Los Angeles Business Litigation Blog

Should McGwuireWoods Get Paid?

Daniel Reisman — Sun, 14 Feb 2010 05:15:51 -0800

The WSJ Law Blog details an unfortunate predicament for McGwuireWoods. In short, after five long years of litigation in a massive class action suit, McGuireWoods will not, according to the district court's latest order, recover any of its $12 million fee. I'm not convinced the decision was fair.

Background

The problem arises from a conflict of interests due to a provision in the original retainer agreement among the firm and five of the seven representative plaintiffs.

Via the WSJ Law Blog:

In early 2007, a $49 million settlement was reached. But before the settlement was approved, it emerged that five of the seven plaintiffs acting as class representatives had an agreement with their lawyers at McGuireWoods which provided that they’d each receive so-called incentive payments after the settlement was approved.
The agreement stipulated that the five would get payments on a sliding scale; the more taken in by the class, the more they’d each get. Specifically, the agreements provided that if the case settled for $500,000 or more, the representatives would get $10,000. The payments would go up as the settlement figure went up, but were capped if the settlement figure reached $10 million.

According to the Ninth Circuit, the incentive agreements created a conflict of interests among the parties, and under well established rules of ethics, law firms may not represent parties, with presently conflicting interests, without written informed consent. To do otherwise, is an automatic ethics violation and grounds for disqualification.

To that end, the Ninth Circuit reversed Judge Real's original award of attorney's fees, and "remanded it for consideration of the effect, if any, of the incentive agreements on entitlement to fees." Rodriguez v. West Publishing Corp., 563 F.3d 948, 969 (9th Cir. 2009).

On remand, Judge Real decided McGuireWoods is not entitled to any fees because of the ethics violation.

A debatable decision at best

When a law firm violates ethics rules in other situations, as for example, agreeing to fee splitting without disclosure and client consent, a law firm may still recover in quantum meruit for the reasonable value of its services. Oftentimes, the reasonable value of the services is going to be far lower than the firm's full fee, but at least the firm doesn't walk away entirely empty handed.

In the present case, the court interpreted California law to bar quantum meruit recovery as well. However, the Ninth Circuit still left open the possibility for an order granting attorney's fees to McGuireWoods. While the Ninth Circuit certainly implicated that the award should be reduced, it did not hold that an absolute bar was necessarily the right outcome. Thus, the district court still had some room to determine whether some award of attorney's fees to McGuireWoods would be reasonable under the circumstances.

Considering that Judge Real found the $49 million settlement agreement to be fair, and the Ninth Circuit found no abuse of discretion in his doing so, it appears that the conflict of interests, although real, had little impact on the overall outcome of the case. (Also note, incentive agreements in class actions are not unethical per se. In fact, they are quite common.)

While I certainly do not condone unethical behavior, I also think that any measure taken by the court that is clearly punitive, such as reducing an award of attorney's fees, should be balanced against the actual harm that the ethics violation caused.

Where is the harm in this case?

Turning Piracy into Profit for Content Owners Has Some Ethical Pitfalls

Daniel Reisman — Tue, 30 Jun 2009 12:34:34 -0800

Mozilla officially released Firefox 3.5 today. One of its touted new features is Private Browsing mode (also known as "porn mode").

While private browsing may be useful for protecting sensitive information from some prying eyes, it's important to note that private browsing only means that Firefox won't save browsing history and cookies on one's local machine. In other words, you can now search for that perfect anniversary gift for your spouse online without the fear that he or she will be able to figure out what you were doing just by launching Firefox. However, your activity is still just as easy to track from another computer. (So, if any member of your household knows how to use a packet-sniffer, she'll still be able to see just ~~how much porn you're watching~~ how many gifts you're thinking about purchasing.)

Turning piracy into profit for content owners:

Piracy watchdog Nexicon has found the ultimate way to turn piracy into profit for the fresh copyright holders added to their clientele. They offer alleged file-sharers the chance to settle for $10 per downloaded song or an equal amount for a pirated movie. If you decide not to settle, they promise to bankrupt you in court.

(via TorrentFreak).

There's nothing wrong with content owners tracking the digital distribution of their work. And, there isn't necessarily anything morally, ethically, or legally wrong with pursuing infringers. However, Nexicon and its affiliates such as the Video Protection Alliance ("VPA") (which happens to deal exclusively with adult content) have crossed the line.

The article at TorrentFreak points the reader's attention to the FAQ on the VPA's website. While all of the questions and answers are obviously aimed to scare the recipient of a settlement letter into using the credit card processing system conveniently provided by the VPA to quickly settle the matter, there are two that are particular causes for concern. They are as follows:

How do I obtain a Liability Release & Settlement Receipt? Your Liability Release & Settlement Receipt will be automatically provided on screen and via email at the end of the settlement payment process.

Do I need a lawyer? As with any legal proceeding, the guidance and representation of a lawyer can be very important. It is likely that the cost incurred to retain a lawyer will exceed the settlement amount offered. The decision to hire a lawyer is entirely up to you.

Regarding the first question, the problem is that it doesn't provide any detail as to what a "Liability Release & Settlement Receipt" actually is. As far I as I know, there is no standard legal definition of a "Liability Release & Settlement Receipt." Nor would it be in the VPA's interest if there were a standard definition. While a "Liability Release & Settlement Receipt" could theoretically contain an actual settlement agreement and release from liability, there is nothing in the language used on the website to indicate that it actually does. Even if the receipt does contain language releasing the settlor from liability, it may be very narrowly drafted. And, of course, one doesn't actually get to see the "Liability Release & Settlement Receipt" until after payment is tendered.

Regarding the second question, it essentially advises the reader not to seek the independent advice of a lawyer, and simultaneously attempts to avoid advising the reader not to seek the independent advice of a lawyer. In my opinion, it is plainly unethical. In general, if a lawyer is going to advise an individual to take any sort of action that is in the lawyer's interest, but adverse to the individual's interest, the lawyer should encourage the individual to seek independent counsel. Although the VPA is neither a lawyer nor a law firm, to the extent that it offers legal advice, I see no reason as to why it shouldn't be bound by similar ethical standards. After all, the VPA's website isn't solely providing educational information, and it isn't just advertising--it's negotiating settlements.

Bozeman, MT Goes Phishing--Applicants Seeking City Jobs Must Disclose Usernames and Passwords

Daniel Reisman — Thu, 18 Jun 2009 08:28:03 -0800

It's no secret that more and more employers are doing a quick Google search for a job applicant’s name as part of their background checks, but the City of Bozeman is taking it one step further.

In an article published yesterday afternoon, Montana's News Station reports that applying for a city job now requires turning over some fairly sensitive information. Specifically, the background check form for city jobs requires applicants to

list any and all, current personal or business websites, web pages or memberships on any Internet-based chat rooms, social clubs or forums, to include, but not limited to: Facebook, Google, Yahoo, YouTube.com, MySpace, etc.,...There are then three lines where applicants can list the Web sites, their user names and log-in information and their passwords.

When the station asked Bozeman City Attorney Greg Sullivan about the new policy he stated,

So, we have positions ranging from fire and police, which require people of high integrity for those positions, all the way down to the lifeguards and the folks that work in city hall here. So we do those types of investigations to make sure the people that we hire have the highest moral character and are a good fit for the City...

