Outside Inhouse Lawyer Blog : New York & Seattle Corporate Dispute Lawyer & Attorney : Grace M. Healy : Outside counsel : King County, Tacoma, Bellevue

I know I didn't do a blog post for more than three months and am now doing my second post in two days.  It isn't a New Year resolution, I simply came across two cases that seem to be of general interest to commercial lawyers.  Today's case shows the importance of the way in which a challenge to an arbitration clause is framed.  Challenge just the arbitration clause, you're in court; the entire agreement, you're in arbitration.

Everyone I know who has purchased a newly constructed home has had some issues.  The plaintiff-purchasers and children in Townsend v. The Quadrant Corporation apparently had more than some.  They sued in Superior Court for outrage, fraud, unfair business practices, negligence, negligent misrepresentation, rescission and breach of warranty.  The seller, and its parent and its parent corporation, moved to compel arbitration, based upon a clause in the purchase/sale agreement.  (The parent corporations’ motion for summary judgment was denied; the decision also discusses when compelling arbitration in waived.)

The Supreme Court ruled – in an opinion signed by four justices – that because plaintiffs challenged the validity of the entire purchase/sale agreement, not just the arbitration provision, the claim would be determined by an arbitrator.  The opinion ruled that the children’s claims, which tracked the parents’ claims would also be arbitrated on the theory of equitable estoppel.  

However, a concurrence/dissent signed by five justices stated that the children’s claims would not be subject to arbitration because they were not signatories to the purchase/sale agreement.

I have no idea or position regarding the merits of these claims, or the facts in this matter, and it is helpful for any business operating in this state to have the court speak on enforceability of arbitration clauses.   But this seems puzzling to me – why isn’t the concurrence/dissent the primary opinion, it is signed by the majority of the justices.  More disturbing is the apparent result that the non-signatory parent corporations are going to arbitration, while the non-signatory children will have a court determine these same claims.  I doubt this made anyone happy.

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Here’s a topic for a few law review articles (not this blog). What is the effect, if any, of yesterday’s Supreme Court decision in AT&T Mobility v. Concepcion, on the Washington Supreme Court’s decision in McKee v. AT&T, which struck down a contractual prohibition on class actions?  Here is a blog post I did in 2008 regarding McKee.

Yesterday's case reversed the Ninth Circuit, which had applied California law, but the statements regarding the Federal Arbitration Act and its intent, raise questions for anyone dealing with consumer claims.

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I was taught to expressly include costs and attorneys’ fees in any release or settlement agreement because – if I didn’t -- the opposing party would come back and demand that the client pay those claims on top of the settlement amount. I always did it but, frankly, I thought this was an urban legend. I was wrong -- this issue made it all the way to the Washington Supreme Court. The dispute in McGuire v Bates illustrates the wisdom of using belts and suspenders when drafting agreements.

After a settlement of $2,180 plaintiff asserted that the settlement of “all claims” did not include statutory attorneys fees, which are awarded to a prevailing party in Washington in certain situations. An arbitrator denied this claim; the Superior Court decided plaintiff was the prevailing party and awarded attorneys' fees, costs and interest on the settlement amount.  The Court of Appeals affirmed.  The Washington Supreme Court, in a unanimous decision, reversed and ruled that a settlement of “all claims” includes a claim for attorney fees.

Despite this decision, it seems like a good idea to always expressly include costs and attorney fees in any settlement and release, since one superior court judge and an appellate panel saw this the other way. 
 

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This week’s Ninth Circuit decision in Hyundai Motor V. National Union Fire Ins. reminded me that advertising injury insurance coverage should be considered when a claim – that doesn’t seem to fit under any other coverage -- comes in to a business.

The court ruled that the insurer had a duty to defend Hynudai in a patent litigation because the patent infringement claim involved method of advertising used on Hyundai’s web site. Although the court referred to many other cases where advertising injury coverage had been rejected in patent violation claims, it examined the context of the claim and determined that it was implicated in this case. (A jury had found against Hyundai in the underlying case and awarded the patent holder $34,000,000 in damages. This suggests a pretty large defense bill.)

