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Wachovia Bank v. Schmidt involves a tax-shelter-gone-bad scheme in which  the taxpayer received a promissory note and a warrant containing arbitration provisions. The taxpayer sued Wachovia Bank in state court. Wachovia Bank responded by filing a petition for an order compelling arbitration in federal court, which the district court denied. On appeal, the Fourth Circuit held that the court lacked subject matter jurisdiction. The U.S. Supreme Court reversed and remanded.

Back before the Fourth Circuit, Wachovia Bank had to convince the court that the state law claims must be arbitrated. It failed.

Wachovia Bank argued that the taxpayer's state law claims were significantly related to the promissory note containing the arbitration provision because the tax shelter and the loan evidenced by the note were part of a "single, integrated course of dealing." The court disagreed, finding that the taxpayers' claims relate to Wachovia Bank's role in inducing them to participate in the tax shelter--not to the tax shelter itself.

Francis G.X. Pileggi of the Delaware Corporate and Commercial Litigation Blog posts about a significant opinion issued by the Chancery Court on March 21, 2006. According to Francis, the 74-page opinion in Carlson v. Hallinan addresses a "smorgasbord of issues" involving executive compensation, indemnification, dissolution or appointment of receiver of solvent closely-held entity, entire fairness standard, independent committees and minority shareholder ratification by those disinterested, etc. Francis provides an excellent summary of the case.

Also be sure to read another of Francis' posts, Exception to Attorney/Client Privilege Requires Production of Documents. This post refers to a decision by a Delaware judge to require the production of documents reflecting legal advice, which were given to directors. The case UniSuper Ltd. v. News Corporation, recently settled.  Gee, I wonder why?

Bruckelmyer v. T.H.E. Machine Company, a patent infringement case, turned on a stipulation made by plaintiff. Bruckelmyer stipulated that if a Canadian patent application were a “printed publication” under 35 U.S.C. § 102(b), it would render the patents in suit invalid on the ground of obviousness. The district court held that the application was a “printed publication.” The Federal Circuit agreed and affirmed.

The Federal Circuit reversed a lower court decision in Lava Trading, Inc. v. Sonic Trading Management, LLC. This case involved two stipulated judgments of non-infringement. The appellate court identified flaws in the district court's claim construction, deciding that those flaws called the stipulated judgments into question and reversing the judgment below.

In Breckenridge Pharmaceutical, Inc. v. Metabolite Laboratories, Inc., Breckenridge Pharmaceutical, Inc. (“Breckenridge”) appealed a district court decision dismissing for lack of personal jurisdiction its claims of tortious interference, unfair competition, and declaratory judgment of non-infringement against patent holder, Metabolite Laboratories, Inc. (“Metabolite”). Breckenridge also appealed the district court’s subsequent grant of summary judgment on all claims to PamLab, L.L.C. (“PamLab”), the exclusive licensee of the patents at issue. The Federal Circuit held that the district court erroneously concluded that it lacked personal jurisdiction over Metabolite and that there are genuine disputes of material fact with respect to the state law claims. It reversed the dismissal of Metabolite, vacated the grant of summary judgment to PamLab, and remanded.

In Computervision Corp. v. United States, a tax case, the Federal Circuit affirmed a decision by the U.S. Court of Federal Claims holding that Computervision is not entitled to a refund of interest assessed and paid anent to its 1982 tax year and that Computervision failed to state a claim for interest netting. Reading the case made me dizzy, but here are the facts--

Computervision overpaid the IRS by nearly $5 million in 1982 and by over $7 million in 1983. The IRS gave Computervision a refund without interest. Later, the IRS conducted an audit. It concluded that Computervision had underpaid its taxes in 1982. Computervision, the IRS, and the Justice Department litigate the IRS' findings for years. In the meantime, Congress added a provision to the tax code that requires interest netting, that is, requiring the IRS to apply a zero net interest rate to overlapping periods of mutual indebtedness between a taxpayer and the IRS.  Two years after Congress amended the tax code, Computervision first asserted a claim for refund of interest. That was more than ten years after its claim accrued.

Both the trial and appellate courts agreed that Computervision waited too long to assert the claim. The Federal Circuit identified the various ways around the statute of limitations, but held that none of them applied. The court also agreed that Computervision had failed to state a claim for interest netting, which would allow the rival interest claims to offset each other. The court held that because the statute of limitations had expired on both the underpayment and overpayment interest claims, Computervision could not state a claim for interest netting.

The Fifth Circuit has issued an opinion in Minard v. ITC Deltacom Communications, Inc., a case involving the Family Medical Leave Act (FMLA). Minard requested medical leave. ITC granted the leave in a written memorandum stating that she was an “eligible employee” under the FMLA. While Minard was on leave, ITC discovered that Minard was not an eligible employee under the FMLA because when she requested leave, ITC employed less than 50 employees at or within 75 miles of the worksite at which she was employed. ITC fired Minard.

