Navigating today’s complex risk environment can be a monumental task. Steve Shappell, Alliant Claims & Legal, spearheads Executive Liability Insights, a monthly review of news, legal developments and information on executive liability, cyber risk, employment practices liability, class action trends and more. 

Table of Contents

QUI TAM ACTION AND RELATED SUBPOENA PRECLUDED FROM COVERAGE UNDER D&O POLICY

Springstone, Inc. v. Hiscox Ins. Co., No. 20-6014 (6th Cir. Sep. 17, 2021)

 

A behavioral health services company was sued in a whistleblower action alleging it violated the False Claims Act by obtaining reimbursement from Medicare and Medicaid for medically unnecessary services provided to patients. 

 

Read More >>

DELAWARE SUPREME COURT ADOPTS STRINGENT TEST FOR DERIVATIVE DEMAND FUTILITY

United Food & Com. Workers Union v. Zuckerberg, et al., No. 2018-0671-JTL (Del. Sep. 23, 2021)

 

In the underlying suit, shareholders of a social media giant filed a derivative action seeking to recover litigation expenses incurred defending and settling a suit challenging the company’s stock reclassification proposal. 

 

Read More >>

BOARD DIVERSITY DERIVATIVE SUITS DISMISSED BY FEDERAL DISTRICT COURTS IN CALIFORNIA & FLORIDA

Roughly a year after a California-based law firm filed a slew of “cookie cutter” shareholder derivative lawsuits accusing public companies of “falling short on their publicly declared diversity commitments,” the results have not been favorable for plaintiffs.

 

Read More >>

NO COVERAGE UNDER COMPANY’S FIDUCIARY LIABILITY POLICY FOR ESOP CLASS ACTIONS AGAINST THIRD PARTY

Martin Res. Mgmt. Corp. v. Federal Ins. Co, No. 20-40571 (5th Cir. Sep. 20, 2021)

 

This matter arose after employees of an oil and gas company filed two class actions against the financial institution that managed the employees' stock ownership plan (“ESOP”), accusing the financial institution of approving an ESOP transaction that benefited the oil and gas company and its executives more than the company's workers.

 

Read More >>

D&O INSURER LIABLE FOR SETTLEMENT PAYMENT MADE AFTER STATUTE OF LIMITATIONS EXPIRED

HM Int’l, LLC v. Twin City Fire Ins. Co., No. 20-20122 (5th Cir. Sep. 2, 2021) 

 

An investment firm fell victim to a social engineering fraud, wherein a bad actor purporting to be a client instructed the firm to transfer a large sum of money out of the client’s account. 

 

Read More >>

D&O INSURER NOT OBLIGATED TO ADVANCE DEFENSE COSTS WHERE NO COVERED CLAIM EXISTS

Conn. Mun. Elec. Energy Coop. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 19-cv-00839 (D. Conn. Sep. 14, 2021)

 

The underlying suit arose after a municipal energy company received a federal grand jury subpoena from the U.S Attorney's Office for the District of Connecticut directing the company to "provide any and all documentation associated with personnel from your company who attended” certain annual retreats.

 

Read More >>

SHAREHOLDER APPRAISAL RIGHTS IN DELAWARE CAN BE WAIVED

Manti Holdings, LLC, et al. v. Authentix Acquisition Co. Inc., No. 354 (Del. Sep. 13, 2021)

 

Minority shareholders of a recently-merged corporation challenged a provision in a stockholder agreement that contractually waived their rights to a court appraisal of the value of their shares. 

 

Read More >>

COURT STRIKES DOWN DUAL-NATURED CLAIMS PRECEDENT IN STOCKHOLDER ACTION

Brookfield Asset Mgmt. Inc., et al. v. Martin Rosson, et al., No. 406, 2020 (Del. Sep. 20, 2021)

 

This matter involved a consolidated stockholder derivative and class action lawsuit. The plaintiffs, stockholders in a company that acquired, owned, and operated solar and wind assets, allege new stock in a private placement was priced too low, thereby harming minority stockholders through economic and voting power dilution, proportional to their shareholdings, and giving the controlling stockholder an unfairly priced gain in control of the company. 

 

Read More >>

OTHER INSURANCE CLAUSE IN PROFESSIONAL LIABILITY POLICY PRECLUDES COVERAGE 

Foremost Signature Ins. Co. v. Silverboys, LLC, No 19-24859-CIV-GOODMAN (S.D. Fla. Sep. 13, 2021) 

 

The owner of a vacation home sued an interior design company it had hired in state court. The design company was insured under three liability policies by one insurance company (“first insurer”) and under a professional liability policy by a second insurer (“professional liability insurer”). 

 

Read More >>

PROOF OF PREJUDICE NOT REQUIRED TO DENY COVERAGE FOR LATE NOTICE UNDER CLAIMS-MADE POLICIES

Hanover Ins. Grp. v. Aspen Am. Ins. Co., No, 1:20-cv-00056 (D. Mont. Aug. 25, 2021) 

 

Years after a legal malpractice suit was brought against a law firm, the firm provided notice of the suit under two claims-made policies it purchased. Both insurers declined to cover the suit under their respective policies due to late notice and coverage litigation ensued. 

 

Read More >>

LACK OF CONSENT FROM INSURER BARS COVERAGE FOR SETTLEMENT UNDER E&O POLICY

Benecard Servs. Inc. v. Allied World Specialty Ins. Co., et al., No. 20-2360 (3rd Cir. Sep. 8, 2021)

 

The underlying matter involved a fraud suit filed against a major prescription benefits manager by a former business partner alleging the benefits manager botched the administration of Medicare Part D plans. 

 

Read More >>

PRIOR ACTS EXCLUSION IN D&O POLICY DOES NOT PRECLUDE DEFENSE COVERAGE

Estate of Coombs v. Atlantic Healthcare Ctr., No. 21-10675 (11th Cir. Aug. 24, 2021)

 

This case arose after the estate of a patient of a healthcare facility filed suit against the facility and its owners. The suit alleged the facility was understaffed in a direct effort to generate as much profit as possible for the owners, taking advantage of vulnerable adults. 

 

Read More >>

PRICE MANIPULATION SCHEME TRIGGERS EMPLOYEE THEFT COVERAGE UNDER COMMERCIAL CRIME POLICY

Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Cargill Inc., No. 20-cv-0839 (D. Minn. Aug. 24 2021)

 

After finding uncharacteristically large accounts-receivable balances during an internal audit that triggered a fraud investigation, an American global food corporation discovered an employee had, over the course of a decade, manipulated its accounting system by misrepresenting the prices customers were willing to pay, which led the corporation to sell commodities at lower prices. 

 

Read More>>

 

DELAWARE CHANCERY FINDS BUSINESS JUDGMENT RULE NOT OVERCOME IN SHAREHOLDER CLASS ACTION

Kihm v. Mott, No. 2020-0938-MTZ (Del. Ch. Aug. 31, 2021)

 

A former stockholder of a public oncology company brought a shareholder class action in the Delaware Court of Chancery against the company’s directors and officers after they agreed to sell the company to a pharmaceutical conglomerate. 

 

Read More>>

2ND CIRCUIT DISMISSES SECURITIES CLASS ACTION OVER IPO, FINDING STATEMENTS AT ISSUE WERE NOT MATERIALLY MISLEADING

Asay v. Pinduoduo Inc., No. 20-1423 (2nd Cir. Aug. 31, 2021)

 

The Second Circuit Court of Appeals recently found a district court properly dismissed a shareholder class action alleging violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. 

 

Read More >>

CAPACITY EXCLUSION IN D&O POLICY DOES NOT BAR COVERAGE FOR SHAREHOLDER SUITS

LOR Inc. v. Allied World Nat’l Assurance Co., No. 1:20-cv-08187 (S.D.N.Y Sep. 15, 2021)

 

An insured investment holding company incurred millions of dollars in defense costs indemnifying its directors and officers in two shareholder suits alleging executives breached their fiduciary duty in their handling of the company's investments and stocks.

