NAD Finds Support for Cleaning Products Claims Not All Sunshine and Daisies

ToxicWhoopsy daisy.

Better Life, a maker of home cleaning products, recently ran evocative comparative video ads with a product demonstration to grab consumers’ attention and gain share. It’s a common enough advertising strategy, but one that Better Life in this case should have nipped in the bud, according to NAD.

The ads featured a time-lapse demonstration in which gerbera daisies were placed inside Better Life All Purpose Cleaner and in four other household cleaning products, including Windex®. During a sped-up 24-hour period, consumers watched as the daisies in the other four cleaning products tragically wilted and died, while the daisy in Better Life’s cleaner thrived. Beneath the video appeared this message: “Amazing things happen when you take the toxins out of the household cleaners.”

S.C. Johnson & Son, Inc. (SCJ), the maker of Windex® and other cleaning products, did not like to be tagged as a flower killer along with a germ killer, so it turned to the National Advertising Division (NAD). SCJ argued that the video denigrated and disparaged Windex® by falsely suggesting that it is toxic and harmful to consumers.

NAD agreed. It determined that the video conveyed two messages, both of which were unsubstantiated. NAD recommended that Better Life discontinue the video and either discontinue or modify certain similar claims that appeared in a chart on Better Life’s site.

First, NAD indicated that the video conveyed the message that the daisies in the other cleaning products had been killed by the products’ toxicity, and that Better Life’s cleaner is less biologically harmful to living things (like a flower) because of its “natural” (i.e., nontoxic) ingredients. NAD ultimately held that Better Life failed to provide a reasonable basis for this message, concluding that the demonstration did not produce sufficiently reliable evidence of a difference in toxicity among the products and that Better Life failed to present any scientific evidence that would otherwise explain the different reactions in the flowers.

Second, NAD determined that Better Life’s video reasonably communicated the message that competing products, including SCJ’s Windex®, are “toxic” and create potential safety problems for consumers, and that Better Life’s cleaner is much safer. NAD likewise held that this comparative safety claim was unsubstantiated. In particular, NAD rejected Better Life’s argument that it was safer because Windex® Multisurface Cleaner is registered with EPA as a pesticide and thus must include certain warning statements on its label. NAD determined that EPA as part of its registration process had reviewed the potential health and environmental effects of the product and concluded that it was safe. NAD also rejected Better Life’s argument that it was safer because Windex® is an antimicrobial disinfectant that is specifically designed both to clean and to kill certain bacteria. NAD concluded that the fact that Windex® is an antimicrobial product does not constitute reliable evidence that it poses a greater risk to consumers than Better Life.

In its analysis, NAD also took issue with the comparative demonstration more generally. It noted that, contrary to NAD precedent, the demonstration in Better Life’s daisy video was not conducted under consumer-relevant conditions, and there was no evidence that the results were in fact representative of a real health or safety difference between the products.

Aside from challenging the video, SCJ also challenged a comparative ingredient chart that appeared on Better Life’s website. The chart listed ingredients of “possible concern” that are found in competing cleaning products but not in Better Life’s All Purpose Cleaner. The chart contained the following claims:

  • Dyes – “Have been linked to cancer.”
  • Alcohol – “Respiratory and skin irritant.”
  • Synthetic Fragrance – “Toxic.”
  • Sulfates – “May contain 1, 4-Dioxane, a possible carcinogen.”
  • Ethoxylates – “Linked to cancer and sterility.”

Because the chart stated that competitive products have potentially dangerous ingredients but Better Life does not, NAD determined that the chart reasonably conveyed the message that the competing products are more harmful than Better Life’s products or are otherwise unsafe.

NAD concluded that Better Life failed to provide a reasonable basis for the claim that the products with the identified ingredients posed greater health or safety risks than Better Life’s product. In NAD’s view, none of Better Life’s evidence—from general articles and studies to anecdotal evidence of consumer injuries—reliably showed that any of the cleaning products in the chart contained the listed ingredients in a quantity that gave rise to the “possible concerns” when used as directed.

This case serves as a reminder that advertisers must be sure to substantiate all their advertising claims, especially where the claims are comparative and use evocative product demonstrations, as these claims are particularly likely to draw competitor challenges. Put another way, if you don’t have the data to back up all express and implied claims, it won’t be long before those claims are pushing up daisies.


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Hurricane Harvey and Oil and Gas Operations – What To Do

In light of the adverse effects the storm, floods and tornadoes will have on oil and gas production, transportation and processing operations, we offer several bits of advice:

Force majeure

Winds and floods are among the very reasons for the seldom-invoked force majeure provisions of your oil and gas leases, operating agreements, transportation agreements and other contracts. If your operations are affected by the storm, study your contracts and be mindful of what you will need to do and when in order to invoke the protections force majeure clauses offer.

Environmental concerns. Special thanks to environmental lawyer Cindy Bishop

  • Debris from a declared disaster – Request approval from Texas Commission on Environmental Quality (TCEQ Form 20660) so you can temporarily stockpile debris on-site to avoid classification of the debris as a solid waste. (We are NOT suggesting that you submit this form without competent legal advice.)
  • Did shutting down your facility cause unauthorized air emissions in excess of the reportable quantity?  Normally, notice must be given to the regional TCEQ office at least 10 days before the shutdown, but TCEQ waives this requirement if the shutdown is related to a hurricane.  Regardless, a final report must be provided to TCEQ within two weeks after startup.
  • Repairs to equipment that is covered by an air permit may require notice to the TCEQ regional office within 30 days of commencement of the repairs.
  • If your wastewater treatment plant is damaged, you may not need a permit amendment or authorization to repair it.
  • Unauthorized discharges to Texas waters as a result of an act of God are not considered violations by TCEQ; however, TCEQ requires notice of an accidental discharge or spill resulting from a hurricane as soon as it is safe and feasible to report after discovery of the release.