She sued, asserting a claim under the FMLA. She contended that ITC should be estopped from arguing that she was not an eligible employee under FMLA due to the memorandum. ITC moved for summary judgment, arguing the court lacked subject matter jurisdiction because Minard was not an eligible employee under the FMLA.

The district court granted ITC's motion, holding that federal courts would have subject matter jurisdiction over an FMLA case only if the 50-employee threshold was met. As that threshold was not met in this case, the court dismissed for lack of subject matter jurisdiction. Because the court interpreted the threshold as jurisdictional, it also  rejected Minard's equitable estoppel argument.

On appeal, the Fifth Circuit reversed. It held that the 50-employee threshold is an element of a plaintiff’s claim for relief, not a jurisdictional limitation. Regarding Minard's equitable estoppel argument, the court also reversed. It concluded:

• that ITC unintentionally made a definite misrepresentation that Minard was an “eligible employee” under FMLA at the time she requested leave;
  

• that she reasonably relied upon that misrepresentation in taking leave and undergoing surgery for the protection of her health; and

• that there is a genuine dispute between the parties as to whether Minard relied to her detriment on that misrepresentation given that she might have take the leave regardless of the applicability of FMLA due to her medical condition and thus the case should be remanded to the district court for further proceedings.

Teragram Corp. v. Marketwatch.com involved a contract dispute arising from a software licensing agreement that covered Teragram’s “Entity Extraction Software” and “Summarization Software.” Teragram sued Marketwatch.com, Inc., a.k.a. "ScreamingMedia," for breach of contract. It sought damages, representing the annual licensing and support fees for the first two years of the three-year contract; ScreamingMedia counterclaimed that Teragram misrepresented its products and was itself in breach of contract, thus excusing ScreamingMedia from its payment obligations.

The district court issued judgment in favor of Teragram anent the Summarization Software, but limited Teragram's damages award to the amount of one year's licensing and support fees for that product. The court also entered judgment in ScreamingMedia's favor with respect to the Entity Extraction Software, awarding nominal damages of $1.00. Both parties appealed.

ScreamingMedia faired no better with the First Circuit than it did with the trial court regarding the Summarization Software. That’s probably because ScreamingMedia admitted that it paid Teragram nothing at all for the software. Nor did it timely notify Teragram of any material failure of the Summation Software.

As for the other software, the First Circuit again affirmed the district court’s findings. It held that ScreamingMedia had properly notified Teragram of a material failure of the software, and that Teragram was entitled to no more damages than awarded by the district court.

The Class Action Fairness Act of 2005 (CAFA), which enables defendants in large class actions to remove cases from state to federal courts, isn’t quite as defense-oriented as some may have hoped. Such was the lesson learned by The Dow Chemical Company.

In Abrego v. The Dow Chemical Co., 1,160 Panamanian banana plantation workers filed a complaint in state court against several chemical companies. The workers asserted claims stemming from the workers’ alleged exposure to pesticides that defendants distributed and used on plantations in after the pesticides had been banned in the The workers allege that they suffered “sterility and other serious injuries” as a result of exposure to the pesticide, and seek unspecified damages, fees, and costs.

Three weeks after the state court suit commenced, Dow filed a notice of removal pursuant to CAFA. Dow invoked federal jurisdiction under CAFA’s “mass action” provision, i.e., establishing federal jurisdiction over a civil case in which 100 or more individuals assert claims each worth more than $75,000 with an aggregate amount in controversy exceeding $5,000,000. The district court ordered Dow to show cause as to whether these jurisdictional thresholds were met. Dow argued in response that plaintiffs—not defendants—bore the burden of defeating the court’s jurisdiction and that the court was required to permit discovery to determine the amount in controversy. The district court disagreed, as did the Ninth Circuit.

Dow on appeal argued: (1) CAFA's legislative history indicates that plaintiffs bear the burden of refuting the district court’s removal jurisdiction; (2) a “mass action” is removable regardless of whether there is jurisdiction over all plaintiffs whose claims are necessary to qualify the action as a mass action; and (3) the district court must allow jurisdictional discovery to determine the amount in controversy. The court declined to address Dow’s second argument. As to the others, the court held:

Dow on appeal argued: (1) CAFA's legislative history indicates that plaintiffs bear the burden of refuting the district court’s removal jurisdiction; (2) a “mass action” is removable regardless of whether there is jurisdiction over all plaintiffs whose claims are necessary to qualify the action as a mass action; and (3) the district court must allow jurisdictional discovery to determine the amount in controversy. The court declined to address Dow’s second argument. As to the others, the court held:

• that before Congress enacted CAFA defendants bore the burden of proving removal jurisdiction;

• that to determine whether CAFA shifts the burden to plaintiffs by requiring them to refute removal jurisdiction, the court must first look to the statute's text and only if the text is ambiguous should the court look to legislative history;

• that CAFA on its face does not require plaintiffs to refute  removal jurisdiction and thus, the burden of proof on removal jurisdiction remains with defendants;

• that Dow “failed to present to the district court any pleading, evidence, or admission that establishes that it is more likely than not that jurisdiction lies”;

• that under these circumstances, the district court was “well within” its discretion to remand to state court; and

• that Dow will be able to remove the case to federal court at any time it becomes apparent that CAFA’s jurisdictional requirements are met.

