The 9th Circuit on Friday upheld a $2.6 million arbitration award against a former Toyota in-house lawyer who gained notoriety by claiming that the car company hid evidence in hundreds of rollover cases.

The California lawyer-turned-whistleblower, Dimitrios Biller, had argued that Toyota’s deception in product liability litigation justified his disclosure of confidential information obtained during his tenure at the company.

But the 9th Circuit indicated that personal gain rather than justice may have been foremost on Biller’s mind when he decided to breach confidentiality provisions in a severance agreement he had with Toyota.

“[S]ome of Biller’s disclosures bore no relationship to Biller’s stated goal and instead appeared to stem from Biller’s desire to advance his career after leaving [Toyota],” the court said.

From 2003 to 2007, Biller worked for Toyota managing product liability litigation relating to rollover accidents involving the popular 4Runner SUV.

After leaving the company, Biller sued for constructive discharge, making the inflammatory and widely reported accusations that key Toyota executives conspired to withhold evidence in hundreds of rollover lawsuits across the country.

Biller settled his lawsuit against Toyota in September 2007 and entered into a formal severance agreement with the company. Under the terms of the severance agreement, Biller agreed to: (1) protect and not to disclose Toyota’s confidential information; (2) return all of Toyota’s confidential information in his possession; and (3) not to copy that information.

While fencing with Toyota over the terms of his departure, Biller was also starting a litigation consulting business and website, Litigation, Discovery & Trial Consulting.

After the parties settled Biller’s constructive discharge lawsuit, Toyota became concerned that Biller was using confidential information about his work on Toyota products liability in his new business.

Toyota sued in California state court for injunctive relief, seeking to enforce its confidentiality agreement with Biller. 

In response, Biller raised his own cross-claims in state court, and took the further step of suing Toyota in federal court for RICO violations, emotional distress and defamation.

The parties’ state and federal claims were ultimately consolidated and sent to arbitration pursuant to a clause in Biller’s severance agreement. 

In November 2010, an arbitrator handed Toyota a stunning victory. The arbitrator decided that Biller had breached his severance agreement and violated the attorney-client privilege by disclosing confidential information.

In addition to granting Toyota a permanent injunction aimed at preventing further disclosure of its confidential information, the arbitrator awarded the car company$2.5 million in liquidated damages and $100,000 in punitive damages. Last January, a federal court confirmed the arbitration award.

Friday’s decision by the 9th Circuit addressed Biller’s contention that the arbitrator’s decision was contrary to California law. Biller lost this argument on several fronts.

First, the court found that Toyota’s arbitration clause was airtight and governed by the Federal Arbitration Act rather than state law:

Consistent with state law regarding contract interpretation, the plain language of the Severance Agreement is unambiguous and shows the parties’ intent that while contract terms are generally to be governed by California law, any arbitration more specifically is to be conducted under the FAA unless “a decision maker of competent jurisdiction” finds that it should be governed by the [California Arbitration Act]. Biller neither alleges nor shows that any decision maker determined that the arbitration agreement should not be governed by the FAA. Absent such a determination, we conclude that the plain language of the Severance Agreement requires that the FAA governs the arbitration proceedings here.

Moreover, the 9th Circuit upheld a key determination by the district court that the FAA authorized a limited review of the arbitrator’s final award, denying Biller’s desire for a merits review.

Finally, the 9th Circuit rejected Biller’s contention that the arbitrator had manifestly disregarded the law governing the severance agreement.

Before the arbitrator, Biller had raised the affirmative defense of unclean hands, arguing that any misconduct on his part was far outweighed by Toyota’s alleged illegal activities and misconduct in its products liability litigation.

The 9th Circuit determined that the record supported the conclusion that the unclean hands defense did not apply in this case, noting that the arbitrator had found that Biller had committed an unforgivable breach of the attorney-client privilege by intentionally and repeatedly disclosing Toyota’s confidential information.

Moreover, the court found that Biller had a problem linking his actions with Toyota’s alleged misconduct:

[T]he misconduct that brings the clean hands doctrine into play must relate directly to the cause at issue. … Biller contends that he disclosed the confidential information to reveal Toyota’s misconduct for the purpose of revealing continuing misconduct. But some of Biller’s disclosures bore no relationship to Biller’s stated goal and instead appeared to stem from Biller’s desire to advance his career after leaving [Toyota]. Specifically, [Toyota’s] breach claims stem, at least in part, from Biller’s use of the confidential information on Biller’s fledgling … website and in Biller’s presentation of professional seminars, pursuits whose purpose was Biller’s own professional enhancement and personal gain from his consulting firm.

(Biller v. Toyota) 

– Pat Murphy

patrick.murphy@lawyersusaonline.com

If you want to convince a judge that you suffer from chronic, debilitating pain, it’s probably not a good idea to have pictures of yourself carousing with your pals plastered all over the Internet.

