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BlogsLegal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Update: Hopping on the Missouri Bandwagon? Not so Fast Out-of-State Litigants.

May 20, 2019 | Megan Sterchi Lammert

In this March 18, 2019 blog post, we reported on important pending legislation that could substantially change Missouri’s venue rules. In case you missed the news, look no further….

At the beginning of May, the Missouri House passed the venue and joinder bill (Senate Bill 7) by a 100-46 vote. The bill primarily aims to restrict non-Missouri plaintiffs from joining their claims, in the same lawsuit, with those of a Missouri resident, where the non-residents’ claims have no legal nexus to Missouri. Read more here and here.

Next stop? Governor Mike Parson’s desk for signature, which will likely occur based on positive statements he has made about the bill: “[p]assing venue and joinder reform is a huge win and will provide long overdue relief to Missouri businesses that have been taken advantage of by rampant abuse of our state’s legal system….I look forward to signing these positive reforms to improve our state’s competitiveness, strengthen our legal climate, and bring fairness to our courtrooms.” 

Prior to its passage, while the House did not change the Senate’s language, there was not a lack of effort by some opponents in the House. For example, the “innocent seller” provision of the bill caused a bit of an uproar with some members. This provision discourages lawsuits against a defendant whose liability is based only on its status as a seller in the stream of commerce, permitting such a defendant to seek to be dismissed from a lawsuit. Certain House members challenged this provision in light of the current law not divesting a Missouri court of venue or jurisdiction  against  such a defendant in the event of a dismissal that was otherwise proper at the time the lawsuit began. However, Senate Bill 7removes that protection. Opponents of the bill argued that removing the current provision could force a lawsuit naming such a protected innocent seller entity to move to another county or state. Proponents of the bill countered that this was a prudent way to prevent plaintiffs from unnecessarily suing anybody and everybody in the manufacturing and distribution chain.

The House opponents were unsuccessful, Senate Bill 7 was passed.  It will officially become law once it receives the Governor’s stamp of approval.

Illinois Legislature Proposes to Amend the Biometric Informational Act, Deleting Private Right of Action

May 16, 2019 | Laura Beasley

Proposed amendments to Illinois’ Biometric Information Privacy Act “BIPA” are welcomed by employers who have been bombarded with class action lawsuits in Illinois since the Rosenbach decision. SB 2134 provides that any violation resulting from the collection of biometric information by an employer for employment purposes is subject to the authority of the Department of Labor and must be enforced by the Attorney General. The proposed amendments would likely eliminate the influx of class action litigation into our court system, shifting the claims for violations to the Illinois Department of Labor from the State and Federal Courts. 

This is not the only proposed amendment to BIPA, which shows the legislators’ realization of much needed clarification to the Act. HB3024 was introduced to further define biometric identifier as to include electrocardiography results from a wearable device.  

Until the proposed amendments to BIPA are passed, stripping an individual’s right of action and clarifying the definition of biometric identifiers, Illinois employers will likely face a slew of class action lawsuits.  

The proposed amendments to the BIPA are referred to committee but no hearing dates have been set at this time. We will follow the process of the proposed amendments and update this post as necessary.

SCOTUS Strikes Another Blow to Class-Action Claims, Favoring Individual Arbitration

May 13, 2019 | Douglas Hill

A divided United States Supreme Court recently handed down the latest in a series of wins for employers, manufacturers, retailers, and other businesses looking to use arbitration as a means to mitigate the risks of possible class-action litigation. This time, in Lamps Plus, Inc. v. Varela, the Supreme Court overturned the Ninth Circuit Court of Appeals, finding that an employer could not be compelled to arbitrate similar claims by its employees on a class-wide basis, even though its employment agreement was ambiguous as to whether the arbitration of similar claims be conducted on a class-wide basis, instead of individually. 

I.                    A clear, albeit controversial, trend in favor of individual arbitration

Arbitration agreements, which are strongly favored under the Federal Arbitration Act (“FAA”), can be a powerful tool for potential class-action defendants, both to mitigate the risks of potential exposure and to make those risks more predictable. But a contract is only useful to the extent it can be enforced. Fortunately for potential defendants, there has been a string of Supreme Court decisions in recent years empowering businesses to use arbitration clauses to narrowly define the procedures by which class-wide claims can be asserted. 

These decisions have been controversial, and most have been decided along roughly the same ideological divide. But there has been a clear trend in favor of the enforceability of arbitration agreements that limit or exclude class-wide arbitration actions.

For example, Stolt-Nielsen S.A. v. AnimalFeeds International Corp. was a 2010 case in which the Supreme Court concluded that silence was no substitute for the requisite “affirmative consent” to class arbitration, meaning that class-wide arbitration cannot be compelled based on an agreement that is simply silent as to the availability of class-wide remedies.   

The following year, in AT&T Mobility LLC v. Concepcion, the Supreme Court found that the FAA preempted a California statute providing that any class-action waiver in a consumer contract was unconscionable and, therefore, unenforceable. This 5-4 decision held the state statute was inconsistent with the FAA’s “overarching purpose” of ensuring “the enforcement of arbitration agreements according to their terms, so as to facilitate informal, streamlined proceedings.”

Then in the 2013 case of American Express Co. v. Italian Colors Restaurant, SCOTUS rebuffed another attempt to invalidate contracts that affirmatively waived the right to class arbitration. There, the Second Circuit had found a class-action waiver in American Express’s merchant agreement to be unenforceable, on the grounds that individually arbitrating each claim would be prohibitively expensive, since the costs of the arbitration would almost always exceed the potential recovery on any one claim. On appeal, a divided Supreme Court found that this sort of practical analysis was beyond the courts’ authority and ran counter to the principle, embodied in the FAA and recent case law, that parties should be free to agree to arbitrate, or not, as they see fit.

And just last year, in Epic Systems Corp. v. Lewis, the high court—once again split 5-4 along ideological lines—found that the National Labor Relations Board had overstepped its authority by finding that the National Labor Relations Act’s protection of employee “concerted activities” taken for their “mutual aid or protection” gave employees the right to pursue class claims and displaced the FAA in interpreting arbitration agreements between employers and employees. Recognizing that whether to arbitrate on an individual or class-wide basis is one of the “fundamental attributes” of an arbitration agreement’s character, the majority held that class-action waivers are just as enforceable in employment agreements as in any other arbitration agreement.

II.                  The recent Lamps Plus decision

This brings us to the recent Lamps Plus case, decided on April 24, 2019. It arose from a corporate data breach in which a hacker gained access to the personal financial and tax information of 1,300 company employees. Many of these employees had been required by the employer to sign contracts at the start of their employment, each of which included a clause requiring disputes regarding their employment to be submitted to binding arbitration. The arbitration language, however, was ambiguous as to whether similar claims would be arbitrated in separate proceedings or together, on a class-wide basis.

Frank Varela was one of the employees whose personal information had been compromised in the data breach, and he filed a civil lawsuit in the Central District of California seeking to assert claims under state and federal law, both individually and as a representative of a putative class of similarly situated employees. The employer moved to dismiss the civil case and to compel arbitration, specifically requesting that arbitration be on an individual rather than class-wide basis.

The trial court granted the employer’s motion to dismiss, but its order specified that arbitration would proceed on a class-wide basis. The employer appealed to the Ninth Circuit, which affirmed the trial court’s ruling, reasoning that ambiguities in the employment agreement—which was mandatory for the employees and was drafted exclusively by the employer—should be construed against the employer and in favor of the employees’ right to assert claims as a class.

The Supreme Court granted certiorari and struck down the lower courts’ rulings. Chief Justice Roberts authored the majority opinion and was joined by the court’s four other conservative-leaning justices (Thomas, Alito, Gorsuch, and Kavanaugh). The remaining four justices each filed dissenting opinions.

The court accepted the Ninth Circuit’s conclusion that the arbitration clause was ambiguous as to whether arbitration would be conducted individually or on a class-wide basis. Even though the agreement never specifically mentioned class-wide proceedings, some of its language—for example, its statement that arbitration would be “in lieu of any and all lawsuits or other civil legal proceedings”—was “capacious enough to include class arbitrations” as a potential remedy. 

But that ambiguity was not enough to force class-wide arbitration. Irrespective of state-law principles that ambiguous contractual language should be construed against its drafter, arbitration remains “a matter of consent, not coercion,” according to the majority, so there must be an “affirmative contractual basis for concluding that the parties agreed to class arbitration.” Relying heavily on the Stolt-Nielsen opinion discussed above, the majority ruled that without a clear expression of the parties’ intent to arbitrate on a class-wide basis, courts cannot force them to do so. An ambiguous contract is, by its very nature, not a clear expression of intent. Therefore, each employee’s claim was subject to individual arbitration, rather than a single class-action.

In a scathing dissent, Justice Ginsberg lamented what she sees as the Court’s consistent use of the FAA “to deny employees and consumers effective relief against powerful economic entities.” She found it ironic for the majority to invoke “the first principle” that “arbitration is strictly a matter of consent,” when employment agreements like the one at issue here are often presented on a take-it-or-leave it basis, and she decried the “Hobson’s choice employees face: accept arbitration on their employer’s terms or give up their jobs.” 

Justice Sotomayor authored a dissent of her own, in which she took issue with the majority’s characterization of class arbitration as fundamentally different from individual arbitration, characterizing it as “simply a procedural device,” which “an employee who signs an arbitration agreement should not be expected to realize that she is giving up.”

Justice Kagan’s dissent focused on the authorship of the employment agreement, arguing that it should be construed against its drafter—the employer—under general principles of contract law adopted in every state, which are not abrogated by the FAA.

Justice Breyer also authored a dissent, focused largely on the threshold question of whether the order compelling arbitration a “final” order was vesting the appellate courts with jurisdiction even to hear the appeal.

This case fits the mold of recent Supreme Court cases addressing class arbitration, which have consistently affirmed the validity of arbitration agreements and pushed back on efforts to limit their applicability or enforceability. Although the dissenting opinions evidence just how controversial the use of arbitration clauses remains, the majority opinion further entrenches arbitration agreements as a bulwark against class-action liability. Given the current makeup of the Supreme Court, the trend is unlikely to be reversed any time soon.

Restatement of the Law of Liability Insurance - Additional Insureds and Other Insurance

May 9, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our seventh post considers RLLI’s thoughts on additional insureds and other insurance.

THE RLLI LANGUAGE

§ 20. When Multiple Insurers Have a Duty to Defend

When more than one insurer has the duty to defend a legal action brought against an insured:

(1) The insured may select any of these insurers to provide a defense of the action;

(2) If that insurer refuses to defend or otherwise breaches the duty to defend, the insured may select any of the other insurers that has a duty to defend the action; and

(3) The selected insurer must provide a full defense until the duty to defend is terminated pursuant to § 18 or until another insurer assumes the defense pursuant to subsection (4)(a).

(4) If the policies establish an order of priority of defense obligations among them, or if there is a regular practice in the relevant insurance market that establishes such a priority, that priority will be given effect as follows:

(a) An insurer selected pursuant to subsection (1) or (2) may ask any insurer whose duty to defend is earlier in the order of priority to assume the defense; and

(b) An insurer that incurs defense costs has a right of contribution or indemnity for those costs against any other insurer whose duty to defend is in the same position or earlier in the order of priority.

(5) If neither the policies nor the insurance-market practice establish an order of priority:

(a) The duty to defend is independently and concurrently owed to the insured by each of the insurers;

(b) Any nonselected insurer has the obligation to pay its pro rata share of the reasonable costs of defense of the action and the noncollectible shares of other insurers; and

(c) A selected insurer may seek contribution from any of the other insurers for the costs of defense.

WHY IT IS PROBLEMATIC

It is admittedly not a restatement of the law – Comment a, acknowledges that courts have developed a body of case law regarding “other insurance” clauses and priority of coverage. This is presented as a reimagining of the approach under the common law. The RLLI also suggests that it is necessary to “protect” insureds from having to hire an insurance-coverage expert to determine which insurer to ask for a defense.” Comment a. This is frankly absurd – insureds with multiple potentially-applicable policies routinely tender to carriers for all potentially-triggered policies and leave the carriers to ascertain how the defense is provided. The notion that the insured has, or should be entitled to enforce, any preference as to which policy defends is not well-founded, and certainly not a “restatement” of the state of existing law.

Furthermore, in the additional insured context, the AI is given the option to choose which policy defends. This disregards that the loss risk for general contractors is priced into their policies based upon the expectation that they will, in the ordinary course of business, have additional insured status under subcontractors’ policies that would ordinarily defend. The RLLI approach proposes to usurp the terms of the subcontract agreements, which typically address whether AI coverage is available on a primary, co-primary, or secondary basis, and whether contribution is permitted. These contracts are separate and distinct from the insurance policies at issue, and the RLLI cites no well-established body of case law that would override the enforceable provisions of underlying indemnity agreements. 

HOW THE COURTS HAVE REACTED

As of the date of this writing, we have not seen reported decisions addressing § 21 of RLLI.

This concludes our series of blog posts regarding provisions of the RLLI, although we will periodically update the series to provide a “scorecard” of how various jurisdictions have responded to the RLLI. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

RLLI – Independent Counsel

RLLI – The Insured’s Duty to Cooperate

RLLI – Bad Faith

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Bad Faith

May 7, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our sixth post considers RLLI’s thoughts on an insurer’s bad faith failure or refusal to settle. Bad faith is very much a creation of state law, and the RLLI’s proposals here are not a “restatement” so much as an entirely novel approach to bad faith law. 

THE RLLI LANGUAGE

§ 24. The Insurer’s Duty to Make Reasonable Settlement Decisions

(1) When an insurer has the authority to settle a legal action brought against the insured, or the insurer’s prior consent is required for any settlement by the insured to be payable by the insurer, and there is a potential for a judgment in excess of the applicable policy limit, the insurer has a duty to the insured to make reasonable settlement decisions.

(2) A reasonable settlement decision is one that would be made by a reasonable insurer that bears the sole financial responsibility for the full amount of the potential judgment.

(3) An insurer’s duty to make reasonable settlement decisions includes the duty to make its policy limits available to the insured for the settlement of a covered legal action that exceeds those policy limits if a reasonable insurer would do so in the circumstances.

§ 27. Damages for Breach of the Duty to Make Reasonable Settlement Decisions

An insurer that breaches the duty to make reasonable settlement decisions is subject to liability for any foreseeable harm caused by the breach, including the full amount of damages assessed against the insured in the underlying legal action, without regard to the policy limits.

§ 36. Assignment of Rights Under a Liability Insurance Policy

(1) Except as otherwise stated in this Section, rights under a liability insurance policy are subject to the ordinary rules regarding the assignment of contract rights.

(2) Rights of an insured under an insurance policy relating to a specific claim that has been made against the insured may be assigned without regard to an anti-assignment condition or other term in the policy restricting such assignments.

(3) Rights of an insured under an insurance policy relating to a class of claims or potential claims may be assigned without regard to an anti-assignment condition or other term in the policy restricting such assignments, if the following requirements are met:

(a) The assignment accompanies the transfer of financial responsibility for the underlying liabilities insured under the policy as part of a sale of corporate assets or similar transaction;

(b) The assignment takes place after the end of the policy period; and

(c) The assignment of the rights does not materially increase the risk borne by the insurer.

§ 49. Liability for Insurance Bad Faith

An insurer is subject to liability to the insured for insurance bad faith when it fails to perform under a liability insurance policy:

(a) Without a reasonable basis for its conduct; and

(b) With knowledge of its obligation to perform or in reckless disregard of whether it had an obligation to perform.

§ 50. Remedies for Liability Insurance Bad Faith

The remedies for liability insurance bad faith include:

(1) Compensatory damages, including the reasonable attorneys’ fees and other costs incurred by the insured in the legal action establishing the insurer’s breach of the liability insurance policy and any other loss to the insured proximately caused by the insurer’s bad-faith conduct;

(2) Other remedies as justice requires; and

(3) Punitive damages when the insurer’s conduct meets the applicable state-law standard.

WHY IT IS PROBLEMATIC

Bad faith is a highly state-specific cause of action

Bad faith, as a cause of action, is one of the most distinct and individualized expressions of each jurisdiction’s public policy. There is no uniform agreement as to whether “bad faith” is a contractual or tort cause of action, and state-specific expressions of what conduct rises to the level of “bad faith.” It is, therefore, a difficult subject for a “restatement” of the law.

Failure to settle

Initially, RLLI reformulates an existing cause of action commonly known as “bad faith failure to settle” or “bad faith refusal to settle” as simply a “breach of the duty to make reasonable settlement decisions.” Comment a to § 24 makes it clear that liability is imposed for less than a bad faith state of mind on the part of the insurer, but for simple negligence. RLLI construes the standard of care in terms of “commercial reasonableness.” As is clear from Comment c, it is a “disregard the limits” remedy, which blows up the limits even in the absence of wrongful intent by the insurer. Amazingly, the RLLI argues that this is a more lenient approach than “strict liability,” with Comment b being the only nod in the entire RLLI to any interest in preventing the bad faith setup, while citing no authority for the proposition that any jurisdictions presently impose a strict liability standard for failure to settle.

This is not a “restatement.” The Reporter’s Note to § 24 cites treatises rather than case law in support of the contention that this is a “majority rule,” and admits, without clearly addressing the issue, that liability for failure to settle is determined by different standards of “bad faith” or negligence by the various jurisdictions. Remarkably, the Reporter’s Note to § 27, in claiming that the majority of jurisdictions have adopted the principle, cite to cases establishing the measure of damages for “bad faith failure to settle,” without noting that this section is the measure of damages for a breach of duty to settle that is not predicated in “bad faith.”

The RLLI approach would eliminate the minimal protections afforded to insurers in some notorious “set up” states like Missouri. Every reported Missouri case involving insurer bad faith, beginning with Zumwalt v. Utilities Ins. Co., 228 S.W.2d 750 (Mo. 1950), limits liability to a bad faith refusal of an offer to settle within or for the liability policy’s limitsSee Id. at 754 (bad faith for insurer to refuse reasonable settlement offer within liability limits and instead gamble on escaping liability by favorable verdict); Landie v. Century Indem. Co., 390 S.W.2d 558, 564-66 (Mo. App. K.C. 1965) (the insurer’s duty is to give good faith consideration to settlement offers within the liability limits; insurer’s refusal to accept such offer, if in bad faith, entitles insured to recover); Levin v. State Farm Mut. Ins., 510 S.W.2d 455, 458 (Mo. banc 1974) (offer to settle within liability limits is a “necessary predicate” to bad faith claim); Bonner v. Auto. Club Inter-Ins. Exch., 899 S.W.2d 925, 928 (Mo. App. E.D. 1995) (not only must there be an offer to settle within the liability limits, but also the offer must be definite in amount); Ganaway v. Shelter Mut. Inc. Co., 795 S.W.2d 554, 556 (Mo. App. S.D. 1990) (insurer liability results from failure to exercise good faith in considering offers to compromise within liability limits). An offer to “settle” within policy limits is a “necessary prerequisite” for a claim for bad faith in Missouri. Levin, 510 S.W.2d at 458. The “good faith” contemplated by the law is a duty to give consideration to settlement offers within the liability limits. Landie, 390 S.W.2d at 564-66. The RLLI would eliminate the need for the policy-limits demand to trigger potential bad faith liability in Missouri, and other similar jurisdictions.

Moreover, the RLLI would propose to blow up the policy limits without addressing circumstances in which the insurer’s position on settlement was based upon its coverage analysis. Again, even in insurer-hostile jurisdictions, this kind of liability generally requires more than an erroneous denial of coverage. See, e.g., Shobe v. Kelly, 279 S.W.3d 203, 211-12 (Mo. App. W.D. 2009).

Bad faith

Punitive damages are the only additional remedy brought to the table by the bad faith cause of action, with RLLI’s proposed standard for failure to settle already accomplishing the elimination of the policy’s liability limits and recovery of the insured’s attorneys’ fees and consequential damages. Again, the RLLI is lacking in case law support for this approach. 

Many courts will define “bad faith” as a “state of mind” consisting of the insurer’s “‘intentional disregard of the financial interest of [the] insured in the hope of escaping the responsibility imposed upon [the insurer] by its policy.’”  Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818, 828 (Mo. banc 2014). Often, evidence must establish that the insurer “intentionally disregarded” the insured’s financial interests in the hope of escaping its responsibility under the policy. Rinehart v. Shelter Gen. Ins. Co., 261 S.W.3d 583, 595 (Mo. App. W.D. 2008). The principle is that the insure

The measure of damages

The RLLI fails to address a critical topic – how to measure the insured’s damages for bad faith failure to settle. There is a significant question as to whether courts should presume that the amount of the underlying judgment equals the amount of the judgment or settlement entered into by the insured. 

This includes circumstances in which the insured has protected itself from the impact of a judgment in excess of its policy limits by virtue of a covenant not to execute against the insured’s assets, a/k/a a “Mary Carter” agreement, an agreement pursuant to Mo. Rev. Stat. § 537.065, etc. The essence of a bad faith cause of action is that the insured suffered tangible economic loss as a result of its insurer’s tortious refusal to settle claims against it. However, where the insured has not suffered these tangible economic losses, including by virtue of a covenant not to execute, there is case law in many jurisdictions holding that the insured has sustained no actual damages. Allowing a party in such circumstances to collect all or part of the judgment amount:

perpetrates a fraud on the court, because it bases the recovery on an untruth, i.e., that the judgment debtor may have to pay the judgment. Such a result should be against public policy, because it allows, as here, parties to take a sham judgment by agreement, without any trial or evidence concerning the merits, and then collect all or a part of that judgment from a third party. Allowing recovery in such a case encourages fraud and collusion and corrupts the judicial process by basing the recovery on a fiction.... [T]he courts are being used to perpetrate and fund an untruth.

H.S.M. Acquisitions, Inc. v. West, 917 S.W.2d 872, 882 (Tex. App. Corpus Christi 1996) (citations omitted). The Texas court found that the consent judgment entered by the parties pursuant to the covenant not to execute could not be enforced against the insurer in a bad faith action. Id.

Moreover, Courts have found that a judgment entered into by the insured with the injured party need not even have been collusive for a court to refuse to give it any weight in determining the amount of insured’s damages in a bad faith action against his insurer. See Hamilton v. Maryland Casualty Co., 117 Cal. Rptr. 2d 318, 327 (Cal. 2002). “A defending insurer cannot be bound by a settlement made without its participation and without any actual commitment on its insured’s part to pay the judgment.” Id. RLLI is astonishingly silent on these issues.

HOW THE COURTS HAVE REACTED

As of the date of this writing, we have not seen reported decisions addressing these RLLI provisions.

Watch for our final post in this series, which considers RLLI’s thoughts on additional insureds and other insurance.  Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

RLLI – Independent Counsel

RLLI – The Insured’s Duty to Cooperate

Related Services: Insurance

Attorneys: Angela Higgins

Illinois Appellate Court Affirms Double Whammy Dismissal of Medical Negligence Case Based on Statute of Limitations and Statute of Repose

May 6, 2019 | Nathan Leming

The Illinois First District Appellate Court recently affirmed a Cook County Circuit Court’s dismissal of a medical negligence action as time-barred by both the statute of limitations and the statute of repose. In reaching its decision, the appellate court relied upon long-standing Illinois case law as to when a medical negligence action accrues in a wrongful death action. 

In January 2017, plaintiff Joseph M. Osten (Osten), surviving husband of Gail Osten (decedent), filed a Complaint alleging medical negligence.  In the Complaint, Osten alleged that defendant physician, one of decedent’s treating doctors, ordered a screening mammogram on April 21, 2011, which was subsequently conducted by defendant radiologist technician and interpreted by defendant radiologist.

According to the Complaint, a non-party technologist noticed a slightly inverted left nipple with a brown discharge, which decedent specifically denied she had ever seen. The mammogram revealed a bilateral benign calcification with no masses or other findings suggestive of malignancy. The results of the mammogram were not transmitted to the defendant physician, the screening mammogram was not converted to diagnostic mammography, and no ultrasound tests were ordered.   Decedent was diagnosed with breast cancer in December 2011 and passed away in March 2015.

Plaintiff’s Complaint asserted five counts of professional negligence and wrongful death against defendants, alleging negligence in (1) failing to convert the screening mammogram to a diagnostic mammography, (2) failing to perform an ultrasound, and (3) failing to recognize the risk factors for breast cancer of an inverted nipple and brownish discharge.

Defendants filed motions to dismiss plaintiff’s Complaint, asserting plaintiff’s claims were time-barred by both the two-year statute of limitations and the four-year statute of repose applicable to medical negligence claims. Defendants contended the statute of limitations began to run on decedent’s medical negligence claims in April 2011, when the screening mammogram was performed or, at the latest, in December 2011, when she was diagnosed with breast cancer.  Defendants argued that, under either date, the statute of limitations expired on the medical negligence claims no later than December 2013.

Defendants also asserted the four-year repose period on any medical negligence claims began to run on the date of the alleged negligence, and therefore the repose period lapsed on April 21, 2015. Defendants further argued the plaintiff could not bring a wrongful death claim premised on defendants’ alleged medical negligence because the statute of limitations on those claims expired before decedent’s death in March 2015.

In response, the plaintiff argued his Complaint was timely because it was filed within two years of decedent’s death, the same date plaintiff contended was the date the statute of limitations and statute of repose began to run on his wrongful death claims. Plaintiff argued defendants advanced no facts to show that in December 2011, decedent knew or reasonably should have known of defendants’ alleged negligence, making the date of death the only relevant date for measuring the timeliness of his claims.

The appellate court held that:

“[i]n a wrongful death action, the cause of action is the wrongful act, neglect, or default causing death and not the death itself.” Wyness v. Armstrong World Industries, Inc., 131 Ill. 2d 403, 411 (1989). Claims under the Wrongful Death Act must be commenced within two years of the person’s death. 740 ILCS 180/2 (West 2016).  Under the Wrongful Death Act, there can be no recovery ‘where the decedent once had a cause of action, but was not entitled to maintain that action and recover damages at the time of [her] death.’ Lambert v. Village of Summit, 104 Ill. App. 3d 1034, 1037-38 (1982).

With respect to the statute of repose issue, the appellate court held that the Illinois Supreme Court:

has observed that “the statute of repose is triggered by the ‘act or omission or occurrence’ causing an injury, rather than by the patient’s discovery of the injury,” and that “the statute of repose cannot start to run until the last date of negligent treatment.” Cunningham v. Huffman, 154 Ill. 2d 398, 405-06 (1993); see also Kanne v. Bulkley, 306 Ill. App. 3d 1036, 1040 (1999) (“In failure-to-diagnose cases *** where a plaintiff blames a defendant’s omission for his injury, the omission at issue is deemed to have occurred on the date defendant rendered his final treatment.”).

Based upon the above case law, the appellate court found that both the statutes of limitations and repose began to run either in April 2011 or, based on the allegations in plaintiff’s Complaint, no later than December 2011.

The Osten court noted multiple times that its decision was based solely upon the allegations contained in plaintiff’s original Complaint and “at no point did plaintiff seek leave to amend his Complaint to allege any additional facts to defeat the motion to dismiss.”  The opinion goes so far as to point out that “[p]laintiff failed to allege a single fact that might allow an inference that defendants provided [decedent] with any treatment—negligent or otherwise—after April 21, 2011.” 

Presumably, the Court was insinuating plaintiff could have potentially defeated the motions to dismiss if he had shown an “ongoing course of continuous negligent medical treatment”, which the Illinois Supreme Court found in Cunningham v. Huffman, 154 Ill. 2d 398, 609 N.E.2d 321 (1993), could extend the start date for the statute of repose.

The Cunningham court concluded the statute of repose does not bar a plaintiff's action if s/he can demonstrate an ongoing course of continuous negligent medical treatment. To prove such, the plaintiff must demonstrate: (1) the existence of a continuous and unbroken course of negligent treatment, and (2) the treatment was so related as to constitute one continuing wrong. Thus, under Cunningham, not only does there need to be treatment, but the treatment must be negligent, a continuous and unbroken course, and so related as to constitute one continuing wrong. Whether plaintiff could have asserted facts to support such an argument is unknown.

Although the Osten decision does not plow any new ground for calculating when Illinois’ statutes of limitations and repose issues begin to run, a consistent approach and analysis by the Illinois appellate courts should be reassuring to our healthcare industry clients on what will undoubtedly continue to be a frequently litigated issue in medical negligence cases.

Osten v. Northwestern Memorial Hospital, 2018 IL App (1st) 172072

Restatement of the Law of Liability Insurance - The Insured's Duty to Cooperate

May 2, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our fifth post considers RLLI’s thoughts on the insured’s duty to cooperate.

§ 29. The Insured’s Duty to Cooperate

When an insured seeks liability insurance coverage from an insurer, the insured has a duty to cooperate with the insurer. The duty to cooperate includes the obligation to provide reasonable assistance to the insurer:

(1) In the investigation and settlement of the legal action for which the insured seeks coverage;

(2) If the insurer is providing a defense, in the insurer’s defense of the action; and

(3) If the insurer has the right to associate in the defense of the action, in the insurer’s exercise of the right to associate.

§ 30. Consequences of the Breach of the Duty to Cooperate

(1) An insured’s breach of the duty to cooperate relieves an insurer of its obligations under an insurance policy only if the insurer demonstrates that the failure caused or will cause prejudice to the insurer.

(2) If an insured’s collusion with a claimant is discovered before prejudice has occurred, the prejudice requirement is satisfied if the insurer demonstrates that the collusion would have caused prejudice to the insurer had it not been discovered.

§ 25. The Effect of a Reservation of Rights on Settlement Rights and Duties

(1) A reservation of the right to contest coverage does not relieve an insurer of the duty to make reasonable settlement decisions stated in § 24, but the insurer is not required to cover a judgment on a non-covered claim.

(2) Unless otherwise stated in an insurance policy or agreed to by the insured, an insurer may not settle a legal action and thereafter demand recoupment of the settlement amount from the insured on the ground that the action was not covered.

(3) When an insurer has reserved the right to contest coverage for a legal action, the insured may settle the action without the insurer’s consent and without violating the duty to cooperate or other restrictions on the insured’s settlement rights contained in the policy if:

(a) The insurer is given a reasonable opportunity to participate and is kept reasonably informed of developments in the settlement process;

(b) The insured makes a reasonable effort to obtain the insurer’s consent or approval of the settlement;

(c) The insurer declines to withdraw its reservation of rights after receiving prior notice of the proposed settlement; and

(d) The settlement agreed to by the insured is one that a reasonable person who bears the sole financial responsibility for the full amount of the potential covered judgment would make.

WHY IT IS PROBLEMATIC

Initially, the recognition that collusion with a claimant would constitute a breach of the duty to cooperate is useful, though why the insurer must still demonstrate that such “collusion” would be prejudicial (rather than such prejudice being implied) is questionable. Notable is how the duty to cooperate is conceived of as very much bare-minimum conduct by the insured – even collusion is not a breach unless it is or, if completed would have been, prejudicial to the insurer. The RLLI thus conceives of the obligations under an insurance policy as almost entirely running in one direction, from the insurer to the insured.

Allowing the insured to settle a claim without the insurer’s consent merely because it has issued a reservation of rights letter is not a “restatement” of the law. This is the bad faith set up, in many ways worse than the Missouri problem. Missouri allows this because it treats a reservation of rights as an inherent, unwaivable conflict of interest between the insurer and insured. But Missouri does not provide for independent counsel. RLLI requires provision of independent counsel, not controlled by the insurer, if there is a reservation of rights, to address the perceived conflict, then still allows the insured to settle/submit to judgment. The insurer has no meaningful right to control the defense/settlement if it issues a reservation of rights. RLLI proposes that an insurer can only exercise its contractual right to control the defense and settlement of claims if it waives its contractual rights to limit or deny coverage based on its policy language.

HOW THE COURTS HAVE REACTED

§ 29

Adopted or cited with approval:

Mid-Continent Cas. Co. v. Petroleum Solutions, Inc., No. 4:09-0422, 2016 U.S. Dist. LEXIS 182174, at *11 n.28 (S.D. Tex. Dec. 16, 2016) (citing the 2016 discussion draft, along with case law, for the proposition that “the substantive test for breach of the duty to cooperate is whether the conduct was ‘reasonable and justified under the circumstances.’”).

Watch for our next post in this series, which considers RLLI’s thoughts on an insurer’s bad faith failure or refusal to settle. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

RLLI – Independent Counsel

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Independent Counsel

April 30, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word.  This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our fourth post considers RLLI’s thoughts on an insurer’s obligation to provide independent counsel to defend the insured.

THE RLLI LANGUAGE

§ 16. The Obligation to Provide an Independent Defense

When an insurer with the duty to defend provides the insured notice of a ground for contesting coverage under § 15 and there are facts at issue that are common to the legal action for which the defense is due and to the coverage dispute, such that the action could be defended in a manner that would benefit the insurer at the expense of the insured, the insurer must provide an independent defense of the action.

§ 17. The Conduct of an Independent Defense

When an independent defense is required under § 16:

(1) The insurer does not have the right to defend the legal action;

(2) The insured may select defense counsel and related service providers;

(3) The insurer is obligated to pay the reasonable fees of the defense counsel and related service providers on an ongoing basis in a timely manner;

(4) The insurer has the right to associate in the defense of the legal action under the rules stated in § 23; and

(5) The rules stated in § 11 govern the insured’s provision of information to the insurer.

WHY IT IS PROBLEMATIC

Right to independent counsel upon issuance of reservation of rights

The majority rule is that an insurer has a duty to defend a liability claim if there is even an arguable basis for coverage. The accepted approach, where the insurer must defend but reasonably questions coverage, is to issue a reservation of rights letter. The insurer is at a clear disadvantage, as compared to the parties embroiled in the dispute, regarding the underlying facts of the claim. RLLI suggests that there is something nefarious about an insurer’s reservation of rights, but insurers are routinely obligated to undertake a defense on short notice with minimal knowledge of the facts. 

Even in jurisdictions that provide for Cumis counsel, there is rarely any absolute requirement to provide independent counsel at the insurer’s expense merely upon the issuance of a reservation of rights letter. California does not require provision of Cumis counsel upon issuance of a reservation of rights. See, e.g., Dynamic Concepts v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1006-07, 71 Cal. Rptr. 2d 882 (1998); Gafcon, Inc. v. Ponsor & Associates, 98 Cal. App. 4th 1388, 1421, 120 Cal. Rptr. 2d 392 (2002) (“a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights”). If the insurer must provide independent counsel, and surrender control of the defense as suggested by RLLI, the insurer is precluded from exercising its contractual right to control the defense if it asserts its contractual rights to disclaim coverage. This is an outlier position, not a “restatement.”

Communications with the insurer are not shielded by attorney-client privilege

Where counsel is independent, he/she does not have an attorney-client relationship with the insurer. Accordingly, communications with the insurer are not protected by the attorney-client privilege. Instead, the RLLI assures us that these communications would be protected by a “common interest” doctrine. However, many jurisdictions do not have a well-developed body of law on the common interest doctrine. Where such law exists, often the interests must be identical for the common interest to apply. See, e.g., Ayers Oil Co. v. Am. Bus. Brokers, Inc., 2009 U.S. Dist. LEXIS 111928, *5 (E.D. Mo. Dec. 2, 2009). The RLLI establishes, by virtue of the provisions on reservations of rights and the supposed resulting need for independent counsel, as well as by the tripartite provisions discussed above, that the interests of the insured and insurer are not identical. 

The insurer must provide independent counsel, but the insured “may” select that counsel.

Under § 16, if the insurer issues a reservation of rights, it “must” provide independent counsel. However, under § 17, the insured “may” select that counsel. The gap here anticipates that there will be circumstances in which the insurer is obligated to supply independent counsel, but the insured leaves that selection up to the insurer. Under other provisions of the RLLI discussed above, the insurer would, presumably, then face potential liability for the conduct of the defense by the counsel that it selected, all the while being precluded from controlling the defense and existing in a tenuous environment with respect to attorney-client privilege for its communications. Liable for failing to supervise defense counsel, but unable to do so.

HOW THE COURTS HAVE REACTED

§ 16

Rejected:

Outdoor Venture Corp. v. Phila. Indem. Ins. Co., No. 6:16-cv-182-KKC, 2018 U.S. Dist. LEXIS 167986, at *55 (E.D. Ky. Sep. 27, 2018). The insured cited a 2016 draft of the RLLI, instead applying Kentucky law.

Watch for our next post in this series, which considers RLLI’s thoughts on the insured’s duty to cooperate. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

RLLI – The Tripartite Relationship

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - The Tripartite Relationship

April 26, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our third post considers RLLI’s thoughts on the tripartite relationship amongst insurer, defense counsel, and insured. The reimagining of the tripartite relationship is perhaps the part of the RLLI that ventures farthest afield from any “restatement” of existing legal principles.

THE RLLI LANGUAGE

§ 11. Confidentiality

(1) An insurer or insured does not waive rights of confidentiality with respect to third parties by providing to the insured or the insurer, within the context of the investigation and defense of a legal action, information protected by attorney–client privilege, work-product immunity, or other confidentiality protections.

(2) An insurer does not have the right to receive any information of the insured that is protected by attorney–client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured.

§ 12. Liability of Insurer for Conduct of Defense

(1) If an insurer undertakes to select counsel to defend a legal action against the insured and fails to take reasonable care in so doing, the insurer is subject to liability for the harm caused by any subsequent negligent act or omission of the selected counsel that is within the scope of the risk that made the selection of counsel unreasonable.

(2) An insurer is subject to liability for the harm caused by the negligent act or omission of counsel provided by the insurer to defend a legal action when the insurer directs the conduct of the counsel with respect to the negligent act or omission in a manner that overrides the duty of the counsel to exercise independent professional judgment.

WHY IT IS PROBLEMATIC

It is not a “restatement”

A restatement should express the majority view of the law, except in rare instances where that majority view has become outdated and there is a clear trend away from it. These changes are not a “restatement” of existing law, but rather a wholesale creation of new law. As noted by DRI in its opposition to the 2017 draft, Section 12 “would create new direct liability on the part of the insurer to the insured for the acts of defense counsel” with no support from the case law.

This is not an entirely insurer-oriented problem. Policyholders, too, should be concerned about greater intrusion into the attorney-client relationship between insured and defense counsel. Facing potential liability for negligent selection or “supervision” of counsel, we would expect insurers to exert greater influence over defense counsel. Moreover, this is in tension with provisions that defense counsel is not permitted to share certain information or communications with the insurer. If these provisions of RLLI are adopted, there would be a new and real conflict of interest between the insurer and the insured, placing defense counsel in an untenable and practically unworkable position.

The insurer faces potential liability but is foreclosed from managing the defense in such a way as to limit its exposure.

These sections of the RLLI propose to render insurers liable to insureds for mistakes by defense counsel, while at the same time preventing the insurer from receiving a full account from defense counsel of any information that defense counsel deems he/she should not share with the insurer. Indeed, as discussed in the above section, if the insurer is defending under a reservation of rights, the insurer is required to pay for independent counsel, and the insured is free to act without the insurer’s consent. It appears that the actions of independent counsel, who are not controlled by the insurer but who might be “selected” by the carrier, could subject the insurer to liability even though the insurer has no meaningful opportunity to supervise or control defense counsel.

Some jurisdictions have case law addressing insurer liability for the professional negligence of insurer-retained defense counsel. However, there is by no means a consensus on this issue such that the RLLI’s approach could be said represent a “restatement” of the law. “The question of whether an attorney appointed to represent an insured to defend a claim is an agent for the insurer is one that has divided courts, and often turns on specific facts.” Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602, 615 (Minn. 2012). Some jurisdictions hold that the insurer does not have the necessary opportunity to control defense counsel’s conduct that would justify rendering the insurer vicariously liable for acts or omissions of the attorney. See, e.g., Ingersoll-Rand Equip. Corp. v. Transp. Ins. Co., 963 F. Supp. 452, 454 (M.D. Pa. 1997) (stating that an attorney's ethical obligations to the insured "prevent the insurer from exercising the degree of control necessary to justify the imposition of vicarious liability"); Lifestar Response of Ala., Inc. v. Admiral Ins. Co., 17 So. 3d 200, 214-18 (Ala. 2009) (imposing no vicarious liability for defense attorney's alleged negligence because insurer could not control attorney's professional judgment). 

Others take a compromise approach:

In the typical situation in which an insurer hires an attorney to defend an insured, the relationship of the insurer and its attorney is precisely that of principal to independent contractor. For example, the attorney is engaged in the distinct occupation of practicing law, and this occupation is one in which the attorney possesses special skill and expertise. . . . Finally, and obviously, the practice of law is not, nor could it be, part of the regular business of an insurer.

Givens v. Mullikin, 75 S.W.3d 383, 393-94 (Tenn. 2002). However, “an insurer can be held vicariously liable for the acts or omissions of an attorney hired to represent an insured when those acts or omissions were directed, commanded, or knowingly authorized by the insurer.” Id. at 395. 

Even under this approach, however, the insurer can face liability only if it expressly directed the conduct of defense counsel at issue. The RLLI approach would render the insurer liable for “negligent selection of defense counsel,” not for specific actions or omissions that the insurer directed the defense attorney to undertake. 

Defense counsel is required to “hide the ball” from the insurer

Defense counsel hired by the insurer is required to keep from the insurer any privileged information if the information could be used to benefit the insurer at the expense of the insured. While there is existing case law in many jurisdictions that prevents an insurer from directing defense counsel to develop a coverage case against the insured, what is new is this notion that defense counsel, who typically does represent the insurer in the tripartite relationship, is obligated to hide from the insurer information that is pertinent to the insurer’s interests. 

Unfettered communication with both clients on the subject of the joint representation is therefore a practical necessity. Both are directly interested in the case, its progress and any material developments, counsel's litigation and trial strategy, his assessments of the merits and likelihood of success, his views on whether the case ought to be tried or settled, and myriad other issues, many of which require expression of counsel's strategic judgments and mental impressions. In communicating with the insurer on these matters, the attorney is rendering advice and counsel to a client as a necessary aspect of his representation, both of the insurer and of the insured.

RFF Family P'ship, LP v. Burns & Levinson, LLP, 32 Mass. L. Rep. 88 (2013).

Some jurisdictions expressly hold that both defense counsel and the insured have a duty to disclose to the insurer relevant information regarding the claim and defense. See, e.g., Cont'l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510, 518 (E.D. Cal. 2010). This is a contractual duty on the part of the insured, and an ethical obligation by the defense counsel. Furthermore, some courts have held that the insured does not have a reasonable expectation that information it communicates to defense counsel will be privileged and withheld from the insurer that has hired defense counsel for the action. Northwood Nursing & Convalescent Home, Inc. v. Continental Ins. Co., 161 F.R.D. 293, 297 (E.D. Pa. 1995). 

Notably, there is a significant absence of established case law regarding what information an attorney may ethically withhold from its insurer client in a tripartite relationship, so the RLLI’s position is in no respect a “restatement” of the existing law on this question. A number of courts to have considered the issue have held that the insurer is entitled to be completely informed of information related to the defense of the claim. Obviously, information that is relevant to a coverage issue (such as intent) is likely to be highly relevant to the defense as well. RLLI proposes no practical approach to defending claims here, and fails to recognize that in the ordinary course of the defense facts discovered will bear on both the defense to liability and the insurer’s coverage position. 

Moreover, RLLI seeks to intrude upon the individualized ethical obligations imposed upon attorneys by weighing in upon what defense counsel may or may be required to withhold from insurers in a tripartite relationship in which defense counsel is also deemed to represent the insurer. This is not the place of RLLI, and is not a “restatement” of insurance law, but a statement on professional ethics. It would also seem to open the door for plaintiffs’ counsel to seek to discover information communicated to the insurer by defense counsel on the argument that, where the insurer is not permitted to receive the information under § 11, there is no attorney-client relationship between the insurer and defense counsel.

HOW THE COURTS HAVE REACTED

§ 12

The insured’s reliance upon § 12 of the RLLI was found to be “premature.” Progressive Northwestern Ins. Co. v. Gant, No. 15-9267-JAR-KGG, 2018 U.S. Dist. LEXIS 163624, at *16 (D. Kan. Sep. 24, 2018). “[T]he notes to the Restatement acknowledge that ‘there is a dearth of reported cases holding liability insurers directly liable for negligent selection [of defense counsel].’ Accordingly, this Court is not inclined to use a nonbinding Restatement as a means to overturn or expand Kansas law.” Id. at *16-17.

Watch for our next post in this series, which considers RLLI’s thoughts on an insurer’s obligation to provide independent counsel to defend the insured. Our prior posts in the series can be found at:

RLLI – Exclusions

RLLI – Duty to Defend

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Duty to Defend

April 23, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our second post considers RLLI’s thoughts on the duty to defend.

THE RLLI LANGUAGE

§ 13. Conditions Under Which the Insurer Must Defend

(1) An insurer that has issued an insurance policy that includes a duty to defend must defend any legal action brought against an insured that is based in whole or in part on any allegations that, if proved, would be covered by the policy, without regard to the merits of those allegations.

(2) For the purpose of determining whether an insurer must defend, the legal action is deemed to be based on:

(a) Any allegation contained in the complaint or comparable document stating the legal action; and

(b) Any additional allegation known to the insurer, not contained in the complaint or comparable document, stating the legal action that a reasonable insurer would regard as an actual or potential basis for all or part of the action.

(3) An insurer that has the duty to defend under subsections (1) and (2) must defend until its duty to defend is terminated under § 18 by declaratory judgment or otherwise, unless facts not at issue in the legal action for which coverage is sought and as to which there is no genuine dispute establish that:

(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;

(b) The vehicle or other property involved in the accident is not covered property under a liability insurance policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;

(c) The claim was reported late under a claims-made-and-reported policy such that the insurer’s performance is excused under the rule stated in § 35(2);

(d) The action is subject to a prior and pending litigation exclusion or a related claim exclusion in a claims-made policy;

(e) There is no duty to defend because the insurance policy has been properly cancelled; or

(f) There is no duty to defend under a similar, narrowly defined exception to the complaint-allegation rule recognized by the courts in the applicable jurisdiction.

§ 14. Duty to Defend: Basic Obligations

When an insurance policy obligates an insurer to defend a legal action:

(1) Subject to the insurer’s right to terminate the defense under § 18, the insurer has a duty to provide a defense of the action that:

(a) Makes reasonable efforts to defend the insured from all of the causes of action and remedies sought in the action, including those not covered by the liability insurance policy; and

(b) Requires defense counsel to protect from disclosure to the insurer any information of the insured that is protected by attorney–client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured;

(2) The insurer may fulfill the duty to defend using its own employees, except when an independent defense is required; and

(3) Unless otherwise stated in the policy, the costs of the defense of the action are borne by the insurer in addition to the policy limits.

§ 18. Terminating the Duty to Defend a Legal Action

An insurer’s duty to defend a legal action terminates only upon the occurrence of one or more of the following events:

(1) An explicit waiver by the insured of its right to a defense of the action;

(2) Final adjudication of the action;

(3) Final adjudication or dismissal of parts of the action that eliminates any basis for coverage of any remaining parts of the action;

(4) Settlement of the action that fully and finally resolves the entire action;

(5) Partial settlement of the action, entered into with the consent of the insured, that eliminates any basis for coverage of any remaining parts of the action;

(6) If so stated in the insurance policy, exhaustion of the applicable policy limits;

(7) A correct determination by the insurer that it does not have a duty to defend the legal action under the rules stated in § 13; or

(8) Final adjudication that the insurer does not have a duty to defend the action.

§ 19. Consequences of Breach of the Duty to Defend

An insurer that breaches the duty to defend a legal action forfeits the right to assert any control over the defense or settlement of the action.

§ 21. Insurer Recoupment of the Costs of Defense

Unless otherwise stated in the insurance policy or otherwise agreed to by the insured, an insurer may not seek recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs.

§ 33. Timing of Events That Trigger Coverage

(1) When a liability insurance policy provides coverage based on the timing of a harm, event, wrong, loss, activity, occurrence, claim, or other happening, the determination of the timing is a question of fact.

(2) A liability insurance policy may define a harm, event, wrong, loss, activity, occurrence, claim, or other happening that triggers coverage under a liability insurance policy to have taken place at a specially defined time, the timing of which is also a question of fact, even if it would be determined for other purposes to have taken place at a different time.

§ 45. Insurance of Liabilities Involving Aggravated Fault

(1) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for defense costs incurred in connection with any legal action is enforceable, including but not limited to defense costs incurred in connection with: a criminal prosecution; an action seeking fines, penalties, or punitive damages; and an action alleging criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.

(2) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for civil liability arising out of aggravated fault is enforceable, including civil liability for: criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.

(3) Whether a term in a liability insurance policy provides coverage for the defense costs and civil liability addressed in subsections (1) and (2) is a question of interpretation governed by the ordinary rules of insurance policy interpretation.

WHY IT IS PROBLEMATIC

Duty to defend continues until the insurer has made a “correct determination” that it has no duty to defend under § 13, or “final” adjudication that it has no duty to defend.

Initially, the insurer cannot make its own “correct determination” that it has no duty to defend where there is no “occurrence,” offense, “wrongful act,” etc., even though it is the insured’s burden to prove that the claim is within the scope of the insuring agreement under the default rule of the common law. Similarly, § 13 does not identify the insured’s failure to satisfy the policy’s conditions for coverage, including, significantly, the duty to give notice and to cooperate, as bases upon which the insurer may deny or terminate a defense. Many jurisdictions hold that it is the insured’s burden to prove compliance with the policy’s conditions, including the duty to cooperate. See, e.g., Steadfast Ins. Co. v. Purdue Frederick Co., No. X08CV020191697S, 2005 Conn. Super. LEXIS 3286, at *8 (Super. Ct. Nov. 29, 2005). There is ample case law supporting the proposition that not only does pre-suit conduct by the insured in breach of its obligations under the policy obviate a duty to defend, the duty to defend may be terminated by the insured’s breach during the course of the claim. See, e.g., Arton v. Liberty Mutual Ins. Co., 163 Conn. 127, 302 A.2d 284 (1972). RLLI simply abrogates the insurer’s contractual rights under the policy, with no firm support in well-established case law.

The RLLI proposes that the insurer must also litigate the applicability of any exclusions other than the prior/pending litigation exclusion. This would include exclusions such as the sexual molestation, criminal acts, “your work,” professional liability, and many similar commonly-applicable exclusions. One of the most common coverage questions presented is the contractor seeking coverage under a CGL policy for faulty work, and under the RLLI the insurer would apparently have a duty to defend these claims to the bitter end despite clear case law in most jurisdictions that CGL policies do not afford coverage for professional errors and omissions by contractors in the performance of their contracts. See, e.g., Owings v. Gifford, 237 Kan. 89, 94, 697 P.2d 865 (1985) (“the [CGL] insurance policy is not a performance bond or a guarantee of contract performance. A house built or being constructed by an insured builder is the work product of the builder and under the exclusion clause of the policy no coverage is provided the insured for damages due to faulty construction.”).

“Final adjudication” means the exhaustion of all appeals. Because the appellate process can reasonably be expected to take longer than the course of litigation of the underlying civil claim, this proposition effectively negates the insurer’s contractual right to deny a defense for uncovered claims. RLLI also proposes that the insurer has no right to recoupment of defense costs. Moreover, the RLLI’s position is inconsistent with the position of a significant number of jurisdictions (including what are regarded as policyholder-friendly jurisdictions) that an insurer may terminate its defense upon its discovery of facts placing the claim outside of coverage. See, e.g., Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 661, 31 Cal. Rptr. 3d 147, 115 P.3d 460 (2005); Certain Underwriters at Lloyd's London v. Mestmaker, No. F066016, 2014 Cal. App. Unpub. LEXIS 3021, at *27 (Apr. 29, 2014).

Requires the insured’s consent to settlement of covered claims

Where the insurer is defending without a reservation of rights, it has the contractual right to control the investigation, defense, and settlement of claims under the policy. The RLLI cites no legal authority for the proposition that a majority of courts have held, as the ALI suggests in § 18(5), that the insured’s consent is required to settle covered claims under the policy, leaving uncovered claims unresolved. Why would the presence of uninsured claims in the action give the insured veto power over the insurer’s contractual right to control settlement of covered claims?

Whether there was an occurrence within the policy period becomes a fact question that precludes summary disposition.

One of the most remarkable positions taken by the RLLI is in § 33, which suggests that it is a fact question whether there is a trigger of coverage. In describing this language, Comment a, expressly discusses this “trigger” in terms of whether there is an occurrence within the policy period. In Comment b, “Because all liability insurance policies are issued for a defined policy period, all liability insurance policies have some trigger of coverage.” Comment d expressly suggests that, “Determining whether the required event took place during the required period involves the application of the policy, as interpreted by the court, to the facts,” and suggests that unless the facts are undisputed the matter cannot be resolved with a trial. 

HOW THE COURTS HAVE REACTED

§ 19

Rejected:

  • Catlin Specialty Ins. Co. v. J.J. White, Inc., 309 F. Supp. 3d 345, 363 (E.D. Pa. 2018) discusses the insured’s argument that the 2017 draft of § 19, which then provided that “an insurer that breaches the duty to defend without a reasonable basis for its conduct must provide coverage for the legal action for which the defense was sought, notwithstanding any grounds for contesting coverage.” The court declined to adopt such a position, and the language changed substantially from the 2017 draft to the 2018 final.

Adopted or cited with approval:

  • Nationwide Mut. Fire Ins. Co. v. D.R. Horton, Inc., Civil Action No. 15-351-CG-N, 2016 U.S. Dist. LEXIS 160148, at *20 n.6 (S.D. Ala. Nov. 18, 2016) cited a 2015 draft of § 19 RLLI and a Florida federal opinion for “the longstanding principal of law that an insurer which ‘breaches its duty to defend or unjustifiably refuses to defend its insured . . . forfeits control of the suit to the insured and may be held liable to its insured for costs incurred in providing its own defense.’”

§ 21

Rejected:

  • Catlin Specialty Ins. Co. v. CBL & Assocs. Props., No. N16C-07-166 PRW CCLD, 2018 Del. Super. LEXIS 342, at *8 (Super. Ct. Aug. 9, 2018) (applying Tennessee law) declined to adopt § 21. “Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law. And this Restatement itself acknowledges that ‘[s]ome courts follow the contrary rule[.]’”

