Search Results

On February 21, 2018, the United States Supreme Court ruled that the anti-retaliation protections passed by Congress after the 2008 financial crisis extend only to individuals who report suspected violations of the securities laws to the Securities and Exchange Commission (“SEC” or “Commission”). In Digital Realty Trust, Inc. v. Somers , 583 U.S. _____ (2018) ( here ), the Court held that individuals who blow the whistle through internal means only are precluded from the anti-retaliation protections enjoyed under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank” or the “Act”). This Blog has written about Digital Realty here , here , here and here . The Court, in an opinion authored by Justice Ruth Bader Ginsburg, resolved a circuit court split over whether individuals are required to report alleged violations of the securities laws to the SEC to qualify as a whistleblower under Dodd-Frank. The Ninth and Second Circuits held that Dodd-Frank did not limit the anti-retaliation protections of the Act to those who disclose information to the SEC only.  Digital Realty Trust, Inc. v. Somers , 850 F.3d 1045 (9th Cir. 2017); Berman v. NEO@OGILVY LLC , 801 F.3d 145 (2d Cir. 2015). 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” or “SOX”) and other laws, rules, and regulations. By contrast, the Fifth Circuit, which was the first to address the issue, held that the Act’s definition of “whistleblower” applied 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). 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. In reversing the Ninth Circuit decision, the Court held that a “plain-text reading” of Dodd-Frank controlled because the statute unequivocally limited the definition of “whistleblower” to only those individuals who provide “information relating to a violation of the securities law to the commission.” 15 U.S.C. §78u-6(a)(6). The Court held as such notwithstanding the anti-retaliation provision of Sarbanes-Oxley, which applies to all “employees” who report misconduct to the SEC, any other federal agency, or their internal supervisors. In giving Section 21F(a)(6) its plain meaning, Justice Ginsburg refused to give deference, under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc. , 467 U. S. 837 (1984), to the SEC’s interpretation of Dodd-Frank – that is, the Court refused to ascribe different meanings to “whistleblower” in the reward and anti-retaliation provisions of the Act. Because “Congress has directly spoken” to the matter, she wrote, the SEC is precluded from a more expansive interpretation. Background Paul Somers (“Somers”), a former Vice President of Digital Realty Trust (“Digital Realty”), a real estate investment trust specializing in properties for data centers, alleged that he was fired after reporting possible securities law violations to senior management. Somers was an executive in the company’s Singapore office when he reported that his boss had hidden millions of dollars in cost overruns, granted no-bid contracts and made payments to friends, among other things. Although nothing impeded Somers from reporting the suspected wrongdoing to the SEC prior to his termination, he failed do so. Additionally, Somers failed to file an administrative complaint within 180 days of his termination, rendering him ineligible for relief under Sarbanes-Oxley. Thereafter, Somers sued Digital Realty, alleging violations of state and federal securities laws, including violations of the anti-retaliation provisions of the Act ( e.g. , Section 21F(h)(1)(A) of the Act).  Digital Realty moved to dismiss on the ground that Somers was not a “whistleblower” under Dodd-Frank because he only reported the wrongdoing internally and not to the SEC. In May 2015, the district court denied the company’s motion to dismiss. In denying the motion, the district court deferred to the SEC’s interpretation of “whistleblower” to include internal whistleblowers. The court analyzed the statutory text, the Act’s legislative history, and the procedural and practical implications of harmonizing the narrow definition of “whistleblower” with the broad protections of the anti-retaliation provision.  Somers v. Digital Realty Trust, Inc. , 119 F. Supp. 3d 1088, 1100–05 (N.D. Cal. 2015). The court observed that “ t bottom, it is difficult to find a clear and simple way to read the statutory provisions of Section 21F in perfect harmony with one another.” Id . at 1104.  Having analyzed the tension between the definition and anti-retaliation provisions, the district court deferred to the SEC’s interpretation that individuals who report internally only are nonetheless protected from retaliation under Dodd-Frank. Id . at 1106. The district court certified the question for interlocutory appeal pursuant to 28 U.S.C. § 1292(b), and the Ninth Circuit granted Digital Realty’s petition for permission to appeal. The court concluded, like the Second Circuit, that Congress intended Section 21F(h)(1)(A) (iii) to broaden the anti-retaliation protections to include internal reporters.  Digital Realty Trust, Inc. v. Somers , 850 F.3d 1045 (9th Cir. 2017).  The majority found that “ y broadly incorporating, through subdivision (iii), Sarbanes-Oxley’s disclosure requirements and protections, necessarily bars retaliation against an employee of a public company who reports violations to the boss, i.e. , one who ‘provide information’ regarding a securities law violation to ‘a person with supervisory authority over the employee.’” The court noted that “ strict application of ’s definition of whistleblower would, in effect, all but read subdivision (iii) out of the statute.”  The court also noted that there are provisions in SOX and the Securities Exchange Act of 1934 that mandate internal reporting before external reporting in certain instances.  Therefore, “ eaving employees without protection for that required preliminary step would result in early retaliation before the information could reach the regulators.” The Ninth Circuit found that Dodd-Frank’s anti-retaliation provision “unambiguously and expressly protects” whistleblowers of both types: those who report matters to the SEC and those who only make internal reports to their employer. 850 F.3d at 1050. In a brief dissent, Judge John Owens sided with the Fifth Circuit.  Judge Owens maintained that the statutory definition of whistleblower was clear, left no room for interpretation, and plainly governed. Id . at 1051. Sommers appealed to the Supreme Court. The Supreme Court’s Decision In reversing the Ninth Circuit decision, the Court held that the plain text of the statute, in conjunction with the Act’s anti-retaliation provision, as well as the intent of Congress in enacting the statute, negated the Ninth Circuit’s expansive reasoning. The Court found that the definition of “whistleblower” under Section 21F(a)(6) plainly “describes who is eligible for protection” from retaliation, i.e. , someone who “‘provides … information relating to a violation of the securities laws to the Commission.’” (Citation omitted; orig’l emphasis.) This definition, Justice Ginsburg found, applies “throughout” the statute. The definition section of the statute supplies an unequivocal answer: A “whistleblower” is “any individual who provides . . . information relating to a violation of the securities laws to the Commission .” §78u–6(a)(6) (emphasis added). Leaving no doubt as to the definition’s reach, the statute instructs that the “definitio shall apply” “ n this section,” that is, throughout §78u–6. §78u–6(a)(6). Having determined “who” is a whistleblower, the Court turned to the conduct protected under the Act – that is, “what” conduct is protected by Dodd-Frank. The Court explained that such conduct can be found in the three clauses of Section 21F(h)(1)(A). The three clauses of §78u–6(h)(1)(A) then describe what conduct, when engaged in by a whistleblower, is shielded from employment discrimination. See §78u–6(h)(1)(A)(i)–(iii). Reading the “who” and the “what” provisions together, Justice Ginsburg explained how an individual can obtain the anti-retaliation protections of the Act. An individual who meets both measures may invoke Dodd-Frank’s protections. But an individual who falls outside the protected category of “whistleblowers” is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages. Justice Ginsburg noted that “Dodd-Frank’s purpose and design corroborate our comprehension of §78u–6(h)’s reporting requirement,” noting that Congress enacted Dodd-Frank “to motivate people who know of securities law violations to tell the SEC,” and, in connection with this purpose, Congress granted such individuals “immediate access to federal court, a generous statute of limitations … and the opportunity to recover double backpay.” The Court, however, found that the reason for such incentives was to effectuate Dodd-Frank’s narrow objective of motivating individuals to “tell the SEC,” and not (as with SOX) to “disturb the ‘corporate code of silence’” and embolden employees to report fraudulent behavior “not only to the proper authorities … but even internally.” The “core objective” of Dodd-Frank’s robust whistleblower program, as Somers acknowledges is “to motivate people who know of securities law violations to tell the SEC .” By enlisting whistleblowers to “assist the Government identify and prosecut persons who have violated securities laws,” Congress undertook to improve SEC enforcement and facilitate the Commission’s “recover money for victims of financial fraud.”  