The second arbitration anecdote I’d like to share (see my first “sausage factory” anecdote here) involved, once again, a 3-person arbitration panel. The case arose out of a manufacturer-distributor relationship.
Here’s how the business worked.
The high-priced hardware product at issue was sold to businesses via a national network of dealers, and the dealers often encountered price competition from competing manufacturers of this type of product. If a dealer lowered its price to meet the competition, it reduced its profit margin. To give dealers an incentive to compete in those situations the manufacturer would lower its price to the dealer if the manufacturer received written certification, via fax, documenting the price competition. This allowed the dealer to maintain its profit margin, and the manufacturer took the hit to profits.
The manufacturer discovered that one dealer had been falsely representing price competition on a large scale for several years. The manufacturer brought an arbitration case against the dealer seeking to recover the profits it had lost as a result of this fraud. I was one of three arbitrators on the case. I’ll call myself Arbitrator 1 and the other two arbitrators Arbitrators 2 and 3. All three of us were lawyers with many years of experience.
There was a two-day hearing (arbitration-speak for a trial), and as it turned out the dealer didn’t have much of a defense. One defense theory asserted by the dealer’s lawyers was that the manufacturer’s sales people had encouraged this practice, presumably to encourage sales and pump up their commissions. However, it was unable to present even a shred of evidence to support this – no testimony, no documents, nothing. Of course, in a trial what the lawyers say is not evidence – evidence is the testimony of witnesses and documents.
When the panel met to decide the case, to my surprise Arbitrator 3 said that he was experienced with commission sales people in situations like this, and he believed that the manufacturer’s sales people had encouraged the fraud. Therefore, he argued, the dealer should win the case.
Arbitrator 2 and I pointed out that this might be true in some situations, but we couldn’t reach this conclusion when there was no evidence to support it in this case. Arbitrator 3 became angry with us and said that in that case he would not join in the award. He stormed out of the conference room (leaving Arbitrator 2 and myself with mouths agape), and we didn’t hear from him again before deciding this case. The two of us went ahead and issued the award for the manufacturer.
What struck me in this case was that Arbitrator 3 was willing to decide the case based on his personal experience, even though there was no evidence that what Arbitrator 3 claimed he had seen elsewhere had occurred here. Although a jury might conceivably do this, a competent, trained judge never would, and I felt that a party in an arbitration should expect no less.
Imagine if the arbitration agreement at issue had called for a single arbitrator and the sole arbitrator had been Arbitrator 3. The distributor would have won based on the preconceptions that Arbitrator 3 brought to the case. The arbitration agreement didn’t call for a “reasoned award” (most don’t, given the extra expense involved), and the manufacturer would never have known why it lost.
I believe that parties to arbitration should be able to count on arbitrators relying on the evidence put before them, and not have an arbitrator make it up, as Arbitrator 3 did in this case. Often the evidence is in dispute, and an arbitrator (like a judge or jury) has to evaluate credibility. But for an arbitrator to decide a case where there is no evidence to support the arbitrator’s theory, is simply wrong. And, as I’ll discuss in my next (and final) post in this series, there’s nothing to stop an arbitrator from doing that. If you elect arbitration you may encounter a situation like this, and even worse you may never know it.
What’s my take-away from this? You never know what you don’t know going into an arbitration. You may believe (or your lawyer may tell you) that you have a good case, a strong case, a great case, even a “can’t lose” case (no lawyer should ever tell a client this!), but in arbitration you just don’t know. So if you’re a client heading for an arbitration hearing, and your lawyer tells you it’s the strongest case s/he’s ever seen, with an 80% likelihood of success, maybe you should discount that to 70%, and factor that adjustment into your settlement strategy.
In the last post in this three-part series on arbitration I’ll provide a few observations about the decision whether or not to include an arbitration clause in a contract.
“The thing to fear is not the law, but the judge” Russian Proverb
I’ve been arbitrating legal disputes since the early 2000s. Here is the first of a couple of anecdotes I’ll share. I am referring here to my experience as the arbitrator, not an attorney arguing a case before an arbitrator.
My cases have varied enormously, from huge multimillion dollar disputes to relatively small cases involving under a hundred thousand dollars. You might think that when I look back on these cases I have interesting stories about the lawyers and the clients, but that’s almost never the case. My most vivid memories involve my co-arbitrators on 3-person arbitration panels. This is where I’ve seen the most surprising aspects of human nature.In this post I’ll describe one of these, and leave other cases for future posts. I’ve slightly disguised the parties and facts so that they would not be recognizable, even to the parties, but they maintain the essence of the case.
The case was a David Inc. v. Goliath Inc. arbitration that involved complex patent and trade secret misappropriation claims by David. The arbitration panel was unusual, in my experience – the parties agreed on a single neutral, and each party retained their own arbitrator who was, in effect, their advocate on the panel. So, it was a three-person panel with one neutral arbitrator, one arbitrator chosen by David and one chosen by Goliath. My “client” was Goliath Inc., the defendant (or in arbitration-speak, the “respondent”). There were no restrictions on my meeting with Goliath’s attorneys during the hearings – indeed, I had lunch with them every day of the hearings, and advised them on how I thought their case was proceeding. I assume the same was true of David Inc.’s chosen panel member.In this case David was seeking approximately $200 million in damages.