In other words, in order to apply to become a lifeguard employed by the City of Bozeman, I can never have any expectation of privacy online. At any given time, some random city employee can use my login credentials to chat on AOL using my name. Perhaps the form should include authorization for the City to enable one-click purchasing on Amazon.com using my account in order to expedite the hiring process.

Although thorough background checks are mandated for certain types of jobs in both the public and private sectors, requiring all job-seekers, no matter the position, to disclose sensitive login information on an application that may be seen by dozens of people raises major concerns regarding discrimination, privacy, and the safety of data stored on remote servers.

[Update (6/19/09): According to this article in the Bozeman Daily Chronicle, the City's policy caused enough of a stir on the internet to prompt the ACLU to look into the matter. Consequently, "City Attorney Greg Sullivan said in light of concerns being expressed by the public, officials are looking at ways to alter the policy so that they might view an applicant’s online information without asking for log-in codes."]

[Update (6/21/09): According to cnet, Bozeman stopped asking for passwords as of midday on Friday.]

Don’t Judge a Complaint By Its Cover Sheet

Daniel Reisman — Sat, 13 Jun 2009 20:01:05 -0800

An elderly woman is suing Sacha Baron Cohen and NBC in Los Angeles County Superior Court for injuries she suffered, which left her permanently disabled, due to an incident at a bingo tournament where Cohen was filming for his upcoming movie “Bruno.” The lawsuit seeks unspecified damages of more than $25,000.

Gossip blog Gawker’s take on the matter:

We would hope that if this lady genuinely suffered brain bleeding that left her in a wheelchair that she's asking for much more than $25,000 in damages, but why she waited two years to file the suit is anyone's guess—-Some would say probably because it's all a bunch of BS.

Fellow legal blogger Maxwell Kennerly's explanation:

[A] suit that "seeks unspecified damages of more than $25,000" could be worth millions or billions of dollars. That allegation is nothing more than a legal term inserted in the complaint by the plaintiff's lawyer to let the clerk know that the case should be assigned to the full-fledged civil trial court and not the small claims court.

(via Litigation and Trial).

Generally, Kennerly is right. Specifically, in most types of Unlimited Jurisdiction cases, the amount in controversy must exceed $25,000 (see the mandatory Civil Case Cover Sheet). And, while a plaintiff is usually required to state the amount of damages he or she is seeking in a civil case in the complaint under section 425.10(a)(2) of the California Code of Civil Procedure (“CCP”), in personal injury cases, CCP § 425.10(b) specifically prohibits the plaintiff from stating the amount of the damages in the complaint.

Instead, the plaintiff must serve the defendant with a “separate statement of damages” that is not filed with the court. See CCP § 425.11. The reasoning behind the rule is that it protects defendants from adverse publicity resulting from exaggerated monetary demands since the separate statement of damages is not public record.

Of course, given that Sacha Baron Cohen essentially built his career by making an ass of himself in public and on film (frequently with hilarious results), I doubt he’s worried about the adverse publicity. Nevertheless, and despite the irony, even plaintiffs suing those who thrive on bad publicity are bound by the rule.

A Plaintiff Must Plead California UCL Causes of Action With "Heightened Particularly" in Federal Court

Daniel Reisman — Mon, 08 Jun 2009 20:56:54 -0800

In Kearns v. Ford Motor Co., No. 07-55835, 2009 WL 1578535 (9th Cir. June 8, 2009), the Ninth Circuit held that Federal Rule of Civil Procedure ("FRCP") 9(b) applies to causes of action under California's unfair competition laws brought in federal court. FRCP 9(b) requires that

when fraud is alleged, "a party must state with particularity the circumstances constituting fraud . . . ." [FRCP] 9(b). Where fraud is not an essential element of a claim, only those allegations of a complaint which aver fraud are subject to Rule 9(b)'s heightened pleading standard. Id. at *2.

Kearns brought a class action against Ford alleging that Ford Motor Company and its licensed dealerships conspired to mislead customers into paying more for "Certified Pre-owned Vehicles," which weren't actually any better than equivalent non-certified used cars.

According to Kearns, Ford misled its customers by making false statements regarding the overall safety and road-worthiness of Ford-certified pre-owned vehicles when compared to regular used cars. As a result of Ford's false statements, consumers were led to believe that the certified pre-owned vehicles were guaranteed safer than non-certified used cars when, in fact, they were not.

Kearns argued that Ford never maintained much oversight over the certification process. Thus, the certified pre-owned cars were really no safer than average used cars, and the average price difference between a certified pre-owned car and a regular used car was somewhere around $1,080.

Kearns further argued that Ford's behavior with regard to the certified pre-owned vehicles constituted violations of California's Consumer Legal Remedies Act, and California's Unfair Competiton Law. However, the district court dismissed the case because Kearns' complaint failed to state his claims with the requisite heightened particularity.

The Ninth Circuit affirmed the district court's decision, holding that since essentially all of Kearn's claims were grounded in fraud, his pleadings had to meet the "heightened particularity" requirement as articulated in FRCP 9(b). Kearns' claims that he relied on false or misleading television advertisements, and other misleading sales materials were too unspecific to satisfy FRCP 9(b). As the Ninth Circuit states,

[n]owhere...does Kearns specify what the television advertisements or other sales material specifically stated. Nor did Kearns specify when he was exposed to them or which ones he found material. Kearns also failed to specify which sales material he relied upon in making his decision to buy a [certified pre-owned] vehicle. Id. at *4.

What's the Point of the "Heightened Particularity" Standard for Fraud Claims?

Fraud claims are unique as they are basically excepted from the relatively loose federal notice pleading standard because of how potentially damaging they may be to the defendant's reputation. As the Ninth Circuit explains,

[FRCP] 9(b) serves three purposes: (1) to provide defendants with adequate notice to allow them to defend the charge and deter plaintiffs from the filing of complaints "as a pretext for the discovery of unknown wrongs"; (2) to protect those whose reputation would be harmed as a result of being subject to fraud charges; and (3) to "prohibit [ ] plaintiff[s] from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis." In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996) (quoting Semegen v. Weidner, 780 F.3d 727, 731 (9th Cir. 1985)). Id. at *3.

In short, the heightened standard is supposed to deter serious accusations of fraud and conspiracy that lack a real basis in fact; however, I've never been quite convinced that it actually serves that purpose. Rather, it seems that it serves to deter accusations of fraud and conspiracy that lack a basis in specific facts known to the plaintiff when filing a claim. But, isn't formal discovery at least in part designed to give the parties access to evidence that independent investigation and other methods of informal discovery might otherwise fail to uncover?

I also find it odd that of the three purposes behind FRCP 9(b), as stated by the courts, not one of them specifically mentions that a successful fraud claim can lead to large punitive damages awards. What other "enormous social and economic costs" could the Ninth Circuit be referring to?

How effective is litigation as a vehicle for negotiating a business deal?

