The S.D. Supreme Court just handed down an insurer-friendly decision, Amco Ins. Co. v. Employers Mutual Casualty Co., 2014 SD 20 (April 16, 2014). Policyholder argued that it was against public policy to exclude a preexisting loss that is unknown to the insured when the policy incepted. The court rejected the policyholder’s public policy argument and enforced the exclusion:
“EMC crafted a specific contract exclusion for ‘property damage’ that ‘commenced or which is alleged to have occurred, prior to the inception or effective date of this policy,’ whether the damage is ‘known, unknown, or should have been known’ by the insured. Because EMC's policy provision is neither ‘prohibited by statute, condemned by judicial decision, nor contrary to any identifiable public morals,’ we see no indication that its exclusion violates public policy.”
This decision would be very helpful in the event that a policyholder sought coverage under a new policy for an old S.D. operation.
A 6-2 U.S. Supreme Court judgment today upheld Michigan voters’ rights to eliminate race based preferences in state university admissions. Schuette v. BAMN, etc., 572 U.S. ___ (2014). Early media reports focus on a somewhat inflammatory dissent, which per the majority member opinions, misses the point of the case. Schuette leaves the constitutionality of affirmative action intact on a national level, instead addressing the right of State voters to decide how to be governed. Regardless of media reports otherwise, in four separate concurring opinions, Schuette
1) Confirms the Michigan affirmative action ban does not violate equal protection;
2) Leaves alone the constitutionality of affirmative action programs;
3) Upholds States’ rights via their democratic process to determine how they choose to be governed; and
4) Retains court needs redressing governmental action inflicting injury on racial minorities.
While the decision seems fractured, it is not. Justice Kennedy wrote the 18 page plurality opinion joined by Chief Justice Roberts and Justice Alito. Roberts added a two page separate concurrence. Justice Scalia, joined by Justice Thomas wrote an 18 page concurrence. Justice Breyer added his six page concurrence.
Justice Sotomayor, joined by Justice Ginsberg, provides a 58 page dissent. Justice Kagan recused herself from the case.
The case involves a Michigan ballot proposal, “Proposal 2”, approved by voters (58-42%) after statewide debate on the issue of having racial preferences in the context of governmental decision-making, including state university admissions processes. Now Article I, §26 of the Michigan Constitution, it prohibits discrimination against or the granting of preferential treatment on bases of race, sex, color, ethnicity, or national origin by any public school or by any government entity in Michigan in public employment, public education or public contracting. The Supreme Court reversed prior panel and en banc decisions of the Sixth Circuit Court of Appeals which reversed the district court result originally upholding Proposition 2.
The plurality states the case “is not about the constitutionality or merits of race-conscious admissions policies in higher education”, leaving intact Fisher v. University of Texas, 570 U.S. ____ (2013), permitting racial considerations in college admissions under certain conditions. Rather, Schuette addresses whether and how “voters in the States may choose to prohibit the consideration of racial preferences in governmental decisions, in particular with respect to school admissions.”The right of the individual not to be injured by the unlawful exercise of governmental power is preserved.
Scalia’s and Breyer’s concurrences address equal protection arguments. Scalia concludes “any law expressly requiring state actors to afford all persons equal protection of the laws does not—cannot—deny ‘to any person…equal protection of the laws’.” Breyer agrees the amendment is consistent with equal protection and concludes favoring decision-making via the democratic process rather than through unelected administrators. “Just as this principle strongly supports the right of the people…to adopt race-conscious policies for reasons of inclusion, so must it give them the right to vote not to do so.”
Falkinbury v. Boyd & Associates [cite] demonstrates that the seminal Brinker decision has not put an end to wage and hour class actions in California. Josie Falkinbury and William Levene were security guards employed by Boyd & Associates. They filed suit against Boyd on behalf of themselves and 4,000 similarly situated guards claiming that Boyd’s policies precluded them from taking their meal and rest breaks on an uninterrupted basis. (The suit included other claims not germane to this article.)
The trial court denied the plaintiffs’ motion for class certification on the basis that the proposed classes of employees were not ascertainable because individual questions of fact predominated.
The Court of Appeal reversed. It distinguished the proposed classes from those in Brinker on the basis that the Brinker employer’s written policies properly provided for meal and rest breaks that complied with the law, and the question of whether a particular individual had been denied the breaks would have to be resolved on a case by case basis.
