The Superior Court of New Jersey, after appellate argument by Thomas J. Cullen, Jr., affirmed the trial court’s decision to bar plaintiff’s sole expert witness on the grounds he intended to offer inadmissible opinions regarding additional safety warnings and design alternatives. Cross-examination of plaintiff’s expert revealed deficiencies in the expert’s opinions, and provided the basis for a summary judgment motion. The trial court, after argument from Mr. Cullen, held the expert lacked subject-matter expertise and possessed an inadequate factual basis for the formation of his opinions. With the expert barred from testifying the client’s motion for summary judgment was granted as the expert was critical to plaintiff’s case. On appeal, Mr. Cullen argued the expert was unable to satisfy New Jersey’s standards for the admission of expert testimony. The Appellate Division agreed; it found the expert’s opinions to be “nothing more than bare assertions,” as it upheld the trial court’s decision to exclude the testimony and dismiss the case.
Please see Mr. Ismail’s post in the Maryland Appellate Blog on “Twombly-Iqbal ‘Plausibility’ and Maryland’s Pleading Requirements. https://mdappblog.com/2017/04/19/twombly-iqbal-plausibility-and-marylands-pleading- requirements/#more-3068
What exactly should the word “healthy” mean on food labels?
The United States Food & Drug Administration (“FDA”) asked that same question on Thursday, March 9, 2017. In an all-day public meeting in Rockville, Maryland, the FDA opened the floor to interested parties, asking for input on its ongoing effort to redefine what “healthy” means and which food products can be labeled as such. The meeting began with opening remarks from FDA representatives, followed by presentations and panel discussions from food companies and health experts, break-out sessions on various topic areas, and a public comment session.
As a starting point, the FDA has indicated that “[r]edefining ‘healthy’ is part of an overall plan to provide consumers with information and tools to enable them to easily and quickly make food choices consistent with public health recommendations and to encourage the development of healthier foods by the industry.” Accordingly, it is important for the definition of “healthy” to be updated as science and dietary patterns evolve.
The FDA’s current decision to consider redefining “healthy” was prompted by two developments. First, there was a recognition that Americans are under-consuming certain important nutrients the FDA should be encouraging them to eat. Second, there was a recognition that some previously-held beliefs regarding what constitutes a healthy diet are now outdated.
By way of example, there has been considerable focus on limiting total fat consumption without regard to the type of fat consumed. As a result, nuts, avocados, fatty fish and other foods are not considered “healthy” under the current guidelines because they contain more than 3 grams of fat per serving. Science has evolved, however, and the prevailing view is that not all fats are created equal – i.e., monounsaturated fat (found in nuts) and polyunsaturated fat (found in fatty fish) can lower blood cholesterol levels and decrease the risk of cardiovascular disease. Thus, one of the issues discussed during the public meeting was whether “healthy” should be redefined in such a way that would permit such foods to carry the “healthy” claim. On that point, the Vice President and General Counsel of KIND, LLC, Justin Mervis, noted that there is something wrong with the definition of “healthy” when low-fat pudding qualifies, but avocados and almonds do not.
During the meeting’s break-out sessions, the discussions centered, in part, on whether “healthy” should be a nutrient-based claim, a food-based claim, or a hybrid of the two, with most participants favoring a hybrid approach. In so doing, however, many participants advocated for a broader array of nutrients to be considered “healthy.” Those participants argued that, if a health benefit can be demonstrated, it should make the list. Other participants advocated for the inclusion of more food groups – such as nuts, fatty fish and eggs.
Specific concerns were voiced over the option of defining “healthy” based solely on nutrient content. In addition to the previously-mentioned debate over fat content, there also was a great deal of discussion surrounding the difference between natural sugar (such as that in bananas) and added sugars. Additionally, there was concern that being overly-focused on a particular nutrient may have unintended consequences. For example, focusing on reducing sugar may lead to the addition of artificial sweeteners, which may have detrimental health consequences.
There also were concerns with defining “healthy” based solely on food groups. Specifically, which food groups should be included, what should the selection criteria be, and should foods be required to have a certain nutrient profile in order to qualify as “healthy”? Some participants noted that the health benefits can vary, even within a particular food group – for example, the health benefits of broccoli are very different from the benefits of celery. Additionally, there was concern expressed whether certain food groups, such as fruits and nuts, which in limited quantities are viewed as healthy, but in large quantities may not be because of the natural sugar and fat levels, should be included in the definition.
Regardless of the definition, some participants questioned whether a food label should be permitted to simply claim that it is “healthy” without saying why it is healthy, such as “healthy because it provides 100% of the recommended daily value of Vitamin C.”
Finally, an over-arching concern among the participants was how the FDA intended to keep the “healthy” definition up-to-date with science, and whether it intended to revisit the definition on a pre-determined regular basis. The FDA did not answer those questions, but instead invited the public to provide its thoughts on those topics.
The FDA concluded the meeting, advising that it will continue to receive written comments until April 26, 2017. After that, the FDA will review all of the information and decide whether the definition should be redefined, and if so, how and when. The FDA expressed a desire to continue the dialogue, but expressed no date for when any decisions would be made.
 https://www.fda.gov/food/guidanceregulation/guidancedocumentsregulatory information/labelingnutrition/ucm520695.htm.
The Obama Administration is appealing U.S. District Court Judge Mazzant’s November 22 Order that enjoined the implementation of the overtime rule scheduled to take effect today, December 1. Had the rule gone into effect, employers would have been required to pay overtime to most employees making less than $47,476 annually. Currently, employers are required to pay overtime only to employees who make less than $23,660. The overtime rule was expected to impact approximately 4.2 million workers.
The uncertainty surrounding the overtime rule is causing heartburn for many employers. Anticipating the change, some employers already have changed their employees’ compensation (for example, by switching a salaried employee to hourly or raising some employees’ salaries above the $47,476 threshold). Still other employers have revised their overtime policies (for example, by changing when overtime is permitted, how it is to be recorded, and whether prior approval is required). Now those employers have the difficult task of deciding whether to enact those changes or suspend them until the dispute is finally resolved.
In making their decision, employers should be aware that the Department of Labor’s appeal that was noted today may never get off the ground. Generally, it takes months for an appeal to be briefed and heard, and by then, President-Elect Trump and his team will be in office. Mr. Trump campaigned on his opposition to regulations that adversely affect businesses―particularly small businesses. And the business community, anticipating the overtime rule’s adverse economic impact, has loudly opposed it. Accordingly, the Trump Administration might abandon the appeal. The Republican Congress, no longer threatened by President Obama’s veto power, also could try to overturn the rule. Thus, it is likely that the new overtime rule – at least as currently drafted – will never go into effect.
In the much awaited ruling from the United States District Court for the Eastern District of Texas, Judge Amos Mazzant issued an injunction banning the implementation and enforcement of the Department of Labor’s (DOL) overtime rule that was set to take effect on December 1, 2016. If implemented, the overtime rule would have increased the exempt salary threshold under the Fair Labor Standards Act (FLSA) from $455.00 weekly to $913.00 weekly, thereby requiring anyone making under $913.00 per week to be paid overtime for any hours worked over a standard 40-hour week. The Rule also provided that the salary threshold would increase automatically every three years.
Twenty-one States brought suit against the DOL and moved for a preliminary injunction to stop the implementation of the overtime rule. In granting the injunction, the Court found that “[t]he State Plaintiffs have established a prima facie case that the Department’s salary level under the Final [Overtime] Rule and the automatic updating mechanism are without statutory authority” and that the States would suffer irreparable harm if the rule were permitted to go into effect on December 1.
Specifically, the Court noted that Section 213(a)(1) of the FLSA (also known as the EAP exemption) provides that “any employee employed in a bona fide executive, administrative, or professional capacity . . . as such terms are defined and delimited from time to time by regulations of the Secretary” shall be exempt from minimum wage and overtime requirements. 29 U.S.C. § 213(a)(1). The Court found that Congress’s intent was clear from the statute’s unambiguous language, and that Congress intended the EAP exemption to be tied to the duties of the job, not a salary level.
The Court also found that, although Section 213(a)(1) authorizes the DOL to define the types of duties that would qualify an employee for exemption, it does not authorize the DOL to set a minimum exemption salary level. Thus, the Court concluded that the DOL exceeded its delegated authority “by raising the minimum salary level such that it supplants the duties test.” The Court explained that the “Department’s role is to carry out Congress’s intent. If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change.”
Although only twenty-one States moved for the preliminary injunction, the Court issued a nationwide injunction, reasoning that because the overtime rule applied to all states, the scope of the irreparable injury extended nationwide.
Today’s ruling is not the final word. The injunction merely maintains the status quo until the Court rules on the merits of the case or the issue is decided on appeal. A ruling on the merits, however, may be here before we know it. In addition to the twenty-one States that have challenged the overtime rule, more than fifty business organizations also have sued the DOL challenging the rule. The two lawsuits have been consolidated before Judge Mazzant, and the Business Plaintiffs have moved for expedited summary judgment. The issues have been fully briefed and are ripe for the Court’s consideration. The Court may rule on the papers, but has reserved November 28th for a hearing, if necessary.
For now, employers are not required to follow the new overtime rule. Its implementation is stayed until further court or legislative action.
President-Elect Donald Trump vowed, if elected, to “drain the swamp” in Washington, D.C. As part of that effort, Trump promised that he would undo many of the regulations enacted during President Obama’s eight years in office. With a Republican in the White House and Republicans controlling both the House and the Senate, the climate is ripe for Trump’s de-regulation promises to become a reality. One regulation likely to be targeted by President-Elect Trump – at least in part – is the Department of Labor’s (DOL’s) revised overtime rule, set to become effective December 1, 2016.
The overtime rule more than doubles the exempt salary threshold under the Fair Labor Standards Act (FLSA) from $455.00 weekly ($23,660 annually) to $913.00 weekly ($47,476 annually). Thus, beginning December 1st, employees making less than $913.00 per week (unless specifically exempted) must be paid time-and-a-half for any hours worked over a standard 40-hour week. The impact is not insignificant. It is estimated that over four million workers who previously would have been exempt will receive overtime pay under the revised law.