Daniel Reisman — Fri, 29 May 2009 13:41:01 -0800

Via The Complete Lawyer, Savvy Lawyers Value Their Human Capital:

Use litigation as an opportunity to negotiate a business deal. In hard economic times, GC’s are not in the “millions for defense but not a penny in tribute” mood. Google’s GC Eric Schmidt famously said that litigation is “just a business negotiation being conducted in the courts.” The more working parts any potential business deal has, the easier it is to find solutions that benefit both parties in different ways. Before we can explore the most effective and efficient business solution to a commercial problem, we must shed our merits-based resolution blinders and explore the parties’ commercial interests. One of the swiftest means of doing so is bringing the decision-makers on both sides to the planning, problem-solving and bargaining table. If the parties agree that these brain-storming sessions can be considered “mediations” you can avail yourself of state or federal confidentiality protections. Then let the business people do what they do best: plan for a productive future rather than fighting about an unproductive past.

Settling earlier often means spending less and potentially earning more. But, shedding “our merits-based resolution blinders” may not be so easy. Clearly delineating and distinguishing among commercial interests and personal interests can be difficult for both lawyer and client, especially when smaller businesses and/or individuals are involved. Many business relationships are also personal relationships. Thus, the negative impact of a dispute that reaches litigation on, for example, longstanding friendships, may prove difficult to ignore. While a collaborative approach to dispute resolution may lead to a productive future, sometimes moving forward may require a judgment about an unproductive past.

California Continues to Endorse Unconstitutional Content Restriction

Daniel Reisman — Sat, 23 May 2009 09:11:00 -0800

Back in February I wrote about the Ninth Circuit decision holding a 2005 California law banning the sale of violent video games to minors unconstitutional.

Apparently, California isn’t satisfied with that ruling. According to the Associated Press, Attorney General Jerry Brown has petitioned the Supreme Court for a Writ of Certiorari to review the Ninth Circuit’s holding in Video Software Dealers Association v. Schwarzenegger, 556 F.3d 950 (9th Cir. 2009).

So, instead of focusing on the budget crisis, prison overcrowding, and/or subpar public schools, California is going to spend as much money as possible trying to keep our impressionable youth from playing GTA IV. Then again, maybe the excessive penalties that video game retailers will face for selling a game to a minor that someone in Sacramento decided was too violent for innocent children will solve all the budget woes?

Hopefully, the Supreme Court will just deny cert, saving both the video game industry and the taxpayers money. I doubt that even the conservative justices on the Supreme Court really want to tackle the issue of whether the definition of obscenity should be extended to include violence.

On the other hand, if the Court does hear the case and rules in favor of the State, it may become easier for kids to figure out which video games are the best. All they’ll have to do is look for the big “18” sticker on the front of the boxes.

You can find a copy of California’s petition here (warning: pdf).

The Business of Fee Disputes and Mandatory Fee Arbitration

Daniel Reisman — Fri, 22 May 2009 17:59:49 -0800

Most attorneys that I know are vigilant about their billing practices, and upfront with their clients about them. But, as with any other contractual relationship, disputes inevitably arise. And, in an effort to cut costs due to the economic climate, both individuals and businesses are paying much closer attention to their bills lately. So, it shouldn’t come as much of a surprise that law firms are looking for a way to cash-in on clients’ new spendthrift habits.

Although attorneys who specialize in managing costs and fees of litigation as well auditing other attorneys’ billing practices have been around for ages, I wouldn’t be surprised if other mid-sized firms started looking for partners with specific experience in related areas.

At Legal Blog Watch, Carolyn Elefant writes:

Manchester, England-based law firm Boote Edgar Esterkin has figured out a novel way to generate more revenue. Instead of charging clients more for the firm's services, Boote Edgar has created a new practice specialty going after other law firms for overcharging, reports Crain's Manchester Business. The service, which is called ab8, will help clients either by opening formal negotiations on behalf of customers who believe they’ve been overcharged by their law firms or, in some cases, issuing proceedings against firms.

According to Mark Yaffe, the associate who will run the new service,

[t]here are strict rules governing how solicitors provide information to their clients, especially in relation to costs. Solicitors have a duty to provide their clients with the ‘best information possible’ at the outset of any matter, and this ought to include a clear and concise explanation of the total costs involved.

Lawyers in California Are Not Usually Bound by Their Initial Estimates.

Lawyers in California do not have the same duty as their British counterparts regarding initial fee quotes. Although it’s a good practice to provide clients with the best information possible at the outset of a matter, most lawyers who do are also careful to explain that litigation can be very unpredictable (which is certainly true), and the costs and fees they quote at the outset of a matter are just an estimate.

The Mandatory Fee Arbitration Act

The problem, especially for individuals and small businesses with limited resources, with hiring another lawyer to “go after” a previous lawyer for overcharging is the expense of hiring another lawyer. Consequently, the California Legislature enacted the Mandatory Fee Arbitration Act (“MFAA”). Cal. Bus. and Prof. Code. §§ 6200-6206.

The policy behind the mandatory fee arbitration statutes...is to alleviate the disparity in bargaining power in attorney fee matters which favors the attorney by providing an effective, inexpensive remedy to a client which does not necessitate the hiring of a second attorney. Manatt, Phelps, Rothenberg & Tunney v. Lawrence, 151 Cal. App. 3d 1165, 1174-1175 (1984).

The MFAA provides that if a dispute over costs and fees for legal services arises between a lawyer and a client, the client may choose to have the case heard before an arbitration panel under procedures established by the State Bar. The arbitration is optional for the client and mandatory for the lawyer, regardless of which party initiates a fee suit. The arbitration is only binding, however, if the attorney and client so agree in writing after the dispute has arisen. Otherwise, either party may request a trial de novo (something similar to an appeal) within 30 days after the arbitration has concluded.

Also, a lawyer who intends to a initiate a fee dispute against a client is required to notify the client of his or her right to arbitration under the MFAA. Otherwise, there may be grounds for dismissal.

A few important things to keep in mind regarding mandatory fee arbitration:

The courts are not fond of dismissing suits because the lawyer neglected to serve the MFAA notice, especially if the client doesn’t actually want to arbitrate.
If the client is already aware of his or her right to arbitration under the MFAA, the lawyer’s failure to give MFAA notice may not result in a dismissal.
A dismissal with prejudice based on the lawyer’s failure to give MFAA notice is an abuse of discretion.
If the client brings any action for affirmative relief against the lawyer that isn’t specifically limited to the dispute over costs and fees, the right to MFAA arbitration is waived.
If the attorney files a complaint against the client, and the client answers the complaint, the right to MFAA arbitration is waived.
Most importantly, the judgment of the arbitration panel is not binding for either party, unless the (a) parties otherwise agreed to in writing, or (b) neither party requests a trial de novo within 30 days after the arbitration.

Also of note, a binding arbitration agreement in an agreement for legal services is still binding even if the client requests MFAA arbitration. In other words, if there is a relevant binding arbitration clause in the in the contract between the lawyer and the client, the lawyer may compel the contractually based arbitration proceedings after the MFAA arbitration. See Schatz v. Allen Matkins Leck Gamble & Mallory LLP.

Big Law Firms Cutting Summer Programs May Ultimately Broaden Job Prospects

Daniel Reisman — Wed, 13 May 2009 12:30:02 -0800

What if lawyers could get jobs at big firms after they've been lawyers for a few years? If big law firms cut their summer programs, and in turn, dismantle the formal hiring process that basically starts and ends during the first semester of a student's second year in law school, it might just happen.

