What word that comes to mind when you hear the term “professional malpractice”? Medical? Legal? To be sure, doctors and lawyers are the more common professionals subject to malpractice claims. But, there are other professionals who can commit malpractice. These include accountants, architects, and engineers. Yet, not all professionals are subject to malpractice claims. In Gutterman v. Stark , 2017 NY Slip Op. 32618(U) (Sup.Ct. N.Y. County, Dec. 18, 2017) ( here ), a financial advisor learned, to his benefit, that he was not a professional for purposes of a malpractice claim. To put Gutterman in perspective, a brief summary of the law follows. Who is a Professional? Malpractice is the negligence of a professional toward a person for whom a service is rendered. Historically, a “professional” is a person engaged in an occupation generally associated with long-term educational requirements leading to an advanced degree, licensure evidencing qualifications met prior to engaging in the occupation, and control of the occupation by adherence to standards of conduct, ethics and malpractice liability. Santiago v. 1370 Broadway Assocs., LP , 264 A.D.2d 624, 625(1st Dept. 1999); see also Leather v. United States Trust Company of New York , 279 A.D.2d 311, 312 (1st Dept. Jan. 11, 2001); Matter of Rosenbloom v. State Tax Commn. , 44 A.D.2d 69, 71 (3d Dept. 1974). As noted, the occupations that traditionally fall within the definition of “profession” have been limited to such “learned professions” as the law, accountancy, architecture, and engineering. Gutterman v. Stark Background Gutterman arose out of an investment in an ambulatory care surgical facility. In early 2015, defendant Ilya Kogan (“Kogan”), a part-time employee of an asset management company (“Asset Manager”), referred plaintiffs Aharon Gutterman, MD and Aharon Gutterman MD PLLC (together, “Gutterman”) to an advisor (“Advisor”) at the Asset Manager about investing in surgical centers. In connection with the referral, Gutterman and the Advisor met at a Manhattan restaurant to discuss Gutterman’s interest in investing in an ambulatory surgery center (“ASC”). During their meeting, Gutterman claims that the Advisor falsely touted his experience and expertise in ASCs, and told Gutterman that he could “get it done” for him. Months later, the Advosor informed Gutterman of an investment opportunity to convert the offices of Luis A. Vinas (“Vinas”), a Florida plastic surgeon, into a surgical center where Vinas and other surgeons could operate. The Advosor, Kogan and Nicholas Monroy (“Monroy” and, together with the Advisor, Kogan, and the Asset Manager, the “Asset Management Defendants”) introduced Gutterman to Vinas for the purpose of forming a partnership to establish the ASC. In December 2015, Gutterman, Vinas, and the Asset Manager entered a Memorandum of Terms, which set forth the terms of their “efforts to expedite creation of new surgical facility in West Palm Beach.…” The proposed facility faced numerous regulatory hurdles, among which was Kogan and the Advisor's alleged lack of experience with ASC facilities. Gutterman claimed that if the Asset Management Defendants had the claimed experience or performed due diligence, circumstances upon which they relied, they would have known of the regulatory requirements that rendered the project unfeasible. Gutterman commenced the action on October 13, 2016 by summons with notice and filed a complaint on November 22, 2016, asserting eight causes of action, one of which (the third claim) was against the Advisor for malpractice. Service was made by overnight delivery and first-class mail, which the Court ruled failed to comply with the CPLR. The Asset Manager never appeared, and neither the Asset Manager nor the Advisor filed an answer. Gutterman moved for a default judgment, which the Court denied for failure to specify the cause of action forming the basis for the requested default. Thereafter, Gutterman refiled the motion, seeking a default judgment against the Advisor and the Asset Manager on Plaintiffs’ third, fourth, fifth, sixth, and seventh causes of action. The Court’s Ruling The Court denied the motion. Regarding the malpractice cause of action, the Court dismissed the claim because the Advisor, against whom the claim was brought, was not a “professional” for purposes of the claim: As to , the motion is denied as to the third cause of action for malpractice. The Complaint alleges that became the financial and investment advisor for Gutterman, but failed to use reasonable and proper skill in providing financial and investment advice and to properly manage account. Malpractice is professional misfeasance. Professional malpractice requires that a professional failed to perform services with due care and in accordance with the recognized and accepted practices of the profession. Professionals, in the context of professional malpractice, refers to the learned professions such as, architects, engineers, lawyers, and accountants. Financial advisors are not professionals. Citations and internal quotation marks and insertions omitted. Although the Court dismissed the malpractice claim, it found that Gutterman alleged sufficient facts that could give rise to a claim for breach of fiduciary duty. Consequently, the Court sua sponte granted leave to replead the claim accordingly: If, as alleged, Gutterman reposed confidence in and reasonably relied on superior expertise or knowledge, owed Gutterman fiduciary duties as his financial and investment advisor and as manager, through , of Gutterman’s invested funds. Allegations of self-dealing, conflict of interest, and failure to prudently advise Gutterman may give rise to a breach of fiduciary duty. Citations and internal quotation marks omitted. Takeaway Whether a person is a professional under the law matters. Among other reasons, it is relevant for statute of limitations purposes. Under CPLR 214(6), a claim for professional malpractice (other than medical malpractice) must be brought within three years of the wrongdoing. In making the limitations period three years, the New York Legislature sought to correct attempts to circumvent the statute by “allowing actions that were technically malpractice actions to proceed under a six-year contract statute of limitations.” Matter of Arbitration Between Kliment & McKinsey & Co. , 3 N.Y.3d 538, 541 (2004). Prior to the Legislature’s action, the courts “determined the appropriate statute of limitations in nonmedical malpractice actions based upon the proposed remedy instead of the theory of liability.” Id . (citations omitted). The courts reasoned that “liability would not have existed between the parties without the contractual relationship and that there was an implied agreement to perform professional services using due care.” Id . (citations omitted). With the amendment to the CPLR, the analysis changed. Thus, as the Court of Appeals observed, “ he pertinent inquiry is … whether the claim is essentially a malpractice claim.” Although the statute of limitations was not at issue in Gutterman , the decision nevertheless highlights the importance of understanding whether a person is a professional. For Gutterman, it meant dismissal of the claim – though, with leave to replead the claim as one for breach of fiduciary duty.

On December 12, 2017, the New York Court of Appeals resolved an ambiguity in Rule 908 of the Civil Practice Law and Rules, concerning whether the parties to a putative class action must give notice of a dismissal, discontinuance, or compromise to members of the class before the lower court certifies the action as a class action. In Desrosiers v. Perry Ellis Menswear, LLC , 2017 NY Slip Op 08620 ( here ), a divided court held that, where a complaint containing class allegations is dismissed, discontinued, or settled before the action has been certified by the court as a class action, notice of the impending dispositon must be provided to potential class members, even though the disposition is not binding on them. Desrosiers involved two unrelated actions under CPLR 908.  In the first action, Desrosiers v. Perry Ellis Menswear, LLC , the plaintiff, Geoffrey Desrosiers, brought a class action to recover wages from the defendant, Perry Ellis Menswear, LLC, that Desrosiers claimed should have been paid to him and those similarly situated. Desrosiers worked as an unpaid intern for Perry Ellis. In March 2015, Perry Ellis sent an offer of compromise to Desrosiers, which he accepted. On May 18, 2015, Perry Ellis moved to dismiss the complaint. By that date, the time within which Desrosiers was required to move for class certification pursuant to CPLR 902 had expired. Desrosiers did not oppose dismissal of the complaint, but filed a cross motion seeking leave to provide notice of the proposed dismissal to putative class members pursuant to CPLR 908. Perry Ellis opposed the cross motion, arguing that notice to putative class members was not required because Desrosiers had not moved for class certification within the required time. The Supreme Court dismissed the complaint but denied the cross motion to provide notice to putative class members. In the second action, Vasquez v. National Sec. Corp. , the plaintiff, Christopher Vasquez, brought a class action against the defendant, National Securities Corporation, for alleged minimum wage and overtime violations. Vasquez worked as a financial products salesperson at National Securities and filed a class action on behalf of himself and “all similarly-situated individuals.” The parties agreed to postpone a motion for class certification in order to complete pre-certification discovery. In February 2015, before Vasquez had moved for class certification, NSC made a settlement offer, which Vasquez accepted the following month. NSC thereafter moved to dismiss the complaint. Vasquez cross-moved to provide notice of the proposed dismissal to putative class members pursuant to CPLR 908. NSC opposed the cross motion, asserting that CPLR 908 applies only to certified class actions. The Supreme Court granted the cross motion to provide notice to putative class members and granted NSC’s motion to dismiss the complaint, but directed that the action would not be marked disposed until after notice had been issued. On appeal, in both cases, the Appellate Division, First Department held that the notice requirement of CPLR 908 applied despite the absence of a certified class.  In  Desrosiers , the court held that the notice requirement in CPLR 908 “is not rendered inoperable simply because the time for the individual plaintiff to move for class certification has expired,” and notice to putative class members of the compromise is “particularly important … where the limitations period could run on the putative class members’ cases following discontinuance of the individual plaintiff’s action.”  In  Vasquez , the First Department followed its ruling in  Avena v. Ford Motor Co. , 85 A.D.2d 149 (1st Dept. 1982).   Avena involved the settlement of a putative class action that did not release the claims of absent class members. 85 A.D.2d 149 (1st Dept. 1982). The settling parties contended that because absent class members were preserving all their claims, there was no need to send class members notice or review the compromise and dismissal for fairness. The First Department disagreed, holding that the necessity of notice and review followed from the existence of the class representatives’ fiduciary duties. Though the individual plaintiffs’ recovery, and lawyers’ fee was “in absolute terms … a modest amount” the settlement assured the fiduciaries of these results. Id . at 154. Meanwhile, “the other members of the class, left to struggle for themselves.” Id . Thus, the First Department held that notice was required even in the case of “a without prejudice (to the class) settlement and discontinuance of a purported class action before certification or denial of certification.” Id. at 152. The court emphasized the role of CPLR 908 in preventing abuse of the class action device: Clearly some control of settlement or discontinuance of a purported class action is necessary. The abuses which have developed incident to the beneficent widened availability of class actions and the potential for abuse in a private settlement even before certification are widely recognized. The requirement of notice to the class makes settlement more difficult, perhaps even impossible in some cases. But of course Rule 908 intends to make settlement of class actions somewhat more difficult as part of the price of preventing abuse. And by the very act of asking for court approval, which would otherwise not be necessary, the parties recognize that such settlements are subject to greater control and thus more difficult than the settlement of a purely individual lawsuit. Id. at 153. The First Department further noted the role that objectors would play in any hearing on the settlement’s fairness and the importance of notice in bringing contrary points of view to the court considering a settlement: In our adversary system of justice the court must rely on adversary attorneys to produce the necessary