President-Elect Trump’s anti-regulation stance is no secret. He believes that fewer regulations will spur economic growth. Nevertheless, a whole-sale undoing of the overtime rule may not be in the cards. First, on the campaign trail, Trump did not cite the rule as a priority. When asked about it, he seemed to advocate for a small business exception to the rule, rather than doing away with the rule in its entirety. Second, given Trump’s higher priorities – like repealing and replacing the Affordable Care Act – he may not wish to use his political capital on this issue. Third, rolling back the overtime rule may be unpopular among Trump’s working-class supporters. Thus, rather than getting rid of the rule in its entirety, it is likely that President-Elect Trump will strike a middle-ground by phasing-in gradual salary threshold increases over time, carving-out a comprehensive exception for small businesses, or undoing that portion of the rule that requires the salary thresholds to increase automatically every three years.
Whatever changes may be on the horizon, absent success in the pending lawsuit that has been brought by twenty-one states and various business groups against the DOL seeking to enjoin implementation of the rule, nothing is likely to happen before the December 1 effective date. Thus, for now, the only prudent course is for employers to continue taking action to ensure that they will be in full compliance with the overtime rule by December 1st. Should there come a time when the regulation is rolled back – in whole or in part – employers will need to reevaluate the situation, keeping in mind the laws of their particular state, the time and effort already expended on compliance, the additional resources required to reclassify or change compensation, as well as morale and other workforce issues.
business infringement, cloudflare, counterfeit, cyber security, cybersquatting, dish network case, featured, internet hosting, internet safety, north face apparel corporation, north face infringement, north face trademark, trademark infringement, trademarks, web hosting
Co-author Brian M. Lands
The ever-growing number of websites presents businesses that value their brands and intellectual property with the common problems of counterfeiting and cybersquatting. Cybersquatting is the act of registering, trafficking in, or using an internet domain name with the intent to profit from the goodwill of someone else’s trademark. Sophisticated counterfeiters often register domain names and develop websites that use, or closely resemble, an established company’s name and logos to confuse consumers in an attempt to sell them fake goods.
Although trademark and copyright owners can obtain an injunction to shut down or transfer ownership of an infringing website, defendants often evade a court’s order by creating new websites to continue their counterfeiting activities. This ability to spawn new websites as quickly as old ones are taken down has become an obstacle for companies trying to protect their intellectual property. To combat this thorny problem, owners of intellectual property are seeking innovative injunctive remedies against third-parties who provide services that support a defendant’s infringing website, such as domain name registries, website optimization companies, and search engines. This ability to hold third-parties accountable is a newly developing and unsettled area of law.
As a general rule, due process concerns limit a court’s ability to bind non-parties to the litigation. Federal Rule of Civil Procedure 65(d)(2)(c) is an exception that gives a federal court the authority to issue an injunction or a temporary restraining order against “other persons who are in active concert or participation with” an infringing defendant, so long as that third-party has “actual notice” of the court order. As discussed in this article, the meaning of “in active concert or participation with” is a hotly contested issue in the quest for a robust solution to online infringement.
The seminal case analyzing “in active concert or participation” in this context is The North Face Apparel Corporation v. Fujian Sharing Import & Export LTD. Company. In that case, China-based defendants operated a wide array of websites that were set up to mimic authorized online retail stores that sold genuine “North Face” merchandise. In actuality, however, the defendants used the web sites to sell counterfeit products falsely bearing the plaintiff’s “famous and well-regarded trademarks.” Finding in the plaintiff’s favor, the court entered a permanent injunction against the defendants. The court also issued orders requiring non-parties to disable the defendants’ domain names, make them inactive and transferable, and to stop providing services in connection with the offending websites.
Disregarding the court’s ruling, the defendants set up a new website and continued their counterfeiting. Unable to effectively enforce the injunction against the defendants, the plaintiffs attempted to hold third-parties accountable. Specifically, the plaintiffs asked the court to find Public Interest Registry, a corporation that maintains a database of all “.org” domain names, in contempt for continuing to provide services to the defendants’ websites. Although the court initially granted the plaintiff’s request, it reversed itself only eleven days later. Because Public Interest Registry was a non-party, the court determined that it “lacked the authority” to order it “affirmatively to act, i.e., to disable or otherwise render inactive defendants’ infringing domain names and transfer them to plaintiffs’ ownership and control.”
Nevertheless, relying on Rule 65(d)(2)(c), the court concluded that it could enjoin Public Interest Registry from “aiding and abetting, or participating, in defendants’ unlawful activities.” The court reasoned that:
Public Interest Registry, for example, cannot continue to make the connections that enable customers attracted to defendants’ websites to access those websites. Physically, such a connection is made when a customer types one of defendants’ domain names ending in ‘.org,’ such as ‘officialpolos.org,’ into an Internet browser or [c]licks on a hyperlink that corresponds to such a domain name. Public Interest Registry’s server responds to the customer’s initiated message by supplying the link that connects the customer to the appropriate secondlevel domain name server, which, in turn, directs the customer to the specific website he or she addressed.
Thus, if Public Interest Registry continued to “connect consumers to defendant counterfeiters’ websites, and continue[d] to permit the registration and renewal of defendants’ infringing domain names, Public Interest Registry” was subject to the court’s jurisdiction.
Less than one year later, in Dish Network LLC v. Dillion, the Southern District of California entered a temporary restraining order against a number of defendants who set up a website allowing users to illegally access the plaintiff’s television programming. As in The North Face, the defendants in Dish Network circumvented the order by registering new domain names and establishing new websites. In addition to being entered against the defendants, the TRO covered third-parties that aided and abetted the defendants, such as the domain name registrars and registries, “all website hosting, website optimization, and any other company or person that provided website services for the [infringing] domains, including without limitation, CloudFlare, Inc.” The court ordered these third-parties to “cease all website services made in connection with the [infringing] domains,” but did not explain how their activities “aided and abetted” the defendants’ misconduct.
In 2015, the Southern District of New York, in Arista Records, LLC v. Tkach, found third-party, CloudFlare, “in active concert or participation with (i.e., aiding and abetting)” cybersquatting defendants. Unable to stop the defendants from repeatedly setting up new websites that improperly used its trademarks, the plaintiffs sought to enforce a TRO against CloudFlare. CloudFlare is an internet service provider that, when someone types a domain name into a web browser, converts “the domain name into the IP address for the website associated with the domain name so that the user can connect to the website they are trying to reach.” CloudFlare also “optimizes the delivery of customers’ websites from the customers’ origin server to the visitors’ browsers,” giving a website faster page load times and better performance, while blocking various threats to the website.
In opposition, CloudFlare contended that its services “passively” and “automatically” served the domain names at issue, and that they were not necessary for the operation of the defendants’ websites. The court rejected this argument and reasoned that, by connecting internet users to the infringing websites, CloudFlare’s services not only benefit the defendants, but also “fundamentally assists them in violating the injunction because, without it, users would not be able to connect to Defendants’ site unless they knew the specific IP address for the site.” Relying on The North Face and Dish Network, the court found that by connecting users and providing performance enhancements to the defendants’ websites, CloudFlare’s services went beyond the “passive hosting of content.” Importantly, the court held that it was not determinative that CloudFlare’s services were automated, or that the defendants’ websites would to continue to exist without CloudFlare’s existence. As a result, CloudFlare was within the court’s reach under Rule 65(d)(2)(c).
Two weeks after the court’s decision, CloudFlare filed a motion to clarify whether it or the plaintiffs had the “burden of affirmatively identifying” other websites operated by the defendants that infringed the plaintiffs’ trademarks. Noting that CloudFlare was “merely a third party” to the action, and because the plaintiffs were already monitoring their intellectual property for such sites, the court concluded that the plaintiffs were obligated to notify CloudFlare of websites that violated the injunction. Id. at *2. However, if CloudFlare became aware that one of its customers was infringing the plaintiffs’ trademarks, it could not sit on its hands and had to cease serving that customer without having received a request from plaintiffs. Id.
In conclusion, because counterfeiters often rely on the freedom and anonymity provided by the internet for their operations, trademark owners seeking to protect their brand must remain vigilant and employ creative legal strategies involving non-parties that aid and abet infringement. The developing case law in this area shows that enforcement options are available to combat cybersquatting, and that a free internet does not equate to a lack of accountability for those who facilitate trademark infringement.
 See 15 U.S.C. § 1125(d).
 Fed. R. Civ. P. 65(d)(2)(c).
 The North Face Apparel Corp. v. Fujian Sharing Imp. & Exp. LTD. Co., No. 10 CIV. 1630 (AKH), 2011 WL 12908845 (S.D.N.Y. June 24, 2011).
 Dish Network LLC v. Dillion, No. 12CV157 BTM NLS, 2012 WL 368214 (S.D. Cal. Feb. 3, 2012).
 Arista Records, LLC v. Tkach, 122 F. Supp. 3d 32, 37 (S.D.N.Y. 2015).
 Arista Records, LLC v. Tkach, Case No. 15-cv-3701 (AJN), 2015 WL 4742597, at *1 (S.D.N.Y. July 9, 2015).
In marketing a franchise, Ms. Jones talks up the opportunity in glowing terms, using a spreadsheet that projects large profits after a minimal investment, and hands Mr. Brown a 75-page prospectus in small print. Sold on the idea, Mr. Brown signs a franchise agreement.
Struggling to stay afloat a year later, Mr. Brown takes stock of the situation, and realizes that his outlays have been far larger and his revenues infinitesimally smaller than Ms. Jones had projected. Worse, he learns from another angry franchisee that Ms. Jones had known all along that the projections were unrealistic. He pulls out his agreement, where his eyes fall immediately on the following:
Franchisee acknowledges that he has not received, and is not relying upon, any representations from Franchisor as to the capital or operating costs needed to operate a franchise, or of the amount of revenues or profits that a franchise may generate. Franchisee also acknowledges that he has received and read copies of this franchise agreement and the Franchise Disclosure Document.
It slowly dawns on Mr. Brown that he has probably signed away all recourse for the misleading projections from Ms. Jones. Right?
Not necessarily. Whether a claim might be viable could depend on both factual issues and what law applies. Maryland law, for example, states that:
As a condition of the sale of a franchise, a franchisor may not require a prospective franchisee to agree to a release, assignment, novation, waiver, or estoppel that would relieve a person from liability under [Maryland franchise law].
This means that Ms. Jones could not require Mr. Brown to give up his rights under franchise law as a condition of entering into a franchise agreement. This law has been held to trump contractual language in which a franchisee agreed that it had not received and was not relying on any representations or guarantees. The court held that the contractual language alone was not enough for dismissal of the case; instead, a jury would have to decide whether the franchisee had reasonably relied on the projections of outlays and revenues.