By contrast, the Falkinbury plaintiffs alleged that Boyd’s policy required that all guards meal periods be taken at their posts, albeit on a paid basis. They asserted that the policy itself violated California law requiring meal breaks for all employees be taken within the first five hours of their shifts, and that they be relieved of all duty during that meal break.
The appellate court ruled that the question of whether Boyd’s policy satisfied California law was common to all of the potential class members and could be decided on a class basis.
The Court also reversed as to rest breaks because Boyd had a policy of requiring the guards to remain at their posts during their rest periods. Because this policy applied to all guards, it too could be decided on a class basis.
What can employers learn from this case? It behooves all employers to formulate policies which comply with the law. Brinker protects employers who maintain lawful practices and encourage their employees to take their meal and rest breaks. It does not protect employers who do not. Employers should examine their meal and rest break policies for compliance and would be well advised to confirm the propriety of those policies with legal counsel.
Drager v PLIVA, Inc., --- F.3d --- (2014) (not yet published)
Plaintiff was the personal representative of the Estate of Shirley Gross, who alleged significant injuries as a result of her extended use of the generic gastroesophegeal reflux disease drug Reglan, manufactured by PLIVA. Plaintiff filed suit against both PLIVA and the name-brand manufacturers of Reglan, alleging various theories of state law tort liability arising out of the drug’s hazard from chronic use. After Plaintiff confirmed that the deceased, who had passed away during the pendency of the action, had only used the generic form of Reglan, the brand manufacturers were dismissed. The case was then stayed pending the determination of the Supreme Court case of PLIVA, Inc. v. Mensing, 131 S. Ct. 2567 (2011). After the opinion in Mensing was issued by the Supreme Court, holding that state law failure-to-warn claims were preempted by the Federal Food, Drug, and Cosmetics Act, 21 U.S.C. §§301, et seq. (“FDCA”), PLIVA moved for a motion for judgment on the pleadings on the basis that the claims brought by Plaintiff in this action were by necessity state law failure-to-warn claims. The Court granted the motion, denied Plaintiff leave to amend the complaint to add, and Plaintiff appealed.
The 4th Circuit Court of Appeals reviewed the trial court’s decision de novo. The Court initially disposed of Plaintiff’s argument that the amendment should have been permitted, noting that Plaintiff had never filed a motion for leave to amend the complaint, and therefore, the trial court did not abuse its discretion to “declin[e] to grant a motion that was never properly made.” The Court then addressed the more substantive arguments that the Plaintiff’s claims were not preempted. The Court observed that Mensing established that generic drug manufacturers, like PLIVA, were “not entitled to unilaterally change their labeling and therefore any state law tort premised on the failure of a generic to alter its labeling was preempted.” Plaintiff’s state law claims included: 1) negligent testing, inspection and post-market surveillance, 2) defective design, 3) breach of implied and express warranties of merchantability or fitness for a particular purpose, and 4) negligent misrepresentation and fraudulent concealment about the safety of the product. The Court observed that since the generic drug manufacturer cannot change its warning, or its formula, absent preemption protection its only options would be to withdraw from the market, or accept state tort liability. As such, the Court held that regardless of the independent viability of the state law claims, the Plaintiff’s causes of action were preempted by the FDCA.
Submitted by: Marisa A. Trasatti & Gregory S. Emrick, Semmes, Bowen & Semmes (Baltimore, MD)
Just last week I blogged about coverage issues arising from cybercrime. But, this morning I found another new and interesting case. Transtar Electic, Inc. v. Charter Oak Fire Ins. Co., No. 3: 13CV1837, 2014 U.S. Dist. LEXIS 8000 (W.D. Ohio Jan. 22, 2014).
Much like the Metro Brokers case that I wrote about last week, in Transtar a thief used online access to steal from a bank account. A Transtar employee stole $120,000 from a related company, Eagle Creek. After Transtar discovered the theft, Transcar reimbursed Eagle Creek. Transtar then submitted a claim under its “Commercial Crimes Coverage.”
The insurer disclaimed on two grounds.
First, the insurer said this was not a covered theft because the thief did not steal from the insured, Transcar. The court rejected the insurer’s argument. The court noted that the policy defined theft as “the unlawful taking of money.” The policy did not limit theft to the taking of the insured’s money.