According to The National Law Journal's L.A. Legal Pad,

With no sign of a lasting rebound in the wider economy, some law firm leaders are playing it safe by reducing their 2010 summer programs or skipping them altogether.

Personally, I think that big firms should cut their formal summer programs entirely.

The idea of securing a job through on-campus interviews during the fall of one's second year in law school with a start-date just over two years away is ridiculous. It creates a false sense of security, and it puts too much emphasis on a student's grades from his or her first year in law school.

I don't think that firms should necessarily stop hiring law students for summer positions; however, I think that the focus of summer employment should shift from lining up next year's crop of associates to actually providing the students with some practical experience.

Clients are increasingly requesting that law firms refrain from staffing cases with first-year associates in order to cut down on their legal fees. Clients tend to think of a lawyer's first year as nothing more than on-the-job training, and they don't want to pay for it. Also, partners at large firms often prefer to hire laterals, who already have experience in specific areas. However, the big firms' formal hiring processes--which start with summer programs--make it nearly impossible for a student who chooses not to go through on-campus interviewing during his or her second year of law school to get a job at a big firm at all.

The result? Law students are advised to get a job at a big firm for a couple years before doing anything else--even if said students have no desire to work at a big firm--because they may never get another chance. Instead of working up the pay ladder, many lawyers are paid more for their first two years of practice than for their next ten.

If big law firms break with tradition by ending their summer programs and their formal yearly hiring processes, hiring partners will be able to hire associates based on academic credentials and experience. Clients will be happier because they'll at least think that they're getting a better deal. Most importantly, law students, and new lawyers will be able explore different career choices without the fear that there's no chance they'll ever get hired at a big prestigious firm.

Overall, lawyers may actually be able to work their way up into big firms based on broad qualifications rather than just their grades from their first years of law school.

MN Supreme Court Decision on Breathalyzer Source Code Intentionally Ambivalent?

Daniel Reisman — Mon, 04 May 2009 07:59:35 -0800

Last week, the Minnesota Supreme Court ruled that one DWI defendant is entitled to examine the source code of the breathalyzer used to determine his blood alcohol content, and that another DWI defendant is not entitled to examine the source code of the same make and model of breathalyzer.

The court reasons as follows:

Under Minn. R.Crim. P. 9.01, subd. 2(3), it was an abuse of discretion for a district court to order discovery of the source code of the Intoxilyzer 5000EN when a defendant did not submit any evidence on how the source code may relate to his guilt or innocence; however, it was not an abuse of discretion for a court to order discovery of the source code to a defendant who submitted evidence that an analysis of the source code may reveal deficiencies that could challenge the reliability of the Intoxilyzer and would relate to his guilt or innocence. State v. Underdahl, Nos. A07-2293, A07-2428, 2009 WL 1150093 (Minn. Apr. 30, 2009).

The evidence presented by the defendant who won access to the code consisted of a definition of source code, and a declaration by a computer science professor discussing voting machines and the law regarding breathalyzer source code in New Jersey. The unsuccessful defendant's lawyer argued that he should have the right to attack the reliability of the test itself, and that the source code was necessary in order to do so, but he only did it during oral argument. Apparently, this is not a distinction without a difference although I fail to understand why.

From a cynical point of view, I guess there is a positive aspect of the decision--since the court reached two completely opposite conclusions in two very similar cases, it left the breadth of trial courts' discretion in discovery matters intact. From a reasonable point of view, the decision leaves the question of whether defendants in DUI or DWI cases should have access to breathalyzers' proprietary source code unanswered.

In sum, both DWI defendants want to challenge the reliability of the breathalyzer through analysis of the source code. One of the defendants won the right to do so because he presented evidence that the source code "may reveal deficiencies about the test's reliability." That evidence was based on access to proprietary source code obtained in a case in New Jersey. So, in order to provide evidence sufficient for discovery purposes that the State should grant a defendant access to otherwise inaccessible proprietary source code, one must provide a copy of buggy proprietary source code. I believe computer programmers would call this an infinite loop.

Wikipedia Entries Still Aren't Admissible Evidence

Daniel Reisman — Wed, 22 Apr 2009 13:23:11 -0800

An article in the North Jersey Crime Examiner reports that an appellate court in New Jersey reversed the judgment in a collection case because the lower court mistakenly admitted a Wikipedia entry into evidence during a bench trial. The case is a good example of what not to do at trial.

The plaintiff collections agency allegedly acquired the defendant debtor's delinquent credit card account as part of a portfolio of delinquent accounts originating from Bank One Corporation. It sued the defendant alleging $30,000 in unpaid credit card debt. See Palisades Collection, L.L.C. v. Graubard, 2009 WL 1025176 (N.J.Super.A.D. Apr. 17, 2009).

At the beginning of the trial, the plaintiff, invoking the doctrine of judicial notice, offered a Wikipedia entry into evidence "to establish that Bank One Corporation was purchased by J.P. Morgan & Company in 2004," which the trial court accepted. At the conclusion of the trial, the court entered a judgment against the defendant for approximately $18,000.

On appeal, the defendant argued that the trial court should not have admitted the Wikipedia entry into evidence. Consequently, the plaintiff failed to meet its burden with regard to standing because it lacked sufficient evidence to prove ownership of the debt. The appellate court agreed.

The court reasons,

[t]he trial court's acceptance of Wikipedia was...contrary to the principle that judicial notice must be based upon "sources whose accuracy cannot be reasonably questioned."

The court further explains,

it is entirely possible for a party in litigation to alter a Wikipedia article, print the article, and thereafter offer it in court in support of any given position. Such a malleable source of information is inherently unreliable, and clearly not one "whose accuracy cannot be reasonably questioned."

As a final note, the court's reasoning here is also consistent with a case decided late last year in Texas. In Flores v. Texas, the court noted that Wikipedia's openness--its greatest strength--is also its greatest weakness. Again, since anyone can edit the material on Wikipedia, the court declined to rely on its accuracy. See Flores v. Texas, No. 14-06-00813-CR., 2008 WL 4683960 (Tex. App. Oct. 23, 2008).

With One Billion Apps Downloaded, Should Apple Be Worried About iPhone Hackers?

Daniel Reisman — Thu, 16 Apr 2009 17:37:14 -0800

As I write this post, about 965,000,000 iPhone applications have been downloaded from Apple's App Store. Apple is celebrating by giving away a variety of free Apple products to the lucky billionth downloader. Nevertheless, Apple wants the right to sue iPhone owners who jailbreak their phones.

However, as law professor Mark Roark points out in a column published in the Daily Journal (subscription required) yesterday, [t]here is just one problem. The law does not necessarily afford Apple a remedy. See Mark L. Roark, Will iPhone Network Hacking Shake Apple to Its Core?, L.A. Daily J., Apr. 15, 2009, at 5.

Presently, according to Roark, Apple cannot sue under the Digital Millennium Copyright Act ("DMCA") (that may change in October). However, Roark suggests that Article 2 of the Uniform Commercial Code ("UCC"), may allow Apple to maintain control of endusers' behavior through the terms of the iPhone's warranty. In short, Apple's warranty for the iPhone could include enforceable terms stating that if a user alters the hardware or software, the user loses the warranty. See Id.

