A Recent Folly by General Mills Exemplifies the Need to Consider the Business Consequences of All Legal Decisions

Before a legal decision is employed, it must be thoroughly vetted from multiple perspectives (including a determination of whether the decision comports with the company’s business goals).  Otherwise, unintended business consequences could overshadow the intended benefits of a legal decision.  A recent misstep by General Mills exemplifies this concept.  General Mills, like many other American companies, prefers to resolve consumer disputes through cost-effective negotiations and arbitrations – as opposed to engaging in traditional litigation.  Accordingly, General Mills recently rolled out a new policy that required all customers who used its website, subscribed to its email newsletters, downloaded or printed a digital coupon, entered a sweepstakes or contest, and/or redeemed a promotional offer to settle their disputes with General Mills “by informal negotiations or through binding arbitration.”

Although it is uncertain whether such a policy would even be upheld if it were challenged in court, what is clear is that General Mills did not anticipate the negative business consequences brought on by this seemingly innocuous legal policy revision.  Indeed, shortly after the policy change was made public, the New York Times ran an article (entitled “When ‘Liking’ a Brand Online Voids the Right to Sue”, Stephanie Strom, April 16, 2014) questioning the propriety of General Mills’ new policy.  This New York Times article led to a significant consumer backlash against General Mills, which ultimately caused the company to retract its revised policy.  In a blog post entitled “We’ve listened – and we’re changing our legal terms back” General Mills apologized to its customers, stating that: “We’re sorry we even started down this path.  And we do hope you’ll accept our apology.”

Just as General Mills learned, every legal decision must be evaluated from various angles in order to ensure, among other things, that the decision is consistent with your company’s business goals.  It is much better to make this determination at the onset rather than having to backtrack from unexamined decisions that could ultimately cost your company significant money and goodwill down the road.

At Genova Burns, we stand at the intersection of law, government, and business and pride ourselves on always evaluating decisions from numerous perspectives to ensure that our clients receive the highest quality legal advice.  For more information about how Genova Burns can assist your company in achieving its legal, business and political goals, please contact Kathleen Barnett Einhorn, Director of Complex Commercial Litigation.

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Section One’s Shining Moment: A new antitrust lawsuit threatens the NCAA

This year, the term “March Madness” meant more than basketball tournaments to the National Collegiate Athletic Association, its conferences and member schools.  On March 17, 2014, a group of college basketball and football players filed a federal class-action lawsuit in New Jersey against the NCAA and its five “power” conferences (the Southeastern, Big Ten, Pacific-12, Atlantic Coast, and Big 12).  The suit, Jenkins v. NCAA, alleges violations of Section 1 of the Sherman Antitrust Act, and seeks to remove the cap on compensation that colleges and universities can provide to their Division I basketball and Football Bowl Subdivision players.  The rules targeted by the suit also allow the NCAA to deny athletic eligibility to individual players, and to sanction or boycott its member schools who do not comply with the NCAA’s rules regarding athlete compensation.

The Jenkins plaintiffs assert that these rules are really a price-fixing and boycotting scheme that violates the Sherman Act, which broadly prohibits competing business entities from entering into agreements – “horizontal agreements” – that restrain trade.  The Supreme Court has declared horizontal maximum price-fixing to be per se illegal under Section 1, meaning the practice will be deemed illegal without further inquiry into its reasonableness or its beneficial effects.  Group boycotts have also been found per se illegal by the Supreme Court under Section 1, but only when the boycotting entities have market power; otherwise courts will apply the “rule of reason” approach which permits inquiry into the purpose of the boycott and its effects on competition.

The NCAA is no stranger to antitrust allegations under Section 1.  In a seminal case, the Supreme Court in NCAA v. Board of Regents, 468 U.S. 85 (1984), held that the NCAA’s then-current television plan, which limited the number of times college football teams could appear on television each season, violated Section 1.  And two pending Section-1-based class-actions against the NCAA have already garnered significant publicity.  The first case, filed in 2009 by former UCLA basketball star and former New Jersey Net Ed O’Bannon, confines its arguments to compensation derived from the use of players’ names, likenesses and images by broadcasters.  The second case, filed weeks ago by former University of West Virginia running back Shawne Alston, confines its arguments to the NCAA rules that cap the value of full athletic scholarships below the full cost of attendance.  The Jenkins case generally makes the same arguments and allegations as the O’Bannon and Alston suits, but does not seek monetary damages on behalf of the entire class, and seeks to invalidate the overall limit on compensation for athletes (unlike those prior suits).

