The Litigation Reporter

The Litigation Reporter
June 2008
In This Issue:
Arbitration
Civil Procedure
Class Actions
Intellectual
Property
Mutual Fund
Litigation
White Collar
Crime &
Investigations
ARBITRATION
Order refusing to enforce arbitration clause not appealable
A licensing agreement granting defendant Wabtec Corp. the right to make and sell railcar braking systems
contained a “competent jurisdiction” clause requiring all disputes to be submitted to arbitration in Sweden.
When the licensing agreement ended, Wabtec began making unauthorized use of the technology. To
stop the improper use, plaintiff began arbitration proceedings in Sweden and simultaneously moved
for a preliminary injunction in the U.S. District Court for the Southern District of New York. Wabtec
immediately moved to dismiss the motion based on the “competent jurisdiction” clause of the licensing
agreement that precluded recourse to the courts. The district court denied Wabtec’s motion and Wabtec
sought leave to appeal. In denying Wabtec’s appeal, the Second Circuit held that it lacked jurisdiction
because the district court’s order was not an appealable interlocutory order under the collateral order
doctrine or the Federal Arbitration Act, both of which grant exceptional jurisdiction over appeals of
certain non-final orders. (Wabtec Corp. v. Faiveley Transp. Malmo AB, No. 07-5189-cv (2d Cir. May 2, 2008)).
CIVIL PROCEDURE
New York Court approves service by e-mail in certain circumstances
The widespread use in legal documents of terms such as “e-discovery” and “e-filing” is a testament to
how the computer and internet have changed the way law is practiced. And now, a recent New York state
court opinion may be pushing service into the digital era as well. In that case, plaintiffs were allowed to
serve the defendant company and its president and owner by e-mail after failing to effectuate service at
the defendants’ last known addresses and having exhausted public records, online phone books and other
people locators. Despite the defendants’ elusive whereabouts, the defendant president was responsive to
e-mail. Persuaded that plaintiffs took all reasonable steps to locate defendants, made actual attempts to
effectuate service, and could demonstrate that the defendant president regularly used an e-mail address that
appeared to be his own, the court held that e-mail was an appropriate method of service because it was
“reasonably calculated, under all of the circumstances, to apprise defendants of the action brought against
them.” (Snyder v. Alternate Energy Inc., 2008 N.Y. Slip Op. 28137 (Sup. Ct. N.Y. County April 4, 2008)).
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CLASS ACTIONS
Circuits split over the Class Action Fairness Act
The Class Action Fairness Act (CAFA), which allows defendants to remove certain class actions from state court to federal court,
applies only to lawsuits filed after CAFA’s effective date, February 18, 2005. Several courts have addressed whether an earlier-filed
action naming the wrong party can be removed under CAFA if the plaintiff later substitutes the correct defendant. The Ninth Circuit
has held that such actions are not removable even if the plaintiff substituted the correct defendant after the effective date. Several
circuits, however, have rejected this position, including, most recently, the Seventh Circuit. As Judge Posner explained in disagreeing
with the Ninth Circuit’s conclusion: “On the Ninth Circuit’s view, a plaintiff can defeat removal by first filing a complaint that does
not include a claim or a defendant that would trigger the Act’s right of removal and later substituting a claim or defendant that would
have triggered the right. Suppose that with the Act’s effective date looming, the plaintiff had not completed even a minimal precomplaint investigation. Under the Ninth Circuit’s view, the plaintiff could sue Donald Duck for violating a Chicago noise ordinance
and then at his leisure amend the complaint to substitute a proper claim against a proper defendant, and the new defendant would not
be able to remove.” (Springman v. AIG Marketing Inc, No. 08-1019 (7th Cir. April 15, 2008)).
Second Circuit limits scope of exception to CAFA removal
A majority panel of the Second Circuit has given an expansive interpretation to the Class Action Fairness Act (CAFA) by limiting
the scope of an exception to removal under CAFA. A class of plaintiffs brought suit in state court against officers of Agway Inc.
and Agway’s accounting firm, PriceWaterhouseCoopers, LLP, under New York’s consumer fraud statute. Plaintiff alleged that the
officers, with the aid of their auditor, failed to disclose that Agway was insolvent while marketing certain debt certificates. The
defendants removed the case to federal court under CAFA. The district court, however, held that the plaintiffs’ claims fell within
an exception to federal jurisdiction under CAFA, specifically, for class actions “that relate[] to the rights, duties (including fiduciary
duties) and obligations relating to or created by or pursuant to any security,” and remanded the case back to state court. The Second
Circuit reversed, holding that even though the Agway debt certificates are “securities” and create “obligations” and “rights” in the
holders, the exception to CAFA did not apply because the plaintiffs’ suit did not “relate[] to” those rights where the suit was a state
consumer fraud action alleging that Agway fraudulently concealed its insolvency while marketing its certificates. The court ruled that
“[c]laims that ‘relate[] to the rights . . . and obligations’ ‘created by or pursuant to’ a security must be claims grounded in the terms
of the security itself.” The court stated that such claims “might arise where the interest rate was pegged to a rate set by a bank that
later merges into another bank, or where a bond series is discontinued, or where a failure to negotiate replacement credit results in
a default on principal.” Distinguishing such scenarios from the plaintiffs’, the Second Circuit concluded that the claim “that a debt
security was fraudulently marketed by an insolvent enterprise . . . does not enforce the rights of the Certificate holders as holders.”
