June 16, 2004

ABA Project: Model Case Management Orders
for Patent Cases

Several years ago, I chaired a special committee of the American Bar Association's Section of Intellectual Property Law. We set out to develop some model orders for implementing "best practices" in managing patent litigation cases.

(Of course, many of the model orders could be used in non-patent litigation as well.)

We adopted many of the provisions in the model orders from local rules of various federal district courts. The model orders reflect many practices that are already somewhat routine among experienced patent litigators. They also include provisions to help reduce administrative and mechanical costs.

Last month I participated in a panel discussion on local court rules in patent cases. The panel took place at the spring continuing-legal-education meeting of the American Intellectual Property Law Association. Several people asked me where to get an electronic copy of the model orders. Here they are:

Download model_case_management_orders_1998.12.08.rtf

June 16, 2004 in Intellectual Property, Litigation | Permalink | Comments (3) | TrackBack

June 15, 2004

Corporate Governance Changes
as Settlement Currency?

An article by Stephen Taub in today's Compliance Week ($) gives some examples of how companies seem to be using their executive compensation and other corporate-governance policies as "settlement currency" to help resolve shareholder lawsuits. The article's list of companies includes Cendant, Citrix, Enterasys, MCI, Sprint., and Siebel Systems.

The article says:

While denying that the actions taken were improper, [Cendant chairman and CEO Henry] Silverman and the other defendants agreed to significantly alter his existing contract. He agreed to move up the expiration date by five years, to Dec. 31, 2007, and reduced severance to no more than 2.99 times the prior year's compensation.

In addition, a significant majority of Silverman's bonus will now be subject to the attainment of certain performance-based earnings per share goals. Also as part of the compromise, the cash compensation portion of a post-employment consulting contract was reduced from life to a period of five years.

(Even the new contract still seems pretty rich to me, but hey, I don't move in those circles....)

We're likely to see more of this phenomenon, according to the article:

"It is definitely a growing trend," says Richard Koppes, of counsel to Jones Day Reavis & Pogue and former general counsel of Calpers. "It's beginning to happen in a fair amount of cases."

"It does seem like something that is gathering momentum," adds Bruce Carton, executive director of Institutional Shareholder Services' Securities Class Action Services.

A couple of years ago, I heard a speaker suggest that the street-smart company will deliberately hold back on some reforms of this kind. That way, if litigation should ever come to pass, the company will still have something to offer in settlement discussions. This was in a panel discussion on the law of sexual harassment, not corporate governance, but the principle would seem to be be the same.

I'm not sure where I come out on that idea: if a particular reform makes sense, I wonder whether you might be better off implementing the reform on your own initiative, before litigation, in the hope that it will help prevent litigation-causing events in the first place.

June 15, 2004 in Litigation, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

June 14, 2004

Counseling an Employee for Poor Performance?
Consider Getting a Signed Written Acknowledgement

In an age-discrimination lawsuit against American Airlines by a former employee, the court recently denied American's motion for a summary judgment dismissing the case. The court's reason offers a lesson for managers and HR personnel.

The former employee, one Walker, claimed he had been fired during a post-9/11 reduction in force because of his age. American Airlines responded with evidence that Walker had been a poor performer. Walker replied that American's performance argument was merely a pretext.

Walker supported his pretext contention in part with his affidavit that he never knew he had received low performance marks. (He also introduced evidence that other, younger employees in comparable positions had serious employment problems yet were not terminated.) The court concluded that Walker had produced enough evidence of pretext to entitle him to have a jury hear his case; it denied American's motion for summary judgment.

POSSIBLE LESSON: If you're counseling an employee because of poor performance, consider 1) writing up an accurate summary of the counseling, 2) asking the employee to sign it, 3) giving him or her a copy, and 4) keeping the signed original for the employee's personnel file. (If the employee refuses to sign, consider making a written note of the employee's refusal.) That should provide at least some ammunition to help refute a later claim that the employee never knew about the performance issues.

CITATION: I couldn't find the court's opinion on-line. The case is Walker vs. American Airlines, Inc., No. Civ.A 4:03-CV-46-Y (N.D. Tex. June 9, 2004), summarized in this BNA Corporate Law Daily report ($).

June 14, 2004 in Leadership and Management, Litigation, Record-keeping | Permalink | Comments (0) | TrackBack

That $1.45 Million House May Not Look So Great Now

You're a public-company officer. Your company's been having -- or will soon have -- financial troubles. You've had a hankering for a million-dollar home in Florida. You might want to think twice about buying that house. A former officer of Homestore, Inc., who is now a defendant in a variety of securities lawsuits. recently learned that his purchase of a $1.45 million home in Florida could eventually be found to constitute a sheltering of his assets from creditors, which in turn could make him ineligible to have the company advance his defense costs in various securities lawsuits. See the opinion by the Delaware Chancery Court. (Link via BNA Corporate Counsel Weekly [$])

Here's what happened. Homestore.com's corporate bylaws contain a fairly typical indemnification provision. The provision is designed to protect the company's officers and directors if they are sued for their actions or omissions in that capacity. Under that provision, the company is required to indemnify the officer or director, and to advance the defense costs for the suit.

But there's a catch. To be entitled to indemnification, the officer must have "acted in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe the person's conduct was unlawful." If the officer is ultimately found not to be entitled to indemnification, he or she must repay the company for the defense-cost advances.

Homestore's former officer, one Peter Tafeen, sued the company to get an advancement of his defense costs in the securities litigation. Homestore contested Tafeen's suit. It noted that, during the time that the alleged securities frauds were supposedly taking place, Tafeen had built a $1.45 million house in Florida. It argued that what Tafeen really had in mind was to shelter his assets, so that, if he were ultimately found not to be eligible for indemnification, he could avoid repayment of the company's advances of defense costs. This, the company said, constituted "unclean hands" that justified the company's refusal to advance defense costs.

