Defense Counsel Journal

October, 1997

Department

*623 CURRENT DECISIONS

EXPERT EVIDENCE

If It's Not "Scientific," It's Not Daubertizable

Another panel of the Ninth Circuit has narrowed the application of the U.S. Supreme Court's Daubert standards only to "scientific" expert testimony, permitting an experienced mechanical and metallurgical engineer to offer alternate design testimony in a products liability case.

The district court had granted a forklift truck manufacturer summary judgment, excluding the proffered expert testimony of Martin Siegel on the ground that it was not based on "scientific knowledge," was not derived by a reliable and "scientific method" and did not amount to "good science." Siegel wanted to testify that the forklift should have had a barrier between the cargo and operator areas, although he had neither built nor tested that design. On the other hand, the plaintiff contended that Daubert did not apply because Siegel's testimony would be based on his knowledge, skill and experience.

A panel of Judges Fletcher, Pregerson and Wexler agreed with the plaintiff and concluded that Siegel's testimony should have been allowed because it would be "facially helpful and relevant," thus meeting the test of Rule 702 of the Federal Rules of Evidence, based on Siegel's "engineering experience and his having investigated hundreds of forklift cases over the past 30 years that a safety device is feasible." The manufacturer will have the opportunity, Judge Fletcher wrote for the panel, to cross-examine the expert to point out that he has not created or tested the alternate design.

The court was influenced by the 10th Circuit's decision in a similar case, Compton v. Subaru of America Inc., 82 F.3d 1513 (1996), which dealt with automobile design. Judge Fletcher also pointed out that Daubert itself stated that Rule 702 applies to "technical or other specialized knowledge." She also noted that two Ninth Circuit cases reaching the same conclusion--United States v. Cordoba, 104 F.3d 225 (1997), and Thomas v. Newton International Enterprises, 42 F.3d 1266 (1994). But in what Judge Fletcher called dicta, two other Ninth Circuit cases hold that Daubert applies to all expert testimony-- Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134 (1997), and Claar Burlington Northern Railroad Co., 29 F.3d 499 (1994).

McKendall v. Crown Control Corp., No. 95-56657, 1997 WL 448265 (9th Cir. Sept. 8, 1997).

But in another Ninth Circuit case, the panel found that it didn't have to decide whether the proffered expert testimony was scientific or technical. It was so unreliable that it didn't meet any standard, the court said.

The expert, Loren Forney, was described by the court as a "tire analyst," and he was prepared to testify that the tread on a tire *624 came off because an adhesion defect caused the steel belts of the tire to separate. He planned to discuss belt separation generally and dismiss any possibility other than a manufacturing or design defect. The district court barred the testimony on the ground that Forney did not qualify as an expert in tire failure analysis and that his testimony was not reliable. 919 F.Supp. 1353 (D. Ariz. 1996).

The Ninth Circuit agreed that the proffered testimony, whether scientific or technical in nature, was unsubstantial and subjective, and therefore it was unreliable and inadmissible.

The court also turned aside an argument that the district court abused its discretion by imposing a higher burden of proof than that required by Arizona law in strict products liability actions. It noted that the district court required only that the plaintiffs prove, "sufficient to allow a trier of fact to reasonably infer it more probably than not, that the tire was defective and unreasonably dangerous." This is the correct standard, the Ninth Circuit said.

Diviero v. Uniroyal Goodrich Tire Co., 114 F.3d 857 (9th Cir. 1997).

INSURANCE COVERAGE

Insurers Skewered Twice by Fraud and Duty to Defend

Talk about ironical situations. Gregory S. Bodell, a lawyer, pleaded guilty to a criminal charge arising from his activities in using the U.S. mails to defraud insurance companies, yet the Ninth Circuit held that Bodell's malpractice insurer was obliged to pay his attorney's fees and costs incurred in the federal investigation and grand jury proceedings.

Bodell was the insured under two claims-made professional liability policies, both of which provided for a defense in "any proceeding or suit brought by any governmental regulatory agency seeking non-pecuniary relief." Splitting 2-1, the panel concluded that both the investigation by the Postal Inspection Service, an arm of the U.S. Postal Service, and the subsequent grand jury proceedings, which ended with an indictment of Bodell, fell under the coverage through this policy language. The court included the investigation in the duty to defend, although Bodell had requested a defense only at the grand jury level.