Second, the insurer said that the claim did not fit within the policy’s causation limitations. That is, the policy only covered losses “resulting directly from ‘theft,’” What’s more, the policy reinforced this point with an exclusion that barred coverage for a “loss that is an indirect result” of a theft.
The court interpreted the causation language as a single concept; the exclusion simply reinforced the coverage agreement. The question became, what is the meaning of “direct”?
The court recognized two points of view on direct. Some courts find that “direct is direct”; meaning the loss must be an immediate result, with “no intervening medium, agency, or instrumentality.” Other courts define “direct” more broadly, and consider direct to include anything “reasonably foreseeable.”
The court applied the broader, more policyholder-favorable view. The court found that there was a sufficient link between the theft and the insured’s loss.
The case is interesting on many levels, but one point stands out. In pollution and other heavily contested issues, disputes often centered on exclusions. But for cyber claims, such as Transtar and the Metro Brokers case that I addressed last week, the dispute focused on the coverage agreement.
Title: United States Court of Appeals for Fifth Circuit holds that plaintiffs’ failure to warn claims against generic manufacturers preempted by federal law.
In Lashley v. Pfizer, Inc., ___ Fed.Appx.___, 2014 WL 661058 (5th Cir. Feb. 21, 2014), the United States Court of Appeals for the Fifth Circuit held that two (2) plaintiffs’ failure to warn claims against generic drug manufacturers were preempted by state law. In both instances, the Court followed Supreme Court precedent to find that a generic manufacturer has no duty to label its products in a manner that is different from their brandname counterparts. In fact, federal law required that generic manufacturers’ labels match their brandname counterparts. Therefore, the plaintiffs’ claims against the generic drug manufacturers were preempted by federal law. While the plaintiffs also brought claims against the generic manufacturer’s brandname counterparts, state law prevented the plaintiffs’ recovery as a matter of law. Therefore, the Court entered summary judgment in favor of the brandname manufacturers.
This case was the result of two (2) cases that the Court consolidated, both of which dealt with claims against the generic and brandname manufacturers of the drug metoclopramide (brandname Reglan). The plaintiffs ingested the generic form of Reglan. The plaintiffs late developed tardive dyskinesia and akathisia. Both conditions are central nervous system diseases, and cause involuntary movement. The plaintiffs sued the generic manufacturers, alleging that the defendants were liable for damages as a result of the plaintiffs’ ingestion of Reglan because the generic manufacturers’ labels failed to warn of the drug’s dangers. The plaintiffs also filed claims against the brandname manufacturers, and alleged that they were liable as a result of misrepresentations made to the medical community. Both of the federal district courts in which the two (2) cases were brought dismissed the plaintiffs’ claims against the generic manufacturers, and granted summary judgment in favor of the brandname manufacturers.]\
The Court of Appeals for the Fifth Circuit affirmed the district courts’ decisions. As to claims made against the generic manufacturers, the Court was presented with the question of whether plaintiffs’ claims were preempted under PLIVA, Inc. v. Mensing, ___ U.S. ___, 131 S.Ct. 2567 (2011). In Mensing, the Supreme Court held that federal law required that generic manufacturers’ labels must mirror the brandname labels. The Court held that the plaintiffs’ arguments in this case were almost identical to those at issue in Mensing. The Court explained that the Mensing decision preempted any state law duties requiring generic manufacturers to publish any materials other than the same labels found on the brandname counterpart. Similarly, the plaintiffs’ strict liability and breach of warranty were preempted under federal law because of the Supreme Court’s decision in Mutual Pham., Co, Inc.v . Bartlett, ___ U.S. ___, 133 S.Ct. 2466 (2013), which held that design defect claims were tantamount to failure to warn claims. In the instant case, the plaintiffs’ claims were all rooted in a failure to warn theory. Given that the generic defendants’ labels matched their brandname counterparts, the plaintiffs’ claims were preempted under federal law. Therefore, the plaintiffs’ claims against the generic manufacturers were dismissed. The Court entered summary judgment in favor of the brandname manufacturers in the plaintiffs’ misrepresentation claims. The Court’s reasoning was premised on the law of the individual plaintiff’s forum state, which included Mississippi and Texas law. In both states, the law shielded companies from liability for products they did not create. The brandname manufacturers could not be held liable because the plaintiffs did not take the brandname manufacturers’ products. Therefore, summary judgment in favor of the brandname manufacturers was appropriate.
