Devoted to Corporate Attorneys, Corporate Lawyers, and Corporate Counsel

The Fifth Circuit today handed down a decision involving arbitration. Bulko v. Morgan Stanley DW Inc. involved a dispute between Simon A. Bulko and Morgan Stanley and a Morgan Stanley.

After losing $16 million within a 14-month period, Bulko initiated a National Association of Securities Dealers (NASD) arbitration against Morgan Stanley. Because his claim exceeded $50,000, NASD requires a three-member panel consisting of two public and one non-public arbitrator. When the non-public arbitrator withdrew, NASD proposed replacing the arbitrator with a lawyer who said, in her application, that she was a commercial litigator emphasizing securities law. The parties accepted NASD's recommendation. In 2000, the lawyer advised the NASD that she was no longer practicing law full time. It turned out that she had taken inactive status from Texas bar in 1999.

When the panel subsequently ruled in Morgan Stanley's favor, Bulko appealed to the decision to a federal district court. The court found that the lawyer was not qualified to serve as a non-public arbitrator, granting summary judgment in Bulko's favor and ordering the parties to submit the dispute to another arbitration panel.

On appeal to the Fifth Circuit, the appellate court reversed. The court found that regardless of the lawyer's status as a practicing attorney, she was selected pursuant to the NASD's rules. Moreover, those rules do not require the non-public arbitrator to be a practicing attorney. Finally, even if the lawyer's participation contradicted the parties' arbitration agreement, the departure was too "trivial" to warrant vacatur of the arbitral award.

Wall Data Inc. v. Los Angeles County Sheriff's Dep't involved a dispute between the L.A. County Sheriff's Department and a software company, Wall Data. The Department bought 3,663 software licenses from Wall Data, but installed the software onto 6,007 computers. Sounds like a pretty obvious case of copyright infringement, doesn't it?

It would've been an easy case, if the Sheriff's Department hadn't gotten cute. You see, although it installed the software onto 6,007 computers, it configured the computers such that the total number of workstations able to access the software did not exceed the total number of licenses purchased by the Sheriff's Department. Still copyright infringement?

A federal jury thought so.  The Ninth Circuit agreed.

The court addressed a number of issues with which corporate counsel should be familiar. The issues include:

• whether the Sheriff Department's configuration constituted fair use under 17 U.S.C. § 107 because the number of "useable" copies of the software did not exceed the number of licenses purchased from Wall Data;

• whether the Sheriff Department was entitled to an "essential step" defense under 17 U.S.C. § 117(a)(1) because the hard drive imaging process that was used to install the software was a necessary step of installation; and

• whether Wall Data, as the prevailing party, was entitled to attorneys' fees and costs.

In Laws v. Sony Music Entertainment, Inc., the Ninth Circuit addressed the Copyright Act preempts the state common law right to privacy and the state statutory right of publicity. The case relates to a dispute over Debra Laws' song, "Very Special," which was incorporated into another released by Sony. The district court held that Laws' privacy and publicity claims were preempted by the Copyright Act. The Ninth Circuit agreed.

The court held:

• that § 301 of the Copyright Act governs the issue of preemption;

• that the Ninth Circuit applies a two-part test to determine whether a state claim is preempted under § 301: the court determines (i) whether the "subject matter" of the state law claim falls within the subject matter of copyright, and if it does, the court decides (ii) whether the rights asserted under the state law are equivalent to the rightsof copyright holders under 17 U.S.C. § 106;

• that the subject matter of Laws' claims is within the subject matter of the copyright because the "subject" in dispute--Laws' recording--plainly is a work that falls squarely within the definition of a work of authorship entitled to copyright protection under 17 U.S.C. § 102;

• that "it is clear that federal copyright law preempts a claim alleging misappropriation of one’s voice when the entirety of the allegedly misappropriated vocal performance is contained within a copyrighted medium";

• that the rights asserted by Laws in her state law claims are equivalent to the rights of copyright holders under 17 U.S.C. § 106; and

• that "[a]lthough the elements of Laws’s state law claims may not be identical to the elements in a copyright action, the underlying nature of Laws’s state law claims is part and parcel of a copyright claim."

In Elementis Chromium L.P. v. Coastal States Petroleum Co., the Fifth Circuit addressed the apportionment of liability among defendants in a cleanup case under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The case arose after a manufacturing plant owned by Elementis Chromium L.P. became contaminated due to operations at a property owned by El Paso Merchant Energy-Petroleum and another owned by Amerada Hess Corp. that it sold Magellan Terminals Holdings L.P.

Elementis sued El Paso, which settled. El Paso then sued Hess and Magellan, seeking contribution for response costs at the Elementis plant. The case was tried in a bench trial in federal district court.

