Charlene Hicks—Senior Attorney, National Legal Research Group
Prior to bringing a shareholder derivative action, the complaining shareholders must normally make a detailed presuit demand on the corporation’s board of directors or show the court that such a demand would be futile. In United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020, 2021 WL 4344361 (Del. Sept. 23, 2021), the Delaware Supreme Court announced a new “universal test” for determining whether a shareholder demand should be excused as futile. This new test imposes more stringent pleading requirements on the derivative plaintiffs to show futility.
In United Food, the complaining shareholders alleged that the members of Facebook, Inc.’s (now “Meta Platforms Inc.”) board of directors violated their fiduciary duties when they voted in favor of a stock reclassification that would have allowed Mark Zuckerberg, Facebook’s CEO, to sell most of his Facebook stock while still maintaining voting control. The Board’s vote eventually led to the company spending approximately $90 million to defend against a class action lawsuit. The complaining shareholders filed the derivative action in an attempt to recoup those litigation expenses.
Charlene J. Hicks,
impartial business judgment,
shareholder dirivative action,
Anne Hemenway—Senior Attorney, National Legal Research Group
Facing tens of thousands of claims against Johnson & Johnson's ("J&J's") baby powder and other talc products, alleging that the baby powder contains asbestos and causes cancer, J&J put the talc claims into a separate entity called LTL Management LLC, which then filed for Chapter 11 bankruptcy in mid-October 2021 in the U.S. Bankruptcy Court for the Western District of North Carolina. In re LTL Mgmt., LLC, No. 21-30589 (Bankr. W.D.N.C. Oct. 14, 2021). J&J itself is not part of the bankruptcy filing.
The pharmaceutical company's corporate shuffling and bankruptcy maneuver is known as a "Texas two-step" bankruptcy, whereby J&J split its business through a divisive merger under Texas law and created a new entity to carry the talc liabilities. The Texas law allowed J&J to avoid accountability for the over 40,000 talc powder claims. The State's divisive merger statute, Tex. Bus. Orgs. Code Ann. § 1.002(55)(A), allows a company to divide into two separate entities. Because a divisive merger is not treated as an assignment of assets or liabilities, it is used as a strategic alternative to a traditional spin off or asset sale.
Anne B. Hemenway,
J&J talc claims,
Texas two-step bankruptcy,
Amy Gore—Senior Attorney, National Legal Research Group
Recently, the Appellate Division of the New York Supreme Court suspended the law license of Rudy Giuliani, pending a fuller hearing in In re Giuliani, 197 A.D.3d 1, 146 N.Y.S.3d 266 (2021). Without getting mired in any of the political ramifications the suspension of Giuliani may trigger, this ruling provides a useful procedural and substantive framework for evaluating the limits of advocacy by attorneys, both inside and outside of a courtroom.
In this case, multiple complaints were filed before the New York Attorney Grievance Committee ("AGC") based primarily on alleged false statements made by Giuliani in various filings before multiple courts as well as statements made to the press and before other groups during the course of his representation of Donald Trump and the Trump Campaign. The AGC is the administrative entity charged with investigating allegations of attorney misconduct in violation of the New York Rule of Professional Conduct, 22 NYCRR 1240.7, upon receipt of a written complaint. One of the procedural mechanisms available to the AGC is to motion to the Appellate Division a request for interim suspension when "uncontroverted evidence of professional misconduct" has been demonstrated. 22 NYCRR 1240.9(a)(5).
limits of advocacy,
false or misleading statements by attorney
Paul Ferrer—Senior Attorney, National Legal Research Group
Well-established contract law holds that when one party breaches a contract, the nonbreaching party must make reasonable efforts to mitigate its damages. The consequences of failing to mitigate are well illustrated by a recent Illinois appellate decision. See Mayster v. Santacruz, 2020 IL App (2d) 190840, 163 N.E.3d 246.
The plaintiff owned and operated a Mathnasium math tutoring franchise. The franchisee entered into a binding purchase agreement to sell the franchise for $100,000. The parties bickered over several terms, but the disagreement did not justify the buyer's termination, which therefore constituted a breach. Soon after the breach, however, the buyer offered to reinstate the deal and buy the franchise for the same $100,000 originally agreed. The franchisee refused, choosing instead to raise the asking price to $130,000 to explore more profitable opportunities. The franchisee also declined the franchisor's suggestion that it advertise the franchise for sale in an internal publication that targeted Mathnasium owners, and would thus have been more likely to produce a new buyer. The trial court concluded that the buyer had breached the contract but that the franchisee could not recover any damages based on its absolute failure to mitigate. The only questions presented on appeal were whether the franchisee had failed to mitigate its damages and, if so, whether its failure barred it from recovering anything at all.