Write it down

It is generally good practice to document for your files the existence of any force majeure situation or any impact on the environment from releases or damage resulting from the hurricane.  Contemporaneous documentation prevents confusion in a subsequent dispute with a counter-party (your lessor, for example) or TCEQ inspection.

Insurance claims. This one is time sensitive!

Texas House Bill 1774 governs “force of nature”-related insurance claims and will go into effect on September 1.The Bill alters notice requirements and potential recovery available on insurance claims and lawsuits asserted after September 1, 2017.

The Bill does not affect claims covered through the federal government’s National Flood Insurance Program and the Texas Windstorm Insurance Association, which largely provides insurance coverage in coastal areas. If you anticipate bringing a new claim you may want to check your current policies. And consult counsel if you have a prior unresolved force-of-nature claim and have not filed suit.

Media coverage of the law has been confusing. Here is a Gray Reed legal alert  explaining it.

 

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A New Day for Louisiana Oil and Gas Lenders?

Like Les, except with an offense, Coach O congratulates the Tigers for subscribing to Energy and the Law

Lenders to Louisiana operators are likely to be reconsidering their business practices in light of Gloria’s Ranch v. Tauren et al.

A rather ordinary lease termination suit resulted in the lender Wells Fargo being solidarily liable with the lessees for $22.8 million in lost leasing opportunities, $242,000 in unpaid royalties, $484,000 in statutory damages, and almost $1 million in attorneys’ fees.

Here’s why:

Wells was solidarily liable with the lessees because:

  • According to Mineral Code Art 168, undivided ownership of mineral rights is indivisible, which made the co-owners’ obligation to execute a release of the lease upon demand indivisible,
  • The mortgage contained an assignment of the leasehold,
  • Cubic could not release the lease without Wells’ prior consent,
  • Wells had an override and an NPI, and
  • Wells received cost information from Tauren and Cubic and regularly audited their records.

The lease was on 1,390 acres in Caddo Parish. The deep rights were owned 51 percent by Exco (who settled before trial) and 49 percent by Cubic. The shallow rights were owned 51 percent by Tauren and 49 percent by Cubic. Wells Fargo’s credit facility and mortgage were converted into a net profits interest in a portion of the shallow rights and an override in a portion of the deep rights. The lessees were counting on several Cotton Valley wells to hold the lease.

Other issues

Mineral Code Article 124 requires production in paying quantities: Would a reasonable prudent operator, for the purpose of making a profit or minimizing loss, continue to operate a well in the manner in which the well in question was operated?

After a bench trial the court found:

  • The lease expired and the defendants failed to execute a release of the lease after demand.
  • Because of the failure to release the lease, the lessor lost the opportunity to lease the property to another operator
  • The real reason the defendants maintained the wells and endured significant net losses was “in hopes of selling the deep rights and profiting from the Haynesville Shale boom.”
  • Those actions were clearly speculative, and “a textbook example of what the Legislature intended to prevent in enacting Art. 124.”

Penalty for unpaid royalties: Times two or plus two?

Plus two. Under Mineral Code Art. 140 if the lessee fails to pay royalties or to inform the lessee of a reasonable cause for failure to pay, the court may award as damages “double the amount of royalties due”. Is that unpaid royalties times two or plus two? The court concluded that statute means the offending lessee must pay unpaid royalties plus 2 times the royalties.

The dissent, respectful but … indignant? 

Two justices were unhappy with the result. Justice Brown predicted an apocalypse of sorts for Louisiana’s oil business. Justice Bleich agreed, contending it was legal error to impose solidary liability on a mortgagee with only a security interest. Solidary liability is never presumed and arises only from a clear expression of the parties’ intent or by law. In the name of public policy alone, this aberration needs to be corrected.

A Cajun musical interlude for a Cajun coach.

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Guest Post: Divided Second Circuit Panel Overrules Prior Newman Insider Trading Decision

One issue with which courts dealing with insider trading cases have struggled is how to interpret and apply the personal benefit element of the liability standard. The personal benefit standard was in fact an important part of the U.S. Supreme Court’s 2016 decision in Salman v. United States (as discussed here). Last week, the Second Circuit issued an important decision in the United States v. Martoma, in which the appellate court provided important additional perspective on the personal benefit test. In the following guest post, Brad S. Karp, Geoffrey R. Chepiga, Daniel J. Kramer, Lorin L. Reisner, Audra J. Soloway, and Richard C. Tarlowe of the Paul Weiss law firm take a look at the Second Circuit’s decision in the Martoma case and the appellate court’s discussion of the personal benefit test. I would like to thank the authors for their willingness to allow me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ guest post.

 

*********************************************

 

On Wednesday, in United States v. Martoma, the United States Court of Appeals for the Second Circuit overruled its own 2014 decision in United States v. Newman and altered the standard for determining whether the personal benefit element of insider trading has been satisfied.  The decision had been eagerly anticipated as a key test for how courts would interpret the U.S. Supreme Court’s 2016 decision in Salman v. United States.

For more than 30 years, since the Supreme Court’s seminal decision in Dirks v. SEC, the dividing line between lawful trading on material, nonpublic information and unlawful insider trading has been whether the tipper breached a duty in exchange for a “personal benefit.”  In most cases, courts have had little difficulty defining the boundaries of that requirement because either the tipper received a financial benefit, or the tippee was a close friend or relative with whom the insider had no legitimate, business reason to be sharing confidential corporate information.  In those circumstances, courts have generally permitted an inference of a personal benefit.