Another court went even further, applying this statute to override a choice-of-law clause in an agreement that – on its face – was governed by Texas law, with all disputes to be resolved in Texas courts. The plaintiff characterized the parties’ agreement as a franchise, for which he had paid a franchise fee. The defendants, on the other hand, argued that the arrangement was a distributorship, and that the payment was for merchandise ordered. Disregarding the venue provision, the plaintiff filed suit in Maryland.
Under Maryland law, the defendants’ failure to register franchise disclosure documents with state regulatory authorities was actionable. Texas law, by contrast, did not provide a comparable right of action. The court held that, “if enforced, the choice-of-law clause here would operate as precisely the type of waiver proscribed by the Maryland General Assembly.” It therefore rejected a motion to dismiss and a motion to transfer to Texas, holding that the choice-of-law provision was against Maryland public policy and unenforceable.
Not all states, of course, have anti-waiver provisions governing franchise agreements. Even where they do, courts don’t always apply them to trump choice-of-law clauses. In states that have such provisions, however, especially where they have been held to override choice-of-law clauses, these laws require careful analysis of franchise rights and liabilities – by both franchisees evaluating potential claims and franchisors defending against them.
 Md. Code Ann. Bus. Reg. § 14-226.
 Hanley v. Doctors Express Franchising, LLC, 2013 WL 690521 at *26-29 (D. Md. Feb. 25, 2013).
 Id. at *27. The disclaimer, thus, could still be relevant in the end; the question was whether the franchisee – as a factual matter – reasonably relied on the flawed projections while aware of the contractual language disclaiming them.
 Three M Enter., Inc. v. Texas D.A.R Enter., Inc., 368 F. Supp. 2d 450 (D. Md. 2005).
 Id. at 454, 457-60.
 See id. at 458-59.
 Id. at 459.
 See, e.g., JRT, Inc. v. TCBY Systems, Inc., 52 F.3d 734 (8th Cir. 1995).
 E.g., Three M, 368 F. Supp. 2d 450; Dunkin Donuts, Inc. v. N.A.S.T. Inc., 428 F. Supp. 2d 761, 767 (N.D. Ill. 2005). Non-waiver provisions were also enforced in Solanki v. 7-Eleven, Inc., 2014 WL 320236 (S.D.N.Y. Jan. 29, 2014); Randall v. Lady of Am. Franchise Corp., 532 F. Supp. 2d 1071 (D. Minn. 2007); Long John Silver’s, Inc. v. Nickleson, 923 F. Supp. 2d 1004 (W.D. Ky. 2013). Note that the federal Petroleum Marketing Practices Act also prohibits the conditioning of a franchise agreement on the release or waiver of any protected right. 15 U.S.C. § 2805(f)(1)(B); see also Coast Village, Inc. v. Equilon Enter., LLC, 263 F. Supp.2d 1136, 1178 & n. 38 (C.D. Cal. 2001).
Is it reasonable for a patient to believe that her health insurer is the employer of its in-network physicians? If so, can the insurer be held liable for the actions of in-network physicians? Just how much should an insurer assume that patients know about healthcare finance? A recent case in Maryland addressed these very questions. The answers may change the way healthcare providers do business.
Bradford v. Jai Medical Systems
In Maryland, a hospital may be liable for the negligence of a non-employee physician under the doctrine of apparent agency.[i] Only recently, though, has the state’s highest court held that this doctrine extends to managed care organizations (MCOs) as well.
In Bradford v. Jai Medical Systems, the Maryland Court of Appeals[ii] considered whether an MCO could be held liable for the negligence of an in-network provider.[iii] The plaintiff, a member of an MCO, sought a referral from her primary care physician for a specific podiatrist for treating her bunion. As a result of the podiatrist’s negligent care, the plaintiff underwent partial amputation of her foot.[iv] The plaintiff then sued, naming her MCO as one of the defendants. Though the negligent podiatrist was not an employee of the MCO, the plaintiff claimed that the MCO was liable under the doctrine of apparent agency.
At trial, a jury found for the plaintiff, and the MCO appealed. The Maryland Court of Special Appeals reversed, finding that the plaintiff did not fulfill the criteria of apparent agency and faulting the lower court for not applying the “common knowledge” test.[v] The Maryland Court of Appeals, the state’s highest court, affirmed, but disagreed, in part, with the intermediate court’s reasoning.
MCOs may be liable under apparent agency
MCOs encompass a variety of organizational structures formed to reduce healthcare costs. They include preferred provider organizations (PPOs), which generally cover both in-network and out-of-network physicians and charge more for the latter, and health maintenance organizations (HMOs), which generally restrict coverage to in-network physicians and require members to select a primary care physician. The defendant MCO in Bradford operated like an HMO and did not directly employ any healthcare providers.
Maryland has adopted the doctrine of apparent agency as set forth in the Restatement (Second) of Agency § 267.[vi] The doctrine, as applied by Maryland courts, holds a person or entity (“the principal”) liable for the actions of a non-employee (the apparent agent) when three criteria are met. First, the principal must have created, or allowed creation of, an appearance of agency, i.e., that the principal employed the apparent agent. Second, the plaintiff must have subjectively believed an agency relationship existed and relied on her belief. Finally, the plaintiff’s belief and reliance on that belief must be objectively reasonable.
In prior cases, Maryland courts have held that hospitals may be liable for the actions of independent-contractor physicians, in the capacity of apparent agents of the hospital.[vii] For example, if an emergency room is operated by a hospital’s independent contractors, but the emergency room is within the same physical structure as the hospital and there are no signs indicating that the hospital does not directly run the emergency room, the hospital is liable for the negligence of the emergency room physicians.[viii] The Court of Appeals in Bradford reasoned that an MCO, like a hospital, may lead members to believe that in-network physicians are employed by the MCO. Explaining that “there is no reason to preclude application of the theory of apparent agency in the context of an MCO and a network physician,” the court thus joined the courts of Illinois, Florida, and Pennsylvania in holding that MCOs may be liable under the doctrine of apparent agency.[ix]
The Bradford court ultimately found that the plaintiff had failed to establish apparent agency. Though the plaintiff claimed that the text of the MCO’s directory of in-network physicians suggested that the physicians were employees of the MCO, the court found no such suggestion, especially considering that the directory listed the names of 4,000 providers, including numerous hospitals and nationally known retailers and pharmacies like Wal-Mart and Rite Aid. The plaintiff showed that she subjectively believed the podiatrist was employed by the MCO, but the court held that her belief was not reasonable—the MCO did not hold out its providers as employees, and the plaintiff did not receive treatment on or near the MCO’s premises. Had the podiatrist been located in the same building as the MCO’s offices, there might have been a different result—or at least a question of fact created. Then, it would have been left to a jury to determine whether the MCO had implied that the physician was its employee.
The “common knowledge” test is inapplicable to MCOs
The Court of Appeals affirmed the intermediate court’s decision, but it disagreed in regard to the application of the “common knowledge” test. Under this test, a plaintiff cannot prevail on a claim of apparent agency if his belief contradicts matters of common knowledge. For example, it is common knowledge that an oil company’s signs and emblems at a gas station indicate only that the company’s products are sold at the station, not that the oil company owns and manages the station. Therefore, a plaintiff may not successfully claim that an oil company’s signs led him to believe that a gas station attendant was an employee of the oil company.[x]
The intermediate court in Bradford ruled in favor of the defendant MCO, based in part on the common knowledge test. Here, the plaintiff’s belief that the MCO employed the podiatrist was not objectively reasonable, because “it is common knowledge that MCOs are the equivalent of insurance providers and not the provider of actual medical services.”
The Court of Appeals pointedly disagreed and instead held that the common knowledge test is inapplicable to healthcare finance. First, the Court noted that MCOs, due to their diversity, may be very different from traditional insurers. MCOs may finance healthcare services directly and may even employ healthcare providers. Thus, an assertion that MCOs do not provide medical services is not necessarily accurate and therefore not common knowledge.
Second, when a court finds that a decisive fact is a matter of common knowledge, it is taking judicial notice that no person of ordinary intelligence could possibly have a belief contradicting that fact. Citing research showing that only a small percentage of Americans understand fundamental insurance terms like “deductible” and “copay,” the court explained that “it is not clear that details of health care finance are ‘common knowledge’ even to well educated members of our society.”
Apparent agency is not a new concept in the health sector. Hospitals in Maryland know, or should know, that an independent-contractor physician can create liability if the hospital does not clearly communicate to patients the actual status of the physician as an independent-contractor. But MCOs may be surprised to learn that they are subject to the same test in regard to professional liability.
Based upon the recent decision in Bradford, MCOs should clearly state in their directories that in-network physicians are not employees of the organization. Also, if the in-network physicians are located in the same building as an MCO, that MCO should require that the physicians post signs clearly stating that the physicians are not employed by the MCO.
Finally, MCOs should consider requiring that their members sign a form containing an express acknowledgement that healthcare providers in the MCO’s network are not the employees or agents of the MCO. Such documentation would establish unequivocally that the MCO is not representing the providers in its network as its agents, rather than leaving it up to the courts to decide that such a presumption could not be inferred from the actions they did take. An express acknowledgement, signed by an MCO’s members, would also serve to contradict a plaintiff’s claim that he subjectively believed that there was an agency relationship between the MCO and the provider, and that his belief was reasonable.
This case shows that MCOs cannot rely on claims of “common knowledge” in asserting that patients realize that in-network physicians are not agents of the MCO. When it comes to healthcare finance, MCOs, hospitals, and physicians should not assume that patients understand basic terms and concepts. Taking the time to explain, and then fully document, fundamental concepts upfront may reduce the likelihood of litigation later on.
- Mehlman v. Powell, 281 Md. 269, 378 A.2d 1121 (1977).
- The Court of Appeals is Maryland’s highest court. The Court of Special Appeals is the intermediate appellate court.
- Bradford v. Jai Med. Sys. Managed Care Orgs., Inc., 439 Md. 2, 93 A.3d 697 (2014).
- The podiatrist’s negligence was undisputed, as a default judgment had been entered.
- JAI Med. Sys. Managed Care Org., Inc. v. Bradford, 209 Md. App. 68, 57 A.3d 1068 (2012) cert. granted, 431 Md. 219, 64 A.3d 496 (2013) and aff’d sub nom. Bradford v. Jai Med. Sys. Managed Care Orgs., Inc., 439 Md. 2, 93 A.3d 697 (2014).
- See B. P. Oil Corp. v. Mabe, 279 Md. 632, 370 A.2d 554 (1977).
