BERGEN BRUNSWIG: Wolf Haldenstein Files Securities Lawsuit in Delaware COMET SYSTEMS: Hit With Web Browsers' Suit over Privacy COMPUTER ASSOCIATES: NY Ct Denies Motion to Dismiss Securities Suit CSX CORP: Loui. Judge Pares Jury's $2.5B Award to $850M for Car Fire DELTA & PINE: Agrees to Settle Missouri Suit Re Bronze Wilt of Cotton
DELTA & PINE: DOJ Investigates on Acquisition and Antitrust DELTA & PINE: Farmers in Mississippi Can Sue After Loss in Arbitration DELTA & PINE: Monsanto Indemnifies TX Suits over Gene in Cottonseed DELTA & PINE: Settles Shareholder Suit in Dela. Re Merger with Monsanto DELTA & PINE: Tenders out Defence of Suit in Georgia Re Glyphosate Gene
DELTA & PINE: Tenders out Defense of Loui. Suits over Soybean Seeds DELTA & PINE: Arbitration with Farmers Goes on in Georgia, Ark. & Fla. DIGNITY PARTNERS: SIA Urges 9th Cir to Rehear Viatical Shareholder Case GUN MANUFACTURERS: Update on Responses to Clinton Administration's Suit HOLOCAUST VICTIMS: Schroder Rules out Larger Fund; Envoy Is Open to It
INMATES LITIGATION: 11th Cir in Alabama Says HIV Poses Direct Threat LLOYD'S INSURANCE: Argues against Asbestos Related Fraud Claims in N.Y. MONTGOMERY WARD: Presents Dela. Trent Settlement Pact to Bankruptcy Ct NAVIGANT CONSULTING: Lowey Dannenberg Files Securities Suit in Illinois O'QUINN: Former Clients in TX Sue over Kennedy Heights Toxic-tort Case
ORANGE UNIFIED: Retired Teachers Sue over Reneging on Medical Care PLAINS ALL: Shepherd & Geller File Securities Suit in Texas RUBENSTEIN: Fed Ct Oks Classes in Urologists' Price-Fixing Case in Il. STYLING TECHNOLOGY: Shepherd & Geller File Securities Suit in Arizona THE YORK: Former Employees Sue over Age Discrimination in Downsizing
TOBACCO LITIGATION: French Ct Holds Seita Liable for Death of Smoker U.S.: Fed Judge Dismisses Lawsuit over Phasing out of Marijuana Program Y2K LITIGATION: Paper Says Act May Complicate Litigation Y2K LITIGATION: Remediation Cost Can Be Claimed Under Property Policies
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BERGEN BRUNSWIG: Wolf Haldenstein Files Securities Lawsuit in Delaware ---------------------------------------------------------------------- Wolf Haldenstein Adler Freeman & Herz LLP, The Law Offices Of Charles J. Piven, P.A., and Chimicles & Tikellis announce on December 8, 1999 that they have filed a class action lawsuit in the United States District Court for the District of Delaware on behalf of investors who purchased or otherwise acquired the shares of 7.8% Trust Originated Preferred Securities ("TOPrS" or the "Preferred Stock") of Bergen Capital Trust I ("BCT"), a subsidiary of Bergen Brunswig Corporation ("Bergen" or the "Company") pursuant to a public offering that went effective on or about May 26, 1999 in a public offering or thereafter on the open market until October 14, 1999 (the "Preferred Stock Offering"), certain of its officers and directors, and Merrill Lynch & Co., Inc., Banc of America Securities LLC, A.G. Edwards & Sons, Inc., Goldman, Sachs & Co., Morgan Stanley & Co., Inc., PainWebber Incorporated, and Prudential Securities, Inc., (collectively "defendants").
The Complaint charges defendants with violations that arise under 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act").
Specifically, on May 26, 1999, Bergen consummated the Preferred Stock Offering, selling 12 million shares of the Preferred Stock and receiving net proceeds in excess of $290 million. As detailed in the Complaint, the registration statement and other materials filed with the SEC concerning the Preferred Stock Offering did not discuss, or even mention, that the financial data for Bergen, following its recent acquisition of Stadtlander Drug Co., Inc. ("Stadtlander") could not be relied upon because Stadtlander was suffering from accounting irregularities.
On October 14, 1999, however, Bergen, to the surprise of the markets, announced that it would not meet analysts' consensus estimates for its fourth quarter and fiscal year ended September 30, 1999, blaming the shortfall on "[l]ower than expected results at Stadtlander." That same day, Bloomberg, Dow Jones and other news services reported that Bergen had filed a lawsuit against Counsel Corp., (the company that sold Stadtlander to Bergen) claiming that Counsel Corp. had "fraudulently induced" Bergen into paying an "inflated purchase price" for Stadtlander by "grossly overstat[ing] the specialty-drug unit's earnings and net income during periods when it actually had little or no income."
Stadtlander's huge and pervasive accounting irregularities, as described by Bergen in its complaint against Counsel Corp., are so great that their existence at the time of the Preferred Stock Offering is self evident. Moreover, the Bergen lawsuit substantiates the existence of these conditions at the time of the purchase of Stadtlander continuing at least until October 14, 1999. Thus, the registration statement and related documents issued during the course of the Preferred Stock Offering were materially misleading. Defendants were directly responsible for the contents of these documents, filed with the SEC, and employed to effectuate the Preferred Stock Offering. Since disclosure of this information, the TOPrS have declined significantly.
If you purchased TOPrS pursuant to the Preferred Stock Offering, or traceable there to, you have until, January 24, 2000 to participate in the case and ask the Court to appoint you as one of the lead plaintiffs for the Class.
In order to serve as lead plaintiff, you must meet certain legal requirements. If you wish to discuss this action or have any questions, please contact Wolf Haldenstein Adler Freeman & Herz LLP at 270 Madison Avenue, New York, New York 10016, by telephone at (800) 575- 0735 (Michael Miske, Gregory Nespole, Esq., via e-mail at classmember@whafh.com, whafh@aol.com, nespole@whafh.com or Gnespole@aol.com or visit website at http://www.whafh.com or contact Pamela Tikellis, Esq. at (302) 656-2500, or Charles J. Piven at (410) 332-0030 or by e-mail at pivenlaw@eros.com (All e-mail correspondence should make reference to Bergen.)
COMET SYSTEMS: Hit With Web Browsers' Suit over Privacy ------------------------------------------------------- Comet Systems Inc., which distributes free software that allows computer users to change their Web browser cursor into cartoon characters, failed to tell millions of customers that it was also tracking the sites they visited, a class-action lawsuit filed December 8 alleges. Comet Systems used this information about its customers' viewing habits 'for its own benefit.' The company did not return a call seeking comment. (National Post (formerly The Financial Post) December 09, 1999)
COMPUTER ASSOCIATES: NY Ct Denies Motion to Dismiss Securities Suit ------------------------------------------------------------------- U.S. District Court: E.D.N.Y.
IN RE COMPUTER ASSOCIATES CLASS ACTION SECURITIES LITIGATION QDS:03761812 -Defendants have moved to dismiss plaintiffs' Consolidated Amended Class action Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.
Background
Lead plaintiffs Steven Sinsheimer, John Greco, Felix Glaubach, Mishel Tehrani, Jerry Wehmhoefer, Lillian Herschkowitz, Bruce Montague, Kerry Gillispie, John Biegen, Jixiang Wu, Richard Wadsworth, and Andrew Breiman all purchased stock in Computer Associates International, Inc. or transacted in such stock options from January 20, 1998, through July 22, 1998, the relevant period in this action. (On October 9, 1998, this Court appointed these individuals Lead Plaintiffs.) Likewise, plaintiffs' putative class consists of over two-hundred individuals who purchased CA stock during the Class Period.
Defendant Computer Associates International, Inc. ("CA") is a Delaware corporation with its principal executive offices in Islandia, New York. CA is in the business of developing, marketing, licensing, and supporting standardized computer software for use in a broad range of computers on a variety of hardware platforms, operating systems, and application development environments. (Am. Compl. PP 12, 42.) CA's shares are traded on the New York Stock Exchange ("NYSE").
At all times relevant to this action, defendant Charles Wang was CA's Chief Executive Officer and Chairman of its Board of Directors. Defendant Sanjay Kumar was CA's President and Chief Operating Officer, as well as a member of the company's Board of Directors. Defendant Artzl, as CA's Executive Vice President of Research and Development and Senior Development Officer, also served on the company's Board of Directors. As officers and directors of CA, defendants Wang, Kumar and Artzt (collectively, the "individual defendants") participated in the drafting, preparation, and/or approval of the various financial reports, press releases, internal shareholder communications, and Securities Exchange Commission ("SEC") filings at issue in this action. (Am. Compl. P 19.)
Plaintiffs' Class Action Allegations
Plaintiffs commenced this action pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of a Class, consisting of all persons who purchased CA common stock from January 20, 1998, through July 22, 1998. Excluded from the Class are the individual defendants, CA's officers and directors, and members of their families. Plaintiffs allege that this Class satisfies each of the requirements of Rule 23(a), namely, that (1) the Class is so numerous that joinder is impractical (2) the Class members share common issues of law and fact; (3) the claims and defenses of the Class representatives are typical of those belonging to the class as a whole, and (4) the Class representatives will adequately protect the interests of the entire class. This Court has yet to certify the putative class.
Plaintiffs' Substantive Allegations
In 1995, CA adopted the Key Employee Stock Ownership Plan (the "1995 Plan"), the purpose of which was "to promote the creation of stockholder value by encouraging, recognizing and rewarding sustained outstanding individual performance by certain key employees who are largely responsible for the management, growth and protection of the business." (Defs.' Ex. B at 14.) Under the 1995 Plan, "three key executives," namely defendants Wang, Kumar and Artzt, would receive approximately $ 1 billion in CA Common and Restricted Stock as long as the price for CA's Common Stock exceeded $ 53.33 (as adjusted after stock splits) for 60 days during any 12-month period by the end of the company's fiscal year 2000. (Defs.' Ex. B at 15.) Plaintiffs contend that as of January 1, 1998, CA stock traded above the threshold level for a mere six days since October 1, 1997, the date that CA stock first traded above the vesting price. (Am. Compl. P 43.)
According to plaintiffs, immediately prior to and throughout the Class period, CA began to experience financial problems, stemming from, inter alia: the reluctance on the part of CA's largest customers to commit significant financial resources to CA's costly products in light of the Y2K problem and the Asian financial crisis; (2) the increased saturation in CA's markets, causing a decline in the demand for CA's technology; and (3) CA's inability to diversify its business by providing installation and maintenance services. (Am. Compl. P 46.)
In an attempt to remedy the latter problem, CA sought to acquire Computer Sciences Corporation ("CSC"), which was in the business of implementing, servicing, and maintaining the kind of software produced by CA. Accordingly, on or about February 17, 1998, CA announced a cash-for stock tender offer for all outstanding stock of CSC at $ 108 per share. (Am. Compl. P 144.) In response, CSC mounted a defense to CA's takeover efforts, which led to a sharp decline in the price of CA's stock - from the mid to high $ 50s to the mid to high $ 40s - well below the price necessary for the stock grants provided to the individual defendants under the 1995 Plan to vest. (Am. Compl. P 44.)
Plaintiffs' claim that in order to restore the sagging value of CA stock, and therefore protect the stock interests of the individual defendants as provided under the 1995 Plan, CA began taking steps to artificially inflate its reported revenues and thereby conceal the deteriorating state of CA's business. (Am. Compl. P 47.) Although general accounting procedures "provide that revenues should not be recognized until they are realizable, earned and the collection of the sales price is reasonably assured," CA allegedly recognized revenue from the sale of software on credit terms extending as long as 10 years. (Am. Compl. PP 82, 86.) CA also offered customers excessive discounts, placed an unusual amount of pressure on its sales force to "book" sales, and engaged in "improper revenue recognition practices that artificially inflated" CA's operating results. (Am. Compl. P 47.) According to plaintiffs, each of these practices front loaded sales both before and during the class period at the expense of future periods, thereby hiding CA's poor earnings prospects while at the same time safeguarding the individual defendants' interests under the 1995 Plan.
At the same time, CA allegedly made numerous false and misleading statements during the Class period, portraying itself publicly as a "booming company which was experiencing and would continue to experience rapidly rising sales and profits on its core products and new product offerings, and as a company whose order pipeline was 'strong.'" (Am. Compl. P 45.) According to plaintiffs, each of these false statements was either prepared, made, or released by one or more of the individual defendants. (Am. Compl. PP 51, 56-57, 63, 67, 69.) In issuing such statements, CA and the individual defendants allegedly failed to reveal adverse financial information, the disclosure of which "was necessary to make the statements not false and misleading." (Am. Compl. P 49.)
For example, on four separate occasions during the relevant period, CA issued press releases published on Business Wire in which they boasted record financial results and a strong worldwide demand for CA's products. (Am. Compl. PP 51, 55, 57, 63.) On January 20, 1998, April 22, 1998, and May 19, 1998, CA reported large increases in its revenues and earnings results for the third and fourth quarters respectively of fiscal year 1998. (Am. Compl. PP 51, 57, 63.) Plaintiffs maintain that each of these statements was rendered false and misleading because of CA's failure to disclose that its revenue figures were, in fact, artificially inflated. (Am. Compl. PP 52, 58, 64.) Similarly, on March 5, 1998, CA announced that it would allow its tender offer for CSC expire without disclosing the primary reason for its abandonment thereof, namely, CSC's active opposition to such offer. (Am. Compl. P 55.)
Following each of these press releases, the information contained therein was incorporated into reports issued by analysts from various brokerage houses, including Prudential, Bear Stearns, Furman Selz, and AAI, characterizing CA's earnings as "strong," and giving the stock a "BUY" rating. (Am, Compl. 60, 67). Plaintiffs emphasize that the analysts' reports "and the estimates and recommendations contained therein, were based upon direct communications with defendants Wang, Kumar and/or Artzt, and were of a nature that could only have been provided (or based on specific information provided) by the Company and its senior management." (Am. Compl. P 68.)