In Newman, however, the Second Circuit was faced with a corporate insider (an investor relations employee) who shared information with an analyst at an institutional investor.  In order to enforce the dividing line created by the Dirks Court, and avoid chilling legitimate communications between market professionals and company insiders, the Second Circuit in Newman held that, in the absence of an explicit quid pro quo, a gift of confidential information from a tipper to a tippee could only amount to a “personal benefit” when the tipper had a “meaningfully close personal relationship” with the tippee.

On Wednesday, however, the Second Circuit panel majority in Martoma overruled that test and created a new standard for defining the boundaries of the “personal benefit” requirement:  a “personal benefit” to the tipper may exist “whenever the information was disclosed with the expectation that the recipient would trade on it and the disclosure resembles trading by the insider followed by a gift of the profits to the recipient.”[1]  One judge dissented from the panel’s decision.

If the Second Circuit’s new test for determining “personal benefit” survives a potential en banc review, it will remain to be seen how lower courts implement that test, particularly in the context of communications between a corporate insider and a market professional.  It will be incumbent upon the courts to ensure the test has real teeth to address the Supreme Court’s concerns in Dirks and avoid blurring the line between lawful and unlawful trading.

The “Personal Benefit” Requirement

In Dirks v. SEC, [2] the U.S. Supreme Court held that trading on material, nonpublic information is not, without more, unlawful.  Rather, tippers must receive a personal benefit for insider trading to be unlawful. [3]  The Court viewed it as “essential” that there be a “guiding principle” for market participants “whose daily activities must be limited and instructed by the SEC’s inside-trading rules.”[4]  Accordingly, the Court held that the “test” for determining whether such a breach has occurred is “whether the insider personally will benefit, directly or indirectly, from his disclosure.”[5]  “Absent some personal gain” by the insider, there has been no breach and thus no duty to refrain from trading.[6]

Prior to the Second Circuit’s 2014 decision in United States v. Newman, the personal benefit requirement was generally not perceived as imposing a particularly high bar.  Nonpecuniary benefits, including friendship and “gifts” of information, were generally viewed as sufficient to constitute a personal benefit that triggered a duty to abstain from trading.  But in many of those cases, the facts easily permitted an inference of a personal benefit because the tippee was a close friend or relative and therefore the insider had no legitimate reason to be discussing corporate information with them.

In Newman, however, where the tippee was a market professional whose job involved speaking to company insiders, the Second Circuit imposed a more stringent test of what constitutes a personal benefit.[7]  In that case, portfolio managers at two hedge funds were convicted after trial based on alleged tips from an investor relations employee to an analyst.  The government argued that the personal benefit to the investor relations employee included career advice and friendship.[8]  The Newman panel held that in the context of a gift of inside information, a personal benefit to the tipper requires “a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”  The panel held that absent potential financial gain in response to the gift, no personal benefit exists.[9] [10]

After the Second Circuit’s decision in Newman, the Supreme Court considered the scope of the personal benefit requirement in Salman.  There, the tipper was an investment banker who provided material, nonpublic information about impending mergers to his brother who, in turn, provided the information to Salman, his brother-in-law.  In affirming Salman’s conviction, the Court concluded that a gift of confidential information to a trading relative or friend satisfies the personal benefit requirement.[11]  The Court characterized the issue presented as a “narrow” one that was “easily resolve[d]” by Dirks. [12]  As the Court explained, “Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative’ and that rule is sufficient to resolve the case at hand.”[13]  According to the Court, under Dirks, “when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift.”[14]

The Court explained that, to the extent that the Second Circuit’s holding in Newman requires that the tipper receive something of a “pecuniary or similarly valuable nature” in the context of “a gift to family or friends,” such a requirement is inconsistent with Dirks, and therefore should be rejected.[15]  The Court acknowledged, as it had in Dirks, that “determining whether an insider personally benefits from a particular disclosure. . .will not always be easy for courts,” but found no difficulty resolving that question under the facts presented in Salman because the case involved “precisely the gift of confidential information to a trading relative that Dirks envisioned.”[16]

The Decision in Martoma

In United States v. Martoma, the defendant argued that Salman did not affect Newman’s requirement that there be a “meaningfully close personal relationship” between the tipper and tippee for a personal benefit to exist absent financial gain.[17]  The defendant argued that in Salman, it was clear that such a relationship existed between the tipper and tippee because they were brothers, whereas no such “meaningfully close personal relationship” existed between the defendant (Martoma) and his alleged tipper in this case (a doctor involved in a clinical trial).[18]

The Second Circuit rejected these arguments and affirmed the defendant’s conviction in a split panel decision.  The majority (Chief Judge Katzmann and Judge Chin) concluded that a tipper can receive a personal benefit from giving a gift of inside information to another person even where there is no “meaningfully close personal relationship” between the two.[19]  While Dirks referred to gifts of information to a “relative or friend,” and Salman repeatedly limited its holding to those same categories of tippees, the majority held that Dirks was merely using this as an example of a situation in which there is a personal benefit, not as a limitation on when insider-trading liability can be imposed.[20]  The majority wrote that, under Dirks and Salman, a corporate insider benefits personally when “he disclos[es] inside information as a gift . . . with the expectation that the [recipient] would trade” on that information.[21]  This logic applies whether or not there is a “meaningfully close personal relationship” between the tipper and tippee.[22]  The majority acknowledged that Salman had not explicitly overruled this aspect of Newman, but nevertheless concluded that Salman cast sufficient “doubt” on the Newman analysis to justify holding that Newman’s requirement of a “meaningfully close personal relationship” is “no longer good law.”[23]  The majority emphasized, however, that “not all disclosures of inside information will meet this test.”[24]  There must be sufficient facts from which an inference can be drawn that the information “was disclosed with the expectation that the recipient would trade on it and that the disclosure resembles trading by the insider followed by a gift of the profits to the recipient.”[25]