To that end, §78u–6 provides substantial monetary rewards to whistleblowers who furnish actionable information to the SEC. See §78u–6(b). Financial inducements alone, Congress recognized, may be insufficient to encourage certain employees, fearful of employer retaliation, to come forward with evidence of wrongdoing. Congress therefore complemented the Dodd-Frank monetary incentives for SEC reporting by heightening protection against retaliation. While Sarbanes-Oxley contains an administrative-exhaustion requirement, a 180-day administrative complaint-filing deadline, and a remedial scheme limited to actual damages, Dodd-Frank provides for immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double backpay. Dodd-Frank’s award program and anti-retaliation provision thus work synchronously to motivate individuals with knowledge of illegal activity to “tell the SEC.” When enacting Sarbanes-Oxley’s whistleblower regime, in comparison, Congress had a more far-reaching objective: It sought to disturb the “corporate code of silence” that “discourage employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.” (Citations omitted; orig’l emphasis; internal quotation marks omitted.) The Court concluded that, given the unambiguous definition of whistleblower, because “Somers did not provide information ‘to the Commission’ before his termination,” “he did not qualify as a ‘whistleblower’ at the time of the alleged retaliation.”  Therefore, he was “ineligible to seek relief under §78u–6(h).” In a concurrence, Justice Clarence Thomas, joined by Justices Samuel Alito and Neil Gorsuch, agreed with the Court’s conclusion, but declined to adopt Justice Ginsburg’s argument that the purpose and design of Dodd-Frank and its legislative history supported the Court’s decision. Justice Thomas maintained that even if “a majority of Congress read the Senate Report, agreed with it, and voted for Dodd-Frank with the same intent, ‘we are a government of laws, not of men, and are governed by what Congress enacted rather than by what it intended’” (quoting Justice Antonin Scalia’s concurring opinion in Lawson v. FMR LLC ). Justice Sonia Sotomayor, joined by Justice Stephen Breyer, filed a separate concurrence that supported Justice Ginsburg’s use of legislative history, noting that “ ust as courts are capable of assessing the reliability and utility of evidence generally, they are capable of assessing the reliability and utility of legislative-history materials.” Takeaway As Justice Ginsburg observed, Congress “complemented the Dodd-Frank monetary incentives for SEC reporting by heightening protection against retaliation.” In this regard, the Act “provides for immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double backpay.” (Citation omitted.) Thus, “Dodd-Frank’s award program and anti-retaliation provision … work synchronously to motivate individuals with knowledge of illegal activity to “‘tell the SEC.’” (Citation omitted.) In light of this synchronicity, giving the term “whistleblower” a consistent meaning makes sense. It not only comports with the plain text of the Act, but also the legislative history and “purpose and design” of the statute. After Digital Realty , whistleblowers will no longer have a reason to blow the whistle internally, even where the company has a strong and robust compliance program. Instead, to avail themselves of the Act’s anti-retaliation protections, employees will likely report their concerns of suspected wrongdoing directly to the SEC – before any adverse action occurs, but also before employers have had the chance to hear, investigate, and address their concerns – notwithstanding the fact that they may receive a higher bounty for participating in internal compliance programs in the first instance. See Rule 21F-6, 17 C.F.R. § 240.21F-6 (listing as a factor that may increase an award whether the individual reported internally before, or at the same time, as any report to the SEC). Whether the incentive to report wrongdoing to the SEC in the first instance trumps the financial incentive to report internally remains to be seen. No doubt, the number of filings with the SEC after Digital Realty will be watched closely by practitioners and the Commission. Finally, although Digital Realty eliminates the ability of individuals who report suspected violations of the securities laws only internally to bring retaliation actions under Dodd-Frank, internal whistleblowers still have protections under Sarbanes-Oxley.

In Dormitory Authority of the State of New York v. Samson Construction Co. (Feb. 15, 2018) , the New York Court of Appeals was called on to address, inter alia, the question of whether the City of New York “is an intended third-party beneficiary of the architectural services contract between…Dormitory Authority of the State of New York (DASNY) and…Perkins Eastman Architects, P.C. (Perkins)….” The facts of Dormitory are relatively simple and typical of many construction projects. The City was interested in building a forensic biology laboratory for the Office of the Chief Medical Examiner (OCME) next to Bellevue Hospital (the “Project”). The City entered into a Project Management Agreement with DASNY, pursuant to which DASNY was to finance and manage the design and construction of the Project. DASNY entered into a contract with Perkins to provide design, architectural and engineering services. The Perkins contract provided that “Perkins would ‘indemnify and hold harmless’ DASNY and the ‘Client’ (that is, OCME…) from any claims arising out of Perkins’ negligent acts or omissions and that extra costs or expenses incurred by DASNY and the Client as a result of Perkins’ ‘design errors or omissions shall be recoverable from and/or its Professional Liability Insurance carrier.’” Samson Construction Co. was also retained by DASNY to perform excavation and foundation work for the Project. The Court of Appeals emphasized that “the contract executed between DASNY and Samson provides that the Client - i.e., the City - ‘is an intended third party beneficiary of the Contract for the purposes of recovering any damages caused by Samson.’” (Brackets omitted.) Conversely, the Court noted that “ though there are passing references to the Client in the Perkins Contract, no analogous language providing that the City is an intended third-party beneficiary appears there.” During the prosecution of the foundation work, the failure to properly install an excavation support system led to significant problems, including severe damage to neighboring Bellevue buildings. As a result, the Project was delayed by more than 18 months and $37 million in additional costs were incurred. In the ensuing litigation, the City asserted, inter alia, a breach of contract claim against Perkins. In granting Perkins’ motion for summary judgment on that claim, Supreme Court held that the City was not an intended third-party beneficiary of the Perkins contract with DASNY. The Appellate Division, holding that there were factual issues as to the City’s status as a third-party beneficiary, modified Supreme Court’s order by denying that portion of Perkins’ motion for summary judgment. The Court of Appeals reversed the Appellate Division and held that the City failed to raise any factual issues concerning its status as a third-party beneficiary and, therefore, Perkins was entitled to summary judgment. In so holding, the Court generally described the relevant law as follows: A third party may sue as a beneficiary on a contract made for its benefit. However, an intent to benefit the third party must be shown, and, absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts. We have previously sanctioned a third party’s right to enforce a contract in two situations: when the third party is the only one who could recover for the breach of contract or when it is otherwise clear from the language of the contract that there was an intent to permit enforcement by the third party. (Citations, internal quotation marks and brackets omitted.) When construction contracts are at issue, the Court noted that in order to be a considered a third-party beneficiary, “express contractual language stating that the contracting parties intended to benefit a third party by permitting that third party to enforce a promisee’s contract with another.” (Citations, internal quotation marks and brackets omitted.) Absent express language, “such third parties are generally considered mere incidental beneficiaries.” (Citations, internal quotation marks and brackets omitted.) The Court explained that “ his rule reflects the particular nature of construction contracts and the fact that - as is the case here - there are often several contracts between various entities, with performance ultimately benefitting all of the entities involved.” In applying the previously quoted “two-situation” analysis to the facts of Dormitory, the Court found that the City was not a third-party because “the City is not the only entity that can recover under the Perkins Contract” and “the Perkins Contract does not expressly name the City as an intended third-party beneficiary nor authorize the City to enforce any obligations thereunder….”