The insurers contended that the proceedings were not "brought" by the Postal Inspection Service, but rather by the United States through the U.S. attorney, and therefore no defense was owed under the policies. But that interpretation of the coverage language was too rigid, the panel's majority of Judges Hawkins, who wrote the opinion, and Reinhardt held, concluding that the proceeding in fact was "brought" by a "governmental regulatory agency." And, Judge Hawkins added, it was reasonable for Bodell to believe that an investigation that matures into a grand jury proceeding is one brought for "non-pecuniary relief."

The majority also disposed of two other defenses. It held that a California statute prohibiting insuring the defense of criminal actions or proceedings applied only to criminal actions brought by California state, county or city officials, not federal criminal actions. It also held that insuring defense costs in this case did not violate California public policy, relying on a reading of Gray v. Zurich Insurance Co., 419 P.2d 168, 177 (Cal. 1966), that a contract to defend an insured in a criminal proceeding "does not encourage" criminal conduct.

Dissenting, Judge Kozinski observed that Bodell once was convicted for "helping bilk insurance companies out of attorney's fees. This time he gets away with it." To the dissenter, it was manifest that the proceedings the insurers were asked to defend were not "brought" by a "regulatory agency," but by the grand jury and the U.S. attorney. He also disagreed on the public policy aspect of the case, finding that the California statute prohibits insurers from defending criminal proceedings and stating that "no California court has ever construed an insurance policy to cover *625 Criminal defenses, including federal criminal prosecutions."

Bodell v. Walbrook Insurance Co., 119 F.3d 1411 (9th Cir.

LLOYD'S

Names Must Pay Up and Use English Courts and Law

Lloyd's was successful in the English Court of Appeal in enforcing the payment of premiums against names who rejected the Equitas contract, while the U.S. Court of Appeals for the Fifth Circuit joined five other circuits in upholding the forum selection and choice of law provisions in the general undertaking the names executed.

In the Court of Appeal case, a group of names who rejected the reconstruction and renewal plan by Lloyd's for the voluntary global settlement of claims in 1992 and before nevertheless were held to be liable for premiums payable for the reinsurance cover and run-off contract with Equitas, a group of companies formed to implement the plan. Lord Justice Saville, speaking for a bench that included Lord Justices Ward and Phillips, stated that the case raised fundamental questions about the efficacy of the scheme under which Lloyd's was resolving the avalanche of litigation that had threatened to destroy the Lloyd's market and those who traded in it.

Affirming a judgment of the Commercial Court of the Queen's Bench Division, the Court of Appeal found that Lloyd's had authority under Section 6(2) of the Lloyd's Act 1982 to enact Bylaw No. 20 of the 1983, under which AUA 9, a company owned and indirectly controlled by Lloyd's, was able to effectuate the Equitas agreement and bind names, even those who purported to reject the agreement, to pay the premiums necessitated by the agreement.

Three English names brought a test case, and they were joined by 215 Canadian names, who intervened. They raised three objections to being bound by the agreement, but all were turned down by the Court of Appeal. First was the contention that the scheme offended what the names claimed was a principle under Section 8(1) of the 1982 act that underwriting should not be subject to mutualization. But that section, the court said, was directed solely to the writing of insurance business and not to contracts concluded thereafter and ancillary to the insurance business. Second, the court did not buy the argument that the names could use fraud to rescind the contract they had entered into when they signed the Lloyd's general undertaking. Rescission on that ground was not possible, the court said, because it would harm the rights of third parties; the proper remedy was a claim for damages. Third, the court held that the names could not claim a setoff against Lloyd's on the ground of assumed damages due them for fraud.

Society of Lloyd's v. Lyon, The Times [London] Law Report, August 11, 1997, judgment of July 31, 1997.

In the Fifth Circuit case, the court affirmed the validity and applicability of provisions of the 1986 Lloyd's general undertaking under which the names agreed that the "courts of England shall have exclusive jurisdiction to settle any dispute and/or controversy of whatsoever nature arising out of or relating to the member's membership of, and/or underwriting of insurance business." That undertaking also provides that the rights and obligations of the parties "shall be governed by and construed in accordance with the laws of England."

