Business Litigation in the Southern District of New York - Analysis and updates on business litigation cases out of the federal court for the southern district of New York

The conclusion of fashion week in New York City is an appropriate coda for Judge Scheindlin’s decision in Gucci v. Guess. In 2009, Gucci accused Guess of an elaborate scheme to knock off Gucci’s products, particularly its famous Green-Red-Green stripe, as well as related designs. The opinion includes several interesting pictures comparing the Guess and Gucci versions. 

Guess moved ahead on a motion for summary judgment despite a warning from Judge Scheindlin that the issues were "fact intensive" and required a trial. So it should come as no surprise that Judge Scheindlin after "careful consideration of the voluminous submissions with which the parties have inundated this Court," largely denied the motion. Guess may not have liked the result, but for practicing lawyers the opinion is as clear a review of often frustratingly amorphous trademark issues as one will find.

The opinion contains a particularly thorough analysis of Gucci’s claim of "post-sale confusion," where infringement is actionable, not because the consumer was confused, but because the consumer purposely bought a cheaper product that looked similar, expecting that the public would likely be deceived into thinking it was the genuine article. This allows the consumer "to gain the same prestige at a lower price." Judge Scheindlin held that the test for post-sale confusion turns on an analysis of eight different factors set forth in Polaroid Corp. v. Polared Elecs. Corp., 287 F.2d 492 (2d. Cir. 1961), including any bad faith by the defendant, and the relative quality of the products. Guess also sought summary judgment that Gucci was not entitled to monetary damages based on its trademark infringement claims because Gucci could not prove any actual lost sales. 

Judge Scheindlin agreed that Gucci could not prove its lost sales, but still denied Guess’s motion because Gucci raised genuine issues of fact as to post-sale and actual confusion as well as bad faith by Guess. Among the interesting bad faith evidence was an Amazon.com receipt that Paul Marciano, head of Guess, purchased a book entitled "Gucci by Gucci," which prominently featured the Gucci logo style in dispute on its cover. Another piece of bad faith evidence was a "spec sheet" sent to a Guess licensed manufacturer that included a picture of a Gucci shoe, rather than a Guess prototype.

 For those interested in the niceties of expert testimony, one issue where Guess prevailed was in dismissing Gucci’s claim for actual dilution of its brand (as opposed to likelihood of dilution, where Gucci’s claim remains viable). Gucci’s actual dilution claim failed because its expert couched his conclusions with conditional phrases such as "likely" to cause actual dilution and creating a substantial "risk" of actual dilution. According to Judge Scheindlin that means the report "is sufficient to raise a genuine issue of material fact as to the existence of a likelihood of dilution, [but] it does not do so on the issue of actual dilution." Conditional conclusions from an expert didn't cut it.

(Hat tip to my colleague Spencer Stiefel on this post.)

As Facebook prepares its much ballyhooed IPO, in Fteja v. Facebook Judge Holwell addressed the question of the enforceability of Facebook's terms of use against individuals users.  Mustafa Fteja, a Staten Island resident, alleged that he suffered "mental anguish" when Facebook disabled his account “without justification and for discriminatory reasons.”  But because Fteja clicked that he agreed to Facebook's terms of use when he opened his account, he now is required to pursue his claims in Santa Clara, not New York. 

Even though Fteja claimed that he never agreed to sue in Santa Clara, Facebook demonstrated that when Fteja opened his account he was asked to click “Sign Up,” and was notified that “By clicking Sign Up, you are indicating that you have read and agree to the Terms of Service.”  The phrase “Terms of Service” presented a hyperlink to the actual terms, which included a Northern California venue provision. 

As Judge Holwell framed the question: Is it enough that Facebook warns its users that they will accept terms if they click a button while providing the opportunity to view the terms by first clicking on a hyperlink?

There are various methods by which websites and software companies can display their terms and the method that they choose is a key factor in deciding whether their terms are binding on users.  Facebook’s method is most closely akin to what are known as “clickwrap” licenses, where the user clicks “I agree” to the standard terms after the terms are displayed.  However, Facebook did not display the terms, it just linked to them. In that way, Facebook’s terms are also like “browsewrap” agreements which tell a user that he is subject to the terms of use just by using the site, without requiring specific assent.  Browsewrap agreements have typically been enforced against businesses, but not individual users.  

Judge Holwell went out of his way to state that he was applying well settled principles of contract law, even in the context of new media: "... it is tempting to infer from the power with which the social network has revolutionized how we interact that Facebook has done the same to the law of contract that has been so critical to managing that interaction in a free society. But not even Facebook is so powerful."  Powerful or not, Facebook still gets the win. 