Through the years, numerous class action lawsuits have been brought involving securities fraud, corporate misconduct, unfair business practices and other claims. This article provides a brief overview of class action lawsuits . What is a class action lawsuit? A class action is a procedural device in which one or more persons sue on behalf of a larger group of persons, referred to as the “class.” The class action lawsuit started in the courts of equity in seventeenth-century England as a Bill of Peace. A Bill of Peace allowed the Court of Chancery to hear the dispute of a group of persons – known as the “multitude” – in one lawsuit. The Bill of Peace provided the means by which a court could resolve legal disputes affecting numerous people with similar claims in one lawsuit rather than in separate actions. To bring a Bill of Peace, the number of persons affected had to be so numerous that joining their claims in one lawsuit would be impractical; the members of the group had to possess a common interest in the issues to be adjudicated; and the persons named in the lawsuit had to adequately represent the interests of persons who were absent from the action but whose rights would be affected by the outcome. If a court allowed a Bill of Peace to proceed, the judgment that resulted would bind all members of the group. In the early nineteenth century, the Bill of Peace came to the United States. Justice Joseph Story, then serving on the United States Court of Appeals for the First Circuit, advocated the use of the Bill of Peace in courts of equity. In that regard, Justice Story wrote that “all persons materially interested, either as plaintiffs or defendants in the subject matter of a bill ought to be made parties to the suit, however numerous they may be,” so that the court could “make a complete decree between the parties prevent future litigation by taking away the necessity of a multiplicity of suits.” West v. Randall , 29 F. Cas. 718, 2 181 <1820> . Initially, a class action could be brought only in actions in which the plaintiffs sought equitable, as opposed to monetary, relief.  In 1938, with the adoption of Rule 23 of the Federal Rules of Civil Procedure, plaintiffs were permitted to seek monetary damages using the class action device. In 1966, Rule 23 was amended to provide that absent class members would be bound by a final judgment so long as their interests were adequately represented by the class representative. There are three categories of actions that fall within the scope of Rule 23. The first category involves the commencement of separate actions that may adversely affect members of the class or the defendant in one of two ways: it may impose inconsistent rulings on the defendant, or it may “impair or impede” class members from protecting their interests. The second category involves non-monetary relief, where the party against whom the class seeks relief “has acted or refused to act on grounds generally applicable to the class” so that injunctive or declaratory relief as to class would be appropriate. The third category involves cases seeking monetary relief in which there are questions of law or fact common to the class that predominate over questions specific to each class member, and the class action device is a more efficient means to resolve the controversy – that is, it is “superior to other available methods” for resolving the dispute. Regardless of the category of class action, a plaintiff, known as the class representative, who seeks class certification, must demonstrate that: (1) the number of class members is too numerous making it impracticable to join them in the action; (2) there are common questions of law and fact shared by members of the class; (3) the claims or defenses of the proposed class representative are typical of the class; and (4) the proposed class representative will adequately protect the interests of the class. Defendants can object to class certification. For instance, defendants can argue that the proposed class representative does not satisfy the adequacy and typicality requirements of Rule 23(a)(3) and (4). Defendants can also argue that the proposed class representatives have injuries that are different or more severe than those suffered by the class. If a class is certified, then members of the class must receive notice of the action. The notice includes information about the lawsuit and informs class members that their rights may be affected by the outcome of the litigation. The notice also provides information about how class members may opt out of, or exclude themselves from, the class if they do not want to be bound by the outcome of the litigation. If class members remain in the class, they give up their right to sue the defendants individually on the same claim after the class action concludes. If the named plaintiff and defendants reach a resolution, all members of the class must receive notice of the settlement. The court must approve the settlement to ensure that it is fair, reasonable and in the best interests of the class. Many, but not all, states permit class action lawsuits. The states that permit class actions have rules that mirror the Federal Rules of Civil Procedure. One notable exception is California, which has materially different rules for class actions in its state courts. Virginia does not allow class actions – there are no procedural rules or statutes permitting the commencement of a class action lawsuit in Virginia state courts. Here.=">Here."> The Benefits and Criticisms of Class Actions The Benefits Class action lawsuits advance important public policy goals. Such lawsuits often provide an oversight function for misconduct the government may be unable or unwilling to police, whether because of deregulation or resource conservation. A class action is often the only way average Americans with limited means can remedy wrongs committed by powerful, multi-million-dollar corporations and institutions. As noted by Justice William O. Douglas, “The class action is one of the few legal remedies the small claimant has against those who command the status quo.” Class action lawsuits have a deterrent effect on bad actors.  It forces those within the defendants’ industry or sector to change their behavior, product or procedures. In short, because a class action lawsuit combines and disposes of numerous claims that may not be practical to litigate individually, the process is more efficient. Additionally, aggregating small claims into a collective action can reduce the cost of litigation. A class action lawsuit can also ensure that all the plaintiffs obtain some compensation, even though the award may not cover all of the damages. The Criticisms Many critics consider the plaintiffs’ lawyers, not the class, to be the only “winners” in a class action lawsuit – if successful, the plaintiffs’ lawyers receive a percentage of any recovery achieved for the class. Proponents of the class action device, in particular, those from the plaintiffs’ bar, contend that this perception ignores the risk that class action attorneys take in starting such lawsuits. Indeed, not every class action results in a successful outcome. Without a financial incentive, attorneys will not handle class action lawsuits, thereby depriving average Americans the ability to recover damages for their injuries and losses. Proponents of the device also note that contingent fee attorneys receive large percentages of the awarded damages through their fee agreements. Class action lawyers should not be treated differently. Critics maintain that there is no salutary purpose to class actions, especially in small claims actions, in which individual class members have very small stakes. These critics argue that such actions are lawyer-driven – because the class representatives have so little at stake, they do not exercise any control over the litigation. With the class action lawyer in complete control, the economics of the lawsuit change. The lawyer has the largest financial interest in the outcome of the litigation, leading to settlements that produce high attorneys’ fees and minimal payouts to class members. Some critics argue that class action attorneys are more interested in securing a lucrative fee than advancing social justice. These critics claim that if social justice was the driving force behind the lawsuit, then class action lawyers would let the government perform its regulatory and oversight functions. Instead, by filing a class action lawsuit, private lawyers are substituting their judgment for that of a government agency charged with overseeing the conduct at issue. This usurpation of the government function is significant when the agency concludes that the conduct at issue and the injuries sustained by the plaintiff are immaterial and do not warrant prosecution of the defendant. Finally, as to the deterrence factor, critics maintain that state and federal law enforcement organizations have the ability to investigate and punish cases involving fraud and other wrongdoing regardless of its size and scope and offer an alternative means of addressing wrongful conduct. Private enforcement through a class action, they say, reduces the accountability of the law enforcement effort and delegates to the plaintiffs’ attorney control over enforcement priorities.  Since payouts to class members are often insignificant, class actions wind up being the cost of doing business rather than a deterrent to future conduct.