Alleging fraud and overreaching in being induced to sign the 1986 general undertaking, a group of Texas names sued in federal district court on the ground that the forum selection and choice of law provisions should not bar their U.S. actions. The Fifth Circuit relied on The Bremen v. Zapata Off- shore Co., 407 U.S. 1972), and Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974), to conclude that federal law applied and that a presumption of validity attached to the provisions in the interests of international comity and deference to the integrity and proficiency of foreign courts.

*626 The court turned away an attempt by the names to invoke two exceptions to the presumption of enforceability on two grounds. The first was that the inclusion of the forum selection and choice of law provisions in the 1986 general undertaking was the product of fraud or overreaching. The court replied that this exception had to be specific to the forum selection clause, rather than to the agreement as a whole, and that the plaintiffs' general allegations had not shown that to be so.

The second was that enforcement of the forum selection clause would be contrary to United States and Texas public policy as embodied in the anti- waiver provisions of federal and Texas securities laws. Without expressing an opinion on whether whatever names acquire in their relationship with Lloyd's constitutes a "security," the court rejected, as did The Bremen, the "parochial" notion that all disputes in international business transactions must be resolved under American laws in American courts. This is particularly true in the case of England, the court continued, a forum that "American courts repeatedly have recognized to be fair and impartial.... The view that every foreign forum's remedies must duplicate those available under American law would render all forum selection clauses worthless and would severely hinder Americans' ability to participate in international commerce."

Five other federal courts of appeals have found the Lloyd's forum selection and choice of law provisions valid. They are the Second Circuit in Roby v. Corporation of Lloyd's, 996 F.2d 1353 (1993); the Fourth in Allen v. Lloyd's of London, 94 F.3d 923 (1996), mandamus denied sub nom. In re Allen, 117 S.Ct. 2497 (1997); the Sixth in Shell v. R.W. Sturge Ltd., 55 F.3d 1227 (1995); the Seventh in Bonny v. Society of Lloyd's, 3 F.3d 156 (1993); and the 10th in Kingsley v. Underwriting Agencies Inc., 969 F.2d 953 (1992). Only the Ninth Circuit has come up with a different decision--Richards v. Lloyd's of London, 107 F.3d 1422 (1997).

Haynsworth v. Corporation of Lloyd's, Nos. 96-20769, 96 20805, 1997 WL 534146 (5th Cir. Aug. 29, 1997).

JURISDICTION

The Internet and Jurisdiction: The Twain Meet--Sometimes

Does the maintenance of a presence on the Internet subject the proprietor of the website to personal jurisdiction wherever the website can be accessed? Courts are struggling with this question, and the answers seem to depend on how the website is used. Intermediate appellate courts in California and Minnesota have found jurisdiction, but the Second Circuit concluded the contacts were not sufficient for jurisdiction.

In the California case, the long arm of the Internet, perhaps aided by the telephone, reached a New York software developer and provided enough minimum contacts to subject him to personal jurisdiction in California, the California Court of Appeal, Second District, held.

The losing New Yorker was Brad Laronde, who agreed to pay Blake Hall, who lived in California, a license fee for sales of a computer program that incorporated a software module written by Hall. Laronde was never in California; all the parties' dealings were by electronic mail and telephone. When Laronda stopped making payments, Hall sued in California state court, but the trial court dismissed on the ground of no jurisdiction.

Reversing, the court of appeal held that the circumstances created specific personal jurisdiction. First, the court had to deal with 1973 California authority, Interdyne Co. v. SYS Computer Corp., 107 Cal.Rptr. 499 (Cal.App.), in which letters and telephone calls between California and New Jersey were held insufficient to establish personal jurisdiction in California. The court found Interdyne not controlling. "Much has happened in the role that electronic communications plays in business transactions since Interdyne was decided *627 more than 20 years ago," it stated. "The speed and ease of such communications has increased the number of transactions that are consummated without either party leaving the office. There is no reason why the requisite minimum contacts cannot be electronic."

Also satisfying the establishment of jurisdiction were the facts that the contacts were deliberate, substantial, continuous and systematic--more than random, fortuitous or attenuated.

Hall v. Laronde, 66 Cal.Rptr.2d 399 Cal.App. 1997).

In the Minnesota case, the Minnesota Court of Appeals sided with the state's attorney general's action to put a gambling website out of business in that state.

