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Apple v. Samsung: One Angry Man?

Juror #8: It’s always difficult to keep personal prejudice out of a thing like this. And wherever you run into it, prejudice always obscures the truth. 12 Angry Men

In this business you got fifty ways you’re gonna screw up. If you think of twenty-five of them, then you’re a genius… and you ain’t no genius. Body Heat (“G”-rated version of quote from the movie)

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If you’ve noticed a lawyer with a paranoid, haunted look, and you’re wondering why, the answer may be that the lawyer is thinking, “what I have forgotten? Having a waived something I shouldn’t have?” The last time I wrote about the lawyer’s nightmare of waiver the waiver may have ended up costing Microsoft $300 million. In that case, i4i’s patent suit against Microsoft, Microsoft’s appeal of damages was made more difficult  by its failure to move for judgment as a matter of law on the issue. As I said in my post on that case, “trials are a virtual waiver landmine.”

Now, a waiver in Apple v. Samsung may outdo the cost of the waiver in the Microsoft case by $700 million.

In Apple v. Samsung a California federal jury awarded Apple over $1 billion for infringing patent and trade dress rights associated with the Apple iPhone.

Following trial the jury foreperson, Velvin Hogan (pictured above), became a media star, granting generous interviews to the press. Some of what he had to say motivated Samsung to investigate his background, and it didn’t like what it learned. During jury selection the judge asked the prospective jurors “have you or a family member or someone very close to you ever been involved in a lawsuit, either as a plaintiff, a defendant, or as a witness?” Hogan described a 2008 lawsuit in which he had been a defendant, but failed to disclose the fact that he had been sued by Seagate in 1993, and had filed for bankruptcy at least in part as a consequence of that lawsuit.

Since 2011 Samsung has been Seagate’s largest shareholder, owning almost 10% of Seagate’s stock. It follows, Samsung has argued, that Hogan may have been biased against Samsung based on this financial relationship. At the very least, he should have disclosed this lawsuit in response to the judge’s question. Samsung filed a motion for a new trial or an evidentiary hearing to examine Hogan’s conduct during jury deliberations.

No way, the judge ruled this week. Hogan disclosed the fact of his bankruptcy during voir dire (questioning during jury selection). Samsung was able to dig up his bankruptcy case file after trial, and they could have done it during trial. If they had, the bankruptcy filing would have led them to the Seagate case and they could then have moved to disqualify Hogan during trial. Samsung was obligated to act with “reasonable diligence based on information about juror misconduct” in its possession, and it failed to do so. Consequently, Samsung waived its right to seek a new trial, or even an evidentiary hearing into juror misconduct.

What is one to make of all of this?

If given a choice between retrying this case and torture with a medieval thumbscrew Judge Koh might be hard-pressed to chose. This trial consumed enormous resources—of the parties and the court system—and the idea of being forced to retry it based on one errant juror’s failure to disclose a fact that could have been totally irrelevant to the jury’s decision would be anathema to her.

As a legal matter, whether to grant a new trial or an evidentiary hearing is at the discretion of the court, and Judge Koh is unlikely to be reversed on appeal. Not every judge would necessarily rule as she did, but Samsung is almost certainly stuck with her ruling. The fact that the Seagate case against Hogan is almost 20 years old, and that Samsung’s financial relationship with Seagate is so tenuous, makes it extremely unlikely that the Federal Circuit will reverse Judge Koh on this issue.

If Hogan had brought evidence into the juryroom—or if there was reason to believe he was doing independent research into the patents at issue and sharing that with the jury—it might be a whole other story. For example, the Federal Circuit reversed a federal judge in the district where I practice (Massachusetts) for failing to question the jury after learning that a juror had brought a physical object into the jury room during in order to help clarify the evidence. (Atlantic Research Marketing Systems, Inc. v. Troy). However, that case involved conduct brought to the attention of the court during deliberations, not afterwards, as was the case here. And, Hogan didn’t bring any objects (other smart phones?) or information to the deliberations, so this case doesn’t go as far as the Federal Circuit’s ruling in Atlantic Research.

Samsung does seem to have dropped the ball by not investigating Hogan’s bankruptcy filing during trial. Each side of this case was almost certainly heavily staffed, and one attorney or paralegal should have been assigned to investigate each juror. To the extent this wasn’t standard procedure before this case, it is a lesson to trial lawyers that an in-depth background check on each juror is mandatory. Failing to do so is arguably malpractice, unless the case is too small (or client funds too constrained) for a check to be affordable.