facts. But here, without some notice to the outside world and to possible other members of the class and their representatives (or at least the appointment of a special guardian), who is to find and present to the court considerations that may cast doubt upon the agreement of the attorneys for defendant and for the named plaintiffs for a settlement without notice? Id. at 155. In each case, the First Department granted the defendant leave to appeal to the Court of Appeals, certifying the question whether its order was properly made. The Court of Appeals affirmed the ruling in both cases. The Court of Appeals Ruling The Court found the language in CPLR 908 to be ambiguous, noting that the phrase “class action” had multiple meanings and no clear legislative intent on which to rely: The text of CPLR 908 is ambiguous with respect to this issue. Defendants argue that the statute’s reference to a “class action” means a “certified class action,” but the legislature did not use those words, or a phrase such as “maintained as a class action,” which appears in CPLR 905 and 909. Plaintiffs assert that an action is a “class action” within the meaning of the statute from the moment the complaint containing class allegations is filed, but the statutory text does not make that clear. Similarly, the statute’s instruction that notice of a proposed dismissal, discontinuance, or compromise must be provided to “all members of the class” is inconclusive. Defendants contend that there are no “members of the class” until class certification is granted pursuant to CPLR 902 and the class is defined pursuant to CPLR 903. Yet the legislature did not state that notice should be provided to “all members of the certified class,” or “all members of the class who would be bound” by the proposed termination, or some other phrase that would have made the legislature’s intent clear. “ urning to other principles of statutory interpretation and sources beyond the statutory text itself to discern the intent of the legislature,” such as the former version of Rule 23 of the Federal Rules of Civil Procedure, on which CPLR Article 9 was modeled, and which “was virtually indistinguishable from the current text of CPLR 908,” the Court determined that these sources supported the requirement of a pre-certification class notice of settlement, dismissal or discontinuance. The majority also drew a distinction between CPLR 908 and the current version of Rule 23(e). Rule 23 was amended to provide that a district court is required to approve settlements only in cases where there is a “certified class” and that notice must be given only to class members “who would be bound” by the settlement. In contrast, CPLR 908 has not been so amended, despite proposals by the New York City Bar Association and scholarly criticisms of the rule. The Court further considered the First Department’s decision in  Avena , “the only appellate-level decision to address this issue.” It put a lot of emphasis and weight on the fact that “no other department of the Appellate Division ha expressed a contrary view” of CPLR 908, the Court “never overruled Avena or addressed” the issue, and the legislature had not “amended CPLR 908 in the decades since Avena ha been decided.” The majority further found that the legislature’s refusal to amend CPLR 908 since  Avena  indicated that the First Department had correctly ascertained the legislature’s intent. Finally, the majority pointed to policy considerations, including ensuring that settlements are free from collusion and that absent class members are not prejudiced. The majority dismissed any concerns about practical difficulties that could arise from this decision, claiming that they were best addressed by the legislature, not the courts. Any practical difficulties and policy concerns that may arise from Avena’s interpretation of CPLR 908 are best addressed by the legislature, especially considering that there are also policy reasons in favor of applying CPLR 908 in the pre-certification context, such as ensuring that the settlement between the named plaintiff and the defendant is free from collusion and that absent putative class members will not be prejudiced. The balancing of these concerns is for the legislature, not this Court, to resolve. Citations omitted. The dissent took the majority to task for what it described as an unwarranted reading of the rule in light of the overall context of the class action provisions in Article 9 of the CPLR. In their view, the fact that the plaintiffs had never moved for, let alone received, a ruling certifying the action as a class action meant that the case was not a class action at all. “In each of the actions here,” they said, “plaintiffs did not comply with the requirements under article 9 of the CPLR that are necessary to transform the purported class action into an actual class action, with members of a class bound by the disposition of the litigation.” Responding in particular to the plaintiff’s contention that a case becomes a “class action” from the moment it is filed putatively as such, the dissent said: There is nothing talismanic about styling a complaint as a class action. Indeed, any plaintiff may merely allege that a claim is being brought “on behalf of all others similarly situated.” However, under article 9 of the CPLR, the court, not a would-be class representative, has the power to determine whether an action “brought as a class action” may be maintained as such, and may do so only upon a showing that the prerequisites set forth in CPLR 901 have been satisfied. Takeaway As the dissent observed, “ here is nothing talismanic about styling a complaint as a class action.” Notwithstanding, the filing of a class action complaint can impact the rights of the plaintiff and putative class members, especially before the filing of a certification motion. For example, absent class members may have statute of repose issues depending upon the claims asserted in the class action complaint. California Public Employees’ Retirement Sys. v. ANZ Sec., Inc. , 137 S. Ct. 2042 (2017) (“CalPERS”). In CalPERS , the Supreme Court held that the class action “tolling” principle set forth in American Pipe & Construction Co. v. Utah , 414 U.S. 538 (1974), does not apply to the three-year statute of repose under the Securities Act of 1933. This Blog discussed the CalPERS decision here . Although the Supreme Court specifically addressed the statute of repose set forth in the Securities Act, the Court’s reasoning indicates that tolling under American Pipe does not apply to a statutory repose period, unless the particular statute “itself contains an express exception.” Id . at 2050; see also id . at 2050 (“In light of the purpose of a statute of repose, the provision is in general not subject to tolling.”), 2051 (“statutes of repose are not subject to equitable tolling”), 2055 (“Because § 13’s 3-year time bar is a statute of repose, it displaces the traditional power of courts to modify statutory time limits in the name of equity.”). The majority’s ruling also ensures that, notwithstanding the costs of providing notice to absent class members, which may be an impediment to pre-certification dispositions, absent class members will be provided with an opportunity to present arguments as to the fairness and reasonableness of the settlement that might not be made by the parties. Whether the legislature takes up the issue remains to be seen. This Blog will update any developments on the legislative front, and post commentary about decisions of interest involving CPLR 908.

Should Your Business Contracts Contain Mandatory Arbitration Clauses? Mandatory arbitration clauses have increased in popularity in recent years and are now part of most business contracts. While arbitration clauses are not ideal for all situations, this method of dispute resolution can provide benefits to both businesses and customers alike.  What is an Arbitration Clause? Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. A mandatory arbitration clause is a contractual provision in which one party requires the other to arbitrate their disputes.  Such clauses are often found in a contract's "terms of agreement," including those used for employment, insurance, home-building, car loans and leases, credit cards, retirement accounts, investment accounts, and nursing facilities, among others. While the exact terms and conditions differ depending upon each business, most mandatory arbitration clauses limit the rights of a party to appeal an arbitral award and prevent claimants from pursuing their claims as a class action. Further, some mandatory arbitration clauses impose a cap on damages and require a non-disclosure agreement to be signed. Arbitration Clauses – The Upside and Downside There are advantages and disadvantages associated with the arbitration of disputes.  Below are some of the advantages: Since the parties agree to resolve their disputes by arbitration, the parties are indicating their confidence that the arbitrator, the rules governing the proceeding, and the forum in which the arbitration will take place are, and will be, impartial and fair. A dispute in arbitration typically gets resolved sooner than a litigation in court. Arbitration is usually less expensive than litigation in a court. Unlike a trial, arbitration is a private procedure.  Thus, if the parties want privacy, then the dispute and the resolution can be kept confidential. There are limited opportunities for either side to appeal an arbitral award. This gives finality to the resolution of the dispute that is not often present with a judgment after trial. There are, however, some disadvantages to arbitration, which are discussed in the next section. Incomplete Justice? A “one-size-fits-all” policy, mandating arbitration for all disputes, unnecessarily shoehorns disputes that would otherwise be more appropriate for the court system. Critics of mandatory arbitration clauses point to the incomplete justice that is sometimes administered in the name of efficiency and finality.  A few of the criticisms are discussed below. First, the agreement to arbitrate is not negotiated. Mandatory arbitration allows one party (typically the business or employer) to force the other party (usually the customer or employee) to use arbitration for dispute resolution. In most instances, the consumer or employee is unaware they have agreed to arbitrate their disputes and are, therefore, unaware of  the rights they have given up . Second, if arbitration is binding, both sides give up their right to an appeal. That means there is no opportunity to correct an erroneous decision. Third, if the matter is complex, but the amount in controversy is modest, then the fees and expenses imposed by the arbitrator and the arbitral forum may make arbitration uneconomical. Finally, the rules of evidence may prevent some evidence from being considered by a judge or a jury, but may nevertheless be considered by an arbitrator. Thus, an arbitrator's decision may be based on evidence that a judge or jury would not consider at trial. Limitation of Rights? In addition to losing the right to appeal any unfair judgments, mandatory arbitration clauses also limit other rights. Typically, the complaining party has a more limited access to evidence and witnesses.  Moreover, mandatory arbitration clauses can limit the public’s ability to expose corporate misbehavior -- that is, the deterrent effect that litigation can impose on other companies engaging in the same or similar misconduct.  Limiting Class Action Lawsuits? Mandatory arbitration clauses often include a provision that prohibits claimants from litigating their claims as a class action. In a class action, the claimant brings an action on behalf of a group of similarly situated people with damages that were caused by the alleged wrongdoer.  Class action lawsuits provide legal redress for people who, on their own, would likely not bring because their claim is too small to litigate on their own. Class action waiver clauses are used by businesses and employers to reduce the risk of collective or class action litigation.   Takeaway The use of mandatory arbitration clauses in business and consumer contracts has grown in recent years. In most cases, consumers are not aware of mandatory arbitration clauses, because they are located in the fine print within a user agreement.  Many critics of mandatory arbitration consider such clauses to be unfair. Despite the perceived unfairness of requiring a party to arbitrate a dispute as a condition of the transaction or employment, recent Supreme Court cases have upheld the right of companies to insert mandatory arbitration clauses in their agreements with other companies or consumers. Perhaps unsurprisingly, mandatory arbitration clauses have become the latest weapon in the political arena. Responding to the Obama administration's ban on the use of mandatory arbitration clauses in financial contracts, the Trump administration has now reversed the ban. With the legally-imposed cap on mandatory arbitration clauses lifted, this popular form of alternative dispute resolution is likely to grow.