Plaintiffs claim that as a direct result of these misstatements and omissions, on May 22, 1998, the price per share of CA stock rose above the threshold level of $ 53.33 for the sixtieth day within the previous 12 months. This, in turn, caused the stock to which the individual defendants were entitled under the 1995 Plan to vest, allowing defendants Wang, Kumar and Artzt to collect a combined $ 1.15 billion worth of CA stock. (Am. Compl. P 70.)
Plaintiffs assert that a mere eight weeks later, a very different picture of CA's financial status began to emerge. On July 21, 1999, CA issued a press release in which defendant Kumar stated that although CA had again reported increased revenues for the first quarter of fiscal 1999, it anticipated that growth over the next several quarters would be slow in light of the Asian financial crisis and Y2K problem affecting several of CA's clients. (Am. Compl. P 72.) CA's management also revealed that it had reduced its estimates of CA's future revenue by $ 100 million for the quarters ending September 30th and December 1, 1998. (Am. Compl. P 74.)
On July 22, 1999, the market price of CA's shares dropped to $ 17.5 per share, at which point market analysts quickly reduced their ratings and estimates for CA stock. (Am. Compl. PP 74, 75.) Plaintiffs allege that CA's reliance on the Asian financial crisis and the Y2K problem as the source of its own financial troubles was mere "windowdressing," designed to conceal the fact that CA's problems stemmed from its efforts to artificially inflate CA's sales prior to and during the Class period. To support this contention, plaintiffs rely on reports from such analysts as Weslet Golby, who essentially accused CA, among others, of "overinflating their current revenues at the expense of future revenues." (Am. Compl. P 77.)
On July 23, 1998, plaintiffs commenced this action, asserting two claims under the Securities Exchange Act of 1934, 15 U.S.C. @ 78(a) et seq.: a claim against all defendants under section 10(b), and Rule 10b-5 promulgated thereunder, as well as a claim against the individual defendants under section 20(a). Plaintiffs also contend that CA employed improper revenue recognition practices that caused CA's reported revenue and earnings per share to be materially overstated.
Standard of Review Under Rule 12(b)(6)
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, dismissal is warranted where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Ricciuti v. New York City Transit Authority, 941 F.2d 119, 123 (2d Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, (1957)). The Court must accept the facts alleged in the complaint as true and draw all reasonable inferences from those allegations in favor of plaintiff. Scheuer v. Rhodes, 416 US 232, 236 (1974). The complaint, however, must "give defendants fair notice of what the plaintiffs' claim is and the grounds upon which it rests." Conley, 355 U.S. at 47.
Standard of Review under Rule 9(b) and Section 10(b)
When a complaint alleges fraud, Rule 9(b) of the Federal Rules of Civil Procedure requires that the circumstances be pled with particularity. Acito v, Imcera Group, Inc., 47 F.3d 47, 51 (2d Cir. 1995). The complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. Id. However, Rule 9(b) states that "malice, intent knowledge, and other condition of mind of a person may be averred generally." Id. at 52.
Under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. @ 78j(b), and SEC Rule I 10b-5, a plaintiff must prove that the defendant, in effectuating an allegedly fraudulent sale, acted with scienter. Press v. Chemical Investment Servs. Corp., 166 F.3d 529, 537 (2d Cir. 1999). "The Private Securities Litigation Reform Act of 1995 heightened the requirement for pleading scienter to the level used by the Second Circuit: Plaintiffs must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. 15 U.S.C. @ 78u-4(b)(2)." Id. at 537-538. However, this requirement may be satisfied either: (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. Acito, 47 F.3d. at 52.
Discussion
Section 10(b) Liability is Adequately Pled
Plaintiffs adequately plead fraud with the required particularity. They allege a number of statements made by defendants, detailing the who, what, where, when and how of the fraudulent statements as discussed supra, p. 3-8. See also Am. Complaint, PP 49-68. Plaintiffs supply "as much detail of the alleged fraud as can be expected before discovery commences." In re Anne Taylor Stores Sec. Listig., 807 F.Supp. 990, 1004 (S.D.N.Y. 1992).
Plaintiffs allege, among other things, that CA's Class Period earning announcements and SEC-filed financial statements for the third quarter ending December 31, 1997 and for the quarter and fiscal year ending March 31, 1998 were knowingly and intentionally inflated. Plaintiffs point specifically to the premature recognition of income on Unicenter deals, long-term installment sales, and on customer support fees. Plaintiffs detail how defendants used specific accounting practices in violation of the Generally Accepted Accounting Principles, ("GAAP"), to prematurely recognize revenue. See Am. Complaint, PP These allegations render defendants' earning statements and other positive statements as materially false at the time they were made, not merely optimistic statements. See In re Northern Telecom Ltd. Sec. Litig, 1994 U.S. Dist. LEXIS 11730, at **18-22 (S.D.N.Y. Aug. 19, 1994); Shapiro v. UJB Financial Corp., 964 F.2d 272, 282 (3d Cir. 1992); In re Anne Taylor, 807 F.Supp. at 998. Similarly, these alleged statements are also not more statements of historical performance or protected by the "safe harbor". See Bausch & Lomb, Inc. Sec. Litig., 941 F.Supp. 1352, 1363 (W.D.N.Y. 1996).
Moreover, statements such as ones specifically attributed to defendants Wang and Kumar in CA's own April 22 and May 21 press releases, stating that CA's "business is stronger than ever," that there was "strong worldwide demand" for CA software, that "[CA's] business fundamentals are strong" and that CA was "solidly positioned for growth", were alleged to be false and misleading for failure to disclose materially adverse business trends and accounting practices. Am. Comp. PP 57, 63. Thus, this statement, as well as the others concerning the supposed health of the company, are all actionable when considered as a whole and in light of the alleged improper accounting and revenue inflating practices. See in re Northern Telecom Ltd. Sec. &. Litig, 1994 U.S. Dist. LEXIS at **15-23; Ann Taylor, 807 F. Supp. at 1004-5.
Defendants' citation of San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos, 75 F.3d 801, 804 (2d Cir. 1996) is unavailing. San Leandro is easily distinguishable, involving whether "a company had a duty to disclose its consideration of an alternative business plan in order to prevent its prior statements from becoming misleading," not allegations of glowing press releases and the like, concerning the state of the company in the face of massive, intentionally inflated earning statements at issue here.
Defendants only assert that CA's class period press releases and financial statements include meaningful cautionary language consisting of the following: that "there can be no assurances that future results will be achieved," and that there were "important factors that could cause actual results to differ materially." These are general boilerplate disclaimers that do not alter that fact that plaintiffs allege that defendants knowingly made particular factual representations that they knew to be false, especially as to level of consumer demand and CA's past performance, revenues, sales, and earnings. See Bausch & Lomb, 941 F.Supp. at 1363.
Unknown specifics, such as the exact amount the earnings have been overstated, are not fatal in this case. Plaintiffs allege such a widespread fraudulent practice, that if true, would have a huge net effect in error as to the company's overall figures and is the type of information peculiarly within the defendants' control. See Bausch & Lomb, 941 F.Supp. at 1361 ("Since many of these facts lie particularly within defendants' knowledge, plaintiffs cannot reasonably be expected to be able to state at this stage exactly when and how defendants learned that B&L's sales figures were being overstated"); Craftmatic Securities Litigation, 890 F.2d 628, 645 (3d Cir. 1989) ("Particularly in cases of corporate fraud, plaintiffs cannot be expected to have personal knowledge of the details of corporate internal affairs"). Plaintiffs have not simply alleged mere accounting improprieties or mismanagement; rather, plaintiffs describe a pervasive fraudulent scheme, including intentionally violative accounting practices and inflated revenues, which is materially misleading.
Scienter is Adequately Pled - Motive and Opportunity
The plaintiffs have sufficiently alleged the Individual Defendants' Motive and opportunity - the receipt of outright stock grants worth over $ 1 billion if the price of CA's common stock traded at or above the Vesting Price for 60 days in any 12 month period prior to March 2000. See e.g. Am. Complaint, P 43. The combination of the timing of this vesting, the subsequent large and unexpected drop in value of the stock, and the mammoth grant incentive, strongly supports Individual Defendants' motive. In addition, plaintiffs have alleged insider trading, which supports an inference of scienter. See Goldman v. Belden, 754 F. 2d. 1059, 1070 (2d Cir. 1985).
Plaintiffs also adequately allege opportunity, as defendants Wang, Kumar and Artzt were the three most senior officers, who participated in the drafting, preparation, and/or approval of the financial reports, press releases, shareholder communications, and SEC filings at issue.
Reckless or Conscious Misbehavior
The plaintiffs have also adequately alleged facts sufficient to demonstrate reckless or conscious misbehavior. Plaintiffs detail among other things, defendants' alleged fraudulent scheme involving intentional and knowing improper recognition and inflation of earnings, revenue and sales. These allegations, in combination with other statements made by Individual Defendants, and the enormous scope and scale of this alleged fraud, if true, rises to the level of conscious misbehavior or recklessness. See In re MTC Elec. Techs. Shareholders Litig. 898 F.Supp. 974, 989 (E.D.N.Y. 1995) vacated in part, 993 F.Supp. 160, 162 (E.D.N.Y. 1997). In all, plaintiffs alleged sufficient facts to give rise to a strong inference of fraudulent intent.
Conclusion
For the foregoing reasons, defendants' Motion to Dismiss must be and the same is hereby denied. So Ordered. (New York Law Journal, November 23, 1999)
CSX CORP: Loui. Judge Pares Jury's $2.5B Award to $850M for Car Fire -------------------------------------------------------------------- Louisiana district Court Judge Wallace Edwards has left intact $ 850 million of a jury's $ 2.5 billion punitive damages award against CSX Corp. over the railroad company's role in the leak of the toxic chemical butadiene from a tank car parked on a CSX track. The verdict against CSX was part of an overall $ 3.367 billion award -- all but $ 2 million of it in punitives -- ordered against nine defendants in 1997.
In his Nov. 5 decision, Judge Edwards contended that the $ 2.5 billion hit against CSX "shocks the conscience of this court and is therefore manifestly unreasonable." But he declined CSX's motions to set the punitives aside completely, calling "not unreasonable" the jury's assessment of "reckless disregard of public safety in the storing, handling or transportation of hazardous or toxic substances."
In his decision, Judge Edwards upheld the jury's findings of liability, but reduced the $ 2 million in compensatory damages to about $ 700,000. The punitive award against CSX is the only punitive award still standing; the other four defendants hit with punitive judgments have since settled. In re: New Orleans Tank Car Leakage Fire Litigation, No. 87-16374 (Dist. Ct., Orleans Parish, La.).
The $ 3.367 billion verdict arose from a chemical leak and subsequent fire in the Gentilly section of New Orleans. Shortly after midnight on Sept. 9, 1987, butadiene seeped out of the bottom of a tank car parked on a CSX railroad track, said plaintiffs' counsel Joseph M. Bruno, of New Orleans' Bruno & Bruno. Once the butadiene hit the air outside the car, it was transformed into a white vapor cloud that crept along the ground outside the car, spreading out four blocks from the track, he said.
The vapor hit an ignition source, and the cloud caught on fire. As it exploded, a line of fire flashed back to the railroad car, Mr. Bruno said. The houses in the area shook from the impact of the explosion, and the neighborhood was awakened and evacuated as the fire in the railroad car burned for a day and a half, he added.
The 8,000 or so residents of Gentilly, a mostly minority neighborhood northeast of the French Quarter, sued CSX, which owned the track; General American Transportation Co., which owned the railroad car; Phillips Petroleum Corp., which cleaned the car before it was loaded; and six other corporate defendants.
Under the law in Louisiana at the time of the incident, the five defendants charged with wanton or reckless disregard for public safety in the storage, handling or transportation of hazardous or toxic substances were at risk for punitive damages. The law has since been changed, but the companies were still at risk because the cases were filed before the law was repealed, said CSX attorney Harry S. Hardin III, of New Orleans' Jones, Walker, Waechter, Poitevent, Carrere & Denegre L.L.P.
At the start of trial, Phillips Petroleum admitted liability; Phillips personnel had cleaned the car out and "improperly closed it afterward," Mr. Bruno said. Phillips, however, never handled butadiene and was not at risk for a punitive verdict.
No Real Injuries?
All the defendants vigorously contested the claims of damages to the plaintiffs, said Mr. Hardin. "A number of people were evacuated and inconvenienced," he said. "But no houses caught fire, nobody died, no skin was burned, no bones were broken." The plaintiffs conceded that the visible injuries were limited, but claimed that the smoke from the fire left the residents at substantially greater risk to cancer, said Mr. Bruno. The ash products from burning butadiene, he said, "are extraordinarily carcinogenic." In addition, he said, the defendants were negligent in failing to inspect the car and prevent the leak.
In the first phase, the claims of 20 representative plaintiffs went to trial. Many of the leading attorneys in Louisiana were on the trial teams, including, for the plaintiffs, Wendell H. Gauthier, of Metairie's Gauthier, Downing, LaBarre, Beiser & Dean.
On Aug. 25, 1997, a New Orleans jury awarded the plaintiffs $ 2 million in compensatory damages. The jury returned the punitive award two weeks later.
Then the case started bouncing up and down between the trial court, intermediate appellate courts and the Louisiana Supreme Court. The trial court entered the judgment, but in October 1997, the state Supreme Court vacated it, agreeing with CSX that any final entry would have to await the trials of the remaining plaintiffs. The court later reconsidered, Mr. Bruno said, allowing entry of judgment.