- Mehlman, 281 Md. 269; Debbas v. Nelson, 389 Md. 364, 885 A.2d 802 (2005); Hunt v. Mercy Med. Ctr., 121 Md. App. 516, 710 A.2d 362 (1998).
- Mehlman, 281 Md. 269.
- Petrovich v. Share Health Plan of Illinois, Inc., 188 Ill. 2d 17, 719 N.E.2d 756 (1999); Ramos v. Preferred Med. Plan, Inc., 842 So. 2d 1006 (Fla. Dist. Ct. App. 2003); Boyd v. Albert Einstein Med. Ctr., 377 Pa. Super. 609, 547 A.2d 1229 (1988).
- Chevron, U.S.A., Inc. v. Lesch, 319 Md. 25, 570 A.2d 840, 845 (1990).
Franchising and licensing disputes don’t typically end all that well for franchisees or licensees. The Federal Reporters and Federal Supplements are rife with reports of proceedings to confirm arbitration awards, or to enter default judgments, permanent injunctions and judgments for money damages in amounts that, one guesses, will probably never be satisfied in full. So it may come as a surprise that one such encounter, at least, ended with a more modest tab for the licensee.
Although Ledo Pizza System, Inc. is a franchisor, and the parties did have a licensing agreement, the dispute between Ledo Pizza System, Inc. and Ledo Restaurant, Inc. was not actually a franchise dispute. Rather, it involved some minor breaches of the licensing agreement and, more fundamentally, of a prior settlement agreement between the parties. But, first, a little background.
Ledo Restaurant, Inc. was the original Ledo Restaurant, formed jointly by members of the Beall family and the Marcos family in Adelphi, Maryland, in 1955. (It later moved a few miles to College Park, Maryland.) After decades of happy dough-making together, there was a falling-out between the families, and a lawsuit was filed. It was settled in 1994 under an agreement in which the Bealls obtained ownership of the Ledo Pizza® trademark (and franchising rights) and the Marcoses obtained full ownership of the original Ledo Restaurant, a license to use the Ledo name with certain restrictions, and the right to establish future restaurants or carry-outs in Bowie, Maryland. Things were again fine for the next 12 (or almost a baker’s dozen) years.
However, another dispute eventually arose between the Bealls and the Marcoses.  The Bealls sued the Marcoses and related parties in 2006, asserting breach of contract, trademark infringement and unfair competition. Among other things, Ledo Pizza System complained about the alleged use of its trademarks by Expressions Catering, a business owned partly by the Marcoses and partly by other investors. The dispute initially arose from a wedding party catered by Expressions at which eight pizzas from the Ledo Restaurant were heated and served. The dispute then expanded to encompass two or three other events catered by Expressions, including a bar mitzvah at which six pizzas from a Ledo Pizza® (franchise) location were served, and a church event which did not feature pizza but did involve “Ledo” lasagna and tiramisu.
As found by United States District Judge Deborah K. Chasanow, who presided over the dispute for six years, Ledo Restaurant supplied the eight pizzas on request for the wedding party but took no other part in the catering operation, which was, instead, handled solely by Expressions. (Tommy Marcos sent Deborah Hamann, the operator of Expressions, an open invoice for the eight pizzas.) Judge Chasanow concluded that none of the Marcoses directly infringed on the Ledo Pizza® trademark but, after the wedding party, Ms. Hamann apparently used the expression “Ledo Pizza” on some of the catering operation’s menus. After a full trial, Judge Chasanow concluded that the Bealls had established a breach of the settlement agreement, but that “it was totally inadvertent,” and that the Marcos brothers, while they owned a majority of the catering company that had infringed the mark, were not responsible for its day-to-day operations. Judge Chasanow found two minor breaches of contract for which the defendants were responsible. One of these resulted from the posting of a link to a Washingtonian magazine review that opined that the pizza offered “through the mediocre Ledo Pizza chain” did not “do justice” to the “real thing” available at the Ledo Restaurant. Judge Chasanow awarded nominal damages of two dollars, one dollar for each breach. So, first serving: to the plaintiffs. Tab to the defendants: two bucks.
On appeal, however, the United States Court of Appeals for the Fourth Circuit disagreed in part, holding that the Marcoses were also responsible for a breach of the settlement agreement in the use of the Ledo Pizza® mark by Expressions, the catering company. The Fourth Circuit vacated that portion of the District Court judgment and remanded it “to allow the District Court to consider damages on this claim.” On remand, Judge Chasanow carefully checked each item on the Fourth Circuit’s order – and added five dollars to the Marcoses’ tab on five other breaches.  (These included the use of the Ledo mark on the wedding party and bar mitzvah invoices.) There, after six years, the story pretty much ended.
To recap the courses: appetizer in federal District Court: tab of two dollars. Trip up to Richmond to the Fourth Circuit and back down for the main course: Five dollars more. Putting this another way – with the caveat that I have not actually checked menu prices – about the cost of one topping in Round One and maybe some garlic bread or mozzarella sticks in Round Three. No delivery charge, of course, because Ledo’s doesn’t deliver. (Hey! If it’s worth getting pizza, it’s worth going there in person!) As a cola, er, I mean, coda, to the story, Ms. Hamann of Expressions did not actually pay Mr. Marcos for the eight pizzas supplied by Ledo Restaurant at the wedding event. Instead, she “‘bartered’ with [him] by preparing desserts for the restaurant.”
In all seriousness, I should note that, while the facts here provide the ingredients for a rather entertaining story, violations of franchise and/or license agreements are not generally matters for comic relief. As the Ledo plaintiffs themselves argued to Judge Chasanow, “this case was never about damages, but rather about clarifying rights.” Fair statement. And that’s generally worth a lot more than a buck or two. But, after incurring over a quarter of a million dollars in legal fees, this case can also serve as a reminder that it is generally wise at the outset to carefully consider objectives, weigh all options and make a realistic assessment of what one stands to gain (or lose). Litigation is sometimes necessary, sometimes unavoidable, sometimes even beneficial, but it should never be approached as an All You Can Eat Buffet.
Are you ready to place your order now?
*The image pictured does not portray actual Ledo Pizza
 Not that disputes typically end much better for franchisors or licensors, either. They commonly face business disruptions and lots of attorneys’ fees, and may have to seek injunctive proceedings to protect trademarks, or accounting proceedings with only the prospect of uncollectible judgments at the end. But well-written franchise agreements and proper disclosure documents generally afford them more protection than their counterparties.
 At least in part, the dispute seems to have been fired by questions as to who was entitled to benefit from publicity stoked by a favorable review on the Oprah Winfrey Show. See Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2010 WL 1328538 at *1 n.3 (D.Md. March 29, 2010) (Ledo I).
 Id. at *3.
 Id. at *4.
 Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 407 Fed.Appx. 729, 732 (4th Cir. Jan. 7, 2011) (Ledo II).
 See Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2012 WL 1247103 (D.Md. April 12, 2012) (Ledo III). Judge Chasanow did also award attorneys fees of $25,000 to the plaintiffs, less than one-tenth of the fees sought of $251,493.50. Id. at *6-8. She did later amend the fee award to include an additional amount of $4,620 in attorneys’ fees. Ledo Pizza System, Inc. v. Ledo Restaurant, Inc., 2012 WL 4324881 (D.Md. Sept. 18, 2012) (Ledo IV).
 Ledo I at *3.
 Ledo I at *9.
While it is generally difficult to recover attorneys’ fees in the absence of a statute, rule, or contract,[i] many attorneys often will ask for them at the outset of litigation, either because that is what they normally do or because their opposing counsel has asked for them. While ordinarily this might not be a significant issue, it can be if the forum is an American Arbitration Association (“AAA”) arbitration.
Reflexively asking for attorneys’ fees in a AAA arbitration, simply because your opponent did, can be a trap for a number of reasons. To begin with, Rule 47(d)(ii) of the AAA Rules provides that an arbitrator may award attorneys’ fees if either: (1) both parties request an award of attorneys’ fees; or (2) the award is authorized by law or the arbitration agreement.[ii] What this means is that the arbitrator may award fees even if the parties agreed otherwise in a document, including an arbitration agreement. This can happen either where the arbitrator determines that an award is authorized under the law – even if it’s at odds with an arbitration agreement – or because both sides have requested it. In some cases, we have seen respondents/defendants—who asked for attorneys’ fees simply because the other side did—get hit with a fee award after they lost the case.
An award of attorneys’ fees at arbitration is likely to surprise clients and insurance adjusters, particularly in cases where an agreement did not allow for an award of fees but their counsel mistakenly asked for them. Indeed, we have taken part in panel discussions with adjusters and in-house attorneys who believe it is below the standard of care to seek attorneys’ fees reflexively at AAA arbitrations. As such, it is possible that legal malpractice claims will arise out of the decision to seek attorneys’ fees in a AAA arbitration. Accordingly, the best course of action is to scrutinize whether seeking an award of attorneys’ fees makes sense given the facts, and refrain from asking for the fees simply because your opponent has done so.
[i] Pacific Employers Ins. Co. v. Eig., 864 A.2d 240, 160 Md. App. 416 (2004).
[ii] See AAA Rules, 47(d)(ii).
5 Things That Can Make Or Break A Case Involving Intentional Acts Committed By An Employee
Recently, we handled a case in Maryland involving claims made against a private school for the intentional acts of one of its employees. In an effort to recover money damages and reach a possible insurance policy, plaintiffs often assert claims that center on the school’s purported negligence in (1) supervising; and (2) hiring the employee. When faced with similar claims in Maryland, it’s important at the outset to remember five key things that can make or break the case.
1. Were The Alleged Acts Within The Scope Of Employment?
The law in Maryland is clear that an employer may be vicariously liable for the tortious acts of its employees, but only if those acts are within the scope of employment. Tall v. Bd. of School Commissioners of Baltimore City, 120 Md. App. at 251, 706 A.2d at 667.[i] “An employee’s tortious conduct is considered within the scope of employment when the conduct is in furtherance of the business of the employer and is authorized by the employer.” Id. When faced with a case involving employee intentional torts, the Court of Appeals of Maryland has concluded that:
To be within the scope of the employment the conduct must be of the kind the servant is employed to perform and must occur during a period not unreasonably disconnected from the authorized period of employment in a locality not unreasonably distant from the authorized area, and actuated at least in part by a purpose to serve the master.
Sawyer v. Humphries, 322 Md. 247, 255, 587 A.2d 467, 471 (1991).