 

Read More >>

CYBER CORNER

Click to read the following cases:

 

  1. BIPA CASE LAW IS STILL EVOLVING; COMPLIANCE IS KEY FOR BUSINESSES
  2. COVERAGE PRECLUDED FOR SOCIAL ENGINEERING SCHEME UNDER PROFESSIONAL LIABILITY POLICY
  3. DEAL REACHED BY BANK IN THIRD PARTY DATA BREACH
  4. OFAC ADVISORY AROUND RANSOMWARE HIGHLIGHTS SACTIONS RISKS

EPL CORNER

Click to read the following cases:

 

  1. COURTS MUST CONSIDER WHETHER ARBITRATION AGREEMENTS ARE PERMITTED UNDER STATE LAW BEFORE DECIDING FEDERAL ARBITRATION ISSUES
  2. FORMER EMPLOYEE FAILED TO PROVE TITLE VII DISCRIMINATION
  3. OIL COMPANY A JOINT EMPLOYER DUE TO CONTROL OVER GAS STATION OPERATIONS

SEC CORNER

Click to read the following cases:

 

  1. SEC WHISTLEBLOWER AWARDS TOP $1B
  2. SEC SETTLES WITH CONSUMER GOODS COMPANY OVER ACCOUNTING IMPROPRIETY 

SHAREHOLDER CORNER

September 2021 securities class action filings.

 

Read More >>

QUI TAM ACTION AND RELATED SUBPOENA PRECLUDED FROM COVERAGE UNDER D&O POLICY

Springstone, Inc. v. Hiscox Ins. Co., No. 20-6014 (6th Cir. Sep. 17, 2021)

A behavioral health services company was sued in a whistleblower action alleging it violated the False Claims Act by obtaining reimbursement from Medicare and Medicaid for medically unnecessary services provided to patients. 

A year later, the U.S. Department of Health & Human Services sent the company a subpoena associated with its investigation of the qui tam action, seeking documents related to patient treatments and management practices. The whistleblower suit was ultimately dismissed, but not before the company incurred substantial legal fees relating to both the suit and the subpoena.


The company sought coverage under its directors and officers liability (“D&O”) policy but the insurer denied the claim and litigation ensued. The insurer asserted that although the policy covered claims of wrongful acts against the company itself, any claims seeking “fines, penalties or nonmonetary relief” against the company were excluded. The company argued the subpoena could be construed as an investigation of claims against individual employees, rather than a claim for nonmonetary relief against the company, but the district court disagreed, holding the subpoena did not constitute a covered claim. 


The Sixth Circuit recently upheld the lower court’s ruling, finding that while the D&O policy covers claims for wrongful acts by executives and employees of the company, no employees were identified in the subpoena. “Although some individual insureds had documents relevant to the subpoena,” the court noted, “they did not have any financial obligations related to those requests. Those costs were [the company’s] alone.” 


The court further found the insurer had no duty to reimburse the company for costs incurred in defending the qui tam action because it was filed before the inception of the policy. The company argued the action was only unsealed after the policy began, and therefore, coverage fell within the policy period, but the court disagreed, noting “a lawsuit is first produced or created when it is filed, not when it was unsealed.”

DELAWARE SUPREME COURT ADOPTS STRINGENT TEST FOR DERIVATIVE DEMAND FUTILITY

United Food & Com. Workers Union v. Zuckerberg, et al., No. 2018-0671-JTL (Del. Sep. 23, 2021)

In the underlying suit, shareholders of a social media giant filed a derivative action seeking to recover litigation expenses incurred defending and settling a suit challenging the company’s stock reclassification proposal. 

The proposed reclassification, which would have allowed the company’s Chairman and CEO to sell most of his stock while maintaining voting control of the company, was eventually withdrawn after a series of shareholder lawsuits were filed in opposition.  


In the case at hand, plaintiff shareholders alleged the defendants breached their duty of care in negotiating and approving the stock reclassification. The plaintiffs filed their complaint without first demanding the board investigate and file litigation on behalf of shareholders, arguing demand futility excused the derivative demand requirement because the complaint challenged a decision made by the same board that would consider the litigation demand. The trial court disagreed, however, and dismissed the complaint, noting that under Delaware law, several factors needed to be considered in order for shareholders to demonstrate futility, but those had not been met.


On appeal, the Delaware Supreme Court reviewed the trial court’s reasoning as well as prior Delaware cases that established the standards for review. In affirming the lower court’s decision, the Delaware Supreme Court reiterated that disinterested and independent directors are in the best position to manage the corporation's affairs and could decide it is not in the corporation's best interest to spend the time and money to pursue a claim, even one that is likely to succeed.


In coming to its decision, the court set out a new, universal three-part demand futility test. Under the new test, when evaluating allegations of demand futility courts should ask, on a director-by-director basis:

 

  1. whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
     
  2. whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
     
  3. whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

 

If the answer to any of the questions is not “yes” for at least half of the board, the demand is excused as futile.

 

 

The Takeaway

The increase in shareholder derivative litigation has been a significant contributing factor to a hardened directors and officers liability (“D&O”) insurance market and a pattern of escalating premiums. The ruling handed down by the Delaware Supreme Court here is likely a step in the right direction. With a more stringent demand-futility standard for derivative suits, it will be harder to bring such cases, which could perhaps be reflected in a lower volume of filings. 

 

BOARD DIVERSITY DERIVATIVE SUITS DISMISSED BY FEDERAL DISTRICT COURTS IN CALIFORNIA & FLORIDA

Multiple Cases

Roughly a year after a California-based law firm filed a slew of “cookie cutter” shareholder derivative lawsuits accusing public companies of “falling short on their publicly declared diversity commitments,” the results have not been favorable for plaintiffs. 

 

As discussed previously, in recent months, there have been numerous dismissals achieved by targets of this first wave of board diversity cases. 


In two recently dismissed cases in Florida and California, the court allowed the plaintiffs a short window of time to amend their complaint and try again, if they so choose. Both suits contained similar allegations of boards failing to follow through with promises regarding diversity.

 

 

  • Lee v. Frost
  • Esa v. NortonLifeLock Inc.
Lee v. Frost, et al., No. 1:21-cv-20885 (S.D. Fl. Sep. 1, 2021)

 

In this case, shareholders accused a healthcare company of publicly priding itself on its diverse staff while actually showing little interest in nominating or appointing underrepresented minorities to the board or executive management team. A Miami federal judge determined shareholders’ “conclusory allegations” against the healthcare company for violations of anti-discrimination laws and its own code of conduct were not substantiated by “particularized facts” supporting the accusations. Instead, the judge noted the plaintiffs highlighted a settled lawsuit against one of the company’s subsidiaries as well as the recent social justice initiatives of other companies. “These allegations have no bearing on whether [the company’s] directors discriminated against underrepresented minorities when nominating individuals to serve on [its] board or executive team,” the judge said.


The complaint further referenced annual proxy statements issued to investors, alleging they mislead investors about the company’s purported commitment to respecting and safeguarding individual dignity and autonomy “while doing very little to curb discrimination occurring at the company or its subsidiaries.” The court, however, held the allegations did not “support the assertion that the [proxy statements] were misleading or that any of the directors had acted in bad faith.” In so holding, the court referenced some of the prior dismissals and ruled that “statements concerning [the company’s] commitment to diversity are inactionable puffery.”