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• that by arguing that the district court erroneously treated Borinquen's mark as incontestable because it did not require proof of secondary meaning, M.V. was improperly conflating two issues;

• that the trial court was not required to consider proof of secondary meeting because M.V. failed to prove, by a preponderance of the evidence, that the "RICA" mark is merely descriptive;

• that while M.V. introduced survey evidence on the issue of consumer confusion, it adduced no comparable evidence in support of its contention that Borinquen's mark is merely descriptive;

• that M.V.'s failure to meet its own evidentiary burden meant that the district court was warranted in not taking the next step and shifting the burden to Borinquen to show that its registered but contestable mark had acquired secondary meaning;

• that Borinquen was not required to produce evidence of actual confusion; and
  

• that while survey evidence would have been helpful, it was not indispensable to a finding of likelihood of confusion.

Today, the SEC announced a settlement with Tyco International Ltd. The government charged Tyco with violating the securities laws by using improper accounting practices and a scheme involving transactions with no economic substance to overstate its reported financial results by a least one billion dollars.

Without admitting or denying the allegations in the Commission's complaint, Tyco consented to the entry of a final judgment permanently enjoining it from violating the antifraud, proxy disclosure, periodic reporting, corporate recordkeeping, and antibribery provisions of the federal securities laws. The proposed final judgment also orders Tyco to pay $1 in disgorgement and a $50 million civil penalty.

Would you ever agree to an arbitration provision that only gives the other party the right to arbitrate? Think I'm kidding? Albert M. Higley Company v. N/S Corporation involved an arbitration provision that did precisely that.

Higley is a prime contractor on a project with the City of Cleveland. Higley hired N/S as a subcontractor. The parties entered into a written agreement, authored by Higley. The agreement contained an arbitration provision:

N/S notified Higley that it would be unable to comply with certain provisions of the agreement. After attempting to resolve the dispute that followed through negotiation and mediation, Higley filed suit against N/S in federal court. N/S filed a motion to compel arbitration, which the court denied.

The Sixth Circuit affirmed. It held:

• that a one-sided arbitration provision is enforceable absent evidence of fraud, coercion, or lack of consideration;

• that N/S' argument, i.e., Higley could have drafted the clause to unambiguously state that it had the sole discretion to decide whether to arbitrate so Higley must not have meant this clause to be interpreted as giving it sole discretion, must be rejected because it would require the court to interpret the clauseas it could have been written, not as it is written;

• that N/S' interpretation of the clause, i.e., the clause only gives Higley the discretion to decide whether a dispute continues to exist, must be rejected because it would lead to irrational results.

Key takeaways: First, don't agree to a one-sided arbitration provision.  Second, if you agree to a one-sided arbitration provision, don't expect a court to bail you out. Third, don't agree to a one-sided arbitration provision.

The First Circuit recently addressed an unusual question: When is an affiliate not an affiliate? In Re: Blinds to Go Share Purchase Litigation involves a dispute among the shareholders of the Blinds to Go, Inc. (BTG). BTG and its shareholders alleged that Harvard Private Capital Holdings, Inc. (Holdings) violated their right of first refusal when it transferred all of BTG's preferred shares to the putative affiliate, Charlesbank Equity Fund II, Limited Partnership (the Fund). The trial court agreed, concluding that the transaction should be rescinded.

On appeal, Holdings and the Fund argued that they are affiliates and their transaction therefore did not violate anyone’s right of first refusal. BTG and its shareholders, in turn, challenged the district court's choice of remedy. They argued that the court should have ordered specific performance. The First Circuit held that Holdings and the Fund were not affiliates, that their transaction breached the right of first refusal, and that the district court's choice of remedy was consistent with the contract and with equitable remedial principles.

The affiliate issue turned on the interpretation of the shareholder agreement, which defined an affiliate as a person or entity “directly or indirectly controlling, controlled by or under common control with such person or entity.” The term "control" was defined to mean the right to cast, directly or indirectly, more than 50% of the voting interests in a person or entity.

