so that counsel and client together could identify, preserve, and search the sources of discoverable information.” Id. The court held that in this case counsel fell “far short” of their obligation to “examine critically” the information that Tellermate gave them about the existence and availability of documents the plaintiffs requested. See id. at *1. The court stated that counsel “have a duty (perhaps even a heightened duty) to cooperate in the discovery process; to be transparent about what information exists, how it is maintained, and whether and how it can be retrieved; and, above all, to exercise sufficient diligence (even when venturing into unfamiliar territory like ESI) to ensure that all representations made to opposing parties and to the Court are truthful and are based upon a reasonable investigation of the facts.” Id. at *2. Similarly, in Procaps S.A. v. Patheon Inc., No. 12-civ-24356, 2014 WL 800468 (S.D. Fla. Feb. 28, 2014), in an opinion invoking the Paul Newman film Cool Hand Luke (“what we’ve got here is a failure to communicate”) and the band U2 (“but I still haven’t found what I’m looking for”), the court faulted plaintiff’s counsel in an antitrust suit for (i) failing to ensure that the plaintiff implemented a legal hold; (ii) failing to travel to Colombia (where the plaintiff is based) to meet with the plaintiff’s IT team or other executives to discuss how relevant ESI would be located; (iii) failing to retain an “ESI retrieval consultant” to help it implement a legal hold and to search for relevant ESI; and (iv) relying on the plaintiff’s own executives and employees to self-search for documents. See id. at *1-*2. The court ordered the plaintiff to retain an e-discovery vendor to conduct an extensive analysis of its data sources, make forensic images of sources where potentially relevant ESI was located, identify custodians whose files must be searched, interview the custodians, and use agreed-upon search terms to search the documents. Id. at *3 –*5. The court also imposed monetary sanctions, requiring that the plaintiff’s law firm be responsible for paying 50% of the sanctions.  Furthermore, the court expressly urged–though it did not require–that the plaintiffs’ law firm identify “which attorneys caused, or helped cause, this discovery failure and to determine whether those attorneys (rather than the firm itself) should pay all or some” of the monetary sanctions imposed upon the law firm. Id. at *6. In Knickerbocker v. Corinthian Colleges, 298 F.R.D. 670 (W.D. Wash. 2014), the court imposed monetary sanctions on the defendant and its counsel for a series of alleged failures, including (i) failure to issue a legal hold notice or to implement preservation procedures; (ii) reliance on employees to search for relevant documents and, compounding the problem, testimony from employees that they had not, in fact, been asked to search for relevant documents; (iii) allowing all of the plaintiff’s emails to be deleted from the defendant’s email server after commencement of the case pursuant to the company’s six-month retention period for emails; and (iv) counsel’s certification that all available sources had been searched despite the fact that the defendant had not searched its backup tapes.  Id. at 678-81. Based on the court’s finding that both the defendant and its counsel’s conduct constituted bad faith, the court imposed monetary sanctions on both. Id. at 681-82. There were other cases illustrating things that can go wrong in implementing legal holds.  See, e.g., Vincente v. City of Prescott, No. CV-11-08204, 2014 WL 3894131 (D. Ariz. Aug. 8, 2014) (defendant issued legal hold notices but (i) did not coordinate with IT department, which failed to suspend autodelete for email; and (ii) relied upon individual custodians for self-collection); Osberg v. Foot Locker, No. 07–cv–1358, 2014 WL 3767033 (S.D.N.Y. July 25, 2014) (court held that the defendant failed to implement a legal hold until three years after suit was originally filed–although the suit was dismissed and later re-filed during that time–and that defendant conducted “spring cleanings” that destroyed potentially relevant documents). With respect to the duties of counsel in handling e-discovery, the State Bar of California Standing Committee on Professional Responsibility and Conduct issued in 2014 its Formal Opinion Interim No. 11-0004 (ESI and Discovery Requests) for public comment. The interim opinion recognizes that while attorney competence related to litigation generally requires a basic understanding of and ability to handle issues relating to e-discovery, cases involving more complex e-discovery issues “may require a higher level of technical knowledge and ability[.]” See id. The interim formal opinion states that “[a]ttorneys handling e-discovery should have the requisite level of familiarity and skill to, among other things, be able to perform (either by themselves or in association with competent co-counsel or expert consultants) the following: (1) initially assess e-discovery needs and issues, if any; (2) implement appropriate ESI preservation procedures, including the obligation to advise a client of the legal requirement to take actions to preserve evidence, like electronic information, potentially relevant to the issues raised in the litigation; (3) analyze and understand a client’s ESI systems and storage; (4) identify custodians of relevant ESI; (5) perform appropriate searches; (6) collect responsive ESI in a manner that preserves the integrity of that ESI; (7) advise the client as to available options for collection and preservation of ESI; (8) engage in competent and meaningful meet and confer with opposing counsel concerning an e-discovery plan; and (9) produce responsive ESI in a recognized and appropriate manner. Id. According to the interim formal opinion, “[s]uch competency requirements may render an otherwise highly experienced attorney not competent to handle certain litigation matters involving ESI. An attorney lacking the required competence for the e-discovery issues in the case at issue has three options: (1) acquire sufficient learning and skill before performance is required; (2) associate with or consult technical consultants or competent counsel; or (3) decline the client representation. Lack of competence in e-discovery issues can also result, in certain circumstances, in ethical violations of an attorney’s duty of confidentiality, the duty of candor, and/or the ethical duty not to suppress evidence.” Id. Back to Top Text Messaging and Mobile Devices Emails have traditionally been the primary source of relevant communications and documents.  Increasingly, text messages and other data on mobile devices are becoming important and, not too surprisingly, the subject of sanctions decisions where a party has failed to preserve and collect relevant text messages. The United States Supreme Court’s landmark decision in Riley v. California, 134 S. Ct. 2473 (2014), highlighted both the importance of mobile devices such as smart phones as a source of potentially relevant information and the privacy interests that can be involved in discovery of the information from such devices. In Riley, the Court unanimously held that the Fourth Amendment generally requires law enforcement to obtain a warrant before reviewing digital information that is stored on a smart phone seized incident to arrest. Id., 134 S. Ct. at 2485, 2493. The Court observed that modern cellphones have the capacity to store “millions of pages of text, thousands of pictures or hundreds of videos” and thus “implicate privacy concerns far beyond those implicated by the search of a cigarette pack, a wallet, or a purse.”  See id. at 2478, 2488-89. The Court also stated that “it is no exaggeration to say that more than 90% of American adults who own a cellphone keep on their person a digital record of nearly every aspect of their lives.”  See id. at 2490. The Court further stated that a cellphone’s immense storage capacity “has several interrelated consequences for privacy. First, a cellphone collects in one place many distinct types of information–an address, a note, a prescription, a bank statement, a video–that reveal much more in combination than any isolated record. Second, a cell phone’s capacity allows even just one type of information to convey far more than previously possible.” Id. at 2478-79. The Court further recognized that “[a]lthough the data stored on a cell phone is distinguished from physical records by quantity alone, certain types of data are also qualitatively different.” Id. at 2490. The Court referred to Internet search and browsing history that may reveal an individual’s private interests and concerns, such as “symptoms of disease, coupled with frequent visits to WebMD.” Id. While Riley dealt with the requirement of a warrant for law enforcement to search smart phones, the privacy interests that the Court recognized will likely lead to challenges in civil litigation to broad requests for information off of such devices. See, e.g., Bakhit v. Safety Marking, Inc., 2014 WL 2916490 at *2 (D.Conn. Jun. 26, 2014) (citing Riley in denying motion to inspect the data stored on individual defendants’ cell phones). Now that mobile devices and the immense volumes of data they can store have become a feature of modern life, it is not surprising that data on such devices–in particular, text messages–have become the subject of sanctions decisions regarding alleged failures to preserve relevant information. In 2014, the Seventh Circuit upheld sanctions imposed in In Re Pradaxa (Dabigatran Etexilate) Prods. Liab. Litig., MDL No. 22385, 2013 WL 6486921 (S.D. Ill. Dec. 9, 2013), aff’d, 745 F.3d 216, 218 (7th Cir. 2014). In Pradaxa, the court held that the defendant had a duty to suspend an auto-delete function that operated on relevant text messages and imposed nearly $1 million in sanctions for having failed to do so on company-issued smart phones, among other things. The court found that the plaintiffs had expressly requested the text messages by including text messages in the boilerplate definition of “document,” but the defendants failed to halt the auto-programmed delete function for text messages once a litigation hold was in place. In Calderon v. Corporacion Puertorrique de Salud, 992 F. Supp. 2d 48, 52-53 (D.P.R. 2014), an employment discrimination case, the court held that an adverse inference instruction against the plaintiff was appropriate where the plaintiff had only selectively preserved relevant text messages between himself and a third-party. The court found that the plaintiff’s failure to preserve more than 38 text messages prejudiced the defendants by precluding a complete review of potentially relevant conversations and pictures sent via text messages. The court viewed the plaintiff’s actions as a “conscious abandonment of potentially useful evidence,” indicating that “he believed those records would not help his side of the case.”  Id. at 52. In Hosch v. BAE Systems Information Solutions, Inc., No. 1:13-cv-00825 (AJT/TCP), 2014 WL 1681694, at *2 (E.D. Va. Apr. 24, 2014), the district judge adopted the magistrate judge’s findings that the plaintiff had engaged in a series of intentional and bad faith discovery violations, including the permanent deletion of all text messages and voicemails, by wiping his iPhone just two days before turning it over to counsel. The court dismissed the plaintiff’s action with prejudice and awarded the defendant attorney’s fees and costs incurred in bringing motions to compel and a motion for sanctions. In Ewald v. Royal Norwegian Embassy,  No 11-cv-2116, 2014 WL 1309095 (D. Minn. Apr. 1, 2014), the court declined to impose spoliation sanctions against a defendant for failure to preserve the contents of a cell phone because the plaintiff failed to produce sufficient evidence of prejudice. Id. at *1. The plaintiff presented evidence relating to just one lost but potentially relevant text message, and the plaintiff had failed to pursue other avenues of discovery (e.g., deposition testimony) relating to that message or the existence of others. Id. at *2, *19. We expect that decisions involving the discoverability of and duty to preserve text messages and other information on smart phones and other mobile devices will increase in the future. The defensibility of using “disappearing text” messaging apps that automatically delete text messages either immediately after they are read or within a period of time set by the sender also likely will be an issue that courts are called upon to address. Back to Top Proportionality Limiting the scope of discovery based on proportionality interests has been a significant topic in e-discovery for several years, and 2014 was no exception. Several significant cases addressed proportionality in 2014. In Lord Abbett Municipal Income Fund, Inc. v. Asami, No. C–12–03694, 2014 WL 5477639 (N.D. Cal. Oct. 29, 2014), the court invoked proportionality in granting the plaintiff’s motion that it not be required to continue to preserve 159 computers where there was no basis from which to reasonably conclude that the computers contained relevant evidence. The court stated that Federal Rule of Civil Procedure 26(b)(2)(C)(iii) “sets forth a proportionality principle which requires courts to limit the frequency or extent of discovery where it determines that the ‘burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.'” Id. at *3. Citing the Northern District of California’s Guidelines for the Discovery of Electronically Stored Information, the court further stated that “[t]his district recognizes that the proportionality principle applies to the duty to preserve potential sources of evidence.” Id. In United States v. Univ. of Nebraska at Kearney, No. 4:11-cv-3209, 2014 WL 4215381 (D. Neb. Aug. 25, 2014), the court denied a motion to compel production of documents in response to broad document requests. Even if it assumed that the requested documents might be relevant, the court stated that it must weigh the burden versus the benefit pursuant to Federal Rule of Civil Procedure 26(b)(2)(C)(iii). See id. at *5. The court found that the additional costs of the proposed discovery would “far outweigh” what could be gained from it. Id. It rejected the government’s proposed broad search terms, such as “document* w/25 policy,” as they would retrieve “thousands of documents that have no bearing on this case.” Id. at *6. Additionally, the court rejected the government’s proposal that the defendant produce documents without review subject to a claw back agreement on the grounds that the review was necessary to protect the privacy interests of the students who were the subjects of the documents. Id. In Kellogg Brown & Root Services, Inc. v. United States, 117 Fed. Cl. 1 (Jun. 26, 2014), an action against the federal government alleging breach of a contract to provide a broad range of support services for various Army operations in Iraq, the Court of Federal Claims granted a motion for protective order regarding a broad document request on proportionality grounds. The document request sought “all documents related to” the government’s creation, receipt, circulation, exchange, response to, or use of an Army officer’s presentation on substandard wiring conditions (the presentation had already been produced). Id. at 6-7. The court found that the request sought “potentially marginally relevant” information, yet would impose an enormous burden. Id. at 8. “This generic request–for ‘all documents’ having virtually any association or relation to the 2006 presentation–targets potentially massive quantities of material. The request fails to delineate any specific custodians by, inter alia, limiting the request to one or more individuals, or even specific government entities. Rather, the request encompasses all government entities, and all of their current and former employees who served at all levels of government (ministerial to senior executive). Moreover, the request lacks any temporal limitation and, thus, requires the government to search, and potentially produce, at least eight to ten years of files in order to capture materials related to the presentation’s initial creation in 2006 through to its present use.” Id. Additionally, the court stated that the request “would require the government to invade an overwhelming number of computers, email accounts, and paper files from both past and present government employees and would require the government to devote substantial time and resources to the review of the material for relevancy, privilege, and security.” Id. Citing the proportionality principle of Rule of Civil Procedure 26(b)(2)(C)(iii), the court granted the motion for a protective order with respect to the document request. Id. With the proposed amendments to the Federal Rules of Civil procedure moving proportionality from its current place as a potential limit on discovery in Rule 26(b)(2)(C)(iii) to the definition of the scope of discovery itself in Rule 26(b)(1), we can expect frequent litigation of proportionality issues in the future. Back to Top Social Media The number of cases focusing on the discovery of social media continued to skyrocket in the second half of 2014. Reflecting that the use of social media continues to proliferate in business and social contexts, courts and commentators alike have noted that discovery of social media is now routine. As reflected by the volume of reported decisions relating to social media, courts are still struggling to develop rules and protocols applicable to social media evidence, including whether special authentication rules should govern social media evidence, what threshold showing of relevance must be made before discovery of personal social media data should be allowed, and when the duty to preserve social media evidence arises. Bar associations have jumped into the fray to offer guidance to attorneys regarding the ethical duties implicated by preservation of clients’ social media evidence. As explained in our Mid-Year Update, courts have taken two basic approaches to the authentication of social media evidence, which the Delaware Supreme Court coined “the Maryland approach” and “the Texas approach.” Parker v. State, 85 A.3d 682, 684 (Del. 2014). Under the Maryland approach, there are three permissible methodologies for authenticating social media evidence:  “the testimony of the creator, documentation of the internet history or hard drive of the purported creator’s computer, or information obtained directly from the social networking site.” Id. at 683 (citing Griffin v. State, 19 A.3d 415 (Md. 2011)). Unless the proponent can “convince the trial judge that the social media post was not falsified or created by another user” via one of these methods, the evidence “will not be admitted and the jury cannot use it in their factual determination.” Id. Conversely, under the Texas approach, “a proponent can authenticate social media evidence using any type of evidence so long as he or she can demonstrate to the trial judge that a jury could reasonably find that the proffered evidence is authentic.” Id. (citing Tienda v. State, 358 S.W.3d 633 (Tex. Crim. App. 2012)). The Second Circuit recently considered the issue, noting that “[s]ome courts have suggested applying ‘greater scrutiny’ or particularized methods for the authentication of evidence derived from the Internet due to a ‘heightened possibility for manipulation.'” U.S. v. Vayner, 769 F.3d 125, 131 n.5 (2d Cir. 2014) (citing Griffin). The court went on to hold that, “[a]lthough we are skeptical that such scrutiny is required, we need not address the issue as the government’s proffered authentication in this case falls under Rule 901’s general authentication requirement.”  Id. In Vayner, the defendant was accused of transferring a false identification document. Id. at 127. The primary evidence submitted by the state was testimony from a witness who said he had received the document from defendant via a particular email address, and a profile page from a Russian social networking site (VK.com), which included a variation of defendant’s name, a photo of defendant, two places of employment where defendant had allegedly worked in the past, and a skype moniker that matched the moniker contained in the email address alleged to have been used to transfer the false document. Id. at 127-28. The district court found the document to be authentic, noting “The information on there, I think it’s fair to assume, is information which was provided by [the defendant],” and “There’s no question about the authenticity of th[e] document so far as it’s coming off the Internet now.” Id. at 128. A Special Agent with the State Department’s Diplomatic Security Service then testified regarding the content of the profile page, admitting on cross-examination he only had “cursory familiarity” with VK.com and did not know whether any identity verification was required in order for a user to create an account. Id. at 128-29. The Second Circuit reversed, finding the district court abused its discretion in admitting the social networking profile page “because the government presented insufficient evidence that the page was what the government claimed it to be–that is, [defendant’s] profile page, as opposed to a profile page on the Internet that [defendant] did not create or control.” Id. at 127. The court compared the profile page to “a flyer found on the street that contained [defendant’s] Skype address and was purportedly written or authorized by him,” and reasoned “the district court surely would have required some evidence that the flyer did, in fact, emanate from [defendant].” Id. at 132. The court vacated the conviction and remanded the case for a new trial, finding the error not to be harmless. Id. at 134. Because the court “express[ed] no view on what kind of evidence would have been sufficient to authenticate” the profile page, it is unclear whether in application the court would require the high bar of the Maryland approach, the lower bar of the Texas approach, or something in between. Id. at 133. The Vayner decision follows a general trend wherein courts have found the testimony of the individual who printed the webpage in question to be insufficient to authenticate social media evidence. See, e.g., Moroccanoil, Inc. v. Marc Anthony Cosmetics, Inc., — F.Supp.3d —-, No. CV 13–2747 DMG (AGRx), 2014 WL 5786253, at *7 n.5 (C.D. Cal. Sept. 16, 2014) (“Defendant’s argument, that [Facebook screenshots] could be ‘authenticated’ by the person who went to the website and printed out the home page, is unavailing. It is now well recognized that ‘Anyone can put anything on the internet.’ [citations omitted] No website is monitored for accuracy.”) Courts continue to hold that “the fact that the information [sought] is in an electronic file as opposed to a file cabinet does not give [the party seeking discovery] the right to rummage through the entire file.”  Del Gallo v. City of New York, 43 Misc.3d 1235(A), at *6 (N.Y. Sup. Ct. 2014) (internal citations and quotations omitted). As with more traditional forms of evidence, the party seeking discovery “must establish a factual predicate for their request by identifying relevant information in [the social media] account — that is, information that contradicts or conflicts with plaintiff’s alleged restrictions, disabilities, and losses, and other claims.” Id. at *3. (internal citations and quotations omitted). Absent such a showing, “granting carte blanche discovery of every litigant’s social media records is tantamount to a costly, time consuming fishing expedition.” Id. at *5. (internal citations and quotations omitted) In DelGallo, defendants argued that because plaintiff claimed to be “totally disabled” as a result of the accident in question, they were entitled to access all of plaintiff’s social media sites to learn about plaintiff’s post-accident condition and her self-assessment of the extent of her injuries. Id. at *7-8. The court ordered plaintiff to produce information from her LinkedIn account related to job offers, inquiries, and searches because such information was relevant to damages, but denied defendant’s request to access any other social media information based on “the mere hope of finding relevant evidence.” Id. Other courts have similarly denied discovery of the entirety of social media accounts because of an insufficient threshold showing of relevancy to the claims at issue. See, e.g., Finkle v. Howard County, Md., 2014 WL 6835628, at *1-2 (D. Md. Dec. 02, 2014) (Gallagher, Mag. J.) (denying as “overly broad” and “not reasonably calculated to lead to the discovery of admissible evidence” plaintiff’s requests for all personal email and social networking account information for nonparty employees involved in alleged discrimination); Doe v. Rutherford County, Tenn., Bd. of Educ., No. 3:13–0328, 2014 WL , at *1-3 (M.D. Tenn. August 18, 2014) (Bryant, Mag. J.) (granting defendant social media discovery from certain plaintiffs whose public social networking profiles included relevant information, but denying social media discovery from other plaintiffs for which there was no predicate showing); Stonebarger v. Union Pac. Corp., No. 13–cv–2137–JAR–TJJ., 2014 WL 2986892, at *2-5 (D. Kan. July 2, 2014) (James, Mag. J.) (denying defendant’s request for blanket access to plaintiff’s social networking profiles, but “allowing defendant to discover information relevant to plaintiff’s emotional state (which plaintiff put at issue),” which protected “plaintiff from a fishing expedition”); Smith v. Hillshire Brands, No. 13–2605–CM, 2014 WL 2804188, at *3-6 (D. Kan. June 20, 2014) (O’Hara, Mag. J.) (“allow[ing] defendant to discover not the contents of plaintiff’s entire social networking activity, but any content that reveals plaintiff’s emotions or mental state, or content that refers to events that could reasonably be expected to produce in plaintiff a significant emotion or mental state”). A continuing theme in 2014 was the extent to which parties have an obligation to preserve social media during litigation, and whether the modification of social media constitutes sanctionable spoliation. Because social media is dynamic, account holders may delete information from their page or cancel their account altogether, without realizing that the information could be relevant to an anticipated or pending matter. In determining whether to award sanctions for spoliation of social media, courts have focused on whether it was reasonably foreseeable that the information would be sought in discovery, and whether the users had a duty to preserve their account at the time the evidence was deleted. In Keller v. Keller, the court found that because its order to preserve all electronically stored information (ESI) did not specifically include social media information, the plaintiff’s changes to her Facebook page were not a willful violation of the order, reasoning, “Although the defendant’s motion included social media specifically, the court’s order did not. It is possible to successfully argue that a social media account such as Facebook is a form of ESI, but it would not rise to the unambiguous level of understanding necessary to make a finding of contempt for a violation of such an order.” No. MMXFA114014330S, 2014 WL 4056926, at *8-9 (Conn. Super. Ct. July 9, 2014). The court found that changes plaintiff made to her Facebook account after the discovery special master entered an order to preserve ESI and specially extended it to include social media sites, however, were “willful contempt of a clear and unambiguous order.” Id. at *8. See also Painter v. Atwood, No. 2:12–CV–1215 JCM (NJK), 2014 WL 3611636, at *2 (D. Nev. July 21, 2014) (upholding magistrate judge’s finding of spoliation sanctions against plaintiff who deleted social media posts and text messages that defendant argued contradicted her sexual harassment claims). Additionally, the ethics committees of various bar organizations have begun to weigh in on the duty of attorneys to advise their clients regarding the preservation of social media. In July, the Philadelphia Bar Association issued an opinion that indicated an attorney may instruct a client to delete damaging information from a social media account, but must also “take appropriate action to preserve the information in the event it should prove to be relevant and discoverable.”  