In 12 Angry Men one juror, played by Henry Fonda, persuaded 11 jurors to change their view of the evidence. Did Velvin Hogan connect the relationship between Samsung and Seagate and decide to use his place on this jury to retaliate against Seagate for the suit it brought against him 19 years ago? Likely, we will never know. Big money cases and s0-called “trials of the century” like Apple v. Samsung are common, and are quickly forgotten. The lesson this case is most likely to be remembered for years from now is this: research your jurors at the outset of trial as soon as possible. If a juror has a hidden bias or there is some other basis for disqualification and you could have learned it during trial, you risk a post-trial challenge to the verdict based on waiver.

Apple v. Samsung Order re Juror Misconduct (courtesy Groklaw.com)

 

You Want to Blog for Huffpost? Well, I Have to Warn You – We’re Pretty Darn Selective!

You Want to Blog for Huffpost? Well, I Have to Warn You – We’re Pretty Darn Selective!

A lot of people blogged for The Huffington Post for free between 2005 and 2011. But after Huffpost was sold to AOL for $315 million in 2011, they had second thoughts about their generosity. They filed a class action seeking compensation for their work based on claims of unjust enrichment and deceptive business practices, seeking one-third of that money for the bloggers. The trial court, and now the Second Circuit, rejected their claims. As the Second Circuit stated early this week in Tasini v. AOL (2d Cir. Dec. 12, 2012):

Plaintiffs’ basic contention is that they were duped into providing free content for The Huffington Post based upon the representation that their work would be used to provide a public service and would not be supplied or sold to “Big Media.” Had they known that The Huffington Post would use their efforts not solely in support of liberal causes, but, in fact, to make itself desirable as a merger target for a large media corporation, plaintiffs claim they would never have supplied material for The Huffington Post.

The problem with plaintiffs’ argument is that it has no basis in their Amended Complaint. Nowhere in the Amended Complaint do plaintiffs allege that The Huffington Post represented that their work was purely for public service or that The Huffington Post would not subsequently be sold to another company. To the contrary, plaintiffs were perfectly aware that The Huffington Post was a for-profit enterprise, which derived revenues from their ubmissions through advertising. Perhaps most importantly, at all times prior to the merger when they submitted their work to The Huffington Post, plaintiffs understood that they would receive compensation only in the form of exposure and promotion. Indeed, these arrangements have never changed.

The case puts me in mind of the observations of a great American writer:

Tom said to himself that it was not such a hollow world, after all. He had discovered a great law of human action, without knowing it – namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain. If he had been a great and wise philosopher, like the writer of this book, he would now have comprehended that Work consists of whatever a body is obliged to do, and that Play consists of whatever a body is not obliged to do. And this would help him to understand why constructing artificial flowers or performing on a tread-mill is work, while rolling ten-pins or climbing Mont Blanc is only amusement. There are wealthy gentlemen in England who drive four-horse passenger-coaches twenty or thirty miles on a daily line, in the summer, because the privilege costs them considerable money; but if they were offered wages for the service, that would turn it into work and then they would resign.

In an earlier time, I think Ms. Huffington would rarely have been required to lift a paintbrush.

Baker v. Goldman Sachs – The Business Deal From Hell

Baker v. Goldman Sachs – The Business Deal From Hell

An interesting “David v. Goliath” jury trial is scheduled to begin in Massachusetts U.S. District Court Judge Patti Saris’s Boston courtroom this week. The case has received a fair amount of press coverage, but not nearly enough in my opinion.  (Steven Syre Boston Globe column today, July 2012 NYT article).

The events in Baker v. Goldman Sachs date back to the heady days of the dotcom era. In short, James and Janet Baker (pictured here) spent much of their careers pioneering speech recognition technology which they commercialized under their company Dragon Systems, based in Newton, Massachusetts. The Bakers were legendary in the Massachusetts tech community in the 1990s – home-based technologists who came up with a promising-today, sky-is-the-limit-tomorrow technology.