The hearings lasted about 20 days, spread out over several months.At the close of the case it was clear that the “neutral” thought that David had put on a very weak case. However, he insisted that David was entitled to an award of around $2 million, one percent of what it was seeking in damages. I disagreed, to the point that I told the neutral that I would not join in the $2 million award. I felt that the proposed award was legally defective, and that the neutral was wrong on the law in reaching it. I thought it was a “sympathy award” by the neutral – give David (and likely it’s contingent fee attorneys), something that they could perhaps break-even on in terms of fees and expenses.
At a meeting with the neutral and “David’s” lawyer I told them that although I would not write a dissent to the “reasoned award” the parties had requested that the panel prepare, neither would I join in the award. In other words, two of the arbitrators would sign the award, which would be legally sufficient for it to be fully enforceable.A couple of days later the neutral arbitrator called me one-on-one and told me that if I would not join in the award he would increase the damages against “my party” – Goliath – by millions of dollars. I was shocked, but I had no choice but to go along with what I viewed as little more than blackmail. I joined in the award, and I never told my party about this call.
What was the neutral’s motive for strong-arming me like this? I believe that given the size of the case and its complexity he wanted a three-person award, to avoid any chance it might be successfully challenged in court – he wanted a 100% appeal-proof award.End of my story. I hope it provides some insight into what can go on inside the “sausage factory” of an arbitration panel.
A final word on this case – I’ve never been on a “one-neutral, two-advocate” arbitration panel before or since, and I would advise against it. The neutral arbitrator is unlikely to be swayed one way or the other by the “party arbitrators” (after all, the lawyers for the parties do that job). In fact, as I will discuss in another post, I would stay away from 3-person panels altogether, except in cases where the economics of a potential dispute justify it.
“You can’t waller with the pigs and not get dirty” Anon
As I’ve watched the political events of the last few years I’ve heard each side argue that their side needs to “fight dirty” to match the tactics of the opposing party.
I’m not going to voice an opinion on the political issues raised by these arguments, but I’ve learned one thing from personal experience: if you are an ethical litigator you are likely to be faced with a similar personal challenge at some point during your career. Sooner or later, and probably more than once, you’ll have a case where opposing counsel behaves borderline unethically, or even over the line. The list of ways in which a lawyer can skirt the rules to do this are countless. If you’re on the receiving end it can be upsetting and infuriating.
You, as the ethical lawyer, can’t change your opponent’s conduct. You can complain to the judge overseeing your case, but this is often a futile effort – judges have better things to do than oversee the conduct of lawyers, and they often are dismissive when they are asked to do so. The legal profession is expected to regulate itself, so unless the conduct is extreme and obvious, judges will usually remind the lawyers that they are professionals, admonish them to act like it, and send them on their way. Litigation can be like a football game where the players know the rules but are told to apply them themselves, without referees.
So, you face a choice: do you respond in kind, or do you “go high”?
There are two parts to this decision. The first is the conversation you hold with yourself and your colleagues. You’re an ethical lawyer, and you may say to yourself, “opposing counsel is behaving in a way that I think is unethical, but I will maintain my values. I will ‘go high.’ I won’t let myself be dragged into the mud. I’ll create a record and I’ll let the judge know when I think it will be effective, but I won’t let this lawyer drag me down to his or her level.”
Good thinking, but you still have a problem.
The problem is that your client may not agree with you, and this adds to the discomfort of your situation. In the eyes of the client, if the opposing party crosses the line, so should you. By not doing so, they may think you’re putting their case at a disadvantage. And, they may be right!
So, what do you do?
I don’t have any easy answers for a lawyer facing this situation, just as I don’t have an answer for people who may be struggling with this dilemma in the political world. However, I know that, between the natural instinct to fight fire with fire and client pressure, it can be difficult not to be dragged down by an unethical lawyer.
Fortunately, after 40 years of experience I’ve encountered this situation only a few times. In at least one case I can think of the client hired a new lawyer – one whose values were more in tune with those of the client. The client didn’t make it explicit, but it was clear what was going on – the client wanted a junkyard dog lawyer that would counter the opposing junkyard lawyer, and I didn’t fit the bill. Sorry.
In a couple of other cases I told the clients that I would not let the opposing lawyer force me to act unethically, and the clients accepted that.
If (or when) this happens to you, my advice is to continue to “go high.” It may be hard to take, but when you look back on your career from the perspective of many years or decades, you’ll like yourself a lot better, which is all that really matters in the end.
Good decisions come from experience. Experience comes from making bad decisions. Mark Twain
I’ve been reading about mental models. Everyone has these, whether they are aware of them or not. Doctors, engineers, sports coaches, electricians, architects, they all have them. Gary Kasparov has them for chess. Warren Buffett for investing. Nancy Pelosi for legislative politics. Bill Belichick for football (Tony Romo too). And, whether they are aware of it or not, lawyers have them.
you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.