Finally, Roark discusses some empirical research he conducted with 150 individuals. The results essentially suggest that the threat of losing the warranty is enough to deter a decent percentage of consumers from altering their iPhones, depending on how valuable the consumer perceives the warranty to be. See Id.

In essence, Apple, or any other device-maker, can lawfully maintain a certain level of control over their products, without resorting to threats of litigation because it can still reduce the value of the device post-purchase. But, for Apple it doesn't seem to be enough.

Apple's warranty for the iPhone most likely already prohibits jailbreaking.

The Genius Bar at your local Apple Store probably won't provide service for an iPhone that is obviously jailbroken because the warranty is already rather restrictive.

The relevant terms of the iPhone 3g's warranty already includes the following language:

This warranty does not apply...to damage caused by operating the product outside the permitted or intended uses described by Apple; [or]...to a product or part that has been modified to alter functionality or capability without the written permission of Apple. See Apple's Limited Warranty for the iPhone 3g (warning: pdf).

Apple also has similar provisions in its warranties for its other products although they generally aren't quite as strict with regard to software.

Jailbreaking an iPhone is not the same thing as unlocking it.

One thing that Roark overlooks in his column is that there is a distinction between jailbreaking and unlocking an iPhone. The process of jailbreaking entails altering the iPhone so as to allow it to run applications other than those from Apple's official App Store. Unlocking, on the other hand, refers to enabling the iPhone to be used on other cellular networks. Presumably, unlocked phones threaten the profits of both Apple and AT&T whereas jailbroken phones really only threaten Apple's monopoly over the software distribution channel.

Apple contends that merely jailbreaking an iPhone should be illegal under the DMCA.

In February, the Electronic Frontier Foundation ("EFF") submitted exemption requests to the U.S. Copyright Office as part of the 2009 DMCA Triennial Rulemaking. One of them pertains specifically to jailbreaking.

Proposed Class #1: Computer programs that enable wireless telephone handsets to execute lawfully obtained software applications, where circumvention is accomplished for the sole purpose of enabling interoperability of such applications with computer programs on the telephone handset. (The entire text is available here as a PDF).

In its opposition, Apple argues that the EFF is trying to use the DMCA exemption to change Apple's business model.

Specifically, [the EFF] seeks through the proposed exemption to clear the path for those who would hack the iPhone's operating system so that a proprietary mobile computing platform protected by copyright can be transformed into one on which any third party application can be run, without taking account of the undesirable consequences that would ensue from the transformation. (The entire text of Apple's Comment is available here).

The Copyright Office will issue its final rulemaking order in October.

So, should Apple have the right to sue individuals who run unapproved third-party software on their iPhones?

I'm still somewhat undecided. In any case, I don't think it would be particularly worthwhile for Apple to start suing its customers. I doubt that the threat of litigation will prove an effective deterrent to iPhone hackers. Moreover, both the EFF and Apple agree that there are only a few hundred thousand jailbroken iPhones even though millions have been sold.

At best, Apple may get a few popular websites to shutdown. At worst, Apple will find itself in a position similar to that of the RIAA.

Bits that Bite Back: Republishing Your MySpace Blog Without Your Consent Is Not An Invasion of Privacy

Daniel Reisman — Wed, 08 Apr 2009 21:49:20 -0800

"Undo Send"—Five More Seconds to Change Your Mind

Gmail Labs added a new feature a few weeks ago—Undo Send. If enabled, a user has about 5 seconds to "hit the panic button" before the message is sent.

On one hand, given the time limitation, the feature's uses are limited. On the other hand, five seconds may, for example, be just long enough to realize that one made the commonly embarrassing and potentially damaging mistake of selecting "Reply to All" instead of "Reply."

Hitting the Panic Button Too Late—Moreno v. Hanford Sentinel, Inc.

Unfortunately, there generally isn't a simple way to undo the damage an ill-conceived email or blog post (or Tweet) can do—as is the case in Moreno v. Hanford Sentinel, Inc., No. F054138, 2009 WL 866795 (Cal. Ct. App. April 2, 2009). See also Mike Mckee, MySpace Musings Aren't Private, Appeals Court Rules, Law.com, April 6, 2009.

Background: Moreno v. Hanford Sentinel, Inc.

In 2005, after returning from a visit with her family in her hometown of Coalinga, CA, Cynthia Moreno, an undergraduate at UC Berkeley, wrote "An Ode to Coalinga" and posted it on her MySpace page. Apparently, she didn't have anything positive to say. As the court describes it,

[t]he Ode opens with "the older I get, the more I realize how much I despise Coalinga" and then proceeds to make a number of extremely negative comments about Coalinga and its inhabitants. Moreno, No. F054138, 2009 WL 866795, at *1-2.

Six days after posting the Ode, Moreno decided to take it down, but it was too late. Cynthia's high school principal in Coalinga had already read the post and given a copy to his friend, the editor of a local newspaper. The editor then republished Ode in the paper, and, of course, attributed it to Cynthia Moreno. Id. at *2.

Moreno's family received hate mail and death threats. Her father was forced to close the 20 year-old family business, and, ultimately, the family was forced to move. Id.

The family sued the principal, the school district, the editor, and the newspaper for invasion of privacy and intentional infliction of emotional distress ("IIED"). The editor and the newspaper were dismissed as defendants after winning an anti-SLAPP motion and motion to strike. The principal and the school district demurred to both of the plaintiffs' theories of liability, and the trial court sustained the demurrer on both claims without leave to amend.

On appeal, the court upheld the trial court's dismissal of the invasion of privacy claim, holding that the author of an article published on MySpace.com cannot state a cause of action for invasion of privacy against those who republished the article in a local newspaper. However, the court still allowed the case to move forward on at least one theory of liability by reversing the ruling of the trial court with regard to the claim of IIED. See Id.

Where nothing private is revealed, there is no invasion of privacy.

Eric Goldman, at his Technology & Marketing Blog, explains the court's decision as follows:

The privacy invasion claim was easily rejected. Once Moreno posted the essay to an open-to-the-public MySpace page (even if only briefly), it was no longer private. As the court says, "the fact that Cynthia expected a limited audience does not change the above analysis. By posting the article on myspace.com, Cynthia opened the article to the public at large. Her potential audience was vast." It also did not matter that Moreno did not use her last name on her MySpace page; the court says that her identity was readily ascertainable from her MySpace page (which included a photo)...

So, does publication on the internet necessarily bar invasion of privacy actions?

In Moreno, the court doesn't entirely foreclose upon the possibility that one may still have a right to keep something private, even if published on the internet, but it certainly doesn't provide a clear test.

Using language borrowed from a case where alleged trade secrets were leaked online, the court states "[t]he publication was not so obscure or transient that it was not accessed by others." Id. at *3. This language raises at least two questions. First, does the work have to obscure and transient even if it isn't accessed by others? Second, can a work be accessed by others, and still be obscure and transient enough to retain its private status?