That’s a lesson Zackery Clement should have learned before he requested an extension of temporary total-disability benefits by the Arkansas Workers’ Compensation Commission.

Let there be no doubt that Clement did indeed suffer a legitimate injury while working at a Johnson’s Warehouse Showroom in Arkansas. Clement in fact suffered a hernia on March 12, 2009, when a refrigerator he was attempting to move fell on him.

The employer through its workers’ comp insurer paid Clement’s medical expenses and temporary total-disability benefits from the date of his injury until May 10, 2010, and, when he suffered a setback, for a second time from July 15, 2010, until Aug. 8, 2010.

But when Clement wanted those benefits continued indefinitely because of continued pain in his groin as well as an alleged back injury, Johnson’s Warehouse Showroom balked.

According to the employer’s doctors, Clement didn’t have a traumatic work-related back injury. Moreover, those doctors said that further medical treatment was unreasonable and unnecessary for his compensable hernia injury.

Clement’s claim for continued benefits may have had a fair chance of succeeding because he had his own medical evidence supporting his contention that he still suffered from severe pain due to a recurrent hernia and nerve damage.

But there was the problem of certain pictures of Clement on the Internet showing him having way too much fun for a man who was supposed to be suffering from debilitating pain. 

Yes, the employer had done some poking around and discovered pictures of Clement on Facebook and MySpace. The employer introduced those photos at the administrative hearing on Clement’s claim for extended benefits. 

The pictures may well have tipped the scales because the administrative law judge rejected Clement’s claim and the state workers’ compensation commission upheld the denial of continued benefits.

The turn of events had Clement’s attorney crying foul before the Arkansas Court of Appeals, which reviewed the commission’s denial of benefits.

According to Clement’s attorney, the introduction of the Facebook and MySpace pictures in the administrative proceedings was “a disgrace to the dignity of the workers’ compensation proceedings.”

The court begged to differ: “We find no abuse of discretion in the allowance of the photographs. Clement contended that he was in excruciating pain, but these pictures show him drinking and partying. Certainly these pictures could have a bearing on Clement’s credibility, albeit a negative effect that Clement might not wish to be demonstrated to the ALJ or the Commission.” (Clement v. Johnson’s Warehouse Showroom) 

This case illustrates that workers’ compensation attorneys and their clients have more to fear than just the sneaky claims investigator with a camcorder.

Social media provides the potential for self-inflicted wounds with the inadvertent disclosure of photographic evidence undermining a claim of disability.

– Pat Murphy

patrick.murphy@lawyersusaonline.com

A federal judge on Monday gave the green light to a South Carolina employer’s lawsuit against a former employee who allegedly stole 17,000 Twitter followers from the company. 

The lawsuit was brought by PhoneDog, a South Carolina company that operates a popular website that reports on and reviews mobile phone products and services.

Noah Kravitz worked for the website as a product reviewer and video blogger from April 2006 until October 2010. As part of his job, Kravitz was given and maintained a Twitter account that he used to promote the company’s services.

The account eventually generated approximately 17,000 Twitter followers. Such a following is a valuable asset because, according to advertising industry standards, each Twitter follower has a value of about $2.50 per month.

According to PhoneDog, when Kravitz quit in October 2010, he effectively took the 17,000 PhoneDog followers with him by changing the Twitter handle on the account to “@noahkravitz.” PhoneDog alleges that Kravitz thereafter used the account as a free lancer and when he was hired by a competitor.

Kravitz lives in Alameda County, California, so when PhoneDog decided to sue it filed its lawsuit in the U.S. District Court for the Northern District of California.

In a complaint filed last July, PhoneDog asserted that Kravitz was liable for negligent and intentional interference with prospective  economic advantage, misappropriation of trade secrets,  and conversion.

In addition to seeking punitive and general damages, PhoneDog specified $340,000 in losses due to Kravitz’s alleged conversion. PhoneDog came to this figure by taking the 17,000 Twitter followers and applying the industry rate of $2.50 per month to the eight-month period relevant to the company’s lawsuit.

Kravitz moved to dismiss PhoneDog’s claims for negligent and intentional interference with prospective economic advantage. The ex-employee argued that those claims failed as a matter of law because PhoneDog could not show that any of its economic relationships were actually disrupted by his alleged conduct.

In a Jan. 30 order, U.S. Magistrate Judge Maria-Elena James rejected Kravitz’s argument and denied his motion to dismiss. The judge concluded that PhoneDog’s allegations sufficiently showed that Kravitz’s alleged theft of 17,000 Twitter followers disrupted the company’s relationship with its current and prospective advertisers:

Kravitz argues that the allegations supporting this relationship are speculative because they only assert that PhoneDog’s advertising revenue “might have” decreased. But that is not the case. PhoneDog explicitly alleges … that a significant amount of its income is derived from advertisements on its website, and “advertisers pay for ad inventory on PhoneDog’s website for every 1000 pageviews generated from users visiting PhoneDog’s website.” Due to Kravitz’s alleged conduct, “there is decreased traffic to [the] website through the [Twitter] Account, which in turn decreases the number of website pageviews and discourages advertisers from paying for ad inventory on PhoneDog’s website.” … Based on these factual allegations, the Court is able to draw the reasonable inference that PhoneDog had an economic relationship with at least one third-party advertiser that was disrupted by Kravitz’s alleged conduct, causing it economic harm.

