By Jeffrey M. Haber On October 25, 2016, the Appellate Division, First Department issued a unanimous decision addressing the protection of confidential information. In BitSight Technologies, Inc. v. SecurityScorecard, Inc., 2016 NY Slip Op. 06980, the Court reversed the decision of the motion court, holding that “[W]hen a party sells information to [subscribers] with the requirement that the latter keep the information confidential, the information is still protected.” The Facts: The action arose from a March 18, 2014 agreement between one of the plaintiffs, Anubisnetworks (“Anubis”), and the defendant, SecurityScorecard, Inc. (“SecurityScorecard”). See BitSight Technologies, Inc. v. SecurityScorecard, Inc., Docket No. 650042/2015, Motion Seq. No. 003, 2016 NY Slip Op 30138(U), at 1 (Sup. Ct., N.Y. Cnty. Jan. 25, 2016). Pursuant to the Agreement, Anubis agreed to provide SecurityScorecard its subscription-based feed service, known as the Cyberfeed Service (“Cyberfeed”), for a one year period, and SecurityScorecard “agree[d] that it [would]: a) use provided feeds for own internal use only; and b) not resell cyberfeeds to customers (customers using directly cyberfeeds in their systems).” Id. (quoting the Agreement). Almost 7 months later, on October 7, 2014, Anubis claimed that SecurityScorecard had breached the Agreement by “‘making Anubis’ Cyberfeed Service available and/or reselling it to third parties.’” Id. Anubis demanded that SecurityScorecard cease using the Cyberfeed service in violation of the Agreement and that it delete all Cyberfeed data from “‘any external websites, databases, subscriptions, product offerings, servers or other services or offerings.’” Id. Anubis also gave notice that it was terminating the Agreement. Id. SecurityScorecard denied selling the Cyberfeed service to any third parties. Id. at 1-2. Three days later, BitSight Technologies, Inc., a long-time customer of Anubis and a competitor of SecurityScorecard, acquired Anubis. Id. at 2. The Agreement terminated on November 5, 2014. Id. The Motion Court’s Ruling: The plaintiffs sued SecurityScorecard, alleging that it breached the Agreement and misappropriated confidential information, among other things. Regarding the misappropriation claim, the motion court held that the plaintiffs failed to state a claim upon which relief could be granted. In so holding, the court found that since there was no breach of the Agreement concerning confidentiality, there could be no misappropriation of the Cyberfeed service. This was especially so since “neither the complaint nor plaintiffs’ opposition papers specif[y] any confidential information allegedly misappropriated by SecurityScorecard.” Id. at 4. Moreover, the court found that Anubis failed to take sufficient precautionary measures to ensure that the Cyberfeed service remained confidential. Id. at 5. In fact, the court noted that the plaintiffs even “concede[d] that Anubis’s business hinged on making this data available to Cyberfeed subscribers.” Id. As such, there could not be any misappropriation of confidential information. The First Department’s Reversal: The Court addressed the breach of the Agreement first, since the issues on appeal stemmed from the motion court’s analysis and decision on whether the Agreement’s definition of confidential information included the Cyberfeed service. In that regard, the Court found that the definition of confidential information in the Agreement was “ambiguous”, making the dismissal of the breach of contract claim in error. Since the motion court’s dismissal of the misappropriation claim substantially rested on its finding that there was no breach of the Agreement, the dismissal of that claim necessarily had to be in error too: The first cause of action (misappropriation of confidential information/unfair competition) should not have been dismissed. When a party sells information to subscribers with the requirement that the latter keep the information confidential, the information is still protected. At least for the purposes of a CPLR 3211 motion to dismiss, Anubis took sufficient precautionary measures to keep cyberfeeds confidential, since a trier of fact might find that cyberfeeds are covered by the contract’s confidentiality provisions. Slip op. at 1 (citations and internal quotations omitted). Takeaway: The First Department had to reach back to the early 1900s (citing International News Serv. v. Associated Press, 248 U.S. 215, 237 (1918); Dodge Corp. v. Comstock, 140 Misc. 105, 109 (Sup. Ct., Erie Cnty. 1931)) to underscore the point that “[W]hen a party sells information to [subscribers] with the requirement that the latter keep the information confidential, the information is still protected.” The Court made it clear that it is incumbent upon the owner of the information to clearly state that the information is confidential and is to remain confidential. One way to convey that message is to draft contract provisions that clearly and unambiguously state this position. This is especially important if the owner of the information wants to show that it took precautions to keep the information protected. For related discussions of trade-secret misappropriation and unfair-competition claims in New York, see our posts on Purolite’s trade secret misappropriation suit against Hitachi and the New York Attorney General’s unfair-competition investigation of Mylan Pharmaceuticals. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

On November 1, 2016, the U.S. Supreme Court heard oral argument on an appeal that State Farm Fire & Casualty Co. brought in a case filed by two whistleblowers back in 2006. (This Blog wrote about the case here.) The whistleblowers, Cori and Kerri Rigsby, brought a lawsuit against State Farm for defrauding the National Flood Insurance program on claims after Hurricane Katrina in 2005. The federal government declined to intervene.According to the Rigsby’s, State Farm charged policy limits of $250,000 to the federal flood program, but shorted claimants Thomas and Pamela McIntosh. The court ordered State Farm to pay treble damages in the amount of $750,000 for false claims against the government, with 15% set to compensate the whistleblowers.The Supreme Court granted cert. to consider a single question in the case – whether the attorneys for the Rigsby’s violated the False Claims Act (the "FCA") by leaking details of the lawsuit to the media while it was still under seal. The FCA is silent about the consequences of breaking the seal. Why are federal whistleblower cases placed under seal? Whistleblowers who file a lawsuit under the FCA, also known as a “qui tam” action, are required to file their complaint under seal. This means that the case is not made public and no one may talk about the case, except prosecutors and agents, for at least 60 days -- the government often requests additional time, which the courts usually grant upon a showing of "good cause". Once the seal is in place, whistleblowers cannot even discuss the fact that they filed a case. The purpose of the seal is twofold. Sealing the case provides protection for whistleblowers, who remain anonymous until the seal is lifted. This can be beneficial in instances when the whistleblower is seeking new employment or is concerned about retaliation from his/her current employer, who may be a defendant in the qui tam action. Sealing the case also allows prosecutors to investigate the claims without alerting the potential defendants to the case. Under normal circumstances, lawsuits are matters of public record, so the media (or anyone for that matter) can access the pleadings and potentially wreak havoc on the government’s investigation. What happens if you violate the seal? As noted, the FCA does not state what happens if the whistleblower violates the seal. The argument did not add any clarity to this issue. The bulk of the argument, focused on the proper standard to apply when determining if dismissal is required for a violation of the seal requirement. See Ronald Mann, Argument analysis: Justices dubious about mandating dismissal for “seal” violations in False Claims Act cases, SCOTUSblog (Nov. 2, 2016, 6:49 AM). The Court did, however, express skepticism about a mandatory rule requiring dismissal of the action. As noted by Mann, the justices who did weigh in on the subject indicated that there were myriad violations that would render a mandatory dismissal rule inappropriate. A decision is expected next year. Thinking About Filing a Whistleblower Suit? If you are thinking about filing a whistleblower lawsuit, you need experienced representation. Freiberger Haber LLP regularly provides whistleblower representation in False Claims Act, IRS, SEC and CFTC actions. Contact us or call today at 212-209-1005. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber On November 3, 2016, the Appellate Division, First Department revived a case against J.P. Morgan Securities LLC and JPMorgan Chase & Co., the parent company of Bear Stearns & Co. Inc. (“Bear Stearns”), that had been dismissed over losses that the plaintiff, Aozora Bank, Ltd. (“Aozora”), a Japanese lender, suffered after investing in collateralized debt obligations (“CDOs”) it claims Bears Stearns used as a “dumping ground” for its most toxic, risky assets. In Aozora Bank, Ltd. v. J.P. Morgan Securities LLC, 2016 NY Slip Op. 07260, the Court dismissed Aozora’s claims because, inter alia, disclaimers in offering documents put Aozora on notice that Bear Stearns had colluded with the collateral manager to accept into the CDO toxic assets from Bear Stearns’ own balance sheet. The Facts: Aozora sought damages against JPMorgan arising from its investment in HG-COLL 2007-1, Ltd. (“HGC”), an asset-backed CDO. Aozora alleged that Bear Stearns portrayed HGC as a legitimate investment vehicle, but in reality, secretly used HGC as a “dumping ground” to “offload” Bear Stearns’ most toxic, risky assets that it no longer wished to own. Aozora sought damages against JPMorgan under several theories of liability, including fraud, breach of the implied covenant of good faith and fair dealing, tortious interference with contractual relations, and negligent misrepresentation. JPMorgan moved to dismiss the complaint on statute of limitations grounds and for failing to state a cause of action upon which relief could be granted, as well as for failing to plead fraud with the requisite particularity and state of mind. The Motion Court’s Ruling: The motion court dismissed Aozora’s fraud claim on the grounds that, among other things, Aozora could not have relied on any misstatement and omission because it was aware of the information it claimed to have no knowledge of through various offering documents: Azora’s admission that it reviewed [the] asset-level information, at the time it invested in HGC, requires dismissal of the fraud claim. This conclusion is supported by numerous disclaimers contained in the HGC Offering Circular …. It is well-settled that “a specific (rather than general) disclaimer in a guarantee bars the guarantor’s claim for fraud in the inducement, where the guarantor specifically disclaimed reliance on the very information which it now claims caused it to be misled.” This legal principle is particularly compelling when “the guarantee in question had been the product of ‘extended negotiations between sophisticated business people’ involved in a ‘multimillion dollar’ transaction.” The disclaimers in the HGC Offering Circular made clear that, by agreeing to invest in HGC, Aozora was capable of analyzing and assessing the risks associated with the investment, and that it was using its independent judgment in assessing these risks. Aozora Bank, Ltd. v. J.P. Morgan Securities LLC, Index No. 652274/2013 (Sup. Ct. N.Y. Cnty. Apr. 22, 2015) at 23-24 (citations omitted.) The motion court also dismissed the claim for breach of the implied covenant of good faith and fair dealing. Aozora contended that JPMorgan “secretly influenced collateral selection and filled HGC with at least $185.2 million of assets that [it] alone knew [was] toxic and wished to remove from [its] books” thereby making the disclaimers in the offering documents irrelevant. Id. at 36-37. The motion court rejected the argument, noting that it was unsupported by any legal authority. In doing so, the court declined to “nullify the express disclaimers contained in the HGC Offering Circular.” Id. at 37. This was especially important since Aozora never claimed that “the assets comprising HGC failed to meet the eligibility requirements set forth in the [Offering] Documents” and was required to “conduct an independent investigation of the characteristics of the notes and risks of ownership of the notes.” Id. As far as the motion court was concerned, Aozora essentially alleged an unsustainable breach of contract claim. Id. (citation omitted). Aozora appealed the dismissal of the fraud and the breach of the implied covenant of good faith and fair dealing claims. The First Department’s