Thus, the court held that the district court erred in remanding the class action to state court. Judge Pooler in dissent stated that the
majority “misconstrue[d] the plain language” of the statute and that if the plaintiffs’ suit does not relate to rights and obligations
created by the Agway certificates, “[she was] at a loss to understand why.” (Estate of Barbara Pew v. Cardarelli, No. 06-5703-mv (2d Cir.
May 13, 2008)).
INTELLECTUAL PROPERTY
Adidas owns parallel stripes
The European Union’s highest court recently found that retailers selling apparel featuring two parallel stripes infringe Adidas’
distinctive three-stripe logo. Adidas’ opponents—Marca Mode, C&A, H&M and Vendex—argued that they should be free to place
two stripes on their goods for decorative purposes. The European Court dismissed the retailers’ argument that signs such as stripes
should be available for general use. The court found that availability of signs is not “a relevant factor for determining whether the use
of the sign takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the trade mark.” The court further
found that the mere association or “link” in the public’s mind of the trademark and the third party’s use of the sign may suffice for a
finding of infringement, even where there was no likelihood of confusion between the marks. (Case C‑102/07, Adidas AG v. Marca
Code CV (2008)).
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Adidas successfully defends its stripes
A federal jury in Portland awarded Adidas $305 million for the trademark violation of its three-stripe design by the company that
operates the Payless and Stride Rite shoe stores. The jury awarded these exceptionally high damages after hearing evidence that
Payless bought multiple versions of three-stripe Adidas sneakers, sent them to China to be manufactured with either two or four
stripes, and then sold some 30 million pairs of the infringing shoes. This massive award will certainly sound a precautionary note
to retailers seeking to sell discount look-alike products. (Adidas America Inc. et al. v. Payless ShoeSource, Inc., No. 01-1655 (D. Or.
May 5, 2008)).
MUTUAL FUND LITIGATION
Seventh Circuit holds that fund advisory fees should not be regulated by the courts
The U.S. Court of Appeals for the Seventh Circuit recently affirmed the grant of summary judgment to Harris Associates, the manager
of the Oakmark funds, in a suit brought by three investors claiming that the fund’s fees were excessive in violation of Section 36(b) of the
Investment Company Act. The Seventh Circuit’s decision represents a significant victory for the mutual-fund industry as well as a marked
divergence from precedent. The court departed from the longstanding approach established by the Second Circuit in Gartenberg v. Merrill
Lynch Asset Management, Inc., which focuses on the proportionality and reasonableness of fees. In determining that courts should play no
role in reviewing the reasonableness of mutual fund fees, the court emphasized the language of Section 36(b) that prohibits excessive fees:
investment advisers “shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services.” The court stated
that “[a] fiduciary duty differs from rate regulation. A fiduciary must make full disclosure and play no tricks but is not subject to a cap on
compensation.” The court reasoned that where mutual funds have a significant interest in keeping administrative costs down to attract and
keep investors, “competitive processes” in the market for advisory services, though “imperfect,” “remain superior to a ‘just price’ system
administered by the judiciary.” (Jones v. Harris Associates L.P., No. 07-1624 (7th Cir. May 19, 2008)).
WHITE COLLAR CRIME & INVESTIGATIONS
A year is a year
The United States District Court for the Southern District of New York rejected a defense attorney’s argument that the extra day in
a leap year caused the statute of limitation to expire one day before the end of the fifth year. The government charged Jerry Brooks,
owner of Engineering Services Unlimited, with knowingly making material false statements in connection with a contract to provide
government-trained security guards for federal buildings on the last day of the limitations period. Mr. Brooks moved to dismiss
on the grounds that the applicable five-year statute of limitations had expired before he was charged because one of the included
years, 2004, was a leap year and counted for 366 days. Judge Sweet entertained Mr. Brook’s creative argument but ultimately found
no precedent supporting the proposition that a leap year results in the expiration of the statute of limitations one day earlier than
it would if each year had been 365 days. The court also noted that other courts that have considered this issue have read “year” to
mean “calendar year.” (U. S. v. Brooks, No. 08 Civ. 35 (S.D.N.Y. May 16, 2008)).
The Litigation Reporter
The Litigation Reporter summarizes noteworthy decisions selected by the Editors. It is a source of general information for clients
and friends of Milbank and its content should not be construed as legal advice and readers should not act upon the information in
this report without consulting counsel.
Editors:
Sander Bak
Mehrnoush Bigloo
Atara Miller
Renee Sekino
Alison Teh
© 2008 - Milbank, Tweed, Hadley & McCloy LLP.
For further information about this report, please visit our website at www.milbank.com or contact one of the
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