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August 28, 2008 9:30 AM

THE AM LAW LITIGATION DAILY: August 28, 2008

Posted by Kirstin Maguire

Edited by Ben Hallman

ARBITRATION
Don't Like Your Arbitrator's Ruling? California Supreme Court Says You Can Appeal
Arbitration is supposed to be a trade-off. You want your case decided fast, so you give up the right to appeal arbitrators' decisions in court. But some businesses--typically those that sign commercial contracts for tens of millions of dollars--want to have their arbitration cake and eat it too: They're trying to carve out a right to go to court to challenge so-called "errors of law" by arbitrators. A ruling out of California this week helps advance their cause.

The case dates back to 2001, when retailers of DirecTV equipment from four states filed a class action in Oklahoma, alleging that the company was skimping on commissions. Kirkland & Ellis, which represented DirecTV, compelled the case to arbitration, which took place in Los Angeles. Three arbitrators considered the question of whether the retailers' claims could be heard on a class-wide basis; two decided that they could, although the contract between DirecTV and the retailers was silent on the issue, and the panel awarded damages on a class-wide basis.

Kirkland successfully petitioned a trial court in Los Angeles to overturn the arbitration award, but the Court of Appeal reinstated it. Then the state supreme court picked up a paddle in this game of legal ping-pong. The question on the table: When does a trial court have jurisdiction to review an arbitration ruling?

The state's highest court sided with Kirkland, finding that the contract between DirecTV and the retailers provided for judicial review when arbitrators committed errors of law or legal reasoning. The ruling makes California the first state to allow parties entering into an arbitration contract to rely on such language. (Other states permit judicial review of flawed arbitration awards by statute.) This question has been a hot topic lately; in March, the U.S. Supreme Court ruled that legal challenges to arbitration aren't permitted in federal courts, but that states can set their own rules.

Leading the case for DirecTV were Michael Baumann, Becca Wahlquist, and Shaun Paisley of Kirkland, as well as Drew Paris of Reed Smith. The plaintiffs team was led by Dan Osborn of Beatie & Osborn.


IP
Federal Circuit Re-lights Tobacco Suit
Where there is smoke, there is fire. But where there's tobacco smoke there are nitrosamines--hazardous chemicals that form on tobacco leaves during the curing process. In the latest chapter in an ongoing dispute over patent technology that prevents the harmful chemicals from forming, the U.S. Court of Appeals for the Federal Circuit this week revived Star Scientific's patent infringement claim against R.J. Reynolds, in a case that Star estimates to be worth as much as $1 billion. The appellate ruling also clears the names of a couple of Star's outside lawyers--patent counsel Paul Rivard of Banner & Witcoff and litigation counsel Richard McMillan, Jr., of Crowell & Moring--who had been accused by the district court judge of failing to disclose information to the U.S. Patent and Trademark Office.

Here's the back story. In the late 1990s, Star Scientific filed a handful of patents on a tobacco curing process aimed at lowering levels of the harmful chemicals. In 2001, Star filed suit against R.J. Reynolds, which it claimed was infringing Star patents in its curing process. At around the same time, Star replaced its original patent counsel with the Banner & Witcoff firm.

During the litigation, Star's trial counsel at Crowell & Moring told Banner & Witcoff's Rivard that RJR had raised the issue of a 1998 letter from Star to a consultant, which suggested that harmful microbes formed in tobacco leaves during a drying process called direct-fired curing. Star's patent counsel at the time the letter was written, Romulo Delmondo, deemed the letter non-material and did not notify the PTO of its contents when he filed Star's patent applications. Rivard, after the inquiry by Crowell & Moring, also concluded the letter was not material. But in 2007, Baltimore federal district judge Marvin Garbis found Star's patents unenforceable, concluding there was "clear and convincing proof of an intent to deceive" the PTO about the 1998 letter.

In overturning the lower court's decision in a 3-0 ruling, the federal appeals court panel said that the district court "clearly erred" in his finding. The appellate judges also reversed an earlier summary judgment ruling against Star, which had invalided the patents on a technical detail.

To find out how Star managed this dramatic reversal of fortune, we tracked down appellate uber-advocate Carter Phillips of Sidley Austin, who argued for Star at the Federal Circuit. Phillips told us that in preparing the case, he read the controversial 1998 letter many times, and concluded that it "doesn't look, feel, or strike anyone as material you would have to disclose" in a patent application. Phillips said that on appeal, RJR was simply unable to support its central theory that Star and its co-founder Jonnie Williams conspired to keep the letter from reaching the PTO, first by firing Delmondo and then by hiding the letter from the Banner firm.

Richard Kaplan of Brinks Hofer Gilson & Lione of Chicago argued for R.J. Reynolds.


CORPORATE
Even Pro Football Players Have a Beef With UBS
If it seems like many of our reports lately have been about the litigation troubles of Swiss bank UBS, we swear it's not intentional. We just go where the suits are. And this case, which comes via Brian Baxter at the Am Law Daily, was too meaty to ignore: Seven current and former National Football League players--including former New England Patriots quarterback Drew Bledsoe--have retained famed California trial lawyer Joseph Cotchett of Cotchett, Pitre & McCarthy to sue UBS for fraud.