The court found El Paso 89.95% responsible, Hess and Magellan 10.05% responsible. It concluded that Magellan and Hess should be treated as a collective entity for the purposes of allocating responsibility, and imposed joint and several liability on them. Everyone appealed.

The Fifth Circuit affirmed the lower court's findings regarding El Paso, but reversed as to Hess and Magellan. It held:

• that El Paso bore the burden of proof to establish that Hess and Magellan each is a responsible party under § 107(a) of CERCLA;

• that § 113(f)(1) of CERCLA provides that “any person may seek contribution from any other person who is liable or potentially liable under § 107(a). . . . In resolving contribution claims, the court may allocate response costs among liable parties using such equitable factors as the court determines are appropriate.”;

• that § 113(f) is intended to provide a liable party with a cause of action to “mitigate the harsh effects of joint and several liability” imposed under § 107(a);

• that the "overwhelming majority" of federal circuits have concluded that liability under § 113(f) is several, not joint and several;

• that the Fifth Circuit will follow the majority and hold that liability under § 113(f) should be several; and

• that the district court must determine the proper division of liability between Magellan and Hess.

In Morris v. Wachovia Securities, Inc., the Fourth Circuit held that the Private Securities Litigation Reform Act of 1995 (PSLRA) mandates a sanction in any private securities action where a party or lawyer violates Fed.R.Civ.P. 11(b). Having found that Morris violated Rule 11(b) three times, the district court thus should have imposed sanctions. Because it declined to do so, the Fourth Circuit vacated and remanded the case.

Morris invested $1.4 million in Wachovia's Masters Program, and lost over a $1 million of it within months. He subsequently filed a securities case against Wachovia, asserting claims under the '34 Act and SEC Rules 10b-5 and 10b-10. When the court dismissed the complaint without prejudice, Morris filed another one.

This one survived a motion to dismiss, but the court eventually entered summary judgment in Wachovia's favor. It also found that Morris violated Fed.R.Civ.P. 11(b) by making allegations for which he had no factual basis and by making factual misstatements in a brief.

Wachovia sought attorneys' fees for the Fed.R.Civ.P. 11(b) violations. The court denied Wachovia's request, finding that it failed to proffer proper documentation of the fees it incurred as a result of the violations. Indeed, it declined to impose any sanctions at all.

On appeal, the Fourth Circuit affirmed the lower court's Fed.R.Civ.P. 11(b) findings. However, the court held that the PSLRA required the district court to impose some type of sanction even if it was non-monetary. The Fourth Circuit thus remanded the case, instructing the district court to "issue a written order admonishing by name the individual lawyers responsible for the Rule 11(b) violations that the district court identified in Morris's complaints and in the brief."

We're starting to see the effects of the Supreme Court's controversial decision in Kelo v. City of New London. In that case, the Court held that local governments enjoy far-reaching authority to exercise eminent domain power. A small city in the Bay Area has decided to exercise some of that authority--against Wal-Mart.

The City Council of the City of Hercules voted unanimously "to use the power of eminent domain to prevent Wal-Mart from" opening a store in Hercules. According to this AP story, Council Fights Wal-Mart on Eminent Domain, the City Council voted "to seize 17 acres where Wal-Mart intended to build a shopping complex."

Hercules of course will have to pay Wal-Mart fair market value for the property. If Hercules indeed pays Wal-Mart fair market value for the property, then Wal-Mart might have little choice but to move on. Stay tuned.

What is up with corporate America?  You can't pick up a newspaper without reading about some business executive somewhere being investigated, indicted, convicted, or sentenced. 

We all know about the Ken Lay et. al trial, which is now in the hands of a jury. But that's just the tip of the iceberg. According to this article, Bank CEO Guilty of Multiple Fraud Offenses, the former CEO and chairman of Hamilton Bank has been convicted on 16 counts of fraud by a Florida jury.  Eduardo A. Masferrer "allegedly conspired with other bank officers to fraudulently inflate the institution's reported income and earnings in 1998 and 1999 in order to hide significant losses." He "faces up to 300 years in prison."

Then there's this . . . SynPep Corp., a California-based company, and its president, Chi Yang, have been indicted "for allegedly shipping bogus research material to many corporate and academic researchers." According to this article, Feds charge scientist, Bay Area biotech company with fraud, the indictment includes 13 counts of mail fraud, false statements, and other charges.

Criminal defense lawyers certainly aren't hurting for work. Of course, if business executives spent a little more time listening to their corporate counsel, maybe they wouldn't need to hire criminal defense lawyers. There's a thought . . .

