Northwest Business Litigation

Supreme Court declines bright-line rule for securities disclosure

On Tuesday, the U.S. Supreme Court refused to dismiss a complaint alleging securities fraud based on a company's failure to disclose reports that its cold remedy product caused consumers to lose their sense of smell.  In Matrixx Initiatives, Inc. v. Siracusano, plaintiffs claimed that the manufacturer made optimistic statements about expected sales of its product, Zicam, and didn't disclose that some doctors and consumers had reported adverse impacts. 

The company argued that the law requires disclosure only when it knows of sufficient adverse events to establish a statistically significant risk that the product is in fact causing the events.   The Supreme Court, affirming the Ninth Circuit, refused to adopt a bright-line rule that adverse events that are less than statistically significant need not be disclosed.  Instead, the relevant inquiry continues to be whether a reasonable investor would view the undisclosed information as altering the "total mix" of information made available.

Homeowner may pursue negligence claim for construction defect, Oregon Supreme Court holds

Last week the Oregon Supreme Court held that a homeowner seeking to recover against a builder for damages caused by construction defects may sue for common law negligence, absent a contractual provision that forecloses such a claim.  In Abraham v. T. Henry Construction, Inc., plaintiff homeowners hired defendant contractors to build a house.  When plaintiffs discovered defects in the construction years later, they sued for negligence. 

The Court of Appeals held that the parties' contractual relationship did not prevent a negligence claim, and that plaintiffs were entitled to pursue a negligence per se claim based on a violation of the Oregon Building Code.

The Supreme Court affirmed, but on a somewhat different basis.  First, according to the Court, a construction defect claim concerns damage to property -- and not mere economic losses -- and thus is not barred by the economic loss doctrine.  Second, the existence of a contract between plaintiff and defendant does not preclude a common law negligence claim for personal injury or property damage, unless the contract defines the parties' obligations and remedies in such a way as to limit or foreclose such a claim.  As a result, plaintiff is entitled to pursue a tort claim as long as the property damage at issue was a reasonably foreseeable result of defendant's conduct.  Plaintiff is not limited to a negligence per se claim. 

See our discussion of the Court of Appeals opinion in Abraham here.

Ninth Circuit holds that pharmaceutical sales reps aren't entitled to overtime pay

Last month, in Christopher v. SmithKline, the Ninth Circuit held that pharmaceutical sales representatives are exempt from the Fair Labor Standard Act's overtime requirements. 

Two pharmaceutical sales representatives filed a lawsuit challenging defendant's practice of requiring overtime work without paying additional compensation, as a violation of the FLSA.  The FLSA requires overtime payment for employees for hours worked in excess of forty per week.  However, there are numerous exceptions to this rule, including an exemption for persons employed "in the capacity of outside salesman." The trial court did not allow the plaintiff's case to proceed to trial, finding that pharmaceutical sales representatives "unmistakably fit within the terms and spirit of the [FLSA's outside sales] exemption."  The plaintiffs appealed to the Ninth Circuit.

The Ninth Circuit affirmed the trial court's ruling.  Despite the fact that PSRs do not technically sell pharmaceuticals to doctors, a doctor's commitment to a PSR to prescribe his assigned product when medically appropriate is a "meaningful exchange."  This meaningful exchange, the Court held, fits within the FLSA's definition of a "sale," which includes "other dispositions."  In addition, PSRs are "rewarded with commissions when their efforts generate new sales.  They receive commissions in lieu of overtime and enjoy largely autonomous work-life outside of an office."  For these reasons, the Ninth Circuit Court held that PSRs are exempt from the overtime-pay requirement of the FLSA.

This result creates a split with the Second Circuit, and raises the possibility that the U.S. Supreme Court will take up the issue.

Ninth Circuit reins in trademark infringement liability for keyword bidding

The Ninth Circuit this week cast doubt on whether an advertiser that uses the name of a competitor's product in keyword advertising is liable for trademark infringement.  In Network Automation, Inc. v. Advanced Systems Concept, Inc., the Ninth Circuit vacated a preliminary injunction preventing defendant from purchasing the name of plaintiff's product as a keyword to display sponsored ads. The court expressed skepticism about whether such trademark use creates consumer confusion, which is the essence of trademark infringement.   

Plaintiff Network Automation, Inc. (Network) and defendant Advanced Systems Concepts, Inc. (Systems) are competitors.  Systems markets software under the trademark ACTIVEBATCH.  Network purchased the keyword ACTIVEBATCH from Google AdWords in order to display a sponsored ad for Network's products when users searched the term ACTIVEBATCH.  The district court found that this use likely created initial interest confusion -- meaning that defendant used plaintiff's mark in a manner calculated to capture intial consumer attention even though no actual sale is made.  On that basis, the district court granted injunctive relief.   