A civil suit filed Monday in state superior court in San Francisco alleges that UBS withheld information on the criminal history of John Rogers, the founder and former CEO of Pay By Touch, a biometric payment service that was supposed to allow customers to make payments using their fingerprints. Bledsoe and the other six NFL plaintiffs say that UBS helped Rogers raise $130 million for Pay By Touch by touting the secure nature of the transactions.

But Pay By Touch, which operated under the name Solidus Networks, fared about as badly as an ill-fated fourth quarter Bledsoe pass, losing $137 million and bringing in only $700,000 in revenue. The company filed for bankruptcy in December 2007, and court documents show that it owes nearly $330 million to creditors. According to Cotchett's complaint, UBS should have known that Rogers' company would fail--and should have given investors a heads-up. "Rogers had such a detailed history of criminal and civil misconduct and tax evasion prior to his involvement with Pay By Touch that any knowledge of this would have warned investors," the complaint says.

Cotchett, a former U.S. Army Special Forces paratrooper who has represented the NFL and several football teams in the past, is working on the case with William Parish, a name partner at Stockton, California's Parish & Small. UBS did not respond to a request for comment; Parish told the Am Law Daily that he is not sure whether the bank has retained counsel in the matter.

                         

CONTRACTS
No Royalties for You! Maryland Judge Cites Jerry Seinfeld in Tom Clancy's Dispute with Ex-Wife
Jerry Seinfeld and Tom Clancy are not celebrities whose names are often linked. Affable sitcom chronicler of modern-day absurdities and bestselling author of ponderous national security thrillers. Nope, not much overlap there.

But given enough time, everyone has a Seinfeld moment. Even the Maryland State Court of Appeals, which, in a recent decision overturning a judgment against author Tom Clancy, cited a Seinfeld episode to illustrate a point of contract law.

A Seinfeld moment, by our definition, is when you realize that the social rules governing some facet of human behavior are just silly--and then you remember an episode of the hit show from the 1990s in which one of the characters has the same realization and breaks said rules. Like in a 1996 episode called "The Wig Master," in which Jerry tries to return a jacket to a men's clothing shop after a personal quarrel with the salesman. When the clerk asks Jerry why he is returning the jacket, he answers: "For spite."

"I don't think you can return an item for spite," the clerk responds. "If it were unsatisfactory in some way, then we could do it for you, but I'm afraid spite doesn't fit any of our conditions for a refund."

What, you may ask, does this have to do with Tom Clancy? It's all about spite, according to the Maryland court. Clancy was accused by his ex-wife of removing his name from a book series to deprive her of royalties, regardless of the cost to himself. The court confronted the question: Was Clancy breaching a contractual promise of good faith?

Based on Seinfeldian "Wig Master" precedent, the Maryland judges decided that spite was not adequate justification for breaking a contract. "In attempting to exercise his contractual discretion out of 'spite,' Jerry breached his duty to act in good faith towards the other party in the contract," the court wrote.

But in the court's final analysis, the former Mrs. Clancy made out about as well as Elaine Benes at a dance contest. Deciding that there was conflicting evidence about why Clancy removed his name from the book series, the high court overturned a lower court ruling in her favor. Maybe she should hire Jackie Chiles for an appeal to the U.S. Supreme Court.


REAL ESTATE
Piratical Law Firm Wins Appellate Approval For Lease Deal Worth Its Weight in Gold
You'd think a realty company would know to read the fine print in a rental contract. But to be fair, even if S&R Playhouse Realty, based in Cleveland, had discovered a clause in the original 1912 lease agreement on their office space that allowed the property owner to demand rent payment in gold coins, they probably would have laughed it off as a quaint anachronism.

Can you guess where this story is headed? S&R was paying a very reasonable $35,000 a year for its 200,000 square feet. Then, suddenly, its landlord demanded a rent payment equivalent to the value of 35,000 1912 one-dollar gold coins--now worth about $1.5 million. Sounds crazy, right? But as Zach Lowe reports at the Am Law Daily, the landlord's lawyers at Cooper & Kirk, a Cleveland litigation boutique that celebrates wins by flying a "Victory or Death" flag outside of headquarters (a photo, sadly, is not available), somehow convinced the U.S. Court of Appeals for the Sixth Circuit to agree with the landlord's interpretation.

S&R's counsel, Gary Lee Walters at Thompson & Hine, had successfully argued in federal district court that the 1912 lease clause had lain dormant for so long as to be unenforceable. He also pointed out that Franklin Roosevelt had banned private ownership of gold in 1933, effectively voiding any pre-1933 contract requiring payment in gold.

The Sixth Circuit disagreed, saying a bizarre quirk in the law makes the clause valid. Cooper Kirk managing partner David Thompson, who argued for the property owners, actually won the 1997 U.S. Supreme Court case that helped set the precedent the Sixth Circuit relied upon. As he explained to Lowe, courts have held that since Congress repealed FDR's gold ban in 1977, pre-1977 gold clauses can be reactivated if a post-1977 renter assumes the lease. "It's a very interesting little area of the law we've developed something an expertise in," Thompson said.

And the way he sees it, his client isn't asking for more than its due. S&R, he told the Am Law Daily, was lucky it enjoyed a sweet deal on prime property for as long as it did. "Tenants of this property got 70 years of a windfall," Thompson said.

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