Adopted or cited with approval:

  • Selective Ins. Co. of Am. v. Smiley Body Shop, Inc., No. 1:16-cv-00062-JMS-MJD, 2017 U.S. Dist. LEXIS 215904, at *15-16 (S.D. Ind. July 28, 2017) cites the 2017 discussion draft of the RLLI, specifically § 21, in support of its holding that an insurer may not seek recoupment of defense costs for uncovered claims unless the policy provides for recoupment.

Watch for our next post in this series, which considers RLLI’s thoughts on the tripartite relationship amongst insurer, defense counsel, and insured. Our prior post in the series can be found at:

RLLI – Exclusions

Related Services: Insurance

Attorneys: Angela Higgins

Restatement of the Law of Liability Insurance - Exclusions

April 18, 2019 | Angela Higgins

The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.

Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings.  Following its passage, a number of state legislatures have passed laws or resolutions to prevent the adoption of the RLLI.  These include:

  • Arkansas (Ark. Code § 23-60-112);
  • Indiana (2019 House Concurrent Resolution No. 62);
  • Kentucky (2018 Kentucky House Resolution 222);
  • Michigan (Mich. Comp. Laws § 500.3032);
  • North Dakota (N.D. Cent. Code § 26.1-02 (2019));
  • Ohio (Ohio Rev. Code § 3901.82); and
  • Tennessee (Tenn. Code § 56-7-102).

Idaho and Texas are currently considering bills to preclude the adoption of the RLLI.

In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.

Our first post considers RLLI’s suggestions on the interpretation of policy language, and specifically exclusions:

§ 32 Exclusions

(1) An “exclusion” is a term in an insurance policy that identifies a category of claims that are not covered by the policy.

(2) Whether a term in an insurance policy is an exclusion does not depend on where the term is in the policy or the label associated with the term in the policy.

(3) Exclusions are interpreted narrowly.

(4) Unless otherwise stated in the insurance policy, words in an exclusion regarding the expectation or intent of the insured refer to the subjective state of mind of the insured.

(5) An exception to an exclusion narrows the application of the exclusion; the exception does not grant coverage beyond that provided in the insuring clauses.

WHY IT IS PROBLEMATIC

The RLLI proposes that any exclusion related to the expectation or intent of the insured should be determined by the subjective state of mind of the insured. RLLI proposes that even the insured’s statement of his/her state of mind can be disregarded – “even an insured’s admission of intent to harm is subject to cross-examination and the jury’s assessment of credibility.” Comment d. 

Furthermore, RLLI suggests that as to exclusions such as sexual abuse, physical and mental abuse, etc., “The default rule is that such exclusions are severable, meaning that they apply only to insureds whose conduct meets the requirements of the exclusion.” Comment c. That is not an accurate statement of the law, which depends upon the precise language of the exclusion, including whether the exclusion applies to “the insured” or to “any insured.” In policies with severability or “separation of insureds” language, claims against each insured are evaluated separately for coverage, but there is considerable case law distinguishing between “the insured” and “any insured” language, where “any insured” language will exclude coverage for all insureds if any of them has engaged in the excludable conduct. See, e.g., Am. Family Mut. Ins. Co. v. Copeland-Williams, 941 S.W.2d 625, 629-30 (Mo. App. E.D. 1997) (“The use of the phrase ‘any insured’ makes the exclusionary clause unambiguous even in light of the severability clause. . . . [it] unambiguously precludes coverage to all persons covered by the policy if any one of them engages in excludable conduct.”).

Moreover, many modern exclusions are written to exclude coverage for particular claims and losses, without regard to the insured’s intent, including the sexual, physical, and mental abuse exclusions. Courts interpreting this kind of policy language have found that it “serves to exclude an entire category of injury based on the cause, not just the person who committed the harmful act.” Safeco Ins. Co. v. Thomas, No. 13-CV-0170-AJB (MDD), 2013 WL 12123852, at *5 (S.D. Cal. Nov. 26, 2013) (emphasis added); see also, accord, Universal N. Am. Ins. Co. v. Colosi, No. 217CV00113JADGWF, 2018 WL 3520118, at *4 (D. Nev. July 20, 2018); Liberty Mut. Fire Ins. Co. v. Shaibaz S., 2017 WL 2118312 (N.D. Cal. May 16, 2017); Travelers Indem. Co. of Am. v. Isom, 2014 WL 1092542 (D. Ariz. Mar. 20, 2014). RLLI does not address the modern language of sex abuse exclusions in suggesting that there is a “default” rule that applies the exclusion only to the abuser.

RLLI mentions, in passing, that some states have adopted an inferred-intent approach to the insured’s subjective intent with sexual molestation claims, but otherwise takes no position that intent may (and should) be inferred or determined on an objective basis in many circumstances. Not only does this raise significant questions of how the insurer could prove the insured’s subjective state of mind, it is inconsistent with well-established law in all jurisdictions that will infer intent as to certain conduct as a matter of public policy, including sex abuse and other criminal conduct.

As discussed below, it is clearly distasteful and inappropriate to allow insureds who have engaged in certain conduct to advance an argument regarding whether they subjectively believed that their victims would welcome, rather than be harmed by, offensive behavior. Moreover, the principle that the insured is deemed to intend the reasonable and probable consequences of his/her voluntary acts, an objective standard for intent, is a widely-accepted standard that serves public policy and preserves the resources of the courts and parties.

Sexual abuse and expected/intended exclusions

Many modern policies will have a specific sexual abuse/molestation exclusion. However, practitioners can face a lack of case law interpreting their specific exclusion(s) or a policy that lacks a sex abuse-specific exclusion, including in older policies. Historically, sex abuse has been addressed, in whole or in part, through expected/intended exclusions.

A person who sexually molests a minor is deemed as a matter of law to have expected and intended to cause harm or injury. See, e.g., B.B. v. Cont’l Ins. Co., 8 F.3d 1288, 1296 (8th Cir. 1993) (applying Missouri law). 

Forcing the insurer to indemnify the insured “subsidizes the episodes of sexual abuse of which its victims complain, at the ultimate expense of other insureds to whom the added costs of indemnifying child molesters will be passed.” . . . “The average person purchasing homeowner’s insurance would cringe at the very suggestion that he was paying for [coverage for liability arising out of his sexual abuse of a child]. And certainly he would not want to share that type of risk with other homeowner’s policy holders.”

B.B., 8 F.3d at 1295 (citations omitted). 

“The inference or inferred-intent standard in cases of sexual molestation is now the unanimous rule among jurisdictions that have considered the issue.” B.B., 8 F.3d at 1293. 

The rationale behind the inferred-intent standard is based on the inherently harmful nature of child molestation. . . . Courts have stated that “‘acts of sexual molestation against a minor are so certain to result in injury to that minor that the law will infer an intent to injure on behalf of the actor without regard to his . . . claimed intent.’” . . . . “in the exceptional case of an act of child molestation, cause and effect cannot be separated; that to do the act is necessarily to do the harm which is its consequence; and that since unquestionably the act is intended, so also is the harm.” . . . “the very essence of child molestation is the gratification of sexual desire. The act is the harm. There cannot be one without the other. Thus the intent to molest is, by itself, the same thing as intent to harm.”

B.B., 8 F.3d at 1293.

When an adult subjects a minor to “unwanted and unconsented to sexual contact,” the perpetrator is deemed as a matter of law to have intended and expected the resulting physical and psychological damages, even if the perpetrator “believed in some perverse way” that his conduct would be welcomed by the minor. State Farm Fire & Cas. Co. v. Caley, 936 S.W.2d 250, 252 (Mo. App. W.D. 1997). “Missouri case law specifically holds that a person engaging in sexual misconduct against a minor intends to cause any resulting injuries.” California Cas. Gen. Ins. Co. v. Nelson, 2014 U.S. Dist. LEXIS 191438, *15-16 (W.D. Mo. Dec. 22, 2014).

With a “unanimous rule” for legally inferred intent as to acts of sexual abuse, is there a place for the RLLI’s subjective intent standard? In the modern climate of “me too” and a growing awareness and litigation of sex abuse, who has the appetite to argue for a subjective standard of intent as to such conduct? Although we might expect any jurisdictions tempted to adopt the subjective intent standard to try to carve out sex abuse against minors, for the same reasons that intent is inferred for this type of behavior, intent is properly inferred or judged on an objective basis for many types of conduct.

Criminal acts and expected/intended exclusions

Although many policies will include a criminal acts exclusion, the expected/intended exclusion is often used to address conduct that constitutes a crime, particularly under commercial policies. Many jurisdictions apply an inferred-intent standard to this exclusion as a matter of public policy.

In James v. Paul, 49 S.W.3d 678 (Mo. 2001), the Missouri Supreme Court agreed with an insurer that it was entitled to summary judgment on the question of the applicability of its intended/expected acts exclusion based upon the insured’s plea of guilty in a criminal case arising out of the same underlying conduct that gave rise to the civil case. 49 S.W.3d at 682.

If issue preclusion is not permitted, Paul will, in effect, be insulated by an insurer from the full brunt of economic responsibility resulting from his admittedly intentional criminal act. This runs contrary to the public policy of Missouri. . . . Both James and Paul stood to profit from Paul’s duplicity in admitting intentional wrongdoing in the criminal proceeding while, in effect, denying it in the present case. Applying collateral estoppel in this situation serves to prevent the potential of collusive litigation as well as promoting the other policies of finality, consistency and judicial economy discussed above.

James, 49 S.W.3d at 687-88 (citation omitted).

“[W]here the insured made a judicial admission as part of a prior judicial determination in a criminal case that the insured's conduct was intentional,” a court considering the application of an intended/expected exclusion is also required to presume that the insured’s conduct was intentional. James, 49 S.W.3d at 689. “The criminal conviction foreclosed [the insured] and any party claiming through him from asserting that his conduct was not intentional.” Id. (emphasis added).

Again, there are significant public policy considerations underlying an inferred-intent approach to the expected/intended acts exclusions commonly found in liability policies. RLLI’s suggestion that a subjective intent standard is preferred, which would place the burden on the insurer to establish the insured’s state of mind, is inconsistent with well-developed precedent in most jurisdictions.

HOW THE COURTS HAVE REACTED

To date, the only available decision to address RLLI § 32 cited it, along with preexisting case authority, for the proposition that an insurer bears the burden of proving the applicability of exclusions. Akorn, Inc. v. Fresenius Kabi AG, No. 2018-0300-JTL, 2018 Del. Ch. LEXIS 325, at *137 n.619 (Ch. Oct. 1, 2018) (citing Restatement of the Law of Liability Insurance § 32 cmt. e (Am. Law. Inst. 2018); “It is the insurer that has identified the excluded classes of claims and will benefit from being able to place a specific claim into an excluded class. Thus, assigning the insurer the burden of proving that the claim fits into the exclusion is appropriate.”)

Watch for our next post in this series, which considers RLLI’s thoughts on the duty to defend.

Related Services: Insurance

Attorneys: Angela Higgins

Illinois Appellate Court Holds Employer's Alleged Biometric Information Privacy Act Violation Is Not Subject to Arbitration

April 16, 2019 | Lisa Larkin

Not all employment-related claims are subject to an employment agreement’s mandatory arbitration clause, according to the Illinois Appellate Court for the First District.

In Liu v. Four Seasons Hotel, LTD., 2019 IL App (1st) 182645 (April 9, 2019), the plaintiffs, all employees of the defendant hotels, filed a class action alleging their employer violated the Biometric Information Privacy Act (740 ILCS 14/1 et seq. (West 2016)) in their method of collecting, using, storing, and disclosing employees’ biometric data, namely fingerprints taken for timekeeping purposes.  Defendants filed a motion to compel arbitration, arguing that each employee signed an employment agreement requiring “wage and hour violation” claims, as well as the initial question of arbitrability, be submitted to and decided by an arbitrator. 

Illinois enacted the Biometric Information Privacy Act in 2008 to help regulate the collection, use, safeguarding, handling, storage, retention, and destruction of biometric identifiers and information.  These identifiers include things like retina or iris scans, fingerprints, voiceprints, hand scans, or face geometry scans.  The Act provides a private right of action that permits a prevailing party to recover damages of $1000 or actual damages (if greater) for negligent violation of the Act and $5000 or actual damages (if greater) for intentional or reckless violations, in addition to attorney’s fees and costs. 

The plaintiffs, on behalf of themselves and all those similarly situated, claimed defendants scanned their fingerprints, placed and maintained that biometric data in a database, and then used it for timekeeping purposes.  They alleged violations of the Act in defendants’ failure (1) to inform employees that it discloses fingerprint data to an out-of-state third party vendor; (2) to inform employees in writing of the specific purpose and length of time for which their fingerprints were being collected, stored, and used; (3) to provide a retention schedule and guidelines for permanent deletion of biometric information; and (4) to acquire written releases from employees to collect biometric information.

The trial court denied the defendant’s Motion to Compel Arbitration, and the Appellate Court affirmed.  The Appellate Court held the claims did not fit within the “wage or hour violation” category of disputes subject to mandatory arbitration under the employment agreements.  The defendants argued the sole purpose for requiring employees to scan their fingerprints was to monitor the hours worked, which necessarily makes it a “wage or hour violation” claim.  The Court, however, looked to how this phrase has been used in other contexts, such as under Illinois’ Wage Payment Act or Minimum Wage Law or the federal Fair Labor Standards Act.  In all those enactments, wage and hour violation claims involve allegations of an employer wrongfully withholding compensation or failing to pay employees overtime rates.  Plaintiffs here, in contrast, alleged nothing beyond violations of the Biometric Information Privacy Act.  They made no claims of improperly withheld compensation or hours violations. 

The Court noted, citing to Rosenbach v. Six Flags Entertainment Corp., 2019 IL 123186, that the Act is a privacy rights law that applies inside and outside the workplace.  “Simply because an employer opts to use biometric data, like fingerprints, for timekeeping purposes does not transform a complaint into a wages or hours claim.” 

This opinion, as we noted in an earlier blog post addressing Rosenbach, creates a strong incentive for employers to conform to the Act to prevent problems before they occur and subject them to potential civil litigation, as mandatory arbitration clauses may not cover the claims.   

In a case of first impression, the Appellate Court of Illinois allows counsel to withdraw previously disclosed testifying expert

April 12, 2019 | Richard Woolf and Rebecca Guntli

In a case of first impression, the Illinois Appellate Court, First District, applying federal law principles, held that a party who discloses a testifying expert may later redesignate that witness as a consultant whose opinions and work product are privileged and protected from discovery absent a showing of exceptional circumstances.

In Dameron v. Mercy Hospital and Medical Center, plaintiff Alexis Dameron disclosed Dr. David Preston in her interrogatory answers as a testifying expert witness on May 30, 2017.  She further disclosed, pursuant to the applicable rules, that Dr. Preston would provide testimony regarding the results of testing he was to perform on Ms. Dameron on June 1, 2017.  Dr. Preston did perform tests of the Plaintiff and later prepared a report in which he discussed his findings and opinions, but the report was never disclosed, despite Illinois Supreme Court Rule 213(f)(3) requiring disclosure of “any” reports prepared by a controlled expert about the case. 

Almost two months later, on July 27, 2017, Ms. Dameron notified opposing counsel that she had “inadvertently” disclosed Dr. Preston as a testifying expert and amended her discovery answers excluding Dr. Preston as a testifying expert. 

On August 3, 2017, shortly after notifying opposing counsel of the inadvertent disclosure, Ms. Dameron filed a motion to designate Dr. Preston as a non-testifying expert consultant pursuant to Illinois Supreme Court Rule 201(b)(3), which states as follows:

A consultant is a person who has been retained or specially employed in anticipation of litigation or preparation for trial but who is not to be called at trial. The identity, opinions, and work product of a consultant are discoverable only upon a showing of exceptional circumstances under which it is impracticable for the party seeking discovery to obtain facts or opinions on the same subject matter by other means.

The circuit court denied Ms. Dameron’s motion to redesignate Dr. Preston and ordered Plaintiff to produce Dr. Preston’s records and report regarding the testing he performed.  Plaintiff refused, and the trial court found her in contempt, imposing a $100 fine. Plaintiff filed a motion to reconsider, which was likewise denied by the trial court, but reduced the fine to $1.  Plaintiff then appealed the matter to the Appellate Court for the First Circuit.

The Appellate Court ultimately reversed the circuit court’s decision and held, as a matter of first impression, that where a previously disclosed testifying expert is timely withdrawn prior to disclosing his or her report in discovery, the expert may be redesignated as a Rule 201(b)(3) consultant and entitled to the consultant’s privilege against disclosure, absent exceptional circumstances.

Given it was a matter of first impression, the Appellate Court found sufficient similarities between Illinois and federal discovery rules and rendered federal case law on this issue persuasive.  Federal case law supported the contention that both the disclosure of the expert as well as the expert’s required report is necessary to fully disclose a testifying expert under Federal Rule of Civil Procedure 26.  In this case, Ms. Dameron had only disclosed Dr. Preston’s identity, but had not disclosed or identified his report because at the time she filed her answers to interrogatories, Dr. Preston had not yet conducted his testing. 

Defendants made several arguments in an attempt to gain access to Dr. Preston’s examination results.  They argued that Dr. Preston was a treating physician and, consequently, Plaintiff waived any right to withhold the results.  The Appellate Court disagreed and found Dr. Preston was hired to testify, not to treat.  They also argued that Ms. Dameron’s disclosure of Dr. Preston was a judicial admission, but the court disagreed arguing Plaintiff was permitted to withdraw Dr. Preston as a witness and/or supplement her discovery answers. 

Defendants further argued that because Dr. Preston was initially disclosed as a testifying expert, Plaintiff waived any privilege to Dr. Preston’s report.  However, the court stated that the rules only required Plaintiff to turn over a report if Dr. Preston was going to testify at trial.   Defendants also argued that they were entitled to the report because it contained relevant facts, but the court disagreed and found that Dr. Preston’s report was protected by the consultant’s work product privilege only subject to discovery upon showing of exceptional circumstances.

Finally, Defendants argued that Plaintiff was attempting to subvert the legal process.  The timeline of these events does appear to be highly suspicious in that the motion to redesignate Dr. Preston was filed after he presumably drafted his report and almost two months after disclosure.  One may assume that Dr. Preston’s report was unfavorable to Plaintiff and, consequently, prompted her to withdraw Dr. Preston as an expert.  Nevertheless, the court found that Defendants failed to identify any evidence to support their claim of Plaintiff’s subversion of the legal process.

The Appellate Court ultimately held that where a previously disclosed testifying expert witness has been timely withdrawn prior to disclosing his or her report in discovery, the expert may be redesignated a Rule 201(b)(3) consultant and entitled to the consultant’s privilege against disclosure, absent exceptional circumstances.  The court found no exceptional circumstances in this case.

The implications of this case are significant, and this is probably not the end of the story, as this issue will likely be relitigated in the future should parties employ this as a tactical litigation strategy.

Dangerous Advertising: Violations of a fair trade practices statute creates new liability for firearm manufacturers and sellers

April 4, 2019 | James Seigfreid and Andreea Sharkey

On December 14, 2012, Adam Lanza used his mother’s XM15-E2S to shoot his way into the locked Sandy Hook Elementary School. Lanza killed twenty-six persons and wounded two others. The attack lasted four and one-half minutes. One hundred fifty-four rounds from Lanza’s XM15-E2S were fired.

The XM15-E2S Bushmaster is an AR-15 assault style semi-automatic rifle. It is similar to the standard issue M16 military service rifle used by the United States Armed Forces. Following the shooting, plaintiffs (Sandy Hook parents and others) filed actions against the Bushmaster Firearms International, LLC company (Remington) alleging a number of distinctive theories of liability. Among these was the claim that defendant wrongfully advertised and marketed Lanza’s assault rifle, emphasizing its character as a military style assault rifle suitable for offensive combat missions. Plaintiffs alleged, among other things, that this advertising was unethical, oppressive, immoral, unscrupulous, and in violation of the Connecticut Unfair Trade Practices Act (“CUTPA”). Defendants countered that the CUTPA was not broad enough to encompass such a claim and that defendants were immunized from suit by the federal Protection of Lawful Commerce in Arms Act (“PLCAA”).

The trial court agreed. On appeal, however, the Connecticut Supreme Court in Soto v. Bushmaster Firearms International, et al. concluded that the PLCAA did not immunize firearms manufacturers or suppliers who engage in wrongful marketing practices promoting criminal conduct. The Court also found that the CUTPA was indeed broad enough to address wrongful advertising practices and that it would fall to a jury to decide whether or not the defendant’s advertising violated standards set forth in Connecticut’s Unfair Trade Practices Act.

The CUTPA is an unfair and deceptive acts and practices statute with counterparts in every state. These acts prohibit deceptive, unfair and unconscionable practices and commonly create private rights of action for individuals harmed by the practices prohibited. Many such statutes also create authority for governmental entities or state consumer protection officials to bring suit.

Historically, firearms manufacturers and sellers have relied on the PLCAA bar to claims and immunize them from suits for injuries caused by the criminal conduct of third-party gun users. The Court in Soto, however, held that the PLCAA did not insulate Bushmaster from claims related to its advertising and marketing of the XM15-E2S assault style weapon.

The Connecticut Supreme Court also found that while prior interpretations limited the reach of the CUTPA with respect to such claims, plaintiffs’ claims in this case would be permitted. The holding expands the scope of the Connecticut statute in at least three important respects: (1) plaintiffs no longer need to have a “commercial relationship” with defendant; (2) personal injuries are now a cognizable harm under the CUTPA; and (3) continuous advertising up to and including the date of plaintiffs’ filing prohibits the tolling of applicable statutes of limitation.

While this ruling greatly changes the use and landscape of the CUTPA in Connecticut, the Court has only addressed the issue of standing in this case and no disposition has yet been made on the merits of plaintiffs’ claims.

The ruling is likely to encourage plaintiffs in other states to challenge advertising and marketing by firearm manufacturers under similar and applicable unfair practices acts. Plaintiffs’ challenge in Connecticut may be the first of many such efforts yet to come.

Soto v. Bushmaster Firearms Int'l, LLC, 331 Conn. 53, 157 (2019)

Supreme Court of Missouri Issues First-Of-Its-Kind Ruling Overturning a $2.3 Million Negligent Credentialing Verdict

March 28, 2019 | John Mahon, Jr.

In Thomas E. Tharp, et al. v. St. Luke's Surgicenter – Lee's Summit, LLC, the Supreme Court of Missouri overturned a $2.3 million jury verdict in favor of a patient and his wife against a hospital, because there was no proof the hospital negligently granted staff privileges to a surgeon. The opinion is the first from the Supreme Court of Missouri to address the requirements of a negligent credentialing claim. 

The plaintiff alleged injuries stemming from a surgical procedure to remove his gallbladder. The plaintiff and his wife settled their claims with the surgeon, but went to trial against the hospital alleging it negligently granted privileges to the surgeon. At trial, plaintiffs presented evidence that the surgeon failed to disclose to the hospital all prior malpractice suits.

The hospital filed a motion for directed verdict at the close of all evidence on two grounds: (1) There was insufficient evidence to establish it had been negligent; and (2) the act of granting privileges to the surgeon was not the proximate cause of the injury. The trial court denied this motion, and the jury returned a verdict in favor of the plaintiffs. The trial court also overruled the hospital’s post trial motion for judgment notwithstanding the verdict, asserting the same arguments set forth above.

In a 6-1 decision, the Supreme Court held that a breach of the hospital’s bylaws (requiring the surgeon to report all prior malpractice suits) was not enough to support a negligent credentialing claim, and found no evidence that the grant of staff privileges to the surgeon was the proximate cause of the injury.

Addressing the nature of the relationship between a modern healthcare facility and its medical staff, the Court observed that “Physicians working under staff privileges are typically independent contractors, not hospital employees,” and that “staff privileges allow physicians to utilize a healthcare facility to admit and treat patients as independent care providers rather than as employees of the facility.” Under appropriate circumstances, a negligent credentialing claim can provide an avenue for potential liability against a hospital for injury caused by an independent contractor. The focus is whether the hospital gathered pertinent information to make a reasonable decision as to whether to grant privileges. The proper inquiry is whether the physician was competent and possessed the necessary knowledge, skill and experience to perform his job without creating unreasonable risk of injury to others.     

One of the requirements in the hospital’s bylaws was full disclosure of all prior malpractice suits, and the failure to do so was grounds to automatically remove a physician from staff privilege consideration. The evidence at trial showed the surgeon failed to list on his application each suit he had defended over his career, but there was no evidence that addressed the surgeon’s qualifications to perform surgery. The plaintiff’s own expert admitted there was no “magical number” of malpractice suits that shows a surgeon is unqualified. Further, plaintiff’s expert cited a statistical study showing physician malpractice claim rates vary widely depending, in large part, on the medical specialty involved. “Even acts of repeated negligence do not support a finding a surgeon is incompetent when there is no evidence that shows a surgeon generally lacks a professional ability.” Thus, the Court found the plaintiffs failed to make a submissible case of negligent credentialing. 

The Court also found the plaintiffs failed to prove the credentialing of the surgeon was the proximate cause of the injury. It was not enough to prove that but for the credentialing, the surgeon could not have performed the surgery that produced the injury. Rather, the plaintiffs needed to prove the injury was the natural and probable consequence of the surgeon’s incompetence. “Even a supremely qualified, competent, and careful physician may nevertheless injure a patient through an isolated negligent act.” Because plaintiffs failed to show the surgeon was incompetent, they could not prove the injury was the result of the surgeon’s incompetence and thus failed to make a submissible case.    

In this first ruling of its kind in Missouri, the Missouri Supreme Court has provided guidance to Missouri lower courts and practitioners prosecuting or defending a negligent credentialing claim. These claims are difficult to prove, as they require proof beyond that which is required to support a malpractice claim against a physician. Absent credible evidence of a physician’s incompetence generally, and the negligent failure of a hospital to discover the incompetence and act accordingly, courts should dispose of these claims via dispositive motion.     

The opinion did not address whether the negligent credentialing theory conflicts with Mo.Rev.Stat. § 538.210.4, which provides, in part, that “[n]o health care provider whose liability is limited by the provisions of this chapter shall be liable to any plaintiff based on the actions or omissions of any other entity or individual who is not an employee of such health care provider . . . .” Negligent credentialing liability necessarily depends on the negligent act or omission of a non-employee physician. In the event this argument is raised, it is unclear how the Court would address the apparent conflict of law.   

SCOTUS Rebuffs Ninth Circuit's Attempt to "Soften" Deadline to Appeal Class Action Certification

March 25, 2019 | Douglas Hill

The deadline to appeal an order granting or denying class certification is a rigid one that is not subject to equitable tolling, according to a unanimous United States Supreme Court. Reversing the Ninth Circuit Court of Appeals, the high court found that lower courts lack the power to relax the 14-day deadline for filing a petition for permission to appeal class-certification rulings.

Nutraceutical Corporation v. Lambert arose from a putative consumer class action filed against the maker of a dietary supplement. Although the Central District of California initially certified a class of similarly situated plaintiffs, it later changed its decision and entered an order decertifying the class. Rule 23(f) of the Federal Rules of Civil Procedure provides that a petition for permission to appeal that order had to be filed with the Ninth Circuit Court of Appeals within 14 days. 

However, 10 days after the ruling, the plaintiffs’ lawyers informed the district court at a status hearing that they intended to file a motion for reconsideration of the order decertifying the class. The district judge instructed them to do so within 10 days of the hearing—20 days from the decertification order—which they did. Several months later, the trial court denied the motion for reconsideration, and the plaintiffs’ lawyers then filed their petition for permission to appeal. While the petition for permission to appeal was filed within 14 days of the order denying reconsideration, it was more than four months after the initial order decertifying the class action. 

Notwithstanding this apparent procedural defect, the Ninth Circuit accepted the appeal. It rejected the manufacturer’s argument that the appeal was untimely, primarily because the plaintiffs’ lawyers had told the trial court of their intention to seek reconsideration within the initial 14-day window and then sought permission to appeal within 14 days of the denial of that motion for reconsideration. To reach this result, it invoked the doctrine of equitable tolling to “soften” the deadline and permit the appeal. True to its reputation as a judicial outlier, the Ninth Circuit acknowledged contrary authority from the Second, Third, Fourth, Fifth and Seventh Circuits and admitted those courts “would likely not toll the Rule 26(f) deadline” under these circumstances.  

The United States Supreme Court took a far more rigid view of the 14-day deadline imposed by Rule 26(f), describing it as “purposefully unforgiving.” Writing for a unanimous court, Justice Sonia Sotomayor framed the issue as whether the text of the rules left room for flexibility in how this deadline is imposed. Although appellate courts have very broad authority under the Federal Rules of Appellate Procedure to “suspend any provision of these rules in a particular case,” that flexibility comes with an important caveat: Appellate Rule 26 expressly provides that courts of appeals “may not extend the time to file […] a petition for permission to appeal.” The court found that this language shows “a clear intent to compel rigorous enforcement” of the 14-day deadline to file with the appellate court. “Courts may not,” Justice Sotomayor concluded, “disregard a properly raised procedural rule’s plain import any more than they may a statute’s.”

The plaintiffs’ lawyers tried to draw a distinction between “extending the time to file” a petition to appeal, which Appellate Rule 26 expressly forbids, with a decision “to excuse late filings on equitable grounds after the fact.” Relying on prior Supreme Court precedent under the analogous rules of criminal procedure, the high court rejected this type of hair-splitting. No matter how it is described, the acceptance of a late filing is a de facto extension of time.

But this opinion does not completely dash these plaintiffs’ attorneys’ hopes of appealing the decertification of their class. The Supreme Court declined to weigh in on two of their primary arguments for certification, because those were not addressed by the underlying court of appeals opinion. This leaves the Ninth Circuit free to revive those arguments on remand. 

First, the plaintiffs’ lawyers argued that regardless of whether the deadline for a petition for permission to appeal could be extended, the trial court could extend the time to file a motion for reconsideration, and they claimed the district court did just that when it instructed them to file their motion for reconsideration within 10 days of the hearing.  Alternatively, they argued that the order denying reconsideration was itself an “order granting or denying class-action certification,” starting a new 14-day window in which to file a petition to appeal, even if they had blown the initial deadline. In either case, the crux of the argument is that the deadline to file a petition for permission to appeal should have been calculated from the date the motion for reconsideration was denied, not the date of the initial class decertification.

And these arguments might have some legs, too. The Supreme Court carefully confined its analysis to the narrow issue of whether equitable tolling could be applied to the deadline to appeal class certification orders, since that was the sole basis for the Ninth Circuit’s ruling. Justice Sotomayor even acknowledged that a timely motion for reconsideration can render an otherwise final decision not final for appeal purposes.  The question of whether the motion for reconsideration was timely and, if so, its effect remains unanswered. This means the parties’ appellate battle is not over, with the next round back before the Ninth Circuit. And regardless of how that court rules, a second appeal to the Supreme Court may be necessary to untie the rest of this procedural knot.

Hopping on the Missouri Bandwagon? Not so Fast Out-of-State Litigants.

March 18, 2019 | Megan Sterchi Lammert

In an effort to overhaul Missouri’s current venue and joinder laws, Missouri lawmakers introduced Senate Bill 7, aimed at restricting non-Missouri plaintiffs from joining their claims in the same lawsuit, with those of a Missouri resident, even though the non-residents’ claims have no legal nexus to Missouri. The most immediate and prominent impact of the bill, if enacted, would be upon mass tort litigation. The bill also limits the use of joinder in product liability cases, prohibiting joining claims arising out of separate purchases or separate incidents related to the same product. 

Following its introduction, Senate Bill 7 was revised to adopt the February 13, 2019 Missouri Supreme Court ruling in State ex rel. Johnson & Johnson v. Burlison. The Missouri Senate subsequently passed the revised version on March 4, 2019.  The Johnson & Johnson case dealt with the talcum powder litigation filed in St. Louis City Circuit Courts, involving many plaintiffs with both non-Missouri and Missouri residents, and held that plaintiffs cannot use joinder rules to establish venue in a jurisdiction where it otherwise would not exist. 

Senate Bill 7 moved onto the House, which recently considered similar legislation. See House Bill 231.  As of March 6, 2019, the Senate bill was read and referred to the Judiciary Committee. 

Proponents of the legislation say that it will help address “a crisis” in Missouri’s courts, where out of state plaintiffs have flocked to litigate their claims in perceived plaintiff-friendly venues, such as St. Louis City (which has been dubbed a “Judicial Hellhole” by the defense bar); and Jackson County, which includes the greater Kansas City area.  The Senate bill’s sponsor, Ed Emery, notes that out of the 13,252 mass tort plaintiffs involved in cases being heard in St. Louis City, only 1,035 are Missouri residents.

Proponents of the bill say that its passage will also have significant economic benefits, because Missouri taxpayers are currently paying for out of state plaintiffs to clog the Missouri courts with claims that have nothing to do with Missouri, thus taking up precious judicial resources that would better be used to adjudicate the claims of Missouri citizens.  Opponents of Senate Bill 7 primarily argue that it makes sense to have groups of plaintiffs, who all purportedly suffered similar injuries, to bring their claims together in the same court and lawsuit. 

The current bill contains “grandfather” provisions, making the legislation inapplicable to any action that meets two criteria:  (1) the action is pending as of February 13, 2019 (when the Supreme Court decided Johnson & Johnson), and (2) the action is set for trial on or before August 28, 2019 (the date on which the new legislation is scheduled to take effect.). 

If enacted, this legislation may significantly alter the landscape of tort litigation in Missouri, both for litigants, and for the judiciary (especially in St. Louis City and Jackson County).  Companies that do business in Missouri should follow its progress closely.

Jackson County Circuit Court's Fine of City of Raytown Is a Sunshine Law Cautionary Tale

March 13, 2019 | Lisa Larkin

A Jackson County, Missouri, Circuit Court Judge ordered the City of Raytown - specifically its City Clerk - to pay more than $42,000 in attorney fees and civil penalties after ruling in July 2018 that the city violated Missouri’s Sunshine Law. The City Clerk denied the release of records in an apparent attempt to shield the city from litigation involving the design of one of the city’s intersections.

Several months after Plaintiff Paula Wyrick’s mother died in a vehicle crash at an intersection in Raytown. Wyrick requested records from the City about the intersection, including its design, any traffic or other diagnostic studies conducted there, and any complaints about the safety of or accidents occurring at or around the intersection.  On multiple occasions, the City Clerk refused to produce the requested records, asserting all requests fell within the Sunshine Law’s litigation exception.  The litigation exception protects, in part, documents related to potential legal actions or litigation involving a public governmental body. 

Wyrick filed suit seeking declaratory and injunctive relief against the City Clerk.  Wyrick moved for summary judgment asserting that the City Clerk, on behalf of her office, “took a position completely unheard of under Sunshine Law, namely, that a specific category of records can be closed only to Plaintiff and her lawyers, but otherwise open to anyone else.  Put another way, the City Clerk has admitted that she would search for and produce records responsive to Paula Wyrick’s requests, if only the requests would come from a different person.”

The City Clerk countered that Wyrick only sought the records to use in potential litigation against the City of Raytown as a result of her mother’s death.  In the face of this clear and unequivocal threat of litigation in this matter, the City Clerk argued she was justified in closing and refusing to produce the records.

In July 2018, Jackson County Circuit Court Judge S. Margene Burnett granted Wyrick partial summary judgment and ordered production of the design records and traffic studies conducted at the intersection.  She ruled that while Wyrick admitted she was contemplating litigation against the City, the City Clerk’s use of the Sunshine Law as a “shield to hide behind rather than shed light on potentially inappropriate governmental activity…is precisely why the Sunshine Law was enacted.” 

Initially, Judge Burnett declined to order civil penalties against the City Clerk, finding that the refusal to comply was done under an incorrect reading of Missouri law.  However, the Judge reconsidered in November 2018 after hearing additional arguments, which convinced her that the city clerk’s actions rose to a knowing and purposeful violation of the Sunshine Law.  The Clerk had testified that she “implemented a policy to refuse the production of any requested documents to any citizen if that citizen has filed a notice of claim against the City of Raytown, regardless of the nature of the document requested.”  The Court awarded $38,550.00 in attorney fees and assessed civil penalties of $4,000.00, representing $1,000.00 for each of the four distinct violations of the Sunshine Law established by the evidence.  The City filed a Notice of Appeal on February 14, 2019.

This ruling is likely to encourage municipalities to take a closer look at their open-records policies to ensure they are encouraging the spirit of openness which is embodied in the state’s Sunshine Law.

Paula Wyrick v. Teresa M. Henry, in her capacity as City Clerk of the City of Raytown, No. 1716-CV-24321, Circuit Court of Jackson County, Missouri.  

Missouri Supreme Court: There Must be Sufficient Evidence at Trial to Support Each Alternative of a "Disjunctive" Jury Instruction

March 7, 2019 | Noemi Donovan

The Missouri Supreme Court's recent holding in Kader v. Bd. of Regents underscores the importance of ensuring that each alternative of a disjunctive verdict directing instruction is supported by sufficient evidence at trial. Because the Court found there was not substantial evidence to support each alternative of the circuit court's disjunctive instructions, the instructions were erroneous and prejudicial. As a result, it reversed the $2.5 million verdict in favor of plaintiff Kader, a former Harris-Stowe State University ("HSSU") professor, who filed claims of national origin discrimination and retaliation against HSSU under the Missouri Human Rights Act.

Kader, an Egyptian national, came to the United States in 1999 to pursue her graduate education. After working on the faculty at HSSU while completing her doctorate, she was promoted to assistant professor upon completion of her studies when she received her degree.  In a performance review several years later, Kader believed she received lower ratings because of her race, religion and national origin and filed a discrimination complaint with HSSU.  

Plaintiff worked at HSSU under a J-1 visa, which is a non-immigrant visa for individuals approved to participate in work and study based exchange visitor programs.   A J-1 visa requires an employer sponsor and the facility where she attended graduate school originally sponsored her visa from 2007 until 2010.  HSSU supplied information needed to maintain her visa while she was on the HSSU faculty and indicated it would assist her with obtaining a new visa when her J-1 expired.  Typically, exchange visitors on J-1 visas return to their home countries for at least two years when their visas expire and then apply for a new visa if they decide to return.  Kader did not want to return to Egypt so she filed for a waiver of the two year waiting period to obtain an H1-B visa and continue teaching at HSSU. 

While waiting to learn if she received a waiver of the two year waiting period, she applied for an O-1 extraordinary person visa as an alternate means to obtain work authorization.  She requested HSSU provide documentation to supplement her O-1 application, which HSSU supplied.  When Kader had not heard about whether her visa was granted, she contacted the United States Citizenship and Immigration Services and learned it had requested additional information from HSSU, but had not received a response.  Two days before her J-1 visa expired, plaintiff contacted HSSU about her O-1 application and the request for additional information.  HSSU denied receiving the request.  The O-1 application was then denied and HSSU did not appeal the denial. 

Kader then did not receive the waiver she sought in conjunction with her H1-B visa request before her J-1 visa expired.  Because she no longer had J-1 status, she was required to leave the U.S. within 30 days unless she obtained another visa. HSSU notified her that her contract for the next academic school year would not be renewed because she lacked a valid visa.

Kader filed suit against HSSU, alleging race and national origin discrimination and retaliation under the MHRA. The jury returned a verdict in plaintiff's favor on retaliation and national origin discrimination for $750,000 in actual damages and $1.75 million in punitive damages. HSSU appealed, asserting that two disjunctive jury instructions were erroneous and prejudicial.  Specifically, HSSU argued that the instructions permitted the jury to find HSSU liable for conduct that is not actionable under the MHRA.

During trial, the court instructed the jury to rule in plaintiff's favor on her national origin discrimination claim if: (1) the jury found HSSU failed to do one or more of five listed acts, including HSSU did not appeal the denial of the O-1 visa petition; (2) plaintiff's national origin or discrimination complaints were a contributing factor to HSSU's failure to do any of those acts; and (3) such failure damaged plaintiff.

Similarly, the other disjunctive jury instruction at issue on the retaliation claim also instructed the jury that it must return a verdict for plaintiff if (1) plaintiff made complaints of discrimination; (2) HSSU failed to do any one of five acts, one of which was not appealing the denial of the O-1 visa petition; (3) plaintiff's complaints of discrimination were a contributing factor in defendant's failure to do one of the five acts; and (4) defendant's actions directly cause or contributed to plaintiff's damages. 

The Missouri Supreme Court emphasized that for disjunctive verdict directing instructions to be appropriate, each alternative must be supported by substantial evidence.  Such an instruction is prejudicial when substantial evidence does not support each disjunctive alternative because there is no way to determine which theory the jury chose.  Therefore, there must have been substantial evidence at trial that HSSU's failure to appeal the denial of plaintiff's O-1 visa application constituted an unlawful employment practice under the MHRA.  Because there was no evidence, the circuit court erred by including a disjunctive instruction that HSSU's failure to seek an appeal of the O-1 visa application in its disjunctive jury instructions.

The outcome in this case serves as an important reminder to defendants that if the plaintiff has failed to introduce sufficient evidence at trial of some element of claimed unlawful conduct, any disjunctive jury instruction proffered by the plaintiff that includes the unsupported claim should be challenged. 

Related Services: Employment & Labor

Attorneys: Noemi Donovan

Missouri Supreme Court Compels Arbitration, Finding Adequate Consideration for Arbitration Agreement with At-Will Employee

March 4, 2019 | Lisa Larkin

In Soars v. Easter Seals Midwest, 563 S.W.3d 111 (Mo. banc 2018), the Missouri Supreme Court ordered that at-will employee’s case be arbitrated and denied the employee’s challenge to the validity of the arbitration agreement as a whole.

As a condition of employment with Easter Seals Midwest (ESM), a charitable organization, each new, at-will employee is required to sign an arbitration agreement. The arbitration agreement provides that, as consideration for employment, the employee will submit all disputes and claims arising out of the employment to binding arbitration. In turn, ESM also agrees to submit all disputes and claims arising out of the employment to binding arbitration. The ESM arbitration agreement also included a delegation clause providing that the arbitrator and not any court had the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of the arbitration agreement. 

Plaintiff Lewis Soars signed the arbitration agreement as a condition of his at-will employment with ESM, and three months later. ESM terminated his employment after he refused to participate in an internal investigation involving accusations against him of abuse or neglect of ESM’s clients. In response, he filed suit against ESM in circuit court for wrongful discharge and race discrimination. ESM filed a motion to compel arbitration. Plaintiff argued the arbitration agreement and delegation clause lacked consideration and mutuality and were unconscionable. The circuit court denied ESM’s Motion to Compel Arbitration, and the Court of Appeals affirmed.

The Supreme Court, however, reversed. It held that arbitration must be compelled if the parties signed an arbitration agreement that contains a valid delegation clause mandating that the arbitrator has “exclusive authority to decide threshold issues of interpretation, applicability, enforceability, or formation.” Whether or not the arbitration agreement as a whole is valid is for the arbitrator to determine so long as the delegation provision, standing alone, is valid. In this case, the Court found that in the delegation provision both parties mutually agreed to arbitrate all threshold questions of arbitrability. “Because neither ESM nor Soars retains any unilateral right to amend the delegation clause nor avoid its obligations, the delegation clause is bilateral in nature and consideration is present.”  

Significantly, and surprisingly, this is the Missouri Supreme Court’s first opinion holding that referral to an arbitrator should occur, notwithstanding a party’s challenge to the validity of the arbitration agreement as a whole. While the United States Supreme Court has made this same ruling numerous times over many decades, this was the Missouri Supreme Court’s first occasion to consider the issue.

Notably, the Court found that an initial offer of at-will employment was sufficient consideration for the contractual promise to arbitrate claims. This was a major point of disagreement for the dissenting justice, who would have concluded that the arbitration agreement was unenforceable because at-will employment, which by its very nature is no employment contract at all, can provide no legal consideration for the arbitration agreement. According to the dissent, because a fundamental component of the at-will employment relationship is the ability for either party to terminate the relationship at any time, there was no valid contract to support the arbitration agreement or the delegation provision. 

Going forward, the majority’s decision should provide comfort to employers that, under Missouri law, their arbitration agreements with at-will new-hires are enforceable and may include provisions placing all claims and controversies into the hands, in the first instance, of the arbitrator, including all objections to the existence, interpretation, application, and enforceability of the arbitration agreement itself.

Related Services: Employment & Labor

Attorneys: Lisa Larkin

CFPB Proposes to Rescind Underwriting Requirement of 2017 Payday Loan Rule

February 26, 2019 | Megan Stumph-Turner

Earlier this month, the CFPB took one of its first substantial steps under new leadership, with a Notice of Proposed Rulemaking seeking to rescind the underwriting requirements of the Bureau’s 2017 Final Rule regarding payday loans, vehicle title loans, and high-cost installment loans (the “2017 Payday Loan Rule”). Signed by new director Kathy Kraninger and published on February 6, this proposal is open for comment through May 7, 2019.

This recent proposal seeks to eliminate the “identification” provision in the 2017 Payday Loan Rule that makes it an unfair and abusive practice for lenders to make these types of loans without making a reasonable determination that the customer will have the ability to repay those loans. The new proposed rule also seeks to remove the “prevention” provision, which set forth certain underwriting guidelines that lenders were going to be required to use in an effort to prevent loans from issuing to borrowers not reasonably likely to be able to repay. Also subject to elimination were new recordkeeping and reporting requirements promulgated by the 2017 Rule. Director Kraninger’s new proposal did not seek to remove any of the new payment policies put into effect by the 2017 Rule.

In its Notice, the CFPB reasoned that there was not sufficient evidence to support the 2017 Rule, particularly where the 2017 Rule would prevent many consumers from accessing credit when needed. The CFPB also noted that most states have some degree of regulation in place as to payday loans, with varying levels of oversight and intricacy. To impose an additional federal, uniform requirement over the industry, it maintains, would be overly burdensome to both lenders and consumers seeking credit.

The CFPB acknowledged that, in response to the original proposed 2017 Payday Loan Rule, it received a substantial number of comments from those who observed undesirable consequences from payday lending. However, those comments were far outnumbered by those from consumers who reported that payday loans, title loans, and other applicable products had been a necessary tool for survival in hard times where no other financing was available due to poor or nonexistent credit history.

In the alternative, the CFPB also proposed that enforcement of the 2017 Payday Loan Rule underwriting requirements be delayed due to massive overhaul in technology and training payday lenders would have to undergo in order to meet these underwriting requirements.

Director Kraninger has welcomed comment on all sides regarding this proposal, but it seems likely at this point that the anticipated underwriting requirements of the 2017 Rule will not be implemented or enforced.

The Notice of Proposed Rulemaking to rescind the underwriting requirements may be found here. BSCR will continue to monitor until a final rule is issued.

Missouri Court of Appeals Rules Venue Proper Only in County Where Decedent First Ingested Opioid Pain Medication and Not Where Drug Prescribed

February 21, 2019 | John Mahon, Jr. and Katie Davies

In State ex rel. Mylan Bertek Pharmaceuticals, Inc. v. Vincent, the Missouri Court of Appeals, Eastern District, held that, in a case alleging wrongful death, medical malpractice, and pharmaceutical liability, venue was proper only in the county where the decedent first ingested opioid pain medication, rather than the county where a defendant prescribed it.  

Decedent’s widow filed suit in St. Louis County, alleging that defendants’ negligence caused her husband to become addicted to opioid pain medication, leading to unbearable withdrawal symptoms that caused him to commit suicide. The defendants were the physician who prescribed the medication for a back injury and several pharmaceutical companies that manufactured it.  The plaintiff alleged the physician defendant first prescribed opioids at his medical office located in St. Louis County and continued to do so over a period of twelve years. Later, while travelling in Florida, the decedent ran out of medication and could not refill it. Plaintiff alleged the decedent suffered intense withdrawal symptoms and, as a result, shot himself in the chest and died. 

One of the pharmaceutical company defendants filed a motion to transfer venue asserting that venue was proper only in St. Charles County because that was the county where the decedent lived and first ingested the medication.  Plaintiff successfully opposed the motion, arguing that St. Louis County was the proper venue because that was where he was first exposed to the physician defendant’s negligent prescribing practices in his medical office. 

The appellate court analyzed § 508.010, RSMo, which sets venue in the county where the plaintiff was “first injured.” Section 508.010.14 provides that a plaintiff is “considered first injured where the trauma or exposure occurred rather than where the symptoms are first manifested.” 

The court explained the alleged bodily injury to the decedent – opioid addiction, resulting pain and suffering, and ultimately death – could only have occurred when he ingested the medication. In other words, no bodily injury could have occurred at the time of prescribing, and it was not until the decedent ingested the medication that he exposed his body to the ill-effects of the drug. Under that analysis, venue was proper only in St. Charles County (where decedent first ingested the drug) and not in St. Louis County (where the physician prescribed the drug).  

Accordingly, the appellate court reversed the trial court’s order, issued a writ of prohibition directing the St. Louis County judge not to proceed with the case, and remanded with instructions to transfer to St. Charles County. The court’s analysis demonstrates that: (1) under Missouri venue law, the key inquiry is the location where the injury occurred, rather than where the allegedly negligent conduct occurred; and, (2) the alleged injury and alleged negligence do not necessarily occur in the same location. 

The opinion does not reference Section 538.232, which states that, in any action against a health care provider, “the plaintiff shall be considered injured by the health care provider only in the county where the plaintiff first received treatment by a defendant for a medical condition at issue in the case.”  It is unclear what effect that section, if discussed, would have had on the court’s analysis.     

Illinois Supreme Court Confirms State's Biometric Information Privacy Act Has Real Teeth

February 18, 2019 | Lisa Larkin

In this age of face recognition, digital fingerprints, and iris scans, what allegations and proof of damages is sufficient to state a claim for the mishandling of biometric identifiers? Must the aggrieved party have suffered any actual damages beyond the improper collection, retention or disclosure of his biometric identifiers themselves? 

In Stacy Rosenbach, as Mother and Next Friend of Alexander Rosenbach v. Six Flags Entertainment Corporation, 2019 IL 123186, the plaintiff alleged violations under Illinois’ Biometric Information Privacy Act (740 ILCS 14/1 et seq. (2016)). The Act imposes restrictions on how private entities collect, retain, disclose, and destroy biometric identifiers, such as retina or iris scans, fingerprints, voiceprints, scans of hand or face geometry, or other biometric information. Under the Act, any person “aggrieved” by a violation of its provisions “shall have a right of action… against an offending party” and “may recover for such violation” the greater of liquidated or actual damages, reasonable attorney fees and costs, and any other relief, including an injunction, that the court deems appropriate. The issue in this particular case was whether a person qualifies as an “aggrieved” person and may seek liquidated damages and injunctive relief pursuant to the Act if he has not alleged some actual injury or adverse effect, beyond violation of his rights under the statute. The First District Court of Appeals answered this question in the negative, holding a plaintiff who alleges only a technical violation of the statute without alleging some injury or adverse effect is not an aggrieved person under the Act.

Since at least 2014 defendant Six Flags has used a fingerprinting process when issuing season passes to its Great America theme park. Plaintiff alleged the system scans pass holders’ fingerprints; collects, records and stores biometric identifiers and information gleaned from the fingerprints; and then stores that data in order to quickly verify customer identities upon subsequent visits to the park. 

Plaintiff’s 14 year old son was to visit the park on a school field trip in May or June 2014, and plaintiff purchased a season pass for him online. When he arrived at the park with his class, he had to complete the season pass sign-up process, which included scanning his thumb into defendant’s biometric data capture system. The complaint alleged that plaintiff was not informed in advance that the minor’s fingerprints were to be used as part of defendant’s season pass system and that neither the minor son nor his mother were informed in writing of the purpose or length of term for which his fingerprint had been collected. Neither of them signed any release or written consent for the collection, storage, use, dissemination, disclosure, or trade of the fingerprint or the associated biometric information. The complaint also alleged that, although the minor child has not visited the park since that school field trip, defendant has retained his biometric identifiers and information and has not disclosed what was done with the information or how long it will be kept. 

Plaintiff’s complaint sought redress for the minor child, individually and on behalf of all other similarly situated persons under the Act. The defendant moved to dismiss on the basis that the plaintiff had suffered no actual or threatened injury and something more than just a violation of the Act must be alleged to state a claim. The Appellate Court for the First District agreed with defendant and held that while the injury or adverse effect alleged need not be pecuniary, it must be something more than a technical violation of the Act. 2017 IL App (2d) 170317. 

The Illinois Supreme Court reversed upon de novo review. Basic principles of statutory construction dictate that if the legislature had wanted to impose a requirement limiting a plaintiff’s right to bring a cause of action to circumstances where he or she had sustained some actual damages, beyond violation of the rights conferred by the statute, it could have made its intention clear. The Act contains no such requirement. It simply provides that any person aggrieved by a violation of the Act shall have a right of action. While the Act does not define “aggrieved”, the state Supreme Court more than a century ago held that to be aggrieved simply “means having a substantial grievance; a denial of some personal or property right.” Glos v. People, 259 Ill. 332, 340 (1913). As held in Glos, “[a] person is prejudiced or aggrieved, in the legal sense, when a legal right is invaded by the act complained of or his pecuniary interest is directly affected by the decree or judgment.” Id. This is consistent, the court noted, with the dictionary definition of “aggrieved”, which includes definitions such as “suffering from an infringement or denial of legal rights” or “having legal rights that are adversely affected.”

The Court concluded that when a private entity fails to comply with one of the Act’s requirements, that violation alone constitutes an invasion, impairment, or denial of the statutory rights of any person or customer whose biometric identifier or biometric information is subject to the breach. Such person or customer is clearly “aggrieved” within the meaning of the Act and is entitled to seek recovery under that provision with no need to plead or prove additional consequences. A contrary result would misapprehend the nature of the harm the legislature is attempting to mitigate through this legislation. “The Act vests in individuals and customers the right to control their biometric information by requiring notice before collection and giving them the power to say no by withholding consent.” When an entity violates the statutory procedures, such as what the defendant is alleged to have done here, the individual loses his right to maintain his biometric privacy, which is the precise harm the legislature sought to prevent by passing the Act in the first instance. “The injury is real and significant.”