The trade secrets case that the court cites in Moreno doesn't provide much guidance because, with regard to leaked trade secrets,

[t]he concern is whether the information has retained its value to the creator in spite of the publication. Publication on the Internet does not necessarily destroy the secret if the publication is sufficiently obscure or transient or otherwise limited so that it does not become generally known to the relevant people, i.e., potential competitors or other persons to whom the information would have some economic value. DVD Copy Control Ass'n Inc. v. Bunner 116 Cal. App. 4th 241, 251 (2004) (citations omitted).

Since there is no dispute over the economic value of Cynthia Moreno's Ode, most of the analysis above is inapplicable in her case. Also, the court in Moreno seems to have conspicuously omitted the language about becoming known to the relevant people.

What if Cynthia Moreno's high school principal was the only person who read the Ode? Would the Ode have then been "transient and obscure" enough to remain private?

New Century v. KPMG - Should Theories of "Gatekeeper Liability" Allow Private Causes of Action for Fraud Against Third Parties?

Daniel Reisman — Thu, 02 Apr 2009 18:57:46 -0800

Kevin La Croix, at his blog, The D&O Diary, writes,

In a development that may foreshadow further "gatekeeper" claims as part of the current credit crisis litigation wave, on April 1, 2009, the trustee for the New Century Financial Corp. liquidation initiated lawsuits in California and New York against KPMG and its international parent, seeking to recover $1 billion in damages for negligence and for aiding and abetting breaches of fiduciary duty.

After a thorough summary of the complaints filed against KPMG, he further states,

[t]he trustee’s filings in these complaints certainly suggest the possibility that auditors and other "gatekeepers" could be targeted in the wake of the subprime meltdown. Id.

Moreover, The Wall Street Journal points out that

[t]he claims are among the first to attempt to blame auditors for the subprime-mortgage crisis, which spread beyond lenders such as New Century and engulfed the global financial system.

In order for private plaintiffs to successfully litigate claims like the ones the New Century trustee asserts against KPMG, some theory of "scheme liability," or "gatekeeper liability" will most likely need to be accepted by the courts.

In 2007, the Supreme Court rejected a theory of "scheme liability" in the context of securities fraud litigation in Stoneridge Investment Partners v. Scientific-Atlanta. SCOTUSblog summarized the Court's holding in 2007 as well as the background of the case as follows:

Investors, the Court said, may only sue those who issued statements or otherwise took direct action that the investors had relied upon in buying or selling stock — whether that involved public statements, omissions of key facts, manipulative trading, or conduct that was itself deceptive.

***

The case involved what has been called “scheme liability,” in which everyone involved in a plot to deceive securities investors would be legally at fault, whether or not each of them had issued any public statements. The Securities and Exchange Commission had previously supported such liability, and wanted to enter the Stoneridge case to say so, but its participation was vetoed by the Bush Administration, with President Bush and Treasury Secretary Henry Paulson directly involved in the decision to keep the SEC out of the case. The Court took the case apparently to resolve a dispute among federal appeals courts on the issue.

Since "gatekeepers" are generally third parties, e.g., auditors like KPMG, Stoneridge has been construed so as to deny private causes of action for securities fraud based upon almost all theories of "gatekeeper liability." However, the plaintiffs in Stoneridge were investors. Here, the plaintiff is the New Century trustee. Furthermore, the trustee's claims for negligence and aiding and abetting breach of fiduciary duty, at least in California, are brought under California law whereas Stoneridge addressed fraud claims pursuant to federal law. So, one question is whether the holding in Stoneridge is even applicable, at least in California.

Also, in Stoneridge, the Court states that third parties, or "secondary actors" may be held both civilly and criminally liable for their roles in securities fraud; however, only the SEC may pursue civil remedies against said secondary actors. Thus, another question, as to whether these remedies are adequate, may arise.

The outcomes of New Century v. KPMG and similar lawsuits may eventually provide some answers to these questions. In any case, at least one thing that is certain--theories of "gatekeeper liability" are not dead.

How Much Can Be Accomplished in One Month?

Daniel Reisman — Mon, 30 Mar 2009 13:46:13 -0800

On the transactional side, the Obama Administration seems to believe that quite a bit can be accomplished in as little as thirty days. The administration released a report yesterday about the crisis in the auto industry, which states, among other things, that Chrysler has until April 30 to finalize an agreement with Fiat as well as reduce health care and other debt in order for the company to receive more aid according to The New York Times. In other words, the struggling automaker has about thirty days to put a massive agreement together that a variety of interested parties find satisfactory.

Normally, joint ventures, however categorized, take at least a few months to materialize, and joint ventures of international scale can take years. However, I think the Obama Administration has at least one good reason to impose such a harsh deadline on the agreement--if Chrysler does finalize an agreement with Fiat by April 30, it will show that, at least when necessary, both government and private business (or whatever amalgamation we have now) can act fast, and perhaps even efficiently.

Of course, in this case, there are unusual and extraordinary circumstances involved given the government-imposed ultimatum that Chrysler faces. The question is whether such circumstances are necessary in order for large business transactions to move at a fast pace.

Similarly, on the litigation side of the fence, disputes that have reached litigation may still be resolved in a relatively short timeframe, depending on the willingness of the parties to settle.

For example, Ars Technica reports that Microsoft and TomTom have settled their patent dispute. I discussed Microsoft's suit against TomTom in a previous post. In short, Microsoft sued TomTom alleging patent infringement. In the time since that post, TomTom filed a counter-claim for patent infringement against Microsoft.

As far as I know, the exact details of the settlement have not been released, but, according to Ars Technica, TomTom essentially agreed to pay Microsoft for its patents and remove support for the FAT filesystem from its products over the next two years.

While the few details released seem to imply that the agreement is a little one-sided, Microsoft and TomTom still managed to resolve their patent dispute in about a month. Thus, despite the size of the businesses and the scope of the claims involved, it was apparently possible to reach an agreement rather quickly.

Recent Study, Test Finds Effective Lawyers Are Effective

Daniel Reisman — Wed, 25 Mar 2009 01:34:56 -0800

In a recent article, the NY Times reports that researchers at UC Berkeley “have come up with a test that they say is better at predicting success in the field than the widely used Law School Admission Test [LSAT].”

For the uninitiated, the LSAT is the standardized test that all law school hopefuls must endure because the majority of law schools rely very heavily on an applicant’s LSAT score during the admissions process.

But, according to the Times, the LSAT is a poor measure of how the potential law student will actually perform as a lawyer. In response, the aforementioned researchers developed a new test.

First, the researchers identified 26 factors that measure “raw lawyerly talent.”
Next, they interviewed a variety of individuals in the legal profession, asking them to identify lawyers whom they consider to be “effective.”
Finally, they administered the test to 1,100 lawyers.

Shockingly, when the results came in, the researchers concluded that the experimental test is much better at “predicting lawyer effectiveness” than the LSAT, which, at best, only predicts how a potential law student will perform in law school. (Note, however, that the LSAT is not regularly administered to lawyers as most lawyers, having already graduated from law school, have no need to take an admissions test for law school.)

Apparently, the new test relies on questions designed to gauge how well subjects respond to relevant hypothetical situations.

For example, it might describe a company with a policy requiring immediate firing of any employee who lied on an application, then ask what a test taker would do upon discovering that a top-performing employee had omitted something on an application.