  (PhoneDog v. Kravitz) 

– Pat Murphy

patrick.murphy@lawyersusaonline.com

The 7th Circuit yesterday issued a ground-breaking decision on Title IX equal treatment claims, reviving a lawsuit against 14 Indiana school districts that allegedly kept their girls’ basketball teams from having a fair share of games on Friday and Saturday nights. 

“Non-primetime games result in a loss of audience, conflict with homework, and foster feelings of inferiority,” the court said in ruling that such discriminatory scheduling practices are actionable under Title IX.

The court’s decision came in a lawsuit Amber Parker brought on behalf of her minor daughter, J.L.P. From 2007 to 2009, Parker was the head coach of the girls’ varsity basketball team at Franklin County High School. J.L.P. was a member of that team during the 2008-2009 season.

According to Parker’s lawsuit, the girls’ basketball season regularly starts two weeks before the boys’ team begins play. During this time, the girls’ games are scheduled for Friday and Saturday nights, primetime for high school athletics. Parker claims that these early-season games are well-attended, with the game atmosphere heightened by the presence of the school band, cheerleaders, and dance teams.

Parker says that that all changes when the boys’ basketball season starts. The girls are relegated to playing most of their games on week nights, with far fewer fans in the seats and without the benefit of the pep band, cheerleaders, and dance team.

In addition to losing student and community support, Parker claims that the weeknight games make it harder for the girls to complete homework assignments and study for tests. According to Parker, the scheduling policy affected J.L.P.’s grades during the season.

For her part, J.L.P. attested that the school’s practice of giving the boys’ team the primetime slots made her feel like girls’ accomplishments are less important than boys’.

Fed up, Parker filed a Title IX lawsuit against the Franklin County school district in 2009. Also named as defendants were 13 other school districts that contracted to play the Franklin girls’ basketball team. Although Parker originally filed the suit, other plaintiffs with more current ties to the Franklin girls’ basketball team were later added to the suit.

Parker’s Title IX equal treatment lawsuit alleged discrimination by virtue of the fact that the girls’ basketball team had only 53 percent of its games on primetime nights, while the boys’ team had 95 percent of its games in primetime.

A federal judge in Indiana heard the case and entered summary judgment in favor of the defendant school districts, concluding that the treatment of the plaintiffs did not result in a disparity so substantial that it denied the plaintiffs equality of athletic opportunity.

But Tuesday the 7th Circuit decided that the trial judge had jumped the gun.

Addressing the merits of Parker’s lawsuit, the 7th Circuit concluded that there was sufficient evidence that the difference in scheduling had a negative impact on the members of the girls’ basketball team and that the disparity was substantial enough to deny them equality of athletic opportunity.

The court observed that the “practice of scheduling almost twice as many boys’ basketball games on primetime nights sends a message that female athletes are subordinate to their male counterparts and are ‘second-class.’”

Reversing the trial judge’s grant of summary judgment, the court concluded:

[T]his disparate scheduling creates a cyclical effect that stifles community support, prevents the development of a fan base, and discourages females from participating in a traditionally male-dominated sport. Accordingly, “[t]he different value that society may place on the competitive success of female athletes as compared to male athletes … must not play a role in our assessment of the significance of the denial of opportunity to the female athletes …’ The central aspect of Title IX’s purpose is to encourage women to participate in sports, despite stereotyped notions of women’s interests and abilities.

(Parker v. Franklin County Community School Corporation)

– Pat Murphy

patrick.murphy@lawyersusaonline.com

Mug shot of David Kernell

Apparently the Sarbanes-Oxley Act isn’t just for snagging corporate crooks. It also provided a handy tool for sending to prison a college student who hacked into Sarah Palin’s e-mail account during the 2008 Presidential election. 

Yesterday, the 6th Circuit upheld the constitutionality of a lesser-known provision of Sarbanes-Oxley that makes it a crime to destroy records that may be of interest to federal investigators. 

As we all know, the passage of Sarbanes-Oxley in 2002 brought volcanic changes to securities regulation and corporate governance. The package of laws passed by Congress as part of Sarbanes-Oxley included an obstruction of justice provision, 18 U.S.C. §1519. 

Section 1519 prohibits the knowing destruction or alteration of any record “with the intent to impede, obstruct, or influence the investigation … of any matter within the jurisdiction of any department or agency of the United States … or in relation to or in contemplation of any such matter or case.”