Decision: In a unanimous decision, the First Department reversed the decision of the motion court as to both claims. With regard to the fraud claim, the Court found that, notwithstanding the disclaimers in the offering documents, Aozora could not have known that Bear Stearns and Ischus Capital Management, LLC (“Ischus”), the collateral manager, colluded to mix HGC with toxic assets from Bear Stearns’ balance sheet: Plaintiff adequately stated a claim for fraud. Defendants failed to show that plaintiff’s reliance on statements that the collateral manager would select collateral independently was unreasonable as a matter of law. The complaint alleges that plaintiff, while aware or on notice of the concentration of Bear Stearns underwritten assets in the collateralized debt obligation (CDO) at issue, was unaware of how this compared to other CDOs generally or those managed by the same collateral manager. On this motion, defendants have not shown that the disclaimers in the offering documents put plaintiff on notice that defendants had already colluded with the collateral manager to accept into the CDO toxic assets from Bear Stearns's own balance sheet. (Citations omitted.) With regard to the breach of the implied covenant of good faith and fair dealing, the Court found that Aozora stated a claim because the allegation was based upon a separate tort that was independent of the rights under the offering agreements – that is, it was based on a breach in the performance of the agreements: Plaintiff adequately stated a claim for breach of the duty of good faith and fair dealing, given the allegation that defendants subverted the collateral manager to favor the interest of Bear Stearns, and given that many of the CDO’s assets were purchased after plaintiff's investment (see Aozora Bank, Ltd. v Credit Agricole Corporate & Inv. Bank, 2015 NY Slip Op 31426[U], *17 [Sup Ct, NY County 2015]). Takeaway: The Court’s decision stands as a reminder that a party to an agreement cannot hide behind general warnings of adverse events, such as potential conflicts of interest or collusive conduct, when that party knows, with certainty, and yet fails to disclose, that those events were then occurring. As a federal court long ago observed: the law “provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.” In re Prudential Secs. Ltd. P’ships Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996). This is especially so when one of the parties warrants, as in Aozora, that it did not omit to state any material fact necessary to make their statements not misleading. The Court’s decision is notable because it confirms the long-standing principle that disclaimers and disclosures do not defeat a plaintiff’s reliance when the information necessary to discover the fraud was within the defendant’s peculiar knowledge. (In September, this Blog posted an article about the justifiable reliance element of fraud.) This makes sense, even if the plaintiff is a sophisticated investor and required to exercise due diligence prior to the subject transaction. As the facts in Aozora showed, there was no way for Aozora to know from the disclaimers or its diligence that Bear Stearns and Ischus colluded to include toxic assets in HGC. The Court’s decision also stands as a reminder that a party can breach the implied covenant of good faith and fair dealing by defeating the purpose of the agreement through his/her actions. This is true even when the conduct at issue does not violate the express terms of the agreement. (In September, this Blog posted article about how the implied covenant of good faith and fair dealing can stand as a separate basis of liability.) That is what happened in Aozora. The bank believed that Bear Stearns and Ischus would, in good faith, select the asset portfolio pursuant to the written representations in the offering documents. Aozora had no reason to believe that Bear Stearns would engage in self-dealing. As the First Department found, such conduct is a separate, actionable wrong. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Champerty. Most people have never heard of the word, and, even if they did, it is more likely they do not remember what it means. The same is probably true for most lawyers, who most likely encountered the doctrine when they studied for the bar exam. So what is champerty? Black’s Online Law Dictionary (2d ed.) defines champerty as: “A bargain made by a stranger with one of the parties to a suit, by which such third person undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if he wins the suit, a part of the land or other subject sought to be recovered by the action.” In plain English, this means that champerty occurs when a person or entity agrees to finance someone else’s lawsuit in exchange for a portion of the judicial award.\ The prohibition of champerty dates back to the middle ages. Martin, Syndicated Lawsuits: Illegal Champerty or New Business Opportunity?, 30 Am Bus LJ 485 (1992). Some commentators believe that the doctrine go back to ancient Greece and ancient Rome. E.g., Jason Lyon, Revolution in Process: Third-Party Funding of American Litigation, 58 UCLA Law Review 571, 580 (2010). Regardless of its origins, champerty was considered to be against public policy – a person who has nothing to do with the matter being litigated should not be able to profit from it. Over time, however, the prohibition on champertous transactions began to decline. Today, the states are split on the enforcement of the prohibition. Some jurisdictions strictly enforce the doctrine, others enforce it less strictly, while the remainder have abolished the doctrine. The Law in New York: New York continues to enforce the prohibition of champerty. See Judiciary Law § 489(1). Judiciary Law §489(1) provides, in pertinent part: No person or co-partnership, engaged directly or indirectly in the business of collection and adjustment of claims, and no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon …. The New York Court of Appeals has placed a heavy burden of proof on the party claiming champertous conduct, requiring a showing that the primary, if not the sole, purpose of the transaction was the collection of a claim. In Bluebird Partners v. First Fid. Bank, 94 N.Y.2d 726, (N.Y. 2000), the Court noted that it had been historically “hesitant to find that an action is champertous as a matter of law….” Id. at 735-36. Indeed, prior jurisprudence showed that “a mere intent to bring a suit on a claim purchased does not constitute the offense; the purchase must be made for the very purpose of bringing such suit, and this implies an exclusion of any other purpose.” Id. at 735 (quoting Moses v. McDivitt, 88 N.Y. 63, 65 (1882)). Thus, “in order to constitute champertous conduct in the acquisitions of rights, …the foundational intent to sue on that claim must at least have been the primary purpose for, if not the sole motivation behind, entering into the transaction.” Id. at 736. In Bluebird Partners, the Court found that the record did not support a finding of champerty as a matter of law, because it could not be determined that profiting from litigation was the primary motivation behind the acquisition of the certificates at issue. Almost a decade later, the New York Court of Appeals had the opportunity to further comment on the requirements needed to find champerty. In Trust for the Certificate Holders of Merrill Lynch Mortg. Investors v. Love Funding (Merrill Lynch Mortg.), 13 N.Y.3d 190 (2009), the Court held, in response to certified questions from the U.S. Court of Appeals for the Second Circuit, that a corporation or association does not violate Judiciary Law § 489(1), as a matter of law, when the “purpose in taking [the] assignment of … rights … was to enforce its … preexisting proprietary interest in the [debt instrument]….” Id. at 201-02. The Court explained that “the critical issue” in assessing champerty is the purpose behind the acquisition of rights that allowed the plaintiff to file the lawsuit. Id. at 198-99. The Court made it clear that intent to enforce does not, by itself, constitute champerty. Id. at 200 (noting that “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.”). Because the plaintiff had a preexisting interest in the loan and would suffer the damages of any default on the loan, the Court found that, as a matter of law, it did not violate New York. Id. at 202. After Love Funding, many considered champerty to be a dead doctrine in New York, except in the rare case where the facts and evidence truly reflected a champertous transaction. Indeed, cases in the lower courts confirmed this view. E.g., Seomi v. Sotheby’s, 27 Misc.3d 1231(A) (Sup. Ct. N.Y. Cnty. 2010); IRB-Brasil Resseguros v. Inepar Invs., No. 604448/06, 2009 WL 2421423, at **19, 20 (Sup. Ct. N.Y. Cnty. July 31, 2009) (holding that an assignment of the rights of a noteholder was not champertous where the assignee had purchased $14 million worth of notes itself, and was a signatory to the subject notes); Nat’l City Commercial Capital v. Becker Real Estate Servs., 24 Misc. 3d 912 (Sup. Ct. Suffolk Cnty. 2009) (holding that the defendant failed to demonstrate that champerty was the primary purpose behind the plaintiff’s acquisition of a financial lease). On October 27, 2016, in Justinian Capital SPC v. WestLB AG, 2016 NY Slip Op. 07047, the Court of Appeals reminded everyone that the champerty doctrine is alive and well. Justinian Capital SPC v. WestLB AG: The Facts: In 2003, non-party Deutsche Pfandbriefbank AG (“DPAG”) invested nearly 180 million euros (approximately $209 million) in notes (the “Notes”) issued by two special purpose companies, Blue Heron VI Ltd. and Blue Heron VII Ltd. (collectively, the “Blue Heron Portfolios”). The Blue Heron Portfolios were sponsored and managed by the defendant WestLB. By January 2008, the Notes had lost much (if not all) of their value. Slip op. at 2. In the summer of 2009, DPAG’s board of directors approved the filing of a lawsuit against WestLB, a German bank partly owned by the German government, to recover the losses caused by the devaluation of the Notes. Both DPAG and WestLB were receiving substantial support from the German government at the time. Because of these relationships, the DPAG board feared that pursuing a lawsuit against WestLB would result in the loss of government support for the bank. Consequently, the DPAG board determined to have a third party bring the lawsuit and remit a portion of any proceeds to DPAG. In February 2010, DPAG discussed this option with the plaintiff Justinian Capital SPC (“Justinian”), a Cayman Islands shell company with little or no assets. Id. at 2-3. In April 2010, DPAG and Justinian entered into a sale and purchase agreement (the “Agreement”) pursuant to which DPAG assigned the Notes to Justinian for a base purchase price of $1,000,000 (representing $500,000 for the Blue Heron VI notes and $500,000 for the Blue Heron VII notes). Justinian did not, however, pay for the Notes. Under the Agreement, the only consequences of Justinian’s failure to pay appeared to be that interest would accrue on the $1,000,000 and that Justinian’s share of any proceeds recovered from the lawsuit would be reduced from 20% to 15%. At the time of the appeal, Justinian had not paid any portion of the $1,000,000 purchase price, and DPAG had not demanded payment. Id. at 3. Within days after the Agreement was executed, and shortly before the statute of limitations was to expire, Justinian filed a summons with notice against WestLB. The subsequently filed complaint alleged causes of action for breach of contract, fraud, breach of fiduciary duty, negligence, negligent misrepresentation, and breach of the covenants of good faith and fair dealing, all in connection with WestLB’s purchase of ineligible assets for the Blue Heron Portfolios. Id. WestLB moved to dismiss the complaint on champerty grounds. The court found questions of fact with respect to the champerty defense and instructed the parties to conduct discovery on that issue. Following the close of this limited discovery, WestLB moved for summary judgment. Id. at 3-4. The motion court dismissed the complaint, concluding that the Agreement was champertous because Justinian had not made a bona fide purchase of the Notes and was, therefore, suing on a debt it did not own. The motion court also concluded that Justinian was not entitled to the protection of the safe harbor under Judiciary Law § 489(2) because Justinian had not made an actual payment of $500,000 or more. Id. at 4 (citing 43 Misc. 3d 598 (Sup Ct, N.Y. Cnty 2014)). On appeal, the Appellate Division, First Department, affirmed, largely adopting the rationale of the motion court. Id. (citing 128 A.D.3d 553 (1st Dep’t 2015)). The Court of Appeals granted leave to appeal, and affirmed the holding of the lower courts, though for somewhat different reasons. Id. The Court’s Ruling: In a 5-2 ruling, the Court concluded that Justinian’s acquisition of the Notes represented a “sham transaction” that was designed to put Justinian in a position to champertously sue WestLB: Here, the impetus for the assignment of the Notes to Justinian was DPAG’s desire to sue WestLB for causing the Notes’ decline in value and not be named as the plaintiff in the lawsuit. Justinian’s business plan, in turn, was acquiring investments that suffered major losses in order to sue on them, and it did so here within days after it was assigned the Notes…. [T]here was no evidence … that Justinian’s acquisition of the Notes was for any purpose other than the lawsuit it commenced almost immediately after acquiring the Notes.