Granite Gate Resorts Inc. and Kerry Rogers, its principal officer, operated the website On Ramp, which provided Nevada tourist information. They were sued in Minnesota under Minnesota statutes for deceptive trade practices, false advertising, and consumer fraud because they provided Internet advertising for WagerNet, an online gambling service based in Belize. The information stated that WagerNet would provide a "legal way to bet on sporting events from anywhere in the world." A linked web page listed the terms and conditions for subscribing to WagerNet and stated that while a customer could sue WagerNet only in Belize, it could sue the customer in his or her home state. When an attorney general's investigator called the number listed, he was referred to Rogers at a Nevada telephone number. Later he became a subscriber under a fictitious name.

Granite Gate and Rogers sought dismissal for lack of personal jurisdiction. They refused to produce the WagerNet mailing list, but the trial court found that the list contained the name and address of at least one Minnesota resident and denied dismissal.

Affirming, the court of appeals noted that Minnesota'a long arm statute permits courts to go as far as the constitutional requirements of due process will allow. It ruled that the Internet advertising demonstrated a clear intent to solicit business in Minnesota and that the solicitation resulted in business in Minnesota, which in turn implicated the state's interest in maintaining he enforceability of its consumer protection laws. Submission to personal jurisdiction would not subject the defendants to undue inconvenience. Therefore, the court concluded, traditional notions of fair play and substantial justice were not offended.

Humphrey v. Granite Gate Resorts Inc., No. C6-97-89, 1997 WL 557670 (Minn.App. Sept. 5, 1997).

But in the Second Circuit case, in which New York law applied by virtue of diversity, the court held the maintenance of a website by Missouri jazz club did not subject it to personal jurisdiction in New York.

The Blue Note, a well-known jazz club in New York City, which registered that name as a federal trademark for cabaret services in 1985, sued the Blue Note of Columbia, Missouri, alleging violations of the Lanham Act and the Federal Trademark Dilution Act of 1995, as well as for common law unfair competition. The Missouri Blue Note maintained an Internet website, which included a disclaimer that it "should not be confused in any way, shape or form with Blue Note Records or the jazz club, Blue Note, located in New York."

The district court dismissed the complaint pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure for lack of personal jurisdiction, 937 F.Supp. 295, and the Second Circuit affirmed. Remarking "that attempting to apply established trademark law in the fast-developing world of the Internet is somewhat like trying to board a moving bus," the Second Circuit turned to New York's long-arm statute for guidance.

That statute provides two ways in which New York courts may exercise personal jurisdiction over a non-resident. One is against a party who "in person or through an agent" commits a tortious act in the *628 state. As explicated by official practice commentary and as construed by New York courts, that provision requires physical presence in New York, the Second Circuit concluded. The second way for personal jurisdiction to attach is the commission of a tortious act outside the state that causes injury within the state, if the person who commits the act expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate commerce.

The court concluded that the new Blue Note had met neither of the statute's prongs.

Bensusan Restaurant Corp. v. King, No. 96-9344, 1997 WL 560048 (2d Cir. Sept. 10, 1997).

PRACTICE AND PROCEDURE

Palimony Action Accrues When Payments Stop

Los Angeles lawyer-celebrity Johnnie L. Cochran Jr. has lost a statute of limitations argument in the California Court of Appeal, Second District.

In the state that invented palimony actions, the court had to answer the question of when the action, which is based on contract, accrues. Patricia Ann Cochran's complaint alleged that what the court described as a "romantic relationship" between the Cochrans began in the 1960s when they had a child and, although unmarried, lived together as husband and wife for many during which Patricia changed her name to Cochran. During this time, she alleged, he promised that property acquired belonged to both equally and that he would provide lifetime support to her. In October 1983, they settled their acquired property rights, and again he promised lifetime support. In 1986, he told her he had married another woman and moved out, but he continued payments to Patricia until February 1995. She filed a seven-cause-of-action palimony complaint a month later.

Johnnie won a dismissal on the ground that any breach of the 1983 agreement occurred when he moved out in 1986 and that the two-year California statute of limitations for contract actions barred Patricia's suit filed in 1995. Any agreements made after 1986, he contended, were against public policy and unenforceable because he was married to another person.

But the court of appeal reversed. Palimony actions, which originated in Marvin v. Marvin, 557 P.2d 106 (1976), sound in contract, the court stated. A cause of action for breach of contract accrues at the time of breach, the court continued, stating that contrary to Johnnie's contention, it was logical and plain that if there was an agreement for lifetime support, and that support continued for nine after he married another, the breach did not occur until the support payments stopped. The court noted that usually Marvin agreements are breached when the parties discontinue living together, but it added that needn't always be the case. "If the parties have separated, but the obligor performs as required by the Marvin agreement," the court stated, "there has been no breach, no cause of action has accrued, and the statute of limitations had not begun to run."