You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.
This got me thinking about mental models for lawyering. Of course, the only ones I’m familiar with are my own. I know I have a bunch of them – how to evaluate a case, how to conduct discovery or a deposition, prepare or oppose a preliminary injunction or summary judgment motion, prepare an opening statement, prepare for trial, conduct direct examination, conduct cross-examination, research a legal issue …. But, I’ve never spent much time thinking in any detail about my “latticework” of mental models.
I thought it would be interesting (self-indulgent?), if I took a shot at this for one mental model. I chose what I think is the easiest of the several I listed above – how to evaluate a new case. So, here goes. And yes, I get that “mental models” is just a fancy term for what people have called “experience” since time immemorial. But if it’s good enough for Charlie Munger, it’s good enough for me. 1
A Case Evaluation Mental Model
First, think about jurisdiction and venue. Does the client have personal jurisdiction over the defendant in Massachusetts? If so, where does venue lie, state court or federal court (diversity, federal cause of action)? If I file in state court can the defendant remove the case to federal court? Which court do I prefer, and can I exert some control over this based on the claims asserted (e.g. assert/not assert a federal claim)? Either way, state or federal, which court has venue? Do I want to handle a case that must be filed or defended in Springfield, Mass., an hour-and-a-half drive from my office?
Look for an arbitration clause. If it appears to be enforceable, it can change my thinking on many of the issues described below. If the clause calls for a three-member arbitration panel, warn the client that the potential cost of the case may be about to sky rocket, and that a three-member panel complicates the case in a variety of ways.
What are the disputed/undisputed facts and potential causes of action? What is the black letter law on the legal claims? Where is the law uncertain or unclear and how might that effect the case? What research will I have to do to update myself on these issues and what resources will I use to do it? Can I start identifying strengths or weaknesses on each side of the case? Do I have adequate expertise in the relevant area of law? If not, what will it take for me to get up to speed? Can I do that economically, given the cost constraints of the case?
Who is on the other side of the case, if that is known? Do I know that lawyer, or her reputation? What is my experience with the opposing law firm. Is it a thousand-plus lawyer firm or a solo?
What are the economics of the case? What are the relative resources of the parties? Is my client is financially weaker than the adverse party? If so, how big a problem will that be for my client? Is the client hinting that it wants representation on a full or partial contingent fee basis? Is that the client’s only option? Is that of interest to me? How will that work for my firm economically? When will I be in a position to give the client a cost estimate? What more do I need to know to provide an estimate?
How much electronic evidence is involved? How will that be handled as a technical matter, how will if affect cost, and what evidentiary issues does it raise?
How experienced and savvy does the client appear to be? Will the client be easy to work with or difficult? Am I being asked to replace another lawyer (often a negative indicator)? Does the client have an unrealistic view of the merits of the case? How likely is that to change as the case progresses? Will I be able to persuade the client to see the case objectively for purposes of settlement? Is the case motivated by emotion/passion or money?
Is the case likely to involve a motion for preliminary injunction? A motion to dismiss? A motion for summary judgment? How should I factor these into a cost estimate? Sometimes the client shows up with a motion for preliminary injunction against it already pending. This is typically a fire drill situation where time is short and the focus must be on defending against that motion before other factors are considered. How does that urgency affect my decision to take the case?
Is the case likely to involve a jury trial? If so, how is a jury likely to see the equities based on “person on the street” values? How is a jury likely to view my client in term of socioeconomic status and credibility? Does the case lend itself to a “story” that I could present persuasively in my opening statement? In that regard, I begin to think about the “theory of the case” as early as possible.
Do I need to interview any witnesses before taking on the case to get a better handle on the facts or to give the client a better evaluation of the case? How many witnesses will be involved? Are they friendly or unfriendly? Are any witnesses out-of-state, requiring travel to take their depositions and increasing the cost?
Does the case lend itself to mediation? The majority of cases that go to mediation settle – at what stage of this case should I recommend that we pursue mediation, if at all? Is early mediation an option?
If the case does go to trial how likely is an appeal, which could delay resolution for an additional year or two? At what point should I mention this possibility to the client? How does this risk factor into my decision to take the case on a full or partial contingent fee basis? On what terms should the full/partial contingent fee agreement cover an appeal?
Can I (or my office) handle the time and resource demands of this case? How will I staff the case? How do those demands impact my overall case load?
What is my initial impression of the case? I’ve learned that once I get deeply involved in a case I can lose sight of this. But, this is how a judge or jury is likely to view the case. It’s important to capture this before I start thinking about the case at a level of detail a judge/jury is unlikely to apply. I might even take the time to write this down so I can go back and read it months or years later.
What does my intuition tell me about the case? As Joel Tillinghast describes it (in a different context2), my evaluation of the case should be a combination of thinking and trained intuition.
If you are a client and you’re describing your case to a lawyer, this will give you some idea of what may be going through her head. If the lawyer appears to be thinking hard, now you know why.