… Here, the lawsuit was not merely an incidental or secondary purpose of the assignment, but its very essence. Justinian’s sole purpose in acquiring the Notes was to bring this action and hence, its acquisition was champertous. (Internal quotations and citations omitted.) The Court also ruled that the transaction did not come within the statutory safe harbor. Judiciary Law § 489(2) exempts the purchase or assignment of notes or other securities from the restrictions of Section 489(1) when the notes or other securities “hav[e] an aggregate purchase price of at least five hundred thousand dollars.” In concluding that the transaction did not come within the safe harbor, the Court found that because the $1 million purchase price listed in the transaction documents “was not a binding and bona fide obligation to pay the purchase price other than from the proceeds of the lawsuit,” Justinian’s acquisition of the Notes did not satisfy the safe harbor’s requirements: The record establishes, and we conclude as a matter of law, that the $1,000,000 base purchase price listed in the Agreement was not a binding and bona fide obligation to pay the purchase price other than from the proceeds of the lawsuit. The Agreement was structured so that Justinian did not have to pay the purchase price unless the lawsuit was successful, in litigation or in settlement. The due date listed for the purchase price was artificial because failure to pay the purchase price by this date did not constitute a default or a breach of the Agreement. The Agreement permitted Justinian to exercise the option to let the due date pass without consequence and simply deduct the $1,000,000 (plus interest) from its share of any proceeds from the lawsuit. The Court explained that its finding was consistent with the legislative history and the purpose of the safe harbor provision: The legislative history reveals that a purchase price of at least $500,000 was selected because the Legislature took comfort that buyers of claims would not invest large sums of money to pursue litigation unless the buyers believed in the value of their investments. This comfort is lost when a purchaser of notes or other securities structures an agreement to make payment of the purchase price contingent on a successful recovery in the lawsuit; such an arrangement permits purchasers to receive the protection of the safe harbor without bearing any risk or having any skin in the game, as the Legislature intended. The Legislature intended that those who benefit from the protections of the safe harbor have a binding and bona fide obligation to pay a purchase price of at least $500,000, irrespective of the outcome of the lawsuit. That is precisely what is lacking here…. (Internal quotations and citations omitted.) Two justices dissented, arguing that the majority decision depended upon reaching conclusions about the intent and motivation of the parties, which, they said, are not issues to decided on summary judgment. Takeaway: The Court’s decision will have broad implications for small litigation funders and distressed debt purchasers. See, e.g., Reuters, New York’s Top Court Clamps Down On Shoestring Litigation Funders, dated October 28, 2016). As a result of the Court’s decision, these financiers must have “skin in the game” when they enter into transactions that do not exceed $500,000. That means that they must ensure, among other things, that the payment obligations set forth in the transaction papers are bona fide – that is, the purchase price will be paid on a date certain or contemporaneously with the execution of the agreement, and the payment will not be contingent or revocable. It also means that transactions involving disallowance provisions, consideration without apparent or facial value, complex financing arrangements, or other provisions that indicate the buyer does not actually hold at least $500,000 in the investment will be closely scrutinized. Consequently, these companies and purchasers will have to document and retain records showing that the primary intent and purpose of the transaction comports with the Court’s ruling. Otherwise small funders and debt purchasers will learn that the champerty prohibition is alive and well in New York.

By Jonathan H. Freiberger Laborers and material suppliers (collectively, “Providers”) that add value to construction projects are entitled to be paid for their work by the owner, general contractor or whoever else hired them for the project in the first instance. If Providers do not receive payment despite their own performance, several remedies are available. For example, a simple claim for breach of contract may be brought by an unpaid Provider. Such remedies, however, may be insufficient to ensure payment. Accordingly, Article 2 of New York’s Lien Law provides additional rights and remedies to Providers by permitting the filing of mechanics’ liens against the improved property. A mechanic’s lien can be filed at any time during the prosecution of the work or within eight months after the work is completed unless the improvement relates to a single-family dwelling, in which case the time is reduced to four months. Lien Law 10. Thus, “Lien Law § 3 provides that a contractor who performs labor or furnishes materials for the improvement of real property with the consent, or at the request of, the owner ‘shall have a lien for the principal and interest, of the value, or the agreed price, of such labor ... or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien.’” NGU, Inc. v. City of New York, 189 A.D.3d 850 (2d Dept. 2020) (hyperlink added); see also Quality Aggregates, Inc. v. Prime Mix Corp., 244 A.D.3d 887, 888 (2d Dept. 2025). “It is well established that the purpose of the mechanics’ lien statute is to provide an added degree of protection to persons who provide labor or material for construction projects by providing independently enforceable security interest upon the construction property.” Strober Brothers, Inc. v. Kitano Arms Corp., 224 A.D.2d 351, 352 (1st Dept. 1996) (citations omitted); see also Sky Materials Corp. v. Frog Hollow Industries, Inc., 125 A.D.3d 751, 352 (2d Dept. 2015). So important are the rights afforded by the Lien Law, Section 34 of the Lien Law provides that “[n]otwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable….” In describing the background of the adoption of Section 34, the Court of Appeals stated: Senator James H. Donovan, a sponsor of the bill which the Legislature ultimately enacted as Lien Law § 34, described the impetus behind this legislation: “Since the year 1897 the Legislature has recognized the need to afford protection to those who furnish work, labor and services or provide materials for the improvement of real property. Throughout the succeeding years changes in the law have been enacted to clarify, enlarge and perfect the right of those who improve real property to be paid. The Lien Law has been the sole vehicle through which such interests may gain a measure of protection. … The surrender of such protective rights as a prerequisite to obtaining a contract or subcontract is repugnant, against public policy and should be void” It is evident from the foregoing that New York’s Lien Law is remedial in nature and intended to protect those who have directly expended labor and materials to improve real property at the direction of the owner or a general contractor. West-Fair Elec. Contractors v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148, 156 (1995) (quoting Mem of Senator Donovan, L.1975, ch. 74, 1975 N.Y.Legis Ann., at 341) (ellipses omitted). While the Lien Law is a valuable tool for Providers to secure payment, the rights afforded by the lien law can also be abused in order to, among other things, pressure an owner or general contractor into paying a downstream Provider when, perhaps, there is a legitimate dispute as to a Provider’s entitlement to be paid. The filing of a mechanics’ lien, for example, may be a default under a mortgage, a construction loan or the contract between an owner and its general contractor. Accordingly, the Lien Law affords an owner or general contractor the opportunity to discharge a lien under certain circumstances. For example, Lien Law § 19 provides that liens for private improvements can be discharged by, inter alia, failing to commence an action to foreclose the lien within one year of filing (§19(2)), neglecting to prosecute an action to foreclose a lien (§19(3)), or by executing a bond or undertaking under specified conditions “in an amount equal to one hundred ten percent of such lien conditioned for the payment of any judgment which may be rendered against the property for the enforcement of the lien” (§ 19(4))[1]. Lien Law §§ 20 (discharge of lien after notice of lien filed by payment of money into court), 21 (discharge of lien for public improvement) and 21-a (vacating a lien for a public improvement, by court order) also permit the vacatur or discharge of mechanics’ liens under appropriate circumstances. Another check on the ability to abuse the right to file a mechanics’ lien is that a lienor is not permitted to file a lien for a willfully exaggerated amount. Thus, Lien Law § 39 provides: In any action or proceeding to enforce a mechanic's lien upon a private or public improvement or in which the validity of the lien is an issue, if the court shall find that a lienor has wilfully exaggerated the amount for which he claims a lien as stated in his notice of lien, his lien shall be declared to be void and no recovery shall be had thereon. No such lienor shall have a right to file any other or further lien for the same claim. A second or subsequent lien filed in contravention of this section may be vacated upon application to the court on two days' notice. Section 39-a of the Lien Law, which sets forth the penalty for a willfully exaggerated lien provides: Where in any action or proceeding to enforce a mechanic's lien upon a private or public improvement the court shall have declared said lien to be void on account of wilful exaggeration the person filing such notice of lien shall be liable in damages to the owner or contractor. The damages which said owner or contractor shall be entitled to recover, shall include the amount of any premium for a bond given to obtain the discharge of the lien or the interest on any money deposited for the purpose of discharging the lien, reasonable attorney's fees for services in securing the discharge of the lien, and an amount equal to the difference by which the amount claimed to be due or to become due as stated in the notice of lien exceeded the amount actually due or to become due thereon. See also Degraw Construction Group. Inc. v. McGowan Builders, Inc., 178 A.D.3d 770, 771 (2d Dept. 2019). Further, to receive the benefit of Lien Law 39-a’s remedies, there must be a finding that “the lienor deliberately and intentionally exaggerated the lien amount….” Degraw, 178 A.D.3d at 771 (citation and internal quotation marks omitted; emphasis in original). That a lien “may contain improper charges or mistakes does not, in and of itself, establish that a plaintiff wilfully exaggerated a lien” and the “burden is upon the opponent of the lien to show that the amounts set forth were intentionally and deliberately exaggerated.” Consumer Protection Restoration , LLC v. Hickory House Tenants Corp., 236 A.D.3d 744, 746-47 (2d Dept. 2025) (citations, internal quotation marks and brackets omitted). Sections 39 and 39-a of the lien law “must be read in tandem, and damages may not be awarded under § 39-a unless the lien has been discharged for willful exaggeration.” Guzman v. Estate of Fluker, 226 A.D.2d 676, 678 (2d Dept. 1996) (citations omitted); see also Thorobird Grand LLC v. M. Melnick & Co., Inc., 233 A.D.3d 520, 522 (1st Dept. 2024).