In other portions of its decision, which were not certified for publication, the court affirmed the dismissal of Patricia'a causes of actions for a constructive trust, declaratory relief, fraud, and negligent and intentional infliction of emotional distress.

Cochran v. Cochran Jr., 66 Cal.Rptr.2d 337 (Cal.App. 1997).

PROFESSIONAL CONDUCT

If the Butler Did It, the Butler Pays for It

Repeating that bon mot from a district judge's report and recommendation, the Fourth Circuit has affirmed an award to General Motors Corp. of $190,541 in legal costs against James E. Butler Jr., a Columbus, Georgia, plaintiff's attorney.

Butler has represented numerous plaintiffs in actions against GM involving gasoline *629 tank explosions in C/K pickup trucks. In one of those actions, Judge G. Ross Anderson of the U.S. District Court for the District of South Carolina recused himself, but as a part of his recusal order he made a finding that a review of documents in the case revealed "a substantial likelihood that perhaps perjury and the systematic destruction of documents involving gross misconduct by General Motors' regional counsel occurred." On review, however, the Fourth Circuit struck those charges from the recusal order and stated that they "should not be hereafter cited as authority."

Nevertheless, Butler cited the stricken passages in a Georgia state court and a Kansas federal court. The Fourth Circuit then found him in contempt and awarded GM "reasonable costs for its efforts to correct Butler's misconduct." The court referred the matter to District Judge Robert G. Doumar of the Eastern District of Virginia for a determination of the amount to be assessed against Butler. 61 F.3d 256 (4th Cir. 1995).

After wading through what the Fourth Circuit termed the "murky waters of legal billing," Judge Doumar came up with $24,894 for GM's legal costs in correcting the effects of Butler's misconduct and $165,647 for the legal costs of the contempt proceeding. "Butler may have had to pay less, however, if he had not followed an ill-advised policy of contesting each and every aspect of this contempt proceeding," the Fourth Circuit remarked in affirming the award.

Judge Doumar's report, aside from the pun on Butler's name, is notable for a series of quotations heading its various sections. Here are some samples:

"Revenge is a kind of wild justice, which the more man's nature runs to, the more ought law to weed it out." Francis Bacon, "Of Revenge," Essays on Counsels, Civil and Morall (1625).

"Truth often suffers more by the heat of its defenders than from the arguments of its opposers." William Penn, Some Fruits of Solitude (1693).

"The voice of the intellect is a soft one, but it does not rest until it has gained a hearing." Sigmund Freud, Future of an Illusion (19 28).

"And do as adversaries do in law, Strive mightily, but eat and drink as friends." William Shakespeare, The Taming of the Shrew, Act I, Scene ii (1594).

In re General Motors Corp., 110 F.3d 1003 (4th Cir. 1997).

TORTS

Departing Lawyer and Paralegal Free to Contact Clients

Associate Michael Cohen and paralegal Elizabeth Smyth packed up and left Kucker, Kraus & Bruh, a New York City real estate law firm, and went to Szold & Brandwen, another New York City real estate law firm. At the new firm, they contacted Kucker clients by mail and telephone, seeking their business.

This didn't sit well with the Kucker firm, which sued the Szold firm, as well as Cohen and Smyth, alleging several causes of action--that Cohen and Smyth breached their fiduciary duty by either stealing or memorizing Kucker's client list; by using confidential commercial information; by appropriating trade secrets; unfair competition; and tortious interference with prospective economic advantage. The firm also sought injunctive relief. Both sides sought summary judgment.

Ruling for the defendants, the New York Supreme Court found the plaintiffs' allegations and supporting documentation sadly deficient. They didn't specify what was misappropriated, as it was clear the defendants didn't take a "confidential" list. They simply contacted people they knew from their experience at Kucker. The tortious interference claim failed because Kucker didn't describe its contracts with clients that were undermined and didn't show that any clients were induced to breach their relationships with Kucker.

Rucker, Kraus & Bruh v. Szold & Brandwen, New York County Supreme Court, Index No. 601487/97, September 2, 1997.

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