This claim was decided using California law, but the court noted that California law was essentially the same as that of Washington on this point.

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Responding to discovery requests is expensive, but – in all likelihood -- will cost less than the $8,000,000 default judgment sanction that the Washington Supreme Court reinstated today in Magana v. Hyundai.

This decision is a must-cite for anyone moving for or opposing discovery sanctions. There is a two-judge dissent.

The case – which the court said involves “unique facts and circumstances” -- was commenced in 2000 and arises from an auto accident that took place in 1998. An  $8,000,000 jury verdict was set aside by the Court of Appeals in 2005. Upon remand, plaintiffs requested that defendant update discovery responses prepared in 2000. A motion to compel was filed about three months before the second trial was scheduled to begin.  Documents involving similar problems came to light.

The  trial court determined that the additional documents should have been produced long before the motion to compel. Defendant, apparently, had only reviewed law department files for complaint documents; there were others in defendant’s consumer affairs department. Plaintiffs argued that they were prejudiced in trial preparation; the court agreed, and the sanction was imposed because of false responses, spoliation and substantial prejudice to plaintiffs.

That is a gross simplification of the facts in the opinion.

The bottom line for businesses is: when responding to discovery requests, you must search outside your legal department for responsive documents. In addition, when you think that discovery requests are over-broad (not really a “unique fact or circumstance” in my experience) consider the pros and cons of moving for a protective order instead of simply objecting in your responses and waiting for a motion to compel.

The irony here is that defendant won the appeal of the $8,000,000 jury verdict but has now been assessed with the same judgment, plus an obligation to pay plaintiffs’ attorneys fees and expenses, and, just a guess, there are going to be some insurance issues. Of course, with the additional disclosures, plaintiffs probably think they could have done much better if they had time to get ready for a second trial. 

Whatever, it is crystal clear that Washington courts will not tolerate incomplete discovery responses.
 

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Limited liability companies have only been authorized in Washington since 1994 and there isn’t much case law discussing them or the statutory scheme which authorizes them.  So, any decision discussing LLC law is big news.

Knowing this -- and doing business as a PLLC -- last May, I promptly downloaded a Washington State Supreme Court  decision that discusses whether an LLC may sue and/or be sued after its certificate has been canceled or it has been dissolved.   Chadwick Farms Owners Association v. FHC LLC,  The decision, which involves two distinct fact patterns, is a bonanza for anyone interested in LLC law or who advises clients about it.  The opinion also reviews when the members of an LLC may be personally liable.

However, although the decision is must reading for anyone looking to sue a dissolved LLC, or for the former members of an LLC who want to bring an action (or are concerned about being sued), the discussion and the rulings that the court makes are fairly technical.  Anyone else might find it, well, dry reading, which is why I looked at it on my desktop for almost 90 days before getting past page 2. 

There is a vigorous dissent (it is a 5-4 decision), so it is probably prudent for someone reading the decision to check if the legislature has addressed the concerns in the dissent.

 
 

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The Washington Supreme Court ruled today that Washington follows the Delaware “demand futility” rule for shareholder derivative claims.  The court was answering a certified question in a case filed in the US District Court for the Western District of Washington involving option backdating at  a Washington corporation, In re F5 Networks, Inc.,

Shareholders may bring a derivative suit without making a demand on the board of directors if there is a reasonable doubt that the board could exercise “its independent and disinterested business judgment in responding to demand.”  Reasonable doubt will be present and demand excused if under particularized facts it is doubtful that 1)  the directors are disinterested and independent, and 2) the challenged transaction was the product of a valid exercise of business judgment.

The court reached this holding by analyzing RCW 23B.07.400(2),  the shareholder derivative suit demand provision, and the fact that Delaware courts are well versed in this matter -- more than half of publicly traded corporations and sixty (60) percent of Fortune 500 companies are incorporated in Delaware.