[2] Lien Law § 39-a’s remedies and damages are “available only where the lien was valid in all other respects and was declared void by reason of willful exaggeration after a trial of the foreclosure action.” Matrix Staten Island Dev., LLC v. BKS-NY, LLC, 204 A.D.3d 1004, 1006 (2d Dept. 2022) (citation and internal quotation marks omitted). In circumstances where a lien is discharged “for reasons unrelated to its supposed exaggeration, there remains no lien to be declared void by the court.” Wellbilt Equip. Corp. v. Fireman, 719 N.Y.S.2d 213, 216 (1st Dept. 2000) (citations omitted). Further, because Lien Law § 39-a is penal in nature, “it must be strictly construed in favor of the person upon whom the penalty is sought to be imposed.” Guzman, 226 A.D.2d at 678; see also Esperanza Mansion Group LLC v. Mehlenbacher, 240 A.D.3d 1356, 1357 (4th Dept. 2025). Against this backdrop, we discuss Lori Joseph Builders, Inc. v. Torres, a case decided by the Second Department on September 16, 2026. In 2020, the plaintiff entered into a contract with the defendants to act as a construction manager with respect to the construction of the defendants’ residence.[3] The Plaintiff filed a mechanic’s lien against the defendants’ property claiming it was owed money under the operative contract. Thereafter, the plaintiff commenced an action to foreclose the lien and for damages under a variety of other theories. The defendants interposed a wilful exaggeration counterclaim in their answer. After trial, the court dismissed the counterclaim and the defendant appealed. On appeal, the Court found that damages for wilful exaggeration were not available to the defendant because the trial court found that the lien was properly dismissed as untimely. Thus, the Court stated: When a court determines that a mechanic's lien is void due to willful exaggeration, the person filing such notice of lien is liable in damages to the owner or contractor. However, the Legislature intended the remedy in Lien Law § 39-a to be available only where the lien was valid in all other respects and was declared void by reason of willful exaggeration after a trial of the foreclosure action. Here, the Supreme Court determined, as the defendant had argued, that the mechanic's lien was invalid because it was untimely. Therefore, under these circumstances, damages under Lien Law § 39-a for willful exaggeration of the mechanic's lien are unavailable to the defendant. [Citations, internal quotation marks and brackets omitted.] Nonetheless, the Court found that “under the circumstances here, where the plaintiff's allegations that it had received no payment were flatly contradicted by the plaintiff's own evidence, an award of sanctions for frivolous conduct may be appropriate.” Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] When a lien is discharged by the posting of a bond or by paying money into court, a lien on the bond/funds is substituted for the lien on the real property. See, e.g., KSK Construction Group, LLC v. 26 East 64th Street, LLC, 126 A.D.3d 568, 569 (1st Dept. 2015). While the real property securing the lien is no longer encumbered, the Provider remains protected in the event it is successful on its lien claim. [2] This BLOG has previously written about Thorobird in “The First Department Holds that Completing Surety Under Performance Bond is not Entitled to File Mechanic’s Lien”. [3] The facts as recited herein are abridged for editorial purposes.

By: Jonathan H. Freiberger Today’s BLOG article is about Thorobird Grand LLC v. M. Melnick & Co., a case decided by the Appellate Division, First Department, on December 12, 2024, and which involves mechanic’s liens. The Facts of Thorobird[1] Plaintiff, as owner, hired defendant M. Melnick & Co., as contractor, on several projects. Pursuant to the parties’ agreement, contractor was required to procure performance[2] and payment bonds[3] from a surety; in this case, defendant Federal Insurance Co. Ultimately, the owner terminated the contractor from the project and notified the surety of that fact. The owner, contractor, and surety then entered into a takeover agreement pursuant to which, inter alia, “as a completing surety and not as a contractor to the Owner, agrees to arrange for the performance and completion of the Work required of under the contract in accordance with the terms and conditions of the Contract and Performance Bond….” To satisfy its obligations under the performance bond, the surety hired the defendant contractor to complete the work “in spite of termination” from the project by the owner. The Owner commenced action against the contractor and the surety for breach of contract with respect to the various agreements to which, respectively, they were parties. The surety and the contractor also filed mechanic’s liens.[4] In the surety’s answer, it asserted counterclaims against the owner for, inter alia, breach of contract and the foreclosure of its mechanic’s liens. The owner subsequently amended its complaint to assert claims against the surety under Lien Law § 39 for willful exaggeration of its lien and under Lien Law § 39-a for damages related to the willful exaggeration.[5] Thereafter, the owner moved for partial summary judgment on its willful exaggeration claim in which it sought the discharge of the surety’s liens and monetary damages. The motion court granted the owner’s motion to the extent of discharging the liens because they were “invalid” because “based on the clear and unambiguous terms of the takeover agreement, the parties intended to retain its status as a surety and not be considered a contractor.” The First Department’s Decision On the surety’s appeal, the First Department affirmed and, in so doing, stated: We agree with Supreme Court that the takeover agreement is clear and unambiguous that the parties intended to remain a surety and not be deemed a contractor. It states, in pertinent part, “s completing surety and not as a contractor to the Owner, agrees to arrange for the performance and completion of the Work required of ” under the terms of the construction contract and performance bond. It further states, “ has entered into this Agreement in order to discharge obligations to the Owner under the Performance Bond,” so “any Work performed by is, therefore, being performed by as a completing surety and not as a contractor of the Owner.” Our reasoning is underscored by the fact that retained to continue working on the project. The Court also declined to award the owner damages because damages under Lien Law § 39-a “are unavailable where, as here, the lien has been discharged for reasons other than willful exaggeration.” (Citations omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] Some of the facts recited herein came from the underlying record available on the Court’s NYSCEF system. [2] Construction contracts frequently require contractors to obtain performance bonds. “The purpose of a performance bond is to insure that a contract will be completed consistent with its terms.” U.W. Marx, Inc. v. Mountbatten Surety Co., Inc., 3 A.D.3d 688, 691 (3rd Dep’t 2004) (citations omitted). Accordingly, in “the event of a contractor’s default, the surety’s obligation is to either complete the work or to pay the obligee the amount necessary for it to have the contract completed.” Id. (citations omitted). [3] Construction contracts frequently require contractors to obtain payment bonds. The purpose of a payment bond is to make sure that persons furnishing labor and materials to a contractor receive payment for their efforts. Novak & Co, Inc. v. The Travelers Indemnity Co., 85 Misc.2d 957, 959 (Sup. Ct. Kings Co. 1976), aff’d, 56 A.D.2d 418 (2nd Dep’t 1977). [4] This BLOG has previously addressed issues involving mechanic’s liens. [5] This BLOG has previously addressed issues involving the willful exaggeration of mechanic’s liens.

By: Jeffrey M. Haber The intersection of affinity fraud and Ponzi schemes is a recurring theme in securities enforcement. Although each theory is distinct, they frequently appear together in SEC enforcement actions. Affinity fraud focuses on the means by which trust is cultivated and exploited,[1] while a Ponzi scheme focuses on how an investment enterprise is funded and sustained.[2] When combined, the result can be devastatingly effective: shared religious, ethnic, cultural, or social ties create an environment of trust that facilitates investment, while existing investors often become informal ambassadors whose referrals help attract the new capital necessary to keep the scheme operating. The SEC’s enforcement action against Kwabena Boateng (“defendant”), and the two New Jersey-based companies he controls (Intercontinental Wealth Network LLC and I Wealth Network LP), illustrates this dynamic. Background According to the SEC’s complaint, defendant immigrated to the United States from Ghana in approximately 2016 and became part of a community of Christians of Ghanaian heritage residing primarily in New York and New Jersey. During the period at issue, defendant allegedly developed a reputation within that community and maintained relationships with many of its members. The SEC alleged that a substantial number of the investors who later participated in defendant’s investment program belonged to the same Ghanaian Christian community, and that some were immigrants residing in the United States. The complaint alleged that defendant promoted an investment opportunity through a pooled investment vehicle referred to as the “I-Fund.” According to the SEC, defendant represented that he managed the I-Fund and solicited individuals to invest through a variety of means, including face-to-face meetings, telephone conversations, email communications, and text messages. The SEC further alleged that defendant made presentations concerning the I-Fund and investment opportunities associated with the other defendants to at least two churches and a prayer group affiliated with the Ghanaian Christian community. The SEC’s complaint described a fundraising effort that relied heavily on preexisting personal relationships and community connections. According to the SEC, many investors became aware of the I-Fund through established religious, social, and cultural networks. Some investors were introduced to the opportunity directly by defendant, while others learned of it through family members, friends, fellow congregants, or other individuals who had previously invested. The SEC alleged that these referrals contributed to the continued growth of the investor base and enabled information about the investment program to spread throughout the community. The complaint further alleged that many of the investors had limited experience with financial markets and investing. According to the SEC, defendant knew that investors trusted him because of shared religious beliefs, common Ghanaian heritage, and longstanding social relationships. The SEC contended that these factors were significant in investors’ decisions to entrust funds to the I-Fund and to recommend the investment opportunity to others within their personal networks. The SEC alleged that defendant and the related entities ultimately raised at least $16 million from more than 200 investors. Takeaway The SEC’s enforcement action highlights the close relationship between affinity-fraud allegations and alleged Ponzi-scheme operations. While the two theories address different aspects of an investment fraud, the facts alleged in the complaint demonstrate how they can work in tandem. Affinity fraud focuses on the exploitation of trust within an identifiable community, whereas a Ponzi scheme focuses on the use of new investor funds to sustain the enterprise. In the SEC action, the same community relationships that allegedly generated investor confidence also allegedly supplied the referrals and new capital necessary to expand the investment program. The enforcement action also illustrates why the SEC scrutinizes investment opportunities promoted through close-knit religious, ethnic, and social networks. According to the complaint, many investors learned about the investment opportunity through churches, prayer groups, family members, friends, and fellow congregants. Such networks can accelerate investor participation because recommendations come from trusted sources rather than traditional financial intermediaries. As a result, individuals may rely more heavily on personal relationships and community standing than on independent diligence regarding the investment itself. Finally, the enforcement action is notable for its emphasis on investor referrals. The complaint alleged that existing investors helped introduce new participants to the program, allowing the investment opportunity to spread throughout the community through word-of-mouth endorsements. This type of growth is significant because it can serve both as evidence of affinity-based solicitation and as a potential mechanism through which an alleged Ponzi scheme attracts the continuous flow of new capital needed to continue operating. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________ [1] Affinity fraud generally refers to schemes that target members of an identifiable group, such as a religious, ethnic, or professional community, by exploiting preexisting relationships and trust among group members. [2] A Ponzi scheme is generally characterized by the use of funds obtained from new investors to sustain the appearance of a profitable investment operation and to satisfy obligations to earlier investors.