 

Esa v. NortonLifeLock Inc., et al., No. 20-cv-05410-RS (N.D. Cal. Aug. 30, 2021)

 

In a similar case, shareholders asserted that a cybersecurity company and certain of its directors made materially misleading statements regarding the company’s commitment to diversity in its proxy statements. Specifically, shareholders contend the company falsely represented that the board actively seeks diversity among its members.


In dismissing the suit, the judge noted that “[w]ithout questioning that there may be systemic under-representation in corporate boardrooms, or plaintiff’s good faith in looking for legal recourse, the flaws in this putative class action complaint require dismissal.” Like the Lee court, the Northern District of California did not find the allegations were specific enough nor sufficient. More importantly, the judge noted that courts “routinely find similar statements to be non-actionable puffery or aspirational.” Further, the court found the shareholders failed to sufficiently allege that a demand that the company’s board pursue the claims would have been futile.  

 

NO COVERAGE UNDER COMPANY’S FIDUCIARY LIABILITY POLICY FOR ESOP CLASS ACTIONS AGAINST THIRD PARTY

Martin Res. Mgmt. Corp. v. Federal Ins. Co, No. 20-40571 (5th Cir. Sep. 20, 2021)

This matter arose after employees of an oil and gas company filed two class actions against the financial institution that managed the employees' stock ownership plan (“ESOP”), accusing the financial institution of approving an ESOP transaction that benefited the oil and gas company and its executives more than the company's workers. 

 

 

As the only named defendant in the suits, the financial institution demanded the oil and gas company pay for defense and indemnification under their trust agreement. The oil and gas company tendered the demand for defense costs to its fiduciary liability insurer, and after initially agreeing to cover the financial institution's legal bills, the insurer backtracked, saying such costs were not covered because there were no fiduciary claims against the oil and gas company in the class litigation.


Upholding a lower court’s decision, the Fifth Circuit recently found the demands made by the financial institution were “facially insufficient to trigger” coverage. “Coverage is only available if a fiduciary claim is made against an insured for a wrongful act by an insured,” the court held. Accordingly, the insurer was successful in arguing the oil and gas company was never legally involved in the underlying suits and there were no allegations of wrongful acts against it directly.

D&O INSURER LIABLE FOR SETTLEMENT PAYMENT MADE AFTER STATUTE OF LIMITATIONS EXPIRED

HM Int’l, LLC v. Twin City Fire Ins. Co., No. 20-20122 (5th Cir. Sep. 2, 2021) 

An investment firm fell victim to a social engineering fraud, wherein a bad actor purporting to be a client instructed the firm to transfer a large sum of money out of the client’s account. 

 

The client subsequently retained an attorney who sent the firm a letter alleging negligence, threating suit, and demanding compensation. The firm tendered the demand letter into its directors and officers liability (“D&O”) insurer, requesting defense and indemnification. 


The insurer declined to defend the investment firm, citing two policy exclusions, and coverage litigation ensued. Meanwhile, the firm reached a settlement with its client, and as such, the client never filed suit. By the time the parties had settled, the limitations had run on any suit. 


Recently, the Fifth Circuit overturned a lower court’s decision, finding it had misinterpreted the policy, which, when properly interpreted, provided the demand letter was sufficient to trigger a claim, and the firm had a contractual liability to pay arising from their settlement obligation, which constituted “Loss” under the D&O policy. The fact that the settlement payment was made after the expiration of the statute of limitations was irrelevant because there was no lawsuit, the court found.  

D&O INSURER NOT OBLIGATED TO ADVANCE DEFENSE COSTS WHERE NO COVERED CLAIM EXISTS

Conn. Mun. Elec. Energy Coop. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 19-cv-00839 (D. Conn. Sep. 14, 2021)

The underlying suit arose after a municipal energy company received a federal grand jury subpoena from the U.S Attorney's Office for the District of Connecticut directing the company to "provide any and all documentation associated with personnel from your company who attended” certain annual retreats. 

 

Several month later, the U.S Attorney’s office issued a second federal grand jury subpoena for documentation associated with various aspects of the company’s operations. Both subpoenas were accompanied by a letter noting the subpoena had “been issued as part of a federal grand jury investigation into the possible commission of a felony.” The company tendered the subpoenas under its not-for-profit directors and officers liability (“D&O”) insurance policy, but the insurer denied coverage on the grounds that neither subpoena constituted a “Claim.” 


The federal grand jury later returned two indictments, both of which indicted individuals who were all officers or directors of the company during the period of the alleged criminal acts. The company submitted both indictments to its D&O insurer and requested advance payment of legal fees and expenses stemming from the defense of the indicted individuals, but the insurer denied coverage for these costs, citing the policy’s commissions exclusion. Subsequently, one of the indicted directors filed suit against the company, claiming it withheld advance payment of legal fees relating to his criminal case, in violation of the company’s bylaws. The company tendered the suit to its insurer, but the insurer once again denied coverage. 


Coverage litigation ensued and the company argued the insurer had a duty to advance defense costs equivalent to a duty to defend, but the insurer contended it was only obligated “to indemnify [the company] for its payment of Defense Costs for a covered claim.” The policy’s defense and settlement provision stated that “when the Insurer has not assumed the defense of a Claim … the Insurer shall advance nevertheless, excess of any applicable retention amount and at the written request of the Insured, Defense Costs prior to the final disposition of a Claim.” On this point, the court agreed with the insurer, finding that because the insurer did not have the duty to defend under the policy, it could withhold advance payment of defense costs if such costs were not covered. 


Next, the court looked to whether the policy provided coverage for losses related to the subpoenas. The company contended it was entitled to coverage for losses it incurred under the D&O policy’s entity liability coverage, which provided the insurer “shall pay on behalf of the Organization Loss arising from a Claim made against the Organization … for any actual or alleged Wrongful Act of the Organization.” “Wrongful Act” was defined as “any breach of duty, neglect, error, misstatement, misleading statement, omission or act by or on behalf of the Organization.” Here, the court again sided with the insurer, finding the grand jury subpoenas were not a “Claim” because they did not assert “that a wrongful act ha[d] occurred, but rather demanded documents as part of an ‘investigation into the possible commission of a felony.’” Moreover, neither subpoena indicated the government was pursuing a theory of criminal liability against the company, the court noted, which was required to trigger the entity liability coverage.

SHAREHOLDER APPRAISAL RIGHTS IN DELAWARE CAN BE WAIVED

Manti Holdings, LLC, et al. v. Authentix Acquisition Co. Inc., No. 354 (Del. Sep. 13, 2021)

Minority shareholders of a recently-merged corporation challenged a provision in a stockholder agreement that contractually waived their rights to a court appraisal of the value of their shares. 

 

The shareholders alleged the mandatory right to appraisal in Delaware could not be waived, as a matter of public policy. 


The Delaware Supreme Court, however, disagreed, finding the parties were sufficiently sophisticated and represented by counsel, the shareholders received considerable funding in exchange for their agreement, and the agreement struck should be upheld. The court also disagreed with the shareholders’ contention that the waiver should be considered a stock provision, holding the waiver did not attach to the stock and only limited the affected shareholders.


In a dissenting opinion, Justice Valihura invited the legislature to offer clarification of its intent regarding the ability to waive mandatory rights.

COURT STRIKES DOWN DUAL-NATURED CLAIMS PRECEDENT IN STOCKHOLDER ACTION

Brookfield Asset Mgmt. Inc., et al. v. Martin Rosson, et al., No. 406, 2020 (Del. Sep. 20, 2021)

This matter involved a consolidated stockholder derivative and class action lawsuit. The plaintiffs, stockholders in a company that acquired, owned, and operated solar and wind assets, allege new stock in a private placement was priced too low, thereby harming minority stockholders through economic and voting power dilution, proportional to their shareholdings, and giving the controlling stockholder an unfairly priced gain in control of the company. 