According the the Judge, "at least for those to whom the internet is in an indispensable part of daily life, clicking the hyperlinked phrase is the twenty first century equivalent of turning over the cruise ticket. In both cases, the consumer is prompted to examine terms of sale that are located somewhere else. Whether or not the consumer bothers to look is irrelevant. 'Failure to read a contract before agreeing to its terms does not relieve a party of its obligations under the contract.'"

The opinion also includes a useful review of traditional venue factors that come in to play regardless of the applicability of a choice of venue provision as  “[t]he existence of a forum selection clause cannot preclude the district court's inquiry into the public policy ramifications of transfer decisions.”

(My colleague Spencer Stiefel ably assisted with this post.)

Subprime mortgage litigation doesn’t always pit shareholders against banks which invested unwisely. Banks have been suing each other, too.  Exhibit A is Judge Scheindlin’s most recent opinion in Citibank v. Morgan Stanley, which provides a great primer on reformation and mutual mistake between “two of the most sophisticated financial institutions in the world.” The opinion analyzes Citi’s claim that Morgan Stanley failed to pay under a credit default swap covering bad mortgages. 

A company called Capmark issued a CDO, a security backed by a collateral mix of mortgages and other assets.  Under the CDO’s governing indenture, Citi, which lent $366 million to the CDO under a revolving credit agreement, had the right to liquidate the collateral if its loan was not repaid.  Thinking that it was getting belt and suspenders, Citi also purchased credit protection on its Capmark loan from Morgan Stanley via a credit default swap – essentially loan insurance.  As the real estate market tanked in 2007-08, so did the Capmark CDO, which defaulted on the Citi loan. Citi liquidated its collateral, but collected only $121 million of the $366 million it lent. Citi then turned to Morgan Stanley to collect its $245 million shortfall under the swap. 

But, Morgan Stanley claimed that the swap agreement between Citi and Morgan should be “reformed” because it did not reflect what Morgan claimed was an agreement by that only Morgan had the authority to liquidate the Capmark collateral. During the negotiations of the swap agreement, the lead Citi negotiator inserted the word “OK” in reply to an email from his counterpart at Morgan Stanley proposing that Citi’s rights under the Capmark loan agreement would pass to Morgan for the term of the swap. That transfer of rights provision was not included in the final swap agreement, and Morgan claimed that the failure to include it was a mutual mistake in the drafting of the swap. 

Judge Scheindlin’s opinion recognizes that  “In the proper circumstances, mutual mistake ... may furnish the basis for reforming a written agreement. [But] [b]ecause the remedy of reformation presents the danger that a party, having agreed to a written contract that turns out to be disadvantageous, will falsely claim the existence of a different, oral contract, the New York courts have sharply limited the remedy of reformation both procedurally and substantively.”

Judge Scheindlin exhaustively examined the evidence presented by the parties on cross-motions for summary judgment, ultimately finding that the interlineated “OK” did not meet the high standard of “clear and convincing evidence” necessary to reform the swap. She also addressed the perplexing issue of who has the authority to bind a principal where there are teams of senior officers negotiating on parallel tracks.  Here’s the Judge’s useful take on that issue:

“Even assuming that [the Citi officer] was the “chief negotiator” for Citibank—and that his intent was to effect a transfer [to Morgan Stanley]—the undisputed facts establish that (1) [Morgan] knew the parties' ultimate “intentions” would be reduced to a fully-integrated contract, (2) Costango [the Citi officer] did not have authority to override that contract by responding “OK” to a request in an informal email exchange… (3) Morgan was on notice that any executed agreement would require “Citi final internal approvals,” and (4) the parties agreed that they were “not relying upon any representations (whether written or oral) of the other party other than the representations expressly set forth” in the Capmark Swap Agreement…. ”

In other words, in a case between sophisticated parties, even the subjective intent of a lead negotiator expressed in writing won’t carry the day when it comes to meeting the daunting standard of mutual mistake.  So in the end, Citi got its belt and suspenders, but it was not an easy path, which brings us to Exhibit B – when there’s a large amount of money at stake, the gloves will come off, even between banks that usually are on the same side of the caption in subprime litigation.

And, of course, Happy Father's Day to all.

Judge Batts' opinion in In Re Kingate Securities Litigation shows how difficult it can be to bring a class action alleging state law claims-- even against an off-shore Madoff “feeder fund” that lost $3 billion of its investors' money.  The funds in question were pass through vehicles which gave investors the "opportunity" to invest with Madoff.  Because they were off-shore, the funds investors were not protected by the federal securities laws.

