West Virginia Business Litigation

"Sophisticated Entities" May Bear Burden of Proving Coverage

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Mon, 06 Jul 2009 06:00:00 -0500

For one of its last decisions for the January Term, the Supreme Court of Appeals of West Virginia answered certified questions from a federal court attempting to determine insurance coverage for a substantial medical malpractice verdict.

In Camden-Clark Memorial Hosp. Ass'n v. St. Paul Fire and Marine Ins. Co., 2009 WL 1835016 (W.Va. 2009), the Supreme Court answered two certified questions from the United States District Court for the Southern District of West Virginia in a declaratory judgment action filed by Camden-Clark

Camden-Clark's insurance policy with St. Paul provided $1,000,000 in coverage for bodily injury and medical negligence claims, $2,000,000 in self-insured retention, and $15,000,00 in excess liability coverage. The policy did not contain an exclusion for punitive damages, nor did it require St. Paul to defend Camden-Clark, although St. Paul had the option to join in the defense for claims that could exceed the self-insured retention.

The jury's verdict against Camden-Clark awarded compensatory and punitive damages of $6.5 million for claims of fraudulent concealment, negligence, and vicarious liability. But the verdict form did not require an allocation of liability between negligent and intentional conduct.

Camden-Clark claimed that coverage existed for the judgment against it of $4,834,380.00, which was the amount of the verdict remaining less punitive damages against co-defendants and offsets for settlements with co-defendants after their punitive damages awards were satisfied.

St. Paul claimed that the burden for proving that coverage existed for the intentional torts and punitive damages rested with Camden-Clark, even though St .Paul did not exercise its right under the policy to submit special interrogatories to the jury that would differentiate between damages for intentional conduct versus damages for negligence.

The district court determined that West Virginia law was unclear as to who had the burden for proving coverage, and certified two questions to the Supreme Court of Appeals:

Under West Virginia law, when an insured is found liable for a tort, and the complaint indicates that the tort could be based on conduct that the insurance policy covers, on conduct that the insurance policy does not cover, or both, and when the jury verdict does not specify which conduct gave rise to the insured's liability, does the insured bear the burden of proving that the liability was based on covered conduct, or does the insurer bear the burden of proving that the liability was based on non-covered conduct?

Under West Virginia law, when a jury awards punitive damages against an insured, and the punitive damages could be based on a claim covered by the insurance policy, on a claim not covered by an insurance policy, or both, does the insured bear the burden of proving that the punitive damages were based upon a covered claim, or does the insurer bear the burden of proving that the punitive damages were based on a non-covered claim?

The Supreme Court determined that West Virginia law adhered to the majority view regarding shifting burdens of proof in insurance coverage disputes, which is that an insured bears the burden of first demonstrating the existence of coverage, after which the burden shifts to the insurer to prove that an exclusion applies.

Important to the court's reasoning was that the policy's self-insured retention provision, which meant that St. Paul did not have to defend, gave Camden-Clark significant control over its defense of the action. If St. Paul is not defending the action, does it have an obligation to allocate the verdict between covered and non-covered claims? After reviewing decisions from several jurisdictions, the court concluded that "the insured's ordinary burden to allocate a verdict between covered and non-covered claims does not shift to an insurer unless the insurer has an affirmative duty to defend the insured under the policy terms."

The Supreme Court answered the certified question regarding allocation of an insured's liability between covered and non-covered conduct as follows:

When a policy of insurance does not impose a duty to defend upon the insurer and the insured has controlled the defense of the underlying claims, if a court determination regarding allocation of a jury verdict between the claims covered by the terms of the policy and the claims not covered by the the terms of the policy is sought, the insured has the burden of proof to establish proper allocation.

And the Court answered the certified question regarding allocation of punitive damages between covered and non-covered conduct as follows:

In order to obtain indemnification under a policy of insurance which does not exclude punitive damages and under which there is no duty to defend, an insured who has controlled the defense in a case resulting in a punitive damage award and who seeks a court determination regarding allocation of the award has the burden of proving that the claim or claims on which the punitive damage award is based is covered by the terms of the policy.

The holding of this case may have a lot of insureds reviewing their insurance policy language, particularly where they have self-insured retentions, such as Camden-Clark. If the retention relieves the insurer of its duty to defend the insured, and the insured experiences an adverse verdict, then the insured must prove that damages are attributable to covered, as opposed to non-covered, claims.

WV Supreme Court Delays Ruling on $400 Million DuPont Class Action Appeal

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Sun, 05 Jul 2009 20:10:23 -0500

According to this article by Ken Ward, Jr. in Thursday's Charleston (West Virginia) Gazette, a decision in DuPont's appeal of a $400 million verdict in a medical monitoring class action is one of two that the Supreme Court of Appeals has delayed until at least September, when its new term begins on September 2. The other decision that has been delayed involves a lawyer disciplinary matter. Here's my post from last September when the Court accepted the apppeal.

The appeal had been originally scheduled for March 25, but was rescheduled to April 7 due to the death of Justice Joseph P. Albright. The docket for March 25 provides the circuit court's orders and the parties' and amici briefs.

Fourth Circuit Holds Insurance Policy Exclusion Applies to Strip-Search Claims

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 30 Jun 2009 10:26:38 -0500

My thanks to Mack Sperling, who writes the North Carolina Business Litigation Report, for letting me know about the Fourth Circuit’s unpublished decision last week in Cornett Management Co., LLC v. Firemen’s Fund Ins. Co., 2009 WL 1755912 (4th Cir. 2009). Here is the opinion, which addressed whether an insurance coverage exclusion applied to facts that are, to put it mildly, unique.

Cornett, which owns several restaurants, including the Hooters franchise in Charleston, West Virginia, faced claims from two female employees who alleged that in 2001, a store manager called them into his office and told them that a customer had reported a stolen change purse. He then told them that a police officer was on the phone and wanted to talk to them. The voice on the phone directed the women to strip in front of the manager to prove they didn’t have the purse, and told them that they risked arrest if they did not cooperate. So the women took off their clothes in front of the manager.

Guess what? The call was a hoax. (As an aside, there was a rash of these calls a few years ago, one of which resulted in a multi-million dollar verdict.) But apparently this call was not the only incident against Cornett, as seven female employees, including the two here, alleged sexual harassment and filed suit, described by the court as the Reynolds complaint.

Cornett settled the Reynolds action, and Lexington Insurance Company paid its policy limits for Cornett’s defense and settlement costs. Cornett then made a claim under its commercial general liability policy with Firemen’s Fund.

Cornett’s suit against Firemen’s Fund was removed to the United States District Court for the Northern District of West Virginia, which granted Firemen’s motion for summary judgment on the grounds that the “employment-related practices exclusion [ERP]” in its policy provided no coverage for personal injury arising out of any “employment-related practices, policies, acts or omissions” and applied to the Reynolds action against Cornett.

