Chicago Business Litigation Lawyer Blog
Peter Lubin Named to Super Lawyers;
Only 5% of Illinois Lawyers Receive This Distinction
The Wall Street Journal Reports: H-P Sues to Stop Ex-Chief’s Job
H-P Sues to Stop Ex-Chief’s Job
By ROBERT A. GUTH, BEN WORTHEN And JOANN S. LUBLIN .
The Wall Street Jornal Reports:
Hewlett-Packard Co. sued to block its former chief executive from joining rival Oracle Corp. as a senior executive, alleging Mark Hurd’s hiring breaches his exit agreement and will inevitably lead to a transfer of its trade secrets to a competitor. …
While it isn’t unusual for companies to sue departing executives to enforce exit agreements, H-P’s suit Tuesday against Mr. Hurd is atypical in that former CEOs are rarely subject to such legal actions, experts said.H-P’s suit focuses on a confidentiality agreement, which restricts Mr. Hurd from disclosing sensitive information about his former employer.
New York Times Reports: Landis Files Whistle Blower Suit Against Armstrong
Landis Said to File Suit Against Cycling Team
By JULIET MACUR
Published: September 3, 2010
Floyd Landis, who was stripped of the 2006 Tour de France title for doping, is claiming that Lance Armstrong’s former team defrauded the government. This article in the New York Times describes the entire scandal and the lawsuit Landis has filed.
The New York Times article states in part:
Landis is claiming that team management was aware of the team’s widespread doping when the contract with the Postal Service clearly stated that any doping would constitute default of their agreement, the people said. They did not want their names published because the suit is still under seal.
Bloomberg Reports: Tougher Standards for Filing Lawsuits Makes it Harder to Bring Employee and Investor Lawsuits
Wall Street Banks Benefit From Tougher Suit Standards in U.S.
By Thom Weidlich – Sep 8, 2010
This Bloomberg article should be read in full at the above link. It describes how all knids of lawsuits will be tougher to pursue in federal court with stricter standards for setting forth facts in order to even proceed with a lawsuit. The article states in part:
Two U.S. Supreme Court decisions making it tougher to pursue lawsuits may have begun to bear fruit for corporations fighting investor claims or employee litigation.
Where once it was enough to give a defendant “fair notice” of a claim and the grounds on which it rested, the high court’s 2007 holding in Bell Atlantic Corp. v. Twombly required an antitrust complaint to contain enough facts to show a claim that is “plausible on its face.” Two years later, in Ashcroft v. Iqbal, the court applied Twombly to all federal civil suits.
The Supreme Court rulings mean that someone who wants to sue in federal court “should not subject a defendant to the costs and burdens of litigation when there is no plausible basis for their claims,” Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said in an e-mail.
Investors May Not Go Forward With Flawed Fraud Claim, Seventh Circuit Rules
Our Illinois class action attorneys recently noted a Seventh Circuit decision ending a class-action case in the difficult realm of securities fraud. In Re Guidant Corporation, No. 08-2429 (7th Cir. Oct. 21, 2009), is a securities class action stemming from allegedly misleading statements Guidant Corp. made about its implanted defibrillators. A design flaw with certain lines of defibrillators was discovered in February of 2002, and by April, Guidant had corrected the problem in all of the new devices it made. However, the problem remained in machines already made, and Guidant failed to recall them or warn the public. All in all, Guidant knew in 2002 of at least 25 reports of short-circuiting from the older defibrillators. More reports emerged later.
Two years after this redesign, Guidant entered into merger talks with Johnson & Johnson. As part of these negotiations, it issued a press release expressing confidence about its growth prospects in the implanted defibrillator market. In their claim, plaintiffs said this was false and misleading because Guidant knew it still had liability for the Ventak defibrillators. Subsequent press releases on the merger also omitted this information, as were three merger-related forms Guidant filed with the SEC. However, in March of 2005, a young man died after his Guidant defibrillator short-circuited. Guidant issued several other SEC filings and press releases without disclosing this before it finally sent a letter to doctors in May of 2005 disclosing reported problems, an act prompted by an article about to be published in the New York Times.
The FDA recalled the defibrillators the next month, and Guidant’s stock dropped immediately. It dropped further when Johnson & Johnson announced that it was reconsidering the merger. All in all, the stock fluctuated between $63 a share and $80 a share until Guidant was purchased by Boston Scientific. The instant case is a consolidated class action filed against Guidant and eleven officers and directors as a result of these drops. In addition to alleging that all defendants made false and misleading statements about the company and omitted material information from their statements, it alleged that the individual defendants used insider knowledge and the approval of the Johnson & Johnson merger to sell stock during the period at issue.