One judge on the three-judge panel (Judge Pooler) dissented, and offered a starkly different view of the appropriate scope of insider trading liability.  Judge Pooler concluded that the majority went too far in eliminating important restrictions on when the sharing of information in the absence of financial benefit is illegal.  While Salman abrogated Newman’s requirement that an insider must have the potential to profit financially from a disclosure, Newman’s conclusion that insider trading liability based upon a gift requires a “meaningfully close personal relationship” between the tipper and tippee is fully consistent with the ruling in Salman.[26]  Moreover, Judge Pooler wrote, this rule is logical, since tippers will typically have no “legitimate commercial reason to share business secrets with friends and family,” and a personal benefit can thus be inferred from a gift to close friends or family.[27]  By contrast, gifts to colleagues or acquaintances are more likely to result from “innocent conduct,” so inferring a personal benefit in such situations is harder to justify.[28]  By overriding Newman’s requirement of a “meaningfully close personal relationship,” the dissent maintained, the majority had “vastly expanded” when a gift of information can support insider trading liability.[29]  Because it is so difficult to know when inside information is a “gift” and when it is not, the majority’s approach would result in “decision-making that is arbitrary and subjective” and would “undermine[] the objectivity and limitation that the personal benefit rule is designed to provide.”[30]  As a result, the dissent concluded, the personal benefit requirement would cease to serve as a meaningful limitation on insider trading liability and would no longer address the concerns articulated in Dirks that initially necessitated the personal benefit requirement.[31]

Discussion

The U.S. Supreme Court intended the personal benefit requirement to provide clear boundaries to guide market participants and avoid chilling legitimate communications between market professionals and company insiders.  Without a statutory definition, however, or much clarity from the Supreme Court, lower courts have been left to define and apply the personal benefit requirement.

A personal benefit to the tipper clearly exists when he receives a financial benefit or quid pro quo.  And, where an insider discloses information to a close friend or relative with whom they have no legitimate commercial reason to share business secrets, an inference of a personal benefit is often not difficult to justify.  In that circumstance, the risk of sweeping in “innocent” conduct is low.

On the other hand, in the context of analysts and other market professionals, whose job functions generally require direct contact with company insiders, there are often legitimate business reasons for such communications, and an insider might disclose material, nonpublic information to a market professional without intending for it to be an improper “gift” of information.  As such, as Judge Pooler recognized in her dissent, the risk of sweeping in “innocent” conduct is far greater, and the corresponding need for clear boundaries more acute, in that context.

The competing tests articulated by the panels in Newman and Martoma reflect very different approaches to this problem.  In Newman, where the alleged tip was made to an analyst for no financial benefit, the Second Circuit developed the “meaningfully close personal relationship” standard.  In Martoma, the Court overruled Newman and replaced that standard with a new test for assessing the “personal benefit” requirement:   whether the information “was disclosed with the expectation that the recipient would trade on it and the disclosure resembles trading by the insider followed by a gift of the profits to the recipient.”  It will now be up to the lower courts in the Second Circuit to interpret and apply this new standard.  It remains to be seen whether this new test will be effective in providing clear boundaries and preventing innocent conduct from being swept up in insider trading actions, particularly in the context of communications between company insiders and market professionals.  To carry out the Supreme Court’s mandate in Dirks, courts must treat this test as imposing a meaningful burden on plaintiffs and prosecutors rather than a hollow standard without real teeth.  That means that courts will need to require real proof that a tipper believed the tippee would trade and that the tipper truly intended the disclosure to be a gift akin to sharing trading profits with the tippee.  Otherwise, if courts permit generalized allegations that can be made in nearly every circumstance, such as a corporate executive trying to maintain a good relationship with a large institutional investor, the new test risks eviscerating the “guiding principle” viewed as essential by the Supreme Court and chilling the communications the Court sought to preserve in Dirks.

The Newman and Martoma opinions paint two different pictures of the appropriate way to determine when there is a personal benefit in the absence of a financial benefit.  Given the stark contrast between the two opinions (and between the majority and dissent in Martoma), the importance of Second Circuit law in this area, and the unusual procedural posture involved in overruling such a recent precedent, the Martoma decision may be a candidate for en banc review by the full Second Circuit.

Conclusion

In United States v. Martoma, a divided panel of the Second Circuit overruled the court’s own 2014 decision in United States v. Newman, abandoning the “meaningfully close personal relationship” test and instead creating a new test to define the boundaries of the personal benefit requirement.  If the opinion withstands a potential en banc review, it will be up to lower courts in the Second Circuit to implement the test in a way that gives meaning to the concerns that led the Supreme Court to impose the personal benefit requirement in the first place.