A recent blog post entitled: “ Appellate Division, Second Department Tells Foreclosing Residential Lender to ‘SHOW ME THE EVIDENCE ,’” cautioned foreclosing mortgagees that evidence in admissible form must be submitted to the court to demonstrate compliance with the many statutory provisions that must be followed to ensure a successful foreclosure action. The Second Department in U.S. Bank National Association v. Brody , decided on December 20, 2017, reiterates that foreclosing mortgagees must submit appropriate proof in admissible form in order to prevail on a summary judgment motion in a residential mortgage foreclosure action. In the Brody complaint, the plaintiff alleged that it was the current holder of the note secured by the mortgage being foreclosed. Brody, in his answer, alleged that the plaintiff did not have standing to bring the subject foreclosure action. The supreme court in Brody, inter alia , granted plaintiff’s motion for summary judgment, but the Second Department, “modified” the lower court’s decision by denying same. The Brody Court explained that a foreclosing mortgagee makes its prima facie case by the production of the note, the mortgage and evidence of default. The Court did note, however, that “when a defendant places standing in issue, the plaintiff must prove its standing in order to be entitled to relief.” (Citations omitted.) The Brody Court further recognized that standing is conferred on a plaintiff in a mortgage foreclosure action “when it is the holder or assignee of the underlying note at the time the action is commenced.” (Citations omitted.) A “holder,” according to the Brody Court, “is the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession. (Citations and quotation marks omitted.) While the Court found that the Brody plaintiff produced the note, mortgage and proof of default, it also found that standing to bring the action was not sufficiently established. Because the note was “endorsed in blank”, standing must be established “by demonstrating that the original note was physically delivered to it prior to the commencement of the action.” (Citations omitted.) Initially, plaintiff attempted to establish standing through the affidavit of an officer of the plaintiff’s servicing agent, merely stating that the plaintiff was in possession of the note. A subsequent affidavit of another officer of the plaintiff’s servicing agent asserted that: the servicing agent was appointed in 2014; and, that based on her familiarity with the servicing agent’s business records, plaintiff had possession of the note in 2006. The Brody Court, however, found the servicing agents’ affidavits to be insufficient. First, the subsequent servicing agent’s affidavit “failed, among other things, to explain how a review of the business records of a servicing agent appointed in 2014 could prove that plaintiff had obtained physical possession of the note more than seven years earlier.” Thus, the Court concluded, neither affidavit provided “sufficient factual details to establish the physical delivery of the note to the plaintiff prior to the commencement of action, nor the foundational knowledge required to admit such factual details under the business records exception to the hearsay rule.” (Citations omitted.) Thus, the Brody Court held that the plaintiff’s motion for summary judgment and for the appointment of a referee should have been denied “regardless of the sufficiency of Brody’s opposition papers.” (Citations omitted.) TAKEAWAY Presumably, the submission of more detailed affidavits from individuals with first-hand knowledge of the facts and circumstances surrounding plaintiff’s acquisition of the note and its possession of the note at the time the action as commenced, would have been sufficient to establish standing, defeat Brody’s affirmative defense and support the grant of summary judgment in favor of the foreclosing mortgagee. As a result of the failure of plaintiff’s proof, the parties may have to go through discovery and trial; which could be costly. Courts continue to force parties to lay bare their proof if they expect to be granted summary judgment, notwithstanding the sufficiency of the opposition papers. In cases such as Brody , it is critical that the foreclosing mortgagee presents to the court in admissible form, all of the information necessary to justify the requested relief. Failure to do so can lead to otherwise costly and time-consuming litigation.

What facts must you plead to pursue a false claims case? In , the United States Court of Appeals for the Sixth Circuit (Sixth Circuit) reaffirmed the “stringent” pleading requirement for cases brought under the False Claims Act. The pleading standard comes from the Federal Rules of Civil Procedure 9(b) which requires the plaintiffs to plead their case with “particularity.” In , the Sixth Circuit held that the “particularity” standard for litigating complex schemes or fraud under the False Claims Act could be satisfied by providing proof of a single representative sample - from start to finish-  of the alleged fraud. The high bar set for plaintiffs seeking to bring a claim can reduce costly litigation and discovery periods for some plaintiffs with weak cases. However, critics of the heightened pleading standard point to a lack of available information and facts that could prevent The case in involves a lawsuit against a pharmaceutical company for allegedly encouraging medical professionals to prescribe the antipsychotic drug Abilify for off-label uses.  In short, the plaintiffs in the case allege that the pharmaceutical company’s promotion of Abilify for off-label uses caused pharmacies to submit “false claims” to the government when the government reimbursed the company for the price of the medication. Pleading a Complex Scheme With Particularity The plaintiff’s case rests upon what has become a popular legal approach to litigating False Claims cases - a “chain” or sequence of events that, taken as a whole, constitute a violation of the False Claims Act. In , the Plaintiff first alleges that the pharmaceutical company promoted Abilify for off-label uses. Then, physicians prescribed the drug for off-label uses. After that, the patients filled their Abilify prescriptions for these off-label uses. Finally, pharmacies received government reimbursement for the prescription cost. The Sixth Circuit responded by dismissing the case. According to the Sixth Circuit, in order to plead a complex scheme, the plaintiff must describe “each step with particularity.” This standard requires a plaintiff to “adequately allege the entire chain - from start to finish - to fairly show defendants caused false claims to be filed.” While the pleading standard is high, the Sixth Circuit notes the high burden would be satisfied if the Plaintiffs were to provide a single representative sample. Therefore in order to be successful, the Sixth Circuit required: proof that a specific prescription for Abilify that was prescribed for an off-label reason and then filled by a pharmacy that was later reimbursed by the government. Personal Knowledge Exception There is an exception for someone with “personal knowledge” that a false claim was submitted and later paid by the government. Because the Plaintiffs did not allege they had any personal knowledge of the fraud, the Sixth Circuit said the “personal knowledge” exception did not apply in this case The Sixth Circuit’s holding in Ibanez will almost certainly blunt future litigation under the False Claims Act for off-label prescriptions. Acknowledging the obvious effect of the high pleading standards, the Sixth Circuit described the False Claims Act as “an awkward vehicle” for litigating off-label drug prescriptions. If you are aware of a violation of the False Claims Act and would like competent advice on how to move forward, contact the experienced attorneys at Freiberger Haber LLP to ensure you obtain the rewards that you are entitled to.