The Ninth Circuit rejected that analysis, emphasizing that the owner of the mark must demonstrate "likely confusion, not mere diversion."  To determine the likelihood of confusion, the court applied the Sleekcraft factors, of which one is the degree of "consumer care."  According to the court, the degree of consumer care on the Internet is greater now than in years past, as the novelty of the Internet evaporates and online commerce becomes commonplace.  That makes confusion from a competitor's keyword advertising less likely. 

The court also added as a factor to the Sleekcraft test the labelling, appearance and context of the sponsored ads.  Network's ads did not clearly identify their source, and in certain cases that may cause initial confusion.  But the surrounding context of the ads may eliminate that confusion; Google and Bing segregate sponsored ads from search results to highlight that the ads are not the result of an objective search result.  Because the district court failed to properly consider the heightened care of consumers and the context of the ads, the Ninth Circuit ruled that the district court abused its discretion in granting injuctive relief.    

 

Ater Wynne scores trial victory for NAACP

Ater Wynne's Seattle trial lawyers, Steve Kennedy and Rob Roy Smith, today prevailed in a lawsuit filed against the NAACP, following a week-long bench trial in King County Superior Court.  At issue was whether the national office of the NAACP was liable for legal malpractice, breach of contract, and negligence, arising from the alleged acts and omissions of a lawyer who also happened to work as a volunteer officer at the Seattle-King County Branch of the NAACP. 

The plaintiff alleged that the lawyer mishandled his earlier race discrimination lawsuit against a former employer.  Plaintiff also alleged that he thought he was being represented by the NAACP, which had supposedly "assigned" the lawyer to his case.

Relying on the U.S. Supreme Court's 1982 decision in NAACP v. Clairborne Hardware Co., the trial court found that there was no credible evidence that the NAACP authorized or ratified (either expressly or by implication) any of the activities of the local lawyer in connection with the previous discrimination lawsuit.  The court found that neither the NAACP nor the Seattle-King County Branch was acting as the plaintiff's lawyer;  rather, the plaintiff separately retained the lawyer as a private attorney.

Shareholder status can exist without corporate formalities, Oregon Court of Appeals holds

Last week the Oregon Court of Appeals held that an individual can be deemed a shareholder of a corporation even though the corporation neither formally recorded her status in its records nor issued stock certificates.  In Yeoman v. Public Safety Center, Inc., plaintiff sought a declaratory judgment that his late wife, Anita Yeoman, had been a shareholder in defendant corporation.  Plaintiff further requested inspection of corporate records under ORS Chapter 60. 

Mrs. Yeoman had been an employee of defendant coporation, and before she started work the corporation's sole officers and shareholders told her she would become a 10% shareholder, earning 2% ownership per year.  Her employment was terminated after nearly one year.  For three years after that, the corporation mailed annual checks to her, which plaintiff claimed represented dividends associated with the 2% ownership.

The corporation disputed Mrs. Yeoman's status as shareholder, contending that the corporation's records didn't show that she was a shareholder, and no stock certificates were issued to her.  The Court of Appeals reversed summary judgment for the corporation, holding that plaintiff had raised a genuine issue of material fact regarding whether she was a shareholder.  Under state law, shares are deemed to have "issued" once the corporation accepts payment in exchange for the authorized shares.  A factfinder could conclude that the corporate board of directors had authorized the issuance of the shares in exchange for her employment, and that Mrs. Yeoman was a shareholder even though she was never issued stock certificates.

However, according to the Court, plaintiff was not entitled to inspect corporate records because, under ORS Chapter 60, only shareholders whose interest is registered in the corporation's records have that right.  This means that, as a prerequisite to inspection of the records, plaintiff must first obtain an injunction requiring that corporate records reflect share ownership.

Securities fraud claim under Oregon law requires proof of reliance

Last week the Oregon Court of Appeals held that a plaintiff making a claim under the state's securities fraud statute must prove reliance as an element of the claim.  In State of Oregon v. Marsh & McLennan Companies, Inc., the state filed suit to recover losses to the Public Employees Retirement Fund in connection with the drop in the value of stock in Marsh & McLennan.  The state claimed that Marsh & McLennan issued statements about its business ethics and sources of income that proved to be false once certain executives pleaded guilty to various corporate misdeeds.  Plaintiff sued under ORS 59.135 (prohibiting fraud and misrepresentation in security transactions) and ORS 59.137 (creating cause of action for violating ORS 59.135). 

Defendant obtained summary judgment on the ground that the state could not provide evidence that the retirement fund's agents purchased the stock in reliance on Marsh & McLennan's fraudulent misrepresentations.  The Court of Appeals affirmed, holding that, even though the statute does not expressly call out reliance as an element of the claim, use of the terms "fraud" and "defraud" in the statute necessarily implies reliance.