This opinion creates a strong incentive for private entities, which might include not only theme parks but financial institutions, recreational facilities or health clubs, employers, etc., to conform to the law and prevent problems before they occur and cannot be undone.    

Buyer Beware: Illinois Supreme Court Protects Subcontractors from Implied Warranty Claims by Homeowners with No Contractual Relationship

February 12, 2019 | Richard Woolf and Douglas Hill

The Illinois Supreme Court recently overturned 35 years of precedent in holding that a purchaser of a newly constructed home cannot pursue a cause of action for breach of an implied warranty of habitability against a subcontractor where there is no contractual relationship between the two, explicitly overruling Milton v. Richards Group of Chicago Through Mach, 116 Ill. App. 3d 852 (1st Dist. 1983). In a victory for construction subcontractors, the court held that the homeowner’s claim for breach of the implied warranty of habitability is limited to those parties with whom the homeowner has a direct contractual relationship, typically the general contractor. Specifically, a subcontractor hired by the general contractor owes no such implied warranty to the homeowner.

The case of Sienna Court Condominium Association v. Champion Aluminum Corp., et al. arose from claims of water intrusion and other construction defects at a newly constructed 111-unit condominium complex in Evanston, Illinois. Acting on behalf of the owners of the individual units, the complex’s condominium association filed a lawsuit claiming that latent construction defects rendered the complex unfit for habitation. The pleadings alleged a contractual warranty claim against the developer, as well as claims for breach of an implied warranty of habitability against the general contractor, the architects, the engineers, and numerous materials suppliers and subcontractors.

The subcontractors and material suppliers filed a motion to dismiss arguing that they owed no implied warranty of habitability, in part because they had no direct contractual relationships with the individual homeowners or the association. Although the trial court denied the motion, it promptly certified the ruling for interlocutory appeal under a state rule allowing appellate courts to examine certain preliminary issues.

On appeal, the state Supreme Court overruled the trial court and ordered it to dismiss the claims against the subcontractors, holding that “the purchaser of a newly constructed home may not pursue a claim for breach of an implied warranty of habitability against a subcontractor where there is no contractual relationship.”

The doctrine of implied warranty of habitability is a “creature of public policy” that was first recognized by the Illinois Supreme Court in 1979. See Peterson v. Hubschman Construction Co., 76 Ill. 2d 31 (1979). It protects the first purchaser of a new home against latent defects that may render the house not reasonably fit for habitation, under the reasoning that a buyer “has a right to expect to receive that for which he [or she] has bargained and that which the builder-vendor has agreed to construct and convey to him, that is, a house that is reasonably fit for use as a residence.” Id. at 40.  Such a warranty, whether or not explicitly stated in a contract, exists “by virtue of the execution of the agreement” between the builder and the buyer. Id. at 41.

While the doctrine has expanded and been developed through case law over the years, the Illinois Supreme Court has never held that a homeowner may pursue a claim for breach of an implied warranty of habitability against a subcontractor with whom it has not contracted. That said, one intermediate appellate decision had allowed such a claim only where the homeowner “has no recourse to the builder-vendor,” this newly decided Supreme Court opinion overrules that decision and limits the applicability of the implied warranty of habitability to only those parties who have a direct contractual relationship with the plaintiff.

At the heart of this decision is the distinction between contract and tort law. Here, the plaintiff had contended that privity of contract should not be a factor because the implied warranty of habitability was a tort claim developed by the courts. The Supreme Court disagreed. It characterized the warranty as an implied contractual term imposed by the courts as a matter of public policy. Because the cause of action was based on an implied contractual term, if no contract exists between parties, neither does an implied warranty of habitability.

The court found support for its reasoning in prior cases holding that parties were free to include in their contracts a waiver of the implied warranty of habitability. “A person may choose not to commence an action in tort,” the court wrote, “but he [or she] cannot waive a duty imposed by the courts” (emphasis added). The fact that the implied warranty of habitability is subject to waiver is “a conclusive indication that a cause of action for breach of the warranty must be based in contract, not in tort.”

The court also noted that if a claim for breach of an implied warranty of habitability was based in tort, as the plaintiffs had argued, it would be precluded by the “economic loss doctrine.” This somewhat complex doctrine grew out of product liability law but is now frequently applied in construction cases. In its simplest form, it provides that “an action for economic loss requires the plaintiff to be in contractual privity with the defendant,” preserving the “distinction between tort and contract” by denying remedies in tort for complaints that are based in contract. 

Under the economic loss doctrine, also known as the Moorman doctrine in Illinois, tort claims for purely economic losses—without accompanying claims of personal injury or damage to other property—are limited to cases of fraud or misrepresentation.  See Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69 (1982).  Here, the court found that the latent defects that formed the basis of the condominium owners’ claims were “the definition of pure economic loss […], i.e., when the product disappoints the purchaser’s commercial expectations and does not conform to its intended use.”

This decision provides meaningful protection to Illinois subcontractors. It insulates them from tort claims asserted by dissatisfied homeowners whose complaints should be addressed with the general contractor whom they hired and with whom they have a contractual relationship. It is then left to the general contractor to seek defense, indemnity, and/or contribution from the various trades responsible for the claimed defects, all according to the terms of their respective contracts. 

The ruling protects subcontractors’ freedom to negotiate the allocation of risks and liabilities directly with the general contractor without fear that they will face some additional and unforeseen exposure in tort if the homeowner ends up unhappy with the finished product delivered by the general contractor. This security is especially important to subcontractors that did not agree to guarantee the quality of the entire home and often only worked on a small portion of the overall project. By not allowing homeowners to bring direct actions for breach of an implied warranty of habitability against a subcontractor with whom they have no contractual relationship, the Illinois Supreme Court has in one decision strengthened contract law in Illinois, reined in attempts to unnecessarily broaden tort law, and reaffirmed the legal distinction between the two. 

Jury trials in the Kansas City area slightly increase in number, but jury verdicts decline in amount

February 6, 2019 | Dylan Murray

Data from the Greater Kansas City Jury Verdict Service shows that while there were slightly more jury trials in 2018 than in 2017, the average monetary awards for Plaintiffs declined significantly. Every year, the Greater Kansas City Jury Verdict Service issues a “Summary and Statistics of Jury Verdicts” for the greater Kansas City area. The report includes verdicts from the Kansas City division of the U.S. District Court for the Western District of Missouri; the Kansas City branch of the U.S. District Court for the District of Kansas; and state courts in Jackson, Clay and Platte counties in Missouri; and Johnson and Wyandotte counties in Kansas. The statistics in 2018 indicate various shifts from 2017.

More Trials, with a Lower Percentage of Plaintiffs’ Verdicts

The Jury Verdict Service’s annual summary reported on 104 trials in 2018, compared to 97 in 2017.  Previously, there were 113 trials in 2016, 110 trials in 2015, and 133 trials in 2014. 

Because trials often involve multiple claims and multiple verdicts, the verdict statistics are based on the claims adjudicated, rather than simply the number of cases. The 104 trials in 2018 resulted in 168 verdicts; and the 97 trials in 2017 resulted in 193 verdicts. 

While the number of jury trials slightly increased in 2018, the percentage of Plaintiffs’ verdicts decreased very slightly. In 2018, 48% of the verdicts were for Plaintiffs compared to 49% for Plaintiffs in 2017. These figures go against what had been a trend of increases in the percentage of Plaintiffs’ verdicts dating back to 2014.

Decrease in Average Monetary Awards for Plaintiffs 

The overall average of monetary awards for Plaintiffs experienced a significant decrease in 2018 from 2017, but was still higher than in earlier years. In 2018, the overall average monetary award was $1,810,693, down from $4,204,501 in 2017. However, first appearances are somewhat deceiving, since the Jury Verdict Service reported that the average in 2017 was greatly inflated by two verdicts of $217.7 million and $139.8 million. In 2018, in contrast, there was only one very large verdict for $76 million. Additionally, the 2018 figure of $1,810,693 represents an increase from the figures from the years prior to 2017. In 2016, the average Plaintiff’s verdicts was $1,383,549, while the average in 2015 was $1,376,323. 

Slight Increase in Number of Million-Dollar Verdicts 

In 2018, there were 14 verdicts of $1 million or more, compared to 11 such verdicts in 2017. But the 14 verdicts figure is slightly lower than in 2016, when there were 16 verdicts of $1 million or more. Of the 14 verdicts of $1 million or more in 2018, 6 were in Jackson County, MO Circuit Court (1 in Kansas City and 5 in Independence), 4 were in the Circuit Court of Clay County, MO, 2 were in the Circuit Court of Platte County, MO, and 2 were in the U.S. District Court for the Western District of MO. Finally, the number of verdicts between $100,000 and $999,999 decreased slightly in 2018 (29 verdicts) from 2017 (36 verdicts).

Key Observations and Conclusion 

While the percentage of Plaintiffs’ verdicts decreased ever-so-slightly in 2018, the 48% figure still remains much higher than where it stood 4 years earlier (38%). Additionally, the average Plaintiff’s verdicts ($1,810,693) – while down from the inflated figures of 2017 – continues to trend upward from the $1.3 million range of 2016 and 2015 and the low point figure of $350,730 in 2014. Almost half of the verdicts awarded in 2018 that were $1 million or more were in Jackson County, MO, which was again consistent with the view that this can be a Plaintiff-friendly forum. As we have stated in our previous Jury Verdict roundups, clients and national counsel should work with local counsel to carefully consider the forum when assessing the value of a case.

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Source: Greater Kansas City Jury Verdict Service Year-End Reports 2014 -2018

Despite 2017 Amendment to Statute, Court of Appeals Holds Section 490.715 Fails to Preclude Evidence of "Charged" Amounts of Medical Expenses at Trial

January 29, 2019 | Paul Venker and John Beard

In what was widely seen as an attempt to prevent plaintiffs from introducing evidence at trial of the full, undiscounted “amounts charged” for medical treatment, a revised version of § 490.715 was signed into law in 2017. It provides that “parties may introduce evidence of the actual cost of the medical care or treatment rendered to a plaintiff or a patient whose care is at issue.” See § 490.715(5)(1), RSMo. (emphasis added). “Actual cost” is defined as:

“a sum of money not to exceed the dollar amounts paid by or on behalf of a plaintiff or a patient whose care is at issue plus any remaining dollar amount necessary to satisfy the financial obligation for medical care or treatment by a health care provider after adjustment for any contractual discounts, price reduction, or write-offs by any person or entitySee § 490.715(5)(2) (emphasis added).

But in the recent case of Brancati v. Bi-State Development Agency, the Eastern District Court of Appeals held that evidence of the “amount charged” could still be introduced at trial, effectively rendering the revised version of § 490.715 meaningless. Brancati was a general liability case with stipulations that the “amount charged” for medical treatment totaled $77,515.48 while the actual “amount paid” to satisfy the financial obligation was $40,842.95. Before trial, Brancati filed a pre-trial Motion, arguing that the revised version of § 490.715 did not apply retroactively to this case. The trial court ruled that § 490.715.5, as amended, did not apply and that the parties could offer evidence of the value of medical treatment by allowing both the “amount charged” as well as the “amount paid” into evidence.

After a $625,000 adverse jury verdict, Bi-State appealed and argued, in part, that the revised version of § 490.715 applied retroactively to limit the evidence admissible regarding the cost of Brancati’s medical care to the “amount paid” and not the “amount charged.” 

The Eastern District affirmed the trial court and held that the revised version of § 490.715 did not eliminate the ability to introduce evidence of the “amount charged” for medical bills. The Court ruled that the statute did not expressly prohibit the introduction of “amounts charged” and merely permitted parties to introduce the “actual costs” of medical treatment. It also relied on Subsection 4, which provides that evidence admissible for “another purpose” may be introduced. Notably, the decision is devoid of any discussion about what other purpose was at issue to support the admission during trial of the “amount charged.” 

There are two other fundamental problems with the Eastern District’s decision, one dealing with legal and logical relevance, and the other with maxims of statutory construction. First, legal relevance requires a trial court to weigh the probative value of proffered evidence against its costs, such as unfair prejudice, confusion of the issues, misleading the jury, or wasting time. Reed v. Kansas City Missouri School District, 504 S.W.3d 235, 242 (Mo. App. W.D. 2016). Missouri courts have long held that a plaintiff may recover only those medical treatment expenses that he was liable to pay for the medical treatment, and actually incurred. See Cordray v. City of Brookfield, 88 S.W.2d 161, 164 (Mo. 1935); Zachary v. Korger, Inc., 332 S.W.2d 471, 475 (Mo. App. W.D. 1960). To allow the introduction of the full, undiscounted “amount charged” for medical expenses defies both basic principles of logical relevance (the evidence tends to make the existence of any material fact more or less probable than it would be without the evidence) and legal relevance. Evidence of the “amount charged” does not meet the litmus test of logical relevance because its introduction does not affect a plaintiff’s ability to recover the “amount paid” for medical treatment. Nor does it meet the litmus test of legal relevance because its probative value is far outweighed by the dangers of confusing the issue and misleading the jury. 

Second, this decision disregards the most basic canons of statutory construction. A fundamental principle of statutory construction is that a primary role of the courts in construing statutes is to “ascertain the legislature’s intent from the language used in the statute and, if possible, give effect to that intent.” State ex rel. Koehler v. Lewis, 844 S.W.2d 483, 487 (Mo. App. W.D. 1992). Under the “Reenactment Canon,” “when the Legislature amends a statute, it is presumed that the legislature intended to effect some change in the existing law.” State v. Liberty, 370 S.W.3d 537, 561 (Mo. banc 2012). This is because “to amend a statute and accomplish nothing from the amendment would be a meaningless act, and the legislature is presumed not to undertaken meaningless acts.” Id. By continuing to allow plaintiffs to introduce evidence of the “amount charged” for medical expenses, the Brancati court appears have rendered this legislative amendment meaningless. Further, in considering the landscape prior to the 2017 amendment, specifically that both the Eastern District and Missouri Supreme Court held that the “amount charged” for medical expenses could be introduced at trial, the language used in the 2017 statute clearly evinces an attempt to eliminate this practice. See Berra v. Danter, 299 S.W.3d 690 (Mo. App. E.D. 2009); Deck v. Teasley, 322 S.W.3d 536 (Mo. banc 2010). Likewise, this decision violates the canon that courts “must examine the language of the statutes as they are written [and] cannot simply insert terms that the legislature has omitted.” Loren Cook Co. v. Director of Revenue, 414 S.W.3d 451, 454 (Mo. banc 2013). 

A request that the Brancati case be transferred to the Missouri Supreme Court for review is presently pending.  Whether or not the Supreme Court takes the Brancati case, we are confident that we have not seen the last of litigation on this issue. 

Illinois Supreme Court Further Defines Product Liability Seller Exception

January 28, 2019 | Michael Hunter

Plaintiff Mark Cassidy was injured while at work in Mendota, Illinois. He filed a Complaint in Cook County against U.S.-based China Vitamins, a distributor of an imported flexible bulk container of vitamins that allegedly broke and injured him.  He alleged strict product liability, negligent product liability and res ispa loquitur.  China Vitamins denied that it manufactured the container, and it identified the manufacturer of the containers as Chinese-headquartered Taihua Shanghai Taiwei Trading Company Limited (Taihua). 

Cassidy then filed an Amended Complaint adding Taihua.  Taihua filed an Answer, but its counsel then withdrew.  The court entered a default judgment after Taihau failed to retain new counsel.  After Cassidy presented evidence, the court entered judgment of over $9.1 million against Taihua. 

In the interim, China Vitamins sought and obtained summary judgment on the basis that it was a mere distributor pursuant to 735 ILCS 5/2-621(b).

Thereafter, Cassidy sought to discover and collect assets from Taihua, as well as third-parties.  He was unsuccessful and filed a motion to reinstate China Vitamins under 735 ILCS 5/2-621(b)(4).  China Vitamins opposed the motion.  The trial court denied Cassidy’s motion, finding that he had not met the statutory reinstatement requirements. The trial court made the order final and appealable under Illinois Supreme Court Rule 304(a). 

The Illinois Appellate Court for the First District rejected its prior interpretation of 2-621(b) as set forth in Chraca vs. U.S. Battery Manufacturing Co., 214 Il App. (1st ) 132325, 24  N.E.3d 183.  The court interpreted the statutory language to require a showing that the manufacturer is “judgment proof” or “execution proof” rather than “bankrupt or no longer in existence” before a previously dismissed seller or distributor could be reinstated as a party.  It remanded the case to the trial court for an initial determination of whether Taihua group was unable to satisfy the default judgment entered against it under this new standard.  The Illinois Supreme Court granted China Vitamins’ petition for leave to appeal pursuant to Supreme Court Rule 315(a).

The Illinois Supreme Court addressed how subsection 2-621(b)(4), requiring the plaintiff to show that “the manufacturer is unable to satisfy any judgment as determined by the court” prior to reinstatement of a seller or distributor, is be applied. 

The majority opinion, authored by Justice Kilbride, overruled Chraca to the extent it held that the plaintiff must show the manufacturer is either bankrupt or no longer in existence under 2-621(b)(4).  The court held that if a plaintiff asserting product liability claims can establish “other circumstances” that effectively bar recovery of the full damages awarded against a manufacturer, a non-manufacturer in the chain of distribution may be reinstated as a defendant under section 2-621(b)(4).  The court remanded the case to the trial court for consideration of the sufficiency of the evidence concerning Cassidy’s efforts to collect the default judgment.

While the Supreme Court declined to detail the specific evidentiary showing necessary, instead noting that “the precise formula needed to satisfy the plaintiff’s evidentiary reinstatement burden is best adduced by the trial court,” it appears to have impliedly provided some direction. For example, the Court noted there was evidence Taihua group had a functioning website which strongly suggested it has close continuing business ties with Europe and North America.  The website also mentioned a domestic sales office in the state of Georgia, foreign sales offices in France and Germany and a central warehouse in Germany.  The court found that the record suggests viable avenues for Cassidy’s collection efforts may remain untapped.

In reaching its conclusion, the majority noted that if section (b)(4) was interpreted to mean bankrupt or no longer in existence as Chraca suggests, it would be duplicative of section (b)(3), which is contrary to fundamental rules of statutory construction.  The court noted the language in (b)(4) is much broader than (b)(3).  The court also noted the fundamental policies underlying Illinois strict product liability law and public policy remain the same: “[T]o provide full compensation to plaintiffs injured due to defective or unsafe products whenever possible based on differences of the parties’ degree of culpability."  The majority found that its interpretation of (b)(4) “harmonizes the plain language of Section 2-621(b), when read in its entirety, the legislature’s intent, and the public policies underlying the enactment of our strict product liability laws to create cohesive and consistent statutory scheme.”

Justice Karmier authored the dissent, taking issue with how the majority framed the question before it.  He opined that the majority erroneously focused on a plaintiff’s ability to enforce a judgment rather than a manufacturer’ ability to satisfy it.  He opined a plaintiff must provide evidence that a manufacturer has no ability to meet its obligation, as opposed to evidence of his or her efforts to enforce it, in order to seek reinstatement a non-manufacturer defendant pursuant to 2-621(b)(4).  He further took issue with the majority’s emphasis on the public policy behind strict product liability law generally.  He argued that to the extent policy purposes are to be considered it should be those behind 2-621, which is to limit financial exposure of sellers, not to ensure full recovery for plaintiffs.

There remain open questions as to how 2-621(b)(4) is to be applied by a trial court.  Ultimately, the analytical dispute between the majority and the dissent may be one of semantics. Focusing on evidence of plaintiff’s efforts to collect the judgment from the manufacturer rather the manufacturer’s ability to satisfy it may be two sides of the same analytical coin. Both analyses will focus on the identification of a manufacturer’s assets and the plaintiff’s ability to secure those assets for payment.     

Related Services: Product Liability

Attorneys: Michael Hunter

When it Comes to Nonconforming Goods, is the Customer Always Right?

January 23, 2019 | Douglas Hill

There are two important lessons to be learned from Williams v. Medalist Golf, a recent case from the Eighth Circuit Court of Appeals, applying Missouri law. First, when a company guarantees customer satisfaction, only to leave the customer unsatisfied, it risks not only its business reputation, but also its legal right to collect payment. Second, when giving testimony about the meaning of a contract, it is almost always best to let the written document speak for itself.

Plaintiff Cane Creek Sod submitted a bid to provide almost a million square feet of grass for the construction of a new golf course at Big Cedar Lodge in Branson, Missouri. Cane Creek promised to provide premium Meyer Zoysia grass, and it offered a lower price than any other bidder. Defendant Medalist Golf, Inc., accepted the bid and provided a “Grass Supplier Agreement” for Cane Creek to sign.

The Grass Supplier Agreement provided that the seller “guarantees the quality and specification of the materials provided.” Supplier Cane Creek’s owner testified that he understood this to mean he “was guaranteeing that they were going to get Meyer Zoysia and that it would be the quality that satisfied the customer [or Cane Creek] would fix it.” The contract set a fixed price per square foot and provided an estimate of the quantity that would be need. But it also cautioned that this was “a target and not a guaranteed amount” and affirmed the parties’ understanding that the project “may use more or less than estimated quantities.”

Over the following months, Cane Creek devoted considerable time and resources to growing dozens of acres of Meyer Zoysia. Shortly before the sod was to be harvested, the golf course’s developer asked Medalist Golf to visit the sod farm to inspect the quality of the grass. After inspecting and photographing the sod, the developer decided the quality of the grass was unacceptable for the course and instructed Medalist Golf to reject it. Medalist did so, and then purchased the required grass from another bidder. Cane Creek was able to find alternative buyers for some, but not all, of what it had grown for Medalist.

The supplier sued Medalist for breach of contract, arguing that Medalist had been contractually obligated to purchase all of the grass needed for this golf course exclusively from Cane Creek. Medalist moved for summary judgment, arguing that: (1) no enforceable contract existed, and (2) even if a contract did exist, Medalist was relieved of any obligations, because Cane Creek’s sod failed to conform to the contract. The trial court granted Medalist’s motion, and Cane Creek appealed. The Eighth Circuit affirmed the summary judgment in Medalist’s favor.

The Eighth Circuit rejected Medalist’s first argument—that no enforceable contract ever existed between Medalist and Cane Creek. The “Grass Supplier Agreement” was an enforceable “requirements contract.” A requirements contract is one in which “one party promises to supply all the specific goods or services which the other party may need during a certain period at an agreed price, and the other party promises that he will obtain his required goods or services from the first party exclusively.” 

The court held that imprecise estimates of the quantity to be purchased were sufficient to support such a contract, and it saw ample evidence that the parties intended for Medalist to buy all of the grass needed for this golf course exclusively from Cane Creek, at an agreed-upon price. Thus, the court concluded, there was a valid agreement upon which Cane Creek could base its breach of contract claim.

But the breach of contract claim still failed as a matter of law, because the court agreed with Medalist that the sod failed to conform to the contract. The Uniform Commercial Code as adopted in Missouri allows a buyer to reject tendered goods without payment, if they “fail in any respect to conform to the contract.” Mo. Rev. Stat. § 400.2-601. Therefore, if the sod was not of the quality that was promised, Medalist had the right to reject it and no obligation to pay for it.

The case ultimately turned on the contract’s provision that Cane Creek would “guarantee the quality and specification of the materials provided.” This language, Medalist argued, required more than just sod that was acceptable to an expert or another golf course; it required that the sod be to the customer’s satisfaction.

Notably, though, the contractual language itself only required Cane Creek to “guarantee the quality and standards” of its product. It did not specify how the sod’s “quality and standards” were to be judged. Although it conceded that Medalist did not act in bad faith, Cane Creek tried to present other evidence that the grass lived up to the “quality and standards” required by the contract, including: (1) expert testimony that the sod was high quality, (2) the results of a test finding the sod to be free of “noxious weed contaminates,” and (3) the fact that some of the same sod was subsequently sold to and used by another golf course. Cane Creek argued that this evidence at least created a genuine factual dispute as to whether Medalist wrongfully rejected the sod. 

But Cane Creeks’ position was seriously undermined at its owner’s deposition, where he testified that he understood the “guarantee” to mean that he “was guaranteeing that they were going to get Meyer Zoysia and that it would be the quality that satisfied the customer, [or Cane Creek] would fix it.” This testimony arguably broadened Cane Creek’s duties under the contract. It made the customer’s judgment as to the sod’s quality—as subjective as that may be—the ultimate and final measuring stick for compliance with the contract. Unfortunately for Cane Creek, this rendered irrelevant all of its expert opinions, test results, and other evidence about the high quality of the sod. If Medalist was unsatisfied, the sod was nonconforming and could be rejected. Full stop.  (Had there been evidence that Medalist rejected the goods purely out of bad faith, the court would have been obliged to consider it; but concededly, this was not the case.)  

Customer satisfaction is always the goal, of course. But it is also an inherently subjective and often unpredictable concept. A customer may be dissatisfied simply because he or she is persnickety, capricious, or just misinformed. As tempting as it is to “guarantee” that a customer will be satisfied, businesses must understand the legal implications of doing so. Courts will enforce quality guarantees, and they will usually leave it to the parties to decide how quality should be measured.  A guarantee of customer satisfaction may make for a good sales pitch, but it is a poor legal standard.

Courts favor the Federal Arbitration Act, but some workers are exempt.

January 18, 2019 | Bryan Mouber

In New Prime, Inc. v. Oliveira, petitioner New Prime Inc. was an interstate trucking company, and respondent Dominic Oliveira was one of its drivers. Oliveira worked under an operating agreement that called him an independent contractor and contained a mandatory arbitration provision. When Oliveira filed a class action alleging that New Prime denied its drivers lawful wages, New Prime asked the court to invoke its statutory authority under the Federal Arbitration Act to compel arbitration.

Oliveira countered that the court lacked authority, because §1 of the Act excepts from arbitration disputes involving “contracts of employment” of certain transportation workers. New Prime insisted that any question regarding §1’s applicability belonged to the arbitrator alone to resolve, or, assuming the court could address the question, that “contracts of employment” referred only to contracts that establish an employer-employee relationship and not to contracts with independent contractors. The District Court and First Circuit agreed with Oliveira, and the Supreme Court affirmed, holding that a court should determine whether a §1 exclusion applies before ordering arbitration.

A court’s authority to compel arbitration under the Act does not extend to all private contracts, no matter how clearly the contract expresses a preference for arbitration. In relevant part, §1 states that “nothing” in the Act “shall apply” to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

For a court to invoke its statutory authority under the Act to stay litigation and force arbitration, it must first know if the parties’ agreement is excluded from the Act’s coverage by the terms of §1. This sequencing is significant, because it means the court and not the arbitrator decides this issue, unlike other issues, which may be delegable to the arbitrator.

The issue for the Supreme Court thus became whether the Act’s term “contract of employment” referred to any agreement to perform work or applied strictly to contracts of employment. The Court held that Oliveira’s agreement with New Prime falls within §1’s exception.

The unanimous opinion relied on the Act’s original meaning for its decision.  Citing dictionaries, statutes, and rulings from the era, Justice Gorsuch concluded that “contract of employment” was understood to encompass “work agreements involving independent contractors.” At the time of the Act’s adoption in 1925, the phrase “contract of employment” was not a term of art, and dictionaries tended to treat “employment” more or less as a synonym for “work.” Contemporaneous legal authorities provide no evidence that a “contract of employment” necessarily signaled a formal employer-employee relationship. Evidence that Congress used the term “contracts of employment” broadly can be found in its choice of the neighboring term “workers,” a term that easily embraces independent contractors.

New Prime also made a policy argument that the Court should order arbitration to further Congress’ effort to counteract judicial hostility to arbitration and establish a favorable federal policy toward arbitration agreements. Justice Gorsuch stated that courts, however, are not free to pave over bumpy statutory texts in the name of more expeditiously advancing a policy goal. Rather, the Court should respect “the limits up to which Congress was prepared” to go when adopting the Arbitration Act.

Finally, the Court declined to address New Prime’s suggestion that it order arbitration anyway under its inherent authority to stay litigation in favor of an alternative dispute resolution mechanism of the parties’ choosing.

Justice Ginsburg, in a concurring opinion, explicitly agreed with the Court’s unanimous opinion that words should be interpreted as taking their ordinary meaning at the time Congress enacted the statute.  However, she also reasoned that Congress may design legislation to govern changing times and circumstances, perhaps foreshadowing future disputes between judicial philosophies.

Eighth Circuit Refuses to Punish Employer for History of Granting Special Treatment to Disabled Employee with Poor Attendance Record

January 8, 2019 | Douglas Hill

While the Americans with Disabilities Act requires employers to make reasonable accommodations for the mental and physical limitations of otherwise qualified employees with a disability, it does not require employers to set aside their established attendance policy to accommodate disabled employees who simply cannot reliably and regularly make it to work. The recent Eighth Circuit case of Lipp v. Cargill Meat Solutions Corporation demonstrates this principle.

Sheena Lipp worked for 19 years at a Cargill meat processing facility in Ottumwa, Iowa, until she was terminated for absenteeism in November 2014. For most of her employment, she suffered from an incurable lung disease known as eosinophilic granuloma. For the final two years of her employment, this condition limited her ability to work in several ways. She required lifting assistance, limited working hours, and a clean working environment. But most notably also suffered from “flare-ups” that would require her to take off work for a few days at a time, two to four times a year. 

Cargill accommodated all of Ms. Lipp’s needs, despite its written attendance policy allowing only six “unplanned” absences (i.e. sick days, personal business, etc.), if reported via an automated call-in system. After those six unplanned absences, a progressive disciplinary system existed, which culminated with termination after the ninth unplanned absence. In the case of medical absences, Cargill’s policy was that employees “may be required” to provide a doctor’s note or other verification upon their return to work.

Ms. Lipp’s ability to satisfy the attendance requirements of her job was further compromised in early 2014, when she was forced to take a nine-month leave of absence (originally planned to be only a few weeks) to care for her ailing mother. The first twelve weeks of leave were protected under the Family and Medical Leave Act. Beyond that, Cargill voluntarily accommodated Ms. Lipp’s request for additional leave, during which time she called the automated phone system daily to report her absences.

When she returned to work in October 2014, Ms. Lipp was presented with a series of written disciplinary notifications, indicating that she had accumulated 194 unplanned absences and was being placed on a “Last Chance” attendance policy. “Employee needs to understand,” the notices stated, “that any call-ins, lates, or leave early without authorization will violate this last chance agreement and will terminate her employment.” Ms. Lipp refused to sign any of the notifications but was allowed to return to work anyway.

Two weeks later, Ms. Lipp called the automated phone system and reported that she would be absent for “vacation.” Her testimony was that she must have mistakenly keyed the wrong entry on the phone system, because her absence was actually due to a “flare-up” of her lung condition. When she returned to work, she was terminated, despite explaining that her absence was for medical reasons, not vacation. Although she eventually provided medical documentation of her flare up, she did not do so until about three months after her termination.

She filed suit for disability discrimination under the ADA, but the Northern District of Iowa granted summary judgment in Cargill’s favor. Although the parties agreed that Ms. Lipp qualified as a disabled employee under the ADA, only “qualified individuals” can assert a claim for disability discrimination. A “qualified individual” is one “who, with or without reasonable accommodation, can perform the essential functions” of his or her job. 42 U.S.C. § 12111(8). An employer’s written policies—including attendance policies—are relevant guidance as to what constitutes an essential function of employment. Cargill insisted Ms. Lipp not a “qualified individual” under the Act, because she could not “regularly and reliable attend work, an essential function of her employment.” On appeal, the Eighth Circuit agreed.

The appellate court relied on a long line of ADA cases holding that “regular and reliable attendance is a necessary element of most jobs,” and that “the ADA does not require employers to provide an unlimited absentee policy.” Ms. Lipp argued that her 195 unplanned absences in 2014 were not excessive, since they were authorized by the employer. The court was unconvinced, noting that “persistent absences from work can be excessive, even when the absences are with the employer’s permission.” 

Ms. Lipp also argued that Cargill was required to grant her additional time off for “flare-ups” after her return from the extended leave of absence, as a reasonable accommodation under the ADA—pointing out that Cargill had always been willing to do so in the past. The court rejected this argument, holding that even though medical leave of absence “might, in some circumstances, be a reasonable accommodation,” an accommodation is not reasonable if it requires the employer to set aside the essential functions of the job, including regular and reliable attendance (emphasis supplied by the court).

As for the past pattern of granting Ms. Lipp leave for “flare-ups,” the Court was unwilling to punish Cargill for its history of accommodating Ms. Lipp’s condition: “If an employer bends over backwards to accommodate a disabled worker, it must not be punished for its generosity by being deemed to have conceded the reasonableness of so far-reaching an accommodation.” “To hold otherwise,” the opinion concluded, “would punish Cargill for giving Lipp another chance instead of terminating her employment” earlier.

This case offers lessons for employers facing requests for disability accommodations or potential ADA claims. First, there is a limit to what is a reasonable accommodation for absenteeism. There is no bright-line rule for how much leeway a disabled worker must be given, but if an employee’s disability keeps her away from work so often that she cannot meet the basic requirements of her employment, she is not legally “qualified” for the job under the ADA. Second, employers should not live in fear that they will be punished for good behavior. As this case demonstrates, past acquiescence to a disabled employee’s request for special treatment should not be used to set some new standard for what accommodations are “reasonable” under the ADA.

The Piper is Finally Paid - the Hatch-Goodlatte Music Modernization Act Becomes Law

January 2, 2019 | John Patterson

As reported in a previous post, Congress spent a portion of the last year considering the Music Modernization Act (MMA), a sweeping piece of legislation meant to bring the world of music licensing into the era of online streaming services. In a rare show of bipartisanship, the MMA sailed through both houses of Congress, and was signed into law by President Trump last fall. This article discusses the key features of the new law.

Blanket Licenses and Royalty Rates

Before the MMA’s passage, streaming services negotiated licenses on an inconsistent basis, and often filed bulk Notices of Intention to use works with the Copyright Office. This haphazard practice created great uncertainty for streaming services and artists: the former faced the very real possibility that they were infringing upon copyrights and providing unlicensed work, while the latter could find themselves uncompensated for the use of their intellectual property.

Under the MMA, a process of blanket licensing has been established. Most works will now be subject to a blanket compulsory license, although the MMA still allows for parties to negotiate their own licensing terms if they so desire. A streaming service need only apply for such a license, and, once granted, the streaming service can make the work available without the fear of copyright infringement looming over it.

The MMA also sets a new standard for establishing royalty rates. Before, the royalty rate was determined by a formula having little to do with prevailing market rates. But now, a copyright royalty judge will determine the rate that would have been negotiated in the marketplace between a “willing buyer and a willing seller.” In reaching this decision, the judge must consider “economic, competitive and programming information” submitted by the parties. Section 102(c)(1)(F).

The Musical Licensing Collective

The MMA creates a body known as the Mechanical Licensing Collective (MLC) to administer this new licensing regime. The MLC will collect royalties from streaming services, pay royalties to artists, and assist in identifying the owners of any and all rights in a particular work. The MLC will be a non-profit entity, created and supported by copyright owners and funded by the payment of licensing fees. The composition of the MLC will be reviewed every five years. It will be overseen by a board of directors consisting of both industry and songwriter representatives.

One of the more interesting aspects of the MLC is the requirement that it establish and maintain a musical works database that will match artists and copyright owners with a particular work. This database will be fully searchable and publicly available. The initial creation of this database will be a formidable task for the MLC, and for the music industry.

Pre-1972 Sound Recordings

The final version of the MMA also incorporates portions of the Classic Protection and Access Act, extending full copyright protection to sound recordings, not already in the public domain, created on or before February 15, 1972. Service providers will now have to pay royalties to copyright owners when these pre-1972 sound recordings are streamed.

The MMA will bring interesting changes to the music industry, and, as with any new law, there will likely be unforeseen consequences of its enaction, whether for good or ill. However, the MMA has been greeted with approval by all sides of the industry, and will hopefully be a strong step towards fully modernizing the licensing and copyright of musical works in the age of streaming services.

City of St. Louis – Still A Judicial Hellhole

December 26, 2018 | Joshua Davis and Rebecca Guntli

The 2018-2019 ATRF Judicial Hellholes Report is out, and, surprise, surprise, the “Show Me Your Lawsuit” state, specifically the City of St. Louis, landed fourth on the list—only behind California, Florida, and New York City. While it must be noted that St. Louis has moved down in the ATRF Judicial Hellhole rankings (St. Louis was ranked No. 3 in 2017-2018 and No. 1 in 2016-2017), St. Louis is still considered by many to be one of the most plaintiff-friendly courts in the nation, making it an inhospitable venue for corporate defendants, or any defendants for that matter.  While the term “hellhole” may be a bit over the top, defense counsel must nonetheless be wary of this venue and advise their clients accordingly. And in-house counsel should pay particular heed when drafting jurisdiction and venue clauses in corporate agreements.

There was initial optimism from 2017 that political changes in the executive branch would aid business interests and result in certain statutory reforms. The ATRF Report bursts that balloon, reporting that optimism “quickly evaporated in 2018 as massive verdicts, blatant forum shopping, and legislative ineptitude plagued the ‘Show Me Your Lawsuit’ state.” 

The ATRF Report also attributes St. Louis’ inability to become a more balanced venue to its “loose” application of procedural rules, and an unwillingness to consistently follow Missouri appellate court and U.S. Supreme Court precedent, especially as it applies to a court’s exercise of jurisdiction over out-of-state defendants. A combination of these two elements is what generally encourages forum shopping and out-of-state plaintiffs to seek out this jurisdiction, which gained national recognition in recent substantial toxic exposure verdicts.

Looking ahead to the 2019 Missouri General Assembly legislative session, the Missouri Chamber of Commerce President and CEO, Daniel P. Mehan, recently vowed to address this state’s litigious climate which he describes as a “black eye for Missouri.” He intends to push for new legislation to make Missouri’s courtrooms more balanced when the Missouri General Assembly convenes for their legislative session in January 2019. More recently, the Missouri Chamber Board of Directors has approved the organization’s 2019 Legislative Agenda which include several modifications that are aimed specifically at curtailing Missouri’s Judicial Hellhole status. These reforms contain measures that would:

1.    Clarify venue and joinder laws in an effort to curb venue/forum shopping;

2.    Strengthen the Missouri Merchandising Practices Act to reduce frivolous class action lawsuits;

3.    Increase transparency in toxic exposure litigation to curtail fraudulent claims and ensure compensation for future claimants;

4.    Strengthen Missouri’s employment arbitration climate in an effort to avoid costly litigation and resolve disputes rapidly;

5.    Establish a statute of repose to stop new regulations from opening additional paths to litigation; and

6.    Reforming the statutes regarding punitive damages to clarify the standard and define when an employer can be held liable for such damages.

Whether or not all of these reforms will make it to committee is still yet to be determined, especially since several of these reforms were attempted in 2018 but failed. Nonetheless, 2019 is a new year!

A Passive Website Is Insufficient to Confer Personal Jurisdiction in Missouri

December 20, 2018 | Robert Chandler

Over the years – and to the dismay of out-of-state defendants – state trial courts have often taken an expansive view of when they may exercise personal jurisdiction over companies with limited ties to Missouri. Recently, however, the Missouri Supreme Court made permanent a preliminary writ of prohibition in the case of State of Missouri ex rel PPG Industries, Inc. v. The Honorable Maura McShane, Case No. SC97006. Advertisement on a passive website by an out of state company is not conduct sufficient to confer personal jurisdiction under the Missouri long arm statute. 

Facts

Hilboldt Curtainwall, Inc. provided materials for a Missouri construction project. Some of these materials were to be coated with a product made by PPG Industries, Inc., a Pennsylvania corporation. Hildboldt reviewed PPG’s website and identified Finishing Dynamics, LLC as an “approved applicator” of the coating product manufactured by PPG. Finishing Dynamics failed to properly apply the coating product, rendering useless the products which were coated. Hilboldt subsequently filed suit in the Circuit Court of St. Louis County, Missouri against Finishing Dynamics for breach of contract and implied warranty of merchantability. Hilboldt also sued PPG under a negligent misrepresentation theory stemming from the information obtained by Hilblodt from PPG’s website.

PPG filed a motion to dismiss Hilboldt’s negligent misrepresentation claim for lack of personal jurisdiction. PPG argued that its website advertising was insufficient conduct to confer personal jurisdiction, stating that representations on its passive website, which were not aimed specifically to Missouri consumers, were insufficient to confer personal jurisdiction. PPG had no other ties to Missouri.

Hilboldt argued that, under its negligent misrepresentation theory, PPG committed a tortious act in the state of Missouri. Hilboldt believed conduct sufficient to confer personal jurisdiction in Missouri existed because the representations on PPG’s website were received by Hilboldt in Missouri, relied upon by Hilboldt in Missouri, and caused injury to Hilboldt in Missouri.

The Circuit Court denied PPG’s motion to dismiss, and PPG filed a petition for a writ of prohibition in the Missouri Supreme Court to prevent the circuit court from taking any further action other than to dismiss PPG from the case. The Supreme Court issued a preliminary writ, and this decision followed.

PPG’s Conduct Was Insufficient to Confer Personal Jurisdiction.

The Supreme Court agreed with PPG that the passive website, visible within Missouri but not used for direct communication or negotiation, was not conduct falling under the Missouri long arm statute. The Court stated that, in light of “the broad and general nature of PPG’s website, PPG’s suit-related contacts with Missouri are not sufficient to be considered tortious acts in Missouri.”

Missouri courts apply a two part test to determine whether personal jurisdiction exists over a nonresident defendant. First, the nonresident’s conduct must fall within the Missouri long arm statute. That statute, RSMo. §506.500(3), confers personal jurisdiction upon foreign persons and firms who commit a tortious act within the state. Secondly, once it is determined that the conduct does fall under the statute, the Court must determine whether the defendant has sufficient minimum contacts with Missouri to satisfy due process.

The Court emphasized that no direct or individual communications occurred between Hilboldt and PPG, PPG did not contact any Hilboldt representative through the website and Hilboldt did not interact with any PPG representative using the website. The website was not used to complete any transaction, facilitate communication or conduct any interactions between Hilboldt and PPG. The website was merely accessible by Missouri residents, as well as residents of every other state, but PPG did not specifically target or solicit web traffic from Missouri.

Furthermore, the Court noted that the information from PPG’s website, even if false, was used by Hilboldt to enter into a contract with third-party Finishing Dynamics. The true basis for Hilboldt’s underlying claim was the mistakes made by the third-party in failing to appropriately apply PPG’s coating product, further “muddling” any connection between Hilboldt and PPG.

Because PPG’s limited conduct was found not to fall under the first prong of the Missouri personal jurisdiction analysis, the Court did not determine whether PPG’s contacts with Missouri were sufficient to satisfy due process under the second prong of the analysis.

Conclusion

The Supreme Court ruling establishes that a “passive website” which is used only for advertising and is not used to facilitate communication or negotiations will not provide the basis for conduct sufficient to confer personal jurisdiction against nonresident parties under the Missouri long arm statute. 

Who May Challenge an Allegedly Discriminatory Property Tax Assessment? And What is the Burden of Proof?

December 17, 2018 | Lisa Larkin

In Crowell v. David Cox, Assessor, Missouri’s Western District Court of Appeals reaffirmed that a taxpayer lacks standing to protest a property assessment made before the taxpayer owned the property. It also held that a taxpayer asserting a discrimination claim carries the burden of proving that other similarly situated properties were undervalued compared to their property, including presenting evidence of the fair market value of the similarly situated properties.

In 2014, the Crowells bought residential property in Parkville, Platte County, Missouri. As of 2006, the property had an appraised value of $48,832 (the value the assessor determined was the property’s fair market value) and an assessed value of $9,278 (a percentage of the appraised value which serves as the basis for calculating real estate tax liability). After extensive repairs and renovations, the property sold in December 2007 for $234,000. Based upon the sale, the appraised value increased in 2008 to $230,660, with the assessed value increasing to $43,825. These valuations were applied to the property for tax years 2008 through 2014 with no protests of the valuations. In October 2014, the Crowells purchased the property for $230,000.

After the purchase and after doing some research into the assessment and sales history, the Crowells engaged in informal negotiations with the assessor to have the appraised and assessed values of the property reduced. In 2015, the assessor reduced the appraised/assessed values to $210,660/$40,025. Dissatisfied with the reduction, the Crowells pursued formal review and appeal through the Platte County Board of Equalization, which affirmed, and the State Tax Commission. 

Before the State Tax Commission, the Crowells argued discrimination in that their property was appraised at a higher ratio of its sale price than five other comparable properties. The five other properties were all recent sales and, unlike the Crowells’ property, none of them received an increase in assessed value based upon the sale. The Crowells also presented a chart comparing 41 other Platte County properties, as to square footage, appraised/assessed values, tax amount, and tax amount per square foot. Based on this comparison, the Crowells argued their property was assessed at a higher rate per square foot than all 41 comparison properties. The Crowells did not dispute, however, that the fair market value of their property was $210,660. Nor did they present any evidence of the fair market value of the comparison properties. 

The State Tax Commission concluded the Crowells lacked standing to challenge the 2008 assessment because they did not own the property until 2014. It also found no discrimination because the Crowells failed to show that other properties in the same general class, i.e. residential, were undervalued. The Commission found the Crowells presented no evidence from which a comparison could be made between the median level of assessment of residential property in the county and the actual level of assessment of their property. 

The Crowells filed a petition for review in the Circuit Court asserting disparate and discriminatory treatment because the 2008 assessment increase was based on the property’s sale price whereas none of the other properties sold in the Crowell’s neighborhood between 2008 and 2015 received an assessment increase based on the sale price. The Circuit Court affirmed the Commission’s decision and order.

On appeal, the Crowells argued two points: (1) the 2008 assessment violated Missouri law and was thus void ab initio, even if the Crowell lacked standing to challenge the assessment at the time it was imposed; and (2) the Commission had erroneously concluded that the Crowells were required to prove all other property in the same class was undervalued.

As to the challenge to the 2008 assessment, the Western District reaffirmed the long-standing rule that individual taxpayer plaintiffs lack standing to challenge other taxpayers’ property tax assessments, as they are not injured personally by others’ assessment calculations. This is true even though the allegedly legally faulty 2008 assessment in this case set in motion a chain of events which was directly and causally connected to the performance of the Crowells’ 2015 appraisal and assessment. According to the Court, a taxpayer lacks standing to challenge another taxpayer’s assessment even if the assessment results in a tax increase for the complaining taxpayer. 

As to the Crowells’ discrimination claim, the Western District found the Crowells failed to meet their burden of showing that disparate treatment caused them to bear an unfair share of the property tax burden compared to the other properties.  Even had the Crowells’ property been the only one reassessed based on its sale price that alone, would be insufficient. The Crowells failed to prove that the other recently sold properties were not assessed at their fair market values, and that failure was fatal to their claim. 

Related Services: Appellate

Attorneys: Lisa Larkin

10th Circuit Declares Adverse Employment Action Required For Failure To Accommodate Claims

December 11, 2018

The Tenth Circuit was tasked with evaluating whether or not an adverse employment action is an essential element of a failure to accommodate action under the American Disabilities Act (ADA). In a divided opinion, the court said Yes. 

In Exby-Stolley v. Board of County Commissioners, plaintiff worked as a county health inspector and her job required her to inspect restaurants, bars, other places that handle food, interview employees and observe safety practices. While on the job, plaintiff broke her arm and required two surgeries. Because of her injury, plaintiff had to use makeshift devices to assist her and she could not complete the number of inspections required for her position.

The court noted there were two very different versions of the efforts to accommodate plaintiff. Plaintiff alleged that she suggested various accommodations that were rejected by her supervisors. This resulted in her supervisor telling her to resign. The County alleged that plaintiff requested that a new position be created for her piecing together various tasks from her job and other positions. The County considered it unfair to take tasks from fellow employees to create a new job for plaintiff. Plaintiff resigned when she was told the County would not provide job she requested.  

Plaintiff filed suit alleging that the County violated the ADA by failing to reasonably accommodate her disability. The Court of Appeals recited the familiar proposition that “failure to accommodate” claims are actionable under the ADA, but then turned to the question of whether proof of an adverse employment action is an essential element of such claims; and whether the plaintiff in this case had in fact suffered an adverse employment action. The court explained at length that although the language “adverse employment action” does not appear in the ADA, it is well established in judicial opinions. Furthermore, the court will not consider a mere inconvenience to accommodating an individual, there must be a material alteration in a term, condition or privilege of employment.

The Court rejected the dissenting judge’s view that an “adverse employment action” was not essential, as having relied on dicta “of the weakest sort”, which it viewed as contrary to the weight of authority on this subject. The majority further concluded that the record showed Plaintiff had permission to continue to perform her job with some minor inconveniences or alterations in how she performed the work, but that she declined to do so, and insisted on more substantial accommodations. The Court thus held that the “inconveniences and minor alterations” of job responsibilities required of the plaintiff did not rise to the level of an adverse employment action  

This ruling from the Tenth Circuit ups the ante for plaintiffs asserting a failure to accommodate claim. There must be a material and significant impact on the employee. Inconveniences and minor alterations of job responsibilities will not suffice. 

Employees: An affirmative and purposeful reminder that the safety of your co-workers may also be your duty

December 7, 2018 | Suzanne Billam

Recently, in Brock v. Dunne, the Missouri Court of Appeals for the Eastern District affirmed a trial court judgment assessing liability against a co-employee pursuant to the 2012 Amendment to § 287.120.1 of the Missouri Workers’ Compensation Act. The appellate court held that the defendant co-employee (1) owed the injured plaintiff a personal duty of care, separate and distinct from his employer’s non-delegable duties, and (2) engaged in an affirmative negligent act that purposefully and dangerously caused or increased the risk of injury, which prevented him from claiming immunity under the statute.

The Missouri Worker’s Compensation Act immunizes employers from their employees’ tort claims for injuries that arise from workplace accidents. Generally, this immunity extends to the injured employee’s fellow employees where such co-employee’s negligence is based upon a general non-delegable duty of the employer.  But a fellow employee does not have immunity where he commits an affirmative act causing or increasing the risk of injury. Specifically, the 2012 Amendment to § 287.120.1 grants immunity to co-employees except when “the employee engaged in an affirmative negligent act that purposefully and dangerously caused or increased the risk of injury.”

Here, plaintiff Brock sued his supervisor at the time of his injury, claiming the supervisor’s actions of removing a safety guard from a laminating machine and ordering plaintiff to clean the machine — while it was still running and without the safety guard equipped — constituted negligence and invoked the co-employee exception to immunity for workplace injuries under § 287.120.1. The jury returned a verdict against the supervisor co-employee, and assessed over a million dollars in damages.

Independent Duty

Before the Missouri legislature’s 2012 modification, § 287.120.1 did not mention co-employee liability and such persons were liable to the full extent they would otherwise be under the common law. At common law, an employee is liable to a third person, including a co-employee, when he or she breaches a duty owed independently of any master-servant relationship – that is, a duty separate and distinct from the employer’s non-delegable duties. In 1982, closely following the common law, the Missouri Court of Appeals for the Eastern District initially articulated what is frequently referred to as the ‘something more’ doctrine. State ex. rel Badami v. Gaertner, 630 S.W.2d 175, 180 (Mo. Ct. App. E.D. 1982) (en banc). Under the ‘something more’ test, an employee may sue a fellow employee only for (1) affirmative negligent acts which are (2) outside the scope of an employer’s responsibility to provide a safe workplace.

While the 2012 Amendment does not expressly state that such acts must be committed outside the scope of an employer’s responsibility to provide a safe workplace for co-employee liability to attach, the appellate court in Brock v. Dunne found the Amendment did not abrogate the common law. Rather, the Amendment must be interpreted in conjunction with the common law requirement that an employee owes a duty to fellow co-employees if it is beyond the scope of an employer’s non-delegable duties.

The Supreme Court of Missouri has held that, as is the case with most common law duties, an employer’s non-delegable duties are not unlimited, but instead, are limited to those risks that are reasonably foreseeable to the employer. Conner v. Ogletree, 542 S.W.3d 315, 322 (Mo. banc 2018). Notably, one example of reasonably foreseeable actions is a co-employee’s failure to follow employer-created rules. It has also repeatedly been held that a co-employee’s creation of a hazard or danger does not fall within the employer’s duty to provide a safe workplace.

In Brock v. Dunne, not only did the supervisor violate specific safety rules created by the employer; his actions also affirmatively created the hazardous condition that resulted in plaintiff’s injury. The appellate court thus held the supervisor’s actions were not reasonably foreseeable to the employer and fell outside the scope of the employer’s non-delegable duties, because he purposefully performed affirmative negligent acts that created an additional danger which would not have been otherwise present in the workplace.

Affirmative Negligent Act

An affirmative negligent act can best be described as an act that creates additional danger beyond that normally faced in the job-specific work environment. These actions create a separate and extreme risk of injury and death, far beyond that anticipated or contemplated by the ordinary duties and responsibilities of the plaintiff’s position of employment. Affirmative negligent acts are not required to be physical acts, and, as was evident here, can be as simple as a superior directing a co-employee to perform a task.

Further, while § 287.120.1 requires that the act“purposefully and dangerously caused or increased the risk of injury[,]” the statute does not require proof the co-employee “had a conscious plan to dangerously cause or increase the risk of injury, and that he did so with awareness of the probable consequences[,]” as the defendant suggested in this case. Rather, the statute merely requires that the negligent act be conducted purposefully and intentionally (rather that inadvertently or by mistake).

The Bottom Line

For a co-employee to be liable in Missouri for a workplace injury, the plaintiff has to show BOTH:

(1)   That the defendant co-employee owed a personal duty beyond the employer’s non-delegable duty to provide a safe workplace (defendant’s conduct created a job hazard beyond the foreseeable risks of the tasks assigned to the plaintiff by the employer); AND,

(2)   That, in so doing, the defendant co-employee committed an “affirmative negligent act” (i.e., not a mere omission) that was purposeful and put the plaintiff in danger.