By: Jeffrey M. Haber In Gamma USA, Inc. v. Pavarini McGovern, LLC, 2026 N.Y. Slip Op. 05237 (1st Dept. September 10, 2026), the Appellate Division, First Department, addressed the interplay between pass-through claims, liquidating agreements, liquidated damages provisions, and consequential damages waivers in complex construction disputes. The Court held that a subcontractor could not be exposed, through a pass-through claim, to damages that had been contractually waived or limited under the governing project agreements. At the same time, the Court rejected an expansive reading of those limitations, concluding that direct damages remained recoverable where the contracts did not expressly bar them. Gamma is notable not only for its treatment of pass-through claims, but also for its application of fundamental principles of contract interpretation. In reading the primary contract and subcontract together, the Court emphasized that negotiated risk-allocation provisions must be enforced according to their plain terms. A liquidated damages clause governing delay damages could not be transformed into a cap on all damages, and a waiver of consequential damages could not be expanded to eliminate direct damages. Gamma, therefore, underscores that a liquidating agreement cannot be used to circumvent or reallocate the contractual limitations negotiated by sophisticated parties; rather, the scope of recoverable damages remains a matter of contract interpretation governed by the plain language of the underlying agreements. Gamma USA, Inc. v. Pavarini McGovern, LLC Gamma arose from a renovation project involving a 47-story mixed-use tower in Times Square, New York, which included hotel, retail, and theater improvements. Plaintiff served as a subcontractor on the project, while defendant acted as the construction manager and general contractor. After disputes emerged during the project, litigation followed. The primary issue in Gamma concerned the scope of damages that could be recovered by the defendant, the general contractor. Specifically, defendant asserted a counterclaim against plaintiff as a “pass-through” claim on behalf of the project’s owner, Times Square Hotel Owner, LLC (“Owner”), a non-party to the action. The Owner engaged defendant on the project pursuant to a Construction Management Agreement (the “CMA”) in August 2018. Pursuant to Section 3.1.2 of the CMA, if defendant did not meet certain milestones by a specified date, it was required to pay the Owner liquidated damages in the amount of $10,000 per day, not to exceed $3.6 million (the “Delay Provision”). The Delay Provision clarified that such liquidated damages would constitute the Owner’s “sole remedy” for delay damages from defendant. Separately, Section 25.19 of the CMA provided that defendant and the Owner would waive claims for consequential damages against each other arising under the contract (the “Waiver Provision”). The Waiver Provision clarified that it was not meant to preclude an award of liquidated damages in accordance with the Delay Provision. The parties did not waive other damages (such as direct damages) under the Waiver Provision. In August 2018, defendant retained plaintiff to perform curtain wall and facade work pursuant to a trade contract (the “Subcontract”). The Subcontract required plaintiff to complete the work in accordance with the CMA and other contract documents, with time being of the essence. Unlike the Waiver Provision found in the CMA (which waived consequential damages), Section 6.1 of the Subcontract specified that plaintiff would be liable to defendant “for all direct and consequential damages arising out of . . . this [Subcontract] including any defects in [plaintiff’s] Work”. In Section 22.1 (entitled “Timely Completion”), as modified by Exhibit H, Section V(7) of the Subcontract, plaintiff acknowledged that failure to complete the work in a timely manner would “result in extreme hardship to [the] Owner” and that if plaintiff failed to do so “[the] Owner’s damages for such delays shall be liquidated” in the same manner as specified in the Delay Provision of the CMA, and “[n]otwithstanding the foregoing, [plaintiff’s] liability for liquidated damages” would be capped at $3.6 million (the “Liquidated Damages Cap”). Section 22.2 set forth that the Liquidated Damages Cap would not “in any way limit [defendant’s] right . . . to collect damages for, inter alia, increased cost of construction . . . and any other damages, including direct or consequential damages, to which [defendant] may be entitled to collect by law for breach of this contract.” Plaintiff commenced the action against defendant, seeking more than $16 million for nonpayment and breach of the Subcontract. Defendant answered the complaint. Several months after the commencement of the action, defendant and the Owner entered a “pass-through” liquidating agreement so that defendant could assert a counterclaim in the lawsuit on the Owner’s behalf (as amended, the “Amended Liquidating Agreement”). The Amended Liquidating Agreement was necessary because the Owner lacked privity to assert its own claim against plaintiff, and the Owner wished to avoid the time and expense of suing defendant (which would then in turn sue plaintiff for indemnification). In the Amended Liquidating Agreement, the Owner and defendant acknowledged that the Owner had incurred damages (including consequential damages) on account of plaintiff’s failure to perform work in accordance with the Subcontract (the “Owner Claim”), and that defendant was liable to the Owner for that claim under the CMA. The Owner and defendant also agreed that they had entered the Amended Liquidated Agreement to “liquidate the Owner Claim such that [defendant’s] liability to [the] Owner in connection with the Owner Claim [was] liquidated and limited to the amount, if any, that [was] actually recovered from [plaintiff] on account of the Owner Claim, including, without limitation the consequential damages incurred by [the] Owner as a result of [plaintiff’s] breach. . . .” Defendant filed a second amended answer, the operative pleading in the action, asserting an amended counterclaim brought by defendant solely on the Owner’s behalf in accordance with the Amended Liquidating Agreement. Plaintiff moved to dismiss the amended counterclaim shortly after it was filed, arguing that the Amended Liquidating Agreement was unenforceable. In the alternative, plaintiff argued that its liability for liquidated damages was capped at $3.6 million under the Liquidated Damages Cap of the Subcontract. Supreme Court granted the motion to dismiss the amended counterclaim to the extent it sought damages exceeding the $3.6 million Liquidated Damages Cap. The court found that the amended counterclaim sought damages solely for the Owner’s injuries, not defendant’s injuries. The court also noted that, under the CMA, the Owner had expressly waived its right to recover “any damages” other than liquidated damages from defendant, which included consequential delay damages. Thus, Supreme Court held that while defendant would have retained the right to recover consequential damages from plaintiff for its own injuries under the Subcontract (see, e.g., Section 6.1 of the Subcontract), the liability for the Owner’s injuries was governed by the Liquidated Damages Cap found in 2.21 of the Subcontract, which capped recoverable damages at $3.6 million. Defendant’s recovery on its amended counterclaim asserted on behalf of the Owner was thus limited to a maximum of $3.6 million with respect to all forms of damages. The Court held that Supreme Court “correctly read the amended counterclaim — styled entirely as a pass-through claim by [defendant] on behalf of the Owner — in determining that there was no independent claim asserted by [defendant] (apart from the liability for its subcontractors to the Owner under the CMA).”[1] The Court pointed to paragraph 194 of the second amended answer in support, which alleged that the “Owner incurred substantial additional costs as a result of [plaintiff’s] breaches, in the form of overhead and supervision, direct work costs charged by separate contractors, additional storage, and labor expenditures.”[2] The Court also pointed to paragraph 196 of the second amended answer, which “asserted that “[u]nder the [CMA], [defendant] is responsible for all the acts and omissions of its subcontractors and is liable to [the] Owner for damages incurred due to" the Subcontractor's breaches of the Subcontract.”[3] From these allegations, the Court concluded that defendant “did not allege that it incurred additional damages apart from those owing to the Owner on account of the [plaintiff’s] breaches.”[4] The Court also held that “Supreme Court . . . properly found that it was necessary to interpret both the CMA (between the Owner and [defendant]) and the Subcontract (between [defendant] and [plaintiff]) in determining the scope of recoverable damages on the pass-through counterclaim.”[5] “First,” said the Court, Supreme Court “correctly found that to the extent [defendant] sought to recover damages from [plaintiff] that the Owner incurred based on [plaintiff’s] delays, that recovery was subject to the Liquidated Damages Cap in the Subcontract.”[6] “That section,” noted the Court, “explicitly provide[d] that the Owner’s damages for such delays would be . . . liquidated in the same daily amount specified by the owner in the CMA (i.e., $10,000 per day for each day of the delay) in the proportion that [plaintiff] was the cause of such delay, and that notwithstanding the foregoing, [plaintiff’s] liability for liquidated damages would be capped at $3.6 million.”[7] “However,” said the Court, “the above limitation [was] applicable only to the Owner’s damages caused by the Subcontractor’s delays.”[8] “The relevant agreements do not,” explained, “restrict the other damages that [defendant could] recover on behalf of the Owner.”[9] “Notably,” said the Court, “the first amended counterclaim claim assert[ed] several forms of damages attributable to Owner, not just delay damages. To the extent the damages sought were not delay damages, they should not have been subject to the $3.6 million cap.”[10] Second, said the Court, “with respect to other forms of damages recoverable by the Owner, it was necessary to look to the CMA.”[11] “While Supreme Court addressed the CMA only in passing,” noted the Court, “the recognition that the terms of the CMA apply to the pass-through counterclaim [was] important.”[12] The Court explained that the Owner had the ability to assert claims for damages directly against [defendant] for liquidated delay damages and other (nonconsequential) damages under the CMA. However, the Owner instead chose to rely on the Amended Liquidating Agreement to pursue claims against [plaintiff] by way of a pass-through counterclaim asserted by [defendant] against [plaintiff]. This strategic decision did not (and should not) alter or expand the scope of [plaintiff’s] liability for the Owner’s damages under the Subcontract, which expressly incorporated the terms of the CMA.[13] The Court noted that “[w]hile Supreme Court properly acknowledged that the CMA applied, the court’s interpretation exceeded the intended scope of the prescribed damages waived in the CMA.”[14] “Specifically,” said the Court, “Supreme Court concluded that the ‘Owner expressly waived its rights to recover any damages other than liquidated damages from defendant [General Contractor], including consequential delay damages” in the CMA.”[15] “However,” explained the Court, “the CMA did not waive all damages as between the Owner and the General Contractor, but only claims for “consequential damages arising of and relating to the Contract.”[16] The Court concluded that “[c]onsequential damages are meant to compensate for indirect losses, and are but a small subset of permissible damages under a contract.”[17] Thus, held the Court, “nothing in either the Subcontract or the CMA limit[ed] the Owner’s ability (vis-a -vis the [defendant]) to pursue direct damages from [plaintiff], so long as they [were] not consequential damages or delay damages in excess of the $3.6 million cap.”