 

In addition to their direct claims, the plaintiffs also argued the inadequate price and dilution created derivative, company rights to damages to be pursued by the stockholders on the company's behalf.  

 

Thereafter, a stock-for-stock deal that took the company private extinguished any derivative claims as no public stockholders owned stock or derivative rights afterward. As such, the defendants moved to dismiss the direct claims, arguing they were entirely derivative, but the lower court declined to do so, finding direct claims can exist under such circumstances. 


On appeal, the Delaware Supreme dismissed the case and struck down the "dual-natured" claims precedent related to whether direct claims in cases such as this can survive after mergers or buyouts eradicate derivative rights, holding the precedent created confusion and conflicted with state law. Therefore, to plead a direct claim, a “stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” Furthermore, “the economic and voting power dilution that allegedly harmed the stockholders in this case, flowed indirectly to them in proportion to, and via, their shares in the company,” the court found.  “Thus, any remedy should flow to them the same way, derivatively via the corporation.”    

OTHER INSURANCE CLAUSE IN PROFESSIONAL LIABILITY POLICY PRECLUDES COVERAGE 

Foremost Signature Ins. Co. v. Silverboys, LLC, No 19-24859-CIV-GOODMAN (S.D. Fla. Sep. 13, 2021) 

The owner of a vacation home sued an interior design company it had hired in state court. The design company was insured under three liability policies by one insurance company (“first insurer”) and under a professional liability policy by a second insurer (“professional liability insurer”). 

 

 

The first insurer denied coverage for defense and indemnity, seeking a ruling from the court in that regard, and also entered into a cost sharing agreement with the professional liability insurer to provide defense to the design company. The state court ruled in the first insurer’s favor and the case was dismissed.  


The owner of the vacation home then sued the design company in federal court and the first insurer sought a judgment that it was not obligated to defend or indemnify the design company. The design company alleged the professional liability insurer breached its policy by prematurely exhausting its limits by entering into the cost-sharing agreement with the first insurer.  


Both insurers’ policies had “other insurance” clauses. Under the professional liability policy, the provision stated the policy “shall be excess insurance over any other valid and collectible insurance available to the Insured,” while the first insurer’s policy stated its coverage would be primary. Since the first insurer had denied coverage, which the court supported, primary coverage was not available. Therefore, the court found the professional liability insurer was no longer “excess” and its decision to enter into the cost-sharing agreement with the first insurer was in good-faith as it inured to the benefit of the insured.

PROOF OF PREJUDICE NOT REQUIRED TO DENY COVERAGE FOR LATE NOTICE UNDER CLAIMS-MADE POLICIES

Hanover Ins. Grp. v. Aspen Am. Ins. Co., No, 1:20-cv-00056 (D. Mont. Aug. 25, 2021) 

Years after a legal malpractice suit was brought against a law firm, the firm provided notice of the suit under two claims-made policies it purchased. Both insurers declined to cover the suit under their respective policies due to late notice and coverage litigation ensued. 

The court sided with the insurers, holding coverage was unavailable under both policies because the suit was not timely reported when it was first made. The court noted that while the claim was made during one of the insurer’s policy periods, it was not noticed to the insurer until after that policy’s expiration. The court further found that although the suit was noticed during the second insurer’s policy period, no coverage was available under that policy because the claim was made prior to the policy’s inception. 


Moreover, the court rejected the firm’s argument that Montana law required an insurer to prove it was prejudiced by the late notice before denying coverage. Instead, the court found the notice-prejudice rule does not apply to claims-made policies as it does to occurrence-based policies.

 

The Takeaway

The notice-prejudice rule bars an insurer from using late notice as a reason to deny an insured's claim unless the insurer can show it was materially prejudiced by the untimely notice. Time and again, however, courts have ruled the notice-prejudice rule does not apply to claims-made policies because doing so be tantamount to rewriting such policies to afford coverage insureds have not purchased. As such, timely and accurate noticing of claims under claims-made policies is vital to securing coverage and avoiding litigation.

 

LACK OF CONSENT FROM INSURER BARS COVERAGE FOR SETTLEMENT UNDER E&O POLICY

Benecard Servs. Inc. v. Allied World Specialty Ins. Co., et al., No. 20-2360 (3rd Cir. Sep. 8, 2021)

The underlying matter involved a fraud suit filed against a major prescription benefits manager by a former business partner alleging the benefits manager botched the administration of Medicare Part D plans. 

 

The benefits manager tendered the suit under its errors and omissions (“E&O”) policy and the insurer agreed to pay defense costs. The company ultimately settled the dispute without seeking the insurer’s written consent, and as a result, the insurer declined to cover the settlement. Coverage litigation ensued. 


In another showing of reluctance to subvert “plain policy language and unambiguous exclusions,” the Third Circuit recently upheld the insurer’s denial under the E&O policy. The benefits manager argued that because the dispute involved a consent requirement and not a notice requirement, appreciable prejudice needed be shown. In finding the appreciable prejudice doctrine did not apply, the circuit court cited a recent ruling by the New Jersey Supreme Court in which it “stat[ed] flatly that it ‘has never afforded a sophisticated insured the right to deviate from the clear terms of a “claims-made” policy.’” As such, the court found obtaining written consent from the insurer before agreeing to settle a claim to be an unambiguous policy condition precedent to coverage. 

The Takeaway

As this case highlights, it is critical to involve insurers early and often when it comes to both reporting and managing claims. Failure to seek an insurer’s consent to a proposed settlement or resolution of a claim could needlessly jeopardize coverage that would otherwise be afforded. 

 

PRIOR ACTS EXCLUSION IN D&O POLICY DOES NOT PRECLUDE DEFENSE COVERAGE

Estate of Coombs v. Atlantic Healthcare Ctr., No. 21-10675 (11th Cir. Aug. 24, 2021)

This case arose after the estate of a patient of a healthcare facility filed suit against the facility and its owners. The suit alleged the facility was understaffed in a direct effort to generate as much profit as possible for the owners, taking advantage of vulnerable adults.

The complaint alleged the owners conspired with the facility to breach duties of loyalty, good faith, and fair dealing and used the patient’s funds to establish a partnership venture. Importantly, the complaint also alleged the facility and its owners exploited the patient.


The suit was noticed under the facility’s directors and officers liability (“D&O”) policy, but the insurer denied coverage, citing the policy’s prior acts exclusion. According to the insurer, all the allegations in the estate’s complaint related to the formation of the venture, which took place before the date listed in the prior acts exclusion. Because the allegations were interrelated to earlier, excluded wrongful conduct, no coverage was available for the facility or its owners.


Coverage litigation ensued an the Eleventh Circuit upheld a lower court’s decision in favor of the insureds, finding the insurer had a duty to defend both the individual insureds and the corporate entity “because the complaint allege[d] a Wrongful Act potentially covered by the insurance policy.” According to the court, the prior acts exclusion precluded coverage for “wrongful acts and acts interrelated with a wrongful act that occurred before” the prior acts date, but it did not apply to the count alleging exploitation of the patient, which asserted “no date when any defendant misused [the patient’s] property.”

 

The Takeaway

This case is a good example of the aggressive use of the prior acts exclusion by an insurer in an effort to avoid coverage. Careful attention must be paid to policy wording on interrelatedness to avoid coverage litigation like that in the case at hand.

 

PRICE MANIPULATION SCHEME TRIGGERS EMPLOYEE THEFT COVERAGE UNDER COMMERCIAL CRIME POLICY

Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Cargill Inc., No. 20-cv-0839 (D. Minn. Aug. 24 2021)

After finding uncharacteristically large accounts-receivable balances during an internal audit that triggered a fraud investigation, an American global food corporation discovered an employee had, over the course of a decade, manipulated its accounting system by misrepresenting the prices customers were willing to pay, which led the corporation to sell commodities at lower prices. 