 

*                                              *                                              *

This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its content.  Questions concerning issues addressed in this memorandum should be directed to:

Bruce Birenboim

+1-212-373-3165

bbirenboim@paulweiss.com

 

Geoffrey R. Chepiga

+1-212-373-3421

gchepiga@paulweiss.com

 

Charles E. Davidow

+1-202-223-7380

cdavidow@paulweiss.com

 

Andrew J. Ehrlich

+1-212-373-3166

aehrlich@paulweiss.com

 

Michael E. Gertzman

+1-212-373-3281

mgertzman@paulweiss.com

 

Udi Grofman

+1-212-373-3918

ugrofman@paulweiss.com

 

Brad S. Karp

+1-212-373-3316

bkarp@paulweiss.com

 

Daniel J. Kramer

+1-212-373-3020

dkramer@paulweiss.com

 

Lorin L. Reisner

+1-212-373-3250

lreisner@paulweiss.com

 

Walter G. Ricciardi

+1-212-373-3350

wricciardi@paulweiss.com

 

Richard A. Rosen

+1-212-373-3305

rrosen@paulweiss.com

 

Audra J. Soloway

+1-212-373-3289

asoloway@paulweiss.com

 

Richard C. Tarlowe

+1-212-373-3035

rtarlowe@paulweiss.com

 

Theodore V. Wells Jr.

+1-212-373-3089

twells@paulweiss.com

 

Associates Matthew J. Carhart and Jacob R. Fiddelman contributed to this Client Memorandum.

 

[1] United States v. Martoma, No. 14-3599, slip op. at 27–28 (2d Cir. Aug. 23, 2017).

[2] 463 U.S. 646 (1983).

[3] The Supreme Court has recognized two theories of insider trading liability: “classical” and “misappropriation.”   The “classical theory” of insider trading liability applies when a “corporate insider trades in the securities of his corporation on the basis of material, nonpublic information.”  United States v. O’Hagan, 521 U.S. 642, 651-52 (1997).  The “misappropriation theory,” by contrast, applies when an investor “misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.”  Id. at 652.

[4] Id. at 664.

[5] Id. at 662.

[6] Id.

[7] 773 F.3d 438 (2d Cir. 2014).

[8] Id. at 452–53.

[9] Id. at 452.

[10] Additionally, in Newman, the Second Circuit addressed a related question that is not at issue in Martoma: whether a remote tippee is required to have knowledge of the receipt of a personal benefit by the insider.  Based on its reading of Dirks, the Second Circuit held that “a tippee’s knowledge of the insider’s breach necessarily requires knowledge that the insider disclosed confidential information in exchange for personal benefit.”  Id. at 452.  Going forward, it does not appear that the government intends to challenge this aspect of Newman.

[11] Salman v. United States, 137 S. Ct. 420, 426 (2016).

[12] Id. at 427.

[13] Id.

[14] Id. at 428.

[15] Id.

[16] Id. at 429.

[17] Post-Argument Letter Brief of Appellant at 1, United States v. Martoma, No. 14-3599 (2d Cir. Jan. 17, 2017).

[18] Id.

[19] United States v. Martoma, slip op.  at 25.

[20] Id. at 21.

[21] Id. at 25 (quoting Salman, 137 S. Ct. at 428).

[22] Id. at 25–26.

[23] See id. at 23-24 (quoting Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 378 (2d Cir.

2016).

[24] Id. at 29.

[25] Id.

[26] United States v. Martoma, dissent slip op. at 18 (Pooler, J., dissenting).

[27] Id. at 29–30.

[28] See id.

[29] Id. at 20.

[30] Id.

[31] Id.

The post Guest Post: Divided Second Circuit Panel Overrules Prior Newman Insider Trading Decision appeared first on The D&O Diary.

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A Visit to Warsaw

The D&O Diary’s European assignment continued last week with a stop for meetings in Warsaw, Poland, a city that absolutely confounded expectations. As befits a national capital of a country with a growing economy, Warsaw (in Polish, var-SHAW-vah) is a dynamic, energetic city, and full of history and interesting architecture. It also a surprisingly green city, with a huge, beautiful river and vast parklands.

 

Following World War II, Poland was a part of the Eastern Bloc of countries. The remnants of the country’s Soviet era are still in evidence, although rapidly being modernized or expunged. Warsaw’s roadways still show the Soviets’ penchant for building wide boulevards, which today are choked with traffic, as shown in the first picture below. Many of city blocks still contain Soviet era concrete buildings, but many of those buildings are quickly being replaced by 21st century steel and glass towers. In the center of the city is what is still perhaps the city’s most well-known structure, the Palace of Culture and Science, originally dedicated to Josef Stalin. (The locals call it by a name that refers to a specific part of Stalin’s anatomy.) The building is still the tallest building in Poland, although the encroaching modern office towers seem to be giving it a run for its money.

 

Aleje Jerozolimskie, a typically wide boulevard in Warsaw

 

 

The Soviet-era Palace of Culture and Science

 

 

A view of the Palace of Culture and Science from the River

 

The busy streets and the transformation from the Soviet era are consistent with my expectations. One characteristic part of the city that I did not anticipate is how much green space the city contains. On my first full day in the city, I walked to the Łazienki Krowlewskie (Royal Baths) park, about a mile south of my hotel. I had intended just to have a quick look, but it proved to be such a beautiful park that I wound up staying and exploring for the better part of the afternoon.  One of the most striking features in the wooded, 200-acre park is the baroque 17th century Palace on the Isle, which served as a summer residence for Polish monarch. The park also includes a famous sculpture of Poland’s most famous composer, Frederik Chopin. It was, in fact, a perfect late summer day, well-suited for wandering around in the park.

 

 

The Palace on the Isle in the Łazienki Park

 

 

The Chopin Monument in Łazienki Park (the statue depicts Chopin under a willow tree)

 

 

A wooded walkway in Łazienki Park

 

 

More of Łazienki Park — it was a beautiful summer day

 

I also visited Warsaw’s famous Old Town. I suspect that most people these days describing their visit to Warsaw would lead with a description of the Old Town. It certainly is beautiful and interesting, but I confess to having mixed feelings about the Old Town. The original structures in the Old Town were all destroyed in the Second World War. What is there now is almost entirely a reconstruction. To be sure, the Varsovians did an amazing job reconstructing their historic center city. Indeed, the success of the old city’s restoration is one of the reasons the Old Town is a Unesco World Heritage Site. The reconstructed old city quarter does have a convincing air of an antiquity.