The New York Court of Appeals rules that a litigant must produce information from her Facebook account notwithstanding her chosen “privacy” settings.  The plaintiff in Forman v. Henkin (February 13, 2018) was injured after falling from a horse owned by defendant and alleges she suffered “spinal and traumatic brain injuries resulting in cognitive deficits, memory loss, difficulties with written and oral communication, and social isolation.”  During the litigation, plaintiff revealed she was a frequent Facebook user, but deactivated her account within six months of her accident.  Plaintiff claims that, after her accident, she had “difficulty using a computer and composing coherent messages” and that her e-mails were riddled with grammatical and spelling errors and took too long to compose. During discovery, defendant “sought an unlimited authorization to obtain plaintiff’s entire ‘private’ Facebook account, contending the photographs and written postings would be material and necessary to his defense of the action under CPLR 3101(a).”  Defendant moved to compel disclosure when plaintiff refused to provide the requested authorization. Plaintiff opposed the motion arguing that defendant failed to establish a basis to access the “private” portion of the Facebook account.  Defendant argued that the information sought would lead to relevant evidence – such as the amount of time it took plaintiff to write posts. Supreme Court granted the motion and directed plaintiff to “produce all photographs of herself privately posted on Facebook prior to the accident that she intends to introduce at trial, all photographs of herself privately posted on Facebook after the accident that do not depict nudity or romantic encounters, and an authorization for Facebook records showing each time plaintiff posted a private message after the accident and the number of characters or words in the message.”  The content of any of plaintiff’s written Facebook posts, whether authored before or after the accident, were not directed to be produced. The Court of Appeals pointed out several times that although defendant was denied some of the discovery it sought, only plaintiff appealed to the Appellate Division.  The Appellate Division modified Supreme Court’s decision by “limiting disclosure to photographs posted on Facebook that plaintiff intended to introduce at trial (whether pre- or post-accident) and eliminating the authorization permitting defendant to obtain data relating to post-accident messages, and otherwise affirmed.” The Court of Appeals reversed the Appellate Division and reinstated Supreme Court’s Order.  In its opinion, the Court generally reiterated the liberal discovery rules that permit the disclosure of “material and necessary” information that “bear on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.”  (Citations omitted.)  The Court also recognized that there are limitations to discovery and that when faced with “onerous” demands “competing interests must always be balanced; the need for discovery must always be weighed against any special burden to be borne by the opposing party.” (Citations omitted.) The Court recognized that when faced with discovery disputes, discovery requests must be evaluated on a “case-by-case basis.” The Court of Appeals found that there is no reason to apply any different standard to the disclosure of social media materials and, thus, stated that “ hile Facebook-and sites like it-offer relatively new means of sharing information with others, there is nothing so novel about Facebook materials that precludes application of New York’s long-standing disclosure rules to resolve this dispute.” Thus, the Court rejected the ruling of the First Department in Tapp v. New York State Urban Dev. Corp., 102 A.D.3d 620 (2013) , that “ o warrant discovery, defendants must establish a factual predicate for their request by identifying relevant information in plaintiff’s Facebook account –that is, information that ‘contradicts or conflicts with plaintiff’s alleged restrictions, disabilities, and losses, and other claims.’” (Quoting Tapp , emphasis in original.) The Court also rejected Tapp’s progeny, relied upon by the plaintiff in Forman , which “conditioned discovery of material on the ‘private’ portion of a Facebook account on whether the party seeking disclosure demonstrated there was material in the ‘public’ portion that tended to contradict the injured party’s allegations in some respect.”  (Citations omitted.) The Court agreed with defendant’s argument that the “Appellate Division erred in employing a heightened threshold for production of social media records that depends on what the account holder has chosen to share on the public portion of the account.”  The rule employed by the Appellate Division would permit the account holder “to unilaterally obstruct disclosure merely by manipulating ‘privacy’ settings or curating the materials on the public portion of the account.” In applying the general concepts of disclosure to social media discovery, the Court stated: New York discovery rules do not condition a party’s receipt of disclosure on a showing that the items the party seeks actually exist; rather, the request need only be appropriately tailored and reasonably calculated to yield relevant information.  Indeed, as the name suggests, the purpose of discovery is to determine if material relevant to a claim or defense exists.  In many if not most instances, a party seeking disclosure will not be able to demonstrate that items it has not yet obtained contain material evidence.  Thus, we reject the notion that the account holder’s so-called “privacy” settings govern the scope of disclosure of social media materials. The Court, however, tempered its decision by rejecting the notion that “commencement of a personal injury action renders a party’s entire Facebook account automatically discoverable”, holding that “ ather than applying a one-size-fits-all rule…, courts addressing disputes over the scope of social media discovery should employ our well-established rules – there is no need for a specialized or heightened factual predicate to avoid improper “fishing expeditions.” When judicial intervention is necessary in cases involving social media discovery disputes, the Court instructed lower courts to: 1. consider the nature of the event giving rise to the litigation, the injury claimed and any other case specific information to assess whether relevant information is likely to be found on Facebook; and, 2. “balanc the potential utility of the information sought against any specific ‘privacy’ or other concerns raised by the account holder… tailor to the particular controversy that identifies the types of materials that must be disclosed while avoiding disclosure of nonrelevant materials.”  In issuing such a ruling, the Court recognized that “private” materials, such as medical records, are discoverable in litigation if relevant. Among other things, the Court found that Supreme Court’s order was consistent with the principals espoused in Forman because, for example: 1. the request for photographs was “reasonably calculated to yield evidence” related to plaintiff’s claim that she was unable to engage in previously enjoyed activities; and, the request for the data revealing the timing and number of characters in posted messages would be relevant to plaintiff’s claim cognitive injuries caused difficulty writing and using a computer.   Because defendant did not appeal Supreme Court’s order, the Court of Appeals could not decide whether said order barring access to the content of the messages on plaintiff’s Facebook account (as opposed data revealing the timing and number of characters in posted messages) was appropriate. _____________________________________ <1>   Because defendant did not appeal Supreme Court’s order, the Court of Appeals could not decide whether said order barring access to the content of the messages on plaintiff’s Facebook account (as opposed data revealing the timing and number of characters in posted messages) was appropriate.

Last November, this Blog wrote about an announcement Michael D. Granston (“Granston”), Director of the DOJ Commercial Litigation Branch, Fraud Section, made at a health care conference concerning the DOJ’s intention to seek dismissal of meritless qui tam cases. ( Here .) Since the speech was not accompanied by a policy memorandum, there was skepticism within the False Claims Act (“FCA”) bar that there would be any material change in policy. That skepticism was met last month with a memo, titled “Factors for Evaluating Dismissal Pursuant to 31 USC 3170(c)(2)(A),” that Granston sent to all attorneys in the Fraud Section and all Assistant U.S. Attorneys handling FCA cases that encourage the DOJ to “seek[ ] dismissal” of non-intervened qui tam cases that “lack substantial merit” and discusses the factors that should guide the exercise of dismissal discretion (the “Granston Memo”).  A copy of the Granston Memo can be found here . Under the FCA, whistleblowers, also known as relators, can sue persons or entities believed to have engaged in a fraud against the government. A relator can recover a reward equaling up to 35% of the damages and penalties (up to $21,916 per fraudulent filing) recovered by the government. Such an economic benefit serves as a powerful incentive for whistleblowers to come forward and report fraud on the government.  Critics (and the FCA defense bar) claim, however, that this economic incentive too often results in the filing of costly, meritless qui tam actions. When a qui tam action is commenced, the complaint is filed under seal, to provide the Department of Justice (“DOJ” or “Department”) with time to investigate the allegations and decide whether to intervene and join the lawsuit. The FCA also provides that if the government determines its interests are not served by the lawsuit, it may seek dismissal, over the relator’s objections, provided the relator has an opportunity to be heard. 