Last week, the U.S. Attorney for the Central District of California announced the indictment of famed plaintiffs' securities firm, Milberg Weiss Bershad & Schulman, and two of its name partners. The indictment alleges that the defendants participated in a scheme in which several individuals were paid millions of dollars in secret kickbacks in exchange for serving as named plaintiffs in more than 150 class-action and shareholder derivative-action lawsuits. The indictment alleges that the firm received well over $200 million in attorneys' fees from these lawsuits over the past 20 years.

Yesterday, the U.S. Attorney for the Southern District of Florida announced the unsealing of an indictment charging a lawyer, Lous S. Robles, with 41 counts of mail fraud in connection with his misappropriation of $13.5 million of settlement monies from clients' trust accounts.  What did Robles do with his clients' money? In addition to financing his waste management companies and making mortgage payments of up to $101,000 a month on four different properties, Robles made a movie. What a guy.

Hmmm . . . is there a pattern here?

Today, the SEC and the Office of Federal Housing Enterprise Oversight announced a settlement with the Federal National Mortgage Association (Fannie Mae). Fannie Mae, among other things, allegedly engaged in accounting fraud.

According to the government's complaint, Fannie Mae misapplied Generally Accepted Accounting Principles from 1998 through 2004 thereby failing to comply with SFAS 91 and SFAS 133. Fannie Mae's management also overstated revenues and understated expenses in 1998, allegedly to obtain bonuses it otherwise would not have been abole to obtain.

Without admitting liability for accounting fraud, Fannie Mae agreed to an injunction.  The settlement requires Fannie Mae to re-state its historical financial statements for the years ended December 31, 2002 and 2003, and for the quarters ended June 30, 2004, and March 31, 2004.  The company estimates that its restatement will result in at least an $11 billion reduction of previously reported net income.  In addition, Fannie Mae will pay a $400 million penalty.

The Chairman of the Federal Reserve  makes one little ill-advised comment and what happens?  The stock market tanks.  Talk about a tough day at the office.

According to this AP article, Bernanke: Comments a 'Lapse of Judgment', Fed Chairman Ben Bernanke caused a stir when he "told a CNBC reporter that investors had misinterpreted his recent congressional remarks as an indication the Fed was nearly done raising rates."  The result--stocks took a nosedive.

Few corporate counsel are ever in a position to have such a profound effect on listeners.  Yet, we can all learn something from Bernanke's mistake.  We always have to be mindful of the effect we have on our listeners because everything we say will have an effect--good or bad.  Communication skills are therefore critical to success, even for those of us who can't cause stocks to tank by stating the obvious.

The SEC announced its first enforcement actioun under the USA Patriot Act, which requires broker-dealers to implement and document identity verification procedures for all new accounts. The SEC has sanctioned broker-dealer Crowell, Weedon & Co. for failing to properly document its customer identification program.

According to the SEC, Crowell, Weedon failed to document its actual customer identity verification procedures in its written customer identification program (CIP) from October 2003 to at least late April 2004.  During this period, the firm opened approximately 2,900 new accounts for customers.  In verifying the identities of those customers, Crowell, Weedon simply relied on its registered representatives' attestations that they had personal knowledge of the customers opening the new accounts. This practice was not documented in the firm's written CIP.

While not admitting or denying any of the SEC's findings, Crowell, Weedon consented to the issuance of a cease and desist order.  The order prohibits any further violations of the USA Patriot Act.

In Bill Graham Archives (BGA) v. Dorling Kindersley Ltd. (DK), the Second Circuit addressed whether the reproduction of images concert posters in a book constituted fair use under the Copyright Act of 1976.  The court concluded that it did.

The case involved a biography of the Grateful Dead published by DK. The biography includes seven images of concert posters to which BGA owns the copyright. DK reproduced the images without BGA’s permission. Initially, DK sought permission from BGA to reproduce the images. The parties disagreed as to an appropriate license fee. Nevertheless, DK published its book without entering a license fee agreement with BGA.

BGA sued for copyright infringement. The district court determined that DK’s reproduction of the images was fair use and granted DK’s motion for summary judgment.

E. & J. Gallo Winery v. Andina Licores S.A. involves a dispute between Gallo and its Ecuadorian distributor, Andina. Although the agreement between Gallo and Andina contained forum selection and choice of law clauses in favor of California, Andina sued Gallo in Ecuador. Gallo filed suit in California, seeking to enjoin Andina from pursuing the litigation in Ecuador. The district court denied Gallo's motion for an injunction. Gallo appealed.

• that Gallo need not meet the usual test of a likelihood of success on the merits of the underlying claim to obtain an anti-suit injunction;
  
• that the claims in both actions are the same;
  
• that the policy in favor of enforcing forum selection clauses would be frustrated by allowing Andina to pursue litigation in Ecuador;
  
• that refusing to enforce forum selection clauses in this context could have “considerable” ramifications on “international commerce;” and
  
• that the interest in enforcing the forum selection clause trumped comity concerns.