Do you have a law-related mental model that you’d like to share? If so, email it to me at email@example.com and perhaps I’ll feature it in a follow-up post. No “this-is-my-mental-model-when-I’m-meeting-with-a-lawyer” humor please! 🙂
One of the things that keeps lawyers awake at night (or should) is the risk that they will unknowingly waive a client’s legal rights. I wrote about this in 2008 (Traps for the Unwary – Waiver), and again in 2010 (Mister Softee Bitten By Waiver Under FRCP 50 ). In the 2010 post I observed that Microsoft’s failure to move for judgment as a matter of law (“JMOL” in legal jargon) under Rule 50 may have cost it several hundred million dollars.
The bottom line is that lawyers always need to be alert to the risk of a waiver.
When it comes to waivers during trial, one of the biggest mistakes a lawyer can make is to fail to move for JMOL before jury deliberations, and to then timely renew that motion after trial if the jury verdict makes it necessary. Failure to make these motions puts a losing party at a significant disadvantage on appeal: the party will be precluded from challenging the sufficiency of the evidence supporting the verdict.
This was the error in the Microsoft case, and it occurred once again in Gaye v. Williams. This was a high profile case, and it would be reasonable to expect the lawyers for Williams and Gaye (and their publisher) to avoid this mistake. The Ninth Circuit addressed their failure to file Rule 50 motions as follows:
The Thicke Parties . . . failed to make a Rule 50(a) motion for judgment as a matter of law at trial. Their failure to do so “precludes consideration of a Rule 50(b) motion for judgment as a matter of law.”
This procedural limitation is well worth underscoring. We held, in a case in which a party made an oral Rule 50(a) motion, but failed to renew its motion, that the party “waived its challenge to the sufficiency of the evidence because it did not renew its pre-verdict Rule 50(a) motion by filing a post-verdict Rule 50(b) motion.” . . . We further held that. . . a party’s failure to renew a Rule 50(a) motion “precluded [us] from exercising our discretion to engage in plain error review.” . . . Thus, when we stitch together Rule 50’s requirements with our case law, we are left with this result: Because “a post-verdict motion under Rule 50(b) is an absolute prerequisite to any appeal based on insufficiency of the evidence,” . . . and because a Rule 50(a) motion is, in turn, a prerequisite for a Rule 50(b) motion, . . . an advocate’s failure to comply with Rule 50’s requirements gives us serious pause, and compels us to heighten the level of deference we apply on appeal.
This was an important case, with a lot at stake. After their unsuccessful appeal Thicke and Williams are faced with a $5 million-plus judgment, an ongoing royalty obligation of 50%, and very little chance that they can persuade the Supreme Court to take this case and change the result. Whether the outcome would have been different had their lawyers filed Rule 50 motions is impossible to say. However, in litigation you need every advantage you can get, and waiving your ability to challenge the sufficiency of the evidence on appeal is not a trivial mistake.
To be clear, Federal Rule of Civil Procedure 50 requires that a party move for judgment, with specificity, on every issue before the case goes to the jury (Rule 50(a)), and then again following the verdict if the jury finds against the party (Rule 50(b)). Failing to file either motion will compromise the party’s ability to raise the issue on appeal – in other words, it will result in a waiver.
Why Pharrell Williams and Robin Thicke’s lawyers failed to make these motions will likely never be known. Nor can we know whether, had they done so, the outcome on appeal would have been different. But we, and their clients, can be left to wonder.
A motion for judgment as a matter of law may be made at any time before the case is submitted to the jury. The motion must specify the judgment sought and the law and facts that entitle the movant to the judgment
If the court does not grant a motion for judgment as a matter of law made under Rule 50(a), the court is considered to have submitted the action to the jury subject to the court’s later deciding the legal questions raised by the motion. No later than 28 days after the entry of judgment . . . the movant may file a renewed motion for judgment as a matter of law.
Earlier this year, on the eve of trial in Baker v. Goldman Sachs in federal district court in Boston, I published a blog post describing the facts behind this unusual case, which involved the acquisition of Dragon Systems by Lernout & Hauspie in a $600 million all-stock deal. Soon after the acquisition closed the market discovered that Lernout had fabricated its Asian sales figures. This was quickly followed by Lernout’s bankruptcy, which left Dragon (owned by the Bakers, husband and wife founders) holding worthless Lernout stock. (Baker v. Goldman Sachs – The Business Deal From Hell).
The acquisition was negotiated and concluded in the first half of 2000, just as the technology bubble was beginning to deflate.
After a lengthy trial the jury ruled in favor of Goldman Sachs on all issues except the claim that Goldman violated M.G.L. c. 93A, the Massachusetts statute that makes illegal “unfair or deceptive acts or practices.” Under Massachusetts law, that claim must be decided by the judge.
Now, Massachusetts federal district court judge Patti Saris has issued her decision on the Baker’s 93A claims, holding that Goldman Sachs did not violate 93A. This ruling is not a surprise; judges rarely find a violation of 93A when a jury rules against a plaintiff on the underlying claims, which in this case were negligence, breach of fiduciary duty and fraud.