Philadelphia Bar Ass’n Prof’l Guidance Comm., Op. 2014-5 (July 14, 2014). Also in July, the North Carolina State Bar issued Formal Ethics Opinion 5, which found a lawyer “may advise a client to remove information on social media if not spoliation or otherwise illegal.” See North Carolina State Bar 2014 Formal Ethics Op. 5, July 25, 2014. In September, the Pennsylvania Bar Association followed suit, issuing Formal Opinion 2014-13, which allows an attorney to advise a client to take down damaging material from social media, subject to spoliation concerns. Pennsylvania Bar Ass’n Formal Op. 2014-13. See also New York County Lawyers Ass’n Ethics Op. 745 (2013) (“Provided that such removal does not violate the substantive law regarding destruction or spoliation of evidence, there is no ethical bar to ‘taking down’ such material from social media publications, or prohibiting a client’s attorney from advising the client to do so, particularly inasmuch as the substance of the posting is generally preserved in cyberspace or on the user’s computer.”). Back to Top Federal Rule Amendments After a drawn-out process that began in 2010, the proposed e-discovery amendments to the Federal Rules of Civil Procedure took a major step in 2014 towards actual enactment. Following the closure of a several-month public comment period, the Judicial Conference of the United States, the federal judiciary’s policymaking body, approved a final set of proposed rule amendments on September 16, 2014. Nevertheless, we still won’t see any of the proposed rule amendments taking effect until nearly the end of 2015. The United States Supreme Court must approve the proposed amendments and then, barring Congressional intervention, they will take effect on December 1, 2015. The affected rules include Rules 1, 4, 16, 26, 30, 31, 33, 34 and 37(e).  Of particular note, the Judicial Conference in its last iteration of the proposed amendments dropped proposed limits on the number of document requests, interrogatories and requests for admission. It also substantially changed the proposed sanctions rule for failures to preserve relevant information. The following is a summary of the key proposed amendments affecting e-discovery. Back to Top Cooperation (Rule 1) The proposed amendment to Rule 1 was originally crafted to require cooperation among the parties, but that language was dropped relatively early on out of concerns that it would only spawn tangential disputes regarding whether parties were being sufficiently cooperative. In its final proposed form, the language of Rule 1 would be altered to provide that the rules of civil procedure would not only be “construed and administered” (the current language) but also “employed by the court and the parties” to secure the just, speedy, and inexpensive determination of every action and proceeding. The concept of cooperation still made it into the Committee Note that accompanies the proposed amendment, which states that “effective advocacy is consistent with – and indeed depends upon – cooperative and proportional use of procedure.” Back to Top Proportionality and the Scope of Discovery (Rule 26(b)(1)) The proportionality factors currently listed in Rule 26(b)(2)(C)(iii) would be moved, with certain modifications, to the scope of discovery provision of Rule 26(b)(1). As amended, Rule 26(b)(1) would permit a party to obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense “and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” Moving the language from a provision providing a limitation on the scope of discovery to the definition of the scope of discovery itself is viewed as a means of strengthening proportionality in discovery. The amendments also would remove from current Rule 26(b)(1) the language that relevant information need not be admissible at trial if it is reasonably calculated to lead to  the discovery of admissible evidence. According to the Committee Note, that language “has been used by some, incorrectly, to define the scope of discovery.” Back to Top Proposed Limits on Discovery Methods Withdrawn (Rules 30, 31, 33 and 36) Previously proposed presumptive limits on the number of depositions (from the current 10 to 5), interrogatories (from the current 25 to 15), and requests for admission (from no current limit to 25 (except for authentication of documents)) have been withdrawn by the Judicial Conference and are no longer part of the rules amendment package. Back to Top Objections to Document Requests (Rule 34) The proposed amendment to Rule 34 requires that objections to document requests must be “state[d] with specificity” and also requires that the responding party state in its written responses “whether any responsive materials are being withheld on the basis of [an] objection.” According to the Committee Note, this requirement “should end the confusion that frequently arises when a producing party states several objections and still produces information, leaving the requesting party uncertain whether any relevant and responsive information has been withheld on the basis of the objections.” The Committee Note clarifies that the responding party is not required to “provide a detailed description or log of all documents withheld.” Rather, it states that the responding party must “alert other parties to the fact that documents have been withheld and thereby facilitate an informed discussion.” It further provides that an objection “that states the limits that have controlled the search for responsive and relevant materials qualifies as a statement that the materials have been ‘withheld.'” Back to Top Sanctions for Failure to Preserve ESI (Rule 37(e)) The Judicial Conference substantially revised its proposed amendment to Rule 37(e) following widespread criticism of aspects of the prior proposed amendment. The proposed amendment in its latest iteration would replace the current language of Rule 37(e) with a rule would permit a court to impose curative measures or sanctions if ESI that should have been preserved “is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery[.]” The proposed sanctions rule consists of several important elements:  (1) For curative measures or sanctions to be imposed, a party must have failed to have taken reasonable steps to preserve the lost information. (2) Curative measures or sanctions can only be imposed if the lost information cannot be restored or replaced through additional discovery. (3) A court may order curative measures only “upon finding prejudice to another party from the loss of the information.” (4) The proposed rule contains an explicit proportionality requirement–i.e., the measures ordered must be “no greater than necessary to cure the prejudice.” (5) the most severe sanctions–evidentiary estoppel, an adverse inference instruction, or case terminating sanctions–may be ordered “only upon a finding that the party acted with intent to deprive another party of the information’s use in the litigation.” The Civil Rules Advisory Committee of the Judicial Conference intended the proposed amendment to Rule 37(e) to resolve a circuit split regarding when these most severe of sanctions are appropriate, as it allows imposition of the most severe sanctions only when a party acts intentionally. See Report of the Advisory Committee on Civil Rules, at 50. C.f. Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002) (permitting severe sanctions for negligent conduct in the Second Circuit). The Civil Rules Advisory Committee endorsed the higher standard for sanctions because it believed that the negligence standard often goes beyond restoring the evidentiary balance in a case, it can be too harsh considering the ease with which ESI is lost, and can lead to costly over-preservation. Given the December 1, 2015 effective date for the proposed rule amendments, we likely will not know until at least mid-2016 (or later) whether the amendment to Rule 37(e) appears to be fulfilling these goals in practice and can bring more fairness to the e-discovery sanctions area. In other words, don’t expect amended Rule 37(e) to have a significant impact any time soon. Back to Top Conclusion The developments discussed above demonstrate, in our view, that 2014 was indeed “the year of technology” in e-discovery. While new technologies help create solutions to long-standing challenges, they also create new complexities–such as the proliferation of data sources, the ubiquitous use of mobile devices and applications that run on them (in particular, text messaging), and determining what technologies to use and how to use them in search and review. Obtaining advice from counsel and technical personnel who are well versed in e-discovery technologies and the legal and practical issues associated with them is more important than ever. Gibson Dunn will continue to track the latest developments and trends. Please look for our updates and our attorneys’ articles, and for our 2015 Mid-Year E-Discovery Update, which will be published early in the third quarter of 2015. Back to Top        Gibson Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The Electronic Discovery and Information Law Practice Group brings together lawyers with extensive knowledge of electronic discovery and information law. The group is comprised of seasoned litigators with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. The group’s lawyers work closely with the firm’s technical specialists to provide cutting-edge legal advice and guidance in this complex and evolving area of law. For further information, please contact the Gibson Dunn lawyer with whom you usually work or the following Co-Chairs of the Electronic Discovery and Information Law Practice Group: Gareth T. Evans – Orange County (949-451-4330, gevans@gibsondunn.com) Jennifer H. Rearden – New York (212-351-4057, jrearden@gibsondunn.com)   © 2015 Gibson, Dunn & Crutcher LLP   Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 30, 2015 |
2014 Year-End Update on Class Actions

In 2014, with the dust finally starting to settle following the Supreme Court’s blockbuster class action rulings in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend, lower courts continued to grapple with significant class action issues.  One discernible trend during the past few years has been increased appellate scrutiny of the entire class action mechanism.  From the initial assessment of federal jurisdiction, to the class certification determination, to the impact of offers of judgment to individual plaintiffs under Rule 68, to the settlement process, to how to apply damages methodologies in class litigation, courts have focused on tightening and defining the rules by which class actions will (or will not) proceed.  Last year was no exception, with courts continuing to take careful looks into the class action device at all stages of the litigation.  As a result of this increased scrutiny, class action lawsuits are becoming more challenging and costly for plaintiffs to litigate.  Yet despite these increased challenges and costs, the plaintiffs’ bar continues on an aggressive march–by most accounts, class action filings have continued to increase even after Dukes and Comcast.  This update provides an overview and summary of the key cases in which these trends have developed in 2014.  Part I discusses how courts applied and interpreted the Supreme Court’s guidance from Dukes and Comcast in 2014.  Part II discusses how federal courts have wrestled with applying the Constitutional requirement of standing to absent class members, and the circuit split that has developed on "no injury" class actions that urgently requires Supreme Court resolution.  Part III discusses the implied Rule 23 requirement of ascertainability, as more and more class actions are challenging everyday consumer purchases for which there are not complete, consistent, or detailed proofs of purchase to demonstrate class membership.  Part IV addresses the increasing scrutiny of individual offers of settlement pursuant to Rule 68, especially when such offers have the effect of mooting a class representative’s ability to pursue both individual and class relief.  Finally, Part V provides an update on the trend in some federal circuits of applying increased scrutiny in reviewing the fairness of proposed class action settlements.        I.   Courts Continue to Interpret and Apply Dukes and Comcast in 2014, Often Reaching Conflicting Decisions On the Meaning of the Supreme Court’s Landmark Decisions In 2014, both state and federal appellate courts issued significant rulings interpreting the Supreme Court’s landmark decisions in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).  Two important aspects of these decisions–the use of statistical sampling and the impact of individualized damages issues–received particular attention in 2014, with multiple courts issuing conflicting interpretations of Dukes and Comcast.  Most notably, the California Supreme Court, the Pennsylvania Supreme Court, and the Ninth and Tenth Circuits issued conflicting decisions regarding the use of statistical sampling and extrapolation in class actions in the wake of Dukes‘s unanimous rejection of "Trial by Formula."  Further, decisions from the Ninth and Fifth Circuits deepened an existing circuit split over the relevance of individualized damages issues to Rule 23(b)(3)’s predominance requirement following Comcast.  Given these conflicting interpretations of Dukes and Comcast, it is only a matter of time before the Supreme Court once again takes up these significant issues, and a number of petitions for certiorari are already pending (with more expected) to seek to resolve these questions.                         A.   "Trial by Formula" After Dukes In Dukes, the Supreme Court unanimously rejected the use of statistical sampling and extrapolation to circumvent resolution of individualized inquiries in a class trial.  The plaintiffs in Dukes proposed, and the Ninth Circuit endorsed, a procedure in which "[a] sample set of the class members would be selected," and the "percentage of claims determined to be valid would then be applied to the entire remaining class . . . without further individualized proceedings."  131 S. Ct. at 2561.  The Supreme Court "disapprove[d]" this "novel project" of "Trial by Formula," and held that, because the Rules Enabling Act "forbids interpreting Rule 23 to ‘abridge, enlarge or modify any substantive right, . . . a class cannot be certified on the premise that [a defendant] will not be entitled to litigate its statutory defenses to individual claims."  Id. (quoting 28 U.S.C. § 2072(b)). Although the Court premised its rejection of "Trial by Formula" on the Rules Enabling Act, the use of statistical sampling and extrapolation to eliminate the class action defendant’s right to present individualized defenses also raises serious due process concerns.  Those concerns were placed before the California and Pennsylvania Supreme Courts in 2014–and those courts came to very different conclusions. The California Supreme Court squarely held that a "Trial By Formula" approach raises due process concerns.  In Duran v. U.S. Bank National Association, 59 Cal. 4th 1 (2014), employees claimed they were improperly denied overtime compensation.  The court overturned a $15 million verdict that was the product of a trial that adjudicated claims of a 21-person sample set, and the results were extrapolated to the remaining class members.  In doing so, the court unanimously concluded that the trial court’s "decision to extrapolate classwide liability from a small sample, and its refusal to permit any inquiries or evidence about the work habits of [employees] outside the sample group," impermissibly "deprived" U.S. Bank of its right to litigate its defenses to liability.  Id. at 35.  Echoing Dukes, the California Supreme Court explained that "the class action procedural device may not be used to abridge a party’s substantive rights," and thus "a class action trial management plan may not foreclose the litigation of relevant affirmative defenses, even when these defenses turn on individual questions."  Id. at 34.  Significantly, the court grounded its holding in "both class action rules and principles of due process."  Id. at 35.  While the court declined to resolve definitively "whether or when sampling should be available as a tool for proving liability in a class action," it instructed that "any class action trial plan, including those involving statistical methods of proof, must allow the defendant to litigate its affirmative defenses."  Id. at 40. By contrast, the Pennsylvania Supreme Court faced a similar set of facts and concluded that the plaintiffs’ extrapolation evidence did not create any due process concerns.  Braun v. Wal-Mart Stores, Inc., Nos. 32 EAP 2012, 33 EAP 2012, — A.3d –, 2014 WL 7182170 (Pa. Dec. 15, 2014).  Braun, like Duran, was a wage-and-hour case that was tried to verdict.  The plaintiffs obtained a $187 million judgment based largely on extrapolation from a sample of employee records.  For example, plaintiffs’ expert used time records from 1998 to 2001 to calculate the number of rest breaks class members purportedly missed from 2001 to 2006.  Id. at *3.  Despite this extensive use of extrapolation, the Pennsylvania Supreme Court upheld the verdict and rejected the defendant’s due process argument.  Id. at *6.  It reasoned that "the now-disapproved ‘trial by formula’ process at issue in Dukes was not at work" because the extrapolation evidence related only to "the amount of damages to the class as a whole," rather than "liability to the entire class."  Id.  One justice dissented, and sharply criticized the "majority’s relaxed approach to class-action litigation" and its approval of a trial procedure based on "simple averaging and extrapolations" that "would never hold up to peer review as a matter of science."  Id. at *9 (Saylor, J., dissenting). The Pennsylvania Supreme Court was not the only tribunal viewing the permissibility of "Trial by Formula" as hinging on whether it is used to establish liability or damages.  In another case, the Tenth Circuit similarly upheld the use of extrapolation in a class action trial "to approximate damages," and held that Dukes "does not prohibit certification based on the use of extrapolation to calculate damages."  In re Urethane Antitrust Litig., 768 F.3d 1245, 1257 (10th Cir. 2014).  The Ninth Circuit has also viewed the analysis as depending on liability versus damages, but it has determined that statistical sampling is acceptable to "determine liability so long as the use of these techniques is not expanded into the realm of damages."  Jimenez v. Allstate Ins. Co., 765 F.3d 1161, 1167 (9th Cir. 2014) (emphases added).  None of these decisions, however, has offered any principled reason for limiting the Supreme Court’s rejection of "Trial by Formula" to certain types of issues, and there is nothing in Dukes to suggest that the Court intended to allow the use of statistical sampling and extrapolation to resolve either damages or liability.  In sum, these courts appear to have latched on to an irrelevant distinction to avoid the Supreme Court’s ruling in Dukes.  These decisions indicate that the permissibility of "Trial by Formula" after Dukes continues to vex courts around the country, and there is good reason to believe that more courts will address this important issue in the year ahead.  Given the conflicts among the lower courts, it is possible that the Supreme Court will have to revisit this issue and confirm that replacing individualized proceedings with the statistical sampling and extrapolation violates the due process rights of class action defendants and allows the class action procedural device to impermissibly alter the substantive law.                          B.   Damages Issues and Predominance After Comcast In a sharply divided 5-4 decision, the Supreme Court in Comcast reversed certification of an antitrust class action after concluding that plaintiffs had proposed to rely on a flawed damages model that fell "far short of establishing that damages are capable of measurement on a classwide basis."  133 S. Ct. at 1433.  The Court explained that in the absence of a valid damages model, plaintiffs could not "show Rule 23(b)(3) predominance" because "[q]uestions of individual damage calculations will inevitably overwhelm questions common to the class."  Id.  In other words, Comcast held that damages issues, like liability issues, could justify the denial of certification under Rule 23(b)(3).  The dissenting opinion in Comcast attempted to minimize the significance of the majority’s ruling, claiming that it should not be read as altering the "well nigh universal" rule that "individual damages calculations do not preclude class certification under Rule 23(b)(3)."  Id. at 1437 (Ginsburg & Breyer, JJ., dissenting).  Given the conflicting messages from the Comcast majority and dissenting opinions, it is perhaps not surprising that the courts of appeals almost immediately split over the meaning of Comcast.  In the months following Comcast, the Sixth, Seventh, and Ninth Circuits all issued decisions that appeared to narrow the relevance of damages issues to the assessment of Rule 23(b)(3)’s predominance requirement.  See In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 722 F.3d 838, 860-61 (6th Cir. 2013) (citing Comcast dissenting opinion with approval); Butler v. Sears, Roebuck & Co., 727 F.3d 796, 801 (7th Cir. 2013) (holding that individualized damages issues do not preclude a finding of predominance "[i]f the issues of liability are genuinely common issues"); Leyva v. Medline Indus. Inc., 716 F.3d 510, 514 (9th Cir. 2013) (holding that "[t]he amount of damages is invariably an individual question and does not defeat class action treatment" (quotation marks and citation omitted)).  By contrast, both the Tenth and D.C. Circuits held that after Comcast, individualized damages issues can preclude certification under Rule 23(b)(3).  See Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213, 1220 (10th Cir. 2013) (holding that "predominance may be destroyed" if "damages determinations will require individualized inquiries"); In re Rail Freight Fuel Surcharge Antitrust Litig., 725 F.3d 244, 253 (D.C. Cir. 2013) ("No damages model, no predominance, no class certification."). In 2014, the circuit split deepened, as the Fifth Circuit held that it was "a misreading of Comcast" to view that decision as "preclud[ing] certification under Rule 23(b)(3) in any case where the class members’ damages are not susceptible to a formula for classwide measurement."  In re Deepwater Horizon, 739 F.3d 790, 815 & n.104 (5th Cir. 2014).  The Ninth Circuit also reaffirmed its view that, notwithstanding Comcast, individualized damages issues cannot defeat class certification, and it deemed the Fifth, Sixth, and Seventh Circuit’s similar decisions on this issue to be "compelling."  Jimenez, 765 F.3d at 1167-68. A significant number of circuits have thus firmly adopted the Comcast dissent’s view that would have left unaltered the traditional rule that individualized damages issues do not preclude class certification under Rule 23(b)(3).  But it is hard to square that interpretation of Comcast with the actual language of the majority’s opinion, which both the Tenth and D.C. Circuits have faithfully followed.  Until the Supreme Court confirms that it meant what it said in Comcast, and again addresses this important issue–which affects almost every Rule 23(b)(3) class action–the lower courts will no doubt continue to reach conflicting conclusions regarding the impact of individualized damages determinations on the ability of a case to proceed as a class action.        II.   The Rise of "No Injury" Class Actions:  Does The Article III Standing Requirement Apply to Absent Class Members? Another lingering area of confusion is whether the "irreducible constitutional minimum" of Article III standing applies with equal force to both the named plaintiffs in a class action and the absent class members.  Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).  In individual actions, a plaintiff can bring a claim only if (1) he has suffered an "injury in fact"; (2) there is a "causal connection between the injury and the conduct complained of" so that the injury is "fairly . . . trace[able] to the challenged action of the defendant"; and (3) the injury is "likely" to be "redressed by a favorable decision."  Id. at 560-61.  Although the Rules Enabling Act forbids interpreting Rule 23 to "abridge, enlarge or modify any substantive right," 28 U.S.C. § 2072(b); Dukes, 131 S. Ct. at 2561, federal and state courts have divided sharply on how to apply standing requirements in class actions.  For example, the Seventh Circuit has held that "as long as one member of a certified class has a plausible claim to have suffered damages, the requirement of standing is satisfied."   Kohen v. Pac. Inv. Mgmt. Co., 571 F.3d 672, 676 (7th Cir. 2009); see also In re Nexium Antitrust Litig., Nos. 14-1521, 14-1522, 2015 WL 265548, at *2, *7 (1st Cir. Jan. 21, 2015) ("We conclude that class certification is permissible even if the class includes a de minimis number of uninjured parties," because the court had "confidence that a mechanism would exist for establishing injury at the liability stage of this case" and thus would weed out uninjured plaintiffs before entry of judgment). By contrast, the Eighth Circuit has held that "[i]n order for a class to be certified, each member must have standing and show an injury in fact that is traceable to the defendant and likely to be redressed in a favorable decision."  Halvorson v. Auto-Owners Ins. Co., 718 F.3d 773, 778 (8th Cir. 2013) (emphasis added).  The D.C. and Second Circuits have agreed.  In re Rail Freight Fuel Charge Antitrust Litig., 725 F.3d 244, 252 (D.C. Cir. 2013) ("[W]e do expect the common evidence to show all class members suffered some injury."); Denney v. Deutsche Bank AG, 443 F.3d 253, 263-64 (2d Cir. 2006) (same).  Decisions from the Ninth Circuit have been mixed, but the most recent opinion to issue from that court followed Denney and held that "'[n]o class may be certified that contains members lacking Article III standing.’"  Mazza v. Am. Honda Motor Co., 666 F.3d 581, 594 (9th Cir. 2012) (quoting Denney, 443 F.3d at 264). The circuit split was placed in focus by In re Deepwater Horizon, 739 F.3d 790, 796 (5th Cir. 2014).  The Fifth Circuit concluded that it did not have to resolve the disagreement, because the operative complaint adequately alleged that every class member had standing and thus satisfied even the Second Circuit’s more restrictive test.  Id. at 804.  The court affirmed certification of the settlement class and rejected BP’s argument that the district court should have considered evidence demonstrating that some claimants were not injured by the accident, because courts are not permitted to conduct "an evidentiary inquiry into the Article III standing of absent class members during class certification."  Id. at 805-06. The Supreme Court has not spoken definitively on this circuit split, but it has emphasized repeatedly that the standing requirement is a "hard floor of Article III jurisdiction that cannot be removed," Summers v. Earth Island Inst., 555 U.S. 488, 497 (2009), and that "[i]n an era of frequent litigation [and] class actions, . . . courts must be more careful to insist on the formal rules of standing, not less so," Ariz. Christian Sch. Tuition Org. v. Winn, 131 S. Ct. 1436, 1449 (2011).  And aside from the fundamental requirements of Article III, classes in which elements of the plaintiffs’ claims such as injury, causation, or reliance cannot be manageably proven on a classwide basis should mean that the proposed class fails to satisfy the commonality or predominance requirements of Rule 23.  See, e.g., In re Rail Freight Fuel Surcharge Antitrust Litig., 725 F.3d at 253 (holding that class certification should be denied where "a case turns on individualized proof of injury"). Until the Supreme Court addresses this issue, defendants should continue to focus on the lack of absent class member injury when faced with overly broad classes that sweep in persons who have no viable claim.  While in some jurisdictions this argument may not defeat class certification, it may nonetheless have persuasive force at trial.  Note, for instance, the experience of Whirlpool in its long-running litigation in which plaintiffs allege that its washing machines are allegedly defective and prone to developing mold.  When the Sixth Circuit affirmed class certification and rejected Whirlpool’s arguments regarding the impropriety of certifying a class action containing a significant percentage of uninjured class members, the court noted that Whirlpool would have the opportunity at trial to attempt to "prove that most class members have not experienced a mold problem" because that would defeat the plaintiffs’ claim that the washers "are defectively designed."  In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 722 F.3d 838, 857 (6th Cir. 2013).  