While employers are immune from civil suits due to the exclusivity of Missouri’s Worker’s Compensation Act, the same cannot be said for all employees. The duty to provide a safe workplace and safe appliances, tools and equipment for the work belongs to the employer, but employees must stay mindful that their own actions may endanger their co-workers and subject them to personal liability.

Missouri Court of Appeals Declines to Adopt a Parking-Lot Right-of-Way Rule

December 4, 2018 | Lisa Larkin

The Missouri Court of Appeals for the Eastern District recently rejected an invitation to recognize a common-law right-of-way rule for vehicles operating within a private parking lot. By operation of the fundamental principle that the law should impose tort liability on the party better able to alter their behavior to avoid harm, the court held concurrent duties of drivers to keep a careful lookout and to slow, stop, or swerve to avoid a collision better conform to Missouri’s principles of tort law.

Barth v. St. Jude Medical, Inc., involved an automobile collision on the parking lot of Mercy Hospital in St. Louis County. Defendant’s employee, who was backing out of a parking space, relied primarily upon her back-up camera because a vehicle parked to her right obscured her vision of any vehicles coming down the parking lane. Plaintiff, who was traveling down that parking lane, did not see defendant’s taillights or reverse lights. Defendant collided with the passenger side of plaintiff’s vehicle, causing plaintiff personal injury. 

At trial, plaintiff tendered a disjunctive comparative-fault jury instruction which included the defendant’s failure to yield the right-of-way and an instruction defining the phrase “yield the right-of-way.” The trial court refused to submit these tendered instructions and instead submitted two comparative-fault instructions: one for assessing fault to plaintiff and the other to defendant with neither instruction hypothesizing a failure to yield the right-of-way. The jury returned a verdict for defendant. 

On appeal, plaintiff asserted that the trial court erred by failing to instruct the jury on failure to yield the right-of-way. Plaintiff argued his proposed comparative fault instruction properly hypothesized a failure to yield the right-of-way under Missouri Approved Instruction 17.08, and his proposed definitional instruction was consistent with and required by the Notes on Use for that approved instruction. 

The Court of Appeals found no error because the proposed definitional instruction, which it agreed was a necessary addition to any instruction hypothesizing a failure to yield the right-of-way on a public thoroughfare, did not pass muster. The Missouri pattern instructions provide eight different definitions for the phrase “yield the right-of-way.” All are patterned after statutory rules of the road, but notably, none of those statutory rules of road, applies to this case because the collision occurred on a private parking lot

Plaintiff’s counsel argued that the statutory-based definitional instruction could be based upon a common-law right-of-way rule, even if the statutory rules did not apply. Toward this end, plaintiff proposed a definitional instruction hypothesizing “yield the right-of-way” in the context of this case means a driver backing out of a parking spot on a parking lot is required to yield to another vehicle approaching in the lane adjacent to the parking spot. As support, plaintiff cited to a statutory rule of the road setting out the definition of “yield the right-of-way” for when a vehicle enters a roadway from an alley, private road, or driveway. The court found, however, that since the statutory rules of the road did not apply to the private parking lot, it would have been error to submit a statutory right-of-way instruction for a private parking-lot accident.

Alternatively, plaintiff urged the court to recognize his proposed common-law right-of-way rule requiring vehicles backing out of parking spaces to yield to vehicles approaching in the traffic lane adjacent to the parking spot. The court declined to do so as such a rule would conflict with a fundamental principle of Missouri tort law:  liability should be imposed on the party better able to alter his or her behavior to avoid the harm. Plaintiff’s proposed rule assumed that in every situation the party better able to avoid the harm is the party backing out of the parking space. This, however, may not always be the case. The court concluded that concurrent duties of the drivers to keep a careful lookout while in the parking lot and to slow, stop, or swerve to avoid a collision, consistent with the instruction the trial court gave in this case, conform to this basic principles of tort law. Any deviation from this basic principle under the circumstances of this case would have to come from the Missouri legislature.

At-Will Employee Properly Paid Commission as Monthly Draw

November 29, 2018 | Paul Venker

Recently, the Southern District Court of Appeals affirmed the trial court’s determination in a bench tried case on an employee’s claim for what he described as unpaid commissions. In affirming the trial court’s Judgment, the court of appeals made clear that Missouri law allows an employer to unilaterally modify the terms of an at-will employee’s compensation. However, the facts of this case show that the employer did not fail to pay earned commissions, but rather, due to the specific compensation arrangement, plaintiff had drawn against any commissions he had earned. 

Plaintiff began working for Dennis Oil in January 2010, on a trial basis and had specific terms of compensation which involved 8% commission on profit from new sales plus a $550 per week salary. He also was to be paid 5% commission on profit from existing sales, and provided a company truck and phone. Employee did not dispute the amount or calculation of his compensation during the trial period. 

Effective June 1, 2010, and after the trial had expired, the employer unilaterally changed the terms such that the employee received a guaranteed draw of $2,333.33 per month, which was to be drawn against the employee’s commissions to be earned. The employee also was to receive commissions of 5% on profits earned by employer on existing customer accounts, as well as commissions of 8% on profits earned by employer on newly-acquired customer accounts. During the bench trial, the employer’s manager explained this to be “draw against commissions”, which meant that if the employee earned commissions that exceeded the guaranteed draw amount of $2,333.33 per month, then he would be paid the excess. However, if the employee did not clear that guaranteed amount, only that amount would be paid. The employer made no attempt to recoup payments to the employee for months where his commissions fell short of the guaranteed draw amount.

It is well settled that where sales have been fully consummated, commissions are considered due and owing, even if the employee is terminated before the scheduled payout date. Earned commissions, like salary or hourly pay, are “wages” that must be paid, even if the employee is an employee-at-will.  Here, however, the Southern District Court of Appeals had to enlighten plaintiff that his simply was not a case in which his employer had failed to pay commissions he had earned. 

This case demonstrates the potential confusion which can arise if counsel retained does not have the experience needed in the area of employment law. At Baker Sterchi we pride ourselves in providing clients with experience in all the areas of law in which we practice. Employment, labor, and wage-hour law are certainly no exceptions.

Related Services: Employment & Labor

Attorneys: Paul Venker

Fifth Circuit Denies Recovery of Attorneys' Fees Despite FDCPA's Mandatory Recovery Provision

November 26, 2018 | Megan Stumph-Turner

It is well known to financial services practitioners that a “debt collector” under the FDCPA is prohibited from using false or misleading information in furtherance of collecting a debt, and that a debt collector is liable for the claimant’s attorneys’ fees for such a violation. But a recent decision out of the Fifth Circuit serves as a worthwhile reminder that the conduct of a party and its counsel, as well as reasonableness of the fees, matters in considering whether or not to grant recovery of fees.

In Davis v. Credit Bureau of the South, the defendant’s name alone reveals a violation of 15 U.S.C. §§ 1692e(10), (16), as it had ceased to be a credit reporting agency years before it attempted to collect a past due utility debt from Ms. Davis under that name. Cross motions for summary judgment were filed, and the Court found that the defendant was liable for statutory damages under the FDCPA for inaccurately holding itself out as a credit reporting agency.

Subsequently, Davis’ attorneys filed a motion for recovery of their fees, relying upon 15 U.S.C. § 1692k(a)(3), which states that a debt collector who violates these provisions of the FDCPA “is liable [ . . . ] [for] the costs of the action, together with reasonable attorneys’ fees as determined by the court.” The motion sought recovery of fees in the amount of $130,410.00 based upon on hourly rate of $450.00. The trial court was, as it held, “stunned” by the request for fees and denied the motion. For its holding, the court cited to the fact that there was disposed of by summary judgment with a Fifth Circuit case directly on point, and that there were substantial duplicative and excessive fees charged by Plaintiff’s multiple counsel. The trial court also characterized the rate of $450.00 as excessive in light of the relative level of difficulty of the case and the fact that the pleadings were “replete with grammatical errors, formatting issues, and improper citations.” From this order, Davis appealed.

In its holding, the Fifth Circuit recognized that the FDCPA’s express language, and several other circuit holdings, suggest that attorneys’ fees to a prevailing claimant are mandatory. However, the Court relied upon other circuits that have permitted “outright denial” (as opposed to a mere reduction) of attorney’s fees for FDCPA claims in “unusual circumstances,” as well as other Fifth Circuit cases with similar conduct under other statutes containing mandatory attorney fee recovery, to deny recovery of fees altogether. The Court found there was extreme, outrageous conduct that precluded recovery of fees, where the record showed Davis and her counsel had colluded to create the facts giving rise to the action. For instance, Ms. Davis misrepresented that she was a citizen of Texas rather than Louisiana in order to cause the defendant to mail a collection letter, thus “engaging in debt collection activities in the state of Texas.” Furthermore, Davis and her counsel made repeated, recorded phone calls to the defendant asking repetitive questions in order to generate fees. While the FDCPA’s fee recovery provision was intended to deter bad conduct by debt collectors, the Fifth Circuit found it was even more important in this case to deter the bad conduct of counsel.

 

The Davis opinion may be found here and is a cautionary tale that attorneys’ fees, as well as behavior throughout a case, may be held under the microscope, even where the law suggests that fees are recoverable as a matter of right. 

Missouri Supreme Court Opinion Calls Into Question Many Consumer Arbitration Agreements

November 20, 2018 | Douglas Hill and Joshua Davis

The Missouri Supreme Court recently issued an opinion that could undercut the arbitration clauses found in many existing commercial contracts. In A-1 Premium Acceptance, Inc. v. Hunter, the court refused to name a substitute arbitration forum when the parties’ agreed-upon arbitrator—the National Arbitration Forum—suddenly and unexpectedly stopped providing arbitration services in consumer claims nationwide.

By way of background, the National Arbitration Forum was one of the nation’s largest providers of arbitration services for consumer debt collection claims. In 2008, NAF administered over 200,000 cases. But a series of lawsuits alleged unfair practices and hidden ties to the debt collection industry, culminating in a July 2009 action by Minnesota’s attorney general. Just three days after the Minnesota case was filed, NAF entered into a consent judgment compelling it to immediately stop administering consumer credit arbitrations nationwide. (NAF has since re-branded as Forum and now focuses on internet domain-name disputes.)

Meanwhile, many existing consumer credit contracts were written with language requiring binding arbitration of consumer protection claims by the borrower and expressly naming NAF as the forum for arbitration. Several such agreements existed between A-1 Premium Acceptance, a payday lender operating as “King of Kash,” and borrower Meeka Hunter. Ms. Hunter had originally taken out four loans in 2006, totaling $800. When she defaulted almost nine years later, interest had grown the total debt to over $7,000. A-1 sued on the debt, and when Ms. Hunter filed a counterclaim alleging violations of the Missouri Merchandising Practices Act, A-1 sought to enforce the arbitration clauses from the original loan agreements.

Unfortunately, those clauses provided that that consumer claims “shall be resolved by binding arbitration by the National Arbitration Forum, under the Code of Procedure then in effect.” Conceding that NAF was no longer available to arbitrate the claims, A-1 asked the circuit court to appoint a substitute arbitrator, as authorized by the Federal Arbitration Act in the event of “a lapse in the naming of an arbitrator.” The circuit court refused to do so, and A-1 appealed.

The Missouri Supreme Court affirmed the lower court’s decision on the grounds that the language from the subject arbitration clauses stated an intent to arbitrate only before NAF. The opinion distinguished this type of agreement from those that express an agreement to arbitrate generally, regardless of the availability of a named arbitrator. Noting that A-1 drafted the agreement and chose to “insist upon NAF—and only NAF—as the arbitration forum,” the Court refused to “expand the arbitration promise [A-1] extracted from Hunter” by naming someone else as a replacement arbitrator. Since arbitration before NAF was not possible, the Court held, Ms. Hunter was free to pursue her claims in Missouri state court, a much more receptive forum for consumer protection claims like these.

Notably, the arbitration clauses at issue never expressly stated that arbitration could proceed “only” or “exclusively” before NAF. Instead, the court relied primarily on three factors to conclude that the parties had agreed to arbitrate only before NAF: (1) the language mandating that claims “shall be resolved by arbitration by the National Arbitration Forum” (emphasis added by the court); (2) the fact that A-1 drafted the contract and could have included language contemplating the unavailability of its preferred arbitrator, noting that many contracts do just that; and (3) language mentioning the “Code of Procedure then in effect,” a reference to the 2006 NAF Code of Procedure, which includes a rule that only NAF can administer the Code. Combined, the court concluded, these provisions showed that the parties agreed to arbitrate “before NAF and no other arbitrator.”

The Court finished, however, by cautioning that “merely identifying an arbitrator in an arbitration agreement—without more—cannot justify refusing to name a substitute.” A substitute should still be named unless there is “a basis to conclude the parties’ arbitration agreement was limited to the specified arbitrator,” which the Court determined existed in this case.

This decision adds to a wild profusion of existing case law addressing the numerous and diverse arbitration agreements that name NAF as arbitrator. Although the result invariably depends on the language of the particular contract at issue, courts across the nation that have taken the same approach as the Missouri Supreme Court and denied applications to compel arbitration include the Second, Fifth, and Eleventh Circuit Courts of Appeals, and the New Mexico Supreme Court. But the Third and Seventh Circuits and the Supreme Courts of Arkansas and South Dakota have reached the opposite result, appointing substitute arbitrators in place of NAF. Federal district courts across the country have come down on both sides. A-1’s attorneys have expressed an intent to appeal this Missouri decision to the United States Supreme Court, hoping to bring some clarity to this recurring and divisive issue.

This case demonstrates the importance, especially in Missouri, of exercising caution when drafting arbitration clauses. This is particularly true in the context of consumer transactions, where one side typically sets the terms of the transaction. If the intent is to ensure that disputes end up in private arbitration instead of state court litigation—then naming a preferred arbitrator is fine, but it is also essential to plan for the possibility that the arbitrator is unavailable. Otherwise, as A-1 experienced here, the agreement to arbitrate may be for naught.

The Missouri Supreme Court’s opinion is available here.

Consider Playing By This Book's Rules: FDA-MITRE Cybersecurity Guidance

October 31, 2018 | Megan Sterchi Lammert and Paul Penticuff

As part of Cybersecurity Awareness Month, we continue our discussion about the FDA’s efforts to help prepare various entities to address cybersecurity threats, vulnerabilities, and even attacks. In our previous post, we previewed the FDA and MITRE’s cybersecurity Regional Incident Preparedness and Response Playbook (the “playbook”) for health care delivery organizations. Here, we take a more in depth look into what that playbook has to offer.

The playbook’s focus is primarily aimed at preparing Health Care Delivery Organizations (“HDOs”), including their stay, for addressing and responding to cybersecurity threats. The playbook is not intended to address the day-to-day patch management of devices, but rather addresses threats and vulnerabilities for large-scale, multi-patient impact and patient safety concerns.

The playbook’s guidance primarily consists of four guiding steps, going in chronological order: (1) preparation, (2) detection and analysis, (3) containment eradication and recovery, and (4) post-incident activity. Below is a summary of these action steps, but you are encouraged to read the actual playbook for a more in-depth explanation and/or expansion on the summary below.

(1)   PREPARATION

Assess and bolster cyber defensive measures and develop handling process and procedures to enable better operations when an incident arises.

Suggested Steps:   

1.      Incorporate cybersecurity awareness into medical device procurement in order to strengthen the response to a cybersecurity incident. (E.g. Request a Software Bill of Materials to identify and address vulnerable device components.)

2.      Take a medical device asset inventory. (E.g. Identify device name and description, physical location of device, device owner and manager.)

3.      Perform a hazard vulnerability analysis to assess and identify potential gaps in emergency planning, including a review as anticipated cybersecurity threats and existing mitigations. (E.g. Identify potential cybersecurity risks, such as lack of staff with the ability to detect and respond to a cybersecurity incident.)

4.      Prepare medical technical specialists (i.e. the response team to all hazard incidents) with cybersecurity and medical device expertise as part of the hospital incident management team.

5.      Create an Emergency Operation Plan to determine how the HDO will “respond to and recover from a threat, hazard, or other incident” with a device. (E.g. Identify members and their roles and responsibilities.)

6.      Create an overall Incident Response communication plan (E.g. Identity key internal and external communication roles.)

a.      Specify incident-sharing expectations for all participants in the above communication plan. (E.g. What incidents can and cannot be shared?)

b.      Identify cybersecurity incidents, initiate outreach to manufacturer and then to broader healthcare community. 

c.       Implement external incident notification and continue to stay abreast of intrusion information and/or mitigation recommendations from manufacturer(s).

d.      Create a communication template for how incident notification will occur and how.

7.      Implement user awareness training with all medical device users in your company and conduct preparedness and response exercises for all-hazards.

(2)   DETECTION AND ANALYSIS

Identify and establish that an incident has occurred.

Suggested Steps:

1.      Define the priority of and appropriate level of response to incidents.

2.      Implement formal and informal reporting obligations (Note: Manufacturers are required to conduct a formal notification of the incident to its customers and user community.)

3.      The incident investigation and analysis can begin once initial incident parameters have been set. 

4.      All activities taken to address cybersecurity incidents and responses must be recorded or otherwise documented. Benefits of recording these activities include preserving evidence for potential criminal activity and learning to improve the response for the future.

(3)   CONTAINMENT ERADICATION AND RECOVERY

Response to the confirmed cybersecurity incident begins. Such activities could include a strategy of “contain, clear, and deny” (i.e. halt cybersecurity incident, fix it and restore services quickly) or a “monitor and record” strategy (i.e. watch and “capture” adversary actions).

(4)   POST-INCIDENT ACTIVITY

Identify what went well and what did not; such information can be leveraged to improve existing plan and future response. It is also suggested to retain a trained, digital forensics expert to fully identify the damage done.

For immediate, additional information about addressing cybersecurity breaches in medical devices, consider visiting the BSCR blog posts below addressing cybersecurity:

Missouri Supreme Court Explains Some Ground Rules for Using Multiple Experts

October 30, 2018 | Paul Venker

The Missouri Supreme Court has firmly upheld the right of a party to present multiple expert witnesses during the trial of a medical malpractice case. Shallow v. Follwell, 554 S.W.3d 878 (Mo. banc 2018). The Supreme Court disagreed with the Court of Appeals’ decision in the case, and instead affirmed the trial court’s overruling of plaintiff’s objections that the testimony of multiple defense experts was prejudicially cumulative. In doing so, the Supreme Court affirmed the jury verdict in favor of the physician defendant.  

In this wrongful death, medical malpractice action, the three adult children of decedent Saundra Beaver claimed that Dr. Follwell negligently performed decedent’s bowel surgery and then failed to recognize post-surgical problems which developed into sepsis, which caused the patient’s death. During trial, plaintiff presented one medical expert (whose specialty was not described in the opinion), and also the testimony of a treating surgeon. Dr. Follwell presented four expert witnesses and also testified on his own behalf as a fact witness and an expert witness. The jury found for Dr. Follwell. 

In post-trial Motions, plaintiffs alleged the trial court had erred in: 1) allowing prejudicially cumulative testimony from Dr. Follwell and his four expert witnesses; and, 2) permitting Dr. Follwell to testify at trial to a causation opinion different than that which he had offered at his own deposition. The trial court denied plaintiff’s post-trial Motions and plaintiffs appealed. 

The Eastern District Court of Appeals had admonished the trial court for having ignored its duty to properly assess whether the testimony of all five defense expert witnesses was needed, and whether it was legally relevant. That court described the four retained experts as a “chorus of the same ultimate opinions…” which “posed a substantial risk of interfering” with the jury’s ability to properly decide the case.

After taking the case on transfer, the Missouri Supreme Court affirmed the jury’s verdict after analyzing the two main points which plaintiff/appellant had put before the trial court and the Court of Appeals. 

I.  
Testimony of Multiple Experts Was Not Cumulative

One of Dr. Follwell’s defense theories was that the patient had a complex cardiac condition which caused her bowel injury. Dr. Follwell retained four experts, all with a separate specialty, which included: 1) cardiology; 2) general surgery and critical care; 3) colorectal surgery; and, 4) vascular surgery. 

In finding that the trial court had not erred in denying plaintiffs’ objections that the defense experts’ testimony was prejudicially cumulative, the court stated it had carefully reviewed the trial transcripts, which showed that Dr. Follwell and his expert witnesses had “testified about the very root of the matter in controversy”, and so the evidence was not cumulative.  The court also made clear that the rule against cumulative evidence remains intact, but that evidence is prejudicially cumulative only when it relates to a matter which is already so fully and properly proven by other testimony or evidence, that it removes it from the “area of serious dispute”.    (The Supreme Court also noted that it appeared no sufficient trial record was made as to the objections to the purportedly cumulative nature of the challenged testimony.)

The court also made clear that evidence can be cumulative without necessarily being prejudicial. The Court observed that at trial, Dr. Follwell’s four experts testified contrary to the expansive testimony of plaintiff’s sole retained expert witness. However, in doing so, those four experts were testifying about issues – standard of care and causation – which were at the very core of the controversy. At the same time, the Supreme Court cautioned that  a trial court should be alert to the risk of having jurors resolve differences in opposing expert witness testimony simply by the sheer number of witnesses called to testify, rather than giving due consideration to the quality and credibility of each expert’s opinions. Such a circumstance could well be prejudicial. 

The Supreme Court also emphasized that the Circuit Court, “enjoys considerable discretion in the admission or exclusion of evidence and, absence clear abuse of discretion, its actions will not be grounds for reversal.” Whether to exclude evidence on ground of unfair prejudice rests in the discretion of the Circuit Court. The Circuit Court is uniquely positioned to evaluate the testimony of witnesses and to determine its prejudicial impact when prompted by a timely objection. The Court found that when considering the testimony of Follwell’s multiple expert witnesses, the trial court showed careful, deliberate consideration of plaintiff’s objections. 

II.  
Dr. Follwell Did Not Offer a New Opinion at Trial

As to the claim that Dr. Follwell was improperly permitted to offer a different opinion at trial than at his deposition, the court pointed out that the purpose of preventing witnesses from offering new opinions at trial “is to relieve a party who is genuinely surprised at trial”. This can occur when an expert suddenly has an opinion where he had none before, renders a substantially different opinion than that earlier disclosed, and/or uses facts to support or newly bases that opinion on data or facts not earlier disclosed. 

The court’s opinion contains pertinent portions of Dr. Follwell’s trial and deposition testimony to support its conclusion that the trial court did not err in overruling plaintiffs’ objections to Dr. Follwell testifying as he did at trial because he did not offer a substantially different opinion than what he offered at his deposition.  

Here, the court found a central issue about which Dr. Follwell testified was the cause of the patient’s ischemic, and then necrotic, bowel. In both situations (deposition and trial), Dr. Follwell testified that vascular injury could cause bowel ischemia. He had also testified that he had not seen a surgical perforation of the bowel cause a vascular injury which then led to necrotic bowel. 

Conclusion

Follwell is an important decision for a number of reasons, perhaps chiefly because it reaffirms the right of a party to defend itself with a sufficient number of expert witnesses, even where one’s adversary has chosen to use fewer expert witnesses. Follwell also demonstrates the crucial importance of making a proper and complete record at the trial court level, so an appellate court has the ability to fully examine that record, including the objections made by trial counsel. 

At Baker Sterchi Cowden & Rice, we are committed to providing our attorneys with as full an education as possible in the fine art and science of trial work. We believe this is all the more important with the opportunities for jury trial experience diminishing, due to the shrinking number of jury trials across the country. 

Eighth Circuit Takes a Hardline Position on Non-Retained Expert Witness Disclosures

October 25, 2018 | Lisa Larkin

In a recent opinion, the United States Court of Appeals for the Eighth Circuit took a hardline position as to a plaintiff’s failure to disclose information required by Rule 26 of the Federal Rules of Civil Procedure, as to non-retained experts. Vanderberg v. Petco Animal Supplies Store, Inc., ---F.3d---, 2018 WL 4779017 (8th Cir., October 2, 2018). The result, though harsh, underscores the importance of strict compliance with not only the rules of discovery, but the rules regarding sanctions for non-compliance.

Plaintiff Vanderberg suffered injuries when making a delivery to a Petco store in Sioux City, Iowa, and sued Petco for negligence and premises liability. In his initial Rule 26 disclosures, plaintiff listed his medical provider, Fox Valley Orthopedic Institute, as likely to have discoverable information. In his interrogatory answers, plaintiff provided the name of Dr. Timothy Petsche as a treating physician from Fox Valley, as well as other medical professionals, and produced 573 pages of medical records. Several of those records reflected opinions held by Dr. Petsche, including that certain of plaintiff’s conditions were related to the injury at Petco. Plaintiff did not, however, designate Dr. Petsche or anyone else as an expert witness, or provide any summaries of the facts and opinions to which such experts would testify, as is required by Rule 26(a)(2). 

After the deadline for plaintiff’s expert witness disclosures, Petco’s counsel asked plaintiff’s counsel about the failure to designate any experts. Plaintiff’s counsel responded that plaintiff had no retained experts but expected the treating physicians to provide testimony. Plaintiff’s counsel also indicated that if Petco’s position was that treating physicians must be identified through expert witness certification, then it should so advise.

After the close of discovery, Petco filed a Motion for Summary Judgment on the basis that plaintiff had no produced any expert medical opinion evidence, as required by Iowa law, to show that his injuries were caused by the Petco incident. In opposition, plaintiff relied, in part, on Dr. Petsche’s notes to in an attempt to establish causation. Petco moved for sanctions for plaintiff’s failure to make the required Rule 26(a) expert witness disclosures and requested the exclusion of Dr. Petsche’s testimony. 

The district court found plaintiff violated Rule 26(a)(2), and ruled that exclusion of the doctor’s statements was the appropriate sanction. Allowing the evidence to be used would almost certainly require a continuance of trial so the doctor could be deposed, and plaintiff provided no valid reason for the failure to disclose. Having excluded the only expert opinion evidence plaintiff had to establish that his injuries were caused by the fall at the Petco store the district court granted summary judgment to Petco. (Plaintiff also attempted to rely upon a report from a second undisclosed physician, but at oral argument plaintiff’s counsel conceded that exclusion of this second physician’s report was not an abuse of discretion, thus removing that issue from the case.)

The Eighth Circuit affirmed. The civil procedure rules are very clear: absent stipulation of the parties or a court order, parties must disclose the identity of non-retained experts who may testify at trial and disclose “the subject matter on which the witness is expected to present” expert opinion testimony and “a summary of the facts and opinions to which the witness is expected to testify.” Rule 26(a)(2)(C). 

Rule 26’s disclosure mandates are given teeth in Rule 37. Rule 37(c)(1) provides that when a party fails to comply with Rule 26(a), “the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless.” This is a self-executing sanction for failure to make a Rule 26(a) disclosure, without need for a motion for sanctions, unless the failure was substantially justified or harmless. 

The Court ruled that neither the production of hundreds of pages of medical records, nor the disclosure by plaintiff that Dr. Petsche was a treating physician and potential fact witness, satisfied plaintiff’s duty to disclose experts under Rule 26(a)(2)(A). Nor could plaintiff’s counsel’s letter stating that he expected non-retained physicians to testify on various issues save his claim. The Eighth Circuit agreed with the district court that, “[i]n essence, [plaintiff’s] counsel asked Petco if the Rules of Procedure regarding expert disclosures mean what they say.” 

The Eighth Circuit also accepted the trial court’s finding that  plaintiff’s failure to  comply with Rule 26(a)(2) was neither substantially justified nor harmless where, although the record contained no hint of bad faith, there also was no proffered reason for noncompliance. Allowing the evidence after the close of discovery and just two months before trial would almost certainly require a continuance of trial. 

Finally, the Eighth Circuit rejected the notion, espoused by the opinion’s dissent, that since the exclusion of the evidence was tantamount to dismissal, the district court should have first considered the possibility of a lesser sanction. Plaintiff never asked for a lesser sanction. The text of Rule 37(c)(1) provides that where a party violates the disclosure requirements of Rule 26(a), an alternative sanction to exclusion may be imposed by the court “on motion.” It was plaintiff’s obligation, as the party facing sanctions, to show that its failure to comply with the Rule deserved a lesser sanction. 

The Court explained:

The result of Vanderberg’s failure to comply with his … disclosure requirements may seem harsh. But the burdens on parties who are not adequately appraised of an opposing party’s experts’ identity and expected testimony are also real and costly. In any event, the balance between adequately incentivizing compliance with parties’ disclosure obligations and not unfairly punishing “insignificant, technical violations” has already been struck by the drafters of Rule 37(a)(1). It is our role to conform our analysis to the text of the rule, rather than strike our preferred balance.

Food Labeling Litigation Under the Missouri Merchandising Practices Act: When the Label's Impact on Consumer Choice Doesn't Really Matter

October 22, 2018 | Martha Charepoo

In a potentially problematic decision for manufacturers and sellers of consumer packaged goods, a federal judge allowed a lawsuit against Atkins snack bars to proceed under the Missouri Merchandising Practices Act (“MMPA”). Johnson v. Atkins Nutritionals, Inc., 2:16-cv-04213. The MMPA is Missouri’s consumer protection statute that has attracted a steady rise in the filing of food labeling cases in Missouri over the past few years. The lawsuit arises from a local resident’s purchase of five different Atkins-brand “low carb” snack bars found in most grocery stores.  The lawsuit alleges that Atkins misrepresented the carbohydrate content of its snack bars by making statements on the wrappers such as “Only [X]g Net Carbs” and “Counting Carbs?” Atkins asked the court to dismiss the lawsuit, and while the District Court dismissed some of Plaintiff’s state common law claims, and his implied warranty claim, it allowed Johnson’s MMPA claims to move forward.

The Court allowed Johnson to proceed on his MMPA claim, on the theory that labels stating that an Atkins bar contained “Only [X]g Net Carbs” were false, misleading or deceptive because such labels may be illegal under federal law. The court also allowed Johnson’s theory that a “Counting Carbs?” label is false, misleading or deceptive concerning the effects of sugar alcohols on blood sugar. Thus, even though the court decided that claims based on the calculation method for determining net carbs were preempted by federal law, evidence of the calculation method can be introduced because it relates to the assertion that sugar alcohols have energy content and impact blood sugar. The court also decided that evidence concerning the labels would be admissible to give context to the “Counting Carbs?” labels.

In its motion for summary judgment, Atkins had asked the court to dismiss the case because Johnson testified that he purchased the products for reasons other than what was stated on the wrappers. In fact, Johnson testified that he saw but did not read the “Counting Carbs?” label on one product, and did not even look at it on another one before purchasing it. He also testified that the word “only” in the “Only 2g Net Carbs” label was meaningless, but that he purchased the bars as a part of a zero-to-low carbohydrate diet plan to cut sugar and lose weight. Atkins argued that dismissal was warranted because the labels or their contents must have actually factored into Johnson’s purchasing decision for a violation of the MMPA to have occurred. In other words, Johnson must have relied on the labels, or their contents must have been material to his decision to purchase the bars.

The court rejected this argument, citing Missouri Court case law, statutes, and regulations, stating that nothing in the MMPA indicates that there must be proof that a consumer actually relied on the allegedly unlawful practice to pursue a claim under the MMPA. The court pointed out that the definition of the three unlawful acts alleged by Johnson under the Act are intentionally broad: “The MMPA is a consumer-friendly law that is specifically designed to enable consumers to obtain relief even in those circumstances where they cannot prove fraud.”  According to the court, Missouri law is well-established that materiality is an element of an MMPA claim only when the consumer alleges concealment as an unlawful practice. The proof required is that “the fact so-concealed would have been material to their purchasing decision.” 

Thus, Johnson’s MMPA claim survived, with the Court concluding there was a genuine dispute of fact as to whether or not the “Only [X]g Net Carbs” label and the claim made in the “Counting Carbs?” label concealed facts that would have been a part of Johnson’s decision to purchase had he known them at the time.

Johnson’s common law claims fared differently. The court examined two product labels on five of the bars, to determine if Johnson established the elements of breach of express warranty and unjust enrichment.  Breach of express warranty requires a showing that Johnson was aware of the statement made by Atkins that he is now saying is a misrepresentation. To prove unjust enrichment, there must be proof that Johnson actually relied upon the misrepresentation in making his purchase. Atkins won on both claims as to the “Counting Carbs?” label on the Peanut Butter Fudge Crips Bar and the Chocolate Peanut Butter Bars because the court found that Johnson saw the label but did not read it. The court allowed these two claims to proceed on the other three products containing the “Counting Carbs?” label and the “Only Xg Net Carbs” label — the Chocolate Chip Cookie Dough Bar, the Caramel Nut Chew Bar, and Endulge Chocolate Candies —only because there was a question of fact about whether Johnson saw and/or read the statements on those wrappers.

At the end of the day, however, this partial “victory” was not much of a victory for Atkins, because Plaintiff can seek at least as expansive remedies under the MMPA as those available under the common law theories.

There should be little doubt after Johnson v. Atkins that the MMPA means what it says when it comes to proving unlawful practices in food labeling. Food merchandisers can face liability for violation of the statute even if the contents of the label had no impact on consumer choice. 

Related Services: Food & Beverage

Attorneys: Martha Charepoo

House Financial Services Committee introduces bill to provide uniform reporting standards in the event of data breaches

October 17, 2018 | Megan Stumph-Turner

In the spirit of National Cybersecurity Awareness Month, BSCR reports that Rep. Luetkemeyer of Missouri introduced H.R. 6743, a measure aimed at amending the Gramm-Leach-Bliley Act to provide a national uniform standard for addressing cyber security data breaches. The bill has already made some traction, as it was ordered by vote to be reported to committee last month.

Some key amendments would be to revise the following two sections of the GLBA:

Standards with respect to breach notification

Each agency or authority required to establish standards described under subsection (b)(3) with respect to the provision of a breach notice shall establish the standards with respect to such notice that are contained in the interpretive guidance issued by the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision titled Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice, published March 29, 2005 (70 Fed. Reg. 15736), and for a financial institution that is not a bank, such standards shall be applied to the institution as if the institution was a bank to the extent appropriate and practicable.

Relation to State laws

(a)

In general

This subtitle preempts any law, rule, regulation, requirement, standard, or other provision having the force and effect of law of any State, or political subdivision of a State, with respect to securing personal information from unauthorized access or acquisition, including notification of unauthorized access or acquisition of data.

The full text of the proposed amendments can be found at this link.

It is this second provision that is troubling some state-level authorities. In a letter to Chairman Hensarling, John W. Ryan, the President and CEO of the Conference of State Bank Supervisors (CSBS) expressed concern on behalf of state regulators that the bill, if enacted into law, could hurt efforts to protect consumers more than help. Arguing that the GLBA and state privacy laws already provide sufficient guidance for cyber breach events, Mr. Ryan contends that H.R. 6743 would actually undermine state consumer protection laws, and that it would undermine the authority of state attorneys general and other authorities to enforce reporting requirements.

BSCR will continue to monitor the status of H.R. 6743, and our Financial Services Law Blog will keep the community posted as to pertinent events.

FDA Announces Strengthened Focus On Cybersecurity

October 11, 2018 | Paul Penticuff and Megan Sterchi Lammert

CYBERSECURITY. In a statement issued from FDA Commissioner Scott Gottlieb, M.D., the FDA made clear the threat of cybersecurity attacks are no longer a theoretical discussion, but are present and as such steps must be taken to proactively address future threats. Such attacks are already here in other capacities, including attacks on financial institutions, government agencies, and health care systems. 

The FDA’s specific concerns revolve around attacks on patient medical devices. Cybersecurity researchers have found various vulnerabilities in patient medical devices that could result in bad actors gaining access and control over the patient’s medical device.   While “FDA isn’t aware of any reports of an unauthorized user exploiting a cybersecurity vulnerability in a medical device that is in use by a patient,” the “risk of such an attack persists.” As a result, in an effort to instill confidence in both patients and providers that it can effectively address any reported medical device cyber vulnerabilities, the FDA has determined that it is important to address such a threat of an attack now.

In taking such proactive steps, the FDA announced it has coordinated with the MITRE Corporation to launch a cybersecurity “playbook” for health care delivery organizations, along with the “signing of two significant memoranda of understanding.” A “sneak peek” at the playbook shows it addressing the types of readiness health care delivery organizations should consider in order to be better prepared and address cybersecurity incidents involving their respective medical devices. The memoranda, among other actions, created such groups as information sharing analysis organizations, which are groups of experts (aimed to include manufacturers who share potential vulnerabilities and threats) that gather, analyze and disseminate important information about cyber threats.  

The FDA’s work in addressing cybersecurity threats dates back to 2013 with the establishment of its medical device cybersecurity program. The FDA has issued a premarket and postmarket guidance for manufacturers to consider in addressing their cybersecurity vulnerabilities and threats. While the FDA’s premarket guidance was finalized in 2014, it announced in this statement that it plans on publishing a “significant update to that guidance to reflect the FDA’s most current understandings of, and recommendations regarding, this evolving space.” One such example included providing customers with a list of cybersecurity bill of materials to ensure that device customers and users are able to respond quickly to potential cybersecurity threats. 

Finally, the FDA is taking steps to bring additional resources to build its medical device cybersecurity program, starting with its Fiscal Year 2019 Budget in order to establish additional “regulatory paradigms” to proactively address vulnerabilities and threats.

Be on the lookout for a future discussion of the FDA’s collaborative “playbook” with MITRE, as well as a posting on the FDA’s “significant update” to its 2014 premarket guidance.

For immediate, additional information about addressing cybersecurity breaches in medical devices, visit our prior posts addressing cybersecurity:

Plead It or Concede It: Court May Not Raise Affirmative Defense Sua Sponte

October 4, 2018 | Douglas Hill

The Missouri Court of Appeals for the Western District recently confirmed the long-standing principle that a party’s failure to plead even a valid affirmative defense constitutes a waiver of that defense. Missouri trial courts have no authority to step in and remedy a defendant’s pleading error by applying such a defense sua sponte (“of its own accord”).

The case of Templeton v. Cambiano involved a series of three promissory notes issued between 2003 and 2005. The plaintiff claimed that the defendant had executed the notes in order to borrow nearly $50,000 but had then failed to make a single payment. She filed suit for the principal, plus over $75,000 in interest and late fees, in December 2015, which was just shy of ten years after the final note had been signed. The defendant filed a responsive pleading that generally denied liability for the debt, but his answer did not separately allege that the plaintiff had failed to mitigate her damages by allowing interest and late fees to accumulate for almost a decade before filing suit.

After a bench trial, the trial judge entered judgment in favor of the plaintiff, but excluded from the award all of the claimed interest and late fees, on the grounds that the plaintiff had “failed to mitigate these damages by the delay in prosecuting this action for ten years.” In her sole point on appeal, the plaintiff argued that the trial court had overstepped its authority by applying the affirmative defense of failure to mitigate damages, which the defendant had failed to plead.

The Western District Court of Appeals reversed the trial court’s judgment and remanded the case with orders to amend the judgment to include the $75,927.12 claimed as interest and late fees. This holding was based on long-standing Missouri precedent that an affirmative defense is waived if it is not either: (1) properly pleaded, according to Missouri’s fact-pleading standard, or (2) tried by the parties’ express or implied consent. Failure to mitigate damages is an affirmative defense. Seeing no evidence in the record that the issue of failure to mitigate damages had been tried by the parties’ consent, the appellate court ruled that the defendant had waived the defense when he omitted it from his answer. Regardless of how meritorious the defense might have been, the appellate court concluded, “the circuit court could not breath life back into this extinguished claim sua sponte.”

The defendant also argued that even if the trial court had relied on “a wrong or insufficient reason,” its judgment should still be affirmed because the equitable doctrine of laches would have supported the same result. Laches is an equitable doctrine that precludes claims asserted after an unreasonable delay, which has prejudiced the opposing party.   The Court of Appeals was wholly unconvinced, observing that here too, Defendant had failed to raise laches as an affirmative defense. (Laches is specifically listed in Missouri Rule 55.08 as one of the affirmative defenses that must be pleaded to avoid waiver.) For good measure, the Court also concluded that in any event, the doctrine of laches would not apply even had it been properly pleaded.

The significance of this opinion for defendants in Missouri state court is twofold. First, the case stands as a potent reminder of the importance of carefully pleading all legal defenses and their supporting facts or, in the event a defense is omitted, of promptly seeking leave to amend the answer. Second, it demonstrates how a party’s failure to preserve its own legal defenses can tie the court’s hands, preventing it from crafting the remedy that it deems fair and leading to potentially severe results. Here, the pleading error was costly, ultimately increasing the defendant’s liability by about 150%.

The court of appeals opinion is available online through this link

Missouri Criminalizes the Word "Meat": Civil Liability for the Mislabeling of Meat Substitutes as Meat

September 27, 2018 | Martha Charepoo

On August 28, 2018, with the passing of Senate Bill 627, Missouri criminalized the use of the word “meat” on labels of food products that do not come from an animal and became the first state to do so. The bill states that “[n]o person advertising, offering the sale or selling all or part of a carcass or food plan shall engage in any misleading or deceptive practices, including, but not limited to, any one or more of the following . . . misrepresenting a product as meat that is not derived from harvested production livestock or poultry.” The prohibition has been codified in Missouri Revised Statutes § 265.494(7). Violation of the prohibition is punishable as a Class A misdemeanor. Mo. Rev. Stat. § 265.496. Missouri’s meat advertising law empowers the Department of Agriculture to inspect products and make referrals to the prosecutor in the county in which they are sold. Mo. Rev. Stat. § 265.497.  This poses risks not only under the newly enacted statute, but under the Missouri Merchandising Practices Act, as well.

It can be argued that the plain meaning of the statute cannot be reasonably construed to apply to non-animal products. The statute explicitly states that it applies to “person[s] advertising, offering the sale or selling all or part of a carcass or food plan.” The word “carcass” is not specifically defined in the statute. The ordinary meaning of “carcass” is the dead body of an animal. “Food plan” is “any plan offering meat for sale or the offering of such product in combination with each other or with any other food or nonfood product or service for a single price.” Mo. Rev. Stat. § 265.490(3). “Meat” means “any edible portion of livestock, poultry, or captive cervid carcass or part thereof.” Mo. Rev. Stat. § 265.300(7). Arguably, plant-based and lab grown meat substitute products do not constitute a “carcass” or “food plan”. However,it is widely believed that the amended statute will govern the marketing, sale, and offer of sale of meat substitute products that utilize the word “meat” on their packaging. 

The new law is being challenged by vegan brand Tofurky and food-advocacy group Good Food Institute (GFI) in the U.S. District Court of the Western District of Missouri, in a case titled Turtle Island Foods v. Richardson. The American Civil Liberties Union of Missouri and the Animal Legal Defense Fund are also participating in the lawsuit. The petition alleges that § 265.494(7) is unconstitutional because it violates the Free Speech Clause of the First Amendment, the Dormant Commerce Clause, and the Due Process Clause.  Filed on August 27, 2018, the day before the law passed, the lawsuit seeks to halt enforcement of the statute until the constitutionality of the statute can be ruled upon by the court.

However, the threat of criminal prosecution is probably not imminent. On August 30, 2018, the Missouri Department of Agriculture (“MDA”) issued a memorandum providing guidance about when the MDA will make referrals to the county prosecutor and Attorney General. The memorandum states that products whose labels contain prominent statements on the front of the packaging immediately before or after the product name that the product is “plant based”, “veggie”, “lab grown”, “lab created” or something comparable, or prominent statements that the product is made from plants or grown in a lab, will not be referred for prosecution. The Department also states that it will refrain from making any referrals for prosecution until January 1, 2019 “[t]o allow for any necessary label changes to be made.” Thus, companies should move quickly to ensure that their product labels display the required language on the primary packaging.

An additional legal threat could come from meat-eating consumers seeking relief under the Missouri Merchandising Practices Act (“MMPA”), Missouri’s consumer protection statute that has spawned a recent rising of food labeling litigation in Missouri. See our prior posts on food labeling litigation here, here, and here. The MMPA bars three types of conduct: deception, unfair practices, and concealment. Mo. Rev. Stat. § 407.020.1. The regulations that provide the definition of “unfair practice” for the statute define it as “any practice which . . . [o]ffends any public policy as it has been established by the . . . statutes or common law of this state” that “[p]resents a risk of, or causes, substantial injury to consumers.”  The Missouri Supreme Court has commented on the scope of the term “unfair practice”, describing it as “unrestricted, all-encompassing, and exceedingly broad. For better or for worse, the literal words cover every practice imagine able and every unfairness to whatever degree.”

Unlike a cause of action for fraud, a consumer does not need to plead that the producer intended to dupe the consumer into thinking the product is meat and that the consumer relied on the misrepresentation to state adequately an unfair practice claim under the MMPA.See the U.S. District Court of the Western District of Missouri's Order in Michael Johnson v. Atkins Nutritionals, Inc.  In addition to encompassing a broad range of merchandising practices, the appeal of the MMPA as a vehicle for consumer grievances is the availability of damages and attorney’s fees.  The statute also allows for class action lawsuits.

Food products such as meat substitutes are arguably “merchandise” within the scope of the Act.  Thus, a meat purchaser could bring a claim under the MMPA that a product that was mislabeled “meat” in violation of the new law is an unfair practice in violation of the MMPA. Moreover, compliance with the MDA’s labeling guidelines might not be enough to shield companies because the MMPA does not contain an exemption for conduct that complies with the MDA’s memorandum. Other jurisdictions have language in their consumer protection acts that exempt from violation labels that comply with state product labeling regulations. Currently, there is nothing similar in the MMPA that would bar an unfair practice claim brought against a meat substitute product whose label complied with the MDA’s guidelines as a matter of law.  Of course, a food industry supplier could argue that a label that meets the standard established by the MDA is by definition not “deceptive” or “unfair” but there is currently no case law in Missouri addressing the merits of this contention.

Related Services: Food & Beverage

Attorneys: Martha Charepoo

The Missouri "Long-Arm" Statute and Fraudulent Conduct by an Out-of-State Defendant

September 18, 2018 | Noemi Donovan

The Missouri long-arm statute provides that an out-of-state defendant can be subject to personal jurisdiction in Missouri when it commits a tortious act within Missouri. See R.S.Mo. §506.500.1(3). The issue of what constitutes a tortious act within Missouri is not always evident, especially when a defendant solely acted outside of the state. A recent case decided by the Missouri Court of Appeals for the Western District squarely addressed the issue of when alleged out-of-state tortious acts give rise to long-arm jurisdiction in Missouri. In Good World Deals, LLC v. Gallagher, et al., the court held that letters or telephone calls containing fraudulent representations from an out-of-state defendant to a Missouri resident are sufficient to subject the out-of-state defendant to long-arm jurisdiction in Missouri under its tortious act provision.

 In Good World, the plaintiff appealed the trial court’s finding that defendant Xcess was not subject to personal jurisdiction in Missouri. Good World, a Missouri limited liability company located in Kansas City, received an email from Xcess, an Ohio limited liability company with its principal place of business in Wooster, Ohio, regarding merchandise that Xcess had for sale. 

Following the email, defendant Gallagher, on behalf of Xcess, and Good World engaged in telephone communications and text messages regarding the merchandise. Xcess represented that it had approximately 1,500 Xbox games and 200 Fitbits to offer, among other items, and that the items were overstock and could have damaged boxes. Good World informed Xcess it was interested in the merchandise because of the Xbox games and Fitbits. Following an agreement on the price, Good World arranged its own shipping and picked up the merchandise in Ohio.

Upon receipt of the merchandise and after discovering that there were fewer than 700 Xbox games, no Fitbits and many boxes were empty or contained broken items, Good World notified Xcess that the goods were nonconforming and gave them the opportunity to cure. When Xcess refused, Good World filed suit, alleging misrepresentation and breach of contract.

Xcess moved to dismiss the lawsuit, claiming it was not subject to personal jurisdiction in Missouri. The circuit court agreed. The Missouri Court of Appeals, however, reversed and remanded after employing a two-step analysis to determine if personal jurisdiction existed over Xcess. First, it examined whether Xcess’ conduct satisfied the Missouri long-arm statute and, once it determined that it did, it examined whether Xcess had sufficient minimum contacts with Missouri such that asserting personal jurisdiction over it comports with the principles of due process.

The Missouri long-arm statute vests jurisdiction in the Missouri courts when a defendant personally transacts business, makes a contract, or commits a tortious act in the state. See R.S.Mo. §506.500.1(1)-(3). It provides in relevant part as follows:

Any person or firm, whether or not a citizen or resident of this state, or any corporation, who in person or through an agent does any of the acts enumerated in this section, thereby submits such person, firm, or corporation, and, if an individual, his personal representative, to the jurisdiction of the courts of this state as to any cause of action arising from the doing of any of such acts:

(1)   The transaction of any business within this state;

(2)   The making of any contract within this state;

(3)   The commission of a tortious act within this state.

Id.

Plaintiff claimed that personal jurisdiction existed over Xcess because it transacted business within Missouri, it entered into a contract in Missouri and it committed a tortious act within Missouri. Because the conduct of Xcess only needed to satisfy one of these subdivisions, the appellate court found that Good World sufficiently alleged that Xcess committed a tortious act, i.e. making false and material misrepresentations about the conformity of the merchandise, within Missouri. Since it was dispositive, the court only addressed the tortious act provision of the long-arm statute.

While Xcess denied any tortious act, it also argued that if there were alleged misrepresentations, they occurred in Ohio and not in Missouri. The Good World court therefore was faced with the issue of what constitutes the commission of a tort “within the state” for purposes of the long-arm statute. In analyzing this issue, the Good World court rejected Xcess’ argument that any such acts did not occur in Missouri because of well-established precedent holding that “‘[e]xtraterritorial acts that produce consequences in the state’ such as fraud, are subsumed under the tortious act section of the long-arm statute.” Because Good World alleged fraudulent acts of Xcess that created consequences in Missouri, the long-arm statute was satisfied and Missouri courts could exercise jurisdiction over Xcess. 

Having decided that the long-arm statute was satisfied, the court turned to the second prong of the analysis, which is whether Xcess had sufficient minimum contacts with Missouri such that asserting personal jurisdiction over it comports with due process. The court recognized that the focus of such an evaluation is “whether ‘there be some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.’” The Court of Appeals held that plaintiff established Xcess purposefully engaged plaintiff in Missouri through emails, text messages and phone calls which contained misrepresentations about the merchandise. Citing the Missouri Supreme Court’s earlier ruling in Bryant v. Smith Interior Design Grp., Inc. 310 S.W.3d 227, 235 (Mo. banc 2010), the Court reasoned that when the actual content of communications in a forum gives rise to intentional tort causes of action, i.e. when the communications contain fraudulent content, there is purposeful availment. 

The Good World holding does not limit Missouri precedent holding that communications from an out-of-state defendant to a Missouri resident alone do not amount to transacting business in the state for purposes of the long-arm statute. To the contrary, the court did not address whether Xcess transacted business in Missouri. Instead, this holding is limited to cases in which a plaintiff alleges that an out-of-state defendant sent communications into Missouri that were false and misleading, therefore satisfying the tortious act section of the Missouri long-arm statute. 

Related Services: Commercial

Attorneys: Noemi Donovan

Adding to a Circuit Split, the Tenth Circuit Rules that Arbitrators May Determine Whether Classwide Arbitration is Allowed

September 13, 2018

In August 2018, the Tenth Circuit Court of Appeals decided Dish Network L.L.C. v. Ray, an important ruling in the field of arbitration clauses and their effect on potential class action litigation. The Tenth Circuit specifically addressed the question of who should determine whether an arbitration clause allows classwide arbitration: a court or an arbitrator?

While the contract at issue and its accompanying arbitration clause did not expressly grant the right or ability to apply arbitration on a classwide basis, the Court concluded that the arbitrator appropriately interpreted the broad language of the contract as authorizing classwide arbitration. The Tenth Circuit cited the contract’s adoption of American Arbitration Association rules, granting arbitrators the power to determine their own jurisdiction and scope of authority. The Court reasoned that this explicit adoption of the AAA rules was clear and unmistakable evidence that the parties intended to empower an arbitrator to determine whether classwide arbitration of a dispute is permitted.

Through the Ray decision, the Tenth Circuit cast its vote in a growing circuit split. Now, the Tenth, Second, and Eleventh Circuits have ruled that an arbitrator may determine whether or not an arbitration clause permits classwide litigation. The Third, Fourth, Sixth, and Eighth Circuits have reached opposite conclusions. The Circuits that reject an arbitrator’s authority to determine whether classwide arbitration is allowed have held that adoption of AAA rules within the underlying contract is not sufficiently clear or unmistakable so as to bind the parties to class arbitration. The developing circuit split has turned largely upon the tension between explicit contract language, and the intent that can be implied from the adoption of AAA rules and the explicit content of those rules.

As a growing number of circuits reach opposite conclusions on the availability of classwide arbitration through the adoption of AAA rules, it is imperative that parties entering arbitration agreements be aware of whether or not the circuit governing the agreement has ruled on the issue. Parties should also consider spelling out their intent that classwide arbitration either is or is not permitted under the contract, thus removing any uncertainty. Clear and unequivocal language remains the best medicine to prevent against the unintended consequences of seemingly innocuous provisions within an arbitration agreement or clause. While this circuit split continues to grow, it seems only a matter of time before the Supreme Court of the United States fully considers and resolves this growing issue. 

Enactment of Senate Bill 608 Affords Missouri Businesses Greater Protection

August 31, 2018 | Kara Stubbs

Governor Parson has signed Senate Bill 608, which enacts three new sections relating to civil liability due to criminal conduct. The Bill affords Missouri business owners greater protection against liability for criminal conduct that occurs on their property. 

Senate Bill 608 repealed part of Section 537.349, RSMo, which provided that a person or business owner could not be found liable for the injury or death of a trespasser if the trespasser is substantially impaired by alcohol or an illegal controlled substance, unless the person or business owner acted with negligence or willful and wanton conduct. Under the revised law, negligence is no longer a basis for liability. Now, a person or business owner may only be liable if their willful and wanton misconduct was the proximate cause of the injury or death of the substantially impaired trespasser.