The court agreed that this was a possibility. It said it could not determine Tafeen's intent without a trial (presumably including Tafeen's testimony and cross-examination). The court therefore denied Tafeen's motion for a summary judgment.

June 14, 2004 in Litigation, Securities law, SEC regs / actions | Permalink | Comments (1) | TrackBack

June 09, 2004

Adelphia Vendors Motorola, Scientific-Atlanta Implicated in Executives' Securites-Fraud Trial

Today's WSJ ($) reports that, in the trial of two former Adelphia executives, an email and witness testimony have implicated Adelphia vendors Motorola and Scientific-Atlanta as "allegedly help[ing] Adelphia cook its books."

According to [prosecution witness Jarmes R.] Brown's testimony in U.S. District Court in Manhattan, Adelphia in mid-2000 realized it was going to miss its earnings targets, in part because of higher-than-expected expenses related to the rollout of new set-top converter boxes -- the equipment that generally sits on top of cable subscribers' televisions -- that it had purchased from Motorola and Scientific-Atlanta.

Mr. Brown testified that Timothy Rigas, one of the former Adelphia executives on trial, suggested capitalizing the marketing and advertising expenses associated with the rollout of the equipment. That would stretch out the expenses and boost Adelphia's earnings.

The article notes that "the Securities and Exchange Commission has taken a harder line on suppliers, customers, bankers and others who knowingly helped companies commit accounting fraud."

See also SEC Hammers Company's Customers for Securities-Fraud Participation.

June 9, 2004 in Criminal Penalties, Finances, Litigation, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

April 28, 2004

$1.1 Billion (Yes, Billion) Verdict
Against Pharmaceutical Manufacturer

Plaintiffs' attorney John O'Quinn just won a $1.1 billion (yes, billion) jury verdict for the widower of a woman who took a diet drug. The verdict came in a wrongful-death suit against pharmaceutical manufacturer Wyeth.

About $ 900 million of that amount was punitive damages, making the ratio of punitives to actual damages approximately 9 to 1. Why didn't this verdict violate Texas's statutory cap on punitive damages? Attorney O'Quinn was quoted in this Associated Press story:

[O'Quinn] said Wyeth was negligent and "acted with malice in marketing of this drug by putting its making of money ahead of human life and safety."

That's an interesting use of the term "malice." The Houston Chronicle's story quotes O'Quinn as saying:

"This drug corporation knowingly sold and marketed a diet drug that it actually knew would kill some of the people that took it, and they never warned anyone against the risks," O'Quinn said shortly after the verdict was returned.

* * *

. . . O'Quinn said the jury found that Wyeth had erased entries describing problems with the drug on "adverse drug event" forms it is required to file with the FDA.

"That broke the cap because if the jury finds the corporation committed a criminal act, the cap doesn't apply," O'Quinn said.

Reading between the lines, this might have been a situation where the jury decided that "the cover-up proved the crime," i.e., that Wyeth's alleged attempts to hide its problems amounted to proxy evidence of guilt.

According to the Chronicle, Wyeth says that the evidence doesn't support more than about $1 million in actual damages and double that in punitives:

"[The decedent] Ms. Cappel Coffey, who was morbidly obese, a strong candidate for using diet drugs and had a family history of cardiovascular disease prior to taking diet drugs, did not develop PPH [primary pulmonary hypertension] symptoms until more than four years after she stopped using Pondimin," lawyer Bill Sims said in a news release posted on the Web site. "There is absolutely no basis in the record for the amounts awarded."

It will be interesting to read in the legal newspapers, over the next few days, just what evidence on the malice issue was actually presented to the jury. I wonder how the verdict will stand up in post-trial motions and on appeal.

UPDATE: The New York Times's article adds these details:

But Wyeth said that Ms. Cappel-Coffey's condition might have been caused by something other than fen-phen. In the company's statement, Mr. Sims said that Ms. Cappel-Coffey "did not develop P.P.H. symptoms until more than four years after she stopped using" one of the two drugs that make up fen-phen, sold under the name Pondimin. He continued, "There are no studies that demonstrate an association between Pondimin use and an increased risk of P.P.H. that long after cessation of use."

Mr. Sims also said in the statement that the court had not permitted the company to present evidence that might have suggested that the damage to her lungs had been caused by another diet drug. The court excluded evidence that Ms. Cappel-Coffey used four other diet drugs after she took Wyeth's Pondimin, he said.

April 28, 2004 in Litigation | Permalink | Comments (0) | TrackBack

April 23, 2004

Public Allegation of Copyright Infringement
Leads to $300K Defamation Verdict

If you think a competitor is doing something illegal, like infringing your copyright, it's usually best not to complain to customers about it. If it turns out you're wrong about the alleged illegality, you could be liable for defamation. A Web site operator named Boats.com recently learned a $300,000 lesson on that subject in a Florida federal district court.

The "student," now $300K poorer -- plus legal expenses, of course -- is a company called Boats.com. It has a Web site, Yachtworld.com, where subscribing yacht brokers can post listings of yachts for sale. The "teacher" is another company, Nautical Solutions Marketing (NSM), which started a competing Web site, Yachtbroker.com.

NSM's competing Web site apparently was an "aggregator"; it used a "spider" program called Boat Rover to harvest factual data from other yacht-brokerage Web sites, including the Yachtworld Web site of Boats.com. NSM employees also copied and pasted other data from the Yachtworld Web site.

Boats.com didn't especially like having data copied from its Web site to a competing site. According to a report published by the Bureau of National Affairs in one of its printed weeklies (not available on-line), Boats.com sent out letters to yacht brokers and others, claiming that NSM's data-harvesting was illegal.