When the Supreme Court denied review, Whirlpool proceeded to trial and an Ohio jury ruled in favor of the company on October 30, 2014.        III.   Ascertaining Who’s In and Who’s Out of a Class Nearly five years ago, our 2010 fall update on class action developments correctly predicted "the rise of ascertainability as an independent check on class certification."  This requirement, while not specifically enumerated in Rule 23, gained momentum in the last year.  As plaintiffs’ lawyers have strategically focused their litigation on small everyday purchases–such as food products sold without written agreements containing arbitration clauses–courts have increasingly been confronted with the issue of how to identify product purchasers and other class members. For example, in Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013), the Third Circuit confronted a proposed class of consumers who purchased an over-the-counter vitamin.  The court underscored that class membership of any proposed class must be ascertainable using "reliable and administratively feasible" evidence.  Id. at 308.  Because defendants have a due process right to challenge whether a person is a class member, the court rejected plaintiffs’ offer to use affidavits from class members attesting to their class membership.  Id. at 307-12.  Observing that putative class members were unlikely to have "documentary proof of purchase, such as packaging or receipts" of their $10 vitamin purchases, and that Bayer had no list of purchasers because it did not sell its over-the-counter vitamins directly to consumers, the Third Circuit vacated the order certifying the class, holding that the district court did not adequately confirm the ascertainability of the class.  Id. at 304, 307-12; see also EQT Prod. Co. v. Adair, 764 F.3d 347, 358-59 (4th Cir. 2014) (decertifying class because of "serious ascertainability issues" where the district court "failed to rigorously analyze whether the administrative burden of identifying class members . . . would render class proceedings too onerous").  Recently, in a case brought on a pro bono basis by a law firm that typically defends class actions, the Third Circuit clarified that Carrera‘s ascertainability analysis does not apply to putative class actions brought under Rule 23(b)(2)–at least when only injunctive and declaratory relief are sought.  Shelton v. Bledsoe, No. 12-4226, — F.3d –, 2015 WL 74192, at *5-6 (3d Cir. Jan. 7, 2015).  In explicitly limiting the ascertainability requirement to Rule 23(b)(3) classes, the Third Circuit joined the First and Tenth Circuits.  The court noted that the ascertainability requirement is tied to "procedural protections," such as "notice and opt-out rights," and when those protections are not at issue (as can be the case in a Rule 23(b)(2) action), having a precise class definition is not as critical.  Id. at *6.  This construction of the ascertainability requirement suggests that plaintiffs’ lawyers might start pursuing more Rule 23(b)(2) class actions, at least where the claims involve small everyday purchases for which it would otherwise be impracticable to identify class members. California state courts have likewise begun to apply an exacting ascertainability requirement in recent years.  For instance, in 2014, the Court of Appeal affirmed an order decertifying a class that was "not reasonably ascertainable without an individualized or file-by-file analysis."  Hale v. Sharp Healthcare, 232 Cal. App. 4th 50, 58 (2014).  The court explained that the ascertainability test "requires class members to be readily identifiable without unreasonable time and expense," and there, class members were not readily identifiable because determining class membership would require individualized analysis of each patient’s payment record to discern whether a government health care program ultimately paid for the patient’s urgent care.  Id. at 59. In 2014, there was also a renewed focus on the hurdles to ascertainability in consumer class actions from district courts in the Ninth Circuit, although those courts have not uniformly embraced the Third Circuit’s approach in Carrera.  See, e.g., Sethavanish v. ZonePerfect Nutrition Co., No. 12-2907-SC, 2014 WL 580696, at *4-6 (N.D. Cal. Feb. 13, 2014) (adopting Carrera and denying certification because plaintiff did not "present any method for determining class membership, let alone an administratively feasible method"); In re POM Wonderful, LLC, No. ML 10-02199 DDP (RZx), 2014 WL 1225184, at *6 (C.D. Cal. Mar. 25, 2014) (decertifying class in part because there was "no way to reliably determine who purchased [d]efendant’s products or when they did so").  But see, e.g., McCrary v. The Elations Co., No. EDCV 13-00242 JGB (OPx), 2014 WL 1779243, at *8 (C.D. Cal. Jan. 13, 2014) ("While [Carrera] may now be the law in the Third Circuit, it is not currently the law in the Ninth Circuit.  In this Circuit, it is enough that the class definition describes ‘a set of common characteristics sufficient to allow’ a prospective plaintiff to ‘identify himself or herself as having a right to recover based on the description.’" (citations omitted)); Lilly v. Jamba Juice Co., No. 13-cv-02998-JST, 2014 WL 4652283, at *4 (N.D. Cal. Sept. 18, 2014) ("Adopting the Carrera approach would have significant negative ramifications for the ability to obtain redress for consumer injuries.").  The Ninth Circuit has the opportunity to address ascertainability issues in consumer class actions in Jones v. ConAgra Foods, Inc., which currently is being briefed (No. 14-16327).  In that case, the district court held that plaintiffs’ proposed class–which involved dozens of different food products across several brands (such as Hunt’s canned tomato products, PAM cooking sprays, and Swiss Miss hot cocoa beverages)–was not ascertainable because class members could not recall whether the small-dollar purchases contained the challenged "100% natural" labeling statement.  Jones v. ConAgra Foods, Inc., No. C 12-01633 CRB, 2014 WL 2702726, at *10 (N.D. Cal. June 13, 2014) ("Even assuming that all proposed class members would be honest, it is hard to imagine that they would be able to remember which particular Hunt’s products they purchased from 2008 to the present, and whether those products bore the challenged label statements.").        IV.   Does Making a Complete Offer of Relief to a Putative Class Representative Moot the Case? In Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013), the Supreme Court decided whether an offer of judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure may moot a plaintiff’s right to pursue both individual and collective relief in the context of a federal Fair Labor Standards Act ("FLSA") claim.  There were high hopes that this decision would resolve the split among the circuits on the issue of whether a complete offer of relief to a named plaintiff is sufficient to moot that plaintiff’s claims.  Those hopes were dashed when a majority of the Court concluded that the issue had not been properly presented, and thus assumed, without deciding, that the plaintiff’s claims were mooted by the Rule 68 offer.  Several dissenting justices exclaimed that it would be "wrong, wrong, and wrong again" to conclude that an unaccepted settlement offer moots a claim.  Id. at 1533 (Kagan, J., dissenting). This unresolved split in Genesis Healthcare has left lower courts wrestling with how to proceed in class actions where a defendant makes an offer of judgment (under Rule 68) that provides the complete measure of individual relief that the named plaintiff seeks.  Several circuits have held that such an offer cannot moot a class action, notwithstanding the Court’s conclusion that an individual whose claim is moot cannot pursue a collective claim under the FLSA.  In so holding, these circuits have cited the distinction between the nature of and procedure in an FLSA action, on the one hand, and a class action under Rule 23, on the other.  See Gomez v. Campbell-Ewald Co., 768 F.3d 871, 875-76 (9th Cir. 2014); Mabary v. Home Town Bank, N.A., 771 F.3d 820, 825 (5th Cir. 2014).  Other circuits have reached the same conclusion, and have cited the reasoning of the Genesis Healthcare dissent as the basis for their holding–namely, that a rejected statutory offer of judgment would not moot the individual plaintiff’s claim because an unaccepted settlement offer is a legal nullity, and has no operative effect.  Stein v. Buccaneers Ltd. P’ship, 772 F.3d 698, 704 (11th Cir. 2014).  The Eleventh Circuit also opined that "[e]ven if the individual claims [were] somehow deemed moot, the class claims remain live, and the named plaintiffs retain the ability to pursue them."  Id.   In other circuits, an offer of complete relief can moot individual and class claims.  See, e.g., Doyle v. Midland Credit Mgmt., Inc., 722 F.3d 78, 81 (2d Cir. 2013); Hrivnak v. NCO Portfolio Mgmt., Inc., 719 F.3d 564, 567-68 (6th Cir. 2013).  But there has been some pause in the face of the strong dissent in Genesis Healthcare.  See Scott v. Westlake Servs. LLC, 740 F.3d 1124, 1126 n.1 (7th Cir. 2014) (dissenting opinion in Genesis Healthcare provides "reasons to question our approach to the problem").  Yet because the parties "did not challenge [the] circuit’s view," in Scott, the Seventh Circuit stated that it "will continue to await a resolution of the split."  Id. What this means for litigants is that the strategic approach to early settlement offers under Rule 68 will likely be dictated by the circuit in which the parties are litigating, and there are still circuits in which a complete offer of relief will bar a plaintiff from proceeding with a class action lawsuit.  Accordingly, while Justice Kagan’s dissent has put a spotlight on this issue, it appears that litigants, like the Seventh Circuit in Scott, will just have to "continue to await a resolution of the split."  Id.        V.   Heightened Scrutiny of Class Settlements Expands Unlike in other types of cases, settlements in class actions require court approval.  In our February 2013 class action update, we discussed how this process was becoming more difficult in the last few years.  We covered Ninth Circuit decisions that subjected pre-certification settlements to an even higher degree of scrutiny (In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935 (9th Cir. 2011)), and drew tighter limits around the selection of charities for cy pres distributions of settlement funds (Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012); Nachshin v. AOL LLC, 663 F.3d 1034 (9th Cir. 2011)).  Since that update, the trend of increased settlement scrutiny has continued and spread to other Circuits.  Judges have generally become more proactive in policing class action settlements for signs of unfairness or potential collusion; the underlying concern is that class counsel may bargain away the rights of their clients in exchange for a substantial fee. In November 2013, in Marek v. Lane, 134 S. Ct. 8 (2013), the U.S. Supreme Court denied a petition for certiorari filed by four objectors to a class settlement that contained a cy pres component.  In a separate statement, Chief Justice Roberts raised a number of "fundamental concerns" about the cy pres mechanism as it is used in class action litigation–"including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on."  Id. at 9.  Although Marek did not provide the appropriate vehicle to answer these questions, Chief Justice Roberts concluded:  "In a suitable case, this Court may need to clarify the limits on the use of such remedies."  Id. A few weeks ago, the Eighth Circuit Court of Appeals cited the Chief Justice’s concerns in vacating the cy pres portion of a class action settlement.  In re BankAmerica Corp. Sec. Litig., No. 13-2620, 2015 WL 110334 (8th Cir. Jan. 8, 2015).  That court clarified that cy pres distributions of unclaimed settlement funds are appropriate "only when it is not feasible to make further distributions to class members . . . except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution."  Id. at *2 (quotation marks and citation omitted; emphasis in original).  Moreover, the court held that class members must ordinarily have a say in the selection of a cy pres recipient:  "[U]nless the amount of funds to be distributed cy pres is de minimis, the district court should make a cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient.  This gives class members a voice in choosing a ‘next best’ third party and minimizes any appearance of judicial overreaching."  Id. at *4; see also In re Baby Prods. Antitrust Litig., 708 F.3d 163, 174 (3d Cir. 2013) (vacating approval of class settlement and directing district court to consider the degree of direct benefit provided to the class:  "Barring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds."). In addition to cy pres, another recurring topic in recent class settlement decisions is the propriety of so-called "clear sailing" agreements, in which a defendant agrees not to oppose class counsel’s fee award up to a specified maximum value.  The Ninth Circuit has described clear sailing agreements as one of the "subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations."  In re Bluetooth, 654 F.3d at 947; see also Redman v. RadioShack Corp., 768 F.3d 622, 637 (7th Cir. 2014) ("Clear-sailing clauses have not been held to be unlawful per se, but at least in a case such as this, involving a non-cash settlement award to the class, such a clause should be subjected to intense critical scrutiny by the district court.").  California courts, by contrast, have taken a more pragmatic approach, recognizing that clear sailing agreements may facilitate completion of settlements by giving defendants a more predictable measure of their total exposure.  See, e.g., Laffitte v. Robert Half Int’l Inc., 231 Cal. App. 4th 860, 884 (2014) ("In the absence of any of the recognized warning signs of collusion or other evidence of collusion, the inclusion of a clear sailing provision in the settlement agreement did not constitute a breach of fiduciary duty on the part of class counsel."). A trio of strongly worded Seventh Circuit opinions issued last year, all written by Judge Richard Posner, also illustrates what appears to be growing judicial skepticism toward class settlements that provide no real value to the class and yet are accompanied by significant plaintiff fee awards.  In Eubank v. Pella Corporation, 753 F.3d 718 (7th Cir. 2014), the Seventh Circuit reversed the approval of a "scandalous" settlement that contained "almost every danger sign in a class action settlement that our court and other courts have warned district judges to be on the lookout for."  Id. at 721, 728.  The case involved a class counsel with numerous conflicts of interest, an $11 million fee award compared with approximately $8.5 million in actual value for class members, an "incomplete and misleading" class notice, and overly complicated claims forms.  Id. at 728.  In short, "Class counsel sold out the class."  Id. at 726; see also Pearson v. NBTY, Inc., 772 F.3d 778, 780-81 (7th Cir. 2014) (reversing settlement approval where the district judge valued the settlement "at the maximum potential payment that class members could receive," even though that figure "ha[d] barely any connection to the settlement’s value to the class"); Redman, 768 F.3d at 630-31 (reversing approval of settlement that would have provided $10 coupons to class members because, among other reasons, the district court had overestimated the value of the coupons for class members in approving a $1 million fee award). Of course, even with this increased skepticism toward class settlements, many settlements will still be able to pass muster.  See, e.g., Wong v. Accretive Health, Inc., 773 F.3d 859 (7th Cir. 2014) (affirming approval of a $14 million class settlement and rejecting a number of the objectors’ arguments); Laguna v. Coverall N. Am., Inc., 753 F.3d 918, 925 (9th Cir. 2014) (affirming approval of class settlement because, among other reasons, "Plaintiffs faced real dangers in proceeding on their case in light of menacing precedents from the United States Supreme Court"), vacated due to settlement, 772 F.3d 608 (9th Cir. 2014).  Yet the recent trend still points decidedly toward the application of heightened scrutiny of settlement terms, notice and claims processes, counsel’s fee award, and the overall value of the settlement for class members.  The reality of this heightened scrutiny is that class actions may as a practical matter be more difficult to settle.  It is not likely a coincidence, then, that in 2014 we saw several class action trials, with some notable victories for defendants.        Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Appellate and Constitutional Law Group and Transnational Litigation Group – Los Angeles (213-229-7000, tboutrous@gibsondunn.com) Gail E. Lees – Co-Chair, Class Actions Group – Los Angeles (213-229-7163, glees@gibsondunn.com)Andrew S. Tulumello – Co-Chair, Class Actions Group – Washington, D.C. (202–955–8657, atulumello@gibsondunn.com)Christopher Chorba – Co-Chair, Class Actions Group – Los Angeles (213-229-7396, cchorba@gibsondunn.com)Kahn A. Scolnick – Los Angeles (213-229-7656, kscolnick@gibsondunn.com)Timothy W. Loose – Los Angeles (213-229-7746, tloose@gibsondunn.com)Bradley J. Hamburger – Los Angeles (213-229-7658, bhamburger@gibsondunn.com) © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 15, 2015 |
2015 Mid-Year E-Discovery Update

Progress on Some Fronts, But Significant Dangers Remain, and New Dangers Emerge E-discovery remains an incredibly rich and rapidly developing field, as the many developments on which we report from just the first half of 2015 attest. We are seeing progress in some areas (e.g., predictive coding, cost recovery, and rule amendments), remaining dangers in others (e.g., sanctions, preservation, and cross-border discovery), and new dangers emerging (e.g., text messaging, mobile devices, and e-discovery vendor selection). We encourage you to read all the content below, but we recognize there is a lot. So, you may want to approach it one topic at a time. Our 2015 Mid-Year E-Discovery Update covers the following (click on headings to go to full section): Text Messaging and Mobile Devices: Text (aka instant) messaging and mobile devices are shaping up to be the new frontier in e-discovery. Texts and instant messages are increasingly at issue in investigations and litigation. But extracting them from mobile devices can be expensive and time consuming, if possible at all. Consequently, companies should consider implementing appropriate controls over employees’ business-related text and instant messaging, particularly on mobile devices.  Information Governance: Information governance (or "IG") has been the "next big thing" in e-discovery over the past couple of years. Like all "next big things," the early breathless hype about "IG" is beginning to fade. Companies are eschewing grand plans to implement information governance programs on every nook and cranny of their information systems, and are instead focusing on high-yielding, low-hanging fruit such as email and disposing of legacy backups. The Internet of Things: "IoT" is being promoted by some in the e-discovery world as the next, next big thing. To us, it seems to require a rather fertile imagination to identify circumstances where IoT data would be relevant to most business disputes. Nevertheless, companies should consider the legal significance of the IoT data in their possession, custody or control and, if determined to be necessary, have a process in place for preserving and extracting this data, should the need arise. Predictive Coding: Predictive coding continues to be the big underachiever of e-discovery. There may be a number of reasons why it is not being utilized more, despite its potential to significantly reduce the costs and time required for document review. One, for certain, has been the perception that disclosing irrelevant documents and coding decisions from training sets will be required of those who wish to use predictive coding. Magistrate Judge Andrew Peck of the Southern District of New York has sought to dispel that perception in Rio Tinto PLC v. Vale S.A., in which he identifies a number of more palatable alternatives that make such disclosure unnecessary. Sanctions: Sanctions are an ever-present danger in the e-discovery world. Continuing a trend that we have seen in recent years, sanctions were imposed not only for spoliation–i.e., failing to preserve relevant information after a duty to preserve arose–but also for delayed productions of relevant and responsive information. Preservation: Courts issued several interesting decisions in the first half of 2015 regarding (1) the trigger of the duty to preserve, (2) the extent to which the duty reaches data in the possession of non-parties, and (3) the subject matter scope of the duty. E-Discovery Cost Recovery: Prevailing parties increasingly are seeking to recover a portion of their e-discovery costs upon conclusion of their litigation pursuant to 28 U.S.C. § 1920(4), which permits the taxing of "[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case." Courts are increasingly granting recovery of e-discovery costs beyond just those related to the conversion of electronic documents to TIFF format. Discovery of Social Media: Reflecting that the use of social media continues to proliferate in business and social contexts, and that its importance is increasing in litigation, the number of cases focusing on the discovery of social media continued to skyrocket in the first half of 2015. Courts are still struggling to develop rules and protocols applicable to social media evidence, including whether special authentication rules should govern social media evidence, what threshold showing of relevance must be made before discovery should be allowed, when the duty to preserve social media evidence arises, what role privacy rights should play in social media discovery, and who should bear the burden of review. Governmental Investigations: Courts continue to grapple with how to apply e-discovery concepts to governmental investigations. For example, courts have had to balance Fourth Amendment rights with the opportunities for discovery created by the Stored Communications Act (SCA), 18 U.S.C. §§ 2700 et. seq,, which permits access to the files of technological intermediaries, such as Internet service providers and cell phone providers. E-Discovery Vendor Developments: With respect to e-discovery service providers (aka vendors), in some respects it is the best of times and in others it is the worst of times. Much of the market is immature, with a dizzying array of vendors and consumers not well equipped to distinguish among them. Aggressive sales tactics are common, and attempts at consumerizing e-discovery technology and services are a troubling new trend. Federal Rule Amendments: It has taken an interplanetary probe nine and one half years to travel to Pluto, so the five years that the latest e-discovery amendments to the Federal Rules of Civil Procedure have taken to come to fruition seems pretty good in comparison (by cosmic standards, at least). The Supreme Court approved their adoption in April, leaving Congress as the only potential obstacle to their implementation in December (what possibly could go wrong?). The sanctions rule amendment may make a significant difference, so the wait will likely be worth it. International E-Discovery Developments: The cross-border transfer and disclosure of information remains challenge for multinational corporations. The proliferation of data localization laws such as China’s State Secret laws have led companies and their counsel to increasingly process and review documents locally. In Europe, the EU-US Safe Harbor Framework, which allows certified US companies to transfer personal data outside Europe if they meet certain requirements, is being amended with the goal of stricter compliance with EU data privacy provisions. At the same time, the Framework’s adequacy is being challenged before the European Court of Justice. Text Messages and Mobile Devices Text (aka instant) messaging and mobile devices are shaping up to be the new frontier in e-discovery. In 2013, the Pew Research Center reported that 91 percent of American adults owned a mobile phone and 81 percent used their phone to send or receive text or instant messages. See Pew Research Center, Cell Phone Activities 2013 (Sept. 16, 2013). An open question, however, was how often text messaging is used for business-related communications. A RingCentral survey found that 79 percent of respondents used text messaging for business purposes, and 32 percent had closed a business deal by text message. See Gareth Evans and Lauren Eber, Is Instant Messaging The Next Email?, Inside Counsel (Nov. 1, 2013). Since then, text messages have increasingly played a role in high profile controversies. Relevant text messages are now more commonly sought in governmental and other investigations, and are occasionally at issue in civil litigation. Text messages sent and received on mobile device apps may feature an even greater degree of casual banter than emails. Users may engage in such casual communication assuming that their messages are "off the radar" because they are not going through company servers. Text messaging apps often store messages in databases on the mobile device, however, and "deleted" messages may still be extracted, though it can be expensive and difficult to do so (and such deleted messages are generally considered to be inaccessible). See Gareth Evans and Veeral Gosalia, The Coming Storm: Companies Must Be Prepared to Deal With Text Messages on Employee Mobile Devices, 15 Digital Discovery & e-Evidence (Bloomberg BNA, June 25, 2015).  Most often, text messages are not for business purposes and they are not relevant to the issues in litigation and investigations. But, occasionally they are, and as we reported in our 2014 Year-End E-Discovery Update, text messaging and mobile devices have increasingly become the subject of sanctions decisions. An example from the first half of 2015 is Clear-View Technologies, Inc. v. Rasnick, No. 13-cv-02744-BLF, 2015 WL 2251005 (N.D. Cal. May 13, 2015). Although primarily focused on when the duty to preserve was triggered–the court held it was approximately two years before the suit was filed–the case is noteworthy for what the court found should have been preserved. The court sanctioned defendants for, among other things, having deleted relevant text messages and having "lost or thr[own] away" several mobile devices (including iPhones and an iPad) used to access relevant communications and documents. See id. at *5. The case reflects that where unique and relevant electronically stored information is contained in text messages and stored on mobile devices, courts increasingly will hold parties responsible for their preservation. Companies may mitigate the risks associated with discovery of text messaging, including BYOD policies, implementing "sandboxes" (separate spaces for work apps) on employees’ mobile devices, and requiring the use of enterprise texting apps that are journaled or backed up onto company servers. We expect preservation of relevant text messages and other data on mobile devices to be an increasingly common and important issue in the future. See The Coming Storm, supra, 15 Digital Discovery & e-Evidence (June 25, 2015). Back to Top Information Governance Information governance has been the "next big thing" in e-discovery over the past couple of years. Like all "next big things," the early breathless hype about "IG" is beginning to fade as the next "next big thing" comes around the corner with its own trendy acronym ("IoT"–Internet of Things–anyone?). Early visions of grand information governance projects–including automated classification of documents for disposal using predictive coding algorithms–have, for the most part, not yet gained much traction in the business community. IG was earlier conceived as an integrated approach to records management providing an overall framework for managing, organizing, and defensibly deleting data throughout an organization. It is a worthy goal whose time will likely come, eventually. In the meantime, companies are focusing their efforts on low hanging fruit that can provide bountiful harvests. The most prominent of these more attainable projects have consisted of implementing e-mail retention and defensible deletion policies, and defensible disposal of legacy backups.  