On appeal, Cornett argued first that it had no practice or policy of strip-searching its employees, which rendered the exclusion inapplicable. In its per curiam opinion, the court dispensed with that argument quickly, and noted that the exclusion also applied to employment-related “acts or omissions,” which is what the Reynolds plaintiffs alleged.

Cornett’s second argument was that the provision was ambiguous and to be construed against Firemen’s Fund. This argument required the court “to determine what types of acts the policy meant to exclude from coverage when it listed ‘[c]oercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination or other employment-related … acts.’”

The court looked to West Virginia law in interpreting this provision, specifically the Supreme Court of Appeals of West Virginia’s decision in Bowyer v. Hi-Lad, Inc., 609 S.E.2d 895 (W. Va. 2004). Bowyer involved an employer that installed a security camera and microphone in a hotel lobby without informing its employees. The Supreme Court found that the employment-related practices exclusion in the employer's insurance policy did not apply because the employer’s acts were not intended to cause humiliation.

Conversely, the Bowyer exclusion “would apply to any claim arising from an employer’s act or omission intended to result in coercion, harassment, humiliation, or discrimination.” (Emphasis in original.) The Fourth Circuit reasoned that because the Reynolds action alleged acts that involved “intentional coercion, harassment, and humiliation of the two female employees who were strip searched[,]” a West Virginia court “would hold that the ERP exclusion in the Firemen’s Fund policy excludes coverage for the false imprisonment claims that arose from the strip searches.” (Emphasis in original.)

After reviewing decision from other jurisdictions that reached similar results, the court concluded that "[a] manager's act, like the one in this case, which intentionally humiliates, coerces, or harasses an employee, will clearly have an effect on the employment relationship. Such an act, therefore, is employment-related and, under West Virginia law, falls within the language of the ERP exclusion at issue here."

Federal Court Has Discretion to Exercise Supplemental Jurisdiction

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Mon, 15 Jun 2009 21:59:08 -0500

You may remember Paul Ratchford, the former president of The Greenbrier, who was terminated in 2007 after less than one year on the job. He filed suit against CSX Corporation, the resort’s then-owner and some individual officers, and alleged several causes of action, including a violation of the West Virginia Wage Payment and Collection Act because CSX allegedly failed to pay him his severance of $700,000 and the value of 1,200 shares of CSX stock within 72 hours of his termination, as the statute requires. I wrote about Ratchford's termination and lawsuit in this post.

Last year, the Circuit Court of Greenbrier County granted CSX’s motion to dismiss and denied Ratchford’s motion for partial summary judgment on the grounds that under the Wage Payment and Collection Act, Ratchford’s severance and stock were not “wages” or “fringe benefits” that would entitle Ratchford to treble damages.

Ratchford appealed the dismissal to the Supreme Court of Appeals of West Virginia. Here are his petition for appeal and CSX’s response in opposition. On October 30, 2008, the Supreme Court refused his petition for appeal 4-0 with Justice Brent Benjamin disqualified.

That left Ratchford’s claims for breach of contract, wrongful discharge, tortious interference with a contractual relationship, intentional infliction of emotional distress, California labor statute violations, and fraud.

Ratchford sued at least two West Virginia residents, which destroyed diversity, but CSX Hotels, Inc.’ s bankruptcy in March created federal jurisdiction under 28 U.S.C. § 1334. In April, CSX filed this notice of removal.

Due to CSX Hotels’ sale of The Greenbrier to Jim Justice, the bankruptcy court dismissed CSX’s bankruptcy petition as moot. Ratchford claimed that without the bankruptcy proceeding, the federal court was deprived of jurisdiction to adjudicate his claims.

Although United States District Court Judge Thomas E. Johnston remanded Ratchford’s civil action, his order points out that a remand in these circumstances is not automatic:

Plaintiff [Ratchford] contends that in the absence of a bankruptcy debtor as a party to the action, the Court is “divest[ed]” of jurisdiction to adjudicate the state law claims… This assertion is not necessarily accurate. It is well-established that once a court obtains jurisdiction over a matter, jurisdiction “remains … even if subsequent events eliminate the original basis for federal jurisdiction.” Chapman v. Currie Motors, 65 F.3d 78, 81 (7th Cir. 1995). The Court can continue to exercise jurisdiction over this case, but it does not necessarily follow that it should.

(Emphasis added.)

The Court explained that it had discretion to continue to exercise supplemental jurisdiction over Ratchford’s remaining claims under 28 U.S.C. § 1367(a), abstain from exercising its supplemental jurisdiction under 28 U.S.C. § 1367(c)(3), or remand the action under 28 U.S.C. § 1452(b).

The Court determined that remand under § 1452(b) was appropriate because “the equities weight heavily in favor of remand[.]” Among the factors the Court looked at were the relative lengths of time the case had been in state court versus federal court, the fact that all of Ratchford’s claims are grounded in state law, and the fact that the defendants did not oppose the remand.

So remember that just because the original basis for federal jurisdiction disappears, that does not necessarily mean that the court loses jurisdiction. And for a case where the court elected to exercise its supplemental jurisdiction, take a look at former Chief Judge Charles H. Haden, II's opinion in Greiner v. Columbia Transmission Corp., 41 F.Supp.2d 625 (S.D.W.Va. 1999), which Judge Johnston cited in his order.

USDC Opinion Determines Reasonableness of Class Counsel's Attorney Fees

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Sun, 14 Jun 2009 11:48:44 -0500

United States District Court Chief Judge Joseph R. Goodwin recently ruled in Jones v. Dominion Resources Services, Inc., 601 F.Supp.2d 756 (S.D.W.Va. 2009), on the class counsel’s motion for attorney’s fees and expenses, and his order entered on March 6, 2009 is important for attorneys who prosecute and defend class actions in West Virginia.

Jones was a class action filed by gas well owners who alleged that gas companies cheated them out of their royalties. Earlier this year, the parties agreed to a settlement creating a common fund of between $40 and $50 million and awarding attorney’s fees not to exceed 25% of the total settlement. Class counsel sought an award of attorney’s fees equal to 25% of the settlement, which they estimated at $50 million, plus reimbursement of $91,883.50 in expenses and a $25,000 incentive award for each of the three named class representatives. Here is the settlement website.

In considering the motion, Judge Goodwin noted initially that the Fourth Circuit Court of Appeals has not stated a preference between the “lodestar” method and the “percentage of fund” method, so he had complete discretion to determine how to compensate class counsel. He also discussed how each method is applied and its relative advantages and disadvantages.

He found that the percentage method was appropriate and would also apply the lodestar crosscheck as “an element of objectivity.”

He identified these factors for determining the reasonableness of the fee, which are “commonly used by courts in the application of the percentage method”:

The results obtained for the class;
The quality, skill, and efficiency of the attorneys involved;
The complexity and duration of the case;
The risk of non-payment;
Awards in similar cases;
Objections; and
Public policy.

I won’t review Judge Goodwin’s analysis of each factor, except that he concluded the factors that weighed in favor of the reasonableness of the requested fee award were the significant benefit obtained for the class; the quality, skill, and efficiency of class counsel; the proximity of the requested award to awards in similar cases; and the low incidence of objections to the award.