Jenkins may be the most direct legal challenge to the NCAA’s amateurism model yet, but it faces significant obstacles.  Most importantly, although the Supreme Court invalidated the NCAA’s television plan in Board of Regents, the Court also stated that some horizontal restraints on competition, including requirements that athletes attend classes and remain unpaid,  were “essential” to the availability of the NCAA’s product – intercollegiate athletic competitions.  Therefore, the Court held that the rule of reason, instead of the per se rule, should be used to evaluate the NCAA’s policies.  Employing the rule of reason, multiple federal courts applying Section 1 have upheld NCAA policies regarding individual and institutional sanctions.

The Jenkins plaintiffs will likely have to argue that the Supreme Court’s statement regarding the essentiality of not paying players was dicta that does not bind lower courts, and that the ever-increasing amount of money flowing into big-time college football and basketball justifies a thorough evaluation of whether caps on athlete compensation support or undermine competition in big-time college sports.  The O’Bannon plaintiffs used similar arguments to successfully avoid dismissal of their claims last November, and even to partially prevail on summary judgment in April of this year – two rulings on which the plaintiffs in Jenkins will heavily rely.  However, questions regarding what rules the NCAA can promulgate in the name of promoting amateur athletics are very real, and likely cannot be answered by simply pointing to escalating coaches’ salaries, valuable broadcast contracts and licensing agreements, or even the recent National Labor Relations Board ruling that football players at Northwestern University qualify as university employees and can unionize.

The NCAA may be the favorite in its matchup against the players in this newest case.  But in litigation, as in March Madness, anything can happen.

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Recent Supreme Court Decision Undermines SLUSA Security for Secondary Actors in Ponzi Schemes

The Supreme Court’s February 26, 2014 decision in Chadbourne & Parke LLP v. Troice, et al., has eliminated a potential protection for secondary actors (such as investment advisors, law firms or insurance brokerages) that allegedly assist a fraudster in a Ponzi scheme.

Reviewing four consolidated class actions by victims of Allen Stanford’s Ponzi scheme, the Court narrowly interpreted the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) to apply only to frauds directly connected to purchases of securities “traded nationally or listed on a regulated national exchange,” known as “covered securities.”  SLUSA preempts state or common law based class actions relating to “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.”  Stated another way, when SLUSA preemption is found, secondary actors are protected from state law based class action suits.  The question before the court was just how “connected” to the covered securities did the misrepresentation or omission need to be for SLUSA protection to apply.

The answer, and crux of the Courts decision is that a fraudulent misrepresentation or omission is not made in connection with a “purchase or sale of a covered security” unless it is material to a decision by one or more individual (other than the fraudster) to buy a covered security.  In the case of Stanford’s Ponzi scheme, the uncovered securities sold to investors were represented to be (of course, falsely) backed partially by covered securities.  The Court found that this was too tenuous a connection for SLUSA to apply.

A vigorous dissent by Justice Kennedy (joined by Justice Alito) predicts the narrow interpretation will have two primary consequences – first, that the SEC and litigants will have more difficulty utilizing federal law in obtaining relief from fraudsters; and second, that those whose profession it is to give advice and assistance in investing in the securities market will be subject to “complex and costly state-law litigation based on allegations of aiding or participating in transactions that are in fact regulated by federal securities law.”

While it is still too early to assess the ramifications of the Supreme Court’s decision, what is known now is that the litigation landscape has changed.  Previously, this area of law afforded secondary actors a degree of protection due to the variety of interpretations of SLUSA preemption.  The Second Circuit had previously suggested a test that had been used by some courts to broadly interpret SLUSA preemption.  The Third Circuit, on the other hand, has suggested a narrower reading of SLUSA preemption.  Now, however, the Supreme Court’s guidance eliminates many of the ambiguities in this complex area of law in favor of disallowing SLUSA preemption – and a degree of protection that secondary actors had previously relied upon is lost.

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The First Rule of Bieber Parties: Can You Talk About Bieber Parties?