In response, NSM filed a lawsuit accusing Boats.com of defamation and asking the court to declare that its data-harvesting activities were legal. In November 2003, the jury awarded NSM $250,000 in damages for defamation, plus $50,000 in punitive damages. And then earlier this month, the judge issued findings of fact and conclusions of law that pretty much gave NSM the declaration it had asked for.

References: The Associated Press story was carried in USAToday. The district court's findings of fact and conclusions of law on the copyright issue are here.

April 23, 2004 in Intellectual Property, Litigation, Marketing, Sales | Permalink | Comments (1) | TrackBack

March 08, 2004

Martha Stewart Juror Says Her Changing
a Phone Message Brought Her Down

This AP story reports some post-trial comments by jurors in the Martha Stewart case. It seems that one of the key pieces of evidence was testimony that Stewart had tried to change a phone message from her stockbroker:

Other jurors said Stewart's assistant Ann Armstrong, who reluctantly testified that Stewart tried to alter a phone record of a message from her stockbroker, was the key witness leading them to the domestic diva's conviction.

Armstrong testified that Stewart sat down at Armstrong's desk to change a message from her broker, Peter Bacanovic, that informed her that he thought the ImClone stock price would start falling.

"She ultimately gave the testimony that was going to bring Martha down. That was a very important piece," said juror Chappell Hartridge, one of six jurors who spoke to "Dateline NBC" in interviews that aired Sunday night.

"We all believed her 100 percent," juror Adam Sachs said of Armstrong.

This is another example of a brutal fact of legal life: In a trial, evidence can often be confusing, difficult to understand, or even contradictory. If you are accused of wrong-doing, it may not be entirely clear whether what you did was wrong. (This can be especially true in intellectual-property cases, by the way.) On the other hand, evidence-tampering is very easy to understand. If jurors conclude that you tampered with evidence, they may well seize on that as "proxy evidence" that your actions must indeed have been wrong, otherwise why would you have tried to cover your tracks?

It bears repeating: If you've been sued, or if you think you're going to be sued, or if you hear that government authorities are investigating your actions, DON'T destroy or tamper with potential evidence. The chances are you'll only be hurting yourself.

March 8, 2004 in Criminal Penalties, Litigation, Record-keeping | Permalink | Comments (0) | TrackBack

February 11, 2004

Compuware: Hit By Its Own Torpedoes

In my Navy days I was a carrier sailor, not a submariner. But I still heard the story about the valor of the submarine USS TANG, sunk in the middle of a furious battle in 1944 by one of its own faulty torpedos with the loss of all but nine of its crew. TANG's skipper, Richard O'Kane, was one of the most successful U.S. sub skippers of WW II; he was awarded the Medal of Honor after he and his surviving crew were released from Japanese captivity at the end of the war.

(In re-reading this essay before posting it, I wonder whether I'll be guilty of poor taste in using TANG's epic saga as a motif for a far less-heroic tale. But many of you will have never heard of either TANG or O'Kane, and you should, so here goes.)

Compuware, a mainframe computer software vendor, seems to have been hit by several of its own torpedoes. In 2002, it launched a copyright- and trade-secret lawsuit against IBM, its former alliance partner. Not long afterwards, CompuWare's own assertions were re-directed at them, as part of a class-action securities lawsuit. Last week, Compuware's motion to dismiss the class-action lawsuit was denied in part, leaving the unfortunate Compuware to the tender mercies of the securities plaintiffs' bar. See In re Compuware Securities Litigation, _ F. Supp.2d _, 2004 WL 231464 (E.D. Mich. Feb. 3, 2004) (link via Securities Litigation Watch.)

A Rocky Alliance

IBM was and is a major player in the market for mainframe computers. Compuware is a software vendor in the mainframe market. It was (formerly) a "tier one" alliance partner of IBM; as such, it enjoyed access to IBM source code and other proprietary information. One might think of them as sailing in IBM's wake.

IBM, however, allegedly became dissatisfied with the pricing of Compuware's software. So, beginning in 1999 and 2000, it developed its own competing software, much to Compuware's displeasure. In 2002, Compuware filed a copyright- and trade-secret lawsuit against IBM.

Unhappily, just a few weeks later, Compuware pre-announced what the class-action complaint delicately describes as "disappointing financial results." Its stock price dropped 25% in one day on heavy volume.

A securities class-action plaintiff seized on Compuware's allegations against IBM. The plaintiff claimed that Compuware had admitted that it knew for a long time that its relationship with IBM was deteriorating -- and that it had wrongfully failed to disclose that deterioration.

Torpedo 1 Away: A 1999 Press Release

The class-action plaintiff focused on several of Compuware's press releases, but one of them stands out. In a press release from 1999, Compuware's CEO was quoted as saying "I see no significant trends or impediments that would negatively affect our prospects." (Emphasis added.) No doubt that sentence was actually written by some marketing type, seized by the enthusiasm of the late 90s tech bubble. (Incidentally, Compuware's executive VP for corporate communications and investor relations was named as one of the individual defendants in the class-action suit.)

But according to the class-action plaintiff, the CEO either knew, or recklessly failed to know, that IBM was a'coming, and therefore his statement was deceptive. Judge Taylor concluded that the plaintiff had made out a plausible case in that regard, commenting that:

Plaintiffs have alleged and provided the most plausible inference that Defendant [and CEO] Karmanos knowingly stated that he saw "no significant trends or impediments" to Compuware's growth while being fully aware that a company [i.e., IBM] accounting for one-third of the company's business was becoming increasingly dissatisfied with Compuware's price structure and that an all-important relationship may well disintegrate at any time, absent correction.

Torpedo 2 Away: The IBM Litigation

Compuware's 2002 copyright- and trade-secret suit alleged that IBM had started its competing activities back in 1999 and 2000. When Compuware filed its complaint, it also issued a press release that said, among other things, that "We have been considering this distressing issue for quite some time . . . ."

The class-action plaintiff regarded these statements as admissions that Compuware knew about its problems with IBM and had failed to disclose them.