Stated more simply, the test for whether an employee is acting within the scope of employment “is whether the servant was advancing his master’s interests in doing what he did at the time he did it.” Rusnack v. Giant Food, Inc., 26 Md. App. at 265, 337 A.2d at 454.[ii]
2. Were The Alleged Acts Of A More Personal Nature?
In contrast to the above, where “an employee’s actions are personal, or where they represent a departure from the purpose of furthering the employer’s business, or where the employee is acting to protect his own interest, even if during normal duty hours and at an authorized locality, the employee’s actions are outside the scope of his employment.” Sawyer v. Humphries, 322 Md. at 256-57, 587 A.2d at 471 (citations omitted) (emphasis added). Indeed, “‘[w]here the conduct of the servant is unprovoked, highly unusual, and quite outrageous’ courts tend to hold ‘that this in itself is sufficient to indicate that the motive was a purely personal one’ and the conduct outside the scope of employment.” Id. at 257, 587 A.2d at 471 (emphasis added).
3. Did The Alleged Acts Involve Sexualized Contact?
Courts interpreting Maryland law specifically have held that employers cannot be vicariously liable for sexual assaults committed by their employees because such conduct is by its nature personal, does not further an employer’s business and, as a matter of law, is not an act within in the scope of employment. Selective Ins. Co. v. Oglebay, 242 Fed. Appx. 104, 106 (4th Cir. 2007) (“[U]nder Maryland law, the intentional acts committed by Mr. Oglebay [a driving instructor alleged to have sexually assaulted a mildly mentally retarded student] were not ‘within the scope of his employment.’”); Morash v. Anne Arundel County, 2004 WL 2415068, * 5 (D. Md. Oct. 28, 2004) (“Actions taken out of ‘a desire to fulfill sexual urges may not be actuated by a purpose to serve the employer’ and are outside the scope of employment. . . . [Accordingly], Morash’s claim of respondeat superior liability will be dismissed.”) (quoting Lewis v. Forest Pharm., Inc., 217 F.Supp.2d 638, 659 (D. Md. 2002)); Green v. The Wills Group, Inc., 161 F.Supp.2d 618, 626 (D. Md. 2001) (“[U]nder Maryland law, an employer is not vicariously liable for the torts of assault and battery based on sexual assaults by another employee as they are outside the scope of employment.”).[iii]
4. Did The Employer Use Reasonable Care In Hiring The Employee?
When analyzing liability for the hiring of an employee who committed an intentional tort, under Maryland law, “an employer’s liability [for negligent hiring/retention] is not to be reckoned simply by the happening of an injurious event. Rather, there must be a showing that the employer failed to use reasonable care in making inquiries about the potential employee[.]” Economides v. Gay, 155 F.Supp.2d 485, 489 (D.Md. 2001) (citations omitted) (emphasis added). In Economides, the Court granted the defendant’s motion to dismiss, holding:
Although Plaintiffs allege that Dean Witter demonstrated negligence in hiring and retaining Mr. Gay, they fail to allege a specific instance illustrating that Dean Witter failed to use reasonable care in employing this particular employee. Consequently, the court shall dismiss this claim.
Id. at 489-90 (emphasis added).
Thus, a dispositive motion will often be successful unless the plaintiff can demonstrate more than bald allegations of negligent hiring.[iv]
5. Did The Employer Have Reason To Believe That The Employee Might Have A Propensity To Engage In Improper Conduct?
In order to succeed on a claim for negligent supervision, a plaintiff would have to establish, among other elements, that a defendant knew or should have known that the employee in question had a propensity to engage in improper conduct. Williams v. Cloverland Farms Dairy, Inc., 78 F. Supp. 2d 479, 484 (D. Md. 1999); Evans v. Morsell, 284 Md. 160, 395 A.2d 480 (1978). Often, in cases involving the intentional acts of employees, another issue will center on whether the acts were reported. The acts often go unreported or underreported, with the plaintiff arguing that he/she failed to report the acts for fear of being retaliated against by the employer. Under Maryland law, however, a generalized fear of retaliation does not excuse a failure to report improper actions and/or sexual harassment on the part of one offended or purportedly injured by the employee. Barrett v. Applied Radiant Energy Corp., 240 F.3d 262, 267 (4th Cir. 2001); Matvia v. Bald Head Island Mgmt., 259 F.3d 261, 270 (4th Cir. 2001); Bush v. Potter, 2009 WL 5177286, No. AW-06-959 *6 (D.Md. Dec. 21, 2009).
While litigation centering on intentional acts committed by employees often grabs headlines and can be embarrassing – particularly when the acts are sexual in nature – Maryland law generally protects employers who take reasonable precautions. Generally, in Maryland, an employer is not liable for the intentional acts of an employee that were not committed within the scope of his or her employment. Further, intentional, sexualized contact (such as abuse) generally can never be within the scope of employment. As for a claim of negligent hiring tethered to other sexualized contact claims, a plaintiff must show that the employer failed to use reasonable care in hiring the employee in question and that the employer knew that the employee had a history of engaging in the kind of acts called into question.
[i] See also Dhandraj v. Potomac Electric Power Co., 62 Md. App. 94, 98, 488 A.2d 512, 514 (1985); Rusnack v. Giant Food, Inc., 26 Md. App. 250, 261, 337 A.2d 445, 451-52 (1975); Perry v. FTData, Inc., 198 F.Supp.2d 699, 708-09 (D. Md. 2002) (dismissing respondeat superior claim, in part on the grounds that plaintiff “does not allege that FTData knew or should have known of the conduct so as to authorize it or that FTData ratified it”).
[ii] See also Guzel v. State of Kuwait, 818 F.Supp. 6, 10 (D.D.C. 1993) (“As solely a question of common sense, it is difficult to comprehend how any sexual assault could be committed for a purpose other than that of the individual. Sexual assault is, by its nature, a crime committed for personal reasons.”).
[iii] See also Thomas v. BET Sound-Stage Restaurant/BrettCo., Inc. 61 F.Supp.2d 448, 454 (D. Md. 1999) (dismissing claims against the employer/restaurant for the alleged sexual assault of an employee by the restaurant’s manager, holding “as a matter of law, an employer is not vicariously liable for sexual assault and harassment of its employee, as such acts are outside the scope of employment”); Wolfe v. Anne Arundel County, 374 Md. 20, 34, 821 A.2d 52, 60 (2003) (police officer who made a traffic stop and then raped the female motorist was not acting within the scope of his employment); Tall v. Bd. of School Comm’rs of Balt. City, 120 Md. App. at 257, 706 A.2d at 670 (school is not vicariously liable, as a matter of law, for the sexual assaults committed by a school employee upon a student).
[iv] As the Court of Appeals of Maryland has aptly noted, a complaint in a negligence action must “allege, with certainty and definiteness, facts and circumstances sufficient to set forth (a) a duty owed by the defendant to the plaintiff, (b) a breach of that duty and (c) injury proximately resulting from the breach.” Scott v. Jenkins, 345 Md. 21, 28, 690 A.2d 1000, 1003 (1997) (quoting Read Drug and Chemical Co. v. Colwill Constr. Co., 250 Md. 406, 412, 243 A.2d 548, 553 (1968)) (underlining added). “Merely stating that a duty existed, or that it was breached, or that the breach caused the injury does not suffice[.]” Horridge v. St. Mary’s County Dept. of Social Services, 382 Md. 170, 183, 854 A.2d 1232, 1238 (2004).
FINRA Expungements And Proposed Rule 2081
Over the last few years, the chorus of voices demanding a change in the way FINRA handles expungements has grown louder. From Iowa Senator Charles Grassley to the influential Public Investors Arbitration Bar Association (PIABA), concerns have been raised that it has been too easy for brokers and other financial services professionals to scrub customer complaints from FINRA’s Central Registration Depository. Regardless of the fact that from 2007 through 2012 FINRA granted expungements in less than 5% of cases (838 out of 17,765 cases), FINRA, in 2014, has made a proposal to the Securities and Exchange Commission to adopt Rule 2081, which will make expungements more difficult to obtain. This presentation provides an overview of FINRA’s approach to handling expungements and what the industry can expect if Rule 2081 is implemented.
The Central Registration Depository
Every financial services professional who is licensed to sell securities in this country has a “CRD” number. CRD stands for Central Registration Depository, which is a central licensing and registration database that contains the registration records of over 6,800 broker-dealers and 660,000 securities representatives. The CRD contains information about registered personnel, including customer complaints, arbitration claims, and court filings made by customers, and the arbitration awards or court judgment that may result from those claims or filings – what is commonly called “customer dispute information.”
FINRA’S Expungment Framework
Brokers who wish to have customer dispute information removed from the CRD system must seek expungement – which FINRA has long described as an “extraordinary remedy” (see footnote 14, infra) – pursuant to FINRA Rule 2080 (formerly NASD Rule 2130). FINRA Rule 2080 provides that firms and associated persons seeking expungement of customer dispute information from the CRD system must name FINRA as a party and obtain a court order that either directs expungement or confirms an arbitration award containing expungement relief. Upon request, FINRA may waive the obligation to name it as a party if FINRA determines under Rule 2080 that the expungement relief is based on an affirmative judicial or arbitral finding that one of three elements are present:
- The claim, allegation or information is factually impossible or clearly erroneous;
- The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
- The clam, allegation or information is false.
Interestingly, under the plain language of Rule 2080(a), the only requirement for expungement seems to be that the party seeking expungement “obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.” This appears to be at odds with later guidance provided by FINRA, including in its “Expanded Expungement Guidance,” where FINRA emphasizes the need to find one of the three elements listed above. In actuality, Rule 2080 does not appear to require a finding of the three elements in order to grant expungement relief (the three elements only relate to the waiver requirement pertaining to FINRA), although FINRA continues to intimate that arbitrators must describe which of the three elements are present to support expungement.
Problems Associated With FINRA Rule 2080
The above notwithstanding, FINRA has continued to express concern at the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief. Essentially, FINRA takes issue with what it perceives as defense counsel “purchasing” expungements while settling cases. FINRA has taken certain steps over the years to address these concerns, including adopting NASD Rule 2130 in 2004 (FINRA was formerly known as the NASD, or the National Association of Securities Dealers) which stated that the Rule’s affirmative determination requirement imposed on arbitrators would reduce, if not eliminate, the risk of expunging information that is critical to investor protection and regulatory interests based on an agreement between the parties. FINRA also cautioned associated persons and firms that negotiating settlements with customers in return for exculpatory affidavits that the firm or associated knows or should know are false or misleading was a violation of FINRA Rules.