Over the course of pre-trial motions, the plaintiffs attempted to amend their complaint at least three times, twice because of new information revealed in related product liability cases. At some point, Guidant moved to dismiss the complaint for failure to state a claim. The claims were brought under the Securities Exchange Act, which requires heightened pleading standards for plaintiffs alleging securities fraud. Specifically, the court found that the plaintiffs’ pleadings were not particular enough and failed to include facts showing that defendants knowingly and with malice misled investors. It dismissed the case with prejudice. It also declined to reconsider based on new evidence from a products liability case, and declined a motion to amend their complaint based on the same evidence. The plaintiffs appealed all three decisions.
In its analysis, the Seventh started by noting that plaintiffs had ample time to make changes to their complaint. In addition to the consolidated complaint from individual claims, it allowed an amendment at the start to change the class period. Plaintiffs notified the court twice of new evidence from other cases, but failed to amend their complaint with that evidence. The Seventh found that this was ample time for plaintiffs to amend their complaint to meet the admittedly strict standards provided for securities cases by the Private Securities Litigation Reform Act.
It then moved to the trial court’s denial of reconsideration of the dismissal. The plaintiffs claimed that it should have been reconsidered because they had new evidence from product liability cases, a standard ground for reconsideration. They acknowledged that those facts were older, but said the trial court stymied them by refusing to lift a stay of discovery. The Seventh found this unpersuasive, saying the trial court could have ruled either way without abusing its discretion. The trial court must have assessed the new evidence, it wrote, and decided that a new amended complaint would still have lacked the necessary specific facts and evidence of scienter. And the plaintiffs could have entered the new evidence into the record earlier. Thus, the district court did not abuse its discretion by denying reconsideration. For the same reasons, it was also not an abuse of discretion to deny the motion to amend, the Seventh said. Thus, all of the district court’s rulings were affirmed.
Fortune Reports: “How Ronald Perelman Met His Match”
Fortune Reports: How Ronald Perelman Met His Match
Fortune magazine provides an insightful account of billionaire Ronald Perelman’s litigation on behalf of his daughter against his ex-wife’s family of New Jersey book store and publishing distributor magnates. The New Jersey state court sanctioned Perelman’s counsel in excess of a million dollars for allegedly pursuing frivilous litigation. The article states:
When the Revlon chairman sued his ex-father-in-law Robert Cohen and his ex-brother-in-law James Cohen in 2008, hardly anyone batted an eyelash. …
Even by modern standards of dysfunctional-family estate battles — think of the Astor clan — this one was a lulu. … But Perelman, it turned out, tangled with the wrong octogenarian. …
Judge Koblitz’s decisions fell like a lash on Perelman’s legal team. In June she found Robert Cohen competent, rejecting Perelman’s demand that a guardian be appointed to represent him during the litigation. Later in the month she ruled on the central claim in Perelman’s case, that Robert Cohen had made a promise to Claudia before Sept. 1, 1978. “It’s just not there,” the judge said. “You can’t make a silk purse out of a sow’s ear.”
The Wall Street Journal Reports: Larger Bounties Spur Surge in Fraud Tips
Larger Bounties Spur Surge in Fraud Tips according to a recent Wall Street Journal article. The article can be read in full by clicking on the link to it at the start of this post. It describes that large bounties are now available to whistle blowers who report financial fraud. This should help uncover and stop financial fraud like the Madoff scandal and others that have harmed investors and the financial system. The article states in part:
New awards for informants who help the Securities and Exchange Commission uncover fraud are already prompting a surge in tips, the agency says.
The Dodd-Frank financial law passed in July provides for the larger bounties, with the hope of fingering wrongdoers such as Bernard Madoff before they swindle thousands of people.
People who supply “original information” about large frauds could net as much as 30% of the penalties and recovered funds collected by the SEC, which could add up to a multimillion-dollar payout.
Lawyers who represent whistle-blowers have been spreading the word about the new incentives.
“We’ve gotten some very high-quality tips,” said SEC official Stephen Cohen.