[18] In so holding, the Court modified Supreme Court’s order to dismiss “only those portions of the counterclaim seeking delay damages in excess of the $3.6 million liquidated damages cap and consequential damages.”[19] Takeaway Although Gamma arose in the context of a pass-through claim, the decision is fundamentally a contract interpretation case. It concerns the well-established doctrine under New York law permitting a contractor to assert claims on behalf of a party with whom the defendant lacks contractual privity through a liquidating agreement. The central principle is that a pass-through claim is a procedural vehicle for recovery; it does not create new substantive rights or expand existing liability. The Court emphasized that the Owner’s decision to proceed through a liquidating agreement could not alter the scope of damages otherwise available under the governing contracts. Starting from that premise, the Court analyzed the CMA and Subcontract together, giving effect to each provision according to its plain language. The Court rejected the notion that the subcontract’s $3.6 million liquidated damages cap restricted all forms of owner damages. By its terms, the provision addressed only delay damages. Consistent with New York’s preference for enforcing negotiated risk-allocation provisions as written, the Court refused to expand the cap beyond the category of damages expressly identified in the contract. The Court applied the same interpretive approach to the consequential damages waiver in the CMA. Supreme Court had effectively treated the waiver as eliminating all damages other than liquidated damages. The Court disagreed, emphasizing that the parties waived only consequential damages, not direct damages. Relying on established New York law distinguishing direct damages from consequential damages, the Court declined to enlarge the scope of the waiver beyond what the parties actually negotiated and memorialized in their agreement. Viewed through this lens, Gamma reinforces several related principles of contract interpretation under New York law. Related agreements forming part of the same transaction must be read together. Damages limitations and waivers are enforced according to their plain terms. Courts will not rewrite contracts by implication, nor will they transform a liquidated damages provision governing one category of loss into a cap on all damages. Likewise, a waiver of consequential damages does not extinguish claims for direct damages absent clear contractual language to that effect. The pass-through nature of the claim ultimately reinforced, rather than altered, those principles. Because defendant was asserting only the Owner’s claim, it stood in the owner’s shoes and could recover only those damages the Owner itself could have recovered under the contractual framework. As a result, delay damages remained subject to the $3.6 million liquidated damages cap, consequential damages remained barred by the waiver provision, and direct damages remained recoverable because neither agreement expressly eliminated them. The liquidating agreement provided a mechanism for pursuing the claim, but it could not expand plaintiff’s contractual exposure beyond the limits established by the underlying agreements. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________ [1] Slip Op. at *4. [2] Id. [3] Id. [4] Id. [5] Id. [6] Id. [7] Id. [8] Id. [9] Id. [10] Id. [11] Id. at *5. [12] Id. [13] Id. [14] Id. [15] Id. [16] Id. (internal quotation marks omitted). [17] Id., citing Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 192-193 (2008); American List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 43 (1989). [18] Id. [19] Id. at *1.

By Jeffrey M. Haber On October 20, 2016, the Financial Industry Regulatory Authority (“FINRA”) announced that it had submitted proposed rule changes to the Securities Exchange Commission (“SEC”) for approval that are intended to help member firms detect and prevent the abuse and financial exploitation of senior and vulnerable adult customers. If approved, the proposed rules would allow member firms to temporarily halt the disbursement of funds or securities from their customers’ accounts if they believe the customer is being financially exploited, and to notify a person identified by the customer of the hold and suspected wrongdoing. Elder Abuse and Financial Exploitation Defined Elder abuse is a serious and growing problem that affects millions of seniors each year. Financial exploitation is the most common form of elder abuse. There is no single definition of elder abuse or financial exploitation. Because financial exploitation can occur in many ways (see below), FINRA has taken a broad view of the types of conduct that fall within its scope. Consequently, the proposed rules define “financial exploitation” to include: “(A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult’s funds or securities; or (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult’s money, assets or property; or (ii) convert the specified adult’s money, assets or property.” The Problem of Elder Abuse and Financial Exploitation Financial exploitation often occurs by those entrusted with the responsibility to protect a senior’s assets, such as children and family members, attorneys, accountants, guardians, and investment brokers and financial advisors. As such, financial exploitation is often manifested by: 1) the unauthorized appropriation, sale or transfer of property; 2) the unauthorized taking of personal assets; 3) the misappropriation, misuse or transfer of monies from a personal or joint account; or 4) the failure to use a senior’s income and assets for required support and maintenance. Financial exploitation tends to be underreported. Often, the victim feels ashamed or embarrassed that it happened. Its financial impact can be devastating, especially for seniors who are living on fixed incomes and who have no financial ability to offset the economic losses caused by the exploitation or recover the funds once they leave the account. Federal and State Attempts to Address the Problem For some time, the federal government has been trying to adopt legislation and programs to detect and prevent the incidence of elder abuse. Below is a brief overview of the government’s more recent efforts. In 2010, as part of the Patient Protection and Affordable Care Act, Congress enacted the Federal Elder Justice Act (“EJA”). The EJA is designed to strengthen federal and state efforts to prevent and deal with financial exploitation and abuse. In June 2015, Senators Richard Blumenthal and Kelly Ayotte introduced the Robert Matava Elder Abuse Victims Act of 2015. The proposed legislation was intended to protect, serve, and advance the rights of victims of elder abuse and financial exploitation by, among other things, encouraging states and other qualified entities to hold offenders accountable and enhance the capacity of the justice system to investigate, pursue, and prosecute elder abuse cases. In December 2015, the White House Conference on Aging issued a report devoted to, among other things, ensuring that “elder abuse and financial exploitation are more fully recognized as a serious public health challenge and addressed accordingly and effectively.” On the state level, most states protect seniors (and vulnerable adults) through guardianships, Adult Protective Services, and criminal actions and penalties. Only four states specifically target the financial exploitation of seniors. As noted by FINRA, those states – Delaware, Missouri, Washington and Indiana – permit financial institutions, including broker-dealers, to place temporary holds on “disbursements” or “transactions” if the firm suspects the financial exploitation of covered persons. Additionally, the North American Securities Administrators Association (“NASAA”) drafted model legislation in 2015 that requires qualified individuals to report suspected financial exploitation to the state’s Adult Protective Services, the state securities regulator, and trusted third parties designated by the senior investor (the “Model Act”). So far, only two states – Alabama and Indiana – have enacted the Model Act into law. Additionally, Vermont has adopted the Model Act by regulation, and Louisiana has passed legislation that protects voluntary disclosures. The new rules proposed by FINRA are, for the most part, consistent with the Model Act. In the text accompanying the proposed rules, FINRA explained that even though the proposed rules and the Model Act are not identical, “FINRA and NASAA … worked together to achieve consistency where possible and appropriate.” FINRA’s Experience with Financial Exploitation and The Proposed Rule Changes In recent years, fighting the financial exploitation of elderly investors has been a high priority for regulators, such as FINRA and the Consumer Financial Protection Bureau. In April 2015, for example, FINRA launched its Securities Helpline for Seniors, which was intended to be a “‘go-to’ resource for senior investors with securities-related questions and concerns.” (See December 2015 Report, here.) As explained by Susan Axelrod, FINRA Executive Vice President, Regulatory Operations, “Since its launch in April 2015, the helpline has received calls highlighting some of the issues firms are facing when it comes to senior investors, including how firms respond when they suspect a senior customer is being exploited.” Approximately six months later, in October 2015, FINRA issued Regulatory Notice 15-37, in which it sought public comment on the rules that it has now submitted to the SEC. The proposed rules submitted to the SEC are, for the most part, unchanged from those set forth in Regulatory Notice 15-37. The proposed rules require member firms to “make reasonable efforts to obtain the name of contact information for trusted” individuals who are designated by senior and vulnerable adult account holders (the “Trusted Contact Person”). The Trusted Contact Person must be 18 years or older, such as a close friend and family member, and cannot be “authorized to transact business on behalf of the account.” As noted by FINRA in Notice 15-37, the Trusted Contact Person is intended to “be a resource for the firm in administering the customer’s account and in responding to possible financial exploitation.” Under the proposed rules, the member firm is required to notify the Trusted Contact Person if financial exploitation is suspected (e.g., when a customer tries to change his/her Trusted Contact Person “from an immediate family member to a previously unknown third party .