However, her opinion is a fascinating look into how a transaction of this magnitude can go wrong. In addition, I read her opinion to imply that, in her view, the jury should have found Goldman Sachs negligent. Of course, there is no explanation for why the jury ruled against the Bakers – perhaps the Bakers were unsympathetic witnesses, or they drew a hostile jury. Perhaps the jury failed to understand the case, or the Baker’s case was poorly tried. These are the risks of the jury system–you may be convinced you have a great case and the jury can still rule against you. And, to rub salt in your wounds, you will never know why.
But, the case shows what goes on behind the scenes in a transaction of this sort, especially when your investment banker is Goldman Sachs, which was paid $5 million for its services to Dragon Systems. Here are a few points from Judge Saris’ opinion that caught my attention:
The Goldman Sachs Investment Banking Team Was Very Young. The team was comprised of three people. The leader of the team was only 31 years old. The second team member was 25 years old and was job hunting at the time. The third investment banker was a 21 year old recent college graduate. No senior Goldman Sachs investment banker did any work on the transaction.
=> The fact that Dragon allowed a 31 year old Goldman employee to be the leader on a $600 million deal of this importance to Dragon’s owners is a mystery. This brings to mind the saying, “young doctors, old lawyers.” For this case, I would change that to read, “young doctors, old lawyers and old investment bankers.” A degree from a prestigious business school does not equal experience.
Dragon Made a Critical Decision Without the Involvement of Its Investment Bankers. The sale of Dragon to Lernout initially had a large cash component – 50% cash/50% Lernout stock. But, this changed at a meeting at which Goldman Sachs was not present. Judge Saris wrote that “Janet Baker chose to pursue an all-stock transaction with [Lernout] for $580 million. By the end of the meeting, Janet Baker and [Lernout] signed a handwritten agreement setting forth a fixed exchange ratio for an all-stock acquisition of Dragon. … Janet Baker made this napkin agreement without consulting Goldman.”
=> The fact that the Bakers modified the deal without consulting Goldman Sachs suggests a lack of business sophistication on the part of the Bakers. A “napkin agreement” to sell your company for 100% stock, without including your investment banker in the decision? This was a huge decision, and by the time it was made it was too late for Goldman Sachs to advise against it. If you’re going to pay your New York investment bankers $5 million, keep them in the loop.
Goldman Sachs C.E.O. Lloyd Blankfein and C.O.O. Gary Cohn, in the boardroom of Goldman’s headquarters, in New York City
The Investment Bankers Are Not Your Friend, So Get Their Opinions and Assurances in Writing. Judge Saris wrote that “Goldman was dissatisfied with respect to Lernout’s answers on many due diligence questions up until the last moment. The transaction would likely not have gone forward if Goldman had voiced its ongoing concerns about financial due diligence. In his deposition, Wayner said he did not disclose any concerns he had about due diligence at the March 27 meeting because ‘the client did not ask.’”
=> Wow. Wayner was the senior Goldman team member. His testimony that he was concerned about due diligence but didn’t voice his concerns because “the client did not ask” shows how careful a client must be in dealing with its investment banker. When you are about to sell your company for $600 million in stock you should be waking up in the middle of the night worrying. And, before you fall back to sleep you should be emailing your investment banker and asking, “is there anything about this deal you’re concerned about that we should know before we jump?” The fact that an investment banker as prestigious, expensive and (supposedly) competent as Goldman Sachs took a “don’t ask, don’t tell” position toward its client says a lot about where investment banker interests lie. Could their $5 million fee on the sale of the company been in the back of Wayner’s mind when he weighed whether to tell the Bakers about his concerns?
Don’t Assume the Investment Banker is Creating a File You Can Use to Sue The If Things Go Wrong. Judge Saris wrote that Goldman Sachs has a “written policy encouraging its mergers and acquisitions department not to safeguard their written notes. The policy tells investment bankers to keep ‘[n]otes supporting due diligence,’ to throw out ‘[n]otes to self-citing unresolved problems,’ and ‘[w]hen in doubt, throw them out,’ unless litigation has commenced.”
=> In case you had any doubts, that’s what’s going on behind the scenes at Goldman Sachs, and probably other New York investment bankers. If you make a note to yourself regarding an unresolved problem in an M&A transaction, throw it out. Why? So it can’t be used in litigation against Goldman Sachs if there is a legal problem later.
Near the end of her lengthy opinion Judge Saris observes that “The reasons why small startup companies like Dragon go to a place like Goldman to assist with hatching their golden eggs is because they don’t have their own expertise to analyze revenue projections by asking tough questions to potential merger partners.” Reading between the lines of her opinion, one could conclude that Judge Saris felts that Goldman Sachs did not provide that expertise to Dragon. However, this decision was the province of the jury, and the jury ruled for Goldman Sachs on all of Dragon’s legal claims. Judge Saris’ ruling on Dragon’s Chapter 93A claims was Dragon’s last chance, and she concluded that Goldman Sachs did not engage in conduct that met the test of “unfair and deceptive practices,” as that law has been interpreted by the courts. Absent an appeal, her decision marks the end of a long road, strewn with missteps by Dragon and its advisors. Perhaps it will serve as a lesson for the future.
