Commercial Litigation - Business Litigation News
Below are short descriptions of recent decisions from the United States Supreme Court, the United States Court of Appeals for the Ninth Circuit, the Washington State Supreme Court, and the Washington State Court of Appeals. There are also federal and state legislative updates.
U.S. Supreme Court Adopts "Nerve Center" Test for Jurisdiction
Hertz Corporation was sued by two of its employees in a California state court alleging violations of state wage and hour laws. Hertz sought removal to federal court under diversity jurisdiction. Diversity jurisdiction is the federal court's power to hear cases between citizens of different states. The employees claimed that Hertz was a California citizen, like themselves, so that diversity jurisdiction was lacking. Under a federal statute, "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." To show that its "principal place of business" was in New Jersey, not California, Hertz submitted a declaration stating that it operated facilities in 44 states, that California accounted for only a portion of its business activity, that its leadership is at its corporate headquarters in New Jersey, and that its core executive and administrative functions are primarily carried out there. The district court concluded that it lacked diversity jurisdiction because Hertz was a California citizen under Ninth Circuit precedent, which asks, inter alia, whether the amount of the corporation’s business activity is "significantly larger" or "substantially predominates" in one state. Finding that California was Hertz’s "principal place of business" under that test because a plurality of the relevant business activity occurred there, the district court remanded the case to state court. Hertz appealed, but the Ninth Circuit affirmed. Hertz appealed to the U.S. Supreme Court. In a unanimous opinion, the Supreme Court reversed the Ninth Circuit decision.
The Supreme Court wrote that it returns to the "nerve center" approach: "[P]rincipal place of business" is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. The Court applies this test in an effort to find a single, more uniform interpretation of the statutory phrase. In practice, the nerve center will normally be the place where the corporation maintains its headquarters. The federal court will not find a state as the nerve center if it is simply an office where the corporation holds its board meetings. The nerve center test is relatively easy to apply and does not require courts to weigh corporate functions, assets, and revenues that may be different in kind from one another.
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Electronic Discovery Continues to Evolve
A United State District Court judge issued a series of opinions in a case known as Zubulake. Those opinions established what kind of electronic evidence was discoverable and how costs should be apportioned. That judge issued a new opinion, which she titled "Zubulake Revisited: Six Years Later" in The Pension Committee of the University of Montreal Pension Plan, et al., v. Banc of America Securities, LLC, et al. The new opinion identifies specific behavior as satisfying or not satisfying obligations to preserve discoverable information during litigation. The opinion should be reviewed by attorneys, even though it is not binding authority under either Washington law for cases in Washington State Superior Court or under federal law for cases in the United States District Court for the Western District of Washington. The eighty-five page opinion is being reviewed for its application to cases in Washington.
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Washington Supreme Court on Discovery
In November 2009, the Washington Supreme Court decided Magana v. Hyundia. This case arose from a product liability claim, but the issue appealed concerns discovery, which relates to all civil cases. The Washington Supreme Court reversed the intermediate court of appeals and opened its opinion with the statement: "Trial courts need not tolerate deliberate and willful discovery abuse." The trial court entered liability against Hyundia for its actions in discovery. The Washington Supreme Court previously made history with its decision in Washington State Physicians Insurance Exchange & Association v. Fisons Corp., which also concerned discovery. The trial court found that Hyundai had the obligation ... to maintain a document retrieval system that would enable the corporation to respond to plaintiff's requests." The Magana Court also apparently held that discovery abuse should be sanctioned if it prejudices a party's ability to prepare for trial, as opposed to abuse that prejudices a party at trial. The experts told the trial court that they did not know whether the discovery under discussion would have been material or not, yet the trial court decided the documents prejudiced their ability to prepare for trial. The full, practical implications of the opinion will not be known until the lower courts grapple with how to apply the opinion in new cases.
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Cybersquatter Wins Some, Looses Some
The U.S. Court of Appeals for the Ninth Circuit recently decided a cybersquatting and trademark case, Lahoti v. Vericheck, Inc. David Lahoti bought the domain name vericheck.com. In 2006, Vericheck filed an arbitration complaint pursuant to the Uniform Doman-Name-Dispute-Resolution Policy, and the arbitrator ordered the transfer of the Domain Name to Vericheck. Instead of complying, Lahoti filed a declaratory judgment action in U.S. District Court for the Western District of Washington asking that he did not violate the Lanham Act's cybersquatting or trademark provisions. VeriCheck counterclaimed on the Anti-Cybersquatting Consumer Protection Act (ACPA), the Lanham Act, the Washington Consumer Protection Act, and various common law theories. After summary judgment and a bench trial, the district court found for VeriCheck on all counts. Lahoti appealed the issues that the "VeriCheck" mark was a distinctive, legally protectable mark under the ACPA and federal trademark law and the finding of bad faith. The appellate court discussed how it was a reasonable conclusion, yet reversed because the trial court relied in part on incorrect law. The trial court found that Lahoti acted in bad faith when acquiring the domain name, and the appellate court affirmed that issue.