The Adoption Of FINRA Rule 12805
In 2008, FINRA adopted FINRA Rule 12805 to require arbitrators to perform additional fact finding before recommending expungement of customer dispute information from the CRD system. FINRA Rule 12805 requires arbitrators, among other things, to do the following when presented with a request for expungement:
- Review settlement documents;
- Review the amount of payments made to any party, and any other terms and conditions of the settlement;
- Indicate in the award which of the grounds in FINRA Rule 2080 serves as the basis for their expungement recommendation, and;
- Provide a brief written explanation of the reasons for recommending expungement.
In implementing this Rule, FINRA believed the requirements listed above would alleviate any concerns over arbitrators recommending expungement under what might appear to be questionable facts and circumstances.
FINRA Comments Suggesting Expanded Expungement Requirements
In addition to the requirements of Rules 2080 and 12805, FINRA has also made various comments in proposals and notices stating that expungement relief can only be granted when the information being expunged “has no meaningful investor protection or regulatory value.” This language has always been viewed as problematic since a claim could be found to be factually impossible, clearly erroneous, or false under Rule 2080, and yet the claim could relate to an issue of “meaningful investor protection or regulatory value” that would preclude expungement. Importantly, FINRA has not announced that this language is a necessary element for granting expungement relief, but it is something to be mindful of as we have seen arbitration panels mention it at hearings and in telephone conferences when considering the issue of expungement.
Proposed FINRA Rule 2081
Despite the steps it has taken previously, FINRA continues to be concerned about whether firms and associated persons should be prohibited from otherwise compensating customers in return for the customer’s agreement not to oppose expungement of customer dispute information from the CRD system. As a result, in 2013, FINRA sent to arbitrators and published on its website guidance stating that, in determining whether to recommend expungement relief in settled arbitration claims, arbitrators should inquire whether a party conditioned settlement on an agreement not to oppose a request for expungement relief.
Following that, FINRA proposed adopting Rule 2081, which would provide that no member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to agree or not oppose the member’s or associated person’s request to expunge such customer dispute information from the CRD system.
Rule 2081’s proposed prohibition would apply to both written and oral agreements and agreements entered into during the course of settlement negotiations, as well as to any agreements entered into separate from such negotiations. The proposed rule change would, for instance: (1) preclude a firm or associated person from conditioning the settlement of a customer’s claim on the customer’s agreement to consent to, or not to oppose, the firm’s or associated person’s request for expungement; and (2) would preclude a firm or associated person, following a settlement of the dispute at issue, from compensating the customer in return for the customer not opposing the firm’s or associated person’s expungement request.
Not surprisingly, the plaintiff’s bar supports the idea of adopting Rule 2081, with PIABA declaring that while “FINRA has taken steps in the past to discourage the practice of conditioning settlements on the customer’s consenting to or not opposing expungement, this practice nonetheless persists and remains a threat to the transparency and integrity of the CRD.” Of course PIABA does not believe that the new rule would go far enough, suggesting instead that expungements should be done away with, but the organization believes Rule 2081 would be a good first step in curtailing the efforts of defense attorneys to “cleanse” the records of rogue financial services professionals.
The Practical Effect Of Rule 2081
It is unclear at present what the final decision of the SEC will be. To the extent that Rule 2081 is adopted, it may result in closer scrutiny of cases, allegations, and documents and ultimately make it slightly more difficult to obtain expungement, though it is likely parties will continue to seek expungement in much the same way they did before Rule was adopted (with a few differences). For instance, if Rule 2081 is adopted, it will likely be useful for parties seeking expungement to include certain language in settlement agreements that states some or all of the following:
- The Respondent/Respondents intend to seek expungement relief;
- The Respondent/Respondents has/have not paid any consideration in relation to the expungement request;
- The request for expungement was not a condition of the settlement agreement.
Including the above language (or something similar), would allow defense counsel to work within the language of Rule 2081 and assist in obtaining expungements, assuming FINRA does not further alter or narrow the expungement framework.
 See Notice to Members (“NTM”) 04-16 (March 2004).
 See Securities Exchange Act Release NO. 48933 (December 16, 2003), 68 FR 74667 (December 24, 2003), (Order Approving File No. SR-NASD-2002-168).
 See FINRA Rule 2080(b)(1)(A)-(C).
 See Notice to Arbitrators and Parties on Expanded Expungement Guidance, available at http://www.finra.org/arbitrationandmediation/arbitration/specialprocedures/expungement/.
 Courts have determined that Rule 2080 does not provide a substantive test that must be met in order to obtain expungement, rather, it is a procedural rule that “does not provide any substantive criteria as to when expungement would be appropriate.” See Lickiss v. FINRA, 208 Cal.App. 4th 1125, 1135 (Cal. 2012).
 See www.finra.org/web/groups/arbitrationmediation/@arbmed/@arbtors/documents/arbmed/p016853.pdf. In particular, see page 6 of 11.
 See NTM 04-43 (June 2004).
 See Securities Exchange Act Release No. 58886 (October 30, 2008), 73 FR 66086 (November 6, 2008) (Order Approving File No. SR-FINRA-2008-010).
 See Securities Exchange Act Release No. 57572 (March 27, 2008), 73 FR 18308 (April 3, 2008) (Notice of Filing File No. SR-FINRA-2008-010).
 See Notice to Arbitrators and Parties on Expanded Expungement Guidance, available at http://www.finra.org/arbitrationandmediation/arbitration/specialprocedures/expungement/.
 The proposed rule change would not affect the processes relating to requests for expungement relief set forth in FINRA Rules 2080, 12805 and 13805. Thus, if an arbitration panel is considering the appropriateness of expungement in accordance with FINRA Rule 12805, a customer could express support for, or opposition to the firm’s or associated person’s request for expungement as part of the recorded hearing session required by that Rule.
 Id. at 1.
On July 22, 2014, Goodwill Industries became the sixth major retailer to have its systems breached by malware. These breaches likely come from major cyber syndicates rather than individual hackers. With an ever-evolving threat, businesses must do all they can to protect data, lest the goodwill they’ve built for years be destroyed in a flash.
The threatening cyber-security climate demands that every business undertake a comprehensive risk analysis. Without a comprehensive risk analysis designed to prevent a breach, major consequences can follow. Businesses face the high costs of notifying individuals and of rectifying the breach, as well as government penalties, industry penalties and civil liability. And worst, people may simply avoid your business in the future.
Staying in front of the threat and identifying malevolent activity represents a multi-factorial problem for many businesses. Some companies lack the technology and tools to identify threatening activity at all. Others have the technology or tools to monitor their databases and identify threats, but cannot do so quickly enough. Some lack the financial resources to monitor in a manner that meets industry standards. Some lack institutional policies and controls to prevent data breaches. Whatever the reason, lapses invite risk; business must be vigilant in this continuously changing environment.
Adapting your business to minimize the risk of a data breach is no easy task. Laptops can be left at the airport. Cell phones can be stolen. On the more complex side, an SQL database can be injected with malware causing a major data breach. A real and virtual minefield waits.
The right steps to take seem simple. You can hire the right staff, train them, use trustworthy vendors for your software, and put the right policies in place. However, these steps may not be enough to protect your business. Another step to consider is purchasing the right insurance. Today, several major insurance carriers are offering insurance policies to protect companies against liabilities arising specifically from data breaches. Such insurance can be invaluable.
Cyber risk and data breach coverage can come in a separate policy or a rider on your general liability insurance. At a minimum, it can provide a defense and indemnity for liabilities arising from a breach. But that is only a start. Some insurers may offer their policyholders assistance in regulatory compliance and risk-prevention techniques. Some may help you manage the consequences of a breach, if one occurs, and work with your business to notify affected individuals. All of this should be part of a vigilant business’s comprehensive plan for anticipating and dealing with these cyber risks and data threats.
The five key things to be aware of if an opposing party is seeking to establish a mechanic’s lien on a piece of property you have an interest in.
To encourage construction in the state, Maryland has enacted a statute to assure payment to laborers, contractors, suppliers of materials, and others who have conferred a benefit to a property owner. Maryland’s mechanic’s lien statute, which is found at Section 9 of the Real Property Article of the Maryland Annotated Code, allows those who have provided labor or materials on a construction project to place a lien on the underlying improvements to the real property for the value of any unpaid labor or materials. Because mechanic’s liens are creatures of statute, strict compliance with the procedural requirements of the statute is required. This post reviews several key factors that both parties to a mechanic’s lien proceeding should bear in mind.
1. Is There An Arbitration Clause?
At the outset, it’s important to determine whether there’s a contract at issue that contains an arbitration clause. Maryland courts will stay the mechanic’s lien proceedings if an arbitration clause exists and one of the parties seeks to compel the matter to arbitration.[i] Arbitration clauses can therefore disrupt the efforts of the moving party to establish a lien by, among others: (1) thwarting the ability of the moving party to have the court hold a prompt hearing to establish the lien; and (2) disrupting the statutory deadline for seeking to establish the lien. While arbitration clauses are not in every contract, it’s imperative to quickly determine whether there’s an arbitration clause that might be triggered to impact the mechanic’s lien case.
2. Timing Is Everything
When seeking to establish a mechanic’s lien, time is of the essence. Maryland’s mechanic’s lien statute imposes two key deadlines for those seeking to establish a lien: (1) a 120-day deadline for filing a “Notice of Intention to Claim Lien”;[ii] and (2) a 180-day deadline to file a petition to establish the mechanic’s lien[iii] (the “Petition to Establish the Lien.”) These deadlines begin from the “day that work is finished or materials furnished,” and are strictly construed, so if the party seeking to establish the lien has missed either of them, a motion to dismiss or other appropriate response can be filed.
3. Has Sufficient Information Been Provided?
Maryland courts have consistently found that a mechanic’s lien is not created until it is established by a court, and it may not be established, even on an interlocutory basis, absent a finding of probable cause made after the owner has an opportunity to object.[iv] In order to establish the lien, the moving party has to make a number of submissions to the court which must contain certain specific information.