Although 2014 has thrust Justin Bieber into the legal spotlight for a variety of reasons, the most interesting Beiber-related legal question surrounds a party he threw at his California home in November, 2013. While the party was probably memorable for the guests who attended, the conditions placed on their attendance is what is most remarkable. Guests and workers at the party were required to sign a non-disclosure agreement (the “Bieber Contract”) in which they agreed not to text, tweet, record, or even talk about what they witnessed at the party. Any breach of those obligations would be punishable by a $3 million fine. The Bieber Contract was meant to protect the privacy of Bieber and his associates. But would such a contract be enforceable under New Jersey law?

Probably, but without the $3 million penalty, which New Jersey courts would likely find to be “unconscionable” – so one-sided or unjust that it “shocks the conscience.” In determining unconscionability, New Jersey courts tend to focus on two factors: unfairness in the formation of the contract; and unfairness or one-sidedness in the terms of the contract. New Jersey allows the defense of unconscionability to succeed based on a strong showing of one factor, even if the other factor is only marginally present.

Here, there is a strong argument for non-enforcement of the penalty in the Bieber Contract, due to its unconscionability. First, we should note that the Bieber Contract is a “contract of adhesion.” Adhesion contracts differ from other contracts in that they are typically presented on a take-it-or-leave-it basis, in a standardized form, and without the opportunity for the “adhering” party to negotiate its terms. It can be argued that at the time of execution, the Bieber Contract was thrust upon potential attendees, who likely did not have an opportunity to consult with legal counsel before signing, and likely received it in a setting that was not conducive to reasoned thought regarding the waiver of substantial legal rights or the undertaking of substantial legal obligations. Adhesion contracts necessarily involve indicia of unfairness in their formation.

Substantively, the Bieber Contract subjects even the most innocuous tweet to a $3 million fine. Although parties to a contract are generally free to set forth the amount to which either party will be entitled if the other party breaches, such a “liquidated damages” provision must be set at an amount that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulty proving loss. A provision fixing unreasonably large liquidated damages is in reality a penalty and unenforceable. Because it would be difficult for Beiber to prove that $3 million dollars fairly represents his damages from one tweet, conversation or photo, this liquidated damages provision would be stricken.

However, New Jersey law permits courts to sever unconscionable provisions from otherwise enforceable contracts. Therefore, the fact that the $3 million liquidated damages provision may be unconscionable will not necessarily render the rest of the Bieber Contract unenforceable. Indeed, the subject matter of the Bieber Contract does not otherwise present obstacles to the contract’s enforceability. Parties are free to contract away their right to freedom of speech under the First Amendment, and their rights to “works made for hire.”

Without the $3 million fine, the Bieber Contract is little more than an agreement holding the signer generally liable for damages that he or she causes by the unauthorized publication of information about Bieber and his associates. Bieber hardly needed a contract to so bind his party guests and workers; any person, Bieber-Contract-signer or not, would be liable under the law for any damage they inflict on others for invasion of privacy, absent some affirmative defense.

While there certainly may be lots of juicy questions you may want to ask those who attended or worked at Bieber’s party, don’t ask whether they got more than they bargained for. We can assure you that they did.

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Supreme Court’s Opinion Reiterates Principle that Patent Holders Bear Burden of Proof in Infringement Actions

The Supreme Court, in a unanimous decision issued on January 22, 2014, held that the burden of proof in patent infringement actions falls upon the patentee, regardless of whether the patentee is the moving party in the infringement action.

In Medtronic Inc. v. Boston Scientific Corp., Medtronic, Inc., a designer and seller of medical devices, entered into a license agreement with Mirowski Family Ventures, LLC with respect to certain patents held by Mirowski. The license agreement permitted Medtronic to utilize certain patents held by Mirowski in exchange for royalty payments. In 2007, Mirowski provided Medtronic with a notice of infringement alleging that seven new Medtronic products violated two Mirowski patents. Medtronic responded by bringing a declaratory judgment action seeking a declaration that Medtronic’s products did not infringe Mirowski’s patents and that the patents were invalid.

The District Court held that the burden of proof in a declaratory judgment action falls on the patentee to prove that its patent rights have been infringed upon. The Court of Appeals for the Federal Circuit held that the burden should shift to the moving party because when a patentee is the defendant they are unable to bring an infringement action.