Submitted by: Marisa A. Trasatti & Wayne Heavener, Semmes, Bowen & Semmes (Baltimore, MD)
I just came across an interesting recent case addressing coverage issues in a growing area, cyber-crime. Metro Brokers v. Transportation Insurance Co., 2013 U.S. Dist. LEXIS 184638 (N.D. Ga. Nov. 21, 2013).
Thieves put a virus into the insured’s computers. Then, they logged into the insured’s bank account and stole almost $200,000. The insured demanded coverage. The insurer disclaimed, and the court upheld the disclaimer.
The policyholder argued that a forgery endorsement covered the loss. This endorsement covered the “forgery” of any check, draft, promissory note, bill of exchange or similar promise….” The policy defined “forgery” as “signing the name of another person … with the intent to deceive.”
The court seemed to accept that logging into computers was effectively a “signing.” But, the court found that the forgery coverage applied to negotiable instruments, and electronic transfers are not negotiable instruments.
The court also held that coverage was barred by exclusions for malicious code and system penetration.
Cyber-crime is a relatively new type of loss. And as sure as the night follows the day, when a new loss emerges, new coverage issues emerge. We’ll be seeing more coverage cases on cyber-crime.
Title: Federal Tax Proposal Would Adversely Affect Many Law Firms
Section 212 of the U.S. House of Representative’s Ways and Means Committee’s (“Committee”) discussion draft “Tax Reform Act of 2013” will require all law firms and other personal service businesses with annual gross receipts over $10 million to use the accrual method of accounting (“accrual method”) rather than the traditional cash receipts and disbursement method of accounting (“cash method”). According to correspondence from the American Bar Association (“ABA”) President to the House Ways and Means Committee Chairman, this would result in negative unintended consequences and cause substantial cash flow hardships to, among others, many law firms and other personal service businesses by requiring them to pay taxes on income accrued, i.e. income that they have not yet received and may never receive, due to write-offs, etc. The ABA has urged the Committee to remove this provision from the overall draft legislation.
Under current law, businesses are permitted to use the simple, straightforward cash method of accounting—in which income is not recognized until cash or other payment is actually received and expenses are not taken into account until they are actually paid—if they are individuals or pass-through entities (e.g., professional corporations, partnerships or subchapter S corporations), or their average annual gross receipts for a three year period are $5 million or less. In addition, all personal service businesses—including those engaged in the fields of law, accounting, engineering, architecture, health, actuarial science, performing arts, or consulting—whether organized as sole proprietorships, partnerships, limited liability companies, or S corporations, are exempt from the revenue cap and can use the cash method of accounting irrespective of their annual revenues, unless they have inventory.
Section 212 of the draft legislation would dramatically change current law by raising the gross annual receipts cap to $10 million while eliminating the existing exemption for personal service businesses, other partnerships and S corporations, and farmers. Therefore, if this proposal is enacted into law, all law firms and other personal service businesses with annual gross receipts over $10 million would be required to use the accrual method of accounting, in which income is recognized when the right to receive the income accrues and expenses are recorded when they are fixed, determinable, and economically performed — both aspects of which present complications, given the often significant lag between billing and collections.
Although Section 212 would allow certain small business taxpayers with annual gross receipts in the $5 million to $10 million range to switch to — and thereby enjoy the benefits of—the cash method of accounting, the proposal would significantly complicate tax compliance for a far greater number of small business taxpayers, including many law firms and other personal service businesses, by forcing them to use the accrual method. Partnerships, S corporations, personal service corporations and other pass-through entities favor the cash method because it is simple and generally correlates with the manner in which these business owners operate their businesses—i.e, on a cash basis. The increased complexity associated with the accrual method will raise compliance costs for many law firms and other personal service businesses—as separate sets of records will be needed to reflect the accrual accounting—while greatly increasing the risk of noncompliance with the Code.