The fraud was reported under the corporation’s commercial crime policy, and subsequently, an investigative specialist was jointly retained to provide a Fidelity Research and Investigative Settlement Clause (“FRISC”) report. 


The FRISC report confirmed that, due to the employee’s actions, the corporation had been adversely impacted by tens of millions of dollars, which included millions in theft of cash. With its loss amount confirmed, the corporation sought to recoup amounts in excess of the retention from the crime insurer, but the insurer denied coverage and asked the court to affirm its position. In return, the corporation filed a counter claim alleging breach of contract. 


The policy’s employee theft insuring agreement provided coverage for “loss of or damage to 'money,' 'securities' and 'other property' resulting directly from 'theft' committed by an 'employee.'” “Theft” was defined as “the unlawful taking of property to the deprivation of the Insured.” The insurer argued the FRISC report had concluded the employee’s price manipulation scheme was not connected to her embezzlement scheme and that only the embezzlement losses (which fell well below the policy’s retention) were covered. The corporation countered that “taking,” as used in the definition of “theft,” was not limited to physical possession and the policy did not “limit coverage only to the property or money taken to the deprivation of [the corporation]."


Finding in favor of coverage, the court determined that “taking,” while requiring an implicit transfer of possession or control, was not limited to physical possession and did not require a physical act. The court also rejected the insurer’s argument that the employee needed to benefit from the fraudulent conduct for the corporation to recover losses. 

The Takeaway

As this case demonstrates, insurers are often quick to interpret FRISC reports to assert that losses are not covered. In such situations, it is important to clarify what the FRISC investigator is tasked to do: determine the amount of loss and not who received the loss. Careful attention also must be paid to policy language to ensure terms such as “theft” are defined to afford the broadest coverage possible.

 

DELAWARE CHANCERY FINDS BUSINESS JUDGMENT RULE NOT OVERCOME IN SHAREHOLDER CLASS ACTION

Kihm v. Mott, No. 2020-0938-MTZ (Del. Ch. Aug. 31, 2021)

A former stockholder of a public oncology company brought a shareholder class action in the Delaware Court of Chancery against the company’s directors and officers after they agreed to sell the company to a pharmaceutical conglomerate. 

The stockholder alleged the directors and officers breached their fiduciary duties because the recommendation statement for the merger contained inadequate disclosures, resulting in an underpriced sale of the company. Specifically, the stockholder contended the recommendation statement omitted certain revenue projections, conflicts of interest held by the investment bank and certain directors and officers, as well as alternative valuations. 


The court found the stockholder failed to show shareholders were uninformed at voting time due to the alleged inadequate disclosures in connection with the sale of the company. According to the court, because the transaction was ratified by a fully informed majority of stockholders and in the absence of a conflicted controlling shareholder, the business judgment rule under Corwin v. KKR Financial Holdings LLC would apply. 


In evaluating whether the shareholders were fully informed, the court looked to the disclosures and whether they included all material information relative to the transaction. Furthermore, because the stockholder did not allege the tender offer was coerced or that the acquisition failed to receive approval of a disinterested majority of shareholders, the presumption of the business judgment rule had not been rebutted. Accordingly, the court found in favor of the defendants and dismissed the suit. 

 

 

The Takeaway

The business judgment rule served to protect a corporation's board of directors from frivolous legal allegations about the way it conducts business. Under the rule, boards are presumed to act in good faith, meaning within the fiduciary standards of loyalty, prudence, and care directors owe to stakeholders. The business judgment rule carries a lot of weight in Delaware corporate law and a shareholder plaintiff must plead with particularity for it to be overcome. 

 

SECOND CIRCUIT DISMISSES SECURITIES CLASS ACTION OVER IPO, FINDING STATEMENTS AT ISSUE WERE NOT MATERIALLY MISLEADING

Asay v. Pinduoduo Inc., No. 20-1423 (2nd Cir. Aug. 31, 2021)

The Second Circuit Court of Appeals recently found a district court properly dismissed a shareholder class action alleging violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. 

Plaintiff shareholders alleged a Chinese e-commerce company made material misrepresentations and omissions in its initial public offering (“IPO”) documents related to its anti-counterfeiting measures and marketing expenses. Specifically, the plaintiffs alleged that while the offering documents boasted that the company undertook “strict” anti-counterfeiting measures, at the time of the IPO, the measures were insufficient, allowing merchants to sell counterfeit goods on the company’s site for years. Additionally, the plaintiffs asserted the company failed to disclose its interim marketing expense data in its offering documents. 


The Second Circuit found the company had sufficiently warned investors in its offering documents about the risks related to the sale of counterfeit goods on its platform, and that its use of the word “strict” was too general for a reasonable investor to rely upon. Furthermore, the court found the company did not violate securities laws by failing to disclose interim financial data relative to marketing expenses. The court noted the offering documents stated marketing expenses had been increasing substantially for several years, and that the test for materiality is “whether there is a ‘substantial likelihood that the disclosure … would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’” In this case, the court found investors could have looked at the information provided and understood there had been significant increases in marketing expenses. Accordingly, the court found none of the statements at issue were materially misleading.

 

 

CAPACITY EXCLUSION IN D&O POLICY DOES NOT BAR COVERAGE FOR SHAREHOLDER SUITS

LOR Inc. v. Allied World Nat’l Assurance Co., No. 1:20-cv-08187 (S.D.N.Y Sep. 15, 2021)

An insured investment holding company incurred millions of dollars in defense costs indemnifying its directors and officers in two shareholder suits alleging executives breached their fiduciary duty in their handling of the company's investments and stocks. 

The company sought reimbursement of those costs under its directors and officers liability (“D&O”) coverage, but the insurer denied coverage, saying the suits were excluded because the claims against the company’s directors were not related to their conduct and capacity as executives of the company. In response to the denial, the company filed a coverage complaint, and soon after, the insurer filed a counterclaim.


In asking the court to declare that it had no duty to defend or indemnify the company, the insurer maintained the claims against the executives “arose from their acting in capacities other than those of an ‘Executive,’ ‘Employee,’ or ‘Outside Entity Insured Person.’” The company, however, argued the policy excluded claims against an insured person working in a capacity other than as an “Executive,” “Employee,” or “Outside Entity Insured Person” only when those claims were “brought by or on behalf of any Insured, other than an ‘Employee.’”


The court, following Georgia law, determined it should strictly construe the exclusionary language against the insurer and held the policy excluded coverage only when the underlying claims were brought by another insured. Since the shareholders were not insureds, coverage was available under the policy.

 

Cyber Corner

  • BIPA CASE LAW (Multiple)

  • PROFESSIONAL LIABILITY

  • THIRD PARTY DATA BREACH

  • OFAC ADVISORY

BIPA CASE LAW IS STILL EVOLVING; COMPLIANCE IS KEY FOR BUSINESSES

 

The Illinois Biometric Information Privacy Act (“BIPA”) went into effect in October of 2008 in order to protect public welfare, security, and safety by regulating how companies manage biometric identifiers and information. In the years since, a number of class action lawsuits have been filed by Illinois residents alleging various BIPA violations, including proper disclosure, consent, collection and storage of data, business purpose, as well as related violations of the right to privacy. Courts are now being presented with a range of defenses to such allegations, including jurisdiction, standing, First Amendment protections, and the relevant statute of limitations.  

 

ACLU v. Clearview AI, Inc., No. 20-CH-4353 (Aug. 27, 2021)

 

The American Civil Liberties Union (“ACLU”) and other groups representing Illinois residents who are survivors of domestic violence and other sex crimes filed a class action lawsuit against a popular social media platform, asserting the platform violated BIPA by scraping photos of the plaintiffs’ faces from other websites and reposting them onto a database. Users could then match photos they would upload to the stored profiles to help determine a person’s identity. The plaintiffs alleged they never consented to their photos being used for this purpose, while the social media company contended its activities were protected by the First Amendment. The company also argued it only sold the platform to law enforcement.  