In addition to retention and disposal programs, there is a growing trend towards adoption of "data minimization" policies, which can have practical benefits in both the legal and business spheres. Data minimization policies encourage employees to reduce the volume of data they generate–focusing on the front-end creation practices rather than the back-end storage and deletion practices. Such programs may not solve all the problems that IG seeks to address, but they may make a difference. An important issue that has not yet received a lot of attention, but for which there is an increasingly pressing need to address, is the need to have enterprise controls–such as journaling and defensible disposal–applied to work-related text messages on mobile devices. Absent some form of information governance applied to employee texting, the risks of exploding litigation costs (extracting data directly from mobile devices is time consuming and expensive, if it works at all) and spoliation sanctions may increase considerably as more employees use texts for business-related messaging. If there is a "next big thing" within information governance, addressing work-related text messaging on mobile devices should be it.  See Gareth Evans and Veeral Gosalia, The Coming Storm: Companies Must Be Prepared to Deal with Text Messages on Employee Mobile Devices, 15 Digital Discovery & e-Evidence (Bloomberg BNA June 25, 2015). Back to Top The "Internet of Things" One of the newest technological advances that could, hypothetically, complicate parties’ preservation and collection obligations is the growing web of interconnected, data-receiving and data generating devices referred to as the Internet of Things (often referred to as the "IoT").  Indeed, in some e-discovery circles, the IoT appears to have become the NBT (that is, the "next big thing"), prominently included at the top of e-discovery discussion agendas, and joining the ranks of past breathlessly hyped topics such as early case assessment ("ECA"), discovery of ESI stored in the cloud, and information governance ("IG"). It is too soon to tell whether IoT will become truly important in significant corporate litigation and investigations, but we expect that it will be the relatively rare exception rather than the rule. IoT has been described as an "ecosystem of interconnected sensory devices performing coordinated, pre-programmed–and often learned–tasks" that differs from the traditional Internet because it operates without the necessity for active human input. See Elizabeth McGinn & Ty Yankov, Trading Beyond Fear: eDiscovery of the Internet of Things, Electronic Commerce & Law Report, 20 ECLR 562, Apr. 15, 2015. Data-collecting sensors that feed into this network may one day become a part of daily life–take, for example, fitness-tracking devices that monitor vital signs, sending a constant stream of data to the cloud for storage and future analysis. Additionally, many household items such as garage door openers, thermostats, alarm systems and appliances are already IoT enabled, with automobiles and medical devices soon to follow. According to a 2013 poll, 96 percent of surveyed senior executives said they expected their businesses to utilize IoT within the next three years. Clint Witchalls, The Internet of Things Business Index: A Quiet Revolution Gathers Pace, The Economist (Oct. 29, 2013). IoT’s implications for data preservation and collection are complicated due to the fact that this data is not "created" by humans, but rather by devices, with the data processed and stored on the cloud. One question courts are likely to have to address is who controls such cloud data for disclosure purposes–potential options are the device manufacturer, the party that monitors an individual’s data, or the individual from whom the data is collected. Although the question of data control can largely be addressed by contracts between parties, there are likely to be at least some contracts that do not cover the issue, and courts will be left to decide based on applicable rules of civil procedure. Applying Federal Rule of Civil Procedure 34(a), which requires litigants to produce ESI that is in their "possession, custody, or control," courts may look to how a party uses the relevant data to determine if that party is "in control" of that data. See Brown v. Tellermate Holdings, Ltd., No. 2:11-cv-112, 2014 WL 2987051 (S.D. Ohio July 1, 2014) (plaintiff controlled cloud-based financial data). However, much remains to be seen in this emerging area. Despite these issues, IoT should not yet strike fear into the hearts of business litigators. To us, it seems to require a rather fertile imagination to identify circumstances where IoT data would be relevant to a business dispute. Nevertheless, companies should consider the legal significance of the IoT data in their possession, custody or control and, if determined to be necessary, have a process in place for preserving and extracting this data, should the need arise. Back to Top Predictive Coding The most important predictive coding case of the first half of 2015–Rio Tinto PLC v. Vale S.A., 306 F.R.D. 125 (S.N.D.Y. 2015)–did not involve an actual dispute: the parties stipulated to a predictive coding protocol, which the court approved. Nevertheless, Magistrate Judge Andrew Peck wrote an opinion that provides significant guidance to litigants regarding the use of predictive coding (commonly referred to as "Technology Assisted Review" or "TAR," a nomenclature with which we are not particularly enamored, as there are various types of technology assisted review in addition to predictive coding). Of particular significance, Judge Peck wrote in Rio Tinto that sharing training sets of documents–including the irrelevant documents in the training set and counsel’s coding decisions on them–is not necessary to ensure that the predictive coding model was trained appropriately. Rather, Judge Peck pointed out that there are alternatives to producing the training documents and coding decisions. See id. at 128-129. To understand the importance of this statement in Rio Tinto, it’s helpful to know some of the backstory. Three years ago, in Da Silva Moore v. Publicis Group, Judge Peck issued the first published decision recognizing predictive coding as an "acceptable way to search for relevant ESI in appropriate cases." Da Silva Moore v. Publicis Group, 287 F.R.D. 182, 183 (S.D.N.Y. 2012). Predictive coding had been available for some time, but it generally wasn’t being used. Judge Peck knew that attorneys who were aware of predictive coding were nevertheless reluctant to use it because no court had approved it. Thus, he wrote in Da Silva Moore that "[c]ounsel no longer have to worry about being the ‘first’ or ‘guinea pig’ for judicial acceptance of [predictive coding]." See id. at 193.  Judge Peck wrote that "[w]hat the Bar should take away from this Opinion is that [predictive coding] is an available tool and should be seriously considered for use in large-data-volume cases where it may save the producing party (or both parties) significant amounts of legal fees in document review." Id. So what’s happened since then? Despite Judge Peck’s endorsement of predictive coding in Da Silva Moore, and the rulings of a significant number of other courts either encouraging or approving the use of predictive coding, it generally has not caught on–certainly not to the extent that many thought it would have after Da Silva Moore. Why? One commentator recently opined that it’s not because of software makers, vendors, judges, governmental investigators or clients, many of whom favor and promote its use, but rather it’s due to litigation counsel "not understanding the value of TAR" in appropriate cases. See Geoffrey A. Vance, Confessions of an E-Discovery Lawyer: We’re Light Years Behind, LegalTech News (June 23, 2015). There may be some truth to this, but we think the story is more complex, as it does not reflect the role of opposing counsel, who have been known to seek to effectively preclude the responding party’s ability to use predictive coding by demanding conditions that the responding party will likely find unacceptable (often referred to as the "TAR tax"). Probably the greatest impediment to the use of predictive coding has been the argument that the party seeking to use it should agree to share its coding decisions on the documents used to train the predictive coding model, including providing to the opposing party the irrelevant documents in the training sets. Indeed, a certain mythology has developed that the "transparency and cooperation" that commentators and courts have encouraged in connection with predictive coding means that a party must provide these irrelevant documents to the other side. See, e.g., our discussion of the Progressive v. Delaney decision in our 2014 Year-End E-Discovery Update. When many lawyers and clients hear that they may need to share documents that are not relevant to the litigation with opposing counsel, they want nothing to do with predictive coding. Many also consider counsel’s coding decisions on the training set to be protected attorney work product. See, e.g., John M. Facciola & Philip J. Favro, Safeguarding the Seed Set: Why Seed Set Documents May Be Entitled To Work Product Protection, 8 Fed. Cts. L.Rev. 1 (2015). In Rio Tinto, Judge Peck has sought to resolve this divisive issue. First, he points out that the courts have developed a significant amount of comfort with predictive coding in the three years since Da Silva Moore. "[T]he case law has developed to the point that it is now black letter law that where the producing party wants to utilize TAR for document review, courts will permit it." Rio Tinto PLC, 306 F.R.D. at 127. Second, he points out that predictive coding also can no longer be considered an "unproven technology." Judge Peck quotes the Dynamo Holdings decision of last year, in which the court stated that "In fact, we understand that the technology industry now considers predictive coding to be widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden." Id. (quoting Dynamo Holdings Ltd. P’Ship v. Comm’r of Internal Revenue, 143 T.C. 9, 2014 WL 4636526 at *5 (T.C. Sept. 17, 2014). Third, Judge Peck cites studies that the contents of the "seed set" are much less significant with tools using "continuous active learning" in which the model is continually trained as reviewers review all documents identified as potentially relevant. See id., 306 F.R.D. at 127. Fourth, and most significantly, Judge Peck points out that there are alternatives to sharing coding decisions on the training set to insure the defensibility of a predictive coding protocol. "[R]equesting parties can insure that training and review was done appropriately by other means, such as statistical estimation of recall at the conclusion of the review as well as by whether there are gaps in the production, and quality control review of samples from the documents categorized as non-responsive." See id., 306 F.R.D. at 128-29. See also Gareth Evans and David Grant, Metrics that Matter: Van Halen, M&Ms and Metrics in E-Discovery (2015 White Paper). Judge Peck, of course, recognizes that it should be up to the responding party to decide what search and review methodology to use and that, as before, the developments since Da Silva Moore do "not mean [predictive coding] must be used in all cases." See id. at 126 (quoting Da Silva Moore, 287 F.R.D. at 193). Indeed, he points out that "[i]n contrast, where the requesting party has sought to force the producing party to use TAR, the courts have refused." Id., 306 F.R.D. at 127 n.1 (listing cases). There were other decisions involving predictive coding during the first half of 2015.  The District of Connecticut approved an ESI stipulation that explicitly provided that a responding party "need not share the intricacies of [its production] methodology unless and until there is a good faith allegation of a violation of Rule 26."  Thus, if a party opted to use predictive coding it need only "disclose its intent to use that technology and the name of the review tool." Connecticut Gen. Life Ins. Co. v. Health Diagnostic Lab., Inc., No. 3:14-cv-01519, 2015 WL 417120 (D. Conn. Jan. 28, 2015).  The District of Nebraska recognized that "[p]redictive coding is now promoted (and gaining acceptance) as not only a more efficient and cost effective method of ESI review, but a more accurate one." Malone v. Kantner Ingredients, Inc., No. 4:12-cv-3190, 2015 WL 1470334, at *3 n.7 (D. Neb. Mar. 31, 2015). In Chevron Corp. v. Snaider, No. 14-cv-01354-RBJ-KMT, 2015 WL 226110 (D. Col. Jan. 15, 2015), the district court refused to quash a subpoena seeking discovery into an international racketeering scheme, rejecting the resisting party’s undue burden objections in part because "Snaider does not address the likelihood that in a case such as this computer-assisted review would no doubt be invoked, and while that is costly, it is much more efficient than assigning individuals to review a large volume of paperwork."  Id. at *11, n.9. Thus, in the first half of 2015, more courts have referred to predictive coding as a viable option for document search and review, and Judge Andrew Peck in his Rio Tinto decision has helped develop a more well thought-out predictive coding jurisprudence, the need for which we lamented in our 2014 Year-End E-Discovery Update. Back to Top Sanctions Many of the sanctions cases in 2015 have grappled more with the type of conduct that justifies imposition of sanctions, rather than the question of what type of sanctions are appropriate. Continuing a trend that we have seen in recent years, sanctions were imposed not only for spoliation–i.e., failing to preserve relevant information after a duty to preserve arose–but also for delayed production of relevant and responsive information. Failure to Preserve The first half of 2015 has already seen several important sanctions decisions dealing with spoliation. As usual, these decisions echo a persistent theme: the importance of implementing a timely and effective litigation hold. In Clear-View Technologies, 2015 WL 2251005, Magistrate Judge Paul Grewal of the Northern District of California found defendants had an obligation to preserve evidence once the plaintiff’s CEO sent them text messages threatening a lawsuit, which occurred a full two years before the suit was filed. See id. at *7. After receiving these text messages, Defendants intentionally deleted relevant documents, failed to implement a hold or monitoring policy, and ran a "Crap Cleaner" software to wipe files on a laptop while plaintiffs’ motion to compel was pending. See id. at *1, *7. As is often the case in sanctions cases, bad facts invite the court to make an example of defendants, and here the court imposed severe sanctions for spoliation of evidence–a joint monetary sanction of $212,320 against defendants and defense counsel and an adverse jury instruction. See id. at *8 & n. 90. While this case garnered attention for the harshness of the sanctions, its most important takeaway is that courts may find that informal communications, such as text messages, may be sufficient to trigger the duty to preserve evidence. Indeed, the court made clear that, in its view, there was no doubt that defendants were on notice of foreseeable litigation in this case–"[t]his call is not even close." Id. at *7. In Fidelity Nat. Title Ins. Co. v. Captiva Lake Inv., LLC, No. 4:10-CV-1890, 2015 WL 94560 (E.D. Mo. Jan. 7, 2015), the court imposed sanctions on a plaintiff whose failure to institute a litigation hold resulted in the mass deletion of relevant emails. Following a protracted dispute between the parties regarding the adequacy of plaintiff’s production of ESI, the court granted defendant’s request for a specialist to examine plaintiff’s computer systems. The specialist found, among other things, that plaintiff (1) had not instituted a litigation hold, (2) did not conduct a systematic search of its computer systems for discoverable information, (3) and allowed a contractor to delete as many as 13 million emails after the commencement of litigation. See id. at *2. The court found that the email deletions likely caused the loss of discoverable emails and that the defendant was prejudiced by the loss of these emails. See id. at *3. Significantly, the court held that the plaintiff’s "failure to implement a litigation hold . . . establishes the necessary intent to support the imposition of sanctions." Id. Based on these findings, the court issued an adverse inference instruction with respect to the deleted emails and ordered plaintiff to pay fees and expenses related to the delay caused by its "mishandling of discovery." Id. at *7. In a rare appellate decision on spoliation, Blue Sky Travel & Tours, LLC v. Al Tayyar, No. 13-2500, 2015 WL 1451636 (4th Cir. Mar. 31, 2015), the Fourth Circuit vacated sanctions for spoliation imposed by a lower court after finding the lower court applied the incorrect standard when assessing a defendant’s duty to preserve evidence. The Fourth Circuit took the opportunity to clarify both the scope of a litigant’s duty to preserve and the purpose of a litigation hold. In the underlying trial court case, Defendant ATG repeatedly failed to produce copies of certain original invoices that it was ordered to turn over by the magistrate judge. ATG claimed it did not have these invoices because its document retention practice was to discard the original invoices after transcribing the information contained in these invoices into a Microsoft Excel spreadsheet. See id. at *3. The magistrate judge rejected this argument and held that once litigation commenced, ATG had an obligation to discontinue its document retention policies and preserve "all documents." Id. at *8 (emphasis in original). Finding ATG liable for spoliation, the magistrate judge issued an adverse jury instruction, which "effectively relieved [plaintiff] of its burden to prove its damages claim for lost profits." Id. The magistrate judge’s rulings were upheld by the district court. On appeal, however, the Fourth Circuit found that the magistrate judge and district court had applied the incorrect standard to ATG’s duty to preserve evidence, stating "a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute." Id. at *8 (emphasis added). A final noteworthy recent decision is Malibu Media, LLC v. Tashiro, No. 1:13-CV-00205, 2015 WL 2371597 (S.D. Ind. May 18, 2015), which presents a thorough analysis regarding whether a court may issue a sanction for spoliation of evidence where a party intentionally deletes electronic files that may be subsequently recovered. Plaintiff brought suit against defendants, a married couple, alleging they had used a BitTorrent client to illegally download and distribute plaintiff’s copyrighted works. During discovery, defendants agreed to produce their hard drives for forensic analysis. Plaintiff’s expert determined that a large number of files were permanently deleted from the hard drives the very night before the hard drives were produced. See id. at *1-*2. Defendants’ expert agreed that files were deleted from the hard drives but claimed that he was able to recover all of the deleted files. See id. at *2.  Plaintiff contended defendants had destroyed evidence by deleting the files that would have exposed them to liability. See id. at *17. Defendants countered that no spoliation had occurred because all the deleted files were recoverable and plaintiff was thus not prejudiced by the "deletions." See id. at *18. The magistrate judge sided with plaintiff, finding defendants liable for spoliation because it was "highly likely" that the files were deleted and unrecoverable, id. at *19, and because defendants had deleted these files in bad faith, see id. at*13-*19. Significantly, the magistrate judge went on to explain that even if the deleted files were recoverable, defendants would not have been absolved of liability for spoliation. See id. at *19. As a practical matter, the magistrate judge noted that the "mere deletion of files has evidentiary ramifications" as it can alter the metadata associated with those files. Id. at *21. But more importantly, the magistrate judge rejected defendants’ assertion that a permanent loss of evidence is a prerequisite to a finding of spoliation. See id. at *19. To the contrary, the magistrate judge stated that "the Seventh Circuit has implicitly acknowledged that recovery of deleted or destroyed evidence does not preclude entry of sanctions." Id. at *21 (citing Barnhill v. United States, 11 F.3d 1360, 1367-68 (7th Cir. 1993)). According to the magistrate judge, the recoverability of the files would not change the fact that defendants "attempted to work a fraud on this Court, obstruct Plaintiff’s pursuit of its case, and subvert the judicial process." Id. Accordingly, "even if [defendants’] conduct had not harmed Plaintiff, the Court would not allow [their] attempted fraud to go unpunished." Id. In the end, the magistrate judge imposed the most severe sanction against defendants–an entry of default judgment–because in addition to spoiling evidence, the defendants had committed perjury by making false representations regarding the evidence during their depositions. See id. at *37-*38. Significantly, it appears that this decision may have come out very differently if the pending amendment to Federal Rule of Civil Procedure 37(e) had been in effect, as it forecloses the imposition of sanctions if the deleted information can be recovered or obtained from other sources. Failure to Produce As we have increasingly seen in recent years, courts in the first half of 2015 addressed whether sanctions should be imposed because of delayed productions.  In Oracle Am., Inc. v. Terix Computer Co., Inc., No. 5:13-CV-03385, 2015 WL 2398993 (N.D. Cal. May 19, 2015) (Grewal, Mag.), plaintiffs learned of the existence of a laptop containing relevant information during a deposition of one defendant’s employee at the close of fact discovery. See id. at *2-*3. Although defendants later produced the laptop, plaintiffs moved for sanctions, alleging defendants intentionally withheld the laptop. See id. at *3. The magistrate judge declined to impose sanctions after finding there was insufficient evidence that defendants had acted in bad faith. Id. at *4. Specifically, plaintiffs failed to show that defendants intentionally misrepresented the existence of this laptop. Id. "[W]ithout clear evidence of bad faith," the magistrate judge noted, it would be inappropriate to sanction defendants for their initial failure to produce the laptop. Id.     Likewise, in Logtale, Ltd. v. IKOR, Inc., No. C-11-5452, 2015 WL 581513 (N.D. Cal. Feb. 11, 2015) (Ryu, Mag.), the court considered the appropriate sanctions for defendant’s repeated failures to produce responsive documents in accordance with court-ordered deadlines. See id. at *3. Because plaintiffs failed to offer "any argument or evidence" with respect to defendant’s willfulness, fault, or bad faith, the magistrate judge declined to impose a terminating sanction. See id. at *3-4. However, the magistrate judge ordered defendants to pay for plaintiff’s reasonable expenses caused by their failure to comply with discovery orders. Id. at *4. Finally, in Parsi v. Daioleslam, 778 F.3d 116 (D.C. Cir. 2015), the D.C. Circuit reaffirmed that a district court seeking to impose monetary sanctions under its inherent judicial authority–as opposed to its authority pursuant to Rule 37–must first find by clear and convincing evidence that the party committing the improper conduct acted in bad faith. In the case, plaintiffs repeatedly failed to produce relevant documents, including highly relevant emails between plaintiffs and third parties. Id. at 124. On top of sanctions it imposed for violations of its discovery orders, the court exercised its inherent authority to order plaintiffs to pay attorney’s fees and expenses specifically related to its failure to produce the emails. Id. at 119-120. The D.C. Circuit determined that the imposition of this particular sanction required a finding of bad faith conduct under a clear and convincing standard of proof. It then held that the district court met this obligation, as it had provided ample support on the record for its conclusion that plaintiffs’ failures to produce these emails were "indefensible" and "inexplicable." Id. at 132. If the pending amendment to Federal Rule of Civil Procedure 37(e) becomes effective on December 1, 2015, we will not likely see future sanctions decisions resting on the court’s inherent authority, as the Advisory Committee Note to the amendment declares that the amended rule precludes the issuance of sanctions based on courts’ inherent authority. Finally, one court found during the first half of 2015 that failure to provide documents in an accessible format can be sanctionable. In Boxer F2, L.P. v. Flamingo W., Ltd., No. 14-CV-00317, 2015 WL 2106101 (D. Colo. May 4, 2015) (Watanabe, Mag.), the court granted plaintiff’s renewed request for sanctions for generally obstructive discovery conduct. In an "effort to reduce further gamesmanship over the precise wording or scope of Plaintiff’s discovery requests," the magistrate judge previously ordered defendants to produce complete copies of certain accounting records. Id. at *1. Defendants provided plaintiff with the records via a Dropbox hyperlink, but did not provide plaintiff a functioning username or password until almost a month later. Id. The court found defendants did not give plaintiff "any meaningful access" to the accounting records, id. at *3, and it further found that defendants had modified the records prior to production, see id. Because defendants failed to comply in good faith with discovery orders, the magistrate judge ordered defendants to pay fees and expenses related to plaintiff’s renewed motion for sanctions and entered certain factual allegations in plaintiff’s complaint as findings of fact for the purposes of the litigation. Id. at *4. Back to Top Preservation Courts issued several interesting decisions in the first half of 2015 regarding (1) the trigger of the duty to preserve, (2) the extent to which the duty reaches data in the possession of non-parties, and (3) the subject matter breadth of the duty. Many who are not immersed in e-discovery are surprised to learn that the duty to preserve documents and ESI that are relevant to the litigation can be triggered before suit is filed–in some cases long before. In the Seventh Circuit, the duty to preserve is only triggered when a litigant knew or should have known that litigation was imminent. In all other Circuits, however, courts expect a greater deal of clairvoyance, holding that the duty to preserve begins when litigation is "reasonably foreseeable." In Clear-View Technologies, 2015 WL 2251005, Magistrate Judge Paul Grewal of the Northern District of California ruled that the duty to preserve arose over two years before the plaintiff commenced its lawsuit. The case involved less than model behavior on the part of the defendants–after receiving a legal hold notice from the plaintiff "in anticipation of litigation," they nevertheless failed to take any active steps to preserve data, deleted relevant text messages, and they lost and threw away several iPhones and other devices with unique relevant information. Additionally, after being served with document requests in the litigation, they failed to take reasonable steps to search for responsive documents, and one defendant deployed "Crap Cleaner" and other wiping software to remove data from his laptop computer while a motion to compel was pending. See id. at *1–5. Finding the duty to preserve to have attached upon defendants’ receipt of the legal hold notice would have been less controversial. The court, however, found that it arose approximately six months earlier, when the plaintiff’s CEO sent the defendants angry text messages saying "don’t call my shareholders with your b.s. . . . [K]eep it up and you’ll find [yourself] in court. Call Clyde again and I sue." The next morning, however, he sent apologetic texts, and acknowledged that he had been drinking ("I was very upset last night, plus the booze").  