(Shameless Plug Department: For more information about copyrights and trade secrets in computer software -- as well as software patents, software licensing, export controls, and related topics -- see my one-volume treatise, The Law and Business of Computer Software, published by West Group. Last year I turned over the editing and updating responsibilities to the publisher, but I'm still sentimentally attached to the book.)

The Cautionary Language in
Compuware's SEC Filings Wasn't Enough

In its motion to dismiss, Compuware pointed out that it wasn't as if they hadn't included cautionary language about IBM in their SEC filings. Some of those filings had listed a number of significant competitors (not including IBM), then mentioned that IBM also made competitive products and there could be no assurance IBM would not offer significant competing products in the future.

Judge Taylor didn't buy it, at least for purposes of determining whether the plaintiff was entitled to keep working toward an eventual jury trial:

With regard to future events, uncertain figures, and other so-called soft information, a company may choose silence or speech elaborated by the factual basis as then known -- but it may not choose half-truths. [Citations and internal quotation marks omitted.] IBM's introduction of the Fault Analyzer and File Manager programs not only signaled the release of directly competing products, but were accompanied by a staunch refusal to share indispensable source code information. Clearly, a good relationship had ended.

In light of this, Defendants' choice to disclose anything about that relationship in its press releases and SEC filings mandated full disclosure concerning the benefits, as well as the impediments, to realizing the full potential of that relationship.

* * *

Defendants' statement that "there can be no assurance that IBM will not choose to offer significant competing products in the future," implied that IBM's development of competing software was a possibility as opposed to an actuality, and therefore, this statement does not qualify as meaningful cautionary language. The court finds that the 10-K filings did not satisfy Defendants' obligation to warn investors of risks and negatives as significant as those which were actually realized.

(Emphasis and paragraphing edited.)

Motion to Dismiss Denied

The judge denied Compuware's motion to dismiss the class-action lawsuit in most respects. The denial order said:

Contrary to the assumptions underlying Defendants' arguments, the relevant issue here is not what Plaintiffs can prove, but rather whether what they have alleged creates a plausible inference that Defendants acted or spoke with the requisite state of mind. . . . [I]n this instance, it is hard to imagine a complaint that could better withstand a motion to dismiss. The court finds that Plaintiffs have submitted a well-crafted, well-pled complaint, stating sufficient facts to create a plausible inference that Defendants knowingly misstated or omitted material information. Therefore, Defendants' Motion to dismiss must fail.

(Citations omitted.)

Possible Lessons

In the classic book The Right Stuff, Tom Wolfe recounts that whenever a test pilot crashed and burned, his surviving colleagues -- bathed as they were in the certainty of their own infallibility and immortality -- often reacted along the lines of: How could he have been so stupid?

We might be tempted to say the same about Compuware. But can we? What could Compuware have done differently? That's hard to say. Here are some thoughts:

Press releases: Obviously it would have been better if Compuware's press release hadn't had the CEO saying he saw no significant negative trends. That's an example of a categorical statement, which you're usually better off avoiding when possible. (All categorical statements are bad, including this one.) But at the time, Compuware's CEO may well have genuinely believed that he saw no negative trends.

SEC filings: Obviously, you have to do your best to make a full and fair disclosure of known material information in your SEC filings. But for all we know, at the time, Compuware's executives might have been genuinely optimistic that they could patch up their relationship with IBM. Moreover, they had to face the choice of just how much to disclose about their relationship with IBM. Conceivably, if they had disclosed more than they did, the mere act of disclosure might have damaged the relationship even further, possibly causing more harm than good to the company and its shareholders.

Plaintiffs' lawyers always have the benefit of hindsight. Executives, in contrast, have to make actual business-judgment calls, usually on the basis of limited information.

But even so, companies -- especially their marketing people -- would do well to keep Compuware's troubles in mind when they're drafting press releases and SEC filings.

February 11, 2004 in Intellectual Property, Litigation, Marketing, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

January 07, 2004

SEC Hammers Company's Customers
for Securities-Fraud Participation

The SEC has again gone after customers of a company for allegedly helping to perpetrate the company's securities fraud by "round-tripping," i.e., creating fictitious transactions that were reported as revenue. As part of the settlement, the customers' principals, as well as the company insiders who were involved, were barred from serving as an officer or director of a publicly-held company.

The SEC announced today that it had reached a settlement with the former controller, former operations manager, and several former customers and vendors of Suprema Specialties, Inc., a now-defunct cheese manufacturer based in Paterson, N.J. customers in question. According to the SEC press release:

The SEC's complaint alleges that defendants Quattrone [Ed: Robert Quattrone -- if it had been Frank Quattrone, surely we would have heard more about it before now] and Vieira, using the private companies they controlled, knowingly entered into numerous circular round-tripping transactions with Suprema from at least 1998 through early 2002, and that defendant Fransen similarly entered into such transactions with Suprema from at least 2000 through early 2002.

The complaint further alleges that, during the respective time periods, Quattrone, Vieira, and Fransen each signed false audit confirms that were provided to Suprema's independent auditors, and each received kick-backs for their participation in the scheme.

According to the complaint, the round-tripping transactions involving Quattrone, Vieira, Fransen, and their companies collectively resulted in overstatements of Suprema's reported revenues by approximately 5.75%, 7.41%, 14.25%, 19.51%, and 19.48% in fiscal years 1998, 1999, 2000, 2001, and the first quarter of 2002, respectively.

(Paragraphing added for readability)

(Link via Securities Litigation Watch.)

January 7, 2004 in Accounting, Litigation, Sales, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

Junk FAXing brings $5.4M Fine

On Monday the Federal Communications Commission (FCC) announced that it was fining Fax.com, Inc. nearly $5.4 million "for faxing unsolicited advertisements to consumers in violation of the Telephone Consumer Protection Act (TCPA) and the Commission’s rules. . . . This is the largest single fine ever imposed by the Commission for violation of the TCPA."