The Supreme Court reversed, specifically noting the extensive case law supporting the patentee’s burden of proof, stating that it was “well established that the burden of proving infringement generally rests upon the patentee”.

In addition, Justice Breyer noted that shifting the burden of proof away from the patentee could create “unnecessary complexity” and cause confusion as to what theory a patentee’s infringement claim lays upon because the patentee is best equipped to state how an alleged infringer has infringed on an existing patent, whereas the alleged infringer would need to “negate every conceivable infringement theory” as part of their proof that they did not violate the patent.

In addition, the Court stated that shifting the burden away from the patentee would move against the basic purpose of the Declaratory Judgment Act. The Court held that were it not for the declaratory judgment procedure, the alleged infringer would be forced to either continue the alleged breach, forcing the patent holder to bring an infringement action, or cease the alleged breach and cure.

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New AAA Rules Create Greater Flexibility in Appealing Arbitration Awards

In a groundbreaking step, the American Arbitration Association (“AAA”) and the International Centre for Dispute Resolution have newly enacted the Optional Appellate Arbitration Rules (“Appellate Rules”) which allows for a specific and streamlined procedure for parties to obtain further review of arbitral awards. Effective November 1, 2013, these rules put a serious dent in the rigidity that once was the finality of arbitration awards.

Arbitration has traditionally been the gold star standard in the conservation of judicial resources, representing a process intended to be both efficient and final, in that an arbitration award would only be set aside under extreme circumstances. Both the Federal Arbitration Act and the New Jersey Arbitration Act provide that an arbitration award will only be vacated upon a showing of corruption, fraud, partiality or misconduct, or by showing that an arbitrator exceeded his powers. See, 9 U.S.C. § 10, N.J.S.A. 2A:23B-23.

By allowing for a much broader review of arbitration awards by a AAA appellate panel, the Appellate Rules offer a refreshing alternative to the narrow grounds dictated by both the federal and state statutes, but also complicate the overall goal of efficiency and finality. The Appellate Rules are optional, only invoked upon agreement by the parties. Unlike the strict grounds dictated by the state and federal statutes, appellate arbitrators are authorized to review both questions of law and issues of fact, as a party may appeal on the grounds that the arbitral award is based upon an error of law that is material and prejudicial or determinations of fact that are clearly erroneous. See, Appellate Rules, A-10. These new bases for appeal give litigants additional options to consider when entering into a AAA agreement.

The AAA appellate process is truncated, and can be completed in about three months’ time. Oral argument is permitted only if the Appeal Tribunal deems it necessary, and generally appeals will be determined upon the written documents submitted. Id. at A-15. The parties are mandated to cooperate in compiling the record on appeal and may submit as part of the record the relevant excerpts of the transcript of the hearing, any evidence relevant to the appeal that was previously presented at the arbitration hearing and pre- and post-hearing briefs. The Appeal Tribunal’s written decision is due within thirty days of the last appeal brief. The Tribunal has the authority to adopt the underlying award as its own or substitute its own judgment for the underlying award, but is precluded from ordering a new arbitration hearing or remanding the case back to the original arbitrator(s) for corrections or further review. Id. at A-19(a).

It is AAA’s intention that parties engaged in large, complex cases will make use of the Appellate Rules, as evidenced by the type of record required to be maintained for any appeal, and the costs associated with invoking the Appellate Rules. Pursuant to the Administrative Fee Schedule, there is a non-refundable $6,000.00 fee to be paid by the party seeking appellate arbitration and an additional $6,000.00 administrative fee to be borne by any party filing a cross-appeal. These fees do not include the fees and costs associated with the Appeal Tribunal. Such a requirement has the intended outcome of limiting the adoption of the Appellate Rules to large, complex matters, as well as dissuading frivolous appeals.

The ultimate take-away from the introduction of the Appellate Rules is that review of arbitral awards is now much more flexible, as parties may opt into the Appellate Rules and seek an appeal on the grounds that the underlying award is based upon an error of law or fact. Yet these benefits do not come without costs, and the Appellate Rules are obviously tailored for larger, complex cases. With time, we will be sure to see how these newly enacted Appellate Rules will play out and what their effect will be on the arbitration process.

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