The court also held that the reasoning in Ryan v. Gifford, a Delaware case finding demand futile in an option backdating claim based upon circumstantial evidence, applied to the F5 Networks claim.

Although the opinion only follows Delaware law on the demand futility standard, if the Washington statutory scheme is similar to that of Delaware in another  area – given the reasoning that Delaware courts are well versed in corporate law – it seems reasonable to rely on Delaware case law in cases involving Washington corporations.

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The New York Court of Appeals issued three interesting decisions this morning. One – a libel case – offers an analysis of “clear and convincing” evidence of actual malice.   Often when asked to explain that standard, the response is: “Well, it has to be clear and convincing.”  Or, "it is somewhere between a preponderance of the evidence and proof beyond a reasonable doubt."  Neither explanation is overly helpful.

Today’s decision in Shulman v. Hunderford   discusses the facts necessary for a finding that actual malice has been proven by clear and convincing evidence. The court, which normally only reviews law, not facts, was able to do so because of the libel standard articulated by the Supreme Court in New York Times v. Sullivan  – the statement must be made with actual malice, and the record must be examined to make certain that there is no constitutional violation.  Thus, this is a rare case in which the NY Court of Appeals could do a factual analysis.  It is interesting for citizens of Washington, as well, because there has been talk of the state legislature prohibiting untrue campaign statements.

Plaintiff brought the action alleging libel after he lost a local election. The basis of his claim was a pamphlet circulated on the eve of the election, which said that plaintiff had flagrantly broken the law.  The case went to a jury and defendant was found liable for $100,000 in punitive damages.  The trial court set aside the verdict, the Appellate Division reinstated it, and the Court of Appeals dismissed the action.

The Court of Appeals determined that, to prove libel, the evidence had to show actual malice with convincing clarity.  Because the record failed to show that defendant knew that his statement was untrue, or that defendant had no basis for thinking plaintiff guilty of any legal transgression, the evidence of actual malice was not clear and convincing – even though defendant “could not have believed every word in the statement”.  (That seems to relate to defendant's use of the word "flagrantly.")  Therefore, clear and convincing evidence of actual malice requires a showing that the defendant knew his statement was not true and had no basis for thinking it was true.

Given this ruling, clear and convincing evidence is a pretty stringent standard. 
Granted this is an analysis of whether actual malice is proven in the context of Constitutional free speech, but the clearly convincing standard applies in other civil contexts – such as fraud, which is a pretty common cause of action in commercial litigation.

I’m working on posts about the other two decisions. 

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When using a contract on a printed form, make sure you fill in all of the blanks.  Otherwise, you may be creating a question of fact regarding the meaning of your agreement.

That is the lesson from the Washington Supreme Court’s recent unanimous opinion in Brogan & Anensen LLC v. Lamphiear.  The court ruled that extrinsic evidence should be  allowed to interpret a real estate contract where the form agreement set forth alternatives on the point in dispute, and none of the alternatives was checked.

The transaction was between two restaurant acquaintances, one an elderly man, the other a real estate developer. The elderly man/seller allegedly was told that he would have one year after the sale to stay on the property where his home was located.  The developer gave a real estate sales agreement to the seller, which did not mention that the seller could remain on the property for a year.  The seller was supposedly reassured that it was not necessary for the agreement to have that provision included.  Six months later, the purchaser listed the property for twice his purchase price, and told the elderly gentleman to vacate the property. 

The trial court granted summary judgment to the developer on the ground that the agreement was complete and extrinsic evidence could not be admitted to alter its terms, and the Court of Appeals affirmed.  The Supreme Court disagreed (maybe because this fact pattern doesn’t score very well on the smell test) because the form agreement contained choices for when the property was to be possessed by the purchaser, and next to each of the choices was a box to be checked.  None of the boxes was checked; therefore, the date of possession was ambiguous, and extrinsic evidence should be admitted to define the possession date. 

