A/C Privilege - Common Interest Doctrine

In Seahaus La Jolla Owners Association v. Superior Court (224 Cal.App.4th 754), the California Court of Appeals explained the Common Interest Doctrine of the attorney-client privilege.  The defendant sought to obtain information disclosed by counsel of the HOA at pre-litigation meetings; the defendant claimed that the presence of homeowners (who were affiliated with the defendant) at the pre-litigation meetings waived the attorney-client privilege. The plaintiff claimed the disclosure was was protected under the Common Interest Doctrine and contested the defendant's request.

The Court ruled in favor of the plaintiff and held the information privileged. As the Court explained, the Common Interest doctrine was a qualified privilege dependent on the content and circumstances of the communication sought to be privileged.  The qualification required that all parties (to the allegedly privileged communication) have (1) a common interest in securing legal advice related to the same matter, and (2) the communications are made to advance that common interest.  Since the homeowners were concerned with their respective property values in relation to the claim made by the HOA, they shared a common interest in the legal status of the HOA’s claim.  Since the disclosures were also made pursuant to the HOA’s claims, they were made to advance said common interest.  Because the HOA was required by law to notify all homeowners of upcoming litigation, its was required to disclose the information to homeowners affiliated with the defendant, and that did not destroy the privilege.

The court concluded that the decision did not expand the scope of the attorney-client privilege, but only applied recognized rules to an unusual set of facts.

Shareholder records and book inspection qualified right under §220

In United Techs. Corp v. Treppel (2013 Del. LEXIS 608) the Court of Chancery denied defendant United’s request to restrict the use of information obtained through a shareholder records and books inspection under Delaware General Corporation Law §220(c). In 2012, shareholder Lawrence Treppel sent a demand letter to United's board to investigate and commence proceedings against certain officers and directors for their involvement in exporting military helicopter software to the Chinese government.  For those actions United entered into a Deferred Prosecution Agreement with the Justice Department and paid significant fines.  Treppel was not the only shareholder to file suit, but the first shareholder derivative action was dismissed for failing to make a demand on the board.  The board rejected Treppel’s demand and insisted that he sign a confidentiality agreement before an inspection; Treppel refused based on the Delaware court forum selection clause within the confidentiality agreement.  Treppel then filed a DGCL §220 action in the Court of Chancery and while it was pending, the United board adopted a forum selection clause to its bylaws.  The Court denied United’s inspection restriction and United appealed.

The Supreme Court of Delaware reversed.  Section 220(c) states: “The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relied [deemed] just and proper.”  The Court explained the broad discretion was based on shareholder inspection rights being qualified.  Because the Court of Chancery denied the request without analyzing any considerations for its discretion, the Supreme Court remanded.  On remand the Court of Chancery was to consider the duplicative nature of Treppel’s litigation, United interest in a Delaware forum, United’s adoption of the forum-selection clause, and the investment United already made in the present and prior litigation.

The Court reversed and remanded the case.

Terms and Marketing of Annuity Insufficient to Support RICO Fraud Claims

In 2007, Paul Harrington purchased a MarketPower Bonus Index Annuity (the “Annuity”) from Equitrust Life Insurance.  The Annuity uses “index accounts” to generate “index credits” that increase the annuity’s total amount based on periodic changes in the closing value of the S&P 500.  The Annuity also permitted annual withdrawals to an extent with no penalty; larger withdrawals were subject to diminishing surrender charges and market value adjustments.  The Annuity also included a premium bonus whereby Equitrust added 10% of the premiums paid in the first year. In 2009, Harrington brought a putative class action against Equitrust (Harrington v. EquiTrust Life Ins. Co., 2015 U.S. App. LEXIS 2717) for violations of RICO and Arizona law.  After Harrington filed a motion for class certification, Equitrust moved for summary judgment.  The district court granted summary judgment, entered judgment for Equitrust, but declined to award costs without any explanation.  Both parties appealed.

Harrington specifically alleged RICO violations of mail fraud (18 USC §1341) and wire fraud (18 USC §1343).  The violations can either be premised on a non-disclosure or an affirmative representation, but non-disclosure can support fraud only if the person charged breached an independent duty.  Harrington based his complaint entirely on the language of the Annuity contract and marketing materials - specifically, the (1) promise of premium bonuses, (2) the application of the Annuity’s market value adjustment, and (3) the circumvention of state nonforfeiture laws.

The Ninth Circuit agreed with the district court finding no actionable predicate acts.  Harrington claimed that the bonus was fraudulent because Equitrust failed to disclose that no additional money is invested when the bonus is credited and that the bonus is recouped by Equitrust crediting lower index credits than it might have in a contract without bonuses.  However, Equitrust delivered exactly what it promised.  Equitrust accurately described the program and it was unclear whether the Annuity would not outperform a non-bonus annuity.  As to the market value adjustment, Harrington alleged that the marketing materials failed to disclose a constant used for calculating the adjustment.  Again the Court rejected Harrington’s argument, noting the meticulous explanation and examples of the adjustment formula.  Finally, Harrington argued that the Annuity had an optional maturity date, based on Equitrust’s policy of affording annuitants relief from fixed-date terms upon request, which violated Arizona non-forfeiture law.  His argument failed because he offered no authority for his proposition and suffered no recognizable injury from his claim.