In Third Degree Films v. Does 1-47 (D. Mass. October 2, 2012), Judge William Young took on the “copyright trolls” in the adult film industry as best he could, holding that the plaintiff (a publisher of copyright-protected adult films that are being shared on the Internet) cannot join 47 “John Doe” defendants in a single action — it must instead file 47 individual suits.
The issue here is part of a larger controversy, the “porn film copyright shakedown.” The way this works is as follows. Copyright holders file Doe suits, which identify defendants only by IP address (all the plaintiff knows at that point). They then subpoena the ISPs and identify the owner of the IP address. Having identified the owners, they tell them that, absent a quick settlement (typically under $5,000), they will name them in the suit and serve them. Most people, rather than suffer the embarrassment (or what Judge Young calls the “reputational cost”) of having court records show that they downloaded films with titles like “Big Butt Oil Orgy 2,” settle out-of-court. Judge Young describes this process as “misusing the subpoena powers of the court, seeking the identities of the Doe defendants solely to facilitate demand letters and coerce settlement, rather than ultimately serve process and litigate the claims.”*
*As one court put it, a defendant – “whether guilty of copyright infringement or not — would then have to decide whether to pay money to retain legal assistance to fight the claim that he or she illegally downloaded sexually explicit materials, or pay the money demanded. This creates great potential for a coercive and unjust ‘settlement.'” SBO Pictures, Inc. v. Does 1-3036.
Why do the plaintiffs in these cases name tens, hundreds, sometimes thousands of Doe defendants in one suit? Money, money, money. By filing claims against multiple John Does, as Third Degree tried to do in this case, the plaintiff avoids a separate filing fee for each defendant (currently $350 per complaint). If Third Degree were required to file 47 separate cases, it would cost $16,450. Filing one case — $350. Assuming an average settlement of $2,500, joinder results in a gross of $117,500, while separate suits would yield a gross of only $101,050. Some porn film copyright cases name thousands of defendants. At $350 a pop, this can start to add up and the number of defendants climbs. In one case, for example, the plaintiff sought (unsuccessfully) to join 3,036 separate defendants.
No doubt, it’s more profitable for a copyright holder to be able to file a single case against multiple defendants and save money on filing costs, but that begs the legal question: why should this be permissible? Why shouldn’t porn film plaintiffs be required to file separate cases, like everyone else? The answer lies in the federal rules of civil procedure, which allow multiple defendants to be joined in a single case where the claims arise “out of the same transaction, occurrence, or series of transactions or occurrences.” (Fed. R. Civ. P. 20(a)(1)). How do the copyright plaintiffs claim the benefit of this rule?
The answer lies in a variation of the BitTorrent peer-to-peer file-sharing technology known as “BitTorrent swarm” or segmented file transfer. Simplified, a BitTorrent swarm distributes parts of a file among mutiple users. The file is downloaded from various sources simultaneously and assembled on the destination computer. Because movie files are very large (as compared with mp3 files, for example), this provides a faster, more efficient way to distribute these files.*
* BitTorrent swarms in the context of mass copyright filings are discussed on Slashdot here. For a semi-technical discussion in a court filing see the John Doe filing in Malibu Media v. John Does 1-5, here.
Although the 47 alleged downloaders in the Third Degree Films case may never have met each other or know each other’s identities, they all downloaded the same adult film and (according to Third Degree) were part of the same swarm. Perhaps any given member of the “swarm” interacts with electronically another participant, perhaps not. The larger the swarm (and a BitTorrent swarm can include thousands of users), the less likely that any one defendant will share part of the file with another. However, unbeknownst to them, using BitTorrent swarm technology made them susceptible to the “swarm joinder theory.”
Whether a plaintiff can name many defendants in a single suit based on swarm joinder is highly controversial. Judge Young issued an opinion on this issue a year ago in Liberty Media Holdings v. Swarm Sharing Hash File. In that case he permitted the “swarm participants” to be joined in one case, concluding that the Doe defendants’ behavior satisfied the “same transaction or occurrence” requirement. In the current case Judge Young stands by his reasoning in Liberty Media. He discusses the technological complexities of this issue, and concludes that even indirect interactions between swarm defendants may constitute “shared, overlapping facts” sufficient to establish a “series of transactions or occurrences.”*
*Judge Young noted it gave him “pause that district courts are so divided over whether file sharing via the BitTorrent protocol constitutes a series of transactions or occurrences . . . The inquiry is so fact intensive, and the BitTorrent protocol so technologically complex, that no principled conclusions have emerged from the abundance of recent case law and this Court is not entirely comfortable hanging its hat on its own understanding of the process.” Indeed, some of the discussion of whether an initial seeder indirectly uploaded pieces of a work to every peer in the swarm is surprisingly abstruse.
However, judges are not always bound by the letter of the law, and when it comes to multi-defendant joinder, Judge Young decided to take full advantage of his discretion. In this case, Judge Young expressed “serious concerns regarding the propriety of joinder of tens, hundreds, or thousands of Doe defendants” in adult film mass copyright infringement cases. He noted that each case would require a mini-trial (for example, one defendant suggested that her tenant, who occupies the other half of her two family house, must be responsible for the download). Combining 47 defendants with different defenses into one case was likely to create a “procedural albatross. Judge Young also took a dim view of the use of joinder to create a “low-cost, low-risk revenue model for the adult film companies.”