Whatever the reasoning behind the opinion, it illustrates that filling in the key terms on any form agreement is important. 




 

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This is a quick post on what should be an important decision regarding tort liability in Washington.

Yesterday, the Ninth Circuit certified a question regarding the extent of the economic loss rule to the Washington Supreme Court.  Affiliated FM Ins. Co. v. LKT Consulting Services Inc.  The Washington Supreme Court decision – when it comes – should be an important ruling on the scope of the economic loss rule, which bars tort recovery for purely economic damages, as opposed to damages for personal injury or other property losses.

The action seeks damages as a result of a fire in 2004 which damaged the monorail trains.  The monorail is owned by the City of Seattle, which in 1999 contracted with defendant LTK for a study to identify and repair problems with the monorail trains.  The monorail is actually operated by Seattle Monorail Services (SMS) pursuant to a concession contract with the city.  SMS did not have a contractual relationship with defendant.  Plaintiff, asserting the interests of its insured, SMS, brought this action claiming tort damages as a result of the 2004 fire – alleging that the fire was the result of defendant’s negligent design work. 

The district court dismissed the case finding that the economic loss rule applied.  It analyzed the nature of SMS’s interest and found  that SMS’s interest was akin to a license, rather than a lease, and, therefore, it was seeking damages to its economic interest, rather than for a property interest.   Thus, its tort damage claim was barred by the economic loss rule. 

The Ninth Circuit has now submitted the question to the Washington Supreme Court.  In its order, the Ciruit notes that the Washington Supreme Court has never defined the type of interest in property required for the rule to apply.  The Circuit order seems to focus on whether the economic loss doctrine, which bars tort recovery, requires privity of contract.



 

 

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In a unanimous decision today in Michael V. Mosquera-Lacey, or what the media calls the ‘Cow Bone Case’ the Washington Supreme Court discussed two facets of a Washington Consumer Protection Act claim -- its application to professionals, and the requirement that a CPA claim must impact the public interest.  The plaintiff alleged that the CPA was violated when her periodontist implanted a cow bone rather than human bone during a bone graft.  The court dismissed the claim. 

I'm not sure there is anything new here, but, since, at one time or another, everyone is a consumer and pretty much everyone in "trade or commerce" might have to defend one of these claims, it is an interesting opinion.

The decision first discusses when a claim against a professional is considered to be in trade or commerce as required by the CPA. Professionals are not exempt from the CPA, but, for a claim to be proven, the allegedly unfair or deceptive practice must relate to the entrepreneurial aspects of the professionals' practice -- not to the substantive quality of the services they provided.  In finding that the CPA did not apply, the court noted that the allegedly deceptive act (use of cow bone)  involved plaintiff’s treatment and not the ‘entrepreneurial’ aspects of a practice -- billing, or obtaining or retaining patients, or increasing profits or the number of patients. 

The court also decided that the case did not impact the public interest.  (Maybe the claim doesn’t, but the decision is interesting for anyone who might want to bring or might be faced with a CPA claim.)  A claim may have an impact on the public interest if it is likely that additional plaintiffs have or will be injured in exactly the same fashion.  To decide that, four factors will be looked at:

•    Were the acts in the course of defendant’s business,
•    Did defendant advertise to the public in general,
•    Did defendant actively solicit this plaintiff (because this suggests that others in the public also may have been solicited),
•    And, were there unequal bargaining positions.

Not all of these factors have to be present for a claim to  have an impact on public interest.  Here, bottom line, the dental office did not act in trade or commerce in using some human bone, and the misplant did not impact the public interest.
 

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When I was in law school I clerked for a managing attorney who made his clerks – to our occasional frustration -- obey every procedural rule to the letter.  A case, Cornhusker Casualty Ins. v. Kachman,
handed down by the Washington Supreme Court last month shows that there is merit to strict compliance, even if you think that taking the rule one step further seems more effective.