While §1519 may have been aimed at preventing the sort of widespread destruction of evidence that federal investigators encountered in the Enron and Adelphia accounting scandals, it turns out the statute has other uses as well. 

David Kernell probably never even heard of Sarbanes-Oxley, let alone §1519, when in the early morning hours of Sept. 16, 2008, he wormed his way into Palin’s e-mail account.

At the time, Kernell was a University of Tennessee student. The son of a Democratic politician, he probably thought it was pretty neat when he posted several pages of Palin’s e-mail on an Internet message board.

But after boasting about his mischief on the Internet, he began to have second thoughts and started to take steps to try to erase from his computer information relating to his hacking of Palin’s e-mail. These actions proved to be the real problem when the FBI caught up with him and he was charged under §1519.

A federal jury convicted Kernell for violating the law by deleting information on his computer relating to the Palin affair.

Monday, the 6th Circuit affirmed Kernell’s conviction, turning aside his argument that §1519 is unconstitutionally vague.

Kernell raised two arguments in his challenge to the statute. First, Kernell contended that the structure of the statute creates an ambiguity as to the application of mens rea to the various elements of the statute.

The court rejected this argument, explaining that “‘the statute does not impose liability for “knowingly … destroy[ing] … any … document … in … contemplation of any [federal] matter,” without an intent to impede, obstruct, or influence a matter.’ By applying this requirement to each of the three scenarios, the construction creates the needed specific intent and avoids Kernell’s concern that ‘the statute would forbid innocent conduct such as routine destruction of documents that a person consciously and in good faith determines are irrelevant to a foreseeable federal matter.’”

Kernell also argued that §1519’s requirement that the defendant act “in contemplation of an investigation” is vague.

But the 6th Circuit observed that other courts “have consistently held that the belief that a federal investigation directed at the defendant’s conduct might begin at some point in the future satisfies the ‘in contemplation’ prong.”

The 6th Circuit conceded that “this interpretation makes ‘in contemplation’ under §1519 very broad,” but also observed that  ”it is consistent with the legislative history and other cases to consider the question.”

Moreover, the court concluded that the statute could not be said to be vague as applied in Kernell’s case because the hacker had posted an Internet message revealing his concern that his actions could trigger a federal investigation.

“Thus there is no doubt from this post that Kernell ‘contemplat[ed]’ that an investigation would occur when he took his action, since he specifically referenced the possibility of an FBI investigation in his post,” the court said. “As such, to the extent there are any ambiguities in the ‘contemplation’ prong, Kernell may not raise or rely on them.” (U.S. v. Kernell) 

So Kernell’s conviction stands. According to Reuters, the hacker was released in November after serving less than eleven months of his one-year sentence, so he’s already paid his debt to society.

But Kernell’s misadventures do serve notice that Sarbanes-Oxley has some bite outside of Wall Street and the boardrooms of Fortune 500 companies.

– Pat Murphy

patrick.murphy@lawyersusaonline.com

It’s always amusing when the high priests of tolerance get caught dishing out their own brand of intolerance.

Friday, the 6th Circuit taught several college professors the simple lesson that “tolerance is a two-way street” in the case of a graduate student who was expelled after she expressed religious objections to affirming homosexual behavior.

The expelled student is Julea Ward. In May 2006, after teaching at a suburban Detroit high school for ten years, Ward decided to add to her professional credentials by becoming a licensed school counselor. In order to achieve that goal, she enrolled at Eastern Michigan University and started taking classes towards a master’s degree in counseling.

In accordance with the American Counseling Association’s (ACA) code of ethics, Eastern Michigan University prohibits students in its counseling-degree program from discriminating against others based on sexual orientation. In fact, students are taught to affirm a client’s values during counseling sessions.

In her three years in the program, Ward frequently expressed a conviction that her Christian faith prevented her from affirming a client’s same-sex relationships as well as sexual relationships outside of marriage. Those views naturally brought her at loggerheads with liberal-minded professors who evidently view deeply held religious beliefs as being of no consequence when compared to someone’s sexual preferences.

Despite these head winds, Ward did quite well in her course work, maintaining a 3.91 GPA. But in order to complete the program, Ward was required to participate in a student practicum that involved counseling real clients. 

At this point Ward’s religious beliefs concerning homosexuality came in direct conflict with the university’s code of ethics. After she counseled two clients in the practicum without incident, the university asked Ward to counsel a gay client.

Ward advised the school that her religious beliefs would preclude her from affirming his sexual orientation. As an accommodation of her Christian faith, Ward requested that the client be referred to another student in the counseling program outright or at the point when a counseling session turned to relationship issues. 

Ward’s faculty supervisor did refer the client to another student, but certain of the program’s professors concluded that Ward had violated the code of ethics and commenced a disciplinary hearing into Ward’s referral request.