There have been many adult film (and conventional film) “copyright troll” cases in the last couple of years, and Judge Young’s decision collects court decisions in many of them. It appears that this phenomenon may be close to running its course. Many courts now see the issue the way Judge Young sees it, and are denying joinder in BitTorrent cases. Some plaintiffs have been sanctioned for abusing the joinder process. Bellwether trials are pending to test the extent to which an IP address can be used as the basis for legal wrongdoing, and whether the plaintiffs in these cases are correctly representing the technological properties of BitTorrent. Class action suits have been filed against Third Degree Films and other adult film companies based on their litigation practices. The easy money has been made, people are getting wise to the risk associated with these downloads and the courts have wised-up. The end may be in sight.
The ConnectU/Facebook legal saga is truly astounding. Imagine a mature Oak tree. Now give the it properties of Kudzu vine (the “vine that ate the South”). Each branch of this tree is another lawsuit involving ConnectU, Facebook, the principals, and their lawyers.
Now, a new branch has burst forth. Wayne Chang has sued ConnectU and its lawyers in Superior Court Business Litigation Session in Suffolk County, Boston, claiming that Chang is entitled to as much as 50% of the value of the ConnectU/Facebook settlement (so called, since ConnectU has challenged the finality of the settlement).
Here is the text of new Federal Rule of Evidence 502, eliminating waiver resulting from inadvertent disclosures of attorney-client privileged or work-product materials in federal litigation:
Federal Rule of Evidence 502 (signed into law September 19, 2008)
The following provisions apply, in the circumstances set out, to disclosure of a communication or information covered by the attorney-client privilege or work-product protection.
(a) Disclosure made in a federal proceeding or to a federal office or agency; scope of a waiver. —
When the disclosure is made in a federal proceeding or to a federal office or agency and waives the attorney-client privilege or work-product protection, the waiver extends to an undisclosed communication or information in a federal or state proceeding only if:
(1) the waiver is intentional;
(2) the disclosed and undisclosed communications or information concern the same subject matter; and
(3) they ought in fairness to be considered together.
(b) Inadvertent disclosure. —
When made in a federal proceeding or to a federal office or agency, the disclosure does not operate as a waiver in a federal or state proceeding if:
(1) the disclosure is inadvertent;
(2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and
(3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Fed. R. 25 Civ. P. 26(b)(5)(B).
(c) Disclosure made in a state proceeding. —
When the disclosure is made in a state proceeding and is not the subject of a state-court order concerning waiver, the disclosure does not operate as a waiver in a federal proceeding if the disclosure:
(1) would not be a waiver under this rule if it had been made in a federal proceeding; or
(2) is not a waiver under the law of the state where the disclosure occurred.
(d) Controlling effect of a court order. —
A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court – in which event the disclosure is also not a waiver in any other federal or state proceeding.
(e) Controlling effect of a party agreement. —
An agreement on the effect of disclosure in a federal proceeding is binding only on the parties to the agreement, unless it is incorporated into a court order.
(f) Controlling effect of this rule. —
Notwithstanding Rules 101 and 1101, this rule applies to state proceedings and to federal court-annexed and federal court-mandated arbitration proceedings, in the circumstances set out in the rule. And notwithstanding Rule 501, this rule applies even if state law provides the rule of decision.
(g) Definitions. —
In this rule:
(1) “attorney-client privilege” means the protection that applicable law provides for confidential attorney-client communications; and
(2) “work-product protection” means the protection that applicable law provides for tangible material (or its intangible equivalent) prepared in anticipation of litigation or for trial.
This rule comes too late for the many lawyers spending their weekday mornings in dark bars, drinking their memories away, their careers ruined by inadvertent disclosure of privileged client documents. It also comes too late to save the hundreds of millions of dollars spent on document review over the last few decades, in an effort to make sure that privileged materials aren’t produced to opposing counsel. But, better late than never. Click here to read the explanatory note on this rule.
It’s probably fair to say that there are thousands of software license and development agreements entered into every business day in the U.S. Only a very small number result in a lawsuit, and an even smaller number end up with a jury verdict and ruling under 93A by a Massachusetts trial judge. So, when a case does go the distance, it’s worth paying attention.
The recent decision by Massachusetts Superior Court Judge Leila R. Kern in Perfectyourself.com v. Accusoft Corporation discusses the evidence in a jury trial that resulted in a more than $400,000 verdict against Accusoft. In Massachusetts the trial judge, not the jury, decides claims under M.G.L. c. 93A, Massachusetts’ “little FTC Act.” Depending on the violation, Chapter 93A allows the judge to award double or treble damages and attorney’s fees to the prevailing plaintiff. The Accusoft decision is the trial judge’s discussion and analysis of the evidence that the jury heard for purposes of her analysis and decision under 93A.