Paul A. Ferrer,
failure to mitigate,
no recovery of damages
Paul Ferrer, Senior Attorney, National Legal Research Group
The Virginia Supreme Court's recent decision in Flint Hill School v. McIntosh, No. 181678, 2020 WL 33258 (Va. Jan. 2, 2020), seems to provide some support for the old adage that "bad facts make bad law." In that case, the McIntoshes enrolled their minor child in Flint Hill School, a private school in Fairfax County, Virginia. The McIntoshes signed an enrollment contract in which they agreed to pay "all attorneys' fees and costs" incurred by the school "in any action arising out of or relating to this Enrollment Contract." Significantly, the provision did not require that the school be the prevailing party in order to recover its attorneys' fees. As the Virginia Supreme Court pointed out, the practical effect of such a provision, if applied as written, is essentially to foreclose all litigation on the contract.
Paul A. Ferrer,
contract of adhesion,
common law of unconscionability,
Anne Hemenway, Senior Attorney, National Legal Research Group
The economic fallout from the COVID-19 pandemic and the sudden and worldwide shuttering of large and small businesses may be felt for a long time. One of the resulting issues is the applicability of a force majeure clause, or common-law impossibility, frustration of purpose, or commercial impracticability excuses for contract performance and obligations. Force majeure clauses come into effect when events occurring beyond the control of the parties prevent performance of contract obligations. Some contracts include specific force majeure events that will excuse performance at this time, such as a pandemic (the World Health Organization declared a pandemic on March 11, 2020) or when governmental or administrative action is taken that disrupts or precludes performance under a contract.
Anne B. Hemenway,
force majeure clause,
frustration of purpose,
excuse for performance
Anne Hemenway—Senior Attorney, National Legal Research Group
In Return Mail, Inc. v. USPS, 139 S. Ct. 1853 (2019), the U.S. Supreme Court held that a federal agency is not considered a "person" for purposes of seeking review of the validity of a patent under the Leahy-Smith America Invents Act of 2011 ("AIA"), 35 U.S.C. §§ 1 et seq. The AIA, enacted on September 16, 2011, changed the patent system from a first-to-invent to a first-inventor-to-file system. The transition to a first-to-file system took place over a period of approximately 18 months.
The AIA also created the Patent Trial and Appeal Board and established three types of administrative review proceedings before the Board. See 35 U.S.C. § 6. The reviews include an "inter partes review," a "post-grant review," and a "covered-business-method" ("CBM") review. See id. §§ 311, 321.
Anne B. Hemenway,
Amy G. Gore—Senior Attorney, National Legal Research Group
The Model Rules of Professional Conduct provide that “[t]o maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology.” Model Rules of Prof’l Conduct R. 1.1 cmt. 8. Maintaining computer security is both a business responsibility and an ethical obligation for all lawyers. Additionally, attorneys are charged with the ethical obligation to make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client. Id. R. 1.6(c). The need for attorneys to maintain current security protocols for the technology used in their offices has never been more pressing.
Computer “hackers” have infiltrated thousands of computer systems from private individuals to government entities, and litigation firms have increasingly been targeted. A recent article highlights the story of several firms involved in litigation arising out of the 9/11 attack, including the ransoming of sensitive and confidential information that had been on the firms' systems.
ethical obligations of attorneys,
Alistair Edwards—Senior Attorney, National Legal Research Group
The Telephone Consumer Protection Act (“TCPA” or the “Act”) makes it unlawful “to make any call . . . using any automatic telephone dialing system . . . to any telephone number assigned to a . . . cellular telephone service.” 47 U.S.C. § 227(b)(1)(A)(iii).
In Maes v. Charter Communication, No. 18-cv-124-jdp, 2018 WL 5619199 (W.D. Wis. Oct. 30, 2018), the United States District Court for the Western District of Wisconsin recently considered whether a predictive dialer constituted an autodialer (an automatic dialing system) under the TCPA. In that case, the telemarketer called the plaintiff using a predictive dialer, a piece of equipment used in call centers to automatically dial phone numbers and connect representatives to customers that answer the phone. When the plaintiff answered phone calls from the telemarketer, he heard silence before the phone system connected him with a representative. The plaintiff then proceeded to sue the telemarketer under 47 U.S.C. § 227(b)(1)(A)(iii), which prohibits making “any call . . . using any automated telephone dialing system . . . to any telephone number assigned to a . . . cellular telephone service.”
Alistair D. Edwards,
Telephone Consumer Protection Act,
Lee Dunham—Senior Attorney, National Legal Research Group
Student debt is the second-largest source of U.S. household debt, at nearly $1.4 trillion. Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit (accessed on Nov. 10, 2018). It is projected that nearly 40% of student loan borrowers will default by 2023. Judith Scott-Clayton, The Looming Student Loan Default Crisis Is Worse Than We Thought (accessed on Nov. 10, 2018). Many attorneys have seen increased requests for student loan advice.
Because students are often young and legally unsophisticated at the time they borrow, many understand little about their contracts, or have lost—or never obtained—copies of the essential documents. The first step in such circumstances is to have the client contact the servicer to request copies of the promissory note and related documents, payment history, name and address of the current lender, and documentation of any transfers.
default on loan,
obtaining essential documents