…”). If the Trusted Contact Person is not available or the firm reasonably believes that he/she has engaged, is engaged or will engage in the financial exploitation of the senior or vulnerable account holder, then the firm must contact an immediate family member, unless the firm reasonably believes that the family member has engaged, is engaged or will engage in the financial exploitation of the account holder. Under those circumstances, the proposed rules allow the firm to conclude that the Trusted Contact Person “was not available” and “use the temporary hold provision” to protect the senior or vulnerable account holder. Additionally, the proposed rules permit a member firm to place a temporary hold on the disbursement of funds or securities from the account of a senior or vulnerable adult customer when the member reasonably believes that financial exploitation may be, is likely to be, or is occurring. As noted in FINRA Regulatory Notice 15-37, “[C]urrently, FINRA rules do not explicitly permit firms to contact a non-account holder or to place a temporary hold on disbursements of funds or securities where there is a reasonable belief of financial exploitation of a senior or other vulnerable adult.” When a member places a temporary hold on the account, the proposed rules require the firm to immediately initiate an internal review of the facts and circumstances that caused the member to reasonably believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted. In addition, as noted, the proposed rules require the member to provide notification of the hold and the reason for the hold to the Trusted Contact Person, if available, as well as all parties authorized to transact business on the account. While the proposed rules do not establish an affirmative requirement to withhold funds, it creates a safe harbor for firms that do so when: (1) there is reason to suspect financial exploitation; (2) the Trusted Contact Person has been notified of the hold, as well as all parties authorized to transact business on the account; and (3) the firm undertakes an immediate review of the facts and circumstances necessitating the hold. The temporary hold would last up to 15 business days, unless extended by a state regulator or agency or court of competent jurisdiction. If, after conducting the internal review, and the member firm reasonably believes that financial exploitation has occurred or is occurring (or has or will be attempted), the member firm can extend the hold for up to another 10 business days. The proposed rule changes are not effective until approved by the SEC. Notably, the SEC staff can decline to adopt the proposed changes or request changes or amendments to the rule proposal. Takeaway: FINRA’s effort to implement rules that empower member firms to detect and prevent the financial exploitation of seniors and other vulnerable adults is laudable. Having a trusted person to contact when financial exploitation is suspected and allowing a temporary hold on account activity will ensure that senior account holders do not fall victim to the financial exploitation by others. Regardless of whether the SEC adopts the proposed rules, FINRA’s efforts should be held as an industry best practice that member firms should strive to achieve. LINKS: SEC Notice of Filing, Release No. 34-79215 (Nov. 1, 2016), announcing FINRA's October 19, 2016 rule filing Proposed Rule Changes NASAA model legislation or regulation to protect vulnerable adults from financial exploitation, adopted January 22, 2016 FINRA Regulatory Notice 15-37, October 2015 This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

The SEC’s Findings On September 28, 2016, one day before the Securities and Exchange Commission (“SEC”) announced its first stand-alone action to enforce Section 21F(h) of the Securities Exchange Act of 1934 (discussed on this Blog here), the SEC settled with Anheuser-Busch InBev SA/NV (“AB InBev”) for its alleged violations of the Foreign Corrupt Practices Act (“FCPA”) and the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Pursuant to the settlement, AB InBev agreed to pay $6 million to the SEC in disgorgement ($2.7 million), prejudgment interest ($300,000), and a civil penalty ($3 million). According to the SEC, AB InBev “used third-party sales promoters to make improper payments to government officials in India to increase the sales and production of AB InBev products in that country.” Although employees repeatedly complained about the adequacy of AB InBev’s internal controls to detect and prevent the improper payments, “the company failed to ensure that transactions involving the promoters were recorded properly in its books and records.” As set forth in the SEC Order, AB InBev: (1) failed to report employee complaints about the wrongful conduct; (2) failed to timely respond to subpoenas; (3) broadly asserted the privilege, causing the SEC to expend additional resources on the investigation; and (4) entered into a separation agreement with a former employee that prevented the employee from communicating directly with the SEC about possible securities law violations. Regarding the separation agreement, the SEC found that employees were required to maintain information about AB InBev “in strict secrecy and confidence,” and were threatened with a $250,000 liquidated damages penalty if they violated the non-disclosure terms of the agreement. According to the SEC, after signing the separation agreement, the employee, who had previously communicated with SEC about the wrongdoing, stopped doing so. The SEC said that AB InBev’s separation agreement “chilled” employees “from communicating with the SEC” in violation of SEC Rule 21F-17(a). “Anheuser-Busch InBev recorded improper payments by its sales promoters in India as legitimate expenses in its financial accounting, and then exacerbated the problem by including language in a separation agreement that chilled an employee from communicating with the SEC,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. In addition to paying $6 million, AB InBev agreed to cooperate with the SEC and report its compliance with the FCPA, and make “reasonable efforts to notify certain former employees that Anheuser-Busch InBev does not prohibit employees from contacting the SEC about possible law violations.” The Takeaway The SEC’s settlement with AB InBev is notable for a few reasons. First, the settlement evinces the continued effort by the SEC to root out corporate efforts to chill whistleblowing. “Threat of financial punishment for whistleblowing is unacceptable,” said Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, in the AB InBev announcement. “We will continue to take a hard look at these types of provisions and fact patterns.” Second, the settlement confirms the SEC’s interest in bringing internal controls cases against companies with inadequate processes and procedures, even when the company at issue is a partner in a venture with less than a controlling interest in the joint operation. As noted in the SEC Order, although AB InBev held less than 50% of the voting power of the joint venture, the SEC required AB InBev to “proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls.” Third, nearly 50% of the settlement amount was comprised of the disgorgement of ill-gotten gains. Yet, AB InBev was not charged with violating the anti-bribery provisions of the FCPA. The settlement, therefore, reinforces the SEC’s long-held position that disgorgement is appropriate when there are only violations of the books and records or the internal controls provisions of the FCPA. LINKS: SEC Press Release; and SEC Order This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber On October 3, 2016, the United States Supreme Court invited the U.S. Solicitor General to express the U.S. Government’s views about the application of the False Claims Act (“FCA”) public disclosure bar. 31 U.S.C. § 3730(e)(4)(A). The request was made in United States ex rel. Advocates for Basic Legal Equality v. U.S. Bank, a qui tam action that the Sixth Circuit held was properly dismissed because of the public disclosure bar. In United States ex rel. Advocates for Basic Legal Equality v. U.S. Bank, 816 F.3d 428 (6th Cir. 2016), the Sixth Circuit held that prior public disclosures are “substantially the same” for purposes of the public disclosure bar if they “encompass” the allegations in the subject qui tam action even though the prior disclosures do not reveal the specific fraud alleged. Based upon that analysis, the court dismissed the case against U.S. Bank on the grounds that two prior public disclosures barred the action. The Public Disclosure Bar The public disclosure bar precludes a relator from pursuing a qui tam action if the allegations have been publicly disclosed through official proceedings or in the news media, unless the relator was an original source of the information upon which the action was based. The bar operates regardless of whether the whistleblower knew about or reviewed the public information prior to filing the complaint. Courts generally apply a two-part test to determine whether the public disclosure bar applies. First, the courts inquire whether there has been any public disclosure of the fraud in (1) a federal criminal, civil, or administrative hearing in which the government is a party; (2) a congressional, Government Accountability Office, or other federal report, hearing, audit or investigation; or (3) the news media (such as newspapers; scholarly, scientific, and technical periodicals, including trade journals; advertisements in periodicals; and widely accessible internet publications). Second, the courts look to whether the whistleblower’s allegations are substantially the same as the previously disclosed fraud. If either requirement is not satisfied, the bar does not apply and the relator can proceed with the action. If both requirements are met, the action is barred unless the relator qualifies as an original source under the FCA. An original source is “an individual who either (i) prior to a public disclosure … , has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.” The Proceedings in Advocates for Basic Legal Equality Advocates for Basic Legal Equality involved a mortgage insurance program, backed by the Federal Housing Administration, that encouraged banks to lend money to high-risk borrowers. The insurance provided under the program covered the losses incurred by a lending institution that were caused by a borrower who defaulted on a loan. To participate in the program, a lender, such as U.S. Bank (which participated in the program), had to certify that it would meet, and did meet, certain requirements each time it requested an insurance payment. 816 F.3d at 429. The key requirement to be certified, for purposes of the action, was that the lender, in this case U.S. Bank, would engage in “loss mitigation” measures, such as attempting to arrange a face-to-face meeting with the defaulting borrower, before foreclosing. Id. The relator, Advocates for Basic Legal Equality (“ABLE”), an Ohio non-profit organization that advances the interests of low-income individuals, claimed that U.S. Bank did not satisfy the loss mitigation requirement. It alleged that U.S. Bank promised to engage in loss mitigation, failed to do so, and then lied about the failure. 816 F.3d at 429. ABLE cited to three foreclosures where this happened, claiming that those instances demonstrated a widespread pattern showing that U.S. Bank wrongfully foreclosed on 22,000 homes and wrongfully collected $2.3 billion in federal insurance benefits. Id. ABLE filed the action on behalf of itself and the United States claiming that U.S. Bank violated the FCA. The Department of Justice declined to intervene. Id. The district court found that two of ABLE’s claims stated a violation of the FCA. United States v. U.S. Bank, N.A., No. 3:13 CV 704, 2015 WL 2238660, at *4–7 (N.D. Ohio May 12, 2015). Nevertheless, it dismissed the action because ABLE based its case on information that had been publicly disclosed, precluding it from bringing the lawsuit as a qui tam plaintiff. Id. at *8–11. In that regard, the court found that ABLE’s allegations had been publicly disclosed in: (1) a 2011 consent order between U.S. Bank and the federal government, which required U.S. Bank to implement a wide variety of reforms, including measures “to ensure reasonable and good faith efforts, consistent with applicable Legal Requirements, are engaged in Loss Mitigation and foreclosure prevention for delinquent loans”; and (2) a 2011 foreclosure practices review from three federal agencies, which noted that various banks, including U.S. Bank, had failed to take a variety of loss mitigation measures, and which emphasized the need for banks to make “reasonable and good faith efforts … to engage in loss mitigation and foreclosure prevention for delinquent loans where appropriate.” 816 F.3d at 431. The Sixth Circuit affirmed the dismissal, holding that a general disclosure suffices to bar a case involving more specific and detailed claims of wrongdoing: “the broader, publicly disclosed category (a variety of mortgages) encompasses ABLE’s narrower category (federally insured mortgages).” 