He also concluded that factors that weighed against the reasonableness of the requested fee award and supported a reduced fee were the non-complex nature of the case; the low risk of non-payment; public policy and the high lodestar multiplier resulting from the requested fee award.

He devoted the most discussion to the public policy factor, where he expressed support for the lone objector’s “concerns about the trend toward excessive attorneys’ fees in class actions. I can easily understand that fees deemed reasonable by the bar and the judiciary appear unseemly to the general public.” (Judge Goodwin overruled the objection but stated that he would keep it in mind when deciding the amount of the fee.)

After reviewing all the factors, and calculating a lodestar multiplier of 4.5 to 5.3, which he described as “closer to the middle of the range considered reasonable by courts[,]” Judge Goodwin found that a fee award of 20% of the settlement fund was reasonable compensation for class counsel.

In arriving at 20%, he placed the most emphasis on:

the high incidence of actual, direct notification in this case and the resulting near-unanimous approval of the attorneys’ fee provision by the Class Members. The rest of the factors alone, as relevant as they are to the determination of a reasonable attorney’s fee, are not enough to convince me that a fee of this magnitude is "reasonable." Even reduced, the fee that I approve in this case remains extremely high. Nevertheless, I am reluctant to deviate too greatly from a fee amount approved by virtually all of the Class Counsels’ clients.

Judge Goodwin also approved the payment of the requested expenses, but reduced the incentive award for each class representative to $15,000 because he had no evidence that the representatives participated in the case and therefore would be overcompensated by $25,000 each.

Until the Fourth Circuit addresses the issue, I expect federal courts in West Virginia to rely on this decision when determining attorney’s fees in class actions. In fact, I am aware of one court that has already looked to Jones when determining attorney’s fees.

In Loudermilk Services, Inc. v. Marathon Petroleum Co. LLC, 2009 WL 1306917 (S.D.W.Va. 2009), District Judge Robert C. Chambers relied on Jones in reducing the class counsel's requested fee from $6 million to $4.25 million. Here is Judge Chambers’ order entered on May 7, 2009. (I was counsel for one of the defendants in Loudermilk, but I was out of the case when the attorney’s fee issue was briefed and decided.)

WV Supreme Court Enters Administrative Orders in Caperton v. A. T. Massey Coal Company

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Fri, 12 Jun 2009 18:48:53 -0500

Apparently, I could go only one day without another post related to the Supreme Court's decision in Caperton v. A. T. Massey Coal Company. But the Supreme Court of Appeals of West Virginia yesterday resolved the question of who will replace Chief Justice Brent Benjamin when the Court hears the appeal in the fall.

In an administrative order entered yesterday by Justice Robin Jean Davis, acting as chief due to Chief Justice Benjamin's recusal, she appointed Senior Status Judge James O. Holliday, who retired from the Circuit Court of Putnam County, as Benjamin's replacement. Paul Nyden reviews Judge Holliday's prior service on the Supreme Court in the Charleston Gazette.

Justice Davis entered a second administrative order yesterday that terminated the service of Hampshire County Circuit Court Judge Donald H. Cookman and Marion County Circuit Judge Fred L. Fox, II, who had been appointed to replace former Justices Elliott E. "Spike" Maynard and Larry V. Starcher, respectively, when the Court heard the appeal for the second time. Justices Maynard and Starcher are no longer on the Court.

According to Rule 45 of the Rules of the Supreme Court of the United States, the Court will issue its mandate 25 days after entry of the judgment, in case any party files a petition for rehearing. Assuming no petition is filed, the mandate will issue on July 3.

The appeal will be heard for the third time during the Supreme Court of Appeals' Fall Term, which begins on September 2.

Sixth Circuit Reverses Position on Workplace Retaliation-by-Association

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Thu, 11 Jun 2009 21:54:56 -0500

The Supreme Court’s decision in Massey v. A. T. Massey Coal Company has occupied my attention so far this week, but today I want to look at a decision issued earlier this month by the United States Court of Appeals for the Sixth Circuit.

Eric Thompson and his then-fiancé, Miriam Regalado, worked together at North American Stainless. Regalado filed a charge with the Equal Employment Opportunity Commission alleging that the company had discriminated against her because of her gender. A few months later, the company terminated Thompson allegedly for performance-based reasons, although he alleged that it was in retaliation for Regalado‘s EEOC charge. In other words, if the company couldn’t terminate her, it would terminate him to get back at her.

Title VII of the Civil Rights Act of 1964 prohibits retaliation against employees where the employee has opposed any practice that is an unlawful employment practice (such as gender discrimination) or has testified, assisted in or participated in an investigation, proceeding or hearing.

Thompson filed suit, and the district court granted the company’s motion for summary judgment and found that he did not state a claim under either Title VII’s anti-discrimination provision or its anti-retaliation provision.

He appealed, and last year, a three-judge panel from the Sixth Circuit held 2-1 that Title VII prohibit employers from retaliating against employees who are not directly involved in protected activity, but who are so closely related to or associated with those who are directly involved that it is clear that the protected activity motivated the employer’s action. Thompson v. North American Stainless, LP, 520 F.3d 644 (6th Cir. 2008).

North American Stainless petitioned the Sixth Circuit for rehearing en banc, and the court granted the petition and vacated the panel’s decision.

Following its en banc reconsideration, the court held 10-6 in Thompson v. North American Stainless, LP¸ 2009 WL 1563443 (6th Cir. 2009), that § 704(a) of Title VII of the Civil Rights Act does not create a cause of action for third-party retaliation for persons who have not personally engaged in protected activity. Only those persons who have personally engaged in protected activity by opposing a practice, making a charge or assisting or participating in an investigation may maintain a claim.

Thompson did not claim that he had personally engaged in any protected activity, but that he was terminated in retaliation for Regalado’s EEOC charge.

The majority opinion for the en banc decision was written by Judge Richard Allen Griffin, who dissented from the three-judge panel’s decision that held for Thompson.

The majority stated that by adopting Thompson’s position, the court would have become “the first circuit court to hold that Title VII creates a cause of action for third-party retaliation on behalf of friends and family members who have not engaged in protected activity[,]” which the court declined to do.

The majority pointed out that the Third, Fifth, and Eighth Circuits have previously considered and rejected similar third-party retaliation claims, which seemed to influence its view.

Here are an article by Tresa Baldas about the decision in yesterday's National Law Journal, as well as Bob Ambrogi's post today in Legal Blog Watch.

Baldas' article points out that the Seventh and Eleventh Circuits have extended protection from retaliation to third parties, a fact also noted by Judge Karen Nelson Moore in her dissent (which was one of three separate dissents).

It doesn't appear that the Fourth Circuit has ruled on a retaliation-by-association claim.