In addition to creating unnecessary complexity and compliance costs, Section 212 would lead to economic distortions that would adversely affect all personal service businesses that currently use the cash method of accounting and those who retain them, including many law firms and their clients, in several ways. The proposal would place a new financial burden on millions of personal service businesses throughout the country—including many law firms—by requiring them to pay tax on income not yet received and which may never be received.
The existing cash method of accounting produces a sound and fair result because it properly recognizes that the cash a business actually receives in return for the services it provides—not the business’ accounts receivable—is the proper reflection of its true income and its ability to pay taxes on that income. While accounts receivable clearly are important to determining the overall financial condition of a business and assessing its future prospects, they do not accurately reflect its current disposable income or its present cash flow ability to pay taxes on that income.
The mandatory accrual accounting provisions in Section 212 of the draft bill would create unnecessary complexity in the tax law, increased compliance costs, and impose significant and unnecessary new financial burdens and hardships for many law firms and other personal service businesses throughout the country by requiring them to pay taxes on income not yet received, and that may never be received.
To avoid these harmful unintended consequences, the ABA has urged the Committee to remove Section 212 from the draft bill or from any tax reform bill that may be approved by the Committee. The ABA has recently asked state and local bar associations to join in the opposition of the proposal. DRI, the Voice of the Defense Bar, also plans to oppose this legislation. Law firms should monitor this legislation closely.
Submitted By: Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes (Baltimore, Maryland)
United States Court of Appeals for Sixth Circuit dismisses claims against generic drug manufacturers, and enters summary judgment in favor of brand name counterparts
In Strayhorn v. Wyeth Pharmaceuticals, Inc., Nos. 12-6195, et al. (6th Cir. Dec. 2, 2013), the United States Court of Appeals for the Sixth Circuit held: (1) that plaintiffs’ claims against generic manufacturers of the drug Reglan were preempted under the Federal Food, Drug, and Cosmetic Act (FDCA), 21 U.S.C. §§ 301–399f; and (2) that summary judgment in favor of the brand name Reglan manufacturers was appropriate because plaintiffs ingested only the generic form of the drug. In reaching its decision, the Court affirmed the decision of the United States District Court for the Western District of Tennessee. Importantly, the Court followed the Supreme Court’s decision in PLIVA, Inc. v. Mensing, - U.S. - , 131 S.Ct. 2567 (2011), and found that state law failure to warn claims based on generic drugs were preempted by the federal requirements that generic drug labels conform to the labels on their brand name counterparts. Judge Jane B. Stranch concurred in part, and dissented in part.
Strayhornwas the consolidated product of seven (7) different cases arising under Tennessee state law, all of which had the same factual background. Several people (“Plaintiffs”) alleged injuries arising from their long-term exposure to metoclopramide, the brand name of which is Reglan (the “Drug”). Plaintiffs alleged that both generic and brand name manufacturers (collectively, “Defendants”) of the Drug knew that the warnings on under the law. Plaintiffs maintained that Defendants failed to use reasonable care to communicate information that would constitute adequate warnings regarding the Drug’s long-term risks. The District Court held that the Supreme Court’s decision in Mensing required Plaintiffs to abandon their failure to warn claims against the generic manufacturers. Additionally, the District Court held that the Tennessee Products Liability Act (TPLA) allowed recover solely against the manufacturer or the seller of the product actually causing the harm. Because Plaintiffs ingested only the brand name form of the Drug, the District Court entered summary judgment in favor of the brand name manufacturers.
Writing the opinion of the United States Court of Appeals for the Sixth Circuit, Judge Thomas Anderson affirmed the District Court’s decision. Following the Supreme Court’s ruling in Mensing, the Court of Appeals held that implied warranty claims premised on a failure to warn theory were preempted by the FDCA. Under federal law, the generic manufacturers had to mirror their warnings regarding the long-term use of the Drug after those warnings distributed by the brand name manufacturers. Therefore, Plaintiffs could not maintain a claim that the warnings distributed by the generic manufacturers were insufficient under the TPLA, as any alleged necessity for a more stringent warning would be preempted by federal law. While Plaintiffs’ TPLA claims against the brand name manufacturers were not preempted, the brand name manufacturers were nevertheless entitled to summary judgment because Plaintiffs alleged that they ingested the generic form of the Drug only. Therefore, the Court held that the lower court properly dismissed Plaintiffs claims against the generic manufacturers, and entered summary judgment in favor of the brand name manufacturers. The Court did acknowledge, however, that “[a]lthough we feel compelled to affirm the judgment below in light of the controlling case law, we cannot help but note the basic unfairness of this result.” Strayhorn, slip op. at 38–39. Writing separately from the Court, Judge Stranch concurred with the majority’s decision that Plaintiffs could not bring design defect or failure to warn claims against generic manufacturers, and acknowledged that Mensing barred any such state law claim. Judge Stranch dissented, however, as to the brand name manufacturers, finding that Tennessee state law could impose liability upon brand name manufacturers for failing to produce an adequate drug label, which necessarily had to be mirrored by their generic counterparts.