The question presented by the case was whether a commercial auto insurance policy was effectively cancelled.  The Washington statute required actual delivery or mailing to the insured at its last known address.  Here, the insurer sent the notice of cancellation by certified mail. The letter was not received.  The cancellation was not effective – because the statute uses the term “mailed” not “certified mail”. 

One might argue that certified mail has a better chance of being received than first class mail.  (And, give the sender the comfort of a signed receipt in the file.) But, the court finds that certified mail places a duty on the recipient to either be at home or go to the post office, and is more relevant to the actual delivery option that was set forth in the statute. The bottom line is that the statute required mailing or receipt, neither one was present, and the policy was not effectively cancelled.

Since 2006 the statute has required the insurer to “deliver or mail,” and the court does not state if the change would affect its reasoning.  However, the case illustrates the fact that statutory procedures are to be followed; substituting your idea of an improvement is not a great idea.  


 

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Taking it a step further, in a second asbestos product liability case decided today, Braaten v. Saberhagen Holdings  the Washington Supreme Court refused to hold a manufacturer liable for duty to warn of dangers of exposure to  asbestos in replacement parts that it did not manufacture. 

The products in issue were pumps, which used asbestos packing and gaskets.  The manufacturers did not specify that asbestos packing and gaskets had to be used when the original packing and gaskets were replaced.

The defendant manufacturers did not sell replacement packing or gaskets and plaintiff was not able to sufficiently demonstrate that he was exposed to the original product.  The court noted that even where the replacement products were virtually the same as the original there would be no liability where defendant was not the manufacturer.  This opinion is pretty strong, but maybe there would be a claim for design defect if asbestos containing components were specified by the manufacturer, or, if this didn’t involve asbestos.

The case also refused to impose liability in connection with exposure to the asbestos insulation used around the pumps.

Again, three judges dissented.

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Today, the Washington Supreme Court refused to hold a manufacturer liable for failing to warn of the danger of another manufacturer’s product.  The case Simonetta v. Viad Corporation involved a claim for personal injury as a result of asbestos exposure. Because the plaintiff was exposed to asbestos before 1981, the court decided the case using common law principles of negligence and strict liability rather than the Washington Product Liability Act.

Defendant manufactured and sold an evaporator, which did not contain asbestos but which was encapsulated with insulation (asbestos) when it was used.  In order to maintain the product, the insulation had to be disturbed.  In an extensive opinion, the court ruled that there was no duty to warn of the dangers of asbestos because defendant did not manufacture, supply or sell it.  Liability for negligent failure to warn is limited to those in the chain of distribution of the hazardous product.  Strict liability attaches to the manufacturer of a product.  Here the dangerous product was asbestos not the evaporator.  The opinion is must reading for anyone who wants (needs to) distinguish between strict liability for failure to warn and negligent failure to warn. 

There was a three judge dissent which would have found that plaintiff stated a prima facie case for negligence and strict liability.


 

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Last week, the Washington Supreme Court ruled in St. Paul Fire and Marine Ins. Co. v. Onvia, Inc.  that an insured may have bad faith and Washington Consumer Protection Act claims against its insurance carrier even though the carrier did not have to defend or indemnify -- if the carrier made procedural missteps in deciding that there was no coverage. 

That is correct – the insurer did not have an obligation to defend or indemnify, and the insured still may have a claim for damages.  But, harm and damages must be proven. 

Here, it appears that there was a delay of almost nine months between tender and denial of coverage, during which time the insured defended itself in the litigation and entered settlement negotiations.  Because the duty of good faith toward an insured applies to the handling of the claim, if the claim was handled badly, there may be a claim for procedural bad faith. As for the Consumer Protection Act cause of action, a violation of the investigative requirements of the Washington Administrative Code automatically establishes the first element of a claim under the Consumer Protection Act.  Under the Washington Administrative Code, an insurer has a duty to act promptly in communication and investigation after a claim is tendered.