31 U.S.C. § 3730(c)(2)(A). “Historically,” the DOJ has used Section 3730(c)(2)(A) “sparingly,” in large part because the FCA permits relators to pursue their claims even when the government declines to intervene in the action. And, because declination can be based on factors other than the merit of the claim, the government has been “circumspect” in its use of Section 3730(c)(2)(A). Nevertheless, in order to fulfill its “gatekeeper role in protecting the False Claims Act,” and “to advance the government’s interests, preserve limited resources, and avoid adverse precedent,” the Granston Memo encourages Department attorneys to exercise their “authority to dismiss cases” under certain circumstances. The memo identifies a number of factors, gleaned from cases in which the government has sought dismissal, that Department attorneys should consider in determining “whether the government’s interests are served” by the qui tam action. These factors, which are intended to “ensure consistency across the Department,” and “serve as a basis for evaluating whether to seek to dismiss future matters,” include: (1) “curbing meritless cases,” “where a qui tam complaint is facially lacking in merit-either because relator’s legal theory is inherently defective, or the relator’s factual allegations are frivolous”; (2) “preventing parasitic or opportunistic qui tam actions,” where the relator only provides the government with “duplicative information” or “adds no useful information to the investigation”; (3) “preventing interference with agency policies and programs,” “where an agency has determined that a qui tam action threatens to interfere with an agency’s policies or the administration of its programs and has recommended dismissal to avoid these effects”; (4) “controlling litigation” and “avoid the risk of unfavorable precedent,” “to protect the Department’s litigation prerogatives,” such as to “avoid interference with the government’s ability to litigate the intervened claims”; (5) “safeguarding classified information and national security interests,” “particularly” in cases “involving intelligence agencies or military procurement contracts”; (6) “preserving government resources” in cases “when the government’s expected costs are likely to exceed any expected gains”; and (7) addressing “procedural errors” by relators, when they “frustrate the government’s efforts to conduct a proper investigation.” The Granston Memo notes that “the factors identified above are not mutually-exclusive,” and are not “intended to constitute an exhaustive list.”  Indeed, “there may be other reasons for concluding that the government’s interests are best served by the dismissal of a qui tam action.” Having said that, the Granston Memo contains an important qualifier, noting that “to maximize its resources” the DOJ typically only investigates a whistleblower action to the point needed to decide whether to decline intervention. Since that level of investigation “may not equate to a conclusion that no fraud occurred,” the relator should be afforded “an opportunity to further develop the case” before dismissal is considered. Of the foregoing factors, perhaps the most interesting for defendants is the third – “preventing interference with agency policies and programs.” In discussing this factor, the Granston Memo recognizes that weak qui tam actions can be costly to entities that do business with the government: “ here may be instances where an action is both lacking in merit and raises the risk of significant economic harm that could cause a critical supplier to exit the government program or industry.” In support, the memo cites to a recent decision coming out of the Fifth Circuit, United States ex rel. Harman v. Trinity Industries , 872 F.3d 645 (5th 2017), in which the court reversed a $680 million judgment because the government agency had decided that the relator’s purported violations were not material to the government’s decision to pay. The memo’s citation to Harman suggests that the DOJ would be more inclined to dismiss cases where liability hinges on a minor contractual or regulatory violation that would not pass muster under   Universal Health Services, Inc. v. United States ex rel. Escobar , 136 S. Ct. 1989 (2016), but which could cost significant resources to defend in a qui tam action. Under Escobar , an alleged false certification must be material to a federal agency’s decision to pay the claim for the claim to become an FCA violation. escobar.> escobar.> This Blog has written about Escobar and its progeny here , here , here , here , here , here and here . In a nod toward allowing relators the opportunity to decide whether to proceed with a qui tam action, the Granston Memo recommends that “to the extent possible,” Department attorneys should “consider advising relators of perceived deficiencies in their cases as well as the prospect of dismissal so that relators may make an informed decision regarding whether to proceed with the action.” Such information can save time and resources, especially when the agency affected by the qui tam action opines on “whether dismissal is warranted.” As noted in the memo, “ n many cases, relators … choose to voluntarily dismiss their actions, particularly if the government has advised the relator that it is considering seeking dismissal under section 3730(c)(2)(A).” Takeaway “Of the more than $3.7 billion in FCA settlements and judgements reported by the Department in 2017, $3.4 billion came from cases initiated by whistleblowers, who received nearly $393 million in whistleblower rewards.” ( Here .)  In light of these statistics, this Blog remains skeptical that the Granston Memo will result in a material departure from past Department practice. Indeed, this Blog expects government attorneys to remain resistant to aggressively dismissing qui tam actions. Notwithstanding, the Granston Memo provides useful guidance for relators and defendants to consider in cases in which the strength of the action is in question – guidance that can save the parties, and the government, significant costs in prosecuting or defending the action. For defendants, it is reasonable to expect they will use the Granston Memo to persuade the DOJ that the qui tam complaint in which they are the subject lacks merit and should be dismissed following the initial meeting with the DOJ while the case remains under seal. For relators, it means that, while the case is under seal, they should be given the opportunity to use the factors to further develop their claims before the government acts – either by declination or a motion to dismiss. In any event, whether the Granston Memo portends a sea change in Department policy or is simply a reminder for government attorneys to exercise their statutory authority to dismiss a qui tam action remains to be seen.  One thing is certain, however, even a small shift in the DOJ’s willingness to exercise its dismissal authority would be welcome by FCA defendants.

Directors and officers of publicly traded companies have a fiduciary duty to their shareholders. In the face of corporate misconduct, executives are often reluctant to take legal action against their peers. However, shareholders may bring a derivative lawsuit against the board of directors and other responsible parties. The goal is to compel the board to remedy the damages sustained by company and to protect the interests of investors. Nonetheless, a successful claim depends on the skills of an attorney with experience handling complex litigation. What is a derivative lawsuit? A shareholder derivative lawsuit may arise when a company’s value is diminished because of mismanagement or unlawful conduct by directors and officers. A derivative lawsuit is filed by an investor, or a class of investors, for the benefit of both the corporation and the shareholders. The plaintiffs are not seeking compensation. Instead, the objective is to protect their investment by imposing management changes and corporate governance reforms. Any proceeds of a successful action are awarded to the corporation, not the shareholders. Before filing a lawsuit, a shareholder must demand that the board take legal action. If the board rejects the demand or refuses to act, then the lawsuit is permitted to proceed. Shareholders may file lawsuits to remedy all types of corporate misconduct, including: Breach of Duty of Care - Directors and officers have a duty of care to act responsibly, and in good faith, when managing the company’s affairs. Examples of breaches include a director or officer not exercising rational judgment, acting in bad faith, or not being reasonably informed when making a decision. Breach of Duty of Loyalty - Directors and officers cannot profit at the expense of the corporation and have a duty to put the financial interests of the shareholders first. A breach this duty may involve self-dealing, misuse or waste of corporate assets, or abuse of corporate privileges, such as using a corporate jet for personal travel. Accounting Malpractice - Financial statements must be prepared in accordance with generally accepted accounting principles (GAAP). Corporate executives are prohibited from using aggressive accounting techniques and overstating or manipulating earnings. A derivative lawsuit can be brought to remove the directors and officers who had knowledge of any improprieties. Shareholders may also seek to compel the company to establish stricter governance measures that will prevent similar activities in the future. Improper Mergers and Acquisitions - Shareholders can also pursue legal action to challenge proposed mergers or acquisitions. If the directors and officers approve a deal that fails to maximize shareholder value, a breach of fiduciary duty may have occurred. Other Misconduct - A derivative lawsuit can also be filed if a company’s executives fail to address violations of environmental regulations, wage and hour laws, workplace safety guidelines, or other state and federal regulations. The Takeaway A successful shareholder derivative lawsuit can result in corporate governance reforms, prevent future wrongdoing, and increase shareholder value. In some cases, the court may also approve an incentive reward to compensate the plaintiffs for the time and inconvenience associated with pursuing a legal action. In the end derivative lawsuits and class actions give shareholders power legal recourse to protect their interests.