CSX will appeal this latest ruling, said Mr. Hardin. CSX's conduct was not "of the kind to be characterized as a violation of the statute. There was no reckless disregard of public safety." The tank car was left for several hours on a CSX track for CSX to pick up. When the CSX crew arrived, the car was already on fire, and CSX workers, at substantial personal risk, he said, "disconnected all the other cars and isolated the burning car."
The claims of 20 more plaintiffs were tried this summer and the new jury awarded $ 330,000. Only three of the original nine defendants remain -- CSX, AMF-BRD Inc. and Novacore Inc. AMF-BRD and Novacore did not handle the chemical and thus are not at risk for punitives. The total amount of the settlements so far is confidential, but, Mr. Hardin said, "the rumors on the street are that the total amount is under $ 300 million." (The National Law Journal, November 29, 1999)
DELTA & PINE: Agrees to Settle Missouri Suit Re Bronze Wilt of Cotton --------------------------------------------------------------------- The Company and Monsanto were named as defendants in a lawsuit filed in the Circuit Court of the State of Missouri, County of Dunklin, on April 2, 1999. This case was subsequently removed to the United States District Court for the Eastern District of Missouri, but remanded back to the Circuit Court of the State of Missouri, County of Dunklin. This suit alleges that certain varieties of cotton offered for sale by D&PL were unmerchantable as a result of the alleged susceptibility to a malady referred to as bronze wilt. Although this litigation involves a transgenic variety, there is no allegation in the complaint sufficient to trigger any contractual obligation to defend or indemnify under the terms of the Roundup Ready Agreement. A settlement of this claim has been agreed to (but not yet consummated).
DELTA & PINE: DOJ Investigates on Acquisition and Antitrust ----------------------------------------------------------- On July 18, 1996, the United States Department of Justice, Antitrust Division ("USDOJ"), served a Civil Investigative Demand ("CID") on D&PL seeking information and documents in connection with its investigation of the acquisition by D&PL of the stock of Arizona Processing, Inc., Ellis Brothers Seed, Inc. and Mississippi Seed, Inc. (which own the outstanding common stock of Sure Grow Seed, Inc). The CID states that the USDOJ is investigating whether these transactions may have violated the provisions of Section 7 of the Clayton Act, 15 USC 18. D&PL has responded to the CID, employees were examined in 1997 by the USDOJ, and D&PL is committed to full cooperation with the USDOJ. At the present time, the ultimate outcome of the investigation cannot be predicted.
On August 9, 1999, D&PL and Monsanto received Civil Investigative Demands from the USDOJ, seeking to determine whether there have been any inappropriate exchanges of information between Monsanto and D&PL or if any prior acquisitions are likely to have substantially lessened competition in the sale or development of cottonseed or cottonseed genetic traits. D&PL is complying with the USDOJ's request for information and documents and with the recent Civil Investigative Demand.
DELTA & PINE: Farmers in Mississippi Can Sue After Loss in Arbitration ---------------------------------------------------------------------- In 1999 and 1998, 45 farmers in Mississippi filed seed arbitration claims against the Company and Monsanto with the Mississippi Department of Agriculture arising from the 1998 cotton crop. The Mississippi Department of Agriculture dismissed all but 19 of those claims due to the failure of the farmer to provide adequate information. Those farmers, however, still have a right to pursue litigation should they so choose. The remaining arbitration claims were heard in March of 1999. The Company was exonerated from liability in 16 of those cases. Three cases resulted in the suggestion of nominal damages. Each of those farmers has, likewise, the right to pursue litigation should they so choose. Five of the 16 unsuccessful claimants from the 1998 crop year filed suit on May 21, 1999, in the Circuit Court of Bolivar County, Mississippi, against the Company and Monsanto. The Company and Monsanto are presently investigating the claims. Pursuant to the terms of the Roundup Ready Agreement between D&PL and Monsanto, D&PL has tendered the defense of these claims to Monsanto and requested indemnity, as Monsanto is contractually obligated to defend and indemnify the Company against all claims arising out of the failure of the Roundup glyphosate tolerance gene. D&PL will not have a right to indemnification from Monsanto, however, for any claim involving defects in seed separate from or in addition to the failure of the herbicide tolerance gene, and such claims are contained in these complaints. Additionally, one farmer in Mississippi has filed a seed arbitration claim against the Company with the Mississippi Department of Agriculture arising from the 1999 cotton crop. The Mississippi Department of Agriculture has not yet scheduled a hearing on this claim.
DELTA & PINE: Monsanto Indemnifies TX Suits over Gene in Cottonseed ------------------------------------------------------------------- The Company and Monsanto are named as defendants in four pending lawsuits filed in the State of Texas. Two lawsuits were filed in Lamb County, Texas on April 5, 1999; one lawsuit was filed in Lamb County, Texas on April 14, 1999; and one lawsuit was filed in Hockley County, Texas, on April 21, 1999. These lawsuits were removed to the United States District Court, Lubbock Division, but subsequently were remanded back to the state court where they were filed.
In each case the plaintiff alleges, among other things, that certain cottonseed acquired from Paymaster which contained the Roundup Ready gene did not perform as the farmers had anticipated. These lawsuits also include varietal claims aimed solely at the Company. This litigation is identical to seed arbitration claims previously filed in the State of Texas which were concluded in the Company's favor.
The Company and Monsanto have investigated the claims to determine the cause or causes of the alleged problems. Pursuant to the terms of the Roundup Ready Agreement between D&PL and Monsanto, D&PL has tendered the defense of these claims to Monsanto and requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is contractually obligated to defend and indemnify the Company against all claims arising out of the failure of the Roundup glyphosate tolerance gene. D&PL will not have a right to indemnification from Monsanto, however, for any claim involving defective varietal characteristics separate from or in addition to the failure of the herbicide tolerance gene, and such claims are contained in these complaints.
The Company, certain subsidiaries of Monsanto and others were named as defendants in a lawsuit filed in the Civil District Court, Williamson County, Texas, 277th Judicial District, in April 1997. The plaintiffs allege, among other things, that certain cottonseed acquired from Monsanto in the Hartz Cotton acquisition and subsequently sold by the Company, failed to perform as represented allegedly resulting in lost yield. Pursuant to the Hartz Cotton acquisition agreement, the Company is entitled to indemnification from Monsanto for damages resulting from the sale of bagged seed inventories acquired by D&PL in that acquisition. Some or all of the seed involved in this case may meet this criteria and D&PL will therefore be entitled to indemnification from Monsanto for any losses resulting from such seed. In October 1999, this case was dismissed and the parties to this litigation, including the Company and Monsanto, agreed to mediate the claims which were the subject of this lawsuit. Should mediation fail, the parties have agreed to enter into binding arbitration.
The Company, Monsanto and other third parties were named as defendants in lawsuits filed (i) in the District Court of Falls County, Texas, in August 1996 and (ii) in the District Court of Robertson County, Texas, in March 1998. The plaintiffs allege, among other things, that D&PL's cottonseed varieties, which contain Monsanto's Bollgard gene, did not perform as the farmer had anticipated and, in particular, did not fully protect their cotton crops from certain lepidopteran insects. On or about October 8, 1999, a settlement of the Falls County case was agreed upon, but it has not yet been consummated.
DELTA & PINE: Settles Shareholder Suit in Dela. Re Merger with Monsanto ----------------------------------------------------------------------- In May 1998, five individual alleged shareholders brought suits against Monsanto, the Company and its Board of Directors ("Directors") in the Court of Chancery in New Castle County, Delaware. The complaints alleged that the consideration to be paid in the proposed merger of the Company with Monsanto is inadequate and that the Company's Directors breached their fiduciary duties to the Company's stockholders by voting to approve the Agreement and Plan of Merger, and that Monsanto aided and abetted the alleged breach of fiduciary duty. The complaints were consolidated into one action, which sought a declaration that the action was maintainable as a class action, that the merger be enjoined, or alternatively, rescinded, and/or an award of unspecified compensatory damages if the merger was consummated. A settlement agreement was reached with the named plaintiffs in November 1998. The parties intend to apply to the Court for a date for a hearing on approval of the settlement which, if approved, will not have a material effect on the Company's consolidated financial statements.
DELTA & PINE: Tenders out Defence of Suit in Georgia Re Glyphosate Gene ----------------------------------------------------------------------- The Company, Monsanto and other parties were named as defendants in a lawsuit filed in the Superior Court of Calhoun County, Georgia on April 19, 1999, which has been removed to the United States District Court of the Middle District of Georgia, Albany Division. The Company and Monsanto are presently investigating the claim to determine the cause or causes, if any, of the alleged problems. Pursuant to the terms of the Roundup Ready Agreement between D&PL and Monsanto, D&PL has tendered the defense of this claim to Monsanto and requested indemnity, as Monsanto is contractually obligated to defend and indemnify the Company against all claims arising out of the failure of the Roundup glyphosate tolerance gene. D&PL will not have a right to indemnification from Monsanto, however, for any claim involving defects in seed separate from or in addition to the failure of the herbicide tolerance gene, and such claims are contained in these complaints. This case was the subject of a seed arbitration case filed in Georgia during 1997 which was concluded in the Company's favor.
DELTA & PINE: Tenders out Defense of Loui. Suits over Soybean Seeds ------------------------------------------------------------------- On March 30, 1999, the Company, Asgrow Seed Company, L.L.C., and Terra International were named as defendants in a lawsuit filed in the Fourth Judicial District Court, Parish of Morehouse, State of Louisiana, which has now been removed to the United States District Court for the Western District of Louisiana. The suit alleges, among other things, that certain soybean seed which contained the Roundup Ready gene did not properly germinate and did not perform as the farmer had anticipated and, in particular, did not fully protect their crops from damage following the application of Roundup. The Company and Monsanto are presently investigating the claim to determine the cause or causes, if any, of the alleged problem. Pursuant to the terms of the Roundup Ready Agreement between D&PL and Monsanto, D&PL has tendered the defense of this claim to Monsanto. Pursuant to the Roundup Ready Agreement, Monsanto is contractually obligated to defend and indemnify any and all claims arising out of the failure of the glyphosate gene tolerance.
On June 11, 1999, Delta & Pine Land Co., Monsanto, Asgrow Seed Company, SF Services, Terral Seed, Inc., Valley Farmers Co-Op, Red River Co-Op, and Central Louisiana Grain Co-Op were named as defendants in a lawsuit filed in the Fourth Judicial District, Parish of Natchitoches, State of Louisiana. The suit alleges, among other things, that certain soybean seeds which contain the Roundup Ready(R) gene did not perform as advertised and did not produce promised yields. The plaintiffs in this case are seeking certification of a class of all purchasers of Roundup Ready soybeans during the years of 1997 and 1998. The Company and Monsanto are presently investigating the claim; however, they believe it to be without merit and their plan is to vigorously defend this lawsuit. Pursuant to the terms of the Roundup Ready Soybean Agreement between D&PL and Monsanto, D&PL has tendered the defense of this claim to Monsanto. Pursuant to the Roundup Ready Soybean Agreement, Monsanto is contractually obligated to defend and indemnify any and all claims arising out of the failure of glyphosate gene tolerance, and certain other types of claims. D&PL will have no right to indemnification from Monsanto, however, for any claim involving defects in seed and/or promotional representations made solely by D&PL without Monsanto's approval. Such claims appear to be contained within this complaint.
DELTA & PINE: Arbitration with Farmers Goes on in Georgia, Ark. & Fla. ---------------------------------------------------------------------- In 1999 and 1998, approximately 210 cotton farmers in Georgia had filed seed arbitration claims arising from the 1998 cotton crop against the Company, and in some cases, Monsanto. Approximately 180 of those cases have now been settled. Those settlements were achieved without any material impact on the Company's consolidated financial statements. The remaining claimants who had filed for the 1998 crop year still have the right to pursue litigation if they so choose. The Company believes that these claims can be resolved without any material impact on the Company's consolidated financial statements.
In 1999, approximately 31 cotton farmers in Georgia have filed seed arbitration claims against the Company and, in some cases, Monsanto, alleging damages for their 1999 crop. Six of these claims have been scheduled for hearing, four on January 11, 2000, and two on January 20, 2000. The Company and Monsanto are in the process of investigating these claims to determine the cause or causes, if any, of the alleged problems. Pursuant to the terms of the Roundup Ready Agreement between D&PL and Monsanto, D&PL has tendered the defense of these seed arbitration claims to Monsanto and has requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is contractually obligated to defend and indemnify the Company against all claims arising out of the failure of the Roundup glyphosate tolerance gene. D&PL will not have a right to indemnification, however, for any claim involving defects in the seed, separate from or in addition to the failure of the herbicide tolerance gene, and such claims are contained in some of the seed arbitration claims filed.
In 1998, one claim was filed with the Arkansas Seed Arbitration Council. A Motion to Dismiss has been filed. This case alleges that certain Roundup Ready cottonseed marketed by the Company in 1997 failed to perform as farmers had anticipated and caused the farmers to suffer crop loss. Pursuant to the Roundup Ready Agreement between D&PL and Monsanto, D&PL has tendered the defense of this claim to Monsanto. Pursuant to the Roundup Ready Agreement, Monsanto is contractually obligated to defend and indemnify any and all claims arising out of the failure of the glyphosate gene tolerance.
In 1999 and 1998, three farmers in the State of Florida had filed arbitration claims against the Company. Two of those claims have now been resolved. A hearing was conducted on the remaining claim on October 12, 1999; however, no ruling has yet been received.
DIGNITY PARTNERS: SIA Urges 9th Cir to Rehear Viatical Shareholder Case ----------------------------------------------------------------------- Case: Viatical Settlements: Hertzberg v. Dignity Partners Inc.