The message for insureds is to keep track of the efforts made in connection with tender of a claim so that you can prove damages, if necessary.  For carriers, the clock is ticking on handling that tender of claim.
 

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Washington defense counsel had best not breathe a sigh of relief because the statute of limitations on a potential claim has run on the calendar.  On the other hand, plaintiff counsel should not despair because a statute may have been missed.  In Washington, a short stay in intensive care during which a cause of action accrues may toll a statute of limitations.

Plaintiff in Rivas v. Overlake Hospital filed one day after a three-year statute of limitations had run.  Last month, the Washington Supreme Court ruled that the statute of limitations on her medical malpractice claim may have been tolled because of incapacity during four days spent in intensive care during which the cause of action arose.  Defendant offered evidence that plaintiff was alert, oriented and aware of her surroundings at all times.  Plaintiff’s expert countered that she was incapacitated and not capable of understanding legal proceedings during her intensive care stay; her family described her as unresponsive and out of it. 

In reaching its decision, the court analyzed the interaction of the tolling statute  and the Guardianship Act, which the tolling statute states determines incompetency or disability. The Court of Appeals had ruled that plaintiff had not been incapacitated long enough to trigger the tolling statute.  However, the Washington Supreme Court reversed holding that the tolling statute does not require that a party be incompetent or disabled for any minimum amount of time.  A dissent reasoned that the Guardianship Act requires that an inability to manage ones affairs must exist over time for a finding of incapacity.

My knowledge of this case is based on the Supreme Court opinion and dissent.  But, as an aside, although the opinion and the tolling statute are clear that the incapacity must be present when the cause of action accrues, I am having a hard time with the chronology because it suggests that the facts supporting the cause of action led to the incapacity and didn’t necessarily exist at the time that the cause of action arose. I find myself wondering how plaintiff consented to the surgery if she were, indeed, incompetent.  Whether or not she was able to consent seems like pretty important evidence regarding her capacity; however, the opinion doesn’t mention this. 

Anyway, the Washington Supreme Court has ruled, and it would be a mistake to think that this broad reading of incapacity warranting a toll is limited to medical malpractice claims. Why wouldn’t any claim involving a serious injury or trauma implicate this toll?  No matter, there is a good chance that a statute of limitations defense may now create collateral issues, litigation and expense.

 

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For anyone who deals with Washington consumers, the Washington State Supreme Court came down with a decision this week that is not to be missed.  I suspect that the decision’s reach will be debated for some time, but, right now, any business that has a consumer contract with an arbitration dispute resolution clause and/or out of state choice of law provision should look carefully at yesterday’s 35 page opinion in McKee v. AT&T, which stated that a cell phone dispute resolution clause was unconscionable in four different aspects and refused to enforce an arbitration clause that contained those provisions. 

McKee, an AT&T customer, initiated a class action suit in Washington state court relating to a cell phone contract.  AT&T objected for a number of reasons including a dispute resolution paragraph in the agreement that mandated arbitration and that waived any right to start class actions.  Citing Washington’s strong interest in consumer protection and limited contacts with New York, the court refused to apply New York law (which allows contractual waiver of class actions), and found the arbitration provision was substantively unconscionable because it mandated that the arbitration be confidential, prohibited class actions, shortened the statute of limitations, and limited attorney’s fees – only the customer paid them.  The bottom line is that the court refused to sever the unconscionable provisions, and the dispute resolution paragraph was stricken from the agreement because of the taint of the unconscionable portions.

I have no involvement in this case, but, given the tenor of the opinion, the best news for AT&T yesterday was that the court didn’t think it was necessary to reach the issue of whether the agreement was procedurally unconscionable.  The court did not seem particularly impressed with those procedures. 

Anyway, given this decision, sellers or service providers dealing with Washington consumers should take a hard look at their agreements, as well as their procedures for binding their customers or amending their agreements as soon as possible.
 

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