Massey CEO Comments on SCOTUS Recusal Decision

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Wed, 10 Jun 2009 22:38:37 -0500

There are a few more items I want to mention today about the Supreme Court’s decision in Caperton v. A. T. Massey Coal Company. The first is a personal statement released by Don L. Blankenship, the chairman of Massey Energy Co., and the person whose 2004 campaign contributions on behalf of Brent Benjamin created the conflict that culminated in the Court’s decision on Monday.

Blankenship’s statement is not on Massey’s website and apparently does not represent Massey’s official reaction to the decision. Massey’s statement released on Monday quotes only Shane Harvey, Massey’s general counsel and vice-president, and is far more measured than Blankenship’s.

Blankenship’s statement is his attempt to justify his substantial financial support on behalf of Justice Benjamin, even though the highest court in the country just held that his support objectively required Justice Benjamin to recuse himself from Caperton, and that Justice Benjamin's failure to due so denied Hugh Caperton and his companies due process under the United States Constitution. I guess if I were in Blankenship’s position, I’d issue a statement that was as unapologetic and arrogant as the motive behind the contributions that were at the heart of the situation.

Of more interest and, I think, far more value is this interview on The BLT: The Blog of Legal Times with Thomas R. Phillips, retired Chief Justice of the Supreme Court of Texas, and an author of an amicus brief in Caperton on behalf of the conference of chief justices in support of neither party.

I encourage you to read his entire interview, which is brief, but this is his analysis of the decision:

Caperton established a principle that is really important: There are constitutional concerns with a judge sitting in judgment of a case where a party is a significant donor. At some point, the support becomes so substantial and so overwhelming that due process requires the judge to step aside, even if neither the donor not [sic] the judge did anything illegal or even unethical.

(Emphasis added.)

He identifies six criteria in Caperton that must be satisfied in order to establish a violation of a party’s due process and contends that its holding is so narrow that, “I’m not sure Caperton will ever be direct precedent for another recusal.”

Finally, here’s a post from Daily Kos that’s getting quite a bit of traction around the Internet. Its title is a reference to John Grisham’s novel, The Appeal, which, by sheer coincidence, I finished reading about 2 a.m. Monday morning.

As you may be aware, when the book came out last year, Grisham stated that the story wasn't far-fetched and had already happened in West Virginia, which, allowing for some poetic license in the novel, is accurate.

Dissents in Caperton v. A. T. Massey Coal Company Predict More Challenges to Judges

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 09 Jun 2009 17:25:32 -0500

There has been so much reaction and commentary about the Supreme Court’s decision yesterday in Caperton v. A. T. Massey Coal Company that it is hard to know where to begin.

First, I want to discuss the dissents, which I did not do in my post yesterday because I wanted to focus on Justice Kennedy’s opinion.

Chief Justice Roberts wrote a dissent in which Justices Scalia, Thomas, and Alito joined. He criticized the majority opinion for

enlist[ing] the Due Process Clause to overturn a judge’s failure to recuse because of a "probability of bias." Unlike the established grounds for disqualification, a "probability of bias" cannot be defined in any limited way. The Court’s new "rule" provides no guidance to judges and litigants about when recusal will be constitutionally required. This will inevitably lead to an increase in allegations that judges are biased, however groundless those charges may be. The end result will do far more to erode public confidence in judicial impartiality than an isolated failure to recuse in a particular case.

(Emphasis added.)

He also identified 40 “fundamental questions” that courts will now have to determine “with little help from the majority,” such as:

1. How much money is too much money? What level or contribution or expenditure gives rise to a ‘probability of bias’?

6. Does the analysis change depending on whether the judge whose disqualification is sought sits on a trial court, appeals court, or state supreme court?

8. What if the “disproportionately’ large expenditure is made by an industry association, trade union, physicians’ group, or the plaintiffs’ bar? Must the judge recuse in all cases that affect the association’s interests? Must the judge recuse in all cases in which a party or lawyer is a member of that group? Does it matter how much the litigant contributed to the association?

13. Must the judge’s vote be outcome determinative in order for his non-recusal to constitute a due process violation?

21. Does close personal friendship between a judge and a party or lawyer now give rise to a probability of bias?

24. Under the majority’s ‘objective’ test, do we analyze the due process issue through the lens of a reasonable person, a reasonable lawyer, or a reasonable judge?

35. What is the proper remedy? After a successful Caperton motion, must the parties start from scratch before the lower courts? Is any part of the lower court judgment retained?

Chief Justice Roberts also looked at two of the Court’s decisions in cases involving double jeopardy (United States v. Halper, 490 U.S. 435 (1989) and Hudson v. United States, 522 U.S. 93 (1997)), and drew a comparison with the Court’s holding in Caperton, saying that,

The déjà vu is enough to make one swoon. Today, the majority again departs from a clear, longstanding constitutional rule to accommodate an ‘extreme’ case involving ‘grossly disproportionate’ amounts of money. I believe we will come to regret this decision as well, when courts are forced to deal with a wide variety of Caperton motions, each proclaiming the title of "most extreme" or "most disproportionate.

(Emphasis added.)

He also pointed out that, “Justice Benjamin just might have won because the voters of West Virginia thought he would be a better judge than his opponent. Unlike the majority, I cannot say with any degree of certainty that Blankenship ‘cho[se] the judge in his own cause.' Ante, at 16. I would give the voters of West Virginia more credit than that.”

(Emphasis added.)

Justice Scalia also dissented separately, and predicted that the Court’s decision would have the effect of reinforcing the perception that “litigation is just a game, that the party with the most resourceful lawyer can play it to win, that our seemingly interminable legal proceedings are wonderfully self-perpetuating but incapable of delivering real-world justice.” He also predicted that the opinion would add to “the vast arsenal of lawyerly gambits what will come to be known as the Caperton claim.”

Yesterday, Chief Justice Benjamin issued this statement regarding the decision, which was written on his official letterhead and posted on the Supreme Court of Appeals’ website, but was described as “personal” and “not a release of the Supreme Court of Appeals of West Virginia.”

For coverage of the decision, let me start with Paul Nyden’s article in today’s Charleston Gazette, and Jake Stump’s article in today’s Daily Mail. Nyden also wrote an interesting sidebar about who will preside as chief justice when Chief Justice Benjamin recuses himself. I think it will be Justice Robin Davis, as she has the most seniority, but apparently no one from the Court is willing to go on the record at this point.

What is most interesting is that when the Court hears this appeal again, probably during its term that starts in September, Justice Davis, who wrote both of the previous majority opinions, will be the only member who has considered the appeal. Justices Margaret Workman and Menis Ketchum were elected last November and Justice Thomas McHugh was appointed to serve the remainder of Justice Albright's term through 2010. And the acting chief justice must appoint a replacement for Chief Justice Benjamin. So how the Court will rule for the third, and presumably last, time is very much open.

For a sampling of commentary and analysis, Tony Mauro has this article on The National Law Journal 's website; on The BLT ,he has this post about Chief Justice Roberts’ connection to United States v. Halper, one of the double jeopardy cases cited in his dissent.