The Wall Street Journal Reports: Restaurateurs Under Siege
The article describes the spate of lawsuits filed in New York against high profile restaurants for alleged wage theft for unpaid wages and tips. The increase in lawsuits for unpaid overtime and other wage claims is a trend being seen all around the country. The article which can be read in full by clicking on the link at the start of this post states in part:
Some of the city’s hottest chefs and restaurateurs are increasingly being targeted by lawsuits filed by a handful of attorneys on behalf of small numbers of employees.
This week’s targets include Michael White and Chris Cannon’s restaurant group, which runs three upscale Italian restaurants in Manhattan, and Masaharu Morimoto of “Iron Chef” fame. They come on top of a suit filed in federal court last month against Italian giants Mario Batali and Joe Bastianich that has grown to at least 20 plaintiffs from two.
The suits have similar allegations: that restaurants are depriving low-level employees of due tip wages in violation of state and federal labor laws. Some also allege that restaurants fail to abide by a state law requiring that employees receive an extra hour of pay if they work for 10 or more hours in one day. They seek unpaid wages and tips, interest, liquidated damages and attorney’s fees, and all seek class-action certification.
Treasurer Cannot Commit Resources of Family Business Without Board Authorization, Court Finds
As Illinois closely held business dispute attorneys, we read with interest an appellate decision in a dispute over the extent to which a company officer can act without the board’s approval. In Fritzsche v. LaPlante, No. 2-09-0329 (Ill. 2nd March 2010), the “rogue” officer was M. Christine Rock, the secretary/treasurer for family business Fritzsche Industrial Park, Inc. (FIP), which leases real estate at an industrial park in Lakemoor, Ill. Rock also had power of attorney for her father, Herbert Fritzsche, and those two roles allowed her to lease property to Gregory LaPlante, her longtime live-in boyfriend. Separately, Rock also signed a promissory note to Gerald Shaver as payment for work he had done for FIP. This led to a lawsuit by other family members and corporate members, who alleged that she acted without authorization from the board and that the note and lease were invalid.
FIP was incorporated in 2005, although the family had owned the property for decades before. The other corporate officers were Herbert Fritzsche, president, and Scot Fritzsche, vice president and son of Herbert Fritzsche. Shares of stock were divided among the officers and other sons, daughters and grandchildren, with Herbert Fritzsche getting 68 percent. In July of 2006, Herbert Fritzsche suffered a brain hemorrhage, which affected his health and may have compromised his mental capacity. One result of this was that Rock and LaPlante moved into Herbert Fritzsche’s home after he moved in with another sibling. On the first day of August, Rock signed the lease to LaPlante, which gave him 16 properties at Fritzsche Industrial Park and 10 more owned by Herbert Fritzsche individually. LaPlante was to pay rent in the amount of the property taxes, plus 10 percent of his income, although it was not clear what that income referred to.
A week later, on August 8, Rock signed the promissory note to Shaver in exchange for work done on the property, possibly through his trucking and excavating business. It obligated FIP and Park National Bank, trustee of Herbert Fritzsche’s properties, to pay $450,000 by putting a lien on the properties they owned. Park National Bank did not sign. Three months later, Herbert Fritzsche, FIP, Park National Bank and First Midwest Bank, a trustee for some FIP properties, sued Rock and LaPlante, alleging Rock was not authorized to commit the company’s or her father’s resources. The complaint alleged that Rock was suspected of stealing rents from FIP to pay her personal expenses and refused to provide documentation of rental income, which led to a shareholder decision to remove her as secretary/treasurer in May of that year. After his illness, Herbert also allegedly revoked her power of attorney. Therefore, plaintiffs alleged, Rock had no authority to enter into the lease or the note, and they were invalid. They also claimed the rental agreement was too vague to be enforced.
During the next two years, discovery in the case moved very slowly, possibly because Rock and LaPlante also faced criminal prosecution for theft, conspiracy and financial exploitation of an elderly person. In December of 2008, the plaintiffs moved for summary judgment. They argued that even if Rock was not properly removed as power of attorney and a corporate officer, Illinois law does not allow her to enter into the lease or the note without the board’s approval. They also argued that FIP’s bylaws required approval of the note because it was a form of debt. Defendants responded that the board knew about the lease through e-mails sent among the members, and that no board approval was necessary for the lease and the note because Rock was exercising Herbert’s executive authority through the POA, and because many properties were owned by individual family members rather than the board. After oral arguments, the board granted summary judgment to the plaintiffs, saying Rock did not have the authority to act unilaterally as a matter of law. This appeal followed.