On January 31, 2018, the Second Department decided 159 MP Corp. v. Redbridge Bedford, LLC.   The Court in 159 MP , recognized that the “appeal raises an issue of first impression in the appellate courts of New York…” to the extent that it “address the question of whether written leases negotiated at arm’s length by commercial tenants may include a waiver of the right to declarative relief that is enforceable at law or, alternatively, whether such a waiver is void and unenforceable as a matter of public policy.” The plaintiffs in 159 MP are related entities that leased from the defendant landlord commercial retail and storage space in Brooklyn for use as a supermarket and related purposes.  The commercial leases executed by the parties contained provisions that reads as follows: waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease.  Any breach of this paragraph shall constitute a breach of substantial obligations of the tenancy, and shall be grounds for the immediate termination of this Lease.  It is further agreed that in the event injunctive relief is sought by Tenant and such relief shall be denied, the Owner shall be entitled to recover the costs of opposing such an application, or action, including its attorney’s fees actually incurred, it is the intention of the parties hereto that their disputes be adjudicated via summary proceeding <(the “waiver provisions”)> .  Four years into a twenty-year lease (with an additional ten-year renewal option), tenants received from landlord a “Ten (10) Day Notice to Cure Violations” (the “Notice”).  In response, and prior to the cure period in the Notice (the “Cure Period”), tenants commenced an action in the Supreme Court for declaratory and injunctive relief and for breach of contract.  Also before the end of the Cure Period, tenants moved by order to show cause for a Yellowstone injunction staying and tolling the Cure Period and enjoining defendant landlord from terminating the leases.  ( Yellowstone injunctions are fully discussed in Freiberger Haber LLP’s December 1, 2017 Blog Post: “Commercial Tenants Must Remain Aware of Yellowstone Injunctions” .) Defendant landlord answered the complaint and, inter alia , asserted an affirmative defense that plaintiff tenants’ right to seek injunctive relief was contractually waived.  Landlord also cross-moved for summary judgment dismissing the complaint based on the Waiver Provision. The Supreme Court denied tenants’ request for a Yellowstone injunction finding “that all the plaintiffs’ claims were actual or disguised causes of action for declaratory relief…”, and granted landlord’s cross-motion for summary judgment. A divided Appellate Division, Second Department, affirmed the Supreme Court’s decision.  First, the Court held that tenants timely obtained Yellowstone injunctive relief.  However, in finding that such relief was unavailable to tenants in 159 MP, the Court stated that: By nature and definition, a Yellowstone injunction is inextricably intertwined with the court’s role in resolving whether a tenant has breached provisions of the lease and, if so, whether any such breach shall be cured.  As here, a tenant’s preemptive action to have the court determine that the lease has not been breached is in the nature of declaratory judgment.  (Citations omitted.) The Court rejected tenants’ argument that there was a distinction between the declaratory relief prohibited by the Waiver Provision and permissible Yellowstone relief because “ y nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it.”  Because “plaintiffs expressly waived both declaratory and Yellowstone relief pursuant to the ”, the Court held that the Supreme Court properly denied the Yellowstone relief sought by tenants and granted landlord’s cross-motion for summary judgment dismissing the causes of action seeking declaratory relief. Although tenants’ argument that the Waiver Provisions were void as against public policy was raised for the first time on appeal, the Court nonetheless addressed those arguments because “where a contract provision is arguably void as against public policy, that issue may be raised for the first time at the Appellate Division by a party, or by the court on its own motion.”  (Citation omitted.)  Upon consideration, the Court determined that the Waiver Provisions were not void.  Among other things, the Court relied on the fact that “ bedrock principle of our jurisprudence is the right of parties to freely enter into contracts” and that “our jurisprudence provides citizens with the freedom and opportunity to abandon rights and privileges.”  The Court also stated that while “ aivers of rights should not lightly be presumed,” the “parties were sophisticated entities that negotiated at arm’s length and entered into lengthy and detailed leases defining each party’s rights and obligations with great apparent care and specificity.” The plain language of the Waiver Provisions were found to “reflect[] the parties’ mutual intent to adjudicate disputes by means of summary proceedings.” Ultimately, the Court held that “ eclaratory and Yellowstone remedies are rights private to the plaintiffs that they could freely, voluntarily, and knowingly waive.” The Court, in issuing its ruling, considered that notwithstanding the subject waivers plaintiffs had other remedies available to them to protect their interests.  For example, plaintiffs could have cured the breaches that were the subject of the Notice and sued landlord for breach of contract or otherwise.  Also, plaintiffs could have asserted defenses in any summary proceeding brought against them by landlord and, if successful, they would remain in possession. In a lengthy dissent, Justice Connolly urged that the Waiver Provisions were void as against public policy and, therefore, unenforceable because their “enforcement…would deprive the plaintiffs of any meaningful means of accessing the courts….”

Why Corporate Governance Matters Today, it is essential for directors and officers of public companies to have an understanding of corporate governance. Essentially, this involves adhering to state and federal rules and regulations, meeting fiduciary obligations and establishing and implementing internal controls. Ultimately, an attorney with experience in internal investigations and corporate governance can provide guidance on these critical responsibilities. Sarbanes-Oxley Compliance The Sarbanes-Oxley Act of 2002 is designed to foster transparency in corporate governance and financial reporting. The law created a formal system of internal checks and balances designed to ensure the accuracy of corporate financial statements and balance sheets. It is worth noting that the law imposes penalties for noncompliance, including fines and potential delisting of a company from public stock exchanges. In addition, chief executive officers and chief financial officers who knowingly submit incorrect certifications of financial statements can be held legally liable, risking fines and imprisonment. What is good corporate governance? There are a variety of concerns that executives must consider, such as governance structure and oversight, director and officer indemnification and insurance, risk management, and shareholder demands. Because boards of directors are tasked with running corporate affairs, every board member must have a thorough understanding of corporate governance. Moreover, each member should be held accountable for his/her decisions. Boards must also work closely with senior management, conduct self-evaluations of their governance policies, and develop training programs for managers related to internal controls. There is a wide range of other governance concerns, including best practices, codes of ethics, fiduciary duties, conflicts of interest, management succession plans and issues related to mergers and acquisitions and other corporate transactions. Finally, it is essential to establish training programs for employees at all levels of an organization. Director Liability Directors and officers can be held personally liable if a criminal proceeding or enforcement action causes significant financial losses for a company or a decline in its stock value. In addition, executives may also be held legally responsible for the unlawful actions of employees under their supervision. The Takeaway Corporate governance is more than a system of checks and balances. It is the ethical foundation of a business. At the same time, having proper internal controls can mitigate the risk of a regulatory enforcement action, shareholder disputes or civil litigation. Ultimately, establishing a governance structure requires the advice and counsel of an experienced attorney.