The court was not persuaded by the company’s First Amendment argument, finding BIPA’s restrictions on free speech “are no greater than what’s essential to further Illinois’ interest in protecting its citizens’ privacy and security.” The court found that “the fact that something has been made public does not mean anyone can do with it as they please,” and thus concluded the application of BIPA here did not run afoul of the First Amendment.  

 

Tim’s v. Black Horse Carriers, Inc., No. 1-28-0563 (Ill. App. Ct., 1st Dist. Sep. 17, 2021)

 

This highly anticipated BIPA ruling involved the application of the relevant statute of limitations. The plaintiffs filed a proposed class action alleging the defendant scanned the fingerprints of all employees for timekeeping purposes without their consent, violating their rights under BIPA. The defendant moved to dismiss the suit, asserting that as the primary purpose of BIPA is privacy protection, the court should apply Illinois’ one-year statute of limitations for privacy actions. The trial court, however, found against the defendant on the grounds that the plaintiffs’ allegations fell under a “catch-all” five-year statute of limitations for civil suits.  


On appeal, the Illinois appellate court held that each duty under BIPA is “separate and distinct;” thus, a company could violate one aspect of the law and not others. Therefore, each allegation of wrongdoing under BIPA is subject to its own statute of limitations. Claims alleging a business profited from the use or disclosure of biometric data are subject to the one-year statute of limitations applicable to invasions of privacy, whereas other types of claims brought under BIPA, such as those involving informed consent or the collection and safeguarding of data, are subject to the five-year statute of limitations that governs civil suits for which an alternate statute of limitations is not otherwise provided by law.  

 

Fernandez v. Kerry, Inc., No. 21-1067 (7th Cir. Sept. 20, 2021)
 

In this proposed class action lawsuit, former employees of an Illinois food producer alleged the company failed to obtain employees’ consent before requiring them to submit to a fingerprint scan for timekeeping purposes, in violation of BIPA. The company argued that because the employees were unionized, under the federal Labor Management Relations Act, the union’s collective bargaining agreement with management would govern such conditions of employment. 


In declining to revive the workers’ suit, the Seventh Circuit noted that BIPA permits an employee’s “legally authorized representative” to consent to the collection and use of biometric information. Thus, if an employer “plausibly contends” that a union has consented to such practices, then individual workers do not have a right to file suit in this regard. Accordingly, any dispute in connection with the union’s consent would need to be resolved between the employer and the union, the court held.

 

McDonald v. Symphony Bronzeville Park, LLC 

 

The Illinois Supreme Court recently heard oral arguments in a proposed class action that will decide whether the state’s workers’ compensation law prevents employees from seeking statutory damages under BIPA. The lead plaintiff alleged her former employer required her to provide her fingerprint for timekeeping purposes without the informed consent and disclosures required by BIPA. The defendant, a nursing home operator, argued the case involved “a piece of equipment provided by her employer that she used every day as part of her normal duties,” and that any claim of damages would amount to a workplace injury, which is governed by the state workers compensation law. 


The plaintiffs, however, argued the law was meant to address a “particular intangible injury,” and there is no “hook” under the workers’ compensation law to compensate employees for the loss of a privacy right. The judge seemed to concur, and questioned whether limiting employees to injunctive relief to prevent future violations would defeat the purpose of the law, which is to require informed, written consent around the collection, use, storage and disposal of biometric information.

COVERAGE PRECLUDED FOR SOCIAL ENGINEERING SCHEME UNDER PROFESSIONAL LIABILITY POLICY

Helms v. Hanover Ins. Grp., No. CV-20-01728-PHX-DWL (D. Ariz. Aug. 20, 2021)

 

In the underlying suit, a realtor and real estate agency represented a couple who were purchasing a home. The agency sent an unsecured email to the couple providing them with details as to payments to be made. The couple wired the closing funds to the agency as directed, but the funds were actually sent to a fraudster who had intercepted the agency’s email and sent out fraudulent payment instructions to the couple. The couple attempted to stop the wire transfer but were unsuccessful and ultimately sued the agency and their realtor in an attempt to recover the lost money.  


The agency notified its professional liability insurer of the lawsuit but the insurer declined to defend or cover the suit, citing, among other things, the policy’s false pretenses exclusion. The exclusion barred coverage for claims “based upon, arising out of or in any way related to any transfer, payment or delivery of funds, money or property … which was caused or induced by trick, artifice, or the fraudulent misrepresentation of a material fact including, but not limited to, social engineering, pretexting, phishing, spear phishing or any other confidence trick.”


Coverage litigation ensued and the agency argued the false pretenses exclusion did not apply because the couple’s claims arose out of the improper handling of confidential information and were based upon vague and unspecified allegations of wrongdoing. The insurer contended coverage for the couple’s suit was precluded under the policy, and since there were no covered claims, it had no duty to defend or indemnify its insureds.


The U.S .District Court agreed with the insurer, finding the false pretenses exclusion unambiguously applied to bar coverage and the insurer therefore had no duty to defend or indemnify. According to the court, the exclusion was “not limited to claims arising out of the insured's own tricks, artifices, and fraud. Instead, it extend[ed] to a ‘payment … of funds … by anyone,’ which would encompass claims arising out of the [couple’s] payment of funds to the fraudsters.” The court also disagreed with the agency that the couple’s claims were based on vague and unspecified allegations, noting the underlying suit identified the agency’s alleged use of unencrypted email as the basis for the claim. Since the couple’s claims were, at the very least, related to the fraud perpetrated against them, the court found they fell within the false pretenses exclusion.

 

 

The Takeaway

Social engineering, invoice manipulation, and fraudulent wire instructions and transfers have become increasingly frequent. As a result, insurers are narrowing coverage triggers to manage losses for such events. Continued uncertainty around the interpretation of crime, professional liability, and other such policies underscores the need for stand-alone cyber insurance to unambiguously cover events like those in the case at hand.

 

DEAL REACHED BY BANK IN THIRD PARTY DATA BREACH

Beyer v. Flagstar Bancorp, Inc. et al.

 

A bank recently reached an agreement to reimburse losses following a data breach of its third party file transfer service, which potentially exposed sensitive information, including passport data, of over a million customers. The agreement provides for credit monitoring or a cash payout (with California customers receiving larger payments due to statutory provisions) and also requires the bank to strengthen its oversight of vendors and monitor the dark web for any potential releases of breached data.


The bank is just one of dozens of entities affected by the cyberattack on the vendor—which provides secure file-sharing services to businesses—in which hackers targeted a security flaw in an outdated product that the vendor had been planning to discontinue.

 

The Takeaway

Companies should be mindful of the security practices of third party vendors, as they may be held liable for breaches those vendors incur. Moreover, underwriters of cyber insurance are posing more questions to their policyholders around this exposure. Businesses must check their contract wording for hold harmless agreements and limitations of liability – and may even want to consider running vulnerability scans on key IT vendors to assess their security posture.

 

OFAC ADVISORY AROUND RANSOMWARE HIGHLIGHTS SACTIONS RISKS

 

The U.S. Department of the Treasury’s Office of Foreign Asset Controls (“OFAC”) recently issued updated guidance around payments to those engaged in “malicious cyber-enabled activities.” Noting the dramatic increase in ransomware attacks during the COVID-19 pandemic, OFAC “strongly discourages all private companies and citizens from paying ransom or extortion demands and recommends focusing on strengthening defensive and resilience measures to prevent and protect against ransomware attacks.”