Since the late 1970s, federal employees have enjoyed protection from retaliatory acts in response to the reporting of illegal or other wrongful conduct by their employers. Such protections were provided in the Civil Service Reform Act of 1978. Since that time, Congress has expanded the protections for federal employees in the Whistleblower Protection Act of 1989 (“WPA”) and the Whistleblower Protection Enhancement Act of 2012 (“WPEA”). Whistleblower Protection Act Of 1989 To trigger the anti-retaliation protections of the WPA, an employee must demonstrate that: (1) a “personnel action” was taken, (2) because of a “protected disclosure” ( i.e. , whistleblowing), (3) which was made by a “covered employee.” 5 U.S.C. § 2302(b)(8). If the employee meets the foregoing requirements, then the burden shifts to the agency to prove by clear and convincing evidence – which is a more difficult standard to satisfy than the preponderance of the evidence standard – that it would have taken the same action against the employee regardless of whether the employee engaged in protected activity ( i.e. , reported concerns about illegal or improper activity). 5 U.S.C. 1214(b)(4)(B)(ii).  When determining whether an agency has satisfied its burden, the Merit Systems Protection Board (“MSPB” or the “Board”) considers the following factors, among others: “the strength of the agency’s evidence in support of its personnel action; the existence and strength of any motive to retaliate on the part of the agency officials who were involved in the decision; and any evidence that the agency takes similar actions against employees who are not whistleblowers but who are otherwise similarly situated.” See Carr v. Soc. Sec. Admin. , 185 F.3d 1318, 1323 (Fed. Cir. 1999) (citations omitted). The Elements of a Claim of Retaliation Under The WPA Personnel Actions Under the WPA, an agency may not “take or fail to take, or threaten to take or fail to take, any personnel action against any employee or applicant for employment because of” whistleblowing activity ( e.g. , exercising any appeal, complaint, or grievance right granted by law, rule, or regulation; testifying for others or lawfully assisting others in any such appeal, complaint, or grievance right; cooperating with or disclosing information to an agency Inspector General or the Special Counsel; or refusing to obey an order that would be in violation of law). The WPA defines the term “personnel action” to include the following categories of activity: an appointment; a promotion; an action under Chapter 75 of Title 5 or other disciplinary or corrective action ( g. , a demotion; a reduction in pay or grade; a furlough of up to 30 days; removal from federal employment; a suspension; placement on administrative leave; a letter of warning; a reduction in force; and/or a reprimand (either oral or in writing)); a detail, transfer, or reassignment; a reinstatement; a restoration; a reemployment; a performance evaluation (including a performance improvement plan); a decision concerning pay, benefits, or awards, or concerning education or training if the education or training may reasonably be expected to lead to an appointment, promotion, performance evaluation, or other action; a decision to order psychiatric testing or examination; and any other significant change in duties, responsibilities, or working conditions. Certain actions under the WPA are not considered to be personnel actions. These include an arrest by an agency police officer, comments directing an employee to “find another job,” and denying or revoking an employee’s security clearance. Also, opening an investigation into an employee’s conduct is not considered to be a personnel action. However, when “an investigation is so closely related to the personnel action” that the investigation “could have been a pretext for gathering evidence to retaliate,” then the agency must demonstrate by clear and convincing evidence “that the evidence would have been gathered absent the protected disclosure.” If the agency fails to meet this burden, “then the will prevail on his affirmative defense” of whistleblower retaliation. Russell v. Dep’t of Justice , 76 M.S.P.R. 317, 324 (1997).  In that event, the employee may seek compensation for defending against the claim, including recovery of fees, costs, and/or damages reasonably incurred due to the improper investigation. 5 U.S.C. § 1214(h). Pleading Actual or Threatened Personnel Action in Response to Whistleblowing To establish a prima facie case of retaliation for whistleblowing ( i.e. , exercising an employee’s disclosure rights under Section 2302(b)(9) of the WPA), an employee must prove the following by a preponderance of the evidence: (1) the employee, or someone identified with the employee, engaged in a protected activity; (2) the agency took, failed to take, or threatened to take a personnel action ( note : an action recorded on a Standard Form 50 Notification of Personnel Action (SF-50) or SF-52 (Request for Personnel Action) is generally considered to be sufficient proof of personnel action); (3) the official responsible for the personnel action knew about the employee’s protected activity; and (4) a causal connection existed between the protected activity and the personnel action. The Employee Was Engaged in Protected Activity Under the WPA, the employee must be engaged in protected activity – i.e. , whistleblowing. Such activity can include reporting “a violation of any law, rule, or regulation” or “gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety.” 5 U.S.C. § 2302(b)(8)(A). The Employer Knew That The Employee Was Engaged Protected Activity Under the WPA, the employee must prove that individuals within the agency responsible for the decision to engage in the personnel action knew about the employee’s protected disclosures. An employee can meet this requirement by showing either actual or constructive knowledge. An employee may prove actual knowledge using direct or circumstantial evidence and constructive knowledge where an official with actual knowledge influenced the deciding official. Causation An employee must show a causal connection between the protected activity and the retaliatory personnel action. An employee can show causation in one of two ways: the knowledge–timing test; or circumstantial evidence. To satisfy the knowledge–timing test, an employee must prove: (1) the official who took the personnel action knew of the protected disclosure; and (2) the personnel action occurred within a period of time such that a reasonable person could conclude that the protected disclosure was a contributing factor in the personnel action. If the employee fails to demonstrate both knowledge and timing, then the employee may present circumstantial evidence to show that no other factor influenced the outcome of the personnel action. Marano v. Dep’t of Justice , 2 F.3d 1137, 1143 (Fed. Cir. 1993) (holding that “the employee only needs to demonstrate by preponderant evidence that the fact of, or the content of, the protected disclosure was one of the factors that tended to affect in any way the personnel action.”). Protected Disclosures As noted, any disclosure of information that a covered employee reasonably believes evidences “a violation of any law, rule, or regulation” or evidences “gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety” is protected under the WPA, as long as the disclosure is not prohibited by law or required to be kept secret by Executive Order in the interest of national defense or foreign affairs. In the WPEA, Congress added that a disclosure is protected even if the disclosure is made to a person, including a supervisor, who participated in the alleged wrongdoing; revealed previously disclosed information; is made by an employee who may have other motives for making the disclosure; is made while the employee was off duty; is about events that occurred a long time ago; or is made during the employee’s normal course of duties, provided the employee can show that the personnel action was taken “in reprisal for” the disclosure. Moreover, any disclosure made to the Special Counsel or to the Inspector General of an agency or another employee designated by the head of the agency to receive such disclosures, which the employee reasonably believes evidences “a violation of any law, rule, or regulation,” or evidences “gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety” is protected. Notably, the employee need not prove that the matter disclosed was unlawful or constituted gross mismanagement, a gross waste of funds, an abuse of power, or a danger to public health or safety. Rather, the employee need only show that a person standing in his/her shoes would reasonably believe, given the information available to him/her, that the disclosure evidences one of these types of wrongdoing. See Lachance v. White , 174 F.3d 1378, 1380 (Fed. Cir. 1999) (noting the test is based on the “reasonable belief” of the employee and stating that the proper test is whether “a disinterested observer with knowledge of the essential facts known to and readily ascertainable by the employee reasonably conclude that the actions of the government evidence the conduct described in 5 U.S.C. § 2302(b)”) (internal quotation marks and citations omitted). Gross Mismanagement, Gross Waste of Funds, Abuse of Authority, and Substantial and Specific Danger To Public Health Or Safety Defined Gross Mismanagement Gross mismanagement is “a management action or inaction which creates a substantial risk of significant adverse impact upon the agency’s ability to accomplish its mission.” Kavanagh v. M.S.P.B. , 176 F. App’x 133, 135 (Fed. Cir. Apr. 10, 2006). Gross Waste of Funds A “gross waste of funds” is defined as a “more than debatable expenditure that is significantly out of proportion to the benefit reasonably expected to accrue to the government.” Van Ee v. EPA , 64 M.S.P.R. 693, 698 (1994). Abuse of Authority An abuse of authority is an “arbitrary or capricious exercise of power by a federal official or employee” that harms the rights of any person or that personally benefits the official/employee or their preferred associates.” Elkassir v. Gen. Servs. Admin. , 257 F. App’x 326, 329 (Fed. Cir. Dec. 10, 2007). Substantial and Specific Danger to Public Health or Safety To determine whether the disclosed harm was “specific,” the Board looks to the likelihood that the harm will result, as well as when the harm may occur. Chambers v. Dep’t of the Interior , 515 F.3d 1362, 1369 (Fed. Cir. 2008). For example, “ f the disclosed danger could only result in harm under speculative or improbable conditions, the disclosure” would “not enjoy protection.” Id . Similarly, a “revelation of a negligible, remote, or ill-defined peril that does not involve any particular person, place, or thing, is not protected.” Sazinski v. Dep’t of Housing & Urban Dev. , 73 M.S.P.R. 682, 686 (1997). In short, the disclosure of a danger only potentially arising in the future is not a protected disclosure. Chambers , 515 F.3d at 1369; Herman v. Dep’t of Justice , 193 F.3d 1375, 1379 (Fed. Cir. 1999). To determine whether the disclosed harm was “substantial,” the Board looks at the nature of the harm ( i.e. , the potential consequences). The disclosure of trivial or de minimis matters are not protected.   Herman v. Dept. of Justice , 193 F. 3d 1375, 1379 (Fed. Cir. 1999). Covered Employees Generally, current and former employees or applicants for employment to positions in the executive branch of government and the Government Printing Office, in both the competitive and the excepted service, as well as positions in the Senior Executive Service, are considered covered employees. The WPA does not apply to federal workers (1) employed by the U.S. Postal Service or the Postal Rate Commission, the Government Accountability Office, the Federal Bureau of Investigation, the Central Intelligence Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, the National Security Agency; (2) any executive entity that the President determines primarily conducts foreign intelligence or counter-intelligence activities; (3) positions that have a “confidential, policy-determining, policy-making, or policy-advocating character”; and (4) positions exempted by the President based on a determination that it is necessary and warranted by conditions of good administration. Damages Available Under the WPA If an employee prevails on his/her claim, he/she can recover lost wages, attorney’s fees, equitable relief ( e.g. , reinstatement, rescinding a suspension, or modifying a performance evaluation), and compensatory damages (including, damages for emotional distress). The Forums in Which a Whistleblower Claim May Be Asserted Under the WPA, there are three general forums in which a whistleblower may seek protection: (1) an appeal to the MSPB; (2) actions instituted by the Office of Special Counsel (“OSC”); and (3) individual rights of action (“IRA”). Notably, an aggrieved employee adversely affected by a prohibited personnel action is limited to only one of the foregoing forums. Once the employee selects the forum in which to proceed, the other two options are no longer available. Aside from the statutory provisions of the WPA, the defense or claim of retaliation for whistleblowing might also be raised in a grievance proceeding initiated by an employee pursuant to a grievance procedure that was negotiated through collective bargaining between the agency and the employee’s union. However, the employee cannot file a union grievance and an MSPB appeal or OSC complaint over the same act of retaliation. Appeals to the MSPB The MSPB is authorized to hear and rule on appeals by employees regarding agency actions affecting the employee and that are appealable to the MSPB by law, rule, or regulation. The types of agency actions against employees that are appealable to the MSPB, and in which an employee may raise the defense of retaliation for whistleblowing as a prohibited personnel action, include adverse actions against the employee for “such cause as will promote the efficiency of the service” (generally referred to as conduct-based adverse actions) (5 U.S.C. § 7513(a)), and performance-based adverse actions against employees for “unacceptable performance.” 5 U.S.C. § 4303(a). In such appeals, an agency’s decision and action will not be upheld if the employee “shows that the decision was based on any prohibited personnel practice described in section 2302(b) of this title.” 5 U.S.C. § 7701(c)(2)(B). Actions by the Office of Special Counsel The OSC is responsible for receiving allegations of prohibited personnel practices and to investigate such allegations, 5 U.S.C. § 1212(a)(2), as well as to conduct an investigation of possible prohibited personnel practices on its own initiative, absent any allegation. 5 U.S.C. § 1214(a)(5). The Special Counsel has several avenues available through which to pursue allegations, complaints, and evidence of retaliation for whistleblowing activities, including (1) requiring agency investigations and agency reports concerning actions the agency is planning to take to rectify those matters referred (5 U.S.C. § 1213(c)); (2) seeking an order for “corrective action” by the agency before the MSPB (5 U.S.C. § 1214(b)(2)); (3) seeking “disciplinary action” against officers and employees who have committed prohibited personnel practices (5 U.S.C. § 1215(b)); (4) intervening in any proceedings before the MSPB, except that in cases where an individual has brought an IRA under Section 1221 or an appeal to the MSPB under Chapter 77, the OSC must first obtain the individual’s consent (5 U.S.C. § 1212(c)); and (5) seeking a stay from the MSPB for any personnel action pending an investigation. 5 U.S.C. § 1212(b)(1). If an employee chooses to make a claim for whistleblower retaliation with the OSC, then the OSC must investigate the allegations and render a decision within 240 days of receipt of the complaint as to whether there are reasonable grounds to believe that a prohibited personnel action took place. If the OSC rules against the employee, then the employee can seek relief by appealing to the MSPB 60 days after the OSC closes its investigation or 120 days after filing a complaint with the OSC. Individual Right of Action In an IRA appeal, the employee is subject to a personnel action and claims that the action was taken because of whistleblowing. Under this option, the employee has an independent right to seek review of a Section 2302(b)(8) whistleblower retaliation claim at the MSPB, after exhausting administrative remedies at OSC. The IRA appeal option is available after 120 days have passed since the whistleblower filed a complaint with OSC, and an IRA appeal must be filed within 65 days of receiving an IRA rights letter from OSC. Section 101(b) of the WPEA expands the IRA right to include most 2302(b)(9) reprisal claims, including: retaliation for filing a whistleblower appeal; retaliation for assisting an individual in the exercise of an appeal, complaint or grievance right; retaliation for cooperating with or disclosing information to the Inspector General of an agency, or the Special Counsel; or retaliation for refusing to obey an order that would require the individual to violate a law.