The court nevertheless noted that plaintiff’s CEO did not retract the threat of suit. Id. at *2, *7. Combined with defendants’ discussion among themselves about the potential legal ramifications of their conduct later the same month, the court found that "[t]his call is not even close" under the reasonable foreseeability standard. See id. at *7. The extent to which a duty to preserve extends to documents in the possession of non-parties is usually determined by whether they are deemed to be under the control of a party. Three decisions in the first half of 2015 addressed whether parties had such control. In Wandering Dago Inc. v. N.Y. State Office of Gen. Servs., No. 1:13-CV-1053, 2015 WL 3453321, at *11 (N.D.N.Y. May 29, 2015) (Treece, Mag. J.), the court addressed whether a New York state agency was obligated to preserve emails from a nonparty witness in a separate state agency. Id. at *7. The court found that "state agencies for most purposes are separate and distinct organs and should not be viewed in the aggregate," and that "[c]onsidering that hundreds of lawsuits are filed daily against New York State . . . requiring each agency and thousands of officials to institute a litigation hold every time a party contemplates or even commences litigation against another agency would paralyze the State." Id. at *8. In Superior Performers, Inc. v. Meaike, No. 1:13CV1149, 2015 WL 471429, at *3 (M.D. N.C. Feb. 4, 2015), the court found that the plaintiffs had "control" over voicemail that was not stored on their phones. The court held that "even if a party does not physically control the evidence, the party still has an obligation to give the opposing party notice of access to the evidence or of the possible destruction of the evidence if the party anticipates litigation involving that evidence." Id. (internal quotations omitted). Further considering the limitations of control, the court in Perez v. Metro Dairy Corp., No. 13 CV 2109, 2015 WL 1535296, at *1 (E.D.N.Y. Apr. 6, 2015) (Levy, Mag. J.) addressed whether a party had control over records that had been seized pursuant to an order in another matter and therefore were no longer in its possession. Noting that defendants had stated that the records had been seized within 24 hours of the order with no opportunity to back them up, the court found no obligation to have done so. Id. at *3.   Finally, a Circuit Court confirmed that the scope of the duty to preserve is limited to documents relevant to the dispute, and a party cannot be required to preserve all documents in its possession, custody or control. In Blue Sky Travel & Tours, 2015 WL 1451636, at *8, the Fourth Circuit held that it was an abuse of discretion for the magistrate judge to have concluded that a party "had a duty to stop its document retention policies and to preserve all documents because you don’t know what may or may not be relevant." (emphasis in original) (internal quotation marks omitted). Instead, according to the court, "a party is not required to preserve all its documents but rather only documents that the party knew or should have known were, or could be, relevant to the parties’ dispute." Id. (citations omitted). Back to Top E-Discovery Cost Recovery Parties increasingly are seeking to recover a portion of their e-discovery costs pursuant to 28 U.S.C. § 1920(4), which permits the taxing of "[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case." The first half of 2015 was no exception. Although the reference in 28 U.S.C. § 1920(4) to the recovery of the costs of making "copies" is somewhat anachronistic in the digital age, courts have nonetheless applied § 1920(4) to e-discovery by way of analogy, with the issue often being what qualifies as a "copy." See Fitbug Ltd. v. Fitbit, Inc., No. 13-1418 SC, 2015 WL 2251257, at *3-4 (N.D. Cal. May 13, 2015) (discussing how a vacuum of case law interpreting § 1920(4) required courts to use analogies and that e-discovery costs were necessarily incurred in complying with the parties’ production agreement). In Colosi v. Jones Lang LaSalle Americas, Inc., 781 F.3d 293, 297 (6th Cir. 2015), the Sixth Circuit explained, "[i]maging a hard drive falls squarely within the definition of ‘copy’" and affirmed the judgment of costs in favor of a defendant employer in a wrongful termination suit. The plaintiff–in response to a court order compelling production–delivered her computer to her attorney’s office and demanded that defendant employer send a third-party vendor to image it. See id. at 298. Imaging the computer was the "sole avenue permitting review of [the plaintiff’s] files" and was analogous to the taxable "cost of a party delivering an image file in response to an opponent’s production request." See id. The Colosi court expressly distinguished Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158, 166-72 (3d Cir. 2012)–upon which the plaintiff relied in opposing the bill of costs–saying Race Tires was "overly restrictive" because it excluded all e-discovery expenses except  those associated with converting responsive documents to an agreed upon format. See Colosi, 781 F.3d at 297. Likewise, in Resnick v. Netflix, Inc. (In re Online DVD-Rental Antitrust Litig.), 779 F.3d 914, 928 (9th Cir. 2015), the Ninth Circuit affirmed the trial court’s award of e-discovery costs, including not only those costs attributable to OCR and converting documents to TIFF (see id. at 932). The court remanded claims for other categories of e-discovery costs because the requesting party’s description of those tasks was not sufficiently detailed. See id. at 930-31. Although Colosi and Resnick signal an increasing openness of the judiciary to taxing e-discovery costs, and Colosi rejected Race Tires as "overly restrictive", several courts nonetheless continue to rely upon Race Tires and follow its narrow interpretation of § 1920(4). See e.g., CSP Techs., Inc. v. Sud-Chemie AG, No. 4:11-cv-00029-RLY-WGH, 2015 WL 2405528, at *3-4 (S.D. Ind. May 20, 2015); Comprehensive Addiction Treatment Ctr., Inc. v. Leslea, No. 11-cv-03417-CMA-MJW, 2015 WL 638198, at *2 (D. Colo. Feb. 13, 2015); see also Bagwe v. Sedgwick Claims Mgmt. Servs., Inc., No. 1:11-cv-02450, 2015 WL 351244, at *5-6 (N.D. Ill. Jan. 27, 2015) (Mag. J. Young Kim). Parties and courts are also taking a more proactive, forward-looking approach to shifting e-discovery costs, raising the issue of who should pay for e-discovery before they even incur the costs. For example, in United States ex rel. Carter v. Bridgepoint Education, Inc., 305 F.R.D. 225, 247 (S.D. Cal. 2015), plaintiffs requested backup tapes that defendants argued were inaccessible because of the burden and cost in producing the tapes. Magistrate Judge William Gallo said that "[t]o obtain this ESI at the other’s expense, the requesting party must demonstrate need and relevance that outweigh the costs and burdens of retrieving and processing this provably inaccessible information." Id. at 239. After determining the backup tapes were minimally relevant and inaccessible–they were inaccessible because of the defendants’ established data retention scheme–he ordered plaintiffs to bear the cost of recovery and search, and defendants to bear the cost of production. See id. at 240-44. As Judge Gallo implicitly recognized, shifting costs before they are even incurred can encourage the parties to be more reasonable about the scope of discovery they seek. Back to Top Discovery of Social Media Reflecting that the use of social media continues to proliferate in business and social contexts, the number of cases focusing on the discovery of social media continued to skyrocket in the first half of 2015. Courts are still struggling to develop rules and protocols applicable to social media evidence, including whether special authentication rules should govern social media evidence, what threshold showing of relevance must be made before discovery of personal social media data should be allowed, when the duty to preserve social media evidence arises, what role privacy rights should play in social media discovery, and who should bear the burden of reviewing social media data. The first half of 2015 included a major shift in the law governing the authentication of social media evidence. The Court of Appeals of Maryland changed course, and "embrace[d]" the Second Circuit’s holding that "in order to authenticate evidence derived from a social networking website, the trial judge must determine that there is proof from which a reasonable juror could find that the evidence is what the proponent claims it to be."  Sublet v. State, 113 A.3d 695, 698, 718, 722 (Md. 2015) (citing U.S. v. Vayner, 769 F.3d 125 (2d Cir. 2014)). Previously in Maryland, social media evidence was admissible only if the judge was "convince[d] . . . that the social media post was not falsified or created by another user."  Griffin v. State, 19 A.3d 415 (Md. 2011). Under Sublet, the preliminary determination of authentication is made by the trial judge and is a "context–specific determination" based on proof that "may be direct or circumstantial." Id. at 715 (citing Vayner). The court noted that "[t]he standard articulated in Vayner … is utilized by other federal and State courts addressing authenticity of social media communications and postings" and "is not particularly high."  Id. at 715, 718 (citations and internal quotations omitted). The court’s decision in Sublet could very well signal the death knell of a trend wherein some courts required "’greater scrutiny’ or particularized methods for the authentication of evidence derived from the Internet due to a ‘heightened possibility for manipulation,’" (Vayner, 769 F.3d at 131 n.5 (citing Griffin)), as Griffin was the most influential of such cases. In addition, in the first half of 2015, courts continued to find that the testimony of the individual who printed a copy of a social media webpage, or prepared a memorandum summarizing information obtained from the social media account, is insufficient to authenticate social media evidence. See, e.g., Linscheid v. Natus Medical Inc., No. 3:12-cv-76-TCB, 2015 WL 1470122, at *5-6 (N.D. Ga. Mar. 30, 2015) (finding Linkedin profile page not authenticated by declaration from individual who printed the page from the Internet); Monet v. Bank of America, N.A., No. H039832, 2015 WL 1775219, at *8 (Cal Ct. App. Apr. 16, 2015) (finding that a "memorandum by an unnamed person about representations others made on Facebook is at least double hearsay" and not authenticated). Courts also continue to hold that "the fact that the information [sought] is in an electronic file as opposed to a file cabinet does not give [the party seeking discovery] the right to rummage through the entire file." Silva v. Dick’s Sporting Goods, Inc., No. 3:14cv580 (WWE)(WIG), 2015 WL 1275840, at *1-2 (D. Conn. Mar. 19, 2015) (Garfinkel, Mag. J.) (refusing defendant’s request for copies of all of plaintiff’s Facebook communications, many of which plaintiff argued were not relevant to the claims and defenses involved in the dispute) (citations and quotations omitted); see also Cummings v. Bost, Inc., No. 2:14–CV–02090, 2015 WL 1470137, at *9 (W.D. Ark. Mar. 31, 2015) (refusing defendant’s request for access to plaintiff’s Facebook account because the request was "rooted in pure speculation"). As with more traditional forms of evidence, the party seeking discovery of social media "must establish a factual predicate for [the] request by identifying relevant information in [the social media] account, such as information that contradicts or conflicts with plaintiff’s alleged [claims]."  Gonzalez v. City of New York, 47 Misc. 3d 1220(A), 2015 WL 2191363, at *1 (N.Y. Sup. May 4, 2015) (citations and quotations omitted). One court took a novel approach to the establishment of a factual predicate, ordering plaintiff to produce a sample of plaintiff’s Facebook activity limited to specific references to plaintiff’s emotional distress claims and any related treatment. Caputi v. Topper Realty Corp., No. 14–cv–2634(JFB)(SIL), 2015 WL 893663, at *8 (E.D.N.Y. Feb. 25, 2015). The court held that the defendants could review this sample and use it to put forth a factual predicate to obtain additional discovery from plaintiff’s Facebook account information. Id. Once a factual predicate has been established, as with other forms of evidence, most courts only grant discovery of social media evidence that is relevant to the issues involved in the case. In Gonzalez, defendant demonstrated that photographs and comments posted by plaintiff regarding his injuries and the accident in question established that "discovery of plaintiff’s social media account will lead, or may reasonably be calculated to lead, to relevant evidence bearing on plaintiff’s claims."  2015 WL 2191363 at *2. Accordingly, the court ordered discovery of materials on plaintiff’s social media accounts relevant to plaintiff’s claims and injuries, but denied defendant’s request to access any other social media information. Id. See also In re Milo’s Kitchen Dog Treats Consol. Cases, No. 12–1011, 2015 WL 1650963, at *1-5 (W.D. Pa. Apr. 14, 2015) (refusing defendant’s request for "unfettered access to [p]laintiff’s Facebook data" where plaintiff had already provided relevant information from Facebook account); Spearin v. Linmar, L.P., 2015 WL 3678163 at *1 (N.Y. App. Div. June 16, 2015) (granting discovery of social media evidence relevant to alleged injuries only). Another continuing theme in the first half of 2015 was the extent to which parties have an obligation to preserve social media during litigation, and whether the modification of social media constitutes sanctionable spoliation. Because social media is dynamic, account holders may delete information from their page or cancel their account altogether, without realizing that the information could be relevant to an anticipated or pending matter. In addition, information can be deleted from a post by other users who do not have a duty to preserve evidence. In determining whether to award sanctions for spoliation of social media, courts have focused on a variety of factors, including whether the users had a duty to preserve their account at the time the evidence was deleted, and whether the users deleted the social media data to hide adverse evidence. In D.O.H. v. Lake Central School Corp., plaintiff admitted to deleting some relevant information from his Facebook account prior to the court order requiring preservation of evidence, and admitted that he may also have deleted some posts after the order was issued. No. 2:11–cv–430, 2015 WL 736419, at *8-10 (N.D. Ind. Feb. 20, 2015) (Rodovich, Mag. J.) (considering spoliation sanctions for deletion of posts and comments from Facebook). The court found that plaintiff had a duty to preserve evidence starting when he knew litigation was imminent, and thus the evidence was spoliated. Id. at *10. The court held, however, that an adverse inference sanction was not warranted, as plaintiff did not delete the information in bad faith to hide adverse evidence. Id. The court noted that it was likely plaintiff deleted some "vulgar comments to avoid embarrassment or further harassment," and that it was possible third party users, not plaintiff, had deleted their own comments on plaintiff’s Facebook page. Id. A frequently litigated issue regarding the discovery of social media is the role of traditional privacy rights in protecting those new methods of personal expression. In the first half of 2015, most courts continued to find that individuals generally do not have a reasonable expectation of privacy, regardless of activated privacy settings, in the information they submit to social networking sites. See Nucci v. Target Corp., 162 So.3d 146, 153-55 (Fla. Dist. Ct. App. Jan. 7, 2015) (finding no reasonable expectation of privacy in social media accounts because "[b]y creating a Facebook account, a user acknowledges that her personal information would be shared with others. Indeed, that is the very nature and purpose of these social networking sites else they would cease to exist.") (internal citations and quotations omitted); In re Milo’s Kitchen, 2015 WL 1650963, at *3 (holding "there is no reasonable expectation of privacy in information posted on Facebook and … making a Facebook page ‘private’ does not shield it from discovery if the information sought is relevant"). At least one court found, however, that there is "a reasonable expectation of privacy attached to the one-on-one messaging option that is available through Facebook accounts" and thus granted discovery of plaintiff’s Facebook postings, comments, videos, and photographs, but not private messages sent or received by plaintiff. Melissa G v. North Babylon Union Free School Dist., 6 N.Y.S.3d 445, 449 (N.Y. Sup. Ct. 2015); see also Cummings, 2015 WL 1470137, at *9 (refusing defendant’s request for access to plaintiff’s Facebook account in part because it "would allow a substantial intrusion into [plaintiff’s] privacy for which [defendant] has failed to provide a sufficient justification"). The question of who should bear the burden of review has become more important as the volume and costs of electronic discovery increase. In the first half of 2015, most courts continued to require the account holder to gather and review data from social networking accounts, and provide it directly to the defendant, as typically "counsel for the producing party is the judge of relevance in the first instance" for discovery matters. Melissa G, 6 N.Y.S.3d at 447-49 (ordering plaintiff’s counsel to review plaintiff’s Facebook postings and produce those relevant to plaintiff’s damages claim, as "there [was] no basis to believe that plaintiff’s counsel [could not] honestly and accurately perform the review function") (internal citations omitted). A small minority of courts, however, conduct an in camera review of the social media content being sought. Some courts have chosen this method of review to resolve disputes regarding whether certain communications on social media accounts are privileged. See, e.g., In re Milo’s Kitchen, 2015 WL 1650963, at *1-5 (ordering plaintiff to produce social media evidence for in camera inspection so the court could review for privilege). Other courts have chosen in camera review for social media data because social media accounts "may contain material of a private nature that is not relevant." Gonzalez, 2015 WL 2191363, at *1-2 (holding that "the Supreme Court should conduct an in camera inspection of all status reports, e-mails, photographs, and videos posted on the plaintiff’s social media accounts since the date of the accident to determine which of those materials, if any, are relevant to the alleged claim and injuries"); see also Spearin, 2015 WL 3678163 at *1 (overturning lower court’s order requiring plaintiff to provide defendant access to his entire Facebook account, and remanding for an in camera review of plaintiff’s Facebook account instead). By contrast, other courts have acknowledged that social media accounts could contain "embarrassing" content, but have allowed its discovery and refused to preclude it from evidence, reserving the discretion to later exclude the evidence at trial pursuant to Federal Rule of Evidence 611, which allows a court to control the examination of witnesses and presentation of evidence to protect witnesses from harassment and undue embarrassment. See Newill v. Campbell Transp. Co., Inc., 2015 WL 267879, *1-2 (W.D. Pa. Jan. 14, 2015) (refusing to preclude the defendant from introducing several of the plaintiff’s Facebook postings into evidence because they were embarrassing to plaintiff). Back to Top Government Investigations Courts continue to grapple with how to apply e-discovery concepts to governmental investigations. In a number of decisions during the first half of 2015, courts have sought to balance Fourth Amendment rights with the opportunities for discovery created by the Stored Communications Act (SCA), 18 U.S.C. §§ 2700 et. seq,, which permits access to the files of technological intermediaries, such as Internet service providers and cell phone providers.  Notably, in the first half of 2015, the Eleventh Circuit joined several other courts in holding that the Government’s receipt of a robbery suspect’s historical cell tower records pursuant to the SCA does not violate a defendant’s Fourth Amendment rights, even if the information is obtained without a search warrant and its requisite showing of probable cause, as long as the Government complies with the SCA. United States v. Davis, 785 F.3d 498 (11th Cir. 2015).  See also, e.g., In re Application of the United States for Historical Cell Site Data, 724 F.3d 600 (5th Cir. 2013) (holding in a 2-1 opinion that historical cell site records under the SCA did not "categorically" violate the Fourth Amendment); In re United States For An Order Directing Provider Of Electronic Communication Service To Disclose Records, 620 F.3d 304 (3d Cir. 2010) (approving constitutionality of § 2703(d)); United States v. Epstein, CR No. 14-287 (FLW), 2015 WL 1646838 (D.N.J. Apr. 14, 2015); United States v. Dorsey, No. CR 14-328-CAS, 2015 WL 847395, at *6-8 (C.D. Cal. Feb. 23, 2015); United States v. Lang, No. 14 CR 390, 2015 WL 327338, at *3-4 (N.D. Ill. Jan. 23, 2015) (collecting cases); United States v. Shah, No. 5:13-cr-328-FL, 2015 WL 72118 (E.D. N.Ca. Jan. 6, 2015) (holding that there is no Fourth Amendment right to protection against government’s access of cell phone location data from cell company or of user’s IP addresses used to access Facebook); but see United States v. Cooper, No. 13-cr-00693, 2015 WL 881578 (N.D. Cal. Mar. 2, 2015) (coming to the opposite conclusion with respect to historical cell tower record information). Considering the Supreme Court’s decisions in United States v. Miller, 425 U.S. 435, 437-38 (1976), where the Court held that the defendant had no Fourth Amendment interest in his bank account records because they were also the bank’s business records, the Eleventh Circuit reasoned in Davis that the defendant did not own or possess the mobile phone company’s business records. Davis, 785 F.3d at 511. "Instead those cell tower records were created by Metro PCS, stored on its own premises, and subject to its control. Cell tower locations do not contain private communications of the subscriber. This type of non-content evidence, lawfully created by a third-party telephone company for legitimate business purposes, does not belong to [the defendant], even if it concerns him." Id. In addition, the Eleventh Circuit considered the Supreme Court’s decision in Smith v. Maryland, 442 U.S. 735, 742-46 (1979), where the Court held that telephone users have no reasonable expectations of privacy in dialed telephone numbers recorded through pen registers and contained in the third-party telephone company’s records. Similar to Smith, the Eleventh Circuit concluded the defendant had no "subjective or objective reasonable expectation of privacy in MetroPCS’s business records showing the cell tower locations that wirelessly connected his calls at or near the time of the … robberies." Id. At least some courts have taken the same approach to governmental tracking and monitoring of an individual’s cell phone data.  The Northern District of Mississippi held that there is no reasonable expectation of privacy in prospective cell phone tower data (i.e., where permission to collect the data is sought prospectively, rather than after the fact), and the court held that the government could actively track and monitor cell phone data. In re the Application of the U.S. for an Order for Authorization to Obtain Location Data Concerning an AT&T Cellular Telephone, — F. Supp. 3d —-, No. 3:15MC3, 2015 WL 184276, at *5-6 (N.D. Miss. Mar. 30, 2015) (reviewing cases and holding that in light of the "clearly binding Fifth Circuit precedent" that "there is no reasonable expectation of privacy in historical cell phone data," there is similarly no reasonable expectation of privacy in prospective cell phone data as the court "doubt[ed] that prospective cell phone data [was] sufficiently different from historical cell phone data to warrant a different result"). But this decision appears to be at odds with a number of other courts, which have required the government to show probable cause to track and monitor cell phone usage of a suspect. See, e.g., United States v. Cooper, No. 13-cr-00693-SI-1, 2015 WL 881578, at *4-5 (N.D. Cal. Mar. 2, 2015) (collecting cases); Dorsey, 2015 WL 847395, at *9 (citing United States v. Espudo, 954 F. 3d 1029, 1035 (S.D. Cal. 2013) (collecting cases)) (finding that "a majority of courts have taken the position that the government must make a showing of probable cause to acquire ‘real-time’ or ‘prospective’ cell site location data").. Courts have also permitted the government to expansively use the SCA to apprehend suspects, rather than simply to gather evidence.  For example , in In the Matter of Application for Cell Tower Records under 18 U.S.C. § 2703(D), — F. Supp. 3d —-, No. H-15-136M, 2015 WL 1022018 (S.D. Tex. Mar. 9, 2015), the Southern District of Texas issued an order under the SCA for a literal "dump" of cell phone record information from seven different cell phone service providers, which the government had requested in order to "identify the particular device used by the suspect and any confederates, and ultimately to enable their capture and arrest." The Government filed an application under § 2703(d) of the SCA for "an order compelling seven different cell phone service providers to release historical cell tower data for specific towers providing service to a crime scene within Houston city limits at the hour of the crime." Id. at *1. As the Court put it, the request was "unusual" because unlike most account record requests under the SCA, the "targeted account [was] not specified." Id. Keeping with this expansive approach in the context of governmental investigations, a court in the Eastern District of New York concurred with the holdings of other courts in other districts that, pursuant to the SCA, a judge may issue a warrant for the production of email evidence stored in a district other than the one in which he or she sits. United States v. Scully, No. 14-CR-208(ADS), — F.3d —- (E.D.N.Y. June 8, 2015); see also, e.g., United States v. Berkos, 543 F. 3d 392 (7th Cir. 2008) (holding that § 2703(a) permits the issuance of warrants for electronic evidence stored outside of the issuing district); United States v. Kernell, No. 3:08-CR-142 (CCS), 2010 WL 1408437 (E.D. Tenn. Apr. 2, 2010), report and recommendation adopted, No. 3:08-CR-142 (TWP), 2010 WL 1491831 (E.D. Tenn. Apr. 13, 2010) (same); United States v. Noyes, No. 1:08-CR-55 (SJC), 2010 WL 5139859, at *9 n.8 (W.D. Pa. Dec. 8, 2010) (same). In Scully, the defendant filed a motion to suppress email evidence produced by Yahoo pursuant to a search warrant issued by Judge Wall in the Eastern District of New York, arguing that the search warrant violated Federal Rule of Criminal Procedure 41 and § 2703 of the SCA because the emails were stored in California and "a judge in one district cannot issue a search warrant for property located in another district." Id. at *11. After an extensive examination of the relevant rules, statutes, legislative history, and precedent, the Court in Scully held that the search warrants did not violate the Rule 41 or the SCA, and that a court in one district may issue a search warrant for electronically stored information stored in another district. Id. at *20. One limitation that courts seem to put on government investigations into files maintained by ISPs and other similar intermediaries is that courts are reluctant to burden the intermediaries with the obligation to sift through voluminous information and identify the responsive/relevant data.  In one example, the District of Alaska determined that requiring an ISP to perform a review of email evidence for relevance is unduly burdensome. In re the Matter of the Search of Google Email Accounts, No. 14-mj-00352, — F. Supp. 3d —-, 2015 WL 1650879 (D. Alaska Apr. 13, 2015). The Court issued a search warrant that "directed Google to provide the government with email correspondence from six Gmail accounts that were exchanged during brief periods of time these accounts were used to respond to Craigslist advertisements posted by [Redacted poster] @yahoo.com that solicited sexual encounters with minors." Id. at *1. Google resisted the warrant because it "required Google to inspect email content for relevancy and evidentiary value," that is, emails relating to the solicitation of sex with minors, and Google contended "that it is not competent to perform such an analysis, and requiring it to do so is unfair and unduly burdensome." Id. at *2. The Court "readily" agreed, and "absolve[d] Google from any responsibility to review email content when responding to the warrant," and specifically for "relevance and for evidentiary value."  