Carolyn Elefant of Legal Blog Watch wrote this post yesterday about the decision, with links to Mauro, Lyle Dennis at SCOTUSBlog, and George Washington University Law Professor Jonathan Turley. Also, here is some analysis from the Constitutional Prof Law Blog.

For a couple of different takes on the decision, here are Dahlia Lithwick's "The Great Caperton Caper" on Slate and a post from Balkinization.

And from blogs that focus on appellate litigation, here are Todd Smith's post at Texas Appellate Law Blog, which questions the effect of the decision on Texas courts, whose members are elected, and a post from Alabama Appellate Watch, which is written by Lightfoot Franklin White LLC.

Finally, I think there have been as many editorials as there have been news articles and blog posts about the decision. But for your consideration, here is The New York Times' editorial today entitled "Honest Justice" and The Wall Street Journal's editorial entitled "Judges and 'Bias.'" I'll leave it to you to figure out what each paper thought about the decision.

SCOTUS Holds Due Proces Requires WV Supreme Court Justice's Recusal

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Mon, 08 Jun 2009 11:31:27 -0500

The Supreme Court of the United States issued its opinion today in Caperton v. Massey and in a 5-4 decision held that the Due Process Clause of the Fourteenth Amendment required Supreme Court of Appeals of West Virginia Chief Justice Brent Benjamin to recuse himself from Caperton's appeal and reversed the Supreme Court of Appeals' decision in Massey's favor and remanded the case for further proceedings.

The opinion by Justice Anthony Kennedy noted that the majority "do not question his [Justice Benjamin's subjective findings of impartiality and propriety. Nor do we determine whether there was actual bias."

But the Court found that the "difficulties of inquiring into actual bias ... simply underscore the need for objective rules":

Not every campaign contribution by a litigant or attorney creates a probability of bias that requires a judge's recusal, but this is an exceptional case... We conclude that there is a serious risk of actual bias -- based on objective and reasonable perceptions -- when a person with a personal stake in a particular case has had a significant and disproportionate influence in placing the judge on the case by raising funds or directing the judge's election campaign when the case was pending or imminent. The inquiry centers on the contribution's relative size in comparison to the total amount of money contributed to the campaign, the total amount spent in the election, and the apparent effect such contribution had on the outcome of the election.

(Emphasis added.)

The Court concluded, based on the application of the principle, that:

... Blankenship's campaign efforts had a significant and disproportionate influence in placing Justice Benjamin on the case. Blankenship contributed some $3 million to unseat the incumbent and replace him with Benjamin. His contributions eclipsed the total amount spent by all other Benjamin supporters and exceeded by 300% the amount spent by Benjamin's campaign committee. App. 288a. Caperton claims Blankenship spent $1 million more than the total amount spent by the campaign committees of both candidates combined. Brief for Petitioners 28.

(Emphasis added.)

The Court rejected Massey's argument that ultimately West Virginia voters elected Justice Benjamin to the Court, stating that, "[w]hether Blankenship's campaign contributions were a necessary and sufficient cause of Benjamin's victory is not the proper inquiry. Much like determining whether a judge is actually biased, proving what ultimately drives the electorate to choose a particular candidate is a difficult endeavor, not likely to lend itself to a certain conclusion."

The Court also focused on the "temporal relationship between the campaign contributions, the justice election, and the pendency of the case...", meaning the the winner of the election would be on the Court when it reviewed the $50 million verdict:

Although there is no allegation of a quid pro quo agreement, the fact remains that Blankenship's extraordinary contributions were made at a time when he had a vested stake in the outcome. Just as no man is allowed to be a judge in his own cause, similar fears of bias can arise when -- without the consent of the other parties -- a man chooses the judge in his own cause. And applying this principle to the judicial election process, there was here a serious, objective risk of actual bias that required Justice Benjamin's recusal.

(Emphasis added.)

In describing this as "an extraordinary situation where the Constitution requires recusal," the majority opinion also rejected Massey and its amici's prediction that finding a constitutional violation in this case would result in various adverse consequences, "ranging from a flood of recusal motions to unnecessary interference with judicial elections."

The Court found that almost every state, including West Virginia, had adopted the American Bar Association's objective standard that "a judge shall avoid impropriety and the appearance of impropriety," and also noted that the West Virginia Code of Judicial Conduct required a judge's recusal in similar circumstances.

Chief Justice John Roberts wrote a dissent in which Justices Scalia, Thomas, and Alito joined, and Justice Scalia also dissented separately.

I'll write some more about the decision, but I wanted to provide the opinion right now. For some additional reaction, here is SCOTUSBlog's initial post and David Stout's article in The New York Times.

SCOTUS Tightens Pleading Requirements for Plaintiffs

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Sun, 07 Jun 2009 10:30:00 -0500

The United States Supreme Court’s recent decision in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), dealt with a detainee’s claims that he had been discriminated against and treated harshly during his detention. But the Supreme Court dismissed his complaint for failure to state sufficient facts to support his claims against former Attorney General John Ashcroft and FBI Director Robert S. Mueller, III.

For background on the case, here is SCOTUSBlog's analysis of the decision and its effect on future claims that attempt to impose liability on high-ranking officials for the conduct of their subordinates.

Even though Iqbal's facts are unique, I am interested in it because of its language that is troublesome to plaintiffs in federal lawsuits in general.

According to Tony Mauro, who wrote last month about the decision in The National Law Journal, Iqbal “could make it significantly harder for plaintiffs in a broad range of cases to survive defendants’ motions to dismiss….”

The reason is that the opinion appears to expand on the Supreme Court’s 2007 decision in Bell Atlantic Corp. v. Twombly, 550 U.S.544 (2007), which held that initial pleadings must state a claim that is “plausible on its face,” a change from Conley v. Gibson, 355 U.S. 41 (1957), which had interpreted Rule 12(b)(6) of the Federal Rules of Civil Procedure to require dismissal of a complaint only if the plaintiff could prove “no set of facts” that would entitle him or her to relief. Because Twombly had arisen in an action alleging violations of the Sherman Act, practitioners questioned whether the holding applied outside of antitrust litigation.

But Iqbal, which, like Twombly, was written by Justice Anthony Kennedy, makes clear that it applies far beyond antitrust cases, and, according to Alan Morrison, incoming dean and professor of law at George Washington University Law School, “is an invitation to raise a Twombly issue in every case.”

I have not read Iqbal’s complaint, but according to Mauro’s article, it was extremely detailed and should have been able to withstand the motion to dismiss. As a practical matter, plaintiffs often do not have access to a lot of information when they file suit, which requires them to make “bare-bones” allegations in their complaints. Iqbal increases the possibility of dismissal due to their lack of detail.

Citigroup Bets Executives Will Forgo Litigation Over Suspended Severance Payments

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 02 Jun 2009 22:15:53 -0500

A couple months ago, I wrote about the furor over the bonuses paid to some AIG employees, which resulted in the House of Representatives passing a bill that would tax the bonuses at 90%. Although that crisis passed, it looks like another financial services company got the hint.