 

But the hordes of tourists and the plethora of souvenir stores and shops selling ice cream also lend it a bit of a Disney World feel. The beautifully rebuilt older city is certainly an interesting place to stroll around on a summer evening. Or to sit in a sidewalk café and enjoy some of the excellent Polish beer. In fairness, I did in fact lead this post with a picture of one of old town’s most distinctive features – the picture at the top of the post shows the Palace Square, with the Sigismund Pillar on the left (memorializing Sigismund III, the first Polish monarch from the Swedish Vasa dynasty).

 

Old Town Market Square

 

 

A view in the New Town area, looking toward the Barbican

 

 

The Warrior Mermaid, a symbol of Warsaw (and apparently one of those rare river mermaids)

 

One of the things I wanted to do while I was Warsaw was to have a look at the Vlatava River, and also to have a view of the city from the far side of the river. It proved to be more difficult than I had anticipated to get to the river – a wide, busy roadway divides the city from the river. I finally made my way to the riverside and then crossed over a busy bridge to have a look back at central Warsaw from Praga, on the far side of the river. It was here, in Praga, just across the river from Warsaw, that the Soviet army stopped in August 1944, when the Polish resistance Home Army rose up against the Nazi occupiers. The Soviet Army deliberately held back from aiding the Poles; the last thing in the world Stalin wanted was an independent and effective force on the ground in Poland. He was content to let the Nazis eliminate the Home Army.

 

To the surprise of both the Nazis and the Soviets, the Home Army fought valiantly and effectively, and it took the Nazis much longer than anyone anticipated to put down the rising. Hitler was so infuriated that that when the last of the resistance forces finally capitulated, he ordered the  Nazi forces to destroy the remaining city – a task the Nazi troops completed with a grim effectiveness. In an era full of tragedy, the doomed ’44 Rising is among the most tragic.

 

 

The Vlatava River, with the National Stadium on the left.

 

 

A view of Warsaw from the far side of the river, in Praga. This is how close the Soviet army was during the ’44 Rising; yet they held back and did nothing to aid the insurgents.

 

 

The bravery of the resistance fighters lives on in Polish memory; the interlaced Kotwica mark, the Home Army’s symbol, can be found today on walls throughout the city. The symbol combines the letters P and W, to symbolize the phrase Polska Walcząca (“Fighting Poland”).  The Soviet occupiers banned the symbol, but it lived on and it continues to serve as a sign for a variety of political causes.

 

The Kotwica symbol

 

Another vestige of the city’s complicated 20th century history is that memorials to the terrible events can be found throughout the city. Across the street from my hotel was a fascinating photo exhibit with huge photo enlargements of faces of the resistance fighters. It takes your breath away to realize how young they were. In the park next to my hotel was a huge painting depicting the civilian evacuation from the city at the outset of the rising; the artist was a small child at the time of the evacuation. In another part of the city, there is a dramatic memorial to the Warsaw Rising, and nearby a memorial to the separate 1943 Ghetto Rising.

 

 

 

 

 

 

 

 

At the end of the Second World War, the city was left in rubble. Much of its population was gone – dispersed or dead. Over 45 years as part of the repressive Soviet bloc followed. With the city’s complex and tragic past, it is a wonder to see what it has now become. The modern office buildings, the sleek new subway system, and the youthful crowds that throng the street all testify to dynamic present and a promising future.

 

Because of the beautifully rebuilt old town, because of its parks, because of what the city has become, Warsaw is a great place to visit. But Warsaw is also a great place to visit because of what it represents as a symbol of resilience and courage.

 

Respect, Warsaw. Respect.

 

More Pictures of Warsaw: 

 

Nowy Świat, which runs through the city’s historic district and connects the royal palaces.

 

 

This is the Hotel Bristol, where I stayed during my visit. Great Old Europe hotel. Feels like it is right out of a Bond movie. Perfect location on the Royal Way, about 500 yards from the Castle Square. The Old World feel is genuine; the hotel is one of the few buildings that survived the war. Only problem, as I learned during my stay, is that the reason it survived reportedly is that it was the residential headquarters for the top Nazi officials (I am just quoting the guidebooks for this information.) For what it is worth, it has a very nice bar and a great fitness center.

 

 

The Saxon Garden, another of the city’s many beautiful parks.

 

 

The city’s awesome Metro. The sleek new No. 2 line (pictured) just opened in 2015.

 

 

For anybody planning a trip to Warsaw in the near future, here’s a tip you won’t find in the guidebooks. Along the Vlatava River, at the brand new Nauki Kopernick Metro station, there are a bunch of informal beer gardens. A couple of dozen food trucks, a ton of buskers, and a relaxed, unpretentious atmosphere. Perfect place to watch the evening gather on a warm summer evening. Go now; in a year or two, I am sure it will all be replaced by a Ritz-Carlton Hotel with an upscale mall attached.

 

 

The mermaid in the old town square is a facsimile, for tourists. The real Warrior Mermaid statute is down by the river, as pictured here. The sculptor’s model was in fact an active participant in the ’44 Warsaw Rising. This is a serious Warrior Mermaid statute, friends.

 

 

Pirogis, it’s what for dinner.

 

 

Sunset at Castle Square.