Policies? Employees? Personally, I’d call an employment lawyer (just to be on the safe side).

To be fair, the article does note that the researchers realize that the “the participants might have performed differently on it, had they taken the test when they were applying to law school.” (Then again, I would guess that most people who can’t speak Russian would probably perform rather poorly on a test in Russian.)

I’m not trying to defend the LSAT. And, I imagine that the researchers’ new test probably does do a better job at predicting how a subject will perform as a lawyer since it seems to require attending law school in order to answer the questions.

The problem is that we already have a test for law school graduates who would like to become licensed attorneys…

The Post-Credit Collapse Future of Litigation, Securities Fraud, and the State of the "Group Pleading Doctrine" in California

Daniel Reisman — Mon, 23 Mar 2009 21:48:26 -0800

It seems that legal trade publications may have finally tired of reporting on the mass layoffs at big firms as they have — day after day — for the past several months. Either that, or the numbers of daily layoffs at major law firms have decreased enough since late February and early March to appear less newsworthy. See e.g., Martha Neil, March Mayhem: Law Firm Layoffs in 1 Week Total Nearly 1,500, Mar. 4, 2009. In any case, I find it a welcome respite.

Instead, (in what I would call a trend for the better) reports of how lawyers are dealing with the current financial crisis and reshaping their practices accordingly are finding their way to publications' front pages. For example, last Tuesday the Daily Journal (subscription required) featured former San Diego City Attorney Mike Aguirre discussing his ambition to develop his new law firm into the "center of credit derivative litigation." According to the article, "[Aguirre] wants nothing short of effecting regulatory reforms, he said. 'I've never been interested in putting on blinders and doing litigation in the abstract,' he said. 'Long term solutions need to be hammered out in Congress." And, according to a founding partner at a successful securities litigation boutique, also in San Diego, "'[C]ertainly, given the credit crisis and mortgage meltdown we are experiencing now, there is more than enough opportunities to represent victims. There is certainly enough fraud to go around these days.'" See Pat Broderick, Former City Attorney Pins Hope on Derivatives, L.A. Daily Journal, Mar. 17, 2009, at 1.

Coincidentally, on Friday, Division One of the Fourth Appellate District Court of Appeal (in only the second published California case to even address the topic) ruled on the somewhat controversial "group pleading doctrine" in the context of state securities litigation. See Bains III v. Moores, No. D052533, 2009 WL 723530 (Cal. Ct. App. Mar. 20, 2009). "The doctrine, where applicable, allows a party to attribute collective statements made by a company to individual members of the company's board of directors." Id. at *15.

The facts of the case revolve around allegedly fraudulent accounting and financial statements made by Peregrine Systems, Inc. Id. at *1.

In short, the plaintiffs in Moores filed suit against three former directors of Peregrine Systems, Inc. alleging accounting and financial fraud under California Blue Sky Laws as well as common law theories of fraud and deceit. The trial court granted summary judgment in favor of the defendants because the plaintiffs failed to identify information from which a jury could find that the defendants knew about the alleged fraud. Id. at *15, *1. The plaintiffs argued that the group pleading doctrine should apply; therefore, any fraudulent statements that the company may have made could be imputed to the defendants. The Court disagreed.

The Court held "that the group published information doctrine, or group pleading doctrine, as its alternative name suggests, is a pleading device that has no application in the summary judgment context." Thus, "'the group pleading doctrine' does not apply in determining whether a party has present sufficient evidence of its claims to avoid summary judgment, under California law." Id. at *19.

The only other published California case dealing with the group pleading doctrine is Kamen v. Lindly, 91 Cal. App. 4th 197 (2001). There, the Kamen court adopted the Ninth Circuit's view of the group pleading doctrine, or group published information doctrine. The Ninth Circuit developed the doctrine as follows:

In cases of corporate fraud where false and misleading information is conveyed in prospectuses, registration statements, annual reports, press releases or other ‘group-published information,’ it is reasonable to presume that these are the collective actions of the officers. Under such circumstances, a plaintiff fulfills the particularity requirement of [Rule 9(b) of the Federal Rules of Civil Procedure (28.U.S.C.) ] by pleading the misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations. Moores, No. D052533, 2009 WL 723530, at *16.

And, subsequent decisions extended the doctrine to apply to outside directors in addition to officers, who are responsible for day-to-day operation of the company. Id.

The Court agrees with the decision in Kamen based on the rationale that it is difficult for a plaintiff to obtain enough information regarding the perpretrators of corporate fraud to plead fraud with the requisite heightened particularity. But the court in Kamen only addressed the doctrine with regard to the sufficiency of the pleadings. Id. at *17. Here, in Moores, the Court must address it in the context of an evidentiary motion.

In explaining its decision, the Court first notes that the "rationale for invoking the doctrine is less compelling in the context of a summary judgment when discovery is complete." Id. at *18. Second, the Court points out that there is a circuit split as to whether the doctrine should even apply at all because of the stringent pleading requirements adopted in the Private Securities Litigation Reform Act of 1995 ('PSLRA'). (The PSLRA requires that allegations of fraud based on information and belief must "state with particularity all facts on which that belief is formed." 15 USC § 78u-4(b)(1).). Given these factors, the Court concludes "that the doctrine is one that applies, if at all, only in determining the sufficiency of a plaintiff's pleadings." Id. at *19.

Overall, although it appears that the group pleading doctrine is recognized under California law, its future seems rather uncertain.

As the Pendulum Swings: Is the Standing Requirement for 17200 Claims Too Strict?

Daniel Reisman — Wed, 18 Mar 2009 10:18:50 -0800

Prior to 2004, challenging a 17200 claim based on the plaintiff’s lack of standing was nearly impossible. Now, less than five years later, the Court of Appeal not only embraced the 2004 amendment to section 17204, it gave it teeth.

Section 17204 of the California Business and Professions Code used to allow almost anyone to sue under California's Unfair Competition Law (‘UCL’) (Cal. Bus. & Prof. Code § 17200), so long as the person was acting in the interest of the general public.

In 2004, Proposition 64 passed, and the relevant section of code was amended to include an actual standing requirement for private causes of action under the UCL. Now, only a “person who has suffered injury in fact and has lost money or property as a result of the unfair competition” (§ 17204) has the requisite standing.

At first glance, section 17204’s standing requirement still seems rather broad. However, in Troyk v. Farmers Group, Inc., No. D049983, 2009 WL 597256 (Cal. Ct. App. Mar. 10, 2009), the Court of Appeal suggested otherwise by reversing a summary judgment in favor of the plaintiff because the plaintiff did not sufficiently allege that he met the standing requirement of section 17204.

The plaintiff, Thomas Troyk, filed a class action against the defendant insurance company because his agreement with the defendant required him to pay a five dollar monthly service charge for the payment of his car insurance policy’s one-month term, which was not stated in his policy. Id. at *12, *30. Troyk alleged that the extra monthly charge violated the Insurance Code, which requires that the entire premium be stated in an insurance policy, because the monthly service charge was not included in the premium. The trial court granted Troyk’s motion for summary judgment. On appeal, the court agreed with Troyk’s argument regarding the interpretation of ‘premium’ under the Insurance Code; however, the court reversed the summary judgment motion because Troyk did not specifically address how he suffered an injury “as a result of” the defendant's conduct. Id. at *12-13.