A committee composed of several faculty members heard the matter and expelled Ward from the program. This seemed rather harsh, particularly in light of Ward’s academic success and the fact that graduation was in sight.

One wonders why the school just didn’t accommodate Ward’s religious beliefs and allow her to complete the program. After all, public universities are famous for accommodating all sorts of outside-the-norm beliefs and behaviors.

One can imagine that if Ward had been a Wiccan the school would have given her a longer leash. But as someone with deeply held Christian beliefs, she evidently wasn’t going to be cut any slack.

Fortunately, Ward didn’t take the expulsion lying down and filed a §1983 suit against the university and her professors, alleging violations of her First Amendment rights regarding freedom of speech and religion.

The university argued that Ward’s dismissal from the program was justified because her request for a referral violated the American Counseling Association’s code of ethics.

But the court pointed out that it was not entirely clear that the ACA code of ethics prohibited Ward’s request that her gay client be referred to someone else. On this point, the court asked:

What exactly did Ward do wrong in making the referral request? If one thing is clear after three years of classes, it is that Ward is acutely aware of her own values. The point of the referral request was to avoid imposing her values on gay and lesbian clients. And the referral request not only respected the diversity of practicum clients, but it also conveyed her willingness to counsel gay and lesbian clients about other issues – all but relationship issues – an attitude confirmed by her equivalent concern about counseling heterosexual clients about extra-marital sex and adultery in a values-affirming way.

The court observed that the record showed that the program had indeed allowed referral requests in other circumstances, raising a jury question as to whether the school’s treatment of Ward was motivated by impermissible factors.

The court said that the record “shows that the counseling department was willing to avoid unsuitable student-client matches in some instances. Why treat Ward differently? That her conflict arose from religious convictions is not a good answer; that her conflict arose from religious convictions for which the department at times showed little tolerance is a worse answer.”

In reversing the district court’s grant of summary judgment in favor of the university, the court found that “a reasonable jury could conclude that Ward’s professors ejected her from the counseling program because of hostility toward her speech and faith, not due to a policy against referrals.” (Ward v. Polite)

In its decision, the court was careful to distinguish the 11th Circuit’s recent ruling in Keeton v. Anderson-Wiley that the First Amendment does not protect a student in a graduate counseling program who was directed by school officials to enter a remediation program due to her religious views on homosexuality. The 6th Circuit explained:

The two claimants’ theories of constitutional protection … are miles apart. Keeton insisted on a constitutional right to engage in conversion therapy – that is, if a “client discloses that he is gay, it was her intention to tell the client that his behavior is morally wrong and then try to change the client’s behavior.” That approach, all agree, violates the ACA code of ethics by imposing a counselor’s values on a client, a form of conduct the university is free to prohibit as part of its curriculum. Instead of insisting on changing her clients, Ward asked only that the university not change her – that it permit her to refer some clients in some settings, an approach the code of ethics appears to permit and that no written school policy prohibits.

– Pat Murphy

patrick.murphy@lawyersusaonline.com

A Colorado law firm’s sad tale reemphasizes why it’s important to strictly observe the notice requirements of a professional liability insurance policy.

The hard lesson was handed down Tuesday by a federal judge in Davis & Associates v. Westchester Fire Insurance.

Davis & Associates (now Davis Schilken, PC) was retained in February 2004 by Ella Mae Bates. The client wanted the Golden, Colorado, firm to create a trust that would enable her to qualify for Medicaid benefits.

The Davis Firm duly created the Bates Trust, but a state agency subsequently denied Bates’ application for Medicaid benefits. According to the state, the assets of the Bates Trust were not exempt from consideration because of the terms of a loan provision in the trust.

Bates’ application for Medicaid benefits was denied on March 15, 2007. The Davis Firm prosecuted the administrative appeal of the denial of benefits, but it was ultimately upheld by the state in a final agency decision entered Sept. 4, 2007.

Pertinent to Bates’ later malpractice lawsuit, the Davis Firm allegedly failed to file an action for judicial review before the 30-day statute of limitations expired. Thus, the client lost her right to have  a state court review the administrative decision.

Naturally, Bates was miffed at the result. She had funded the trust and depleted her remaining assets, all without accomplishing her goal of attaining Medicaid eligibility.

In March 2009, the Davis Firm became aware that Bates was considering a suit for legal malpractice. The firm accordingly turned its attention to its insurance coverage.

The Davis Firm was insured continually under successive professional liability policies for the period in question. Specifically, Westchester Fire Insurance issued three successive “claims made and reported” policies from April 1, 2007, through April 1, 2010.

On March 29, 2009, a few days before coverage under the 2008-2009 policy ended, the Davis Firm notified Westchester of a potential claim resulting from its representation of Ella Mae Bates.

The law firm probably assumed it was safely covered under the 2008-2009 policy. But its assumption was wrong.