 

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Fan Was Expecting Goldfinger, but Instead Got Oddjob: Woman Sues Movie Studios over James Bond Movie Collection

James Bond Goes to CourtJames Bond is best known for the cars, the adventures, the spy gadgets, and the villains he (generally) defeats by the end of the movie. And, like most big-screen heroes, James Bond is only as good as the unique adversaries, from men with golden guns to odd fellows, he faces in the 26 24 all the franchise’s movies. One particular adversary however, Mary Johnson, a self-described Bond fan, may be James Bond’s biggest rival to date.

In April, Johnson filed a class action suit in Washington State against several entertainment companies that own the rights to the James Bond franchise, including MGM Holdings, Inc. and 20th Century Fox Home Entertainment. Johnson claims that she and other members of the class purchased two James Bond DVD boxed sets that promise: “[ALL] the Bond films gathered together for the first time in this one-of-a-kind boxed set – every gorgeous girl, nefarious villain and charismatic star from Sean Connery, the legendary actor who started it all, to Daniel Craig.” (Emphasis Added). The problem is that the sets don’t include 1967s Casino Royale or 1983s Never Say Never Again films. Some Bond connoisseurs would argue that the two excluded films are not part of the franchise because Casino Royale was a spoof produced by a different movie studio and Never Say Never Again was the result of a complicated rights dispute between MGM and the movie’s writer, Kevin McClory. Nevertheless Johnson claims, the fact that the box sets don’t include literally “all” of the franchise’s movies, the use of the word is deceptive and therefore constitutes a violation of Washington’s Consumer Protection Act. Johnson seeks class certification, an award of damages, including punitive damages, and court costs and attorneys’ fees.

The studios filed a motion to dismiss where they argued that “no reasonable consumer would expect that a box set would contain films that are not included on the list of titles clearly printed on its packaging.” In a pun-filled order, Chief U.S. District Court Judge, Ricardo Martinez, dismissed some of Johnson’s claims while letting other claims stand. “At this time, the Court will ‘Live and Let Die,’” Martinez wrote. Notably, Martinez allowed Johnson’s claim, that the boxed-sets’ marketing violates consumer protection laws, to move forward. Part of the order asserts that “the Court must leave it to the jury to determine whether the box-sets’ representations establish an affirmation of fact or promise of a complete compilation of James Bond movies.” The order further asserts that “a jury must determine whether a reasonable person would expect [the 1967] ‘Casino Royale’ and ‘Never Say Never Again’ to be included in a complete set of James Bond films.” The rest of the order deals with whether the parent companies properly belong in the suit and whether the case is ripe for class action.

Johnson’s false advertising claims may not have the same devastating effects as Goldeneye’s electro-magnetic orbital weapon with which Alec Trevelyan planned to steal money from the Bank of England. But the lesson of the case is that “all” may not always mean “all” to the reasonable consumer but there is some risk in using that word even when it is arguably literally true. The line between mere puffery and deception remains, at best, blurred.


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Ninth Circuit Affirms That Invasion of Privacy Exclusion Precludes D&O Insurance Coverage for TCPA Claim

As litigation under the Telephone Consumer Protection Act (TCPA) has proliferated in recent years, one of the recurring questions has been whether the defendants have insurance coverage for these kinds of claims. The insurance questions have in turn generated insurance coverage litigation, primarily with respect to the defendants’ CGL insurance policies, but also with respect to their D&O insurance policies as well. One closely watched recent case involved a D&O insurance dispute arising out of a TCPA claim against the Los Angeles Lakers. The district court had held that the Lakers’ D&O insurance policy did not cover the TCPA claim and the Lakers’ appealed. On August 23, 2017, in a decision that is sure to attract both attention and perhaps further skirmishing on these issues, a divided Ninth Circuit panel affirmed the district court’s holding, concluding that the invasion of privacy exclusion in the Lakers’ D&O insurance policy precluded coverage for the claim. The Ninth Circuit’s opinion can be found here.  

 

Background

Congress passed the TCPA in 1991 in order to provide consumers protection against unsolicited telemarketing using various electronic technologies such as fax machines, automatic dialing machines and text messaging. The TCPA includes a private right of action under which a plaintiff may recover the greater of actual monetary loss or $500 per violation. A could may treble the amount of damages in the event of a “willful or knowing” violation.

 

In the past, companies hit with these TCPA lawsuits have sought coverage for the claims under their CGL policies. However, many newly issued CGL policies have TCPA exclusions. As TCPA-related claims exclusions have become more common in CGL policies, TCPA claim defendants have sought coverage under other kinds of policies, including under their D&O insurance policies.

 

In attempting to establish coverage under their D&O insurance policies, the policyholders have run into impediments. In particular, carriers have attempted in argue that the TCPA claims are precluded from coverage under the personal injury claim exclusion typically found in most private company D&O insurance policies, and in particular in the “invasion of privacy” provision of the personal injury claim exclusion. These exclusions typically state, among other things, that the policy will provide no coverage for loss in any claim “based upon, arising out from, or in consequence of … invasion of privacy.”

 

The Los Angeles Lakers’ TCPA Claim and Insurance Dispute

A Lakers fan had claimed that the team violated the TCPA when, after the fan had texted a message to the team during a fan promotion, the team them texted him (and other fans) a promotional message. The fan’s lawsuit ultimately was dismissed on the grounds that in sending his initial message to the team, the fan had consented to the text. The team sought coverage for its defense expenses incurred in defending the claim. The insurer denied coverage for the claim in reliance on the “invasion of privacy” language in the policy’s personal injury exclusion. Coverage litigation ensured.