According to several news reports today, Citigroup has told approximately five former executives that they are not going to receive severance payments that Citigroup is contractually obligated to make.

As reported by David Enrich in The Wall Street Journal, Citigroup has cancelled the payments because it doesn’t want to risk a public uproar, and is “wagering that the former executives will conclude that it would be publicly embarrassing for them to file lawsuits against the struggling, taxpayer-backed company seeking the money.”

I’m not sure that Citigroup is going to win that wager. First of all, Citigroup is deciding on its own, without any pressure or demand from the government, not to make the severance payments. Thus, Citigroup is breaching the agreements of its own volition and can’t claim that the government is coercing or requiring it not to make the payments.

Second, the amounts involved are more than enough incentive for the executives to pursue litigation regardless of whether the attendant publicity embarrasses them. The severance payments total approximately $100 million, of which Citigroup has paid more than half. But that leaves a lot of money to fight over. For example, one executive, Michael Klein, was owed $21.3 million in cash on March 31 and another $7.5 million on October 5, although it isn’t clear whether Citigroup made the March payment to Klein. So, Klein is losing at least $7.5 million due to Citigroup’s decision.

I think at least some of the executives will file suit against Citigroup, assuming that Citigroup does not reconsider its decision and pay them their severance payments.

Contractor Alleges Intentional Destruction of Evidence by Power Companies

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Thu, 28 May 2009 06:00:00 -0500

In a lawsuit filed last month in United States District Court for the Northern District of West Virginia at Wheeling, Handling Systems International, Inc. sued American Electric Power Company, Inc., American Electric Power Service Corporation, and Ohio Power Company for their intentional and negligent spoliation of evidence regarding a fatal industrial accident. Handling Systems Int'l, Inc. v. American Electric Power Co., Inc., Civil Action No. 5:09-CV-00043 (N. D. W. Va. April 28, 2009).

In 2006, William Oshie, an employee of American Electric Power Service Corporation, was killed in an industrial accident at the Mitchell Power Plant, which the defendants own and operate. In its complaint, HSI alleged that the defendants controlled and conducted the investigation into Mr. Oshie’s death, but failed to act in accordance with their own policies and procedures.

Specifically, HSI alleged that

the defendants’ failure to follow their own corporate policies and procedures was deliberate and took place for the specific purpose of allowing the mishandling, discarding, destruction, mutilation, or significant alteration of potential evidence related to the potential civil action and/or state and/or federal regulatory penalties, including, but not limited to, the significant alteration and destruction of the accident scene itself that was located within the Mitchell Plant in Marshall County, West Virginia.

HSI claimed that the defendants “ignored, mishandled, discarded, destroyed, mutilated or significantly altered” physical evidence, photographs, notes and notebooks, and internal memoranda and emails relating to Mr. Oshie’s death and the defendants’ investigation.

HSI also claimed that the defendants’ acts and/or omissions “were done for the specific purpose of defeating HSI’s ability to prevail in a future civil action and/or to avoid state and/or federal regulatory investigation and/or penalties.”

In its claim for intentional spoliation, HSI alleged that by spoliating the evidence, the defendants “inten[ded] to defeat HSI’s ability to defend itself and/or to prevail” in a civil action that is pending in the Circuit Court of Marshall County, West Virginia. (I assume that the Marshall County action is a wrongful death lawsuit with HSI and the power companies as defendants.)

HSI alleged In its claim for negligent spoliation that, “there was a significant alteration and/or destruction of potential evidence related to the potential civil action and/or state and/or federal regulatory action, including, but not limited to, the accident scene itself that was located within the Mitchell Plan in Marshall County, West Virginia.” As a result, HSI has been “rendered unable to prevail in the pending civil action and/or its ability to prevail has been significantly prejudiced in the pending civil action.”

In an earlier post, I wrote about the negligent spoliation of evidence, and discussed the Supreme Court of Appeals of West Virginia’s holding in Hannah v. Heeter, 584 S.E.2d 560 (W. Va. 2003). In Hannah, the Court held that the negligent spoliation of evidence is not a stand-alone tort when alleged to have been committed by a party to litigation, but is a stand-alone tort when committed by a third party with a special duty to preserve the evidence (which is what HSI alleged against the power companies). The intentional spoliation of evidence is a stand-alone tort regardless of whether it was committed by a party in the litigation or a third party.

I wish HSI had been more specific about the allegations in the Marshall County lawsuit and how the power companies' alleged spoliation of evidence adversely affected its ability to defend itself or prevail in that action. If I get a copy of the complaint, I’ll make it available and discuss its allegations.

Does Motorola's Termination of CFO for Cause Make Him a Whistleblower?

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 26 May 2009 06:00:00 -0500

On January 29, 2009, former Motorola CFO Paul Liska gave a presentation to the audit committee of its board of directors, in which he addressed the poor performance of the Mobile Division and express concerns about the accuracy of predictions of its future performance.

Liska's position is that his criticism of the Mobile Division and its CEO, Sanjay Jha (who is also Motorola's co-CEO) was intended to warn the board

that the Mobile Devices presentation still lacked the normal and customary specificity expected in business plans, making it impossible to fully verify its reasonableness and accuracy. If approved and presented to the rating agencies (and public), Liska believed that the Mobile Devices' "plan" was likely to lead to the continued deterioration of Motorola's credit and, when shown to be unsupportable and/or misleading, to the possible ruin of the entire company.

I think it's safe to say that Liska did not expect Motorola's reaction to his presentation, which was to discharge him without cause as CFO on January 30. Liska claims that Motorola's co-CEO Greg Brown told him that he "had fired a shot heard around the world."

In an earnings call on February 3, Brown was complimentary of Liska's service to Motorola and attributed his departure to "environmental changes." But that benign reason isn't what Motorola reported to the SEC in this March 3 proxy filing, in which it advised at page 86 that "[o]n February 2, 2009, Mr. Liska was replaced as Chief Financial Officer. On February 19, 2009, Mr. Liska was involuntarily terminated for cause."

The Wall Street Journal's Sara Silver wrote this article on March 4 about the discrepancy in Motorola's reasons for terminating Liska.

The difference in the basis for Liska's termination is critical because his employment agreement provides that if he is terminated other than for "cause" (as defined in the agreement) within two years of his hiring, he would receive a severance payment equal to his annual base salary of $750,000 for one year and his annual incentive bonus calculated as 95% of his annual base salary for one year, or nearly $1.5 million.

If Liska was terminated for cause, he would not receive that severance payment. And perhaps more importantly, as "cause" is defined in his employment agreement, he would have a lot of explaining to do to potential employers. The agreement provides that cause shall mean:

(i) your willful and continued failure to substantially perform your duties, other than any such failure resulting from incapacity due to physical or mental illness, which failure has continued for a period of at least 30 days; or (ii) your willful engagement in (A) in any malfeasance, dishonesty or fraud that is intended to or does result in your substantial personal enrichment or a material detrimental effect on the Company's reputation or business or (B) gross misconduct; (iii) your indictment for, or plea of guilty or nolo contendre to (A) a felony in the United States or (B) a felony outside the United States, which regardless of where such felony occurs, the independent directors of the Board reasonably believe has had or will have a detrimental effect on the Company's reputation or business or your reputation; or (iv) your breach of one or more restrictive covenants in any written agreement between you and Motorola.