Senate Bill 608 also creates what is referred to as “The Business Premises Act”, which is comprised of Sections 537.785 and 537.787, RSMo. The Act creates safeguards to businesses for third-party crimes out of the business’s control. It provides that there is no duty to guard against unpreventable criminal and harmful acts of third parties that occur on the business premises unless the business knows or has reason to know that such acts are being committed or are reasonably likely to be committed. The Act codifies three affirmative defenses available to a premises owner, should a duty be found to exist under the Act. The business will not be liable:

  1. if the business has implemented reasonable security measures;
  2. the claimant was on the premises and was a trespasser, attempting to commit a felony, or engaged in the commission of a felony; or
  3. the criminal acts or harmful acts occurred while the business was closed to the public.  

The Act also provides that evidence of subsequent action taken by a business to provide protection to persons shall not be admissible in evidence to show negligence or to establish feasibility of the security measure.  This is consistent with a wide body of Missouri law on subsequent remedial measures. In addition, the Act expressly states that all immunities and defenses to liability available to a business under Missouri law are unaffected, and it shall not be construed to create of increase the liability of a business.  

The safeguards created by Section 537.349, RSMo and the Act provide clarification of the duty of businesses when third-party crimes occur on business premises and the applicable affirmative defenses, neither of which was clear under Missouri case law. We will closely follow the body of case law that develops around this statutory framework, and are optimistic that the intent of Senate Bill 608 will be realized.

The full text of SB 608, and the cited statutory provisions may be found here.

Federal Preemption Doesn't Bar Railroad's Suit Against Locomotive Seat Manufacturer

August 24, 2018 | John Lord

In BNSF Railway Co. v. Seats, Inc., a Burlington Northern Santa Fe locomotive engineer was injured when the backrest of his locomotive seat broke.  The engineer sued BNSF under the Federal Employers Liability Act alleging the seat did not comply with standards articulated in the Locomotive Inspection Act (“LIA”) The LIA requires all locomotives and their components to be “in proper condition and safe to operate without unnecessary danger of personal injury”. 

BNSF settled the engineer’s lawsuit.  Thereafter, BNSF sued Seats, Inc. to recover its settlement costs.  Seats designed, manufactured and marketed the locomotive seat that injured the engineer.  BNSF sought relief under products liability and breach of contract theories.  The district court decided BNSF’s claims were preempted by the LIA, and granted Seats’ motion to dismiss BNSF’s claims.

On appeal, the Eighth Circuit noted that the LIA does not confer a private right of action on injured railroad workers.  Rather, the LIA establishes standards of care that are enforced by a private right of action for railroad employees under the FELA.  These standards of care, in the interest of national uniformity, are intended to occupy the field of locomotive design, materials and construction.  Thus, quoting the U.S. Supreme Court decision in Kurns v. Railroad Friction Products Corp., 565 U.S. 625 (2012), the Eighth Circuit stated that “state common law duties and standards of care directed to the subject of locomotive equipment are pre-empted by the LIA”. 

The Court framed the primary issue in the case as whether the LIA preempts state claims based on federal standards of care.   Seats argued that state claims based on federal standards compromise national uniformity.   The Court disagreed, and held that “…the enforcement under state law of a federal standard of care does not undermine national uniformity because it does not impose conflicting regulations that a railroad must heed during interstate travel.”  

In determining that the District Court erred in ruling that the LIA preempts BNSF’s products liability claim, the Court added that if it were to hold that state law claims asserting LIA violations are preempted, the nation’s railroads would be left without a remedy, no matter how glaring the liability of an equipment supplier. 

BNSF’s breach of contract claim was based on Seats’ contract with the locomotive manufacturer, General Electric.   Seats and GE executed a contract that required Seats to manufacture locomotive seats “in compliance with the LIA” for installation in the locomotive.  BNSF alleged Seats breached this contract by providing a defective seat.  

Seats successfully argued to the District Court that BNSF’s breach of contract claim was a repackaged version of its products liability claim that was also preempted by the LIA.  Again, the Eighth Circuit disagreed.   The Court’s reasoning on the breach of contract claim was two-pronged.

First, the Court noted that “[j]ust as there is room for state tort remedies, there is room for state contract remedies associated with the federal standards embodied in the LIA”.  Second, the Court found that the breach of contract claim did not require compliance with a state duty or standard of care.  Instead, the claim was based on a duty that was voluntarily assumed and not imposed by state law.   Therefore, these “self-imposed undertakings” are not preempted by federal law.                            

Commentary: The Seats decision provides great clarity to the commercial relationships between railroads and vendors whose products are covered by federal standards of care.  The case is certainly not the first among such entities, and the Eighth Circuit has provided a definitive guide for current and future litigation.

$224 million sought in lawsuit against AT&T over cryptocurrency theft

August 22, 2018 | Megan Stumph-Turner

A cyber thief was able to trick AT&T into providing Michael Terpin’s account information, enabling that thief to make off with nearly $24 million in cryptocurrency belonging to Terpin, according to a complaint filed in the U.S. District Court for the District of California in Los Angeles.

In the lawsuit, among other things, Terpin alleges that AT&T was negligent in failing to protect its customers’ private data, and that it willfully disregarded unlawful transactions between AT&T employees and cyber thieves. Terpin claims that his digital currency was lost due to a “SIM swap fraud,” where the customer’s phone number is transferred to a SIM card operated by a hacker, who then resets the customer’s passwords and logs into their accounts in order to obtain confidential data and access to assets. Terpin believes that an AT&T employee cooperated in the swap that caused him to lose digital coins that would have been valued at $23.8 million in January of 2018, during a time where the value of the bitcoin was soaring, as previously reported by the BSCR financial services law blog. Because he has been publicly involved in cryptocurrency enterprises, Terpin was a prime target for cyber thieves.

AT&T has responded to the complaint publicly, stating, “We dispute these allegations and look forward to presenting our case in court.” Terpin, though, alleges that the telecommunications juggernaut has simply become “too big to care,” prioritizing expansion and acquisition over investing in hiring qualified professionals, providing ongoing training, or investing in systems that would better protect customer data.

While it remains to be seen what the outcome of this litigation will be, this lawsuit serves as a cautionary tale to any large institution that possesses sensitive online account data of its customers. These institutions would be well advised to look into their hiring and training procedures, as well as to consider implementing secure storage systems, in order to curtail future liability. BSCR will continue to monitor this litigation and will provide updates as milestones occur in the case.

UPDATE: Local Payday Lender enters into $1 Consent Order with CFPB

August 16, 2018 | Megan Stumph-Turner

An action filed in the United States District Court for the Western District of Missouri culminated after four years with a consent order that is catching attention due to its unusually small civil penalty, particularly in light of the severity of the conduct being penalized.

Richard Moseley Sr. and others, as well as a multitude of LLCs operating under his control (the “Defendants”), reached a consent judgment in the amount of $69,623,528, representing the amount of Defendants’ ill-gotten gains from their illegal payday lending scheme. But, in that same order, execution of the judgment was suspended upon certain conditions, including the following: (1) that Defendants agree not to participate in any further lending or financial services activities, (2) that they permit the CFPB to work with the Department of Justice to use funds from their bank accounts seized in a separate criminal action, and (3) that they each pay a civil penalty of just one dollar.

This anemic civil penalty was figured based upon affidavits and documents Defendants provided to the Bureau showing their lack of ability to pay the judgment amount, or apparently even a small fraction of it.

The consent order follows the recent criminal conviction of Moseley in the Southern District of New York for conspiracy, collection of unlawful debts, wire fraud, aggravated identity theft, and false disclosures under TILA. Among other things, Moseley and others charged illegally high interest rates, approaching 1,000 percent, on payday loans, took sensitive banking information of prospective customers who had not signed a contract for the loan and withdrew money from their accounts, and falsely reported that his businesses were based in other countries when they were actually operating in the Kansas City area. 

Amended Missouri Interpleader Statute Tackles the Multiple Claimants, Insufficient Limits Problem

August 13, 2018 | Angela Higgins

The Missouri legislature has enacted amendments to our state’s interpleader statute, Mo. Rev. Stat. § 507.060, which address one of the most vexatious problems in claims handling – multiple claimants with insufficient policy limits to fully resolve each claim against the insured. House Bill 1531 was signed by the governor on June 1, and will become effective August 28, 2018. 

Prior to these amendments, Missouri law was unsettled as to which approach should be favored by an insurer in a multiple-claimant scenario without risking third-party bad faith claims, for which Missouri is notorious. This post looks at the approaches to this problem in Missouri and elsewhere under the common law, and then at the changes worked by the revised interpleader statute.

I.              THE STATE OF THE LAW PRIOR TO AUGUST 28, 2018

A.            FIRST-COME, FIRST-SERVE

The oldest rule for resolving an insurer’s duties when presented with multiple claims and insufficient limits to pay all claims and potential claims is “first in time, first in right,” or “first-come, first-served.” When multiple claimants bring lawsuits against one or more insured defendants seeking damages for bodily injuries or death arising from a single occurrence and, based on a reasonable evaluation, the policy limits are plainly insufficient to cover the insured’s total potential exposure, courts generally apply the rule “first in time, first in right.”  Voccio v. Reliance Ins. Cos., 703 F.2d l, 3 (1st Cir. 1983).  This principle “applies regardless of whether the priority is by way of judgment or by way of settlement.”  World Trade Ctr. Props. LLC v. Certain Underwriters at Lloyd’s of London, 650 F.3d 145, 151 (2d Cir. 20 11); Allstate Ins. Co. v. Russell, 13 A.D.3d 617, 788 N.Y.S.2d 401, 402 (N.Y. App. Div. 2004); Castorena v. Western Indemnity Co., 213 Kan. 103, 110, 515 P.2d 789, 794 (1973).

This means that the insurer is entitled to pay the first claimant who obtains a judgment, or the first claimant who presents a settlement demand within policy limits. A liability insurer “has discretion to settle whenever and with whomever it chooses, provided it does not act in bad faith.”  World Trade Ctr. Props. LLC v. Certain Underwriters at Lloyd’s of London, 650 F.3d 145, 151 (2d Cir. 2011); Allstate Ins. Co. v. Russell, 13 A.D.3d 617 (N.Y. App. Div. 2004). The first to settle rule does not literally require that the insurer settle the first claim that is presented, but absolves it of responsibility for later claims when it has reached a reasonable settlement with the first claimant to negotiate to settlement.

[W]hen faced with a settlement demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims. Such an approach, we believe, promotes settlement of lawsuits and encourages claimants to make their claims promptly.

Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994). Soriano is generally considered the lead opinion on resolution of multiple-claimant problems.

It is generally agreed that the insurer can pay some claims and leave others unresolved, such that settlement exhausts policy limits so that the insured and other claimants are left without coverage under the policy. Liquori v. Allstate Ins. Co., 76 N.J. Super. 204, 208, 184 A.2d 12, 17 (N.J. Super. Ct. 1962).  When an insurer “has paid the full monetary limits set forth in the policy, its duties under the contract of insurance cease.”  Boris v. Flaherty, 242 A.D.2d 9, 12, 672 N.Y.S.2d 177, 180 (N.Y. App. Div. 1998).

It is also generally accepted that the insurer does not need to, and probably should not, wait until all claims are presented before determining which it will settle and how it will settle them. Hartford Casualty Ins. Co. v. Dodd, 416 F. Supp. 1216, 1219 (D. Md. 1976); State Farm Mutual Auto Ins. Co. v. Hamilton, 326 F. Supp. 931, 934 (D.S.C. 1971).  

Still, the insurer should make every attempt to settle as many claims as possible within policy limits. In Continental Casualty Insurance Company v. Peckham, 895 F.2d 830 (1st Cir. 1990), the court explained that, in a multiple-claimant case, the insurer should try to settle all or some of the claims so that the insured could be relieved from as much liability as is reasonably possible.  Id. at 835.  In doing so, the insurer is entitled to exercise “honest business judgment” as long as it attempts to resolve the multiple claims in good faith.  The court further recognized that, when the insurer is making a good-faith attempt to resolve multiple claims within the inadequate policy limits, the insurer is not required to make perfect judgments and is not automatically found in bad faith if the insured incurs liability beyond the policy limits.  Id.

However, the insurer must be careful to attempt to preserve policy funds for truly significant claims. In Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675 (2d Cir. 1963), an insurer was found to have acted in bad faith for the “overeager” settlement of a claim in disregard of potential personal liability on the insured.  Id. at 682. That is, the insurer should not jump to settle a claim of minimal value, simply because it is presented first and easy to resolve, when this would deplete already insufficient policy funds and increase the insured’s exposure to an excess judgment. 

The “first in time” cases are obviously in tension with cases holding that the insurer must still attempt to preserve as much of the policy funds as possible to minimize the insured’s exposure to an excess judgment, and the reported cases are highly fact-specific without a bright-line rule. Moreover, there are no reported Missouri cases authorizing a “first in time” approach to settlement of multiple claims exceeding the policy limits.

B.           SEEK THE CLAIMANTS’ SUGGESTIONS ON A SPLIT

Insurers should attempt to resolve all claims if possible. One approach would be to determine whether the claimants would agree to a split of the policy proceeds. See Voccio v. Reliance Ins. Cos., 703 F.2d 1, 3 (1st Cir. 1983) (the fact that “the carrier met together with counsel for both [claimants] and sought suggestions on how to divide the money” was evidence of the insurer’s good faith); accord, Kinder v. Western Pioneer Ins. Co., 231 Cal. App. 2d 894, 902 (1965).

Voccio involved competing claims by the survivors of a decedent, and a minor who lost both legs in an auto accident. The insured maintained only $25,000 in combined liability limits. The insurer consulted with representatives of both claimants and proposed a 50/50 split. The decedent’s family accepted the settlement, but the minor refused, and obtained a substantial judgment. The First Circuit, nevertheless, found no bad faith because the insurer had reasonably attempted to resolve the situation.

There is no real harm in notifying the claimants that their claims are believed to exceed the policy limits, and seeking their input regarding an equitable division of the proceeds. This may help to inoculate the insurer from a later bad faith claim. 

Our sense is that, for claims that pre-date the amended interpleader statute, although there are no reported Missouri cases, Missouri courts would prefer to see an insurer attempt to resolve all claims globally based upon suggestions from the claimants as to how the funds should be divided. It is probably a good idea to make such a request as soon as possible after receipt of a demand. Even though it is unlikely that the claimants will actually provide an agreed-upon division of the policy proceeds, documenting that the insurer has identified the problem and seeking the claimants’ proposals probably can only help deter a future bad faith claim.

C.           PRO RATA

Missouri specifically approves payment of policy proceeds on a pro rata basis, based on the relative magnitude of each claim. Christlieb v. Luten, 633 S.W.2d 139, 140 (Mo. App. E.D. 1982); see also Geisner v. Budget Rent a Car of Mo., 999 S.W.2d 265, 268 (Mo. App. E.D. 1999). However, the Christlieb case involved distribution of policy proceeds following judgments in which the value of the claims were established by juries. 

In Countryman v. Seymour R-II Sch. Dist., 823 S.W.2d 515, 522 (Mo. App. S.D. 1992), plaintiffs in a garnishment action argued that an insurer is required to pay out policy proceeds on a pro rata basis.  The case notes that, other than Christlieb, there is no clear guidance in Missouri law for how to handle multiple claimants to an insufficient policy limit. Countryman, like Christlieb, found that it would be most equitable to divide the policy funds on a proportionate or pro rata basis under the facts of that case. However, this case is post-judgment, and does not address resolution of pre-suit claims.

These cases seem to support an insurer reaching its own good-faith determination of the relative value of the claims and attempting a pro rata distribution. However, these cases do not apply to settlement (as opposed to final judgment). As discussed elsewhere, if a claimant with a significant claim refuses to accept a pro rata distribution, the insurer must re-evaluate its position – Christlieb and others are not a “get out of jail free” card to allow the insurer to avoid bad faith. 

Obviously, in a pre-judgment settlement posture, the claimants may not be willing to accept a pro rata distribution, and/or may disagree regarding the relative values of their claims. As discussed more fully below, there are consequences to an insurer that loses the opportunity to settle at least one of the claims while attempting a global resolution. While proposing a pro rata allocation of the policy proceeds is acceptable, the insurer still must act to settle within or for the policy limits if possible if the claimants will not accept a pro rata distribution. If there is no agreement, then the insurer should proceed with either a “first in time” or “most valuable/greatest risk” approach.

D.           MOST VALUABLE CLAIM OR CLAIM PRESENTING THE GREATEST RISK OF EXCESS EXPOSURE

One of the leading cases on this issue is from across the border in Kansas, Farmers Ins. Exch. v. Schropp, 567 P.2d 1359 (Kan. 1977).  This case involved $25,000/$50,000 policy limits, and an auto accident which resulted in the death of the insured driver and injury to five surviving claimants.  A Mr. Schropp suffered the most severe injuries and the most damages. The insurer refused his settlement demand for $25,000, based on the other four claims.  Id. at 1363. This case is discussed in greater detail below, but Schropp eventually recovered on an assigned bad faith claim. Id. at 1364. 

While the reported case law in Missouri is less clear, the standard for bad faith in Missouri looks at whether the insurer has adequately protected the insured from a judgment in excess of the policy limits:

Circumstances that indicate an insurer’s bad faith in refusing to settle include the insurer’s not fully investigating and evaluating a third--party claimant’s injuries, not recognizing the severity of a third--party claimant’s injuries and the probability that a verdict would exceed policy limits, and refusing to consider a settlement offer. . . . Other circumstances indicating an insurer’s bad faith include not advising an insured of the potential of an excess judgment or of the existence of settlement offers.

Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 662 (Mo. App. W.D. 2008). Where an insurance company, knowing that a claimant was badly injured and that liability was clear, and expecting the possibility of a significant adverse judgment in excess of the policy limits against its insured, refuses to offer the full amount of the policy limit in settlement of the claim, it is apparent the insurer placed its own financial interests before those of its insured. See Frank B. Connet Lumber Co. v. New Amsterdam Casualty Co., 236 F.2d 117, 126 (8th Cir. 1956). This is more complicated in a multiple-claimant context, but under Missouri law there is the clear potential for bad faith liability where the insurer does not take advantage of an opportunity to settle a large claim that would expose the insured to an excess judgment.

E.            DO NOT LOSE THE OPPORTUNITY TO SETTLE ONE CLAIM WHILE PURSUING SETTLEMENT OF ALL CLAIMS.

The lead Missouri case on these issues is not particularly helpful, but does demonstrate some of the potential pitfalls in failing to handle appropriately a multiple-claimant situation. The insurer should not overlook good opportunities to resolve substantial claims in pursuit of the goal of settling all claims. 

In Rinehart v. Shelter General Insurance Company, 261 S.W.3d 583 (Mo. App. W.D. 2008), the insured was driving drunk when he struck another vehicle, causing serious injuries to his passenger (Adkins) and the two occupants of the claimant vehicle (Ingram and Krohn).  The applicable policy limits were $50,000 per person / $100,000 per accident.  Claimants Ingram and Krohn demanded $50,000 each. Id. at 588.  The insurer advised that it was willing to tender the full policy limits, but advised that claimants Ingram and Krohn would have to reach an agreement with insured passenger Adkins as to the distribution of the proceeds. Claimants Ingram and Krohn refused to share the policy limits with Adkins. Id. at 589. Counsel for Ingram and Krohn presented another policy limits demand, and the insurer responded that it would settle the claims for two-thirds of the total policy limits.  Id. at 589.  Claimants Ingram and Krohn filed suit, and excess judgments were entered for more than $3.5 million to Ingram and over $1 million to Krohn.  Subsequently, the insured filed a bad faith action and a jury awarded $6.25 million in compensatory damages and $3 million in punitive damages. Id.

On appeal, the insurer argued that there was no evidence of bad faith because its sole objective was to settle all of the potential claims within the policy limits and, thus, protect the insured from any potential personal liability.  The court determined that the evidence demonstrated that the insurer did not really intend to settle Adkins’s claim, and, therefore, a jury could infer that the insurer had attempted to escape its full contractual obligation to the insured by only offering to pay two-third of the policy limits.  Id. at 596.  The court of appeals also found that a jury could reasonably find that the insurer had acted with reckless indifference to the insured’s financial interests by refusing to settle with Ingram and Krohn for the full policy limits.  Id. Rinehart suggests that it would be preferable to settle with a “big” claimant and to leave other claims unresolved, rather than to lose the opportunity to settle with the big claimant whose claim could well exceed policy limits.

II.            AFTER AMENDMENTS TO MISSOURI’S INTERPLEADER STATUTE

Missouri House Bill 1531 provides clear options for insurers faced with the multiple claimants, insufficient limits problem. The bill amends Mo. Rev. Stat. § 507.060 to specifically provide that an interpleader action may be filed in circumstances “including multiple claims against the same insurance coverage.” The amended statute provides that an interpleader claim may be filed where there are multiple “potential” claims against the insurer or insured.  

Under the new statute, so long as the insurer files an interpleader action within 90 days from receiving a settlement demand, the insurer is insulated from extra-contractual liability in “any other action,” specifically addressing the third-party bad faith problem. However, the insurer gets this “get out of jail free” card as to a potential bad faith claim only if it defends the insured in any bodily injury action even though it has deposited its limits into court in the interpleader. See Mo. Rev. Stat. § 507.060.4 (effective Aug. 28, 2018). Filing the interpleader and timely paying the policy limits into court following its order also insulates the insurer from a subsequent garnishment action by any of the claimants, who are prohibited from recovering from the insurer any amount beyond the limits deposited in the context of the interpleader. § 507.060.5.

This is significant because not only has Missouri been a bad faith trap for decades, there is case law in other jurisdictions holding that filing an interpleader action does not insulate insurers from potential bad faith claims. In Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475 (5th Cir. 1969), the insurer chose to file an interpleader action when faced with multiple claimants and insufficient limits. It did not accept the first-presented demand for policy limits, but proceeded with the interpleader action. While the interpleader was pending, one of the injured claimants obtained a default judgment against the insured, and proceeded with garnishment and an assigned bad faith claim against the insurer. The bad faith claim went to trial.

The Fifth Circuit found that, while Liberty Mutual’s concerns about having to pay more than its policy limits were relevant to the ultimate jury question of bad faith, they did not, as a matter of law, justify the trial court’s directing a verdict for the insurer. It was for the jury to decide whether the insurer’s refusal to settle was primarily in its own interests and with too little regard for its insured’s interests.

When several claimants are involved, and liability is evident, rejection of a single offer to compromise within policy limits does not necessarily conflict with the interest of the insured. He hopes to see the insurance fund used to compromise as much of his potential liability as possible. Of course, if the fund is needlessly exhausted on one claim, when it might cancel out others as well, the insured suffers from the company’s readiness to settle. To put the point another way, even if liability be conceded, plaintiffs will usually settle for less than they would ultimately recover after trial, if only to save time and attorney’s fees. Each settlement dollar will thus cancel out more than a dollar’s worth of potential liability. Insured defendants will want their policy funds to blot out as large a share of the potential claim against them as possible. It follows that, insofar as the insureds’ interest governs, the fund should not be exhausted without an attempt to settle as many claims as possible. But where the insurance proceeds are so slight compared with the totality of claims as to preclude any chance of comprehensive settlement, the insurer’s insistence upon such a settlement profits the insured nothing. He would do better to have the leverage of his insurance money applied to at least some of the claims, to the end of reducing his ultimate judgment debt.

412 F.2d at 480-481.

The Fifth Circuit concluded that:

[E]fforts to achieve a prorated, comprehensive settlement may excuse an insurer’s reluctance to settle with less than all of the claimants, but need not do so. The question is for the jury to decide. As this Court put it in Springer v. Citizens Casualty Company, 5 Cir. 1957, 246 F.2d 123, 128- 129, it is “a question for jury decision whether the insurer had not acted too much for its own protection and with too little regard for the rights of the insured in refusing to settle within the policy limits”. [sic] Here, bearing in mind the existence of multiple claims and the insured’s exposure to heavy damages, did the insurer act in good faith in managing the proceeds in a manner reasonably calculated to protect the insured by minimizing his total liability? In many cases, efforts to achieve an overall agreement, even though entailing a refusal to settle immediately with one or more parties, will accord with the insurer’s duty. In other cases, use of the whole fund to cancel out a single claim will best serve to minimize the defendant’s liability. Considerable leeway, of course, must be made for the insurer’s honest business judgment, short of mismanagement tantamount to bad faith.

Id. at 481.

Although not an interpleader action, an insurer in Kansas filed a declaratory judgment action prior to the reduction of any of five competing claims to judgment. The court found that the insurer could still be liable for bad faith. Farmers Ins. Exch. v. Schropp, 567 P.2d 1359 (Kan. 1977). The facts of Schropp are discussed above. 

The Kansas Supreme Court faulted the insurer for not filing an interpleader action, but also held that the preferred method for resolving the problem was to invite all of the claimants to participate in a joint effort to distribute the available policy funds. Id. at 1364.  Even filing an interpleader may not have been enough to preclude bad faith liability. Filing a declaratory judgment action, however, was definitely not the correct course of action. Id. 

It is a strange and refreshing sensation to find Missouri law to be more favorable than that of other jurisdictions on third-party bad faith exposure. However, given the nature of the plaintiffs’ bar in the state and some problematic courts, we will keep an eye on how the amended § 507.060 is applied by the trial courts.

Related Services: Insurance

Attorneys: Angela Higgins

Missouri Voters Overwhelmingly Reject "Right-to-Work" Law

August 8, 2018 | David Eisenberg

While we regularly report to our readers on significant case law developments in the labor and employment field, the most dramatic developments in Missouri, over the past year, have played out in the legislative arena.

Last year, with a Republican governor and Republican-majority legislature, two major pieces of labor and employment law legislation were passed. One enacted major changes in the Missouri Human Rights Act, revising its terms to largely parallel those of their equivalent federal anti-discrimination statutes. (Over the years, Missouri courts had held that the MHRA had considerably broader reach than federal statutes like Title VII, the ADEA, and the ADA.) The other was the enactment of a right-to-work law that was signed by former Governor Greitens, which would have made Missouri the 28th right-to-work state. The latter result was short-lived, as union supporters gathered enough signatures to keep it from going into effect pending the results of a statewide referendum.

The rejection of so-called “Proposition A” became a major national priority for organized labor, which contributed substantial funds to the cause.  And Missouri voters, by a 2-to-1 margin, have effectively blocked the right-to-work law. 

In a right-to-work state (like Kansas), employees in unionized workplaces are permitted to opt out of both union membership and the payment of union fees of any kind. In states without right-to-work laws, employees at unionized workplaces don’t have to be dues-paying union members, but are required to pay “agency fees.” to cover the union’s cost of negotiating employment contracts that affect all bargaining unit workers.

Related Services: Employment & Labor

Attorneys: David Eisenberg

Missouri Court of Appeals Eastern District Judges Disagree Regarding Substantial Compliance and Affidavit of Merit Statute in Med Mal Case

August 6, 2018 | John Mahon, Jr.

In Ferder v. Scott, the Missouri Court of Appeals, Eastern District (opinion authored by Judge Robert G. Dowd, Jr.), reversed a trial court’s dismissal of a medical malpractice lawsuit for failure to comply with the affidavit of merit requirement in § 538.225, RSMo.  The appellate court held the plaintiff’s affidavit, which complied with the statute in every way except that it combined related defendants into a single affidavit, substantially complied with the statute and was sufficient to avoid dismissal.   

The plaintiff sued three defendants (a doctor, the doctor’s practice group, and a hospital) but filed only a single affidavit as to all defendants.  The plaintiff’s claims against the corporate defendants were premised solely on vicarious liability for the doctor’s conduct as an alleged employee.  The plaintiff voluntarily dismissed her claim against the hospital.  Later, the two remaining defendants moved to dismiss on the grounds that the single affidavit was deficient because it did not strictly comply with the mandatory language contained in § 538.225.4, RSMo, which states: “A separate affidavit shall be filed for each defendant named in the petition . . . .”  The trial court agreed and dismissed the case, without prejudice, pursuant to § 538.225.6.  The plaintiff appealed.  

On appeal, the plaintiff conceded the affidavit was technically deficient and did not strictly comply with the statute because there was only one affidavit and not three separate affidavits.  However, plaintiff argued she substantially complied with the statute because the affidavit was otherwise compliant and timely and verified her claims were not frivolous.  She also argued that because the doctor was an employee of the practice group and because she alleged only a vicarious liability claim against the group, the substance of her single affidavit satisfied the purpose and intent of the statute with respect to both defendants.  In other words, the affidavit complied in all substantive ways but not in form, and a separate affidavit for the group would have been nothing more than a duplicate of the one already filed with no additional information.    

The appellate court reviewed Missouri case law analyzing § 538.225.  The court acknowledged no Missouri court had ever found substantial compliance with the affidavit statute, but Missouri courts had not foreclosed the possibility that a plaintiff could survive a motion to dismiss through substantial compliance under a certain situation.  The court found the plaintiff’s case, under its own unique set of facts, presented that situation.  The court distinguished the various Missouri appellate decisions rejecting substantial compliance arguments as factually dissimilar in that the plaintiffs in those cases failed to file a timely affidavit.  Thus, the court reversed and remanded to the trial court.   

Judge Kurt Odenwald authored a dissent in which he expressed sympathy towards the plaintiff’s position, and agreed the affidavit substantially complied with the statute. But he did not believe the court had the discretion to disregard the express directive of the statute and make a finding of substantial compliance.  That is because the language of the statute is clear and unambiguous, and Missouri law permits substantial compliance with a statute only under a statutory directive to construe a statute liberally or under a statute that expressly allows for substantial compliance, neither of which was present.  Further, construing the statute to permit only one affidavit would necessarily render section 538.225.4 meaningless, and Missouri courts are not permitted to interpret a statute in a way that renders any portion meaningless.  Without a direct mandate from the Supreme Court of Missouri, Judge Odenwald was unwilling to diverge from the express language of the statute and thus dissented.       

On July 11, 2018, the defendants filed an Application for Transfer to the Supreme Court of Missouri asking the Court to address the conflict between the appellate court’s novel application of the substantial compliance theory to § 538.225 on the one hand, and the legislative intent of the statute, and all prior Missouri appellate decisions, including one Supreme Court decision, on the other.  The defendants also argue that the ruling destroys the bright-line nature of the statute and creates a test that will inevitably lead to vastly different applications and inconsistent opinions that will cause confusion among the courts and parties.  The application is currently pending. 

No Class: SCOTUS Holds That Tolling Properties of Class Actions Only Apply to Individual Cases, Not Future Class Actions

July 31, 2018 | David Eisenberg

The recent United States Supreme Court decision China Agritech, Inc. v. Resh, 201 L. Ed. 2d 123 (2018), sensibly resolved some existing confusion about the tolling effect that a putative class action creates for the members of a proposed class. In its 1974 decision in American Pipe & Constr. Co. v. Utah, the Court held that a timely filed class action effectively tolls any applicable statute of limitations for persons who are a part of the proposed class.  The Court elaborated on this rule in 1983 in Crown, Cork & Seal Co. v. Parker, stating that the tolling rule applies to putative class members who, if class certification is denied, “prefer to bring an individual suit rather than intervene.”  This sparked a slew of actions by plaintiff’s attorneys who argued that the tolling rule applied to both individual claims as well as successive class actions after an original class’ certification was denied.  Defense attorneys, understandably, felt differently, and argued against the application of equitable estoppel by some courts, to permit the filing of “stacked” class actions.

The Court’s unanimous ruling in China Agritech, Inc. v. Resh sets the record straight and makes clear that the rule in American Pipe “tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individual or file individual claims if the class fails.  But American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.” 

While widely anticipated, the ruling was no less vital to class action defendants.  Under the arguments advanced by plaintiff’s attorneys, new class actions could conceivably be stacked end-to-end in perpetuity once an original class action had been timely filed.  The Court recognized this perpetual domino effect, and Justice Ginsburg, writing for the Court, viewed this as a fundamental matter of judicial efficiency.  American Pipe properly applies to permit tolling of individual claims, “because economy of litigation favors delaying those claims until after a class-certification denial.  If certification is granted, the claims will proceed as a class and there would be no need for the assertion of any claim individually.”  Early assertion of competing class representative claims is beneficial because it allows “the district court [to] select the best plaintiff with knowledge of the full array of potential class representatives and class counsel.”  The Court’s holding effectively ensures class-action defendants that if class certification is denied in the first place, successive nearly-identical class suits will not follow, assuming the time period contemplated by the statute of limitations has passed.

The ruling comes as a relief to would-be class action defendants concerned that an already time consuming and dreadfully expensive area of litigation could multiply exponentially.  Moreover, the stacking of successive class actions could have effectively allowed plaintiffs to “test the waters” in an original class suit, knowing there would be a fall back option, in a later-filed case.  Class action defendants can now rest a little easier knowing that if class certification is defeated, future liability will be limited to individual claims if the statute of limitations period has expired.  

Related Services: Product Liability

Attorneys: David Eisenberg

Amendments to 537.065 Providing for Notice to the Insurer and Intervention as of Right to be Applied Prospectively Only

July 25, 2018 | Lisa Larkin

A recent decision from Missouri’s Western District Court of Appeals, Desai v. Seneca Specialty Insurance Company, WD81220, involves retroactive vs. prospective application of certain amendments to § 537.065, RSMo. That statute allows a claimant and a tort-feasor to contract to limit recovery against the tort-feasor. It permits any person with a claim for damages against a tort-feasor to enter into an agreement with that tortfeasor whereby, in consideration of the payment of some amount, the claimant would agree that in the event of a judgment against the tort-feasor, he would limit his recovery as against the tort-feasor to the amounts of the insurance policy. Amendments to that statute, effective August 28, 2017, provide new protections to the insurer in the context of these agreement, which are often used to set up claims against an insurer for bad faith refusal to settle. Under the 2017 amendments, before a judgment may be entered against any tort-feasor who has reached such an agreement with a claimant, an insurer must be provided with written notice of the execution of the contract and must be given thirty days after receipt of the notice to intervene as a matter of right in any pending litigation involving the claim for damages. The pre-August 28, 2017, statute contains no such protections for the insurer. The rights to notice and to intervene contained in the amendments is important, therefore, because it seemingly allows the insurer to contest both liability and damages, and possibly coverage issues, as part of the underlying litigation.

In Desai v. Seneca Specialty Insurance Co., Seneca sought to intervene in the lawsuit filed by Neil and Heta Desai against Seneca’s insured, Garcia Empire, LLC. In October 2014, Neil Desai suffered a personal injury while being escorted from a Garcia Empire establishment. The Desais filed suit in May 2016, and Garcia advised Seneca of the suit. Seneca offered to defend Garcia subject to a full and complete reservation of rights regarding coverage, but Garcia rejected Seneca’s offer. In November 2016, the Desais and Garcia entered into a contract under § 537.065 wherein the Desais agreed to limit recovery of any judgment against Garcia to its insurance coverage. 

The parties tried the case on August 17, 2017, and the court entered judgment in favor of the Desais and against Garcia on October 2, 2017. Within 30 days of the entry of judgment, Seneca filed a motion to intervene as a matter of right, arguing it was entitled to receive notice of the § 537.065 contract between Garcia and the Desais and to intervene as a matter of right in the lawsuit based on the August 28, 2017, amendments to § 537.065. 

The trial court denied the motion to intervene, holding the legislature did not expressly provide for the August 2017 amendments of § 537.065 to be applied to proceedings had or commenced under the statute prior to the amendment. The court of appeals affirmed. 

The appellate court rejected Seneca’s argument that the August 28, 2017, amendments applied because the judgment had been entered after the effective date. The plain language of the amended statute provides that an insurer shall be given notice and an opportunity to intervene before a judgment may be entered against any tort-feasor “after such tort-feasor has entered into a contract under this section.” Thus, the trigger point is the entry of the contract, not the date of the judgment. 

The appellate court also rejected Seneca’s argument that the 2017 amendments could apply to contracts entered before that date because the changes to the statute regarding notice and intervention were merely procedural and not a substantive change in the law. When Garcia and the Desais entered into their § 537.065 contract, however, Seneca had no right to notice and no standing to intervene as a matter of right. Yet, after the amendments, an insurer would have such standing and have the right to notice. Thus, that section, as amended, creates new legal rights in favor of an insurer which did not exist prior to the amendments. It also imposes new obligations and duties upon the insured, giving a contract entered before August 28, 2017, a different effect from that which it had when entered. Application of these amendments to contracts executed before August 28, 2017, therefore, would be impermissibly retrospective in nature, i.e., it would affect past transactions to the substantial prejudice of the parties. 

Thus, the appellate court concluded the notice and intervention provisions of amended § 537.065 apply prospectively only to § 537.065 contracts executed after the effective date of the amendments, August 28, 2017. For contracts entered before that date, such as that at issue in this case, the insurer does not have the protection of the new notice provision and the option to intervene as a matter of right. This opinion reaches only these two specific portions of the August 28, 2017, amendments to § 537.065. It remains to be seen how appellate courts will address the retroactive application of other portions, but this opinion gives some good insight into how the Western District is likely to approach the issue. 

Related Services: Insurance, Appellate and Commercial

Attorneys: Lisa Larkin

Medical Malpractice: Missouri's Health Care Affidavit Statute is Constitutional - Comply or Face Dismissal

June 22, 2018 | Suzanne Billam and Hal Meltzer

When will plaintiffs learn? In Hink v. Helfrich, the Missouri Supreme Court has recently added yet another to a long line of Missouri decisions upholding constitutional validity of the health care affidavit requirement for medical negligence actions, and strictly construing the mandatory statutory language. For more on this issue, see our prior post here.

Section 538.225.1 (Missouri Revised Statues) requires that a plaintiff or his counsel file an affidavit with the Court, stating that he has:

“… obtained the written opinion of a legally qualified health care provider which states that the defendant health care provider failed to use such care as a reasonably prudent and careful health care provider would have under similar circumstances and that such failure to use such reasonable care directly caused or directly contributed to cause the damages claimed in the petition.” 

The Supreme Court in Hink held plaintiff’s medical malpractice case was properly dismissed for failure to file the required affidavit. In her Petition, the plaintiff challenged the constitutionality of this statute, as revised in 2005, arguing that it violated a plaintiff’s right to jury trial, Missouri’s open courts provision, and separation of powers.  When the plaintiff failed to file any affidavit within the prescribed time limit (90 days, plus a 90-day extension as permitted by statute), the defendant physician filed a Motion to Dismiss. The trial court granted defendant's Motion, and plaintiff appealed.

The Supreme Court of Missouri endorsed its prior holding in Mahoney v. Doerhoff Surgical Services, Inc., 807 S.W.2d 503 (Mo. banc 1991), declaring that Section 538.225’s affidavit requirement does not violate the constitutional right of access to the courts under the Missouri Constitution, Article I, § 14, because access to the courts simply means “the right to pursue in the courts the causes of action the substantive law recognizes.” Missouri’s substantive medical malpractice law requires a plaintiff to prove by a qualified witness that the defendant deviated from an accepted standard of care.  Without such testimony, the case can neither be submitted to the jury nor be allowed to proceed by the court.

The Court emphasized that Section 538.255’s affidavit requirement is consistent with this substantive law because the legislative purpose of requiring an “affidavit of merit” is to prevent frivolous medical malpractice lawsuits, when a plaintiff cannot put forth adequate expert testimony to support her claims. Thus, the requirement does not deny a fundamental right, or free access to the courts, and does not delay the pursuit of the cause in the courts. At most, it merely redesigns the framework of the substantive law to accomplish a rational legislative end of protecting the public and litigants from the cost of ungrounded medical malpractice claims.

Likewise, the Court once again (as in Mahoney) rejected the argument that Section 538.255’s affidavit requirement violates the right to trial by jury, because the statute simply reiterates existing requirements on plaintiffs: it does nothing more than “parallel” the requirement of Missouri Rule 55.03, that an attorney exercise a reasonable inquiry to ensure the suit is well grounded in fact and law. The affidavit of merit does nothing more than provide more specific guidance as to how medical malpractice plaintiffs must comply with existing pre-suit requirements rather than imposing any new requirement or other restrictions on his or her right to seek redress.

When first enacted, and at the time Mahoney was decided, Section 538.255 gave the trial court discretion on whether to dismiss, providing that if an affidavit was not filed within 90 days, “the court may, upon motion of any party, dismiss the action against such moving party without prejudice.” Mo. Rev. Stat. § 538.225.5, 1985 (emphasis added).  In 2005, the statute was amended to provide the court “shall” dismiss the action if an affidavit is not filed, rather than the permissive “may.” This made it yet clear that the trial court had no option to dismiss, where no affidavit was timely filed.

Finally, the Court rebuffed plaintiff’s contention that the 2005 amendment to Section 538.255 defining “legally qualified healthcare providers” to include only those who practice in “substantially the same specialty” as the defendant, impermissibly imposes a stricter burden on the plaintiff than is required to prove a prima facie case of negligence at trial. As plaintiff Hink failed to file any affidavit, the Court held that she was not affected by the alleged deficits to Section 538.255, and therefore lacked standing to challenge its constitutionality. The Court did explain, however, that its interpretation of “substantially the same specialty” includes persons qualified by expertise rather than board certification, and that Section 538.255 does not require the affidavit to rely on only a single expert opinion for both breach of standard of care and causation.

Missouri courts could not be any clearer, Mo. Rev. Stat. § 538.225 is constitutional, mandatory, and here to stay.

ANTI-FORUM SHOPPING: Limitation on Joinder in Missouri on the Horizon

June 18, 2018 | Noemi Donovan and Hal Meltzer

The Missouri Legislature introduced bills during its most recent legislative session to curtail forum shopping of class action plaintiffs in Missouri. This anti-forum shopping legislation, while not ultimately enacted into law, would have limited out-of-state plaintiffs from joining lawsuits involving local claims against out-of-state defendants. Current statutes permit these out-of-state plaintiffs to join such claims for a nominal fee, thus allowing them to use Missouri’s court resources and taxpayer dollars to pursue out-of-state defendants for injuries that did not occur in Missouri. House Bill 1578 and Senate Bill 546 attempted to eliminate this problem by limiting both the joinder of plaintiffs and defendants in a single action.

Current Missouri law permits joinder of plaintiffs if they assert a joint right to relief or if their claims arise out of the same transaction or occurrence and if there is any question of law or fact common to all of the joined plaintiffs. Likewise, Missouri law permits joinder of defendants if a claim is asserted against the defendants jointly or if an asserted right to relief arises out of the same transaction or occurrence and there is a question of law of fact common to all of the defendants in the action. The proposed legislation sought to limit joinder by precluding joinder of out-of-state injury claims arising out of separate incidents, or purchases of the same product or service in a single action.

The bills further sought to limit joinder of two or more plaintiffs in an action to only those circumstances in which each plaintiff can establish proper venue independently, except that plaintiffs may be joined in actions in counties with populations below certain specified thresholds. Joinder of two or more defendants in a single action would likewise be prohibited under the proposed legislation unless the plaintiff could establish proper venue and personal jurisdiction as to each defendant, independent of plaintiff’s claims against other defendants. If personal jurisdiction and proper venue could not be independently established as to a particular defendant, that defendant would be deemed misjoined and could only be joined if each party to the action waived objection to the joinder. All claims against a misjoined plaintiff or defendant would have been severable from the action and either transferred to a county where proper venue exists, or if venue is not proper in any county in Missouri or personal jurisdiction does not exist, the claims would be dismissed without prejudice.

Ultimately, H.B. 1578 passed the House, but the similar Senate version, S.B. 546, after appearing on the Senate floor multiple times, failed to pass before the end of this year’s legislative session. While this legislation may be reintroduced next year, if it is enacted with the same provisions as the proposed legislation this session, it will not be retroactive and thus would not affect any lawsuits pending at the time of the legislation’s enactment.

UPDATE: Major Financial Reform Bill Signed into Law

May 24, 2018 | Megan Stumph-Turner

Today, President Trump signed into law S. 2155, The Economic Growth, Regulatory Relief and Consumer Protection Act. In doing so, President Trump stated, “the legislation I'm signing today rolls back the crippling Dodd-Frank regulations that are crushing small banks.”

In response to the new law, community lenders across the nation rejoice.  On behalf of Independent Community Bankers of America (the “ICBA”), President and CEO Rebeca Romero Rainey issued a statement that the “landmark law signed by the president today unravels many of the suffocating regulatory burdens our nation’s community banks face and puts community banks in a much better position to unleash their full economic potential to the benefit of their customers and communities.” 

Some of those regulations include stringent ability-to-repay evaluations, record retention requirements, reporting to regulators, and stress-testing under the authority of the Federal Reserve to determine the ability to withstand a financial crisis. Smaller banks and credit unions reportedly found these regulations to be unduly burdensome for them, given their relative size and resources for compliance. Perhaps the best evidence of this argument is the nearly 2,000 community financial institutions that ceased operations after the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in 2010.

Critics of the Act, however, argue that the Act goes too far in deregulation.  According to some, decision to raise the “enhanced oversight” threshold from those banks with $50 billion or more in assets, to those with at least $250 billion, was too severe, and that such a large rollback in regulation could lead to the next major financial crisis in America.  Indeed, the Act provides a new standard for “too big to fail” that excludes nearly two dozen banks that were previously considered to be systematically important financial institutions.

Only time will tell the impact of this new legislation, but The Economic Growth, Regulatory Relief and Consumer Protection Act is being hailed as a win for Main Street by many.

BSCR previously posted about S. 2155 when it was first expected to pass in the Senate and has continued to monitor the bill’s progress. The full text of the new law may be found here.

Kansas Filing Deadline Differs by Filing Type

May 21, 2018 | Bryan Mouber

In Kansas, unless you are electronically filing your documents, the last day for filing ends “when the clerk’s office is scheduled to close.” K.S.A. 60-206(a)(4)(B). If you are electronic or fax filing, you have until “midnight in the court’s time zone.” K.S.A. 60-206(a)(4)(A).

In JPMorgan Chase Bank, N.A. v. Taylor, No. 117,774 (Kan.App. May 11, 2018), the Court of Appeals refused to consider the homeowner’s late-filed opposition to the confirmation of the sale, noting, “any response she would have to the motion needed to be filed by the close of business.” 

In this case, JP Morgan initiated foreclosure proceedings and bought the property at the foreclosure auction for the full judgment amount. JP Morgan then filed a motion with the court to confirm the sheriff’s sale. The District Court confirmed the sale the same day without waiting for any objection and without notifying the homeowner. The District Court never served the homeowner with the Order.

Over one year later, the homeowner realized the District Court confirmed the sale and filed a motion for relief from that Order. The District Court denied the motion, and issued a minute sheet that included no findings of fact or conclusions of law.

The Court of Appeals in partially affirming and partially overturning the lower court noted that the rule requires that any “person that files a timely response objection to a motion to confirm a sheriff’s sale has the right to have that objection read and considered by the district court.” Id. at *6. Thus, “any procedure that allows for automatic approval of a sheriff’s sale without at least waiting to see if someone files an objection is subject to a later ruling that it is void as a violation of due process.” Id.

In this case, however, the Court of Appeals held that the Homeowner:

was served the motion by mail on November 13, 2015. She had seven days to respond, plus three days for mail service. K.S.A. 60-206 (a)(1)(d); Supreme Court Rule 133(b) (2018 Kan. S. Ct. R. 199). Accordingly, any response she would have to the motion needed to be filed by the close of business November 23, 2015. [Homeowner] did not file her response until November 24, 2015, so it was untimely. Therefore, even though the district court's order was premature, opening it up for a claim of violation of [Homeowner]'s due process rights, we cannot find error in the district court's failure to consider an untimely objection to confirmation of the sale.

Id. Thus, the Court of Appeals did not look at any of the arguments.

The Court of Appeals was unable to determine whether the District Court abused its discretion based solely on the minute order and remanded to the district court to make clear the findings of fact and conclusions of law.

U.S. Supreme Court, in a 5-4 Ruling, Upholds Employers' Use of Class Action Waivers in Employment Agreements

May 21, 2018 | David Eisenberg

In a closely watched and long-awaited ruling, the U.S. Supreme Court on May 21st held that it is lawful for an employer, in an agreement with an employee, to provide that all disputes be resolved through one-on-one arbitration between the company and the employee. Accordingly, an employee may waive his right to bring his claims in a class action or collective action.

The decision, in a case titled Epic Systems Corp. v. Lewis, resolved a split in authority between Circuit Courts of Appeal, and actually resolved three recent separate appellate court cases with very similar facts. (The other two cases involved employers Ernst & Young, and Murphy Oil USA.) In each instance, the employee had entered into an employment agreement with his employer, which referred disputes to arbitration, and which contained a class action waiver clause. In the Murphy Oil case, the Court of Appeals had upheld the arbitration/class waiver clause. In Epic Systems and Ernst & Young cases, the Courts of Appeal had denied enforcement of those clauses.

At issue was the friction between, on one hand, a consistent line of recent Supreme Court cases upholding arbitration clauses with class waivers, under the Federal Arbitration Act (e.g. Concepcion, Italian Colors, Kindred Nursing); and a doctrine first espoused by the National Labor Relations Board in 2012, in the D.R. Horton case, holding that an agreement purporting to waive class action rights was unenforceable, because it encumbered the fundamental right under Section 7 of the National Labor Relations Act for employees to engage in concerted activity for their mutual aid or protection.

The majority opinion, written by Justice Gorsuch, rejected the employees’ argument about Section 7 rights, holding that the NLRA “does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.” The opinion further observed that unlike the NLRA, various other federal statutes contain very specific language about the manner in which disputes should be resolved, and “when Congress wants to mandate particular dispute resolution procedures it knows exactly how to do so.”

This is a very important ruling for employers. An employer considering whether to resolve disputes with its employees through arbitration might take be tempted to take a narrow view in weighing whether arbitration is worth the bother, compared to having disputes resolved in court. The arguments against arbitration go roughly as follows:  It is no longer cheaper than court. Discovery is allowed in arbitration. Cases take a long time to resolve. Arbitration fees can be substantial. And arbitrators are more likely to “split the baby”, and issue a compromise ruling in a case, even where the employer’s position is meritorious.

But this type of analysis overlooks an important additional factor. For it is now established law that an employment agreement containing an arbitration clause can preclude a wage-hour claim or discrimination claim from being brought in court as a collective action or class action. Employers who have been “on the fence” about whether to utilize arbitration agreements with class waiver clauses, because of the legal uncertainty about their enforceability, now have their answer. And if avoidance of class actions is a high priority for the company, now would be a good time to take action.

Related Services: Employment & Labor

Attorneys: David Eisenberg

A Circuit Split is Born: Third Circuit Rejects the Discovery Rule for FDCPA Statute of Limitations

May 16, 2018 | Megan Stumph-Turner

In an en banc opinion issued yesterday, the Third Circuit Court of Appeals upheld the district court’s holding that the statute of limitations period for an alleged violation of the Fair Debt Collection Practices Act (the “FDCPA”), 15 U.S.C. § 1692, et seq., began to run on the date the alleged violation occurred, regardless of when the claimant did, or should have, discovered the violation.

This precedential holding in Rotkiske v. Klemm, et al., represents a new deviation from both the Fourth and the Ninth Circuit Courts of Appeal, who have held that the statute of limitations would not begin to run until the date of discovery of the purported violation. “In our view, the Act [FDCPA] says what it means and means what it says: the statute of limitations runs from ‘the date on which the violation occurs,’” the Court reasoned.

In Klemm, the plaintiff alleged that the defendant law firm filed a collection suit that constituted a violation of the FDCPA. Because the plaintiff had moved, and someone else had accepted service on his behalf at the former address, plaintiff claimed that he was not aware of the collection action until years later. On June 29, 2015, the plaintiff sued the defendant law firm and others, alleging that the debt collection lawsuit violated the FDCPA for various reasons. Defendants moved to dismiss Rotkiske’s FDCPA claim on the basis that the action was time-barred, and the United States District Court for the Eastern District of Pennsylvania granted dismissal of the action on that basis.

On appeal, the plaintiff argued, in line with the Fourth and Ninth Circuit positions, that the statute was tolled until he did, or reasonably should have, discovered the wrongful collection action. Adopting the district court’s textualist approach, the Third Circuit Court of Appeals upheld the dismissal, respectfully rejecting the statutory interpretation of the other two circuits on this subject. It is important to note, however, that the Court reinforced the exception of equitable tolling where the defendant’s own fraudulent or misleading conduct concealed the facts that would have permitted the plaintiff to discover the FDCPA violation.

 

The opinion of the Third Circuit Court of Appeals may be accessed here.  

Is Debt Collection a "Merchandising Practice"? Missouri Supreme Court Says Yes

May 14, 2018

In Jackson v. Barton, the Missouri Supreme Court was asked to decide whether unfair debt collection practices were sufficient to sustain a claim under the Missouri Merchandising Practices Act. To the surprise of many, the Court answered this question in the affirmative.

Specifically, the plaintiff received dental work and a series of oral contracts ensued in which the plaintiff was assured the amount he owed would be relatively small. Subsequently, collection efforts began for a much larger sum that had been agreed to orally. An attorney spearheaded the collection efforts, leaving a wake of collection “no-nos” in his trail. Among his many mistakes, the attorney failed to appear at trial in a collection suit he filed and later sent a demand letter for a much larger sum than was actually owed. Unsurprisingly, the Court was not impressed.

Clearly, these actions were sufficient to state a claim under the Fair Debt Collections Practices Act. There was, however, a question of whether a FDCPA claim was barred by the statute of limitations. Whether plaintiff possessed an actionable claim under the Missouri Merchandising Practices Act (MMPA) was significantly murkier. In essence, the question came down to whether the collection efforts qualified as an act “in connection with the sale” of merchandise as required under the MMPA.

The Court first compared the situation to Conway v. CitiMortgage, Inc., 438 S.W.3d 410, 414 (Mo. Banc 2014), a case in which the Court held that subsequent foreclosure proceedings are actions “in connection with the sale of merchandise” as contemplated by the MMPA. Moreover, the Court found that how a party enforces the terms of sale is in fact a continuation of the sale. With this precedent in mind, the Court turned its attention to how collections efforts should be viewed.