The FCC said that it imposed the maximum permissible forfeiture of $11,000 for each of 489 separate violations on grounds that “Fax.com’s primary business activity itself constitutes a massive on-going violation” of the TCPA.

See the FCC's press release for more details.

January 7, 2004 in Litigation, Marketing | Permalink | Comments (0) | TrackBack

November 05, 2003

Review Your Unused Sales Tax Permits

In late 2001, a Texas lighting-fixtures vendor sued one of its customers, a California company, for breach of contract. The vendor brought the suit in, surprise, Texas. The California customer tried to get the lawsuit thrown out because of lack of "personal jurisdiction." That means the customer claimed it didn't have enough presence in, or contact with, the state of Texas to be subject to suit there.

Earlier this year, a federal magistrate judge in San Antonio denied the California customer's motion to dismiss the suit. Her principal stated reason suggests that companies might do well to periodically review their state sales- and use-tax permits. See Ergonomic Lighting System, Inc. v. Commercial Petroleum Equipment/USALCO, No. SA-02-CA-0031 (W.D.Tex. 03/05/2003).

What the Federal Judge Regarded as "Doing Business"

The federal magistrate judge listed several reasons for denying the California customer's motion to dismiss the lawsuit.

  • The first reason she listed was also the one she discussed in the most detail. The customer had obtained a Texas sales-tax permit in 1994. From 1999 to 2002 the customer had filed sales- and use-tax returns with the Texas tax authorities and had paid an aggregate of less than $1,000 in state tax. The magistrate judge appears to have taken this as tantamount to an admission of regularly doing business in Texas.
  • The California customer had "engaged in business with either Texas-based corporations or with out-of-state corporations that have locations in the state."
  • The customer had an interactive Web site that could be accessed by Texas-based companies.
  • The customer had "maintained exclusive distributorship arrangements with businesses that have distribution facilities in Texas."

The magistrate judge concluded: "This evidence, in my opinion, clearly establishes that [the customer] conducted regular business in the Texas, sufficient enough for this court to conclude that [the customer] 'purposefully availed itself of the Texas marketplace' such that it could reasonably anticipate being called into court in Texas."

Possible Lessons

1. Your company may have applied for sales- and use-tax permits in numerous states. It might be a good idea to review them periodically. Consider canceling any permits that you don't need. Of course, check with counsel -- and your sales execs -- before doing so.

2. Consider including a forum-selection clause in your contracts, especially in important deals. A forum-selection clause will typically provide that any lawsuit will be brought in a specified jurisdiction. Such clauses are usually enforced (although there are some notable exceptions to that rule).

There are downsides to proposing a forum-selection clause. Such clauses often cause pushback from the other side in contract negotiations. If the other side has the bargaining power, it might respond, fine, but the chosen forum will be our home turf, not yours. Then you might have to choose between agreeing to sue or be sued in the other side's jurisdiction, or not doing the deal.

Overall, you might decide you're better off not proposing a forum-selection clause, or, if the other side proposes one, insisting that it be deleted. Then each side would accept the risk that someday it might be sued in a foreign jurisdiction. That's a judgment call.

3. Watch out for contract clauses that say something along the lines of, "this contract is entered into in Paris, Texas, as of the date signed by the parties." (Emphasis added.) That might be used to argue that the parties were doing business in Paris, Texas, and therefore were subject to suit there.

4. To state the obvious: The more business relationships you have in other jurisdictions, the more likely you are to being subject to suit in one of those other jurisdictions.

November 5, 2003 in Litigation, Record-keeping, Sales | Permalink | Comments (0) | TrackBack

October 31, 2003

Alone, Unarmed (maybe), and Uninsured

Here's a story about a software vendor that found out -- in probably the worst possible way -- that its general-liability insurance policy did not have the specific coverage that was probably the most crucial for the vendor's software business. Not a good day for the vendor's risk-management people.


The software vendor was a company called Professional Data Services (PDS). Its software was used to help manage medical clinics.

The customer apparently was an opthamology practice or maybe an optometry shop, Heart of America Eye Care, P.A. I'll just call it "the eye clinic."

The software license agreement dated back to 1995. It was a pretty vanilla agreement, judging from the court's sketchy description of it. The agreement gave the eye clinic a license to use several of the vendor's software programs, and required the vendor to investigate and correct problems with the software.

The Vendor-Customer Dispute

At some point the eye clinic had problems with the software. In April 2002 -- some seven years after it first acquired the software -- the eye clinic sued the vendor, PDS. The eye clinic claimed:

  • that PDS failed to provide the required training, customer service, investigation, and correction of software problems;
  • that PDS improperly maintained the software;
  • that the software was not fit for the purposes for which it was intended [Editorial comment: Most software license agreements expressly disclaim any warranty of fitness for a particular purpose; perhaps this agreement didn't do so];
  • that the software did not satisfy the medical accounting needs of the eye clinic [Editorial comment: Many software license agreements expressly disavow any commitment to satisfy the customer's particular needs]; and
  • that PDS misrepresented the quality of service and support it would provide to the eye clinic. [Editorial comment: Many software license agreements contain an "integration" clause that says, among other things, that neither party is relying on any representation of the other except as expressly set forth in the agreement. It sounds like this agreement didn't say that.]

The Missing Insurance Coverage

The vendor, PDS, apparently figured that its insurance carrier would pay the attorneys' fees for defending against the eye clinic lawsuit. It no doubt was also counting on the insurance to cover any damage award that the eye clinic might receive (up to the policy limits, of course).

The insurance carrier thought otherwise. It filed its own, separate lawsuit against the vendor (and the customer too), seeking a judicial declaration that there was no coverage and no duty to defend.