Liska filed suit against Motorola in the Circuit Court of Cook County, Illinois, and alleged in his complaint claims for retaliatory discharge and breach of contract. Liska claims that by terminating him, Motorola "violated a clearly mandated public policy - i.e., the policy that favors full disclosure, truthfulness and accuracy in the financial reports and statements made by businesses to the government and to the public."

That Motorola is not going to let Liska take the high ground is clear from its answer and affirmative defenses, which first defines a "whistleblower" and an "extortionist," then proceeds to explain the difference between the two:

The difference between a whistleblower and someone whose actions are akin to an extortionist is simple -- a whistleblower reports improper conduct because he believes it is the right action to take, while an extortionist threatens to disclose alleged improper conduct unless he is paid a sum of money to remain quiet. This Answer demonstrates that Plaintiff Paul Liska's conduct since at least December 2008 is not that of a "whistleblower" who was fired in retaliation. Rather, his conduct is more akin to an (attempted) extortionist.

But wait, there's more:

Paul Liska joined Motorola as its Chief Financial Officer in March of 2008. During his brief tenure, he proved himself to be erratic, unprepared, abrasive, divisive -- and often simply absent and "unavailable." By mid-December Motorola management had made the decision to remove him as Chief Financial Officer and a search had begun to locate his replacement. After Mr. Liska learned of this decision in December, he devoted himself to an extortion-like scheme designed to portray himself as a whistleblower and demand millions in return for his silence.

And those paragraphs come in the first two pages of the answer.

At this point in the case, which is admittedly very early, I think Motorola has more questions to answer than does Liska. He has a plausible explanation for his termination, including Motorola's decision to terminate him for "cause," especially after Greg Brown, Motorola's co-CEO, praised Liska in the earnings call on February 3.

On the other hand, I'm not sure why, if Motorola had decided in December 2008 to remove Liska as CFO -- after he had been on the job for only eight months -- it didn't do so, rather than risk the sort of situation that it's dealing with now. And Motorola's motivation in changing the reason for Liska's termination is questionable, to say the least.

For some additional information on the termination and the lawsuit, here are an article by Associated Press writer Peter Svensson, and some discussion by Mark P. Loftus on his Illinois Lawyer Blog.

Marriott, Coal Operator Reach Tentative Agreement, Avoid Litigation

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 19 May 2009 20:31:45 -0500

In what I regard as a surprising development, at least this soon, Marriott International and coal operator Jim Justice have reached a tentative settlement regarding his purchase of The Greenbrier from CSX, despite Marriott's contract with CSX to purchase the resort. I wrote about Justice's purchase last week.

According toa story on page A1 in Saturday's Washington Post, reprinted in yesterday's (Charleston, West Virginia) Daily Mail, a Friday meeting between Justice and Marriott representatives resulted in an agreement whereby they have 30 days to negotiate a marketing deal that compensates Marriott for any business that it generates. If they can't reach a deal, Justice will pay a $7.5 million break-up fee to Marriott.

Business Editor George Hohmann's story in today's Daily Mail elaborates on the details of the parties' agreement, such as that the resort will be marketed by both Marriott and Justice not as a Marriott but under its own name, and that Justice will have access to Marriott's national and international reservations systems.

And the Associated Press reports that today, the bankruptcy court in Richmond, Virginia granted The Greenbrier's motion to dismiss its bankruptcy, following Justice's testimony that he has sufficient resources to fund the operation.

Marriott Corp., Coal Operator Dispute Who Owns The Greenbrier

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 12 May 2009 13:28:13 -0500

To the right is a picture of the north entrance of The Greenbrier, which bills itself as "America's Resort." But after some surprising developments last week, it may be known soon as Jim Justice's resort.

CSX has owned The Greenbrier since 1910, when the railroad's predecessor, the Chesapeake and Ohio Railway, bought it. Last year, the resort, a victim of the downturn in demand for luxury resort lodging and its parent's loss in railroad freight volume, lost $35 million.

Earlier this year, CSX hired Goldman Sachs to analyze its options regarding the resort. What CSX and Goldman apparently determined was that CSX didn't want to, or couldn't afford to, keep the resort, so in March, The Greenbrier Hotel Corporation, the CSX entity that owns the resort, filed Chapter 11 bankruptcy in United States Bankruptcy Court in Richmond, Virginia. In re: Greenbrier Hotel Corporation, Case No. 09-31703 (E. D. Va.).

Contemporaneously with that filing, the hotel corporation announced that it would sell the resort to Marriott Hotel Services, Inc., in a deal that would provide Marriott up to $50 million over two years to operate the resort. Ultimately, Marriott would pay CSX between $60 and $130 million, depending on the hotel's financial performance, over seven years.

At least, that was the deal that everyone thought was in place until last Thursday, when Jim Justice, a West Virginia coal operator, announced that his family-owned company, Justice Family Group, LLC, had purchased the resort and 80% of The Greenbrier Sporting Club from CSX for $20.1 million. Here is Justice's letter to the resort's employees and West Virginia Governor Joe Manchin's statement regarding the sale. Justice has also agreed to pay a $2.6 million break-up fee to Marriott.

Not surprisingly, Marriott disagrees that Justice has a binding contract to purchase The Greenbrier, and said that it expects CSX to follow through with its agreement with Marriott. Justice has said that he will ask the bankruptcy court to dismiss The Greenbrier's bankruptcy, but according to this story from Hotel Online, the assistant United States Trustee explains that the bankruptcy must still run its course, including an auction scheduled for June 12. Here is the hotel's motion to dismiss the bankruptcy cases and shorten the notice period for hearing on the motion, which was filed last Friday.

If the auction goes forward, don't automatically assume that Marriott will outbid Justice. Marriott is in a stronger position financially, but Justice completed a deal earlier this year in which he sold his his companies' coking-coal interests to Mechel OAO, a Russian mining and metals company, for $436 million in cash and 83.3 million preferred shares of its stock.

And although $20 million for The Greenbrier is a bargain, Justice may still be willing to pay more for the resort than Marriott, particularly if Marriott has to sue CSX to enforce its contract. On the other hand, Marriott appears to have a solid tortious interference claim against Justice, especially since Marriott said, as of last Friday, that it didn't know anything about a break-up fee.

Interview on Real Lawyers Have Blogs

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Sat, 09 May 2009 12:14:23 -0500

Here is Lisa Kennelly's interview of me, which was posted yesterday at LexBlog's Real Lawyers Have Blogs.

My thanks to Lisa for contacting me and asking some questions that are harder to answer than they may seem.