Applying Massachusetts law, the court first held that the shareholder agreement defined the term "affiliate" “with considerable precision and, in doing so, not only endows the word ‘control’ with decretory significance but also assigns that word a specific meaning.” Having so concluded, the court next turned to whether Holdings and the Fund were affiliates within the meaning of the agreement.

The court identified the various limited partnerships in the Fund’s chain of voting control. It quickly concluded that neither Harvard nor Holdings occupied a place in that chain. It ruled that Holdings and the Fund are not affiliates within the meaning of the shareholders' agreement. Because it was undisputed that Holdings did not afford the BTG shareholders an opportunity to exercise their right of first refusal, the transfer violated the shareholders' agreement.

The trial court entered judgment in Comerica's favor. It held that the UCC preempted all of the common law claims and that Zengen's failure to timely notify the bank of its objection to the debits defeated the UCC § 11204 claim.

On appeal, the court affirmed the trial court's grant of summary judgment. The court held:

• that the UCC establishes a detailed scheme for analyzing the rights, duties and liabilities of banks and their customers in connection with the authorization and verification of payment orders;

• that the UCC expressly states that it is the sole governing body of law for the rights, duties and liabilities associated with funds transfers, and expressly preempts all other principles of law or equity regarding funds transfers;

• that Zengen's common law claims for breach of contract, negligence, return of deposit and money had and received thus are displaced by the UCC;

• that notice to the bank was required to preserve the right to maintain an action for a refund under UCC § 11204;

• that the purpose of this requirement is to put the receiving bank on notice that the customer considers the bank liable for the unauthorized funds transfer; and

• that a notice that only advises the bank that the payment orders were "unauthorized" and "fraudulent," standing alone, does not satisfy this requirement and Zengen's notice thus was insufficient to preserve its UCC § 11204 claim.

Interesting labor law case in California . . . In Harris v. Investor's Business Daily, Inc., telemarketers who sold newspaper subscriptions alleged violations of federal and state labor laws in a class action suit. The issues on appeal:

1.    Whether a federal Fair Labor Standards Act (FLSA) claim could serve as the predicate act for a California unfair competition claim;

2.    Whether the employees qualified for the commission exemption from California overtime laws; and

3.    Whether the employer lawfully deducted points employees had earned from a sale if the customer later cancelled the subscription.

The trial court ruled against plaintiffs on each of these issues; the appellate court reversed on all three.  The highlights:

Regarding the unfair competition claim, the court held that a FLSA claim for unpaid federal overtime could serve as a predicate for an unfair competition claim. The preemption argument was interesting--the employer argued that FLSA preempted California's unfair competition law because the it requires employees who want to become part of the action to formally opt in while the unfair competition law assumes all class members are part of the suit unless they formally opt out. 

The court held that there was no conflict between the two statutes. It reasoned that Congress included the opt-out requirement in FLSA to protect employers from facing “financial ruin” and prevent employees from receiving “windfall payments, including liquidated damages.” According to the court, "[t]hese concerns . . . are absent in a section 17200 action limited to restitution."

On the commission exemption, the court held that the overtime pay exemption applies only if the employer can demonstrate that more than half of the employees’ compensation is from commissions. Because the employees had presented evidence that none of their compensation was derived from commissions, there was a triable issue of fact on the point and the trial court erred by holding otherwise.

Likewise, on the unlawful chargeback claim, the appellate court held that a triable issue of fact exists as to whether the chargeback plan violates California's Labor Code.

Today, the SEC announced insider trading charges against two individuals, one a current employee and the other a former employee of Goldman Sachs. The government's complaint charges the individuals, Eugene Plotkin and David Pajcin, with persuading a Merrill Lynch analyst to provide tips on upcoming mergers in return for a share of the trading profits. The complaint also refers to another alleged scheme in which Plotkin and Pajcin recruited two individuals to obtain jobs at a printing plant in Wisconsin, steal advance copies of BusinessWeek magazine, and tip Plotkin and Pajcin on the names of companies discussed favorably in a column before the magazine became public. Plotkin and Pajcin allegedly traded on the inside information.

Today, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) announced proposed rules that will permit trading of futures on debt indexes. Futures contracts on debt indices that are allowed under the proposed rules would trade on futures exchanges subject to regulation by the CFTC. Security futures on debt securities could be traded on futures exchanges and securities exchanges subject to regulation by the CFTC and SEC.

The proposed rules provide that a future on a debt security index not subject to SEC regulation must be broad-based, a requirement purportedly designed to insure that the securities making up the index are not readily susceptible to manipulation. According to the SEC and CFTC, the rules will clarify the definition of a "narrow-based security index," providing criteria that are specifically relevant to debt securities.

Comments on the proposed rules will be due within 30 days of their publication in the Federal Register. The agencies expect to adopt final rules by June 30, 2006.