The evidence at trial is a common story, although it rarely leads to a jury trial and judgment. Accusoft contracted with Perfectyourself.com to develop a software application. Accusoft represented that it had much of the underlying technology already in place, a claim that the jury and judge found to be untrue. After Accusoft was unable to deliver an acceptable prototype to Perfectyourself a standoff developed – “pay us” – “we’ll pay you when you deliver” – “no, you pay us first, then we’ll deliver”. Eventually Perfectyourself filed suit.
Massachusetts General Laws c. 93A makes unlawful all “unfair or deceptive acts or practices in the conduct of any trade or commerce.” The trial judge held that 93A could be violated even if there was no “intent to deceive,” and even if the defendant didn’t know that the representation was false, so long as the misrepresentation was “reasonably capable of ascertainment.” This conduct qualifies as a “negligent misrepresentation” and is a violation of 93A.
The judge did not find Accusoft’s violation to be “willful and knowing,” and therefore declined to impose multiple damages (93A allows for two or three times actual damages, at the discretion of the trial judge, based on her evaluation of the severity of the defendant’s conduct). She did, however, award Perfectyourself its reasonable attorneys fees, as the statute required her to do once a violation was found.
The moral of the story? The sales staff of a software company has to be careful not to overstate the facts when making a sale to a potential customer. The temptation to do so can be great in a competitive situation where commissions for the salesperson is on the line. Sometimes the sentiment is “sell today, worry about delivering tomorrow.”
A client might ask, “is there any way that this kind of a situation can be avoided by using the typical contractual disclaimers and limitations and liability? With one exception the answer is no, there is no contractual “silver bullet” that will insulate a software vendor from liability under all circumstances. It’s well-established law in Massachusetts that integration and non-reliance clauses are no a defense to fraud, although they may be grounds to avoid a claim of negligent misrepresentation of the sort found in the Accusoft case. However, it is exceedingly difficult to defend a claim of outright, knowing fraud by relying on contract limitations.
The one exception is this: if the signed contract addresses a specific element of performance, the customer cannot claim fraud based on a pre-contract representation with respect to that element. Some examples:
If the contract states that the software development project will be completed in stages with specific dates assigned, a claim of fraud based on different pre-contract promised dates will not succeed.
If the contract states that the software will operate at certain speeds (a common issue in software deals), a claim that the salesman made different pre-contract representations will not stand.
The rationale behind this distinction is that integration and non-reliance provisions are boilerplate, and contracting parties generally don’t pay much attention to them – in fact, they are often thown in at the last minute, and not negotiated at all. However, if the contract addresses a specific, material aspect of the project, such as completion dates and performance metrics, the customer is presumed to have read these terms, and cannot reasonably claim to rely on prior represenations that conflict with the express terms of contract.
The “mother of all software breach/fraud cases” in Massachusetts is VMark Software, Inc. v. EMC Corp., 37 Mass.App.Ct. 610 (1994)
The leading case for the proposition that a party may not base a claim of fraud on oral representations that are directly at odds with the contract provision is Turner v. Johnson & Johnson, 809 F.2d 90, 95 (1st Cir. 1986).
What do lawyers fear the most? Spiders, snakes, public speaking, death by auto de fe?
Well, I’ll be darned if I know, but one thing that scares the bejesus out of all thinking lawyers is waiver. Lawyers start to become vaguely aware of this horror in law school. Once they go out into practice it slowly dawns on them that it’s ultimately undefinable, that it lurks behind every legal shrub and tree, that opposing counsel will throw it in your face when you least expect it and long after you can fix it, and that if they don’t a court may do so on its own initiative. In its most severe forms it can lead to bankruptcy, scandal, and even malpractice (apologies to Jimmy Stewart).
Take a simple summary judgment motion in federal court. Unbeknownst to the novice lawyer, this process is fraught with dangers. The defendant files the motion. You file an opposition. The defendant files a reply affidavit introducing new facts. You lose the motion, and on appeal you argue that it was inappropriate for the defendant to introduce new facts in its reply. You cite the “no new facts” rule. After all, you were sandbagged by that reply, and the court shouldn’t have relied upon it.
Not so fast, the First Circuit recently held on these facts – did you raise this with the district court and object to the new evidence? If not you have waived the right to raise this on appeal. Desrosiers v. Hartford Life (2008). You lose.
A simple, one page motion to strike that could have been drafted and filed in an hour would have saved the day. For want of a nail …
Waiver, one of the most dreaded words a lawyer can hear. And so it goes.
Anytime these judges write an opinion, it’s treated like a papal encyclical,” . . . They really influence other judges, who act like these are the rock stars of their profession. . . These ‘rock star’ judges are not surprised that they, and not the new rules, are still the final word in e-discovery. . . .
Rock star judges, huh? OK, I’m trying not to wince, laugh or, well, you know… The American Bar Association needs to sell its publications, so you can’t blame them too much, I suppose.
In any event, this article names several judges as prominent in the area of discovery of electronically stored evidence (“ESI”), including Chief Magistrate Judge Paul Grimm of the U.S. District Court for the District of Maryland, Se