Alternative dispute resolution (“ADR”) has been gaining momentum as an alternative to litigation over the past decade. Most major corporations insist on it, in one form or another, in every contract they execute. ADR can take on many forms, including negotiation, mediation and arbitration. All ADR methods have pros and cons that should be considered before making them a part of a company’s legal process. Independent Negotiation This is the least formal ADR tactic available and the most common. Most disputes begin with negotiations, in an attempt by the parties to avoid ill-will and court costs. ●      Inexpensive ●      Faster than any other means of resolution ●      More private than court ●      Flexible ●      Risk-Free – parties can always escalate ●      Potential for continued working relationship : ●      Can be a stalling tactic ●      No guarantee of a resolution ●      Power imbalances may go unchecked ●      No guarantee of good faith ●      Lack of neutral 3rd party reduces chance of agreement of complex, multi-party disputes Mediation Mediation is sometimes required by contract and is occasionally a mandatory pre-litigation step in some jurisdictions. Mediation is an informal process wherein the parties meet in front of one or more mediators, also known as “neutrals,” in an attempt to sort out the needs and desires of the parties and reach a resolution. Mediation may be either binding, or nonbinding. In binding mediation, the recommendation of the mediator or agreement of the parties is binding on all parties. In non-binding mediation, if the parties do not reach a resolution or do not agree with a mediator’s recommendation, they may escalate the matter to the courts or to arbitration. ●      Confidential ●      Generally less expensive than trial ●      Faster resolution, compared to going to court ●      Parties may choose a mediator with substantive knowledge of the dispute ●      3rd party neutral can help overcome impasses and alleviate emotional situations ●      If claim could be settled in small claims court, mediation may be prohibitively expensive ●      Incompetent mediators may hinder resolution ●      All parties’ rights may not be adequately protected ●      Legal precedents not created Arbitration Arbitration is typically binding in nature, though not always. This is set in contractual negotiations. However, given the expense of arbitration proceedings, it is generally futile to agree to non-binding arbitration when either party may decide to litigate anyway after going through the time and expense of arbitration. ●      Private ●      Faster than litigation ●      Parties can design the process ●      Sometimes less expensive than trial ●      Confidential Process ●      More formal process than mediation – compels decorum ●      Parties can choose substantive expert(s) to serve as arbitrator(s) ●      Successful outcome may be dependent on quality of mediator ●      Unsatisfactory outcomes may not be addressed by a judge ●      Lack of cooperation by a party may extend time and expense ●      Lack of legal precedents in matters that should be addressed once and for all Takeaway For decades, there has been significant interest in finding ways to resolve business and commercial disputes through methods other than litigation. Some ADR techniques that individuals and businesses have turned to are somewhat new, while others have been used for many years. All methods, however, have a common objective: the resolution of disputes in less time, at less cost and with less emotional turmoil and hostility than typically results from litigation. Independent negotiation, mediation and arbitration offer efficient and effective alternatives to litigation. All three methods may significantly reduce the cost of achieving a resolution of a dispute, and may be conducted at any time, at any location and at the convenience of the parties.

Like many things in life, operating a business with another person, or many persons, is a risk. There is always the possibility that your business associates may act for their own benefit, rather than for the benefit of the business. The law recognizes this risk and assigns special obligations of fidelity to business partners. These obligations are commonly known as fiduciary duties, which require business partners (including officers, directors and managing shareholders of corporations) to act in a trustworthy manner, with honesty, and with the best interests of the company in mind. Unfortunately, these obligations do not always encourage good behavior. Countless claims of breach of fiduciary duty have been brought in commercial litigation over the years. What is a Fiduciary Duty? There are two types of fiduciary relationships: 1) those created by law ( e.g. , statute) or contract; and 2) those that arise from the circumstances underlying the relationship between the parties and the nature of the transactions at issue. While courts generally look to a statute or contractual arrangement to determine the nature of the parties’ relationship ( e.g. , the first type of fiduciary relationship), the existence of a fiduciary relationship is not dependent solely upon a statute or contractual relation. See EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 20 (2005). Rather, the actual relationship between the parties determines the existence of a fiduciary duty ( e.g. , the second type of fiduciary relationship). Id . In Meinhard v. Salmon , 164 N.E. 545, 546 (N.Y. 1928), Justice Cardozo provided the “classic formulation” of a fiduciary duty: Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this, there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a higher level than that trodden by the crowd. In more modern times, the New York Court of Appeals has described the duty as arising from a relationship “‘between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.’” See EBC I , 5 N.Y.3d at 19, quoting Restatement (Second) of Torts § 874, Comment a. The circumstances under which a fiduciary relationship can arise have no limit. Nevertheless, there are certain persons who are often found to be fiduciaries: lawyers; bankers; business partners; corporate directors; corporate officers; managing shareholders; personal representatives (executors and administrators); trustees; and investment advisors. There are three forms of fiduciary duties (often referred to as the “triad” duties): due care; loyalty; and candor Any disinterested and independent decision that is made by a fiduciary, especially a corporate fiduciary, is analyzed under the business judgment rule. The business judgment rule is based on the premise that a court should not be entitled to Monday-morning quarterback decisions made by fully informed individuals who are free from conflicts of interest. Auerbach v. Bennett , 47 N.Y.2d 619 (1979). Thus, the courts will not second-guess the decisions made by fiduciaries and will not hold them personally liable even if the decision turns out to be the wrong one. Duty of Care The duty of care, quite simply, is the duty to act as a reasonable and prudent person in a similar circumstance would act. Duty of Candor A fiduciary must act, not only with honesty, they must fully disclose information that may harm the business or individual that is owed the duty. Duty of Loyalty The duty of loyalty requires that fiduciaries act in good faith and with the best interests of the business or corporation in mind, putting the interests of the business or corporation above their own personal interests. As one court observed: The reasons for the loyalty rule are evident. A man cannot serve two masters. He cannot fairly act for his interest and the interest of others in the same transaction. Consciously or unconsciously, he will favor one side or the other, and where placed in this position of temptation, there is always the danger that he will yield to the call of self-interest. Wachovia Bank & Trust Co. v. Johnston , 269 N.C. 701, 715, 153 S.E.2d 449, 459-60 (1967). See also Birnbaum v. Birnbaum , 73 N.Y.2d 461, 466 (1989) (“it is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and ‘inflexible’ rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty.”) (citations omitted). Included under the umbrella of loyalty is the duty of good faith and fair dealing, which obligates fiduciaries to act with honesty and in the best interests of the corporation. Examples of a breach of the duty of loyalty include: usurping a corporate opportunity; acting with a conflict of interest; competing with the corporation; and misappropriating assets of the corporation. If a fiduciary has the consent of other disinterested fiduciaries, such as a corporate director, that person may undertake the first three bullet points. If a fiduciary breaches the duty of loyalty, the business judgment rule does not apply, and the fiduciary may be held personally liable for their actions. Burden of Proof A plaintiff making a claim against another for breach of fiduciary duty must prove certain factors, depending upon whom the fiduciary is. Fiduciary is a partner, agent, trustee or non-statutory fiduciary – a plaintiff must prove: (a) the existence of a fiduciary duty, (b) the defendant breached that fiduciary duty, and (b) the plaintiff was damaged directly by the breach. Baldeo v. Majeed , 150 A.D.3d 942 (2d Dep’t 2017). Fiduciary is a director or officer – the plaintiff must first overcome the business judgment rule – that is, the presumption that the defendant acted on an informed basis, in good faith, and with the best interests of the company taken into account. In some cases, the court will apply an enhanced scrutiny standard, which shifts the burden to the defendants to show that: (a) the decision-making process was adequate (the reasonableness test), and (2) reasonable in light of the existing circumstances (the proportionality test). Takeaway A breach of fiduciary duty claim is generally no different from other tort claims. Therefore, a breach of fiduciary duty claim should be approached in much the same way as any other tort claim. In this regard, plaintiffs should be mindful of their burden of proof. In New York, a breach of fiduciary duty claim must be pleaded with particularity. Litvinoff v. Wright , 150 AD 3d 714, 715 (2d Dep’t 2017). And, if the plaintiff asserts a contract claim, s/he should be mindful that the claims do not overlap. Under New York law, a breach of fiduciary duty claim that is premised on the same facts and seeks the same relief as a breach of contract claim is duplicative of the contract claim and subject to dismissal. Gawrych v. Astoria Federal Savings & Loan , 148 A.D.3d 681, 684 (2d Dep’t 2017). Finally, where the claim arises in the corporate context, attention should be given to the business judgment rule and the presumption that attaches to it.

