The Whole Foods Saga

With all the talk about Whole Foods CEO John Mackey's, er, unprofessional behavior, it's easy to gloss over the legal issues. Whole Foods is seeking to buy Wild Oats Markets, Inc., another nationwide organic grocery retailer. Or more specifically, the only other nationwide organic grocery retailer. The FTC is arguing that the two retailers operate in a distinct market, thus creating an anti-trust issue with the possibility of blocking competition and raising prices.

Mr. Mackey has not helped his company's case. (And no, I'm not talking about his negative remarks about Wild Oats on investing boards.) Mackey has said that, "Safeway and other conventional retailers will keep doing their thing -- trying to be all things to all people. They can't really effectively focus on Whole Foods' [clientele]." Of course, Mr. Mackey has also said that his company faces competition from other supermarkets who are now offering more organic foods. So which of these conflicting statements, no doubt CEO puffery, is true?

This case will ultimately come down to how the judge defines the organic food market. The case will be heard tomorrow, and we should have a ruling in a few weeks. This is an interesting marketing problem. In order to convince the judge that there is no limited market, Whole Foods will need to argue that they are, essentially, just another supermarket.

On the other hand, the FTC has said, "Whole Foods and Wild Oats are the only two nationwide operators of premium natural and organic supermarkets in the United States." But when one considers that most organic markets are locally-owned, Whole Foods and Wild Oats are indeed the only players in that limited market as defined by the FTC. Thus the question of how narrowly the FTC may define a market for anti-trust purposes - the age-old quandry. I'm not a big fan of Mr. Mackey, but I do hope that the judge dismisses the anti-trust suit.

Watch for September's Hennepin Lawyer

My article, "Will this lead to another Enron?", is scheduled to be published in September's Hennepin Lawyer. It was also accepted for publication by Michigan State's Journal of Business and Securities Law.

Good News for Boards

An article at law.com (http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1184749593213) is reporting that more and more lawyers are sitting on corporate boards again. Many declined to be involved with boards after Sarbanes-Oxley in 2002. The Sarbanes-Oxley Act expanded liability for board members with conflicting interests. Thus, many attorneys were worried about liability exposure if sitting on the board of their firm's client. (This would be particularly troublesome for attorneys in some of the nation's largest firms which also have long client lists.)

So why is this a good thing? Lawyers on boards can add wisdom to corporate governance and internal investigation issues that non-lawyers may not have. Boards of directors can help lawyers gain better understanding of business acumen, thus making them more effective in helping their clients. (Indeed, for this reason, it makes sense for lawyers to sit on the boards of their clients.)

There are, of course, still risks for attorneys who want to sit on client's boards. Many attorneys are concerned about their ability to provide unbiased advice to these companies, or even just the appearance of unbiased advice. The article gives an example of a board member/attorney who supported a takeover of the company. Another board member accused him of having a conflict of interest because the firm would earn extra fees during the takeover. It is also likely that insurance premiums (either for directors' and officers' liability insurance or malpractice insurance) will rise.

While the advantage of having an attorney on a company's board is clear, attorneys still need to be cautious when deciding whether to serve on a client's board. I would definitely argue that the benefits outweigh the risks.

The Lost Art of English

An article on Law.com (http://www.law.com/jsp/llf/PubArticleLLF.jsp?id=1184663193394) reported on a 6th Circuit case, In Re Rodriguez, in which the court decided that a negative comment about an employee's accent could be evidence of discrimination. In the case, Jose Rodriguez was not promoted to a supervisory position at FedEx because of his accent and speech characteristics (as demonstrated by statements of managers). The lower court granted Summary Judgment to FedEx, believing that he did not satisfy two requirements of the McDonnell Douglas test. Under McDonnell Douglas (see McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802 (1973)), the employee must prove that he was a member of a protected class, he was qualified for the position for which he applied, he was denied the position, and that similarly situated employees who were not members of a protected class were treated more favorably. Once the employee establishes his prima facie case, the company can argue a legitimate non-discriminatory reason for its action. If the company does that, then the burden shifts back to the employee to show that the employer's reason was merely a pretext for actual discrimination. However, the scales can be strongly tipped in the employee's favor if the employee can show direct evidence of discrimination.

The lower court believed that Mr. Rodriguez failed to show that he was qualified for the position and that a non-member of a protected class was treated differently. The court also thought that the managers' comments were mere circumstantial evidence of discrimination.
The Sixth Circuit reversed, believing that the comments were in fact direct evidence of discrimination. The Equal Employment Opportunity Commission (EEOC) states that discrimination on the basis of accent is considered to be national origin discrimination. EEOC regulations state that the denial of employment based on accent can be evidence of discrimination. The EEOC also scrutinizes job selection procedures that screen for foreign accents and the inability to communicate in English.