Westchester denied the claim, asserting that, on the inception date of the 2008-2009 policy, April 1, 2008, the Davis Firm had a reasonable basis to believe that it had breached a professional duty owed to Bates and that a legal malpractice lawsuit was a distinct possibility.

The Davis Firm filed a suit to establish its right to coverage in the U.S. District Court for the District of Colorado.

Judge Robert E. Blackburn duly considered the parties’ arguments and on Jan. 24 handed a victory to the insurance company in the form of a summary judgment.

The problem for the Davis firm was an insurance clause that should be pretty familiar to attorneys. The 2008-2009 policy issued by Westchester to the Davis Firm provides coverage for a claim only if “at the inception of this policy the Insured had no reasonable basis to believe that any Insured had breached a professional duty and no reasonable basis to believe an act, error, omission or Personal Injury might be expected to result in such Claim or Suit.”

Applying this clause to the Davis firm’s dealings with Bates, it became clear to the judge that Westchester had no coverage obligation:

By the time the 2008-2009 Policy became effective on April 1, 2008, more than 200 days had passed since the Davis Firm had learned of the thirty day deadline to file an action for judicial review [in the Bates Medicaid case]. The Davis Firm’s knowledge of this breach of duty, and the resulting reasonable belief that a claim might be expected to result from the breach, prior to April 1, 2008, demonstrates that the 2008-2009 Policy does not provide coverage for this claim. 

 (Davis & Associates v. Westchester Fire Insurance) 

The basic problem for the Davis firm was that it should have been alert to the potential legal malpractice claim in 2007 and taken the steps necessary to trigger coverage under Westchester’s 2007-2008 policy. The firm didn’t, so now it will have to bear the full brunt of its former client’s lawsuit.

– Pat Murphy

patrick.murphy@lawyersusaonline.com

Liquid expands as the temperature increases. That simple law of physics is at the heart of a consumer class action that alleges Chevron is cheating California consumers by selling motor fuel at an average temperature of 70 degrees.

Yesterday, a state appeals court revived much of the lawsuit after Chevron had succeeded in having it dismissed.

The plaintiffs in Klein v. Chevron U.S.A. claim that they’re getting short-changed in their gas purchases. Chevron’s alleged scam goes like this. Chevron and other oil companies purchase motor fuel at the wholesale level using an industry standard that adjusts for differences in the temperature of motor fuel. The standard defines a “U.S. Petroleum Gallon” as 231 cubic inches of petroleum at 60 degrees Fahrenheit.

While Chevron makes sure that’s its fuel purchases are adjusted for temperature, the company is not so careful when selling gas at the retail level. According to the plaintiffs’ complaint, gas sold to California consumers is, on average, in excess of 70 degrees Fahrenheit, meaning that consumers receive less fuel (measured in terms of mass and energy) than they would receive if the fuel was delivered at the temperature-adjusted standard of 231 cubic inches at 60 degrees Fahrenheit.

Apart from consumers receiving less fuel for their money, this sleight of hand allegedly results in a windfall for Chevron. According to the plaintiffs, Chevron is able to collect and retain more motor fuel taxes from consumers than it is required to pay to the government.

Asserting that billions of dollars are at stake, the plaintiffs filed their class action in March 2007 in the Los Angeles County Superior Court. The complaint asserts claims for violations of California’s unfair competition and consumer protection laws, breach of contract and unjust enrichment.

Chevron moved to dismiss, arguing that it could not be sued for failing to adjust the temperature of retail motor fuel because California law permitted the practice.

The trial court agreed in part, dismissing the plaintiffs’ claims for breach of contract, unjust enrichment and “unlawful” business practices. However, the trial court rebuffed Chevron’s attempt to dismiss the plaintiffs’ consumer protection claim, as well as their claims for “unfair” and “fraudulent” business practices.

Chevron was provided the key to having the remaining claims dismissed when, in March 2009, the California Energy Commission released the results of its investigation into whether implementing “Automatic Temperature Compensation” (ATC) fuel pump technology that would compensate for temperature increases in retail motor fuel.

The commission’s report concluded that consumers would not realize any economic benefit from requiring retailers to implement the use of ATC fuel pumps because the oil companies would simply increase their prices to account for any loss in revenue.

The California legislature had mandated the energy commission’s investigation, so Chevron argued that the plaintiffs’ remaining claims were barred by the judicial abstention doctrine since state lawmakers had clearly expressed their intent to address the issues in the plaintiffs’ complaint.

The trial court was convinced and the rest of the plaintiffs’ claims were dismissed.

The California Court of Appeal weighed in yesterday and concluded that the trial court had wrongly applied the judicial abstention doctrine. The court explained:

Contrary to Chevron’s assertion, it is not clear at this stage of the proceedings that plaintiffs’ claims will necessarily require the court to enter into complex areas of economic policy. Moreover, the Legislature has not provided any alternative means of addressing the issues raised in plaintiffs’ claims, nor has it provided any certainty that it will address those issues in the future. Abstention would therefore leave the plaintiffs without a remedy.