Fourth Circuit Rules for Hospital in Appeal over Physician's Privileges

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 28 Apr 2009 19:11:50 -0500

My thanks to Mack Sperling, who writes the North Carolina Business Litigation Report, for directing me earlier this month to a Fourth Circuit decision, which involves a dispute over a physician’s practice privileges and the Health Care Quality Improvement Act of 1986. Wahi v. Charleston Area Medical Center, Inc., 2009 WL 962310 (4th Cir. 2009).

Fellow Charleston blogger Bob Coffield, author of the Health Care Law Blog, wrote this thorough analysis of the decision, As Bob explains, this decision makes several points that should be of particular interest to lawyers who represent hospitals and others involved in the peer-review process.

Bob's firm represented the hospital in the appeal, and Kenneth W. Starr, former solicitor general and current dean of the Pepperdine University School of Law, argued on behalf of Dr. Wahi.

Candy Manufacturer Claims Trademark Infringement by Landscaper

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Tue, 21 Apr 2009 20:24:47 -0500

A lawsuit filed last month in federal court for the Northern District of West Virginia involves the two logos shown at the right and the similarities, or lack thereof, between them.

At the far right, obviously, is the logo for Reese's Peanut Butter Cups, which are made by the Hershey Company, the well-known candy manufacturer.

The logo to the near right is that of Reese's Nursery and Landscaping, located in Ranson, West Virginia and operated by Reese Clabaugh.

Here is the complaint filed on March 19, 2009, in which Hershey's alleges causes of action for federal trademark infringement, federal false designation of origin, federal trademark dilution, and unfair competition. Hershey Co. v. Reese's Nursery and Landscaping, Civil Action No. 3:09-CV-00017 (N. D. W. Va. 2009).

Hershey claims that the landscaping company's logo "infringes and dilutes the well-known trade dress of Hershey's REESE'S line of products."

There is some similarity between the lettering of the two logos, and although the nursery's logo shown above is in black (or dark brown) and white, it has also used a logo where "Reese's " and the image of the tree were in orange and yellow.

But where is the possibility of any risk of confusion, which is an essential part of demonstrating infringement? Hershey's manufactures and sells a variety of candy products; Reese's nursery provides lawn care and landscaping services, and sells lawn and garden products. I don't see how someone can confuse the two in such a way that Hershey's is harmed.

Doug Rothschild at Cobalt LLP's blog wrote this post about the complaint, in which he noted that, perhaps in response to the lawsuit, the nursery has changed the colors of its logo, but questioned how much damage Hershey's has actually suffered.

And take a look at Martin Schwimmer's The Trademark Blog, which has the nursery's original logo and some interesting comments about the case.

All in all, this lawsuit makes me think that Reese Clabaugh isn't the only one shoveling manure.

S&C Chairman Cohen Discusses Nation's Financial Crisis

jeff@mehaliclaw.com (Jeffrey V. Mehalic) — Sun, 19 Apr 2009 10:24:19 -0500

On Thursday, I had the pleasure of attending a lecture by H. Rodgin Cohen, chairman of Sullivan & Cromwell LLP, as part of the University of Charleston Speakers Series. Cohen, a native of Charleston, is regarded as one of the, if not the, best banking and financial institutions lawyer in the country.

By way of background, Cohen is the subject of this month's cover story in The American Lawyer, which identifies him as "The Man To Call." The magazine also named him as its Dealmaker of the Year for 2008. Cohen also gave this interview a few days ago to Dan Freed of TheStreet.com. Lastly, in advance of his lecture, (Charleston, West Virginia) Daily Mail Business Editor George Hohmann interviewed Cohen for this article.

Cohen divided his speech, entitled "The Financial Crisis - Causes, Cures and Prevention" into five sections: an overview of the crisis, its causes, the response, potential cures, and the prevention of future crises.

Here are a few of the causes he identified, which he described as a "search for solutions rather than villains":

Gorging on leverage almost unchecked;
A sharp decline in credit standards and a virtual abdication of the credit review function;
A change in the basic business model from originate-to-hold to originate-to-sell;
Diversification of risk without transparency;
Human failure, greed, and corruption; and
The failure to recognize the enormous impact of the sharp decline in housing prices, which he described as the factor that had the greatest impact:

In discussing the government's response, Cohen said that it was inappropriate to conclude that the programs have been unsuccessful because the situation would have been a lot worse without them. But he agreed that the response appeared to be reactive rather than proactive.

He noted another flaw in the government's response in that the Federal Reserve followed the classic approach of providing additional liquidity to the market without recognizing that this was not a classic situation.

Cohen proposed several potential cures, including a willingness to recognize that $700 billion (for the bailout last fall) is not sufficient and to act accordingly. He predicted that the markets and the American people would accept, with transparency, another Troubled Assets Relief Program of $300-500 billion. He also thinks that an enhanced mortgage foreclosure mitigation program is essential.

Cohen was critical of what he called "AIG Hysteria Week," when the House of Representatives passed legislation last month that imposed a 90% tax on certain AIG employees' bonuses, and showed a willingness to act "contrary to the rule of law" and to enact "indiscriminate and devastating legislation."

In terms of preventing future crises, Cohen noted a corollary to Gresham's law that no regulation or bad regulation drives out good regulation.

As a fundamental solution, Cohen proposes the creation of a super-regulator or super-regulatory body that would serve as a systemic risk regulator. He said the critical questions for such a body are what should a super-regulator do, who should the super-regulator be, and who should be subject to a super-regulator. From his perspective, the obvious choice is the Federal Reserve, which is the only entity that is set up to take on such such broad duties.

Cohen criticized corporate governance, which he said failed at risk management, and proposed three reforms: every financial institution should have a separate risk management committee; risk management at a financial institution should be a separate staff function with a direct reporting line to the risk management committee; and a board of directors must understand that when a unit is experiencing growth that is not shared by the rest of the corporation, that is a red flag.

He also pointed out that compensation should be the responsibility of a corporation's board of directors, not legislators or regulators. Cohen admitted that it was difficult to understand why a successful CEO who makes whatever amount of money is objectionable when compared to the salary of a utility outfielder in major league baseball. (In discussing proposals in Congress to limit a CEO's compensation to the president's annual salary of $400,000, Cohen shared what Babe Ruth said in 1930 when asked how he felt about making $80,000 a year when the President of the United States made $75,000: "I know, but I had a better year than Hoover.")

Cohen declined to explain why he withdrew his name`from consideration as deputy Treasury Secretary, the No. 2 position in the department, except to say that his wife was delighted and his dog was even happier. (There has been speculation that Cohen's representation of many banks and financial institutions would have been problematic for his confirmation.)

A couple of other observations:

Cohen noted that nationalization of certain banks is a possibility, but is a last resort because "government is not a good owner," and said that key metrics for him in gauging the nation's recovery from the crisis are a firming-up of housing prices and the level of foreclosures.

I'm not aware that the text of the speech is available, but if it is, I'll upload it. Cohen's remarks are certainly worth reading and studying.