Id. at *2-5.. Back to Top Vendor Developments We are seeing some very positive–and also some rather negative–developments in the e-discovery services (aka vendor) market. The best vendors are providing an array of powerful technologies–such as predictive coding, visual analytics and machine translation–along with consistently high-quality professional services to ensure that these tools are used effectively and defensibly. Some vendors are also beginning to provide more straightforward and simplified pricing, in lieu of the complex à la carte pricing of the past. Until recently, vendors typically charged separately for the use of technologies such as predictive coding, analytics and even e-mail threading–often at expensive rates–making use of these technologies impractical. We are now seeing some vendors, particularly those that have developed their own applications and therefore do not have to pass on licensing fees from separate software vendors (allowing them pricing flexibility), more frequently bundling these technologies in a single technology fee. When this bundling is priced reasonably, which we are also seeing, the use of predictive coding, analytics and other technologies that make search and review more efficient can more often be a viable option than in the past. Some vendors are investing considerable resources to educate their existing and potential clients about the e-discovery process through white papers, webinars, seminars and blogs. Of course, some materials and programs are more sales pitch than real education. But the better materials can add significant value. On the negative side, the market for e-discovery services remains immature. We continue to see a dizzying array of e-discovery service providers vying for market share, with ever lower barriers to entry, and a market that often appears ill-equipped either to distinguish among them or to evaluate the quality of their services, technology or pricing. Vendors that provide both cutting-edge technology and outstanding professional services appear to be a relatively rare find, as those that excel in one area too often fall short in the other. Consistency also remains an issue. Finding a vendor that consistently provides excellent service across matters and over time can seem like prospecting for gold: a lot of work and often disappointing results. In the fog of this environment, some vendors with inferior technology and limited professional services are nevertheless able to demand premium pricing. Sales tactics have grown increasingly aggressive, with direct sales calls to individual (often inexperienced) lawyers at firms and companies, and enticements being offered in exchange for attending demos. One of the more troubling new developments has been some vendors’ attempts to, in effect, "consumerize" e-discovery–i.e., to sell e-discovery software as a service (SaaS) directly to end users (e.g., individual lawyers) much like an app, with little or no professional services component involved. The origins of this consumerization movement may be traceable to some major vendors’ cloud-based e-discovery offerings. Vendors offering these cloud-based e-solutions typically target law firms and companies with professional litigation support staff with the skills to manage complex projects and execute difficult tasks. The consumerization approach, by contrast, directly targets individual lawyers and rests on a sales pitch that implies e-discovery is easy. The problem is that all too often, even with the best technology, it isn’t, and the risks and consequences of failure, as always, remain great (see our sanctions discussion above). Back to Top Federal Rule Amendments For those old enough to remember, there’s a scene in the film Monty Python and the Holy Grail in which Sir Lancelot is seen charging across a field to attack a castle. The camera pans back and forth between two guards posted at the front of the castle and Lancelot, who each time is still where he started, endlessly charging forward but getting nowhere. The drawn-out process to implement a second round of e-discovery related amendments to the Federal Rules of Civil Procedure (the first round was in 2006) has, at times, felt a lot like that scene. It started with the Civil Rules Advisory Committee’s Duke Litigation Review Conference in 2010, followed by a series of public meetings and a "Mini-Conference" in 2011, after which the Committee in August 2013 released a set of proposed rule amendments for public comment. After the public comment period, which included 120 testifying witnesses and over 2,300 written comments, the Discovery Subcommittee of the Civil Rules Advisory Committee submitted a revised proposal, which the Civil Rules Advisory Committee adopted in April 2014. The Judicial Conference approved the proposed amendments on September 16, 2014, and forwarded them to the Supreme Court, which adopted them on April 29, 2015, and sent them to Congress. Absent Congressional action, the proposed amendments will become effective on December 1, 2015. The proposed amendments affect Federal Rules of Civil Procedure 1, 4, 16, 26, 30, 31, 33, 34, 37, 55 and 84. The most significant for e-discovery purposes are the proposed amendments to Rules 37(e) (sanctions), 1 (cooperation) and 26(b)(1) (proportionality and scope of discovery). Sanctions for Failure to Preserve ESI (Rule 37(e)) The most anticipated of the proposed amendments is that to Rule 37(e), which will govern the imposition of sanctions for failures to preserve electronically stored information that a party had a duty to preserve. The amendment is primarily intended to address inconsistencies in the level of culpability courts have applied in imposing the most serious sanctions, such as case termination or an adverse inference instruction, and the perceived unfairness of sanctioning a party that has acted reasonably yet some ESI has nevertheless been lost. It also seeks to address the problem of over-preservation–i.e., parties preserving too much information because of fears of harsh or case-terminating sanctions. The proposed amendment provides: "If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court: (1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or (2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may: (A) presume that the lost information was unfavorable to the party; (B) instruct the jury that it may or must presume the information was unfavorable to the party; or (C) dismiss the action or enter a default judgment." The Advisory Committee Note states that by specifying the measures that a court may employ if ESI is lost and the findings it must make, the proposed amendment to Rule 37(e) "forecloses reliance on inherent authority or state law to determine when certain measures should be used." See Advisory Committee Note at 38. The proposed amendment creates a safe harbor if a party acted reasonably to preserve ESI. See Thomas Y. Allman, Thoughts on the 2015 Amendments to Federal Rule of Civil Procedure 37(e), 15 Digital Discovery & e-Evidence 245 (June 11, 2015). If a party demonstrates that it took "reasonable steps" to preserve, no sanctions or other remedies are available under the proposed rule, even if ESI was lost. The Committee Note expressly states that "[b]ecause the rule calls only for reasonable steps to preserve, it is inapplicable when the loss of information occurs despite the party’s reasonable steps to preserve." See Advisory Committee Note at 41. Significantly, the Committee Note also expressly encourages to courts to consider proportionality in determining whether a party’s preservation efforts were reasonable. Recognizing that "aggressive preservation efforts can be extremely costly," the Note states that "[a] party may act reasonably by choosing a less costly form of information preservation, if it is substantially as effective as more costly forms."  Id. at 42. Only if a party has failed to take reasonable steps to preserve ESI that should have been preserved, and the information is lost as a result, then the proposed amendment provides that the focus should be on whether the lost information can be restored or replaced through additional discovery. If the information is restored or replaced, no further measures should be taken. The Committee Note states that "[a]t the same time, it is important to emphasize that efforts to restore or replace lost information through discovery should be proportional to the apparent importance of the lost information to claims or defenses in the litigation. For example, substantial measures should not be employed to restore or replace information that is marginally relevant or duplicative." See id.  If the lost ESI cannot be restored or replaced through additional discovery, the court must find that the other party has been prejudiced before imposing any curative measures or sanctions. According to the Committee Note, "[a]n evaluation of prejudice from the loss of information necessarily includes an evaluation of the information’s importance in the litigation." Id. at 43. Once a finding of prejudice is made, only then is the court authorized to employ measures "no greater than necessary to cure the prejudice." Id. The court may impose specified very severe measures–i.e., an adverse inference or a case terminating sanction–only if the court finds that the party acted with the intent to deprive the other party of the information’s use in the litigation. Given the December 1, 2015 effective date for the proposed rule amendments, we likely will not know until at least mid-2016 (or later) whether the amendment to Rule 37(e) appears to be fulfilling its goals in practice and can bring more fairness to the e-discovery sanctions area. One important area that it does not address is the trigger for the duty to preserve, for which there is a split in the courts. In the Seventh Circuit, such a duty is triggered only when litigation is "imminent." Everywhere else, it is triggered where courts find that litigation was "reasonably foreseeable." Cooperation (Rule 1) The proposed amendment to Rule 1 was originally crafted to require cooperation among the parties, but that language was dropped relatively early on out of concerns that it would only spawn tangential disputes regarding whether parties were being sufficiently cooperative. In its final proposed form, amended Rule 1 provides that the rules of civil procedure would not only be "construed and administered" (the current language) but also "employed by the court and the parties" to secure the just, speedy, and inexpensive determination of every action and proceeding. The concept of cooperation still made it into the Committee Note that accompanies the proposed amendment, which states that "effective advocacy is consistent with – and indeed depends upon – cooperative and proportional use of procedure." See Committee Note at 1-2. Proportionality and the Scope of Discovery (Rule 26(b)(1)) The amendment to Rule 26(b)(2)(C)(iii) moves the proportionality factors from Rule 26(b)(2)(C)(iii) to Rule 26(b)(1). As amended, Rule 26(b)(1) would permit a party to obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense "and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit." The intended effect of this reorganization is to strengthen the concept of proportionality in courts’ consideration of the permissible scope of discovery. The Committee Note states that the movement of the proportionality factors from Rule 26(b)(2)(C)(iii) to Rule 26(b)(1) "restores" them "to their original place in defining the scope of discovery" and "reinforces" the "obligation of the parties to consider" them "in making discovery requests, responses or objections." See Committee Note at 19. Back to Top International E-Discovery Developments The cross-border transfer and disclosure of information remains a hot topic in e-discovery in Europe and the Asia Pacific region. Adequacy of US-EU Safe Harbor Program Challenged On March 24, the European Court of Justice (ECJ) heard arguments in a case challenging the US-EU Safe Harbor Framework, which allows certified US companies to send personal data outside Europe if they meet certain European Union requirements. In Maximillian Schrems v. Data Prot. Comm’r, activist Max Schrems argued that the Irish Data Protection Agency (DPA) did not properly investigate his claims that Facebook violated European data privacy rules by transferring European users’ data to US-based servers, making the data accessible to the National Security Agency for its PRISM program. The Irish DPA rejected Schrems’ claim without further investigation because of Facebook’s Safe Harbor certification. Schrems sued the DPA in the Irish High Court, which referred his case to the ECJ. The ECJ must decide whether the Irish DPA was correct in relying on Facebook’s Safe Harbor status, or whether the Safe Harbor Framework does not at present ensure adequate data privacy protection for European citizens’ data. At the March argument, the European Commission defended the Framework. The Commission conceded that at present there is no guarantee that EU citizens’ data will be adequately protected, but emphasized that the Safe Harbor Framework is important for maintaining political and economic ties to the United States and US-based companies. In the meantime, the Safe Harbor Framework is in the process of being amended to increase transparency and more actively enforce compliance, though the US and EU negotiators have yet to reach an agreement on the terms of the amendments. Cross-Border Transfer and Disclosure of Information Remains a Hot Topic in the Asia Pacific Region Cross-border transfer and disclosure of information remains a hot topic in the Asia-Pacific region. "Data localization laws"–laws mandating that certain industries store data within a country’s borders–such as China’s State Secret laws are of particular concern to companies.  In the case of China, the law prohibits the export of electronic data concerning "state secrets," a term that is defined broadly by statute and by Chinese enforcement authorities implementing the laws. Notably, a 2014 Hong Kong decision interpreting the law ruled that it does not amount to a blanket prohibition against cross-border data transfers. Despite this, the broad scope of the law and harsh penalties levied for violations have increasingly led companies to keep their data in China, and to rely on mainland Chinese law firms to assist with handling of data and document review. Back to Top Conclusion We’re off to a fast start in e-discovery this year. Look out for our articles, client alerts and our year-end update in January 2016.       Gibson Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The Electronic Discovery and Information Law Practice Group brings together lawyers with extensive knowledge of electronic discovery and information law.  The group is comprised of seasoned litigators with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world.  The group’s lawyers work closely with the firm’s technical specialists to provide cutting-edge legal advice and guidance in this complex and evolving area of law.  For further information, please contact the Gibson Dunn lawyer with whom you usually work or the following leaders of the Electronic Discovery and Information Law Practice Group: Gareth T. Evans – Orange County (949-451-4330, gevans@gibsondunn.com)Jennifer H. Rearden – New York (212-351-4057, jrearden@gibsondunn.com) G. Charles ("Chip") Nierlich – San Francisco (415-393-8239, gnierlich@gibsondunn.com) © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 1, 2016 |
2015 Year-End Update on Class Actions

For both courts and litigants alike, class actions continued to dominate the litigation landscape in 2015.  By most accounts, companies are facing greater-than-ever monetary and reputational exposure from these lawsuits.  A recent survey of several hundred corporations reported that 54% of all major companies are currently engaged in class litigation, that the number of "bet the company" matters–valued at tens of billions of dollars or more in exposure–more than tripled in the last four years, and that companies dedicated 10% of their entire litigation spend on defending class actions.[1]  It is likely not a coincidence that during this same four-year period between 2011 and 2015, the U.S. Supreme Court issued monumental decisions, such as Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend, which left lower courts grappling with how to interpret and apply the new, more stringent rules governing the class action device.  The Supreme Court’s trend of increased scrutiny of class actions continued this past year, with the Court agreeing to consider five significant issues that affect class litigation (and a sixth may be on the horizon for 2016).  This represents an important shift–from the birth of the modern version of the opt-out damages class action in 1966 until 2000, there were eight key Supreme Court decisions construing Rule 23.[2]  In just the last five years, there have been thirteen Supreme Court opinions on issues of significance to class action practitioners, with several more on the way in 2016.  Likewise, lower appellate courts continued to address important class action issues in the last year–including sharpening the requirements for class certification, clarifying federal jurisdiction under the Class Action Fairness Act ("CAFA"), and grappling with the enforceability of arbitration agreements. This update provides an overview and summary of the key cases and trends we have observed in 2015.  Part I discusses the five class action cases that the Supreme Court has or will decide in the October 2015 Term:  Campbell-Ewald Co. v. Gomez (whether an unaccepted Rule 68 offer moots a plaintiff’s claim); Tyson Foods, Inc. v. Bouaphakeo (use of statistical sampling); Spokeo, Inc. v. Robins (whether a mere statutory violation can confer Article III standing); DIRECTV, Inc. v. Imburgia (preemption of state-law rules invalidating class arbitration waivers); and Microsoft Corp. v. Baker (appellate jurisdiction over orders denying class certification).  Part II addresses a few of the recent high-profile defense victories in class action jury trials, which should concern the plaintiffs’ bar.  Part III discusses the implied Rule 23 requirement of ascertainability, and the burgeoning circuit split that may lead to Supreme Court review in the next Term.  Part IV covers several noteworthy decisions from the Ninth Circuit last year on CAFA jurisdiction, including both removal-friendly rulings and decisions that strengthened the ability of plaintiffs to avoid federal jurisdiction.  I.    The Supreme Court Continues Its Increased Focus on Class Actions During the October 2015 Term, the Supreme Court will again address important class action issues, including Article III standing and mootness, the use of statistical sampling and extrapolation to adjudicate class claims, the enforceability of class waivers in arbitration agreements, and appellate jurisdiction over orders denying class certification.  A.    Unaccepted Rule 68 Settlement Offers and Mootness (Campbell-Ewald Co. v. Gomez) In Campbell-Ewald Co. v. Gomez, No. 14-857 (U.S. Jan. 20, 2016), the Supreme Court held in a 6-3 decision that an unaccepted settlement offer (including an offer pursuant to Federal Rule of Civil Procedure 68)–even an offer of complete relief–does not moot a plaintiff’s claim under Article III of the U.S. Constitution.  The Court did not completely close the door to this tactic, however, as it explained that an offer accompanied by proof that the defendant would pay the full amount could moot a plaintiff’s claim. Plaintiff Gomez alleged he received unsolicited text messages from the United States Navy (through its vendor, Campbell-Ewald) in violation of the Telephone Consumer Protection Act ("TCPA").  Campbell-Ewald offered Gomez just over the maximum amount of the statutory penalty to which he claimed he was entitled, but Gomez declined.  The Ninth Circuit held that this rejected settlement offer did not moot a plaintiff’s claims. In an opinion issued on January 20, 2016, the Supreme Court affirmed.  Writing for the majority, Justice Ginsburg adopted the position of Justice Kagan’s dissent in Genesis Healthcare Corp. v. Symczyk,133 S. Ct. 1523 (2013), that "[a]n unaccepted settlement offer–like any unaccepted contract offer–is a legal nullity, with no operative effect."  Campbell-Ewald, slip op. at 7 (quoting Genesis Healthcare, 133 S. Ct. at 1533). Each of the opinions–the majority, a concurrence by Justice Thomas, and separate dissents (by Chief Justice Roberts and Justice Alito)–noted the possibility that another settlement offer could moot a plaintiff’s claim.  Justice Ginsberg explained that the Court did not need to decide whether a claim would be moot if "a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount."  Id. at 8.  In his concurring opinion, Justice Thomas suggested that "further steps" beyond an offer to pay, such as actually making payment, could moot a claim.  Id. at 12 (Thomas, J., concurring).  Chief Justice Roberts’s dissent also suggested that the majority might have reached a different result if "Campbell had deposited the offered funds with the District Court," id. at 18 (Roberts, C.J., dissenting), and Justice Alito’s separate dissent added that the majority opinion does not "prevent a defendant who actually pays complete relief–either directly to the plaintiff or to a trusted intermediary–from seeking dismissal on mootness grounds," id. at 20 (Alito, J., dissenting). Like Genesis Healthcare, the Campbell-Ewald decision missed an opportunity to bring finality to the use of Rule 68 offers to moot class claims, and courts will now be left to explore this unsettled issue in 2016 and beyond. B.    Using Statistical Sampling and Extrapolation to Adjudicate Class Actions (Tyson Foods, Inc. v. Bouaphakeo) In Tyson Foods, Inc. v. Bouaphakeo, the Supreme Court will decide whether the proof of individualized issues in a class action or collective action under the Fair Labor Standards Act ("FLSA") can be replaced with extrapolation from the claims of a statistical sample of the class.  The Supreme Court previously (and unanimously) rejected the use of "Trial by Formula" in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011).  But in Tyson, plaintiffs argued that a statistical sampling approach in FLSA cases is permitted under Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946), which adopted a burden-shifting framework for proving damages under the FLSA if an employer has failed to keep proper and accurate records.  Tyson also presents an opportunity to resolve a long-simmering circuit split regarding whether the named plaintiffs or all absent class members must have Article III standing, which we discussed last year.[3] During oral argument on October 10, 2015, plaintiffs’ counsel relied heavily on Mt. Clemens, while Tyson’s counsel argued that this decision did not authorize the extrapolation-based method, and that this approach to classwide adjudication masked individualized issues (including the lack of injury to many class members) and was impermissible under both Dukes and Rule 23 itself. The outcome of Tyson could be significant for all defendants, at least insofar as the Court does not limit its decision to FLSA claims and Mt. Clemens.  A broad endorsement of procedural shortcuts would run counter to Dukes‘ prohibition of "Trial by Formula" and the "rigorous analysis" required at the class certification stage.  Moreover, the Court has an opportunity to resolve a circuit split regarding Article III standing of absent class members and to stem the tide of "no injury" class actions.  These cases have been on the rise again, and they expose companies to the threat of enormous damages or penalties even where a significant percentage of the class is indisputably unaffected by the challenged practice.  The most pervasive form of this lawsuit is discussed in the next section–"no injury" class actions based on the violation of federal statutes that authorize large statutory penalties. C.    Injury-in-Law vs. Injury-in-Fact (Spokeo, Inc. v. Robins) In Spokeo, Inc. v. Robins, the Supreme Court will decide whether the mere violation of a federal statute can create an injury-in-fact sufficient to create standing under Article III, even if the plaintiff has not suffered any concrete, real-world injury.  The Court previously granted certiorari on this same question in 2011, but dismissed the writ as improvidently granted without addressing the merits.  See First Am. Fin. Corp. v. Edwards, 132 S. Ct. 2536 (2012) (per curiam). Plaintiff Robins alleged that Spokeo, a website operator that provides information about individuals, published false information about him in violation of the Fair Credit Reporting Act ("FCRA").  The district court dismissed the case for lack of standing, because the allegedly false information actually benefited Robins as a job applicant by overstating his qualifications and income.  The Ninth Circuit reversed, holding that alleged violations of a consumer’s statutory rights under the FCRA are sufficient to satisfy the Article III injury-in-fact requirement.  Robins v. Spokeo, Inc., 742 F.3d 409, 413–14 (9th Cir. 2014).  The Ninth Circuit expressly declined to consider whether Robins satisfied the injury-in-fact requirement based on his alleged diminished employment possibilities and resulting anxiety (which were counterintuitive in any event).  Id. at 414 fn.3. The Court granted review to decide whether Congress may confer Article III standing upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute. During oral argument on November 2, 2015, Plaintiff’s counsel argued that Robins suffered a real-world injury when Spokeo published false information about him, and that this alleged injury to his statutory rights was sufficient to confer Article III standing.  Spokeo argued that Supreme Court precedent and constitutional principles require a concrete, real-world–not merely legal–harm.  The outcome of Spokeo will be significant for companies in many industries (including in the telecommunications, financial and consumer services, and technology sectors) that are under assault with "no injury" claims asserting violations of federal statutes that permit large statutory damages without requiring proof of actual injury–such as FCRA, the Truth in Lending Act, the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, and the federal Wiretap Act.  D.    Reaffirming Concepcion‘s Rejection of State-Law Rules Disfavoring Arbitration (DIRECTV, Inc. v. Imburgia) This year continued the recent trend of the Supreme Court’s nearly annual foray into the enforcement of arbitration agreements and class action waivers governed by the Federal Arbitration Act ("FAA") in putative class actions.  In 2010, the Supreme Court held in Stolt-Nielsen S.A v. AnimalFeeds International Corp., 559 U.S. 662 (2010), that "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."  Id. at 684.  The next year, the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the FAA preempts state laws, such as California’s Discover Bank rule, that stand as an impediment to enforcing commercial class arbitration waivers.  Id. at 356–51.  And in 2013, the Supreme Court held in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), that a class action waiver is enforceable, even if the plaintiffs contend that class action procedures are necessary to effectively prosecute claims arising under other federal statutes.  Id. at 2309–11. The Supreme Court this year again ordered enforcement of another arbitration agreement in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015).  In a 6–3 decision written by Justice Breyer, the Court explained that, although AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), was a "closely divided case"–indeed, one in which Justice Breyer had dissented–it nonetheless constitutes "authoritative" law and therefore "the judges of every State must follow it."  DIRECTV, 136 S. Ct. at 468.  The arbitration clause at issue in DIRECTV was drafted before Concepcion, at a time when California courts were invalidating class arbitration waivers as a matter of California public policy.  The arbitration clause thus had a provision that invalidated the entire arbitration provision if the agreement’s class waiver was held to be "unenforceable" under the "law of your state."  The Ninth Circuit specifically held that DIRECTV’s "arbitration agreement is enforceable under Concepcion."  Murphy v. DIRECTV, Inc., 724 F.3d 1218, 1228 (9th Cir. 2013).  But in an identical case filed in state court, the California Court of Appeal voided the entire agreement after interpreting the phrase "law of your state" to include even California law that had been held invalid under federal law, such as the now-preempted rule against class waivers.  Imburgia v. DIRECTV, 225 Cal. App. 4th 338, 346 (2014) ("We find the analysis in Murphy unpersuasive.").  As the Supreme Court described it, the California appellate court reasoned that the parties’ arbitration agreement adopted "California law as it would have been without" regard to the Supreme Court’s recent FAA jurisprudence, such as Concepcion.  