Right you are, the court said. The applicable coverage in the insurance policy was for "property damage." That phrase was defined in the policy as (i) physical injury to tangible property or (ii) loss of use of tangible property that is not physically injured. Loss of use of a software package and corruption of intangible data doesn't count, at least not when the computer itself isn't damaged or rendered useless. The court cited other recent judicial holdings to the same effect.

So, the software vendor is now facing, uninsured:

  • the expense of defending against the customer's lawsuit; and
  • if it loses, the expense of paying any resulting damage award.

The customer didn't necessarily come out ahead here either, because without insurance coverage, the vendor may not have the assets to pay a damage award.

(Cincinnati Insurance Co. v. Professional Data Services, Inc., No. 01-2610-CM, U.S. District Court, District of Kansas, July 18, 2003)

Possible Lessons

If you're a software vendor:

  • Check your insurance policies to make sure you have coverage for information and network technology errors and omissions -- a general-liability policy may not cut it.
  • Take a look at the warranty disclaimers in your standard license agreements.
  • Remember that disputes can arise even with long-time customers.

October 31, 2003 in Embarrassments / Bad Career Moves, Finances, Litigation, Sales | Permalink | Comments (0) | TrackBack

October 28, 2003

Victoria's Secret Exposes Too Much
(It's Not What You Think)

No, it's not what you think. Victoria's Secret had computer security problems that allowed customers to browse through other customers' on-line orders. (Insert your choice of joke here.) That attracted the attention of NY attorney general Elliot Spitzer. When the dust settled, the Victoria's Secret parent company agreed to give refunds or credits to customers in New York and to pay the state of New York a $50,000 fine. See the AP story.

POSSIBLE LESSON: This is yet another example of how companies doing business on the Internet may have to contend with multiple legal authorities. Some other examples:

  • Earlier this month, Google was ordered to pay a French company 75,000 euros in damages for allowing paid advertisements to be linked to the French company's trademark in search terms; see the Reuters story.
  • Last December, an Australian court ruled that a local business executive could bring suit -- in Australia -- against Dow Jones for allegedly libelous statements posted on a U.S. Web site. See this BBC analysis.
  • In November 2000, another French judge ordered Yahoo! to block French access to Nazi-memorabilia sites; see this BBC story.

October 28, 2003 in Litigation, Marketing | Permalink | Comments (0) | TrackBack

October 14, 2003

Mother Always Said, Don't Brag

The exuberance and assertiveness of marketing people can make enormous contributions to a company. They can also put the company in a deep hole. Here's an example of the latter: Some not-atypical, faintly boastful language in a company's press releases language, of a kind your marketing people might well have used themselves, kept the company mired in a securities class-action lawsuit, when the lawsuit might otherwise have been dismissed.

A Sad but Familiar Tale

Log On America (LOA) was a Rhode Island-based Internet access provider for residential and commercial customers. From 1992 to early 1999, LOA grew into a company with nine full-time employees and revenues of just under $760,000, but it never once turned a profit.

Despite this decidedly less-than-stellar track record, LOA decided to go public. In April 1999 it went out at $10, the price spiked to $37 on the first day of trading, and closed at $35 per share. LOA went on a buying spree, using its capital and its publicly-traded "currency" (shares) to acquire various New England internet service providers, growing its customer base from 1,000 to over 30,000.

The Fateful Press Releases

During those exhilerating days, LOA issued press releases and interviews that would come back to haunt them in the subsequent securities class-action lawsuit. The company said, for example, that:

  • LOA was the "premier provider of high-speed DSL services in the Northeast corridor";
  • LOA was "a Northeast Regional [CLEC] and Information Internet Service Provider (IISP) providing local dial-tone, in- state toll, long distance, high speed Internet access and cable programming solutions . . . to residential and commercial customers through the Northeast";
  • LOA was "one of New England's leading providers of bundled communications services";
  • LOA was "in a dominant position in the market for integrated data and voice services" and "a dominant super regional communications player."
(Emphasis added.)

The Lawsuit

In an all-too-familiar story, LOA's rapid post-IPO expansion resulted in exploding net losses, which in turn caused the stock price to drop. And then, in early 2000, the tech bubble burst. LOA's stock dropped even more, down to a low of $0.10 per share. NASDAQ eventually delisted the stock.

As night follows day, the securities class-action lawyers found their way to LOA. They filed the usual lawsuit accusing LOA's CEO and CFO of securities fraud, alleging that those two officers had engaged in "a massive fraudulent scheme to deceive investors into thinking [LOA] was a successful 'dominant' telecommunications company, when in actuality it was not."

The LOA officers did they usual thing: they filed a motion to dismiss the lawsuit. The judge granted some portions of their motion, but also kept other, significant portions of the lawsuit alive. Why? Because, the judge concluded, some of the statements in LOA's press releases and interviews might well have been material misstatements:

The representation that LOA was the "premier provider of high-speed DSL services in the Northeast corridor," as it was described in a May 17, 1999 press release, is much more than mere puffery: it is a statement of LOA's present status and capabilities, and connotes that LOA is comparatively superior to all other high-speed DSL service providers in the Northeast corridor.

Likewise, the statements that LOA's transaction with Nortel would "help further solidify [LOA's] dominant position in the market for integrated data and voice services," and that LOA's "proven early market entry strategy is positioning it as a dominant super regional communications player," are both actionable: they clearly imply a comparison to competitors and suggest that activities undertaken by LOA as of December 17, 1999 or February 10, 2000 had made or were making it "dominant" over all other competitors in its field.

The same is true for the statement that, by October 28, 1999, LOA had become "one of New England's leading providers of bundled communications services." Assuming that the substance of the statement is untrue (as Plaintiffs have alleged, and as Defendants have conceded for purposes of this motion), this statement is material, as it connotes superiority over the vast majority of other bundled communications services providers.

(Paragraphing supplied.)

Moreover, LOA apparently was never able to offer cable services, even though they had described themselves as a cable-programming provider.