The Securities Industry Association (SIA) has filed an amicus brief urging the Ninth Circuit U.S. Court of Appeals to reconsider its August decision restoring a suit by viatical settlement shareholders against the firm that offered the interests in the life insurance policies of persons with AIDS and other terminal ailments. Hertzberg et al. v. Dignity Partners Inc. et al., No. 98-1694 (9th Cir., order granting SIA leave to file amicus curiae brief in support of petition for rehearing granted Oct. 14, 1999); see AIDS LR, Oct. 8, 1999, P. 7.
The appeals court granted the group leave to file an amicus curiae brief in support of Dignity Partners Inc.'s Sept. 10 petition for rehearing and suggestion for rehearing en banc in the case.
In a Sept. 17 brief, the SIA echoes the defendant's assertion that the decision contradicts numerous court rulings and over 60 years of established securities laws by allowing investors who did not buy securities shares within 25 days of an announced initial public offering to sue under Sec. 11 of the Securities Act of 1933. Those who purchase security interests after the closing of the IPO, asserts the SIA, are known as "aftermarket" buyers whose legal remedies lie solely under Sec. 10(b) of the separate Securities Act of 1934.
In the challenged decision, the Ninth Circuit reversed U.S. District Court Judge Charles Legge's 1997 ruling, which dismissed the allegations of prospective class member Howard Hertzberg and others because they bought their viatical shares from Dignity Partners on March 14, 1996, 28 days after the IPO was registered with the Securities Exchange Commission.
In an opinion written by Judge William A. Fletcher, the panel said that Sec. 11 remedies are available to "any person acquiring such security" and, given the fact that all Dignity Partners shares in dispute were made available through only one IPO and were bought based on its allegedly misleading registration statement, the date of purchase was irrelevant.
In its petition for rehearing, Dignity Partners argues that the decision conflicts with the U.S. Supreme Court's ruling in Gustafson v. Alloyd Co. (1994), and makes the Ninth Circuit the first circuit in "the more than 60 years since the enactment of the security laws to confer standing under Sec. 11 upon individuals who do not participate in a public offering but who can merely trace shares acquired by them in the aftermarket to such an offering."
The appeals court, says Dignity Partners, has shown no evidence to support the "tracing" theory adopted in the decision. "Distinguishing between purchasers of stock based upon traceability simply introduces an arbitrary and unfair distinction into Sec. 11," it adds, noting that nothing in the legislative history of the law supports such a reading.
"By extending the draconian remedies of Sec. 11 to a large class of aftermarket purchasers, the panel's opinion dramatically alters the balance between class action plaintiffs (and their lawyers) and defendants, thereby raising issues of exceptional importance to the economy and the nation as a whole."
Dignity Partners says that in reaching its decision, the Ninth Circuit ignored important factors which require a "narrow interpretation" of Sec. 11, mainly that the 1933 Act is concerned not with the securities aftermarket, but only with the initial distribution of stock to the public. Post-distribution trading, it says, is regulated exclusively under the 1934 Act. "Because the 1934 Act provides a remedy for aftermarket purchasers harmed by alleged misstatements in a registration statement, it follows that there is no need to extend Sec. 11 to any class of such purchasers."
The Ninth Circuit's finding, argues Dignity Partners, overlooked the l egislative history of the 1933 Act, which includes a statement that it "affects only new offerings" and "does not affect the ordinary redistribution of securities" (H.R. Rep. No. 85, 73rd Cong., 1st Sess. 5 1933 ).
The plaintiffs are represented by William S. Lerach, Patrick J. Coughlin, Helen Hodges, Eric A. Isaacson, Amber L. Eck, and Joseph D. Daley of Milberg Weiss Bershad Hynes & Lerach in San Diego; Allison M. Tattersall of Milberg Weiss' San Francisco office; and Stephen T. Rodd, James J. Seirmarco, and Peter D. Bull of Abbey, Gardy & Squitieri in New York.
Gerald W. Palmer of Jones, Day, Reavis & Pogue in Los Angeles and Robert C. Micheletto of the firm's Chicago office represent Dignity Partners. SIA's amicus brief was submitted by William F. Alderman of Orrick, Herrington & Sutcliffe L.L.P. in San Francisco and by SIA Senior Vice President and General Counsel Stuart J. Kaswell and Vice President and Associate GeneralCounsel Fredda L. Plesser of New York.
(See Document Section E for the order granting SIA's petition for leave to file an amicus curiae brief for rehearing and the amicus curiae brief, and Document Section F for the petition for rehearing and suggestion of rehearing en banc.) (AIDS Litigation Reporter, Vol. 13; No. 1; Pg. 8, November 8, 1999)
GUN MANUFACTURERS: Update on Responses to Clinton Administration's Suit ----------------------------------------------------------------------- USA Today reports on December 9 that the National Rifle Association, whose political clout persuaded Congress not to pass sales restrictions this year, said the administration's threat to go to court was "reckless harassment" and risked setting a dangerous legal precedent. "No lawful industry is safe," the NRA said. "If some deviant person misuses your lawful product, this administration will sue you, rather than hold the criminal responsible." Stephen Sanetti, vice president and general counsel of firearms maker Sturm, Ruger & Co., said the government's plan is "legally and factually wrong, and we will fight them with all of our resolve."
City and state officials welcomed the federal intervention, saying it was likely to speed a nationwide settlement of litigation aimed at keeping guns from criminals and children.
Housing officials are "not trying to bankrupt any company," Clinton said at a State Department news conference. "They're trying to make their living spaces safer, and I think it's a legitimate thing." The 100 largest public housing authorities report a total of 10,000 gun crimes every year and are forced to spend $ 1 billion on security, Clinton said.
The government's goal is to step up pressure on the gun industry to reach a settlement, HUD Secretary Andrew Cuomo said. "We don't want to go to court, but we do want a resolution," he said.
The cities want manufacturers to equip guns with state-of-the-art safety devices. Under the cities' settlement proposals, gunmakers would blackball retailers who consistently sell to criminals and would tone down advertising that might attract criminals.
"You all remember that one company advertised an assault weapon by saying that it was hard to get fingerprints from," Clinton said, referring to Miami-based Navegar Inc., maker of the Tec-9 assault pistol. "You don't have to be all broke out with brilliance to figure out what the message is there."
Los Angeles City Attorney James Hahn, who filed suit in May, said negotiations have been moving at a glacial pace and that the weight of federal lawyers would make a difference. "It's like the U.S. Coast Guard sending in an icebreaker," Hahn said. "That's what we need. The industry has yet to take these lawsuits seriously."
Plaintiff cities include Los Angeles, Chicago, Boston, Atlanta, Cleveland, Detroit, San Francisco and New Orleans. The attorneys general of Connecticut and New York say they'll file the first suits by states if negotiations fail. "The intervention of the feds strengthens our side," New York Attorney General Eliot Spitzer said. "It makes it more likely that we'll get to our objective: safer schools and safer streets. This is not about money. This case is about changing behavior."
White House press secretary Joe Lockhart said the administration also wants to send a message that it will act on its own despite congressional defeat of gun-control and anti-smoking legislation. "I think we have enormously important public policy goals, and if the Republican-controlled Congress wants to block sensible gun control and if they want to block tobacco policy that the American public supports, we're going to find a way to do it," Lockhart said.
Los Angeles Times of December 9 says that the Clinton administration's threat to bring a class-action lawsuit against gun makers might be largely bluster. But even if it is, Tuesday's announcement, along with suits already filed by 29 cities and counties, reflects the real frustration of public officials and ordinary Americans over gun violence--the unending school shootings, workplace massacres and domestic quarrels that turn lethal. Gun makers, then, would be wise to enact on their own the modest, obvious steps that public officials seek, actions intended to reduce accidental shootings and illegal sales.
The pending suits call on gun makers to adopt a variety of safeguards, including tighter controls on distribution to reduce sales to criminals and juveniles, inclusion of child safety locks on all new handguns, more research on "smart" technology to prevent guns from being fired by unauthorized people, and an end to advertising that promotes or suggests criminal use by, for instance, emphasizing the concealability of guns or their resistance to fingerprints. These changes will not end gun violence, but they will help. The need for new approaches is sharply bolstered by a new UCLA study showing that homicides committed by those under 21 are far more likely to involve a gun.
Long, expensive litigation is in no one's interest. Even the tobacco industry, far wealthier as a group than the firearm makers, has made concessions rather than continue to fight snowballing lawsuits. Gun makers can agree now to modest, responsible steps that will cut the flow of guns to juveniles and criminals. Or they can continue to write very large checks to their attorneys.
Chicago Tribune, December 9, reports that speaking at a news conference, Clinton said guns are involved in roughly 10,000 crimes every year in public housing, where the federal government spends $1 billion on security. Stories abound of children sleeping in bathtubs and residents afraid to answer their doors because of their fears of being shot.
The president's threat to throw the federal government's weight behind legal action against the firearms industry by local governments was seen as a savvy political gesture by some and as a baffling move by lawyers for gunmakers.
Anne Kimball, a Chicago lawyer for Smith & Wesson Corp. and several other gunmakers, said gun manufacturers assist law-enforcement authorities, through gun traces, to solve crimes and catch criminals. "This makes no public policy sense," Kimball said. "As a citizen, I'm shocked that the federal government would contemplate filing a lawsuit for conduct of hardened criminals and then blame the legitimate, legal manufacturers of guns."
By thrusting himself into the battle and threatening to sue, Clinton was making sure the administration had a chair at the table for any settlement talks, said Marshall Shapo, a Northwestern University law professor. "He has opened a second front in the war against guns," Shapo said. "In a very loose sense, he is trying to make himself into an informal commander-in-chief of this overall war and at the same time become a great mediator to reaching a social goal."
The administration and the Department of Housing and Urban Development for months have quietly discussed filing an anti-gun lawsuit in U.S. District Court, and have talked with a number of housing authorities about the idea. While they have not talked to Chicago Housing Authority officials, HUD administrators have received a copy of the city's $433 million suit filed last year against 22 gun manufacturers and four dealers. The city's suit, filed in state court, claims that gunmakers and dealers "saturate the market . . . knowing that persons will illegally bring them into" Chicago for their own use or for illegal resale.
Lawyers from several state and city governments met with representatives of the gun industry in October to consider an out-of-court settlement that might include limitations on gun sales and mandatory locking devices.
Chicago declined to participate because Mayor Richard Daley wants more from the industry than his counterparts may be willing to settle for. The city is seeking to recover the costs of treating victims of gun violence.
Clinton, in arguing for a greater role by his administration, pointed to a recent study by Sen. Charles Schumer (D-N.Y.) that said 1 percent of the gun dealers sell 50 percent of the guns involved in gun crimes. "If there's a way that the court could craft a resolution of that, that would be a good thing," Clinton said.
But Kimball said there already were laws on the books to curb such gun dealers. "My suggestion to the federal government is that they crack down on that 1 percent, pull their licenses and put them out of business," she said.
John Lowy, senior attorney for the Center to Prevent Handgun Violence, said it was encouraging that the administration would be involved in the talks. "It's clear from the administration statements that the industry is going to face a very large nationwide class-action lawsuit unless it agrees voluntarily to behave responsibly in distributing and designing its product." Lowy said.
Robert Spitzer, political science professor at State University of New York at Cortland, said that administration involvement will push the sides to reach an agreement. "It increases the pressure," Spitzer said. "Maybe the gun industry hopes it can hold off for 18 months and hope a Republican is elected president and the policy will change. But for now it's quite significant."
The Scotsman, December 9, says that the planned legal action is an indication that President Bill Clinton is serious in his attempts to tighten the country's notoriously liberal gun laws. It also says that the decision to resort to the courts is also a sign of the White House's frustration that the gun control issue has not been settled by the political process. Proposed firearm control measures have already failed to make headway in Congress this year in the face of stern resistance from gun lobbyists.
Among the administration's objectives will be to urge manufacturers to cut off supplies to dealers whose sales are known to have led to crimes.
A wave of opinion polls favouring stricter gun laws has swept the US following last April's massacre at Columbine High School near Denver, where two teenagers killed 12 fellow pupils and a teacher, and wounded 23 others, before killing themselves.
The Times (London) of December 9 reports that among other challenges, litigants around the country are demanding that manufacturers must cut off dealers whose guns are traced to crimes, the inclusion of safety locks on all guns, an end to marketing aimed at children and criminals and the end of practices such as selling guns that are impervious to fingerprints. "We have safety caps on bottles of aspirin. It makes no sense not to have safety devices on guns," Mr Cuomo said.
Financial Times (London)of December 9 reports Paul Jannuzzo, general counsel for Glock, an Austrian gun manufacturer, saying: "I don't believe you can change the (industry's) perspective at all. A settlement decision would still be based on the common goals of stopping the accidental or criminal use of firearms." He added, however: "I guess (the federal intervention) is leverage, but that also sounds a lot like blackmail to me."
Other industry lawyers argued that any federal intervention should be channelled through the Bureau of Alcohol, Tobacco and Firearms, rather than through Hud. They also noted the lawsuit's fortunes could depend on who next occupies the White House.
Anne Kimball, who represents manufacturers including Sturm Ruger and Smith & Wesson, said that from a legal perspective, the industry remained in a "very good position".
Lawyers from both sides said there was progress in settlement talks in Washington on Tuesday, but cautioned that the discussions were still at early stages and that no firm agenda had been agreed.
Industry officials, meanwhile, said US gun manufacturers' sales continue to grow rapidly. Estimating annual growth in handgun sales of 20 per cent this year, Mr Januzzo said: "Bill Clinton has probably been more of a prime mover for gun sales than any president since wartime."
HOLOCAUST VICTIMS: Schroder Rules out Larger Fund; Envoy Is Open to It ---------------------------------------------------------------------- With negotiations at an impasse over a German fund to compensate Nazi-era slave laborers, Chancellor Gerhard Schroder dismissed demands to improve Germany's latest offer. "It is now an issue for the lawyers," Mr. Schroder said in a television interview, ruling out any increase in the joint offer by German corporations and the government of eight billion marks, or $4.1 billion.