There is an old idiom that says: “the devil is in the details.” It generally means that although something may seem simple, the details are complicated and likely to cause problems. This aptly describes pleading a fraud claim under New York law. To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). The allegations must be stated with particularity to satisfy CPLR 3016(b). Id . Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR 3016 (b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Recently, the New York Appellate Division, First Department, had the opportunity to apply these principles. Fried v. Lehman Brothers Real Estate Associates III, L.P. Background The plaintiffs were each limited partners in one of eleven Delaware limited partnerships (the “Partnerships”) that collectively operated under the name Lehman Brothers Real Estate Partners III (“LBREP III”). The Partnerships were formed generally for the purpose of making investments in real estate assets. Beginning in the fall of 2007, the Partnerships distributed private placement memoranda (“PPM”) to prospective investors. The PPMs generally described the investment opportunity and the Partnerships’ intended investment strategy, outlined the process for selecting investment properties, and set forth the Partnerships’ management structure. The PPMs also contained comprehensive risk disclosures and warnings. Prior Proceedings and the New York Supreme Court Action In October 2009, the plaintiffs filed an action under the federal securities laws against the defendants in federal court to recover the losses they sustained from their investment in the Partnerships. In March 2011, the district court dismissed the complaint. Among other things, the court held that the plaintiffs failed to plead scienter with particularity.  That decision was affirmed by the Second Circuit in 2012. In May 2011, the plaintiffs commenced the action in state court. One month later, the defendants removed the action to federal court. Ultimately, the case was remanded back to state court. The plaintiffs filed an amended complaint in February 2015, alleging, among other things, fraud in connection with the investment in the Partnerships. The defendants moved to dismiss, contending that, inter alia , the plaintiffs failed to plead fraud (and its elements) with the particularity demanded under CPLR 3016 (b). The Supreme Court granted the motion.  The plaintiffs appealed. The First Department Ruling In a pithy decision, the First Department unanimously affirmed the Supreme Court’s dismissal of the fraud claim. Fried v. Lehman Brothers Real Estate Associates III, L.P. , 2017 NY Slip Op. 08638 (1st Dept. Dec. 12, 2017). ( Here .) In doing so, the Court explained that the plaintiffs failed to plead fraud with particularity, and specifically, the scienter (or, intent to deceive) element of the claim: The first and second causes of action, alleging fraudulent misrepresentation and gross negligence in misrepresentation, failed to satisfy the pleading requirements of CPLR 3016(b). The allegations of scienter here were not pleaded with the requisite particularity, but are conclusory, and scienter may not reasonably be inferred from the circumstantial evidence relied on by plaintiffs. Internal citations omitted. Takeaway Business and commercial litigation often involve allegations of fraud. As noted, such claims must be alleged with particularity – remember, the devil is in the details. The failure to do so, as the plaintiffs in Fried learned, will result in the dismissal of the claim.

Certain issues regarding Labor Law §240 were discussed in “Be Helpful at Your Own Peril” , an article posted on this Blog on October 20, 2017. Again, Labor Law § 240 was enacted, inter alia , to protect construction workers from height related injuries.  In discussing the purpose behind Labor Law § 240, the New York Court of Appeals stated: The legislative purpose behind this enactment is to protect workers by placing ultimate responsibility for safety practices at building construction jobs where such responsibility actually belongs, on the owner and general contractor (1969 NY Legis Ann, at 407), instead of on workers, who are scarcely in a position to protect themselves from accident. ( Rocovich v. Consolidated Edison Company , 78 N.Y.2d 509, 513 (1991) (citations and internal quotation marks omitted).)  An owner, among others, can be held strictly liable for injuries resulting from, and has a non-delegable duty to comply with, Labor Law § 240.  As the Rocovich Court stated: It is settled that section 240(1) is to be construed as liberally as may be for the accomplishment of the purpose for which it was thus framed.  Thus, we have interpreted the section as imposing absolute liability for a breach which has proximately caused an injury. Negligence, if any, of the injured worker is of no consequence. In furtherance of this same legislative purpose of protecting workers against the known hazards of the occupation , we have determined that the duty under section 240(1) is nondelegable and that an owner is liable for a violation of the section even though the job was performed by an independent contractor over which it exercised no supervision or control. ( Rocovich, 78 N.Y.2d at 513 (citations and internal quotation marks omitted) (emphasis in original).) A judicial determination that a personal injury case falls within the purview of Labor Law § 240 (as opposed to simple negligence) can have significant implications on a commercial property owner (and, under certain circumstances on a residential property owner as discussed in “Be Helpful at Your Own Peril” ) as well as a contractor. Hoyos v. NY-109 Avenue of the Americas, LLC , 2017 NY Slip Op 08717, decided by the First Department on December 14, 2017, and in which summary judgment was granted to the plaintiff on his Labor Law § 240 claim, expanded the reach of Labor Law § 240 by broadly defining the perimeter of a construction site.   The Owner in Hoyos owned a 42-story commercial office building (the “Building”) in Manhattan. The plaintiff in Hoyos was a painter employed by a subcontractor involved with renovations (the “Project”) for MetLife, a tenant on several floors of the Building. As is frequently the case, the construction workers were not permitted to enter the Building from the main entrance.  Pursuant to the operative lease, certain construction project “rules and regulations set forth standards and procedures that had to be followed so as to insure that other tenants in the building are not inconvenienced by the construction.”  The lease required, inter alia , “that all workers of the various contractors had to use the loading dock and freight elevator at all times”, and that none of the contractors “set[] up ‘shop’ outside a particular tenant’s area, unless the owner approved of an alternate ‘shop’ area”….” Plaintiff, Hoyos, sustained injuries after falling off an elevated and “overcrowded” loading dock, while standing in line with other construction workers to sign a security log and obtain a pass allowing him to enter the building where he was painting.  The loading dock was four feet high and had no guardrails, ropes or any other indication of “where its platform ended and the ledge began.”  The dock was located in the service entrance of the Building and was the only designated point of ingress for the construction workers working on the Project. In determining that Labor Law § 240 was applicable despite the fact that Hoyos “was not ‘working’ at the time of the accident and he was in his street clothes”, the Hoyos Court found: Here, plaintiff, who had been working on this construction project for a month, was following the rules and regulations of the owner and building protocol that he wait outside a closed, gated service entrance until it was opened by the building’s security staff.  Once the gate was opened, and after proceeding through the gate, he could not travel directly upstairs to whichever floor he was assigned to paint.  He was required to line up with other construction personnel and use the crowded, elevated loading dock to gain access into the building at the start of each workday and throughout the day whenever he needed to retrieve supplies. The Hoyos Court noted that Labor Law § 240 does not “use or define the term ‘construction site’ or otherwise expressly limit its protections in that way.”  In reasoning that expanding the Hoyos construction site to include the loading dock area in the Building, the Hoyos Court reasoned that: Plaintiff had no choice but to adhere to the owner’s work site policy, and he was not provided with a safer or different means of gaining access to any other part of the building, including the area that MetLife was renovating in accordance with the terms of its lease with the owner.  Since plaintiff’s painting assignment related to a construction/renovation project within the building plaintiff was unquestionably engaged in an enumerated activity within the meaning of Labor Law § 240(1). In determining that an expansive view of the “job site” was appropriate and that “Labor Law § 240(1) should be construed with a commonsense approach to the realities of the workplace at issue” (citations and internal quotation marks omitted), the Hoyos Court found that “ he building as a whole, and in particular those parts, which must be accessed by a worker to do his or her job, cannot be discounted as a job site simply because it is multi-storied and the dock is not in the immediate vicinity of the floor(s) above that plaintiff was assigned to paint.”  Therefore, the argument that the injury did not occur at a construction site “places an unintended limitation on Labor Law § 240(1).”  Nor was the Hoyos Court moved by the argument that Plaintiff “was not actually engaged in work involving a gravity-related risk” (citations omitted) or that the loading dock area may have been in compliance with OSHA.  Similarly, because the Hoyos Court found that Labor Law § 240(1) was applicable, the issue of plaintiff’s comparative negligence was not deemed to be relevant. Thus, “under the lease had the right and ability to provide safer access to the construction workers using the loading dock” and “ laintiff’s fall was a direct consequence of the owner’s failure to provide adequate protection against the risk of such fall.” Two Justices dissented, in part, and would have dismissed the Labor Law § 240 claim.  In concluding that the scope of Labor Law § 240(1)’s reach should not be extended as held by the majority, the dissent argued: The majority, in invoking Labor Law § 240(1) in this case, has expanded its application to include an injured worker who was not at the work site and not engaged in any enumerated activity under the statute at the time of his injuries, and a fall from height which the Court of Appeals has deemed not to constitute a significant elevation differential to warrant application of section 240(1).  This is a substantial departure from the legislature’s clear intent in promulgating section 240(1) and the case precedents concerning the statute issued by the Court of Appeals. TAKEAWAY Because there was a lengthy, two Justice dissent, the defendants may seek to appeal the Hoyos decision to the Court of Appeals and, thus, this may not yet be over. In the meantime, owners and contractors should be mindful of the First Department’s willingness to expand a plaintiffs’ rights under the Labor Law.  Deciding Hoyos as a Labor Law case (as opposed to a simple negligence case), precluded the defendants from asserting plaintiff’s comparative negligence to potentially reduce any damage award.  Further, any decision expanding the scope of the reach of Labor Law § 240 is troublesome for Owners and contractors.  Owners and contractors should be extra vigilant in making sure that actual work sites, as well as their expanded surrounds, are safe for workers. Perhaps the Court will accept liability for any damages occasioned by the slippery slope created by its decision.   It should be noted that the Hoyos plaintiff asserted a common law negligence claim against the Hoyos defendants and, therefore, would not have been left without a remedy had the Labor Law claim been dismissed.