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Arbitration Clause Case
In another case on arbitration clauses, Division I of the Washington State Court of Appeals decided Townsend v. The Quadrant Corp. Four families sued Quadrant for fraud, negligent misrepresentation, rescission, and a declaratory judgment on the enforceability of the arbitration agreement. The purchase and sale agreement contained a sweeping provision requiring arbitration for any claimed defect arising out of the purchase and sale of real estate. The purchasers sued, and Quadrant moved the court to stay the civil action pending arbitration. The trial court denied to stay the case, and Quadrant appealed.
Division I of the Court of Appeals reviewed the agreement and the allegations, and it held that the agreement was not unconscionable. It then held that claims subject to the arbitration clause should be determined by arbitration. The trial court may stay remaining claims until arbitration is concluded.
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Assignment of Claim Disputed
Some companies assign claims to another entity for litigation and collections purposes. In the recent case of MRC Recievables Corp. v.Zion, the alleged debtor disputed the assignment. The Whatcom County court granted relief to the creditor. Division I of the Washington State Court of Appeals reviewed old precedent and held that the creditor did not provide proof of the assignment, so the appellate court reversed the trial court and remanded the case.
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Intent Not Required to Prevail in Pursuing Debt
The Washington State Supreme Court recently decided Thompson v. Hanson. Under Washington's Uniform Fraudulent Transfer Act (UFTA), creditors may sue transferees who receive fraudulently conveyed property of debtors. The Washington Supreme Court took the case to resolve a split between two divisions of the Court of Appeals regarding the mental state required to sustain an action against a transferee under the UFTA. Division Three has held that a creditor must demonstrate intent on the part of the transferee. Division One held no such requirement. The Washington Supreme Court held that the Fradulent Transfer Act does not require the creditor to prove intent to hinder or delay creditors.
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Court, Not Arbitrator, Decides Whether Case is Subject to Arbitration Agreement
Division II of the Washington State Court of Appeals recently decided a case about whether the court or the arbitrator determines the if a case is subject to arbitration. The case is analyzed on our
Employment News page under the same heading.
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Employer Loses Due to Lack of Company Policies
The U.S. Court of Appeals for the Ninth Circuit recently decided a case about an employee's access to sensitive company information and customer lists. The case is analyzed on our
Employment News page under the same heading.
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Measure of Damages in Trade Secret Case
On July 6, 2009, the Washington State Court of Appeals Division I decided a trade secret case in Petters v. Williamson. Richard Petters designed a particular seafloor drilling technology (sometimes referred to as remote rod-core drilling). Petters sued to enjoin Williamson from misappropriating Petters' trade secrets. In 2001, a trial court enjoined Williamson. In 2008, a trial court dissolved the injunction as it no longer constituted a trade secret. Petters challenged several issues decided by the trial court, including how it applied the measure of damages in a trade secret case.
The appellate court admitted that "[t]he burden of proving the measure of damages in cases addressing misappropriation of trade secrets is not a subject that has received significant attention from Washington's appellate courts. It is well established, however, that '[a] plaintiff seeking to establish a trade secrets claim under the uniform act has the burden of proving that legally protectable secrets exist.'" Citing Boeing Co. v. Sierracin Corp., 108 Wn.2d 38, 49, 738 P.2d 665 (1987). Also, it is the burden of the party seeking relief under the Uniform Trade Secrets Act to demonstrate that such a secret has actually been misappropriated in order to have a right to any damage award. The question in the Petters case as articulated by the court was: "once these things are established, how is the burden of proving the proper amount of restitutionary unjust enrichment damages allocated as between the plaintiff and defendant?"
Petters pointed to the Restatement of Unfair Competition:
The traditional form of restitutionary relief in an action for the
appropriation of a trade secret is an accounting of the defendant's
profits on sales attributable to the use of the trade secret. . . . The
plaintiff has the burden of establishing the defendant's sales; the
defendant has the burden of establishing any portion of the sales
not attributable to the trade secret and any expenses to be
deducted in determining net profits.
5 Uniform Trade Secrets Act, ch. 19.108 RCW. Restatement (Third) of Unfair Competition § 45 cmt. f., at 516-17 (1995).
This rule places the burden of demonstrating which portion, if any, of the revenue obtained through the transfer of a trade secret was not, in fact, attributable to the transferon the on the party in possession of the relevant information -- the defendant. That is, it requires the defendant to explain why any particular portion of the money that it received as a result of the misappropriating transaction should not be considered an "actual loss" suffered by the plaintiff under RCW 19.108.030(1). This rule has been adopted by other states, and now Washington adopts the rule.
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Service of Process
Service of process is giving notice of the lawsuit to the defendant by serving the summons and complaint. This is an important step in initiating any lawsuit. Under state law, this is governed by statutes and court rules. Only certain people may accept service. Failure to serve the right person prevents the court from obtaining personal jurisdiction over the defendant. By law, corporations and other business entities must have a registered agent to accept service of process. In,
Weber v. Associated Surgeons, P.S., the Washington State Supreme Court decided that service on a registered agent's office manager was sufficient. The defense had argued that the person served no longer worked for the corporation and therefore could not accept service. The court of appeals apparently adopted this argument, however, the Washington Supreme Court reversed. The Supreme Court's decision makes sense. Some businesses use an attorney or other professional to act as a registered agent for service of process. Businesses should update their registered agent if that person's employment changes.
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Commercial litigation cases, especially those between companies from different states, are often litigated in
U.S. District Court.