Collection efforts were ultimately held to be a part of or a continuation of the underlying sale of goods and services, in this case dental services. The Court found that because the dentist performed dental services while extending credit to the plaintiff, the sale of such dental services was not actually completed until final payment was received. As such, any collections efforts were made in connection with the sale of dental services in an effort to enforce the terms of the sale.

In sum, even actions that take place long after the bulk of a transaction is completed can still land a party on the wrong side of the MMPA. From a policy standpoint, the MMPA seems to be growing in scope, with Missouri courts willing to apply the Act to a wide array of situations and actions by defendants. In a world where debt collections can be a tricky area for businesses, and other statutes clearly regulate debt collection activities, the threat of running afoul of the MMPA only raises the stakes. 

Intra-Corporate Immunity Rule Alive, Applied, and Affirmed in Dismissal of Missouri Defamation Suit

May 4, 2018 | Megan Sterchi Lammert

In Lovelace v. Van Tine, the Missouri Court of Appeals, Eastern District, applied the “intra-corporate immunity” rule, and upheld the dismissal of a defamation claim filed by a medical assistant against a physician at the hospital where both worked.

Plaintiff Lovelace worked for the Washington University School of Medicine for 12 years, but was terminated after the Defendant, Dr. Van Tine, reported to her supervisors that Lovelace said a certain job candidate should not be hired because that job candidate, as quoted in the opinion, “doesn’t like working with white people.” After being confronted by her supervisors about this allegation, Lovelace called in sick for several days, allegedly due to her distress. She was first placed on administrative leave, but her employment was later terminated. Her lawsuit against Dr. Van Tine followed, asserting that his report to her supervisors was false and defamatory.

A claim for defamation requires a Plaintiff, such as Lovelace, to plead and prove the following elements:

1) a publication,

2) of a defamatory statement,

3) that identifies the plaintiff,

4) that is false,

5) that is published with the requisite degree of fault, and

6) damages the plaintiff’s reputation. 

At issue with Lovelace’s Petition was the element of “publication” -- the communication of the defamatory matter to a third person. The pivotal question was whether Dr. Van Tine’s communication was made to a third person, or whether, in the eyes of the law, it was a protected internal communication, within the hospital’s management group, and subject to intra-corporate immunity.

The idea behind this long-standing rule, as it applies to a defamation case, is that when a false statement is made and/or repeated in the context of a business, this generally does not constitute a publication when the business is merely communicating with itself.

The rule, however, does not offer protection to all communications within the corporate entity. The Missouri Supreme Court, in Rice v. Hodapp, has held that defamatory statements made by company supervisors or officers to non-supervisory employees constitute publication for purposes of a defamation action. However, communications between company supervisors or officers, or made by a non-supervisor to a supervisor or officer, are a different matter.

The public policy behind the intra-corporate immunity rule is to promote responsible reporting of issues within the work place from the bottom to the top or, in certain situations, along the same, linear supervisory lines, without fear of reprisal against the person making the report. The rule encourages reporting of inappropriate work place actions or comments to those in the business who are responsible for addressing those issues - i.e. those who handle the hiring or discipline decisions. Those who receive the reports are expected to take reasonable steps to investigate the report to ensure the report was made in good faith.

Conversely, per the Rice decision, communications made to non-supervisors - who have no need to know the information, and no responsibility for acting on inappropriate conduct – are not protected.

Without the intra-corporate immunity rule, there could be a chilling effect on responsible reporting to management by employees, for fear they could face a lawsuit for reporting the issue. However, the intra-corporate immunity rule apparently is alive and well in Missouri. Indeed, in the case of Lovelace, it was used to affirm the dismissal of a defamation complaint where the information in question was reported only to company management, and no outside publication of the alleged defamatory statement occurred.

The CASE Act - A Noble but Toothless Gesture Toward Fair Copyright Enforcement

April 24, 2018 | John Patterson

The cost of litigating copyright infringement claims in federal court can be immense, taxing the resources of even a well-heeled content creator. For many authors, artists, photographers, and others, this immensity become overwhelming. And at some point, the benefit of pursuing infringement litigation is grossly outweighed by the cost. Consequently, many creators are effectively barred from asserting the full bundle of rights provided by a copyright.

Recently introduced federal legislation purports to change this state of affairs. The Copyright Alternative in Small Claims Enforcement Act of 2017, H.R. 3945 (“CASE Act”) melds elements of traditional small claims procedure, administrative law, and arbitration principles in an attempt to level the playing field. While the bill appears to have some serious deficiencies, its passage would be an interesting first-step towards putting some degree of power back in the hands of average, every-day copyright holders. Here are some key points:

Procedure

The CASE Act would establish a three person board to hear small copyright claims. Parties would be allowed to represent themselves, and in-person appearances at proceedings would not be required. Rather, proceedings would be conducted by written submissions, and by “internet-based applications and other telecommunication facilities[.]” While the CASE Act does not set a formal schedule for proceedings before the board, it seems that a claim would proceed much faster in this forum than in a traditional court of law.

As with many administrative actions, the formal rules of evidence would be relaxed in CASE Act actions. It appears written discovery would be allowed, but there is no specific provision allowing for depositions. It also appears that the three person board would have very modest subpoena power, limited to commanding service providers to divulge the identity of alleged copyright infringers.

Factual findings would be subject to the “preponderance of the evidence” standard, and all decisions would require a majority of the board. Decisions of the board could be appealed to the United States District Court of the District of Columbia, but could only be overturned on the basis of fraud, misconduct, or other very limited circumstances. In this regard, the CASE Act resembles arbitration.

Participation is Voluntary

Under the CASE Act, participation would be voluntary for all parties. A petitioner would be required to serve a respondent, and a form of default judgment could be entered upon failure to timely respond. However, a responding party could immediately opt out of a CASE Act proceeding, and instead require that the claim be pursued in any court of competent jurisdiction.

Damages Limitations

In keeping with the spirit of small claims court, damages in CASE Act claims would be limited. In the aggregate, no more than $30,000 could be recovered in any one proceeding. Furthermore, recovery of attorney fees appears to be generally prohibited under the CASE Act (except in instances of bad faith conduct). This is a departure from traditional copyright claims brought under the Copyright Act, where attorney fees are available in certain circumstances if a copyright has been properly registered.

Conclusion

The primary problem with the CASE Act appears to be the aforementioned “opt out” provision. A respondent with deep pockets could opt out of any CASE Act proceeding, requiring the claimant to resort to a traditional court to pursue her claim, thereby nullifying a low cost option for those who don’t have the means to pour six or seven figures into full throated litigation. Without a mandate for all parties to participate in the proceedings, it could be argued that the CASE Act is essentially toothless in its current form.

Nevertheless, the mere existence of the CASE Act demonstrates that the plight of the individual artist, musician or other content creator is on the radar screen. With a few very important tweaks, its passage could serve make the copyright playing field a little more level. 

"Impossibility Preemption" Remains Alive and Well in Missouri for Generic Drug Manufacturers

April 6, 2018

“Impossibility preemption” applies to bar tort claims where it is impossible for a party to comply with both state and federal law. In the recent opinion of Raskas v. Teva Pharms. USA, Inc., No. 4:17-CV-2261 RLW, 2018 U.S. Dist. LEXIS 3507 (E.D. Mo. January 8, 2018), the Eastern District of Missouri reaffirmed application of “impossibility preemption” to generic drug manufacturers  on strict liability and negligent defective design and failure to warn claims. 

The allegations in the Raskas v. Teva complaint provide the story of a young man, Ralph Raskas, who, after seeking treatment for nausea and vomiting, ingested the medication prescribed by his physician - generic metoclopramide - and allegedly developed pain and restlessness in his legs. After being diagnosed with “drug-induced acute akathisia,” he complained of significant pain and eventually committed suicide after two prior attempts.  His father filed a wrongful death action against Teva Pharmaceuticals, USA (Teva) and Actavis Elizabeth, LLC (Actavis) - manufacturers of the dispensed generic metoclopramide - alleging that the drug caused his son’s neurological injuries and suicide. Plaintiff asserted claims for strict liability and negligent defective design and failure to warn, negligence in identifying risks associated with the drug, as well as what he contended was a failure to update the generic medication’s labeling to conform to that of its brand name equivalent. Relying upon PLIVA, Inc. v. Mensing, 564 U.S. 608 (2011), and Mutual Pharm. Co. v. Bartlett, 570 U.S. 472 (2013), Teva and Actavis sought dismissal of all claims against them on federal preemption grounds. 

The Raskas court began its analysis of the plaintiff’s claims by reviewing the approval requirements of the Food and Drug Administration (FDA) for both brand name and generic drugs. To gain approval of brand name drugs, a manufacturer must submit a new-drug application (NDA) that includes clinical investigative reports and all relevant information to allow the agency to determine whether the drug is safe for use. On the other hand, approval of a generic drug typically requires only that the generic be “bioequivalent” to the branded medication. In fact, a generic may receive FDA approval without any in vivo studies, solely based on in vitro studies that study dissolution of the proposed generic.  See 21 C.F.R. §§ 320.24(b)(5) and 320.22(d)(3).

Critically for the generic drug manufacturers in Raskas, 21 C.F.R. Part 314 prohibits generic drug manufacturers from 1) making any unilateral changes to a drug’s label, and 2) deviating from the drug’s approved formulation. See 21 21 C.F.R. §§ 314.94(a)(8)(iii), 314.150(b)(10), and 314.70(b)(2)(i). These federal regulatory restrictions are the basis for the “impossibility preemption” found in Raskas.

In rejecting the plaintiff’s defective design claims, the court considered Brinkley v. Pfizer, Inc., 772 F.3d 1133 (8th Cir. 2014), in which metoclopramide design defect claims were specifically precluded due to preemption because the only way the manufacturer could avoid liability under Missouri law was by redesigning the product. If a generic drug manufacturer were required to redesign the product to comply with Missouri state law, it would be impossible to comply with federal law, which requires a generic drug’s formulation to be bioequivalent to the branded medication and the generic’s labeling to be identical to that of the brand name drug. This is the definition, and a descriptive example, of impossibility preemption, which provides that “[w]here state and federal law directly conflict, state law must give way.” Mensing, 564 U.S. at 617. 

Raskas’s failure to warn claims were found to be similarly barred by impossibility preemption, because the warning labels on the generic metoclopramide manufactured by Teva and Actavis were required, under 21 C.F.R. Part 314, to be identical to those of the brand name medication Reglan®. If the failure to warn claims were allowed to proceed, generic drug manufacturers - in order to escape state tort liability - would be required to relabel their products to provide additional information or warnings, which is directly prohibited under federal regulations. The Missouri federal district court in Raskas determined it would be impossible for Teva and Actavis to comply with both state and federal law in this instance, so dismissal of the failure to warn claims against them was appropriate. 

Although the plaintiff attempted to distinguish its claims from those presented in controlling legal precedent, the court ultimately concluded that impossibility preemption applied to each of the asserted negligence, strict liability, and wrongful death claims for failure to warn or defective design. The plaintiff was, however, granted leave to amend his complaint to adequately plead an alleged claim against Teva and Actavis for failure to update their labeling to conform to that of Reglan®, the brand name medication.

The Raskas opinion may be found here in its entirety.

Breaking Up [Plaintiffs] Is [Not] Hard To Do

March 28, 2018 | Megan Sterchi Lammert

While Neil Sedaka may have convinced many that breaking up is hard to do, Judge Stephen N. Limbaugh, Jr. of the United States District Court for the Eastern District of Missouri (“EDMO”) has made it clear that breaking up non-Missouri related Plaintiffs from a product liability case is certainly not hard to do in the post-Bristol-Myers Squibb Co. era.

On January 24, 2018, the EDMO added to the split in authority between Missouri and California, two forums favored by Plaintiffs, thereby testing the limits of Bristol-Myers Squibb Co. v. Super Ct. of Cal., 137 S. Ct. 1772 (2017) (“BMS”).In Nedra Dyson, et al., v. Bayer Corporation, et al., No. 4:17CV2584- SNLJ, (E.D. MO Jan. 24, 2018) (“Dyson”), Judge Limbaugh of the EDMO granted Defendants’ Motion to Dismiss 92 non-Missouri related Plaintiffs in a product liability lawsuit based on a lack of personal jurisdiction, finding that a Defendant’s clinical trials and marketing of a product in the state of Missouri does not establish personal jurisdiction for purposes of non-Missouri related Plaintiffs’ claims for that product. This is consistent with other recent EDMO decisions:

  • See Siegfried v. Boehringer Ingelheim Pharmaceuticals, Inc., 2017 WL 2778107 (E.D. Mo. June 27, 2017);
  • Jordan v. Bayer Corp., No. 4:17cv865(CEJ), 2017 WL 3006993 (E.D. Mo. July 14, 2017);
  • Jinright v. Johnson & Johnson, Inc., 2017 WL 3731317 (E.D. Mo. Aug. 30, 2017);
  • Shaeffer et al., v. Bayer Corp., et al., 4:17-CV-01973 JAR (E.D. Mo. Feb. 21, 2018).

The Dyson Defendants, who were also not citizens of Missouri, relied on BMS to argue that the EDMO lacked personal jurisdiction over the claims of 92 non-Missouri related Plaintiffs, and should be dismissed. The Defendants argued that dismissal of these Plaintiffs would provide complete diversity between the remaining Plaintiffs and Defendants and the amount in controversy would still exceed $75,000. This quickly became a fight between the parties, with one side trying to persuade the court to decide personal jurisdiction before subject matter jurisdiction and the other side arguing vice-versa. Ultimately, the court determined that personal jurisdiction could and should be decided prior to subject matter jurisdiction, because it provided the more straightforward analysis in light of BMS. Deciding subject matter jurisdiction would involve resolution of notoriously complex issues, reasoned the court.

Quick Recap On BMS: As a brief refresher, BMS involved both California and out of state Plaintiffs who sued in California state court based on alleged injuries caused by Defendant BMS’ drug. The United States Supreme Court, who took the case on a writ of certiorari, overturned the state court, applying “settled principles regarding specific jurisdiction,” finding that California state courts fail to retain specific personal jurisdiction over non-resident Defendants for claims asserted by non-resident Plaintiffs that do not arise out of or relate to the Defendant’s contacts with the forum. The Court rejected Plaintiffs arguments for specific personal jurisdiction based on alleged marketing and promotion of the product and clinical trials held in the state of California. The Court would also not allow the resident Plaintiffs’ allegations to confer personal jurisdiction over the non-resident Plaintiffs claims. Therefore, the Supreme Court dismissed the claims of the non-resident Plaintiffs.

In Dyson, the non-Missouri related Plaintiffs conceded that the medical device at issue (Essure) was not implanted in Missouri. However, Plaintiffs argued that their allegations concerning Defendant Bayer’s connections with Missouri should support the court’s exercise of personal jurisdiction. Plaintiffs alleged that Bayer’s marketing strategy was developed in Missouri, Missouri was one of the eight sites chosen to conduct pre-market clinical devices on the product (Essure), the original manufacture of the product’s conduct was in Missouri, the sponsoring of biased medical trials was in Missouri, and St. Louis, Missouri was the first city to commercially offer the Essure implant procedure. 

Those arguments failed to persuade Judge Limbaugh, who ultimately found that the Dyson Plaintiffs failed to make a prima facie showing for personal jurisdiction and, as such, he denied their motion for jurisdictional discovery to support those arguments. Relying on BMS, Judge Limbaugh rejected Plaintiffs’ marketing campaign arguments, pointing out that the non-Missouri Plaintiffs not only failed to allege they viewed Essure advertising in Missouri, but also failed to allege they purchased, were prescribed or were injured by the product in Missouri. Thus, it was not relevant that Defendant first marketed Essure in Missouri. As for Plaintiffs’ argument regarding clinical trials in Missouri, Judge Limbaugh found such alleged conduct too attenuated to serve as a basis for specific personal jurisdiction over Defendants. In fact, the non-Missouri Plaintiffs failed to allege they even participated in a Missouri clinical study or that they reviewed and relied on the Missouri clinical studies in deciding to use the products.

In contrast to Dyson, Plaintiffs have tried to rely on the recent California case Dubose v. Bristol-Myers Squibb Co., No. 17-cv-00244, 2017 U.S. Dist. LEXIS 99504 (N.D. Cal. June 27, 2017) in support of specific personal jurisdiction over non-forum Defendants. Dubose, however, does not appear to employ the same analysis as BMS or its progeny.

In Dubose, a South Carolina resident Plaintiff sued AstraZeneca, Bristol-Myers Squibb, and McKesson in California federal court, alleging a defect in a prescription diabetes drug.  The Dubose court relied upon Walden v. Fiore, 134 S.Ct. 1115 (2014), a 2014 U.S. Supreme Court decision that was in fact a pro-Defendant ruling intended to limit the states’ exercise of personal jurisdiction over non-resident Defendants. The Dubose Court reasoned that because Walden stressed that only the Defendants’ conduct could justify exercise of personal jurisdiction, any jurisdictional analysis should ignore Plaintiff’s residence or place of injury, and focus instead upon conduct that might “tether” the Defendant to the forum state. Ultimately, the Court relied on the Ninth Circuit’s preexisting “but for” test, holding that the pre-approval clinical trials were “part of an unbroken chain of events leading to Plaintiff’s alleged injury” and, therefore, specific jurisdiction existed because Plaintiff’s injuries “would not have occurred but for [Defendants] contacts with California.” Regardless, the Dubose Court ultimately transferred the case to South Carolina, the Plaintiff’s home state.

The judge in Dubose also decided Cortina v. Bristol-Myers Squibb Co., No. 17-cv-00247-JST, 2017 U.S. Dist. LEXIS 100437 (N.D. Cal. June 27, 2017) on the same theories, denying a motion to dismiss but transferring the case to New York, where the Plaintiff was a resident and was prescribed the drug at issue.  However, in a footnote, the Cortina court noted that, “[it] does not mean to suggest that even a de minimis level of clinical trial activity would satisfy the requirements of specific jurisdiction.”   

While the holdings for the Dubose and Cortina case appear to have relied upon attenuated claims of specific personal jurisdiction, in the EDMO, Judge Limbaugh concluded that the Dyson non-Missouri Plaintiffs’ claims were too attenuated from Missouri to prove specific, case linked personal jurisdiction. For example, the Dubose Plaintiff did not allege that she participated in any of the Defendants’ California clinical trials, but the Dubose court relied on others, not a party to the case, who participated in them. If specific personal jurisdiction exists in every state where a clinical trial occurred, then any Plaintiff who used the subject drug conceivably could sue the manufacturer in any of those states—no matter where the manufacturer is based and no matter where the Plaintiff resides or used the drug. It would be illogical for courts to adopt this rationale, calling that “specific” personal jurisdiction, and would be contrary to the United States Supreme Court’s recent pronouncements on personal jurisdiction, including in BMS.

Other recent cases have held similarly to the EDMO in Dyson, dismissing non-resident Plaintiffs due to a lack of both general and personal jurisdiction. For example, the Southern District of Illinois has been granting dismissal of non-Illinois Plaintiffs and denying remand in pharmaceutical drug, product liability cases. Specifically, those cases held that misjoined, multi-Plaintiff complaints no longer preclude removal, that there was no general personal jurisdiction pursuant to Daimler AG v. Bauman, 134 S. Ct. 756 (2014) and no specific personal jurisdiction existed pursuant to BMS, and/or found that conducting in-state clinical trials is not sufficient contact to support specific personal jurisdiction in suits by non-residents. SeeBraun v. Janssen Research & Development, LLC, 2017 WL 4224034 (S.D. Ill. Sept. 22, 2017); Bandy v. Janssen Research & Development, LLC, 2017 WL 4224035 (S.D. Ill. Sept. 22, 2017); Pirtle v. Janssen Research & Development, LLC, 2017 WL 4224036 (S.D. Ill. Sept. 22, 2017); Roland v. Janssen Research & Development, LLC, 2017 WL 4224037 (S.D. Ill. Sept. 22, 2017); Woodall v. Janssen Research & Development, LLC, 2017 WL 4237924 (S.D. Ill. Sept. 22, 2017); and Berousee v. Janssen Research & Development, LLC, 2017 WL 4255075 (S.D. Ill. Sept. 26, 2017).

Bringing this back to Dyson, Judge Limbaugh’s decision reaffirms that it really is not that hard to break up Missouri Plaintiffs from non-Missouri Plaintiffs in a product liability lawsuit where the non-Missouri Plaintiffs cannot truthfully allege that their claims arise out of a connection to the state of Missouri (and cannot solely rely on clinical trials occurring in Missouri). This is not to say that non-Missouri Plaintiffs will never find another forum and/or that their claims are foreclosed; rather, those Plaintiffs have a better chance of avoiding a bad break-up by bringing their claims in the forum out of which their claims allegedly arise. 

Jury verdicts in the Kansas City area slightly decline in number, but increase in amount

March 26, 2018

According to data from the Greater Kansas City Jury Verdict Service, courts in the metropolitan area experienced fewer jury trials in 2017, but the Plaintiffs’ Bar still managed to have a good year. Every year, the Greater Kansas City Jury Verdict Service issues a “Summary and Statistics of Jury Verdicts” for the greater Kansas City area. The report includes verdicts from the Kansas City division of the U.S. District Court for the Western District of Missouri; the Kansas City branch of the U.S. District Court for the District of Kansas; and state courts in Jackson, Clay and Platte counties in Missouri; and Johnson and Wyandotte counties in Kansas. The statistics in 2017 indicate a shift in various respects from 2016.

Fewer Trials, with an increased percentage of Plaintiffs’ verdicts

The Jury Verdict Service’s annual summary reported on 97 trials in 2017, compared to 113 in 2016. These numbers are down from the preceding three-year period: there were 110 trials in 2015, 133 trials in 2014, and 122 trials in 2013.

Because trials often involve multiple claims and multiple verdicts, the verdict statistics are based on the claims adjudicated, rather than simply the number of cases. The 97 trials in 2017 resulted in 193 verdicts; and the 113 trials in 2016 resulted in 199 verdicts.

While the number of trials has decreased from the preceding three-year period, the percentage of Plaintiffs’ verdicts has seen a slight increase. In 2017, 49% of the verdicts were for Plaintiffs compared to the 42% for Plaintiffs in 2016.

Increase in Average Monetary Awards for Plaintiffs

The overall average of the monetary awards for Plaintiffs experienced a significant increase from previous years. In 2016, the average of Plaintiffs’ verdicts was $1,383,549 while the average in 2015 was $1,376,323. In 2017, the average monetary award for Plaintiffs rose precipitously to $4,204,501. But most of this increase can be attributed to two hefty verdicts: $217.7 million awarded in the Syngenta Corn Litigation and $139.8 million the Time Warner Cable et al. litigation. (Friendly suggestion to Jury Verdict Service: how about reporting on the median jury verdict, as well as the average?)

Slight Decrease in Number of Large Verdicts

In 2017, the 11 verdicts that exceeded $1 million, compared to 16 such verdicts in 2016. However, both years show a large increase from the 6 verdicts in 2015 in the same monetary range. Of the eleven $1 million+ verdicts in 2017, 6 were in Jackson County, MO Circuit Court (evenly split between Kansas City and Independence), 2 were in the Circuit Court of Clay County, MO, and 3 were in the U.S. District Court for the District of Kansas. Finally, the amount of verdicts between $100,000 and $999,999 was virtually unchanged from 2016 (37 verdicts) to 2017 (36 verdicts).



Key Observations and Conclusion

Over the last four years, the percentage of Plaintiffs’ verdicts has increased. Additionally, the average amount of Plaintiffs’ verdicts has increased steadily from its low point in 2014. Over half of the verdicts awarded in 2017 that exceeded $1,000,000 were in Jackson County, MO Circuit Court, which is consistent with the view of many practitioners that this can be a Plaintiff-friendly forum. As we have stated in our previous Jury Verdict roundups, clients and national counsel should work with local counsel to carefully consider the forum when assessing the value of a case. 


Source: Greater Kansas City Jury Verdict Service Year-End Reports 2013-2017

Premises liability update: Missouri Supreme Court affirms ruling on adequacy of negligence jury instruction

March 23, 2018 | John Watt

We recently reported on a ruling of the Missouri Western District Court of Appeals that there was sufficient evidence to support the giving of the negligence instruction in a case where an employer was found liable for damages sustained when an employee was injured by a third party criminal act. The Missouri Supreme Court has now upheld that ruling. In Wieland v. Owner-Operator Services, Inc., Wieland was an employee of the Owner-Operator company when she alerted her employer that she felt threatened by an ex-boyfriend named Alan Lovelace. In response, the company undertook certain precautions, including disseminating a photograph of the ex-boyfriend to the reception area and informing the company’s safety team about the situation. Some two weeks later, Lovelace gained access to the employee parking lot and laid in wait in Wieland’s vehicle. After approximately an hour, Wieland and Lovelace had a confrontation and as Wieland walked away, Lovelace shot her in the back of the head. Wieland later sued the company. 

At trial, the circuit court judge approved a jury instruction which allowed liability for the criminal acts of a third party in instances where the defendant knew or by using ordinary care could have known that the third party was on its premises and posed a danger. In doing so, the trial court invoked an exception to the general rule that there is no duty to protect against criminal acts of third parties. Missouri courts have essentially adopted the rule established by § 344, Comment F, of the Restatement (Second) of Torts. That rule provides that since the possessor is not an insurer of the visitor safety, he is ordinarily under no duty to exercise any care until he knows or has reason to know that the acts of the third person are occurring, or are about to occur. The rule underscores that once the specter of harm to an invitee becomes apparent, the general rule insulating a premises owner from liability no longer applies. The evidence introduced at trial was that Owner-Operator had surveillance cameras that would have shown Mr. Lovelace gaining access to both parking lot and Wieland’s vehicle. However, the surveillance cameras were not monitored at the time the incident occurred.


In its appeal, the company argued the circuit court erred in submitting the jury instruction that allowed for this finding because there was not substantial evidence to let this issue go to the jury. The Supreme Court ruled that while a challenge to this verdict director was abandoned on appeal and was therefore not properly before the Court, in any event, the Plaintiff’s argument, as adopted by the trial court, did not misstate the law.

Related Services: Premises Liability

Attorneys: John Watt

Bipartisan Financial Reform Bill Expected to Pass in Senate

March 13, 2018 | Megan Stumph-Turner

Following unsuccessful attempts to overhaul Dodd-Frank through varied iterations of the Financial CHOICE Act, the Senate is expected to vote in the immediate future on the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S. 2155).

The bill is sponsored by Idaho senator Michael Crapo (R), and it includes revisions to the Truth in Lending Act (“TILA”), the Bank Holding Company Act, the Volcker Rule, and the United States Housing Act, among others. As part of its bipartisan appeal, the proposed law also includes new protections for consumers to prevent identity theft and cybersecurity breaches, as well as relief for from private student loan debt.

If passed, this act would relieve relatively smaller banks from some of the burdens imposed by heightened regulations, such as ability-to-repay evaluations, record retention, reporting to regulators, and stress-testing. Dodd-Frank requires those banks with more than $50 million in assets, representing roughly the 40 largest banks, to follow the most stringent protocol, while the new bill would raise that tipping point to $250 billion in assets, or the top 12 banks.

Mortgage origination would be impacted as well. The bill creates somewhat of an incentive for lenders to hold on to the mortgages they originate, as it exempts them from the strict underwriting standards of Dodd-Frank if the lender continues to service and hold the loan. Furthermore, banks that originate less than 500 mortgages a year would have relaxed reporting requirements for racial and income data.

Touted as maintaining necessary protections of Dodd-Frank while providing much-needed relief to small and regional banks, the bill represents the first major bipartisan effort to reform financial regulation in recent history, with 20 co-sponsors from both major parties. Although there has been some difficulty in determining which amendments will be accepted and rejected, it is expected to pass at some point. The bill will face a challenge, however, if it proceeds to the House, as House Republicans have already indicated that, in its current form, the bill does not go far enough to undo Dodd-Frank.

The full text of S. 2155, as well as the bill’s progress, may be tracked here.

Political Divisions, Copyright Law, and a Strange Green Amphibian Meme - Pepe the Frog gets his Day in a Kansas City Area Court

February 27, 2018 | John Patterson

Pepe the Frog, a cartoon character created by comic book artist Matt Furie in the mid-2000’s, started out innocently enough. According to an interview given by Furie to the Daily Dot, Pepe’s philosophy on life was simply “feels good man.”  Unfortunately for Pepe, however, he became an internet meme thanks to the notorious 4Chan message board.  While some of the memes have maintained the laid back philosophy originally espoused by Pepe, it appears that the character has been adopted as a symbol of the “alt-right.”  Consequently, many Pepe the Frog memes contain overtly political messages, which are perceived by many as highly offensive or even racist.

Kansas City artist Jessica Logsdon appears to have capitalized on the Pepe phenomenon, and began creating, and selling on-line, politically charged artwork featuring a green frog with a striking resemblance to Pepe.  Furie, the original creator of Pepe, has sued in the United States District Court for the Western District of Missouri, alleging copyright infringement and seeking damages and injunctive relief against Logsdon.  The Complaint alleges that Pepe was originally a “peaceful frog dude,” but that:

“[I]ndividuals like Logsdon have misused Furie’s Pepe character and copied Pepe’s images for use in dozens of images sold online to promote violent and hateful messages espoused by alt-right fringe groups.  In doing so, Logsdon not only copies Furie’s original creation, but also freeloaded off Pepe’s popularity and Furie’s labor.” 

Logsdon has answered the Complaint, admitting that she is a “political artist,” and that she has used “Pepe” in the title of some of her artwork.  But she denies that she has copied the image created by Furie, while simultaneously claiming that her use of the image constitutes “fair use.”  Logsdon also claims that Furie lacks any registered copyright in the image of Pepe the Frog. 

Beyond its obvious socio-political angles, the case has wider legal ramifications as well, and we will observe with interest how Pepe the Frog’s meme status plays into the claims and defenses asserted by the parties.  We will continue to monitor the case and provide updates in this space.

Verdict Based on Disjunctive Jury Instruction Gets Junked

February 13, 2018 | Noemi Donovan

A recent ruling by the Court of Appeals for the Eastern District of Missouri illustrates the perils of using disjunctive verdict directing instructions. In Kader v. Bd. of Regents, the court reversed a $2.5 million verdict against Harris-Stowe State University (“HSSU”) and remanded the case for a new trial based upon instructional error in the disjunctive verdict directing instruction. 

Plaintiff Kader sued under the Missouri Human Rights Act, alleging that the Board of Regents of HSSU discriminated against her based upon several factors, including race and national origin, and retaliated against her for opposing the university’s discriminatory practices. Kader, originally from Egypt, came to the United States on a visa for individuals involved a work and study based program. After completing her studies, she worked at HSSU for three years under her original visa. HSSU then appointed a new dean to the program where Kader worked, and Kader alleged she received poor reviews from the new dean based upon her national origin. She reported this to the president of the university.

When Kader’s visa was about to expire, she sought assistance from HSSU to obtain a new visa. HSSU agreed to submit the paperwork she needed for this new visa and did provide the initial information needed. When Kader had not heard about whether her visa was granted, she contacted the United States Citizenship and Immigration Services and learned it had requested additional information from HSSU, but had not received a response.

When Kader contacted HSSU to inquire about the additional information requested, it denied receiving any such request. HSSU further informed Kader that her visa application had been denied and she had to leave HSSU within 30 days. Kader requested a work leave of absence, which HSSU did not provide. Three days later, Kader again requested a leave of absence from HSSU but received no response. Thereafter, Kader received a letter from HSSU that it would not appeal the denial of her visa application.

During the trial, the court gave the jury disjunctive verdict directing instructions, instructing them to rule in Kader’s favor if: (1) the jury found HSSU failed to do one or more of five listed acts, one of which was whether HSSU denied Kader a work leave of absence; (2) Kader’s national origin or complaints of discrimination were a contributing factor to HSSU’s failure to do any of those acts, and (3) such failure damaged Kader. The jury returned verdicts in Kader’s favor on her claims of national origin discrimination and retaliation.

In reversing the trial court, the appellate court relied on authority holding that “[i]n order for disjunctive verdict directing instructions to be deemed appropriate, each alternative must be supported by substantial evidence.” The court held that the denial of a work leave of absence was not supported by substantial evidence “because the record shows that, at the time she was denied leave, Dr. Kader did not have a valid visa authorizing her to work in the United States, and, therefore, HSSU could not legally employ her.” Therefore, the court declined to find that the denial of employment or a work leave of absence to one who no longer has a valid visa is discriminatory or retaliatory conduct. 

“[A]s there is no way to determine upon which disjunctive theory the jury chose, we cannot rule out the possibility that the jury improperly returned its verdict upon a finding that HSSU discriminated against Dr. Kader by denying her a work leave of absence, which misdirected or confused the jury,” explained the court. Accordingly, the judgment was reversed and remanded for a new trial.

For more on this subject, see our earlier blog post titled “Employers Know That Instructions Matter.”

Related Services: Employment & Labor

Attorneys: Noemi Donovan

North Carolina Court Finds Employer's Negligence to Be Superseding, Sole Proximate Cause of Asbestos Plaintiff's Injuries

February 7, 2018 | Robert Chandler

Plaintiff appealed a jury verdict in the District Court for the Western District of North Carolina in favor of an asbestos product vendor. Plaintiff claimed that the verdict form, which included a series of questions as to each defendant, caused the jury to render a legally inconsistent verdict and requested partial entry of judgment in his favor or a new trial.  The 4th Circuit U.S. Court of Appeals affirmed the judgment.

Facts

Plaintiff Erik Ross Phillips alleged that he contracted mesothelioma from exposure to asbestos-containing brake linings used in a machine at the facilities of his employer, Champion International Paper Company.  The brake linings were manufactured by Reddaway Manufacturing Company and sold to International Paper by Pneumo Abex, LLC.  Plaintiff filed suit against Abex on a negligent failure to warn theory.

At trial Abex argued that even if it was negligent, the intervening negligence of Plaintiff’s employer was the sole proximate cause of Plaintiff’s injury.  Under North Carolina law, where both defendant and a third party are negligent, but the third party’s negligence is the sole proximate cause of the plaintiff’s injury, plaintiff cannot recover from the defendant.

The jury was submitted questions on the verdict form asking them first to determine, for each defendant, whether plaintiff’s injury was proximately caused by any negligence of the defendant.  If the answer was “Yes,” the jury was next asked whether any negligence on the part of a third party served to be a superseding or intervening cause of the injury suffered by defendant.

The jury found initially that Abex’s negligence was the sole proximate cause of plaintiff’s injury, but next found that the negligence of a third party was a superseding or intervening cause of the injury suffered by plaintiff.  Based upon these answers, the Court entered judgment on behalf of Abex, taking the jury’s answers to the verdict form questions to mean that the jury believed that the negligence of a third party was an intervening cause of plaintiff’s injuries which became the sole proximate cause.  Plaintiff then appealed.

The Verdict Form Did Not Present an Inconsistent Verdict Under North Carolina Law

 On appeal Phillips argued that the jury’s answer to the verdict form questions rendered a legally inconsistent verdict.  Because the jury found both that Abex’s negligence was the proximate cause of plaintiff’s injury in answer to the verdict form first question, and that a third party’s negligence was the cause in the answer to the second, the verdict was inconsistent since both could not legally be the proximate cause of plaintiff’s injuries.  The Court disagreed.

The Appellate Court pointed to North Carolina law, indicating that to insulate the negligence of a party, the intervening negligence of a third party must break the sequence or causal connection between the negligence of the first party and the plaintiff’s injury so as to exclude the negligence of the first party as a proximate cause of the injury.  “It must be an independent force which entirely supersedes the original action and renders its effect in the chain of causation remote.”  The Court noted that, under the state law, although there may be more than one proximate cause, a new and entirely independent source of negligence, breaking the sequence of events between the first source of negligence and the injury, will insulate the first source of negligence from liability.

The District Court treated the intervening negligence of plaintiff’s employer as an affirmative defense – the burden of proof for proving third party negligence belonged to Abex – and ruled that, even if the jury found negligence on the part of Abex, the intervening negligence of plaintiff’s employer would act to relieve Abex of liability.  The Court found that the jury was properly instructed on these issues, and, subsequently, the jury’s findings were in accordance with North Carolina law.  The second finding by the jury, that the intervening negligence of plaintiff’s employer was the cause of plaintiff’s injury, was a new proximate cause which extinguished the proximate cause finding by the jury against Abex.  Accordingly, Phillips’ appeal was denied.

Conclusion

When making determinations regarding whether proximate cause exists, parties will want to consider whether a superseding or intervening cause for a claimant’s injury is a defense to claims.  Even where a defendant’s conduct may be a source of negligence, the negligence may not be the proximate cause of the claimed injury.

Paying the Piper (and the Copyright Owner) - The Music Modernization Act of 2017

February 2, 2018 | John Patterson

The rise of streaming music services has changed the landscape in ways that most would not have imagined even a decade ago. Among these changes are the ways in which performers, songwriters, and other copyright owners are compensated when their works are streamed on various devices.  Simply put, the laws which pertain to such compensation have not kept up with the state of technology.  The Music Modernization Act of 2017 (HR 4706 – 115th Congress), a piece of proposed legislation currently being considered in Congress, seeks to address some of these issues.  This article touches on some of the more salient aspects of the proposed law.

Doing Away with Bulk Notices of Intention

In order to distribute a sound recording, any would-be distributor must first obtain a license from the owner of the copyright.  This is often accomplished by providing a Notice of Intention (“NOI”) to the owner, either directly or by filing a copy of the NOI with the United States Copyright Office when information regarding the owner cannot be easily accessed.   Presently, large music streaming services such as Spotify employ a process of filing NOIs in bulk with the Copyright Office, after which time such services simply start streaming the sound recordings.  Many copyright owners believe that this bulk filing process gives them short shrift, depriving them of rightful compensation when their works are digitally streamed without their knowledge.

The MMA proposes to rectify this situation by creating the Musical Licensing Collective (“MLC”), a body that would be funded in part by the various large music streaming services.   The MLC would collect accurate data regarding the identities of appropriate copyright owners.  It would also grant blanket licenses to the streaming services.  Presumably, this would allow the streaming services to more accurately identify copyright owners, while simultaneously lessening the legal risk which streaming services court by streaming songs without the knowledge of the copyright owner.

Royalty Rates for Compulsory Licenses

Even if copyright owners can be accurately identified after acquisition of compulsory licenses, they must still be compensated.  Presently, this compensation, in the form of a royalty rate, is determined by the Copyright Royalty Board.  This rate is set by statute, and employs a mechanical standard which is indexed to inflation.  The MMA seeks to alter this formula, basing the calculation upon supply and demand.  One of the Act’s sponsors refers to this new standard as the “willing buyer/willing seller” standard.

Procedural Changes

The MMA also proposes a number of procedural changes to the royalty process.  Chief among these, it would do away with a fixed panel of rate dispute judges.  Instead, a rotating panel of federal judges would hear rate disputes, presumably allowing for a fresh set of eyes upon disagreements between parties who had previously battled over royalty rights.

Unlike most federal legislation, the Musical Modernization Act has bi-partisan support.  In addition, the streaming sites, which wield ever-increasing power in the industry, also appear to be supportive of the proposed law.  We will continue to track the progress of the proposed legislation, and will provide updates as it winds its way through Congress.

Change in Leadership Marks Turning Point for CFPB

January 30, 2018 | Megan Stumph-Turner

He now leads the Consumer Financial Protection Bureau (the “CFPB”) – the very organization he once called a “sad, sick joke.” But acting director Mick Mulvaney assures the public that he has no intention to burn it down, and that the CFPB will continue enforcing consumer protection laws.

2017 ended with former CFPB Director Richard Cordray stepping down from his post, so that he could pursue his candidacy for Governor in Ohio.  Mulvaney was subsequently appointed by President Trump as interim director, and he will continue in this role until a permanent replacement is appointed by the Senate.

Mulvaney issued a memo last week stating his intentions with respect to how the CFPB would change under his leadership.  He focused on the language of his predecessor, Cordray, who publicly described the CFPB during his tenure as “pushing the envelope” in its fight to protect consumers from unscrupulous practices of lenders and other businesses.  Contrarily, Mulvaney reasoned that the CFPB works for all people, including “those who use credit cards, and those who provide the cards; those who take loans, and those who make them; those who buy cars, and those who sell them.” 

That, it seems, could be the most significant change in tune from the Cordray to the Mulvaney era.  Since its inception, we have seen the CFPB’s one-sided focus on protecting the consumer; after all, that is the “C” in “CFPB,” and the assumption was that business can take care of itself.  Now, we see a new perspective – that banks, creditors, and merchants are people in need of protection under the law, because they are comprised of people.

Mulvaney further assured that the CFPB would strive to protect consumers from unavoidable harm but would not “look for lawsuits to file,” and that the CFPB would no longer engage in the unpredictable practice of regulation by enforcement.

We already have the first concrete examples of the CFPB policy shift.  Earlier this month, the CFPB issued a statement that the Bureau intends to engage in a rulemaking process so that it may reconsider the Payday Rule, which if it went into effect, would place the onus on payday lenders to determine the borrower’s ability to repay before making the loan. Just two days later, the CFPB dismissed a lawsuit that it had filed last year in Kansas federal court against four payday lending companies.

The CFPB has also invited industry personnel and attorneys to comment on the Civil Investigative Demand process, recognizing that many in the financial services industry felt their critiques about the enforcement process were disregarded or ignored in the past.

The full content of Mulvaney’s memo concerning the CFPB policy shift may be found here.

Missouri Court of Appeals Weighs in on the Breadth of Discoverable Prescription Records, Post-Mortem

January 19, 2018

Decedent’s wife filed a lawsuit in Barton County, Missouri in 2016 after her husband was killed when a dump/bale bed manufactured by defendant Cannonball Engineering, which he was repairing at the time of the incident, crushed him. Plaintiff sued Cannonball on various negligence and product liability theories.  A coroner’s two post-mortem blood samples, collected on the date of decedent’s death, revealed reportable amounts of opioid prescription pain medication.

Cannonball served discovery, seeking information on decedent’s prescription medications for about six years prior to his death.  Plaintiff objected that the request was overbroad as to time and scope, and violated the decedent’s physician-patient privilege.  Cannonball moved to compel the production of records. 

Plaintiff argued that the only physical or medical condition identified in Plaintiff’s Petition was the crushing injury that killed decedent; that case law only entitles a defendant to medical records that relate to physical conditions put in issue by the Plaintiff’s pleading; and that any discovery in excess of this scope amounts also to a violation of the physician-patient privilege.

Cannonball argued that it was entitled the information because it was relevant to: (1) the impact the prescription pain medications may have had on decedent’s abilities around the time of his death; and (2) Cannonball’s affirmative defense of comparative fault (i.e., the decedent knew that it was unsafe to consume the medications and then operate heavy equipment, but negligently did so anyway).  Cannonball also argued that the information was discoverable because Plaintiff alleged failure to warn and thereby impliedly asserted that decedent had the mental capacity to appreciate the warnings on the dump/bale at the time of the accident. 

The trial judge sustained Cannonball’s Motion to Compel and ordered Plaintiff to execute the requested authorization for decedent’s prescription medications.  Plaintiff applied for a writ of prohibition to block the trial court’s order.

The Missouri Court of Appeals for the Southern District granted the writ, concluding that the trial court had abused its discretion.  The Court of Appeals noted that the physician-patient privilege remains intact until a plaintiff’s physical condition – as put in issue by the pleadings -  is waived.

The Court of Appeals held that Plaintiff’s allegations placed decedent’s cognitive function at the time of the incident at issue and waived his physician-patient privilege with respect to records that related to the issue of his mental capacity at or around the time of his death.  On this basis, Cannonball, who alleged that decedent may have been cognitively impaired at the time of his death, was entitled to discover decedent’s prescription medication records at or near the event.  But there was no justification for the trial court to allow discovery of nearly six years of prescription records, when decedent’s mental capacity only at or around the time of the incident was at issue. 

Copyright Law: Overcoming Claims of Copyright Protection for Derivative Works

January 11, 2018 | John Patterson

In the recent case of We Shall Overcome Foundation, et al. v. Ludlow Music, Inc., et al., the United States District Court for the Southern District of New York was asked to determine the validity of the copyright to “We Shall Overcome,” the seminal tune of the civil rights movement made famous by folk singer Pete Seeger, which had been registered as a “derivative work” with the Copyright Office, twice in the early 1960’s.

A derivative work is one that is substantially copied from a prior work.  In order to be copyrightable, the derivative work cannot be a simple facsimile of the prior work, but instead must “contain some substantial, not merely trivial originality.”  By way of example, the court noted that copyrightable derivative works include things such as translation of novel into another language, or the adaptation of a novel into a movie or a play.  A derivative work is only copyrightable for the “increments of expression beyond” what is contained in the underlying work.  Put another way, a copyright on a derivative work should not hijack the copyright or public domain status of the original source material.

The disputed copyrighted version of “We Shall Overcome” was actually based on an earlier version that had entered the public domain in the late 1940’s.  Plaintiff argued that the copyrighted version, or, more specifically, one line of the copyrighted version, was essentially the same as the public domain version, save for a minor lyrical discrepancy introduced by the aforementioned Pete Seeger when he sang “we shall overcome” rather than “we will overcome.”  Defendant argued that this was no minor discrepancy, and went so far as to retain an expert in ‘musical hermeneutics’ to opine that the change from “will” to “shall” rendered the meaning of the songs different, and thus entitled the derivative work to copyright protection.

In its 66 page order granting summary judgment to plaintiff and invalidating the 1960’s copyrights to ‘We Shall Overcome,” the court laboriously traced the history of the tune, both lyrically and musically.  After much explication, however, the court based its decision on a rather simple proposition: that the change in wording from “will” to “shall” did not render the disputed version original enough to make it a copyrightable derivative work.

There are lessons in this case for both artists who produce derivative works, and the attorneys who represent them.  First, no matter how often an artist plays an “old standard,” and no matter how closely associated that song may be with the artist, he will need do more than change a few words or notes around, in order to get copyright protection for the derivative work.  Next, practitioners must take special care to clearly outline source material and content differences when registering a derivative work with the Copyright Office.  As the court pointed out, defendant lost its strong presumption in favor of a valid copyright because the 1960’s applications failed to identify the proper source material, and failed to set forth the lyrical differences between the public domain version and the Seeger version of “We Shall Overcome.”  Finally, it is apparent from the opinion that this dispute engendered full throated, i.e. very expensive, litigation.  The parties hired numerous expert witnesses, employed extensive written discovery, and filed motions aplenty.  For the average artist, this could result in a process that breaks the bank.  Artists and their lawyers should anticipate these issues at the inception of the copyright process, to head off the possibility of cost-prohibitive litigation in the future.

"Reasonable Attorney's Fees" Awarded On a Missouri Merchandising Practices Act Claim May Not Be Limited By a Plaintiff's Contingency Fee Agreement With Counsel

January 5, 2018 | Robert Chandler

In Selleck v. Keith M. Evans Insurance, Inc., the Missouri Court of Appeals for the Eastern District remanded a case back to the trial court for further consideration on the reasonableness of an award of attorney’s fees, under the Missouri Merchandising Practices Act. The trial court ruling limiting plaintiff’s fees based upon his contingency fee agreement with his attorney was overturned.

Facts

Plaintiff sued his former employer in state Circuit Court for wrongful discharge, unpaid commissions under the MMPA, unjust enrichment and breach of contract.  The litigation was “contentious” and “antagonistic”, with numerous discovery disputes.  At trial, plaintiff requested damages for wrongful discharge in the amount of $160,000 and lost commissions in the amount of $11,709.  Plaintiff presented evidence at trial that he had hired counsel on a contingency fee basis.  The jury ruled for Defendant on the wrongful discharge claim, but awarded Plaintiff $10,000 for lost commissions on his MMPA claim.

Plaintiff’s counsel filed a post-trial motion seeking attorney’s fees in the amount of $221,292 under § 407.193, which states that a trial court “may award reasonable attorney’s fees and costs to the prevailing party.”  Plaintiff’s counsel represented that they billed 788 hours by attorneys with hourly billing rates of $280 and $450.  Noting that Plaintiff has entered into a one-third contingency fee agreement with counsel, the Court ruled that Plaintiff was entitled to reasonable attorney’s fees and awarded $3,333.33, or one-third of the $10,000 recovery.  The Court found that the $221,292 claimed by plaintiff’s counsel was not reasonable and extremely excessive for the type of case involved.  Plaintiff appealed.

Contingency Fee Agreement Does Not Serve as a Cap on MMPA Attorney’s Fees

Plaintiff’s single point on appeal was that the trial court erred in utilizing the contingency fee agreement to determine the award of attorneys’ fees under the MMPA.  The Court of Appeals agreed.  Although Missouri law does not prohibit consideration of a contingency fee agreement in making a reasonable-fee determination, it is only one of many factors that must be considered.  However, the agreement cannot be used to impose an automatic ceiling on reasonable fees to be awarded.  The Court must also consider other factors, including a determination of a “lodestar” amount – determined by multiplying the reasonable number of hours for the type of case by a reasonable hourly rate determined by rates customarily charged by the attorneys involved as well as other attorneys in the community offering similar services.

Concluding that the Circuit Court had used the contingency fee agreement to determine a cap on reasonable fees for Plaintiff’s counsel, the Court of Appeals reversed, and remanded the matter to the trial court for a determination of a reasonable fee based upon not only the contingency fee agreement, but also:

-the rates customarily charged by the attorneys and others in the community for similar services,
-the number of hours reasonably expended on the case,
-the nature and character of the services rendered,
-the degree of professional ability required,
-the nature and importance of the matter,
-the amount involved or the results obtained, and
-the vigor of the opposition.


Conclusion - Guidance for the Future

Although a contingency fee agreement may be considered in determining reasonable attorney’s fees under the MMPA, it is but one of many factors for the trial court to assess.  The contingency fee provided for in the agreement cannot be used as a “cap” on MMPA attorney’s fees.

Choice of Venue Provision Upheld in Employment Contract

December 28, 2017 | Robert Chandler

After Reilly Company terminated his employment, Plaintiff Jeff Reed brought claims against Reilly in Jackson County, Missouri Circuit Court. Reilly moved to dismiss the claims based upon an employment contract provision stating that all disputes between the parties calling for interpretation and enforcement of the contract must be brought in Johnson County, Kansas.  Plaintiff argued that: (1) because he was not seeking to enforce the contract, the forum selection provision had no applicability to his common-law and statutory tort claims, (2) the forum selection clause, and the contract as a whole, were unenforceable because his employment was “at-will” and no additional consideration was given for the forum selection clause, and, finally, (3) the forum selection clause was unfair and unreasonable because it was procured by fraud and concealment and therefore unenforceable.  The dismissal was affirmed by the Court of Appeals, and the Supreme Court affirmed, rejecting all of plaintiff’s arguments.

Facts

Reed sued in Missouri, seeking declaratory and injunctive relief based on his employment contract with Reilly, damages for alleged fraud including a Missouri Merchandising Practices Act claim of fraud in procuring the contract, and damages for wrongfully withholding commissions.  Reilly moved to dismiss the claims, asserting that Reed’s lawsuit could only be brought in Johnson County, Kansas.  The motion to dismiss was granted, and the Court of Appeals further affirmed the validity and enforcement of the forum selection clause.  The Missouri Supreme Court accepted the case for review.

The Forum Selection Clause Was Enforceable Despite Allegations of Non-Contract Disputes

Reed argued that the trial court erred in enforcing the forum selection clause in the employment contract because the contract lacked precise language requiring him to bring his non-contract claims in Kansas.  The provision at issue stated: 

“In the event of a dispute, jurisdiction and venue to interpret and enforce any and all terms of the Agreement shall be the District Court of Johnson County, KS.”

The Court ruled that whether a forum selection clause applicable to contract actions also reaches non-contract claims depends upon whether resolution of the claims is dependent upon interpretation of the contract.  The resolution of plaintiff’s claims in this matter necessarily required an inquiry into the terms and enforceability of the employment contract, and accordingly, the non-contract claims were subject to the forum selection clause.  Plaintiff’s claims for injunctive and declaratory relief clearly sought determinations regarding the enforcement and validity of the contract as a whole, and therefore the forum selection clause was enforceable.

The Trial Court Was Not Required to Determine Whether the Employment Contract Was Wholly Enforceable and Supported By Appropriate Consideration, Before Ruling on the Forum Selection Provision

The Supreme Court held that the trial court was not required to determine whether the contract was valid and enforceable, before ruling on the enforceability of the forum selection clause.  Such a determination would be absurd, particularly if the matter was sent to a different jurisdiction for the same analysis to be conducted.  Also, assuming that additional consideration was required in exchange for the forum selection clause and no additional consideration was given by Reilly, as long as the contract terms were not arrived at under terms deemed “adhesive” the forum selection clause would be enforceable.  Plaintiff Reed did not argue that the contract was adhesive.

Because resolution of Reed’s arguments that (1) at-will employment does not create an enforceable employment relationship and (2) Reilly breached the agreement were issues that could be addressed in the new venue, they did not void the forum selection provision.

The Forum Selection Clause Was Not Void Due to Unfairness, Fraud, or Misrepresentation.

The Court rejected Plaintiff’s assertion that the forum selection clause was void because the employment agreement, as a whole, was void due to fraud.  Although a forum selection clause may be voided if procured by fraud, there was no evidence in the record concerning negotiation of the forum selection provision, and plaintiff’s arguments that the employment agreement was procured by fraud did not void the forum selection clause because plaintiff did not argue that the forum selection clause was specifically procured by fraud.

The Court likewise rejected plaintiff’s argument that the forum selection clause was unfair and unreasonable, because there was no evidence submitted that the contract was adhesive.  Finally, the Court found that the chosen venue in the contract was a neutral forum for the parties’ dispute which cut against plaintiff’s fairness and reasonableness arguments.

Conclusion

Forum selection clauses that are not adhesive will be interpreted independently of the court’s determination of the enforceability and validity of the contract as a whole.  When, as in this case, a contract specifies a forum for all disputes concerning the contract’s interpretation and enforcement, and the dispute between the parties involves those matters, the forum clause will be enforced.  Parties drafting forum selection clauses should exercise care to avoid contracts that are adhesive – i.e. agreements reached without a realistic opportunity for bargaining – and to choose forums which will be considered “neutral” and not overly advantageous to the party drafting the agreement.