Otto Lambsdorff, Germany's lead negotiator, said German companies might in fact start withdrawing from the proposed settlement and striking individual deals on their own.
German corporations, hoping to avoid protracted court battles and negative publicity in the United States, have been negotiating with American lawyers and Jewish organizations for months. They seemed to be near an agreement just three weeks ago. About 60 of Germany's biggest industrial companies and banks have offered to put up about 5.5 billion marks and the German government has agreed to put up 2.5 billion. But in class action suits, American Jewish groups and lawyers are demanding about 10 billion marks, which amounts to about $1 billion more than the current offer.
The two sides were supposed to meet on December 9 for what many had hoped would be a final round of talks in Washington. But the talks were canceled when it became clear they would not agree. Stuart E. Eizenstat, the United States deputy secretary of the Treasury who has acted as moderator in the talks, refused to comment. But in a speech this week at the Council on Foreign Relations, he said it would be a "tragedy" if talks collapsed over a difference of $1 billion.
People on both sides say it is still possible to reach a deal before the end of the year. "Ironically, the two sides are closer than they have ever been before," said Elan Steinberg, executive director of the World Jewish Congress. Informal discussions and telephone calls continue to take place, and both sides are under pressure to reach agreement. Groups representing Holocaust survivors fear that a long court battle would delay compensation until after many have died.
German corporations, meanwhile, want to avoid an avalanche of bad publicity as well as potentially enormous verdicts handed down by American courts.
Mr. Schroder began seeking a resolution almost as soon as he was elected chancellor about one year ago. Reversing the hard-line stance of his predecessor, Helmut Kohl, Mr. Schroder agreed to the government contributing alongside industry to a fund that would compensate people forced to work in German factories by the Hitler regime.
Experts estimate that about 250,000 slave laborers -- concentration camp prisoners forced to work without pay -- are still alive today. (The New York Times December 9, 1999)
The German government's envoy to negotiations over compensation for Nazi-era forced and slave laborers indicated on December 9 he was still open to raising the German offer even though Chancellor Gerhard Schroeder has ruled out any more money, according to a report on AP Online on December 9.
In an interview on ARD television, Otto Lambsdorff called on those representing the former laborers to produce a concrete counterproposal to the $4.2 billion the German government and businesses have put on the table.
On Tuesday, class-action lawyers involved in the talks sent a letter to Lambsdorff and U.S. government envoy Stuart Eizenstat turning the German offer down. There was no official response from Eizenstat, despite a Wednesday deadline.
''We would like to know what one has to say to this offer and if necessary where their own ideas lie, if the offer is not accepted,'' Lambsdorff said. ''The initiative by German industry to create this fund will fall apart if we don't get a figure named as soon as possible that is worthy of discussion.'' Victims' lawyers have suggested a range from $5.2 billion to $7.9 billion.
Schroeder told ZDF television on Wednesday, however, that the German offer would not be raised. ''The sum is not to be raised,'' he said. ''It's now up to the attorneys to yield. I hope that that still happens.''
INMATES LITIGATION: 11th Cir in Alabama Says HIV Poses Direct Threat ------------------------------------------------------------------- The most sweeping - and revolutionary - declaration of HIV as a "direct threat" came in a class-action lawsuit filed under the Rehabilitation Act by Alabama prison inmates who were segregated from the general prison population and denied a range of services and programs because of their HIV infection. The case, Onishea v. Hopper, has been appealed to the Supreme Court under a new name, Davis v. Hopper.
In a 9-3 decision in April 1999, the 11th Circuit disregarded its earlier holding on "direct defense" as it pertains to HIV and gave a new interpretation, Onishea v. Hopper, 15 NDLR 65 (11th Cir. 1999), cert. pending. In upholding Alabama's policy, the court's majority said that integration poses a "significant" risk, a term it defined as "meaning to be considered" or "notable," rather than "big." "It is the potential gravity of the harm that imbues certain odds of an event with significance," the court said. "Thus, when the adverse event is the contraction of a fatal disease, the risk of transmission can be significant even if the probability of transmission is low: Death itself makes the risk 'significant.' "
The majority held that, as a matter of law, HIV presents a "significant risk" whenever an event presents an opportunity for transmission to occur, provided that the danger is rooted in sound medical opinion. The state did not have to demonstrate that transmission actually occurred in the past as a prerequisite for a finding of significant risk. All the state had to show was that bloody fights, unprotected anal intercourse and the sharing of drug needles do occur in prison. Each of these activities are known to transmit HIV.
The court rejected the plaintiffs' contention the risk could be reduced or eliminated if prison officials applied existing inmate classification systems to exclude from programs those prisoners who had a propensity to engage in high-risk behaviors and allow the others to participate. The 11th Circuit said the lower court made it clear in its findings of fact that inmates were by nature too untrustworthy, volatile and unpredictable to be accommodated under any classification system.
The majority denied it was adopting an "any risk" standard for evaluating significant risk, but the dissent disagreed. "It is one thing to say that objective evidence of a small risk of transmission of a deadly, contagious disease entails a significant risk in a particular context," Chief Circuit Judge Joseph W. Hatchett wrote in the dissent. "It is quite another to say, as the majority does, that the probability of transmission is irrelevant so long as transmission is theoretically possible."
The 11th Circuit disregarded the Supreme Court's guidance in Bragdon, according to AIDS attorneys. The court's majority asserted that Bragdon did not shed much light on the amount or nature of the evidence that is required to prove a risk to be significant. That isn't so, the attorneys point out. The justices expressly rejected reliance on hypothetical or speculative risks in assessing whether a "direct threat" existed.
The Onishea ruling is an important one, because it can extend beyond the prison setting. The same reasoning the 11th Circuit used in finding a "significant risk" in such routine prison activities as classroom instruction and worship services can be applied to exclude people with HIV from jobs, schools and public accommodations, according to the prisoners' legal counsel, the American Civil Liberties Union, said in appealing the ruling to the Supreme Court. The high court is expected to announce in late December whether it will hear the appeal. (AIDS Policy and Law, Vol. 14, No. 21, December 1, 1999)
LLOYD'S INSURANCE: Argues against Asbestos Related Fraud Claims in N.Y. ----------------------------------------------------------------------- Plaintiff names underwrote Lloyd's insurance policies from the 1960s into the 1990s. Plaintiffs allege they were fraudulently induced to become underwriters of millions of dollars of Lloyd's insurance that, unknown to them, was doomed to create huge losses due to concealed liabilities and potential liabilities for asbestos-related and pollution-related losses.
Plaintiffs maintain that unknown to them, the defendant law firms regularly provided reports to Lloyd's insiders throughout the 1980s and early 1990s detailing asbestos-related liability problems.
Consequently, plaintiffs, through their syndicates, underwrote insurance or reinsurance policies which exploded with enormous losses beginning in 1991 and continuing to the present, causing damages.
As a result of defendants' malpractice, plaintiffs maintain they have sustained damages of more than $ 6 million in the aggregate, with each plaintiff having sustained damages of more than $ 80,000.
Arguments
This complaint should be dismissed because all of the plaintiffs signed multiple agreements as a prerequisite to their becoming Lloyd's names in which they agreed to forum selection clauses that explicitly designated England as the place to litigate any and all disputes relating to their membership.
Although the defendants are not signatories to the General Undertaking, in which plaintiffs agreed to litigate in England, the defendants are clearly entitled to enforce its forum selection provision. A nonparty to an agreement with a forum selection clause may enforce the clause if the party is "closely related" to the dispute such that it becomes "foreseeable" that it would be bound (Hugel v. Corporation of Lloyd's, 999 F.2d 206 [7th Cir. 1993]).
All claims are barred by the applicable statutes of limitations because the claims accrued more than six years ago. The statute of limitations has run for each separate cause of action. Additionally, the alleged concealment cannot save the stale claims. Plaintiffs have had actual knowledge of the allegedly concealed facts for at least four years and those facts were widely publicized so that plaintiffs were on constructive notice of them for at least eight years. Therefore, the two-year concealment limitations expired at least two years before this action began.
The fraud and fiduciary claims must be dismissed because the plaintiffs are bound by defendants' delivery of the allegedly "concealed" reports to their agents and because plaintiffs have failed to properly plead the elements of those claims.
Additionally, the claims for aiding and abetting fraud should be dismissed because plaintiffs have not and cannot plead the requisite elements of such secondary liability, including, in particular, substantial assistance and knowledge.
The claim under the General Business Law (GBL) Section 349 consumer fraud statute should be dismissed because this action does involve a consumer transaction. There are no allegations that the wrongful conduct was directed at the consuming conduct.
Plaintiffs' cause of action for civil conspiracy must be dismissed because a "conspiracy to commit a tort is never itself a cause of action" (Alexander & Alexander of New York Inc. v. Fritzen, 68 N.Y.2d 968, 969, 510 N.Y.2d 546, 547 [1986]).
Finally, the complaint alleges no legal duty that defendants are alleged to have breached, and therefore cannot sustain any cause of action for legal malpractice or breach of fiduciary duty.
MEMORANDUM IN OPPOSITION TO BOTH MOTIONS TO DISMISS Filed July 26 by Edith Anthoine, et al
Arguments
The forum selection clause is inapplicable because defendants failed to mention that the Lloyd's contract, if applicable, would also require that English law govern plaintiffs' claim against their lawyers. Defendants' real position, therefore, is that American clients suing their American lawyers for malpractice and breach of fiduciary duty must litigate their claims in England under English law.
Additionally, the document with the forum selection clause is an agreement between plaintiffs and the Society of Lloyd's. Defendants are not a party to the agreement and nowhere does it state that the agreement applies to these defendants or even refers to them.
Plaintiffs' claims are not barred by a statute of limitation because the statute has not yet begun to run due to defendants' fraudulent concealment, continued tortious conduct and continuing representation of the plaintiffs. Additionally, defendants have failed to produce documents that will further show that the statute has not yet begun to run.
Defendants argue that there can be no fraud claims because defendants provided the asbestos reports to plaintiffs' agents and the knowledge of an agent is imputed to the principal. However, principals are not bound by the knowledge of the agents when the third party knows the agent is engaged in a fraud or otherwise acting against the interest of the principle and when the third party knows the agent is not informing the principal.
Plaintiffs have pleaded all the elements of a fraud claim. For example, fraud includes the intentional concealment or suppression of the truth, which the complaint alleges.
Secondly, Plaintiffs have pleaded the "substantial assistance" necessary for the claim of aiding and abetting both fraud and breach of fiduciary duty and the claim is pleaded with specificity.
The malpractice and breach of fiduciary duty claims do not fail. Even if defendants did not represent the plaintiffs, they still owed fiduciary duties to the plaintiffs because as agents of the plaintiffs' agents, they were plaintiffs' subagents and if they were lawyers for plaintiffs' agents, they owed plaintiffs a fiduciary duty.
The complaint does allege a claim under GBL 349 because the wrongful conduct is alleged to have corrupted the entire Lloyd's insurance market.
Finally, a valid conspiracy claim is alleged because the complaint alleges participation in a conspiracy, which the court in Alexander & Alexander held is an additional basis for liability for fraud and breach of fiduciary duty.
REPLY MEMORANDUM Filed Aug. 20 by LB&B and Mendes & Mount
Arguments
Plaintiffs' argument that their forum agreements do not apply fail for several reasons. One reason is because plaintiffs argue that they have a "subagency" relationship with LB&B and Mendes & Mount. But if this relationship does exist, then the subagents have the same contractual rights as their agents, including the right to enforce plaintiffs' agreements to litigate only in England.
Additionally, the forum agreement is broadly written to cover any dispute and/or controversy of whatsoever nature arising out of plaintiffs' membership of Lloyd's; thus the agreement applies to this action .
All claims are barred by the applicable statute of limitations and in their opposition plaintiffs do not dispute that their claims accrued more than six years ago. A May 1996 report of an Irish Lloyd's Names "Action Group" shows that plaintiffs not only had inquiry notice and actual knowledge of the allegedly concealed asbestos reports, but also that plaintiffs had concluded that the firms had concealed the asbestos information from them and the concealment caused loss and damage.
The "continuing tort" doctrine does not apply to claims of fraud, malpractice or breach of duty founded on alleged concealment. The mere "passive failure to disclose" does not constitute a continuing wrong (Neumann v. Nassau County Medical Center, 210 A.D.2d 301, 302, 619 N.Y.S.2d 721 [2d Dep't 1994]).
Plaintiffs' opposition has failed to provide any basis why the fact that LB&B and Mendes & Mount did not sent their asbestos reports directly to plaintiffs could give rise to any actionable claim for fraud. Plaintiffs fail to plead any facts to show that LB&B or Mendes & Mount knew that plaintiffs' agents allegedly were engaged in fraud.
Additionally, plaintiffs fail to support their claim for aiding and abetting with the required element of "substantial assistance." The complaint fails to allege how the law firms supposedly "participated" in creating syndicate reserves.
The complaint fails to state a cause of action for breach of duty because there can be no breach when the purported client does not even know that the attorney existed, much less ever relied on the attorney.
Attorneys LB&B is represented by Fredric W. Yerman and Phillip A. Geraci of Kaye, Scholer, Fierman, Hays & Handler of New York. Norman C. Kleinberg, William R. Maguire and David R. Biester of Hughes Hubbard & Reed in New York represent Mendes & Mount. Plaintiffs are represented by Robert Plotkin, Jonah Orlofsky and Karl Leinberger of Plotkin, Jacobs & Orlofsky in Chicago, Alice McInerney and Joanne M. Cicala of Kirby, McNerney & Squire of New York and Theodore W. Grippo Jr. of Pembroke & Brown in Park Ridge, Ill.