In 2000 they sold Dragon for almost $600 million to Lernout & Hauspie, a Dutch company. Unfortunately, they were paid fully in Lernout stock, and almost immediately after the sale Lernout was discovered to have been cooking its books.  The stock went to zero, and so did the consideration the Bakers received for their company. For the Bakers, this was a business catastrophe of mythical proportions.  One day they owned an immensely valuable company that that owned technology they had spent decades developing.  The next day they had sold the company in exchange for almost $600 million of Lernout stock.  Within a few months, their company was gone and their stock worth nothing.

While several Lernout executives ended up with stiff prison terms in Belgium this was small consolation to the Bakers. Their technology is owned by Nuance, which sells it under the product name “Dragon NaturallySpeaking.” The Bakers’ technology has had steady success under Nuance. Reportedly, it is a component in the Apple iPhone’s Siri product. 

Goldman Sachs was the “investment banker” for Dragon’s sale to Lerner, and the question is, why didn’t they discovery that Lernout was a shell game? The gist of the Baker’s case is that Goldman (which received $5 million in fees) breached various legal obligations to Dragon by failing to discover that Lerner was “all hat, no cattle.” According to Steven Syre’s column, after Dragon’s salel to Lernout The Wall Street Journal simply called purported L&H customers and discovered they weren’t doing business with Lernout, something the Bakers claim that Goldman should have uncovered as part of its due diligence before the sale. In fact, it appears that Lernout’s Asian business—a significant part of its overall revenues—was a sham. Lernout had fabricated almost $400 million in income.

To make matters worse, the Times article asserts that Goldman assigned a young (20s and 30s) and inexperienced team to handle the deal. The Bakers’ court filings claim that Dragon and the Bakers fell victim to a massive fraud, that there were many “red flags” that Goldman failed to pursue in due diligence, and that had Goldman done the job it promised to do, the sale never would have occurred. In fact, the Bakers claim that Goldman had discovered problems with Lernout on behalf of another client, and failed to disclose these problems, or raise its level of investigation based upon this knowledge.

The full story is complex, and involves many different actors at Dragon, Goldman and various accounting and law firms. The question of who should have discovered Lernout’s fraud involves more finger-pointing than the presto movement in a piano concerto for four-hands. Of course, the Bakers (local scientists with significant bona fides) are far more sympathetic than the Goldman witnesses, many of whom left Goldman shortly after the sale to Lernout closed in June 2000. It remains to be seen whether they can hold their own as trial witnesses. Goldman Sachs’ credibility? Well, the Bakers must hope they draw a jury that reads the business pages.

While in the eyes of a non-lawyer the facts (as alleged) appear to favor the Bakers, Goldman has a number of technical legal defenses, and while it’s had little success with them before Judge Saris, presumably it hopes to prevail on them on appeal. For example, it argues that it was not responsible for the due diligence that would have uncovered the irregularities in Lerner’s sales numbers — Dragon’s accountants were responsible for this task. It claims that Lerner’s fraud was essentially undiscoverable by Goldman. It’s trump card is that the Bakers are caught in a legal catch-22: since Goldman Sachs’ engagement letter was with Dragon (the corporation), the Bakers lack legal standing as individual shareholders. And, since Dragon was merged into Lernout (and therefore for reasons arising out of bankruptcy law had no right to sue), Goldman is immune from liability to Dragon. Since neither the Bakers nor Dragon has standing, Goldman has no liability. Thus far the Bakers have been able to side-step this argument (arguing, for example, that they are third-party beneficiaries to the contract), but this issue remains unresolved, and could prove to be a get-out-of-jail-free card for Goldman.

The parties’ joint pretrial memo, outlining the many legal and factual issues, is linked below.

It is surprising that this case has not yet settled (the vast majority of civil cases—estimated as high as 95%—do). However, cases often settle “on the courthouse steps” or during trial. In fact, the trial judge in this case has been known to require party principals to hold a settlement conference following opening statements at trial. The idea is that once the parties get a look at a real jury, and hear the opposing attorney’s opening statement, they may adjust their expectations and reach a settlement.

If this case doesn’t settle it is almost certain to raise interesting and important investment banking legal issues both during trial, and on appeal to the First Circuit. Presumably, Goldman Sachs has revised its engagement letters.

Update: The jury found against the Bakers at trial.

Baker v. Goldman Joint Pretrial Memo

See also Baker v. Goldman Sachs, 656 F. Supp. 2d 226 (D. Mass. 2009) and an as yet unreported 2012 decision Baker v. Goldman Sachs (D. Mass. October 31, 2012).