Needless to say, the investors were unhappy with the ultimate outcome of their investment, and sued the funds for fraud and mismanagement.  The question before Judge Batts was whether the state law class actions claims against the fund were barred by the Securities Litigation Uniform Standards Act of 1998.  According to Judge Batts, SLUSA’s purpose is “to prevent plaintiffs from seeking to evade the protections against abusive securities litigation… by filing class action fraud claims based on state law rather than on Federal securities law.”  The SLUSA bar applies where the defendant is alleged to have misrepresented or omitted a material fact or employed a manipulative device or contrivance “in connection with the purchase or sale” of a security, and plaintiffs are a class of more than 50 prospective members.

In order to avoid the SLUSA bar, the investors made the interesting argument that their claims arose from misrepresentations and mismanagment on the part of the funds, and not from Madoff’s securities fraud. Therefore they argued that their claims were not “in connection with” the securities that Madoff purchased, or pretended to purchase. But Judge Batts did not go for it, and applied the majority view in the SDNY. 

 “[T]he Funds' sole objective was to be invested with Madoff and BMIS in New York. Further, the misstatements and omissions Plaintiffs allege largely concern Madoff's purported trading strategy and/or Defendants' alleged duties and promises to oversee Madoff, audit Madoff, or otherwise ensure that Madoff was purchasing covered securities on behalf of the Funds—and thus on behalf of Plaintiffs—as Plaintiffs intended him to do. The Court therefore concludes that Plaintiffs' claims are brought in connection with the covered securities Madoff pretended to purchase, bringing them within SLUSA's purview.”

Judge Batts dismissed the case with prejudice finding that even with "artful pleading," this was exactly the type of class action Congress intended to preempt with SLUSA. "Here, Plaintiffs can avoid SLUSA preemption of their fraud claims only by reconstituting their class of thousands as a class of fewer than fifty, which would in itself bring this action outside this Court's jurisdiction. Repleading the fraud claims would therefore be futile. Repleading Plaintiffs' non-fraud claims would also be futile, since all of Plaintiffs' claims would be preempted by the Martin Act [New York state's securities law that doesn't allow for private claims] even if repleaded. Accordingly, leave to replead is DENIED as futile."

In a lengthy and fascinating opinion, Judge Kaplan explores the enforceability of foreign judgments in Chevron v. Doniger, 11 Civ 0691. The opinion concerns a motion by Chevron to enjoin a 6.5 billion judgment entered in Ecuador for extensive damage to the rain forest, and indigenous cultures in Ecuador, and which provided for a doubling unless Chevron issued a public apology to the Ecuadorian plaintiffs (which it did not).  

Generally speaking, the standards for enjoining an award from a foreign tribunal are daunting.  The foreign award must be shown to have been procured without due process or by fraud.  But as Judge Kaplan notes, this is an “extraordinary case,” and the level of evidence developed by Chevron is “extensive.”  

Judge Kaplan found significant that much of the evidence was developed from the Ecuadorian parties’ New York lawyer who commissioned a documentary about the case, and circulated his own book proposal. The court found that he “attempted to (1) intimidate the Ecuadorian judges, (2) obtain political support for the Ecuadorian lawsuit, (3) persuade the [Government of Ecuador] to promote the interests of the Lago Agrio plaintiffs, (4) obtain favorable media coverage, (5) solicit the support of celebrities (including Daryl Hannah and Trudie Styler) and environmental groups, (6) procure and package ‘expert’ testimony for use in Ecuador, [and] (7) pressure Chevron to pay a large settlement…” 

Chevron obtained access to damning outtakes from the documentary, including the lawyer’s videotaped comment that “They’re all [i.e., the Ecuadorian judges] corrupt! It’s- it’s their birthright to be corrupt.” Also pertinent was Judge Kaplan’s finding that the enforcement strategy devised by the American attorneys for the Ecuadorian plaintiffs was designed primarily to coerce Chevron to settle the case to avoid injury to its business reputation and relationships, rather than to collect on the judgment, which Chevron otherwise could pay. The court found that a preliminary injunction preventing enforcement was necessary to protect Chevron from the “coercive effect of multiple proceedings… [and] distractions and other burdens of defending itself in multiple fora…” 

The judge recognized that the case involved “posturing on both sides,” and that although the court had an extensive record, it was not a complete record.  Yet, Judge Kaplan found sufficient evidence to grant the extraordinary remedy of preliminarily enjoining enforcement of the Ecuadorian judgment anywhere in the world, recognizing that “a preliminary injunction is customarily granted on the basis of procedures that are less formal and evidence that is less complete than in a trial on the merits.”