With the door reopened, the court went on to address whether the plaintiffs’ complaint stated viable claims. The court concluded that the plaintiffs’ didn’t have a case with respect to their breach of contract and unjust enrichment claims, but said that they could go forward with their allegations that Chevron violated California’s unfair competition and consumer protection laws.

With respect to whether Chevron violated state unfair competition law, the court said that the plaintiffs stated a viable claim that the company acted “unfairly” by alleging that, “by failing to compensate for temperature variations in retail motor fuel, Chevron is engaging in a practice that misleads consumers as to the actual amount of motor fuel they are purchasing and the actual price that they are paying for that fuel.”

Likewise, the court decided that the plaintiffs sufficiently alleged that Chevron engaged in fraudulent conduct:

At the pleadings stage, we cannot say, as a matter of law, that consumers are not likely to be deceived in the manner alleged by plaintiffs. As the trial court observed, plaintiffs have alleged “facts which, if true, may reveal that members of the public . . . [assumed] that . . . they were receiving standardized units of motor fuel when, in fact, the energy content of each gallon depended on the temperature of the motor fuel at the time of purchase.” Plaintiffs have also alleged facts that, if true, may reveal that consumers were deceived as to the true price of motor fuel, which may vary depending on the temperature at which it is sold.

And regarding the plaintiffs’ claims under California’s consumer protection statute, the court said:

[The plaintiffs] allegations are sufficient to state a … claim predicated on a material omission, which “consist[s] of the suppression of a fact by one who . . . gives information of other facts which are likely to mislead for want of communication of that fact.” Plaintiffs allege that Chevron’s failure to disclose the effect of temperature on motor fuel is deceptive because it advertises the price of its product in what consumers understand to be standardized units (gallons). Stated differently, plaintiffs allege that Chevron provided information to the consumer (a stated price in “gallon” units) that was deceptive in light of its omission of other relevant information (the amount of energy output in a gallon of motor fuel depends on the temperature at which it is sold).

– Pat Murphy

patrick.murphy@lawyersusaonline.com

After being on the receiving end of a golf club in an episode of road rage that erupted in a McDonald’s parking lot, two Colorado men wondered whether their injuries would be covered by the Allstate policy on their car.

Last week, the Colorado Court of Appeals decided that the men were out of luck.

The insurance claim filed by Chanson Roque and Shannon Isenhour arose when the two men, in Isenhour’s car, exchanged angry words with Richard Terlingen, who was driving  alongside in his car. Isenhour turned into the parking lot of a Denver-area McDonald’s, but Terlingen wasn’t finished.

When Isenhour parked his car, Terlingen pulled up behind. Blocked in, Isenhour and Roque emerged from their car and were confronted immediately by Terlingen. The argument escalated from there, and Terlingen pulled a golf club from the trunk of his car. Terlingen used the golf club to administer a severe beating to Isenhour and Roque.

The two injured men subsequently sued Terlingen for their injuries.

Terlingen held home, umbrella, and automobile insurance policies with American Family Mutual Insurance Company. American Family obtained a declaratory judgment in federal court that it was not required to cover Terlingen. With regard to Terlingen’s auto policy, the federal court decided that it only covered Terlingen for third-party claims “due to the use of a car,” and that the road rage injuries suffered by Isenhour and Roque did not result from such use.

The federal court judgment rendered Terlingen an uninsured motorist, so Isenhour and Roque sought UM coverage under an Allstate policy on Isenhour’s vehicle. They sued in state court when Allstate denied coverage.

The trial court agreed with Allstate’s contention that the plaintiffs’ injuries did not arise from the use of an automobile.

Last week, the Colorado Court of Appeals affirmed the summary judgment in favor of Allstate issued by the trial court.

Isenhour and Roque did win one point before the state appeals court. Allstate argued as a threshold issue that, because the declaratory judgment in federal court determined that plaintiffs’ injuries had not resulted from Terlingen’s use of his vehicle, issue preclusion barred their claim against Allstate.

In rejecting Allstate’s argument, the state appeals court explained that “the issue litigated in federal court was not identical to the issue before us. This case involves a policy providing first-party coverage mandated by Colorado’s UM statute. The federal court addressed a different insurer’s policy providing third-party coverage. Such coverage does not fall under the UM statute.”

Unfortunately, Isenhour and Roque were doomed to lose on the substantive issue of whether their road rage injuries were covered by the Allstate policy.

“We conclude that exiting the car and then engaging in intentional misconduct breaks the requisite causal chain between use of the vehicle and the injuries,” the court said. (Roque v. Allstate) 

The court concluded on this note: 

Colorado’s uninsured motorist statute is intended only to “compensate[] a person injured by an uninsured motorist to the same extent as one injured by a motorist who is insured in compliance with the law,” not to “require full indemnification of losses suffered at the hands of uninsured motorists under all circumstances.”