Imburgia, 136 S. Ct. at 467. The Supreme Court reversed, and held that the California court’s ruling did not "’rest upon such grounds as exist . . . for the revocation of any contract’" as required to avoid preemption under the FAA.  Id. at 466 (quoting 9 U.S.C. § 2).  Instead, the state court had adopted unique interpretative rules–i.e., that "law of your state" includes invalid California law–that discriminated against arbitration agreements.  Id. at 470.  E.    Appellate Jurisdiction to Review Class Certification Denials Following Voluntary Dismissal with Prejudice (Microsoft Corp. v. Baker) In January 2016, the Supreme Court added another class action to its docket this Term, Microsoft Corp. v. Baker, which concerns attempts by plaintiffs to manipulate appellate jurisdiction after the trial court denies class certification.  Following a denial of class certification in a related action, plaintiffs’ counsel refiled their claims with new putative class representatives in Baker.  Relying on its earlier denial, the district court struck the plaintiffs’ class allegations and the plaintiffs then petitioned for permission to appeal under Rule 23(f).  After the Ninth Circuit denied the request to appeal under Rule 23(f), plaintiffs voluntarily dismissed their claims with prejudice and noticed a post-judgment appeal of the order striking their class allegations.  The Ninth Circuit held that it had jurisdiction despite the voluntary dismissal, reached the merits of the appeal, and reversed the district court’s order denying class certification.  Baker v. Microsoft Corp., 797 F.3d 607, 612 (9th Cir. 2015).  The Supreme Court granted Microsoft’s petition for certiorari to decide whether a federal court of appeals has jurisdiction under both Article III and 28 U.S.C. § 1291 to review an order denying class certification after the named plaintiffs voluntarily dismiss their individual claims with prejudice.  If upheld, the procedural maneuvering used in Baker could have wider application in complex litigation.  In addition to permitting plaintiffs (but not defendants) to take piecemeal appeals of adverse class certification orders, plaintiffs (and absent class members who intervene) could use the same logic to appeal Rule 12 dismissals without prejudice, or to manipulate Rule 41 voluntary dismissals. Oral argument has not yet been scheduled in Baker, although a decision is expected this Term. II.    Significant Defense Victories in Class Action Trials Conventional wisdom holds that class actions rarely, if ever, go to trial.  Yet perhaps as an unintended consequence of the significant developments in class action jurisprudence over the past several years, there have been several high-profile cases in which defendants in certified class actions–unable to secure relief in the district or appellate courts–decided to vindicate their rights in a jury trial.  Class actions (unlike most other cases) require court approval of any settlement, and as we highlighted in our 2013 and 2014 year-end updates, courts are continuing to apply heightened judicial scrutiny to class settlements.  That development, combined with the rise of so-called professional objectors, has made class actions more difficult to resolve through settlement.  In addition, the percentage of granted Rule 23(f) petitions has been declining in recent years, and absent interlocutory review, proceeding to trial is the only alternative to settlement. All of this may help explain why several companies decided to present their defenses in certified class actions to juries.  There are some interesting lessons from these courageous decisions, and we discuss a few of the highlights below.  But more defense trial victories like these could also force the plaintiffs’ bar to rethink the value of their cases at the outset, which may ultimately deter the filing of meritless class actions. Whirlpool Front-Loader Litigation In a multidistrict products liability action, plaintiffs alleged that Whirlpool was liable to all Ohio purchasers of its front-load washing machines on a theory that the design of these machines is defective in that it allows formation of odorous mold within the machines.  See In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., No. 08-65000, 2010 WL 2756947, at *1 (N.D. Ohio, July 12, 2010).  Despite plaintiffs’ inability to show that all members of the proposed class experienced any mold or odor in their washers, the district court certified the class.  Id.  The Sixth Circuit affirmed the certification order, even though the class included individuals who never experienced a problem with their machines, on the basis that plaintiffs may be able to show that each class member "was injured at the point of sale upon paying a premium price" for a product prone to mold buildup.  In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 722 F.3d 838, 857 (6th Cir. 2013).   On remand, after unsuccessfully seeking summary judgment, Whirlpool decided to take the case to trial.  Although the court rejected Whirlpool’s request for a jury instruction that plaintiffs must show injury for all class members, the verdict form required the jury to find in favor "of the plaintiff class" as to each claim.  This language echoed Whirlpool’s strategy throughout the trial, which emphasized that the mold issue was very rare and not a classwide product defect.  Whirlpool’s strategy worked:  An Ohio federal jury returned a verdict in Whirlpool’s favor after a three-week trial.  In a post-verdict statement, Whirlpool said that Ohio jurors had delivered a "complete rejection of the class-action lawyers’ attempt to enrich themselves on the backs of consumers who have never had a complaint about their front-load washing machines," and that the verdict "sends a strong message that this kind of abusive class litigation, targeting American manufacturing and comprised almost entirely of uninjured people, has no place in the landscape of American jurisprudence." Nexium Antitrust Litigation In another class trial, a Massachusetts federal jury decided in favor of defendants AstraZeneca and Ranbaxy Laboratories in the first "pay-for-delay" class action trial since the Supreme Court’s decision in FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013), opened the door to antitrust suits based on patent settlements.  In this case, plaintiffs contended that AstraZeneca and three generic drug manufacturers, who had entered into settlement agreements in prior patent infringement litigation, violated antitrust laws by entering into reverse payment agreements to block competition for generic Nexium.  In re Nexium (Esomeprazole) Antitrust Litigation, 297 F.R.D. 168, 177–79 (D. Mass. 2013).  At trial, the jury determined that the agreements were not unreasonably anticompetitive and that AstraZeneca would never have allowed a generic Nexium to launch before its medicine patents expired. Before trial, the defendants had appealed class certification, challenging the district court’s decision to certify a class that included members who may not have suffered any injury.  Of course, the issue became moot after the favorable jury verdict, but the First Circuit denied defendants’ bid to drop the appeal and issued an opinion upholding the class certification order.  See In re Nexium Antitrust Litigation, 777 F.3d 9, 14 (1st Cir. 2015).  In a split decision, the majority concluded that although a class might encompass some uninjured members, certification is proper as long as the class is definite, the court limits the total recovery to the size of the injury, and the court ensures that only injured class members recover.  Id.  Although AstraZeneca lost its bid to reverse class certification, by prevailing on the merits of the class claims at trial it obtained a preclusive judgment in its favor against the entire certified class. In August 2015, the district court denied plaintiffs’ post-trial motions seeking a new trial and entry of a permanent injunction, explaining that the plaintiffs’ claim that new evidence would let them prove their case at trial was "at least a couple of bridges too far."  In re Nexium (Esomeprazole) Antitrust Litig., 309 F.R.D. 107, 133 (D. Mass. 2015).  The lengthy decision explained:  "Tested against the common sense of actual jurors, the plaintiffs’ evidence fell short.  Far short.  The message is clear–the plaintiffs’ bar will need far more detailed evidence of events in the ‘but-for’ world before a jury will find actual antitrust damages."  Id. at 145. III.    The Growing Conflict Among the Courts of Appeal Regarding Ascertaining Class Membership Last year, we observed that the implied Rule 23 ascertainability requirement had "gained momentum" in 2014.  A number of courts addressed ascertainability again in 2015, creating a circuit split over whether to apply the "rigorous approach" to ascertainability that the Third Circuit endorsed in Carrera v. Bayer Corp., 727 F.3d 300, 307 (3d Cir. 2013).  This may lead the Supreme Court to address the ascertainability requirement in the near future. In Byrd v. Aaron’s Inc., 784 F.3d 154 (3d Cir. 2015), the Third Circuit reaffirmed Carrera‘s ascertainability formulation, which requires a plaintiff to show that "(1) the class is ‘defined with reference to objective criteria’; and (2) there is ‘a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition.’"  Id. at 163 (quoting Carrera, 727 F.3d at 355).  But Byrd cautioned that "[t]he ascertainability inquiry is narrow," and that "[i]f defendants intend to challenge ascertainability, they must be exacting in their analysis and not infuse the ascertainability inquiry with other class-certification requirements."  Id. at 165.  In addition, in Shelton v. Bledsoe, 775 F.3d 554 (3d Cir. 2015), the Third Circuit limited the ascertainability requirement to class actions seeking monetary relief pursuant to Rule 23(b)(3), and not to Rule 23(b)(2) classes seeking declaratory or injunctive relief:  "Because the focus in a (b)(2) class is more heavily placed on the nature of the remedy sought, and because a remedy obtained by one member will naturally affect the others, the identities of individual class members are less critical in a (b)(2) action than in a (b)(3) action."  Id. at 561.  Of course, many courts have held that even if there is not a strict "ascertainability" requirement, plaintiffs still must allege a clear class definition and establish that the class is "cohesive."[4]  In practice, this often results in the same challenges to the proposed class. The Sixth Circuit rejected the Carrera approach to ascertainability in Rikos v. Procter & Gamble Co., 799 F.3d 497 (6th Cir. 2015), and reaffirmed that Young v. Nationwide Mutual Insurance Co., 693 F.3d 532 (6th Cir. 2012), continues to guide the ascertainability inquiry in that Circuit.  In Young, the court noted that "'[f]or a class to be sufficiently defined,’" it must be possible to resolve, with "’reasonable accuracy,’" "’whether class members are included or excluded from the class by reference to objective criteria.’"  Rikos, 799 F.3d at 526 (quoting Young, 693 F.3d at 538–39).  Applying Young, the court in Rikos concluded that the proposed class was sufficiently ascertainable because all of the sub-classes could be "determined with reasonable–but not perfect–accuracy."  Id.  In the Sixth Circuit’s view, the fact that determining who was and was not a member of each sub-class "would require substantial review" did not preclude class certification.  Id.  The Seventh Circuit joined the Sixth in rejecting the Third Circuit’s approach to ascertainability in Mullins v. Direct Digital, LLC, 795 F.3d 654 (7th Cir. 2015).  Specifically, the court declined to require plaintiffs to "prove at the certification stage that there is a ‘reliable and administratively feasible’ way to identify all who fall within the class definition."  Id. at 657.  The court considered, and rejected, several of the arguments–administrative convenience, unfairness to absent class members and bona fide class members, and due process interests of defendant–that led the Third Circuit to adopt a "strong" ascertainability requirement in Carrera.  Id. at 663–72. Petitions for certiorari are currently pending in both Rikos and Mullins. There are several district court decisions addressing ascertainability issues that are now on appeal to the Ninth Circuit.[5]  Just a few weeks ago, the Ninth Circuit issued an unpublished decision in a TCPA case affirming the denial of class certification on ascertainability grounds.  See Gannon v. Network Tel. Servs., Inc., No. 13–56813, — F. App’x —, 2016 WL 145811, at *1 (9th Cir. Jan 12, 2016) ("[T]o determine liability, the district court would be required to determine whether under each of the[] different factual scenarios [for plaintiff groups]–and undoubtedly others–the caller agreed to receive text messages").  Given the conflict among the appellate courts, it is only a matter of time before the Supreme Court steps in and provides guidance regarding what a plaintiff must show to establish that the members of a proposed class can be ascertained.  IV.    The Ninth Circuit Provides Important CAFA Removal Guidance A decade ago, the Class Action Fairness Act ("CAFA") dramatically expanded federal jurisdiction over class actions.  Plaintiffs, however, continue to resist efforts to remove class actions under CAFA.  This year, the Ninth Circuit clarified several important and unsettled issues regarding CAFA removal, with some decisions favoring plaintiffs and others benefiting defendants. A.    Proving Amount In Controversy–How and When? In Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S. Ct. 547 (2014), the Supreme Court held that a defendant need only include a "plausible allegation" in a notice of removal that the amount in controversy meets the $5 million threshold, and need not provide evidentiary proof.  Id. at 554.  The Ninth Circuit expanded on the framework created by Dart Cherokee in two decisions. In Ibarra v. Manheim Investments, Inc., 775 F.3d 1193 (9th Cir. 2015), the court clarified that after Dart Cherokee, if a plaintiff does not plead a specific amount in controversy, a defendant may make its evidentiary showing in response to a motion to remand.  Id. at 1198­–99.  Ibarra thus settled any doubt that a removing defendant need not scramble to assemble this evidence with its removal petition.  Ibarra also clarified that, to meet its burden to show a "plausible allegation" of removal jurisdiction under Dart Cherokee, the removing party cannot rely on assumptions "pulled from thin air."  Id.  Instead, "CAFA’s requirements are to be tested by consideration of real evidence and the reality of what is at stake in the litigation, using reasonable assumptions underlying the defendant’s theory of damages exposure."  Id.   In a companion decision issued the same day, the Ninth Circuit applied Ibarra and concluded that the defendant had met its burden of establishing federal jurisdiction.  LaCross v. Knight Transp., Inc., 775 F.3d 1200, 1201 (9th Cir. 2015).  In contrast to Ibarra, where the complaint alleged a "pattern and practice" but not "universal" violations, the LaCross complaint "clearly defined the class to include only the truck drivers, all of whom allegedly should have been classified as employees rather than as independent contractors."  Id. at 1202.  If the plaintiffs prevailed, the company would need to reimburse them for lease and fuel costs.  Id.  The defendant extrapolated fuel costs based on actual expenses for one quarter and the number of drivers who had signed independent contractor agreements.  Id. at 1202–03.  The court held that the defendant met its burden through this "reasonable" chain of logic and evidence.  Id. at 1203.  B.    Subsequent Removals One of CAFA’s more noteworthy changes was to eliminate the strict, one-year time limit for removals.  See 28 U.S.C. § 1453(b).  In 2015, the Ninth Circuit had an opportunity to address successive removal petitions outside of this one-year period, as well as a plaintiff’s creative attempt to defeat removal through amending its complaint. 1.    "If At First You Don’t Succeed," Defendant’s Edition–Successive Removal Petitions Are Ok In Reyes v. Dollar Tree Stores, Inc., 781 F.3d 1185 (9th Cir. 2015), the defendant was unable to remove a proposed class action because the amount-in-controversy did not exceed $5 million based on the plaintiff’s class definition.  Id. at 1187.  Approximately two years later, the plaintiff moved to certify a broader class that increased the amount in controversy above the $5 million threshold.  Id. at 1187–88.  The district court held that the removal was untimely because it was based on the same complaint that was the subject of the first removal.  Id. at 1188.  The Ninth Circuit reversed, because the state court’s "certification order is functionally indistinguishable from an order permitting the amendment of pleadings to alter the class definition, creating CAFA jurisdiction for the first time."  Id. 2.    "If At First You Don’t Succeed," Plaintiff’s Edition–Amending the Complaint After Removal To Defeat CAFA Jurisdiction Is Ok  A few months later, the Ninth Circuit upheld a plaintiff’s attempt to defeat CAFA removal by amending a complaint to invoke the "local controversy" exception.  Benko v. Quality Loan Serv. Corp., 789 F.3d 1111, 1117 (9th Cir. 2015).  In a split decision, the Ninth Circuit held that the district court abused its discretion in denying the plaintiffs leave to amend, because the proposed amendment related directly to the district court’s CAFA jurisdiction.  Id.  The panel majority acknowledged the general rule that jurisdiction is analyzed as of the pleadings filed at the time of removal, without reference to subsequent amendments, but the plaintiff may be allowed to revise "a complaint originally drafted for state court" that "may not address CAFA-specific issues, such as the local controversy exception" that the court must consider.  Id.  A dissenting opinion by Judge Wallace observed that every removed complaint is "originally drafted for state court," and every state court class action faces at least a possibility that a defendant will attempt to remove it under CAFA.  Id. at 1122–23.    [1]   2015 Carlton Fields Jorden Burt Class Action Survey, available at http://classactionsurvey.com/pdf/2015-class-action-survey.pdf.    [2]   See American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) (tolling of statute of limitations); Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) (notice to class members); Gulf Oil Co. v. Bernard, 452 U.S. 89 (1981) (communication with unnamed class members); Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147 (1982) (typicality) Cooper v. Fed. Reserve Bank of Richmond, 467 U.S. 867 (1984) (res judicata); Phillips Petrol. Co. v. Shutts, 472 U.S. 797 (1985) (choice of law); Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997) (settlement class actions); Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) ("limited fund" class actions).    [3]   Compare Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006) ("[N]o class may be certified that contains members lacking Article III standing"), with Kohen v. Pac. Inv. Mgmt. Co., 571 F.3d 672, 676 (7th Cir. 2009) ("[A]s long as one member of a certified class has a plausible claim to have suffered damages, the requirement of standing is satisfied").    [4]   See, e.g., Barnes v. Am. Tobacco Co., 161 F.3d 127, 143 (3d Cir. 1998) ("While 23(b)(2) class actions have no predominance or superiority requirements, it is well established that the class claims must be cohesive."); Romberio v. Unumprovident Corp., 385 F. App’x 423, 433 (6th Cir. 2009) (reversing certification of a Rule 23(b)(2) class because "[plaintiffs] do not address the well-recognized rule that Rule 23(b)(2) classes must be cohesive"); Lemon v. Int’l Union of Operating Eng’rs, 216 F.3d 577, 580 (7th Cir. 2000) (stating that the cohesion requirement stems from "[Rule 23(b)(2)’s] requirement that the plaintiffs seek to redress a common injury properly addressed by a class-wide injunctive or declaratory remedy"); In re Yahoo Mail Litig., 308 F.R.D. 577, 597–98 (N.D. Cal. 2015) (noting that even if ascertainability is not required for Rule 23(b)(2) classes, plaintiffs still must "provide a clear class definition under Rule 23(c)(1)(B)").    [5]   See, e.g., Jones v. ConAgra Foods, Inc., No. 12-01633 CRB, 2014 WL 2702726, at *11 (N.D. Cal. June 13, 2014) ("The variety of products and of labels, combined with the lack of receipts and the low cost of the purchases, means that consumers are unlikely to accurately self-identify."). The following Gibson Dunn lawyers assisted in preparing this client update:  Andrew Tulumello, Christopher Chorba, Kahn Scolnick, Timothy Loose, Bradley Hamburger, Jeremy Smith, Jennafer Tryck, Jessica Culpepper and Gregory Bok. Gibson Dunn are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Appellate and Constitutional Law Group and Transnational Litigation Group – Los Angeles (213-229-7000, tboutrous@gibsondunn.com) Andrew S. Tulumello – Co-Chair, Class Actions Group – Washington, D.C. (202–955–8657, atulumello@gibsondunn.com)Christopher Chorba – Co-Chair, Class Actions Group – Los Angeles (213-229-7396, cchorba@gibsondunn.com)Kahn A. Scolnick – Los Angeles (213-229-7656, kscolnick@gibsondunn.com)Timothy W. Loose – Los Angeles (213-229-7746, tloose@gibsondunn.com)Bradley J. Hamburger – Los Angeles (213-229-7658, bhamburger@gibsondunn.com)       © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 1, 2017 |
2016 Year-End Update on Class Actions

Last year saw continued attention to class action issues across the federal appellate courts, with the U.S. Supreme Court issuing three decisions on important issues to practitioners–Spokeo, Inc. v. Robins (whether plaintiffs must allege more than a statutory violation to have standing to sue in federal court); Campbell-Ewald Co. v. Gomez (whether the claims of a named plaintiff are rendered moot by an offer of full relief); and Tyson Foods, Inc. v. Bouaphakeo (the permissibility of using statistical sampling and extrapolation to adjudicate class claims).  Both plaintiffs and defendants quickly moved to leverage these decisions in pending class actions, and the lower courts have grappled with the Supreme Court’s guidance and the questions that Spokeo, Campbell-Ewald, and Tyson Foods both created and left unanswered. This update provides an overview and summary of key class action developments during 2016 and previews important issues looming on the horizon.  Part I addresses the Supreme Court’s decisions and explores how the courts of appeals have interpreted and applied this trio of opinions.  Part II discusses several important decisions in 2016 addressing the impact of arbitration agreements on putative class actions.  Part III discusses a deepening circuit conflict on ascertainability that appears destined for the Supreme Court.  Finally, Part IV outlines proposed amendments to Rule 23 addressing class settlements and notice to absent class members that are being considered this year. I.     The Supreme Court’s Decisions in Spokeo, Campbell-Ewald, and Tyson Foods, and How the Courts of Appeals Have Applied Those Decisions      A.     Spokeo:  Article III Standing and Alleged Statutory Violations In Spokeo, Inc. v. Robins, the Court clarified that the injury-in-fact component of the "case" or "controversy" requirement of Article III requires plaintiffs to show they have suffered an actual (or imminent) injury that is both particularized and "concrete . . . even in the context of a statutory violation," and it cautioned against finding that the concreteness requirement is satisfied for statutory violations that "result in no harm."  136 S. Ct. 1540, 1548–50 (2016).  As we explained in our May 2016 alert on Spokeo, the Supreme Court’s decision "clearly places a significant additional burden on plaintiffs seeking to recover statutory damages in federal court, and provides class-action defendants with an additional avenue of attack at both the pleading and class certification stages."  The Supreme Court flatly rejected the plaintiffs’ theory that a bare statutory violation–without more–is sufficient to establish Article III standing. Decisions from several courts of appeals confirm that Spokeo is a useful means for defendants in putative class actions to prevail against named plaintiffs who assert violations of statutes, but cannot allege any actual harm or a meaningful exposure to risk of such harm.  A majority of courts of appeals have held that plaintiffs lacked Article III standing under Spokeo in a variety of statutory contexts.  See, e.g., Meyers v. Nicolet Restaurant of De Pere, LLC, 843 F.3d 724 (7th Cir. 2016) (Fair and Accurate Credit Transactions Act); Nicklaw v. Citimortgage, Inc., 839 F.3d 998 (11th Cir. 2016) (New York real property laws); Lee v. Verizon Commc’ns, Inc., 837 F.3d 523 (5th Cir. 2016) (Employee Retirement Income Security Act); Braitberg v. Charter Commc’ns, Inc., 836 F.3d 925 (8th Cir. 2016) (Cable Communications Policy Act); Hancock v. Urban Outfitters, Inc., 830 F.3d 511 (D.C. Cir. 2016) (District of Columbia consumer identification and protection laws).  In each of these cases, the court held that there were insufficient allegations of any real-world harm or appreciable risk of harm to the named plaintiff.  For example: In Meyers, the Seventh Circuit concluded that a plaintiff alleging a violation of a federal statute requiring truncation of credit card expiration dates printed on receipts lacked Article III standing under Spokeo because the allegations showed he "did not suffer any harm" from the "printing of the expiration date on his receipt," nor "any appreciable risk of harm" because he had "discovered the violation immediately and nobody else ever saw the non-compliant receipt."  843 F.3d at 727.  In Lee, the Fifth Circuit held that, after Spokeo, a "bare allegation of improper defined-benefit-plan management under ERISA, without concomitant allegations that any defined benefits are even potentially at risk, does not meet the dictates of Article III."  837 F.3d at 530.  In Braitberg, the Eighth Circuit reasoned that a plaintiff alleging that a defendant violated a statutory "duty to destroy personally identifiable information by retaining certain information longer than the company should have kept it" lacked Article III standing where he did not allege that the defendant "disclosed the information to a third party, that any outside party has accessed the data, or that [the defendant] has used the information in any way during the disputed period."  836 F.3d at 930. In short, Spokeo appears to have become an effective countermeasure for defendants in "no injury" class actions based on alleged statutory violations.  Plaintiffs now will need to establish not merely that they have been exposed to certain conduct, but that the complained-of conduct actually and concretely caused a particularized harm.      B.     Campbell-Ewald:  Mootness and Offers of Complete Relief As discussed in an earlier update, the Supreme Court held in Campbell-Ewald Co. v. Gomez that an unaccepted settlement offer–even an offer of complete relief–does not necessarily moot a plaintiff’s claim.  136 S. Ct. 663, 670–71 (2016).  The Court’s decision rested on principles of contract law, under which a rejected offer is a nullity.  Id. at 670.  As such, after an offer of relief is rejected, the parties remain adverse, and thus a case or controversy within the meaning of Article III still exists.  Id. at 670–71. Campbell-Ewald nonetheless expressly left open the question whether an offer accompanied by proof that the defendant would pay the full amount could moot a plaintiff’s claim:  "We need not, and do not, now decide whether the result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount."  Id. at 672.  A year after the Court posed that question, decisions have emerged on both sides, but a growing number of courts of appeals have rejected attempts to moot putative class actions after Campbell-Ewald.  A prominent example is the Ninth Circuit’s decision in Chen v. Allstate Ins. Co., which held that a claim is not moot until "a plaintiff actually receives all of the relief he or she could receive on the claim through further litigation."  819 F.3d 1136, 1144 (9th Cir. 2016).  Thus, although the defendant had deposited the full value of the plaintiff’s claims into an escrow account, and had agreed to have judgment entered against it in full satisfaction of the plaintiff’s claims for damages and injunctive relief, the Ninth Circuit concluded that this was insufficient to render the claims moot.  Id. at 1146.  