Unfortunately, many industries and positions require employees who can communicate effectively with customers and colleagues. So what to do? Companies should carefully determine whether an accent is legitimately related to an employee's ability to perform their job. If it is, then job postings will need to indicate the importance of clear communication skills. By clearly specifying communication ability as a job requirement, a company may be able to argue that the employee with a strong accent or other speech problem did not meet the position's qualifications. This is not a complete shield from liability, but it can help communication flow smoothly throughout a company while limiting possible discrimination claims.

A Rise in Consumer Class Actions

A story from law.com (found at http://www.law.com/jsp/article.jsp?id=1184058395924) says that plaintiffs lawyers are filing more consumer class action lawsuits and less personal injury class actions. In many personal injury class action suits, the judges are refusing to certifying the class because the circumstances of each plaintiff's injury are too dissimilar to warrant treatment as a class. In most of these consumer cases, the members of the class are people who claim they would not have purchased the product if they knew of the potential harm. Thus, the suits are ultimately about economic, rather than personal, injury.

An attorney who represents GlaxoSmithKline (the maker of Paxil and a target of many consumer class action suits) said, "[p]laintiffs lawyers are crafty enough to realize that very few people are actually injured by any of these products . . . . Instead, what they look for are people who purchased the products." There are currently suits against the makers of pharmaceuticals, contact lens solution, soft drinks, Teflon cookware, and iPods.

There are a lot of things that trouble me about these suits. First, this is essentially an attempt by plaintiffs lawyers to get around the pesky "injury" requirement in a personal injury suit. Second, if there truly is an injury, then a class action is probably not the best means for an injured party to seek retribution. Lawyers prefer class action suits because the lawyers make a lot more money and do a lot less work than if they brought individual personal injury suits. And ultimately, the plaintiffs themselves recover a lot less. (Note that the ethics rules require lawyers to serve their clients' interests and not their own.)

Of course, if a consumer hasn't been injured by a product but regrets the purchase for a legitimate reason, then they should have no problem getting a refund. There's also the Better Business Bureau, or even conciliation court for a particularly stubborn company. But companies don't want the negative PR, so they will generally bend over backwards to satisfy the consumer (the airlines are a notable exception). If nothing seems to work, then enter the consumer protection laws.

But here's where it gets funny. Because of the allegations in the consumer class action suits, the attorneys can really only sue for a refund of the purchase price. (So, if there really was something wrong with your contact lens solution, then you'd only be getting a refund, minus the 33%-or-so for attorneys fees.) So what could be the possible advantage to consumers? All they have to do is hop on board and claim that they probably wouldn't have bought their iPod if they knew it could affect their hearing, and they get a portion of a refund, and they get to keep their iPod that will eventually damage their hearing.

So, basically, the plaintiffs lawyers are making a lawsuit out of the possibility of a physical risk, without any evidence that the risk will ever actually be realized. Isn't this the very definition of "frivolous lawsuits"?

So fraud isn't just a corporate thing...

I wrote an article last month arguing that the PSLRA (Private Securities Litigation Reform Act) is still necessary legislation. The PSLRA was designed to curb abusive lawsuits by plaintiffs law firms. One of the practices included hiring "professional plaintiffs" to act as lead plaintiffs in their securities class action suits. Well, if you believed that businesses were exxagerating the problem, read this: http://online.wsj.com/article/SB118400043730461025.html?mod=home_whats_news_us.

Milberg Weiss & Bershad LLP is a national plaintiffs law firm that has filed countless securities class action suits. Now a lead partner, David Bershad, has pled guilty to paying kickbacks to encourage clients to serve as lead plaintiffs. More partners are under investigation. The Wall Street journal lays out the scheme:

"The allegations, according to the indictment:
• Before filing often lucrative securities-fraud class-action suits, Milberg Weiss arranged for individuals to serve as 'named plaintiffs' to represent absent class members.
• The individuals would purchase securities of a company whose stock was expected to drop in order to position themselves as named plaintiffs in a to-be-filed suit.
• In exchange for their services, Milberg Weiss would agree to pay the named plaintiffs a portion of the recovered attorneys' fee.
• The scheme violates federal and state law. The payments allegedly set up a conflict of interest between the named plaintiffs and other class plaintiffs.
• Milberg Weiss went to great lengths to hide such arrangements.
• From 1984 through 2005, Milberg Weiss paid more than $11.3 million in kickbacks."

Other facts from the WSJ article of 6/4/07:

"According to the indictment, Mr. Bershad allegedly directed kickbacks to plaintiffs by writing checks to "intermediaries" who then disbursed funds to clients. Mr. Bershad also allegedly kept cash in a safe in his office -- to which access "was strictly limited" -- to pay kickbacks, according to the indictment." (This behavior smacks of the corporate fraud that the plaintiffs lawyers are trying to fight against.)