Standing to sue derivatively requires stock ownership in the corporation at the time the lawsuit is filed and at the time of the wrongful occurrence. As noted in a recent article posted by this Blog ( here ), these standing requirements are strictly enforced. Now comes another decision from the New York Appellate Division, Second Department, that reiterates the point that the absence of standing is the death knell of a shareholder’s derivative action. , 2017 N.Y. Slip Op. 08506 (2d Dept. Dec. 6, 2017). ( Here .) William Jacobs (“Jacobs”) and Charles Cartalemi (“Cartalemi”) were the members of the Westchester Industrial Complex, LLC (“WIC”). At the time Jacobs commenced the action, Jacobs held a 20% membership interest in WIC and Cartalemi held the remaining 80% interest. Jacobs brought the action on September 27, 2012, both individually and derivatively against Cartalemi and WIC, alleging five causes of action: accounting, breach of fiduciary duty, appointment of a receiver, constructive trust, and waste of corporate assets. Jacobs alleged, among other things, that since 2006, Cartalemi had improperly increased his salary and paid his family members excess wages, used space on WIC’s property for his personal use and failed to pay WIC a fair rental price, and mismanaged and misappropriated funds from WIC. During the pendency of the action, Jacobs withdrew his ownership interest in WIC effective December 1, 2015. By notice of motion dated February 5, 2016, Cartalemi and WIC moved for summary judgment dismissing the complaint, contending that Jacobs no longer had standing to maintain any of his causes of action, which were all derivative in nature. Jacobs opposed the motion, contending, , that until such time as he was paid for his membership interest, he remained the equitable and beneficial owner of a 20% interest in WIC, and, therefore, was entitled to assert derivative claims. He also contended that, in any event, he could still maintain each of his causes of action as individual ones. On June 27, 2016, the motion court granted the defendants’ motion for summary judgment dismissing the causes of action for breach of fiduciary duty, imposition of a constructive trust and waste of corporate assets, and denied the motion with regard to the causes of action for an accounting and the appointment of a receiver. Jacobs appealed the portion of the order granting the defendants’ motion for summary judgment. Cartalemi and WIC cross-appealed from the portion of the order which denied dismissal of the causes of action for an accounting and the appointment of a receiver. The Second Department affirmed the dismissal of the causes of action for breach of fiduciary duty, imposition of a constructive trust and waste of corporate assets, and reversed the decision declining to dismiss the causes of action for an accounting and the appointment of a receiver. It did so because Jacobs lacked standing to assert the derivative claims: In the context of a corporation, the standing of the shareholder is based on the fact that . . . he is defending his own interests as well as those of the corporation. Where the plaintiff voluntarily disposes of the stock, his rights as a shareholder cease, and his interest in the litigation is terminated. Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the suit. The same is true in the context of an LLC. … Thus, the Supreme Court properly held that, once the plaintiff withdrew from WIC, he lost standing to maintain any derivative causes of action on behalf of the company, notwithstanding his possible right to a future payment for the value of his membership interest upon his withdrawal. Internal quotation marks and citations omitted. For the same reasons, the Court held that the motion court should have dismissed the first cause of action, which sought an accounting. “Here, the plaintiff’s right to an accounting was based on his ability to prove that Cartalemi breached his fiduciary duty to WIC, a claim that is entirely derivative and which the plaintiff, having withdrawn as a member from WIC, no longer had standing to maintain.” (Citations omitted.) As to the cause of action seeking the appointment of a receiver, the Court found that the motion court should have granted the motion for summary judgment because Jacobs improperly asserted it as a “form of ultimate relief that can be awarded in a plenary action,” rather than as a “limited … provisional remedy … or as an aid in post-judgment enforcement.”   Takeaway : Since February 2008, members of a limited liability company (“LLC”) have been permitted to bring a derivative action on behalf of their company. , 10 N.Y.3d 100, 102 (2008). In order to do so, the plaintiff must be a member of the LLC. , 122 A.D.3d 506, 507 (1st Dept. 2014); , 21 Misc. 3d 535, 540 (Sup. Ct., Erie County (2008). The reason for this requirement “is based on the fact that . . . is defending his own interests as well as those of the corporation.” , 6 N.Y.2d 204, 211 (1959); , 50 N.Y.2d 259, 263(1980). Therefore, a plaintiff who voluntarily disposes of his/her stock cannot defend the corporation’s rights because he/she no longer has an interest in the company. And, without ownership in the company, the courts consider the plaintiff to be nothing more than “a stranger to the corporation,” lacking the necessary “standing to institute or continue the suit.” , 50 N.Y.2d at 263-264. In , these principles informed the Court’s decision and dictated the outcome of the appeal.