 

In an April 17, 2015 opinion (here), Central District of California Judge Dolly Gee granted the insurer’s motion to dismiss the coverage action, holding that coverage for the TCPA action was precluded by the “invasion of privacy” provision in the Lakers’ D&O insurance policy’s personal injury exclusion. In reaching this decision, Judge Gee expressly referred to the prior case law interpreting the CGL policies’ coverage provision, in which the various courts had concluded that a TCPA claim represents an “invasion of privacy” claim within the meaning of the CGL policies advertising injury provision. Judge Gee also cited prior federal district court decisions (including a prior decision relating to the question of D&O insurance coverage for a nearly identical TCPA claim filed against the Lakers’ cross-town rivals, the Los Angeles Clippers) had also found that the “invasion of privacy” provision in D&O insurance policies’ personal injury exclusion precluded coverage for the claims.

 

The Ninth Circuit’s Opinion

In an August 23, 2017 opinion written by Judge N. Randy Smith, with a concurring opinion by Eastern District  of Michigan Judge Stephen Joseph Murphy, III (sitting by designation), over a dissent by Judge Richard C. Tallman, a divided panel affirmed the district court’s opinion that the policy’s invasion of privacy exclusion precluded coverage for the underlying TCPA action.

 

In his opinion, Judge Smith wrote that because a claim for a violation of the TCPA is “inherently an invasion of privacy claim,” the insurer correctly concluded that the underlying TCPA claim fell under the policy’s broad invasion of privacy exclusion. In his concurring opinion, Judge Murphy said that he thought the case could have been decided on narrower grounds. He said that the allegations in the underlying action were sufficient to determine that the claims arose from an invasion of privacy and the Court did not need to hold more broadly that a TCPA claim is inherently an invasion of privacy claim.

 

Judge Tallman wrote in dissent that the underlying action sought recovery based on an alleged violation of the TCPA, and did not seek recovery based on invasion of privacy, and accordingly he would reverse the district court’s order dismissing the Lakers’ claims.

 

Discussion

The Ninth Circuit’s opinion establishes that the coverage for this claim is precluded under the invasion of privacy exclusion in the Lakers’ policy. But that may be about all the ruling decides. The court’s division over the reasoning leaves ample grounds for further dispute in other cases on the question of whether or not other insurers’ D&O insurance policies provide coverage for TCPA claims.

 

In particular, the Ninth Circuit panel split on the issue of whether or not a TCPA claim inherently represents a claim for invasion of privacy. There was no majority consensus on this issue; indeed the three-judge panel split three ways on this issue, meaning that this issue remains undecided in the Ninth Circuit.

 

The Ninth Circuit panel’s decision does seem to mean at least that the question of whether or not a particular TCPA claim represents a claim for invasion of privacy at least is a factual question for the court to decide. However, in view of the dissenting opinion’s view that a TCPA claim does not represent an invasion of privacy claim, there would appear to continue to be grounds on which insureds could continue to try to argue that their D&O policy’s invasion of privacy exclusion does not preclude coverage for a TCPA claim.

 

At the time that the Lakers filed their appeal, there had been some hope (as discussed here) that the Ninth Circuit’s ruling in this case would provide some clarity on the recurring questions regarding D&O insurance coverage for TCPA claims. Unfortunately, because of the split nature of the Ninth Circuit’s opinion, there would appear to be sufficient grounds for continued division and contention on these issues. The likelihood is that even though the Ninth Circuit affirmed the district court’s opinion that the policy exclusion applied to preclude coverage disputes regarding potential coverage for these kinds of claims will continue.

 

It should be noted that the question of D&O insurance coverage for TCPA claims is largely restricted to private company policyholders. In a TCPA action, the claimants typically name as defendants only the corporate entity that allegedly violated the statute. Entity coverage under public company D&O insurance policies is limited to claims for violations of the securities laws. So if the defendant company is a public company and no individual directors or officers are named as defendants, there will be no coverage for the claim under the company’s D&O insurance policy simply because the claim does not fall within any of the policy’s insuring provisions. Entity coverage under a private company D&O insurance policy is broader than under a public company D&O insurance policy, and so the claim arguably does fall within the entity coverage afforded in a private company policy. However, the question is whether the “invasion of privacy” exclusionary provision precludes coverage.

 

The “invasion of privacy” provision in the private company D&O insurance policy’s personal injury claim exclusion is already under challenge now in other contexts, out of concern that the provision could have the unintended effect of precluding coverage under a D&O insurance policy for a data breach-related D&O insurance claim. Questions about scope of the preclusive effect of the invasion of privacy provisions are further highlighted by these questions about the scope of coverage available under the D&O insurance policy for TCPA-related claims.

 

Insurers may well contend that they do not intend to provide coverage for TCPA claims, and I don’t dispute an insurer’s right to choose to exclude coverage for claims for which it does not want to provide insurance. However, in my view, when insurers seek to preclude coverage for specific classes of claim, they should expressly state that they will not cover the claims class – that is, in this context, expressly state that TCPA claims are excluded from coverage. That not only provides further clarity but it also allows the possibility of trying to negotiate off the policy exclusion as part of the policy placement process.

 

In any event, even outside of the TCPA claim context, claims actually or arguably alleging invasion of privacy violations could become an increasingly important part of the D&O claims environment. The invasion of privacy provision could become an increasingly important coverage determinative provision. Insurers likely will face increasing pressure for coverage carve-backs to the policy exclusion, particularly to provide clarification that the exclusion applies only to claims against the entity and not against individuals, or even that the exclusion does not apply to defense expenses.

 

Special thanks to several loyal readers for calling my attention to the Ninth Circuit’s opinion.

 

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