Chen also held that even if the plaintiff had actually received full relief, he would still be entitled to seek class certification.  Id. at 1148.  Relying on a prior decision, the Ninth Circuit held that the "inherently transitory" exception to mootness applies when a defendant attempts to "pick[] off" the named plaintiff in a putative class action.  See id. at 1142–43, 1147 (citing Pitts v. Terrible Herbst, Inc., 653 F.3d 1081, 1091 (9th Cir. 2011)).  Like the Ninth Circuit, both the Third and Sixth Circuits permitted plaintiffs to continue pursuing putative class actions even if their individual claims are rendered moot.  See Richardson v. Bledsoe, 829 F.3d 273, 286 (3d Cir. 2016); Wilson v. Gordon, 822 F.3d 934, 949–51 (6th Cir. 2016).    In the coming year, courts will continue to grapple with how to address the open question of what happens when a defendant makes a complete offer of relief, and places the funds on deposit with the court.  One case that squarely involves that issue is Leyse v. Lifetime Entertainment Services LLC, which is on appeal before the Second Circuit following the district court’s dismissal of a putative class action as moot after the defendant deposited a full settlement with the court.  171 F. Supp. 3d 153, 156 (S.D.N.Y. 2016) ("[A] defendant’s deposit of a full settlement with the court, and consent to entry of judgment against it, will eliminate the live controversy before a court.").  Leyse is scheduled for oral argument in February 2017.      C.     Tyson Foods:  Statistical Sampling and Extrapolation The Supreme Court also decided Tyson Foods, Inc. v. Bouaphakeo, a case involving the important question whether statistical sampling and extrapolation can be used to adjudicate class and collective claims.  Instead of definitively resolving that issue, the Court declined to adopt any "broad and categorical rules governing the use of representative and statistical evidence in class actions."  136 S. Ct. 1036, 1049 (2016).  Rather, the Court held that "[w]hether a representative sample may be used to establish classwide liability will depend on the purpose for which the sample is being introduced and on the underlying cause of action."  Id.  As the Court explained, in those cases "where representative evidence is relevant in proving a plaintiff’s individual claim, that evidence cannot be deemed improper merely because the claim is brought on behalf of a class" because "[t]o so hold would ignore the Rules Enabling Act’s pellucid instruction that use of the class device cannot ‘abridge . . . any substantive right.’"  Id. at 1046 (quoting 28 U.S.C. § 2072(b)).    As for the claims at issue in Tyson Foods, which were brought under the Fair Labor Standards Act ("FLSA") and the Iowa state counterpart to the FLSA, the Court concluded that using statistical sampling and extrapolation was permissible because "each class member could have relied on that sample to establish liability if he or she had brought an individual action."  Id.  According to the Court, Anderson v. Mt. Clemens, 328 U.S. 680 (1946), permits an employee pursuing claims under the FLSA to prove the amount and extent of uncompensated work as a "matter of just and reasonable inference" in situations where an employer has violated a "statutory duty to keep proper records."  Id. at 1047.  Thus, the plaintiffs in Tyson Foods were able to "introduce a representative sample to fill an evidentiary gap created by the employer’s failure to keep adequate records," which is the same method of proof that would likely have been used "[i]f the employees had proceeded with 3,344 individual lawsuits."  Id. While the courts of appeals have not yet applied Tyson Foods in the context of a proposal to use statistical sampling and extrapolation to resolve class claims, the Ninth Circuit has viewed Tyson Foods as supporting the rejection of various arguments challenging class certification orders.  In Vaquero v. Ashley Furniture Industries, Inc., a case involving California wage-and-hour claims, the Ninth Circuit cited Tyson Foods to support its reliance on prior Ninth Circuit decisions holding that "the need for individual damages calculations does not, alone, defeat class certification."  824 F.3d 1150, 1155 (9th Cir. 2016).  And in Torres v. Mercer Canyons Inc., a case involving alleged violations of statutes relating to an employer’s obligations to domestic farm workers under a foreign farm worker visa program, the Ninth Circuit held that Tyson Foods supported the plaintiffs’ "resort to an aggregate method of providing wage underpayment."  835 F.3d 1125, 1140 (9th Cir. 2016). Whether Tyson Foods will extend beyond FLSA claims remains to be seen.  Given the unique rule for FLSA cases under Mt. Clemens, there are good reasons not to extend Tyson Foods to other contexts.  And Tyson Foods plainly does not represent a broad endorsement of the use of "Trial by Formula," which also was unanimously rejected in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 367 (2011).  Indeed, the Court in Tyson Foods expressly stated that its holding was "in accord with Wal-Mart."  136 S. Ct. at 1048. II.     Courts Continue to Address the Interplay Between Arbitration Agreements and Class Actions      A.     The Supreme Court Grants Certiorari to Decide Whether the National Labor Relations Act Precludes Enforcement of Class Action Waivers in Mandatory Employment Arbitration Agreements In our Third Quarter 2016 Update, we noted that the Seventh and Ninth Circuits had created a split of authority regarding whether the National Labor Relations Act ("NLRA") precludes enforcement of class action waivers in mandatory employment arbitration agreements.  Compare Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), and Morris v. Ernst & Young, LLP, 834 F.3d 975, 981 (9th Cir. 2016), with D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013), Cellular Sales of Mo., LLC v. NLRB, 824 F.3d 772, 776 (8th Cir. 2016), and Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013) (per curiam).   Given the numerous pending petitions for a writ of certiorari from parties on all sides (plaintiffs, defendants, and the National Labor Relations Board), it was not surprising that the Supreme Court granted the pending certiorari petitions on January 13, 2017.  The Court is likely to address whether the NLRA contains an express "contrary congressional command" that overrides the Federal Arbitration Act ("FAA"), and whether it is possible to harmonize the two statutes.  As Judge Ikuta explained in her dissent in Morris, "[t]o date, in every case in which the Supreme Court has conducted this analysis of federal statutes, it has harmonized the allegedly contrary statutory language with the FAA and allowed the arbitration agreement at issue to be enforced according to its terms."  Morris, 834 F.3d at 992 (Ikuta, J., dissenting).  We will likely learn in 2017 whether the Supreme Court will follow this same path with respect to the NLRA.        B.     The Ninth Circuit Issues Two Important Decisions Rejecting Challenges to Arbitration Provisions The Ninth Circuit issued two particularly notable arbitration decisions in 2016, both of which rejected challenges to the enforcement of arbitration agreements in putative class actions.  In Mohamed v. Uber Technologies, Inc., a high-profile and closely watched case, the court rejected a number of attacks on the enforceability of Uber’s arbitration agreements.  No. 15-16178, 2016 WL 7470557 (9th Cir. Dec. 21, 2016).  The court first held that the agreements at issue, which were between Uber and individuals who used the Uber app as drivers, clearly and unmistakably delegated to the arbitrator "the threshold question of arbitrability," which meant that the court was required to enforce the agreements "according to their terms," unless there was a valid "generally applicable contract defense."  Id. at *4–5.  The Ninth Circuit concluded that no such defense existed.  Rather, the agreements were "procedurally conscionable as a matter of law" because they included a meaningful opt-out provision.  Id. at *5 (quotation marks and citation omitted).  The court further held that a waiver of representative claims under California’s Labor Code Private Attorneys General Act did not render the entire agreement unenforceable, as that waiver was expressly severable.  Id. at *8. In Tompkins v. 23andMe, Inc., the court affirmed an order compelling arbitration after rejecting various claims that an arbitration provision was unconscionable under California law.  840 F.3d 1016 (9th Cir. 2016).  Specifically, Tompkins held that a fee-shifting clause, a forum selection clause, a clause excluding intellectual property claims from arbitration, and a one-year statute of limitations were either not substantively unconscionable or did not provide any basis for declining to enforce the arbitration provision.  Id. at 1024–33.  Tompkins is important because it firmly rejected several arguments that plaintiffs had routinely raised in opposition to motions to compel arbitration. While plaintiffs seeking to pursue class claims will continue to challenge the enforceability of arbitration agreements in 2017, the Ninth Circuit’s decisions in Mohamed and Tompkins confirm that such challenges remain an uphill battle given the strong federal policy in favor of arbitration.      C.     The California Supreme Court Holds That Whether Parties Have Agreed to Class Arbitration Is Presumptively a Question for Arbitrators, Not Courts In Sandquist v. Lebo Automotive, Inc., the California Supreme Court in a 4-3 decision addressed an important and recurring question:  whether courts or arbitrators should decide if an arbitration agreement permits or prohibits classwide arbitration.  Breaking with several decisions of the federal courts of appeals, a majority of the California Supreme Court held that under the FAA the availability of class arbitration is presumptively a question for the arbitrator.  The California Supreme Court in Lebo held that while "[n]o universal one-size-fits-all rule allocates that question to one decision maker or the other in every case," under California law there is a "presumption" that favors "allocating the class arbitration availability question to the arbitrator."  1 Cal. 5th 233, 243, 247 (2016).  The court further concluded that the FAA did not "impose[] an interpretive presumption that, as a matter of federal law, preempts" that California law presumption.  Id. at 251.  The court reasoned that "a presumption that arbitrators decide the availability of class arbitration is more consistent with the desire for ‘expeditious results’ that motivates many an arbitration agreement."  Id. (quoting Mitsubishi Motors v. Soler Chrysler–Plymouth, 473 U.S. 614, 633 (1985)).  It also emphasized that, in applying the FAA, "if it is uncertain whether the issue is one for the courts or the arbitrator, we are well advised to allocate it to the arbitrator."  Id. at 255.  The dissenting opinion in Lebo disagreed with the majority’s interpretation of the FAA, and instead read the U.S. Supreme Court’s "cases as indicating that classwide arbitrability is a gateway question for purposes of the FAA."  Id. at 262 (Kruger, J., dissenting).  And while the U.S. Supreme Court has yet to squarely address this issue, "every federal court of appeals to consider the issue on the merits has held that the availability of class arbitration is a question of arbitrability for a court, rather than an arbitrator."  Id. at 266.  Although U.S. Supreme Court review was not sought in Lebo, given the conflict the California Supreme Court’s decision creates, it is likely that in a future case the Court will weigh in and conclusively resolve whether a court or an arbitrator should decide whether class arbitration is available under an arbitration agreement. III.     The Circuit Conflict Over Ascertainability Deepens The circuit conflict over the ascertainability requirement, which we outlined in our 2015 Year-End Update, remains unresolved, and has recently deepened after the Ninth Circuit’s decision in Briseno v. ConAgra Foods, Inc., No. 15-55727, 2017 WL 24618 (9th Cir. Jan. 3, 2017).  Given the intractable conflict over both the existence and meaning of the ascertainability requirement, it is increasingly likely that the Supreme Court will ultimately need to address this important issue. In Briseno, the Ninth Circuit joined the Sixth and Seventh Circuits in declining to adopt the Third Circuit’s requirement that a plaintiff seeking class certification identify an "administratively feasible" means of ascertaining the identity of class members.  The court ruled that "the language of Rule 23 neither provides nor implies that demonstrating an administratively feasible way to identify class members is a prerequisite to class certification, and the policy concerns that have motivated the Third Circuit to adopt a separately articulated requirement are already addressed by the Rule."  Id. at *10.  The court also explained that, in its view, "Rule 23’s enumerated criteria already address the interests that motivated the Third Circuit"–(1) mitigating administrative burdens; (2) safeguarding the interests of absent and bona fide class members; and (3) protecting the due process rights of defendants–and therefore "an independent administrative feasibility requirement is unnecessary."  Id. at *5.  While Briseno counted the Eighth Circuit among the courts that have rejected the Third Circuit’s approach to ascertainability, the Eighth Circuit’s articulation of its position was not nearly so definitive.  In Sandusky Wellness Center, LLC v. Medtox Scientific, Inc., 821 F.3d 992 (8th Cir. 2016), the Eighth Circuit stated that while it had "not outlined a requirement of ascertainability," it nonetheless "adheres to a rigorous analysis of the Rule 23 requirements, which includes that a class ‘must be adequately defined and clearly ascertainable.’"  Id. at 996.  Sandusky concluded that this standard is met where a class is defined using "objective criteria that make [the class member] clearly ascertainable."  Id. at 997.  While significant confusion and conflict over the ascertainability requirement remains, there is one area of emerging agreement among courts:  that no ascertainability requirement applies to class actions seeking only injunctive relief under Rule 23(b)(2).  For example, the Sixth Circuit reached that conclusion in Cole v. City of Memphis, 839 F.3d 530, 542 (6th Cir. 2016), and adopted the Third Circuit’s reasoning in Shelton v. Bledsoe, 775 F.3d 554 (3d Cir. 2015), which was one of the decisions we discussed in last year’s update. IV.     Proposed Amendments to Rule 23 Additional amendments to Rule 23 have been in the works for several years, and they are finally nearing completion.  The proposed amendments were published in August 2016, and public comments are due February 15, 2017.  These amendments, if ultimately approved, would likely not take effect until December 2018. The proposed amendments (summarized below) do not amend the core provisions of Rule 23 governing the standards for class certification, but instead are focused on procedural issues of class settlement and notice to absent class members.  The most significant proposed amendments list factors for courts to consider in evaluating proposed class settlements, and add provisions designed to curtail bad faith objections to class settlements.  Standards for Settlement Approval:  To assist courts in determining whether a settlement is "fair, reasonable, and adequate," amended Rule 23(e)(2) would direct courts to consider:  (1) the adequacy of representation; (2) whether "the proposal was negotiated at arm’s length"; (3) the adequacy of relief, taking into account various factors; and (4) whether "class members are treated equitably relative to each other."  The comments specifically note that the proposed amendment is not intended to displace other factors courts have used to determine fairness, reasonableness, and adequacy. Addressing "Bad Faith" Objectors:  The proposed amendments attempt to deter "bad faith" objections to class settlements in two ways.  First, amended Rule 23(e)(5)(A) would require objectors to state specific grounds for any objection and whether the objection applies to the entire class, a subset of the class, or just the objector.  Second, a new provision–Rule 23(e)(5)(B)–would prohibit an objector from receiving consideration for withdrawing an objection except with court approval.  These changes are designed to curb meritless objections that are asserted by objectors in order to obtain payoffs in return for withdrawing the objections–a disturbing trend that has increased in recent years.  Standards for Approving Notice of Proposed Class Settlement:  The amendments would change Rule 23(e)(1) to mandate that a court determine that a proposed settlement is likely to earn final approval before sending notice to the class, and to require parties to submit information sufficient for the court to make that determination.  The amendment aims to prevent situations in which a court is asked to order notice based on insufficient information, and thereafter must order a second notice, which is both wasteful and confusing to class members.  We anticipate that plaintiffs and defendants alike will appreciate this accelerated consideration of the merits of a settlement before incurring the costs of class notice. Electronic Notice to Rule 23(b)(3) Classes:  Rule 23(c)(2)(B), which governs notice for Rule 23(b)(3) classes, would be amended to expressly permit notice via electronic or other means (so long as the requirement that notice is the best practicable under the circumstances is satisfied). Clarification to Rule 23(f):  Rule 23(f), which permits parties to seek permission to pursue an interlocutory appeal of an order granting or denying class certification, would be amended to clarify that it does not apply to an order to give notice of proposed settlement under Rule 23(e)(1).  An order to give notice under Rule 23(e)(1) is sometimes called "preliminary approval" or "conditional certification," even though the act of giving notice does not grant or deny certification.  The proposed amendment thus clarifies that orders under Rule 23(e)(1) cannot be appealed under Rule 23(f).  The following Gibson Dunn lawyers prepared this client update:  Christopher Chorba, Theane Evangelis, Kahn A. Scolnick, Timothy W. Loose, Bradley J. Hamburger, Indraneel Sur, Gregory S. Bok, Jessica Culpepper, and Eric Cohen. Gibson Dunn are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice – Los Angeles (213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Co-Chair, Class Actions Practice – Los Angeles (213-229-7396, cchorba@gibsondunn.com)Theane Evangelis – Co-Chair, Class Actions Practice – Los Angeles (213-229-7726, tevengelis@gibsondunn.com)Kahn A. Scolnick – Los Angeles (213-229-7656, kscolnick@gibsondunn.com)Timothy W. Loose – Los Angeles (213-229-7746,tloose@gibsondunn.com) Bradley J. Hamburger – Los Angeles (213-229-7658, bhamburger@gibsondunn.com)       © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 5, 2018 |
A Better Method For Achieving Broader Class Action Reform

Los Angeles partners Kahn Scolnick and Bradley Hamburger are the authors of “A Better Method For Achieving Broader Class Action Reform,” [PDF] published in Law360 on June 5, 2018.

February 1, 2012 |
A New Battlefield

Los Angeles partner Jesse Cripps is the author of "A New Battlefield" [PDF] published in the February 2012 issue of California Lawyer.

February 28, 2011 |
A Return to the Wild West for Calif. UCL Actions

Los Angeles partner Gail Lees, San Francisco partner G. Charles Nierlich, Washington, D.C. partner Andrew Tulumello and Los Angeles partner Christopher Chorba are the authors of "A Return to the Wild West for Calif. UCL Actions" [PDF] published by Law360 at www.law360.com on February 28, 2011.

September 1, 2010 |
Aggregation or Stacking of Penalties or Punitive Measures

Los Angeles partner Julian Poon, associates Theane Evangelis Kapur and Blaine H. Evanson are the authors of "Aggregation or Stacking of Penalties or Punitive Measures" [PDF] published in ABA’s book, chapter 19, A Practitioner’s Guide to Class Actions. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express or written consent of the American Bar Association.

July 5, 2011 |
California Supreme Court Extends California Overtime Laws to Non-California-Based Employees When Working in the State

In a ruling that could spur a new wave of wage and hour class action litigation, the Supreme Court of California unanimously held in Sullivan v. Oracle Corp. that non-California employees were entitled overtime pay under California law (which requires daily overtime pay after eight hours worked in a day) for full days and full weeks worked in California under the facts presented.  However, the Court also held that work performed by non-California employees outside of California allegedly in violation of the Fair Labor Standards Act ("FLSA") could not be the basis for an unfair competition claim under Business & Professions Code Section 17200 ("UCL"), because there was not a sufficient nexus to California. The named plaintiffs, all residents of Colorado and Arizona, worked as "Instructors" for Oracle Corporation, which is headquartered in California.  Plaintiffs worked mainly in their home states but traveled periodically to California to perform training.  In 2003, a nationwide class of Oracle Instructors sued in federal court alleging they were improperly classified as exempt and seeking overtime pay.  Oracle subsequently reclassified its Instructors as non-exempt, and in 2005, the federal class action was settled with the exception of the claims by nonresident Instructors.  In 2006, a California district court granted Oracle’s motion for summary judgment.  On appeal, the Ninth Circuit initially ruled that: (1) California’s overtime laws and UCL apply to plaintiffs’ claims for overtime for full days/weeks worked entirely in California; and (2) the UCL ”does not apply to allegedly unlawful behavior occurring outside California causing injury to nonresidents of California.”  Sullivan v. Oracle Corp., 547 F.3d 1177, 1187 (9th Cir. 2008).  On a petition for rehearing, the Ninth Circuit certified the following three questions to the California Supreme Court, and on June 30, 2011 the Court ruled as follows: Question 1:  Whether California’s overtime provision applies to business travelers who temporarily visit the state, for as little as a single day. California Supreme Court’s Ruling:  Yes.  California’s overtime rules apply on the facts presented to "overtime work performed in California for a California-based employer by out-of-state plaintiffs…"  (Slip op. at 18.)  The plaintiffs only sought overtime pay for full days/weeks worked in California. Question 2.  Whether California’s Unfair Competition Law, Bus. & Prof. Code § 17200 et seq., also applies to the overtime pay of the same business travelers. California Supreme Court’s Ruling:  Yes.  The violations of California’s overtime laws constituted unlawful acts triggering liability under the UCL.  (Id. at 19.)  Question 3.  Whether the UCL provides a remedy for alleged Fair Labor Standards Act violations involving employees based outside of California for work done outside of California. California Supreme Court’s Ruling:  No.  The UCL "does not apply to overtime work performed outside California for a California-based employer by out-of-state plaintiffs in the circumstances of this case based solely on the employer’s failure to comply with the overtime provisions of the FLSA."  (Id. at 23.)  Oracle’s decision to classify its Instructors as exempt, which was the only nexus to California, was not in itself an unlawful act.  The Court left open the question of whether there would be a sufficient nexus to California if the wages for the out-of-state employees were paid in California.  (Id. at 22.) The Court expressly limited its decision to the factual record presented, leaving open many questions about how the ruling will be applied, such as: While the Court only addressed the applicability of California’s overtime laws, plaintiffs can be expected to argue that other California wage-hour laws apply as well (e.g., California’s minimum wage, meal break, pay stub, vacation, etc.).  The Court expressly left open the possibility that some California wage and hour laws may not apply.  (Id. at 11) Oracle is a California corporation.  It is not clear the extent to which the ruling with respect to California’s overtime laws will be applied to companies based outside of California, particularly those with no permanent California employees.  The Court noted that the burdens on out-of-state businesses in having California’s overtime laws apply to non-California employees were "conjectural" on the record presented because "Oracle itself is based in California."  (Id. at 11) In reaching its decision, the Court considered choice of law principles as applied to Arizona and Colorado law (where the plaintiffs resided), although the plaintiffs’ bar can be expected to argue that California’s overtime laws apply regardless of where the employee resides. The Court only addressed the applicability of California’s overtime laws when the employee works a full day or full week in California, leaving unanswered the question of whether the ruling also applies to partial days or weeks worked in California. The Oracle plaintiffs had traveled to California on business.  It is not clear whether the result would the same if non-California employees performed work in California while traveling to California for vacation. Potential Implications for Consumer Class Actions and Other Litigation Companies throughout the country were watching Sullivan closely because its ruling on the third question (whether the UCL applied extraterritorially outside of California) could have had significant implications in all class actions.  In particular, a reversal of the Ninth Circuit’s original decision in Sullivan could have reinvigorated efforts by the plaintiffs’ bar to file nationwide class actions predicated solely on UCL violations where the connection to California is the defendant’s headquarters.  There have been several successful attempts to apply California law to a nationwide class on this basis.  See Mazza v. Am. Honda Motor Co., 254 F.R.D. 610, 621-24 (C.D. Cal. 2008), appeal docketed, No. 09-80000 (9th Cir. argued June 9, 2010).  But in Sullivan, the California Supreme Court held that "the presumption against extraterritoriality applies to the UCL in full force" because there was no statutory language or legislative history to suggest any intent to apply the UCL outside of California.  (Slip op. at 20.)  Importantly, the Court also noted–but did not reach–the potential due process issues associated with extraterritorial application of the UCL.  (Id. at 20 n.9.) Practical Tips for Employers In light of these uncertainties, companies whose non-California employees perform work in California are advised to consult counsel to determine whether to track time worked in California and evaluate the extent to which they should be complying with California wage and hour laws for time worked in California.  The potential exposure is four years under the California’s UCL.   Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the Gibson Dunn lawyer with whom you work, or any of the following members of the firm’s Labor and Employment Practice Group or Class Actions Practice Group: Labor and Employment GroupChristopher J. Martin – Co-Chair, Palo Alto (650-849-5305, cjmartin@gibsondunn.com)Eugene Scalia – Co-Chair, Washington, D.C. (202-955-8206, escalia@gibsondunn.com)William J. Kilberg P.C. – Washington, D.C. (202-955-8573, wkilberg@gibsondunn.com)Jason C. Schwartz – Washington, D.C. (202-955-8242, jschwartz@gibsondunn.com)Karl G. Nelson – Dallas (214-698-3203, knelson@gibsondunn.com)Michele L. Maryott – Orange County (949-451-3945, mmaryott@gibsondunn.com)Scott A. Kruse – Los Angeles (213-229-7970, skruse@gibsondunn.com)Jessica Brown – Denver (303-298-5944, jbrown@gibsondunn.com)Julian W. Poon – Los Angeles (213-229-7758, jpoon@gibsondunn.com) Jesse A. Cripps – Los Angeles (213-229-7792, jcripps@gibsondunn.com)Elisabeth C. Watson – Los Angeles (213-229-7435, ewatson@gibsondunn.com) Class Actions GroupGail E. Lees – Chair, Los Angeles (213-229-7163, glees@gibsondunn.com)Andrew S. Tulumello – Vice-Chair, Washington, D.C. (202-955-8657, atulumello@gibsondunn.com)G. Charles Nierlich – Vice-Chair, San Francisco (415-393-8239, gnierlich@gibsondunn.com)Christopher Chorba – Los Angeles (213-229-7396, cchorba@gibsondunn.com) © 2011 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.