(Scritchfield v. Paolo, 274 F. Supp. 2d 163 (D.R.I. 2003).)

Some Possible Lessons

  • Think carefully before using superlatives like "premier provider" and "dominant player" to describe your business. The judge and jury might view such statements as non-actionable puffery, or they might regard them as false statements. (Indeed, the Scritchfield judge said that the mere fact that the defendants made a puffery argument was a concession that the statements were not true.)

    I'm not a marketing guy. But my personal belief is that superlative language of this kind seldom does you much good in the marketplace. I think customers and investors tend to discount such language. It therefore provides you with little or no benefit, while still increasing your potential vulnerability to a securities class-action lawsuit. Talk about the worst of both worlds.

  • There's another reason that using pharases like "dominant player" is a bad idea. Someday you may want to acquire, or be acquired by, another company. You might have to do a Hart-Scott-Rodino antitrust filing to get government approval for the acquisition. That filing may have to contain your press releases. You really don't want the government's antitrust reviewer to see your own press releases describing you as the "dominant player" in any particular market or submarket -- at the very least, it likely would complicate the approval process.

Thanks to Securities Litigation Watch for the pointer to this story.

October 14, 2003 in Communications, Litigation, Marketing, Securities law, SEC regs / actions | Permalink | Comments (2) | TrackBack

October 12, 2003

P---d Off

Natural Biologics LLC really knows how to p--s off a federal judge (bad pun intended). Earlier this month, the judge seriously hammered Natural Biologics for misappropriating trade secrets relating to the processing of horse urine. She hit Natural Biologics even harder than usual, essentially putting them out of the business – and for somewhat unusual reasons.

Concealing Evidence, Giving False Testimony

Natural Biologics was -- note the past tense -- in the business of making a generic version of Premarin, a hormone replacement therapy drug of Wyeth (formerly American Home Products Corporation). Both drugs are made using estrogens extracted from pregnant mare urine.

Federal Judge Joan Ericksen found that Natural Biologics knowingly misappropriated Wyeth's trade-secret information about its estrogen-extraction process by getting the information from a former Wyeth employee. She also found that the former Wyeth employee knew he had no right to provide the information to Natural Biologics.

As if that weren't enough, the judge found that the president of Natural Biologics destroyed documents, concealed other evidence, and gave false testimony in deposition and at trial (!). He did so, she said, in an effort to conceal the misappropriation.

The Hammer Drops

If you're found liable for misappropriation of a trade secret, normally you'll be enjoined from continuing to use the secret and ordered to pay damages. Even so, you'll usually be allowed to stay in business, as long as you don't use the secret in doing so.

But it's never a good idea to let a judge think that you've destroyed evidence or given false testimony. This principle was driven home for Natural Biologics when the judge concluded that:

Because Natural Biologics attempted to conceal its misappropriation of the Brandon Process by destroying evidence, giving false testimony, and improperly redacting evidence, the Court concludes that Natural Biologics cannot be trusted to avoid using the misappropriated process and cannot be trusted to obey an Order that permits them to exercise any discretion..

Consequently, the judge did not merely enjoin Natural Biologics from using the misappropriate trade secrets. She went even further – she ordered them, among other things:

  • to stop “producing, manufacturing, selling, offering for sale, distributing, importing or exporting any material or product consisting in whole or in part of estrogens from urine”;
  • to destroy all of its documents concerning its estrogen-extraction processes; and
  • to destroy "any material or product consisting in whole or in part of estrogens from urine resulting from any Natural Biologics Process."

In effect, the judge put Natural Biologics out of the generic-Premarin business entirely. And it sounds like conceivably the president of Natural Biologics may be facing still more legal troubles of his own. (Wyeth v. Natural Biologics, Inc., No. 98-2469 (D.Minn. 10/02/2003), available at CourtWeb)

Possible Lessons

1. Be careful in talking to a competitor's former employees. It won't look good if it even appears that you were trying to learn about the competitor's trade secrets.

2. In litigation, don't play hide the ball. If the judge or jury concludes that you were trying to conceal evidence, or that you otherwise can't be trusted, you're likely to be in big trouble. (This is a variation of the aphorism that the cover-up is often worse than the crime, a lesson that Arthur Andersen, Richard Nixon, and a host of others have learned the hard way.)

3. Never, ever, give false testimony in a court proceeding. If the judge or jury decide you're a liar, it may well be game over.

October 12, 2003 in Intellectual Property, Litigation, R&D; | Permalink | Comments (0) | TrackBack

October 11, 2003

Bye-Bye, Carolina; Hello, California

Late last month, a North Carolina customer of Oracle Corporation found itself involuntarily headed for California to pursue its lawsuit against Oracle. This came to pass because the customer -- probably without even knowing it -- agreed to a forum-selection clause when it bought its Oracle software license.

The Forum Selection Clause

The customer apparently signed an order form which stated that its terms were governed by the Oracle License and Services Agreement. That agreement contained a fairly typical choice-of-law and forum-selection clause:

This agreement is governed by the substantive and procedural laws of California and [ACC] and Oracle agree to submit to the exclusive jurisdiction of, and venue in, the courts in California in any dispute relating to this agreement.

The customer, unhappy about something (the court's opinion doesn't say what exactly), sued Oracle in North Carolina despite the forum-selection clause.

The Court's Analysis

The forum-selection clause didn't automatically mean that the case would be transferred to California. The judge still had to go through a detailed, 11-factor analysis to determine whether the interests of justice and the convenience of the parties would be best served by transferring the case or by keeping it in North Carolina.

In the end, the judge concluded that the case should be transferred. He quoted a prior case that said that "once a mandatory choice of forum clause is deemed valid, the burden shifts to the plaintiff to demonstrate exceptional facts explaining why he should be relieved from his contractual duty."