Submitted by: Marisa A. Trasatti & Wayne C. Heavener, Semmes, Bowen & Semmes (Baltimore, MD)
Fetus Allegedly Injured In Utero Is Patient For Purposes of Application of Virginia’s Statutory Cap on Damages in Med Mal Cases
In Simpson v. Roberts, No. 121984 (Supreme Court of Virginia, Jan. 10, 2014), available at: http://www.courts.state.va.us/opinions/opnscvwp/1121984.pdf, the Supreme Court of Virginia recently examined whether a fetus was a “patient” for purposes of application of Virginia’s statutory cap on damages. The Court concluded that the fetus became a patient when she was born and so the cap applied.
In Simpson, a minor brought a medical malpractice suit through her father and next friend for injuries sustained during a doctor's attempt to extract amniotic fluid from her mother by an amniocentesis procedure. The appellate court held that the circuit court did not err in reducing a $7 million jury verdict to the applicable amount of the statutory cap on damages imposed by the Virginia Medical Malpractice Act, Code § 8.01-581.1, et seq. It was correctly determined that the unborn child was a patient of the defendant doctor and that her claim relating to injuries sustained when she was a fetus in utero was subject to the Act's statutory cap on recoverable damages.
The Plaintiff’s mother was referred to the defendant doctor during the third trimester of her pregnancy because the mother had developed gestational diabetes. The defendant doctor performed an amniocentesis to determine whether the Plaintiff’s lungs were mature enough to induce early labor. When the defendant doctor performed the procedure, bleeding occurred. Complications arose from the unsuccessful amniocentesis. Another physician from that practice performed a caesarean section later that day to deliver Plaintiff. Plaintiff was born with damaged kidneys and cerebral palsy. The jury returned a $7 million verdict in Plaintiff’s favor against both physicians and their practice.
The defendants filed a motion to reduce the jury verdict pursuant to Virginia's statutory cap under the Act. Plaintiff opposed the motion as to the amniocentesis doctor and his employer. Plaintiff argued that when the amniocentesis was performed, and when the standard of care was breached, Plaintiff was not a “natural person” because she had not yet been born, and therefore was not a “patient” as defined by the Act. Plaintiff argued that a common law cause of action, rather than a statutory cause of action, against the amniocentesis doctor was proper, and that the statutory cap should not apply. The trial court disagreed. It concluded that the cap applied and reduced the award to $1.4 million under the cap. The trial court held that Plaintiff was the amniocentesis doctor’s patient because at the time she was born alive, she became a “patient” under the Act.
The appellate court agreed. As to whether Plaintiff was a “patient,” the evidence presented at trial was that the amniocentesis was performed, at least in part, for the child’s benefit to determine whether her lungs were developed enough that she could be safely delivered. When the doctor performed this procedure, he was providing health care to Plaintiff and her mother. If Plaintiff had never been born alive, her mother would have been able to recover for the physical and emotional injuries associated with a stillbirth. However, once Plaintiff was born alive, she became a natural person under the Act. Upon birth, she became a patient of the amniocentesis doctor under the Act and had her own claim against the doctor. Under the Act, her claim for negligence included health care provided in utero consistent with the statutory definition. In addition, the definition of “health care” under the Act was sufficient to encompass the medical services that the doctor provided to Plaintiff while she was in utero.
In a concurring opinion, Justice McClanahan agreed that the Act applied to the Plaintiff’s claim against the amniocentesis doctor, but would have held that the Plaintiff became a “patient” as defined by the Act when the doctor performed the alleged negligent amniocentesis—not at the time of birth.
Submitted By: Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes (Baltimore, Maryland)