816 F.3d at 432. The court reasoned that if the rule were “[O]therwise, one could always—or at least nearly always—evade the public disclosure requirement by focusing the allegations in a second action on sub-classes of potential claims covered by the initial action.” Id. ABLE filed a writ of certiorari with the Supreme Court. Split in the Circuits? According to ABLE, there is a split between the Sixth Circuit, on the one hand, and the Seventh and Ninth Circuits, on the other hand, about how to define “substantially the same”. ABLE contends that the Seventh and Ninth Circuits have considered and rejected the Sixth Circuit’s “broad-brush approach”, holding that “a complaint that is similar only at a high level of generality” does not “trigger[] the public disclosure bar.” Petition for Certiorari at 1 (citing United States ex rel. Mateski v. Raytheon Co., 816 F.3d 565, 575 (9th Cir. 2016); United States ex rel. Goldberg v. Rush Univ. Med. Ctr., 680 F.3d 933, 936 (7th Cir. 2012). In those circuits, public disclosure of some wrongdoing does not bar an FCA action unless it “alerted the government to the specific areas of fraud alleged” in the action. Mateski, 816 F.3d at 579. Only disclosures alleging “that a particular … had committed a particular fraud in a particular way” suffice. Goldberg, 680 F.3d at 935. In response, U.S. Bank contends that there is no split between the circuits. U.S. Bank notes that the panels in the Seventh and Ninth Circuits merely held that “where a relator alleges a different type of fraud from what has been publicly disclosed, courts should not construe the disclosures and allegations so broadly as to obviate the distinction between the kind of fraud alleged and the kind of fraud disclosed.” Brief in Opposition at 15 (citations omitted). According to U.S. Bank, nothing in the Sixth Circuit’s opinion conflicts with the Seventh and Ninth Circuits: “The Sixth, Seventh, and Ninth Circuits all apply the same overarching rule: public disclosures bar a given complaint when they reveal allegations or transactions that are substantially the same as those presented in the complaint and so suffice to put the government on notice of its allegations.” Id. at 24 & n.8 (noting that the First, D.C. and Tenth Circuits are each in accord). Better Markets, Inc., which filed an amicus brief, contends that the Eighth Circuit’s approach offers another view in the split among the circuits. The Eighth Circuit requires the prior public disclosure to “expose[ ]” “the essential elements” of “the transaction as fraudulent” in order for the bar to apply. United States ex rel. Rabushka v. Crane Co., 40 F.3d 1509, 1512 (8th Cir. 1994). According to Better Markets, the Eighth Circuit found persuasive a similar articulation by the D.C. Circuit. See United States ex rel. Springfield Terminal Ry. v. Quinn, 14 F.3d 645, 654 (D.C. Cir. 1994) (“The language employed in § 3730(e)(4)(A) suggests that Congress sought to prohibit qui tam actions only when . . . the critical elements of the fraudulent transaction themselves were in the public domain.”). Better Markets requested that the Court adopt a rule based on this approach: Previous public disclosures bar a qui tam action only where they contain information that, taken as true, describes fraud with sufficient particularity to state a claim to relief under the False Claims Act. In other words, if the disclosures, standing as the sole allegations in a hypothetical complaint against the same defendant, are insufficiently particularized to survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure (and the heightened pleading standard for fraud under Rule 9(b)), then they do not bar a qui tam suit that features additional allegations. Potential Outcome This Blog believes that there is a split among the circuits. In analyzing the different approaches, the Seventh and Ninth Circuits advance a framework that strikes a balance between the competing interests of the parties. By requiring a nexus between the prior public disclosure and the qui tam action such that the government is alerted to the fraud alleged (Mateski, 816 F.3d at 579), both the relator and the defendant have a fair and reasonable framework upon which to argue over the application of the bar. The Sixth Circuit’s approach is far too broad. By analyzing the issue in terms of whether the prior disclosure “encompasses” the alleged fraud, the court creates a rule that potentially has no limit. Any general allegation of fraud necessarily “encompasses” specific frauds that the government does not know about. The Sixth Circuit’s approach therefore would swallow virtually every fraud filed under the FCA. Finally, the rule proposed by Better Markets takes the Eighth and D.C. Circuits’ rulings (which are closer to the approach of the Seventh and Ninth Circuits) too far. Such a rule would allow virtually every qui tam action to escape the application of the public disclosure bar. Indeed, relators would be able to base their qui tam actions on public disclosures, without adding anything material (i.e., original source information) to the claim, because the prior public disclosures did not state a claim under 12(b)(6) and meet the heightened pleading requirements of Rule 9(b). The Supreme Court has not set a deadline for the Solicitor General to file its brief. If the Court takes the case, it will likely result in a decision that clarifies the FCA’s requirement that the prior public disclosure be “substantially same” as the allegations in the qui tam complaint. Update: The Supreme Court has since denied the petition for certiorari in this case. Links: Petition for a writ of certiorari filed. (Response due August 26, 2016) Brief of respondent U.S. Bank, N.A. in opposition filed. Brief amicus curiae of Better Markets, Inc. filed. Reply of petitioner U.S., ex rel. Advocates for Basic Legal Equality, Inc. filed. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Today’s newspapers often report stories about the perils of arbitration. In 2015, for example, The New York Times published a series of articles titled, “Beware the Fine Print” – a special report examining how arbitration clauses buried in contracts deprives Americans of their constitutional rights. (Silver-Greenberg & Corkery, In Arbitration, a Privatization of the Justice System, N.Y. Times (Nov. 1, 2015).) According to the California Assembly Committee On Judiciary, an increasing number of businesses are using arbitration provisions in order to evade California law. Among other things, these provisions allow businesses to select the laws or venues of another state (and even another country) that the business deems to be favorable to its interest to govern a legal dispute if one should arise. Since the bargaining power often rests with the business, the committee found that Californians are often forced to agree to such terms. Given the burden and expense of traveling to another forum, and the favorability of the selected law to the business interest, the committee concluded that most Californians were unlikely to vindicate their legal rights. To protect Californians, and in particular California-based employees, the Legislature sought to level the playing field by ensuring that California-based employees could not be forced to litigate or arbitrate their California-based claims outside of California, under out-of-state laws, as a condition of employment. Accordingly, it passed SB-1241. SB-1241: Barring Out-of-State Choice-of-Law and Forum Provisions SB-1241 targets choice of venue provisions found in employment agreements that require a worker to arbitrate in a different state and choice of law provisions that select a different state’s law to control the arbitral proceeding. In particular, the bill prohibits an employer, as a condition of employment, from requiring an employee who primarily resides and works in California to agree to a provision that would require the employee to adjudicate (i.e., either through litigation or arbitration) a claim arising in California outside of the state or deprive the employee of the substantive protection of California law with respect to a controversy arising in California. The bill makes any provision of a contract that violates the prohibitions of the law voidable upon request of the employee and requires a dispute over a voided provision to be adjudicated in California under California law. The bill further specifies that injunctive relief is available to the employee and authorizes a court to award reasonable attorney’s fees should the employee prevail. Notably, the bill excepts an agreement that is negotiated by counsel on behalf of an employee. The law applies to contracts entered into, modified, or extended on or after January 1, 2017. SB-1007: Guaranteeing a Court Reporter in Arbitration In addition to the foregoing law, the California Legislature sought to fill a gap left in the sections of the California Code of Civil Procedure governing arbitration proceedings. As noted by the California Senate Rules Committee, while certain California laws and procedures govern all aspects of a non-judicial arbitration – from the conduct of arbitrators, private arbitration companies, and the arbitration proceedings, to the enforcement of arbitration agreements and arbitration awards, as well as related judicial proceedings – it is silent as to the right of the parties to have a court reporter in an arbitration proceeding. The California Legislature enacted SB-1007 so that a party to an arbitration can have a court reporter present to create an official record of the proceeding. The law requires the party requesting a certified shorthand reporter to make the request in his/her demand for arbitration, or a response, answer, or counterclaim to a demand for arbitration; or at a pre-hearing scheduling conference at which a deposition, proceeding, or hearing is being calendared. If the arbitrator refuses the request, then the party can petition a court for an order to compel the arbitrator to grant the party’s request. The petitioning party may include a request for an order to stay any deposition, proceeding, or hearing related to the arbitration pending the court’s determination of the petition. For indigent consumers in consumer arbitration, a court reporter will be provided upon request at the expense of the non-consumer party. On September 25, 2016, California Governor Jerry Brown signed both bills into law. Takeaway With regard to SB-1241, this Blog believes that the playing field should be level. This is not to say that employers do not have an obligation to protect their rights. However, the line gets crossed when out-of-state employers impose choice-of-law and forum selection provisions on their workers, many of whom are unable to obtain counsel to negotiate on their behalf, in order to make it more difficult for employees to pursue legitimate claims, and ensure that any disputes are decided in a forum that is most favorable to the employer. As the California Employment Lawyers Association wrote in support of SB-1241: Most workers lack the resources to travel across the country — let alone around the world — to pursue an employment claim in another state or country. The problem is particularly acute for lower income workers and disabled workers. Those workers that do have the resources and ability to travel might well find that the protection that they had under California law does not exist, or is not as comprehensive, in the jurisdiction that will be deciding their dispute. [ . . . ] With regard to SB-1007, having a transcript of proceedings is important to a participant’s ability to appeal an adverse arbitration decision. As State Senator Bob Wieckowski stated in support of SB-1007: Consumers are frequently forced into binding arbitration if they purchase common goods or services. When they go into arbitration it is critical that they have a court reporter present to create an official record. This will protect their due process rights and provide a reviewing court with evidence of bias or misconduct if any occurs in the arbitration proceedings. The ability for a reviewing court to have evidence of bias or misconduct cannot be underscored enough. This Blog previously wrote about such a situation last month. Here. In that case, Royal Alliance Associates, Inc. v. Liebhaber, B264619 (Cal. Ct. App. Aug. 30, 2016), the Court of Appeals vacated an expungement award because, as the transcript of proceedings showed, the arbitrators improperly failed to allow counsel the opportunity to present testimony and evidence at the hearing. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.