The Notice Of Intention To Claim Lien
To begin the process of establishing a lien, the moving party must file its Notice of Intention to Claim Lien under Section 9-104 of the Real Property Article, which must contain specific information concerning the amount and kind of labor and materials furnished.[v]
The Petition To Establish The Lien
Once the Notice of Intention to Claim Lien has been filed, the moving party must then serve on the property owner a Petition to Establish the Lien which also must contain specific information under Section 9-105 of the Real Property Article, including the following items:
- Name and address of petitioner;
- Name and address of owner;
- The nature or kind of work done or the kind and amounts of materials furnished, the time when the work was done or the materials furnished, the name of the person for whom the work was done or to whom the materials were furnished, and the amount or sum claimed to be due, less any credit recognized by the petitioner;
- A description of the land, including a statement whether part of the land is located in another county, and a description adequate to identify the building;
- An affidavit setting forth sufficient facts to establish a lien; and
- Originals or copies of all documents which establish a lien.
It is imperative to correctly include and specify all of the information listed above at the outset, as only certain parts of the Petition can be amended or changed later.[vi] If the requisite specificity is lacking in the Petition, the non-moving party can seek to have the Petition declared invalid and dismissed.[vii]
The Procedure After The Petition Is Filed
After the Petition to Establish the Lien is filed, the court will review the Petition and all attached materials, including any response to the Petition from the non-moving party. If the Petition is defective or missing key information, the court can (1) deny the Petition outright or (2) require the claimant to supplement and explain any part of the Petition. If the Petition appears to contain all of the required information, the court will enter a show cause order and schedule a hearing.
4. Is There Sufficient Evidence To Produce At The Show Cause Hearing?
During the show cause hearing, which is sometimes referred to as a “probable cause” hearing, the court hears the case on a summary basis, meaning it does not hear the entire case. What this means is that the claimant and the property owner are not able to set forth all evidence, including materials gathered during traditional discovery. Rather, the claimant has an opportunity to put forth key portions of his or her case with limited opposition from the owner. For the matter to proceed, the court will have to ascertain that the claimant is “more or less likely” to prevail at the final trial.[viii] Because the claimant may be limited at the show cause hearing to the evidence set forth in the Petition, all materials necessary to establish the lien must be included with the Petition.
5. Three Possible Outcomes After The Show Cause Hearing
The court has three potential options after the show cause hearing has been concluded. The court (1) could deny the lien entirely; (2) enter a final order establishing the lien (often unlikely unless the owner does not defend at all); or (3) enter an interlocutory order establishing a temporary lien and assigning a trial date for final resolution (which is the most likely outcome of the show cause hearing).
The Interlocutory Order
The interlocutory order establishes a temporary lien until a court can hold a complete and final trial. To enter the interlocutory order, the court must determine that a probable cause for the mechanic’s lien exists. Once entered, the interlocutory order will: (1) establish the lien; (2) describe the boundaries of the land and the buildings covered by the lien; (3) state the amount of the probable claim; (4) specify the amount of any bond that the owner can file to release the lien; (5) perhaps require the claimant to file a bond to cover any possible damages as a result of the interlocutory lien; and (6) assign a trial date for the final hearing, which must be within six months.[ix]
The final hearing must be held within six months of the interlocutory order. The lien rights will also expire unless the lien is established by final order within one year of the filing of the Petition.[x] Importantly, the final hearing is a complete trial and the property owner and claimant will be able to engage in full discovery. The burden of establishing the lien is on the claimant. No final order establishing the lien will be entered unless the petitioner prevails. No lien exists until the final order is entered.
[i] McCormick Constr. Co. v. 9690 Deerco Rd. Ltd. Partnership, 79 Md. App. 177, 556 A.2d 292 (1989).
[ii] See Md. Code Ann. Real Prop. §9-104(a)(1).
[iii] See id. §9-105.
[iv] Winkler Const. Co., Inc. v. Jerome, 355 Md. 231, 734 A.2d 212 (1999).
[v] Section 9-104 contains a form “Notice” that can be followed.
[vi] Scott & Wimbrow, Inc. v. Wisterco Investments, Inc., 36 Md. App. 274, 373 A.2d 965 (1977).
[vii] Mervin L. Blades & Son, Inc. v. Lighthouse Sound Marina and Country Club, 37 Md. App. 265, 377 A.2d 523 (1977); Continental Steel Corp. v. Sugarman, 266 Md. 541, 295 A.2d 493 (1972).
[viii] See Reistertown Lumber Co. v. Royer, 91 Md. App. 746, 605 A.2d 980 (1992).
[ix] See Md. Code Ann. Real Prop. §9-106(b)(3).
[x] See id. §9-109.
The conventional wisdom in consumer class action litigation has long been that cases are won or lost when the court decides the plaintiffs’ motion for class certification. Virtually no class representative continues to pursue an individual claim after a court denies class certification. And defendants have long treated certified consumer class claims as too risky to defend at trial, preferring instead to settle the overwhelming majority of them. Many courts have accurately recognized that as “a practical matter, the certification decision is typically a game-changer, often the whole ballgame, for plaintiffs and plaintiffs’ counsel.”[i] Accordingly, “denying or granting class certification is often the defining moment in class actions.”[ii]
But conventional wisdom can shift. For many reasons, defendants have been reconsidering their traditionally strong aversion to taking consumer class actions to trial. First, many plaintiffs’ lawyers, enticed by the prospect of a lucrative settlement soon after certification, have pushed the boundaries of traditionally viable class actions and are now simply over-reaching. So concerned with crafting a claim that meets the procedural requirement of presenting some common questions of law or fact for classwide resolution, many have lost sight of the need to have a meritorious underlying dispute and legitimately-aggrieved named plaintiffs. Plaintiffs can no longer celebrate class certification as crossing the goal line because frivolous claims are increasingly likely to be tried.
Second, the procedural demands for a viable class action are rising. The Supreme Court’s continued emphasis on all federal courts’ requirement to conduct rigorous analysis to ensure compliance with Rule 23 makes class certification more difficult to obtain – at least in federal court. It also makes class certification more difficult to preserve as the trial unfolds and plaintiffs must fully articulate how they plan to prove their damages on a classwide basis.[iii]
Third, many permissive consumer-protection statutes have been amended to prevent frivolous claims and class action abuse. Most notably in California, which remains a popular forum for class action plaintiffs, voters passed Proposition 64 to amend their state’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200 et seq. The UCL broadly proscribes any “fraudulent,” “unlawful,” and even “unfair” business practice, often a low threshold for plaintiffs at the motion to dismiss or summary judgment stages. To represent the class, named plaintiffs now must show “actual reliance” on the challenged practice.[iv]
Given these changes, conventional wisdom on the fallout of class certification has shifted. Companies faced with baseless class actions are not always compelled to settle them after they are certified, even in jurisdictions that plaintiffs favor. If plaintiffs have their class certified, they will often waste their leverage in settlement negotiations by seeking relief that does not materially differ from what they could prove they are entitled to recover after a full trial and neutrally administered claims process. If the claimed injury exists more in theory than in reality, plaintiffs are stuck with the fact that they ultimately have few, if any, customers who can come forward with meritorious claims. In such cases, defendants should no longer simply accept dubious class action payouts as the cost of doing business but should, instead, put the plaintiffs to their proof.
[i] Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 591 n.2 (3d Cir. 2012) (citing Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 167 (3d Cir. 2001) (“[D]enying or granting class certification . . . may sound the ‘death knell’ of the litigation on the part of plaintiffs, or create unwarranted pressure to settle nonmeritorious claims on the part of defendants . . . .”)).
[ii] In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 310 (3d Cir. 2008).
[iii] See Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1433, 185 L. Ed. 2d 515 (2013) (holding “at the class-certification stage (as at trial), any model supporting a plaintiff’s damages case must be consistent with its liability case”) (internal quotation marks omitted). See also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 180 L. Ed. 2d 374 (2011).
[iv] In re Tobacco II Cases, 46 Cal. 4th 298, 314-15 (2009).
A trend towards facts and away from statistics when evaluating future earning capacity claims.
While the origin of this fabled quote is in doubt, we know Mark Twain was right about one thing: people manipulate statistics. One tool frequently used to manipulate statistics in litigation is the Gamboa-Gibson Work Life Expectancy Tables. Fortunately for defendants, courts are increasingly seeing these tables for what they are: unreliable tools developed for litigation and not used by statisticians outside the courtroom. For example, the Circuit Court for Baltimore City recently precluded a damages expert from relying upon these tables as they were not based on a reliable scientific methodology.
The Gamboa-Gibson tables, developed by David Gibson and Anthony Gamboa, purport to “adjust” United States Census Bureau statistics regarding how long Americans can be expected to work despite particular disabilities. The tables operate on the assumption—not always valid–that individuals with disabilities won’t work as long as individuals without disabilities.
By reducing their supposed work life expectancy, personal injury litigants claiming either a loss of earning capacity or lost future wages can argue for increased economic losses as a result of disability. Forensic economists rely upon work life expectancy as a basis for calculating economic loss. Thus, the Gamboa-Gibson tables can significantly affect the size of the claimed economic damages.
For years, plaintiffs have touted the Gamboa-Gibson tables as “the only source that provides worklife expectancy statistics adjusted for disability as defined by the U.S. Census Bureau” and “provide the number of years that a person is expected to be alive and actively employed.” Yet, their reliability is suspect. Economists and courts recognize the tables use flawed data and flawed methodology. These myriad flaws include:
- The tables were created for litigation purposes
- The methodology used has not and cannot be tested
- The methodology used is not generally accepted
- There is no known error rate for the data in the tables
- The underlying survey data are unreliable
- The tables’ conclusions are too general and not individualized
Put simply, the survey data on which the tables are based were not designed to support the conclusions drawn by the authors. They are not specific to specific types of disabilities. And, when considering the effect of disability on individuals’ ability to work in the future, detailed facts about individuals and their disabilities are far more accurate.
Because of these flaws, defense counsel would be wise to consider attacking the admissibility of any economic loss report which relies upon the Gamboa-Gibson tables. Indeed, federal and state courts applying the Daubert, Frye/general acceptance or other standards have excluded economic loss reports and testimony which rely upon the tables. As Thomas Ireland, a leading critic of the tables has stated, the tables are bad science.
Most recently, a defense team that included Goodell, DeVries attorneys Tom Cullen and Gus Themelis convinced Judge Steven Sfekas of the Circuit Court for Baltimore City that a plaintiff’s economist could not rely upon the tables as a basis for his economic loss projections. Stevenson v S&S Partnership, et al. (Cir. Ct. Balt. Cty., Case No. 24-C-11-00008722). Like other courts before him, Judge Sfekas found the data on which the tables relied to be unreliable. Other courts are likely to follow.