In prior posts, this Blog has discussed the elements required to assert a shareholder’s derivative action. ( Here .) Today’s article focuses on the standing requirements needed to commence such an action and the consequences of not satisfying them. What is a Derivative Action? A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” , 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Derivative claims against corporate officers and directors belong to the corporation itself. , 47 N.Y.2d 619, 631 (1979).  As the New York Court of Appeals explained long ago: The remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure to the benefit of the corporation. The stockholder brings the action, in behalf of others similarly situated, to vindicate the corporate rights and a judgment on the merits is a binding adjudication of these rights. , 258 N.Y. 257, 264 (1932) (citations omitted.). , 473 A.2d 805, 811 (Del. 1984) (“The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”). Standing Requirements In New York, as in most jurisdictions, a derivative plaintiff must be a shareholder of the company “at the time of bringing the action,” and at the time of the alleged wrongdoing. , , BCL § 626(b); , 181 A.D.2d 66, 70 (1st Dept. 1992).   , 477 A.2d 1040, 1049 (Del. 1984). “ plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing” to sue derivatively. , 477 A.2d at1049. Accordingly, courts have focused on the plaintiff’s stock ownership during both points in time, and in particular at the time of the alleged misconduct. In New York, the contemporaneous ownership rule is “strictly enforced.” , 291 A.D.2d 318, 318 (1st Dept. 2002). To satisfy the requirement, the plaintiff must have owned stock in the corporation throughout the course of the activities that constitute the primary basis of the complaint. This is not to say that a plaintiff must have owned stock in the company during the entire course of all relevant events. It does mean, however, that a proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired. , 320 F.3d 291, 298 (2d Cir. 2003). “ ailure to satisfy the . . . contemporaneous ownership requirement of § 626(b) is such a fundamental lack of capacity that it results in failure to state a cause of action.” , 15 Misc. 3d 1127(A), 2007 NY Slip Op 50868(U) (Sup Ct. Nassau County 2007), at *6 (citing , 36 N.Y.2d 371 (1975)). For this reason, courts require the plaintiff to plead contemporaneous ownership with particularity rather than through boilerplate assertions. , , , , 2007 WL 1321715, at *15 (C.D. Cal. Mar. 26, 2007) (“ eneral allegation insufficient to allege contemporaneous ownership during the period in which the questioned transactions occurred.”). If a plaintiff voluntarily sells his/her shares during the pendency of a derivative action, his/her rights as a shareholder cease, and his/her interest in the litigation is terminated. , 50 N.Y.2d 259, 263-64 (1980) (citations omitted). “Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the suit.” . at 264. When that occurs, another shareholder with standing can intervene to maintain the lawsuit because his/her rights are no longer represented. , 573 F. Supp. 2d 1228, 1237 (N.D. Cal. 2008) (after dismissing derivative complaint without prejudice because lead plaintiff sold all his shares in the company, the court requested other plaintiffs and intervening shareholders to file new motions to appoint lead plaintiff). Business Corporation Law § 626(b) includes an exception to the requirement that shareholders commencing a derivative action must demonstrate that he/she owned stock both at the time the lawsuit was brought and when the transaction(s) occurred.  That exception provides that the shareholder’s “shares or his interest therein devolved upon him by operation of law.” In that regard, an interest is conferred by operation of law under BCL § 626 only if it occurs automatically by application of some legal mandate or doctrine, not by the voluntary actions of private parties. Thus, where shares are acquired through a will or intestacy, they devolve by operation of law since neither the decedent nor recipient had any control over the death. , 181 A.D.2d at 71. In contrast, shares that are obtained through some deliberate act, such as by gift or contract, do not devolve by operation of law. . Another exception to the rule is the continuing wrong doctrine. Under this exception, the contemporaneous ownership requirement will not apply where the alleged wrong is occurring at the time the shareholder bought his/her stock even if it began before the shareholder purchased the stock. Courts in New York have recognized the continuing wrong doctrine as a limited exception to the contemporaneous ownership rule. , , , 19 A.D.2d 610, 610 (1st Dept. 1963); , 8 A.D.2d 310, 324 (1st Dept. 1959) (explaining that the continuing nature of a wrong did not prevent shareholders from bringing a derivative action with respect to acts that occurred after they became shareholders), , 8 N.Y.2d 430 (1960); , 65 N.Y.S.2d 536, 540-41 (Sup. Ct. NY County 1946), , 272 A.D. 1045 (1st Dept. 1947) (holding that the plaintiff had not satisfied the contemporaneous ownership requirement, noting that the “allegations refer back to the alleged original wrongs specified in some detail under other paragraphs of the complaint, all of which occurred sometime before plaintiff obtained her stock.”).   Upon the commencement of a bankruptcy proceeding, derivative claims become the property of the bankruptcy estate and are subject to the control of the bankruptcy court. , , , 2009 WL 426179, at *3 (Bankr. D. Del. Feb. 20, 2009); , 397 B.R. 670, 680-81 (Bankr. S.D.N.Y. 2008) (holding that breach of fiduciary duty and negligence claims are derivative and belong to the trustee). The right to bring a derivative action asserting claims for injury to the debtor corporation by its officers and directors vests exclusively with the trustee. , 2009 WL 426179, at *3 n.9. If a derivative action is pending at the time the bankruptcy petition is filed, it must be dismissed unless the plaintiff is able to show: (1) the bankruptcy trustee has affirmatively assigned or abandoned the derivative claims to the plaintiff; and (2) the bankruptcy court approves of the plaintiff’s continued prosecution of the derivative claims. , 2009 WL 426179, at *3-4 (dismissing derivative suit because the plaintiff failed to show that the trustee had abandoned or assigned the derivative claims). Recently, the Second Department considered the standing requirements in BCL § 626(b), holding that the plaintiff was not entitled to a fee award for successfully litigating a derivative action because he lacked standing to bring the action. , 2017 N.Y. Slip Op. 08403 (2d Dept. Nov. 29, 2017) ( here ). The case was brought by Walter Sakow (“Sakow”) individually and derivatively on behalf of Mawash Realty Corp. (“Mawash”) against Michael Waldman (“Waldman”) and Mawash. Sakow and Waldman each held an ownership interest in Mawash: Sakow owned 25% and Waldman owned 75% of the company. Mawash owned an apartment building located at 264-266 West 25th Street in Manhattan (the “25th Street Property”). Sakow and Waldman also owned an apartment building at 237 East 10th Street in Manhattan (the “10th Street Property”) as tenants in common. Sakow, both individually and derivatively on behalf of Mawash, commenced the action, alleging that Waldman had retained all of the net income derived from the operation of both apartment buildings without accounting to Mawash or to Sakow, and had pledged or caused Mawash to pledge the two properties as collateral security for a number of loans, with Waldman allocating the proceeds of the loans to his own benefit. The matter proceeded to a nonjury trial. After concluding that Sakow was individually entitled to 50% of the $6,679,958, or $3,339,979, in net income and loan proceeds that related to the 10th Street Property, and 25% of the $5,122,388, or $1,280,597, in net income and loan proceeds that related to the 25th Street Property, the trial court awarded a judgment to Sakow, individually, in the principal amount of $4,620,576, or $3,339,979, plus $1,280,597, and awarded Mawash nothing. On appeal, the Second Department modified the judgment by, among other things, awarding damages to Mawash on a cause of action asserted derivatively on its behalf by Sakow, and remitted the matter to the trial court for the entry of an amended judgment. , 124 A.D.3d 860 (2d Dept. 2015) ( here ). Sakow then moved pursuant to BCL § 626(e) for an award of an attorney’s fees from Mawash. On June 18, 2015, the trial court granted the motion, awarding Sakow $324,204 in attorney’s fees. On September 8, 2015, the court entered a money judgment upon the order. Mawash appealed from the order and the money judgment. That appeal was dismissed. Subsequently, Mawash moved for leave to renew its opposition to Sakow’s motion for an award of an attorney’s fees, arguing that it had recently discovered that Sakow was not a shareholder of Mawash when the action was commenced and, therefore, he lacked standing to commence a derivative action and was not entitled to an award of an attorney’s fees under BCL § 626(e). In opposition, Sakow did not dispute that he had transferred his Mawash stock to nonparty Mawash Realty Trust (the “Trust”) more than two years before the action was commenced. However, Sakow asserted that he had standing to initiate the derivative action because he was acting as a nominee of the Trust. Upon granting renewal, the trial court adhered to its determination that Sakow was entitled to an award of an attorney’s fees under BCL § 626(e), but lowered the award to $300,000 and vacated the money judgment. Mawash appealed. The Second Department reversed, holding that Sakow did not satisfy the standing requirements of BCL § 626(b). In doing so, the Court stated: Here, upon renewal, the Supreme Court erred in determining that Sakow was entitled to an award of an attorney’s fee under Business Corporation Law § 626(e). At the time this action was commenced, Sakow was not a holder of shares or of voting trust certificates of Mawash, and he did not have a beneficial interest in such shares or certificates. Accordingly, Sakow did not have standing to commence a derivative action. While Sakow contends that, as nominee of the Trust, he could have commenced a derivative action on Mawash’s behalf, that was not the capacity in which he initiated the instant action. Since Sakow failed to satisfy the standing requirements for a derivative action, he was not entitled to an award of an attorney’s fee. Internal quotations and citations omitted. Takeaway The policy behind BCL § 626(b) is sensible. It is designed to prevent plaintiffs from buying into a lawsuit or commencing a derivative action by simply purchasing shares after the alleged wrong has occurred. , , , , 50 N.Y.2d 259, 263 (1980). Although there are exceptions to the rule, the law has long required plaintiffs bringing a derivative action to have a stake in the corporation on whose behalf the action is commenced.  After all, if the plaintiff is not a shareholder of the corporation, then he/she has no right to vindicate the corporation’s rights and obtain a judgment on its behalf. In , the Second Department reinforced this common-sense policy.

Real property owners or lessees (“Owners”) often find that their real property is in need of improvement and/or repair (the “Work”).  Sometimes the Work requires access to the property of an adjoining property owner (the “Neighbor”).  In many instances, the Neighbor graciously permits access to the Owner’s contractors so that the Work can be performed.  In such instances the parties can informally agree on how to resolve problems that may result from the Work. Sometimes  the Neighbor may voluntarily permit the Work to be prosecuted, but only after a formal license/access agreement is negotiated and executed.  Access agreements can address many issues including, but not limited to: time and day restrictions for the Work; appropriate indemnification and hold harmless provisions; insurance requirements; requiring the Owner’s insurance policies to name the Neighbor as an additional insured; requiring prompt repair of damage to the Neighbor’s property, and the like. However, when neither informal nor formal cooperation is forthcoming from thy Neighbor, an Owner can rely on section 881 of New York’s Real Property Actions and Proceedings Law (the “RPAPL”), for relief.  RPAPL §881 provides: When an owner or lessee seeks to make improvements or repairs to real property so situated that such improvements or repairs cannot be made by the owner or lessee without entering the premises of an adjoining owner or his lessee, and permission so to enter has been refused, the owner or lessee seeking to make such improvements or repairs may commence a special proceeding for a license so to enter pursuant to article four of the civil practice law and rules. The petition and affidavits, if any, shall state the facts making such entry necessary and the date or dates on which entry is sought. Such license shall be granted by the court in an appropriate case upon such terms as justice requires. The licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry. In explaining the need for RPAPL §881, the court, in , 55 Misc.3d 621 (Sup. Ct. Queens Co. 2017), stated: RPAPL 881 authorizes the court to grant the license on such terms as justice requires.  This language is broad and allows for the flexibility and full scope upon which equity depends.  In a normal commercial setting, where a license agreement cannot be reached, there is no license.  Where a license pursuant to RPAPL 881 is sought, the license can be compelled even though no agreement is reached, and, in that situation, the terms of the license are set in the discretion of the court. ( 55 Misc.3d at 623.) Relief under RPAPL §881 is “addressed to the sound discretion of the court, which must apply a reasonableness standard in balancing the potential hardship to the applicant if the petition is not granted against the inconvenience to the adjoining owner if it is granted.”  ( , 154 A.D.3d 943 (2 nd Dep’t 2017) (citations omitted).) The court may consider a host of factors in deciding a petition under RPAPL §881, including, but not limited to, “the nature and extent of the requested access, the duration of the access, the protections to the adjoining property that are needed, the lack of an alternative means to perform the work, the public interest in the completion of the project, and the measures in place to ensure the financial compensation of the for any damage or inconvenience resulting from the intrusion.”   ( , 154 A.D.3d at 943 (citations omitted).) Courts also recognize that since the access required by an RPAPL §881 order does not benefit the Neighbor, “ quity requires that the compelled to grant access should not have to bear any costs resulting from the access.”  ( , 138 A.D.3d 539, 540 (1 st Dep’t 2016).)  Similarly, “ he statute and case law provide that is strictly liable for any damage it may cause to property.”  ( 55 Misc.3d at 623 (citations omitted).) Accordingly, RPAPL §881 orders frequently require that the Owner reimburse the Neighbor for Architectural and/or Engineering fees incurred by the Neighbor so that Neighbor does not have to bear “the costs of a design professional to ensure work will not endanger his property, or having to grant access without being able to conduct a meaningful review of plans.”  ( , 149 A.D.3d 518, 519 (1 st Dep’t 2017) (citations and internal quotation marks omitted).)  Courts also can award to the Neighbor, reimbursement of the legal fees it incurred in responding to Owner’s petition.  ( , 149 A.D.3d at 519.) In addition, under appropriate circumstances (depending on the length and extent of the intrusion), courts may award an access fee to the Neighbor because the court ordered license may “deprive of the use of a portion of his property.”  ( , 149 A.D.3d at 519.)  Similarly, the posting of a bond by the Owner to secure possible damages and the payment of license fees is sometimes granted notwithstanding the availability of Owner’s insurance.  ( 138 A.D.3d at 540.) TAKEAWAY Informal access, or access under a negotiated license/access agreement, with a cooperative Neighbor is certainly the preferred method of completing Work when access to adjoining property is necessary.  However, commencing a special proceeding under RPAPL §881, and complying with such resulting order as may be issued by the court, while costly, may be the only way for an Owner to complete necessary and/or desired repairs and/or improvements to real property, if dealing with an uncooperative Neighbor.