"Lawyers say Mr. Bershad used a detailed knowledge of corporate finance to figure out how much could be demanded of Milberg's targets. Mr. Bershad, who had a Bloomberg terminal in his office, would suggest creative financial solutions to settling cases if, for example, a company didn't have a lot of cash, says a former partner."

So, Congress wasn't way off base in their concerns about class action lawsuit abuse by the plaintiffs' bar. Also note that the criminal indictments include a period of a decade (1995-2005) after the passage of the PSLRA.

Here, Here (or, The Supreme Court Review)

This won't surprise anyone, but I am very pro-business. My parents had their own small accounting practice, so as I was growing up I became familiar with the struggles of the small business owner. I also love seeing Minnesota businesses make good. I remember falling in love with Target before people in other states knew what Target was. I felt a swell of pride when Medtronic opened its colassal campus in Fridley (as though I had anything to do with it!). Ameriprise Financial has become one of the largest financial planning companies in the country, with about $8 billion in revenues last year. The work I have done for Seagate these last few months has given me a great deal of appreciation for high-tech companies. And then, of course, the darling of Minnesota business: 3M. These companies are a big reason why people are discovering that the Twin Cities area is great for jobs, and they really have enhanced our quality of life.

So with all this in mind, it will also come as no surprise that I am very happy with the Roberts Court this term. The Court heard four anti-trust cases this term, and in all four cases the anti-trust Plaintiff lost. (Summaries of these cases and discussion will come later.) The securities fraud suit, the Tellabs decision about which I wrote a previous entry, also ended badly for Plaintiffs. Ledbetter v. Good Year was an employment discrimination suit that limited the statute of limitations on those suits. Philip Morris v. Williams limited punitive damages. Leegin Creative Leather Products v. PSKS Inc. got rid of the rule that minimum retail price requirements set by manufacturers were a per se violation of the Sherman Antitrust Act. (The full text of the opinions can be found at http://www.supremecourtus.gov/opinions/06slipopinion.html.)

The 2008 term will have some interesting cases. Stoneridge Investments v. Scientific-Atlanta (case no. 06-43) will be the one to watch. Stoneridge is about "scheme liability," and presents the question of whether third parties (e.g., lawyers, accountants, bankers) can be liable for playing a role in a company's alleged fraud, even when they did not perpetrate the fraud themselves. Congress has had the opportunity to legislate scheme liability twice and has failed to do so. The Plaintiffs bar is hoping the Court will do what Congress has not. Because a conservative court is highly unlikely to step in when Congress has refused to create a law, it looks like this could be a victory for the defendants.

For Minnesota businesses, Riegel v. Medtronic (case no. 06-179) will be a big decision. The case will ask whether FDA approval is enough to protect manufacturers from liability. The FDA has an extremely rigorous pre-marketing approval process, and many federal courts have decided that they can't do any better. Furthermore, once a medical device is on the market, the company cannot change its design without FDA approval. The paradox is, the FDA could rule that a product is safe, a jury could find that a product is unsafe, and this leaves a manufacturer unable to satisfy both the FDA and jury decisions.

The next term begins in October. I'll keep you updated.

Re-interpreting Rule 4.2

Overhauling Rule 4.2

Today's post was inspired by "3rd Circuit Panel Reverses Lawyer's Disqualification in Employment Case," which can be found at http://www.law.com/jsp/article.jsp?id=1183453580756&pos=ataglance. The decision exonerated the plaintiff's attorney in a sexual harassment suit for potential violations of Rules 4.2. The attorney, Ms. Barnett, allegedly manipulated a secretary employed by the defendant company, and through that manipulation was able to obtain evidence relevant to her case. The Third Circuit reversed her penalty, largely pursuant to Rule 4.2's comments.

Now, the law. (I will use the text of Minnesota's rule, but it is generally the same in each state.) Minnesota Rules of Professional Conduct rule 4.2 prohibits an attorney from contacting a party whom that attorney knows is represented by counsel. In comment 7, this is limited, in an organization, to communication with an employee who consults with the organization's lawyer, or who has the power to bind the organization through his actions. That would generally include all directors, executives, and managers.

Thus, the Third Circuit's decision is in line with the rules and comments. But I'm sure that I am not the only corporate lawyer troubled by this comment. It's time that the Court reviews the purpose and spirit of Rule 4.2 and does away with comment 7.

Comment 1 states that the purpose of Rule 4.2 is to protect parties from manipulation by opposing counsel. This protection extends to organizations: "Just as an adversary's attorney may take advantage of an individual party either by extracting damaging statements from him, by dissuading him from pursuing his claim, or by negatively influencing his expectations of succeeding on the merits, the same may occur in the case of an institutional or corporate party." University Patents, Inc. v. Kligman, 737 F. Supp. 325, 327-28 (E.D.Pa. 1990). I think this is an important point, because often it is assumed that corporations and their "constituents" (employees) are presumed to have sophisticated legal knowledge. This certainly is untrue. Ms. Barnett chose to target a secretary who may not have knowledge of the potential suit or sexual harassment complaints, and her choice was deliberate. She was able to glean information from this secretary that she would not have gotten from an executive.