In light of the foregoing, in cases in which work life expectancy is an issue, defense counsel should counter with strong factual and expert testimony based on individual plaintiffs’ particularized medical and vocational rehabilitation evidence and be prepared to attack the basis of the claimant’s economic loss claim. Evidence such as family history, personal history, education records, criminal records and financial records, especially in the hands of competent medical and vocational experts, can provide valuable pre- and post-injury evidence, of the extent to which a claimed disability affects future work life expectancy, if at all.
The risks of exposure to businesses concerning data breaches and the need for cyber security policies.
Every day we read about a new virus, a new hacking, or a new data breach. On May 8th, 2014 the United States Department of Health and Human Services announced another settlement for the unauthorized disclosure of electronic Personal Health Information (ePHI). This time, New York and Presbyterian Hospital (NYP) and Columbia University (CU) paid $4.8 million dollars after it was discovered that the ePHI of 6,800 individuals, including their patient status, vital signs, medications, and laboratory results had been disclosed. The ePHI had been held on their network. According to the HHS press release, the breach occurred when a CU employed physician who developed applications for both NYP and CU attempted to deactivate a personally owned computer server on the network containing NYP patient ePHI. Because of a lack of technical safeguards, deactivation of the server resulted in ePHI being accessible on internet search engines.
Fines are not the only risk when ePHI or other protected data is exposed. HIPAA regulations require notification of prominent media outlets if more than 500 individuals’ ePHI is exposed. When data breaches become public, the effects can be devastating. Think how many people did not shop at Target when their credit card information was stolen. USA Today estimated the loss at $61,000,000. And, as a result, Target’s CEO, President and Chairman Gregg Steinhafel stepped down following the data breach and other problems. 
So what does this mean for you and your business? Well, one possible answer is you need to do more, even if you think you are doing enough. Stotz Freidberg recently reported the results of a study that employees give their employers a below average grade on cyber security issues.  And, even senior leaders believe their own efforts are inadequate:
• Nearly half (45%) of senior management acknowledge that the C-suite and senior leadership themselves are responsible for protecting their companies against cyber-attacks.
• Yet, 52% of this same group indicated they are falling down on the job, rating corporate America’s ability to respond to cyber-threats at a “C” grade or lower.
• Rank-and-file workers differ in their opinions about cyber security accountability, with 54% of those respondents saying IT professionals are responsible for putting the right safeguards in place.
Given there is consensus among business leaders and their employees that businesses are not doing enough to protect from potential data breaches, perhaps it is time to assess whether your business is prepared. Goodell, DeVries, Leech & Dann’s forward thinking attorneys are at the forefront of helping our clients formulate a risk management strategy to protect our clients. We advise local businesses and health care providers about current developments to answer important questions and ensure that appropriate safeguards are protecting your bottom line. Has your business appointed a security official to oversee the use and maintenance of electronic data? Have you conducted a risk assessment to determine your business’s potential vulnerabilities and compliance with applicable regulations? Is there an insurance policy in place to cover any losses or fines you might incur as a result of a data breach? We can help develop policies to protect you and your business. By knowing where the problems come from, we can help you on the front end.
Reducing Medicaid Liens to Facilitate Settlement.
Although statistics vary, nearly 95% of all lawsuits are settled before trial. There are myriad reasons for this, but at the end of the day, the amount of money to be paid or received almost always drives a case to settlement. Plaintiffs make a decision that the amount they will receive is worth ending the legal process. Defendants make a decision that the amount to be paid is worth eliminating the risk of going to trial.
But even when there is a fair offer on the table, there can be an unpredictable obstacle to settlement—a lien asserted by the Government. A lien asserted by the Government can take money out of a Plaintiff’s pocket and cost a Defendant more to settle a case. Is this another example of unreasonable government intrusion? Is it permissible? Can you as a litigant, lawyer or insurer proactively take steps to get your case settled when the Government makes it harder for you to resolve a case? The answer is yes—especially when dealing with Medicaid.
Medicaid, the ever expanding program to provide health insurance to our nation’s poor and disabled, often pays medical bills that are the subject of major personal injury and medical malpractice lawsuits. In some high exposure cases, Goodell, DeVries attorneys have dealt with circumstances where Medicaid has paid in excess of $800,000 in medical bills. When the parties then sit down to discuss a possible settlement, Medicaid asserts its statutory right to reimbursement, also known as a lien, on the settlement funds. Attorneys, litigants and insurers all have varying degrees of responsibility to reimburse Medicaid out of the settlement funds. When large sums of money are at stake, the process becomes complicated, time consuming, and can hinder the settlement of cases. Indeed, Goodell, DeVries attorneys are aware of many cases where Medicaid tries to obtain reimbursement for an unfair amount of bills paid. Yet Medicaid is not entitled to such sums.
The Supreme Court of the United States has ruled that Medicaid should only be reimbursed for a fair portion of bills paid, not all monies paid. Arkansas Dept. of Health and Human Servs. v. Ahlborn, 547 U.S. 268 (2006); and Wos v. E.M.A., 133 S. Ct. 1391 (2014). After these cases, states have routinely been thwarted in their efforts to take unreasonable sums from a settlement by striking down anti-lien provisions in Medicaid statutes. Federal and State courts have consistently required an allocation of funds based on the facts of a case, allowing Medicaid to only be reimbursed for a percentage of bills paid based on a percentage of overall recovery and damages sought. This amount is almost always much less than Medicaid initially seeks to recover. In our experience, we have seen cases in which Medicaid has ultimately accepted approximately 20% of the amount initially claimed. In real dollars, this can mean a case can resolve for tens or even hundreds of thousands less.
How does this help you as a defendant, insurer or health care provider? The answer is obvious. When a case can resolve for less, with the same amount of money ultimately being paid to the plaintiff, it is more likely to resolve. Goodell, DeVries lawyers are intimately familiar with this process and are up-to-date with this developing trend. Goodell, DeVries lawyers can work with Plaintiffs and mediators to reduce or eliminate claims of reimbursement by Medicaid, making it faster, cheaper and easier to resolve claims. And claims resolution is best for everyone.
Maryland law generally prohibits an insurer from denying liability insurance coverage on grounds of late notice unless it can show that the untimely reporting caused actual prejudice.
Given the sense of dread that must come with being sued, it is amazing how often – and how long – defendants can sometimes delay in putting their insurance carriers on notice of claims. And yet, it happens time and again. These delays can run afoul of contract clauses inserted by carriers to facilitate prompt investigation of claims, which require prompt notice of accidents, occurrences and/or claims as “conditions precedent” to coverage.
In some states – and in Maryland before 1964 – courts strictly upheld these notice provisions as mandatory “conditions precedent” to coverage. In 1964, however, a carrier denied coverage on grounds that notice was given one month after an accident. This drew the “prompt and decisive”[i] attention of the Maryland legislature, which thenceforth prohibited insurers from disclaiming coverage on grounds of late notice (or lack of cooperation) unless the insurer could show actual prejudice from the delay.[ii] Thereafter, Maryland courts have construed notice provisions as non-obligatory covenants rather than strict conditions precedent.
At the time of enactment, most liability policies were written on an “accident” or “occurrence” basis. Since then, more policies were written on a claims-made basis, where risks could be more easily quantified and rated, and premiums calculated to match. Initially, it was an open question whether the statutory prejudice requirement would apply to these policies. Like bubblegum attached to the sole of a shoe, however, it soon became clear that the prejudice requirement could not be easily dislodged from a late notice disclaimer.
The prejudice requirement was applied very quickly to “claims-made” policies. This seemed logical. An occurrence policy provides coverage if there is bodily injury or property damage during the policy period; a claims-made policy provides coverage if there is a claim made against the insured during the policy period. Under either scenario, notice to the carrier is simply a subsequent requirement after coverage has already attached. But “claims-made-and-reported” policies seemed different. From the insurer’s viewpoint, coverage under these policies is not implicated until a claim is both “made” against the insured and “reported” to the insurance company; this provides predictability in anticipating claims, with corresponding benefits on premiums. Under these policies, the failure to timely report seemed not to be merely “late notice,” but an absence of the very event that implicates coverage in the first place. In other words, a “condition precedent” to coverage. Sound familiar?
So insurers continued to deny coverage under these policies for claims made against an insured during the policy but not reported to the carrier until after the policy period, despite the absence of actual prejudice. This rationale seemed to be supported by a pair of earlier decisions of the Maryland Court of Appeals.[iii] But all this changed on Feb. 24, 2011, when the court held that a showing of prejudice was required to deny coverage on late notice grounds, even under a policy that defined a “claim” to mean one made against the insured and reported to the insurer. [iv]
The full import of that case, Sherwood Brands Inc. v. Gt. Am. Ins. Co., is not yet clear; for now, this state-law question has generated conflicting authorities in the federal courts. Two federal trial judges have ruled that no showing of prejudice is required to deny coverage under a claims-made-and-reported policy. [v] In later affirming one of these rulings, the Fourth Circuit articulated and rested its holding on a quite different ground, namely, that actual prejudice had in fact been shown.[vi] Two other trial judges have held that the prejudice requirement does apply to claims-made-and-reported policies.[vii]
Overall, this may not bode well for the insurer’s position, and in handling claims or rating such policies in the future, a prudent insurer should assume that late notice alone is not enough deny coverage under a claims-made-and-reported policy, assuming the claim against the insured itself is within the coverage period. One day, this may all be clarified further. In the meantime, prejudice is the word of the day. Have you noticed?
[i] Sherwood Brands, Inc. v. Great Am. Ins. Co., 418 Md. 300, 311 (2011).
[ii] Md. Code Ann. Ins. § 19-110 (originally enacted in Chapter 185 of the Acts of 1964).
[iii] St. Paul Fire & Mar. Ins., Co. v. House, 315 Md. 328 (1989); T.H.E. Ins. Co. v. P.T.P. Inc., 331 Md. 406 (1993).
[iv] Sherwood Brands, 418 Md. at 333.
[v] Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 852 F.Supp.2d 647 (D.Md. 2012) (Bredar, J.); Financial Indus. Reg. Auth. v. Axis Ins. Co., 951 F.Supp.2d 826 (D.Md. 2013) (Grimm, J.).
[vi] Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 531 F.App’x 312 (4th Cir. 2013).
[vii] McDowell Bldg., LLC v. Zurich Am. Ins. Co., 213 WL 5234250 (D.Md. Sept. 17, 2013) (Bennett, J.); Navigators Spec. Ins. Co. v. Medical Benefits Adm’rs of Md., Inc., 2014 WL 768822 (D.Md. Feb. 21, 2014) (Hollander, J.).