Case Edith Anthoine, et al. v. Lord, Bissell & Brook, et al., No. 99/102420, N.Y. Sup., N.Y. Co.; See 2/23/99, Page 14. (Mealey's Litigation Report: Insurance, Vol. 13; No. 48, October 26, 1999)
MONTGOMERY WARD: Presents Dela. Trent Settlement Pact to Bankruptcy Ct ---------------------------------------------------------------------- Montgomery Ward & Co., Inc., reports to Judge Walsh in the Delaware Bankruptcy that, after obtaining relief from the automatic stay in mid-1998, the parties returned to Wyoming to continue litigating the Trent Plaintiffs' class action lawsuit. On December 16, 1998, the Debtors report, after briefing on the Class Certification Motion was complete, the United States District Court For The District of Wyoming sua sponte determined as a result of a Tenth Circuit Court of Appeals case that it lacked subject matter jurisdiction over the class action case, and remanded the proceedings to state court. On December 30, 1998, the Trent Plaintiffs filed a motion for reconsideration of that decision and a supplemental memorandum in support of that motion. The Wyoming District Court denied the motion. On February 12, 1999, the Trent Class Plaintiffs filed a Motion to Extend the Deadline for Certain Proofs of Claim. That Motion was resolved by stipulation dated March 18, 1999. On March 5, 1999, the Trent Class Plaintiffs filed a putative class proof of claim in an unliquidated amount. On March 8, 1999, the Trent Class Plaintiffs commenced an Adversary Proceeding (Adv. Pro. No. 99-72) to liquidate as a Class Action their claims against Montgomery Ward. On March 15, 1999, the Trent Class Plaintiffs filed a Motion For an Order Certifying a Class. A hearing on the Class Certification motion was held on April 20, 1999 and the matter is sub judice.
On September 9, 1999, after lengthy, arduous and complex negotiations, the Trent Class Plaintiffs and the Defendants mutually consented to the resolution of the Class Proof of Claim and the Adversary Proceeding as memorialized in the Settlement Agreement. The Settlement Agreement requires the Trent Class Plaintiffs and the Defendants to seek the prompt entry of an order preliminarily approving the Settlement Agreement and the form of notice to be directed to all class members notifying them of the terms of the settlement and of the date of the hearing when the parties will request that the Court finally approve the settlement in all respects and consider the application of counsel to the Trent Class Plaintiffs for an award of counsel fees and costs to be paid from the proceeds of the settlement.
Subject to the final approval of the Bankruptcy Court, the Settlement Agreement provides, among other things, that:
* the Trent Class shall hold an allowed MW Class 3 Unsecured Claim, in the gross amount of $7,000,000, which will be used for the eventual payment of the Trent Class Plaintiffs' counsel fees (not to exceed $1,500,000 as may be approved by the Bankruptcy Court and for cash distribution to the Trent Class;
* Wards will distribute to the Trent Class merchandise credit certificates (i.e. gift certificates) in the total amount of $2,000,000;
* Wards will distribute to the Trent Class discount coupons which have a total value of approximately $6,700,000;
* Wards will pay the sum of $250,000 representing a reimbursement of expenses incurred by Plaintiffs' counsel in prosecuting this case of $200,000, and a payment to each of the Trent Class plaintiffs of $10,000.00.
The Trent Plaintiff Class will consist of all persons employed as commissioned sales associates at Reorganized MW & Co., Inc., formerly known as Montgomery Ward & Co., Inc., in the electronics department or appliance department (Electric Avenue); the furniture department (Rooms & More); and the automotive department (Auto Express) during the period between March 1, 1992 and June 30, 1997.
The Debtors are convinced that these settlement terms are reasonable and in the best interests of the Debtors' estate, Wards and the Trent Class. Accordingly, pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure, the Debtors ask Judge Walsh for authority to take all steps necessary to compromise and settle the Trent Class Claim on these terms. (Mongtomery Ward Bankruptcy News, Issue No. 47, Dec-7-1999)
NAVIGANT CONSULTING: Lowey Dannenberg Files Securities Suit in Illinois ----------------------------------------------------------------------- Notice is hereby given that Lowey Dannenberg Bemporad & Selinger, P.C. ("Lowey Dannenberg") has filed a securities class action lawsuit in the United States District Court for the Northern District of Illinois against Navigant Consulting Inc. ("Navigant" or the "Company") (NYSE: NCI) and certain officers and directors of the Company on behalf of purchasers of common stock during the period May 6, 1999 through November 22, 1999, inclusive (the "Class Period").
Plaintiffs' complaint alleges that defendants violated the federal securities laws by misrepresenting or failing to disclose material information about the Company's accounting practices, as well as the impropriety of certain loans made to its senior officers. Specifically, the complaint alleges that defendants issued false and misleading press releases and financial statements to the investing public concerning Navigant's financial results that inflated the price of Navigant stock purchased by investors during the Class Period.
On November 23, 1999, Navigant announced that the Company's Chairman, Chief Executive Officer and President had been forced to resign over concerns about the propriety of a $10 million dollar loan which he took from the Company; that two other Navigant officers had been terminated amid concerns over similar loans which they had received from the Company and used to purchase Navigant stock; and that the Company's independent auditors were examining the propriety of the Company's accounting practices and the reporting of Navigant's financial results in light of these and related transactions. The market price of the stock dropped as much as 55% ($14.50 per share) on the news, down from $26.00 per share just two days earlier, and down from a class period high of $54 per share.
If you are a member of the class described above, you may, not later than sixty days from November 26, 1999, move the court to serve as a lead plaintiff, provided you meet certain legal requirements. If you wish to discuss this action, or have any questions concerning this notice or your rights or interests with respect to this matter, please contact: David Harrison or Richard Bemporad Lowey Dannenberg Bemporad & Selinger, P.C. The Gateway, 11th Floor One North Lexington Avenue White Plains, NY 10601-1714 Telephone 914-997-0500 Telecopier 914-997-0035 e-mail at ldbs@westnet.com
O'QUINN: Former Clients in TX Sue over Kennedy Heights Toxic-tort Case ---------------------------------------------------------------------- About 50 former clients of John O'Quinn sued the Houston plaintiffs lawyer Nov. 22 claiming he breached his fiduciary duty in his handling of a toxic-tort action known as the Kennedy Heights suit. In that 1996 suit, about 2,400 residents of the Kennedy Heights subdivision in Houston sued Chevron U.S.A. Inc., claiming it had contaminated their water supply. The suit settled this year for $ 12 million. Plaintiffs in Bob Chambers, et al. v. John M. O'Quinn, et al. allege the settlement was too low. In their complaint filed in state district court, O'Quinn's former clients allege he assured them for three years that the Kennedy Heights suit was worth more than $ 500 million but later, in 1998, allegedly suggested the suit could not be won and should be settled for $ 12 million.
Interestingly, Houston solos Benton Musslewhite, his son, Charles B. Musslewhite Jr., and Newton B. Schwartz represent the plaintiffs in Chambers. In a separate case, Benton Musslewhite is suing O'Quinn, his former business colleague, claiming O'Quinn owes him money for referrals. Charles Musslewhite also has a history with O'Quinn: He testified against his father and O'Quinn in a State Bar of Texas grievance suit that alleged that the elder Benton and O'Quinn unethically solicited clients after a 1994 plane crash in North Carolina. A jury exonerated the two men of the barratry allegations. Schwartz says O'Quinn's former clients were abandoned for $ 12 million. "They want their day in court," he says. The Musslewhites and O'Quinn could not be reached for comment. (Texas Lawyer November 29, 1999)
ORANGE UNIFIED: Retired Teachers Sue over Reneging on Medical Care ------------------------------------------------------------------ A $75-million lawsuit filed on behalf of 700 retired teachers charges that the Orange Unified School District has reneged on a 23-year-old agreement to give retirees free lifetime medical care in exchange for lower salaries. The suit, filed late Monday, also contends the school district for years didn't pay into a fund for the health care.
The lawsuit is the latest salvo in the war between the school district and its teachers. But in this case, not only is Orange Unified Education Assn. President John Rossmann attacking the school board, he also is accusing previous union leadership of selling out the retirees.
James Bowles, the district's labor law attorney, said the district was not supposed to pay into a health care fund, that the retirees' health care was never free and that any changes in retirement benefits were negotiated during collective bargaining.
But the lawsuit says that according to state law, the teachers union cannot negotiate for retirees, since they are no longer employees. "I'm not claiming the district or the union did something wrong," said Mark Lerner, attorney for the retired teachers. "They just did something beyond the scope of their ability."
Bowles called the lawsuit a bargaining tactic, and made no attempt to hide his distaste for the union president. "What's happening is a new union regime, the Rossmann regime, is supporting the lawsuit against an agreement its predecessor negotiated," Bowles said. "They don't like the deal they cut two years ago."
The suit, which also seeks class-action status, is similar to one filed by 325 nonteaching retirees that is scheduled to go to trial next month.
Inescapable in any dealings between the teachers and the school district is their acrimonious relationship. Orange Unified teachers earn less money than their counterparts elsewhere in the county. Many stayed with the district because of the promise of lifetime health insurance, which the district has said it can no longer afford.
Rossmann said "affording" has nothing to do with it, since that money belonged to teachers. But instead of going for salaries, he said, it was supposed to fund health care.
After more than a year of bargaining, the district and the union agreed on a contract last spring. But the rank-and-file rejected the offer and Rossmann was elected union president.
The relationship between the union and the district has continued to deteriorate--complete with accusations of unfair labor practices--and a contract still has not been agreed upon. (Los Angeles Times, December 8, 1999)
PLAINS ALL: Shepherd & Geller File Securities Suit in Texas ----------------------------------------------------------- The Law Firm of Shepherd & Geller, LLC announced on December 8 that it has filed a class action in the United States District Court for the Southern District of Texas on behalf of all individuals and institutional investors that purchased or otherwise acquired the common limited partnership units of Plains All American Pipeline, L.P.("Plains") (NYSE:PAA) and the common stock of Plains Resources, Inc. ("Plains Resources") (AMEX:PLX) between November 17, 1998 and November 26, 1999, inclusive (the "Class Period").
The complaint charges that Plains, Plains Resources and certain of its officers and directors violated the federal securities laws by providing materially false and misleading information about the Company's operations, earnings growth and overall financial condition. As a result of these false and misleading statements the Plains' partnership units and Plains Resources' stock traded at artificially inflated prices during the class period. When the truth about the companies was revealed on November 29, 1999, the price of Plains' partnership units dropped to as low as $9-5/8, a 55% decline from its Class Period high, and Plains Resources' stock dropped 45% the same day.
Contact: Shepherd & Geller, LLC, Boca Raton Jonathan M. Stein, 561/750-3000 Toll Free: 1-888-262-3131 E-mail: jstein@classactioncounsel.com or Shepherd & Geller, LLC, Media, Pa. Scott R. Shepherd, 610/891-9880 Toll Free: 1-877-891-9880 E-mail: sshepherd@classactioncounsel.com
RUBENSTEIN: Fed Ct Oks Classes in Urologists' Price-Fixing Case in Il. ---------------------------------------------------------------------- U.S. District Judge George W. Lindberg has granted plaintiff Judith Thompson's motion for class certification as to a plaintiff class and a defendant class in a price-fixing conspiracy action against various urologists in the Chicago area who perform lithotripsy and related services. Sebo et al. v. Rubenstein et al., No. 98 C 8394 (ND IL, Eastern Div., Sept. 9, 1999).
Thompson sought to certify a plaintiff class of lithotripsy patients and a defendant class of urologists/shareholders of defendants Stone Centers of America and Urological Stone Surgeons Inc. under Fed.R.Civ.P. 23(b)(3).
The district court held that the proposed classes fulfilled the requirements of Rule 23(a): (1) the class is so numerous that joinder of all members is impracticable (numerosity); (2) there are questions of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class (typicality); and (4) the representative parties will fairly and adequately protect the interests of the class (adequate representation).
Defendants did not disagree that the approximately 25,000 members of the plaintiff class satisfy numerosity, the court reported. The court found commonality as to injury or impact with respect to plaintiff's price-fixing claim in violation of the Sherman Act. Plaintiff said that common proofs exist that w ill demonstrate that defendants conspired to raise, fix, maintain, or stabilize prices for lithotripsy professional and machine services in the Chicago area. The court agreed that the overriding common issue of conspiracy on the part of defendants predominates over individual issues such as damages.
Similarly, the court agreed that the question whether defendants engaged in willful acquisition of monopoly power, as alleged in plaintiff's Sherman Act monopolization claims, involves issues common to the class.
It also found commonality in plaintiff's allegations of a "tying arrangement," whereby defendants agreed to perform lithotripsy services only if the patient agreed to purchase lithotripsy machine services and anesthesia services through their medical center. The district court said plaintiff Thompson maintains she can prove fact of injury for the class by demonstrating that had a conspiracy not existed, the competitive price would have been lower than the prices paid during the class period.
The court rejected defendants' contention that Thompson failed to establish typicality because she pled the doctrines of equitable tolling and fraudulent concealment in response to defendants' affirmative defense of the statute of limitations. The court said those defenses to the statute of limitations appear to involve factual issues related to proving the conspiracy and these issues would not be so consuming that they would take away focus from the merits of the case.
The court also found Thompson to be an adequate representative of the plaintiff class, questions of law and fact common to the class members predominated over q uestions affecting individual members and class action is a superior method of adjudication for the case. The court noted that class actions are especially suited for cases where each class member may have suffered a small individual loss but where the collective loss is large.
Using a similar analysis, the court certified a defendant class of urologists and shareholders. According to the court, due process mandates that a defendant class should be certified only where the plaintiff class has a colorable claim against each member of the defendant class. In antitrust price-fixing cases, the court said, where each participant in a conspiracy is jointly and severally liable to victims of the scheme, a plaintiff such as Thompson would have a claim against each member of the defendant class even though she only dealt with two of the doctors alleged to be part of the conspiracy.