– Pat Murphy

patrick.murphy@lawyersusaonline.com

A Texas personal injury firm last week failed in its bid to derail a putative class action brought by salaried paralegals who claimed they were entitled to overtime under the Fair Labor Standards Act. 

Batting aside The Mostyn Law Firm’s contention that its paralegals’ job duties were too varied to permit class treatment, a federal judge on Thursday granted conditional certification in an FLSA lawsuit brought by Sherri L. Davis and Carlos Alvarado.

“[T]he Court believes that Plaintiffs have advanced sufficient evidence to support conditional certification on a firm-wide basis, and as to all salaried paralegals,” wrote U.S. District Court Judge Keith P. Ellison in his Jan. 19 order.

The Mostyn Law Firm has its headquarters in Houston. Some of the firm’s 30 lawyers also work out of offices in Austin, Beaumont and Galveston. Of late, the firm has been heavily engaged in representing property owners in insurance disputes arising from Hurricanes Ike and Rita.

Davis alleged that she was employed as a salaried paralegal with Mostyn from June 2007 until February 2009. According to Davis, she typically worked more than 70 hours a week. She claimed that dozens of other salaried paralegals at Mostyn worked more than 40 hours per week and, like her, were denied overtime pay.

Alvarado likewise claimed that he was employed by Mostyn as a paralegal from July 2009 to June 2010.  According to Alvarado, he regularly worked in excess of 50 hours a week. He also alleged that “dozens” of paralegals at Mostyn worked in excess of 40 hours a week and were not paid overtime.

Last August, Davis and Alvarado filed a class complaint for FLSA overtime against Mostyn in the U.S. District Court for the Southern District of Texas. The plaintiffs subsequently moved for issuance of class notice, seeking to notify current and former Mostyn paralegals of their right to recover unpaid overtime by joining the lawsuit.

Mostyn’s general position has been that the plaintiffs were independent contractors and that at least five different exemptions to the FLSA apply to any given paralegal in its workforce.

According to Mostyn, class treatment was particularly inappropriate because its paralegals perform a wide variety tasks depending on how they are classified within the firm and the particular office in which they work.

These were the main points in Mostyn’s argument that the plaintiffs could not show that they were similarly situated to other paralegals for purposes of justifying conditional FLSA class certification.

Judge Ellison concluded Thursday that the plaintiffs had made a sufficient showing to go forward with issuing notice to potential class members.

In particular, the judge decided that the plaintiffs satisfied their burden of providing evidence that Mostyn subjected a group of similarly situated potential class members to a “single decision, policy, or plan” that violated the provisions of the FLSA.

Addressing Mostyn’s point that its paralegals could not be deemed similarly situated because of their varied duties, the judge wrote:

Although there may have been some variation in paralegal duties, such variation does not indicate that the paralegals were not similarly situated. Indeed, even if paralegals’ duties “vary to some degree from day-to-day and possibly from location to location,” or even from docket to docket, the “thrust of the job duties,” as established by Plaintiffs’ declarations, remains similar. Moreover, the fact that some paralegals may have had different titles does not contravene the fact that the paralegals are in essence similarly situated.

The court also found that the plaintiffs sufficiently alleged that they were subject to the same company-wide policy as other salaried paralegals, explaining that “Plaintiffs state that they have knowledge of other paralegals who performed similar work, were paid on a salary basis, and did not receive overtime. In addition, Davis alleges that she spoke with her office manager, who informed her that no salaried employee received overtime pay. At this stage, Plaintiffs’ declarations and allegations are sufficient to meet their lenient obligation.”

Mostyn probably imagined it had an ace in the hole in the form of the Supreme Court’s articulation of a heightened standard for class certification in Wal-Mart Stores v. Dukes. 

The firm was to be disappointed in this regard. The judge wrote that “Dukes does not advance Mostyn’s case, as Plaintiffs and salaried paralegals who have worked at Mostyn during the three-year period do not suffer from ‘dissimilarities’ that may ‘impede the generation of common answers.’”

Dispensing with Mostyn’s remaining objections, the judge conditionally certified a class of all of the firm’s “current and former salaried paralegal employees who worked more than forty (40) hours in a workweek but were not paid one and one-half times their regular rate of pay at any time starting August 3, 2008 to present.” (Davis v. The Mostyn Law Firm)

As a consequence of the judge’s decision, Mostyn has to go about the process of turning over to the plaintiffs information necessary for identifying and contacting potential class members.

To keep everything on the up and up, the judge further prohibited Mostyn’s management “from communicating, directly or indirectly, with any current or former paralegal employees about any matters which touch or concern the settlement of any outstanding wage claims or other matters related to this suit during the opt-in period.”

– Pat Murphy

patrick.murphy@lawyersusaonline.com