Related Services: Employment & Labor

Attorneys: Robert Chandler

It's not a bird or a plane... So what do we do with it? Concerns and regulations increase as drone usage skyrockets.

December 20, 2017

Reports of incidents involving unmanned aircraft systems (UASs), or drones, are on the rise. In October, for example, a drone crashed into a small passenger airplane as it was approaching the runway at the Jean Lesage International Airport in Quebec City, Canada.  Although the airplane was landed safely and there were no reported injuries, the post-collision aircraft inspection revealed damage to one of the plane’s wings.  This is the first time a drone has collided with a commercial aircraft in Canada, though pilot sightings of UASs has increased dramatically, at home and abroad, in the recent years.

Drone popularity has risen steeply as commercial users, not only individuals, are finding new and creative ways to incorporate drone usage into their business models.  Drones are now used to provide video footage for major news stories.  They hover over football players during NFL games.  They’re used to film promotional videos for luxury resorts and hotels.  They may, someday, be used to ensure same-day delivery of online orders. 

The Federal Aviation Administration (FAA), through authority conferred by 49 U.S.C. § 106, implemented regulations known as Part 107 to apply specifically to small unmanned aircraft systems used for purposes other than solely hobby or recreational.  These regulations, effective in 2016, provide relevant definitions (small UASs are those weighing less than 55 lbs) and guidelines for operation of UASs.  For example, 14 C.F.R. Part 107 requires registration of UASs with the FAA and calls for voluntary reporting of accidents or damage caused by a drone.  Similarly, Part 107 requires commercial “flyers” to obtain FAA certificates and prohibits drone usage in certain airspace (e.g., around airports) without the permission of Air Traffic Controllers.

This month, President Trump signed the 2018 National Defense Authorization Act into law, which extends certain requirements to those using model UASs.  Although previously exempted from the registration requirement of Part 107, drone hobbyists (those that purchase and use drones for personal, non-commercial use) will be required to provide their name and contact information to the FAA, as well as pay a small fee, to be legally compliant when operating their drones.

While drones offer many benefits across multiple industries, there are still numerous issues to be addressed.  There are safety considerations (as evidenced by the airfield collision in Canada), legal considerations (e.g., inability to identify owners of drones involved in accidents or collisions), as well as privacy considerations (e.g., drones used for unknown surveillance of an individual), to name a few.  Additionally, the nature and scope of insurance related to drones remains in its early phase.

As drone usage continues to increase, it’s only a matter of time before the common law will develop to address some of these lingering concerns.  Insurance coverage, terms and conditions also will impact the nature and extent of protection for those using drones.

The ultimate impact drones will have on our national airspace, and those involved in its regulation, is unknown.  We’ll keep our eyes to the sky and provide relevant updates when they become available.

Related Services: Aerospace

Gender Stereotypes Now Serve as a Basis for Sex Discrimination Claim under the MHRA

December 18, 2017

Despite an uptick in advocacy, support, and inclusion of the LGTBQ community over the past several decades, as of today, discrimination based on sexual orientation remains an invalid claim under the Missouri Human Rights Act (“MHRA”). However, in a recent decision by the Western District of the Missouri Court of Appeals, disparate treatment of a gay male employee because he did not conform to traditional or stereotypical notions of masculinity warranted a claim of sex discrimination; which is a cognizable claim under the MHRA.

In Lampley, et al. v. Missouri Commission on Human Rights, plaintiff Lampley alleged that his employer discriminated against him based on sex because his behavior and appearance deviated from the stereotypes of “maleness” held by his employer and managers. Lampley claimed the stereotypes surrounding masculinity encouraged his employer to harass him and treat him differently from similarly situated employees who conformed to gender stereotypes. Subsequently, a close friend and co-worker of Lampley’s named Frost also filed charges with the alleging retaliation based on her close association and support of Lampley. The two employees “dual-filed” their charges of discrimination with both the EEOC and the Missouri Commission on Human Rights.  The MCHR dismissed the state administrative proceedings, stating it lacked jurisdiction over the claims because they were based on sexual orientation. Both complainants then petitioned the trial court for administrative review arguing that sex, and not sexual orientation, serves as the basis of their claims. The trial court consolidated the cases and granted summary judgement in favor of the MCHR.

On appeal, Lampley and Frost argued that the trial court erroneously construed their claims to be based on sexual orientation, while in fact, they were based on sex, and therefore actionable under the MHRA. Lampley and Frost further contented that the sex discrimination was based upon sex stereotyping. The Missouri Court of Appeals agreed.  Relying on federal case law under Title VII, the Court held that sex stereotyping can form the basis of a sex discrimination claim allowable under the MHRA. The Court of Appeals also cited R.M.A. v. Blue Springs R-IV School Dist., another recent Missouri Court of Appeals decision, which held “discrimination on the basis of sex means the deprivation of one sex of a right or privilege afforded the other sex, including a deprivation based on a trait unique to one sex, or a deprivation based on traits perceived as unique to one sex.”

In sum, the Court held that under the MHRA, “evidence an employee has suffered an adverse employment decision based on stereotyped ideas of how a member of the employee’s sex should act can support an inference of unlawful sex discrimination.” Thus, employers must be wary of company managers who might try to dictate what is masculine or feminine enough to meet accepted company norms. Just like ideas of gender identity have become more fluid and inclusive over the years, so has the applicable law. 

Court of Appeals Affirms that At-Will Employment Is Not Sufficient Consideration for an Arbitration Agreement, Refuses to Change Law

December 14, 2017 | Robert Chandler

In Wilder v. John Youngblood Motors, Inc., the trial court had denied the employer’s motion to compel arbitration of its former employee’s claim for wrongful termination, and the employer appealed. The Circuit Court ruled that at-will employment was the only consideration given for the agreement to arbitrate, and Youngblood therefore failed to demonstrate sufficient consideration for the agreement between the parties to arbitrate.  Youngblood subsequently appealed this ruling arguing that mutual consideration between the parties existed, and, regardless, the Court should find that at-will employment is sufficient consideration for an agreement to arbitrate in accordance with federal policy favoring arbitration agreements and a tension in Missouri law providing that at-will employment provides sufficient consideration for non-arbitration provisions.  The Court of Appeals affirmed the Circuit Court’s ruling.

Facts

Plaintiff Stephanie Wilder filed a Petition alleging wrongful termination for reporting alleged wire fraud by her employer, Youngblood.  Wilder was an at-will employer, but at the time of hiring she executed an “Agreement for Binding Arbitration” as a condition of her employment.  The Agreement bound Wilder and Youngblood to pursue arbitrations to resolve any claims or disputes arising in the course of her employment, with some exceptions.

Wilder worked for Youngblood for approximately 18 months but was terminated after reporting alleged wire fraud by Youngblood.  Wilder subsequently filed her lawsuit for wrongful termination and Youngblood filed an answer and motion to compel arbitration, citing the Agreement.  Wilder argued that the Agreement was “unconscionable,” lacked consideration and was therefore unenforceable.  Youngblood subsequently appealed.

The Arbitration Agreement Lacked Mutuality of Consideration

Youngblood argued that the trial court erred in denying its motion to compel arbitration because the Agreement was properly supported by mutual consideration.  The Court of Appeals sided with the Circuit Court’s assessment that at-will employment is insufficient consideration for the Agreement.

Additionally, the Court of Appeals agreed with the Circuit Court’s finding of a lack of mutuality with respect to the claims that were exempted from arbitration.  Employer Youngblood had the opportunity to exempt certain potential claims from arbitration (“breach of trust, use or dissemination of confidential information, unfair completion, disclosure, or use of trade secrets”), but Wilder was prohibited from avoiding arbitration except where arbitration was forbidden by law. The Court noted that claims for unemployment benefits and workers’ compensation benefits, exempted from arbitration under the Agreement, were areas already prohibited from arbitration by law as jurisdiction for these areas is vested with specialized administrative tribunals.

The Court was not swayed by Youngblood’s argument that, as consideration for the Agreement, it was foregoing its ability to bring common law tort claims.  The Court noted that Youngblood, in bringing the causes exempted from arbitration in the Agreement, could also bring these common law claims in the event they “relate” to the potential claims exempted from arbitration.  Wilder did not have the same opportunity, and therefore mutual consideration was absent.

Youngblood also pointed to conditioning Wilder’s employment upon execution of the Agreement, a provision in the Agreement calling for it to pay the costs of arbitration if invoked, and Wilder’s continued employment and salary all as independent consideration sufficient to meet the mutuality requirement.  The Court rejected all three arguments:  1) reiterating that at-will employment is insufficient consideration for an agreement to arbitrate, 2) the agreement to pay arbitration costs was obviated by a provision calling for costs to be awarded to the prevailing party, and, 3) although continued employment could be sufficient consideration for a restrictive covenant such as an agreement not compete, agreements to arbitrate are fundamentally different restrictive covenants, and enforced differently.

Accordingly, the Court found Youngblood’s arguments on mutual consideration unavailing and affirmed the Circuit Court’s ruling denying the motion to arbitrate.

The Court Refused Youngblood’s Federal Policy Argument

Youngblood pointed out that at-will employment was sufficient consideration in some employment agreements, but, under Missouri law is insufficient for arbitration agreements.  Youngblood argued that, because at-will employment is sufficient consideration for non-arbitration provisions, Missouri law should be changed to allow at-will employment to be sufficient consideration for arbitration agreements as well.  The Court refused to change the law, noting that the Court of Appeals should not “make the law” but should only “correct errors” and an argument to change the law should be addressed to the Supreme Court.

Conclusion

Agreements to arbitrate based upon at-will employment will continue to be found unenforceable by the Court as lacking sufficient consideration despite at-will employment providing sufficient consideration for other non-arbitration provisions.  This tension in Missouri contract law is notable.

Bitcoin, Bankers, and Barriers to Legislation

December 4, 2017 | Megan Stumph-Turner

Its exact origins are somewhat of a mystery, but it is believed that Satoshi Nakamoto, perhaps a pseudonym for more than one creator, first developed the concept of the bitcoin in 2007. In October of 2008, “Nakamoto” published his first paper describing the peer-to-peer, online-based cash system.  The first Bitcoin transaction occurred in early 2009, and since then, the cryptocurrency market has exploded, and now major retailers, including Overstock.com, Microsoft, Dish Network, Etsy, Expedia, and even Subway have begun accepting Bitcoin for transactions in some capacity. And its value has catapulted, now exceeding $11,000 USD.

But what’s on the other side of the coin?  First, Bitcoin users can make anonymous transfers, which lends itself well to criminal, underground activity.  Likewise, a virtually unregulated market leaves Bitcoin transactions subject to a high risk of fraud, with no recourse for jilted consumers.  While some individual U.S. states have introduced legislation attempting to regulate cryptocurrency, the federal government has not, leaving the environment unstable.

Furthermore, the exponential increase in its value and lack of regulation leaves many experts wondering if this Bitcoin craze is just a bubble, only to be followed by a crash.

While cryptocurrency faces skepticism, the blockchain technology used to effectuate Bitcoin transfers has earned much praise as an alternative for future banking systems, particularly in expediting international payments.   And in light of this year’s highly publicized data breaches, financial institutions may be well advised to explore the use of blockchain technology to prevent public dissemination of sensitive information, as it is touted for its resilient data protection capabilities.

Financial institutions in particular have been wary about the growing popularity of the Bitcoin.  Jamie Dimon, CEO of JPMorgan Chase Bank, issued a statement questioning its legitimacy.  “It’s just not a real thing, eventually it will be closed,” said Dimon, who further threatened to “fire in a second” any JPMorgan trader who attempted to trade Bitcoin.  The Bank’s CFO, Marianne Lake, shortly thereafter qualified Dimon’s statements, avowing that JPMorgan remains  “ very open minded to the potential use cases in future for digital currencies that are properly controlled and regulated.”  This sentiment reflects that held by many institutions – most are open to the idea of a new type of currency, but are reluctant to engage until the currency is widely regulated.

Regulating the Bitcoin presents several challenges.  For one thing, while Bitcoin transcends borders, there is no uniformity among nations, or even states in the U.S., about how it should be treated or regulated.  Furthermore, there is inconsistency among legislators and the judiciary about whether Bitcoin is a currency or a commodity, thus making legislation difficult to draft.  Even so, the SEC has recently expressed its intent to begin regulating the sale of Bitcoin and other cryptocurrency.

Fad or not, the Bitcoin is sure to be a continued hot topic internationally among regulators and financial institution in the coming months.

Clear Public Policy Must Support Doctor's Whistleblower Action

November 30, 2017

In Yerra v. Mercy Clinic Springfield Communities, the Missouri Court of Appeals for the Southern District of Missouri held that the trial court erred in giving the jury a whistleblower verdict-directing instruction, reversed the jury’s verdict for the whistleblowing doctor, and directed that the trial court enter a verdict in favor of the defendant employer.

Dr. Yerra, an internal medicine physician, treated a Medicare patient in her 60’s who had been hospitalized several times for heart issues and other conditions. After the patient was stabilized, Dr. Yerra referred the patient to Dr. Cavagnol for a gall bladder removal procedure. Dr. Cavagnol accepted the referral and asked a cardiologist to consult as to whether the patient could tolerate anesthesia and surgery.  Upon learning of the cardiac consult order, Dr. Yerra canceled it because she deemed it an unnecessary cost.  Dr. Cavagnol re-ordered the cardiac consult and the cardiologist cleared the patient for the procedure. 

Dr. Yerra complained to Mercy’s Medical Staff Services, stating that the cardiac consult was inappropriate, an unnecessary cost, and disrespectful to her.  She threatened to report the conduct to Medicare if it continued.  Mercy investigated the matter and determined that the consult was appropriate, within the standard of care, and not an unnecessary cost. 

Dr. Yerra, who had previously been put on “improvement plans,” was put on a new “improvement plan.”  However, following subsequent incidents, including one involving an ICU patient, Mercy terminated Dr. Yerra. 

Dr. Yerra brought a whistleblower suit against her former employer, citing R.S.Mo. 334.100 and 197.285, asserting that public policy considerations supported her wrongful termination claim.  While generally, an at-will employee may be discharged for any reason, Missouri law protects employees by a very narrowly-drawn public policy exception.  An employee may bring a whistleblower claim against his or her former employer if it is based on a public policy consideration specifically recognized in a statute, regulation, or rule.  Any vagueness is fatal to the at-will wrongful termination claim. 

R.S.Mo. 334.100 identifies a physician’s duty not to willfully and continually perform inappropriate or unnecessary treatment, diagnostic testing, and/or medical or surgical services.  R.S.Mo. 197.285 requires designated healthcare facilities to off protection to employees who report certain matters, such as facility mismanagement, fraudulent activity, or violations of applicable laws related to patient care. 

Although the trial court was skeptical that Dr. Yerra’s cited statutes were “nonspecific” and did not identify a clear public policy that was not vague or general, it agreed to give Dr. Yerra’s requested whistleblower verdict-directing instruction.  The jury returned a verdict for Dr. Yerra and Mercy appealed.

The Missouri Court of Appeals for the Southern District of Missouri was tasked with determining whether the statutes reflected a clear and specific public policy mandate.  Ultimately, it held that Dr. Yerra was not entitled to a whistleblower instruction for reporting what Dr. Cavagnol did because the record did not demonstrate that the pre-surgery cardiac consult violated any provision of the cited statutes and did not amount to serious misconduct contrary to well-established, clearly-mandated public policy reflected in the statutes.  The Court held that Dr. Yerra’s reasonable belief that Dr. Cavagnol’s conduct violated public policy was not relevant to her wrongful termination claim.  Rather, the whistleblower instruction is only proper when the former employee demonstrates that public policy actually forbade the conduct complained of.

Missouri Upholds Pollution Exclusion to Relieve Insurance Company from Duty to Defend Toxic Tort Claims Arising from Industrial Pollution

November 27, 2017 | Martha Charepoo

In a recent decision, the Missouri Supreme Court for the first time considered the meaning and application of a pollution exclusion in a commercial general liability policy, landing unanimously on the side of the insurance company in favor of denying coverage to the insured. In Doe Run Resources Corp. v. St. Paul Fire and Marine Ins. Co. et al., the Supreme Court decided whether a policy’s pollution exclusion relieved the insurer from having to defend a lead mining company in numerous toxic tort lawsuits alleging injury from industrial pollution emitted from an overseas operation. The outcome turned on whether the exclusion was ambiguous, and, therefore, should be construed against the insurer in favor of coverage.

In defending its decision to deny coverage, the insurer had to contend with Missouri appellate precedent relied upon by the insured that found, where the insured’s business involved chemicals that might be deemed “pollutants”, a pollution exclusion is inconsistent with the insured’s reasonable expectations of coverage.  Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., 997 S.W.2d 510 (Mo. App. S.D. 1999).  The trial court adopted Hocker and found that the pollution exclusion created an ambiguity in the policy because it did not specifically identify lead as a pollutant. Consequently, the trial court construed the exclusion against the insurer and entered summary judgment in the insured’s favor on coverage. The Court of Appeals agreed that the pollution exclusion was ambiguous and did not bar coverage for the toxic tort claims.

On transfer from the Court of Appeals, the Supreme Court took the opposite view of Hocker and instead followed a more recent Eighth Circuit decision involving the same insured (Doe Run) which upheld a pollution exclusion and applied it to claims alleging injury from exposure to hazardous waste byproducts of the insured’s production process. Doe Run Res. Corp. v. Lexington Ins. Co., 719 F.3d 876 (8th Cir. 2013). In doing so, the Supreme Court distinguished the facts of Hocker, which involved failure of a gasoline storage tank at a gas station, releasing 2,000 gallons of gasoline into the ground causing damage to neighboring property. The court said that this case is completely different because the alleged exposure here was to toxic lead byproducts released into the air by the insured’s production process, not the insured’s lead products themselves. In framing the facts of the case in this way, the court found this case to be identical to Lexington in which the Eighth Circuit found that a nearly identically worded pollution exclusion barred toxic tort coverage for claims from the insured’s Missouri facility. 

As a result of Doe Run, Missouri law is now clear that pollution exclusions are not inherently ambiguous as to toxic tort claims arising from exposure to industrial pollution rather than the insured’s product themselves, and insurers can probably rely on such an exclusion to deny coverage in such cases. 

Update - Senate Unwinds CFPB Arbitration Rule

November 9, 2017 | Megan Stumph-Turner

It ended before it ever began. As reported in a prior post, in July of 2017, the Consumer Financial Protection Bureau (the “CFPB”) enacted a new rule that would have prohibited financial institutions from including arbitration provisions in their contracts with customers wherein the customers waived their right to bring class action litigation against the creditor.   The new rule was set to take effect in early 2018.

Not under our watch, said the United States Senate.  Promptly following the CFPB’s issuance of the new arbitration rule, Sen. Mike Crapo of Indiana introduced S.J.Res.47, “Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by Bureau of Consumer Financial Protection relating to “Arbitration Agreements.”  The resolution required only a simple majority vote to be enacted into law.  Indeed, the resolution came down to a 51-50 vote, with Vice President Mike Pence breaking the tie.

The CFPB rule was designed with the intention of protecting consumers from an unknowing waiver of their right to pursue legal remedies, such as class action litigation.  Research revealed that 3 out of 4 consumers who had entered into such arbitration clauses in their loan agreements were not aware they had done so.

Critics of the arbitration rule have maintained that the rule is a violation of individuals’ freedom to contract – after all, the consumer arguably could choose not to do business with that lender if unhappy with the terms of the agreement. Furthermore, many observed that the only parties who stood to benefit from the prohibition of class action waivers are the plaintiff’s attorneys representing consumers, and not the consumers themselves, since individual payouts from class litigation are often nominal.

Responding to the Senate’s vote to overturn the arbitration rule, CFPB Director Richard Cordray called the decision a “giant setback for every consumer in this country” and predicted that financial institutions would now “remain free to break the law without fear of legal blowback from their customers.”

Conversely, the Trump Administration commended the result of the Senate’s Vote, in a statement released shortly thereafter:  "By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB’s uninformed and ineffective policy.”

So, while these consumer credit arbitration clauses will likely remain a controversial topic for years to come, the rule intended to get rid of them has instead been extinguished.   

How Many is Too Many? Limiting Cumulative Expert Witness Testimony

November 3, 2017

In Shallow v. Follwell, the Missouri Court of Appeals for the Eastern District of Missouri reversed and remanded a jury’s verdict for defendant Dr. Follwell, holding the trial court improperly allowed cumulative expert witness testimony that imperiled the jury’s ability to fairly consider the quality and quantity of expert witness opinions.

The case involved a surgical mesh procedure to repair decedent’s hernia.  After the doctor twice within 24 hours discharged the patient from the hospital, she returned to the hospital a third time, where she was diagnosed with a severe infection in her abdominal cavity, caused by leakage of toxic and infectious bowel contents into her abdomen.  She died soon thereafter.

At trial, Dr. Follwell – designated as a fact and expert witness on his own behalf – did not dispute that decedent’s bowel was perforated, leaked, and caused the septic condition that led to her death.  He denied that he caused the hole in her bowel, however, and presented his alternative theory that decedent suffered from undiagnosed atrial fibrillation, which caused a blood clot to form, restricted the blood flow to that section of decedent’s bowel, and ultimately weakened and perforated the bowel wall.  Four other retained experts testified for Dr. Follwell: (1) a critical care specialist; (2) a cardiologist and internist; (3) a vascular surgeon; and (4) a colorectal surgeon. 

While there is no “bright line” rule as to how many expert witnesses a party may utilize to prove or defend its case, Missouri trial courts are charged with admitting evidence that is both logically and legally relevant.  The concept of legal relevance includes whether the evidence may, among other things, pose a danger of unfair prejudice, be a waste of time, and amount to the needless presentation of cumulative evidence.  Missouri courts have expressed concern that excessive cumulative evidence risks invading the jury’s ability to resolve the case on the merits and evaluate the quality and credibility of expert opinions.  Cumulative expert opinions may instead result in the jury simply “counting heads.”  The Shallow v. Follwell court held that the trial court abused its discretion in failing to properly determine when cumulative evidence should stop.  

It was not just the number of defendant’s experts that caused the Court of Appeals to reach its conclusion.  Rejecting the defendant’s claim that each expert’s testimony was limited to his own area of medical expertise - cardiology, internal medicine, critical care, the vascular system, and the gastrointestinal system - the Court of Appeals ruled that what actually happened was that each expert presented his expert opinion in his own area of expertise, but also repeated the sum and substance of the defense’s alternative theory of causation, in testimony that extended beyond the expert’s specialty.  The jury therefore heard the same opinions multiple times – essentially a “chorus of the same ultimate opinions” – which impeded its duty and ability to fairly weigh the evidence on each side. 

In returning the case to the Circuit Court for a new trial, the Court of Appeals chastised the trial court for “ignoring its duty to properly assess whether the testimony was needed,” and reminded the trial court “to adhere to the principles and standards set forth in this opinion and elsewhere in Missouri law for determining the admissibility of cumulative evidence.”

Class Action Slack-Fill Litigation in Missouri: How to Keep a Case in Federal Court

October 31, 2017 | Martha Charepoo

Candy manufacturers nationwide are increasingly finding themselves in Missouri state court, facing class action allegations that their use of over-sized packaging misleads consumers into believing the package contains more product than is actually present. A recent Eighth Circuit decision in a “slack-fill” case suggests that when a corporate defendant removes to federal court under the Class Action Fairness Act (CAFA), it may face a stiff challenge when the plaintiffs move to remand the case to state court, on the grounds that the value of their claims total less than $5 million.

In Waters v. Ferrara Candy Co., people who bought Red Hot candies initiated claims against the candy company for violation of the Missouri Merchandising Practices Act (“MMPA”) based on under-filled or “slack-filled” cardboard boxes of the candies.  The consumers filed suit in the City of St. Louis Circuit Court. Presumably seeking a less plaintiff-friendly venue, the candy company removed the case to the federal court for the Eastern District of Missouri, under CAFA, arguing that the total value of the consumers’ claims exceeded $5 million, the minimum amount required for the district court’s jurisdiction under that statute. The candy company based its calculation on what the consumers could potentially recover as compensatory damages (total sales in Missouri for the past five years), attorney’s fees (at 40% of compensatory damages), and punitive damages (at 5 times compensatory and punitive damages), and the cost of changing its packaging processes to eliminate slack-fill.

The consumers moved to remand the case back to the City of St. Louis, arguing that the $5 million threshold was not met. In opposition, the candy company submitted affidavits from executives attesting to the total retail sales of all Red Hots products for the previous five years and how much it would cost to change its packaging processes to eliminate slack-fill, if it were compelled to do so.

The district court considered each category of potential recovery by the consumers and concluded that taken together or separately, the value of the consumers’ claims did not meet the $5 million threshold and ordered the case back to the City of St. Louis.  The court concluded that compensatory damages and attorney’s fees added up to less than $1 million, and that punitive damages should not be included in the calculation, because the consumers had not adequately pled punitive damages in their petition and, therefore, punitive damages would not be recoverable in this case. That left the value of injunctive relief.  In deciding how to calculate the value of injunctive relief, the court followed “longstanding Eighth Circuit tradition” and looked at it from the consumers’ point of view, rejecting the “either viewpoint” test, which compares the value of injunctive relief to consumers to the cost to the manufacturer and taking the more expensive of the two. The candy company urged adoption of the “either viewpoint” test but presented no evidence of the value of injunctive relief from the consumers’ point of view, so the court disregarded this factor as well.

The court went on to criticize the efficacy of the candy company’s affidavits to establish the cost of injunctive relief from the manufacturer’s point of view. The CEO’s affidavit addressed the cost of changing its packaging to eliminate slack-fill based on an estimated cost to upgrade its packing equipment. The court found this to be speculative because it did not specify what injunctive relief would actually require the manufacturer to do -- add more candy to the existing package size, shrink the package size to more closely fit the current weight of actual candy, or modify every Red Hots candy production line. As a result, the court found the proposed cost to be too speculative to allow the consumers’ to rebut it.

The candy company appealed this decision, challenging (among other things) the district court’s adoption of the “plaintiff’s viewpoint” test. The Eighth Circuit Court of Appeals was unmoved.  The appeals court  found it unnecessary to rule on whether the district court should have applied the “plaintiff’s viewpoint” or the “either viewpoint” test, because it found that under either standard, the candy company failed to prove by a preponderance of the evidence that the amount in controversy exceeded $5 million.  The appeals court agreed with the district court that the two affidavits did not adequately quantify what it would cost the company to comply with an injunction.

Given another chance, the Eighth Circuit might decide that the “plaintiff’s viewpoint” test determines the value of injunctive relief for establishing the jurisdictional amount under CAFA. Thus, a reasonable and conservative strategy to keep a slack-fill class action in federal court would be to present evidence from the consumers’ point of view and be as specific as possible about the method and cost of eliminating slack-fill. This is a calculus that can be accomplished before deciding to remove, and if neither of these amounts can be supported with specific evidence to establish a finding of at least $5 million, it might be more cost effective to just stay in state court.

Counsel should also keep in mind that in cases where plaintiffs have adequately pled punitive damages in their state court petition (which did not occur in the Waters case), it is not uncommon for punitive damages to total up to 10 times the amount of compensatory damages, and this can be a critically important factor in determining whether the CAFA threshold has been met. 

Western District Court of Appeals Expounds on Attorney Duty of "Reasonable Investigation" of Juror Litigation History

October 24, 2017

Attorneys typically rejoice when courts provide further definition of previously established rules, standards, and legal terms; and that is exactly what the Western District Court of Appeals did in King v. Sorenson. We have previously chronicled Missouri’s adoption of Rule 69.025, which obligates a litigant to investigate the backgrounds of potential jurors. Specifically, if a litigant has failed to conduct a “reasonable investigation” of prospective jurors’ litigation history, he has waived the right to seek relief from an adverse judgment, based on juror non-disclosure. Before King v. Sorenson, lawyers knew that the definition of a “reasonable investigation” required review of Case.net before the jury is sworn, but there was no further guidance as to the required extent of a “reasonable search,” nor any accepted protocol to ensure that a search of venireperson’s litigation history is conducted properly.

King v. Sorenson was a wrongful death and lost chance of recovery case, in which the trial court provided both parties with a list of sixty-five randomly selected names of potential jurors. One of potential jurors was listed at “J. Paul Willis,” and this was confirmed by a separate juror questionnaire where the venireperson provided the name of “(John) Paul Willis.” At no time did the venireperson represent that Paul was his functional first name, and Plaintiff’s counsel solely conducted Case.net searches using “J” or “John” as the litigant’s first name, “P” or “Paul” as the middle name, and “Willis” as the last name. These searches revealed no collections cases involving the prospective juror.

In voir dire, Plaintiff’s counsel emphasized the importance of prospective juror honesty, candor, and how the lack thereof could cause the same issues to be re-tried and re-litigated. When the panel was questioned about collection cases that have been brought against them, Mr. Willis remained silent. Mr. Willis ultimately was seated on the jury, and participated in its defense verdict, signing the verdict form as “Paul Willis.”

Contrary to Willis’ representations on his juror questionnaire and during voir dire, it was later discovered that he was a defendant in a collection case where he was sued for an alleged breach of contract styled Champion Trim, Inc. v. Paul Willis, et al. Because Willis never provided “Paul” as his first name, Plaintiff’s counsel had not searched Case.net for matters involving a “Paul Willis.”

Plaintiff moved for a new trial based on the juror non-disclosure of litigation history.  But the trial court denied the motion, and ruled that Plaintiff’s counsel “mistakenly used the incorrect first name” when conducting a Case.net search, and the search was therefore unreasonable.  The Western District Court of Appeals disagreed and held that “where a litigant has performed a Case.net search by inserting the names as provided to counsel by the trial court, such a search simply cannot be deemed anything but ‘reasonable.’”

The appellate court remanded the case to the trial court, to determine if a new trial was warranted.  It held that “if the trial court finds that Juror Willis’s nondisclosure was intentional, bias and prejudice must be presumed and a new trial ordered. If the trial court finds that the nondisclosure was unintentional, it must undertake an analysis as to whether Plaintiffs were prejudiced, in such a fashion necessitating a new trial, by Juror Willis’s nondisclosure of the 1991 lawsuit.”

Missouri Supreme Court May Be Signaling a Change in Analysis of Misjoinder of Claims in Multi-Plaintiff Product Liability Cases

October 19, 2017 | Angela Higgins

On October 13, 2017, the Missouri Supreme Court issued a preliminary writ of prohibition directed to Circuit Judge Rex Burlison of the Circuit Court for the City of St. Louis, temporarily staying the talc case, Valerie Swann, et al. v. Johnson & Johnson, et al.  The Supreme Court case number is SC96704.  The plaintiffs, on behalf of the trial court, are to answer the writ petition by November 13, 2017.

Plaintiff Michael Blaes is one of 47 plaintiffs in the case, who contend that they or their decedents developed ovarian cancer following use of talcum powder.  Johnson & Johnson alleges that Blaes’s decedent did not purchase or use talcum powder in the City of St. Louis.  Blaes’s case was set for separate trial from those of the other plaintiffs, but Judge Burlison declined to formally sever his claim such that it could be reassigned and venue assessed.  That decision is the subject of Johnson & Johnson’s petition for a writ of prohibition.

Missouri has long had a troubled history with venue analysis.  As part of tort reform in 2005, the legislature made significant changes to the venue statute, designed to prevent forum shopping.  The recent explosion in “litigation tourism” focused in the City of St. Louis has not been due to any change in, or deficiency of, the venue statute and the joinder rules, but in changes in the application of long-standing principles of venue and joinder.

Refusal to sever unrelated claims is at the core of the problem.  Litigation tourism in St. Louis depends upon a single, anchor plaintiff who is a Missouri resident with a plausible jurisdictional claim and basis to claim venue in the City of St. Louis, with dozens of unrelated, out-of-state plaintiffs clinging to that anchor plaintiff’s case to justify pursuit of claims in Missouri against non-residents.  The claims are misjoined and should be severed, but to date the Missouri Supreme Court has declined to find that a trial court’s refusal to sever misjoined claims warrants reversal on appeal unless the defendant can establish that the severance decision was prejudicial to the outcome (by establishing that the City of St. Louis is a biased venue).  See Barron v. Abbott Labs., Inc., No. SC96151, 2017 Mo. LEXIS 403, at *6 (Sep. 12, 2017).

Severance has not always been this controversial, but reflects a change in the application of Missouri law and procedure in recent years.  Rule 52.06 of the Missouri Rules of Civil Procedure is titled “Misjoinder and nonjoinder of parties,” and provides that “Any claim against a party may be severed and proceeded with separately.”  Misjoinder of claims or parties requires severance of the claims.  See State ex rel. Gulf Oil Corp. v. Weinstein, 379 S.W.2d 172, 174 (Mo. App. St. L. 1964).

Rule 52.05 identifies the only circumstances under which the claims of multiple plaintiffs may be properly joined in a single action:

All persons may join in one action as plaintiffs if they assert any right to relief jointly, severally, or in the alternative in respect of or arising out of the same transaction, occurrence or series of transactions or occurrences and if any question of law or fact common to all of them will arise in the action.

Mo. R. Civ. P. 52.05(a) (emphasis added).  Both tests must be met for plaintiffs to be joined in a single action.  Id.; State ex rel. Allen v. Barker, 581 S.W.2d 818, 826 (Mo. banc 1979).  If those requirements are not met, the claims are misjoined and severance is required.  Even if joinder is permitted, severance is still permissible in the trial court’s discretion, based upon factors related to fairness, economy, and prejudice.  See Wilson v. Bob Wood & Associates, Inc., 633 S.W.2d 738, 743 (Mo. App. W.D. 1981).

Rule 52.05(a) is analogous to Fed. R. Civ. P. 20(a), which provides that parties may be properly joined only where claims by or against them arise out of the same transaction or occurrence or present common questions of law or fact.  In State ex rel. Allen v. Barker, 581 S.W.2d 818, 826 (Mo.1979) the Missouri Supreme Court discussed the adoption of Rule 52.05(a), recognized that it was patterned after the federal rule, and applied federal cases to interpret it.  Id.  The federal rule has been extensively construed, and overwhelmingly find that the claims of multiple plaintiffs are misjoined when the only commonality amongst plaintiffs is that they allege damages resulting from using the same product.  See, e.g., In re Orthopedic Bone Screw Prods. Liab. Litig., MDL No. 1341, 1995 WL 428683, at *5-6 (E.D. Pa. July 15, 1995).  In the bone screw litigation, the only plaintiffs who were allowed to remain joined in a single action were those who underwent surgery by the same doctor or group of doctors, at the same hospital, and who received the same or a similar device by the same manufacturer.  Id. at *5.  There is no reason in the rule why Missouri should be applying joinder principles in a manner so inconsistent with the federal courts.

Recent jurisprudence in the City of St. Louis and in the Eastern District Court of Appeals, in fact, is inconsistent with those courts’ own past precedent on misjoinder and severance.  In Gulf Oil, plaintiffs had purchased fuel oil in unrelated transactions at different times.  Id. at 174.  These transactions did not constitute the “same transaction nor a series of transactions.”  Id. at 175.  Moreover, even though the plaintiffs all sustained fires, these occurred on different dates.  Id.  Accordingly, the plaintiffs’ losses did not constitute the same “occurrence.”  Id. 

The Gulf Oil court was keenly focused upon what is the “transaction” and what is the “occurrence” that is common to the plaintiffs.  Because the issue is joinder of plaintiffs, it is a plaintiff-focused, not defendant-focused analysis.  Recent jurisprudence on the eastern side of the state has shifted that focus to the notion that plaintiffs’ claims can arise out of the same transaction or occurrence when they derive from common conduct of the defendant, which has been expanded to include the design, marketing, and sale of the product.  In reaching these decisions, the early trial court orders rely upon cases analyzing the proper joinder of defendants, which is, of course, a defendant-behavior-focused analysis.  

Taken to the illogical extreme, the approach of focusing upon the defendants’ business practices and product design to establish joinder would allow any purchaser of a product to join with any single Missouri plaintiff and to pursue their claims in Missouri.  It is simply untenable, and seems inevitable that, if the Missouri Supreme Court does not curtail this problem, the U.S. Supreme Court will.  Allowing non-residents to sue non-residents for extraterritorial conduct and injuries is not constitutionally defensible.  Personal jurisdiction limitations “are a consequence of territorial limitations on the power of the respective States.”  Hanson v. Denckla, 357 U.S. 235, 251 (1958); see also World-Wide Volkswagen Corp v. Woodson, 444 U.S. 286, 292 (1980) (minimum contacts requirement serves the dual functions of protecting defendant against the burden of litigation and ensuring states “do not reach out beyond the limits imposed on them by their status as coequal sovereigns in our federal system”).  

There are hopeful signs – the Eastern District Court of Appeals just overturned the first talcum verdict against Johnson & Johnson for lack of personal jurisdiction.  See Estate of Fox v. Johnson & Johnson, No. ED104580, 2017 Mo. App. LEXIS 1043 (Mo. App. E.D. Oct. 17, 2017).  The dust has not yet settled on these issues, however.

Johnson & Johnson’s writ of prohibition takes a subtly different track from the issue argued in Barron.  In its recent writ, Johnson & Johnson does not argue that Judge Burlison erred in denying the original motion to sever based upon misjoinder of the plaintiffs’ claims, but that, when the court ordered separate trial of each of the claims, that the claims of each plaintiff should have been formally severed such that venue (and presumably jurisdiction) would be independently assessed as to each of the severed claims.

Rule 66.02 provides:

The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy, may order a separate trial of any claim, cross-claim, counterclaim, or third-party claim, or of any separate issue or of any number of claims, cross-claims, counterclaims, third-party claims, or issues.

Rule 52.06 provides that “Any claim against a party may be severed and proceeded with separately.”  Missouri law has been somewhat ambiguous as to the relationship between these rules, including whether “proceed[ing] separately” with a claim is the same as severing it.

The 3-judge concurring opinion in Barron, upon which Johnson & Johnson relies for its writ petition, suggested that, when the trial court determines that a plaintiff’s claims should be separately tried, it has effectively “severed” that plaintiff’s claims from the remaining plaintiff(s).  Alternatively, where the trial court has determined that the claims should not be tried together, it would ordinarily have no basis to deny a subsequent motion to sever.  Because Mo. Rev. Stat. § 508.012 (part of the 2005 tort reform) requires reassessment of venue when a plaintiff is either added to or removed from the petition, and mandates transfer if venue is improper, the trial court’s failure to formally sever a separately-tried claim deprives defendants of the benefit of the statute.

When there has been severance, the normal administrative process would involve the assignment of a new case number to the severed case and, normally, random judicial reassignment.  Severance of claims permits the court to render separate judgments which will be deemed final for purposes of appeal.  Engel Sheet Metal Equipment, Inc. v. Shewman, 301 S.W.2d 856, 859 (Mo. App. St. L. 1957).  The claims, being independent, would be subject to independent venue and jurisdictional analysis, having been unchained from the Missouri anchor plaintiff.

It is interesting that the Supreme Court has issued a preliminary writ in the Blaes matter.  Although an order for separate trials is not generally deemed to be equivalent to an order for severance, that general principle must be considered in the context of the venue statute, which does contemplate a reassessment of venue.  A court may be required to order severance based upon misjoinder, and the Johnson & Johnson argument seems targeted squarely at overcoming the “lack of prejudice” finding in Barron – the prejudice is in the denial of the rights afforded under Mo. Rev. Stat. § 508.012.  Additionally, where the court has discretion to sever based upon judicial economy, fairness, and prejudice, it still appears to be an abuse of discretion to order 47 separate trials but refuse to sever them into independent actions. 

Johnson & Johnson’s writ petition may be the hook to pry loose severance orders in these multi-plaintiff cases.  Ideally, however, the impropriety of joinder would be assessed at an earlier stage of the litigation, before decisions on trial management have been made.  We are hopeful that recent developments in the talc cases indicates a shift away from recent practices in these multi-plaintiff cases.

Eighth Circuit Upholds Denial of Benefits Under ERISA-governed Insurance Policy

October 10, 2017

The Eighth Circuit Court of Appeals, in Donaldson v. Nat’l Union Fire Ins. Co. of Pittsburg, recently upheld the denial of benefits under an ERISA-governed insurance policy because the plan administrator’s interpretation of the disputed policy language was found to be reasonable.

Michele Donaldson filed a claim for accidental death and spousal benefits under an insurance policy issued to Schwan’s Shared Services, LLC by National Union Fire Insurance Company of Pittsburgh, PA.  Mrs. Donaldson’s claim arose after her husband was killed in a motor vehicle accident in which his vehicle was struck by another that crossed into his lane of traffic.  Mr. Donaldson was employed as a delivery driver with Schwan’s and was on his delivery route at the time of the accident.

The applicable insurance policy was an employee-benefit plan governed by the Employee Retirement Income Security Act (ERISA).  The policy provided insureds with financial security in the event of an accidental death or injury when traveling on business.  The policy provided “Hazards” that described specifically the circumstances under which coverage would be afforded.

Mrs. Donaldson filed her claim for accidental death and spousal benefits under Hazard H-12, which offered “24-Hours Accident Protection While On A Trip (Business Only).”  National Union denied the claim under Hazard H-12 because Mr. Donaldson was not on a business trip at the time of his death; instead, he was operating a vehicle that he had been hired to operate.  Following denial of her claim, Mrs. Donaldson filed a complaint in state court seeking an accidental death benefit on behalf of Mr. Donaldson’s estate in the amount of $286,000 and a spousal benefit of $50,000.  Following removal to the United States District Court for the Eastern District of Arkansas, the district court found that denial of Mrs. Donaldson’s claim was appropriate because National Union had reasonably interpreted the Policy language and there was no abuse of discretion.  Mrs. Donaldson’s complaint was dismissed with prejudice, which resulted in an appeal to the Eighth Circuit.

The ERISA-governed plan granted the plan administrator discretion to interpret the plan and to determine eligibility for benefits.  The Eighth Circuit reviewed National Union’s decision to deny benefits under the abuse of discretion standard, which required the Court to uphold the insurer’s decision as long as it was based on a reasonable interpretation of the policy and was supported by substantial evidence.  A number of relevant factors to aid the Court in its consideration have been determined in prior matters.  See King v. Hartford Life & Accident Ins. Co., 414 F.3d 994, 999 (8th Cir. 2005).  The dispositive factor, however, was whether the plan administrator’s interpretation of the disputed provisions was reasonable. 

Interpretation of the policy at issue turned on whether an exception listed in Hazard H-12 applied to the circumstances of the accident.  In its close examination of the policy language, the Eighth Circuit determined that the disputed exception language was ambiguous.  The Court held that where the terms of the plan are susceptible to multiple, reasonable interpretations, a plan administrator’s choice among the reasonable interpretations is not an abuse of discretion.  As both National Union and Mrs. Donaldson’s interpretations were equally reasonable, the Court deferred to the plan administrator’s interpretation of the disputed language and found no abuse of discretion by National Union.  The district court’s decision was affirmed.

The opinion in its entirety may be found here.

Whistles Here, Whistles There, Whistles Everywhere - 8th Circuit Allows Airline Whistleblower to Proceed with State Law Wrongful Discharge Claim

October 3, 2017 | John Patterson

In Watson v. Air Methods Corp., No. 15-1900 (8th Cir. en banc, Aug. 31, 2017), the Eighth Circuit Court of Appeals reversed its own precedent and held that a former employee may bring a state law wrongful discharge claim against an “air carrier,” notwithstanding the pre-emption provision contained in the Airline Deregulation Act (“ADA”).

Plaintiff in ­­­­Watson was an in-flight air medic employed by defendant. Over the course of his career, he made a number of complaints to his employer, alleging violations of various federal aviation safety regulations, including: a pilot making cell-phone videos during flight; members of a medical crew text messaging during critical phases of flight; a pilot attempting to take off with frost and ice on the aircraft; and another pilot making unnecessary “run-on landings.” After he was fired by the air carrier, Plaintiff claimed he was dismissed in retaliation for making these complaints, and filed suit in Missouri state court for the common-law tort of wrongful discharge in violation of public policy.

The air carrier removed the case to federal court and then moved to dismiss the state law claim based on the pre-emption provision of the ADA. The district court, relying on the Eighth Circuit’s decision in Botz v. Omni Air International, 286 F.3d 488 (8th Cir. 2002), dismissed plaintiff’s wrongful discharge claim.  Plaintiff appealed, and a Court of Appeals panel upheld the district court.  Plaintiff then sought en banc review, by the full Court.  Somewhat surprisingly, the full court overturned its own decision in Botz and held that a state law claim for wrongful discharge was not preempted by the ADA, despite the existence of a federal whistleblower protection scheme for airline employees.

Defendant argued that if plaintiff’s claims were not pre-empted by the ADA, then state courts would need to adjudicate the meaning of the federal regulations, thus creating a patchwork of differing regulatory standards for air carriers to deal with.  The Eighth Circuit disagreed, noting that state courts do not have federal regulatory enforcement power, that not all claims related to air “safety” are preempted by the ADA anyway (e.g. personal injury claims), and that the federal aviation whistleblower protection program acted in conjunction with state whistleblower claims, rather than superseding such claims.  The Eighth Circuit stated that the Third, Ninth and Eleventh Circuits had reached the same conclusion.

As a result of the holding in Watson, “air carriers” (as defined in the ADA) doing business in the Eighth Circuit may now have to defend whistleblower-style claims from ex-employees, on both state and federal fronts.

Swift Litigation Ensues Following Equifax Data Hack

September 29, 2017 | Megan Stumph-Turner

Almost immediately upon announcement of the Equifax data breach, the plaintiff’s bar speedily initiated class litigation on behalf of consumers for purported failures by Equifax to protect its customer data. For instance, just one day after the breach became public knowledge, a multi-billion dollar class action suit was filed in Portland, Oregon.

We can undoubtedly expect to see more class action litigation crop up, as it has consistently on a daily basis since announcement of the breach.  Nevertheless, the threat to Equifax does not stop at private litigation.  Several state attorneys general have already announced plans to investigate the breach.

While the timeframe permitted to disclose a data breach varies from state to state, most states do have a requirement that the data breach be disclosed by the soonest reasonable date possible.  The delay by Equifax in announcing the breach will certainly serve as the basis for many state-level investigations and penalties.  It is reported that the breach occurred as early as May 2017, was discovered by Equifax in July 2017, but was not reported until September 7.

Several state attorneys general, including:  Tom Miller, Iowa; Derek Schmidt, Kansas; Joshua Hawley, Missouri; and Douglas Peterson, Nebraska, have joined in a letter to Equifax expressing their concerns with the manner in which Equifax has handled the breach, thus far.  Those concerns include many having to do with customer service and accessibility to information.

In particular, though, the state attorneys general have taken issue with Equifax reportedly requiring consumers to enter into mandatory arbitration agreements or pay fees for credit monitoring services that are otherwise available for free to the public.  The letter states, “The fact that Equifax’s own conduct created the need for these services demands that they be offered to consumers without tying the offer to complicated terms of service that may require them to forego certain rights,” and “We remain concerned that Equifax continues to market its fee-based services to consumers affected by its data breach.”

The letter in its entirety is available here.

In excess of 143 million consumers’ personal information may have been compromised, and a software flaw is reported to be the cause.  The compromised information includes names, dates of birth, addresses, social security numbers, credit card numbers, and even driver’s license numbers.  Experts report that the number of affected consumers will likely increase as time passes.

The Balancing Act of OSI Evidence

September 18, 2017

Courts are often asked by plaintiffs’ counsel to admit evidence of other similar incidents (OSI) in order to show a defendant’s knowledge of an alleged defect, and/or causation. Plaintiffs have used this approach to tap into the power of strength in numbers and will typically seek to introduce evidence of as many “similar” incidents as a trial court will allow. Although the law allows for the introduction of this type of evidence, a trial court must carefully balance the relevancy of this evidence versus the prejudicial effect. The Eighth Circuit in Adams v. Toyota Motor Corp., recently examined the admissibility of evidence of other similar instances in an automotive “unintended acceleration” case. Plaintiff Koua Lee was driving his 1996 Toyota Camry on the highway. While exiting the highway, the car continued to accelerate, failing to stop as he pressed on the brake. Lee rear ended a car stopped at a red light, killing three of the five passengers in the stopped car and severely injuring others, including passengers in his own car. The Court of Appeals, in upholding the trial court’s decision to admit this evidence, affirmed that evidence of substantially similar incidents can be admitted in appropriate circumstances, and that the trial court is in the best position to determine whether or not this evidence is a distraction to jurors or is otherwise unduly prejudicial.

Weighing in favor of admissibility, OSI evidence can be relevant in that it can show a party had notice of defects. It may also be used to demonstrate the magnitude of the danger and the product’s lack of safety for its intended uses. But there are limitations to the use of OSI evidence. The prior incidents must be “substantially similar” to the incident in the case at hand. And the probative nature of the evidence must outweigh its potential for prejudice.

Here, the Court explained that there are no hard and fast rules to determine if the evidence is substantially similar. It is a case by case determination, and the court must focus on all the circumstances surrounding the OSI evidence and the facts of the case. When OSI evidence is admitted, a defendant is free to argue to the jury the evidence is not persuasive by pointing out the dissimilarities between the purported “similar” incident, and the incident presently being litigated.

In determining that there was no abuse of discretion in admitting this evidence, the Court stated the trial court properly looked at the circumstances surrounding the OSI evidence and that evidence was similar to what happened to plaintiff.  Each witness drove a 1996 Camry with over 100,000 miles. Each witness testified that the Camry accelerated or maintained speed when his foot was removed from the gas pedal and the brakes were ineffective. Testimony from these three witnesses was very similar to testimony from the plaintiff. Additionally, an expert witness reviewed the OSI evidence and testified that he considered the three witnesses’ experiences to be similar to the plaintiff’s experience. The appellate court also approved of the trial court’s exercise of cautious discretion in limiting the OSI testimony to three witnesses.

There is a risk of admitting OSI evidence. As the Court noted, it can lead to a confusion of issues or be more prejudicial than useful. However, the trial court is in the best position to make sure that this does not occur. As long as the trial court does not abuse its discretion, the admittance of OSI evidence will be upheld.

A Dog-Gone Contract

September 11, 2017 | Megan Sterchi Lammert

“Dogs are not our whole life, but they make our lives whole.”


Animal-Welfare Advocate Roger Caras
(quoted by Court of Appeals Judge Lawrence E. Mooney)

I am an unabashed dog-person. Thus, a recent opinion out of Missouri’s Eastern District Court of Appeals, which entangled a dog’s adoption story with the law, immediately had me hooked.

Other than what I read in the Court’s opinion, I do not personally know Mack the Dog, nor the other dramatis personae in this case, and I am not here to provide commentary or an opinion on any of them.  So I will limit my discussion to the Court’s legal analysis, and its potential implications for future cases.

If you are still reading, you likely are also a dog-person and/or would like to know more about the dog-gone contract at issue.

In Patterson v. Rough Road Rescue, Inc., the Court of Appeals affirmed a trial court’s decision to return a dog named Mack to, according to the Court, its rightful owner, plaintiff Patterson.

The trial court had found in favor of Plaintiff who made a claim for replevin, a civil remedy and “possessory action to obtain property that is in the defendant’s possession,” after Defendant Rough Road Rescue would not return the dog. Mack had previously been adopted from the rescue shelter by Patterson and had been picked up in town and returned to the shelter after wandering off from Plaintiff’s yard. To succeed on such a claim of replevin, a plaintiff must show:

  1. The plaintiff owned the property or was entitled to possess it;
  2. The defendant took possession of the property with the intent to exercise some control over it; and
  3. The defendant, by exercising such unauthorized control over the property, deprived the plaintiff of his right to possession.

On appeal, Defendants argued that the trial court erred in its decision because 1) the adoption was not governed by the UCC in that “the adoption was not a ‘sale’ and because they are not ‘sellers’ or ‘merchants’ as defined by the code, 2) the terms of the contract, under which Patterson adopted Mack, provide a reversionary interest in the dog permitting defendants to retake and retain the dog when the terms of the Animal Adoption Contract were breached, and 3) the $2500 bond posted, which was due to an individual defendant’s failure to comply with the trial court’s order to return Mack, was grossly excessive.

The Court of Appeals’ affirmation of the trial court’s decision, finding replevin was properly granted due to the adopter (Plaintiff) being the rightful owner, came after a de novo review of Plaintiff’s claim to possession of Mack based on Rough Road Rescue’s Animal Adoption Contract.  Unlike the trial court, the Court of Appeals focused not on whether a dog was actually a “good” under the UCC and/or whether the adoption was a “sale” contemplated by the UCC, but rather on the interpretation of the Contract.  Personally, as one who has always considered my dogs as family, I felt uneasy about the trial court’s label of the dog as a “good” and thought that there needed to be a discussion about that label and the law, but perhaps the Court wanted no dog in that fight, for now.

Plaintiff’s claim was based on the Contract; thus, the issue presented was of contract interpretation.  “A cardinal principle of contract interpretation is to ascertain the intention of the parties and to give effect to that intent.”  The Court honed in on five specific “conditions” set forth in the Contract.  The first, third, and fourth addressed fairly standard conditions, setting a timeline for the adopted pet to be spayed/neutered, providing the adopted pet with humane care, and complying with all laws and ordinances applicable to the adopted pet where the adopter lives.  The tenth was an additional, handwritten requirement that the adopter agreed to provide a fenced yard for the adopted pet by a certain date. 

Where there is ambiguity within the four corners of a contract – i.e., the language used “is reasonably susceptible to two or more interpretations” - then the Court looks at such external factors as the relationship of the parties, circumstances of the execution of the contract and its subject matter, acts of the parties, and circumstances which may shed light on the intent of the parties.  A court “construes the ambiguity and interpret the contract in the light most favorable to the party who did not draft the contract.” 