Plaintiffs are represented by Michael Raymond Collins of Collins & Collins; Marvin Alan Miller, Patrick Edward Cafferty, Kenneth A. Wexler, Jennifer Winter Sprengel, and Adam J. Levitt of Miller, Faucher Cafferty and Wexler, Chicago; Joseph Peter Brent of Fumagalli, Tecson & Brent, Chicago; and Louis W. Brydges of Brydges, Riseborough, Morris, Franke & Mill, and George E. Riseborough of Hinshaw & Culbertson, both of Waukegan, IL.
The defense is represented by Anthony C. Valiulis, John Hester Ward, and Peter Dostal McWeeny of Much, Shelist, Freed, Denenberg, Ament & Rubenstein; and Jack R. Bierig, Richard D. Raskin, Bruce Michael Zessar, Theodore R. Scarborough Jr. and Scott David Stein of Sidley & Austin, all in Chicago. (Antitrust Litigation Reporter, Vol. 7; No. 5; Pg. 6, November 1999)
STYLING TECHNOLOGY: Shepherd & Geller File Securities Suit in Arizona --------------------------------------------------------------------- The Law Firm of Shepherd & Geller, LLC announced on December 8 that it has filed a class action in the United States District Court for the District of Arizona on behalf of all individuals and institutional investors that purchased or otherwise acquired the common stock of Styling Technology Corp. (the "Company") (Nasdaq:STYLE) between May 5, 1998 and November 29, 1999, inclusive (the "Class Period").
The complaint charges that the Company and certain of its officers and directors violated the federal securities laws by providing materially false and misleading information about the Company's sales and earnings. As a result of these false and misleading statements the Company's stock traded at artificially inflated prices during the class period. The Defendants took advantage of the inflated stock price by completing a $100 million note offering the proceeds of which the Company used to fund acquisitions. When the truth about the Company was revealed, the price of the stock dropped significantly.
Contact: Shepherd & Geller, LLC, Boca Raton Jonathan M. Stein, 561/750-3000 Toll Free: 1-888-262-3131 E-mail: jstein@classactioncounsel.com or Shepherd & Geller, LLC, Media, Pa. Scott R. Shepherd, 610/891-9880 Toll Free: 1-877-891-9880 E-mail: sshepherd@classactioncounsel.com
THE YORK: Former Employees Sue over Age Discrimination in Downsizing -------------------------------------------------------------------- Four men who were fired by The York Group in 1997 are suing the company, alleging age discrimination in what the company said was a restructuring and reduction in its work force. Lewis T. Knaub, 65, of Red Lion; Gary McBrien, 61, of Felton; Dale Newcomer, 54, of Dover; and Kevin C. Stump Sr., 46, of York were all supervisors for the company's York Casket Co. and York Wood Products divisions.
In addition to alleging age discrimination, the lawsuit says the company violated the Americans With Disabilities Act in its dismissal of Knaub. He had been diagnosed and treated for bone cancer in 1991. Company officials did not return phone calls seeking comment. (York, Pa. The Associated Press, December 7, 1999)
TOBACCO LITIGATION: French Ct Holds Seita Liable for Death of Smoker -------------------------------------------------------------------- In a country where smoking is a social grace not a disgrace, a court ruling that held a tobacco company partially responsible for the death of a three-pack-a-day smoker has sparked a nationwide debate about who is responsible for smokers' deaths.
For the first time, a French court ruled on Wednesday that Seita, the manufacturer of quintessentially French cigarette brands Gauloise and Gitanes, shared the blame for the death of a 49-year-old confirmed smoker from lung and larynx cancer this year.
The ruling might come as no surprise in the United States where last year tobacco companies agreed to pay around dlrs 206 billion over 25 years to settle lawsuits against them by Connecticut and 45 other states over the costs incurred to treat sick smokers. But in Europe, where smoke-filled cafes and bars are the norm, anti-smoking campaigners plow a lonely furrow and such civil suits are few and far between.
In France, where 60,000 people die of smoking-related diseases each year, a county court ruled on Wednesday that Seita had committed a fault by not giving committed smoker Richard Gourlain enough information about the dangers of his habit. But it also blamed the smoker, dividing responsibility between the two parties based on when the first law forcing manufacturers to display warnings on cigarette packets came into force. ''It's a first in France. Seita has been declared responsible for the damages it caused to a smoker though a lack of information,'' Gourlain family lawyer Francis Caballero said after the ruling.
Gourlain brought a lawsuit against Seita in December 1996. His widow continued the action after his death this year, claiming the company did not provide enough information about the health risks.
The judge held Seita entirely responsible between 1963 - 1969, during which time Gourlain was a minor. He found Seita carried 60 percent of the responsibility between 1969 - 1976, when the law about printed warnings was introduced. Thereafter, he said Gourlain alone was responsible.
Seita, which has agreed to merge with Spanish tobacco giant Tabacalera, said in a statement it will appeal the ruling. ''Seita is astonished by this ruling. It considers that Mr. Gourlain was informed of the risks of smoking...it was with full knowledge that (he) took the decision to smoke and continue smoking despite his multiple health problems'' the company said.
Gourlain's case stands in sharp contrast to the efforts of 53 lung cancer victims in Britain to win damages in Britain's first class-action lawsuit against two tobacco companies -- Gallaher Ltd. and Imperial Tobacco Ltd. The majority of the victims dropped the case in February this year because their lawyers said the chances of victory were slim.
In Poland, a country of heavy smokers, the first suit against a tobacco company began this week, and in the Netherlands a man suffering from chronic emphysema is suing R.J. Reynolds, Philip Morris and two other tobacco companies.
But in France, some doubted whether the new, somewhat nuanced ruling would open a Pandora's box of smoking lawsuits. Left-leaning French daily Liberation said in an editorial that the real blame lay with the state, once the majority shareholder in Seita which was privatized in 1995. ''Which court in the name of which victim will call (the state) to account,'' it said. (AP Worldstream, December 9, 1999)
U.S.: Fed Judge Dismisses Lawsuit over Phasing out of Marijuana Program ----------------------------------------------------------------------- A federal judge has dismissed a closely watched class-action lawsuit seeking the right to medical use of marijuana, after finding that the government did not act irrationally in deciding to slowly phase out a program that still provides the drug to eight individuals.
"Providing marijuana to eight people without legal consequence is somewhat strange," Senior U.S. District Judge Marvin Katz wrote in his 14-page opinion in Kuromiya et al. v. United States. "Even odder is the government's having provided marijuana to a small group of people over the years in the compassionate use program without having obtained a single useful clinical result as to the utility or safety of marijuana as a medicine to alleviate the symptoms of illness. If morphine were thus dispensed, the absurdity would be even more apparent," Katz wrote. But Katz said that a court's job in weighing such an equal protection challenge is to employ the "rational basis" test and not to use that standard "as an excuse to judge the wisdom of policy choices. "When pressed, Katz said, government lawyers and witnesses offered sound explanations for why the medical marijuana program was always so tiny; why they resisted letting it grow; and why they decided to phase it out through "attrition," allowing all current participants to retain access to the drug until their deaths. Katz also applauded the government's decision to allow for larger scale tests of medical uses of marijuana that will provide the first truly reliable data on the drug's efficiency and safety." The government has finally instituted a program to make its supply of marijuana available to serious researchers to determine the utility of the substance as medicine based on scientific empiricism rather than shibboleth," Katz wrote. "In time, knowledge sometimes has a chance to prevail over ignorance.... One hopes that both the advocates and opponents of medical marijuana will allow science to substitute for slogans."
The ruling comes in a suit brought by 160 plaintiffs in nearly every state who originally claimed that the legal prohibition against marijuana violates a fundamental right to make use of any plant. Filed in June 1998 by attorney Lawrence Elliott Hirsch, the suit alleged that "the right to consume, ingest or smoke a plant that grows wild in nature, such as cannabis, is antecedent to and more fundamental than the right to vote." The suit didn't get much attention until Judge Katz took it seriously. Although he dismissed most of the claims, Katz refused to dismiss the equal protection challenge in which the plaintiffs complained that it was unfair for the government to operate a compassionate use program for only a handful of sick people who say marijuana cures their symptoms. The case then went forward, with the government forced to produce witnesses to explain how the program works.
Katz's opinion lays out the details. The compassionate use program was established in 1978 to settle a civil lawsuit. Initially, only one individual, Robert Randall, received marijuana from the government for treatment of his glaucoma. The government later agreed to supply medical marijuana to several other individuals through the same mechanism. But unlike most experimental drug trials, in which a large enough sample takes a new drug under controlled conditions to study its effects, the marijuana program was set up as a series of individual trials. Government doctors later said such single patient tests cannot establish the scientific efficacy of new drugs and are not intended to permit the widespread distribution of unapproved drugs. After the number of patients swelled to 13, applications for the program dramatically increased, in part due to the AIDS crisis and the belief among some AIDS patients that marijuana is the most effective appetite-inducing agent to battle AIDS "wasting syndrome." Ultimately, Dr. Louis Sullivan, the Secretary for Health & Human Services, adopted the recommendations of Assistant Secretary for Health, Dr. James O. Mason, that the program end except for those patients already receiving marijuana. In memos to Sullivan, Mason stated that the "widespread use of marijuana for medical purposes, especially where alternative medications are available, is bad public policy and bad medical practice." But Mason said he also felt that it would be problematic for the government to cut off the supply to those who had already started receiving it. He recommended continuing to supply the 13 patients then using the drug while at the same time encouraging them and their doctors to use alternate therapies, and designing a protocol to begin a well-controlled clinical trial of Megace and Marinol, the most promising agents studied to date for HIV wasting-syndrome .
Judge Approves of Attrition
At the time the program stopped accepting new applicants in March 1992, there were 13 participants; presently, eight remain. Judge Katz found that the government's actions and its rationale met the legal test for establishing a rational basis. "The government's submissions suggest at least four bases for the termination of the compassionate use program: bad public policy, bad medicine, a lack of marijuana for the remaining patients, and the existence of alternative treatments," Katz wrote. "The government explains its decision to continue providing marijuana only to the remaining individuals in the program as a means of balancing the government's desire to avoid distributing marijuana to increasing numbers of individuals with the interests of those who had already relied upon the drug. These justifications provide a rational basis for the government's decisions." Katz said the plaintiffs had a "very heavy burden" in challenging a government decision under rational basis review. Testimony of high ranking officials, Katz said, showed that the program ended "because the government did not wish to expand it in the wake of the increased applications, particularly as the government believed that alternative treatments were safer and more effective." The government was also "uncomfortable with distributing marijuana as a medication to increasingly large numbers of patients given that marijuana was and is a controversial and currently illegal drug," he wrote. Katz also found that allowing a handful of users to continue getting the drug did not undermine the government's rationale. The explanation for the disparate treatment, Katz said, was that "these individuals had relied on the government-supplied marijuana for many years and that it did not wish to harm those individuals by abruptly cutting off their supply." But Katz said the government's efforts to persuade those patients and their doctors to utilize alternative treatments "is also consistent with its overall goal of limiting its role in distributing marijuana."
Plaintiffs' Challenge Fails
Katz found that such a decision to discontinue a controversial program by attrition cannot be labeled an infringement of equal protection principles. The plaintiffs, he said, offered no evidence that the government's actions were irrational. Instead, he said, their arguments focused mostly on advocating the benefits of medical marijuana and very little on challenging the government's reasons for continuing the program only for a few. Although some evidence suggested that the increasing number of applications from individuals suffering from AIDS played a role in the decision to terminate the program, Katz said the same documents "also indicate that the concern stemmed from the increasing numbers and expansion of the program rather than any animus towards AIDS sufferers." In closing, Katz noted that the government has informed the court of a new program in which "research grade" marijuana will be made available to doctors and scientists interested in conducting research on the medical benefits of marijuana. "The government emphasizes that these trials will be directed 'toward multi-patient clinical studies' because of concerns that the single patient format cannot produce useful scientific data," Katz wrote. "These regulations seemingly indicate an increased willingness to consider new research protocols that are intended, from their inception, to lead to meaningful results." (The Legal Intelligencer, December 3, 1999)
Y2K LITIGATION: Paper Says Act May Complicate Litigation -------------------------------------------------------- Geoffrey Bestor is counsel at Washingtons Dickstein Shapiro Morin & Oshinsky. He recently served as deputy assistant attorney general in the Office of Policy Development of the Department of Justice, where he represented the department on the Clinton administrations Y2K Act negotiating team. The views expressed herein are his own.
Alarmed by predictions that Y2K would unleash a trillion dollars in (mostly frivolous) litigation, industry groups heavily lobbied Congress for legislation to encourage remediation, discourage litigation, and protect responsible companies from the depredations of plaintiffs lawyers.
Although Congress passed the industry-backed Y2K Act, many potential defendants may find that the law won't live up to their expectations. The legislation may discourage a few class actions, but is likely to make the litigation that does occur more uncertain, complicated, and expensive.
Since the Y2K Act was signed into law July 20, those trillion-dollar predictions have been shrinking steadily, and it is not clear that the anticipated explosion of litigation is going to involve much more than companies suing their insurers over Y2K remediation costs.
Reports from President Bill Clinton's Y2K adviser and the Senate Y2K Committee have been reassuring-essential services are safe and Y2K consequences (at least in the United States) are expected to be minor and short-term. Predictions of massive disruption of our technology-dependent society have disappeared.
Estimates of remediation costs are much less than once feared. While the airlines might have some empty seats on Jan. 1, there appears to be little stockpiling of canned goods and generators, and not much money to be made from Y2K fears-seen any Y2K-preparedness books in the supermarket checkout line lately? Even the millennium itself seems to have bored the public.
Diminished Y2K fears notwithstanding, Congress has given us an extremely broad statute. The law states that it will apply in every suit, in state or federal court, "in which the plaintiff's alleged harm or injury arises from or is related to an actual or potential Y2K failure, or a claim or defense arises from or is related to an actual or potential Y2K failure." See Y2K Act, '3(1)(A).