On November 28, 2017, the United States Supreme Court heard arguments ( here ) in Digital Realty Trust v. Sommers , a case that will determine whether employees who report suspected violations of the securities laws internally can file suit against their employers under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Dodd-Frank”) for retaliation, even if they do not report their concerns to the Securities and Exchange Commission (“SEC”). At issue in Digital Realty is whether the anti-retaliation provisions in the Dodd-Frank Act protect whistleblowers who report suspected violations of the law internally, rather than directly to the SEC. Under Dodd-Frank, the term “whistleblower” is defined to mean an “individual who provides information . . . to the Commission.” The case reached the Supreme Court on appeal from a decision of the Ninth Circuit, which joined the Second Circuit in finding that the term “whistleblower” as used in the Dodd-Frank Act did not limit the anti-retaliation protections of the Act to those who disclose information to the SEC only. Rather, the anti-retaliation provisions also protect those who were fired after making internal disclosures of alleged unlawful activity under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and other laws, rules, and regulations.  In so holding, the court deferred to the SEC’s interpretation of the term “whistleblower” under the Dodd-Frank Act. This Blog has been following the case since the Ninth Circuit issued its opinion in March of this year. ( Here , here , and here .) (Before the Ninth Circuit heard the appeal of the district court’s order, the Second Circuit decided Berman v. Neo@Ogilvy LLC, WPP Group USA, Inc. ) By contrast, the Fifth Circuit, which was the first to address the issue, strictly applied Dodd-Frank’s definition of “whistleblower” to apply only to those who disclose suspected wrongdoing to the SEC. Asadi v. G.E. Energy (USA), L.L.C. , 720 F.3d 620, 621 (5th Cir. 2013). In doing so, the court rejected the SEC’s regulation (17 C.F.R. § 240.21F-2), which extends the anti-retaliation protections to those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC. Id . at 630. Summary of the Allegations Digital Realty arose from the dismissal of Paul Somers, a vice president and portfolio manager at Digital Realty’s Singapore office. Somers alleged that he was fired in 2014, weeks after reporting a possible $7 million cost overrun on a project in Hong Kong. Somers did not contact the SEC before his firing, or file a complaint with the Department of Labor, as required under Sarbanes-Oxley. The company denied Somers’ claims of wrongdoing, and moved to dismiss on the grounds that, among other things, under the Dodd-Frank Act, Somers was not a whistleblower entitled to protection from retaliatory acts. Both the district court and the Ninth Circuit rejected the company’s argument. The Argument Narrow or Broad Reading. Which is it? The parties and the Court focused on whether Congress intended the definition of whistleblower to be narrowly or broadly interpreted. The lawyers for Digital Realty contended that the term should be read narrowly –  that is, only individuals who report suspected violations of the securities laws to the SEC are protected by Dodd-Frank – claiming that any contrary reading was “nakedly atextual.”  Lawyers for Somers and the SEC argued that such a narrow reading of the statute would weaken internal corporate compliance programs and substantially diminish Dodd-Frank’s deterrent effect. Justices Ginsburg and Sotomayor expressed concern for individuals who report suspected violations of the securities laws internally and are fired before they also reported to the SEC – a group likely to include auditors and attorneys engaged in internal reporting (assuming members of this group could go outside the organization at all). For example, Justice Sotomayor noted that employees who are subpoenaed by the SEC before they report a suspected violation of the law and then fired for cooperating also would be excluded from Dodd-Frank protection, as well as Sarbanes-Oxley: “I don't know that that employee is protected under the Sarbanes-Oxley provision either. The only thing that would protect that particular employee is the government’s reading.”  Justice Kagan questioned the fairness of protecting an individual who was fired for reporting internally and externally to the SEC about an unrelated matter that occurred in the past: “There are two employees, and they both internally report, and they’re both fired. And one of them, tough luck, but the other one is going to get protection because he’s filed a report with the SEC about some different matter entirely 10 years earlier. Why does he get extra protection?” By contrast, Justice Gorsuch expressed support for the narrow reading, asking: “I’m just stuck on the plain language here . . . how much clearer could Congress have been than to say in this section the following definitions shall apply, and whistleblower is defined as including a report to the Commission?” Justice Gorsuch pressed further, rhetorically asking: “So ‘shall’ just means maybe; sometimes?” To Give Chevron Deference or Not Give Chevron Deference, that is the Question In addition to addressing whether a narrow or broad reading of the statute was appropriate, the Court considered whether it should give deference to the SEC in construing the statute. In a prior post about this case ( here ), this Blog discussed the possibility that the Court could address the “Chevron deference” doctrine enunciated in the Court’s 1984 decision Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc . Under this doctrine, courts defer to agency interpretations of statutory mandates unless the interpretations are unreasonable. This Blog opined that Justice Gorsuch was no fan of the doctrine, noting that “ hile sitting on the Tenth Circuit, then-Judge Gorsuch called the doctrine ‘a judge-made doctrine for the abdication of the judicial duty.’” During the argument, Justice Gorsuch showcased his dislike of the doctrine. For example, during questioning of Somers’ attorney, Justice Gorsuch argued that the SEC’s administrative procedures were fundamentally flawed – an issue that went to the heart of whether deference should be given to the SEC’s interpretation of the statute. In that regard, he expressed the view that although it might be too late to challenge the validity of the SEC’s definition of “whistleblower” on those grounds, the soundness of those procedures could be taken into account in determining whether Chevron deference should be accorded: “The agency acts without the benefit of the notice and comment and is unable to issue a reasoned decision-making, and then we’re supposed to defer to that to resolve this ambiguity? … How does all that get you Chevron ?” In pressing the point with the assistant to the solicitor general, as an amicus in support of Somers, Justice Gorsuch extracted a concession that if the administrative procedures were inadequate, it would be inappropriate to accord deference to the SEC’s interpretation – a concession that Justice Breyer encouraged the government to retract: “I would be wary of that because I don’t know what implications it has for other cases … I’m just saying … that is not necessarily … a lifetime concession on the part of the government” to make, “is it?” “No, it is not,” responded the government. Can A Court Ignore the Meaning of a Statutory Term? The Court considered whether it is permissible to ignore specific language in a statute to reach a particular result.  The government argued, relying on Lawson v. Suwanee Fruit & SS Steamship Co. , that giving the term “whistleblower” “its ordinary meaning in the retaliation context would harmonize the statute and avoid the anomalies that would result from woodenly applying the statutory definition.” Lawson involved a sailor who had been injured in a pre-employment accident – he lost sight in one eye. He sued his employer for disability when he injured his other eye. The applicable statute defined “injury” as harm or damage that happens on the job; it did not include pre-existing injuries. The Court explained that under the circumstances of the case (which it described as “unusual”), it would be anomalous to give employers relief from injuries incurred while employees worked for them, but not for pre-existing injuries. While such a result would be definitionally correct, it would “create obvious incongruities in the language, and … destroy one of the major purposes of the second injury provision: the prevention of employer discrimination against handicapped workers.” If A Court Can Ignore the Meaning of a Statutory Term, What Standard Should Apply? Justice Alito questioned how the Court could articulate the standard for future cases if it were to ignore the meaning of a term in a statute: “So, you have a statute … that uses a particular term … nd what we write is that the definition in the statute doesn’t apply if it produces an anomaly. Is that the standard?” Justice Ginsburg added that the standard needed to address circumstances that were more than mere anomalies but ones that would produce “an absurd result”: “I thought the stock phrase was absurd, that you -- if the statute gives a definition, you follow the definition in the statute unless it would lead not merely to an anomaly, but to an absurd result.” Ultimately, the government conceded, in response to a question from Justice Gorsuch, that application of the narrow reading of the definition of whistleblower would not produce an absurd result. Conclusion As with most cases before the Supreme Court, it is difficult to tell from the argument how the Court will ultimately decide the case. However, if one were to glean anything from the argument, it is fair to conclude that Digital Realty had a good day. A decision is expected by the end of June 2018.