But Rule 4.2 goes beyond just protecting parties - it protects the attorneys as well. "The focus of MRPC 4.2 is on the obligation of attorneys to respect the relationship of the adverse party and the party's attorney. See United States v. Lopez, 4 F.3d 1455, 1462 (9th Cir. 1993). The right belongs to the party's attorney, not the party, and the party cannot waive the application of the no-contact rule – only the party's attorney can approve the direct contact and only the party's attorney can waive the attorney's right to be present during a communication between the attorney's client and opposing counsel. See id." State v. Miller, 600 N.W.2d 457 (Minn. 1999). In theory, then, only an attorney can waive Rule 4.2's prohibition against communication with opposing counsel. This is in direct conflict with comment 7, which would allow opposing counsel to contact an employee without first conferring with the company's counsel.

Finally, for what it's worth, the Third Circuit consistently stated that Ms. Barnett should not be disciplined because the documents relinquished by the secretary were later obtained during (legal) discovery, and thus no harm was done. The court clearly misunderstands the nature of professional discipline. The Rules of Professional Conduct do not require actual damage. Comment 1 of Rule 8.4 states, "Lawyers are subject to discipline when they violate or attempt to violate the Rules of Professional Conduct. . . ." Therefore, even if information gained through illegal means is later uncovered in normal discovery, that fact is irrelevant to professional discipline.

Liability Protection for Importers and Distributors

Recently we have seen several filings and settlements of lawsuits against U.S. companies who imported faulty products from China. Many companies who do business in other struggling countries may not be fully protected. Indemnification laws and insurance practices may be different (or, occasionally, non-existent) and companies in poorer countries may not have the funds or value to indemnify large judgments that are awarded in American dollars. And even if the laws are on your client's side, your client will still face the expense of collecting a judgment in a foreign country. (See Vesna Jaksic, "Faulty Chinese Goods May Import Lawsuits," National Law Journal, July 3, 2007, http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1183107995726&pos=ataglance.) The countries that many American companies do business with do have quality standards and laws in place, but they may not be consistent with U.S. standards, thus exposing your client to potential liability.

The basis of these suits is strict liability or breach of warranty. A purchaser can recover from a seller under a theory of strict liability if (1) the seller is engaged in the business of selling such a product, and (2) it is expected to and does reach the user without substantial change in the condition in which it is sold. McCormack v. Hankscraft Co., 278 Minn. 322, 338 n.15, 154 N.W.2d 488, 499 n.15 (1967) (quoting Restatement (Second) Torts § 402A (1965)). The Restatement Second of Torts section 402A gives the reasoning: "[T]he seller, by marketing his product for use and consumption, has undertaken and assumed a special responsibility toward any member of the consuming public who may be injured by it; [and] ... the public has the right to and does expect ... that reputable sellers will stand behind their goods." Furthermore, under the UCC sections 2-314 and 2-315 (Minnesota Statutes sections 336.2-314 and 336.2-315), the seller can be liable under an implied warranty of merchantability. UCC section 2-314(2)(c) requires that an item be fit for the ordinary purposes for which that item will be used. If the item is unfit (especially if it causes injury!), then the implied warranty of merchantability has been breached.

There are two ways that your client can protect itself from these suits. The first way is to have quality standards in line with U.S. law clearly drafted into the contract with the foreign company. Consider which laws you wish to include in your contract, and be specific when drafting. Including such standards in the contract will require your client to ensure that the foreign company is complying with the contract, but as they say, the best defense is a good offense.

Second, many large insurers (including Minnesota's own St. Paul Travelers) offer insurance policies specifically designed for companies importing foreign products. Many of these insurers also have risk management resources designed to assist companies with quality control overseas. Your client should talk to its insurer to determine whether it will need to update its insurance to manage the risks associated with its overseas operations or partnerships.

Will this lead to another Enron?

I recently wrote an article entitled, "Will this lead to another Enron?: The Supreme Court's Decision in Tellabs v. Makor." The full article is far too long to post here, but I'll give you a teaser:

"The Supreme Court’s holding in Tellabs v. Makor struck a blow to the fight against securities fraud. Many thought that securities law should – and could – be changed forever after Enron. Instead, it appears as though we have forgotten the lessons of Enron. If Sarbanes-Oxley was the step forward, then Tellabs must be the two steps back. Or is it? Before investors begin to fret and plaintiffs’ lawyers cry foul, a critical review of the case would be worthwhile."

For the full text of the article, e-mail me at elfesq@hotmail.com.