The statute covers nearly every aspect of civil litigation-from pre-litigation notice to pleading to substantive liability law to damages to class actions.
Given that the law's provisions favor defendants in almost all instances, defendants have a strong incentive to be covered by the statute. Since the applicability of the act will be determined at the outset of any litigation, any action in which a computer or computer chip is potentially involved could be a Y2K lawsuit.
There will not need to be massive numbers of actual computer failures for the Y2K Act to have a significant impact on civil litigation in the next few years.
But there is a real question whether defendants have really gained that much from the Y2K Act. When President Clinton signed the law, he gave it the following ringing endorsement:
"I hope that we find that the Y2K Act succeeds in helping to screen out frivolous claims without blocking or unduly burdening legitimate suits. We will be watching to see whether the bill's provisions are misused by parties who did little or nothing to remediate in order to defeat claims brought by those harmed by irresponsible conduct."
One might think-as was suggested at the time-that the forces of tort reform had won a significant victory and that Y2K defendants at least would benefit from the various pro-defendant changes to civil litigation that tort reform proponents had been unable to win more broadly. One might be wrong.
Pre-Litigation Provisions
We can start with the act's pre-litigation notice provisions. Section 7 requires prospective plaintiffs to provide detailed notice of the claim to the prospective defendant at least 30 days before filing suit. If the prospective defendant responds within 30 days with an offer to fix the problem, or to engage in alternative dispute resolution, the plaintiff must wait an additional 60 days to sue.
This all sounds fine, except for two problems. The first is that few plaintiffs, if they have any choice, are going to allege Y2K defects because no plaintiff is going to want the pro-defendant provisions of the Y2K Act to apply.
In addition, there are forum-shopping concerns for plaintiffs to consider. If the plaintiff provides notice, the defendant has 30 days to choose the forum by filing a pre-emptive suit. Even if the act's notice provisions apply to the defendant's action, the defendant is in the forum it wants, and the Y2K Act provides only for stay, not dismissal, of suits filed without the requisite notice. Prudent plaintiffs may well decide to sue and file notice at the same time-the worst that will happen is a short delay in the suit.
Appellate Issues Abound
Another problem with the Y2K Act from the point of view of its intended beneficiaries is the very breadth of the statute. It is safe to say that no one-no one-knows how the statute will work in practice. One thing is certain, however; there will be appellate issues built into every verdict where the act applies.
For example, there are substantial arguments that certain provisions are unconstitutional directions by the federal government to the states. Further, there are no pattern jury instructions for claims under the Act.
Lawyers will have to be paid to resolve the law's thorny issues. The statute is likely to turn at least some straightforward state law contract claims into a tangle of interpretive and constitutional issues that would tax the abilities of the most seasoned Supreme Court practitioner.
If the act applies (the first issue requiring a round of motions), how is the applicable law to be determined? Section 4(d) provides that written contract terms "shall be strictly enforced" unless the term would "manifestly and directly contravene state law embodied in any statute in effect on January 1, 1999, specifically addressing that term."
Common law apparently is to be disregarded, except for "doctrines of unconscionability, including adhesion, recognized as of January 1, 1999, in controlling judicial precedent." If the contract is silent on an issue, state law as of the time the contract was executed controls, unless, of course, the contract is silent as to damages, in which case '11 provides that the law "at the time the contract was effective" applies.
The statute does not tell courts what law to apply when a written contract term only arguably applies, or is ambiguous. And how does one "strictly enforce" an ambiguous term?
Section 8 imposes special pleading requirements as to damages, materiality of defects, and state of mind. What about the legal principle that the "general rule, bottomed deeply in belief in the importance of state control of state judicial procedure, is that federal law takes the state courts as it finds them"? See Johnson v. Frankel, 520 U.S. 911 (1997).
Section 6, which addresses proportionate liability and contains exceptions and special rules for contribution, discharge through settlement, and allocation of orphan liability, is fairly described as incomprehensible.
The Y2K Act does not apply to personal injury and wrongful death claims, but what about the hospital sued for wrongful death that asserts a third-party contract claim against a medical device manufacturer? Is that third-party claim covered by the law?
Curiously, Section 9, which imposes a duty to mitigate "in addition to any duty to mitigate imposed by State law," is not limited to contract actions. Does this mean that the duty applies in tort cases?
Uncertainties Will Be Resolved
All of this is not to suggest that the Y2K Act will be without effect. During the next several years, many of these uncertainties will be resolved by appellate judges (although, since the statute applies in every court in the land, potentially with differing results). Moreover, the act was intended to force contract claims to be decided according to contract rules, and it may well have this effect by making it more difficult for plaintiffs to couch contract and warranty claims as tort claims.
The act also may discourage some class actions, since tort claims will be harder to assert and the law creates presumably less hospitable federal jurisdiction for any class action seeking punitive damages.
Until the meaning of the Y2K Act has been determined through litigation, however, the poor defendants who were supposed to be assisted by the law will still have to pay their lawyers to find out if the bill's proponents were successful.
If nothing much goes wrong on Jan. 1, all those lawyers who have geared up for a trillion dollars' worth of Y2K litigation, including those who represent defendants, can take solace in the knowledge that the few suits that result will probably cost far more per case than they otherwise would have. (Fulton County Daily Report December 9, 1999)
Y2K LITIGATION: Remediation Cost May Be Claimed Under Property Policies ----------------------------------------------------------------------- Although companies have spent millions of dollars on Y2K compliance and remediation programs, many remain unaware that these costs may be recoverable under the "sue and labor" clause contained in their property insurance policies. Several companies already have been forced to file lawsuits to recover the money spent on their Y2K programs. Given the amounts at stake and the unsettled legal landscape, further litigation seems inevitable.
The "Sue and Labor" Clause
The "sue and labor" clause affords companies significant promise for potential recovery of the millions of dollars being spent on Y2K compliance and remediation programs. This clause requires a policyholder to undertake measures to prevent or minimize threatened loss to covered property that the insurer would be required to pay and obligates the insurer to pay the expenses reasonably incurred by the policyholder in taking such measures. In fact, if the policyholder fails to take appropriate steps, coverage may be forfeited.
The "sue and labor" clause is advantageous in the Y2K context because a policyholder may recover by showing only imminent loss or damage, without having to prove actual loss or damage. Indeed, companies should have little difficulty demonstrating that their Y2K remediation efforts prevented some covered loss or damage. The "sue and labor" clause also is beneficial to policyholders because attempts to repair non-compliant programs need not be successful to recover under the provision. Finally, "sue and labor" recoveries are supplemental recoveries that do not otherwise erode the policy limits.
"Sue and Labor" Defenses * Covered Loss
The initial obstacle to recovering on a "sue and labor" claim is proving that the loss sought to be avoided would have been covered under the policy. Because the purpose of the "sue and labor" clause is to prevent or minimize covered losses for the benefit of the I insurer, the clause is ineffective unless the harm prevented would have been covered in the first instance.
Property policies cover damage to a policyholder's own property. In the Y2K context, this could be damage to a company's computer system or other property such as manufacturing equipment. Property policies may be drafted to cover only specifically enumerated "named perils" such as fire, explosion, smoke, earthquake or water damage, or to cover "all risks" except those that are specifically excluded. Until recently, neither type of policy specifically addressed computer failure. Accordingly, the broader "all risk" policies are more likely to provide coverage for Y2K claims than are "named peril" policies because computer failure would have had to be specifically identified as a "named peril." However, property policies issued in the last few years often contain specific language either insuring or excluding Y2K coverage claims. Companies should continue to monitor renewals carefully and resist the insertion of Y2K exclusions because they may be detrimental to coverage.
Insurance companies are expected to argue that the prevented loss is not covered because it would have been subject to a variety of exclusions sometimes found in property policies. Specifically, insurance companies will likely rely upon exclusions for "latent defects" and "design errors." These exclusions have been construed very narrowly in other contexts and should not prevent coverage. For example, a "latent defect" generally is interpreted as one that cannot be discovered by a routine or customary test, but Y2K problems are readily discernible and therefore not "latent." Similarly, a Y2K problem cannot easily be characterized as a "design error" because the computer programs operate as designed. In fact, the use of two- digit date fields was "state of the art" computer design when the practice began and remained an industry standard until the late 1990s. (Note, however, that this creates an apparent tension with the "fortuity doctrine," discussed below).
* Actual or Imminent Loss or Damage
To recover under the "sue and labor"clause, a company's remedial program must have been driven by "[actual] loss or damage or imminent loss or damage." To prove actual "loss or damage," a company must demonstrate "direct physical loss or damage to property." A debate already has begun as to whether the word "physical" modifies only "loss" or both "loss" and "damage." If the damage need not be "physical," policyholders can easily demonstrate that the incorporation of Y2K non-compliant components caused economic consequences. However, if the damage must be "physical," the result is somewhat less obvious. For instance, is there "physical damage" when data is corrupted or processing capabilities are compromised? In such instances, policyholders will rely, at least in part, on a theory known as the "incorporation doctrine," pursuant to which "physical damage" is deemed present when a defective component is incorporated into a larger product, rendering the larger product unusable or less valuable. The incorporation doctrine is readily applicable in the Y2K context because a computer system is physically damaged by the installation of Y2K non-compliant software. However, acceptance of the incorporation theory is not universal, and some courts may agree with the insurers that physical damage exists only when there has been a physical alteration or change in form.
Proving "imminent loss or damage," however, is a much lower hurdle for companies seeking to recover under the "sue and labor" clause. Insurers will argue that companies began their remediation programs in the mid-1990s when the new millennium was not "imminent." However, such a narrow interpretation is untenable in the Y2K context because the "imminence" of anticipated loss or damage must be viewed relative to the scope of the problem and the time needed to "sue and labor" to prevent it. For companies that needed to identify, repair and test thousands of non-compliant programs in facilities throughout the country to avert disaster, the turn-of-the-century may readily have been characterized as "imminent" at the outset of their compliance programs. In fact, had these companies waited until shortly before the new millennium to begin their Y2K programs, the programs would have failed and their insurers would have argued that the companies violated their obligations to "sue and labor," thus forfeiting coverage.
* Ordinary Business Expense
The insurance industry also is expected to argue that the money spent by companies on Y2K compliance programs constitutes "ordinary business expense," a category of costs not covered by insurance. However, most Y2K fixes are far from "ordinary" and cannot be equated with regular computer system maintenance and upgrade simply because of the sheer magnitude of the problem and the catastrophic damages that would result if remediation is not undertaken. Accordingly, to the extent that the purpose of Y2K remediation programs is to save fully functional systems that are about to be rendered obsolete, rather than to replace worn out or antiquated systems, coverage should be available. Remediation prompted by mixed motives, however, will need to be evaluated carefully.
* The Fortuity Defense
Inherent in every insurance contract is the assumption that, in order to be covered, a loss must be "fortuitous." The insurance industry asserts that Y2K remediation costs are not fortuitous because systems are operating exactly as intended, having been designed with two- digit date fields in order to conserve memory. The insurers also point out that the Y2K problem has been well publicized for at least the last few years. Although both contentions are accurate, neither necessarily suggests a non-fortuitous loss.
For one thing, fortuity must be measured by the policyholder's subjective knowledge. A lack of fortuity is present only when the policyholder knew that a particular loss was going to occur at the time the policy was purchased. Indeed, most user companies were not aware of the Y2K problem until the late 1990s and, even after that time, were not focused on the problem when they purchased their policies. In fact, certain "triggers of coverage" assign the damages to earlier policy periods when "fortuity" is not an issue (i.e., coverage placed in the year of installation, rather than the year the problem manifested). Moreover, many courts require a showing of "specific intent," and few companies contemplated the exact type or extent of damage now projected. Accordingly, even though the processing limitations were well known in the computer industry, knowledge of such limitations cannot be imputed to all companies, nor can such knowledge necessarily be equated with an expectation of loss.
* Notice
Property policies contain notice requirements that are likely to be the subject of substantial debate in the Y2K context. Insurance companies are expected to claim that policyholders' notice of Y2K loss is late because the policyholders have been aware for some time of Y2K system risks and potential claims, and, indeed, many companies even implemented their Y2K programs without providing notice. Yet, typical notice of loss provisions require that notice be given only when actual loss or damage is known; mere knowledge of the conditions giving rise to the loss does not trigger the notice requirement. Moreover, notice provisions are often limited to the knowledge of the company's Risk Manager only. An individual employee's knowledge - even that of a senior manager or an employee responsible for technology - is not necessarily relevant. Furthermore, even if a policyholder's notice is deemed late, most jurisdictions do not allow an insurer to avoid coverage unless it has suffered prejudice from the delay. In the Y2K context, insurers will have a difficult time proving "prejudice" because they likely would not have done anything different even if they had been notified earlier. Finally, in some jurisdictions, a company's delayed notice may be forgiven if the policyholder had a justifiable excuse for the delay (for instance, if a company reasonably believed that no coverage for Y2K claims was available under its policies). Because insurance companies, their trade associations, and their lawyers have been preaching for the last three years that no coverage is available for Y2K claims, a company's belief in non-coverage very well may be justified.
Recommendations
To maximize the potential for an insurance recovery companies should:
* Review the language of existing policies to ascertain the scope of coverage available.
* Provide insurance carriers with immediate notice if claims are contemplated.
* Consider using a "stand still" agreement in the event of pre- litigation communications with an insurer to preserve the ability to select the most favorable forum.
* Inspect all policy renewals and resist the introduction of Y2K exclusions.
* Organize and preserve all documentation relating to Y2K compliance programs.
* If coverage litigation appears inevitable, carefully evaluate alternative forums and examine the applicable choice of law decisions and substantive law.
(The Metropolitan Corporate Counsel, December, 1999)
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