In this case, the Court found at least some portions of the Contract ambiguous, largely within the language of the ninth condition, which stated:

9. Any noncompliance of this adoption contract by the above mentioned owner, may void this contract.  And could immediately give a representative of Rough Road Rescue, Inc. the authority to take possession of said animal. (emphasis added)

Since the contract was drafted by Rough Road Rescue, the Court construed the contract, including the ninth provision above, against Rough Road Rescue and in favor of Plaintiff.  Also, of note, is that Rough Road’s own personnel, who were involved in the drafting of the Contract, even disagreed about the meaning of many of its terms, such as adoption, providing further support of the Contract’s ambiguity.   

The use of the words “may” and “could” were central to the Court’s analysis.  In interpreting condition #9, the Court reasoned that “‘may’ and ‘could’ are conditional words as to what might occur, rather than what must result.”  This repossession provision also clearly stated that the adopter was the owner, which implied that the adopter obtained ownership (full and exclusive rights), not just possession (which can be temporary and/or partial) of the adopted animal, therefore, the Court concluded that the Contract did in fact grant Plaintiff ownership of Mack and rejected what it found to be an unreasonable result if Rough Road Rescue was permitted to keep such a long leash on the potential repossession of Mack.

Lessons learned from this dog-gone contract?  First, use assertive, mandatory language, such as “shall void” (not “may void”) and “must” (not “could”) if you want a stronger argument of a right to repossession of property.  Second, make sure those who draft your contract are all in agreement with what those contractual terms mean (perhaps you want to get that agreement in writing too). Third, be cognizant and purposeful with the language that you use in your contracts, to avoid a “ruff” result.

"Slack Fill" Litigation under the Missouri Merchandising Practices Act: Save it for Summary Judgment

August 30, 2017 | Martha Charepoo

In two consecutive nearly identical opinions, a Missouri federal court ruling on food merchandisers’ motions to dismiss indicates that food labeling protections in Missouri strongly favor consumers, including in slack fill cases. (The term “slack fill” refers to the alleged use of over-sized packaging that could mislead a consumer into believing the package contains more product than is actually present.) In Bratton v. The Hershey Company and White v. Just Born, Inc., the Western District of Missouri refused to dismiss claims against candy manufacturers for selling under filled boxes of Reese’s Pieces and Whoppers (Hershey) and Hot Tamales and Mike and Ike’s (Just Born), thereby allowing both class actions to proceed to the discovery stage.  Hershey and Just Born are among several food merchandisers that have recently found themselves in court over claims by consumers that they are being cheated by slack filling.

In both cases, the plaintiffs allege deceptive packaging in violation of the Missouri Merchandising Practices Act (MMPA), in that the candies they purchased came in opaque, rigid, cardboard boxes containing slack-filled space, making plaintiffs think that they were a better value than smaller packages. The plaintiffs argue that consumers spend an average of 13 seconds making purchasing decisions, and that such a decision is heavily based on the product’s packaging. The lawsuits allege that between 29 to 41 percent of the candy boxes are empty, but nothing prevents the candy companies from reducing the box size or adding more candy. The plaintiffs also contend that slack-filled space serves no practical purpose and that they would not have purchased the products or would have paid less for them had they known the boxes were under filled. The plaintiffs seek “benefit of the bargain” damages, measured by the difference between the actual value of the products versus their value as represented.

In each case, the candy company asked the court to dismiss the plaintiff’s MMPA claim, arguing that these allegations are not enough to show that they violated the MMPA or that the plaintiff suffered an “ascertainable loss”, as required by the statute.  The candy companies contended that a reasonable consumer would readily realize the candy boxes are not filled to the top because their contents “audibly rattle.” The candy companies also said that it is common knowledge that most packaged goods contain some empty space, which is “necessary for efficient manufacturing and distribution.” The candy companies argued that consumers are not misled because information about the net weight of the contents, the number of pieces of candy per serving, and the number of servings in the box are clearly listed on the box.

These arguments did not persuade the court that the cases were subject to immediate dismissal. The court stated that whether a reasonable consumer would notice rattling in the 13 seconds it typically takes to make a purchase, and then be able to determine the amount of slack fill, are questions of fact that cannot be resolved before there has been fact discovery on these issues. In both opinions the court relied on the Missouri Court of Appeals decision in Murphy v. Stonewall Kitchen, LLC (see prior post) involving muffin mix labeled as “all natural” while disclosing in the ingredient list that it contained sodium acid pyrophosphate. There, the Missouri Court of Appeals said a reasonable consumer would expect the ingredient list to comport with the packaging. The court stated that the same reasoning could apply in both of these cases. Thus, the court decided that it cannot conclude at this stage of the litigation that the packaging is not misleading.

The message of these decisions is that reasonableness under the MMPA is an issue of fact that should be saved for summary judgment or trial. 

Related Services: Food & Beverage

Attorneys: Martha Charepoo

Deficient Affidavit in Medical Malpractice Action May Be Cured at Probable Cause Hearing

August 24, 2017

In Caplinger v. Rahman, the Missouri Court of Appeals for the Southern District of Missouri reversed and remanded the trial court’s dismissal without prejudice of plaintiff’s medical malpractice action based upon its holding that plaintiff’s R.S.Mo. § 538.225 affidavit was insufficient.

The statute requires that, in a medical malpractice action, a plaintiff or plaintiff’s attorney file an affidavit stating that he or she has obtained the written opinion of a “legally qualified health care provider” who opines that the defendant failed to use such care that a reasonably prudent healthcare provider would have used under similar circumstances and that such failure caused or contributed to plaintiff’s damages. A “legally qualified health care provider” is one who is licensed in the same profession as the defendant and is either actively practicing, or is within five years of retirement from actively practicing, “substantially the same specialty as defendant.”

A defendant may challenge the plaintiff’s affidavit by requesting that the court conduct an in camera inspection of the written opinion.  If the court determines that the written opinion does not meet the requirements of R.S.Mo. § 538.225, then the court shall conduct a probable cause hearing to determine whether there exists at least one competent health care professional to testify that plaintiff was injured due to defendant’s alleged medical negligence.  If the court fails to find probable cause, plaintiff’s petition shall be dismissed.

In Caplinger, the defendant applied a biologic bone-growth stimulant during spinal surgery, which plaintiff alleged caused exacerbated bone growth, complications, and which was done in a non-approved manner and without plaintiff’s informed consent.  Plaintiff’s counsel filed a § 538.225 affidavit, stating that he had obtained the written opinion of a Board Certified physician in General Surgery, who actively practices laparoscopic, general, and weight loss surgery. 

The trial court’s in camera inspection left it unpersuaded that the physician practiced the same specialty or had the requisite experience to stand as a “legally qualified health care provider.”  At the subsequent probable cause hearing, plaintiff provided the trial court with the additional testimony of a practicing neurosurgeon, who opined that defendant violated the standard of care and caused plaintiff’s injury.  Plaintiff represented that this neurosurgeon would so testify at trial.  But the trial court dismissed plaintiff’s petition on grounds that the first physician was not a legally qualified health care provider, and ruled that an expert identified and found qualified at a probable cause hearing must be the same person(s) identified in plaintiff’s § 538.225 affidavit.

On review, the Missouri Court of Appeals for the Southern District agreed that the first physician did not practice substantially the same specialty as defendant, but held that the probable cause hearing remedy provided for in Section 7 of R.S.Mo. § 538.225 was meant to allow a plaintiff to cure deficiencies in his affidavit, through subsequent testimony.  The Court reasoned that every provision of a statute must be given some meaning, and if Section 6 (requiring dismissal without prejudice for the failure to file an affidavit containing the information mandated by Sections 1-5) were the end of the analysis, there would be no purpose for Section 7 (providing for a probable cause hearing if the court finds the affidavit to be insufficient). 

Reversing the Greene County Circuit Court’s dismissal, the Court of Appeals held that the first physician’s failure to qualify as a “legally qualified health care provider” was not fatal to plaintiff’s case, where a fully qualified second physician testified at the probable cause hearing that defendant failed to exercise the appropriate level of care.  The Court of Appeals also expressly rejected the trial court’s finding that at least one of the health care professionals who testifies at a probable cause hearing must be the same person previously identified in plaintiff’s R.S.Mo. § 538.225 health care affidavit.  

Eighth Circuit grants Union Pacific $75 million in Tax Relief

August 17, 2017 | Megan Stumph-Turner

Earlier this month, the Eighth Circuit Court of Appeals overturned the lower court’s decision in a case that involved a dispute over whether the Railroad Retirement Tax Act (RRTA) requires a railroad to pay taxes upon issuing stock as compensation to employees.

In an opinion mirroring, and even explicitly referencing, the textualist sentiment of Justice Gorsuch’s opinion in Hensen v. Santander, the Eight Circuit addressed the parties’ respective positions as to what the words “money” and “compensation” mean in the context of the RRTA. While the federal government argued that “money” has a broad and sometimes intangible meaning, Union Pacific maintained that “money” must refer to a “medium of exchange” – i.e., something tangible and of value that may be given in exchange for goods or services.  The Eighth Circuit found Union Pacific’s reading of the text to be more compelling than the government’s.

In its discussion, the Court further distinguished the RRTA from FICA, which includes a more all-encompassing definition for compensation subject to taxation.  The Court explained that, since the RRTA and FICA’s predecessor were drafted during the same time period, any difference or distinction between each law’s definition of compensation must have been intentional.

It is certainly worth noting that the Eighth Circuit referenced and rejected a recent holding by the Seventh Circuit in Wisconsin Cent Holding v. United States that stock may be considered “money remuneration” that is tantamount to cash, reasoning that “one cannot pay for produce at the local grocery store with stock.” 

The Eighth Circuit also reversed the lower court’s decision concerning ratification payments made pursuant to a union’s collective bargaining agreements, because those payments were not made pursuant to “employment” of the individual by Union Pacific. 

With that, the Eighth Circuit completely reversed the summary judgment rulings previously entered in favor of the United States and against Union Pacific, thus entitling Union Pacific to a $75 million refund for taxes paid over the course of 10 years on stock compensation and ratification payments.

The full text of the Eight Circuit’s opinion is available here.

U.S. Supreme Court Says it Again: Arbitration Agreements Should be Honored, and Not Singled Out for Negative Treatment by State Courts

August 10, 2017 | David Eisenberg

For years, the U.S. Supreme Court has made two fundamental principles crystal-clear:

  1. Under the Federal Arbitration Act, arbitration agreements are “valid, irrevocable, and enforceable”, except where grounds exist that could invalidate any type of contract (such as fraud, duress, or lack of consideration).
  2. As explained by the Supreme Court in its 2011 landmark Concepcion decision, though a court may invalidate an arbitration agreement based on “generally applicable contract defenses,” it may not do so based on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”  The FAA thus preempts any state rule that discriminates on its face against arbitration or that covertly accomplishes the same objective by disfavoring contracts that have the defining features of arbitration agreements.  Arbitration agreements must stand on an “equal footing” with other contracts.

Unfortunately, some state courts have failed to get the message.  And the Supreme Court’s recent 7-1 decision in Kindred Nursing Centers L.P. v Clark, 137 S. Ct. 1421 (2017),forcefully drives home the point that contrived state court attempts to explain why a rule is not impermissibly targeted at arbitration agreements will be viewed dimly

In Kindred, the Kentucky Supreme Court adopted a “clear statement” rule, under which a general power of attorney that was otherwise valid to authorize the execution of contracts in general, would not validly authorize execution of an arbitration agreement unless the power of attorney expressly addressed that topic.  Thus, when family members holding a power of attorney agreed to arbitrate claims regarding the care of their loved ones in a Kindred nursing home, the arbitration agreement was deemed invalid, because the family members’ power of attorney did not “clearly state” that they had the power to waive the right to a jury trial.  The state court opined that “the divine God-given right” to a jury trial could not be contractually waived, absent “an explicit statement before an attorney-in fact” that could “relinquish that right on another’s behalf.”

Justice Kagan, writing pointedly for the 7-member majority, would have none of that.  She wrote that beyond the FAA “prohibiting outright the arbitration of a particular type of claim”, the law likewise prohibits “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of an arbitration agreement.”  To the Kentucky court’s suggestion that its rule “could also apply when an agent endeavored to waive other ‘fundamental constitutional rights held by a principal’,” the Court responded:  “But what other rights, really?  No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.”  Justice Kagan further noted the absence in Kentucky law of explicit authorization requirements as to settlement agreements or consents to a bench trial, both of which relinquish the right to a jury trial.

The Court further rebuffed Plaintiffs’ argument that the FAA applied only to contract enforcement, and not to contract formation, which was at issue in this case, emphasizing that:

  1. This argument was squarely contrary to the FAA’s text and case law; and
  2. “Adopting the respondents’ view would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it. As the respondents have acknowledged, their reasoning would allow States to pronounce any attorney-in-fact incapable of signing an arbitration agreement—even if a power of attorney specifically authorized her to do so. . . . (After all, such a rule would speak to only the contract’s formation.) And why stop there? If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements. (That rule too would address only formation.) The FAA would then mean nothing at all—its provisions rendered helpless to prevent even the most blatant discrimination against arbitration.”

 

The Supreme Court’s message in support of the enforceability of arbitration agreements seems unmistakable.  But a number of states’ courts (including Missouri, California, and others), while routinely accepting arbitration agreements governing commercial disputes, still seem to bristle at enforcing arbitration agreements between consumers and manufacturers or retailers; or between employees and their employer.  State courts that look for reasons not to place all arbitration agreements on an “equal footing” with other contracts in general, do so at their peril.

Is It Necessary for an Expert Opinion to Take Into Account Obvious Alternative Explanations for an Injury? Eighth Circuit Weighs In.

August 7, 2017

In Redd v. DePuy Orthopaedics, Inc., the Eighth Circuit Court of Appeals has reminded litigators of the importance of ensuring expert witnesses perform a thorough review of a matter, including apparent alternative causal explanations, prior to issuing their opinions.

In 2008, plaintiff Redd underwent a total hip replacement, receiving an implant supplied by hip manufacturer DePuy Orthopaedics, Inc.  At the time of her surgery, Redd suffered from a number of risk factors that placed her at a higher risk for failure of the implant as she took immunosuppressant drugs and was considered morbidly obese.  Four years after her initial surgery, the implanted hip stem fractured.  During the revision surgery to replace the hip stem, the doctors determined that the stem had not properly grown into the bone at the top of Redd’s hip, which was a known possibility given her risk factors.  Two years after her revision, Redd again experienced a hip stem fracture.  Plaintiff brought a federal diversity action against DePuy Orthopaedics, alleging negligence and strict liability claims based on product defect and failure to warn.  DePuy moved for summary judgment and for exclusion of plaintiff’s expert testimony under Federal Rule of Evidence 702 and the analysis set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).

Plaintiff retained a professor of metallurgy and materials science, Dr. Shankar Sastry, to testify as to the cause of the fracture.  In preparing his expert report, Dr. Sastry failed to review records related to the manufacturing process of the hip implant and disregarded consideration of biomechanical factors that could have resulted in failure of the prosthesis.  Dr. Sastry concluded that it was the physical state of the implant’s metal that caused the fracture.  He further concluded that any individual environmental or biomechanical factors would have been a secondary cause of the fracture.

In granting DePuy’s motion to exclude Dr. Sastry’s testimony, the US District Court for the Eastern District of Missouri concluded that Dr. Sastry lacked a scientific or factual basis to conclude that there was a manufacturing defect or to opine on causation, and that he failed to consider the necessary issues of the forces that were exerted on the implant as it was placed in Redd’s hip.  Following exclusion of Dr. Sastry’s testimony, Redd lacked expert testimony on defect or causation and DePuy’s motion for summary judgment was granted.

On appeal, the Eighth Circuit reviewed the district court’s exclusion of Dr. Sastry’s testimony, the propriety of which is governed by Rule 702 and the Daubert standard.  Plaintiff argued that the district court erred by requiring Dr. Sastry to exclude other potential causes of the fracture.  The Eighth Circuit concluded that, while an expert is not required to rule out all possible causes of an injury, he or she nonetheless should adequately account for obvious alternative explanations.  Dr. Sastry did not consider the obvious alternative explanation for the fracture—failure of the hip stem to grow into the patient’s upper hip bone and subsequent failure to properly distribute her weight—which was a known possibility at the time of Redd’s surgery given her risk factors.  Because Dr. Sastry failed to consider the individual biomechanical forces placed on the prosthesis in issuing his report, the district court’s decision to exclude the causation testimony was affirmed.

The opinion may be found here.

For more on Missouri’s recent adoption of the expert witness standard set forth in Federal Rules of Evidence 702 and Daubert, see The Daubert Standard – Coming Soon to a Missouri Court Near You.

New CFPB Rule Prohibits Consumer Waiver of Class Action Litigation

July 16, 2017 | Megan Stumph-Turner

In an effort to afford consumers with greater accessibility to the courtroom, the Consumer Financial Protection Bureau (the “CFPB”) has enacted a new rule that, while it does not ban arbitration clauses outright, does substantially limit a financial institution’s right to mandatory arbitration provisions. Specifically, the new rule prohibits financial institutions and consumers from contracting to waive the consumer’s right to join in class action lawsuits with other consumers against that entity.

The arbitration rule was preceded by a CFPB study, spanning several years, of the prevalence and impact of arbitration clauses in consumer financial contracts. One of the chief concerns of the CFPB is the plain ignorance of consumers with respect to arbitration clauses contained within consumer contracts.  According to the study, more than half of credit card and checking account agreements contain mandatory arbitration provisions. Yet, 3 out of 4 of consumers who entered into agreements with such arbitration clauses were not aware that they had done so. 

CFPB Director Richard Cordray, in his public statement regarding the new rule, further justified the rule on the basis that class action lawsuits are more effective in curbing unsavory lending and servicing practices than arbitration, as the penalties and damages imposed in class action litigation vastly exceed those assessed in arbitration. 

In addition to restricting arbitration provisions, the new rule requires financial institutions to report the results of arbitration to the Bureau so that the results may be assessed for fairness and effectiveness.  It is important to note that the rule only applies to new contracts between consumers and financial institutions, and not those already in effect.

Predictably, commentators and critics have already observed that the new arbitration rule truly stands to benefit the plaintiff’s class action bar, rather than the consumers being represented in class action litigation.  Some also view the arbitration rule as an unjust infringement of the freedom to contract with no rational basis under the law.  Legal challenges to the new arbitration rule in the coming months are unquestionably imminent.  The new arbitration rule may be found here.  

"Jurisdictional Discovery" Is Not a Magical Incantation to Ward Off Timely Dismissal of a Case Filed in the Wrong Forum

July 14, 2017 | Angela Higgins

In the wake of Bristol-Myers-Squibb and other game-changing personal jurisdiction decisions from the U.S. Supreme Court and the Missouri courts this year, plaintiffs are chanting “jurisdictional discovery” as if it is a magical incantation to ward off the timely and necessary dismissal of claims improperly filed in the wrong forum. Few if any could even identify what information they believe they could obtain through such discovery that would save their doomed cases, and the courts should curtail the needless, expensive, and harassing discovery proposed by forum shoppers who should never have gained access to the forum in the first place.  

Limited jurisdictional discovery” seems so enticing to judges, as if it is fair or proper to allow forum-shopping plaintiffs to continue to subject non-resident defendants to the burden and expense of discovery in the wrong forum.  The “primary concern” in assessing personal jurisdiction, however, is “the burden on the defendant.”  Bristol-Myers Squibb Co. v. Superior Court, 137 S. Ct. 1773, 198 L.Ed.2d 395, 403 (2017).  Subjecting a non-resident defendant to futile discovery in a case filed in the wrong forum simply prolongs the burden on the defendant in a case in which the forum state lacks authority to act.  Definitive rulings in BMS, BNSF v. Tyrrell, and Dolan should not permit months of pointless discovery in cases that must, under the law, be dismissed for lack of personal jurisdiction.

I.    PLEADING JURISDICTION IS PLAINTIFF’S BURDEN, AND JURISDICTIONAL DISCOVERY IS UNNECESSARY IF ADEQUATE FACTS (NOT CONCLUSIONS) SUPPORTING JURISDICTION HAVE BEEN PLED

As an initial matter, it is plaintiff’s burden to plead personal jurisdiction.  Conway v. Royalite Plastics, Ltd., 12 S.W.3d 314, 318 (Mo. banc 2000);  Dever v. Hentzen Coatings, Inc., 380 F.3d 1070, 1072 (8th Cir. 2004).  In many instances, jurisdictional allegations in these cases are entirely lacking in any facts, whether pled with knowledge or upon information and belief, that would establish personal jurisdiction under the applicable legal standards, and these complaints and petitions are therefore subject to dismissal on the pleadings, without conducting any discovery.

A plaintiff who has failed to meet her pleading burden should certainly not be granted permission to conduct discovery, as she has not properly invoked the jurisdiction of the court.  “In order to be entitled to discovery, plaintiff is required to have alleged facts in the petition which, if true, establish jurisdiction.”  Mello v. Giliberto, 73 S.W.3d 669, 674 (Mo. App. E.D. 2002).  “In the absence of such alleged facts, plaintiff is not entitled to discovery.”  Id.  Legal conclusions are not sufficient, actual facts are required.  Id. 

Furthermore, under Fed. R. Civ. P. 11 and the Missouri equivalent, Mo. R. Civ. P. 55.03, a plaintiff must have a factual basis, formed after reasonable inquiry, for all allegations in the complaint or petition, including her jurisdictional allegations.  The allegations are required to have “evidentiary support,” or to be specifically identified as being made upon information and belief.  See Fed. R. Civ. P. 11(b)(3); Mo. R. Civ. P. 55.03(c)(3).  Moreover, the attorney is certifying that the claims “and other legal contentions” (including contentions as to the existence of personal jurisdiction) are warranted by existing law or a non-frivolous argument for the modification of existing law.  Fed. R. Civ. P. 11(b)(2); Mo. R. Civ. P. 55.03(c)(2).  

From the outset, then, a plaintiff who suggests the need to conduct “jurisdictional discovery” is generally admitting either that she failed to plead sufficient jurisdictional facts (in which case she is not entitled to discovery) or that she lacked a basis for making such allegations in the complaint or petition, in which case she has violated Rule 11.  Plaintiffs should not be caught flat-footed and at a loss to defend their choice of forum, they should have had sufficient grounds to withstand a motion to dismiss for lack of jurisdiction before the petition or complaint was filed.  Other jurisdictions have recognized this:

Complaints should not be filed in matters where plaintiffs intend to find out in discovery whether or not, and against whom, they have a cause of action. Absent exigent circumstances, plaintiffs’ counsel should not file a complaint until sufficient information is obtained, and plaintiffs’ counsel believes in good faith that each plaintiff has an appropriate cause of action to assert against a defendant in the jurisdiction where the complaint is to be filed. To do otherwise is an abuse of the system, and is sanctionable.

Harold’s Auto Parts, Inc. v. Mangialardi, 889 So.2d 493, 494 (Miss. 2004) (emphasis original).

A plaintiff does not need jurisdictional discovery if she has alleged sufficient facts, even upon information and belief, that, if true, would be sufficient to establish the jurisdiction of the trial court to proceed.  See State ex rel. Deere & Co. v. Pinnell, 454 S.W.2d 889, 893 (Mo. 1970).  In virtually every case, to establish personal jurisdiction a plaintiff must allege the occurrence of specific conduct by the defendant within the forum state that gives rise to the plaintiff’s cause of action.  As discussed more fully below, it would be rare for the plaintiff to be unable to allege such conduct, even upon information and belief, if there were a good-faith basis under the established law to support personal jurisdiction.  In actuality, plaintiffs seeking “jurisdictional discovery” are generally seeking to buy time to concoct a plausible theory for jurisdiction, or to leverage settlement.

This highlights the murky legal justification for “jurisdictional discovery” – if there are sufficient factual allegations that, if true, would establish jurisdiction, then a motion to dismiss must be denied, as there is no need for plaintiff to adduce evidence to meet her pleading burden.  “[T]his court is limited to deciding whether the pleadings are sufficient to survive the motion to dismiss.”  Hollinger v. Sifers, 122 S.W.3d 112, 115 (Mo. App. W.D. 2003).  If, on the other hand, plaintiff has failed to plead sufficient factual allegations to establish personal jurisdiction, she has failed to meet her pleading burden and is not entitled to discovery.  See Mello, 73 S.W.3d at 674.  Discovery is not a panacea to cure pleading defects, particularly not where a party is expressly permitted to plead upon information and belief.

II.    THE BASIS, IF ANY, FOR CONTACT-BASED SPECIFIC PERSONAL JURISDICTION IS ALMOST ALWAYS WITHIN THE KNOWLEDGE OF PLAINTIFF

In nearly all circumstances, personal jurisdiction must be founded upon some conduct by the defendant within the forum state that gave rise to the plaintiff’s cause of action.  The exercise of personal jurisdiction over non-residents is called “long-arm” jurisdiction.  The Missouri courts’ authority to exercise long-arm jurisdiction is constrained by the Missouri statutes and the U.S. Constitution.  Missouri’s long-arm statute expressly affords contact-based specific jurisdiction over the person of non-resident defendants.  See Shouse v. RFB Const. Co., Inc., 10 S.W.3d 189, 193 (Mo. App. W.D. 1999).  Specific jurisdiction is called “contact-based” because such jurisdiction only exists for a cause of action “arising from” certain specified conduct by the defendant within the forum state.  See Mo. Rev. Stat. § 506.500.1.  “In order for a court to exercise specific jurisdiction over a claim, there must be an ‘affiliation between the forum and the underlying controversy, principally, [an] activity or an occurrence that takes place in the forum State.’”  Bristol-Myers Squibb, 198 L.Ed.2d at 404.  “For specific jurisdiction, a defendant’s general connections with the forum are not enough. As we have said, ‘[a] corporation’s ‘continuous activity of some sorts within a state . . . is not enough to support the demand that the corporation be amenable to suits unrelated to that activity.’”  Id.

Missouri’s long-arm jurisdiction statute provides:

Any person or firm, whether or not a citizen or resident of this state, or any corporation, who in person or through an agent does any of the acts enumerated in this section, thereby submits such person, firm, or corporation, and, if an individual, his personal representative, to the jurisdiction of the courts of this state as to any cause of action arising from the doing of any of such acts:

(1) The transaction of any business within this state; 

(2) The making of any contract within this state;

(3) The commission of a tortious act within this state;

. . . .

Mo. Rev. Stat. § 506.500.1 (emphasis added).  The three types of conduct listed here are the most common bases for asserting specific jurisdiction against a non-resident defendant. 

When plaintiffs press for “jurisdictional discovery,” they should be required to identify specifically what information they seek that would tend to establish one of these bases for the exercise of specific personal jurisdiction.  Moreover, plaintiffs should be required to plausibly establish that this information would be uniquely within the knowledge of the defendant – not public information, and not already known to the plaintiff.  Otherwise, there is no need for the non-resident defendant to be subjected to the burden and expense of formal discovery.

The long-arm statute’s grant of personal jurisdiction based upon the “transaction of any business within the state” is intended to confer jurisdiction over nonresidents “who enter into various kinds of transactions with residents of Missouri.”  Capitol Indemn. Corp. v. Citizens National Bank of Fort Scott, N.A., 8 S.W.3d 893, 904 (Mo. App. W.D. 2000) (emphasis added).  That transaction must be “the transaction sued upon.”  Id. (emphasis added).  It is difficult to imagine how plaintiff would be unable, after reasonable inquiry prior to filing her complaint or petition, to identify the Missouri resident with whom the non-resident defendant was doing business in a transaction out of which the plaintiff’s own claim arises.  If plaintiff has a theory of how the defendant engaged in wrongful conduct, she must have enough information to plausibly allege facts identifying the Missouri business partner with whom the defendant was engaging in such conduct.

Similarly, for the Court to exercise jurisdiction of the non-residents because of their contracting in the State of Missouri, plaintiff’s claims against the non-residents must arise out of a contract that was entered into in the State of MissouriSee Mo. Rev. Stat. § 506.500.1(2).  The plaintiff’s claim must arise out of that specific contract.  How can plaintiff not know enough to identity the contract, and the Missouri contracting party, if she alleges she was damaged as a direct result of the contract?

In order to rely upon the “tortious act” provision of the long-arm statute, a plaintiff is required to show that the non-resident defendant committed a tort in Missouri and that this specific tortious conduct caused the plaintiff’s injuries.  Hollinger v. Sifers, 122 S.W.3d 112, 116 (Mo. App. W.D. 2003).  To invoke personal jurisdiction under the “tortious conduct” prong of the Missouri long-arm statute, then, plaintiff is alleging that she was directly injured as a result of tortious conduct by the defendant within the forum state.  Plaintiff knows where she was prescribed the medication.  She knows where her treating physician is located.  She knows where she purchased the product at issue.  If the defendant has a manufacturing plant within the state, plaintiff can meet her pleading burden by alleging, even upon information and belief, that the product was defectively manufactured at that plant.  Given the standards of Rule 11 and Missouri Rule 55.03, how can plaintiff be unable to allege, even upon information and belief, what allegedly wrongful conduct by the defendant occurred in Missouri?  How could she, or her counsel, have conducted a minimally sufficient inquiry under Rule 11 or Missouri Rule 55.03 into the claim before filing it and not have some basis to allege facts identifying tortious conduct by the defendant within the forum state?

It is difficult to conceive of a circumstance in which a plaintiff would legitimately need “jurisdictional discovery” to establish contact-based specific personal jurisdiction, because her cause of action arises out of the defendant’s conduct within the forum state and should be known to plaintiff.  Plaintiffs attempt to cloud these issues in an aura of mystery, when in fact there is rarely anything mysterious to the person who alleges that she was harmed by the conduct about where the conduct occurred.

In fact, in actual practice “jurisdictional discovery” is nearly always a fishing expedition directed at discovering corporate organization, sales, employees, office locations, and other matters that relate to general jurisdiction.  As general jurisdiction almost never applies, discovery on these issues is rarely appropriate, and, therefore, “jurisdictional discovery” is rarely appropriate.  At a minimum, under the Dolan and BMS tests, a plaintiff seeking such discovery should be required to identify whether she seeks to establish specific or general personal jurisdiction, and what colorable basis she has to believe that discovery would reveal facts that would establish one of these ground for personal jurisdiction.

III.    GENERAL JURISDICTION IS EXCEPTIONALLY LIMITED AND RARELY APPLICABLE

As to individuals, “general jurisdiction” applies only to the state in which the individual is domiciled.  Daimler AG v. Bauman, 134 S. Ct. 746, 760 (2014).  Accordingly, allegations of general jurisdiction over non-resident individual defendants (often employees or other representatives of corporate defendants) are utterly frivolous under settled law.

“A court normally can exercise general jurisdiction over a corporation only when the corporation’s place of incorporation or its principal place of business is in the forum state.”  State ex rel. Norfolk S. Ry. v. Dolan, 512 S.W.3d 41, 46 (Mo. banc 2017); Daimler, 134 S. Ct. at 760 & 761 n.19; see BNSF Ry. Co. v. Tyrrell, 137 S. Ct. 1549, 1554 (May 30, 2017).  The U.S. Supreme Court just this term again held that the mere fact that a defendant conducts in-state business is not sufficient to permit the exercise of general jurisdiction over claims that are unrelated to the forum state.  See  Tyrrell, 137 S. Ct. 1549.  Of course, Bristol-Myers-Squibb (

Only an “exceptional case” will escape this rule.  Daimler, 134 S. Ct. at 760 & 761 n.19.  This is where the corporate is “essentially at home” in a state where it is not incorporated and does not have a principal place of business.  See id.  To be a “home state,” the forum state must be a “nerve-center” of activities of the company.  Dolan, 512 S.W.3d. at 48.  Initially, it is difficult to imagine how a forum state could be a “nerve center” of a business and not be the business’s principal place of business, unless perhaps the business is a foreign-based company with a substantial U.S. presence in a particular state.  At a minimum, “nerve center” suggests that something close to the majority of the business’s activities within the U.S. must occur within the forum state.

An allegation of “substantial, continuous and systematic contacts” with the forum state is facially insufficient to plead general jurisdiction.

The Supreme Court observed that finding a corporation at home wherever it does business would destroy the distinction between general and specific jurisdiction, for “[a] corporation that operates in many places can scarcely be deemed at home in all of them. Otherwise, ‘at home’ would be synonymous with ‘doing business’ tests framed before specific jurisdiction evolved in the United States.” Id. For this reason, when “a corporation is neither incorporated nor maintains its principal place of business in a state, mere contacts, no matter how ‘systematic and continuous,’ are extraordinarily unlikely to add up to an ‘exceptional case.’” Brown, 814 F.3d. at 629.

Dolan, 512 S.W.3d at 48 (emphasis added); see also Tyrrell, Slip Op. at 11. 

Many of the reported cases show that the courts often accept, uncritically, incantations of the magic of “jurisdictional discovery.”  “Discovery is often necessary because jurisdictional requirements rest on facts that can be disputed, for instance, the domicile of the parties.”  Pudlowski v. St. Louis Rams, LLC, 829 F.3d 963, 964-65 (8th Cir. 2016).  As to corporate defendants, it seems unlikely that there would be any legitimate factual dispute about domicile, however – the company’s state of incorporation is a matter of public record, and corporate registration records generally also reflect the company’s principal place of business, and a corporate defendant sophisticated enough to have multiple options for domicile will usually have a web presence identifying its headquarters.  Courts that are authorizing jurisdictional discovery should take seriously their obligations to enforce Rule 11 or its local equivalent, and to the extent that any discovery is permitted, limit it to facts that are plausibly in dispute and that can only be proven through discovery of the defendant.

For a defendant that has raised an objection to the court’s personal jurisdiction, there are considerable expenses and burdens associated with discovery in a forum in which the action is, in all likelihood, improperly filed.  A plaintiff seeking such discovery should be required to articulate what jurisdictional facts are “in dispute” before discovery can be permitted.  Texas, at least nominally, applies this standard:

[A]ppellant’s counsel told the trial court, “I can’t plead specific facts until I have the facts. I can only get the facts through discovery.” However, appellant was required to provide the court with a colorable basis or reason to believe that discovery would reveal sufficient minimum contacts.  Barron v. Vanier, 190 S.W.3d 841, 849-50 (Tex. App.—Fort Worth 2006, no pet.); Haferkamp v. Grunstein, No. 11-10-00194-CV, 2012 Tex. App. LEXIS 3706, at *25 (11th App. May 10, 2012).

For example, if the defendant has stated, by reference to public filings or by affidavit, that it maintains no offices within the state, then surely plaintiff must be required to make a non-frivolous showing that discovery would disprove this fact.  It cannot be enough that defendant alleges or affirms that “x” is a fact, and plaintiff is permitted to engage in discovery merely to “ask about x” – the relevant, quite permissive standard set out by the Eighth Circuit still requires that the fact be subject to dispute, and, moreover, it must be subject to dispute under the Rule 11 standard.  Courts that do police these standards recognize that a plaintiff seeking “jurisdictional discovery” should be required to identify what facts she seeks to establish in discovery, and some colorable basis to believe that such facts do exist.

IV.    DEPOSING AFFIANTS IS RARELY WARRANTED

In some cases, particularly with respect to allegations of general jurisdiction, a defendant may supply an affidavit from a corporate representative regarding quantification of the defendant’s business within or other contacts with the forum state.  This, predictably, triggers a plaintiff’s request to depose the affiant.  These depositions are generally improper under Rule 11 and Missouri Rule 55.03, are usually futile, and tend to harass the defendant rather than provide plaintiff with any useful information to save her case.

Initially, a motion to dismiss for lack of personal jurisdiction may be decided upon affidavits supplied by the defendant.  In ruling on a motion to dismiss for lack of personal jurisdiction, a trial court may consider affidavits.  Chromalloy American v. Elyria Found, 955 S.W.2d 1, 3 n.3 (Mo. banc 1997); Mello, 73 S.W.3d at 674.  “[T]he motion is not addressed to the merits of the underlying action, but only to the limited question of personal jurisdiction.”  Mello, 73 S.W.3d at 674.  An affidavit is not a self-serving attempt by a defendant to gain an unfair advantage, it is a valid procedural tool to support a motion to dismiss for lack of personal jurisdiction, and courts should not reflexively permit depositions of affiants without good cause to disbelieve the sworn testimony contained in the affidavit.  This is particularly true where jurisdiction is in question, because the court is obligated to ensure that the defendant’s due process rights to be subject to only lawful authority are safeguarded and that any encroachment upon such rights is as minimally invasive as necessary to resolve a legitimate factual dispute as to jurisdiction.

Defendants supplying affidavits in support of a motion to dismiss for lack of general personal jurisdiction are often in an untenable, Catch-22 situation.  Usually, plaintiff has failed to meet her pleading burden under the Daimler, BMS, and/or Dolan standards.  She should not be permitted to even conduct jurisdictional discovery.  Plaintiff is required to plead facts establishing that the defendant is incorporated in the forum state, has its principal place of business there, or is “essentially at home” in the forum.  It is plaintiff’s burden to plead jurisdiction, not defendant’s burden to offer evidence to disprove jurisdiction.  However, the case law entertains this “quantum of business in the forum state” mathematical analysis that invites defendants to submit affidavits to disprove general jurisdiction.  And the supplying of such affidavits should be legally sufficient – a motion to dismiss may be decided upon affidavits. 

But plaintiffs will seemingly always assert a supposed need to depose the affiant.  Such depositions are improper and usually intended to harass and inconvenience the defendant.  Plaintiffs, who have failed to meet their burden to plead jurisdiction, are suggesting that non-resident corporate defendants would lie in an affidavit regarding jurisdictional facts, and courts are indulging plaintiffs in this absurd and offensive innuendo.  A plaintiff confronted with an affidavit from a corporation with an international presence, stating that its sales in Missouri comprise a single-digit share of its overall revenues, should not be permitted to subject the non-resident defendant to “jurisdictional discovery” without a colorable basis to dispute the affidavit as being a lie.

V.    A MOTION OR MOTION RESPONSE SEEKING JURISDICTIONAL DISCOVERY IS SUBJECT TO RULE 11

Rule 11 provides that, by signing any pleading or motion or other paper presented to the court, an attorney “certifies” that “it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation.”  Fed. R. Civ. P. 11(b)(1).  The Missouri rule is functionally identical, though by its terms more stringent even than the federal rule in encompassing “any argument” within the matters presented to the court that are certified not to be for any improper purpose.  Mo. R. Civ. P. 55.03(c)(1).

It is impermissible for a plaintiff to file a motion or motion response seeking “jurisdictional discovery” as a means of treading water and keeping the case alive, where plaintiff’s position is not supported by evidentiary facts or justification under existing law.  Where the highest courts have just, within the last few months, spoken on jurisdictional issues, it is difficult to imagine how a party could make a good-faith, non-frivolous argument to change the law on jurisdiction.

Timing of Changes to 537.065 Agreements and the Bad Faith Setup in Missouri

July 13, 2017 | Angela Higgins

On July 5, 2017, Missouri Governor Greitens signed the Senate Substitute for the Senate Committee Substitute for the House Committee Substitute for House Bills 339 and 714, which brings significant changes to Missouri third-party bad faith litigation. The legislation substantially amends Mo. Rev. Stat. § 537.065, and enacts a new statute, Mo. Rev. Stat. § 537.058.  The new § 537.058 and amended § 537.065 become effective on August 28, 2017.

I. WHAT CHANGES WITH THE NEW LEGISLATION

1. Time-limited demands

Under existing Missouri law, there are no meaningful requirements for a time-limited settlement demand from the claimant sufficient to form the basis of a claim for bad faith refusal to settle.  The new legislation enacts evidentiary rules that exclude evidence of a time-limited demand in a bad faith case, unless the demand meets the requirements of the statute.  A demand that does not meet these requirements “shall not be considered as a reasonable opportunity to settle for the insurer” and “shall not be admissible” in any lawsuit seeking extracontractual damages.

  • New § 537.058 requires that any time-limited demand to settle must be transmitted to the tortfeasor’s liability insurer, must be sent in writing by certified mail, and must reference the statute.
  • A time-limited demand must be left open for “not less than 90 days” from receipt by the insurer.  
  • The demand must specify a dollar amount or “applicable policy limits,” and must specify who will be released and what claims will be released if accepted.  
  • There must be an unconditional release of the insured for all liability in exchange for the payment demanded.  
  • The demand must reference a claim number, if known, the date and location of the loss, and a description of the injuries sustained by the claimant.  
  • The demand must be accompanied by a list of the names and addresses of all healthcare providers who treated the claimant from the date of the incident, and a HIPAA-compliant medical authorization.
  • If the claimant asserts a claim for wage loss, the demand must be accompanied by a list of all employers from the date of the incident until the date of the demand, accompanied by a written authorization to obtain employment records necessary to verify wages, earnings, compensation, or profits “however denominated.”
  • Claimant cannot demand that payment of the settlement funds be earlier than 10 days following the insurer’s receipt of a fully-executed unconditional release of the insured by the claimant.

2. Insureds are not permitted to enter into § 537.065 agreements unless the insurer has the opportunity to defend without reservation but refuses.

Most significantly, the amendments to § 537.065 now bar an insured from entering into an agreement with the claimant unless the tortfeasor’s insurer has the opportunity to defend without a reservation of rights, but refuses to do so.  Our read of the statute is that, if the insured wishes to refuse a defense offered under reservation, the insured must give the insurer an opportunity to withdraw its reservation and defend without reservation.

 3. Notice to insurers before a judgment may be taken against the insured if a § 537.065 agreement has been made with the claimant.

The amendments to § 537.065 now require that, where the insured tortfeasor has entered into a § 537.065 agreement with the injured claimant, no judgment may be entered against the insured before the tortfeasor’s liability insurer has been provided with written notice of the execution of the agreement, and at least 30 days have lapsed after the insurer’s receipt of such notice.

 4. Insurer’s right to intervene in personal injury/property damage lawsuit.

Insurers shall have 30 days after receipt of a notice that the insured has entered into a § 537.065 agreement to intervene in the underlying lawsuit.  The insurer is entitled to intervene as a matter of right, not permissively at the discretion of the court.  

Under existing law prior to this legislation, some Missouri courts have held that an insurer that has filed a declaratory judgment action may intervene in a tort action for the limited purpose of seeking a stay pending the determination of coverage, though such intervention has been permissive, rather than as a matter of right, and there has been a split of authority in the Missouri Courts of Appeals as to the propriety of intervention.  See, e.g., Whitehead v. Lakeside Hosp. Ass’n, 844 S.W.2d 475 (Mo. App. W.D. 1992) (permitting intervention); State ex rel. Mid-Century Ins. Co., Inc. v. McKelvey, 666 S.W.2d 457 (Mo. App. W.D. 1984) (same).  The new legislation resolves these issues in favor of intervention as a matter of right.

 5. The limitations of the revised § 537.065 apply regardless of what the agreement is called.

Regardless of how the parties denominate their agreement, if it has the effect of a covenant not to execute against the insured, it will be treated as an agreement under the amended statute.

II. MISSOURI LAW ON RETROACTIVE APPLICATION OF STATUTES.

The Missouri Constitution bars the legislature from passing any retrospective law:  “That no ex post facto law, nor law impairing the obligation of contracts, or retrospective in its operation, or making any irrevocable grant of special privileges or immunities, can be enacted.”  Article I, Sec. 13 Constitution of Missouri.  Technically, ex post facto is a term applicable only to criminal laws, where the term “retrospective” applies to civil rights and remedies.  State v. Thomaston, 726 S.W.2d 448, 459 (Mo. App. W.D. 1987).

“‘Retroactive’ or ‘retrospective’ laws are generally defined, from a legal viewpoint, as those which take away or impair vested rights acquired under existing laws, or create a new obligation, impose a new duty, or attach a new disability in respect to transactions or considerations already past.”  State ex rel. Clay Equip. Corp. v. Jensen, 363 S.W.2d 666, 668 (Mo. 1963).  “We have many times held that a statute is not retrospective in its operation within the constitutional prohibition, unless it impairs a vested right. . . .  Nor is an act retrospective if it but substitutes a remedy or provides a new remedy.”  Id. at 669.  

Rules of evidence are not deemed to be “vested,” substantive rights in Missouri.  “A right to have one’s controversies determined by existing rules of evidence is not a vested right.”  O’Bryan v. Allen, 108 Mo. 227, 232, 18 S.W. 892, 893 (1891).  In O’Bryan, the Missouri Supreme Court held that rules of evidence “pertain to the remedies which the state provides for its citizens” and “they neither enter into and constitute a part of any contract, nor can be regarded as being of the essence of any right which a party may seek to enforce.”  Id.  

Like other rules affecting the remedy, they must, therefore, at all times be subject to modification and control by the legislature; and the changes which are enacted may lawfully be made applicable to existing causes of action even in those states in which retrospective laws are forbidden; for the law as changed would only prescribe rules for presenting the evidence in legal controversies in the future, and it could not, therefore, be called retrospective even though some of the controversies upon which it may act were in progress before.

O’Bryan, 108 Mo. at 232, 18 S.W. at 893.  

“No person can claim a vested right in any particular mode of procedure for the enforcement or defense of his rights.  Where a new statute deals with procedure only, prima facie it applies to all actions [including] those which have accrued or are pending and future actions.”  Jensen, 363 S.W.2d at 669.  The constitutional bar on ex post facto or retrospective laws “does not apply . . . to a statute dealing only with procedure or the remedy.”  Id.  “A substantive law relates to rights and duties giving rise to the cause of action, while procedural statutes supply the machinery used to effect the suit.”  Patrick v. Clark Oil & Ref. Co., 965 S.W.2d 414, 415-16 (Mo. App. S.D. 1998).  “Statutes affecting the competency or discoverability of evidence are procedural.”  State ex rel. Faith Hosp. v. Enright, 706 S.W.2d 852, 854 (Mo. 1986)

The legislature has a clear and constitutional right to enact evidentiary statutes.  St. Louis v. Cook, 359 Mo. 270, 274, 221 S.W.2d 468, 469 (1949).  The Missouri Supreme Court in Jensen specifically held that evidentiary and procedural statutes apply to all actions within their scope, “whether commenced before or after the enactment, that is, unless a contrary intention is expressed by the legislature, and a statute affecting only the remedy may apply to a cause of action existing at the time the statute was enacted.”  363 S.W.2d at 669.  Thus, an evidentiary statute applies to actions already on file at the time the statute becomes effective.  “Laws which change the rules of evidence relate to the remedy only, may be applied to existing causes of action, and are not precluded from such application by the constitutional provision.”  O’Bryan v. Allen, 108 Mo. 227, 231-32, 18 S.W. 892, 893 (1891).  Evidentiary and procedural statutes apply to all pending cases which have not yet been reduced to a final judgment.  Claspill v. Missouri P.R. Co., 793 S.W.2d 139, 140 (Mo. banc 1990).  

In Enright, the Supreme Court entered an order of prohibition precluding discovery of hospital peer review committee materials based upon a statute enacted after the cause of action accrued.  706 S.W.2d at 856.  In Claspill, the Supreme Court precluded enforced a statutory provision that excluded from evidence information that was compiled for purposes of developing a highway safety construction project.  793 S.W.2d at 140.

Accordingly, it should be settled law in Missouri that evidentiary and procedural statutes can be applied to any action, including any pending action, that is tried after the effective date of the statute.

III. EFFECTIVE DATES OF VARIOUS ASPECTS OF THE LEGISLATION.

 A. Procedural aspect of the legislation that will apply to already-accrued claims and lawsuits in progress as of Aug. 28, 2017

  • The insurer’s right to intervene in a personal injury/property damage lawsuit if it knows or has reason to know that a § 537.065 agreement has been entered.  

This is a procedural aspect of the statute, and should be applicable to cases in progress and not yet reduced to a judgment as of August 28.

  • 30 days’ notice to insurers before a judgment may be taken against the insured.

This change to § 537.065 is a procedural change, which requires that notice be given to the insurer if the insured has entered into a § 537.065 agreement before judgment is entered against the insured.  This should apply to bad faith claims that have accrued in the sense that the claimant has made a policy limits demand to settle that was not accepted, but not where a judgment has already been taken against the insured.  Insurers should be prepared to argue that a judgment entered on or after August 28 is not valid if the insurer was not provided with 30 days’ written notice prior to its entry, even if the § 537.065 agreement was executed previously.

B. Changes that will apply only on and after Aug. 28, 2017

  • The insured’s ability to enter into § 537.065 agreements without notice to the insurer is probably not affected prior to August 28.  

Restrictions on the insured’s right of contracting may not be retroactively applied, under the Missouri Constitution’s ban on retrospective application of laws affecting substantive rights.  Contracting rights are among those specifically identified as being substantive.

  • Policy limits demands.

Policy limits demands made on or after August 28 must conform to the requirements of § 537.058, unless made within 90 days prior to a jury trial on the claim.

C. Evidentiary aspects of the legislation should be retroactively applied to accrued and pending claims.

New § 537.058.7 provides that any time-limited demand that does not comply with the requirements of the statute “shall not be admissible” in any lawsuit seeking extracontractual damages.  This is an evidentiary rule.  Under the authority described above, it should apply to the trial of bad faith claims after August 28.  Evidentiary statutes are typically applied to accrued and pending claims.

As we have previously discussed, the requirements of § 537.058 for a policy limits demand that would support a bad faith claim (that a demand be left open for 90 days and be accompanied by authorizations) are already required by the statute that authorizes recovery of prejudgment interest, Mo. Rev. Stat. § 408.040.  In 2005, as part of comprehensive tort reform efforts, the legislature amended § 408.040 to provide that, before a settlement demand could trigger the accrual of prejudgment interest, it must be transmitted by certified mail, be accompanied by an affidavit of the claimant and, where applicable, medical or wage loss records and authorizations, and be left open for 90 days.  

At least one court seemed to recognize the legislature’s intent that a demand in the format specified by § 408.040 was a necessary predicate for a bad faith claim.  See Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 664 (Mo. App. W.D. 2008).  In Johnson, the court held that claimants’ “demand letter satisfied the requisites of Section 408.040, RSMo 2000, which authorizes individuals with a claim like the Johnsons' to make a demand to an insurance company for either the policy limits or for a specific amount of money.”  

Moreover, although claimants attempting the bad faith setup are in the habit of treating a policy limits demand as a one-time-only offer, there is usually no good faith basis for the drop-dead deadline.  The intent of the original § 537.065, and certainly the intent of the statute as amended by the present legislation, is to allow the claimant to recover the insurance policy proceeds, not to “blow up” the limits of the policy and recover more than the liability limits.  Accordingly, even where the claimant has previously made a demand that was not accepted prior to August 28, there appears to be no reason why the claimant could not be required to make a second demand in accordance with the new requirements, as the claimant has never had any substantive right under Missouri law to recover more than the insurance policy proceeds.

Related Services: Insurance

Attorneys: Angela Higgins

Missouri 2017 Tort Reform Brings Significant Changes to Civil Litigation

July 6, 2017 | Angela Higgins

Although the 2017 session of the Missouri legislature was not geared to comprehensive tort reform, several key bills were passed that will bring significant changes to civil litigation in Missouri. These include changes to the collateral source rule and evidence of discounted medical bills, the adoption of the Daubert standard, and restraints on insurance bad faith claims.
 

I.  COLLATERAL SOURCE RULE

On July 5, 2017, Governor Greitens signed Missouri Senate Bill 31, bringing needed changes to the collateral source rule.  The collateral source rule generally prohibits a defendant from introducing evidence that part of a plaintiff’s loss was paid for by a party independent of the defendant, such as the plaintiff’s insurer or a public benefits program.  Deck v. Teasley, 322 S.W.3d 536, 538 (Mo. banc 2010).  However, this rule has been twisted to allow plaintiffs to offer evidence of full-price or “sticker price” medical bills, without regard to contractual adjustments for health insurance or limits on reimbursement established by public payors, on the premise that defendants should not benefit from discounting of the full-price medical bills.  The counter-argument, of course, is that plaintiffs are then permitted to recover a windfall that far exceeds both their actual liability for medical care and the costs of health insurance premiums they have paid, and are permitted to present evidence of damages that is merely a legal fiction.

By way of background, older Missouri cases held that, if the evidence establishes that the plaintiff is not liable for payment, medical expenses have not been “incurred,” and plaintiff cannot recover for their value.  See Morris v. Grand Ave. Ry. Co., 46 S.W.170 (Mo. 1898).  In the workers’ compensation context, Missouri courts have determined that an employee is not entitled to compensation for healthcare provider write-offs. Mann v. Varney Construction, 23 S.W.3d 231, 233 (Mo. App. 2000) (employee not entitled to compensation for Medicaid write-off amounts when the total amount submitted to Medicaid will never be sought from claimant); accord, Lenzini v. Columbia Foods, 829 S.W.2d 482, 487 (Mo. App. 1992).  “Implicit in both decisions is the requirement of actual liability [for the medical bills] on the part of the employee.”  Farmer-Cummings v. Personnel Pool of Platte County, 110 S.W.3d 818, 821 (Mo. 2003).  However, the Missouri courts have been reluctant to follow this approach outside the realm of workers’ compensation.

As part of the 2005 Missouri tort reform, Mo. Rev. Stat. § 490.715 was amended to include a new subsection 5 that addressed valuation of the medical expenses, including a provision that there was a rebuttable presumption that the “value” of medical treatment is “the dollar amount necessary to satisfy the financial obligation to the health care provider.” Plaintiffs were not permitted to introduce evidence of medical expenses that exceeded the reasonable “value” of medical care and treatment.  See id. 

Missouri cases, however, significantly undermined this statutory tort reform, by allowing evidence of “sticker price” bills to get to the jury upon a very low showing of the “reasonableness” of the full-price bills, which can be made by affidavits or the testimony of the health care providers.  See Deck v. Teasley, 322 S.W.3d 536 (Mo. banc 2010).  The bar to rebut the presumption was so low in practice that the statutory reform failed to have the desired effect.

With the passage of SB 31, laudable carve-outs from the collateral source rule have been made.  As to payments by or on behalf of the defendant, the statute used to provide that the defendant could offer evidence that these medical expenses had been paid, but not by whom.  The new law clearly provides that, where the defendant or the defendant’s insurer or representative have paid a portion of plaintiff’s medical expenses, these sums are “not recoverable from” the defendant.  Although this statute sho