Addressing Equitrust’s appeal, the Ninth Circuit explained that a court is within its discretion to deny costs to a prevailing party under F.R.Civ.P. 54(d), but must explain the denial.

The Ninth Circuit affirmed summary judgment, vacated the order denying costs, and remanded to the district court for an explanation.

ERISA Welfare Plans Subject to General Principles of Contract Law

When M&G Polymers USA purchased a polyester plant in 2000, it also entered into a collective bargaining agreement and pension agreement that provided that specific retirees would “receive a full Company contribution towards the cost of [health care] benefits.”  The agreements were subject to renegotiation three years later.  After the agreements expired, M&G changed the plan, and required that retirees contribute to health care benefit costs.  Those retirees who received benefits under the initial agreement brought suit (M&G Polymers USA, LLC v. Tackett (2015 135 S.Ct. 926) against M&G for violations of §301 of the Labor Management Relations Act and §501(a)(1)(B) of ERISA.  The retirees claimed that the initial agreement created lifetime contribution free health care benefits. Although the district court dismissed the case for failure to state a claim, the Sxith Circuit Court of Appeals reversed.  The Court of Appeals applied International Union, et al v. Yard-Man, Inc. (716 F.2d 1476) inferring the parties to a CBA intended retiree benefits to vest for life based on the fact that such benefits are not required in CBAs and typically understood to be a form of delayed compensation.  Here, specifically, the Court of Appeals concluded that the agreement vested lifetime rights as the beneficiaries would not have agreed to terms that could have been unilaterally changed later by M&G.  After remand and appeal in favor of the retirees, M&G petitioned for certiorari.

The Supreme Court began by explaining that ERISA welfare plans must be established by written agreement under §1102(a)(1), but the plan sponsors are generally free to adopt, modify, or terminate those plans.  As such, the plans must be enforced as written and interpreted according to ordinary principles of contract law.  Although the Sixth Circuit has insisted that the reasoning from Yard-Man and its progeny relied upon principles of contract law, the Supreme Court disagreed.

First, Yard-Man violates the basic principle of the intent of parties by favoring the retirees regarding vested rights in CBAs.  In Yard-Man, the Sixth Circuit derived its assessment from assumptions regarding the intent of the employees and not evidence in the record.  Although intent of the parties can be inferred from industry practice, no evidence supported the court’s inference.

The Court continued, stating that Yard-Man also ignored general durational clauses in contract law inferring that parties would not leave retiree benefits contingent to future negotiations.  The Court of Appeals also misapplied the concept of illusory promises.  The Yard-Man court held that provisions of the welfare plan were illusory because they benefitted some retirees but not all.  The Court explained that this contradicted the concept of illusory promises.  If some retirees received a benefit, it constitutes consideration, and is not illusory simply because it is inapplicable to all parties to the contract.

Finally, the Yard-Man court failed to consider that courts should not construe ambiguous agreements to create lifetime promises.  Although parties are free to provide lifetime benefits in CBAs, when a contract is silent to the duration, the Court cannot infer those benefits.

The Supreme Court vacated the Sixth Circuit’s decision relying on Yard-Man and its progeny and remanded the case, directing the Sixth Circuit to apply the ordinary principles of contract law to interpret the contract at issue.

Corporation cannot be designated as Expert

The Delaware Court of Chancery recently ruled that a corporation cannot be delegated as an expert witness in In Re Dole Food Co., Inc. (2015 Del. Ch. LEXIS 47). In the plaintiff’s breach of fiduciary duty case regarding a take-private action of Dole, the defendants identified Stifel, Nicolaus & Company, Inc. (“Stifel”) as their expert witness for valuation purposes.  The defendants served expert reports identifying Stifel as its author with signatures from the managing director and an employee of Stifel as authorized representatives.  The plaintiffs noticed a Rule 30(b)(6) deposition and questioned whether the defendants designated Stifel or its managing director as the expert during the deposition.  Defense counsel objected when the managing director claimed authorship of the report, stating that Stifel was the expert.

The court explained that although many statutory provisions refer to corporations as “persons”, the Delaware Rules of Evidence clearly require a witness to be a biological person.  The Rules of Evidence require testimony from personal knowledge, that the witness be able to take an oath, and that a witness may have to be sequestered in proceedings - requirements that a corporation cannot meet.

In addition to those requirements, a corporation cannot perceive facts or data, be qualified by knowledge, skill, experience, training or education, or apply reliable principles and methods to the facts of the case.  Finally, a corporation could not designate an agent because no one is permitted to testify through an agent.

In order to avoid prejudicing the defendants from proceeding without an expert, the Court allowed the defendants to proceed with the managing director.

The Court concluded that the managing director has a body and a brain, and as long as he is otherwise qualified, is allowed to serve as an expert witness. The corporation on the other hand, has neither and cannot.