OFAC chronicled the actions it has taken to sanction perpetrators of ransomware attacks, and asserted that making or facilitating payments to sanctioned entities threatens U.S. national security interests and may run afoul of OFAC regulations. Such payments could result in private cautionary letters or the imposition of civil penalties (which are published by OFAC). 


The advisory also encouraged financial institutions and other businesses to develop compliance measures to help mitigate their exposure to sanctions-related violations. These include taking steps to ensure payment is not being made to a blocked party or an embargoed jurisdiction, adherence to any disclosure obligations to the Financial Crimes Enforcement Network, and implementing security controls highlighted by the Cybersecurity Infrastructure Security Agency in its September 2020 Ransomware Guide

 

 

The Takeaway

What the OFAC guidance does not do is ban ransomware payments. Such payments have been, and will continue to be, a last resort for businesses working to terminate a cyber-extortion threat, so long as the payment is not made to a sanctioned party. Exceptions to OFAC’s rules governing payments to malicious actors will continue to be reviewed on a case-by-case basis, and cooperation with law enforcement during and following a ransomware attack will be considered “a significant mitigating factor.”

 

 

 

EPL Corner

  • ARBITRATION AGREEMENTS 

  • TITLE VII DISCRIMINATION

  • GAS STATION OPERATIONS
COURTS MUST CONSIDER WHETHER ARBITRATION AGREEMENTS ARE PERMITTED UNDER STATE LAW BEFORE DECIDING FEDERAL ARBITRATION ISSUES
Harper v. Amazon.com Servs. Inc., et al., No. 20-2614 (3rd Cir. Sep. 8, 2021)

In a notable ruling on a heavily litigated issue, a split Third Circuit panel found courts must first weigh whether employers' arbitration agreements are enforceable under state law before deciding if federal law shields disputes from arbitration. The court held that while the Federal Arbitration Act (“FAA”) exempts certain workers from federal arbitration, it is still unclear which classes of workers count toward that exemption.


This case arose when a former employee of an online shipping company filed an action against his employer alleging the company misclassified him and other similarly situated drivers as independent contractors, rather than employees. As a result of this misclassification, the employee contended the company failed to remit minimum wage and overtime compensation, as well as customer tips, in violation of New Jersey law. 


The company asserted the dispute had to be arbitrated, subject to the arbitration clause in the employee’s contract, which stated the parties “agree[d] that the Federal Arbitration Act and applicable federal law will govern any dispute that may arise between the parties.” But the district court reject the company’s contention and sought to determine whether the FAA did not apply to the claimant and other New Jersey drivers because they made deliveries across state lines. 


On appeal, the Third Circuit found the lower court should have first determined whether the agreement “requires arbitration under any applicable state law,” before returning to the FAA issue. Furthermore, the employee had accepted the employer’s terms of service when he signed up to work as a delivery driver, which included the arbitration provision, the court noted. In so finding, the Third Circuit gave the company new leverage to potentially prevent proposed wage-and-hour class action litigation.

 

FORMER EMPLOYEE FAILED TO PROVE TITLE VII DISCRIMINATION
Vaughn v. Ret. Sys. of Alabama, No. 20-11295 (11th Cir. Sep. 9, 2021) 

 

A terminated employee sought relief from a federal district court when she filed a complaint against her former employer, alleging gender-based harassment, discrimination, and retaliation. Prior to her termination as the properties operation manager, the employee had a years-long, well-recorded contentious work relationship with one of her male subordinates and the company wrote up both employees on numerous occasions for incidents arising out of their disputes. The company subsequently processed its recommendation to terminate the properties operation manager. Weeks prior to her termination, the former employee filed a Charge of Discrimination against the company with the U.S. Equal Employment Opportunity Commission, of which the company’s decision makers had not as yet been made aware. 


On appeal from the federal district court, the Eleventh Circuit found the former employee failed to show her employer violated Title VII of the Civil Rights Act. In order to properly establish a Title VII discrimination claim, an employee must prove an employer took an adverse employment action against the employee, and that such action was motivated by a protected characteristic. While the feud was well-recorded, the record did not support the finding that the former employee’s gender was a motivating factor in her treatment and subsequent termination. 

OIL COMPANY A JOINT EMPLOYER DUE TO CONTROL OVER GAS STATION OPERATIONS
Medina v. Equilon Enters. LLC, No. G058820 (Cal. Ct. App. Sep. 10, 2021)

 

This suit arose after an employee at a gas station in California, which was run by a multi-site operator (“MSO”) of a large oil and gas company, filed suit against the MSO and the oil and gas company alleging wrongful termination and California Labor Code violations. The employee alleged the oil and gas company was his joint employer due to the level of control the company exercised over the operations of its gas stations, and thus was liable for failing to pay overtime and missed break compensation.


Under the MSO model, the oil and gas company would set a form agreement with companies that would then operate its stations. Those agreements required each station to pay monthly rent and have its employees perform all work. The deals also required the MSOs to use the company’s computer systems, which allowed the company to receive proceeds directly. Proceeds for certain products like concessions were then returned to the operator, alongside other fees and services.


The California Court of Appeals found the oil and gas company was a joint employer, at least for wage and hour purposes, of the employees of the MSOs that operated its gas stations because it exercised “near-complete control over the MSO operators’ finances, day-to-day operations, facilities, and practices” such that it could have stopped employees from “working in their stations through a variety of means.” In departing from earlier decisions, the court held that “[i]f the putative joint employer instead exercises enough control over the intermediary entity to indirectly dictate the wages, hours, or working conditions of the employee, that is a sufficient showing of joint employment.”

 

3RD CIRCUIT UPHOLDS VALIDITY OF ARBITRATION AGREEMENT IN DISCRIMINATION SUIT

Carrone v. UnitedHealth Grp., Inc. et al., No. 20-2742 (3rd Cir. Aug. 11, 2021)

 

A former employee at a healthcare and insurance company brought suit alleging her male associates at the company discriminated against female employees, which ultimately resulted in her being fired in retaliation for complaining about such misconduct. 


Upholding a lower court’s ruling, the Third Circuit recently held the former employee must bring her discrimination claims to arbitration. According to the court, the former employee “had two avenues around arbitration. She could have claimed that the arbitration agreement as a whole lacked mutual assent, or she could have directly challenged the delegation provision's validity.” Because the former employee failed to raise either argument before the district court, she “waived the opportunity to assert them on appeal" and must therefore bring her claims to arbitration, the circuit court found.

 

SUPERIOR COURT JUDGE FINDS CALIFORNIA’S PROPOSITION 22 UNCONSTITUTIONAL 

Castellanos v. State of California, et al., No. S266551 (Cal. Super. Aug. 20, 2021) 

 

A group of rideshare drivers, together with a union and its local chapter, recently challenged the constitutionality of California’s Protect App-Based Drivers and Services Act, commonly known as Proposition 22. California passed ballot initiative Proposition 22, which received millions of dollars of backing from rideshare and food delivery companies, to provide an independent contractor exception for app-based drivers.

 

A California Superior Court judge agreed with the rideshare drivers, finding Proposition 22 unconstitutional and unenforceable because it illegally infringed on the California Legislature’s “plenary power” and constitutional authority “to create and enforce a complete system of workers’ compensation.” If a ballot initiative statute can limit the Legislature’s ability to include app-based workers in the compensation system, the Legislature's power is not “plenary,” making Proposition 22 “constitutionally problematic,” the judge noted. Moreover, because employees, unlike independent contractors, are covered by workers’ compensation laws, the appropriate method to restrict the Legislature’s power is not through “initiative statute,” but by Constitutional amendment.