In P. Zaccaro, Co., Inc., et al. v. DHA Capital, LLC, et al. (1st Dep’t January 25, 2018) , the First Department affirmed the dismissal of plaintiffs’ action seeking a significant brokerage commission on the sale of real property in lower Manhattan (the “Premises”) for in excess of $50,000,000.00 because the plaintiff brokers failed to disclose that they represented both the buyer and the seller. According to decisions in the underlying action, the facts as alleged in the complaint are as follows. Plaintiffs are licensed real estate brokers. Defendant Sentry Operating Corp. (“Sentry”) was the owner of the Premises. In 2014, the principal of plaintiff P. Zaccaro, Co., Inc. (“Zaccaro”), met with Sentry’s principal to discuss the sale of the Premises. The meeting resulted in a brokerage agreement pursuant to which Zaccaro was to procure a “ready, willing and able” purchaser for the Premises. Thereafter, Zaccaro contacted plaintiff New Golden Age Realty, Inc. (“Golden”), a Century 21 franchisee, to assist it in finding a buyer. David Shargani (“Shargani”) is a licensed broker with Century 21. Zaccaro and Golden determined that defendant DHA Capital LLC (“DHA”) would be a good candidate to purchase the Premises, but DHA had already engaged defendant Nest Seekers, LLC (“Nest”). Believing that Nest Seekers did not have a real purchaser, Sentry refused to deal with it. Thereafter, Nest Seekers contacted Shargani and advised of DHA’s interest in the Premises. Shargani advised Nest Seekers of his connection with the Premises through Zaccaro. Thereafter, Nest advised Zaccaro and Golden that DHA would pay a 3% brokers commission for the sale. Nest, Golden and Zaccaro entered into an agreement to equally split the 3% commission amongst themselves. Representatives of Nest and DHA and Shargani discussed the terms of the transaction and, thereafter, Shargani made clear to DHA that Nest, Zaccaro and Golden would split a 3% commission. DHA’s representative verbally agreed to the commission split. The Premises were sold by Sentry to DHA due to the efforts of Golden and Zaccaro. As a result of their oral agreement with the representative of DHA, Golden and Zaccaro claimed they were each entitled to a commission equal to 1% of the sale price of the Premises. DHA moved (motion Sequence 3) to dismiss the Complaint pursuant to CPLR §3211(a)(7) for failure to state a claim arguing that its failure to consent to Zaccaro acting as a dual agent on behalf of the buyer and the seller in the transaction “warrants forfeiture of the right to collect any commission and dismissal of the amended complaint.” That motion was granted, and the complaint was dismissed as against DHA. In that regard, Supreme Court held that: Real estate brokers have a fiduciary relationship with their client and an affirmative duty not to act for a party with adverse interests unless consent is obtained from the principal after being provided with full knowledge of the facts. A broker, cannot act as agent for both seller and purchaser of the property. A real estate broker forfeits the right to a commission regardless of the damages incurred if the fiduciary duty is breached. (Internal quotation marks and citations omitted.) The underlying action was not dismissed as to the remaining defendants, and, therefore, continued to proceed, as against them. Thereafter, plaintiffs moved (motion sequence 4) for a default judgment and discovery related relief against Sentry for its failure to answer the amended complaint and to respond to discovery demands. Sentry cross-moved for, inter alia, an order dismissing the complaint as against them for the same reasons that resulted in the dismissal of DHA. By Order dated April 4, 2017 (the “April Order”), Supreme Court denied plaintiffs’ motion in its entirety and granted Sentry’s motion to dismiss the amended complaint as against them. Relying on the “law of the case” doctrine, Supreme Court held that because plaintiffs acted in a dual agency capacity without notice to Sentry, this time, plaintiffs’ forfeited their right to a commission from it. Supreme Court rejected Plaintiffs’ argument that “they simply introduced DHA…to Sentry, without being called upon to do anything more, and thus acted as a traditional finder and not a fiduciary.” In so holding, Supreme Court relied on the allegations in the amended complaint that plaintiffs were acting as DHA’s broker as well as Sentry’s broker. Plaintiffs appealed to the First Department. In unanimously affirming Supreme Court’s April Order, with costs, the First Department found that plaintiffs “engaged in an impermissible dual agency without full disclosure.” (Citation omitted.) Plaintiffs’ argument that it was merely a finder, as opposed to a broker, was also rejected, by the First Department, which held: A finder has no obligation to negotiate the real estate transaction in order to obtain its fee. Here, the amended complaint indicates that plaintiffs were obligated to negotiate the sale of the premises. (Citations omitted.) As a result of the dismissal of the complaint as against DHA and Sentry, the plaintiffs lost millions of dollars in commissions. TAKEAWAY Real estate brokers should be mindful of their role in the transactions in which they participate. If called upon to act in numerous capacities for different parties, full disclosure to all parties should be made and express written consent should be obtained.

The Financial Industry Regulatory Authority (“FINRA”) recently released its 2018 Regulatory and Examination Priorities Letter (the “Priorities Letter”) ( here ). here .=">here."> The Priorities Letter identifies the areas that FINRA intends to focus on in the coming year. “The coming year will bring both continuity and change in FINRA’s programs,” FINRA President and CEO, Robert Cook (“Cook”), wrote in a note accompanying the letter. FINRA’S 2018 Priorities at a Glance The Priorities Letter describes areas that are designed to improve the compliance, supervisory and risk management procedures of member firms. Similar to the self-regulatory organization’s priorities in 2017, retail fraud and high-risk brokers top the list. “Fraud is always a major area of focus for FINRA,” said Cook. Noting that FINRA “made hundreds of referrals to the U.S. Securities and Exchange Commission (SEC) for potential insider trading and other fraudulent activities involving individuals or entities outside FINRA’s jurisdiction,” Cook said that the self-regulator “will continue to pursue our investigations in these areas aggressively.” “ top priority for FINRA” in the coming year, will be “identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors.” In particular, there will be an emphasis on broker recommendations to unsophisticated, vulnerable investors - particularly the elderly. For example, FINRA intends to “focus on recommendations for speculative or complex products by high-risk brokers to investors who may not have the necessary sophistication, experience or investment objectives.” The self-regulatory organization “will also review situations where registered representatives have control of investors’ finances as power-of-attorney or trustee on customer accounts, or have future rights to customer assets as a named beneficiary on customer accounts.” here=">here" and="and" >here.=">here."> Protection of customer assets and the accuracy of member firms’ financial data also will be a FINRA priority. According to the Priorities Letter, “FINRA will continue to focus on firms’ liquidity planning, compare strengths and weaknesses across firms’ liquidity plans and share effective practices.” In particular, “FINRA will evaluate whether a firm’s liquidity planning is appropriate for the firm’s business and customers, and whether it includes scenarios that are consistent with its collateral resources and client activity.” FINRA will continue its efforts to stop bad actors, promote fair and transparent sales practices, and identify and halt abusive market activities. The self-regulator will focus on high-risk brokers with new rulemaking initiatives and examinations. In addition, other areas of focus will be on operation and financial risks, particularly technology governance and cybersecurity, as well as market regulation, the protection of which Cook stated “must remain a top priority for firms.” Cook also noted that the Priorities Letter, coupled with FINRA’s 2017 Examination Findings Report ( here ), “serves as a resource for broker-dealers to enhance their compliance, supervisory and risk management programs and to prepare for their FINRA examination.” here.=">here."> The self-regulator also plans to roll out a revamped exam program. FINRA will implement a risk-based framework aimed at aligning exam resources with the risk profiles of member firms. In this regard, FINRA plans to add or enhance information sharing measures during exams as well as to improve examiner training. Above all, FINRA will continue to work to ensure market integrity, including best execution, protection against manipulation across markets and products, and fixed income data integrity. The Takeaway Although FINRA’s mission will continue to be protecting investors and promoting market integrity, there will be changes in how FINRA accomplishes its mission. In this regard, there will be ongoing changes to the structure of FINRA’s advisory committee, based on input from member participants. The effectiveness of these changes and priorities remain to be seen. As noted by the self-regulatory organization, “FINRA will update its view on risks throughout the year, as well as provide observations on both concerns and effective practices relevant to some of these areas.”