Because it was an appeal of a summary judgment order, the Second noted, it had only to decide whether there were genuine issues of material fact to try. Nonetheless, it found that the defendants failed to meet that standard. Under common law, the court said, the highest officer of a corporation must still get board approval to make contracts, especially ones that are unusual or extraordinary. The lease is such an unusual contract, it wrote, because it involved no trustees for the properties and provided LaPlante with the land for little or nothing. Rock also needed board approval for the lease under the Illinois Business Corporation Act, which requires corporate formalities for transactions involving “substantially all” the corporation’s assets. The lease covered all of the property in the industrial park, the court noted, thus making it impossible for FIP to continue its business.
The court came to similar conclusions about the note. However, in this case, the main support for voiding the note came from FIP’s bylaws. Those bylaws say loans and other forms of indebtedness must be authorized by a board resolution. No such resolution exists, the court said, but the note clearly puts a $450,000 lien on FIP. The appeals court noted that the Business Corporations Act requires board approval for actions outside the ordinary course of business, but believed that the bylaws argument was stronger. Thus, the appeals court upheld the trial court’s grant of summary judgment to the plaintiffs.
Newspaper Not Liable for Police Report Mistake Under Fair Report Privilege
Our Illinois defamation attorneys and Chicago business law lawyers were interested to see a recent Second District Court of Appeal case affirming the fair-report privilege for newspapers accused of defamation. That was one cause of action in Eubanks v. Northwest Herald Newspapers, No. 2-08-0812 (Ill. 2nd 2010), in which plaintiff Carolene Eubanks also alleged false light invasion of privacy. Eubanks was upset at the Northwest Herald for printing a police notice that she had been arrested for retail theft and attempted obstruction of justice. In fact, another woman was arrested; the police had made a mistake in their original report. Unfortunately, the mistake was caught too late and the report went to print. The newspaper printed a retraction the next day explaining that Eubanks was not the person arrested.
Nonetheless, Eubanks filed a lawsuit against Northwest Herald Newspapers about five months later, alleging defamation and false light invasion of privacy. The newspaper moved for summary judgment, asserting that it was immune from defamation lawsuits under the fair report privilege. That privilege shields the media from lawsuits as long as they use official records or reports — including police reports — and fairly and accurately report that official information. The motion included an affidavit from the newspaper employee who received the original, incorrect police report via email, Brenda Schory, as well as the follow-up report correcting it. Because the matter took place on a New Year’s holiday weekend, Schory said, she didn’t open the second email until the incorrect report had already been published.
The trial court denied this motion for summary judgment, saying it provided no evidence of whether another employee might have opened the email before Schory could. In response, the newspaper made another motion for summary judgment, this time including an affidavit from the employee that maintains its computer system, Ben Shaw. Shaw said he had looked through computer records and was able to prove that no employee opened the second email until late in the morning the incorrect story had been published. The trial court granted summary judgment this time. Eubanks appealed, arguing that the fair report privilege does not apply to the article at issue, and that a jury should decide whether it recklessly abused the privilege.
The Second District first addressed the issue of whether the fair-report privilege applied at all. Illinois law says the privilege applies if the report is “accurate and complete or a fair abridgement” of the official information. Eubanks argued that the Northwest Herald article was not fair and complete because it did not contain the information from the second email. The Second disagreed. Relying on caselaw including Gist v. Macon County Sheriff’s Department, 284 Ill. App. 3d 367, 376 (1996), the court noted that the law asks only whether the publication was accurate, not whether the information contained in it is actually true. The newspaper had no obligation to report the contents of the second email until it opened that email, the court said. Thus, the privilege still applies.
Next, the court tackled the argument from Eubanks that summary judgment was inappropriate because a reasonable juror could find that the newspaper abused its privilege by acting recklessly. To support this, Eubanks argued that the newspaper could have covered police reports or checked email over the holiday weekend. In any case, she argued that this is inappropriate for summary judgment and a jury should decide. The Second dismissed this argument as well. Most qualified privileges in Illinois can be overcome if the plaintiff can show malice, the court said. But under Solaia Technology, LLC v. Specialty Publishing Co., 221 Ill. 2d 558, 588 (2006), not even malice overcomes the fair-report privilege. That decision said the privilege can be abused only if the defendant’s report was inaccurate, for example, by omitting information or adding incorrect information. For that reason, there was no abuse of the privilege in this case, and summary judgment was appropriate.