The customer now faces the increased expense and inconvenience of having to litigate its case across the continent from where it originally hoped. That likely will give Oracle some bargaining leverage.

(AC Controls Co. Inc. v. Pomeroy Computer Resources, Inc., No. 3:03CV302 (W.D.N.C. 09/29/2003))

Possible Lessons

1. Read all contracts before you sign them.

2. Know that, if your contract contains a forum-selection clause, you may well have to live with litigating your case in a courtroom far, far away.

October 11, 2003 in Contracts, Litigation, Purchasing, Sales | Permalink | Comments (0) | TrackBack

Dinosaur Bones

Frank Quattrone’s trial for obstruction of justice continues; see this story from the AP. On Thursday, Quattrone took the witness stand in his own defense. Quattrone’s lawyer, John Keker, asked him about an unrelated investor lawsuit against his former firm, Morgan Stanley. Quattrone had been a witness in that lawsuit. According to the WSJ, Quattrone commented, “I was amazed how the plaintiff’s lawyer would take extraneous documents and twist and turn them to make it sound like something bad.” (Wall Street Journal, Oct. 10, 2003, at C1, C10 cols. 2-3.)

Quattrone's comment reminded me of how, in a former life, I sometimes used to explain trials to clients. Think of a trial lawyer as a paleontologist, working with a pile of dinosaur bones (documents, witness testimony) to convince a jury that the dinosaur looked like this. The paleontologist describes her vision of the dinosaur, and tries to show the jury how the bones fit together in a way that matches her vision. Perhaps the bones don’t fit together perfectly, however. Perhaps some bones are missing. Of course, there’s an opposing paleontologist in the courtroom, twisting and turning the bones in a different way in support of his own vision.

The jurors typically knew little or nothing about dinosaurs before the trial, and of course they don't get to see the dinosaur in real life. They still have to decide what the beast really looked like. Their decision can change -- or end -- lives, reputations, and bank balances.

October 11, 2003 in Communications, Litigation | Permalink | Comments (4) | TrackBack

September 20, 2003

Good Personnel Records Save the Day for A & F

Abercrombie & Fitch fired one of its New York City security supervisors for poor performance. She filed a lawsuit, claiming among other things that she had been fired because she was African-American.

A&F; won the case without even having to go through a trial, primarily because the fired employee's manager had kept good personnel records to document her poor performance over several years.

A&F; moved for summary judgment, which is a judgment without a trial based on undisputed material facts. The purpose of a trial is to establish the facts on which a judgment will be based. If either party can show that the "material" (outcome-affecting) facts are not genuinely disputed, then legally there's no need for a trial, and the judge can simply render judgment.

* * *

It appears that the fired security supevisor's performance wasn't stellar. According to the court's opinion, during one evaluation period the fired supervisor had busted only nine shoplifters and fingered only one employee thief, while others in the same job had busted between 109 and 317 shoplifters. Moreover, in the fired employee's store during that period, the overall theft rate was more than 9%, while the company-wide average was only 5.67%.

* * *

Poor performance, however, didn't necesarily mean that A&F; would win. To defeat A&F;'s summary judgment motion, the fired employee had merely to come forward with at least some non-trivial evidence that A&F; had intended to racially discriminate against her. That would have shown the existence of a genuine issue of material fact. This in turn would have entitled the fired employee to have a jury hear the evidence, evaluate witness credibility, and weigh the conflicting evidence. The jury then would decide whether A&F; had racially discriminated against her.

* * *

In their summary-judgment motion, A&F;'s lawyers wielded a not-so-secret weapon. For several years, the fired woman’s supervisor at A&F; had regularly met with her to review her performance. He had prepared written evaluations showing poor performance, and had provided her with copies. He had also prepared written performance-improvement plans for her, and had gotten her to sign them. All those documents presumably were in the woman’s personnel file. A&F;'s lawyers used them, along with the supervisor's affidavit, in support of A&F;'s motion for summary judgment.

A&F; thus was able to put forward solid, documentary evidence that it had indeed terminated the woman for poor performance. Note that A&F; didn't try to rely solely on its manager's hindsight recollection about the woman's performance, which her attorney doubtless would have characterized as self-serving. Instead, it brought contemporaneous documentary evidence to bear.

* * *

In rulling on A&F;'s summary judgment motion, the judge focused on A&F;'s documentary evidence and its manager's affidavit, and on the fired employee's failure to put forth any substantial evidence of discriminatory intent. The judge ruled that there was no genuine dispute concerning any material fact, and threw out the fired employee's case. (Khan vs. Abercrombie & Fitch, Inc., Sept. 17, 2003)

September 20, 2003 in Doing It Right Pays Off, Leadership and Management, Litigation, Record-keeping | Permalink | Comments (0) | TrackBack

September 19, 2003

Why Shareholders Should Come Third - Great Post

There's a great post today on Mike O'Sullivan's Corporate Law Blog. It summarizes former Medtronic CEO Bill George's recent Fortune magazine article about why CEOs should concentrate on pleasing customers, then employees, then shareholders. Not to be missed.

September 19, 2003 in Litigation, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

August 25, 2003

Doctors Have to Explain Joke
Chart Notations on Witness Stand

The BBC's Web site reports that many doctors are being more cautious about the notes they write in their patients' medical records. Why is that? Because the doctors are starting to realize that someday, on the witness stand, they might have to explain their abbreviations and slang. Here's a sampling:

  • CTD: Circling the Drain [i.e., the patient is not expected to live long]
  • DBI: Dirt Bag Index
  • LOBNH: Lights On But Nobody Home
  • TTFO: Told To [Go Away] -- see the BBC story to read the "save" by the quick-thinking doctor who was asked about that one in court.

Sorta makes me glad my writing isn't funny.

August 25, 2003 in Embarrassments / Bad Career Moves, Litigation | Permalink | Comments (0) | TrackBack