 

 

SEC Corner

  • SEC WHISTLEBLOWER

  • SEC SETTLES WITH CONSUMER

SEC WHISTLEBLOWER AWARDS TOP $1B

 

In one of many actions in what turned out to be a significant month for the U.S. Securities and Exchange Commission’s (“SEC”) whistleblower award program, the SEC employed a rarely-used exception to securities laws to award $1 million to a trio of whistleblowers who worked in compliance-related roles. Since their primary function is to remedy potential violations internally, compliance and audit professionals are typically ineligible for SEC whistleblower awards, but certain exceptions can apply. In this case, despite holding compliance roles at the company, the SEC noted the whistleblowers “remained eligible for an award because they submitted their information to the commission more than 120 days after the alleged conduct had been reported internally."


To qualify for an award, whistleblowers must provide the SEC with “original” information based on their “independent knowledge” or “independent analysis,” but that generally excludes those whose information is gleaned from compliance or internal audit responsibilities. In order for compliance professionals’ information to qualify as original, individuals must provide it to the SEC 120 days after having reported it internally to the entity’s audit committee, chief legal officer, chief compliance officer, or other supervisors. According to the SEC, two of the claimants did just that, while the third reported the potential violations to the commission 120 days after determining that senior management was already aware of the misconduct.


In another noteworthy action, the SEC issued its second-highest whistleblower award when it recently awarded $110 million to an individual who provided significant independent analysis that substantially advanced the SEC's and another agency's investigations. Under the SEC's whistleblower program, individuals who provide critical information to other agencies may be eligible for a related action award if they are also eligible for an award in the underlying SEC action. In this instance, the award consisted of approximately $40 million in connection with an SEC case and approximately $70 million arising out of related actions by another agency. 


Since issuing its first award in 2012, the SEC has awarded approximately $1.1 billion to 214 individuals. Whistleblower awards can range from 10-30% of the money collected when the monetary sanctions exceed $1 million.

 

 

SEC SETTLES WITH CONSUMER GOODS COMPANY OVER ACCOUNTING IMPROPRIETY 

 

As previously discussed in the August 2021 edition of Executive Liability Insights, the U.S. Securities & Exchange Commission (“SEC”) launched a probe into the accounting practices of a consumer goods company, which ultimately resulted in a goodwill write down as well as a securities class action lawsuit. The SEC alleged the misconduct stemmed from the company’s reduction of its Cost of Goods Sold, resulting in significantly inflated earnings reports. Earlier this month, the SEC reported the company and two of its former executives would pay several million dollars to settle these allegations. Neither the company nor the executives admitted or denied the SEC’s claims. 

 

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SEC ENFORCEMENT ACTIONS, SETTLEMENTS AND JUDGEMENTS

September 2021 Noteworthy Enforcement Actions Filed*

 Director/Officer

 Role

 Company

 Willard L. Jackson

 CEO

 420 Real Estate

 José J. Cruz

 President, CEO 

 Back to Green Mining, LLC

 Gary Youssef

 Former President

 Biogenic Inc., Diagnostic Link LTD LLC, et al.

 Julie A. Youssef

 Former Director of Business

 Biogenic Inc., Diagnostic Link LTD LLC, et al.

 Susann A. Cargnino

 Former Principal

 Biogenic Inc., Diagnostic Link LTD LLC, et al.

 Zachari A. Cargnino

 Former CFO

 Biogenic Inc., Diagnostic Link LTD LLC, et al.

 Jon M. McGraw 

 President, Chief Compliance Officer

 Buttonwood Financial Group, LLC

 Steele C. Smith III

 CEO

 C3 International, Inc.

 Theresa Smith

 President

 C3 International, Inc.

 Daniel Urness

 Former CFO

 Cavco Industries, Inc.

 Joseph Stegmayer

 Former CEO

 Cavco Industries, Inc.

 Dustin B. Tillman

 Former CEO

 Elite Aerospace Group, Inc.

 Zeeshawn S. Zia

 CEO

 Elite Aerospace Group, Inc.

 Richard Xia

 CEO, President

 Fleet New York Metropolitan Regional Center LLC

 Raquel M. Borges

 President, Chief Compliance Officer

 Global Access Investment Advisor, LLC

 James R. Collins

 Former CEO

 Honor Finance, LLC

 Robert F. DiMeo

 Former COO

 Honor Finance, LLC

 Eduardo Pelleissone 

 Former COO

 Kraft Heinz Company

 Klaus Hofmann

 Former Chief Procurement Officer

 Kraft Heinz Company

 Noble M. J. M. Firdaus El

 CEO

 Michael James Ferguson Jr. Foreign Private Trust

 Joseph Collins

 CEO

 Punch TV Studios, Inc.

 Steven K. Sprague

 President

 Rivetz Corp.

 Katherine E. Dirden

 COO

 SHE Beverage Company, Inc.

 Lupe L. Rose

 CEO

 SHE Beverage Company, Inc.

 Sonja F. Shelby

 CFO

 SHE Beverage Company, Inc.

 Efrain Betancourt Jr.

 CEO

 Sky Group USA, LLC

 Omer Casurluk

 CEO

 Star Chain, Inc.

 Karen M. Michel

 Former CFO

 Sweetwater Union High School District

 Nicole T. Birch

 Former CEO

 Transatlantic Real Estate, LLC

 Vincent Petrescu

 CEO

 TruCrowd, Inc. dba Fundanna

September 2021 Noteworthy Settlements and Judgements

Amount

Director/Officer

Role

Company

$15,001,498.00 

Todd E. Hitt 

President 

Kiddar Capital LLC

$1,000,000.00

Nicholas J. Genovese  Managing Director  Willow Creek Investments, LP 

$700,000.00

Crystal A. Huang CEO ProSky, Inc.

$240,000.00

Johnny R. Thomas Former CEO Blue Earth, Inc.

$125,000.00

Robert C. Potts Former President & COO  Blue Earth, Inc.

$120,000.00

J. Brett Woodard Former CFO Blue Earth, Inc.
Source: U.S. Securities and Exchange Commission

Shareholder Corner

SEPTEMBER 2021 SECURITIES CLASS ACTION FILINGS

Company
Sector
AppHarvest, Inc.
Consumer Non-Cyclical
The Boston Beer Company, Inc.
Consumer Non-Cyclical
The Honest Company, Inc.
Consumer Non-Cyclical
IoanDepot, Inc.
Financial
Waterdrop Inc.
Financial

 Longeveron Inc.

Healthcare
PolarityTE, Inc.
Healthcare

SEPTEMBER 2021 M&A-RELATED SECURITIES CLASS ACTION FILINGS

Company
Sector
Boston Private Financial Holdings, Inc.
Financial

Source: Stanford Law School Securities Class Action Clearinghouse

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Contributors

Steve Shappell, Esq.
Executive Vice President
Claims & Legal
Steve.shappell@alliant.com
303-885-8228




Abbe Darr, Esq.
Claims Attorney
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David Finz, Esq.
Claims Attorney
david.finz@alliant.com


Erica Ahern
Claims Advocate
erica.ahern@alliant.com


Jacqueline Noster, Esq.
Claims Attorney
jacqueline.noster@alliant.com


Jacqueline Vinar, Esq.
Claims Attorney
jacqueline.vinar@alliant.com


Jaimi Berliner, Esq.
Claims Attorney
jaimi.berliner@alliant.com


Katherine Puthota
Claims Advocate
katherine.puthota@alliant.com


Matia Marks, Esq.
Claims Attorney
matia.marks@alliant.com


Meaghan Fisher
Senior Claims Advocate
meaghan.fisher@alliant.com


Megan Padgett
Senior Claims Advocate
megan.padgett@alliant.com


Robert Aratingi
Senior Claims Advocate
robert.aratingi@alliant.com


Robert Hershkowitz, Esq.
Claims Attorney
robert.hershkowitz@alliant.com


Steve Levine, Esq.
Claims Attorney
slevine@alliant.com


Vanessa Gonzalez
Senior Claims Advocate
vanessa.gonzalez@alliant.com