The stated intent behind Proposition 64’s amendment to section 17204 is “to prohibit attorneys from filing lawsuits for unfair competition where they have no client who has been injured in fact under the standing requirements of the United States Constitution.” Id. at *33 (citing Buckland v. Threshold Enterprises, Ltd., 155 Cal. App. 4th 798 (2007)) (emphasis in original). However, as the court notes, only the first element of the three required for federal standing—the injury in fact—is incorporated into the amended code section. Nevertheless, the court breaks down section 17204’s standing requirement into three elements as well. They are (1) injury in fact, (2) lost money or property, and (3) causation.

In Troyk’s case, the court found that parts one and two were satisfied because “Troyk’s alleged payment of money in addition to the premium stated in his insurance policy sufficiently allege[d] lost money.” Troyk, No. D049983, 2009 WL 597256, at *34 (emphasis in original). However, since Troyk did not sufficiently allege causation, i.e., how his lost money was the result of the defendant's conduct, the court reversed the summary judgment motion because Troyk did not satisfy his “burden of production to make a prima facie showing of the nonexistence of any triable issue of material fact regarding his UCL cause of action.” Id. at *35.

The court also notes that the

UCL’s standing requirements appear to be more stringent than the federal standing requirements. Whereas a federal plaintiff’s ‘injury in fact’ may be intangible and need not involve lost money or property, Proposition 64, in effect, added a requirement that a UCL plaintiff’s ‘injury in fact’ specifically involve ‘lost money or property.’ Id. at *34 n. 31.

While the amended text of section 17204 can be parsed so as to treat it as a three-part test, the intent behind Proposition 64 doesn’t necessarily call for it. Frivolous, and unscrupulous 17200 claims were undoubtedly a problem prior to 2004, and section 17204’s pre-2004 standing requirement was ridiculously broad. But, the facts in Troyk are particularly clear with regard to causation. Troyk and the other class members suffered economic injury because they paid a monthly service fee in violation of the Insurance Code.

The analysis in Troyk is sound, but the decision doesn’t strike me as mandated by the language of section 17204 and/or the intent behind Proposition 64. I think section 17204 could reasonably be construed so as to minimize the need for a clear economic injury, and I don’t see why causation can't be inferred in clear cases such as this one.

An Arbitration Award Is Not Subject To Appellate Review Upon the Merits

Daniel Reisman — Tue, 03 Mar 2009 03:44:07 -0800

Christenten v. Smith, Consol. Case Nos. G039923 & G040103, 2009 WL 499748 (Cal. Ct. App. Feb. 28, 2009), upheld the general rule that arbitration awards are not subject to appellate review based on legal error of the arbitrator.

The Court's decision hinged upon its construction of the rule set forth in the California Supreme Court's recent decision in Cable Connection, Inc. v. DIRECTV, Inc. 44 Cal.4th 1334 (2008). There, the supreme court held that parties to a contract may narrow the scope of the the powers of an arbitrator by expressly stating that the arbitrator shall not have the power to commit errors of law and legal reasoning and that such errors would be subject to judicial review.

Here, in Christensen, the plaintiff argues that the same rule should apply because the arbitration clause in the contract at issue states that the arbitrator “shall render an award in accordance with substantive California law” (emphasis in original). The Court disagrees, stating that the phrase “substantive California law” merely amounts to a forum selection clause. Since the arbitration agreement did not expressly limit the powers of the arbitrator, the arbitration award is not subject to appellate review.

Microsoft Sues TomTom for Patent Infringement, Implies TomTom's Implementation of Linux Kernel is Neither Free as in Freedom Nor as in Beer

Daniel Reisman — Thu, 26 Feb 2009 17:09:40 -0800

Microsoft filed a complaint against TomTom yesterday alleging eight counts of patent infringement. TomTom makes in-car navigation devices. The software powering the devices is built upon Linux.

Given that this is the first instance of Microsoft directly asserting that an implementation of the Linux kernel infringes upon Microsoft's intellectual property, the geeks with the long beards, err, open-source software advocates, are concerned. If successful, Microsoft may create a very slippery slope for Linux as well as the myriad of devices it powers.

According to Ars Technica, "[t]he lawsuit, which was reported [yesterday] at Todd Bishop's Microsoft blog, is thought to be the first time that Microsoft has directly targeted Linux with patent litigation." And, in an interview with Todd Bishop, posted today, Horacio Gutierrez, Microsoft's corporate vice president and deputy general counsel for intellectual property, confirmed it.

Gutierrez states that "three of the eight patents in this dispute read on the Linux kernel as implemented by TomTom. The other five relate to car navigation proprietary software used by TomTom." When questioned as to what he meant by "reads on the linux kernel," Gutierrez responded that "the patents cover the implementation of the Linux kernel done by TomTom in their products." Id.

"Reads on" is actually a legal term of art. In very general terms, determination of patent infringement has two steps. First, the patent claim at issue must be construed to determine its scope and meaning. Second, one determines if the accused device or process infringes the properly construed claim. Interpreting the meaning and scope of a claim is generally a matter of law. The question of infringement, specifically literal infringement is generally a question of fact, and requires the factfinder to decide whether the patent claim, as construed, reads on the accused object or process.

As Ars Technica explains, at least two of the patents at issue involve the FAT32 filesystem. FAT is an acronym that stands for File Allocation Table. The FAT filesystem was first developed around thirty years ago for use with MS-DOS and later Microsoft Windows. Although FAT has largely been discarded in favor of the NTFS filesystem, removable devices such as Windows-formatted iPods are still formatted using FAT32. FAT32 is also one of the only, if not the only filesystem with native read/write support in most of the major computing platforms, including Microsoft Windows, Linux, and Mac OS X.

Last year, Microsoft asserted that Linux infringes on over 200 of its patents. From what I can tell, most businesses that rely on Linux either entered into licensing agreements with Microsoft to protect themselves from potential liability (such as TomTom's competitor Garmin), or just entirely dismissed the assertion, assuming it was just FUD aimed at decreasing Linux's share of the server market.

So, what's the point of this litigation? Why attack Linux? Does it actually pose a threat to Microsoft's dominance in most things computer related?

Microsoft should be able to protect its intellectual property; however, FAT32 is essentially outdated technology, so why waste the money suing over it?

According to a blog post on CNET, Microsoft is adding broader support for FAT32 formatted hard drives to Windows 7. Could the push for better backwards compatibility with FAT32 in Windows 7 have anything to do with the case against TomTom? I suppose it's possible (though somewhat unlikely). And, even if it is the driving motivation, it still doesn't necessarily mean that Microsoft has finally decided to wipe Linux from the face of the planet—it may just mean that Microsoft wants to get paid for what it owns. In fact, Gutierrez was fairly adamant in his assertion that the suit against TomTom is not an attack on open-source software, but rather the result of TomTom's absolute unwillingness to come to an agreement regarding licensing of Microsoft's intellectual property—including the five patent claims relating to purely proprietary technology. See Tom Bishop's Blog.

(You can find the complaint here (warning: pdf)).